Q2 2021 Ardmore Shipping Corp Earnings Call
Yeah.
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Good morning, ladies and gentlemen, and welcome.
Welcome to Ardmore shipping second quarter 2021 earnings conference call today's call is being recorded and an audio webcast and presentation are available in the Investor Relations section of the company's website Ardmore shipping dot com.
We will conduct a question and answer session. After the opening remarks instructions will follow at that time, a replay of the conference call will be accessible anytime during the next 2 weeks by dialing 187734475 to 9.
Or.
1 for 123170088 and entering pass code 101589 excuse me.
10158719 again.
10158719, if you require operator assistance. Please press Star then zero at this time I will turn the call over to Anthony Gurnee, Chief Executive Officer of Ardmore shipping.
Thank you and good morning, and welcome to Ardmore shipping second.
Again 2021 on earnings calls.
First of all ask Paul <unk>, our CFO to describe the format from the call and discuss forward looking statements.
Tony and welcome everyone before we begin our conference call I would like to direct all participants to our website and Ardmore shipping dot com, where you'll find a link to this morning's second quarter 2021 earnings release and presentation.
Quarter, Tony and I will take about 15 minutes to go through the presentation and then open up the call to questions.
Turning to slide 2 please allow me to remind you that our discussion today contains forward looking statements actual results may differ materially from the results projected from those forward looking statements and additional information concerning factors that could cause the actual results to maturity.
So from those in the forward looking statements is contained in the second quarter 2021 earnings release, which is available on our website.
And with that I'll turn the call back over to Tony.
Paul So.
In terms of format for today's call to begin with I'll discuss financial highlights and recent product tanker market activity.
After which Paul will provide an update.
On product tanker fundamentals and financial performance and then I'll conclude the presentation and open up the call for questions.
So turning first to slide 4.
We reported adjusted net loss of $7.6 million or <unk> 23 per share for corp for the quarter compared to $8.6 million or 26.
<unk> per share for the first quarter. The result of extremely challenging trading conditions as a result of the pandemic, but with a recovery now on site later this year, which we will discuss in depth later on.
Charter rates improved in the second quarter, representing continued sequential improvement from the low seen in the fourth quarter of last year, but we're now.
Seasonally soft summer period.
RMR has earned 11600 per day in the second quarter compared to 11200 in the first quarter and 9700 in the fourth quarter of last year.
For the third quarter to date, we've earned approximately 10000 per day with 40% per quarter fixed and expected decline.
Aligned given the time of the year regarding the seasonal slowdown.
Our chemical tankers continue to perform well relative to M ours with earnings of 12300 per day or 14000 on a capital adjusted basis, but are now following the product tankers down in a seasonally soft summer period.
Meanwhile, on the face of these challenging markets.
On 2 occasions, we continue to focus on operating performance financial strength and executing on our energy transition plan.
Operationally, we're performing well relative to the market and our peers and in anticipation of improving market conditions are looking to build earnings upside most recently by adding another Tc in MLR for a period.
Up to 1 year at a rate of 11850 per day.
Regarding balance sheet strength, we closed and funded a $25 million perpetual preferred issuance with maritime partners and we also refinanced 2.2015 built ships on a sale leaseback basis with an existing fence here, providing net cash proceeds of $15 million.
The conditions of our energy transition plan, we closed the element 1 transactions in June and among other other initiatives. We're working on deploying the lean marine fuel on system across the fleet, which will improve our fuel efficiency and represents an excellent return on incremental investment.
As of quarter end, we had total cash and Undrawn lines of 77 million.
And the tour consisting of cash on hand of $55 million and available undrawn facilities of $22 million and net leverage of 48%. So we're in a very comfortable position financially despite the ongoing market challenges.
Moving to slide 6 for a summary of MLR charter market activity.
Rather than walk through the slide here in detail I'd like to make a few key observations.
First is that the increasing level of market activity during the quarter resulted in the third successive improvement quarter from the market bottomed and while the market has been weak it's felt quite normal in terms of the tight and the amount of trading activity.
Second is that this level of market activity was sufficient to result in real moves in charter rates when the colonial pipeline hacking incident occurred meaning that there was a sufficient based on demand to support a market improvement with relatively little increments.
On the third thing I want to mention is that if you introduced on top of this base of demand.
Another 3 to 4 million barrels a day is expected by the end of the year you should have a very healthy spot market again.
And fourth and finally the.
The shutdown of the Quinn on a refinery in Australia, which as discussed on the slide is a case study on refinery dislocation, resulting in another 32 mris, calling there in the quarter.
Or about <unk> 10, a month and representing roughly a half per cent increase in global emaar ton mile demand that small, but it is nevertheless, incremental and permanent and resulting from the retirement of just 1 relatively small refinery and an ongoing trend of shutdowns.
In terms of our own fleet deployment as you can see on the callout box on the lower left.
In the second quarter, we were 55% east and 45% West 23% of our revenue days were from chemicals, and 19% of our fleet with time chartered out meaning that if you deduct Tc out of chemicals, only about 60% of our revenue days were exposed to very challenging spot market.
And with that I'd like to hand, the call back.
Thanks, Tony.
On the next 2 slides, we will take a look at the product tanker demand drivers, primarily underlying load consumption and increasing ton mile demand as a result of accelerated refinery dislocation.
So looking firstly at global on demand on slide 8.
The global on demand recovery is well underway current toy consumption is expected.
Expected to increase by approximately 4 million barrels a day by the end of the year.
<unk> on demand is coming back strongly unexpected to exceed pre COVID-19 level to September while the recovery in aviation fuel remains constrained by border closures.
Overall demand across all refined products is expected to return to pre COVID-19 levels. This winter is the vaccine rollout continues.
Paul.
At the same time oil production is expected to increase to meet demand OPEC plus a reversing their cuts while other producing regions are gradually increasing their output.
Finally on product inventory surpluses have been worked through with current stock levels in line with the 5 year trailing average.
Moving to slide 9 we take a look on refinery dislocation developments, which is a key driver of ton mile demand growth.
Dislocation with the shutting down of locally oriented refineries in developed areas and subsequently supply in those markets would refined products transported by sea from refineries, which are opening in the middle East and China.
As you can see on the map on this slide there is a very care trend and where the refineries are closing and where refineries are opening.
Over the past few years, we have seen a redrawing of the global refining map.
Specifically closures net less efficient refineries in the U S Europe, and Australia, and Japan and at the same time significant refinery capacity.
The expansions in the Middle East and Asia. These.
These new refineries are larger and much more efficient.
And while the trend that's been ongoing for some time the pandemic has accelerated the closure of smaller refineries approximately 4 million barrels a day of refinery capacity has been closed or announced since the start of last year.
Recently in June it was announced that the 200000.
That was in part a day refinery in Saint Croix, which shows.
Again indefinitely.
And Meanwhile, the new 400000 barrel a day design refinery in Saudi Arabia, and the 600000 barrel a day refinery in Azure and Kuwait are scheduled to come on line later this year.
Overall refinery dislocation developments are providing a significant.
Capacity on boost to our markets, which will become more evident in the coming months as oil consumption returns to more normalized levels.
Turning to slide 10 supply growth for prototype because remains constrained.
The significant increase in ordering activity in other shipping sectors is resulting in a crowding out of tankers.
Significant tailing future supply.
The order book is already very low as you can see on the graph on the upper right. The product tanker order book is 6.7% of the face with 208 ships delivering over the next 3 years.
Net of scrapping, which we will go through in more detail below we expect fee growth of less than 1% for the next 2.
2 to 3 years.
On the graph on the low right you can see that the product tanker scrapping has significantly increase what level. So far this year doubled 2019.2020 full year numbers, despite COVID-19 related challenges.
40 product tankers have been scrapped so far in 2021 equating to a.
On <unk> 70 ships for the full year.
The scrapping levels are encouraging, particularly given the scrapping the delays that scrapping difficulty subsidiaries in southeast Asia, where activity has been hampered by COVID-19 restrictions.
We also expect scrapping to increase in the coming years, firstly increased admissions and.
On efficiency targets associated with the energy transition will put pressure on older and less efficient ships.
Secondly, the product tanker fleet is aging currently 214 product tankers that are over 20 years old equating to an average of 50 to 60 ships.
To be scrapped annually for the next 5 years.
And looking further out there.
930 ships over 15 years old, which would indicate a much higher scrapping rate over the next 10 years.
Overall based on the low order book on current and anticipated scrapping levels, we expect product and chemical tanker supply growth to be muted for the next 3 years.
Yeah.
Moving to slide 12 for a summary of our quarterly performance and financials.
We're continuing our focus on cost control on efficiency improvements.
Operating expenses are under budget at $15.1 billion for the second quarter compared to $14.3 million for the same period last year, reflecting operational constraints in 2020.
Looking ahead, we expect operating expenses for the third quarter to be approximately $16.5 million.
Chartering expense was $1.4 million for the second quarter, and we expect cost for the third quarter will be $2.3 million with the addition on ship chartered in in June.
Depreciation and amortization totaled $9.2 million for.
In quarter, and we expect depreciation and amortization for the third quarter to come in at $9.3 million.
Total overhead costs were $4.9 million for the quarter, comprising corporate expenses of $3.8 million commercial on chartering of 600000 on 500000 on noncash items.
As mentioned before.
The second in many companies the commercial and chartering costs are incorporated into voyage expenses, which means that the corporate cost as a comparable overhead.
Overall, despite our ardmore ardmore cost structure is amongst the lowest of our peer group. Despite our smaller sites with significant incremental improvement possible through scan.
Currently our internally.
<unk> and overhead costs of approximately 50% of market rates prevailing pool fees.
For the third quarter of 2021, we expect total overhead incorporating corporate and commercial to be $4.9 million, including cash and noncash items.
Interest costs came in at $3.7 million from the second quarter compared to $4.8.
Commercially for the same period last year.
Lower interest cost reflects the fixed to floating to fixed swap entered into in May 2020, currently $270 million of our debt or 70% of our debt is fixed at a margin plus 32 bps through may 2023.
We expect interest on finance costs for the third quarter.
<unk> $24.8 million, including amortized deferred finance fees of 460000.
Finally, as you can see on the chart on the low rise, we're maintaining a strong liquidity position with $55 million in cash on hand as at the end of June with an additional 22 million available and Undrawn lines.
Yeah.
To slide 13 for fees and operations highlights, we're continuing to invest in the fee to optimize operating performance. We had no dry dockings in the second quarter, but we 3 dry dockings scheduled for the third quarter, including 1 ballast water treatment system installations.
In total we're forecasting capex of $6.2 million for 2021, comprising 3 dockings.
On ballast water treatment system installation on performance enhancing upgrades.
Forecasted revenue days for 2021% to 9410, we have 5 vessels are fixed on time charter at attractive rates, representing 19 percentage of revenue days for the third quarter.
Overall, the fleet continues to perform well with all COVID-19 related challenges.
<unk>.
Continuing to be carefully managed.
Turning to slide 14, we take a look at charter rates as mentioned rates have improved slightly from the prior quarter. We reported a fleet average TCE of 11800 per day in the second quarter up from 11350 per day for the first quarter.
<unk>.
Average 11650 for the quarter comprising 11800 on eco designs on 11130 on the commodity.
Meanwhile, the chemical tankers are performing very well on a relative basis.
As with previous quarters, we were presenting the charter rates on the chemical tankers on an actual on capital adjusted basis.
<unk> <unk> to present the rates for the various vessels on a comparable basis to an EMR.
Chemical tanker rates reported 12300 <unk> per day for the quarter on on a capital adjusted basis. The chemical chips reported 13090.964 per day.
Looking ahead as of today and already mentioned by Tony for the third quarter, we are 40.
2 of our days booked on the EMR that 10000 per day on 710000 per day on the chemicals of 35% of the days booked.
Turning to slide 15, we are continuing to prioritize financial strength we.
We have a strong balance sheet and liquidity position total net debt of $321 million with corporate leverage on a net debt.
Percentage of 48%.
We refinanced 2 of Mars with existing financials on a sale on leaseback from June with cash proceeds of $15.5 million after prepayment of debt.
In June we completed the drawdown on 25 million on the preferred equity from Maritime partners on the second tranche of $15 million and subject to final requesting approval.
<unk> debt.
Debt reduction remains a key priority on your capital allocation policy with all of the Ardmore set amortizing.
We have scheduled debt prepayments repayments of $19.6 million for the second half on a maintaining revolving credit facilities for financial flexibility.
The preferred share issuance provides flexibility to prepay debt reduce.
The cash breakeven levels and finally, we have unrestricted available liquidity of $3.1 million per 1 ship, which is amongst the highest of our peer group.
And with that I would like to turn the call back over to Tony.
Thanks, Paul so to sum up on slide 17.
Alex tanker charter rates improved quarter on quarter, but we.
Costa in a seasonally slow period.
Chemical tanker rates are performing very well on a relative basis with rates outperforming product tankers for the last 3 quarters a trend we expect to continue.
We also expect product and chemical tankers to lead in overall tanker market recovery given the very we expected very rapid recovery in CPP demand.
While the exact timing from a market recovery is unclear, we do expect to see meaningful improvement in tanker rates towards the end of the current quarter and into the next as economies reopen in earnest in international Air travel begins again.
Meanwhile, the EMR supply outlook is very positive with the scrapping rate now 3 to 4 times the level of 2020, and an ordering boom in other shipping.
Shipping sector is picking up yard capacity and driving our pricing.
As we wait a market recovery operational performance and financial strength remain our top priorities.
We also continue to pursue our ETP initiatives, we closed the element 1 transactions in June and are working on other initiatives to drive improvement in fleet performance and emissions reduction.
As a final point, we recognize that the purpose of these calls is to discuss economics, but we must remember the very real impact of COVID-19 on our operational world in particular, our thoughts remain with our seafarers and their families and we're working everyday to ensure their health and safety through the pandemic. We're very pleased to have co led the seafarers International relief.
Fundraising effort initiated in May and we want to thank those of you who participated.
And with that we're happy to open up the call for questions.
We will now begin the question and answer session to ask a question you May Press Star then 1 on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the keys.
Any time your question has been addressed and you would like to withdraw your question. Please press Star then 2.
At this time, we will pause momentarily to assemble our roster.
The first.
First question comes from Jon Chappell with Evercore. Please go ahead.
Thank you.
Good afternoon.
Hey, John.
Paul My personal loans for you.
The seawell from the Seahawk Refinancings may free up a fair amount of cash relative to the size of your.
Our balance sheet. Just curious did you have to change the terms of those financing to take on a bigger spread and then also are there any other ships in your fleet, where we have the potential to do a similar refinancing will create the same type of liquidity.
Good question, John So on the specifically on those 2 ships Dave actually it's.
It's an existing financier, but they've moved from a bank facility to a sale.
Sale and leaseback structure.
So the terms on the pricing of that wood reflects the more leasing type structure. So a slight slight increase on the margin there.
Yes, we would have we would have a number of other ships from the fleet that we could.
Put into those type structures, if we need.
2.
But as Tony pointed out and I pointed out on my comments as well, we've got a strong liquidity position now and.
And there's no it doesn't feel like there's any any immediate needs for any any any financings.
For the next from the next.
On a quarter or so.
Okay. I mean can you just say how many shifts because it's good to know.
You have that option without a more dilutive.
Subsidy if need be.
Oh, yes, no we have.
I think its approximate 8 ships on on <unk>.
10 ships on senior bank financing, which we could transfer to <unk>.
Great and then my second question.
I know you said you have 80 Drydock days coming.
I.
Read about this lean marine's fuel on propulsion and installing it on the entirety of your fleet.
Is this something that can be done in voyage is it's something that's done just during the normal dry dock will there be an acceleration of dry dock days in the quarters forthcoming to do that and then also maybe if you can just explain.
A little bit more of the financial benefits of using this technology.
Sure.
And then pass it over on to Tony but no. The lean Marine system. We've had it on 1 of our existing ships trialing. It for a period of time that doesn't require any additional dry dock. He can be done on on the on the run and the dry.
But it's a day is yes, we had shipped scheduled for dry docking in the second quarter, but you arent constrained stable now that would be done on the third quarter. So on 80 days would be it would be pretty standard for that and then in terms of the field.
<unk> benefits and pay off the payback on these things as a matter of months I don't know Tony If you have any further comments on yes, I mean, it's probably close to 2.
My Doctor across the fleet, we will roll it out over time, there is no no meaningful time out of service and it can be done on the round as Paul said and the IRR is about 75 per cent.
Okay, great. Thanks, Tony Thanks, Paul.
Thanks, John.
The next question comes from Randy given.
With Jefferies. Please go ahead.
Howdy gentlemen, how's it going.
Hey, Ravi.
So looking at debt the 1 year time charter in.
Everything like that deal. They are on your 12000, a day for the 2009 built MLR is.
Given the big discount there relative to maybe a modern or eco 2015, and 16 built MLR any further appetite for further time charter ins here.
We're pretty selective on what we do probably.
He co designed with cost maybe 1000.
<unk> because that's what that's the additional incremental earnings.
From the fuel efficiency and a bit of commercial flexibility.
And the design.
So, yes, I mean, we.
It's time chartering in now is that you could consider it a core part of our business.
Great.
Alright, and then I guess second question.
Obviously the E on deals complete you raised the 25 million in the preferreds.
Congrats on that any updates on timing for the additional $15 million in preferred equity and maybe the use of capital that $25 million or even $40 million.
Thanks, Randy I'll take day, so no update on timing of tender.
<unk>, it's likely after the summer break at this point.
And in terms of use of proceeds there is nothing earmarked for it right now I think maintaining financial flexibility is a key priority for us.
But in terms of use of proceeds.
Debt reduction.
<unk> or opportunistic acquisitions or just investments in the energy transition. So I think the main priority right now is maintaining a strong liquidity position and maximum financial flexibility.
Got it.
Well that's it from me thanks, so much.
Thanks, Randy Thanks Ronny.
And if you have a question. Please press Star then 1.
The next question comes from Magnus <unk> with H C. Wainwright. Please go ahead.
Yeah, Hey, guys just a couple of questions last just.
On the.
Hydrogen joint venture I mean, it's been 6 months now do you have any can you give us a little update on what's going on there.
What our expectation should be over the next 12 months.
Thanks, Magnus So I guess, even marine it officially.
So on the at the end of June on June 17th So the management team there managing director in place.
On a marketing director will be joining in the next in the next few weeks. So they're busy right now they are working on.
On a class approval for the system on getting at Mariner East I suppose for want of a better phrase.
It's possible.
We closed on our sales on the board this year, but for Nike it'll be in 2022, So I think right now they're working on on the regulatory modernization and.
But significant inbound interest from.
From the shipping community as well across all sectors. So I think.
It bodes very well for that for that business, but I would say likely 2020.
Where do we go before we get proper sales on the board.
Alright, very good that's it from me thank you.
Thanks, Brian.
This concludes our question and answer session.
And today's Ardmore shipping second quarter 2021 earnings conference call.
<unk>. Thank you for attending today's presentation you may now disconnect.
Yeah.
Okay.
Yeah.
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<unk>.
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No.