Dorian LPG Ltd. (LPG) Earnings Call Transcript & Summary

I welcome you to the 2024 Capital Link's Corporate Presentation Series. In this series, company management highlights the company's current operations, business development, growth prospects and sector outlook. We have with us today the senior management team of Dorian LPG. Mr. John Lycouris, CEO of Dorian LPG USA. LLC; and Mr. Ted Young, the Chief Financial Officer. Dorian LPG is a liquefied petroleum gas shipping company and the leading owner and operator of modern, very large gas carriers. Its fleet currently consists of 25 modern such carriers, including 4 dual-fuel LPG vessels. And Dorian LPG has obviously in Stamford, Connecticut in the U.S., Copenhagen, Denmark and Athens Greece. The company is listed on the New York Stock Exchange under the ticker symbol LPG. Now in terms of logistics, we will begin with the company presentation followed by a Q&A. [Operator Instructions]. Before we begin our webinar kindly note that this discussion is strictly for information and executional purposes and should not be relied upon and the webinar does not constitute an offer to buy or sell securities or investment advice or advice of any kind and capital Link bears no responsibility for the content. And now let's begin our discussion, I would like to pass the floor over to John and Ted.

Thank you, Nicolas.

Thank you, Nicolas. Good morning.

Good morning. We're pleased to be here. So quickly, the normal SEC health warning. We will make some forward-looking statements here. So please note the cautionary statements here. So I'm Ted Young, Chief Financial Officer. This is John Lycouris, CEO Dorian LPG USA. Nicolas already gave us a nice introduction, but I will quickly pick out a few highlights. In addition to having a fleet of 25 vessels, we also jointly own and operate the Helios Pool which -- in which our partner is MOL Energia, which is a subsidiary of MOL, the large Japanese player. They have an operation in Singapore and it gives us a virtual presence there. They have -- they then as a result of a virtual presence in Copenhagen where we do our post-fixture operations. And it gives us quite a strong commercial presence and one we think that we've benefited from over the years. Nicolas touched on the composition of our fleet not only do we have 4 dual fuel VLGCs in our fleet, 3 of which are time chartered in, 1 of which is our own that we took delivery of in March of '23. We also have scrubbers on a number of our ships, 15, which has generated some fuel savings for us, and it's been quite a profitable investment for us. John may touch on that a bit more in his remarks as we go into the presentation. Our average fleet age is still quite young compared to the global fleet, which for those of you who are shipping investors, know is a pretty important metric. Stepping back, I know we have a mix of participants on the call today. So we thought we'd just be a quick primer, refresher on LPG. LPG is obviously distinct from LNG, LPG is a byproduct. No one has ever produced a metric ton of LPG on purpose. It comes about from the gas processing or the refining process, it's split out through a fractionation process and it's sold in its component parts, predominantly propane and butane are the main parts of the natural gas liquids stream, but there are some other smaller components. But for the purposes of today, we're focused on propane and butane and they're effectively interchangeable for the purposes of our business. What is it used for? It is significantly -- it's used in heating and cooking for both residential and commercial settings. And about -- just about 50% of world consumption goes into heating and cooking, which we think is pretty important because it establishes some very stable base user demand regardless of the economic climate. Obviously, no matter what the economic environment is, you need to be warm and you need to eat. The next largest consumer of LPG is in the petrochemical sector. And petchem really has 2 branches to it. One are the classic steam crackers and the steam crackers are able to substitute a portion of their feedstock slate which is typically, predominantly or exclusively naphtha for a portion, depending on the technology, 10% to 15% of their feedstock slate can be swapped for LPG. They do that when LPG is cheap relative to naphtha. Naphtha is an oil derivative. So it's obviously very closely tied to the price of oil. The other piece of LPG petchem demand comes from PDH plants. And PDH is the acronym for propane dehydrogenation, which is a direct on-purpose way of turning propane into propylene which is one of the key building blocks in the plastics value chain. We've seen significant growth in these facilities in China over the years as China strives to be polypropylene independent from the world over the next 5 to 10 years. That's obviously been great for our business, but it's not just China. Other parts of the world, Turkey, Korea, even in the U.S., which, of course, isn't great for our business, have also invested in PDH. PDH Is an old technology that really became profitable once the U.S. became a significant exporter of LPG in the world market. To put that in context, just for a second. And by the way, the petchem accounts for about 25% to 30% of world demand. The other segments are a mix of various applications that we won't delve into. But I would like to come back and talk about the growth of LPG and the significance of the United States becoming a world exporter. So -- in 2013, the United States ordered about 4.5 million metric tons of LPG and imported about the same amount. For the coming year, we expect the United States to export somewhere between 55 million and 60 million metric tons of LPG. So obviously, we've seen significant growth in the last 10 years, and that's really driven the growth of the VLGC sector around the world. But more importantly, if you look at how the 2 main export basins stack up with each other, the Middle Eastern price -- the Middle East was obviously historically the main exporter. It's -- the price there is set by the Saudis -- it's the Saudi contract price. They post it monthly and they have a certain number of acceptances whereas the U.S. price is set daily by traders in the market. And historically, the Saudi CP has been consistently several hundred dollars a metric ton more expensive than the comparable U.S. price. The product is the same, no difference in chemical [indiscernible] no difference in chemical composition. But obviously, you can buy a cheaper product, you're going to buy it in the United States. That's obviously going to be quite -- that's going to be your goal as a consumer, you're going to get the best price you possibly can. What we've seen is significant growth of U.S. cargoes also in 2017, the Panama Canal opened its new locks, which then allowed for the transit of VLGCs, which was -- which shortened transit times from the U.S. Gulf from -- to Asia from 40 to 50 days to about 25 days one way. So that's been quite significant. John will touch on what we've all read about in the press about the drought and the reduction in transits. Also, as we're all aware, there is activity in the Red Sea, which is forcing more vessels to consider going the long way around the Cape of Good Hope. All of that combines to create fleet line, and John will discuss it a bit more. Turning back to some of the fundamentals. One of the big drivers we've seen over time has been, obviously, not only the growth in U.S. production, but the growth in U.S. inventories. U.S. consumption of LPG is structurally flat or in decline. Most folks in the U.S. are aware that natural gas has taken market share all over the place for many different applications, particularly in residential and commercial as new housing developments come up, folks are either being supplied directly or indirectly with their energy needs through LNG, which, of course, is like LPG and environmentally cleaner alternative than oil, diesel and those derivatives. Those high inventory levels mean that the export market is the way for inventories to clear and that's done a nice job of maintaining that price differential that I touched on earlier between the Saudi posted price and the market price here in the U.S. So here, we give you some additional statistics seeing how the natural -- the associated gas production has really driven the increase in production here in the United States, enhance the inventories, enhance export volumes. That brings me to sort of the core of our business and what drives it. We live and die by 2 arbitrages. One is the East-West arb and the other is the LPG-naphtha arb. So what we show you here on the top, is the comparison of the prices between the Far East index price, which is the price in -- the landed price in Asia and the CP price shows the -- sorry, the MD prices, the Mont Belvieu price in the U.S. And you can see that's a very healthy arbitrage. So essentially, between those propane differentials that offers plenty of room for freight. And we -- and the freight quoted in dollars per metric ton, you can see that the profit margin there is forecast to be on the top -- the top bar, in excess of an excess of $250 a metric ton for most of the time. That corresponds to pretty healthy freight rates in our business and many or much of which you've seen in our published financial results over the last year, 18 months. And again, that's driven fundamentally by cheap U.S. LPG, which is a function of oil and gas demand, which does continue to grow as many of us are aware. The other main driver which has not been in our favor as much recently has been the LPG naphtha spread. So you can see that, whoops, you can see here on the chart that we -- in '23, we've enjoyed a decent spread but we need to see usually a bit stronger. But right now, if you look at the current market, what we're seeing is that LPG is not preferred to naphtha right now. So there's a little bit of a slowdown in China. But again, that's only from the crackers -- from the steam crackers. And again, that's only a portion of the overall demand. So as we look out -- we expect China to be strong this year. We don't expect as much growth perhaps as we saw this year, but we still expect to see growth. There's a need to fill up those PDH plants and depending on what happens with oil, we can see some additional demand from the traditional steam crackers if LPG becomes the preferred feedstock compared to naphtha. So with that, I'm going to turn it over to John who's going to delve further into some of the [ works for our trade ].

Thank you, Ted. Yes. Well, there has been a big development in the end of October when Panama Canal administration realized that the level of -- the water levels in the Panama Canal lakes were significantly lower due to very low rainfall and they produced this kind of decreasing kind of a stage of ship transits where a reduction of ships transiting was kind of laid out over the months of November, December, January and February, reducing from 35 typically transits down to 18 in February of 2024. So that caused a huge backup for cargoes. There was a bidding process where people would have to bid for those transit slots if they did not have already been able to book something in advance. Bookings for LPG ships are usually allowed about 7 days out, not earlier than that. So there was a big rush to those transit slots. Rates went sky high for the bids. It goes through for those cargoes that they had to go through but it also caused a lot of other people to -- we think we need to go through the Panama Canal and they started thinking of alternative routes to go to Far East, which typically is where most of these cargoes go. So we had many people deciding to go through the Suez Canal and also some of them through the Cape of Good Hope. The difference between the one and the other is not significant between Suez Canal and Cape of Good Hope is about 3 to 3.5 days more by going via the Cape of Good Hope rather than the Suez canal. But it all means that you have to pay the Suez Canal tolls for going through the Panama -- Suez Canal. So that kind of balances out the extra 3, 4 days that you're going to have to go through the Cape of Good Hope. So these charts show you how the -- we have seen an increase. First of all, on the right-hand side, when the ships are loaded, we have seen an increase of ships going via the Cape Good Hope and Suez. And then on the other hand, the ballast one, we have seen an even higher increase of ships going via those routes to avoid paying the high tolls of Panama Canal and the cost of bidding through transit unless it was necessary.

Yes. And John, give us an indication of where canal fees got to? What was the high point and where are they now?

High point, yes. The high point in November. Thank you, Ted. Yes, the high point of that was almost $2.8 million per transit for ship in November...

Compared to what we used to pay was?

Compared to paying...

$400,000, $500,000.

Yes, $400,000, $500,000 is the cost of a typical transit. $500,000 per transit per ship, and then they have pay over and above that, $2.8 million to get that transit slot a few days hence. Now the next month, it kind of went down to about $1 million, $1.5 million they were ranged, in December, I'm talking about. And now in January, we're seeing as a result of ships coming amended, they're seeing plans and voyages, we have seen those kind of bids lowering down to the low hundreds of thousands rather than millions of dollars. But still, you have to pay $0.5 million for the transit plus $200,000, $300,000, depending on where the bid goes and if there is a lot of competition for that particular transit day. So it is an interesting dynamic that has caused our model ships to go through the Cape of Good Hope. And now we have seen, of course, Suez Canal being not a preferable route. I'm sure you have all read it in the newspapers and the news, there is continuous attacks. They do mention that the attacks are related to Israeli-related cargo. However, we have seen attacks on many containerships, which carry cargoes for everybody, for the whole world. And it is not a preferable route for most of the people especially if you're going in ballast. And later, it is subject to the charters of the decisions. Our guards have to be on board. We have to abide by the rules of the force that controls the U.S. led protection force that has been organized, and we try to go through nighttime to avoid any problems from drones, attacks, et cetera. And also [ dasher ] attacks.

And also, the distances are quite significant, right? We're talking about 40-plus days to go from Asia around the Cape of Good Hope to the U.S. versus 25 days that you can get through the Canal. So that's created quite some fleet line.

That's correct. And that is causing a lot of fleet shortage because there's just not enough ships to service around the exports for the United States, which are -- is the next thing I want to talk about -- and now what we can see is that the United States has been increasing their share of the exports, they have been increasing their -- the market share and we have seen that in 2023, we hit another record of exports. And you could see with those bars a share -- comparing '21, '22 and '23, those numbers indicate the amount of exports to others really quite important to understand why the United States has so much export capacity because it is produced as a byproduct, as Ted said, of natural gas and also crude oil exploration. And so -- and also the export terminal capacity is being continuously improved and increased. We expect more capacity to come online next year, this coming -- this year, actually in 2024, and that will allow inventories to stay high and exports to maintain -- to be maintained to go out of the United States.

[indiscernible]

Here we have the Middle East exports. Middle East has been steady. We have been -- it's really -- it's a reflection of the cutbacks that we have seen in exports on the -- and I'm sorry, we have somebody blowing outside and making a lot of noise. Yes, we have seen that these have been steady, and we expect that they are not going to increase any further for the first few months of this year. It's really mainly to the cutbacks. That does not mean that Iranian exports are not significant and that they will probably maintain their exports as they don't usually apply with those cutbacks as much as the Saudis and the Qataris, the United Arab Emirates. However, we will see a good supply from those countries in the next few months. Yes. China, so -- it's just one of the countries that we highlight here.

But it's largest...

It is one of the largest countries that imports LPG. And they have been a steady demand because of their PDH plants, which continue to be filled. We had a number of plants built in the past year in 2023. There were about 7 plants that came online and we expect more plants to come online in 2024. So we expect that the demand in China is going to be maintained. There is more [indiscernible] polypropylene as a by product -- as a product of PDH plant is becoming cheaper and there's quite an abundance of it. We still see that there are more plants coming online, finding new ways of selling that polypropylene. So we do not see any cutback on the demand from China. And it is -- as Ted said, one of the largest consumers of LPG after India. India is...