StealthGas Inc. (NASDAQ:GASS) Q2 2023 Results Conference Call August 18, 2023 11:00 AM ET
Company Participants
Michael Jolliffe – Chairman
Harry Vafias – CEO
Konstantinos Sistovaris – IR
Conference Call Participants
Tate Sullivan – Maxim Group
Climent Molins – Value Investor’s Edge
Operator
Good day, and thank you for standing by. Welcome to the StealthGas Q2 2023 Results Conference Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.
I would now like to hand the conference over to your speaker today, Mr. Michael Jolliffe, Chairman of the Board. Please go ahead.
Michael Jolliffe
Good morning, everyone, and welcome to our second quarter 2023 earnings conference call and webcast. I’m Michael Jolliffe, Chairman of the Board of Directors and joining me on our call today is Harry Vafias, our CEO, to discuss market and company outlook and Konstantinos Sistovaris, handling Investor Relations to discuss the financial aspects.
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, if 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. Today, we released our earnings results for the second quarter 2023. While we didn’t break last quarter’s record profits, we maintained a strong profitability of $10.5 million, resulting in our best performance on record for the first half of any year.
So, let’s proceed to discuss these results and update you on the Company’s strategy and the market in general. Please turn to slide 3, where we summarize some highlights.
In terms of our sale and purchase activity, we continue to look for opportunities to sell some vessels now that asset prices are rising. We first concluded the previously announced sale of 4 vessels and the last 2 were delivered in July and then entered into a new agreement for the sale of 2 more of the smaller LPGs, the Eco Dream and Eco Green to a third party with delivery in early 2024 for circa $35 million on block.
In terms of chartering, we were less active and concluded 2 six-month period charters but we continue to have secured with employment 80% of the remainder of 2023 days. We have locked in about $90 million in revenues for all subsequent periods.
Looking briefly at our financial highlights, with on average 4 less vessels during the six-month period, our net voyage revenues came in at a very strong $67.2 million compared to $66.3 million last year, a 1% increase in spite of the much smaller fleet.
Adjusted net income for the second quarter was $10.7 million compared to $11.3 million last year, a 5% decrease. Whilst for the recent six-month period, adjusted net income was $28 million compared to $20 million last year.
As we have now reported half of 2023, so far, our profits have been the best on record. We are delighted to announce earnings per share for the six months of $0.71. During that period, we have halved our debt by paying down facilities of $105 million in just six months and still maintaining strong liquidity. To update you on the share repurchase program that was announced during the previous call, up until now, the Company has used up about a third of the $15 million the Board authorized and has repurchased 1.1 million shares, which is close to 3% of our outstanding shares.
Let us move on to slide 4 for our fully owned fleet employment update as of August. These being summer months, period activity was slower. And as previously stated, we entered into only 2 new time charters. However, our contracted days remain at an elevated 80% for the remainder of 2023, and we have secured circa $43 million in revenues.
Our total contracted revenues for all periods up to 2026 are closer to $90 million. It is also worth noting that we currently have no vessels in the stock market as they are all fixed on period charters. Lastly, out of the three Handysize vessels due for drydocking this year, all have completed their dry dock, 2 of them during the same quarter and hence, the elevated drydock expense for that quarter. However, there are no more vessels due for drydock in our fully owned fleet for the remainder of this year.
In slide 5, I would like now to provide an update on our two joint ventures comprising of five vessels. The first joint venture of four small LPG vessels did not enter into any new period charters, mainly due to the fact that three of the vessels were also due for drydock this year. So here, 3 out of the 4 vessels operate in the spot market. The Gas Haralambos completed its drydock in June and remains in the spot market.
We may postpone 1 of the 2 remaining drydocks to 2024. The second joint venture currently comprises of a single medium Gas Carrier in the water plus one more under construction. Following the sale of one vessel in the first quarter, StealthGas received $19.2 million cash in distributions in the second quarter, again boosting its liquidity. As previously discussed, the remaining vessel, the Eco Ethereal, is on a very profitable time charter for one year with a charterer’s option to extend one more year and a sale or purchase option all at profitable levels. The operating cash flow of the Eco Ethereal allowed the joint venture to also pay off the $10 million debt on that vessel in June, so it is currently unencumbered.
Regarding the newbuilding vessel, there’s no intention to fund the new building acquisition with StealthGas equity. The joint venture has sufficient cash in hand, earmarked for this and recently secured a circa $30 million commitment from a financier for the debt needed for the delivery of the vessel, subject to customary closings.
In terms of our fleet geography presented in slide 6, our company focuses on regional trade and local distribution of gas rather than long distance. This graph is a snapshot of the positioning of the fleet, including the joint venture vessels, as of August 2023. The distribution of our fleet has not really changed since our last call, and 17 vessels are positioned in Europe, particularly in the Northwest and in the Mediterranean.
The gap between time charter levels in the East versus the West continues to be considerable, and we may see some vessels deciding to position from East to West in the search for more lucrative period cover. For the time being, we have well positioned more than half of our fleet in the most lucrative market. In addition, eight vessels are trading in the Middle and Far East, four vessels trading in the U.S. and Caribbean, and three in Africa.
I will now turn the call over to Konstantinos Sistovaris, who will discuss our financial performance.
Konstantinos Sistovaris
Thank you, Michael, and good morning to everyone. I will discuss our financial performance for the second quarter of 2023. Let us turn to slide number 7, where we see the income statement for the second quarter and 6 months of 2023 against the same periods of 2022.
Even though calendar rates were — calendar days were reduced by 12%, net revenues came in at $33.1 million for the quarter and $67.2 million for the six months, a small increase of 1% compared to last year for the six-month period. That was mostly due to a reduction in voyage expenses, but also due to the firmer rates. Operating expenses were $13.4 million for the quarter and $27.9 million for the six months. Overall, there has been a significant increase in operating expenses as a result of inflationary pressures that was actually more pronounced during the first quarter, less so in the second quarter that the Company is actually trying to control.
In terms of drydocking costs, an item that had major differences in the comparison, but also depends on the timing of the drydockings. We had $1.5 million in the second quarter and $2.6 million in the six months, an increase of $2 million or 3.5 times in the six months. That was because we drydocked 3 out of the 4 Handysize vessels in the fleet, and they are the larger vessels and hence, incur higher expenses when drydock every five years.
During the second quarter, the Company also recognized a noncash gain on the sale of two vessels that were delivered of $2.9 million and a noncash impairment of $2.8 million on the agreed sale of two vessels that will be delivered in January 2024.
Interest and finance costs were slightly reduced over the quarterly period and flat over the six-month period at $5.1 million, even though rates have more than tripled in the comparative periods. This is a result of the aggressive debt repayment the Company engaged in order to control interest costs.
For the six-month period, there was also a considerable increase in equity income in joint ventures, which is our share in the profits of our joint venture structures that came in at $10.5 million and was mainly attributed to the profits from the sale of one joint venture vessel in the first quarter.
As a result of all of the above, we ended the second quarter of 2023 with net income of $10.5 million compared to $12.2 million for the same quarter of last year; and for the six months period, $27.3 million compared to $19.8 million last year. Profits for the six-month period were the highest this company has ever seen.
Moving on to our balance sheet in slide 8. Our liquidity, including restricted cash and short-term investments was at the end of the quarter $55.1 million, reduced from $95.7 million at the end of last year due to the debt repayment.
Vessels held for sale were $63.6 million as of June 30th and it refers to the four vessels under agreement to sell. During July, the sale of the two vessels was completed and liquidity increased by about $35 million. Advances of $23.4 million remained unchanged and relate to the advanced payments made on the medium Gas Carriers, vessels under construction. Vessels’ book value decreased from $628 million to $515 million due to the sale of the vessels.
The total book value of our investments in our joint ventures decreased to $38 million, following a $19.2 million dividend we received during April after the sale of one vessel. The overall outstanding debt was $140.5 million compared to $277 million at the end of last year. Over a six-month period, the Company has halved its outstanding debt. As a result of the solid results being reported, we increased shareholders’ equity to $541 million.
Concluding our financial commentary with slide 9, we will briefly have a look at the debt profile. As a result of both recent vessel sales and rising interest rates, there was a major focus on reducing leverage for the Company. During the first quarter of 2023, $32 million of debt, including regular amortization was repaid. During the second quarter, a massive $105 million was repaid, and that doesn’t include the repayment of joint venture vessels.
Overall, debt has more than halved from $294 million a year ago to $141 million at the end of the second quarter. During the third quarter, another $13 million has so far been repaid. About 35% of the remaining debt is hedged with the interest rate swaps at an average of 2.1% that further mitigates the effect of interest rate rises.
Overall, we continue to maintain a very low leverage and have increased the number of unencumbered vessels from 10 to 15. As far as the newbuilding vessels are concerned, we have signed a new loan agreement with one of our existing financiers for the financing of the two vessels whereby we expect to receive up to $70 million in finance proceeds for the delivery of these vessels, subject to customary closings.
I will now hand you over to our CEO, Harry Vafias, who will discuss the market and the Company outlook.
Harry Vafias
On slide 10, our brief insight on the LPG market. So far, the first half of the year has been very positive as far LPG supply is concerned, with global exports estimated to have risen by 3.5% as per Banchero Costa reports. The U.S. being a main exporter has been exporting record amounts with 12% increases year-on-year, consistently exporting above 1.5 million tons a month. With current inventories being at high levels, it’s likely this trend will continue.
With the main destination of U.S. export being China and Japan, this has provided firm support for the larger LPG rates and subsequently the medium sized ships as well. The Middle East countries have also been exporting increased amount of LPG, particularly in the second quarter. Although the recent OPEC cut in oil production may moderate this growth, but that remains to be seen.
Overall, in 2023, there has been a positive price differential with naphtha that has supported use of LPG as feedstock by crackers. This had less effect in Europe as plants were operating at lower margins in general, but a more pronounced effect in Asia. There has been a lot of talk in the news lately about China and an importer of LPG and its economic recovery post COVID, with references to declining imports and export numbers. But as far as LPG is concerned, April saw record amount being important and then in May, again an all-time high with 3.3 million tons being imported. Higher U.S. exports, lower propane prices, recovery utilization rates above 70% and capacity additions boded well for LPG demand from Chinese PDH plants.
We have touched on PDH plants quite a few times before as we see it as a macro theme. China wants to control its propane production. Hence, major investments have been made for increasing its capacity. It has been a bumpy ride, but for these plants — but the rapid expansion of PDH capacity in China over the last few years is certain. Two more plants were added in the second quarter and five more are expected until the end of the year.
On slide 11, we present some of the key fundamentals in our shipping market commencing with market rates for our market. As stated in our previous call, on a year-over-year basis, we see significant increases in time charter rates up to 15%. During Q2 ‘23, time charter rates remain steady for the smaller ships while increasing further for the larger ships.
Looking at the small LPG trade West of Suez, the spot market remained tight for the majority of Q2. Since the second half of June, the spot market has started to cool off a bit in line with the usual seasonal pattern we see more or less every year.
On the period side, the market continued in a healthy and a fairly active state through Q2. We have seen a stabilization of rates on the smaller pressure ships and a continued strengthening on the 7,000 cubic meters and above. Expectations are strong for the coming winter period and for the next couple of years in general, and we see keen interest from charters to lock in tonnage going forward.
East of Suez, in Asia, the spot market did not perform as strong as the Western markets did. On the time of the riding, the market is relatively quiet with the expectation of a pickup from September, October onwards, and the period market in Asia remained rather quiet through Q2, with charters still enjoying relatively high TC coverage.
We expect more activity towards Q4. For the Handysize vessels, the spot market continues to remain tight through Q2 as well with little tonnage available on either side of Suez. There was also a spillover effect from the very tight medium-sized market, which again was held up by strong very large Gas Carrier market.
On the period side, rates remain relatively stable and the small order book for this size bodes well for the coming years. I’d like to reiterate that the fundamentals for our core fleet of small pressure continued to look promising as almost one-third of the fleet is over 20 years old, we saw hundreds of vessels being scrapped while market rates hold firm. But this quarter, we also did not see any new ordering of vessels in an already subdued newbuilding market.
As per recent published orders, there are about 18 vessels on order to be delivered up until the next couple of years, a sub 2% annual increase in the fleet before scrapping should eventually lead to defer [ph] vessels in the midterm. We continue to believe that the risk of seeing bulk ordering of new vessels in this segment that could keep the supply-demand balance is improbable.
On slide 12, we are showing the evolution of our LPG fleet. In this slide for comparison purposes, we excluded the tanker ships that we held until 2021, and we focus the pure LPG fleet in terms of cubic capacity, including our JV vessels.
We have always been active in the sell and purchase market buying and selling ships. In a rising market, we continue to sell some vessels after selling 4 in 2022 and 8 more this year as well as 1 sold by our JV. We entered into an agreement to sell another 2 vessels for circa $35 million in aggregate. While we recorded an impairment on this last sale, we extended the timing of the delivery to early ‘24, so we will take advantage a little longer of the profitable charters that these ships are under. We’re looking to sell more vessels if the price is right. Through such sales, we have maintained the average age of our fleet to 10 years, which is quite modern for the industry standards.
Moreover, we have been investing in more newbuilding vessels and our order book consists of three Korean built medium gas ships with 40,000 cubic capacity each. The first one owned by our JV is near completion and will take delivery in October, while the other two, we will take delivery in Q1 ‘24.
It’s a strategic decision to diversify the fleet between the smaller vessels that we have traditionally operated and the larger ships, Handysize and Medium-sized Gas Carriers that have slowly been entering our fleet since 2018.
In slide 13, we are outlining some of the key variables that may affect our performance in the quarters ahead.
We remain optimistic on the longer term for the reasons we analyzed earlier. Despite many uncertainties mostly related to the macroeconomic environment, in the short term, we are in the summer months and the market has held up pretty well so far. We expect, as we enter the winter for the Northern Hemisphere that rates will start increasing as they normally do.
Summing up, after having reported record annual profits last year and record quarterly profits in Q1, the market remained firm, and we had another strong second quarter, allowing us to report record six months profit and keep us on target to break last year annual record. In terms of strategy, during the second quarter, we further divested assets in the rising market, we continue to diversify the fleet with a timely addition of larger, more eco-friendly ships.
We will also largely focus on reducing debt, repaying $105 million during this quarter alone, thus greatly reducing our interest rate expenses. At the same time, our Board authorized us to repurchase shares that we started doing late in the previous quarter. Up to now, we have repurchased over 1 million common shares, and we will continue to do so.
We are in the fortunate position where we can deleverage, diversify, repurchase stock and maintain strong liquidity at the same time. This is the way we are creating shareholder value for our investors. And even though our share price has climbed significantly over the past 6 months, we believe we continue to be a sound investment for anyone wishing to invest in our company at this time.
We’ve now reached the end of our presentation. We would like to open the floor for your questions.
Question-and-Answer Session
Operator
[Operator Instructions] We will now take the first question from the line of Tate Sullivan from Maxim Group. Please go ahead.
Tate Sullivan
[Technical Difficulty] purchase plan late in the second quarter where the majority of the [Technical Difficulty]
Harry Vafias
Sorry. Tate, I cannot hear you. If you can speak louder and more clearer. Sorry.
Tate Sullivan
[Technical Difficulty] most of the repurchases in the quarter.
Harry Vafias
I can’t hear you, Tate.
Operator
We will go now to the next question from the line of David Kwan. [Ph] Please go ahead.
Unidentified Analyst
Yes. What is the current plan to destroy a stockholder value as you did with Imperial Petroleum?
Harry Vafias
Next question, please.
Unidentified Analyst
What is the plan…
Operator
We will now take the next question from the line of Climent Molins from Value Investor’s Edge. Please go ahead.
Climent Molins
On the press release, you mentioned you want to continue to diversify with larger vessels. And I was wondering could you provide some more insight on this regard? Is this something you’re planning to do, let’s say, in the immediate future or once asset valuations normalize? And secondly, do you have a preference for newbuilds for modern tonnage, or what’s your stance?
Harry Vafias
Thank you for your question, Climent. Basically, with the way the market is and with the way that LPG is such a small business with very few players, basically, we don’t have a choice. If we find a good quality vessel, it doesn’t really matter if it’s second and or newbuilding, and it’s valued properly, we’re going to buy it.
Unfortunately, it’s not like dry bulk where you have hundreds of ships, and you can pick and choose when you want to buy and what you want to buy. This is a really small market with very few quality ships for sale. And therefore, if we want to diversify and buy bigger ships, we have to be a bit more — a bit more easy on our decisions.
Climent Molins
Makes sense. Turning towards the share buybacks, it seems you started to use the authorization towards the end of the quarter. What was the reasoning behind this decision? And going forward, could you provide some commentary on how you plan to continue to allocate capital?
Harry Vafias
What was the first part of the question?
Climent Molins
Yes. Like, what was the reasoning to start to use the authorization towards the end of the quarter?
Harry Vafias
Because you need to do legal paperwork, you need to take approvals and all this takes time.
Climent Molins
Makes sense. And regarding the second one, so how you plan to continue to allocate excess capital? So how do you think about repurchases versus newbuild orders? How do you plan to balance it?
Harry Vafias
As we have discussed before, we are in a fortunate position that we can do both. We will buy back stock. We have another approximately $10 million to spend. And we have also to rebuild the Company because we have sold a lot of tonnage over the last two years.
Climent Molins
Yes, makes sense. And final question from me. It’s more on the modeling side. As of quarter end, how much debt did the joint ventures have after the repayment of the loan on the Eco Ethereal?
Harry Vafias
Please send us an email on that because I don’t want to give you a wrong number. If you want to send us an email and we can check and come back to you.
Climent Molins
Yes. Let’s do that. Okay. That’s all for me. Thank you for taking my questions.
Harry Vafias
Thank you.
Operator
Thank you. We will now take the next question from the line of Tate Sullivan, please go ahead, from Maxim Group.
Tate Sullivan
Hello. Thank you. Can you hear me now, Harry?
Harry Vafias
A bit better.
Tate Sullivan
Okay. Thank you. Just for the newbuild deliveries, so the joint venture newbuild is delivered in October and then your first — so your newbuilds in the fourth quarter, the second and the first quarter of ‘24, I believe. Can you talk about the remaining commitments for those newbuilds, please?
Harry Vafias
For the JV, we don’t need to put in new money; for the two other ones that are due in — both in Q1 ‘24, we need to spend about $20 million.
Tate Sullivan
Okay. And then was part of the decision to sell the Eco Dream and Eco Green related to financing those commitments or totally separate consideration?
Harry Vafias
You said financing?
Tate Sullivan
Are you using some of the proceeds from selling Eco Dream and Eco Green to buy the newbuild ships?
Harry Vafias
Not at all. Probably you are a bit confused. We have 15 unencumbered vessels. We can raise hundreds of millions of debt very easily and very cheaply, not at all. We just sold the ships because we saw a very good price for the size and age that the ships were.
Tate Sullivan
Okay. And then, do you — can you share the current number of shares outstanding or after the repurchases — or maybe can you do that in the future?
Harry Vafias
It’s whatever it was minus 1.1 million shares that we have bought back.
Tate Sullivan
Okay. Yes. Just you report the diluted shares. Okay. And then when would you look to start book contracts for the newbuilds for the ships under construction? Is that something that you do well ahead of delivery, or how does it usually work in LPG industry, please?
Harry Vafias
It all depends on the numbers. If we see good numbers in advance, we book; if we don’t, we wait. Normally, we book 30 to 60 days prior to delivery.
Tate Sullivan
Great. Okay. All right. That’s — and then you mentioned you already have $70 million of financing for the newbuilds. And did I hear you right that the — two ships for $35 million. Is that…?
Harry Vafias
Yes.
Tate Sullivan
Okay. Thank you very much.
Harry Vafias
Thank you, Tate.
Operator
There are no further questions at this time. I would like to hand back over to management for final remarks.
Harry Vafias
We’d like to thank you all for joining us today for our conference call and for your interest and trust in our company, and we look forward to having you again with us for the third quarter results in November. Thank you.
Operator
That does conclude our conference for today. Thank you for participating. You may now disconnect.
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