Cmb.Tech NV Q1 FY2020 Earnings Call

Good morning, and welcome to the Euronav Q1 2020 Earnings Conference Call. Please note that today's event is being recorded. I would now like to turn the conference over to Brian Gallagher. Please proceed.

Thank you. Good morning and afternoon to everyone, and thanks for joining Euronav's Q1 2020 Earnings Call. Before I start, I'd like to say a few words. The information discussed on this call is based on information as of today, Thursday, the 7th of May 2020, and may contain forward-looking statements that involve risks and uncertainties. Forward-looking statements reflect current views with respect to future events and financial performance and may include statements concerning plans, objectives, goals, strategies, future events, performance, underlying assumptions, and other statements, which are not statements of historical fact. All forward-looking statements attributable to the company or to persons acting on its behalf are expressly qualified in their entirety by reference to the risks, uncertainties, and other factors discussed in the company's filings with the SEC, which are available free of charge on the SEC's website at www.sec.gov and on our own company's website at euronav.com. You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement, and the company undertakes no obligation to publicly update or revise any forward-looking statements. Actual results may differ materially from these forward-looking statements. Please take a moment to read our safe harbor statement on Page 2 of the slide presentation. I will now pass on to CEO, Hugo De Stoop, to start with the agenda slide. Hugo, over to you.

Yes. Thank you, Brian. We're going to do something a little bit different and more in-depth with today's quarterly call, given the number of factors that are currently impacting the tanker markets. Firstly, I will run through the Q1 highlights before passing on to Lieve, our CFO, to provide a full financial review of the income statement and balance sheet. Then we will look at the current themes in the tanker markets and Euronav's outlook before we take questions. So if we move to Slide 4, the highlights page. I think it's fair to say that the first quarter was an extraordinary quarter for many different reasons. Q1 was a very strong quarter building upon the solid foundations we experienced in Q4, but, of course, it was also a very volatile quarter with events such as the COVID-19 pandemic and the oil price war between the OPEC+ members dramatically influencing the market freight rates as we have seen. The TCE were as high as $200,000 per day, but also as low as $30,000 in the latter part of Q1. The average delivered VLCC rate was very robust. On average, we managed to book $72,000 or a little bit more than $72,000 per day for VLCCs and nearly $60,000 per day for Suezmax. Quite a record. This outstanding rate environment has pushed so far into the second quarter to higher levels with our VLCC fleet reporting so far $95,000 per day for VLCCs, as I said, and for the Suezmax $65,000 per day. This allows us to pay a very strong dividend related to the first quarter of $0.81 per share. As we mentioned many times in the past, we will, as of this quarter, pay quarterly dividends to Euronav shareholders. The good news is that we will also pay our final dividend related to 2019 after our next AGM in May. Therefore, Euronav shareholders will receive $1.10 in June in cash dividends, which represents at the current share price more than 10% dividend yield, and this is within the first 6 months of the year. So quite extraordinary, you must admit. I will return later with more commentary on the key themes in our business, but now I would like to hand over to our CFO, Lieve, to run through the financials on Slide 5. Lieve, over to you.

Thank you, Hugo. Good morning, good afternoon all. Allow me indeed to present the key figures of the first quarter. The revenues generated are $417 million, while EBITDA generated was $360 million. If we add the gain on sale and the income from equity investees, this is $328 million. This resulted in a net income of $225 million. As the company has touched upon the strong freight market, this clearly illustrates the operational leverage that tanker companies possess, namely every $5,000 a day in revenue that Euronav generates over a quarter translates into $27 million net income, culminating in a dividend of about $0.10 per share for Q2. A key highlight that I want to mention, related to Q1, is our fuel procurement strategy, which generated gains of nearly $20 million, but which clearly came under pressure as the oil price and other related commodities fell due to the COVID-19 virus and the related economic restrictions. The company also assessed if a write-down should be accounted for the remaining compliant fuel inventory, as the market value of the fuel that was not yet consumed was $56 million lower than its book value. The company concluded that no write-down was required at this time in view of the robust freight market for Q2 and possibly the rest of 2020, which will offset the higher weighted average consumption costs of the bunker oil consumed from that inventory. However, this assessment has to be performed each quarter. Moving on to Slide 6 and the balance sheet. Euronav's balance sheet remains strong. We have increased the absolute level of cash at our disposal to over $300 million, even though we were active during the quarter in purchasing 4 VLCC resales, requiring a down payment of $100 million. Our leverage is now below 40%. Cash and revolving credit facility liquidity are at $1.1 billion in total. This contributes, for sure, to managing our 2-year liquidity runway, which remains a core philosophy at Euronav. I will now hand back to Hugo to expand further on developments in the tanker space. Hugo, over to you.

Thank you very much, Lieve. We can now move on to Slide 7, capital allocation at Euronav. Capital allocation is very important, especially when markets are so strong. At Euronav, we always make sure to be balanced, but especially consistent in our allocation. We do have some mandatory debt repayment as well as some revolving credit facilities reductions, which, as far as they are concerned, are noncash. But as we target a leverage of 50% or less, we do not need to repay more debt for the time being. We have designed our return to shareholders' policy, taking all aspects of the business into account. We are very pleased to be in a position to pay a $0.81 dividend related to the first quarter, in addition to $0.29 related to the year 2019, as I mentioned earlier. During the quarter, we haven't bought back shares. When we do so, we will always try to create long-term shareholder value rather than giving support to a share price that has been very volatile during the quarter. We also bought a very small portion of our bonds back during the March selloff. We wish we could have done more, but the value of our bonds bounced back very quickly to par or even above par as they're trading today. We also took advantage of the S&P market volatility, as illustrated on the next slide. Slide 8. What seems like a lifetime ago now, we picked up 4 VLCC resales of contract at an average of $93 million, a significant discount to the advertised sales price at that time or even when compared now. This expansion, however, is part of an active fleet management strategy as we sold 3 older vessels so far this year for prices well above the index for the same vintage ships. This recycling of capital and the rejuvenation of our fleet is key to managing the tanker fleet and a feature we maintain as part of our long-term strategy. We can now move to Slide 9. The progressive moves in the freight market since early March, when the Saudi volume increases and price cuts were announced, have allowed tanker operators some optionality to lock in high rates for the upcoming 6 months. We have fixed a number of ships, taking advantage of these opportunities and have now 19% of our fleet on time charter for various durations. You will remember that at the end of last year, we only had 10% of our fleet under fixed contracts. It is important to know that when we decide to fix a ship for a 6-month time charter, we always compare the rate offered to what we can do in the spot market for our next voyage. Often, the shorter spot voyage offers you more than a 6-month time charter fixed contract. Moving on to Slide 10. Regarding the fuel procurement strategy. When we look back at IMO 2020, our approach has been to purchase compliant fuel ahead of January 2020, primarily to reduce any potential risk on either the quality of the new compliant fuel or to avoid the big spread that was foreseen between LSFO and HSFO in the early stages of this new market regulation. This approach benefited our operations initially, and in the first quarter, as indeed upon the implementation of the regulation, the LSFO jumped to much higher levels than what we had procured over the course of 2019. We have consumed a little less than half of our stock of roughly 420,000 tonnes inventory that we purchased in 2019. However, as Lieve mentioned previously, the market has not developed as anyone expected in terms of fuel pricing or in terms of stress between LSFO and HSFO during 2020 and certainly recently. And the prices, as well as the spreads between those 2 products, have now fallen to a level below our entry cost. We have not taken an impairment in the first quarter, as Lieve explained earlier, and we will continue to look at opportunities around the ULCC Oceania, where the fuel is being sold to create value around this operation. Let's all remember that if we had chosen a strategy of retrofitting scrubbers on our fleet, we would have had to deploy more than $350 million. I will now hand over to Brian Gallagher, our Head of Research and Investor Relations, to talk about current market themes, and I will be back for the questions. Thank you. Brian, over to you.

Thank you, Hugo. Slide 11, as Hugo states, looks at a number of different features and illustrates, in particular, why the storage of crude in ships has come into play so quickly. With 90% of us on some form of lockdown over the past 45 days in March and April, the IEA forecasted demand for crude has fallen by around 25 million barrels per day during that period. Yet, during that same period, we've seen production actually being maintained at similar levels. This disconnect, we believe, has produced somewhere around about 1.1 billion barrels of excess crude, the same level as the EIA and others estimate is the global onshore capacity for storage. Indeed, earlier today, Reuters reported that the storage facilities onshore in Europe are already full. This is reflected in the recent move to use ships to store oil, in particular, over the last 3 to 4 weeks. We believe that despite the OPEC cuts, which have started to bite in the last week or so, and production shut-ins by commercial players, any additional excess production from here is likely to have to find some form of home in storage and most likely on ships. This will be a key driver for our market over the summer months. Slide 12 shows that not all storage is created equal. We believe it's important to take a step back and look that this process has only just begun. It's important to remember that we've got the Iranian fleet with around 38 VLCCs and a permanent number of around about 20 to 22 VLCCs, which are always storing oil and are part of the infrastructure chain. This has nothing to do with the current COVID-19-related issues. Therefore, around about 8% of the VLCC fleet in the world has always been otherwise employed before this disconnect between consumption and production started. What is also interesting from Slide 12 is that, unlike other periods, when we've had storage requirements, this is not just a VLCC show. Traders, for instance, estimate that 61 Suezmax are currently used for what we would say market storage reasons. That's already 11% of that particular fleet. And that there are 65 VLCCs in market storage at the end of April. Thus, the true scale and impact of storage, we believe, therefore has not yet fully been revealed, given the speed and scale of the changes that are ongoing in the disconnect between production and consumption. So how do we see this developing? We look at this on Slide 13 with a very simple schematic. We look at the demand for storage that is not just driven by those who are out to derive profit via contango but also increasingly by logistical players, who are forced either involuntarily or voluntarily to use ships in order to transit oil or store oil. We believe that this phase will persist well into the second half of 2020. Clearly, and the market focus has been very acute on this, there will be a transition phase in the midterm, as we say, on Slide 13, into a different phase. As the inventory draw starts, if it's slow, then we believe the disruption to stripping will also be slow. If it is more rapid and accelerated, then past experience suggests that the contango price structure can remain in place for a prolonged period of time. In 2015, for instance, we still had 20-plus VLCCs used for storage even when the market went into backwardation in 2016. Many commentators believe that this midterm phase will kick in sooner rather than later, and then the inventory drawdown will be rapid and, therefore, will impact shipping much quicker. We find it difficult to envisage a shipping sector that works in real time, however. Our voyages take off in days, months, and often spill over quarter-end periods, and often take longer than the simple calculation of how long those voyages will take. There is planning, congestion, and many external factors that impact our business. However, we are not complacent. Management at Euronav does recognize that this middle phase will provide challenges for the tanker sector. When the inventory drawdown starts, that is likely to accelerate and bring pressures on our business in terms of freight rates. But it will also bring what we believe is the last phase in Slide 14 and 15, sustained pressure for a resizing of the global tanker fleet, which we look at in the last couple of slides. Slide 14 shows the large tanker fleet we believe is right for resizing. Financing is becoming ever harder. With increased regulation from areas like Basel IV and environmental pressure from the EU and the IMO, this is only going to intensify. Contracting of new orders is prevented by the requirement for the new propulsion system in order to meet these new stringent environmental requirements. With an 18- to 20-year life on average for a VLCC or a Suezmax, ordering a new vessel is also having the additional challenge that the likely medium-term trajectory will demand is also going to be a negative pressure. All of this is just restricting the new supply of tankers reflected in the 23-year low that we see in the order book. On Slide 15, to sum up, we look at the continued grounds for optimism at the existing fleet in which the large end of the tanker space, in terms of VLCCs and Suezmax, has an awful lot of potential change coming. On average, every quarter between now and the end of 2021, there are 27 VLCC equivalents due for special survey on vessels aged over 15 years of age. Why does this matter? The surveys will require several million dollars worth of investment to provide certification for the following 30 months. Owners will have to have confidence and visibility that they'll be able to make a return in this timeframe, which, with low freight rates, is going to be harder to justify. This pinch point is critical and historically has often been so. This is usually a catalyst for ships leaving the fleet to an alternative lease or to the scrapyard. To put this into context, though, if 2/3 of the vessels that we see on this final slide were to leave the fleet on Slide 14, the global tanker fleet would resize almost instantly to an oil consumption level of 95 million barrels a day, which is where a lot of commentators believe that even on the barest scenario, that's where the consumption will move off. It's time now. We probably can move on to some questions. That concludes the end of the prepared remarks, and I'll now pass it back to the operator. Thank you.

Our first question today comes from Amit Mehrotra from Deutsche Bank.

Congrats on a good quarter. I wanted to check your temperature on the commitment to the dividend. In the event that the public equity markets don't give the company full credit for what you guys are paying out, I mean, the strategy itself is quite clear. I believe it also gives you a little bit of wiggle room to reallocate or repurpose the funds for share repurchases. And then, obviously, you have that AGM meeting coming up on a vote on that aspect. So I just wanted to talk about under what circumstances the company will not pay at least 80% of its net earnings. I think that would just be helpful in trying to understand where your mind is at with respect to that specific item.

Yes, Amit, very good question. You're absolutely right. I mean, when we were thinking about our return to shareholders' policy initially, over 4 years ago, and when we put the guidance out in January, we were thinking about when to apply dividends and when to apply share buyback. In the first quarter, our line of thought was very much geared toward dividends because we wanted to show the market that we can distribute 80% of our earnings in dividends. I think that we heard that some people were skeptical about it. I think it was important to demonstrate that when we say something, we will follow that policy. Obviously, we're not satisfied with the share price where it is right now. That doesn't mean that we have not been satisfied with the share price throughout the quarter. It has been a very volatile quarter, not only in terms of rates but also in terms of share price. As I said in my prepared remarks, our goal is not to chase the share price and not to support the share price at every single point in time. So if we feel that the share price is weak for a prolonged period of time, then, obviously, we will prefer share buybacks over dividends. I don't think that you will ever see us cutting dividends completely. That's not something that we will ever do in any way. We have a policy for a minimum fixed dividend. However, the balance between share buyback and dividends will very much depend on share price weakness. As I said, at the moment, it doesn't look good. I mean, I don't think it's normal that we are distributing a dividend that represents only the first 6 months of the year. In fact, only the first 3 months and then a little bit from last year, an 11% yield. I mean, this is crazy, clearly abnormal.

Right. Okay. I appreciate that. That's pretty clear. I wanted to just pivot on my follow-up to just maybe a more fundamental question about the oil markets. And I want to understand, from your perspective, what the eventual impact will be from the eventual destocking of inventories and how you think that plays out in terms of absorption of the tanker fleet. Obviously, it's right to assume there's going to be some weakness in rates as vessels are released from floating storage. I think we're already kind of starting to see that in some respects. But how quickly after that do you think the tanker market rebalances? You talked a lot about an aging fleet, but, typically, fleets aren't scrapped unless rates are below OpEx levels. And obviously, there's quite a bit of leg down to get there. So if you can just talk to us how quickly do you think the market can rebalance? How long do you think the weakness in the tanker markets could last if we do get a bigger destocking of inventories?

Yes. We've tried to explain that on Slide 13, I believe, future market developments. We have split that between short term, midterm, and long term. The short term is clearly what we are living through now. We see that we have continued demand for both trading and transportation, but also storage. As Brian said, we believe that storage will continue to increase and influence our markets. It's a little bit of a pity that when people say that the rates have halved in the last 2 weeks, yes, right. But you know what? We're still fixing vessels between $60,000 and $75,000 a day. You look at the TI app, and I think that a vessel was just fixed at $90,000 a day. It doesn't mean that's the average, but I'm just trying to say that when we're making good money, but we are coming from extraordinary territory, then people are not happy. Personally, or at Euronav, we are very happy with the market at $60,000, $65,000, or $70,000 a day. When it comes to specifically your question about destocking, I think that there are 2 scenarios. There is a quick draw and a slow draw. The quick draw is basically where people are just dumping the oil that has been stored onboard the ships, and ships are returning quickly to the market, which will lead very quickly to the column called long term, and I'm going to come back to that in a minute. What is likely to happen is the slow draw. And why do I say that? Simply because the last time we had contango, it took about 12 months for the ships that had been taken on storage and potentially prolonged in their contracts to come back fully into the trading fleet. When you think about it, if all the oil stored is coming back to the market at a point where the market is demanding 95 million or potentially 100 million barrels of consumption per day, obviously, the oil price will be negatively impacted. If it's negatively impacted by the draw on the inventory, it means that there is a contango being created because the oil price will be at $15 or $20, but everybody knows that when the draw is done, the oil price will be higher, creating the contango curve. When you create the contango curve, you ask for more ships to store the oil for that contango story. So that's a little bit of what we believe is going to happen. It's not going to be as supportive as what we have seen in the last month and what we are expecting to see probably in the not-too-distant future. But it will not be a catastrophe. When we will hit weakness in the market is probably when all the ships are coming back to the market. Again, it could be quick, but we don't believe that. When they are all back, we will need to see what sort of consumption that is out there because many predictions are set for below 100 million barrels of consumption, which is the consumption levels we had prior to COVID. What is interesting is to look at the older part of the fleet. People will take the decision to scrap their ships much earlier than they hit OpEx levels. Generally, you cannot find a tanker market, I'm talking VLCCs, which on average has printed less than $18,000 per day in the last 20 years. Nevertheless, we have had incredible years in terms of scrapping, the last one being 2018. It's $8,000 or $9,000 above OpEx, nevertheless motivating people to scrap. Why? Because people need to spend a significant amount of capital, and nowadays even more because of the ballast water treatment system, which is costing $1.5 million. You need to return in the next 2.5 years when taking a ship to dry dock, which is more than 15 years of age. In the next 2.5 years after your dry dock, you'll need to make back $4 million, $5 million, sometimes $6 million before you can contemplate the first cent of profit. I don't know a lot of owners who will do that, especially after a period where we have earned so much money. Do you think we are earning money only to waste it in older assets and passing dry docks? I don't believe so. The minute the fleet is oversupplied, we have the perfect solution. As you can see on Slide 15, every single quarter, there's a collection of ships that will need to face that critical question of whether to spend capital or receive $15 million, $16 million, $17 million, $18 million, whatever the scrap is giving you. I think I know the answer.

Yes. I think we can all get bogged down on some details, but congrats on the record quarter. It's clear that the second quarter will be another record quarter, so keep the good work going. Now looking at Slide 9, on your charters, can you give a little more details around that? How many VLCCs, average duration, average rate? When do they begin? We need some details here.

Yes. Well, it's obviously on purpose that we didn't give too many details. I can tell you that it's both VLCCs and Suezmax. I can tell you that it's not only a contract for 6 months. In fact, the last 1 is a 2-year contract on a non-eco vessel. We will continue to look at opportunities. I think that when it's a 6-month contract, we shouldn't differentiate between spot and 6-month contracts because you will look at the spots. You will look at the next voyage. You're being asked to deliver the ship promptly, which means that you can compare and assess what is more lucrative, leaving it in the spot market or pulling it on a 6-month charter. So, of course, in that percentage, we have 3 or 4 vessels that are on 6-month charters. We only accept to book them when there might have been a little bit of weakness in the spot market, and at that time, the 6-month contract was paying more. We've had plenty of other opportunities that we passed on because when you compare $75,000 a day, which is on average what we were offered for 6 months, and a voyage that can give you $130,000, then, obviously, you take the $130,000 for 90 days. That's how we assess this. We have doubled the number of ships on time charter, and that's correct. We are hopeful that we will see more opportunities for longer duration than 6 months because, as I said, 6 months is very much high in the spot market. Whenever we see those opportunities, we are likely to try to grab them because it's good to have a sort of balanced approach.

Okay. And I guess touching on that, we saw some 1-year time charters above $70,000 a day a few weeks ago. Where is that market now? How robust or liquid is that market for the 1-year? And then any inquiries for 3 years?

No. We just did 2 years, option one. That was something, I would say, unrelated to the current environment. It's an oil major that has a program. So every year, they come with inquiries for 2 years, option 1, or even 3 years. We just participated in that tender, and we happen to have a good relationship with them. We have serviced that contract already. I would say we had a head start. The rest that we have seen was more like 6 months. We've seen that others have picked up 1-year contracts. At that time, we decided to pass on, either because it would have meant for us committing an eco-vessel, and we didn't think there was value in doing that, we had no other ships in position to do it, or because we thought that the rate was a little bit weak for that matter. At the moment, we're not seeing many 1-year contracts. The majority of the contracts that we are seeing is indeed 6 months. The difference with maybe 5, 6 weeks ago is that what we call the Phase 1 of the contango was very much to traders. They were just buying physically the oil, storing in our ship, hedging themselves on paper. They are usually the first mover. So the inquiries that we are receiving now are really from people lacking space. They don't know where to put my oil and need to rent a ship, and that's what I'm going to do. It is always a time charter contract for trading with an option to store, but the way they're going to use the ship is very much as a storage. You can see there are different functions on Bloomberg, where you can see the number of ships that have been completely standstill for over 2 weeks. That's how you can identify the number of ships that have been taken for storage. That number continues to grow by the day, and brokers are reporting that on a daily basis. Last but not least, and Brian mentioned that, we're seeing Suezmax being taken as well. In other contango cycles, it was very rare that so many Suezmax were taken. That's a demonstration that clearly people are looking for space.

Okay. And then just quickly, in terms of the 6-month charter that you mentioned, you're getting a lot of — that market is very liquid. What kind of rates are you seeing for 6-month inquiries?

Anywhere between $65,000 and still $80,000. It depends a little bit where you're doing it. It depends if the ship is going to move or if you believe that the ship is going to move at the start or at the end of the voyage. There are a couple of details that will influence the rate. It may be a little bit weaker than what we saw in the first phase, but not that much for the time being.

Perfect. Sounds good. And, yes, just public service announcement for the shareholders. They have to hold the shares on May 28 and, I guess, June 15 to get these dividends. So selling this month is not going to get them any dividends.

That's for sure. Thank you for the reminder, Randy.

Our next question comes from Greg Wasikowski from Webber Research.

It's actually Mike on with Greg. So Hugo, if we could just go to Slide 11 in your deck, I think this kind of sums up where the market is in pretty concise way. And so, obviously, I want to dig into the storage bit. First and foremost, if you look at the demand recovery that's implied by the IEA numbers, right, you're talking about the $20 million to $25 million spike in demand between now and July. Given the lead time associated with international transport, are you guys seeing the green shoots of that kind of demand recovery? Considering that based on most of the published international estimated recovery data, it would have been starting at this point?

No. But I don't think that we're the best people to see that because, indeed, if there is a recovery in demand, let's not forget that there is quite a lot of product that have stalled. And that's very much where you see the demand. The demand will come from the consumers of petroleum products, which will then send a signal to the refiners, and the refiners will then take more crude oil. If they take more crude oil, they will probably process the stuff that they have put on storage themselves nearby their facilities before touching either strategic facilities or even what is onboard vessels.

Yes. I can rephrase that. We can use the rate as a guideline, but there’s significant momentum when rates reach two to three times the reference rate. When we approach around $100,000 a day, much of that is driven by owner momentum and visual negotiation. I’m interested to know if you’ve observed anything operationally that might indicate this. Looking at the data, it seems there was a peak in June around 300 million to 400 million barrels of storage. Based on what you’re currently observing, do you believe that’s when we will see the storage peak? This is subject to change, but where do you currently estimate the cumulative storage peak for the market? It would be helpful if you could provide your insights, understanding that things could shift rapidly, but I’m not holding you to a specific number—just where do you think the peak is?

Yes. When Brian read the forward-looking statement at the start of this call, I thought how true it is. The information shared today is based on the current situation, and things can change rapidly. We included the graph on Page 11 because we believe it's a likely scenario. We anticipate that storage onboard vessels will peak in June 2020, although I can't specify if it will be at the beginning, middle, or end of the month. Most contracts will last six months, so it will take that long to release the oil into the market. We believe that the first oil expected to be taken from storage will come from the land storage and those near the facilities. It’s important to keep an eye on developments until the end of this month, particularly in June. The number of vessels being used for storage is changing almost daily, and you can see that in various reports, including those on Bloomberg.

Mike, if I can interject. It's Brian Gallagher here. To clarify the numbers for everyone on the call, we are taking what we believe to be a very conservative view. For May, we are estimating a disconnect of 14 million barrels per day, and we foresee that this may lead to an additional 2 million barrels per day disconnect in June. This explains the flattening trend you see. While some research suggests a more optimistic turnaround, we believe that storage issues will persist. Our outlook indicates that the situation might drift further out. As Hugo mentioned earlier, shipping does not operate in real-time. We don’t expect that if the situation stabilizes in mid-June, all barrels will be redistributed by the third week of June. Shipping logistics don’t work that way.

Great. And I guess that is kind of what I'm getting at. So there's always a natural conservatism in your version that doesn't mean any time you're talking about variables that you're stretching out for a number of quarters. So I guess, if you were to overlay your estimates in terms of where you actually think, the implication is that we're not done building yet, and that could persist for a while, and the slope of that recovery is probably a bit shallower than what the IEA data would suggest. So I guess what I'm asking is if you could put a vague number on where you think that peak ends up being based on what you can see in front of you right now and what month do you think that ends up being?

Yes. We are a little bit on the same page because who knows? But if the number that Brian mentioned of 14 million barrels to be built up in May and God knows that we are early May and only 2 million barrels in June, then you could see twice as many VLCC and twice as many Suezmax being taken for storage, and then that would happen before the end of June. So you will clearly see that. That would have a positive impact on the ships that are trading because there's still a lot of demand for transporting the oil. The spot market should reflect the diminishing supply side of the world fleet.

As for the other side of the trade, when are we going to see that oil being drawn from those ships? I'm not going to repeat what I said to an earlier question on Page 13. Different scenarios suggest a slow draw is more likely to happen than a quick draw because the impact on oil prices will mean that those being asked to store are for commercial reasons, not for capacity reasons.

Yes. Just following up a little bit differently on Mike's question. I think the confusion is around the contango and the fact that, I guess, what you're saying is a lot of the storage is going to be related more to logistical bottlenecks, which is what we saw earlier this year. I guess the way I would like to ask it is, clearly, this won’t be driven by traders. It will be driven by state oil companies. Have you gotten any indications from them that this is happening? Asking it another way, if I'm a major oil company, and I'm going to take a ship, I might not necessarily have any place to put the oil, do I even have to communicate that this is a storage contract? Or could I just simply charter the vessel and then lay it out on demurrage and then just kind of wait?

Normally, that's not what you do because when you negotiate a rate, it's between a load port and a discharge port. You negotiate the world scale around that and you use the rates published once a year, as you know, and negotiate a premium or discount. That's what we call the world scale, which is above 100% or below 100%. It's difficult to play a game where you say, 'I'm going to ask you to load the oil in the AG, and then I will pretend to go to China, but I won't deliver the oil in China.' Usually, they ask us for an option to store the oil. If we go to the option, then it's a rate per day. Very quickly, the contract is turned into a time charter contract, where we have been paid in advance rather than paid at the end of the voyage. It's true that some people, and I have no doubt that they didn't design that, have ended up having ships that were arriving at the discharge fold and had to wait weeks, if not months, in some locations. Of course, they had to wait, being paid the demurrage rate. You have to know that the demurrage rate is usually very close to the time charter equivalent that we calculate after agreeing on the freight rates.

Okay, great. And then just what I guess my follow-up will be around your fleet time on the website. I guess, based on your comments, 20% of the fleet is fixed. But as I look at the new time charter vessels on this tab, based on your comments, it's safe to — should I be thinking that the incremental ones that have shown up are 1-year time charters, not 6 months? Is that kind of the right way to think about that?

No. You're right that we have this internal debate about whether we should treat 6-month time charter contracts as a spot or equivalent to the spot. That's certainly what we do in our philosophy, in our mind, and, therefore, what we do on the website. We are not trying to be cute about it. We are being transparent, trying to extract more value out of the market. We did 3 contracts for VLCCs for 6 months, 1 for 2 years, option one. For Suezmax, we have done 1 for 4 months and then 2 for 8 or 9 months. That in addition to what's overall.

Our next question comes from Joe Mares from Trium.

As a long-term Euronav shareholder and listener to these calls, it's interesting that nobody brings up your scrubbing decision today, but I just wanted to say I think you've shown a lot of wisdom in how you approached that issue and resisted a lot of short-term pressure. So, as a long-term shareholder, I appreciate a long-term outlook. My question, if we can discuss in a bit more detail. There have been a lot of headlines about COVID-19 and its impact on particular yards or quarantines or bringing things in and out of ports, et cetera. I’m wondering how that has impacted basically the special surveys, et cetera? It seems as though that's one of the things, besides rates, that probably delays the ability of people to go back into special surveys. If you have to go in for a survey now, kind of what do you do?

Well, Joe, first of all, thank you very much for being a long-term shareholder and for your remarks. We are also happy about the decision we took. As far as COVID-19 is concerned, in fact, you've seen 3 phases. You've seen the aging phase very much dominated, at least in the news line, by China. Then it hit Europe and then it hit the U.S. Most of the shipyards, where we're doing repair and maintenance, i.e., our special surveys, are in China and the Singapore region. China has completely reopened for those shipyards. It has created a bit of a lag because for approximately 6 to 8 weeks, it was not possible to take a ship there. At that time, we took 1 ship in Singapore, and then Singapore decided to close down. We were fortunate enough to have finished the survey and to be able to leave that shipyard. However, we know that some other ship owners had their ships stuck there with no work being conducted. The same thing happened to some people retrofitting scrubbers. Today, if you want to take your ship and do a special survey, you can do that, mostly in China. Singapore is a little bit more restricted or still closed at the moment, but there are plenty of yards in China that will do it for the size of ships that we have. It's too early to assess the impact on the construction yard, the building yard, where you build your new buildings. Initially, we heard from Korea, sourcing a lot from China, that because China had closed down for 6 to 8 weeks, they were having delays. It seems, however, that the Koreans are so efficient that they have been able to recover these delays and will be in a position to deliver the ships that they can or want to deliver. Last but not least, I heard a rumor, unconfirmed, that some new buildings orders had been canceled in China during the COVID period, as the Chinese yards didn't know how long it would take to recover. They were facing specific laws in their contracts, allowing the owner to stop it as it was before the start of the construction.

Correct, yes

So to be confirmed would be a very good news for an order book that already looks very, very light.

Our next question comes from Jon Chappell from Evercore ISI.

Hugo, first question is for you. First question on S&P. So, well-timed disposals of non-core tonnage, all-time purchases of newer tonnage. Without asking exactly what the plans are next, as you see the market layout with the different possible scenarios to go out and looking at the asset values today, are you more of a buyer or a seller of assets for the next 6 months?

I would tell you, and that's not going to surprise you, we are more of an opportunistic buyer than a seller. This isn't going to surprise you, but it may be time to praise the people who are looking after S&P at Euronav because they do a fantastic job trying to find the good opportunities, be it on the selling side or the buying side. What you see on the index, you may be a little bit more of a seller. We're not an asset trader. We like to continue to operate a fairly large fleet. That's where we're good, but we also like to take care of our assets, and that means rejuvenation. Euronav will continue to be opportunistic. We'll continue to try to further consolidate the market, further grow the platform. I think we have a platform that has demonstrated it works fairly well, strong balance sheet. However, that doesn't mean our operational leverage isn't good. It's, as demonstrated in this quarter, phenomenal operational leverage and, at the same time, a solid company in case there are some weaknesses. We know we are humble enough to never predict what the next quarter will be. We can exchange views. Everything we say is true as far as today is concerned, but tomorrow may be different. A big consolidation of big fleet acquisition will happen in the down part of the cycle, but as far as picking up assets here and there, it will depend on what we can find and whether we see that there is value in them or not.

Okay. And the second one, I don't know if it's for Brian or for Hugo. I think we've beaten the storage horse to death. You guys had a really good presentation on it, but we are trying to figure out why the storage number keeps rising, all the good things you talked about and yet the rates have collapsed. I'm trying to put those 2 together. The producers were going full bore in April, and now it seems like they're scaling back in May. Is there any way to gauge the actual transport demand and the impact that that's having as producers scale back in May? Is the beneficial impact of this card?

I believe there are multiple factors at play. It's important to note that about 50% to 55% of oil demand comes from transportation. We anticipate that the recovery will be slower than expected. While I acknowledge that there are differing opinions, we have been clear about our perspective this week, as sentiment plays a crucial role. Recently, oil prices declined, and the contango also decreased, which has significantly affected the support we had for contango and higher rates. This situation will likely continue to evolve, and we expect ongoing volatility in this sector. I realize this response may not fully address your question, but until we see clear signs that lockdowns are ending, it seems there isn't a reliable model to follow. In Europe, Germany is set to make some progress next week, but other countries, like Spain and the U.K., will require more time. It appears to be a case-by-case situation.

Our next question comes from Chris Wetherbee from Citi.

Yes, maybe a short-term one and then maybe a longer-term one. First, in terms of the coverage that you procured in Q2, just curious how much of that spills over into the third quarter. If you could talk a little bit about the short-term as well as your term; obviously, we would know the longer-term charters that you've signed up, but in terms of the shorter-term stuff, how much spills over into Q3?

Very little. I think that we've booked less than 5% of the third quarter at this point in time.

Okay. That's helpful. I appreciate that. The bigger picture question that I think is probably important is understanding how this dynamic plays out. We've all been trying to get at it in different ways. You're talking about storage and then maybe sort of the unwind of this process. But I think you bring up a good point about the longer-term uncertainty which prevents the order book from being added to in a material way. So, as you start to think beyond the impact of the storage drawdown and how the fleet development looks beyond that, I guess I'm curious how that plays out. What would the market look like in late '21 or '22 in a scenario with a significantly depleted order book? I don't think we've seen that over the last many decades. I'm curious how that plays out and how you think the ownership structure of the industry might look in terms of consolidation. We've all hoped for that. Is this a potential catalyst for that?

Many very good points that you mentioned or are asking, Chris. Again, I'm not sure it's very straightforward for us to see where it's going to pan out, but something's got to give. At the moment, people are not ordering ships for 2 reasons. The first reason is that there is some sort of uncertainty, and you will remember that most orders are usually placed at the end of a downturn in our industry or at the beginning of an uptick. Very frequently, people order ships to hope to get them before the next cycle or before the uptick cycle is over. We haven't seen that. We've had a good Q4, a good Q1. We're going to get a good Q2, and yet the order book is very flat. That should tell you something. What it tells you is that there is too much uncertainty, too much volatility. It explains why our share prices aren't performing. The second leg to that is probably even more critical. It's about technology. Are you going to order a conventional ship or are you going to order a dual fuel LNG ship or are you going to wait for yet another technology to emerge? Which, clearly, nobody knows what it's going to be. A lot of people are talking about hydrogen being carried on fuel cells or methane or ammonia or you name it. I think that, that technology will not be ready before 2023. People may start ordering it in '22, which is very early stage. Trying to draw a picture of what is going to happen. Any market weakness can be resolved by a number of ships being old enough to hit the scrapyards. We continue to see relatively low orders because even if prices go down for dual fuel LNG, it has not yet been demonstrated that this is a future-proof ship, as technology may not be the right one compared to other technologies that are supposed to emerge.

Okay. And the second one, I don't know if it's for Brian or for Hugo. I think we've beaten the storage horse to death. You guys had a really good presentation on it. But we're trying to figure out why the storage number keeps rising, all the good things you talked about and yet the rates have collapsed. I'm trying to put those 2 together. The producers were going full bore in April and now it seems like they're scaling back in May. So is there any way to gauge the actual transport demand and the impact that that's having as producers scale back in May? Is the beneficial impact of this card?

I believe there isn’t just one factor at play. It's important to note that approximately 50% to 55% of oil demand comes from transportation. We think the recovery will be slower than expected. While we are aware of differing opinions and have been open about our thoughts this week, the sentiment certainly matters. Recently, oil prices dropped, and contango levels decreased significantly, which affected the support we had for contango and higher rates. We anticipate ongoing changes in this area and wouldn’t be surprised by continued volatility. Although it may not be a satisfactory answer, until we see concrete indications that lockdowns are ending, I don’t think there is a reliable model available. In Europe, Germany is expected to start taking action next week, but other economies, like Spain and the U.K., will require more time. Unfortunately, this will have to be addressed on a case-by-case basis.

Okay, great. And then just what I guess my follow-up will be around your fleet time on the website. I guess, based on your comments, 20% of the fleet is fixed. But as I look at the new time charter vessels on this tab, based on your comments, it's safe to think that the incremental ones that have shown up are 1-year time charters, not 6 months? Is that kind of the right way to think about that?

No. You're right that we have this internal debate about whether we should treat 6-month time charter contracts as a spot or equivalent to the spot. That's certainly what we do in our philosophy and is reflected on the website. We are not trying to be cute about it. We are being transparent, trying to extract more value out of the market. We did 3 contracts for VLCCs for 6 months, 1 for 2 years. For Suezmax, we have done 1 for 4 months and then 2 for 8 or 9 months. That in addition to what’s overall.

Our next question comes from Joe Mares from Trium.

As a long-term Euronav shareholder and listener to these calls, it's interesting that nobody brings up your scrubbing decision today, but I just wanted to say I think you've shown a lot of wisdom in how you approached that issue and resisted a lot of short-term pressure. So, as a long-term shareholder, I appreciate a long-term outlook. My question, if we can discuss in a bit more detail. There have been a lot of headlines about COVID-19 and its impact on particular yards or quarantines or bringing things in and out of ports, et cetera.

Well, Joe, first of all, thank you very much for being a long-term shareholder, and thank you very much for your remarks. We are also happy about the decision that we took. As far as COVID-19 is concerned, you have seen 3 phases. You've seen the aging phase very much dominated, at least in the news line, by China. Then it hit Europe and then it hit the U.S. Most of the shipyards, where we're doing repair and maintenance, i.e., our special surveys, are in China and the Singapore region. China has completely reopened for those shipyards. It is true that it has created a bit of a lag because for approximately 6 to 8 weeks, it was not possible to take a ship there. We took, at that time, 1 ship in Singapore and then Singapore decided to close down. We were fortunate enough to have finished the survey and to be able to leave that shipyard. However, some other ship owners had their ships just being stuck there with no work being conducted. The same thing happened to some people still retrofitting scrubbers. Today, if you want to take your ship and do a special survey, you clearly can do that, mostly in China. Singapore is a little bit more restricted or still closed at the moment, but there are plenty of yards in China that will do it for the size of ships.

Correct, yes.

To be confirmed would be, again, a very good news for an order book, which already looks very, very light.

Our next question comes from Jon Chappell from Evercore ISI.

Hugo, first question is for you. First question on S&P. So, well-timed disposals of non-core tonnage, all-time purchases of newer tonnage. Without asking exactly what the plans are next, as you see the market layout with the different possible scenarios, thinking about asset values today, are you more of a buyer or seller of assets for the next 6 months?

I would tell you, and that's not going to surprise you, we are more of an opportunistic buyer than a seller. Perhaps it is time to praise the people who handle S&P at Euronav because they do a fantastic job really trying to find good opportunities, be it on the selling side or the buying side. I'll also add that, what you see on the index, you are probably a little bit more of a seller. But again, we're not an asset trader.

Okay. The second one comes from Brian or for Hugo, and I think we've beaten the storage horse to death. You guys had a really good presentation on it. But we're trying to figure out why the storage number keeps rising. All the good things you talked about and yet the rates have collapsed.

Well, I believe that there's no single variable. You have to remember that roughly 50% to 55% of oil in demand is in transportation.

Our next question comes from Chris Wetherbee from Citi.

Yes, maybe a short-term one and then maybe a longer-term one.

Very little. We've booked less than 5% of Q3 at this time.

Thank you.