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Epic Gas Hit By Impairments

Epic Gas Ltd. (“Epic Gas” or the “Company”) yesterday announced its unaudited financial and operating results for the fiscal year ended December 31, 2017. All amounts reported in US Dollars unless otherwise stated.

Fiscal Year 2017 Highlights
• Vessel Calendar days up 8% year over year to 14,946days
• Revenue of $139.5 million, up 8% year over year
• Time charter equivalent revenues of $8,210 per vessel calendar day, up 1% year over year
• General & administrative expenses of $1,006 per vessel calendar day, down 2.2% year overyear
• Adjusted EBITDA of $29.4 million, up 14% year over year
• Net Loss of $18.0 million before a non-cash impairment charge on goodwill of $12.9million
• $32.3 million Private Placement of common equity closed in March 2017
• 7-year, $90 million senior secured term loan completed in March 2017 to refinance two loan facilities that were due to mature in December 2017 and 2019/2020 respectively
• 5-year, $8.5 million senior secured term loan drawn down to part-finance acquisition of 2009 built 7,500 cubic metre (cbm) vessel
• Delivery of 3 new buildings from shipyards in Japan (2 owned, one bareboat chartered in), capital expenditure of $19 million ofwhich $18 million drawn under existing loan facility
• As of 31 December 2017, 41 vessels on the water

The Pressurised Market
The 3,500cbm and 5,000cbm vessels continued their positive run with market rates improving a further 8% on the previous quarter. The larger-sized 7,500cbm and 11,000cbm vessels experienced flat freight levels, as the market absorbed marginal over supply into developing trades but hindered by larger semi-ref vessels chasing part cargoes in a few trades.

For the fourth quarter of 2017, 3,500cbm, 5,000cbm, 7,500cbm and 11,000cbm market rates averaged $7,714, $9,329, $10,000 and $13,075 per day, respectively. Compared to fourth quarter of 2016, average rates have increased 30% for the 3,500cbm and 5,000cbm vessels, down by 1.9% for the 7,500cbm vessels and remained flat for the 11,000cbm vessels.

During the quarter, two pressurised vessels – a 4,000cbm and a 13,000cbm, and one 7,000cbm semiref vessel delivered, whilst 4 small-sized semi-ref vessels were scrapped. Effectively, a zero increase in capacity.

The year 2017 ended with a total of 329 pressure vessels (non-Chinese flagged over 3,000cbm) on the water, including 8 newbuilds totaling 74,500cbm that delivered during the year. Two pressure vessels involved in international trade were scrapped. They totalled 7,134cbm and were an average age of 28.5 years. This resulted in a net fleet year on year growth in capacity of 4.1% compared to 6.4% in the previous year. Presently, there are 6 newbuild vessels to be delivered in 2018 and 2019 representing a 1.8% increase in existing fleet capacity, the lowest supply growth in any bulk commodity shipping sector. Further, in the existing international trading fleet, there are 11 ships / 36,537cbm that are aged 28 years and older, making them potential scrapping candidates, which will further reduce the aforementioned 1.8% fleet growth rate.

The smaller-sized semi-ref fleet that can compete with the pressure vessels has an order book of 7 vessels, 4 of which are the more expensive ethylene vessels purpose built for that trade. This newbuild capacity equates to a semi-ref net fleet growth of 3.3%, which is more than likely to be lower due to a scrapping ‘pool’ of 18 vessels older than 28 years. We expect that higher operating costs for the older units and probable capital investments required by new legislation will compel owners to strongly consider scrapping these older ships. A total of 12 smaller semi-ref vessels were scrapped in 2017, at an average age of 28 years.

Global seaborne LPG volumes saw continued growth in 2017 reaching 91.9 million tonnes, 4.3% higher than the 88.1 million tonnes shipped in 2016. Epic Gas loaded 2.8 million tonnes in 2017 and was involved in 2,486 cargo operations in 266 different ports. LPG cargoes made up 80% of the cargoes lifted with the balance being petrochemical. At the year end, we had 4 vessels operating in the Americas, 18 in the Europe/Middle East/Africa (EMEA) belt and 19 in Asia.

Propylene imports into China reached a record high of 3.1 million tonnes, a 6.8% year on year increase despite a 16% increase in domestic Propane DeHydrogenation (PDH) capacity. Monthly imports in the last quarter averaged 295,000 tonnes indicating strong downstream demand. During the year, there was significant growth of propylene cargoes out of Thailand, Philippines and Indonesia, with Japan and Malaysia also showing moderate gains. This contributed additional tonnemiles to the usual North Asia trade flow from South Korea, Japan and Taiwan. The smaller 3,500cbm and 5,000cbm vessels are the preferred sizes in these trades and the tightening market and an upward movement in rates for these vessel sizes is a case in point.

Our operations in the LPG break bulk trade has continued to grow. Epic’s vessels carried out 82 shipto-ship (STS) operations during the last quarter, and a total of 413 during the year, which was more than double the number carried out in 2016, and equivalent to about 17% of our loadings.

We have seen strong growth in STS activity off Singapore, which supplies regional demand centres like Sri Lanka and Bangladesh. Operations off West Africa have been growing, albeit at a slower pace, as new infrastructure in the region is developed.

In the Mediterranean, imports into Turkey, Morocco and Spain grew, varying from a modest 2.8% up to a strong 8.3%, the majority of these volumes these delivered on longer haul routes, with Black Sea exports remaining subdued.

Pressurised LPG exports from the USA increased in the fourth quarter, up by 30% from the previous quarter and almost on par with the stronger first half of the year. Exports to the Caribbean and Central America remained firm, with a noteworthy transatlantic cargo to the Mediterranean also loaded in December, a year since the last such delivery. Epic has remained involved with new projects in the region. Most recently, one of our vessels made the first ever delivery of pressurised LPG to a new facility in Puerto Sandino, Nicaragua.

Revenue

We ended the year with a fleet size of 41 vessels with a total capacity of 273,100cbm and an average size and age of 6,661cbm and 7.7 years respectively, a 5.7% increase in average size whilst maintaining the average fleet age below 8 years.

During the fourth quarter, the fleet experienced 50 technical off-hire days, which included one scheduled dry-docking. This resulted in fleet availability of 98.7% (Q4 2016, 95.9%), with operational utilisation of 94.4% (Q4 2016, 93.0%).

TCE revenue per calendar day of $8,449 was 2.7% higher than the $8,206 in Q4 2016. Our revenue for full year 2017 was $8,210 per vessel calendar day, 1.4% higher than the $8,095 achieved in 2016.

The fleet traded under time charter for 68.5% of total voyage days during the final quarter compared to an average of 74% for the year, highlighting a higher exposure to the stronger spot market towards the end of the year.

As of 31 December 2017, the Company was 39% covered for the year 2018 with 5,023 voyage days covered at an average daily TCE rate of $8,988, leaving 7,969 calendar days open on the current fleet for the rest of the year.

Operating Expenses

Vessel operating expenses increased from $58.2 million in 2016 to $62.4 million in 2017 primarily as a result of the Company’s fleet expansion by 8% as measured by the number of fleet calendar days as well as the increased ship average size by 6% as measured in cbm. Vessel operating expenses per calendar day decreased by 1% from $4,233 in 2016 to $4,176 in 2017. Our focus remains on improving the quality and performance of our vessels to further increase utilisation. Voyage costs were $15.5 million, unchanged compared with $15.6 million in 2016. The Company’s voyage charter activity decreased 8% from 4,200 spot market days in 2016 to 3,845 spot market days in 2017.

During 2017, charter-in costs increased $2.4 million to $16.0 million due to the delivery of one 11,000cbm bareboat vessel in Q1 2017. As of 31 December 2017, the Company had 8 ships on traditional inward bareboat charter arrangements under which charter payments are expensed.

The Company recorded a non-cash goodwill impairment of $12.9 million during the year ended December 31, 2017 as a result of the goodwill’s carrying value exceeding its fair value. There was no impairment indicator for any of the vessels.

General and administrative expenses per calendar day fell by 2% to $1,006, but driven by the growth in the Company’s fleet, increased by 7% to $15.0 million for the full year 2017. General and administrative expenses, in our integrated model, includes the cost of commercial and technical management of our fleet as well as all ownership and corporate-level general and administrative expenses.

Finance and other expenses

Finance expenses during the year increased from $13.8 million to $17.2 million primarily due to an increase in the Company’s total finance leases and bank borrowings and the effect of interest rate hedges. The Company has interest rate swaps in place for a total amount of $133 million at a weighted average interest rate of 1.87%.

Subsequent Events

In February 2018, the Company entered into a Memorandum of Agreement to sell the oldest ship in its fleet, the Epic St. John (5,000cbm, 1998 built). The sale is expected to be completed in March 2018 and will not have a material impact on the Company’s FY2018 earnings. In respect to contract coverage, recent fixtures have raised our 2018 cover to 53%.

In January 2018, the Company has granted under the Company’s existing share option plan up to 355,393 stock options to its executive management team at a strike price of $1.85. The options will vest after five years.

Full Report

Source: Epic Gas Ltd.

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