StealthGas Inc. (GASS) on Q3 2021 Results - Earnings Call Transcript
Operator:
Michael Jolliffe : This is Michael Jolliffe, the Board Chairman of StealthGas. Joining me on our call today is our CEO, Harry Vafias; and our Finance Officer, Fenia Sakellaris. Before we commence our presentation, I would like to remind you that we will be discussing forward-looking statements, which reflect current views with respect to future events and financial performance. At this stage, you could all take a moment to read our disclaimer on Slide 2 of this presentation. Risks are further disclosed in StealthGas filings with the Securities and Exchange Commission. I would also like to point out that all amounts quoted, unless otherwise clarified, are implicitly stated in U.S. dollars. Slide 3 summarizes the highlights of our third quarter 2021 results that we released today. Our key strategic highlight is the successful spin-off completion of our 4 tankers now trading in a separate listed entity called Imperial Petroleum Inc. Indeed, we are excited to have completed this transaction as we strongly believe that the timing was right for the creation of two businesses in distinct sectors of the shipping industry. And that is, of course, LPG carriers and tankers. Focusing on StealthGas performance in the third quarter of this year, this was mainly governed by poor spot activity, increased bunker costs and a high number of commercial idle days. Even though the COVID-19 pandemic is still persisting, we managed to limit our spot exposure compared to the second quarter of this year. However, and due to seasonal factors, we did face increased commercial idle time for open vessels seeking new period employment. As a result, our spot revenues were weak, while due to the rise in oil prices, our voyage costs were disproportionately high. Given the completion of two drydockings and the partial completing of another two drydockings within the third quarter, we incurred technical off-hire days. This, in combination with the soft spot performance already discussed, resulted in a lower operational utilization in quarter 3 '21 of 94.1%. However, in spite the commercial obstacles faced in this quarter, we managed to take advantage of the improved market noticeable from September onwards and fix several vessels on period charters. We now have only three vessels operating in the spot market. We have 93% of fleet days on period employment up until the end of this year, with total fleet employment days for all subsequent periods generating approximately $66 million, excluding, of course, our JV vessels in contracted revenues. Period coverage for the first quarter of 2022 is as high as 77%, while for the whole of 2022, our employment coverage is 39%. Focusing on our financial performance, and compared to the third quarter of 2020, our revenues came in at $37.5 million, an increase of $400,000 mainly due to a 45% reduction of bareboat chartering activity where revenues are by default, lower than time charter and spot earnings. Revenue potential was offset by the poor earnings generated from spot activity. Our daily time charter equivalent in the third quarter of 2021 dropped by about $100. We had about 60% increase in commercial idle and technical off hire days. As a result of all of the above, we generated in the third quarter of this year, an EBITDA, excluding noncash items of $14.6 million. In terms of net income, StealthGas produced breakeven results. The profitability stemming from both of our joint venture arrangements stood strong and we ended the quarter with an aggregate adjusted net profit of about $1.8 million corresponding to an adjusted EPS of $0.05. Moving on to slide number 4. We wish to explain in simple terms the impact of the tanker spin-off on StealthGas. As said at the beginning of our call, strategically we felt the timing was right for this separation of asset classes to occur as future prospects for both markets look promising. From a financial perspective, the spin-off of our tankers to Imperial Petroleum will lead to a reduction of gases OpEx by about $2.5 million per quarter or $10 million annually, a drop in quarterly depreciation charges by about $2.2 million per quarter or $8.8 million annually and an almost $30 million reduction and that is about 9% of total debt in StealthGas total leverage. However, these tankers depending on their employment type and market cycle, we're generating on average 10% to 15% of our total time charter equivalent revenue. Hence, this asset separation will, for the time being lead to a decline in revenue potential. Placing our focus now on StealthGas third quarter and nine months performance, Slide 5 provides an analysis of our fleet employment. In terms of charter types, and as of December 2021, out of a fleet of 37 LPG operating ships, excluding our seven joint venture vessels, we have four of these on bareboat, 30 on time charters and only three in the swap market. Regardless of the uncertain market, mostly due to COVID-19 pandemic, we have managed to significantly reduce our spot exposure. Since our previous announcements, we successfully concluded 9 new charters and charter extensions. We have 3 vessels concluding their period charters up until the end of 2021, 2 of which have charter extension options. Our period coverage for the remainder of 2021 is in the order of 93%, while for the first quarter of 2022, the average period coverage is 77%. We have close to $66 million of secured revenues and including our joint venture vessels, total secured revenues increases to about $87 million. In Slide 6 I would like to provide an update as to our two joint venture performances. Our first joint venture, which comprises in its majority of small LPG ships currently has all vessels on time charter. Since our last announcement, we managed to fix the Gas Shuriken on a 14-month time charter, extend the time charter for the Eco Nebula for an additional 6 months and fix the Eco Lucidity on a time charter with a 6-month minimum duration. Our second joint venture comprising of 2 medium gas carrier vessels are both under time charter contracts, thus yielding steady cash flows. Our joint venture arrangements combined have a cash base of about $40 million. In terms of our fleet geography presented in Slide 7, our company focuses on regional trade and local distribution of gas. This graph is a snapshot of the positioning of our LPG vessels excluding our joint venture vessels as of November 30, 2021. Currently, 18 vessels of the LPG fleet trade in Europe, 12 vessels in the middle and the Far East and 2 vessels are now currently trading in South America and 5 in Africa. I will now turn the call over to Fenia Sakellaris, our Financial Director for our financial performance. Thank you.
Fenia Sakellaris : Thank you, Mr. Jolliffe. And good morning to everyone. I will discuss our financial performance for the third quarter and nine months of 2021. Indeed, as we mentioned at the beginning of our call, our biggest obstacle in this third quarter was commercial off-hire days, coupled with a sharp rise in bunker costs. These factors led to low spot revenues, thus undermining overall profitability. Market improvements notable from September onwards allowed us to lock almost all of our fleet on time charters, hence significantly minimizing spot exposure and on higher potential. Let us move on to Slide 8, where we see the income statement for the third quarter of 2021 against the same period of the previous year. Voyage revenues came in at $37.5 million, marking a $400,000 increase compared to the same period of last year. This increase is attributed to 4 fewer vessels on bareboat, now operating either spot or on a time charter contract offset now by the fact that 25% of quarterly spot days were in essence commercial off hire. In terms of off hire this quarter, we faced waiting time of vessel seeking new period deployment. But most importantly, we had one of our product tankers and one similar vessel being in idle for the majority of the quarter. As discussed earlier in our call, almost all of the vessels met an idle time within the third quarter of 2021 are now operating under time charter contracts. In terms of voyage costs, this amounted to $4.5 million, marking a $700,000 increase compared to Q3 '20 in spite of the decline in number of spot days by about 30%. Key driver for this rise in the sharp -- in the daily bunker -- is the sharp rise in daily bunker cost by 55%. Based on all of the above, our net revenues for the period went in the order of $33 million. Running costs at $15.5 million marked about 12% increase compared to Q3 '20, mostly attributed to 4 fewer vessels on bareboat for which now we incur operating costs along with a $250 rise in our daily crew cost, mainly crew medical and crew flight expenses attributed to the COVID-19 pandemic. Drydocking charges amounted to $1.7 million and corresponded to the drydocking of four small LPG vessels, two of which faced prolonged time in the docking yards as they also underwent ballast water system installation. Based on the above factors, our EBITDA, excluding noncash items, such as impairment came in at $14.6 million. Interest and finance costs marked close to a $400,000 increase as $1 million of this quarter financial cost corresponded to swap interest as well as arrangement and refinancing costs. With regards to income from our joint ventures, both of our JVs ended the quarter with an operating profit as the majority of the vessels were under the time charter employment at improved rates. As a result of all the points analyzed above, we ended the third quarter of 2021 with a net income of -- excluding noncash items of $1.8 million corresponding to an EPS of $0.05. Proceeding to Slide 9, we will briefly comment on our performance indicator for the period examined. Our operational utilization for Q3 '21 was quite low in the order of 94.1% are technical off-hire due to heavy diagnostic schedule and commercial off-hire marked a 50% increase compared to the same period of last year. With regards to our daily time charter equivalent in Q3 '21, daily TCE marked a gradual decline over the quarters. In Q2 '21, we noticed an obvious increase, which in spite of seasonal factors in poor spot performance faced in this quarter, we managed to preserve to a great extent. Looking at our balance sheet in Slide 10. Our free cash balance increased and is now in the order of $43 million, while to date, we have no further direct capital expenditure. Our gearing ratio has further declined to 36.6%, while taking into account our free cash and net debt-to-asset ratios as low as 32%. This year, we have been very active investment refinancing as within the first 9 months of 2021 we've completed the refinancing of 14 vessels, thus reducing our average annual finance cost that is LIBOR plus margin by 100 basis points. We will further refinance another 7 vessels within the first quarter of 2022. And therefore, we will have no value obligation for the next 2 years. I will now hand you over to our CEO, Mr. Harry Vafias, who will discuss market and company outlook.
Harry Vafias : Proceeding on Slide 11. During Q3 '21, and in spite of the customary seasonal softness, rents improved mostly towards the end of the quarter. Looking at the small LPG trade West of Suez, the spot market experienced the usual seasonal downturn during the summer months, forcing owners to experience idle time between voyages. We've also seen a few vessels leaving the area heading east in the last couple of months, which has further aided the balance due to the limited availability of spot owners noticeable since September and reasonable freight rates, charters have been increasing their time charter exposure, which has been positive for the owners. With the expected winter seasonal increase in cargoes, owners might witness further rate improvement and enjoy an even more balanced market. In the East of Suez, the spot market in Asia since September is tight and lacking available tonnage. So there are cargoes in the market that are finally not shipped due to the lack of tonnage. Naturally, this has had a positive effect on the freight rates over this period. The increasingly tighter spot market has resulted in an active time charter market that charters have been actively looking for forward shipping covers to move their contract cargoes and get an advantage in the tight spot market. We have seen numerous both new time charters fixed and extensions on existing time charters for periods from three months up to one year. Focusing on our market fundamentals, the small LPG pressure segment has substantial old tonnage. 31% of the fleet is currently above 20 years of age, which is a driving force behind the increased scrapping activity. Since the beginning of this year, we have witnessed a demolition of 7 small pressurized vessels. And indeed, we are witnessing a heightened demolition activity. Aspiration orders, there are 16 vessels on order, 7 to be built in Japan and Korea and 9 to be built in China and to be delivered until the end of 2023. It's important, however, to point out that 7 older LPG vessels equivalent to 45% of current order book were sold for demolition within the first 9 months of 2021. Slide 12 presents our company's share performance since the beginning of the year. During this period, we see that gas' share price has increased by almost 6% and has been trending upwards in the periods of result announcements. It's also interesting to note that following our tanker spin-off, the average trading volume has risen by about 85%. Our stock still trades at the discount to our NAV. In Slide 13, we are outlining the key variables that will affect our performance in the quarters ahead. Given the market turmoil, especially due to the COVID-19 pandemic, it's quite difficult to make any firm predictions. We have visualated a few key points that may assist our financial performance in the upcoming quarters. First point is that we have a total period coverage of about $87 million, a total cash base of about $50 million, sufficient liquidity in both our JV arrangement and solid period coverage with minimum spot exposure. Moreover, we remain under a low LIBOR rate environment. Hence, our interest costs will remain low for the short term. On the downside, we have 7 scheduled drydockings for 2022 for which we face increased costs due to related restrictions mentioned earlier. And while the enduring pandemic might push the global economy in another downturn, Concluding our presentation in spite of the global challenges we're all facing, we believe that StealthGas will perform well provided we do not witness another global economic slowdown due to the new COVID-19 variants like the Omicron. At this stage, our Board Chairman will summarize our concluding remarks for the period examined.
Michael Jolliffe : Thank you, Harry. We are pleased with the successful completion of our tanker spin-off to a newly listed entity called Imperial Petroleum. With regards to StealthGas, the separation of the 4 tankers will give the opportunity to focus exclusively on the broader LPG market, which has always been our core business. The company owns predominantly small LPGs for which rates are less volatile along with large LPG vessels facing more volatile freight rates. Thus, the capability to increase revenue dynamics. Given the different nature of risk that tankers and gas carriers bear, the strategic move of separating these two asset classes will give shareholders the flexibility to adjust their holdings according to the sector in which they want to invest and the timing in the cycle. Focusing on gas results in the third quarter of 2021, these were primarily underpinned by the weak spot market and particularly the increased commercial off-hire days. As the market improved from September onwards, we took the opportunity to fix all of our fleet on period charters and soundly positioned ourselves for the upcoming quarters. Regardless of the LPG market improvement, evident this last couple of months, the biggest global concern is still the COVID-19 pandemic. New variants might potentially heavily impact the market in the short term. And that's why we have chosen to be defensive with low leverage and having only a few ships operating in the swap market. We have now reached the end of our presentation, and we would like to open the floor for your questions. So operator, please open the floor. Thank you.
Operator: Ladies and gentlemen we’ll now begin the question-and-answer session. Okay, we will now take our first question, and it comes from the line of Randy Giveans from Jefferies. Your line is now open.
Randy Giveans : how is it going?
Michael Jolliffe : Hi, Randy.
Randy Giveans : I guess first question being the biggest news here is just the spin-off. Can you discuss that decision to spin-off those tanker assets over simply selling the assets, putting the cash to work by repaying debt and then more importantly, repurchasing shares.
Harry Vafias : Yes, Randy. I mean, we've discussed this matter before. A lot of shareholders were asking why do we have tankers and it's not your core business. And we are better off focusing on all the different sub segments of the LPG market. So we thought spinning this company out into a different company is a nice way of having StealthGas as a pure LPG company focusing on small handy and medium-sized gas carriers at least for now. And at the same time, giving a nice dividend to our shareholders. Selling the ships was not the best idea because selling the ships would have meant that we are selling the ships at the bottom of the market, which doesn't make any sense. And on top of that, because you mentioned that, as you know, StealthGas has very low debt levels. So it wouldn't make a big difference if we reduce the debt a bit further. Our debt levels are very, very low, despite our rapid expansion in the last few years. Buying back stock, you know we've done it before. We've done a tender offer before in the beginning of COVID. And obviously we will do more, but the Board will not allow us for as long as we have COVID affecting our results. So we need to see some more clarity on the COVID matters. And hopefully, disappearance of this pandemic before we sit down and asked for a further allowance on share buybacks.
Randy Giveans : Okay. The tankers, the rates are very low, selling at the bottom, but the asset values haven't really come off much since the beginning of the year. So we don't want to really be selling at the bottom of that capacity. But clearly, the share price relative to your NAV, especially when your balance sheet is in good shape, clearly seems heavily discounted. So waiting till COVID ends, when is that 5 years from now, who knows? But -- all right, I guess, separately, following the spin-off, are you likely to pursue some additional growth in the LPG space? Are you content with your fleet today? For example, you still have some, I would call them noncore handy size larger semi-ref vessels compared to most of your fleet, are those possibly spin-off or sales candidates?
Harry Vafias : No, the opposite. These are core assets, and we will focus more in these handy, medium-sized gas ships.
Randy Giveans : Got it. Okay. And then in terms of the market, clearly it's tightening. Can you provide some insight on the -- basically the increase on your new charters compared to previous charters? Have those rates improved? And maybe specifically, what's the average rate for those 7 charters that last 5 to 12 months?
Harry Vafias : Yeah. I mean if we give you a number, it will make it more difficult because as we are talking about different sizes of ships is not easily distinguishable. I would say that for 3,500 cubic meter vessels, you would be safe assuming a 0% increase on 5,000 vessels out, you would be safe to assume a 5% increasing on 7,500 and more and bigger you would be safe to assume a 10% increase.
Randy Giveans : Okay. Can you give me the nominal numbers instead of just the increase? Like what is that 10% equate to, the 10% increase?
Harry Vafias : On the -- you mean on the 7,500?
Randy Giveans : Yeah.
Harry Vafias : It would be -- it would mean around 320,000 a month.
Randy Giveans : Okay. Great. And then on the 5,000?
Harry Vafias : It would mean 295.
Randy Giveans : 295. And then lastly, on 3,500.
Harry Vafias : There is no increase.
Randy Giveans : And what would that be, though, on a monthly basis?
Harry Vafias : That would mean 225.
Randy Giveans : 225. Great. That helps with the model.
Harry Vafias : Just to clarify the problem Randy, is not the income. The market is tightening, and obviously, this pushes the rates up. The problem is the increased cost due to COVID because of extra quarantines, increased crew costs, increased crew traveling, these kind of things. This is the problem right now, not so much the income side.
Randy Giveans : No. I think that's fair. But I think the cost should come under control here in the next few months. The income, especially with all the charters, you have a lot more visibility there. And again, if you wait for COVID to end, your stock price will reach $6. I don't know if waiting till the end to repurchase shares is the best strategy, but I'll leave that for you and the Board.
Harry Vafias : Thank you.
Operator: Okay. We will now take our next question, and it comes from the line of Lance Gad from Gad family LLP . Your line is now open
Unidentified Analyst : Yes. Good morning. The prospectus for Imperial Petroleum has a statement that the book value is substantially higher than market value. I was wondering if you could clarify substantially, if you could give us an idea as to what the market value of the 4 tankers are?
Harry Vafias : Yes. Actually, as you understand, we cannot give numbers if we have not putting it in the F1. But that is what we discussed on the previous question, where we said that if we sold the ships, we would face a book value loss and the debt reduction would be minor. That's why it was -- we were better off spinning them off, which still means you're going to have a book loss. But at least you don't lose control of the ships and the current shareholders get some shares as a dividend which they can keep or sell depending on what they think about the tanker market. In Q4, StealthGas will have this -- will book this loss. And obviously, the numbers will -- you will see what the numbers are. But indeed, it's not a small number.
Unidentified Analyst : So yeah. I mean it's no secret, market values of ships, I would think from a professional operator, that's kind of known. It's like you can't give us what's in the public domain. And you've already said substantially lower in the prospectus. And this is a public conference call. I mean, I think I don't see any reason why we can't talk about what it's worth. And we've talked about NAV in past conference calls, how our stock was trading substantially, you've even given us numbers. So I'm kind of -- I don't understand why we can't know what the substantial differences or what substantially means?
Harry Vafias : Yeah. I cannot answer that question as I'm not a lawyer, I'll have to check with our U.S. legal team and this type of information can be given or not.
Unidentified Analyst : Okay. I've been an attorney for -- I've been a lawyer for 50 years. I don't see any problem with it, but check with your counsel. I mean...
Harry Vafias : Yes, if it allowed, it's allowed.
Unidentified Analyst : Hello?
Harry Vafias : Yes.
Unidentified Analyst : One other question. Generally, with spin-offs, one of my backgrounds is in tax law. Generally, with spin-offs, things are spun-off sometimes in preparation for a sale or a merger acquisition. Is there any -- was that a motivation here in doing the spin-off at all?
Harry Vafias : Again, I think you're asking things which are not in the public domain. And if we tell you, you're going to be considered an insider. So I guess we cannot answer that question.
Unidentified Analyst : Right. But of course, me and every other shareholder or anyone that wants to access this conference call in the public domain. So I'm not sure I agree with that. But anyway -- okay.
Harry Vafias : Nothing to be said then, sorry, my good friend.
Unidentified Analyst : Right, right. I understand. Well, if you could check with your counsel because--
Harry Vafias : Yes, please send an e-mail so that we don't forget it. Please send us an email and we'll come back to you.
Unidentified Analyst : Yes, I've had -- what is your -- what is the address to use for an e-mail?
Harry Vafias : It's on our announcement. It's all in all our announcements, you can find it there.
Unidentified Analyst : Right, I had an issue previously on. Because the -- for example, the common stock Imperial Petroleum, has traded between 3-ish and 7-ish. It's had a range of 100% and some odd. So -- and I think one of the reasons is the statement that the assets are worth substantially less than book and there's no guidance as to what it's worth. So you have this huge prospectus and shareholders have received dividends but we have no idea of accessing what this distribution is worth. So the market...
Harry Vafias : Exactly. But, you are asking the same thing twice.
Unidentified Analyst : Right. I understand.
Harry Vafias : Please send us an e-mail so that we can check if we can disclose information. And if we can, we'll be delighted to give it to you.
Unidentified Analyst : Good.
Harry Vafias : Thank you very much.
Operator:
Harry Vafias : I think there are no other questions. So we would like to thank you for joining us at our conference call today and for your interest and trust in our company. And we look forward to having you with us again for our fourth quarter '21 results in February '22. Thank you.
