Q3 2021 Ardmore Shipping Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to the Ardmore shipping third quarter 2021.
Paul today's call is being recorded.
Deals are possible presentation are available in the Investor Relations section of the company's website Ardmore shipping dotcom.
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 two weeks.
187731 for Debbie five Tmall.
One one or one to 310.
0088 a M.
Pass code 101611 to one.
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 third quarter 2021 earnings call.
First ask our CFO, Paul <unk> to describe the format for the call and discuss forward looking statements.
Thanks, Tony and welcome everyone.
Before we begin our conference call I would like to direct all participants to our website at Ardmore shipping Dot Com, where you will find a link to this morning's third quarter 2021 earnings release and presentation.
Tony and I will take about 15 minutes to go through the presentation and then open up the call to questions.
Turning to slide two please allow me to remind you that the discussion today contains forward looking statements.
Additionally 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 differ materially from those in the forward looking statements is contained in the third quarter 2021 earnings release, which is available on our website.
And now I'd like to turn the call back over to Tony.
Thank you Paul So let me first outline the format for today's call to begin with I'll discuss financial highlights recent market activity in the near term outlook after which Paul will provide an update on product and chemical tanker fundamentals and financial performance and then I'll conclude the presentation and open up the call for questions.
So turning first to slide four.
We are reporting an adjusted loss of $12 8 million or <unk> 37 per share for the third quarter as compared to an adjusted loss of $7 6 million or 23 per share for the second quarter.
Our MRO average 10280 per day for the third quarter versus 11300 for the second quarter, reflecting extremely tough market conditions impacted by oil demand is still at that times low compared to pre COVID-19 levels oil inventory destocking and reduced refinery throughput.
Our chemical tankers were similarly challenged despite a stronger chemical tanker market as they traded in CPP for a greater percentage of time than usual, earning 10400 per day in the chemical trades, but only 6700 and CGP traits.
Performance through the fourth quarter is expected to be much better, reflecting an improving market, but month by month with October already done at similar levels to the third quarter November Attorney's point and December are expected to be stronger still.
To provide some data in context around this RMR is quarter to date have earned $10004 50 per day with 50% of the quarter fixed and the chemicals at 11400.
However, our EMR voyages fixed over the last two weeks are showing much better levels at 15300 per day with chemicals had 17400.
In addition, as an indicator of the forward market DMR Eco design, one year Tc rate is now at 15400 per day, and the FSA or futures Atlantic triangulation that would be <unk> 14 for December through March is now at 16200 per day, indicating expectations of higher rates This winter and.
Into 2022.
And most recently, we fixed an M. R voyage U S Gulf to carrots, earning 20500 per day on a round trip basis, representing a significant recovery in that market, which has been the worst hit in the recent months.
As an aside one thing to keep in mind is that the Ardmore fleet does not scrubber equipped and thus there is currently a 500 dollar a day TCE differential based on current fuel prices boosting.
Boosting scrubber equipped tce's, but without taking into account the offsetting capital and operating costs of scrubbers.
But back to the market from what we can see the product and chemical tanker trades returned on how far. This goes we will discuss further in the presentation.
Meanwhile, we've made good progress in terms of our energy transition plan, which will also discuss later, but to highlight some of the recent developments even marine has secured its first order for a hydrogen generator from a leading global engine manufacturer and Theres now have agreements in place with Aramco Americas for a joint research project to apply its carbon capture sit.
<unk> two <unk> marine's hydrogen generator.
And as a final point as of quarter end, we're maintaining a strong liquidity position of $61 million of cash and Undrawn lines, plus an additional 15 million cash pending funding of the preferred equity tranche two tranche two.
So moving on to slide five for a discussion of recent market activity in the near term market outlook.
The most notable development is the rapid oil demand recovery expected from the end of August to the end of December which according to Reits that is $3 2 million barrels a day, bringing oil demand close to the levels as of the end of 2019 and with the remaining jet fuel deficit being largely offset by other gains, which you can see in the graph to the upper right on.
This slide.
However, this recovery is being masked by reliance on existing refined product inventories to meet rising demand in other words under supply and destocking, rather than oil production and refinery throughput, which as has been widely commented on is expected to ensign.
As a consequence of this destocking, we now have very low refined product inventories worldwide, but in particular in the Atlantic Basin, which may lead to supply dislocations and thus cargo additional cargo movement through the winter period.
Added to which the energy crisis concerning supply coal natural gas and the impact on electricity supply and pricing has the potential to boost oil demand by an incremental $5 million a million barrels a day through the winter months by virtue of higher gas oil consumption for power generation.
When these factors are layered on top of an already improving product tanker market. We're now expecting a very good run through the winter months.
The near term outlook for chemical tankers is equally positive but for different reasons more in line with containers and dry bulk.
Rapid GDP recovery port congestion regional imbalances and commodity price differentials and a very strong outlook for 2022, which is probably already building in momentum.
So turning to slide six for a discussion of our energy transition plan.
As you probably all know we announced our energy transition plan in March of this year. They cover three key areas transition technologies sustainable cargos and transmission projects.
Through this period last seven months, we've made good progress on many fronts, including our investments in element, one and the related joint venture even marine.
Two recent milestones to report or the Marine has completed its first sale of a generator system to a leading global marine engine App engine manufacturer.
The sales unprofitable terms and it is expected to lead to a commercial licensing agreement and in mass production.
And element one corp is entering into a JV agreement with Aramco Americas to apply their already developed automotive carbon capture system. He wants hydrogen generator, which if successful will result in the world's only function in carbon negative power system for the marine industry.
In addition, we're continuing to advance all aspects of the T P.
Increasing emphasis on sustainable cargos in other words veg oils chemicals, and biodiesel now about 25% of ship days.
In terms of energy efficiency improvements and less carbon emissions reduction, we're installing the lean marine system across our whole fleet.
We're continuing to final installations of PV CFS, we're trialing other energy saving devices and we're in discussions regarding cooperation on the development of an advanced onboard performance management system.
And during the quarter, we renewed the AVN sustainability linked loan extending our maturities in 2023 with a reduced margin for meeting sustainability targets, including emissions levels.
And with that I'll hand, the call back to Paul.
Thanks, Tony turning to slide eight Ah Tony has taken us through the near term market outlook. So I'll focus on the medium term outlook for prototypes of demand, which is also very favorable.
Northern White demand is expected to fully recover and exceed pre COVID-19 levels in early 2022, and then continue on growth trajectory.
Looking to the chart on the upper right. We can see the medium term outlook for oil demand remains firm.
Assumption is expected to reach $104 8 million barrels a day in 2025, representing a one 5% growth rate per annum for the next four years.
Meanwhile, refinery dislocation will continue to have a significant positive impact on product tanker demand, providing an additional layer of growth.
At a high level closures of refineries in developed countries, such as Europe, and the U S means that oil products. We supplied by these refineries are replaced by seaborne imports from new refineries in the middle East and Asia.
The current volume of refined product moved Etsy is approximately 21 million barrels a day and in this context the level of refinery dislocation is significant for product tanker demand.
Between 2021, and 2025 refinery capacity in export oriented locations such as the Middle East and Asia is expected to increase by $9 7 million barrels a day as compared to refinery closures of $5 1 million barrels a day in the U S Europe, Japan and Australia.
In terms of live examples a number of large refinery expansion projects are expected online in the next 12 months after many years of construction.
The 400000, a part of the day <unk> refinery in Saudi Arabia is expected to be fully operational by the end of this year.
The 615000 barrel a day algae oil refinery in Kuwait.
You want to come online in the middle of 2022 and in Oman. The 230000 barrels Jim can refineries is expected to come online later next year.
Overall product tanker ton mile demand is expected to grow by 3% to 4% to 20 to 25, which is above current product tanker supply growth.
Moving to slide nine we highlight the very positive outlook for chemical tanker demand.
Contango trade is highly correlated to global GDP, but the correlation coefficient of 95% from 2010 to 2021.
The global economy has recovered strongly in 2021 with growth of approximately five 5% and chemical tanker demand is now approaching the same pace.
As a consequence chemical tanker freight rates are well ahead of CPP rates Ardmore chemical tankers are currently outperforming MLR product tanker TCE by 2000 to $3000 a day.
Demand backlog is very strong seaborne chemical tanker trade is expected to increase by five 5% in 2022, driven by an ongoing global economic recovery.
Expansion of petrochemical production capacity to meet demand.
And particularly strong export growth of edible oils with an increase of 4% expected in 2022.
Eddie will always represented approximately 35% to chemical tanker demand.
Therefore, we expect chemical tanker charter rates to continue running ahead of product tankers and.
And overall, we expect chemical tanker demand to grow by approximately 4% per annum to 2025, well above current chemical tanker supply growth.
Turning to slide 10 supply growth for products and chemicals tankers is increasingly constrained.
There has been a significant increase in scrapping with both products and chemical tanker scrapping levels well above prior periods.
We're estimating approximately 70 product tankers or two 3% of the fleet.
35, chemical tankers are 2% of the fleet to be scrapped this year.
Sure.
Elevated levels of scrapping is expected to continue as the energy transition accelerates the deletion of older less fuel efficient ships.
ESI carbon intensity index. Another Iowa legislation are expected to accelerate scrapping the application of the new rules are to come into effect on January one 2023.
In addition, the availability of product tankers less than 15 years old which is the core fleet for mainstream trading available for oil traders and oil majors.
Is that to shrink over the next few years for example, unexpected contraction of three 5% in 2022.
This is simply a function of vessels AG now at 15 years old.
Which is a high number versus a relatively light number of new vessel deliveries.
Meanwhile, the current order book is very low at six 3%, a 195 ships for products and four 4% or 78 chips for chemical tankers.
Product and chemical tanker new building deliveries are expected to remain relatively low for the coming years, Firstly Theres limited birth availability as yards are filling up following a surge in orders from other sectors, particularly container ships in dry bulk.
And secondly continued uncertainty on future propulsion and regulatory requirements is leading to ordering hesitation among ship owners.
And overall, we expect net supply growth and product on chemicals to be low for the foreseeable future absent a very strong market.
Moving to slide 12, we take a look at our financial performance.
And starting with TCE rates. It is important to reflect on the impact that Covid has had on product tanker charter rates.
As you can see on the left hand side of the chart and late 2019 and into 2020, the market was steadily gaining momentum driven by improving fundamentals and increased demand for clean products.
At the time the oil market was also preparing for the IMO 2020 fuel switch.
Product tanker rates were very strong in the second quarter of last year due to unprecedented volatility in the oil markets driven by Covid and an oil price war.
And as can be seen under the yellow banner in the middle of the chart on the third quarter of 2020 to date, the oil market experienced unprecedented levels of demand destruction associated with global Lockdowns and restrictions.
Over the past five quarters lagging oil demand lower refinery throughput and inventory Destocking has contributed to record low product tanker charter rates.
We now believe the recovery phase is coming to a conclusion and rates are starting to trend up as you can see on the bars on the right hand side of the chart.
We expect charter rates to continue to strengthen in the coming quarters as the market returns to more normalized conditions.
Moving to slide 13 for a summary of our quarterly performance and financials we.
We are reporting EBITDA of $1 3 million on an adjusted loss of $12 8 million or <unk> 37 per share for the quarter.
Earnings were impacted by the challenging charter market on dry dockings completed in the third quarter.
We adjusted our docking scheduled this year to take advantage of weaker charter rates and completed three dry dockings last quarter, resulting in 80 off hire days.
Meanwhile, we remain focused on cost control and operating efficiency.
Operating expenses came in at $15 5 million for the third quarter compared to $16 1 million for the same period last year.
And looking ahead, we expect operating expenses for the fourth quarter to be approximately $15 9 million.
Chartering expense was $2 3 million for the third quarter and is expected to be $12 $2 1 million for the fourth quarter.
Interest and finance costs came in at $4 4 million for the third quarter compared to 4 million for the same period last year.
The increased interest cost related to refinancings on two shifts completed earlier this year.
We expect interest and finance costs for the fourth quarter to be approximately $4 4 million, including amortized deferred finance fees of 400000.
Total overhead costs were $5 million for the quarter and for the fourth quarter, we expect total overhead incorporating corporate and commercial to be $4 8 million, which includes both cash and noncash items.
Depreciation and amortization totaled $9 1 million for the third quarter, and we expect depreciation and amortization for the fourth quarter to come in at $9 2 million.
As you can see from the graph on the lower right. We are maintaining a strong liquidity position of $61 4 million comprising 54 $5 million of cash at the end of September with an additional $6 9 million available and Undrawn lines.
Turning to slide 14 for fleet and operational highlights were continuing to invest in the fleet to optimize operating performance as mentioned, we completed three dry dockings on one ballast water treatment system installation in the third quarter and we have no further dry docking scheduled until the second half of 2022.
Silicon higher availability was 99, 2% in the third quarter and we're forecasting capex of $2 1 million in the fourth quarter, mainly comprised of payments for dry dockings completed in the third quarter and minor upgrading expenses.
Revenue days for 2021 are forecasted at 9500 <unk>.
In October we time chartered out at an eco design EMR for one year at an attractive rate.
And currently we have five vessels fixed on time charter with an average remaining duration of four months in.
In total for the fourth quarter, we had 19% of fleet days fixed on time charter.
And finally, the fleet continues to perform well and we're very pleased to report that as of today, 83% of the crew are now fully vaccinated and all COVID-19 related challenges are being managed carefully.
Turning to slide 15, we take a look at our capital allocation policy with financial strength remains our top priority. We are continuing to focus on maintaining a strong balance sheet, we had $61 4 million in liquidity available plus an additional $15 million in cash pending funding of the preferred equity tranche two.
Total net debt at the end of September was $326 million.
Corporate leverage on a net debt basis was 48, 5%, which is down one 7% from fourth quarter 2020.
Debt reduction remains a top priority, we have scheduled repayments of $9 2 million for the fourth quarter, and we'll maintain our revolving credit facilities for financial flexibility.
We've renewed the ABL revolving credit facility in September extending maturity to 2023 with reduced margin for outperformance on sustainability targets.
Finally at the end of September we have total liquidity of $2 6 million for one ship, which we believe is the highest of our peer group.
And with that I would like to turn the call back over to Tony.
Thank you Paul so to sum up in the third quarter was impacted by an extremely tough tanker market and we believe that the worst is now well behind us and we've reached a turning point in the market.
We anticipate that the fourth quarter will develop month by month with October already concluded at similar levels as the third quarter November turning point in December expect it to be much stronger.
The market outlook is positive in view of the now close to complete global oil demand recovery and anticipated end to destocking low inventories, creating supply dislocations and potential spillover from the oil crisis into higher gas oil demand. This winter.
The chemical tanker market is similarly bullish but for different reasons rapid GDP recovery congestion pricing differentials driving trade and recognition of the strong market coming into 2022, which already feels like it's building momentum.
The medium term outlook for both products and chemicals was also positive in view of good demand growth coupled with a low order book and constraints on further supply.
Meantime, we're pressing ahead with our energy transition plan and are making good progress with element one and other initiatives.
And we're maintaining our financial strength matched with significant spot exposure in order to benefit from what we are now very much appears to be a rising product and chemical tanker market.
And with that we're happy to open up the call for questions.
Thank you we will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Jon Chappell with Evercore. Please go ahead.
Hey, Tony and Paul This is actually Sean Morgan on for Jon This morning.
So I'd like to just ask a couple of questions on the <unk> Marine JV and what Youre doing there.
So.
<unk>.
Is this a prototype that's been transferred to our manufacturing facility and then you would have a relationship where early in an existing manufacturer would would sort of I guess produce mass produced a prototype or for the JV.
Thanks, Sean it's Paul here so this.
This is actually a sale, it's an outright sale to a global engine manufacturer for a pilot basis.
Plan there is to match the generator up to a fuel cell prototypes.
Prototypes.
If successful expected to lead to a commercial licensing arrangement for <unk> 41.
Okay. So would you would you be getting paid like a royalty or some sort of a commission on their sales of individual units or how would the economics work exactly the commercial licensing model.
<unk> business model for our 41 marine on indeed element one carp is it royalty fee licensee fee based on the number of units sold so it will be an asset light.
Model, but potentially.
Lucrative if it depending on model gets hold.
And then.
The bill sort of influx, but.
They released the preliminary language for for the build back better Act.
There was some stuff in terms of carbon capture credits in either carbon offsets or are other incentives is there anything that you think are applicable to this.
This marine hydrogen JV that youre that you have working.
I guess it's.
It's too early to say on this Sean I think the carbon capture research project, which one have entered into with Aramco is that it's a research projects Theyre mobile as a carbon capture system has been as we've made quite some time ago from mobility applied to trucks and now they're looking to apply to the one system and it sounds like it to vary.
From entry system to the to the E. One so in terms of kind of commercial.
<unk> of this.
Okay.
System down the line in terms of obviously credits, it's too early to say, but what we can say.
Green methanol this would be the first and potentially only carbon neutral.
System Youre recycling capture from Green met Tony any further.
Carbon negative.
It's run on Green methanol and just looked at we don't want to go into a lot of technical detail and we don't want to give the impression that we're no longer shipping company, that's our main business, but but the exhaust that comes out of El <unk>.
Hydrogen generator is already 50% cotwo. So it's an ideal exhaust stream for carbon capture.
Okay. Thanks, and then is there any limit to the scale that you can use this technology I see on slide six you have kind of a smaller Todd looking vessel is there.
Could you scale this up theoretically to like a cape or a VLCC or is it kind of.
It can be sort of limited to smaller vessels.
Yes. It is.
Really ideally apply to smaller vessels either river coastal but importantly, it's a very good generator generated replacement onboard any ship.
Great. Thanks, guys.
Surprisingly fuels burned and generator assumptions.
Okay I appreciate that thank you.
Our next question comes from Randy <unk> with Jefferies. Please go ahead.
Hi, Tony and Paul.
Hey, Randy.
Great.
So looking first at your fleet seems like the chemical tankers continue to maybe outperform the mr's here.
In recent weeks can provide some additional commentary on that and when do you expect <unk> to kind of inflect above cost.
Well I'll take a stab et cetera that Randy yes, it's really interesting I think its largely due to the fact that when you get when you get into periods of rapid GDP growth that really.
The chemical tankers, whereas <unk> are obviously impacted by that as well, but but theyre more.
Subject to the forces of the oil market itself.
And what's really happening is global GDP growth.
On port congestion rates are very very strong in North Asia for example, and that in the chemicals sector thats kind of spreading worldwide.
We think so.
So I think as long as we we think that chemicals will continue to run ahead of us.
For for a while but having said that we're really pleased with what we're seeing now in the MRM space.
Sure.
And then I guess second question on kind of the balance sheet any update on the $15 million preferred option.
No you might not need it for cash reserves, our fleet updates currently but maybe thoughts on using those proceeds for.
Share repurchases at this discount to NAV.
Yes, thanks, Randy So an update on the <unk>. So we do expect to draw that and that will be subject to custom.
Customary closing customer closing conditions and would expect that too to complete within November in terms of use of proceeds I think look I'll direct back to early 2020, when we put in place in our capital allocation policy and the priorities there in terms of debt reduction financial strength et cetera, So I think.
In terms of share repurchases I think the priorities.
We will continue to be on debt reduction until we reach our targets.
In the policy.
Yes.
Good deal that's it from me thank you.
Thanks Randy.
Our next question comes from Magnus <unk> with.
Seaport Global please go ahead.
H C Wainwright.
Hi, Tony on the call just.
Question on your capital allocation you mentioned the debt reduction remains a key priority and maybe it's a little bit early.
With the rates picking up here, but as you go from playing defense to offense.
What what are the priorities.
Besides debt reduction going forward.
Product tankers versus investing in your.
One marine venture.
Thanks, Thanks, Michael I will take a stop of that again I think the.
When we drafted the capital allocation policy early last year, we very much kind of took account of the cyclicality in our business and there is a time to financial strength.
And it's true.
It does allow a company to be counter cyclical and really to kind of grow at opportune points in the markets that remains to kind of longer term focus building financial strength, and then using that as a as a competitive advantage to grow kind of <unk> I think thats still remains the top priority for.
For us now and going forward.
Okay, and you mentioned the.
The core product fleet.
So 15 years of age average age is below 10 years your.
You asked for smaller chemical tankers that are built after.
<unk>.
Look of course.
Yes.
Yes.
The chemical market different from the product tanker market and then how do you see those guys hold trade here over the next five years.
Hey.
This is Tony.
Yes, so actually those ships are under commercial management, we don't own them.
But they trade alongside our very modern and fuel efficient units that were built in 2015 about the same size.
The earnings differential is significant because of the fuel efficiency and the greater capability.
I'm glad you brought up the 15 years of age or less immediate.
I think it's as much an issue in the chemical sector as it is in products.
The oil majors oil traders, who also engage in chemicals to a degree but also the chemical tanker companies state.
We have a strong preference for modern ships.
And this is a really interesting point because.
The focus is always on scrapping, but the reality is that the the fleet that's available to the mainstream traders oil majors et cetera is really up to 15 years of age and it's very interesting to see how.
How how thats going to be shrinking because deliveries are just not keeping up with the with the numbers of ships that are aging out at 15 years.
Okay. Thank you.
Hi, Ken if you'd like to ask a question. Please press Star then one at this time.
Next question comes from Ben Nolan with Stifel. Please go ahead.
Hey, guys.
I wanted to dig and you talked a bit about that.
But in general.
Not all chemical tankers are created equal right.
And clearly <unk>.
<unk> been able to benefit here recently from an improvement but.
As you sort of look out over the landscape of.
What is developing as there.
Is there a right fit that you can say okay. This is the type we want we want stainless or marine line or whatever that is.
Matching up nicely with where you see demand going.
We just see broadly chemicals are attractive.
Something that there's an interesting article in trade winds.
Written by Clarksons.
Based on some comments out of <unk> that they're excited about the fact that <unk> that have been trading aggressively into the chemicals space theyre going to be pulling back in a stronger EMR market. So that crossover business is very real that's currently where we live.
And we also have our.
The coated chemical tankers that debt go more deeply into the chemicals sector, but I think broadly we just we just view the chemicals sector.
In the very near term.
As being quite attractive and then longer term, we think that that's where the growth is going to be.
So so broad based but certainly easy chems.
Are they are in that.
And let's see let's see where we are.
<unk> opportunities take us down the road, but at the moment, that's what we do.
Right Okay.
And you just mentioned with Magnus that Youre doing some commercial management of third.
Third party vessels.
You have for a while now.
I am curious, especially if the cameras are getting more interesting you've been at it for a while here.
Do you think there's more opportunity to maybe be able to do more of that in.
And sort of participate in an asset light way, but.
It gives you a little bit more leverage in the market.
Yes, we would love to to be honest, but the challenges that can that can actually end up being very distracting. If you develop a kind of a third party management pooling.
You know kind of.
Model, which is not our intention.
The the four under commercial management are very high quality German based company that granted the ships are older but they are in great shape in there and they're very good to trade.
So we would be looking for strategic.
Type of relationships like that as opposed to just opening the door to people with one to two ships at a time.
Gotcha.
Alright, I appreciate it thanks Tony.
Thanks, Ken.
Okay.
This concludes our question and answer session as well by call for today.
Thank you for attending today's presentation you may now disconnect.