Navigator Holdings - LPG Sector Outlook – Favorable Supply And Demand Fundamentals

In a recent episode of Capital Link’s Deep Dive Podcast Series, Ben Nolan, Managing Director of Research at Stifel, interviewed Mads Peter Zacho, CEO of Navigator Holdings Ltd. NVGS. The discussion covered Navigator’s background, current strategy, sector outlook, and plans for the Company’s future.

Interview Highlights:

• NVGS has a strong presence in the handysize and midsize LPG sectors, transporting a variety of essential global commodities, including LPG, petrochemicals, and ammonia.
• Increasing investments in onshore infrastructure, specifically the ethylene export terminal at Morgan’s Point.
• Robust financial health with considerable liquidity, low leverage, and strong cash flow.
• Ongoing share repurchase initiative and quarterly dividend distribution.
• Limited supply and healthy demand in the handysize and midsize LPG segments benefit the company due to extended trade routes.
• Investments in expanding CO2 transportation and carbon capture sectors.
• Potential for more infrastructure investments, especially in ammonia.

Navigator Holdings Ltd. NVGS is the owner and operator of the world’s largest fleet of handysize liquefied gas carriers. Its fleet, comprised of 56 semi- or fully-refrigerated liquefied vessels, 25 of which are capable of carrying ethylene and ethane, transports critical commodities like LPG, ammonia, and petrochemical gases such as ethylene and ethane. These commodities are integral to several key industries worldwide and are used for cooking, heating, fertilizer production, and energy supply. NVGS can transport such a wide, diverse range of commodities due to its focus on the handysize and midsize segment. Ships of this size can transport not only LPG but also ammonia and petrochemicals, while larger ships do not have this flexibility. 

Growth Through Secondhand Acquisitions And Sector Consolidation

Since its foundation over 20 years ago, NVGS has grown and diversified through new and second-hand vessel acquisitions and, primarily, through sector consolidation by acquiring its competitors. In recent years, NVGS executed significant mergers and vessel acquisitions. This year alone, the company added five modern ethylene handysize ships to its fleet through a 60/40 joint venture agreement with Greater Bay Gas Co. Over the past two years, a total of 20 vessels have joined the company’s fleet.

NVGS's consolidation strategy has resulted in two major shareholders, ULTRANAV and BW Group, each holding just under 30% of NVGS shares. These shareholders, owned by established shipping families, are diversified shipping conglomerates, making them valuable assets for NVGS. Nonetheless, the company’s CEO stressed that the board of directors remains predominantly independent shareholders, ensuring fair representation for minority shareholders.

Robust Cash Flow Supports Growth Strategy And Shareholder Returns

NVGS is in a robust financial position, having fortified its balance sheet and significantly reduced debt in recent years. Mr. Zacho highlighted that the company generates substantial cash flow, with over $180 million in cash, net debt to capitalization of 36.9% as of June 30, 2023, and a net debt-to-adjusted EBITDA of 3.4 times for the last twelve months as of late June of this year.

This strong financial position primes the company for growth while enabling it to reward shareholders through dividends and share repurchases. Over the past six months, the company repurchased over $50 million worth of shares and implemented a new return of capital policy in May 2023, which will distribute a fixed quarterly cash dividend of $0.05 per share, with an additional return of capital equivalent to at least 25% of net income. Whenever quarterly adjusted EPS exceeds $0.20, additional capital will be returned via a larger dividend and/or share repurchases, depending on the share price.

Moreover, with NVGS shares trading significantly below its NAV of >$20/share, Navigator plans to repurchase approximately $3.0 million of its common shares by the end of the quarter, such that the dividend and share repurchases collectively equal 25% of net income ($6.7 million).

Expanding Ethylene Export Terminal Joint Venture With Enterprise Products Partners

While many shipping companies are focused mainly on the sea, NVGS has extended its operations to the onshore aspect of the industry, most notably by entering into a 50% joint venture with Enterprise Products Partners in the Morgan’s Point ethylene export terminal in July 2017. Enterprise Products Partners L.P. is a leading North American provider of midstream energy services and is one of the largest publicly traded partnerships.

This venture augments NVGS's role in the commodity supply chain, facilitating the coordination of the entire ethylene transportation process, benefitting customers that import onshore ethylene into ships for export to Europe and Asia. Due to its success, NVGS recently further expanded this joint venture. Currently, the terminal's capacity sits at around one million tons, roughly equivalent to all the ethylene exported out of America by ship. 

Under its existing joint venture with Enterprise Products Partners, in November 2022, NVGS agreed to a capital project to increase the export capacity to at least 1,550,000 tons per year and up to 3.2 million tons per year by converting an existing ethane refrigeration train to also refrigerate ethylene. 

The project is currently in progress as the long-lead items have been ordered, groundwork is advancing, and construction is anticipated to be completed by the end of next year. Negotiations are ongoing with current and new customers for multi-year offtake contracts, with the majority of the additional capacity expected to be contracted during the construction phase next year. NVGS and Enterprise are hoping to expand the terminal’s capacity by at least 55%, or even up to 200%, on top of its existing capacity.

LPG Sector Outlook – Favorable Supply And Demand Fundamentals 

NVGS's growth is supported by particularly strong supply fundamentals in the Handysize segment. According to NVGS’ CEO, the order book for new vessels over the next few years is extremely limited, with just five new vessels on the Handysize segment order book, the segment in which the company primarily operates. These tight supply fundamentals, coupled with steadily increasing demand, illustrate the potential for extremely healthy market fundamentals for the company. 

As NVGS transports several commodities, each has specific demand fundamentals to consider. Demand for LPG is currently very healthy, and North America has increased its role as an exporter of the commodity in recent years, becoming the second largest exporter of LPG in the wake of the war in Ukraine. Increased exports from North America to far-off locations such as Europe and Asia have extended trade routes and expanded ton-miles, leading to higher demand for ships. 

Similarly, demand for petrochemical gases, including ethane and ethylene, remains strong. Mr. Zacho noted that NVGS is well positioned to capitalize on increasing demand for the commodities. These gases are produced inexpensively in North America, and the Morgan’s Point terminal exports around one million tons of the commodity annually. NVGS then transports these petrochemicals worldwide, primarily to Europe and Asia, at favorable rates. 

Ammonia, another major cargo for NVGS, has been significantly disrupted by the conflict in Ukraine. Ammonia is an essential component and fertilizer and therefore functions as a foundational block in the global food supply. Russia, once a substantial producer of ammonia, no longer exports the commodity to Europe. Therefore, the region was pushed to seek out the gas from more distant regions such as Asia and North America, which has increased demand and extended ton-miles. 

Emerging Sectors Offer Substantial Growth Opportunities

The current supply and demand dynamics have contributed to NVGS's strong financial performance, enabling the company to explore further growth and investments in emerging sectors.

One promising segment with significant growth potential is the transport of CO2 for carbon capture purposes. As the world transitions toward green energy, industries are facing increasingly stringent environmental regulations limiting carbon emissions. While the ultimate goal is to completely transition away from fossil fuels, it will take years to achieve this, prompting industries to explore alternative routes to reduce carbon emissions, such as carbon capture. NVGS has identified this growth potential and is pursuing the acquisition of CO2 carriers to transport and store the gas under the sea.

This summer, Navigator Holdings signed a non-binding memorandum of understanding with Bumi Armada Berhad, one of the world’s largest floating infrastructure operators, to establish a joint venture company aimed at providing CO2 shipping and injection solutions in the United Kingdom. The JV company, called Blue Streak CO2, will transport and dispose of carbon dioxide emissions by injecting them under the seabed.

In a previous interview with Capital Link, Mr. Zacho emphasized carbon capture and disposal’s significant growth potential, as well as Navigator’s existing activity in the effort toward the green energy transition.

“If you have a strong belief that this energy transition is needed…and if you think that the transportation of CO2 is going to be a big and growing market, I think Navigator is a good way to play that bet on the energy transition,” the company’s CEO stated.

Similarly, NVGS aims to invest in green and blue ammonia as part of the company's ongoing strategy to diversify its commodity portfolio and extend its business in the growing ammonia market. Conventional ammonia, or “gray” ammonia, is produced through fossil fuels with no carbon capture technology in place, therefore resulting in significant carbon emissions. 

Blue and green ammonia, however, are produced through more environmentally friendly means—Green ammonia is created using alternative energy sources, such as solar and wind power, and blue ammonia is made with natural gas, although the carbon emissions are captured and stored underground, rather than released into the atmosphere.

Ammonia is an incredibly important commodity globally due to its significant role in food production, and its use as an energy source is also being explored. Recognizing the potential importance of the blue and green versions of the commodity in the face of environmental regulations, NVGS is looking to expand into the field. In a previous interview with Capital Link, Mr. Zacho stated that he believes blue and green ammonia are “going to be a large and growing business area” for the company.

NVGS - Five Key Goals By 2030 

During the interview, NVGS' Chief Executive Officer outlined five key objectives for the company to be achieved by 2030. First and foremost, NVGS aspires to further strengthen its presence in the handysize and midsize segments as an owner and operator of gas tankers, with a fleet that epitomizes modernity and energy efficiency. Secondly, the company aims to broaden its operational scope in the onshore infrastructure sector by enhancing the capacity of its ethylene export terminal at Morgan’s Point and making strategic investments in analogous facilities for other commodities, particularly ammonia and carbon capture. This expansion is aimed at making infrastructure activities account for a quarter to a third of the company’s EBITDA, Mr. Zacho stated. Thirdly, NVGS plans to modify its cargo portfolio to transport a third of it as non-fossil commodities, like ammonia, a significant shift from its current cargo, which is mainly composed of fossil commodities. The fourth objective is to further enhance the fleet's fuel efficiency, a key step in reaching the ultimate goal of achieving zero emissions. Lastly, NVGS strives to be recognized among the top three US-listed shipping companies in terms of Environmental, Social, and Governance (ESG) criteria. " We want to be a lighthouse here, in having the best corporate governance and sustainable business portfolio that others can look to," remarked Mr. Zacho.

Capital Link is the investor relations advisor to Navigator Holdings.This content is for informational purposes only and not intended to be investing advice.