Ardmore Shipping Corporation Q3 FY2025 earnings call

• Third quarter results showed adjusted earnings of $12.6 million or $0.31 per share, driven by record refined product volumes and strong TCE performance. Rates were firm throughout the year and into winter at over double cash breakeven.
• Capital allocation involves balancing returning capital to shareholders, growing the business, and reinvesting in the fleet while maintaining low debt. They fully redeemed $30 million of preferred shares, declared a 12th consecutive dividend, and took delivery of 3 modern MR tankers.
• Market outlook includes record refined product export volumes, robust demand due to ample oil supply and high crude fleet utilization, geopolitical factors limiting compliant vessels, and an aging fleet with a shrinking order book.
• Financial highlights: EBITDAR of $27.6 million and EPS of $0.31, with cash breakeven reduced to $11,700 per day (including CapEx for drydocking cycles).
• Fleet operations: Drydocking activity mostly complete, limited future dockings, strong spot exposure via high-quality charters, investments in AI/digitalization for voyage optimization, and use of biofuel for EU compliance with 99% on-hire availability in the third quarter.

For the third quarter, MR tankers earned $24,700 per day, and chemical tankers earned $22,600 per day. In the fourth quarter so far, MRs have earned $24,900 per day with 40% booked, and chemical tankers have earned $22,200 per day with 35% booked. These represent the absolute financial performance of the respective product segments.

• Fourth quarter guidance is outlined on Slide 23. The company anticipates continuing favorable market conditions, leveraging strong operating leverage where every $10,000 per day increase in TCE boosts annual earnings by approximately $2.15 per share.

• Geopolitical uncertainties creating inefficiencies and impacting market dynamics. - Regulatory uncertainties limiting ordering activity, with the order book representing just 13% of the fleet.

Q: Maybe Bart, either one of you guys can answer this one. But if you look at Slide 7, the output on the water, the size it's ever been, the refinery run size it's ever been, a lot of favorable things you're talking about as it relates to sanctions. And mid-20s a day is a decent rate, but it's not a phenomenal rate. And it's also lagging, I'd say, a historical relationship with the strength of the VLCC market. So is this like things are building and you expect a much stronger winter period? Or is there some limiting factor that kind of keeps the MR spot rates from getting $35,000, $40,000 a day?

A: Yes. Thanks, Jon. I'm going to start here and then see what Bart might want to add. But you're making a good point. If you look at just sort of the short-term sort of relationship between MRs and some of the crude tankers, if you zoom out, there is a relatively strong correlation. And of course, you could argue that whatever goes into the refinery also comes out the other end. So yes, I think that point is well made. Just kind of looking at our sector, we feel pretty compelled by the significant ramp-up in earnings that we've seen from the start of the year where there's been more of a risk of approaching markets to our trading activity really going through a catch-up phase. But we're equally excited, of course, about sort of the long-term demand drivers, sectoral drivers, evolution of the demand picture of product tankers as a whole, where the market that we're facing today is vastly evolved from what it would have been 10 to 15 years ago. And of course, not to forget that we have the oldest fleet kind of on record this century. So we're quite positive about the long-term picture. And I think near term, not to kind of dive into all the geopolitical factors that are in play, but it certainly feels like the world is nowhere near an equilibrium. And while there are these shifts brought on by geopolitical tension or even by conflict, of which there are many, that creates volatility in commodity markets. And with volatility in commodity markets, you see more trading and with more trading, you have a higher demand for ships carrying those commodities and to move at increasing lengths. I think what we hinted at, what's going on right now with regard to imports really moving up significantly into California is significant. Some of the new triangulations we're seeing in the Atlantic Basin. It's just a story that's starting to play out now. We've, of course, talked at length about the displacement trade of formerly Russian diesel exports into Europe, whereby Europe is cutting that from different regions. But probably very little talked about is that Russia is now actually looking to import CPP or petroleum products from relatively far away places like in Asia to actually bridge the shortfall of their own domestic petroleum production, which has been quite heavily hit, of course, recently. So I think taking into account all of that, we feel positive about the market outlook.

Q: A couple of questions on my end. Just a couple for me. And maybe just following up on the first question from John. I guess, thinking about the market in, you've already talked about it. But just from maybe your vantage point, obviously, the market has gotten better this year as time has gone on, right, your results have sequentially improved, but it doesn't have that sizzle yet like we are seeing in crude tankers. And I guess just from what you're saying, is this as expected? Is this what you would have thought would have happened to product tankers given the shift in OPEC that we would see crude tankers surge, products just sort of improve? And then is it just simply a matter of time, as you mentioned, that it's just simply these cargoes now need to deliver into the refining system and then that will then create more product flow? Is it as simple as that?

A: Yes. I mean, look, if there's an abundance of oil supply, which I think is, at this point, pretty much a given, given the -- not just the strong output and OPEC+ production increases, even though they might be moderated now at the start of the year. But of course, that's always kind of a balancing act. But OPEC+, of course, are not the only oil producers at the moment. And I think we have continued to observe is there is ample oil supply that creates really strong incentives for refineries to, of course, put that to the refinery. We see already refining margins very strong. We see product on the water indeed quite firm. And just with the market -- sort of the oil market kind of flirting with the contango kind of not quite there, but dipping in and out of that, of course, that then creates all sort of interesting commodity plays, increases economic incentive for long-haul trading for the larger ships could certainly lead to some storage activity, which has a very positive cascading effect and just kind of creates that additional layer of trading demand. So to your point, I think there's still a lot of positive factors that could play out in addition to just continued trade shifts that are purely within refined products trading.

Q: That's helpful. And I just wanted to ask maybe a bit more on Ardmore specifically strategy. Obviously, you guys have done very well in terms of strengthening the balance sheet. You've got now just looking here on your slides, no dry docks next year, you've got no real debt repayments next year, and you've paid for those 3 MRs are delivered. So you're in a great position with plenty of flexibility as we look into '26. Presumably, the market still looks fairly decent. Kind of what are you thinking now that you -- especially now that you've redeemed the preferreds, you have a lot more flexibility than you have had in the past. Does this change anything in terms of how you want to deploy capital, whether it's returning more capital to shareholders? Or do you think there's opportunities to kind of maybe replicate the sale and purchase transaction you did a few months ago with those 3 MRs? How are you thinking about that?

A: Yes. That's a great question, Omar. And I think ultimately, our next steps will be guided by the market, always, of course, underpinned and guided by our strong governance and our very balanced approach to capital allocation. We feel like we have found a way to be value-enhancing across a wide range of transactions. So of course, the 3 vessels we took delivery of just after the summer, if you just take sort of price point that we paid for the 5-year-old would have been around $38 million, just north of that. And we've seen now ships of the same age getting sold for $43 million in one case, as much as north of $44 million. So we in the money by 15% there within 4 months. And of course, we take note of that big step-up, happy with that transaction. And to what extent there are opportunities moving forward, closely, of course, connected with all sources of deal flow. It's an active market, fragmented buyers, sellers that sometimes buy and sell ships for reasons that are not necessarily only economically motivated. But at the same time, we've also found ways to reinvest in the business, not by acquiring ships, but by investing in vessel upgrades that had extremely short payback periods, whether it was efficiency upgrades that enabled really compelling fuel savings, whether it was increasing cargo versatility by upgrading our chemical tankers. And of course, across the past year, we have provided shareholder returns, not just through a dividend, but also through share buybacks when we thought there was an opportunity to lean in and all those avenues will continue to be on the table. And of course, what we did recently with the pref helps reduce our breakeven on top of kind of really rigorous cost discipline as well. And I think that will continue to be the guiding pillars of our strategy focused on the product and chemical space and looking to do value-enhancing transactions across the spectrum. And how that would look in detail, again, is ultimately guided by the market.