Navigator Holdings (NVGS) Q1 2021 Earnings Call Transcript

Navigator Holdings (NVGS 0.20%)
Q1 2021 Earnings Call
Jun 11, 2021, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for standing by, ladies and gentlemen, and welcome to the Navigator Holdings conference call on the first-quarter 2021 financial results. We have with us Mr. David Butters, executive chairman; Mr. Harry Deans; chief executive officer; Mr.

Niall Nolan, chief financial officer; and Mr. Oeyvind Lindeman, chief commercial officer. [Operator instructions] There will be a presentation, followed by a question-and-answer session. [Operator instructions] I must advise you that this conference is being recorded today.

And now, I pass the floor to one of your speakers, Mr. Butters. Please go ahead, sir.

David Butters -- Executive Chairman

Thank you, and good morning, everyone, and welcome to our quarterly conference call. Now, as we conduct today's conference call, we'll be making various forward-looking statements. These statements include but not limited to future expectations, plans, and prospects from both the financial and operational perspective. These forward-looking statements are based on management's assumptions, forecasts, and expectations of today's -- as of today's date and are as such subject to material risks and uncertainties.

Actual results may differ significantly from our forward-looking information and financial forecasts. Additional information about these factors and assumptions are included in our annual and quarterly reports filed with the Securities and Exchange Commission. Now, before we make -- handling over the call to one of us -- to Harry and our London team, it maybe get a little bit helpful to look back to where we were at the end of last year. As we entered 2021, we were full of conviction that we had reached an inflection point that we had been working on and waiting for for the past number of years.

Our export terminal was operational, and the critically important storage tank had just been commissioned in mid-December. Everything was good. Indeed, the operating results for December and January confirmed with an exclamation point that we were about to achieve operating performance not seen since 2015. But February Texas freeze changed all that.

Extraordinary natural events shut down the Texas and Louisiana electric grid for weeks, and more importantly, inflicted severe mechanical damage to the area's refining and petrochemical plants. Ethylene became scarce, prices spiked to global highs, and domestic inventories depleted. No barrels moved through our terminal in March. During this period, we issued a force majeure on our terminal, and our tightly scheduled ethylene vessels experienced complete disruption.

Nevertheless, we generated positive quarterly results and an improved balance sheet. January's strong performance offsetting a very difficult February and March showed us Navigator's underlying strength and powerful earnings potential under normalized conditions. As Harry, Niall, and Oeyvind will shortly discuss, since the end of March, conditions have gradually improved, suggesting that we may still be entering into an environment more characteristic of those prevailing at the end of last year and the very beginning of this year. So now, as just before I pass the call over to Harry and his team, I would like you to -- be sure that you open up your website to Navigator's site, and under the investor presentation section, refer to the supplemental information.

I think that you will find to be very helpful as you follow along. So, Harry, why don't you pick up from there, please.

Harry Deans -- Chief Executive Officer and Director

Thanks, David. Good morning to everybody in the call. I hope you're well and keeping safe. I'm pleased to report that Navigator Gas has performed robustly during the period and has had the best start to years since Q1 2016.

This is our fourth profitable quarter in succession, with income translating into an earnings of $0.05 per share. During the period, the company achieved adjusted EBITDA of $31 million, representing a 22% increase in the same period in 2020. This reflects both strong operational performance by the company, as well as the creation and completion of our significant investment into the business in prior periods. The final capital contribution to our Morgan's Point ethylene terminal joint venture was paid in late January, bringing our final investment in the terminal to $146.5 million.

The shipping business had -- has performed well during the period, and we look forward to another -- to more growth as a mark to a trading environment improves. And as we have previously announced, we completed the anticipated merger of Ultragas's fleet and business with Navigator. This transformative combination will create a fleet of 56 vessels, which will enhance our market offering and provide much-needed flexibility and support to our customers. Ultragas's fleet of seven more than 22,000 cubic meters handysize semi-refrigerated vessels, five 12,000 ethylene vessels, and six gas carriers under 10,000 cubic meters will position us to engage new clients and new markets through increased coverage and geographical reach.

We anticipate that the enhanced scale and combined fleet will provide cost savings, significant synergies, and efficiency throughout the business. The additional vessels will allow us to capitalize on the structural growth of LPG and petrochemical gases being exported from the Repauno, Pembina, and of course, our own Morgan's Point terminals. All of which are now on stream and ramping up for exports. We believe these incremental volumes, combined with extremely low level of handysize newbuild activity, as can be seen in Slide 15 of the supplemental pack, will tighten the market, increase utilization rates, and further improve TCE rates.

The proposed Ultragas transaction is progressing well and with completion expected early in Q3 2021 on the same commercial terms as agreed on the LOI. This combination is a cashless transaction, with approximately 21.2 million shares been issued to Navigator's common stock to Ultranav, and the assumption of approximately $197 million in the Ultragas net debt, as well as its working capital. When completed, the combination will introduce another major Navigator shareholder, with long-standing experience in the maritime industry, which we believe will be beneficial for all our shareholders. The transaction is accretive to Navigator's stand-alone budget in terms of revenue, EBITDA, and EPS.

And we expect the combination to complete in line with our expectations, subject to concluding definitive binding agreements, board approvals, and the other customary closing conditions. We were very pleased to announce in late April that Navigator had successfully won for 12-month timecharters with Mitsui, utilizing four of our semi-refrigerated handysize vessels to transport ambient propane from the newly commissioned Pembina terminal in Prince Rupert, Canada to customers in Asia. This is a brand new trade route between the west coast of North America and Asia, which by going directly across the Pacific bypasses the need for a Panama transit, thus minimizing transit times and boosting efficiencies. On its own, that's one deal ties up over 6% of the total handysize semi-refrigerated fleet, over 6%, and approximately between 13% and 18% of the available semi-refrigerated spot vessels.

As discussed in the previous call, utilization rates for these 2020 strongly and they continued into January, reaching 96% before being hit by the headwinds of the southern freeze and the Mont Belvieu pipeline and subsequent Morgan's Point terminal force majeure in early February. Unsurprisingly, given these issues, utilization rates hit to the mid-80s where the overall fleet utilization and in the quarter are 88.2%. This continued into Q2 as olefin capacity started up and the U.S. domestic olefins pipeline was replenished, bringing with it strong domestic demand, and placing.

These all put pressure in export volumes on the ethylene arbitrage. But thankfully, there are plentiful supplies of the most advanced olefin feedstock in the U.S., ethane, which coupled with olefin overcapacity and the efficient ethylene market has again ensured product displaced to move. And as we've seen recently, the hubs have opened again to Europe and to Asia. Our Morgan's Point ethylene terminal has now restarted and is ramping up throughput.

We expect June's export volumes to be close to those of January 2021, and we anticipate exports for the remainder of the year to be at nameplate capacity of 1 million tons per annum. We are looking forward to running this unit at full rates to see if we can score -- squeeze even more than the 10% incremental capacity we've already identified out of the plant. As previously discussed, the forward order book for newbuilds, those stands at around 5%, with minimal vessel deliveries in '21, '22, and 2023. Twenty percent of the entire handysize fleet is no more than 20 years old.

So there's absolutely no pressure coming from vessel supply and our global market. At long last you may say, the three incremental U.S. export terminals have been completed, and they're starting to export product. We estimate that these channels when running at full capacity will require around 12 to 19 handysize vessels to service them, between 12 and 19.

These tailwinds are helped by handysize exports, which are also ramping up at Marcus Hook even before the Mariner East 2X project is completed later in the year. It is no surprise therefore that we maintain a positive outlook on short and medium-term TCE rates and the handysize market in general as there are a lot of factors that are starting to exert outwards pressure on rates. With incremental exports, limited newbuilds, improving customer sentiment, and higher oil prices really does feel that we are on the cusp of a significant uptake and utilization on market rates. With our existing fleet of 38 vessels, our ethylene JV terminal now fully funded and fully commissioned, and with the company on the verge of a merger, which will dramatically grow our presence in the specialty LPG petrochem gas sector, Navigator Gas is poised to capitalize on these conditions.

We expect that benefit, when it comes, to go straight on to our bottom line. With these few remarks, I'd like to hand you over to our CFO, Niall Nolan, who will take you through our Q1 financials. Niall? 

Niall Nolan -- Chief Financial Officer

Thank you, Harry, and good morning, all. The company generated net income of $2.8 million during the first-quarter 2021, which compares very favorable to the loss of $8.2 million made in the first quarter of last year. Last year, of course, was negatively impacted by the initial market's reaction to COVID-19 as the world at large reacted nervously to what was about to unfold. Who would have thought that a year on, the lasting effects of the pandemic would still be impacting our lives? Having said that, the recent quarter's profit has been the best, as Harry has mentioned, since the first quarter of 2016.

The total operating revenue from the vessels during the first quarter was $85.7 million, up 4.5 million from the $81.3 million generated during the first quarter of last year, but slightly behind the 87.4 million generated during the previous quarter, Q4 of 2020. Average charter rates during the most recent quarter were $21,950 a day or $667,830 per month, an increase from the $20,850 per day in the first quarter of last year, as well as an increase from the $21,100 achieved last quarter. Utilization, however, was more challenging during the quarter. As both David and Harry mentioned, January started very strongly with utilization of 96%.

But following the mechanical integrity issues with a 16-mile pipeline between the ethylene caverns and -- at Mont Belvieu and our terminal, creating a force majeure, as well as the Texas winter freeze that initially hit on February 15, the vessels we had lined up to load ethylene at the terminal at that time were unable to do so and had to suddenly find alternative employment. This affected their earnings and utilization fell to the mid-80% during February and March, resulting in overall utilization of 88.2% for the first quarter. And this compared with 89% for the first quarter of last year and 91% for the fourth quarter of 2020. The Luna Pool earnings, which are derived from the current 14 vessels in the pools, are aggregated and allocated to pool participants in accordance with pool points, resulting in a net gain to the company of $1.1 million for the quarter from the other participants' vessels in the pool.

Three vessels entered dry dock for their scheduled surveys during the first quarter, taking a total of 70 days. The cost of these -- of the two dockings that were completed during the quarter was approximately $2.7 million. In total, 14 vessels are scheduled to be dry-docked during 2021 for an anticipated aggregate 300 days and an estimated total cost of $18 million. Following the final capital contribution toward the construction of the terminal earlier in the first quarter, dry docking costs are the only remaining planned capital expenditures for the company during 2021.

Voyage expenses decreased $1.9 million during the quarter to 15.6 million from 17.5 million from the first quarter of 2020. These are pass-through costs reflected in revenue and the reduction resulted from both reduced bunker prices and bunker consumptions. Vessel operating expenses were $27 million for the first quarter equating to $7,892 per vessel per day, which is a 1.5% decrease from the vessel opex incurred during the first quarter of 2020. General and admin costs were $6.3 million for the first quarter, a 3% reduction on the $6.5 million incurred during the first quarter of last year.

And the other income of $72,000 for the first quarter relates to management fees received from the other participants in our -- for our management of the Luna Pool. Interest costs for the first quarter were $9 million, 22.3% less than the first quarter of last year, primarily as a result of reductions in U.S. LIBOR. Applicable U.S.

LIBOR at the beginning of 2020 prior to COVID-19 was 1.96%, whereas at the beginning of 2021, and as it remains the case today, U.S. LIBOR is approximately 0.24%. Due to the issues with the terminal pipeline referred to earlier and the weather in Texas during the quarter, the share of results of the equity-accounted joint venture were a loss of $600,000 for the quarter. However, as Oeyvind will refer to, volumes are picking up and returning to normal.

We did receive our first cash distribution of $850,000 from the JV during the quarter based on the operational performance of January 2021. Net income for the first quarter was, therefore, $2.8 million, or $0.05 per share, compared to a loss for the first quarter of 2020 of $8.2 million, or a loss per share of $0.14. Cash at March 31 stood at $85.2 million, an increase from the $59.3 million at the end of December 2021. We had a further $37.6 million available for -- from undrawn revolving credit facilities associated with our secured vessel loans, taking total available cash to $122.8 million.

In January, we made the expected final capital distribution of $4 million toward the construction of the ethylene terminal, taking our total contributions for the terminal to $146.5 million, which is under the budget set two years ago before construction has started. And it was delivered on time and safely, a significant success given the pandemic-related challenges over the past 12 months. We drew this $4 million capital contribution from the terminal credit facility during the quarter, as well as a further $14 million, which was available for general corporate purposes, resulting in that facility becoming fully drawn at $69 million. And reaching construction practical completion at the beginning of the quarter, the terminal facility was converted into a five-year amortizing term loan, attracting interest at U.S.

LIBOR plus 2.75%. Our total debt at March 31 stood at $849.6 million, which incorporates six bank loan facilities secured on our vessels, the terminal facility, and two Norwegian bonds. There are no maturities on any of these facilities during 2021. And with the exception of an $18 million repayment in March 2022, there are no maturities on any facility until late in 2022.

And with that, I'll hand you over to Oeyvind.

Oeyvind Lindeman -- Chief Commercial Officer

Thank you, Niall, and good morning, everybody. If you take a look at Page 8 of the supplementary presentation, the ethylene graph is quite telling on the right-hand side. It shows that global ethylene prices have gone through a roller coaster over the last six months. At year-end, U.S.

ethylene price stood at $700 a ton, the dark blue line, and U.S. ethylene exports reached an aggregate i.e., from both Targa terminal and our joint venture terminal of 100,000 tons. Nearly 80,000 tons of this was exported through our joint venture terminal. Now we consider a total of 100,000 tons per month a normal state of operations from the U.S.

Today, the U.S. ethylene prices quoted at $670 a ton, nearly half of what it was during its peak in April. The U.S. ethylene price is projecting further backwardation, i.e., reducing in the future, and exports are increasing as a result of this widening arbitrage to international markets.

And why is that? Well, we are seeing the fundamentals of continued cheap ethane available in the U.S. and excess domestic production getting back up, which will move the market to a more normal state of play, and that is good for us. The export volumes are reacting positively, increasing month on month, as you can see on Page 9, illustrating the aggregate U.S. ethylene exports.

As you can see, the exports are moving toward what we call the normal state of 100,000 tons per month for July. A high oil scenario further underpins the attractiveness of these derivatives produced by natural gas liquids. To put into perspective, these 100,000 tons of exports of ethylene per month translates into about 16-handysize ethylene vessel demand, which from a fleet of 38 ships on the water today, it captures nearly half the available tonnage, which is quite extraordinary. We are also about to deliver the last of the four handysize semi-refrigerated ships to the Canadian West Coast LPG project, as Harry just mentioned.

The first three have already successfully loaded from this new terminal and discharged in Northeast Asia. This is all incremental demand to our segment. Four LPG vessels are effectively removed from the spot market, supporting the rest of the fleet. In addition, it is the first structural handysize trade for LPG in the Asia region, with prospects of more to follow.

The Repauno terminal in New Jersey is now operational. We loaded the first handysize both cargo from this facility in April and with two subsequent cargoes in May. This translated into incremental demand for one semi-refrigerated vessel. But please note, a demand for one additional vessel may not sound so much but in a pool of only 63 units, every new opportunity can influence the supply and-demand balance in our segment.

One of the short-term challenges facing the general LPG export markets for the -- for all LPG ship owners is the lack of arbitrage today from U.S. This is less impactful for the specific handysize projects we have mentioned but affects the shipping industry as a whole. Today, U.S. propane is priced at $1 per gallon roughly, compared to about $0.5 per gallon at the same period during 2019 and 2020, and the inventory levels in Mont Belvieu are lower historically by about 10 million barrels today.

At the same time, domestic propane consumption has increased by 10% during the last couple of months and the EIA gives an interesting explanation. Americans have been working from home due to COVID restrictions and many have had to heat their houses with LPG. Under normal circumstances, they would have gone to the offices, which generally use electricity or natural gas for heating. Once the LPG fundamentals normalize, we expect overall LPG export to revert back to 2019 levels supporting the wider business.

In conclusion, though, the stars are very much aligning for our segment and for Navigator Gas. The ethylene fundamentals are reverting back to where they should be, creating demand for our ethylene Luna Pool. The incremental demand from the handysize terminals are starting to take effect. We have a historic low order book, negating any impact on the tonnage situation.

Therefore, the overall market dynamics over the next half year show many similarities to what created the handysize high of 2015. And I -- surprising myself when I say this but back to normal is good for Navigator. Thank you very much.

David Butters -- Executive Chairman

Dany, you can open up the call for the question and answers now.

Questions & Answers:

Operator

Thank you very much, sir. [Operator instructions] Our first question today is from Sean Morgan from Evercore. Please go ahead. Your line is open.

Sean Morgan -- Evercore ISI -- Analyst

Hey, guys. So, we've talked a lot about back to normal on the call. It's kind of a bit of a theme. But back to normal, we really, you know, haven't had a lot of normal because there's been all these sort of one-off disruptions that were sort of macro-related and exogenous to the company.

So, if we look at January as maybe a good benchmark for the -- for the ethylene export terminal, what does Q2 look like in terms of, you know, kind of utilization that you see in, I guess, over the quarter of kind of a normalizing quarter? And how does that compare with Q3 if we can kind of hold the rates that we've seen in June so far?

Harry Deans -- Chief Executive Officer and Director

Thanks, Sean. So, it kind of -- what illustrates part of the answer to your question is on Page 9, the U.S. ethylene export graph. You can see the middle sort of peak there, which we call normal operation, everything was at our standard being 100,000 tonnes exported from the U.S.

during that period of December, January. So, then, of course, we know what happened and you see that trough in -- through March, April, May. So, the utilization, as a result, didn't exceed 90%, it continued in sort of the same vein as the first quarter because of that valley as you see on that graph. Now, but then since then, June is kicking up as you can see picking up, and then July.

Our expectation is back up to the $100,000 aggregate mark with roughly 80% from the joint venture terminal.

Sean Morgan -- Evercore ISI -- Analyst

And then in terms of actual dollar contribution for the income statement, we feel kind of targeting, I mean, it's been really lumpy, obviously, because of all these sort of one-offs. But are we thinking maybe like $9 million a quarter? Is that like a good -- is that still kind of a good estimate? Or it was just 10% debottlenecking and then maybe bring that a little higher?

Harry Deans -- Chief Executive Officer and Director

Sean, yeah. I mean, the terminal from Q2 is still going to be lumpy because of the reasons that both David mentioned at the outset and Oeyvind, subsequently. I think from what when we're talking about normal, we're talking about from June onwards. And we have said that at that level, it would be around $20 million to $25 million of EBITDA on an annualized basis.

So, it's about $6 million per quarter.

Sean Morgan -- Evercore ISI -- Analyst

Yes. And if I could just squeeze in one macro question real quick. In terms of the U.S. demand, I appreciate that the spreads are widening and that's going to be very advantageous, but do we -- are you sort of contemplating a much more normal scenario for when we get back to the colder winter months and essentially like a lower domestic consumption, so that that spread can kind of be maintained through the end of the year?

Harry Deans -- Chief Executive Officer and Director

Yeah, I think the -- on the ethylene spread, our sort of belief is that that's not very much -- it's not relating so much to seasonality because the feedstock is ethane. Now, if you talk about propane LPG, yes, there is some seasonality in the U.S. market because traditionally, consumption goes up in the winter for obvious reasons. But the -- what have caused kind of narrowing of LPG arbitrage from the U.S., not ethylene, LPG as its lack of reduction in production during the freeze, increased consumption, as I mentioned about people working from home was quite interesting, and therefore, the arbitrage sort of shut -- reduces trade of LPG.

Now, we don't do -- our business is less LPG from the U.S. from the spot market. We do a lot now because of the projects we have talked about, and they are projects and -- that contracted and to afford the less impact. But I think that LPG arbitrage will sort of increase again in general once the historic inventory levels get back up to where it's supposed to be, and that is ongoing.

Sean Morgan -- Evercore ISI -- Analyst

OK. All right. All right. Thanks.

Thanks for the time, guys.

Harry Deans -- Chief Executive Officer and Director

Thanks, Sean.

Operator

And our next question for today is from Randy Giveans from Jefferies. Please go ahead. Randy your line is open. Please ask your question.

Randy Giveans, your line is open. Please go ahead and ask your question.

David Butters -- Executive Chairman

OK. We might take another call if there is another one.

Operator

Yes, sir. We'll move to the next question. Ben Nolan from Stifel. Please go ahead. 

David Butters -- Executive Chairman

Morning, Ben.

Ben Nolan -- Stifel Financial Corp. -- Analyst

I have a couple, though. So, as -- you know, as you laid out, especially with the addition of the Pembina volumes, now all this, you know, within the course of a month and a half, the 13%, I think you said 13% to 18% of all of the semi-refrigerated vessels are -- or should have dedicated to that to that trade at the same time that, you know, the ethylene terminal is coming back online, or I guess it is now back online. How -- any color as to what you think is a reasonable assumption for utilization for you guys in the third quarter now that things are sort of where you thought it would be?

Harry Deans -- Chief Executive Officer and Director

I think, look, it's all positive. So, if you talk about third quarter, the Pembina ships, the last one is delivering in about 10 days' time. So, then that is concluded. The ethylene terminal is getting back up to normal days as we have discussed from July onwards.

We also have a potential merger happening in the third quarter. So, all these things should assist in our utilization rate trending positive from the second quarter and the first quarter. I mean, that is quite logical.

Ben Nolan -- Stifel Financial Corp. -- Analyst

Right. But when you say positive, I mean, are we talking mid-90s or what sort of -- if third quarter is the new run rate, what does that run rate look like do you think?

Harry Deans -- Chief Executive Officer and Director

Yeah. A good utilization core number and quarter troughs would be 90%-plus.

Ben Nolan -- Stifel Financial Corp. -- Analyst

90% more. OK. And then to that end, you know, just been keeping an eye on the day rates and they've been OK, but they haven't really moved, and I thought that they might, you know, with the addition of, again, the Pembina terminal and the vessels sort of being incrementally taken out of the market. Do you think that's coming? Or what -- is it the fact that the LPG are bidding quite open enough and that sort of is keeping a cap on day rates? Or what would you sort of attribute that to, or am I just being unreasonable?

Oeyvind Lindeman -- Chief Commercial Officer

I mean, the textbook is on supply demand balance, so we remove available ships and there are no ships to replace that with. Therefore, it should be positive. Now it's not like turning on a switch and it happened overnight. Our expectation is that it is happening but over a short period of time.

Ben Nolan -- Stifel Financial Corp. -- Analyst

OK. So it's your anticipation that the day rates are probably moving up?

Oeyvind Lindeman -- Chief Commercial Officer

Correct.

Ben Nolan -- Stifel Financial Corp. -- Analyst

OK. And then lastly for me, I could keep going, but Randy might be in the background somewhere. The -- it is related to the ethylene terminal. Things are kind of getting back up and running.

I know pre -- the three years that you guys had made mention that you were maybe talking with customers about potential additions to contracts and expansion and all these kinds of things. Can you give a color as the sort of whether that has, you know, recommence store if you feel like there's an incremental long-term business that could be coming around the corner sometimes soon? 

Harry Deans -- Chief Executive Officer and Director

Do you want me to take it, David, or you're going to take it?

David Butters -- Executive Chairman

Harry, why don't you answer that, you know, that would be helpful.

Harry Deans -- Chief Executive Officer and Director

Yeah. OK. Thanks, David. Thanks for the question, Ben.

Yeah, obviously, we're anxious to get the terminal up and running to full capacity. And as I said in my prepared remarks, we think we've identified 10% that we can squeeze out but we haven't really run it fly over yet. And we've run it fly -- we're semi-optimistic there'll be more tons available. And as we've spoken about several times in this call, basically, the bottleneck is a free one.

You will spend a lot of money and we want to see some return from that money and see flow back to our bottom line. But we're constantly in discussion with customers about expanding and we're constantly in discussion with customers about plans for the future for that terminal. But what we need to do now is actually sweep the asset and see it run and run reliably.  Does that answer your question, Ben?

Ben Nolan -- Stifel Financial Corp. -- Analyst

Yeah. That's -- so -- sorry. That is sort of the next for -- I suppose what you're saying is before we should expect to see any incremental announcements or whatever, we kind of need to get a little bit of time under your belt for utilization and so forth? Is that --

Harry Deans -- Chief Executive Officer and Director

That's right. Let's sweep the assets and sell it. You know, as we've talked again before in this call, the cheapest incremental ton of expansion capacity will be on our terminal. So if anybody who's going to -- another dollar and to ethylene terminals, it would be us and our joint venture partners because all the infrastructure is already there.

You know, you've got the vessels, you've got the jetties, you've got other infrastructure. So all things being equal, any ethylene terminal expansion will be in our terminal. It's just a matter of time.

Ben Nolan -- Stifel Financial Corp. -- Analyst

Right. OK

David Butters -- Executive Chairman

But you can imagine, Ben, you know, since the terminal became operational over a year ago, what happened, well, first came the pandemic that really is not the pants off of everything, negative pricing of oil. Then came of course the hurricane in the summer of last, which shut down the electricity and distorted pricing and availability of ethylene. And just as we were getting ramped up again, the -- along came the deep freeze. Now, if you're trying to plan, if you're a buyer of ethylene, and particularly a long-term buyer, you don't know what to look at the moment.

It's been such a distorted market. So I think those things have to settle down a bit. And as Harry says, you first focus on debottlenecking, getting an extra 10% or 20% out of the existing capacity. And then as things settle down, negotiations on long-term supply and how to get those long-term supply barrels up and running and whether that's an expansion of whatever have you or a new facility, that would be the decision.

But, boy, it couldn't make any decisions here in the last year and a half, it is impossible.

Ben Nolan -- Stifel Financial Corp. -- Analyst

Right. OK. That's -- well, maybe there's a little bit. Last question and just as a reminder, capital allocation priorities or near-term debt repayment.

Is that fair?

Harry Deans -- Chief Executive Officer and Director

For the terminal?

Ben Nolan -- Stifel Financial Corp. -- Analyst

No, in general. Yeah, but the company's capital allocation, and should we expect you to be focused on debt repayment there?

Harry Deans -- Chief Executive Officer and Director

Sorry. Yes, yes.

Ben Nolan -- Stifel Financial Corp. -- Analyst

OK.  All right. I appreciate it. Thanks.

David Butters -- Executive Chairman

Thanks, Ben.

Harry Deans -- Chief Executive Officer and Director

Thank you.

Operator

[Operator instructions] We have had Mr. Giveans come through again. Randy, your line is open. Please go ahead and ask a question.

Randy Giveans -- Jefferies -- Analyst

Howdy, gentlemen, can you hear me now?

David Butters -- Executive Chairman

We can.

Harry Deans -- Chief Executive Officer and Director

Yes, Randy, we're waiting for you.

Randy Giveans -- Jefferies -- Analyst

Reunited and it feels so good. Two questions for me. First, does the Ultragas merger -- does that limit any future plans or maybe an expansion of the ethylene terminal? And secondly, now that you have acquired some small LPG carriers, is there any appetite for further acquisitions and consolidation on the smaller LPG side?

Harry Deans -- Chief Executive Officer and Director

Yeah, the first one, let me take it, Randy. No, it doesn't. So we're completing the mergers, the cash in this merger, you know, which is wonderful. It doesn't overleverage our balance sheet.

And that would give us much more opportunity. So it's not either/or.

Randy Giveans -- Jefferies -- Analyst

OK.

Harry Deans -- Chief Executive Officer and Director

On the second question, on the small vessels, Randy, we're still looking at it. It is something that is new to us. And we can't wait to actually get in because, as you know, we're not allowed to discuss certain things ahead of the close of the merger so we can't wait to get and talk more details with our new partners at Ultragas to find out how these vessels operate and where they operate and look for other opportunities with them. We know they've done a very strong fill for the in-gas fill, which has been around for a long period of time and those guys manage those vessels very efficiently and very well. 

Randy Giveans -- Jefferies -- Analyst

Got it. All right. And then, I don't know if you answer this earlier. Clearly, I had some phone issues but I'll ask it.

Obviously, on the Pembina, Repauno, great to see those both online. Were you able to quantify how many, maybe handysize semi-rapid vessels will be employed on those projects on an annual basis? And I know you showed some cargoes per month in your slide deck, but do you have an annual number on how many of those numbers are pulled out of the market?

Oeyvind Lindeman -- Chief Commercial Officer

Yeah. So, Randy, excellent question. The first part is easy to answer. So Pembina one, there are four ships on 12-month charters, so they will then reflect for ship demand on an annual basis.

Now, they're also talking about the fifth ship, so there might be more coming from that opportunity. On the other side, on the Atlantic side, the Repauno terminal, we've loaded two cargos in May and that translated to full employment for one ship. And that went to the Caribbean. So we paid those tons to go further afield while they need more ships.

Now, the specification or nameplate capacity of the Repauno, to the best of my knowledge, is 20,000 barrels a day or even more. Now, in the month of May, they only did 10,000, so half. So you'd be safe to say that that terminal once fully operational, that they got experience under their belts should be at least two handysize ships on an annual basis. So if we combine both of them, then it'll be six or seven, and that is overnight going from zero to that number in our little segment is pretty cool.

Randy Giveans -- Jefferies -- Analyst

Sure. Clearly impactful. I'm going to throw the third question because I think of it at the end of the queue, which is completely my fault, sorry. You mentioned current utilization.

I think we've made the 80% range and continuing to climb. Is that your expectation for Q2 and Q3 now as a run rate? And how is that higher utilization impacted some of the spot handysize shipping rate?

Oeyvind Lindeman -- Chief Commercial Officer

So utilization -- as we talked about on this call from Q1 to Q2, is pretty much a straight line. So it's continuing that thing, as you just mentioned. Now, I think, it was Ben's question earlier in terms of the third quarter -- and for the reasons, we discussed those projects, ethylene ramping up, and so forth, we expect the utilization of the third quarter to be 90 plus.

Randy Giveans -- Jefferies -- Analyst

Perfect. And then in terms of impact on rates --

Oeyvind Lindeman -- Chief Commercial Officer

That should represent a normal state. So we're talking about the back-to-normalization. So that is definitely our expectation, and hopefully, that will materialize.

Randy Giveans -- Jefferies -- Analyst

And is that kind of the threshold for when you really start to see rate inflection? Just trying to get the impact on rates.

Oeyvind Lindeman -- Chief Commercial Officer

Past experience, definitely. So if you go back five months to January where we have 95% utilization, it's fantastic. I think we've said that being able to push the market in the right direction in terms of freight. So if anything, the past experience is anything to go by, we want to get 90 plus.

You are getting into that zone whereby you can actually move the needle.

Randy Giveans -- Jefferies -- Analyst

Got it. All right. Well, hey, thanks again for the patience, it's been a long two years, but great to see things heading in the right direction. Thank you.

Harry Deans -- Chief Executive Officer and Director

Thanks, Randy.

Oeyvind Lindeman -- Chief Commercial Officer

Thanks, Randy.

Randy Giveans -- Jefferies -- Analyst

Thank you.

Operator

Thank you. Ladies and gentlemen, I'll now hand back to your speakers for any closing comments.

David Butters -- Executive Chairman

OK. Well, thank you very much for joining us this morning. And let's hope we don't have any other disruptions before our next call, and we look forward to that. Thank you very much.

Operator

[Operator signoff]

Duration: 48 minutes

Call participants:

David Butters -- Executive Chairman

Harry Deans -- Chief Executive Officer and Director

Niall Nolan -- Chief Financial Officer

Oeyvind Lindeman -- Chief Commercial Officer

Sean Morgan -- Evercore ISI -- Analyst

Ben Nolan -- Stifel Financial Corp. -- Analyst

Randy Giveans -- Jefferies -- Analyst

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