John Fredriksen-controlled Avance Gas is preparing to splash out over $157m by declaring two dual-fuelled VLGC newbuilding options it is holding at Daewoo Shipbuilding & Marine Engineering in South Korea.
This will boost its orders at the yard to six vessels.
An investor presentation on a $65m private placement for the company detailed that Avance plans to add two 91,000-cbm VLGCs that will use LPG as fuel.
The company said it has secured an “attractive average purchase price” on the ships of $78.9m each.
They are scheduled for delivery dates in the second half of 2023.
Options in the money
Cleaves Securities head of research Joakim Hannisdahl said: "Given the recent rise in steel prices and improving backlog at yards, we have seen a significant increase in newbuild prices recently.
"It is thus fair to assume that Avance's newbuild options are in the money, and that the main rational behind the equity raise is to be able to take advantage of this," he added.
Hannisdahl believes that with VLGC market fundamentals looking positive for the coming years the time is right to grow the fleet.
"Our only concern is that the market will peak before the assumed delivery during 2023," he said.
Hannisdahl views the impact of the new ships as negligible and too far ahead to have any significant impact on Cleaves' valuation beyond a potential rise in resale values ahead of delivery.
The investment bank is maintaining its "buy" rating on the stock.
The target price of NOK 55 ($6.45) per share is also unchanged, against a price of NOK 42.84 in Oslo on Friday.
Premium earners
Avance said the VLGCs will be able to net earnings at a 30% premium to non-eco VLGCs while also trading with reduced emissions.
Breaking this down, the company said cash break-even is expected to be $20,000 per day with the newbuildings generating higher daily earnings of $10,300 than a non-eco VLGC.
Using LPG as fuel instead of VLSFO would add a further $8,000 per day and the ship's larger capacity another $2,300 per day.
The company said this would indicate a two-year payback on the higher newbuilding price.
The shipowner originally ordered the first two newbuildings at DSME in December 2019, confirming a pair of optional vessels in January 2021.
These January orders were reportedly concluded at $77.5m each.
The company has since averaged the $473.4m it is paying on the six vessels at $78.9m each.
Avance said that as of 31 March 2021, $31m of the total price on the sextet has been paid with 70% of the purchase price payable at, or close to, the ships’ delivery dates.
Deliveries of the six vessels start from November 2021.
The company said its newbuilding programme is expected to be fully funded through this private placement.
Strengthening market
Avance currently operates a fleet of 13 trading VLGCs — six of which are scrubber-fitted — with the newbuildings boosting its fleet to 19 vessels with an average age of 5.8 years.
The company detailed that its fleet has no dry-dockings scheduled before 2023 and no debt maturities until 2024.
It has time-charter coverage of 25% for its fleet at an average rate of $30,000 per day.
Avance said VLGC freight rates in March 2021 have been 17% above the average for this month over the last five years.
The company flagged up “returning Asian demand” and said propane forward prices point to strong freight rate developments heading into this summer.
