SIMON SAYS: It’s in the hands of the ship owners to call twist!

Submitted by Simon Hill on Wed, 11/20/2019 - 17:00
It’s in the hands of the ship owners to call twist!

At a recent gathering of the good and the mighty in Athens, I understand a distinguished ship owner was able to hold a relatively straight face when explaining the challenges, or something along those lines, faced by the VLGC ship owners in the current mesmerizingly strong LPG shipping market. I’m sure every investor who boarded the run early, maybe even after reading my summer and autumn SIMON SAYS blogs, is sitting extremely comfortably today as he checks his share portfolio. But what happens next, is there going to be a twist, there usually is!

When I look at the graphs produced these days by all the shipbrokers and equity research companies, they always appear to be understated, not that any of the numbers are wrong, it’s just that they still include the mega year of 2015, making even this year look a little on the “average” side, as the Y-axis is squeezed down closer to the very low “$,000 pcm” mark, just to fit the peak of circa $4,000,000 on the scale! Of course what doesn’t disappear are the crisscrossing lines squeezed at around $500,000, and endured by shipowners since the end of the first quarter 2016 until the same time this year, albeit for a few very short blips. But we’ve now seen the ship owners enjoying 35 consecutive weeks, where the spot market has raced away from any OPEX or even CAPEX levels, but unlike the relative shock of the unknown, when the shale gas export revolution burst dramatically onto the international LPG scene in 2014/15, we’ve all been a little more switched on, especially as far as understanding what the potential consequences are likely to be from forecasted supply and demand scenarios, for both product and shipping, for 2019 and beyond. Yes switched on, but for once very much laid back.

I’m interested in the three publicly quoted shipping companies, who ply their trade in the Very Large Gas Carrier (VLGC) sector of the LPG trade, namely Avance Gas, BW LPG and Dorian Gas. It wasn’t so long ago that their shares were all massively under-valued, but not now. BW LPG are still the biggest of the players with a fleet of 32 VLGCs, 19 of them we can class as modern, more fuel and payload efficient, while 13 of the ships are over 10 years of age. They have just announced the sale of their final two Large Gas Carriers (LGC), “BW Nantes” and “BW Nice”, pocketing $31 million in cash and a net book gain expected to be around $9 million. Dorian Gas come in second with a fleet of 22 ships, but match BW LPG with regards modern VLGCs, also owning 19 of them, with only 3 older than ten years. In the meantime, Avance Gas have 14 ships, 8 of the modern type and 6 older VLGCs.

Dorian Gas certainly have the newer fleet averaging 5 years versus 7 years for BW LPG and Avance Gas. I think it’s important to say that each of the fleets are young, so any significant new replacement tonnage is not near the top of the three shipowners lists. The estimated value of all three fleets comes in at over $3.8 billion, for what is approximately 25% of the total VLGC fleet. With current valuations, this significantly reduces all three ship owner’s loan-to-value calculations below 60%, with Dorian’s falling even below 50%. What a turnaround from just over a year ago, when BW LPG withdrew their proposed offer, after a protracted chase to acquire Dorian’s stock, headlining the two company heads, Andreas Sohmen-Pao at BW LPG and his counterpart at Dorian Gas, John Hadjipateras.

Each of the three companies have made some subtle changes over the year, mainly BW’s move to participate in the physical purchase and sale of cargo, primarily to assist in weak freight markets, where the ship owners tend to be the last ones to get fixed, after the traders and majors. With my ex colleague Jo Moffat at BW LPG, they have one of the best traders to execute this policy decision, sadly or not for Jo, the freight market has been so strong that there’s only been the need for a handful of cargoes. BW LPG have also moved into the smaller LPG shipping arena, with the purchase of EPIC. I can see the logic behind it, but I personally would have wanted to also see the company go and introduce the biggest, fastest, most economical, dual fuel, and multi-flexible VLGC to yet hit the market, ultimately somebody will!

The market has also been debating the “what happens next” with regards Avance Gas, especially with John Fredriksen sitting on over $100 million profit from his share activities in the company, and whether he will be spurred to make a major play in the market, only time will tell. The appointment of Ulrik Andersen in August this year, ex Petredec (for a brief time), Neu Gas and Maersk, certainly meant only the letter “C” had to be changed on the CEO’s door. But I’m not sure what this means as far as direction is concerned for the company, and whether they will look to get closer to the cargo side of the business or not, although I accept it’s still important to maximise the value within the company, especially for shareholders. For Dorian I can appreciate it’s time to strengthen the balance sheet, take stock of what’s been such a roller coaster ride for them over the last two years.

You can probably gather from what I’ve said above, that I’m maybe a little frustrated that none of the main ship owners have really grabbed the bull by the horns. Only yesterday I made a veiled attempt to encourage the main exporters to dip more than a toe into the shipping market, as I have tried from a distance to urge ship owners to likewise venture beyond their comfort zone, and explore the pros and cons of the cargo market. I do understand that by announcing any significant volume of new buildings it’s likely to cause further orders to appear, but by taking the LPG shipping market to its next level of innovation, ship owners automatically reduce the comparative value and competitiveness of older, less efficient tonnage. In my view it’s not about the number of ships that shipowners should be ordering, and I could push that argument fairly easily, it’s more about quality, innovation and market leadership.

The market is actually looking as if it will stay on the side of the ship owners for a while yet, as the production growth in the U.S. will continue to be strong, whatever the talk is about rig counts, as export capacity, fractionation capacity, pipeline capacity, in fact all types of capacity are heading higher. And the markets are still a lot of ton miles away, whether it’s from the U.S., Australia, Canada or from Algeria and Europe. In addition, despite the strength in the freight market, the increase in new buildings has hardly materialised. The “Public Relations” job appears to have worked, ship owners are not building, traders are certainly thinking, but the timing is still a little way out of kilter before they make the decision to step up and sign on the bottom line. The Chinese might build a few, maybe more if the tariff war ends, but it looks to me as if we are in for more of the same. But it’s not healthy in my mind, we need to see a twist, and it should be led by the main publicly listed ship owners, and not enforced on them at a later date by letting the market go too far, and a mad rush therefore results. This time round it’s hopefully going to be action and not reaction.