Ardmore Shipping Corp
NYSE:ASC
Earnings Call Analysis
Q3-2023 Analysis
Ardmore Shipping Corp
The company reported a strong third quarter with adjusted earnings reaching $20.3 million or $0.49 per share, signaling the robust health of the product and chemical tanker market. This momentum is further underscored by the Medium Range (MR) tankers, which have earned an average of $28,500 per day in the third quarter and are showing improved rates of $30,100 per day in the fourth quarter with 50% of the days booked. Similarly, chemical tankers reported a capital-adjusted basis earning of $22,100 per day for the third quarter, increasing to $25,800 for the fourth quarter with 60% booked. With the onset of winter, the market anticipates weather delays, daylight transit restrictions, and localized rate spikes, which are likely to propel demand even further. Moreover, the anticipated logistical challenges introduced by the EU's emissions trading system and low newbuilding deliveries suggest fleet growth will be limited, maintaining a favorable environment for tanker demand over the next two years.
The market dynamics currently favor the company due to the low MR order book, which stands at 6.5% of the existing fleet, indicating limited upcoming fleet growth. The company's diversification into various tanker sectors, including crude and chemicals, supported by energy security concerns and refinery dislocation trends, provides a positive outlook for strong underlying demand growth in the product and chemical tanker markets. Despite macroeconomic pressures, the market's positive factors appear to outweigh these challenges. The company's financial resilience has also been highlighted by their reduction of cash breakeven levels by $2,500 per day, boasting significant operational leverage with high potential upside for earnings per share and free cash flow should TCE rates increase.
The company maintains a disciplined approach to capital allocation, guided by a policy that balances its cyclicality with future growth—reflected by a quarterly cash dividend of $0.16 per share. Regarding operational efficiency, the company invests in upgrades to their existing ships, expecting around 30% to 35% yield from these investments once the upgrade program is completed next year, resulting in an upgraded fleet with substantial cash flow improvements. These upgrades demonstrate a commitment to fuel efficiency and carbon reduction while seeking opportunities for well-timed growth in specific sectors.
The company boasts a solid liquidity position, with $50 million cash on hand and $220 million undrawn on revolving facilities. They also emphasize strong operating leverage, which could substantially increase annual earnings per share and free cash flow if the TCE rates rise. Moreover, the executives believe the substantial investments in ship upgrades—which have a rapid payback period of 1 to 2 years—will yield a fleet that is both environmentally responsible and more profitable. Aging ships that have been efficaciously modernized may continue in operation past their typical 15-year tenure due to their enhanced fuel efficiency. The company also navigates potential growth strategies, including perspectives on newbuildings versus secondhand purchases, in the context of long-term inflation trends that affect asset values and investment decisions.
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Good morning, ladies and gentlemen, and welcome to the Ardmore Shipping's Third Quarter 2023 Earnings Conference Call. Today's call is being recorded, and an audio webcast and presentation are available in the Investor Relations section of the company's website, ardmoreshipping.com. [Operator Instructions] A replay of the conference call will be accessible anytime during the next 2 weeks by dialing 1 (877) 344-7529 or 1 (412) 317-0088, entering passcode 8126419.
At this time, I will turn the call over to Anthony Gurnee, Chief Executive Officer of Ardmore Shipping.
Good morning, and welcome to Ardmore Shipping's Third Quarter 2023 Earnings Call. First, let me ask our CFO, Bart Kelleher, to discuss forward-looking statements.
Thanks, Tony. Turning to Slide 2. Please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from those projected in the forward-looking statements. 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 2023 earnings release, which is available on our website. And now I will turn the call back over to Tony.
Thank you, Bart. Let me first outline the format for today's call. To begin with, I'll discuss highlights, current market conditions and capital allocation, after which Bart will provide an update on tanker fundamentals and on our financial performance. And then I'll conclude and open up the call for questions.
So turning first to Slide 4 for highlights. We're pleased to announce strong third quarter results with adjusted earnings of $20.3 million or $0.49 per share, reflecting robust product and chemical tanker markets, which are continuing to strengthen into the fourth quarter, as you can see in the chart on the upper right.
Our MRs earned $28,500 per day for the third quarter and $30,100 per day so far in the fourth quarter, with 50% booked. And our chemical tankers on a capital adjusted basis earned $22,100 per day for the third quarter and $25,800 per day for the fourth quarter, with 60% booked so far.
We believe we are now at a market inflection point with rates building into the winter period. In particular, we're seeing broad strength across all tanker sectors, including crude and chemicals, which is a very good sign.
Meanwhile, Ardmore continues to execute on its long-standing capital allocation policy. We have today declared a quarterly cash dividend of $0.16 per share, consistent with our policy of paying out 1/3 of adjusted earnings. And we continue to invest in energy savings devices in accordance with our energy transition plan, thereby reducing carbon emissions, but also boosting cash flow.
Overall, we continue to focus on optimizing our spot trading performance while managing costs and maintaining an even lowering breakeven level, which now stands at $14,000 per day. And as a final point, our entire fleet is exposed to the spot market, including our time charter in vessels, allowing Ardmore to fully capture the benefits of the strengthening market.
Moving to Slide 5. Our optimism is backed by some important near-term factors. The EU refined products embargo, which commenced in February of this year, is continuing to impact the market by creating additional tonne-mile demand. Also, as the winter market sets in, we expect to see, as always, weather delays, daylight transit restrictions and localized rate spikes driven, for example, by cold snaps, all constricting supply or boosting demand.
And as you can see in the graph on the upper right, global refined product inventory levels remain very low, leaving little margin for error in the oil product supply chain.
Despite the significant levels of refinery maintenance in 2023 as compared to 2022, as shown in the chart on the lower right, product tanker demand has remained very strong, and as we expect to see fewer refineries offline going forward, we should anticipate further incremental demand. As well as this, reduced Panama Canal transits for the next few months are likely to increase traffic by up to 40%. And thereby extending voyage times and keeping ships out of the market.
And the implementation of the EU emissions trading system, which starts January 1, in which Bart will expand on later, we think could lead to logistical inefficiencies in the market further supporting TCE rates. And finally, it's also important to remember that low scheduled newbuilding deliveries should limit fleet growth for at least the next 2 years.
Moving to Slide 6, we will discuss the E refined products embargo in more detail. As highlighted in the chart on the upper right, EU diesel demand has remained consistent, while diesel imports have declined over the past several months. As a consequence, we've seen a substantial draw on inventory since the implementation of the embargo as highlighted in the chart on the lower left. As inventory levels normalize, we believe that imports to this region are poised to increase significantly. These additional volumes are likely to be sourced from far away, resulting in increased ton miles, thus further supporting the overall market.
And then turning now to Slide 7 on capital allocation. We remain fully good to our long-standing policy, which has a big influence on how we approach decision-making. As a result of our strong financial position and low breakeven levels, we're now able to pursue all of our priorities simultaneously, namely: maintaining our fleet over time by investing in our ships to optimize performance, thus boosting earnings and cash flow; sustaining low leverage through the market cycle, which, of course, improves the quality of earnings and provides the company with the financial strength needed for well-timed growth; evaluating growth opportunities while maintaining a patient and disciplined approach; and returning capital to shareholders, where at present we're paying out 1/3 of adjusted earnings.
And as an aside, with the current market outlook and our significant operating leverage, we see the potential for much higher earnings and thus dividends in the coming quarters. The essence of our policy is an acknowledgment that this is a cyclical business, where financial strength can pay off hugely if it permits well-timed investment. But we must balance that with returning capital to shareholders, consisting of a portion of earnings in a manner that's conventional across industries. While we don't rule out special dividends or share repurchases, at the moment, neither are part of our near-term plan.
And with that, I'm happy to hand the call back over to Bart.
Thanks, Tony. Building upon Tony's comments on market conditions, we'll further examine the industry fundamentals. Overall, the supply-demand dynamics remain highly favorable. On Slide 9, we discuss the significant supply/demand gap. The multiyear supply-demand gap remains wide, which birth availability continuing to be limited to 2026 and beyond.
The strong tonne-mile growth, which is highlighted in the green bars in the chart, is driven by positive underlying fundamentals, and, in 2024 is enhanced by the full year impact of the EU embargo, which Tony has discussed in detail.
Despite low scrapping levels, the charter market has remained strong. with the aging fleet representing further scrapping potential, creating additional market support through the cycle. So overall, we believe the limited net fleet growth across the product and chemical tanker sectors, combined with increasing tonne-miles, supports current market strength.
Moving to Slide 10, where we highlight how the low MR product tanker order book contract sharply with the rapidly aging fleet. As just discussed, supply fundamentals remain highly supportive. Although we have seen some moderate ordering of product tankers, this represents only a fraction of the natural replacement cycle of the aging fleet, with only 8 million deadweight tons on order versus nearly 70 million deadweight tons within the scrapping age profile in the next 5 years.
And specifically for MRs, the gap is even more pronounced. The current MR order book stands at a low 6.5% of the existing fleet compared with the overall product tanker order book at 10%. As we mentioned on our last earnings call, it's important to point out that the Aframax crude tankers' net fleet growth is forecast at near 0 levels. This implies that an increased proportion of LR2s, most likely older vessels, will naturally transition to trading crude to cover the shortfall in Aframax tankers. And this is a trend, in addition to the transition we have seen this year, of more LR2s shifting from clean to dirty trade.
On Slide 11, we depict the strong underlying demand growth in the product and chemical tanker markets. As discussed, the Russia-Ukraine conflict has heightened concerns around energy security and led to a persistent reordering of global product trades. Meanwhile, the long-term trend of refinery dislocation between East and West, supported by increasing consumption forecast, will continue to drive incremental tonne-mile demand.
While acknowledging that there are macroeconomic pressures as a result of the high interest rate environment and uncertainties in the Chinese economy, we believe they are currently outweighed by the positive factors in the tanker markets.
Moving to Slide 13. Ardmore continues to build upon its financial strength. As a reminder, the chart on the bottom left notes that we have reduced our cash breakeven levels by $2,500 per day in a rising interest rate environment as a result of our effective cost control, lower debt levels and access to revolving facilities, with the potential to further reduce breakeven levels in 2024. In addition, we have a strong liquidity position with $50 million of cash on hand and $220 million of undrawn revolving facilities at the end of the quarter. As always, Ardmore is focused on optimizing performance, closely managing costs in this inflationary environment and preserving a strong balance sheet.
Turning to Slide 14 for financial highlights. As noted, we are very pleased with our performance during the summer season as we report results of $0.49 per share for the third quarter. We are correspondingly reporting strong EBITDAR for the quarter and continue to frame EBITDAR as an important comparable valuation metric against our IFRS reporting peers. There's a full reconciliation of this presented in the appendix on Slide 25.
Our significant revolving capacity has allowed us to manage our debt levels intra-quarter and minimize our interest expense, even in this elevated rate environment. Please refer to Slide 26 in the appendix for our fourth quarter 2023 guidance numbers.
Moving to Slide 15. As Tony mentioned earlier, in accordance with our energy transition plan, we're making some exciting investments in our fleet to further optimize operating performance and improve earnings. We are now on schedule to complete an updated 7 dry-dockings this year, and this reduces to 5 dry-dockings in 2024, 4 of which are in the first quarter, setting the stage for having our fleet refreshed and upgraded in producing full earnings.
As discussed and within the balance of the scheduled dry-docking periods, we're installing new generation scrubbers and other efficiency enhancing technologies which have high return profiles. Meanwhile, we have successfully completed the technical management transfer of 8 vessels fully consolidating our fleet with our joint venture partner, Anglo Ardmore. Also noteworthy, we had very strong on-hire availability for the third quarter as a result of the continued close coordination of our teams at sea and onshore.
Finally, we are prepared for the implementation of the EU Emissions Trading System, or ETS. While certainly a lot of planning has gone into this by our charging and operations teams, in essence, from a financial perspective, this results in a pass-through voyage expense.
Moving to Slide 16. Here we are highlighting our significant operating leverage. As you can see in the chart, for every $10,000 per day increase in TCE rates, earnings per share is expected to increase by approximately $2.30 annually, with free cash flow increasing by nearly $100 million over the same time period.
Given the range of TCE rates shown on the slide, it is important to remember that in this elevated, highly volatile market, dramatic shifts are possible. And just as we experienced last winter, there is the potential for the market rates to strengthen significantly in a short period of time to level towards the upper end of this scale and even beyond. We certainly like Ardmore's positioning heading into this winter market.
With that, I'm happy to hand the call back to Tony and look forward to answering questions at the end.
Thank you, Bart. So to summarize, first, regarding the market. TCE rates continued at elevated levels through the third quarter during the normally weaker summer and a strengthening into the winter season. Meanwhile, there are a number of near-term drivers, including, among other things, very low refined product inventory levels in Europe expecting to drive long-haul imports into the region and further contribute to overall demand. And the wide gap between tanker supply and demand should continue to underpin the market for at least the next couple of years.
And regarding the company, we're continuing to achieve strong TCE performance while managing costs in an inflationary environment. We're investing in our fleet to further improve operating performance and reduce carbon emissions. And our strong balance sheet and low breakeven level serves to enhance the quality of Ardmore's earnings, while also allowing us to pursue all of our capital allocation priorities simultaneously.
And with that, we're pleased to open up the call for questions.
[Operator Instructions] Our first question comes from Omar Nokta with Jefferies.
Tony, I was actually going to ask about the dividends, but you preempted my question in your opening remarks, I think when you mentioned buybacks and specials in the near term aren't on the horizon. Just I guess in general, when you think about Ardmore and growth potential from here, I know we've talked about this in several quarters in the past. You've done some low-hanging fruit here recently, and you're working on that further with the scrubber installations and efficiency rates on your existing fleet. But when you think just generally about growth for here and expansion for Ardmore, any updated thoughts or views on how that looks for the company?
Sure. Omar. Yes, good question. Again, just to reiterate, we're paying out 1/3 of our earnings as a dividend. At the moment, as of -- for the quarter just reported, about half went into CapEx. And so the amount that we're using to continue to delever is quite a bit less than, for example, last year. So just -- and then the question is, okay, what are we exactly investing in? I think the most important point is that the incremental returns are really excellent. So we would estimate that the upgrades that we're making to the ships as investments themselves are going to provide about a 30% to 35% yield. It's also going to result in our fleet, once we get through this program, which will be kind of into the second quarter of next year, will be an upgraded fleet generating a lot more cash flow, we think. Also the ships that will all be back from dockings off hire, et cetera. So I guess the question is where do we go from there? We'll remain focused on the sectors we're in. We're going to remain focused on fuel efficiency and carbon reduction. We're looking to engage in well-timed growth. So we'll just have to see what the market offers in that time frame. And we're always pleased to pay out more capital if it makes sense at the time. But at the moment, we discussed in detail where we're allocating the capital, and we think that's the best for long-term value.
That's helpful. And I guess, generally speaking, when you think about the growth opportunities, the newbuildings, do they make sense in this context? Or is more of your focus on, say, targeted secondhand transaction?
I don't think we would take anything off the table because, obviously, when you talk about chemicals as well as MRs, you're talking about a pretty broad range of ship types and yards and secondhand sellers, et cetera. So we're -- hopefully, we've demonstrated over the many years now that we're pretty focused on value and pretty disciplined.
Just one final one, just kind of operationally. I noticed the -- your Eco-Mods outperformed quite a bit at 36,000 in the third quarter versus the standard -- or I guess, not just at the Eco-Designs themselves in '26 to a pretty big spread, 10,000 there. Any color you can give there on why such a deviation?
No. It's really just a small sample set on the Eco-Mod side. So we just -- we had a particularly -- it could easily have been Eco-Design ships in those positions for fixing.
[Operator Instructions] Our next question comes from Ben Nolan with Stifel.
So I -- maybe following on to a few of Omar's questions. When -- with respect to some of the modifications and things that you're making to the vessels, and Tony, you talked about the rate of return that you expect to get on those, I'm just curious how -- once all of those are done from an efficiency standpoint, how does -- how would one of your modified ships stack up to, say, a newbuilding from efficiency? And then along those lines how do you think about sort of the useful life of those assets within your fleet as a more efficient asset?
Yes. So look, I think the very newest designs coming out of yards are -- they're very, very fuel efficient. So that's something that's -- those levels are probably unattainable on secondhand ships, certainly kind of 5 years and older. What we're doing is really building our TCE performance. And I think we've been doing that for a while, if you look at our performance over the last kind of year or 2 years versus the peer group. And a component of that comes from the upgrades. So we're now -- many others have done this before, but we're now installing scrubbers, new generation scrubbers that are cheaper and more efficient, and we think are -- have some environmental features, which we really like. And of course, those should bump up -- those ships that are equipped, they'll be bumping up their earnings by $2,000 to $3,000 a day given where spreads are right now.
Right. And I mean, once they're fully kitted and everything else, do they -- would they potentially make sense for you to guys to have them in your fleet for another 10 years? Or how are -- like a protracted period of maybe...
Yes. Sorry, I forgot -- apologies for not answering that question as well. Yes, it's a good question and one where we're going to wait and see. Our policy at this point has been to operate them until around 15 years of age. The difference is these are ships that we actually built. And we've been running them for a long time, obviously, and I think we have a higher degree of confidence in their condition and they'll be very, very fuel efficient for what they are. So it's very likely that we'll operate them beyond 15 at this stage. And then Bart on the...
Maybe Ben, just to add to like these different CapEx upgrades, the -- I mean, the payback periods on them are 1, 2 years and change. So as we're thinking about it, obviously, lots of flexibility thereafter, but we're getting paid back very rapidly.
And to add to that, I think the point being that we're -- there are things that we would consider on newbuildings today that we just can't do on chips that are 8 years old.
Sure. Well, and that connects to the second question I was going to ask. I mean newbuilding prices are pretty elevated, and I know that you're not -- you mentioned you're not taking anything off the table. Obviously, you have the financial flexibility to do a lot of things right now. I guess my question is, given inflation and where the order book stands and everything else, do you think about the risk profile a little bit differently? Or maybe what the appropriate mid-cycle asset value is, is it meaningfully higher going forward? Or something else, such that maybe buying a ship or ordering a ship at current levels, it might have been untenable a few years ago, and today, you just don't think that is the same level of downside risk?
I think you're hitting on a really important point, which is that there is a long-term inflation trend, if you look back 20 years and you can kind of project to where we are today or assess on that basis. And it's clear that new building prices have overshot that line. But we're not going back -- unless there's a big, big change in the structure of the shipbuilding industry, we're not going back to the pricing levels that we saw 10, 15 years ago. So it's an interesting thing to think about. But -- so I think, certainly, we're realistic about what represents a fair price today or kind of a reasonable mid-cycle type price today for newbuilding, and it's very different from kind of 12, 13 years ago when we were building our ships.
Right. Okay. So we'll see...
But in the moment, certainly in key shipbuilding regions, the current prices have overshot.
Right. All right. And then the last one, just going back to the embargo slide that you talked about. I'm curious -- I understand that a rising tide is going to look to all boats, but it seems like a lot of those trades, whether it's from the Middle East or maybe even from the Gulf Coast to Europe, would lend themselves a little bit more easily to LRs versus MRs. Is it -- am I off on that? Or how do you think about sort of your positioning on that restocking of European diesel?
No. I mean it's -- look, I think depending on where the cargo -- the stock is coming from. I think there's this misnomer or there's this conception that LRs do all the long-haul trade. That's not even what LR stands for, but that's another matter. So -- but the fact is that MRs do very long haulages and a lot of the liftings, for example, out of the U.S. Gulf. Most of that is MR. If you're coming in from the Far East or from the Middle East with an LR2, for example, there are only a very small number of ports you can get into. So then you're talking about lightering the cost structure changes. So I think they'll benefit equally.
This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.