LPG – Positive Growth Prospects and Attractive Freight Rate Environment

Dorian LPG Ltd. (NYSE: LPG) Well Positioned to Benefit from the Current Market Environment ?

Highlights from Capital Link’s Corporate Presentation Series

As part of Capital Link’s Corporate Presentation series, Dorian LPG (NYSE: LPG) senior management, Mr. John Lycouris, CEO, Dorian LPG (USA) and Mr. Ted Young, Dorian LPG CFO, delved on January 10, 2024, into the most pressing topics in the LPG shipping sector, including disruptions in the Red Sea and at the Panama Canal, supply and demand fundamentals, and the company’s strategy.?

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Highlights:

• Stable demand for LPG as a cost-effective and significant fuel source and Petchem feedstock.
• The U.S. has become a major exporter of LPG, a byproduct of natural gas and crude oil exploration and is expected to maintain high production levels and robust export volumes.
• Disruptions in the Panama Canal, and the Red Sea have extended routes and voyage time reducing shipping availability enabling Dorian LPG fleet of vessels to generate considerable free cash flows.
• Dorian LPG's prudent financial management, evidenced by its low leverage, attractive debt pricing, and shareholder-friendly policies, positions it well in navigating the dynamic maritime logistics landscape.

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The full presentation can be accessed here:

With its fleet of 25 modern Very Large Gas Carriers (VLGCs), Dorian LPG transports Liquified Petroleum Gas (LPG) across the world. It is one of the three largest operators of VLGC tonnage. The Company provides in-house commercial and technical management services for all owned and bareboat-chartered vessels in the fleet. Also, along with MOL Energia,Pte Ltd it is co-owner and co-manager of the Helios LPG Pool which operates 27 vessels in total. The company has offices in the US, Denmark, and Greece, as well as a strong presence in Singapore.

Dorian’s fleet, which has an average age of eight years, includes four 2023- built dual-fuel ECO VLGCs, three of which are under long-term chartered-in contacts. Additionally, 15 of the company’s 25 ships are equipped with scrubbers, which has led to significant reductions in fuel costs. These scrubbers have proven to be a profitable investment, and Dorian is looking to further enhance its fleet with green technology. Mr. John Lycouris, Dorian LPG (USA) CEO, emphasized the company’s commitment both to reducing emissions and improving efficiency by fitting its ships with new technologies and optimizing operational procedures that reduce fuel consumption.

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LPG Demand Stable

Mainly used in heating and cooking, both residentially and commercially, LPG is a fundamental fuel source for much of the world, Dorian’s CFO Mr. Ted Young noted. Produced as a byproduct during gas processing or refining, LPG has stable demand due to its use for cooking and heating. Apart from these fundamental activities, LPG is also a significant fuel feedstock for the petrochemical (Petchem) industry, where it is used to supplement or substitute a part of their feedstock, usually naphtha, when LPG is more cost-effective, he stated.

A significant portion of the LPG used in the Petchem industry goes into PDH (propane dehydrogenation) plants. PDH is a process that converts propane into propylene, a crucial component for the plastics industry. There has been notable growth in PDH facilities in recent years, particularly in China, as the country aims to be the dominant force in propylene production, Mr. Young said. PDH plants are not limited to China; other regions like Turkey, Korea, and the United States have also invested in this technology. The growth in PDH plants worldwide has led to significantly increased LPG demand for LPG as feedstock.

The LPG shipping sector expansion has been supported to a large extent by the marked growth of LPG exports from the US. Exports from the country have surged from about 4.5 million metric tons in 2013 to an expected 55-60 million metric tons in 2024, making the US the largest exporter of LPG globally. Mr. Lycouris stated that the U.S. became a major exporter from shale exploration – a common source rock for hydrocarbons (natural gas and petroleum) – which provided significant amounts of gas liquids as byproducts of the natural gas and crude oil exploration.

Historically, Saudi Arabia was the primary exporter of LPG, Mr. Young noted, but LPG from Saudi Arabia is often more expensive than LPG from the US, as its price is set by Saudi Arabia's monthly Saudi acceptances of term LPG nominations, while LPG from the US market is priced daily by the market at the Mt. Belvieu hub. LPG Cargoes from the US are priced in the Mt. Belvieu market hub and that pricing transparency was likely instrumental in the significant growth of LPG from the US.

Another major driver of increased exports of LPG from the US has been the lack of significant growth in domestic demand for LPG. Dorian’s CFO highlighted that consumption of LPG in the US is either flat or slightly declining, largely due to the increased use of natural gas from the grid in residential, industrial, and commercial sectors. High inventory levels in the U.S. have been critical in maintaining strong exports, and pricing competitiveness clearing excess volumes and maintaining a healthy price differential with the Saudi posted price. Mr. Lycouris also remarked that the continuous infrastructure improvements and expansions in the terminals export capacity, have enabled the U.S. to maintain higher inventory levels and an increasing number of vessel loadings thus achieving increased export volumes from the USA.

In terms of demand, China is the largest consumer of LPG, and we anticipate the need for LPG to grow as the country continues to add more PDH plants, Mr. Lycouris said. After China, India is the largest consumer of the fuel. In contrast Indian demand for LPG is mainly for domestic cooking and heating, and it has been supported by government subsidies and an effort to replace kerosene and wood burning with LPG. More recently, we have seen Commercial and Industrial demand for LPG picking up in India reinforcing the country's status as a major consumer.

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Disruptions in Panama Canal, Red Sea Extend Routes and Travel Time

Attacks against vessels in the Red Sea and delays at the Panama Canal have impacted the shipping industry widely, and the LPG sector has also felt the effects of these disruptions. Due to low rainfall the water levels at the Panama Canal have been significantly reduced. The Panama Canal Authority announced in October progressive reductions in ship transits from 35 to 18 per day by February 2024; these developments have caused a backlog of vessels and a surge in high bid prices for any auctioned slot, Mr. Lycouris stated. As a result, the transit costs through the Panama Canal rose dramatically, from an average of $500,000/transit to a peak bid for an auctioned slot of $2.8 million in November; though they have since decreased to some hundreds of thousands of dollars, Dorian’s CEO said. This situation forced many vessels loaded in the US Gulf to consider alternative routes to the Far East that are much longer, i.e. via the Suez Canal or sailing past the Cape of Good Hope.

These changes have significantly impacted fleet logistics and operations. The longer transit times, particularly when circumnavigating the Cape of Good Hope, have led to a shortage of available ships to service exports from the United States. This shortage, combined with the continuous increase in U.S. exports of LPG, has put pressure on the global fleet and has provided more pricing power for ship owners due to the scarcity of ships, Mr. Young stated.

Strong, stable demand, as well as these delays at key points of transit, have led to rates exceeding $100,000 per day, substantially higher than the company's daily operating cost of around $25,000 per ship, Dorian’s CFO noted. This favorable rate environment has enabled the company to generate considerable free cash flows.

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Dorian LPG – Prudent Capital Allocation, Low Leverage

From a shareholder perspective, Mr. Young underscored Dorian LPG's disciplined and prudent capital allocation policy, with low leverage, and attractively priced debt, with an all-in cost of debt around 4.6%. He mentioned recent financial initiatives, like the amendment providing increased credit facility availability and a standby "accordion facility" of $100 million for potential opportunities.?

Dorian’s CFO also stressed the company's focus on shareholder returns, highlighting Dorian’s significant dividend payments and stock buybacks. Since its IPO, Dorian has returned over $650 million in cash to shareholders via dividends and stock buybacks. These actions reflect Dorian’s commitment to shareholder returns and the importance of these returns in driving the company's overall shareholder value.

Due to the variability and unpredictability in VLGC rates, Dorian does not offer a standard dividend, opting to evaluate its dividend policy quarterly, taking the health of the market into consideration, Mr. Young underlined. In the present favorable rate environment, the board has been comfortable maintaining a quarterly dividend of $1 per share, but future dividends are subject to change based on the board's assessments each quarter, the company’s CFO stated.

The stable demand for LPG, driven by its varied applications in residential, commercial, and industrial sectors, and particularly in the petrochemical industry, underpins the LPG shipping sector, which is currently further bolstered by the longer routes taken due to the disruptions at the Panama Canal and in the Red Sea. Moreover, Dorian LPG's prudent financial management, evidenced by its low leverage, attractive debt pricing, and shareholder-friendly policies, positions it well to navigate the dynamic maritime logistics landscape. As Dorian LPG looks to the future, its focus on innovation, efficiency, and market adaptability, coupled with a firm grasp of the industry's pulse, positions it to capitalize on emerging opportunities in the LPG transportation sector.

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