Good morning, ladies and gentlemen, and welcome to the Ardmore Shipping Q2 2022 earnings conference call. Today's call is being recorded, and an audio webcast and presentation are available on the company's website. We will conduct a question-and-answer session. Instructions will follow at that time. A replay of the conference call will be accessible on the company's website at any time during the next two weeks by dialing 1-877-344-7529 or 1-412-317-0088 and entering code 5132389. At this time, I will turn the call over to Anthony Gurnee, Chief Executive Officer of Ardmore Shipping.
Thank you. Good morning and welcome to Ardmore Shipping Q2 2022 earnings call. First, let me ask Paul to describe the format for the call and discuss.
Thanks, Tony, and welcome, everyone. Before we direct participants to our website, ardmoreshipping.com, Q2 2022 earnings. Tony and I will take about 15 minutes to go through the presentation, then open up the call to questions. Turning to slide 2, today contains forward-looking statements. Actual results may differ materially from the results projected from those forward-looking statements. Additional information concerning factors that could cause the actual results to differ from forward-looking statements is contained in the Q2 2022 earnings release, which is available on our website. Now I will turn the call back over to Tony.
Thanks, Paul. To begin with, I'll discuss highlights, recent market developments, and overall Ardmore performance. After which, Paul will provide an update on product and chemical tanker financials, and then I'll conclude the presentation and open up the call for questions. Turning to slide four. The product and chemical tanker markets are continuing along at historically high levels, with many factors now contributing to ongoing momentum, which we will discuss later on. Our MRs earned $30,500 per day for the Q2 , up from $15,900 last quarter. They're earning $46,600 so far in the Q3 , with 45% fixed, and are averaging $55,300 for fixtures concluded over the last two weeks. Additionally, our chemical tankers are now approaching similar levels on a capital-adjusted basis.
Given our operating leverage and spot exposure, this has translated into record earnings of $29 million or $0.82 per share for the Q2 , and an estimated $65 million or $1.75 per share for the Q3 if these rates are sustained. Asset prices are also rising as buyers are now factoring in the strong market to their value estimates. Most recently, the sale of a 2016 built Korean MR of 25% from $27.5 million at the beginning of the year. Despite the much improved market conditions, given the very challenging business environment we've just come through, our priority continues to be rebuilding financial strength in order to then continue through our capital allocation priorities once our leverage targets are met.
To this end, we've just completed a refinancing of virtually all of our debt with our core lending banks, repaying most of our higher cost lease portfolio, reducing and thereby significantly lowering our debt cost. We've also engaged in limited usage of the ATM program over the past quarter to further build financial strength. Operationally, we're very proud that our ships, the Ardmore Cherokee and the Ardmore Encounter, have recently won The Seafarers' Charity Maritime Safety Week competition's proactive approach to safety. Moving to slide five, chemical tanker market outlook. The market is being influenced by many factors, but above all, a now deeply rooted energy crisis impacting virtually all energy classes, on a global basis, most notably in Europe.
While concerns about a global economic slowdown should temper expectations, there's nevertheless a growing consensus that the conditions causing the crisis, and thus the strong product tanker market, may continue for some time. This volatility is reflecting, in part, the under-investment in oil and gas exploration for many years. As a result of the war in Ukraine globally, which will take some time to resolve, and low global oil inventories, the difficulty of restocking in a supply-constrained market and strong competition for reliable supplies will likely continue, and thus our markets for some time to come. Under these conditions, MRs in particular are playing a vital role as the most flexible and the largest, as they can trade virtually anywhere in the world, and they comprise fully one-third of the global tanker fleet.
It's important to point out that tanker demand is highly priced and elastic. The cost of freight, even at today's high levels, is less than 5% of the value of the cargo. There would appear to be no practical upper limit on charter rates in terms of potential oil demand destruction. Meanwhile, chemical tanker rates are tracking MRs upwards as a similar dislocation in chemical and veg oil markets is driving ton-mile demand, in addition to which there's less competition for chemical cargoes from MRs. Moving to slide six regarding Ardmore's commercial and financial performance. The strategy has positioned the company very well to maximize earnings in this market upturn. We made a deliberate move to spot trading away from time charter out going into 2022 in anticipation of an improving market.
Of course, neither we nor anyone else anticipated the current strength. Tactically, our fleet is trading 120% spot when including our time chartered-in vessels, now totaling 5 at an average TC rate of $12,600 per day. As mentioned, chemical tankers are now also doing very well on a capital-adjusted basis, notably engaging on very long-haul voyages, reflecting a key driver in this market. In addition, the $40 million perpetual preferred issuance. Then in the meantime, we're continuing improvement in order to maximize earnings and cash flow with an ongoing intense focus on trading performance, and voyage optimization, which is particularly important in this high bunker price environment. We're also continuing with vessel efficiency improvements consistent with our ETP, but also cash flow.
Financially, the recently concluded refinancing will reduce our average credit spread from 3.2% down to 2.6%, resulting in roughly $2.2 million per annum saving. Assuming a continuation of strong market conditions, we anticipate a meaningful reduction in our leverage and our cash flow breakeven levels by year-end, thus opening up new capital allocation opportunities along with more sustainable ongoing profitability. With that, I'll hand the call back over to Paul.
Thanks, Tony. I'll take a look at the fundamentals then move to a financial review and capital. Slide 8 for demand fundamentals. The demand outlook for product and chemical tankers remains very positive. The IEA are forecasting global oil demand to increase by 1.7 billion barrels a day this year and 2.1 billion barrels a day in 2023, in spite of a deceleration of global economic activity. In particular, aviation activity continues to support oil demand, with jet fuel demand increasing by 900,000 barrels a day or 18% since the start of the year. The disruption to trade flows associated with the Ukraine-Russia war and energy crisis are adding to ton-mile demand.
For example, Europe is now sourcing refined oil products from the U.S. Gulf and the Middle East rather than Russia, and this is unlikely to change anytime soon. Meanwhile, as we've been saying for some time, the ongoing trend of refinery dislocation will continue to have a positive impact on product tanker demand, providing an additional layer of growth. Over the next 4 years, there is 8.9 million barrels a day of export refinery capacity growth in the Middle East and Asia. The closures of local market-focused refineries in the U.S., Europe, Japan, and Australia. Combination of these developments means larger seaborne volumes of refined product moving over longer distances. Overall, product tanker ton-mile demand is expected to grow by 3%-4% annually over the medium term, which should be well above supply growth.
Chemical tanker demand outlook is also very positive, driven by ongoing global GDP growth and increasing petrochemical output in the long term, and favorable ton-mile demand forces consistent with product tanker market in the near term. Moving to slide 9, we'll take a closer look at the supply fundamentals. The supply outlook for product and chemical tankers is also favorable, driven by a low order book and increased scrapping levels. Net fleet growth, deliveries less scrapping, is expected to be well below demand growth for the coming years. Estimated net fleet growth in 2022 is 1.4% for product tankers and 1.1% for chemical tankers, with a downward trend expected to continue, as you can see on the chart on the upper right.
Scrapping has been running at more elevated levels for the past 2 years, and given the age profile of the fleet, this should continue. 29 product tankers are scrapped in the year to date, compared to 68 ships or 2% of the fleet scrapped last year. While a resurgent market may slow scrapping in the near term, an aging fleet will ultimately see scrapping levels increase in the long term. Currently, 9% or 271 ships of the product tanker fleet and 13% or 239 ships of the chemical tanker fleet are over 20 years old and close to scrapping age. At the same time, the order book for product and chemical tankers remains low.
The product tanker order book is at 6.2% or 179 ships, and the chemical tanker order book is at 6.3% or 78 ships delivering over the next three years. New ordering activity is expected to remain low in the near term. There's very limited berth availability until 2025, and a lack of priority in propulsion technology and emission regulations has dampened the willingness of tanker owners to order speculatively. Moving to slide 11, we take a closer look at fleet and operational highlights. We are continuing to invest in the fleet to optimize operating performance. We expect to complete 1 dry docking and a ballast water treatment system installation in the Q4 with a total CapEx of $2.4 million.
Forecasted revenue days for 2022 are approximately 9,750, including time charter in ships, with chemical tankers representing 24% of fleet days for the year. Operationally, the fleet continues to perform very well, with on-hire availability at 99.3% for the Q2 . Turning to slide 12 for financial highlights and guidance. We're reporting earnings of $29 million or $0.82 per share for the Q2 , representing our strongest quarter ever. In addition to a strong chartering performance, we have continued our focus on cost control and efficiency improvements. Operating expenses are at $15.9 million for the Q2 compared to $16.4 million for the same period last year. Looking ahead, we expect OpEx for the Q3 to be lower at approximately $14 million following the sale of three ships.
Charter in expense was $2.3 million for the Q2 and will increase to $5 million in the Q3 , reflecting five ships on time charter in, which includes the charter back of the three recently sold vessels. As you can see in the chart, we have split the time charter in expense between operating and capital components in our income statement. More on that in a moment. Depreciation and amortization total $7.9 million in the Q2 , down $1.1 million from the prior quarter as a result of the sale of three ships. We expect depreciation and amortization for the Q3 to be about approximately $8 million. Total overhead costs were $5.3 million for the quarter. We're forecasting them to be in line with the Q3 .
Interest in financing costs, excluding non-recurring items associated with the sale of the vessels, came in at $4.2 million for the Q2 . We expect it to be approximately $3.9 million in the Q3 following the prepayment of the debt associated with the vessel sales and the cost savings associated with the refinancing currently underway. Finally, this quarter we are introducing EBITDAR, which is EBITDA plus bareboat equivalent lease expense as a metric to enable a comparable valuation with IFRS reporting peers. Ardmore reports under U.S. GAAP, while most of our peers report under IFRS. IFRS differs from U.S. GAAP in its presentation of lease expense by including it in depreciation, whereas U.S. GAAP does not. As a consequence, vessels that are chartered in for greater than one year result in higher EBITDA under IFRS than under U.S. GAAP.
Therefore, to assist in the process of a like-for-like valuation, we are introducing EBITDAR as comparable to EBITDA reported by IFRS peers. The effect is that we will add back vessel lease expense, which is the expense to EBITDA to arrive at EBITDAR. A full reconciliation of this is provided on slide 20 to this presentation and also in this quarter's earnings release Form 6-K released this morning. Turning now to slide 13, we can immediately see the reality of the current market. The charter rates for the Q2 were since the charter rates in the Q3. Average TCE was $27,850, and chemicals earning $22,000 per day on a capital adjusted basis.
For the Q3 , with 45% to date booked, the fleet average is $43,300 per day, comprising MRTC of $46,600 per day and chemical tanker rates of $32,900 per day. For perspective on slide 14, we're highlighting our operating leverage and providing some illustrative calculations of EPS and net income at different TCE rates. In the highlighted bars, you can see annualized net income and EPS based on charter rates for the Q2 and approximate charter rates for the Q3 . Based on $27,500 per day the Q2 . This translates to and EPS of $3.25. Using fleet average rates of $42,000 based on the bookings to date, this translates to annualized net income of $265 million or $7.15 per share.
As you can see with our operating leverage, the high rate environment is substantially resulting in stronger financial performance. Moving to slide 15 for the balance sheet. In the Q2 , we finalized a refinancing of our debt facilities with our existing banks for three separate loans for $308 million in the aggregate. The new loans have been used to refinance 19 vessels, including 9 vessels financed under leases. The loans comprise of $185 million fully revolving credit facility, a $108 million senior term loan, and a $15 million receivables facility. The two main loan facilities are priced at an equivalent of LIBOR plus 2.25%. A significant reduction on the existing debt pricing, and all three loans are sustainability-linked and include a pricing adjustment and other environmental and social initiatives.
The refinancing is hugely advantageous for the company. It is allowing us to eliminate the expensive leases, taking the number of leased vessels from 14 to 2 since the start of the year. The average credit spread on the debt was substantially reduced from 3.2% to 2.6%, resulting in annual interest savings of $2.2 million per year. The final documentation is in progress, and we expect it to be fully completed October, when all the leases are refinanced. In addition to the refinancing, we engaged in limited usage of the ATM to build financial strength. We issued 2.8 million shares in the period at a weighted average price of $7.40 per share, raising $20.5 million in net proceeds.
As a result of these initiatives and favorable market conditions, we're well on course to build a fortress-like balance sheet consistent with our capital allocation objectives in a very short timeframe. Finally, moving to slide 16 for our capital allocation policy. Our capital allocation policy was introduced in March of 2020, and the overall objective is to build shareholder value in a highly cyclical industry designed to ensure that Ardmore is well-positioned to capitalize on opportunities through the cycle and developments in the industry. Our priorities remain the same. We maintain the fleet over time and turn leverage to below 40%, grow accretively to scale, and return capital to shareholders. We've made significant progress towards these objectives over the past 18 months. The preferred share issuance in mid-2021 buttressed the balance sheet through the COVID weakness while protecting upside for common shareholders.
The exceptionally strong charter market is now affording a great opportunity to further improve capital structure and reduce debt reduction and clear the pathway to consider different uses of cash when those targets are met.
Thanks, Paul. To sum up then, MR charter rates are now at levels offering impressive returns. For this quarter, earnings of $29 million or $0.82 per share, representing an annualized return on equity of about 40%. For the Q3 to date, with 45% fixed, potential earnings of $65 million or $1.75 in EPS and an annualized return on equity of about 90% if these levels are sustained. Market is being influenced above all by the energy crisis. While the prospects of a global slowdown should temper expectations, there is growing consensus that the energy crisis will not be resolved anytime soon. Meanwhile, product tanker supply demand fundamentals also look favorable, with solid demand growth expected on the back of strong oil demand growth, even after recent downward revisions.
Product tanker supply constrained by shipyard berth availability and continued scrapping. As a company, we remain focused on operating performance and are making good progress, in addition, toward our capital allocation policy objectives, in other words, leverage reduction and fleet size management, which when met, will allow us to pivot to other priorities. In other words, further growth and returning capital to shareholders. It is still very much at the center of our thinking, most immediately driving efficiency improvements and progress with our e1 Marine joint venture, while continuing to seek opportunities in a gradually but nevertheless profoundly changing business landscape.
On a final note, I wanna take this moment to thank our CFO, Paul Tivnan, for all his effort, great results, and companionship over these past 12 years, and wish him the very best in his future endeavors. At the same time, as you will see in our separate press release, we're very pleased to welcome our new CFO, Bart Kelleher, to the team, and we look forward to working with him from September first. With that, we're happy to open up the call for questions.
We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. The first question is from Sean Morgan of Evercore. Please go ahead.
Hey guys. You know, I'm on for John today, and he wanted me to, you know, sentiments to Paul and wish him luck in his new endeavor. Not sure where he's planning to go, but if it's New York, I'm sure we can make room for one more Irishman here. Just on the e1 Marine business, I think it's been about a year since that's closed. Are you guys seeing is it commercially ready to start, you know, licensing out for royalties or where are we?
Thanks for your comments and John also. Yeah, e1 Marine has made a lot of progress and Element 1 Corp indeed has made a lot of progress over the last, you know, number of years, particularly in the last 12 months. In terms of commercialization licenses, the focus
Technology marinized. To that end, the Hydrogen One vessel, which was announced last December, its construction is well underway. I think on the last call, we announced that they've got approval in principle from Lloyd's, and Hydrogen One, Maritime Partners. Our JV partner have also, I think, just ordered their fuel cells to partner with the e1 system, and marinizing the technology. I think in terms of next steps, you'll see kind of commercial progress and perhaps licensing over the next couple of quarters.
Okay. Thanks, Paul. Then just to follow up for Tony, I think on the broader market, we've had obviously nice improvement here in rates on the clean MRs. Just wondering how much of that do you ascribe to sort of dislocation from Russia versus the changing geographies of clean product production and then I guess just kind of return of travel demand, and how sustainable do you think this nice clean environment we have is?
Yeah, that's a good question, Sean, and that's what we tried to focus on in the presentation. You know, I think you're hitting at a few things there. One are fundamentals, return to jet fuel, you know, most particularly. I think that underlying all this is a pretty healthy dynamic in terms of supply and demand. You know, there's you know, what we're seeing and kind of hearing more about now is just more broadly an energy crisis that obviously is in part being driven by the Ukraine war. It's, there are other factors at play.
This happens at a time when, you know, a lot of consumers are, you know, running with very low inventories and are having to go, you know, look very far away for a real.
Okay, thanks. Thanks a lot. That's all.
Thanks, Sean.
The next question is from Ben Nolan of Stifel. Please go ahead.
And give our outlook. I guess I would start from a sort of a bigger picture macro question. You addressed this a little bit in the capital allocation, with, you know, a target of 40% leverage. I mean, at these kind of day rates, you're gonna get there really fast, especially with the addition of the ATM. I sure if this market can sustain here, and/or at least at reasonably healthy levels and the leverage you want Ardmore to be, I don't know, a year from now or two years from now. How would it look different, now that things have sort of transitioned from a theor.
Two years from now, if the market continues, I think we've reached our, you know, leverage, you know, well before then, and we'll be in a position and probably be returning lots of capital to shareholders, you know, under those conditions. Also being then well-positioned to find the right opportunities for growth. If the market isn't sustained, you know, we believe we'll be in a position to, you know, I think as financial strength is gonna build very quickly, and that's gonna give us a lot more flexibility about capital allocation priorities. You know, just to take a step back, the overriding objective when we set out the capital allocation policy was to position the company for well-timed and therefore highly accretive growth.
As well as more regular return of capital to shareholders.
Right. Although, I guess, I suppose the trade-off, and this is always seemingly the case in shipping. You mentioned that MR values have come up a lot. You know, it's always a trade-off. Do you pay for growth even though maybe prices are higher versus return of capital? I'm just trying to get a sense of how you think about executing on growth.
You know, I think you know us well enough to know that we're not momentum players, so we, you know, we'll, you know, be quite prudent in terms of how and when we engage in growth. The last big step we made was quite a while ago now. It was the Frontline fleet acquisition, and we bought those ships, their MRs, eco-design MRs, when they were about a year old. We got them for $29 million each, and now, you know, a six-year-old ship is worth, you know, we don't need to necessarily, you know, do that well in acquisitions. We do think that there's potentially pockets of opportunity that could arise over the next year or two, even in relatively strong market conditions. Otherwise we can be patient.
Okay.
We've got a great fleet that's gonna be able to generate a lot of cash flow for the next at least three years.
Right. Lastly for me, I think I caught this at the end when you were talking about just sort of the chartering strategy and so forth. Are you guys looking to maybe lock in, well, lock in gains, let's say, on some of the charter ins by chartering out those vessels, securing cash, some cash flow visibility? What's the shape of the curve there? I mean, is it a time charter versus spot?
At the moment, it's very heavily backwardated. You know, we're looking, you know, we've talked about the spot rates. One-year TC is probably around $20,000 now, substantially lower, and then it's maybe flat for a couple of years. You know, we're not drawn to those kind of numbers yet. It also depends on our, you know, our view on the next kind of 1-2 years at the time that opportunity arises. Also you have to factor in who the counterparty is, to perform even if rates fall off.
All right, well, I appreciate the time, and Paul, I'll miss our conversations.
Thanks, Ben. We'll talk to you soon.
Yep.
The next question comes from Omar Nokta.
Thank you. Hey, guys. Good afternoon. Yeah, you know, congrats obviously on a very, you know, strong quarter, and it looks like you set up the Q3 to look even better. Also, Paul, you know, congrats on your 12 years with Ardmore. It's been a pleasure, and definitely look forward to seeing what you have coming next. Definitely not a bad way to go with those refinance. I wanted to ask about just kind of going back to, you know, Ben's question about capital allocation. Obviously your priorities in order are maintaining the fleet, followed by getting the target leverage below 40%. That's obviously it seems like that's a bit different than in the past, where the target was to get to 40. Now it's below, which makes sense.
How far below 40 do you wanna get to?
Yep, Omar, I think we're happy with, you know, if we include the preferred, you know, in the leverage component, then, you know, I think we're happy below 40% on a mid-cycle basis. You know, it seems like there's a lot of momentum heading, you know, toward that target right now.
Okay. Do you think that's something that obviously it's all projections, but is that a figure you think you can get to by year-end based off of how things are playing out so far?
Yeah. Based on how things are playing out now, definitely. You know, just look at the forecast for 3Q. If you even have a moderate assumption for 4Q, I think that probably gets us there. You know, we're very pleased when that happens, 'cause then it opens up all sorts of other opportunities, you know, notably returning capital to shareholders, but also looking for growth opportunities without playing into a hot market.
On that note of looking at, you know, fleet opportunities, what do you think makes sense? I know a couple of years back, after that floating storage boom, you had a good amount of excess free cash, and you went out and you bought an MR. It was a bit older. It was a quality ship, but it was, I think, a 2010 built. How do you think about.
The next time you deploy capital in buying ships or a ship? Could you see you doing something opportunistic like that again, or do you focus more on going younger?
That's a really good question. Look, we're really happy with that one acquisition we made. It did use quite a bit of capital, you know, then and even today has breakeven rate, including full overhead allocation of $11,700 per day. You know, that always works. We obviously over time need to consider how to rebuild and modernize our fleet. We think our timing is pretty good in that respect in terms of, you know, what the right type of ship will be for the future, meaning that nobody really knows quite yet, but hopefully we'll have visibility on that in a year or two.
If in the meantime, you know, interesting either in the product or chemical space opportunities come to buy more modern ships at a good price, in some form, obviously, we'll take a hard look at that.
Thanks, Tony. Just one final one, just on, you know, but you did sell three of the older MRs. You've seen asset values go up here tremendously over the past several months. Any interest in monetizing another portion of the Ardmore fleet, whether it be the Handysize or the chemical tankers, or are you happy with what you have at the moment?
Yeah. You know, those ships, we actually kind of held out to sell those ships for about a year, always with the intention of taking them back on a medium-term time charter basis so that we could efficiently exit ships that were approaching 15 years of age, but keep them in the fleet from a, you know, an earning standpoint and kind of commercial platform standpoint. Rates. I think we've seen this in the dry bulk market. You know, rates are so strong that they're actually kind of monetizing themselves through cash flow.
We don't feel that. I think there'll come a time that people will look back in hindsight and say, "Yep, that was the time to sell." That's very, very difficult to call looking forward, and I don't think that's really in our mindset at the moment anyway.
Got it. Thanks, Tony. Thanks, Paul. Again, Paul, pleasure working with you and good luck in the future.
Likewise, Omar. Thank you.
Again, if you have a question, please press star then one. The next question is from Chris Tsung of Webber Research & Advisory. Please go ahead.
Hi, Paul. Hi, Tony and Paul. Thanks for taking my questions. On the new sustainability-linked loans replacing the existing facilities, can you expand a bit on the factors that were considered to secure these low rates? What do the pricing adjustments look like?
Thanks, Chris. Great question. I think when you think about sustainability-linked loans or if you think about the way the shipping finance market is going, I think if you want to get access to funding from top-tier banks, you know, you have to show your credentials on sustainability and sign up to, you know, some pretty carbon reduction. I would say in terms of the loans themselves, the fact that we're able to, you know, given the overall economic environment, at a pretty sharp price and a big saving on our existing. Then on, specifically on the approximately five basis points plus or minus availability-linked loans.
I suppose the main point I would say is in terms of accessing kind of top-tier financing leading banks, you need to build into them.
Got it. Thanks. Yeah. Congrats on securing that. That looks great. Maybe just thinking about Ardmore's scale and perhaps bandwidth, like how long do you continue to commercially manage the three camps?
Chris, you faded out.
Yes, sure. Just when thinking about scale and bandwidth for your operations, how long do you continue to commercially manage?
It's not enough. They're really pleased with the results they're achieving right now. Hopefully it'll be with us for a while.
Okay.
Yeah, that's 30 ships altogether, which, you know, we think is okay for the time being in terms of, you know, commercial platform and market reach.
Right. Okay. For the three vessels that you sold and chartered back for two years, when would those options need to be declared, and are the rates firmer or softer than the current charter-in rates?
Those are. We haven't specified what exactly the rate is, but it's. If the structure is two years firm and then an option one year and I would, you know, I think the one-year option is probably declarable a few months before the end of that two-year period. They're just starting now. The rate, you know, if you combine it with the other two chartered-in ships, the average of the five ships is $12,600 per day, so that's way below current levels.
Great. Thanks. Lastly, just from all of us at Webber Research, congrats and best of luck to you, Paul.
Thanks, Chris, and hopefully we'll speak to you all soon.
Yes, definitely. Take care.
This concludes our question and answer session and today's conference. Thank you for attending today's presentation. You may now disconnect.