The overall sentiment for the gas carrier (VLGC and LGC) industry has been challenging in terms of day rates. There is no doubt that the industry holds immense long-term potential with long-term trade prospects to China, India and other emerging markets.
In line with this long-term view, investors can consider exposure to some quality names in the LPG vessel industry. As sentiments are relatively depressed for the industry, valuations for individual stocks are attractive.
One stock holds immense long-term potential and is listed in the Oslo stock exchange. BW LPG (OSL:BWLPG, Financial) is the world’s leading owner and operator of LPG vessels with 35 years of experience in the industry. As of the first quarter, the company owned 55 VLGC and LGC including two VLGC under construction.
The company’s stock has declined by 13% for the year to date, but there are reasons to be bullish on the stock.
For the first quarter, 70% of the company’s VLGC days were in the spot market, 17% in time charter contracts and 13% in CoA. For the same period, 73% of the LGC days were under time charter contract with the remaining 27% under spot contracts.
Joint venture In India
I want to first focus on some of the big upside triggers for the long term, and the company’s recent JV in India is likely to be a game changer.
On July 29 BW LPG announced that the company has established a JV in India with Global United Shipping India Private Ltd. The 50:50 JV will own and operate gas carriers for the transportation of LPG within Indian waters.
Initially, BW LPG will be selling two of its vessels to the JV. The reason for highlighting this JV at the onset is the big potential the Indian markets hold. The chart below shows the seaborne LPG import by country for the first quarter and first-quarter 2016 and will put things into perspective.
India’s import for the comparable period surged by 40%, primarily driven by increase in retail demand for LPG. With India home to 1.2 billion people and with low LPG penetration, the surge in import is likely to sustain not just in the coming quarters but also in the coming years.
With a leading position globally and entry into the Indian markets through the JV, BW LPG is likely to benefit from the growth trend. In particular, secular demand trends would potentially imply a higher number of vessels in term contracts, thereby increasing the company’s firm revenue visibility.
U.S. demand/supply outlook
LPG production in the U.S. has been surging and as the chart below shows, U.S. production will exceed U.S. demand in fiscal 2017 and fiscal 2018.
This scenario is likely to hold true even beyond fiscal 2018, and the surplus production will be diverted toward exports.
The key export region is likely to be Asia, and LPG transport from U.S. to Asia will involve an increase in tonne miles. As a result, the demand for LPG carriers is likely to remain steady.
It is important to note here that demand for LPG is surging in India, but other countries also hold potential and China will see sustained growth in demand in the coming years.
Therefore, it is unlikely that the depressed sentiment for the VLGC and LGC carriers will sustain in the long term. For the first quarter, BW LPG reported improvement in spot rates, and spot rates will continue to improve from current levels besides an increase in percentage of term contracts.
Fundamentals and conclusion
Besides industry factors that support long-term growth for BW LPG, the company’s fundamentals are also resilient. As of March 31 the company had $48 million in cash and $240 million in undrawn credit facility. With no significant near-term debt maturity, the cash buffer is sufficient for the next 12 months.
From a risk perspective, BW LPG reported negative operating cash flow of $15 million for the first quarter. I don’t see that as a long-term concern with spot rates improving gradually and fleet utilization likely to see improvement as well.
Another risk factor relates to geopolitical tensions between the U.S. and China. While tensions exist, I don’t see any major negative trigger playing out that impacts trade relations.
Overall, BW LPG is appealingly priced after year-to-date correction, and as the company reports its second-quarter results this week, the stock can trend higher. Investors can consider some exposure to this quality name in the LPG carrier industry.
Disclosure: No positions in the stock.
