Avance Gas Holding Ltd. (OTCPK: AVACF) just dropped a bombshell dividend announcement, a staggering $2.15 per share for Q1 2024. This payout eclipses the total dividend for the entire year of 2023. While everyone is understandably focused on the headline-grabbing number, there's a subtle, yet potentially significant, underlying factor at play here: the strategic exploitation of Panama Canal congestion.

Sure, Avance Gas cites robust earnings, a healthy cash balance, and positive market indicators as the justification for this dividend windfall. They've successfully offloaded older vessels, strategically invested in newbuilds, and are enjoying the fruits of a tight VLGC (Very Large Gas Carrier) market. But the elephant in the room – or rather, the bottleneck in the canal – is Panama, and Avance Gas might just be positioning themselves to capitalize on its persistent congestion woes.

Let's delve deeper. The transcript reveals a clear understanding of Panama's limitations. CEO Øystein Kalleklev states, "The Panama Canal story...it's not really any solution to this. The Panama Canal was expanded a long time ago...US was not an exporter of LNG and LPG, and now they've become by far the biggest LPG exporter in the world and the biggest LNG exporter in the world. So there's not really any more space in Panama."

This isn't just idle chatter. Avance Gas is actively adjusting its operations to reflect this reality. They are increasingly favoring the longer Cape of Good Hope route, noting that it "will drive [indiscernible] rates up arbitrage up as we have seen during the last week or so." They're also keenly aware of the impact of container ship competition for slots and the looming threat of La Niña conditions further impacting water levels.

Now, consider the timing of the dividend announcement alongside these pronouncements. It suggests a proactive, almost anticipatory, strategy. By announcing a mega-dividend now, Avance Gas is effectively locking in shareholder returns before Panama congestion potentially throws a wrench in the works.

The numbers back this hypothesis. While Q1 2024 saw significant market volatility due to the US cold snap, Avance Gas still managed a respectable $61,000 per day TCE (Time Charter Equivalent). But they admit that this was largely due to voyages booked prior to the market downturn, voyages likely benefiting from the longer Cape route.

Looking ahead, Avance Gas acknowledges that Q2 bookings are at a lower $48,000 per day. However, this is still well above their cash breakeven point of around $22,000 per day. More importantly, they highlight their high spot exposure, stating, "We have a constructive view on the market and want to capture that upside by having ships in the spot market."

This is where Panama becomes crucial. If, as Kalleklev predicts, Panama congestion worsens in the coming months, VLGC availability will tighten, driving up spot rates. Avance Gas, with their high spot exposure, stands to directly benefit from this.

Consider a scenario where Panama congestion pushes average spot rates up by just $10,000 per day. With their current fleet, this translates to a potential revenue boost of $36.5 million for a single quarter – roughly equivalent to the profit they made selling one of their newbuilds. Now imagine if those rates spike even higher.

Financial Performance and Dividend History

Here's a look at Avance Gas' recent financial performance and dividend history:

Reference: Q1 2024 AVACF Earnings Call Transcript

Projected Impact of Panama Congestion on Spot Rates

The following chart illustrates the potential impact of increased Panama Canal congestion on VLGC spot rates. The blue bars represent a hypothetical baseline scenario with current congestion levels, while the orange bars represent a scenario with increased congestion.

Here's the kicker: this dividend play isn't just about riding the wave of potential rate increases; it's about setting the stage for long-term shareholder value. By returning capital now, Avance Gas is signaling confidence in their ability to weather short-term volatility and capitalize on emerging opportunities. It also strengthens their financial position, allowing for further strategic acquisitions or investments in new technology like their MGCs (medium-sized gas carriers) designed for the burgeoning ammonia trade.

"Fun Fact: Avance Gas, headquartered in the idyllic Bermuda, holds a unique position in the VLGC market. While many of their competitors are scrambling to retrofit older vessels for ammonia transport, Avance Gas is already ahead of the curve with their purpose-built MGCs, ready to ride the wave of the clean energy transition."

It's tempting to dismiss this massive dividend as a one-time event, a generous distribution of asset sale proceeds. But a closer look suggests a more nuanced strategy. Avance Gas seems to be playing a long game, anticipating and positioning themselves to exploit Panama's vulnerabilities and reap the rewards of a tight VLGC market fueled by growing global demand.