introduction

BW LPG (OTCPK: BWLLF) (OTCPK: BWLLY) is an operator of a large fleet of VLGC carriers. Freight rates have been everywhere in 2021 and the company ended the year with a relatively flat performance, with charter rates in the last quarter averaging around $31,000 per day, which is in line with results. of the whole year. The company remained profitable and, as its investment levels were low, the free cash flow generated by BW LPG in 2021 was also very strong, which enabled the company to pay an attractive tax-free dividend, as BW LPG is headquartered in Bermuda, a jurisdiction that does not have a withholding tax rate on dividends.

BW LPG has its primary listing on the Oslo Stock Exchange where it trades with BWLPG as its ticker symbol. The average daily volume in Norway is 388 million shares, making Oslo the most liquid exchange to trade the company’s shares. BW LPG is currently trading at NOK 53.7 per share, which translates to $6.13 using a USD/NOK exchange rate of 8.75.

The last quarter of 2021 was good

In the last quarter of 2021, BW LPG generated total revenue equivalent to time charter just under $117 million which is roughly in line with previous quarters in 2021 as the company was unable to repeat its stellar 2020 performance as the VLGC market softened.

As BW LPG’s operating cost base is quite low, revenue to EBITDA conversion has traditionally been quite high (and predictable) and fourth quarter EBITDA was just under $79 million. As you can see in the image below, depreciation expense tends to be rather high, but BW LPG was able to record an EBIT of $72M mainly due to $34.5M of items not recurring items such as the gain on the sale of a vessel and the reversal of an impairment loss.

These two one-time items pushed reported net income a little higher to just under $63 million, of which $62.4 million was attributable to BW LPG shareholders. This translated to EPS of $0.45 per share and annual net earnings of $1.33 per share. Excluding one-time items, reported net income for the fourth quarter of 2021 would likely have been around $28 million or $0.20 per share. This is obviously still good because the annualized net income of $0.80 per share represents a net income of around NOK 7/share, so BW LPG would still be rather cheap using the “normalized” underlying earnings profile . And keep in mind that the vessel utilization rate in the last quarter of 2021 was relatively low because three VLGCs were upgraded with LPG-powered dual-fuel propulsion engines.

Looking at the cash flow statement, BW LPG reported total operating cash flow of approximately $79.2 million before taking into account interest expense and taxes. After deducting finance charges of $9 million and lease payments of $12.4 million, the underlying operating cash flow was $58 million. This amount increased to $60 million after taking into account interest received and lease payments.

Total capex was just over $39 million for the quarter (and over $187 million for fiscal 2021) and this was primarily related to the upgrade of three vessels with a new propulsion system. This translated to a quarterly free cash flow result of $21 million, or approximately $0.15/share.

Thanks to the non-recurring events, BW LPG was able to announce a very attractive quarterly dividend of $0.18 per share. This brought the dividend for the full year to $0.56 for a dividend yield of around 10%, but investors are warned that BW LPG experienced one-time items that boosted the company’s earnings. If charter rates remain stable and no one-time items occur in 2022, we will likely have to lower our full-year dividend forecast.

2022 has started very well but VLGC rates have been very volatile

The Ukrainian-Russian war served VLGC operators well, as the world sought additional fuel supplies in a supply chain that excluded Russia. This does not mean that the VLGC charter and spot rates are very high because the market anticipates quite a large net amount of VLGC to hit the water in 2022 and 2023.

As you can see in the image above, VLGC’s global fleet continues to expand. In 2021, for example, 18 new ships were delivered and none were scrapped, leading to a net increase in the global fleet of 18 ships. This will accelerate in 2022 with the planned delivery of 18 additional ships, followed by a planned net increase of 38 ships in 2023. This will increase the global fleet by approximately 10% and unless we see more scrapping and/or or further strengthening of demand for LPG transport, given the number of vessels added to the market, will have a negative impact on charter rates and spot rates for this transport segment. You don’t have to go too far back in history to see what a sudden expansion of the global fleet meant for BW LPG. In 2015 and 2016 almost 80 new ships were delivered to their new owners and as the market was oversupplied everyone suffered. As you can see in the following image, BW LPG’s EBITDA plummeted as the vessels were delivered and it took the company several years to recover. In 2016, BW LPG also had to record an impairment charge of $144 million as the market value of the vessels decreased due to the oversupply situation.

The company is also always opportunistic when it comes to recycling its capital. Over the past twelve months, it has sold several vessels above book value, and the proceeds from these transactions are generally used to buy back shares. Not only is BW LPG trading at a substantial discount to its official book value, but the recent sale of vessels seems to confirm that the book value looks rather conservative compared to the market value of some of the assets.

Investment thesis

I think asset sales are smart because they allow BW LPG to monetize part of its fleet ahead of an expected increase in VLGC vessel supply. Capital allocation and management are the most important tools in the shipping industry and I wouldn’t be surprised if BW LPG speculates on LPG vessel prices falling soon.

That being said, I plan to liquidate my entire position in BW LPG later this year, as I’m not too keen on sticking around and seeing what happens when the three dozen new ships hit the water l ‘next year. Shipping is a cyclical business and I want to be out of BW LPG before increased vessel supply weighs on charter rates. I was expecting a bigger jump from the NOK 48/share the stock was trading last summer, but fortunately we have received some good dividends over the past few months. I currently have a small long position left in BW LPG and as mentioned I plan to exit the position in the near future.