Navigator Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 15, 2024

There are 6 speakers on the call.

Operator

You have joined the meeting as an attendee and will be muted throughout the meeting. On today's call, we have Maz Peter Zacco, Chief Executive Officer Gary Chapman, Chief Financial Officer Orson Lindeghan, Chief Commercial Officer and myself, Randy Gibbons, Executive Vice President of Investor Relations and Business Development in North America. I must advise you that this conference is being recorded today. As we conduct today's presentation, we'll be making various forward looking statements. These statements include, but are not limited to, the future expectations, plans and prospects from both a financial and operational perspective and are based on management's assumptions, forecasts and expectations as of today's date, August 15, 2024, and are subject to material risks and uncertainties.

Operator

Actual results may differ significantly from our forward looking information and financial forecast. Additional information about these factors and assumptions are included in our annual and quarterly reports filed with the Securities and Exchange Commission. With that, I will now pass the floor to Knott Peter Zacco, the company's CEO. Please go ahead, Knott.

Speaker 1

Good morning, and thank you all for joining this Navigator Gas earnings call for Q2 2024. Please turn to Page number 3. To begin with, I'll review the key data on our Q2 2024 performance, and then I'll go over the outlook for the rest of the year. Jerry, Oeyvind, Randy will then bring more detail and analysis. Yet again, we generate more revenues during the quarter with operating revenues up 8% compared to the both the same period in 2023 and also Q1 of this year.

Speaker 1

This was driven by both higher rates, but also strong utilization. Adjusted EBITDA for Q2 set yet another Navigator record of $78,000,000 which is well above the EBITDA of $69,000,000 earned in Q2 of last year. The balance sheet is strong with a robust cash position even after we repaid on our debt facilities. We continued deploying capital into our ethylene terminal expansion and we also bought back shares. The return on capital return of capital continued in Q2 with both the $0.05 fixed dividend and the share buyback up to now in combination 25 percent of net income.

Speaker 1

This will continue after the Q2 results. And in addition, you probably also noted that during Q2, we bought back 3,500,000 shares from BW Group for a total of $51,000,000 at $14.52 per share. Commercially, we continue pushing up rates and secured average Q2 TCE rates of $29,500 which is 9% higher than the same period last year. We achieved utilization above 93%, which is high and more than 4% above the same period last year. We are pleased with the direction and continued improvements in our commercial results across rates and utilization and thereby our operating revenues.

Speaker 1

Throughput at our joint venture ethylene export terminal was down at 231,000 tonnes for the quarter, and Oeyvind and Randy will provide a bit more context to this in a few minutes. The expansion of the terminal continues on track for completion in Q4 2024 and with progress payments that are continuing. We have for some time now talked about the significant opportunities lying ahead for Navigator with the transportation of CO2 and clean ammonia. So we're very pleased to have announced progress on both fronts. Within ammonia, we've entered into an MOU with Unica.

Speaker 1

And within ammonia, we've committed a small but important investment into 1,008. None of these will absorb or produce significant cash flows in the near term, but both are paving the way for new potentially very significant markets for Navigator. We remain confident about the outlook for our business for both the near, mid and long term. We expect utilization to remain near 90% in Q3 and we continue to renew our expiring time charters at higher rates. So with solid demand for transportation on handysize gas carriers, we see older vessels being sold out of international trade and limited supply from new buildings in our segment, we expect this to continue.

Speaker 1

So with that, I'll just pass it over to you, Gary, now so you can provide a little bit more detail on the financial result. Go ahead.

Speaker 2

Thank you, Mats, and very good morning or afternoon to everyone. Our Q2 2024 results have continued our progress with again some really positive results and another new record high adjusted EBITDA, as Mats mentioned. On Slide 6, our total operating revenue was $146,700,000 in the Q2 of 2024, with strong utilization of 93.4% against 89.3% for the Q1 of 2024, And this is our still stronger time charter equivalent rates that were on average $29,550 per day in the 2nd quarter compared to $28,339 per day in the Q1 of 2024 and $27,241 per day in the Q2 of last year, 2022. In the Q2 of 2024, our vessel operating expenses were held steady at $43,500,000 despite the larger number of vessel drydocks that are taking place in 2024 and depreciation is principally in line with the previous quarter at €33,300,000 The income from additional nonrecurring general and administrative costs in the quarter related primarily to the secondary public offering of 7,000,000 common shares by the VW Group, of which we concurrently bought back 3,500,000 of those shares, and they were canceled.

Speaker 3

In the Q2, we also saw

Speaker 2

a swing in our noncash unrealized movements on our non designated derivative instruments compared to the Q1 of 2024, This being related to movements in the market valuation of our long term interest rate swaps over the quarter, and which movements are negative thus impacting our accounting net income figures by just over $4,700,000 but which had no impact on our cash or liquidity. Our income tax line reflects current and mainly deferred taxes, primarily derived from our investments and share of profits in our ethylene export term at Malverns Point. And overall, net income attributable to stockholders of Navigator Holdings was 23,200,000 dollars with a basic earnings per share of $0.32 and adjusted net income, which excludes those unrealized gains and losses on derivative instruments and any vessel sales, was $24,800,000 or $0.34 per share. Ethylene terminal throughput volumes in Q2 2024 were 230,857 tonnes, resulting in a contribution of $4,700,000 from our ethylene terminal joint venture, and Randy will talk some more about the terminal shortly. As Max mentioned, our new record adjusted EBITDA was $77,600,000 in the 2nd quarter coming from robust available ownership and earnings base, which translated into strong vessel utilization and combined with generally increased charter rates.

Speaker 2

Our balance sheet, shown on Slide 7, remains very strong with a cash and cash equivalents balance of over $138,000,000 at June 30, 2024, and that's despite paying out $87,900,000 for scheduled loan repayments and share buybacks in the 2nd quarter, plus $16,000,000 in progress payments for our ethylene terminal expansion projects. Our total available liquidity at June 30, 2024, was £167,000,000 and we currently anticipate further robust cash generation from our operations in the Q3 of 2024. As already noted, as part of our share buybacks, we repurchased and then cancelled 3,500,000 of our common shares in the secondary offering from BW Group in June at a cost of $14.52 per share, which is a total cost of $50,800,000 We believe this transaction is highly accretive for the company given our underlying net asset value is currently over $25 per share, and we are pleased to be able to complete it. On Slide 8, we were also pleased to report that on August 9, 2024, we entered into a new 6 year secured term loan involving credit facility of up to $147,600,000 which is to be used to refinance our existing March 2019 secured loan facility that ensures in March 2025 to fund the repurchase in October 2024 of the Navigator Aurora pursuant to our existing October 2019 sales and leaseback arrangement and for general corporate and working capital purposes.

Speaker 2

The facility leases up to $45,000,000 in additional liquidity to the company, and we negotiated improved terms of our existing 2019 facility, including a new lower margin of 190 basis points, and which raised significantly below the cost of our existing sale and leaseback arrangement. We're also very pleased to say that the margin of 190 basis points includes the sustainability linked adjustment of 5 basis points, reflecting our continued commitment to concentrating our efforts on the environmental impact of our fleet. We then have 2 debt maturities, our unsecured bonds and another bank facility, both due in just over 1 year time in September 2025, which refinancings were already in planning and which may result in positive liquidity events for the company. And we'll provide more updates on those as they progress. On Slide 9, our leverage remains very comfortable with net debt to adjusted EBITDA at 2.3x the 12 months to June 30, 2024, and our net debt to capitalization is just 31.2% as of June 30, 2024.

Speaker 2

We're continuing to reduce our debt with more than $100,000,000 of average annual scheduled debt amortization payments during 2024 through 2027, as you can see on the graph. And within our refinancing work streams, we're looking to target further reductions

Operator

in the average cost of our debt.

Speaker 2

We do expect that some of our cash will be needed for the remainder of our ethylene terminal expansion project unless and until we finance the project later in the year and as well for other projects and investments that we're considering that will enhance shareholder returns. As we mentioned in previous earnings calls, there are a number of projects that we're actively looking at, but meantime, we'll continue to manage our business carefully, reduce our debt, look to our capital distributions and share buybacks and remain an active steward of the business' capital. On Slide 10, we outline our latest estimated cash breakeven for 2024 at $20,800 per day, which shows a slight increase of $100 per day compared to the previous quarter estimate, but which figure is all in and includes our scheduled debt repayments and our heavier write off schedule this year. Even considering this with such a breakeven level relative to today's charter rates, recalling our average TCE for the Q2 of 2024 was $29,550 today, it will enable Navigator to generate a very positive EBITDA with significant headwind throughout the shipping cycle. As we like to present on the right is our daily OpEx guidance for 2024 across our different vessel size segments ranging from our smaller vessels to our larger, more complex ethylene vessels.

Speaker 2

I'm following this guidance for the Q3 of 2024 as well as updates for the full year across vessel OpEx, general and other income costs, depreciation and net interest expense, all of which are materially unchanged from the guidance given in our Q1 2024 presentation. Slide 11 outlines our historic quarterly adjusted EBITDA, showing the 2nd quarter's record high figure and demonstrating yet again the very positive and consistent results we have been able to report from any forces now. And despite the currently narrowing ethylene arbitrage, we expect this trend to broadly continue in the Q3 of 2024. On the right side of Slide 11, we show our historic adjusted EBITDA for 2023, our last 12 months adjusted EBITDA and an annualized adjusted EBITDA based on the 2nd quarter results. In addition, the EBITDA bars then to the right provides some sensitivity and illustrates an increase in adjusted EBITDA of approximately $18,000,000 for each $1,000 incremental increase in average time charter equivalent rates today.

Speaker 2

And finally for me on Slide 12, an update on our vessels scheduled dry docks. We have 18 vessels scheduled for dry docking during 2024, of which 6 were completed in the first half of the year with an expected total for the 18 vessels of 504 off high days and total drydocking CapEx anticipated of $29,300,000 all of which is scheduled, fully costed and included in our cash flow plans. As we set out before, some further detail on the expected timing and cost of these dry docks is shown below, noting that 3 more vessels are scheduled to have completed by dry dock Friday end of August, leaving 7 more to complete during the remainder of 2024. Also as an important reminder, we're taking these strategic opportunities to install energy saving technologies on those vessels at a total cost of around $4,800,000 with many of these technologies having a very short payback period. Then finally, we also provide here some guidance on 2025 and 2026 schedule of dry docks for those that are interested, which guidance remains very similar to previous figures we described.

Speaker 2

Overall, Navigator has had a very good quarter both operationally and financially with record adjusted EBITDA, high TCE rates and utilization. We've completed one key step in

Speaker 4

our refinancing plan, and we're looking forward

Speaker 2

to keeping that momentum for the remainder of 2024 and beyond. So with all that said, I'll now hand over to Oeyvind to talk about our commercial position and outlook. Oeyvind?

Speaker 3

Thank you, Gary, and good morning and afternoon, all. Let's turn to Slide 14. Our earnings days continue to be strongly supported by ammonia and petrochemical shipping demand. We recently had an uptick in vessels carrying ammonia and we are now back up to employing double digit 10 vessels in this growing trade. We expect demand for ammonia shipping to continue to be strong for the foreseeable future.

Speaker 3

Significant growth for ammonia transportation is forecasted towards the end of the decade as we are proactively positioning ourselves today, both on the maritime side as well as the infrastructure side to be a major mover and shaker in this emerging market. Randy will shortly give some color to our recent clean ammonia announcements. Petrochemical demand remains relatively robust providing 45% of our total earnings base. U. S.

Speaker 3

Exports of ethylene and ethane are the major commodities within this category. It is also nice to see that butadiene exports from Europe to Asia has returned. Long haul butadiene provides positive support to the semi refrigerated part of our fleet. The 2nd quarter utilization at 93.4% is unseasonally strong. In fact, it is the highest 2nd quarter utilization we've seen for a very long time.

Speaker 3

The top left graph on Page 15 is illustrating this point. The green dotted line represents our 2024 utilization to date. The gray line represents our 5 year average utilization and the gray shaded area represents our historic high and lows throughout those years. And as you can see, we're pretty happy with the countercyclicality for our Q2 and the high levels continued into the Q3 with July coming in at just above 92%. It's well above the average, which puts us in a good trajectory for the next month.

Speaker 3

The bottom right graph is showing our fully refrigerated vessels. They're all on time charters and are all employed in their mono train, and we expect that to continue. The bottom left graph is showing the employment of our semi refrigerated fleet. Here, these are mostly employed in regional distribution of LPGs. These vessels are also recently attracting extra demand from both ammonia and petrochemical customers such as butadiene.

Speaker 3

The top right graph is showing 100% indication to petrochemical cargoes from our ethylene capable fleet. The vast majority of the cargoes are exactly that, ethylene and ethylene exports from the U. S. The

Speaker 1

utilization for

Speaker 3

the ethylene fleet is, however, somewhat under pressure in the near term due to a couple of external factors which we will address on Page 16. Before we get into the short term impact of Hurricane Beryl on Page 16, it is important to highlight the continued rise of natural gas liquids production in the United States of America. This is hugely positive across the board. 1 barrel of natural gas liquids production typically consists of 88% of gases that we do transport on board our vessels. And as you can see on the graph to the left, it's on the rise.

Speaker 3

Excess ethane production should translate to competitive ethylene production and price. Fundamentally, this is still the case in North America. However, there is one element unique to the region that sometimes causes disruptions and that is the hurricane season. Now this year, Hurricane Vero made landfall in Houston area beginning of July. It caused major power shortages for many, many local residents.

Speaker 3

It also disrupted the production of ethylene. Most of the ethylene producers reduced capacity in anticipation of barrels. They can easily ramp up again, but we can see a clear short term impact. The graph on the right will give you an idea of the issue. The light blue area, which represents U.

Speaker 3

S. Ethylene production shutdowns peaked when barrel made landfall. And at the same time, which is pretty logical, U. S. Ethylene inventory levels, showed in the dark blue line, hit and inventory levels to work back to normal over the next couple of months, the loss of supply and demand are at play, influencing ethylene pricing in the near term.

Speaker 3

Updated ethylene prices are illustrated on Page 17. Here we can see the impact clearly, but following the gray line in the left hand graph. The U. S. Ethylene prices increased by about $150 a ton recently.

Speaker 3

Asia pricing remains flat. Dollars 150 less available arbitrage is challenging for exports economics to Asia. This is why we see most of the current ethylene volumes being shipped to Europe as the landed price is on par with Asia, but requires less rate to service. Whilst the ethylene price has risen, price of ethane has fallen. It is very cheap.

Speaker 3

Historically, ethane exports picks up any slack from ethylene and with the increasing proportion of ethane cargoes on our fleet, which is good. The updated Clarkson brokered 12 month time charter assessment for the various segments are shown on Page 18. Compared to last quarter, the very large gas carriers have reduced the most. A small adjustment is seen on the ethylene vessels due to the short term issues we just discussed and the other handysize segments are seeing a small uptick. So all in all, pretty robust.

Speaker 3

The fundamentals remain very healthy. As mentioned in the outlook by Matt, our time charter renewals have all been completed and are being completed at higher levels compared to last year. Turning to Page 19, the Handysize fleet supply remains unchanged with a 7% on order and 21% of the existing vessels are about 20 years of age. All this is very manageable. Apart from the short term after effects of hurricane barrel and decrease in U.

Speaker 3

S. Ethylene price, the handysize fundamentals are robust as we have entered Q3 on a general positive note. There are many exciting growth projects in the pipeline and Randy will talk to some of these

Speaker 2

right now.

Speaker 3

So Randy, over to you.

Operator

Thank you, Oeyvind. So yes, following up on several announcements we made in recent months, we want to provide some additional details on those developments regarding some of the announcements. With that, turning to the next Slide 21, we're pleased to announce our return of capital for the Q2 of 2024. But before we get to that, I want to first highlight that during the Q2, we repurchased MKFLE 117,000 common shares of NVGS in the open market, totaling $2,000,000 for an average price of a little over $17 per share. Additionally, in June, we repurchased and canceled 3,500,000 common shares of Navigator directly from BW Group for $51,000,000 or $14.52 per share.

Operator

To note, this transaction was done at a discount to the prevailing market price, had no impact to our fleet load and has actually helped increase our trading liquidity throughout this summer. So now looking ahead, in line with our recently announced return of capital policy and the illustrative table below, we're returning 25% net income or $5,800,000 to shareholders during this Q3. The Board has declared a cash dividend of $0.05 per share that's payable on September 24 to all shareholders of record as of September 3, equating to a quarterly cash dividend payment of $3,500,000 Additionally, with our shares still staying well below our NAV of well over $25 per share, we'll use the variable portion of the return of capital policy for share buybacks. As such, we expect to repurchase another $2,300,000 of NBJS common shares between now and quarter end. Subsequent dividend and the share repurchases together equal that 25% of net income, dollars 5,800,000 As seen over the past few years and especially again this past June, returning capital to shareholders will remain a core priority for us.

Operator

Moving on to the next Slide 22. Following up on our previous announcement regarding the expansion of our ethylene export terminal, The project continues to progress nicely. Engineering is now complete, constructions are underway and the expected completion date remains mid December 2024, so 4 months from now. The project remains on budget with total capital contributions required from us to be

Speaker 2

around $130,000,000

Operator

To date, we paid $59,000,000 and the remaining CapEx is expected to be paid from cash on hand until potential new financing agreements are completed later this year. And as you can see on the bottom left chart, throughput remained near nameplate capacity throughout June, but there was a dip in July, and that's due to 7 ethylene crackers along the U. S. Gulf Coast experiencing planned or unplanned outages, coupled with the negative impact of Hurricane Daryl. Now as you've seen in recent years, the Q3 is seasonally the toughest quarter for throughput, but the contracts are take or pay.

Operator

So the annual cash flow over time remains firm despite quarterly movements. Now as for contracting the expansion volumes, the second and larger new offtake for the multiyear contract is likely to be signed in the coming weeks as the customized agreed to the commercial terms, and we continue to expect that additional capacity will be contracted in the coming months. Now starting to our 2 most recent press releases starting on Slide 23. Our Blue Street CO2 joint venture with Bumeirata remains active in supporting the carbon capture and storage efforts in the UK and North Sea, specifically targeting stranded emitters with no high volume takeaway capacity. Now as seen in the bottom picture, our primary component of this joint venture will be to transport the CO2 from the shortlist storage tanks to the floating storage and injection units, FSRU.

Operator

Last month, we entered into an MoU with Uniper to help meet the U. K. Government's aim of decarbonizing the power sector by 2,030. The partnership has agreed to collaborate to explore the feasibility of implementing a jetty moored floating liquid CO2 storage facility and lithium wind CO2 carrier solution for the export CO2 from Uniper's proposed carbon capture project on the Isle of Brains in the U. K.

Operator

By bringing the right people to the table, we can leverage our collective expertise to design a sustainable and long term CO2 shipping and storage value chain, and this adds value and reduces environmental impact, aligning perfectly with our sustainability goals. On Slide 24, after a deep vetting process and driven by our firm belief in the immense growth potential of clean ammonia, we recently announced a $2,500,000 co investment alongside lead investor Addus Clean Energy into 10 0 8 Energy, an early stage clean ammonia developer with an export project along the U. S. Gulf Coast of Texas. The first phase of the project will consist of a single training producing 1,400,000 tonnes per year of ultra low carbon ammonia with an expected completion date in late 'twenty 9 or early 2030.

Operator

This initial investment is development capital for the pre seed and FEED studies and gives us an option to make a larger investment at FID of up to $100,000,000 of preferred equity for construction of the terminal and export infrastructure for the project, with potential further investments in subsequent expansions. Now as evidenced by our numerous vessels currently transporting ammonia, our recent investment in the vein fuel solution for ammonia bunkering, our approval and principle for an ammonia fueled vessel and our recently performed 1st shift to ship transfer of ammonia, ammonia is already and will continue to be a key focus for Navigator Gas. And the U. S. Salt will be a key producing region of crude ammonia, which will then obviously be exported for high demand areas around the world, such as Asia for coal fired coal power plants, Europe to crack into hydrogen and then using for power generation and across the globe as a clean bunkering fuel for ships as well as to displace conventionally produced ammonia based fertilizer.

Operator

So we're very excited to take this first step into a project that should be a meaningful contributor to our long term ammonia business. Also, both the Blue Street Venture and this Tenere Investment are helping us build some optionality and to ensure more stable cash flow in the coming years. Finishing on Slide 25, I want to personally invite all of you to our upcoming 2024 Analyst and Investor Day here in Houston, Texas in a few months from now. On Tuesday afternoon, November 12, we'll be hosting our mortgage point tours, the ethylene export terminal and one of our vessels.

Speaker 4

So just take a look at that picture to

Operator

the right and imagine yourself climbing aboard that beautiful Ethylene carrier. Later that evening, the management team and some members of our Board of Directors will host a dinner for our analysts and investors. The next morning, on November 13, we'll host some presentations covering current market trends, a financial update as well as our medium term strategy. Then we'll have a lunch and appreciation event for all of our analysts, shareholders, customers, partners. And fortunately, unlike today's heat, the weather will certainly be better in mid November.

Operator

So hope to see you then. With that, I'll now turn it back over to Mads for some closing remarks before we get to Q and A.

Speaker 1

Good. Thanks, Randy. And yes, so I'll just summarize today's presentation. And when we look at the financial results for Q2, it was great to see that we posted record quarterly adjusted EBITDA of $78,000,000 and adjusted net income of 25 dollars We have the strongest balance sheet in the company's history as illustrated by the low leverage ratios and robust cash position. And we'll continue to pay quarterly cash dividends and buyback shares.

Speaker 1

And as you saw, we did a large share buyback of €51,000,000 or 5 percent of shares out directly from VW in June. We pushed forward and completed our refinancing project with strong appetite for new and existing lenders. And if you look at our shipping business, the average fleet utilization was 93% for Q2 and the average TCE rate for our vessels just above $29,500 per day. So that's the highest that we've seen in more than 8 years. Semi and fully refrigerated time charter extensions continue at higher levels compared to the same period last year.

Speaker 1

And the supply picture remains attractive with a small handysize order book and an aging global fleet. On the energy infrastructure, ethylene export volumes through the ethylene export terminals stay at firm levels and the terminal expansion is on time and on budget with completion set for end of this year. Blue streak entered into a memorandum of understanding with Uniper to help meet the U. K. Government's aim of decarbonizing the power sector.

Speaker 1

And lastly, we just announced the $2,500,000 co investment alongside lead investor additives, Clean Energy into 1,008 Energy. So as you can see here, it's been a really busy summer. We've remained committed to developing Navigator at a high pace. I hope you can see that all the initiatives that we are putting in front of you here that they are very well aligned with the strategy that we previously discussed with you. So I'd say just thank you very much for listening in and back to you, Randy.

Operator

Thank you, Mads. So yes, operator, we'll now open the line for some Q and A. So first question, your line is open.

Speaker 5

Great. Is it me? Can you hear me?

Operator

Hi, Dan. Hey, Dan. How's it going?

Speaker 5

All right. Appreciate it. Thanks, guys. So I've got a couple of questions. The first is, when you were talking about the percentage of the fleet that's doing the substantially larger percentage of the fleet that's doing ammonia now.

Speaker 5

Just curious, is that a function of there just being a lot more ammonia being transported around the world? Or is it you're taking share maybe from other categories or have trading patterns changed? Just curious sort of how you think about appreciating that longer term, there's going to be more ammonia, but today, what's driving that push into a greater percentage of the business being ammonia?

Speaker 3

Yes. 10 vessels carrying ammonia is quite significant. It's great for the business. It's not that we are taking market share from anybody else, but they are changing trade lanes requiring handysize vessels because they are exactly that, they are handy for plugging holes, servicing, optimizing the different producers and the consumers of ammonia. And it's also a growing market.

Speaker 3

The world needs more fertilizers in general. So new plants are coming up. So it is increasing growth, which we're participating in and taking advantage of, and that will continue. As you mentioned, the great significant growth will come in a few years, but I think we are starting from a great place today with 10 vessels, which is quite a lot for any ship owner to be servicing that emerging industry.

Speaker 5

Okay. All right. Appreciate that. And then I guess for my second question, when thinking about the new CO2 businesses and the new ammonia infrastructure, Appreciating that those are early days and you don't have quite line of sight on exactly how those will play out yet. But as you think about planning and strategically where you are, what's the what do you think is a realistic timeframe under which you think actually you there would be capital calls and need to deploy capital?

Speaker 5

I mean, is that a 'twenty five kind of event or are we a number of years away from sort of those really sort of being greenlit and capital needed to be put to work?

Speaker 1

We have a pretty active business development portfolio. And there are also a number of projects that we haven't talked about because they are not ready to be talked about because they haven't materialized as 1,08 and Blue Street Capital. When you look at 1,008, I think we've been clear on the time line here that we're talking 29 to 30 before the operations of the facility there. And that means that the shipping investments don't need to happen anytime soon. So that would be matched to ensure that they are in place at the time of exporting the first ammonia if that goes ahead.

Speaker 1

I think when it comes to Blue Streak, it's also here. A little bit uncertain exactly when it's going to happen. It's going to be pushed towards the end of this decade. But even then, there may be other projects that come into life on the ammonia side or on the CO2 side that can have a shorter fuse than what we're just describing here. So it could well be that there would be newbuilding contracts to be matched against chartering contracts with customers on the other side, potentially long term contracts that would happen for ammonia or for CO2 already within the next year or 2.

Speaker 5

All right. I appreciate it. Thank you, guys.

Speaker 1

And just to make clear here, Ben, we would not be building those ships on speculation. I mean, we would be going into the ammonia segment and into the CO2 segment if we have credible counterparts for long term contracts.

Operator

Understood. Yes. Thank you. Thank you, Dan. Next caller, your line should be open.

Operator

I see you're going to answer your question.

Speaker 5

Yes. Hi, Randy. Thank you. Well, thanks for the time and clearly very detailed presentation. You guys have reported just another strong quarter.

Speaker 5

It looks like it just continues with just the strength in earnings and cash flow generation. So nice to see that. The average charge rate at $29,560,000,000 continues to climb and it's up from 28.3 in the Q1. It went higher despite maybe some of the indices suggesting that term rates came off just slightly, but then also you had VLGCs coming off. I know obviously you're not in that market and you're carrying a lot more specialized cargo than just straight up propane, but we did see the rates come off to the big ships.

Speaker 5

So historically, we would have thought maybe late sort of you would have felt some pressure in the Handy segment, but you did and in fact rates went higher. So just wanted to get a sense from you what drove that, I guess, relative outperformance on the part of your fleet?

Speaker 3

I think, Omar, we are not 100% insular to what is happening in the VLGC market. However, we do trade on different premises and fundamentals. And on the LPG side, which is the direct competition with VLGCs because that is what they carry only, they are completely different trades. So our we showed on a graph there on our semi refrigerated side, most of our vessels there in that with that capability are trading LPG, and that is regional distribution. And that has not seen the decline or pressure as you have you just mentioned that the VLGCs have.

Speaker 3

So it's more to do with the trade, not necessarily that there's direct competition from above at the moment. And we're not really seeing that into July either. So that is positive.

Speaker 5

Okay. Thanks, Lloyd. And then just kind of following up on your comments in the presentation. You walked through the impact of Hurricane Beryl and that's led to a bit of a correction on the inventories that expect do you expect to kind of smooth out or normalize as we get to winter? I guess just in terms of impacts here in the Q3, how do you think that affects both the shipping business and then the terminal business?

Speaker 3

I think the on the terminal side, as Randy mentioned, they're all on take or pay. So with time, it shouldn't really matter. Now of course, from the shipping side, we are interested in physical volumes being exported. And if you see on one of the throughput slide that we had, July is very low. However, our utilization across the fleet was 90 above 92%, much higher than average for that period of time.

Speaker 3

So what is really happening is that we are not exporting ethylene on the ships. We are doing some and that goes to Europe. However, ethane is generally picking up the slack. And if we have the freight hat on, we'll take ethane any day, and it's a great cargo connecting the U. S.

Speaker 3

With the world in terms of petrochemical production. So that is what is really happening. On the ethylene side, we think it's a very short term thing. There was no damages at any of the crackers because of the hurricane. So these operators are pretty savvy.

Speaker 3

They turned them down in anticipation to avoid any damage. So they can easily turn it back up, which they are slowly doing now in August. So that will correct itself, and you'll see ethylene exports decline in parallel with that. That is our expectation. So it was a short term blip because of this hurricane thing.

Speaker 3

Okay.

Speaker 5

And maybe just one final one, Randy, you perhaps. You mentioned obviously the terminal expansion and that's underway. And you entered into the first offtake agreement and you expect the second one here fairly soon. So congrats on that. Just in general, are you able to give any color on that first offtake agreement in terms of whether duration or portion of the facility?

Speaker 5

And then should we assume kind of profitability in line with the existing contracts? Yes, any color you can give.

Operator

Yes. It's multiple years, right? So it's not just a 1 year contract, but we don't want to go into the specific duration. Pricing is at least as good as it was for that extension. And then in terms of volumes, it's slightly more than the initial.

Operator

But again, I'll give you the number, but the size of it has gone up a little bit from what they had been update. So again, the next one's going to be bigger and longer as well, and then we expect incremental off date contracts by the time the completion has set into mid December. So by January 1, when a lot of these off date contracts are going to commence, we expect the majority of the expansion capacity to be sold. And again, one more color on timing. So all the take for pay contracts, if they actually take the cargoes, we get that revenue in the quarter.

Operator

If they don't, there is some deficiency lag. So they might have a quarter or 2 to make up for it. So it's not a one for 1 in terms of the take or pay. But over time, as Arvind was saying, we will recoup that kind of deficiency on needs for the terminal.

Speaker 5

Okay, got it. Thanks, Randy, for that color. Oeyvind, thank you. Good job, guys. I'll turn it over.

Operator

Appreciate it Omar. Next caller,

Speaker 2

I think your line should be open.

Operator

You might still be on mute here.

Speaker 4

Great. Sorry, can you hear me now? Yes.

Operator

Yes. Yes. We can hear you.

Speaker 1

Sorry about that. Thank you for taking my questions.

Speaker 4

I wanted to start by asking about the 1008 investment. You will receive the option to invest up to $100,000,000 in preferred to construct the initial phase, but potential further investments, would those be as equity or once again as preferred? And secondly, do you have any kind of preference to expand the ammonia volumes with your vessels?

Speaker 2

Yes. I'll start. Ma'am, go ahead

Operator

and please, John. So for the first investment up to $100,000,000 that will be taken at FID. So again, we get $2,500,000 for the pre FEMA FEED studies, which again, back to Ben's question, should take about 2 years. So really the next capital deployed into channel 8 would likely be in $26,000,000 and then it would extend throughout the construction period, say 3 years in 'twenty nine, so that's $100,000,000 For incremental investments, correct me, it could be further on the preferred side, it's on the fixed return, potentially some equity upside to it. So we have a lot of optionality with this project, and that was one of the key drivers for the commercial investment, work on the optionality.

Operator

And in terms of the molecules, yes, we certainly like to move it similar to what we do with our ethylene export terminal, right? We don't necessarily or don't produce any ethylene, but

Speaker 2

we liquefy it and then we move

Operator

a lot of it. So similarly, on this terminal, on the clean ammonia side, certainly, we want to help in the terminal in the liquefaction and also on the transportation, but it's already going to add some more color to it.

Speaker 1

Go ahead, Oren.

Speaker 3

That's very straightforward. So some of the offtakers that we are discussing too prefer to have the molecules, the ammonia and the clean ammonia delivered to their site. And that is where Navigator and 108 comes into perfect play, whereby together, we can actually provide that service and economics. That then will include vessels, navigated vessels. So that is very exciting.

Speaker 3

Likewise, if the off taker or the user, the end user would like to buy from the terminal itself, then of course, we are in an excellent position to align with them to discuss what makes more sense logistically to get it to that place. So all in all, pretty good stuff.

Speaker 4

Stuff. That's very helpful. And I have another question more on the modeling side. You've already discussed that soft put on the ethylene export terminal will come under pressure for the quarter, but the take or pay contract should soften the blow. Could you remind us what's kind of the quarterly run rate on the take or pay contracts?

Operator

Yes. So in our range of what we kind have shown previously, dollars 4,000,000 to $6,000,000 But again, we will not collect all of that real time, meaning in 3 quarter in 3Q, as you've seen in July, if there are and there will be some deficiencies, we won't collect those deficiencies likely in the Q3, right? It will take another quarter, maybe 2 quarters beyond that. So on an average basis, it's $5 ish million. You can look at our chart here kind of on a historical basis.

Operator

But does that mean in a single quarter, it might be $3,000,000 and it might be $7,000,000 Absolutely. So if you look over the long haul, maybe $4,000,000 to $6,000,000 is a good range, but it could certainly go below or above that depending on the deficiency timing.

Speaker 4

Thanks for the color. That's all for me. Thank you for taking my questions.

Operator

Thank you, Suneet.

Speaker 5

I believe there's someone else in the

Operator

Q and A. Here we go. I see your hand, Christopher from Arctic. How are you?

Speaker 4

Hello, I'm good. Thank you. What about yourself?

Operator

All well. Thank you.

Speaker 4

So can you just shed some light on the throughput? I'm not sure if I understood correctly, but what was the terminal that you also operate impacted by the hurricane? And sort of if that's the case, how long do you see sort of it takes for volumes to ramp up because we've seen on the VLGC side that it takes some time?

Operator

Yes. Or do you want to add?

Speaker 3

Yes. I mean, just to be clear, the terminal itself, no damage, no issue because of the barrel hurricane. The issue lies with the wider production system capacity in the area. So they will reduce capacity production capacity during July. But at the same time, of course, there was domestic demand and that ate dug into the inventory.

Speaker 3

So that caused the ethylene price to increase. Discouraging ethylene exports to Asia, but European exports remain. So as we mentioned in the prepared remarks, no physical damage. These producers are ramping up because the margins are pretty good. Ethane is super cheap.

Speaker 3

It makes sense for them to run as hard as they can. So it's not a VLGC parallel, it's a petrochemical way.

Speaker 4

Okay, perfect. And in terms of the ammonia investments that you're potentially doing, can you share some color on sort of how you're looking to price such a preferred equity? And you also mentioned that it may be sort of further investments. So can you also take part of sort of the equity in itself so that you get sort of equity upside and not sort of on a bond type of investment into the facility or production together?

Operator

Yes. I can start on that. In terms of the preferred equity return, we have not disclosed that, but it's well above our cost of capital. We can further say that. In terms of equity, the initial investment, the $2,500,000 there's somewhat of an equity component to that.

Operator

But for the larger investment, we probably prefer, put in the tender there, just with the stable cash flow that, that provides instead of taking commodity risk or some kind of equity exposure to the project at a larger level. So for the initial $2,500,000 there's some equity exposure for the larger up to $100,000,000 that would be a fixed preferred rate, again above our cost of capital for sure. And then incremental investments, correct, it could be a combination of preferred equity, maybe selected, maybe we take some commodities, stuff like that. So a lot of options in a few years from now.

Speaker 4

Perfect. That's all from me. Thanks.

Speaker 2

Thank you.

Operator

I believe that ends our Q and A. So Mark, Donald, comment.

Speaker 1

Good. No, thanks a lot for listening in, and thank you to all the questions that we had. So it's been a good quarter and we look forward to sharing the news as it comes along and as we develop our business going forward slower. Thank you and have a fantastic day.

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Earnings Conference Call
Navigator Q2 2024
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