LNG Shipping: Awilco LNG Expects Tonnage Overcapacity to Gradually Fall

TIN news:  Freight income for the quarter was MUSD 2.5, down from MUSD 9.1 in the previous quarter, as a result of low activity and weak spot market rates. Both WilForce and WilPride have operated in the spot market in Q1 2017. Fleet utilisation for the quarter ended at 41 %, compared to 83 % in Q4 2016. Voyage related expenses increased to MUSD 1.6, compared to MUSD 0.3 in the previous quarter, due to extended periods of idling and repositioning of vessels. Operating expenses were MUSD 1.9 (MUSD 1.8 in Q4 2016).

Administration expenses for the quarter were MUSD 0.9, same as in the previous quarter. EBITDA for the quarter was MUSD -2.0 (MUSD 6.1 Q4 2016). Depreciation for the quarter was recorded at MUSD 2.9, same as in Q4 2016. Net financial items were MUSD (5.5), compared to MUSD (5.7) in the previous quarter. Interest expenses on the WilForce and WilPride financial leases amounted to MUSD 5.5 (MUSD 5.7 in Q4 2016). Loss for the period was MUSD 10.4, compared to a loss of MUSD 2.5 in Q4 2016. Statement of financial position Book value of vessels was MUSD 369.2 as at 31 March 2017 (MUSD 371.8 Q4 2016). The decrease reflects ordinary depreciation during the quarter, offset by minor vessel upgrades. Total current assets were MUSD 24.6 as at 31 March 2017 (MUSD 36.4 Q4 2016), of which cash and cash equivalents were MUSD 19.4 (MUSD 30.0 Q4 2016). Total equity as at 31 March 2017 was MUSD 122.4.

Total current liabilities were MUSD 15.8 as at 31 March 2017 (MUSD 16.3 Q4 2016). MUSD 14.1 of the current liabilities relates to the short term portion of the WilForce and WilPride financial leases (MUSD 13.8 Q4 2016). Total non-current liabilities were MUSD 255.7 as at 31 March 2017 (MUSD 259.3 Q4 2016), of which the long-term portion of the WilForce and WilPride financial leases was MUSD 255.4 (MUSD 259.0 Q4 2016). The WilPride financial lease commenced in November 2013, and is for four years plus a one year unconditional option in Awilco LNG’s favour. As the facility can be extended until November 2018 it is presented as a non-current liability as at 31 March 2017.

Liquidity and financing

After a steady improvement in rates and utilisation in the second half of 2016, the LNG shipping market weakened unexpectedly in the beginning of 2017. Both rates and utilisation so far in 2017 have been significantly below Awilco LNG’s expectations. Activity in the market has shown signs of improvement thus far in Q2, but market rates are still significantly below current cash breakeven levels. Due to the difficult current spot market conditions negatively impacting liquidity, the Group is in the process of evaluating its capital structure, and is in positive discussions with its main creditor Teekay LNG Partners L.P. The Board of Directors expects that the process will be successfully completed within a short period of time, and on this basis the Board of Directors confirms that it is correct to prepare the Q1 2017 financial statements on a going concern assumption.

MARKET UPDATE

After a firm start of 2017, with gas prices in the Far East hitting a two year high, the gas price declined sharply throughout the quarter. The Far East gas prices started the quarter at USD 9.13/MMBTU and ended at 5.3/MMBTU. The UK NBP followed the same declining trend, from USD 5.9/MMBTU to USD 4.9/MMBTU at the end of the quarter, while HH declined from USD 3.5/MMBTU to 3.1/MMBTU.

Along with the declining prices, the gas price spread and arbitrage possibilities diminished during the quarter. The year started encouraging with few available vessels and rates reported at USD 52,000 per day in the Atlantic and USD 38,000 per day East of Suez. Along with reduced gas price arbitrage opportunities and lower seasonal demand the activity eased off substantially in both basins, resulting in increased vessel availability combined with a sharp decline in rates. The quarter ended with day rates at USD 30,000 and USD 28,500 West and East of Suez respectively, coupled with low activity. At the end of Q1 construction of Sabine Pass T3 and Gorgon T3 was completed. Sabine Pass T3 is expected to deliver its first cargo in June 2017. Gorgon T2 was down for maintenance in March, but restarted in Q2. In total more than 33 MTPA of new LNG capacity is scheduled for start-up in 2017. As a result of the new production capacity added in 2016, the worldwide LNG trade increased by 12 % in the first quarter of 2017 compared to same period last year. Based on estimated figures LNG imports to Japan, Korea and India increased by 13 %, 6 % and 5 % respectively compared to last quarter, while imports to China declined by 4 %.

Even though LNG trade has increased steadily over the last 9 months, the vessel overcapacity has not been fully absorbed, resulting in a continued weak and volatile shipping market. 9 vessels were delivered during Q1 2017, and a further 35 vessels are scheduled for delivery in the remainder of 2017, although some delays are likely to occur. Newbuilding activity was low in 2016, but has picked up somewhat during 2017. Three newbuildings were ordered in Q1, of which one against contract. According to shipbrokers the orderbook at the end of Q1 for LNG vessels above 100,000 cbm (excl. FSRU and FLNG) was 104 vessels, of which only 10 are available for contract. As a result of the weak market and shipyard constraints some deliveries can be expected to be delayed.

ORGANISATION

The principal activity of Awilco LNG ASA and its subsidiaries is to invest in and operate LNG transportation vessels. Awilco LNG’s fleet is technically and commercially managed from the Group’s office in Oslo, Norway. The Group has 8 employees. Awilco LNG purchases certain administrative and sub-management technical services from two companies in the Awilhelmsen Group; Awilhelmsen Management AS and Awilco Technical Services AS, see note 4 in the interim condensed consolidated financial statements for further details.

OUTLOOK

After a steady improvement in rates during the second half of 2016, the LNG shipping market weakened substantially in so far 2017 both in terms of market rates and utilisation. The volatility and seasonality is expected to continue, but as additional LNG production comes on stream the current overcapacity is expected to gradually be reduced, resulting in an improvement in the market going forward. The long-term outlook for LNG shipping remains promising as a result of scheduled LNG production capacity coming on stream over the next couple of years.