The year 2021 has been volatile for the LPG shipping industry. VLGC rates hit a peak at USD 110,000pd in January but soon nosedived by more than 90% in February, with charter rates on the key AG-Japan route touching USD 6,000pd. The wild swings after subsiding in March-April resumed again in May.

Similarly, LPG stocks also remained unstable/volatile, creating new highs and lows. The upswings in the wild rally and macro-economic factors such as the availability of refinancing options allowed operators to book strong results, which fuelled stock prices. Meanwhile, Asian demand weakened along with narrowing US-Asia arbitrage and easing of the Panama Canal waiting period. This dampened the spirits of charterers and stockholders alike.

All the three LPG shipping stocks under our coverage recently recorded/touched 52-week highs, but it was short-lived, and stock prices retreated. On 18 May 2021, BW LPG reported its 1Q21 results, following which, the stock rallied almost 12% to a 52-week high of NOK 71.45 on 20 May 2021, before it came crashing down to NOK 58.05 on 27 May. Similarly, Navigator Holdings (NVGS) touched a 52-week closing high of USD 11.70 on 7 May 2021, before retreating to USD 10.54 by the end of May. Stealthgas was no different, testing the 52- week high of USD 3.25 on 21 May before settling back on USD 2.97 on 27 May 2021.

The road ahead
Drewry expects the market to continue on the weaker side through June. May was volatile, with increased fixtures in the first couple of weeks, but the enthusiasm dissipated quickly as we moved into the second half of the month. A closed US arbitrage triggered cargo cancellations, after which VLGC freight rates declined on both AG-Japan and US-Asia routes. This was the primary reason for the sudden fall in BW LPG’s stock price, as it is primarily a spot market player and has a VLGC only fleet. For GASS and NVGS, the price decline was not as significant as their fleet is deployed pre-dominantly on long-term charter, and therefore, the revenue stream is in part immune to short-lived spot market fluctuations.

The three operators under our coverage

BW LPG (BWLPG) – The pioneer in duel-fuel LPG propulsion
BW LPG has been a pioneer in LPG propulsion technology. The first vessel with this technology ever – BW Gemini – has been running six months without bunkering fuel oil, saving considerable voyage time. Despite a spot-dominated chartering strategy and off-hire days due to an extended dry-docking schedule, the company’s fleet utilisation stood at 97% in 1Q21. For the remainder of 2021, the charter out coverage stands at 34%, with an average TCE of USD 33,700pd. Meanwhile, the time charter-in coverage is at 14% at an average cost of USD 26,700pd, resulting in an inflow of USD 107mn.

BW LPG dominates the global VLGC sector, owning 15% of the current on the water fleet by number. The operator also is the first mover to the dual-fuel LPG retrofit category. Currently, the company has committed 15 vessels to the cause, of which three are at yards at the time of writing this report, and four are on the water. Based on the current order book, Drewry estimates that BW LPG will have the highest number of retrofitted vessels for any operator. According to BWLPG, this programme although expensive initially (each retrofit costs about USD 9mn), is a major step towards decarbonisation. And the dual-fuel propulsion technology has cut down the company’s emissions by a million tonnes. In addition, the strong and quality asset base has made the balance sheet stronger. Over the last half-decade, the company has consistently improved its liquidity position and reduced its leverage. These factors combined make up for a positive outlook on the company.

Stealthgas (GASS) – Solid chartering strategy protecting the cash flows
Similar to BW LPG, GASS had a strong 1Q21. Given its tendency to lean towards long-term fixtures, the company has secured 61.7% of the remaining days in 2021 already (as of 26 May 2021), and period coverage of 2Q21 was in excess of 80%. Hence, despite the sudden downswing, the majority of its cash flows are protected. Some of the vessels, the 2008-built product tanker vessel ‘Magic Wand’ or the 2015-built LPG carrier ‘Gas Flawless’ have time charters that extend well into 2022. While these fixtures have secured long-term cash flows, GASS also has a part of its fleet exposed to the spot market. In 1Q21, 15 of its 47 vessels (of which five are owned through JVs) were operated in the spot market. This mixed chartering strategy allowed the company to generate high fleet utilisation (98.7% in 1Q21) and operational utilisation (93.1% in 1Q21).

We have seen a strategic shift in the company’s chartering strategy over the last year. Not only the company has been working towards expanding its fleet but also increasing its exposure significantly to the spot market. On the other hand, it has been fixing its long-term charter vessels for longer durations/or extending its existing charters. In terms of fleet, GASS added a net of one vessel, bringing its fleet to 42 from 41 in 1Q21. However, due to the higher number of dry-dockings and special surveys, the calendar days reduced from 3,811 in 1Q20 to 3,745 in 1Q21. This strategic shift in chartering strategy resulted in 1,152 days of spot market exposure and 2,543 days of fixed charters in 1Q21 as compared to just 320 days of spot market exposure and 3,468 days of fixed charters in 1Q20. This did not bode well for the company in 1Q21 because the operational fleet utilisation dropped from 97.3% in 1Q20 to 93.1% in 1Q21, and the net income for 1Q21 came in at USD 0.76mn (EPS: USD 0.02) against the net income of 1Q20 of USD 3.01mn (EPS: 0.08). In our view, it is a positive step for the company to increase its exposure to the spot market in a calibrated manner in 2021.

Navigator Holdings (NVGS) – Expansion paving the way
NVGS – an immediate peer of GASS in terms of fleet characteristics and deployment strategy- saw its financials improving significantly in 1Q21. The net income stood at USD 2.8mn (EPS: USD 0.05) compared to the loss of USD 8.2mn (EPS: -0.14) in 1Q20. This positive result, despite a slightly lower fleet utilisation (88.2% in 1Q21 against 89% in 1Q20), is attributed to better charter rates, lower voyage expenses and gains on non-designated derivative instruments, which in 1Q20 had cost the company in excess of USD 13.9mn. Also, lower interest expenses due to refinancing at more attractive rates helped NVGS’s cause. For NVGS, the acquisition of Ultragas’ fleet in April and the JV of Marine Export Terminal should hold it in good stead. Like GASS, NVGS also uses a mixed chartering strategy, with 15 vessels deployed in the spot market and 22 vessels in the fixed charter market and one vessel at dry-docking, as of 10 June 2021. Fifteen of the 22 vessels deployed on long-term charters are fixed for periods beyond 31 December 2021, thereby providing some protection to the cash flows in case of unforeseen market volatility.

Stock prices and Net Asset Value
After the recent correction in the stock prices, the companies are now trading at a decent discount to their NAVs. This is because, despite the rising concerns about the vessel earnings in the long-term, especially VLGCs, the asset values are still strong, and are driving company valuations.

Conclusion
The LPG shipping market is expected to remain under pressure in the short term. However, supply bottlenecks due to extended dry- dockings and the congestion at the Panama Canal will continue to provide support to the operators. Meanwhile, new orders have surged in the LPG segment, with the orderbook to fleet ratio almost doubling since October 2020. Most of the new VLGCs will be retrofitted with dual-fuel LPG technology, and the supply will increase at a rapid pace by 2023-2024. In such a scenario, we expect operators like GASS and NVGS to deploy a mixed chartering strategy, which may put them at a competitive advantage over operators such as BW LPG that is predominantly a spot market player.
Source: Drewry