A handful of shipping stocks have left the rest in the dust this year. Dorian LPG (NYSE: LPG) is at the forefront. Its adjusted closing price, accounting for dividends, is up 63% year to date. On Monday, its share price hit its highest level since the company went public in 2014.
Dorian operates a fleet of very large gas carriers (VLGCs) that transport liquefied petroleum gas (LPG) — i.e., propane and butane — on long-haul voyages, mainly from the U.S. or the Middle East to Asia.
LPG exports have emerged as a major success story for the U.S. energy complex. America is the largest LPG exporter in the world, with 14.5 million tons of seaborne volume in the second quarter of 2023, the highest quarterly total ever, according to Dorian, citing data from Platts.
Records were also set for Middle East LPG exports (12 million tons) and globally (33.8 million tons) in Q2 2023. Unlike the oil trade, LPG volumes at sea continued to climb throughout the pandemic era and, after that, amid OPEC production cuts.
Dorian’s share price has done so well that Jefferies analyst Omar Nokta downgraded the stock from “buy” to “hold” on Thursday. “Dorian has been the best performing name in our coverage and the shares have transitioned to a premium-to-NAV [net asset value] valuation after years at a discount. Fundamentals remain favorable, but we believe upside is limited,” said Nokta.
More propane available to export
Propane is used residentially for heating and cooking and commercially for petrochemical production.
On the commercial side, propane is supplied to Asian propane dehydration (PDH) plants for production of polypropylene, which is used for plastics production.
Propane is also used as a feedstock by steam crackers in plastics and packaging production. For steam crackers, propane, which is shipped aboard LPG carriers, competes with naphtha, shipped aboard product tankers.
The more LPG available for export in the U.S. and Middle East, the more PDH plants built in Asia, and the higher the discount of propane to naphtha, the higher the demand for VLGCs.
On the export cargo availability front, Tar Rasmussen, Dorian’s vice president of chartering, said on a conference call Wednesday: “North American exports were buoyed by the weak domestic consumption during the tail end of the mildest winter since 2010 and a warmer-than-normal-summer minimizing the need for early crop drying amid continued record-setting production.”
The continued high availability of LPG for export in the Middle East despite OPEC cuts was due to two factors, said Dorian CEO John Hadjipateras. “Crude production cuts don’t include gas production cuts and a lot of the LPG we carry is associated with natural gas,” he said. There’s also a timing factor, he added. OPEC cuts might affect Middle East LPG exports going forward.
Asian LPG demand increases
Regarding PDH plant demand, Dorian CFO Ted Young explained, “A lot of PDH capacity has come online in China. The economic recovery there has not been as steep as everyone hoped, but it’s still coming along, so we expect continued growth, and given the attractive pricing on LPG, it’s a good time to build inventories.”
On the effect of the propane-naphtha spread on steam-cracker demand, Rasmussen said, “Propane was at an average 15% discount to naphtha in January through March and an average 30% discount in April through June.”
Not all steam crackers can use LPG instead of naphtha but that is changing, noted Young. “Particularly in China, a lot of steam-cracker capacity that’s come online over the last couple of years and that is on the books to come online is actually more flexible than in the past with respect to taking LPG,” he said.
Finally, there’s a big seasonal effect. “The focus is shifting to the inventory-building season in the Far East, which will provide further market support,” said Rasmussen. He noted that even at the end of Q2 2023, “we saw Far East importers concentrating on vessels scheduled for September arrival to begin stockpiling for the winter.”
Seasonal demand pushing rates higher
Dorian’s VLGCs obtained average rates of $51,156 per day in Q2 2023 (the first quarter of the company’s 2024 fiscal year), up 29% year on year. Net income was $51.7 million, just over double net income in the same period last year.
VLGC rates have already shot up in the current quarter, according to Clarksons Securities. In Q2 2023, VLGC spot rates per day were averaging in the $50,000-$60,000 range. As of Wednesday, Clarksons put average rates for non-eco-designed VLGCs at $83,500 per day and rates for eco-designed VLGCs at $85,000 per day.
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