Description

Dorian LPG (“Dorian” or the “Company”) is a liquified petroleum gas (LPG) shipping company focused exclusively in modern, very large gas carriers (VLGCs).  The Company’s fleet is comprised of 19 ECO-VLGCs and 3 original VLGCs, with an average age across its fleet of only 4 years. Dorian has the second largest VLGC fleet in the industry behind BW LPG (36 owned, 8 charted) and ahead of Avance Gas (14).  Unlike other areas of shipping, the VLGC market is relatively concentrated with the top 10 owners controlling 50% of the total VLGC fleet of ~285 vessels. This concentration allows for some additional earning power for owners with scale such as through COAs which help to guarantee utilization levels.  

The LPG export market has experienced strong demand growth over the past 7 years led by the boom in US shale production which has resulted in significant growth in the production of natural gas liquids (NGLs), that have far surpassed domestic demand.  As a result, the U.S. share of seaborne LPG has increased from 15% in 2013 to 35% in 2018. By 2019, the U.S. should exceed the entire Middle East region as the largest exporter of LPG. As the US export market expands, the is likely to have an impact to pricing of propane and butane.  

Pricing dynamics set to change - Historically, the Middle East has linked LPG pricing to crude oil whereas U.S. propane and butane pricing has been set by the market with benchmark pricing out of Mont Belvieu, Texas with easy access to the main Gulf Coast export hub out of the U.S.   However, significant salt dome storage in the Gulf Coast region has allowed producers to cheaply store propane during periods of pricing weakness (disconnecting production/supply from the clearing price) resulting in the pricing of propane in the U.S. generally tracking Middle Eastern pricing and preventing the regional pricing arbitrage (U.S. vs Middle East) that can cause VLGC rates to spike.   With the start-up of the Mariner East 2 pipeline in the next few months, which will provide an initial outlet for ~275 /d (~23% increase to existing U.S. export capacity) to the Marcus Hook, PA export facility, the pricing dynamics of U.S. propane are likely to change as similar storage facilities by Marcus Hook don’t exist. The Mariner East 2 pipeline will primarily export NGLs produced in the Appalachian region where excess propane and butane is currently being flared so the clearing price for these NGLs at Marcus Hook is likely to be quite low.

Additionally, Energy Transfer Partners, the owner of Mariner East 2, has seen enough positive demand for ME2 that they intend to start construction of Mariner East 3, which would bring another 275 mb/d of capacity to Marcus Hook, immediately following the opening of ME2.  They expect it to be operational by mid 2019. This significant supply increase out of the East Coast of the U.S. has the potential to lower the clearing price of propane in the U.S. and create the type of regional pricing arbitrage that helped spike VLGC rates north of $100,000/day in 2014.

VLGC market set to fundamentally improve - The VLGC market has been oversupplied for ~3 years after a period of superior earnings in 2014 and 2015 resulted in a wave of new supply that nearly doubled the on the water fleet since 2013.  Despite strong demand growth, the industry has experienced three consecutive years of weak charter rates which resulted in minimal ordering. The remaining orderbook is down to 34 vessels, or ~13% of the current fleet, in a market where ton-mile demand growth can surpass 10% annually.  

There are only 5 VLGCs expected for delivery for the rest of 2018 and 24 VLGCs are over the age of 25 and are prime scrapping candidates particularly in light of the 2020 IMO global sulfur cap.  Without an external demand shock, the VLGC market appears that it has likely troughed and is in the early stages of a recovery as depicted in the graphic below:

Further, rates for VLGCs are starting to increase.  They currently sit around $20,000 / day in the spot market, the highest level for this time of year since 2015.  With practically no net fleet growth throughout the rest of 2018, rates should get firmer with potential for the Mariner East 2 pipeline to add further momentum

Attractive Valuation - Dorian LPG is cheap.  With assets values at multi-year lows, Dorian is priced attractively at a P / NAV of ~0.70x.  Further, using 15 year average VLGC TCE rates, Dorian’s EPS would be ~$1.80. At a 10x P/E, Dorian stock would be worth $18.  

Strategic Asset / Potential Valuation Backstop given BW LPG bids – With the second largest fleet of VLGCs, and the largest fleet of ECO-VLGCs, Dorian is a strategic asset for a niche of the shipping industry that has historically been consolidated. This has been recently evident in BW LPG’s recent all-stock bids to merge with Dorian LPG, which valued Dorian at ~$8.67 per share.  Dorian has turned both recent offers from BW LPG down but a deal is still possible at a higher exchange offer. Nevertheless, the BW Group (the primary owner of BW LPG) has increased their stake in Dorian LPG to 14% and the interest to merge, further consolidate the market and “re-fleet” with Dorian’s younger, ECO-VLGC fleet is unlikely to subside.  At the least, this should provide a potential backstop in valuation for Dorian, and there remains upside that BW LPG increases their offer and the combined company benefits from the scale and synergies that would result from the merger. A potential bidding war with Avance Gas is also possible.

Key Risks:

• New supply - there were new VLGC orders to start 2018 (~20), which were led almost predominately by trading houses.  The supply / demand is still favorable as no supply growth was unrealistic but if these orders continue it would dampen expectations for a sustained recovery

• Trade war / global recession – A lot has been written on the threat of a trade war and a potential Chinese tariff on US propane would very likely impact the VLGC market.  However, the shipping market and US propane market is dynamic (as a byproduct of nat gas / oil production, propane pricing would likely adjust to tariffs, if implemented).  China also imports 25% of their propane from the U.S. making it hard to substitute without becoming a full-on tax on their consumers / industries

• Leverage / Dilution risk – Dorian is leveraged ~60% debt to NAV but weak charter rates can cause liquidity concerns and increase the risk of an equity raise.  Rates would have to weaken down to ~$10k/day for this risk to play out.

Catalyst

• Mariner East 2 pipeline coming online / increased imports out of the US / lower US propane and butane pricing
• Increase in charter rates and corresponding NAVs
• Increased bid from BW LPG