Gas shipping: Moderation in VLGC freight rates ahead

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Natural gas prices at Henry Hub increased by a modest 3% in July helped by higher cooling demand from the power sector amid warm weather.
Propane stocks rose to an all-time high of 92.8m barrels for the week-ended 7 August compared with 85.7m for the week-ended 3 July. Inventory increased because of moderating domestic demand and evolving export infrastructure. Expansion of the Sunoco Logistics’ Mariner East 1 project on the East Coast, will be completed in late-September 2015, which will have propane export capacity of 25k bbl per day.
• Short-term shipping rates for conventional LNG vessels have come down to USD 22,000pd in July from USD 27,000pd in June, as per Drewry’s assessment. Many ships are still lying idle because of the declining LNG demand in Japan and South Korea.
• VLGC freight rates surged to 2015 high of ~USD 138 per tonne in mid-July, although they fell to ~USD 130 per tonne in the latter half as moderate activity led traders to re-let ships at discounted prices. Arbitrage in West of Suez has nearly closed at current spot rates, which reportedly led to some US Gulf cargo cancellations. The growing number of vessels in both East and West coupled with newbuild deliveries shall soften VLGC freight rates, in our view.
• In Northwest Europe, the propane coaster market remained quiet, but there were some enquiries for loading propane from the UK towards the Med. The butane coaster market saw healthy activity because of blending demand. Activity in the Med, Black Sea and Far East was muted on account of limited cargo availability.
Stocks plunge to abysmal lows; Exmar and BW LPG survive the carnage
Further decline in oil prices triggered a sell-off in energy stocks, and gas shipping stocks were no aberration. While WTI crude plummeted ~20% m/m to ~USD 47/bbl, our gas shipping coverage universe shed ~7%. We maintain that the recent sharp correction offers attractive opportunity for long-term investors, especially in LPG shipping.
• Investors welcomed Exmar’s joint venture with Flex LNG and Geveran to create an integrated LNG entity. This was corroborated by the ~9% rise in Exmar’s share price in July. As per 1H15 provisional results, the company’s revenue was down ~2% to USD 70.5m and adjusted net income dipped ~7% to USD 21.6m; however, both fell short of our estimates.
• BW LPG remained flat in July amid high volatility as the VLGC market was buoyant, raising expectations of strong 2Q15 earnings. Meanwhile, BW Euroholdings (BWH), a subsidiary of BW Group, picked up a 10.2% stake in Dorian LPG by acquiring six million shares from Scorpio Tankers for USD 92m. BWH had granted an option exercisable before 27 August 2015 to BW LPG to purchase these shares. Our fair value estimate is NOK 75.
• On 21 July, Golar LNG received financing commitment from CSSC Shipping Co Ltd for the conversion of GoFLNG Hilli, which will fund 80% of the project cost equivalent to USD 960m. In addition, the company also entered into an agreement with Keppel Shipyard for the FLNG conversion of Golar Gandria. On 4 August, it approved the buyback of USD 25m worth of units of Golar Partners, citing attractive yield of ~11% as a key reason.
• Gaslog’ 2Q15 revenue increased ~43% y/y to USD 104.4m and adjusted EBITDA rose ~38% y/y to USD 64.5m. The results lagged our estimates as earnings of three vessels were deployed on the spot market. Our fair value estimate is revised to USD 21 from the earlier USD 25, but we maintain our Attractive stance because the current share price only values the base LNG business without capturing GLOG’s stake in GLOP.
• Navigator Holdings lost ~12% in June with bearish sentiment in the energy sector playing spoilsport. The company’s TCE revenue grew ~14% y/y to USD 70.9m and EBITDA surged ~23% to USD 47.7m; both were slightly ahead of our estimates. We stick with our Attractive view and revise our fair value down to USD 25 from USD 28 because of higher cost of capital.


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