|Shares Out. (in M):||57||P/E||0||0|
|Market Cap (in $M):||760||P/FCF||0||0|
|Net Debt (in $M):||-150||EBIT||0||0|
Dorian LPG (LPG) is a shipping company that will have the second largest fleet of VLGC tankers focused on the transport of liquid petroleum gas. The key driver of the thesis relies on the arbitrage between propane gas pricing in the US vs. Arabian Gulf. Due to the increase in shale production of oil and gas over the last few years in the US, the supply of LPG gases such as propane and butane - which are byproducts of oil and gas production, has outgrown domestic demand - which has actually been decreasing (mainly driven by cooking/heating). Excess supply driven by increased production coupled with limited export terminal capacity has led to a drop in bulk propane gas prices in the US relative to all other major markets. Propane prices in the US currently trade around $300 per metric ton vs. $600-800/mt in 2011/12. On the other hand, pricing in the Middle East (which control about 50% of the export market) goes for around $500 per metric ton today, leading to a spread differential of $200 metric ton.
Most of the demand is coming from Asia which constitutes ~50% of the import market while Europe makes up another 25%. 60% of the demand is dominated by retail (i.e. heating/transport, cooking) while 40% is focused on the industrial market (i.e. switch of feedstock from naphtha to propane). Imports to Asia are expected to grow by 45% from 2013 to 2017, and a significant portion of this demand growth is expected to come from the US. To meet the growing demand and reduce the excess supply in the US and capitalize on the current pricing differentials, several companies in the US have signed medium term contracts to lift LPG out of the US to Japan/South Korea/China through new export facilities being built (i.e. Enterprise Product Partners, Targa Resources, Sunoco, Occidental, etc.). LPG export terminal capacity is expected to grow from 8.7 mmt/y today to 40 mmt/y in 2017.
Due to the long-haul nature of the voyages, most of the capacity will be transported through VLGCs. The US-Asia transportation routes drive growth in transport distances and voyage duration, which combined with the additional export volumes, results in substantial ton-mile growth. Current VLGC fleet is ~158 vessels with an average age of 11 years. The current order book is 78 vessels with most of the deliveries occurring in 2015 and 2016. The increased demand for VLGC capacity and limited shipping capacity has led to historically high spot charter rates in recent months, and will most likely persist until 2016 when the new ships come online. Average rates for VLGC have historically traded around $30k-40k/day and has recently jumped to $75k-$100k/day – illustrating tightness in the market.
Taking a very back of the envelope look at what an Asian importer would save given the various factors involved (i.e. distance, cargo price/value, dayrates, etc.), current pricing shows a savings of ~25% by importing propane from the US vs. Middle East. Despite commanding a higher shipping cost due to the longer trip time (~37 days from Middle East to Japan vs. 43 days from Houston to Japan) and higher number of voyages, the propane spread differential between US and Arabian Gulf of $200/ton leads to savings of ~25%.
Dorian currently has 5 ships online (4 VLGCs) with 18 additional VLGCs by the end of 2016 (2 by end of 2014, 4 2Q15, 4 3Q15, 6 4Q15, 2 1Q16). Average age for the fleet including new builds will be a little over 1 year vs. industry average of 11 years today. Looking at the NAV and taking into account the current fleet + newbuild, shares are currently trading at 1.0x (was trading at 0.75x as of a few weeks ago before recent 30% rally). This assumes carrying value of ~$200MM for its current fleet, $1.4bn for 18 new ships at $80mn each, -$1bn of remaining capex and $135mn of net cash.
Looking at the potential cashflow that can be generated by the fleet, I am estimating $25k for existing fleet of 3 VLGC ships (older ships) while 19 new VLGC ships will command $35k (rates closer to historical average vs. current high rates) and 95% utilization with opex of $10k and debt of ~$900mn (pro-forma for $750mn expected for new build) at 5% leads to EBITDA – interest of $135mn, or ~$2.3/share. Assuming a 10x multiple, this leads to a share price of $23/share vs. $13 today.
Clearly shipping is a cyclical business that is operationally levered to dayrates and the industry has limited barriers to entry with an oversupply of ships leading to a crash in dayrates. We expect that the supply/demand to be favorable for VLGC ship owners for at least the next couple of years as the relative scarcity in shipping capacity vs. increasing demand growth will sustain dayrates and keep propane spreads at current levels. Another risk is that the remaining capex needed for the newbuild program of $1bn is reliant on $750mn of debt financing. Management is in advanced negotiations to finalize the terms for the $750mn financing in one transaction and expect to complete the deal by February of 2015.
The key driver of the thesis relies on the arbitrage between propane gas pricing in the US vs. Arabian Gulf.