Image: Norwegian Cruise Line

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Norwegian Cruise Line Holdings (NCL) reports that second-quarter (Q2) fuel expenses increased year-on-year (YoY) by $8.5 million, or 9.9 percent, to $95.2m.

In the first half (H1) of 2018, fuel costs increased by $13.1 million, or 7.5 percent, to $188.6m.

The average fuel price per metric tonne in Q2, net of hedges, was $481 - an increase of $12, or 2.6 percent, on the $469-per-tonne figure recorded a year ago.

Bunker costs as a percentage of cruise operating expense and total revenue

Fuel expense as a percentage of NCL's total cruise operating expense was 11.0 percent for the three months ended June 30, compared to 11.5 percent during the corresponding period in 2017, whilst for H1 the figure was 11.6 percent - versus 11.9 percent in the prior-year period.

In terms of bunker costs as a percentage of total revenue, the figure was 6.2 percent in Q2, compared to 6.4 percent a year ago; for H1, the result was 6.7 percent, down from 7.0 percent.

Forecasting

Below is NCL's forecast for fuel consumption and pricing for Q3 and full year (FY) 2018.

Fuel consumption in metric tonnes:

Q3 2018: 205,000
FY 2018: 825,000

Fuel price per metric tonne, net of hedges:

Q3 2018: $505
FY 2018: $475

Effect on Adjusted EPS of a 10% change in fuel prices, net of hedges:

Q3 2018: $0.02
FY 2018: $0.05

Fuel risk and hedging

NCL uses fuel derivative agreements to mitigate the financial impact of fluctuations in fuel prices.

As of June 30, 2018, NCL had fuel swaps maturing through December 31, 2020, which are used to mitigate the financial impact of volatility of bunker prices pertaining to approximately 1.0m tonnes of its projected fuel purchases.

By the end of Q2, NCL says it had hedged approximately 64%, 49%, and 26% of its total projected metric tonnes of fuel consumption for the remainder of 2018, 2019, and 2020, respectively.

NCL estimates that a 10 percent increase in its weighted-average fuel price would increase the firm's anticipated 2018 fuel expense by $22.3m. This increase would be partially offset by an increase in the fair value of NCL's fuel swap agreements of $11.4m.

Below is a summary of NCL's hedged and price per barrel of heavy fuel oil (HFO) and marine gas oil (MGO), which are hedged utilizing U.S. Gulf Coast 3% (USGC) and Brent, respectively.

Remainder of 2018

% of HFO consumption hedged: 83%
Average USGC price/barrel: $53.02

% of MGO consumption hedged: 17%
Average Brent price/barrel: $46.50

2019

% of HFO consumption hedged: 59%
Average USGC price/barrel: $47.82

% of MGO consumption hedged: 20%
Average Brent price/barrel: $49.25

2020

% of HFO consumption hedged: 53%
Average USGC price/barrel: $39.50

% of MGO consumption hedged: 11%
Average Brent price/barrel: $51.85

Key results

In its overall results, NCL posted a Q2 net income of $226.7m, which was a YoY improvement of 28.2m, or 14.2 percent.

Adjusted net income for Q2 rose YoY by $39.2m, or 16.8 percent, to $271.9m, whilst total revenue was up 13.2 percent to $1.52 billion.

In terms of H1 figures, net income was up 69.5m, or 26.7 percent, to $329.8m, and revenue climbed $320.7m, or 12.9 percent, to $2.82bn.

Commenting on the results, Frank Del Rio, NCL president and chief executive officer, said: "The continuation of the robust booking environment from our core source markets, combined with the successful execution of demand creation strategies drove higher pricing across all three brands, resulting in second quarter revenue, yield and earnings growth well above expectations.

"Global consumer cruise demand shows no signs of slowing as evidenced by solid organic growth and the hugely successful introduction of Norwegian Bliss, whose record-breaking performance surpassed our high expectations. The strong demand environment is expected to continue driving higher pricing in the back half of the year, leading to an increase of our full year 2018 Adjusted EPS outlook to a range of $4.70 to $4.80, well above the initial guidance range set at the beginning of the year."