Cmb.Tech NV Q1 FY2021 Earnings Call

Good morning and welcome to the Euronav First Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. I would now like to turn the conference over to Brian Gallagher, Head of Investor Relations. Please go ahead.

Thank you. Good morning and afternoon to everyone, and thanks for joining Euronav's Q1 2021 earnings call. Before I start, I would like to say a few words. The information discussed on this call is based on information as of today, Thursday, the 6th of May, 2021, 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 facts. All forward-looking statements are critical 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 www.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 those 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 Chief Executive, Hugo De Stoop, to start with the agenda slide on Slide 3. Hugo?

Thank you, Brian. Welcome to our call today. As usual, I will firstly run through the Q1 highlights and some comments on our active capital allocation during the cycle before passing on to Lieve, our CFO, who will provide a review of the financial statements. Brian, our Head of Investor Relations, will then look at the current themes in the market before I return again to discuss our outlook and traffic lights before we take questions. So turning to Slide 4 and the highlights page. Q1 was admittedly one of the toughest freight markets we have had in recent years. Market recovery is yet to gain traction as either barrels were repeatedly kept out of the market, or demand rises failed to materialize as COVID related restrictions were applied again. As we say in our press release today, available tonnage is abundant. There are simply too many ships and not enough cargoes. There are, however, encouraging signs with the tapering of OPEC plus production, which we hope will translate into more available barrels. This is encouraging but our visibility on this recovery remains slow. Our sector is cyclical. And when it is bad times to be an operator, you need to think about the future. Hence, we have taken the opportunity to invest counter-cyclically, what we believe is a low point in terms of value. And having invested in the latest VLCC and Suezmax vessels, we are closely cooperating with the shipyards to ensure they can maximize their potential role in the energy transition and emissions reductions. I will now pass over to our CFO, Lieve, to walk through the financial highlights. Lieve, over to you.

Thank you, Hugo. On Slide 5, I wanted to cover a number of points when looking at our financials for Q1. Our P&L was clearly challenging with sustained freight rate pressure that Hugo spoke of earlier. This slide gives the details on how challenging it has been. Whilst our leverage has risen to just under 42%, that remains well below our self-imposed limit of 50%. Liquidity remains the strongest in the sector with over $1 billion available for our funding facilities and cash. Finally, we have been very active during this quarter and will be during 2021 in utilizing a challenging freight rate market to undertake and even accelerate our dry docking program. This will ensure when the cycle returns, the profitability Euronav will be optimally placed. Looking now in more detail at the underlying cash generation on Slide 6. Euronav remains focused on cash generation. We have driven further improvements in our working capital to the tune of $36 million as Slide 6 illustrates. This was improved further from the sale and leaseback of VLCC Newton during Q1, releasing further cash, thus allowing the payment of our fixed cash dividend commitments of $6 million for Q1. This underlying cash generation has assisted in our fleet renewal program, which our balance sheet has the capability to manage. Our funding sources remain key to driving our business forward. And Slide 7 looks at how we continue to diversify our funding sources. We increased during the quarter our activity on our sustainability financing. We signed an extension and upsized an unsecured facility to include a number of other banks. As the slide shows, it has a number of features including reduced interest rates, if emission targets are beaten. An additional feature specific to us, if the facility is priced in Euros, no dollars, which is helpful as 80 million of our costs are euro-denominated. A third of our funding sources are now sustainability linked, an important milestone for Euronav. I will now hand over to Brian Gallagher, our Head of Investor Relations to run through a couple of current market themes.

Thank you, Lieve. Capital allocation has remained active with our counter-cyclical investments, continuing with two Suezmax and two VLCC contracts that we announced during Q1. This complements the four VLCCs we took delivery of during this quarter and is part of a coordinated approach to fleet renewal. In the past 18 months or so, we have sold a range of older tonnage, either directly into rising steel values or forward selling by sale and leaseback structures. Recycling this capital into more operationally efficient vessels will significantly improve our emissions profile in terms of CO2 emissions. We remain on trajectory with our commitments to the Poseidon Principles, and additional recycling as we have just executed during this cyclical load in our freight market will allow Euronav to remain on course to simultaneously improve the earnings power of our fleet while maintaining a strong balance sheet and meet our emissions goals and targets. Turning now to Slide 9, and ensuring our capital allocation that Euronav meets those strategic goals. Slide 9 shows the AER or the annual efficiency ratio record of the global VLCC fleet in a very simplistic way, but also shows the trajectory that Euronav is on target to meet its 40% reduction obligation as part of the CO2 emissions targets set by the IMO 2030. In our view, this is a realistic and achievable target. Our recycling of capital and selling nine older vessels in the past 20 months or so, and recycling that capital into seven new vessels is a key part of our compliance, which we are looking to accelerate. Now, turning to two key themes we expect to remain in place for the rest of the year. On Slide 10, firstly, Iran. The Iranian situation in terms of tankers remains fast-moving. Commentary earlier this week suggested that some timetable has returned to around to the oil markets could be agreed very soon. This will be a positive we believe for our markets overall, as it should bring some much-needed barrels back into the commercial fleet and at the same time, reduce the need for the so-called illicit trade of largely older tankers, which have taken up sanction trades over the last 12 to 18 months. If that were to happen, we believe, as many commentators agree, that we will then start to see this older tonnage move to the recycle yards. Finally, for me, we return to a theme of the OPEC barrels which have been missing in the marketplace in the last several years or so. We believe this will continue to be a key feature on Slide 11 for the rest of this calendar year. As the slide shows, OPEC plus production cuts are scheduled to start tapering later this month and continue well into July, bringing potentially 2.1 million barrels per day back into crew transit. Clearly, the very difficult circumstances with COVID in key markets like India make it difficult to predict how much of this tapering will actually impact crude export markets. As a rule of thumb, every 1 million barrels per day of production turning into exports requires a need of around about 30 VLCCs on an annualized basis, but we leave with tangible and encouraging signs and signals to finish with. And I'll now pass on to Hugo to sum up where our traffic lights are currently sitting at the end of Q1. Hugo, back to you.

Thank you, Brian. So as Brian just alluded to, the scheduled tapering of OPEC plus production cuts is sufficient for us to push through a mile upgrading our traffic lights. Provided additional prolonged COVID restrictions do not defer or delay these rising outputs, then this move by OPEC could start to reduce surplus amounts of tonnage in the large crew tanker fleet. This is our first positive change in our traffic lights since Q2 last year, but it does reflect the start of our recovery process in our markets. This is likely to take some time, but we continue to remain confident in the medium-term prospects for the tanker market. And that is reflected in the fleet renewal we've engaged in not just during Q1, but also over the past 12 to 18 months. With that, I will pass it back to the operator to receive questions. Thank you very much for your attention.

Our first question today will come from Randy Giveans with Jefferies. Please go ahead.

How are you team Euronav? How's it going?

Yes, very well. And you, Randy?

Well, hanging strong. Hanging strong. All right. So I guess first question around the acquisitions, right. So you bought some of the Suezmaxes a couple of new building, VLCCs, LNG ready, maybe ammonia ready. I guess, why kind of go with that route instead of participating in some of the longer-term LNG fueled VLCCs that some of the oil majors had put out there? And then when it comes to expanding the fleet from here, is it further new builds or modern second hands more attractive?

Thank you for your question. To be precise, the Suezmax vessels we acquired are second-hand, and securing them before construction allowed us to customize their specifications, which we believe will provide unique advantages to Euronav. Regarding the VLCCs, they are indeed new builds, but they originated from previously abandoned slots after 10 VLCC orders were canceled earlier this year. The market conditions now may differ significantly, possibly pushing us into 2024. This situation presents us with an advantage. For the resale, we had no choice but to accept the specifications ordered by the previous buyer. The VLCC situation is a bit more complicated, as the shipyard had a defined plan for construction, and developing an LNG dual-fuel vessel will take longer due to their commitments to other projects. Nevertheless, we are pleased with our current decisions as they provide us with maximum flexibility. In a prior call, we stated our readiness to build an LNG dual-fuel vessel if we secured a contract, as LNG serves as a transitional fuel. It's crucial to ensure returns on the LNG component during the contract's duration and have a fully amortized vessel for that segment. We did participate in the tenders from Total and Shell; however, we did not win because our return expectations differed from theirs. Ultimately, we believe our current path is more advantageous. Looking ahead, Euronav will continue to evaluate second-hand opportunities to avoid increasing our order book. However, during this transition in propulsion fuel, having flexibility may be our best option, allowing us to decide later based on the charter market or when infrastructure develops, ensuring optimal investment returns.

Yes, that all makes sense. Thank you for the clarification. I have one more question regarding fleet management. Given the number of dry dockings scheduled this year, are you prepared to possibly expedite those to today, ideally before June, as it would be beneficial to act before the market changes? Additionally, considering the anticipated market strength later this year, how do you view time charters at the current rates?

Well, our program of 27 dry dock, that's almost 1/3 of the fleet. So we did already quite a lot of management around the timeframe that you can do in dry dock, which is roughly speaking 18 months a year and a half. We've pulled many of those early because we didn't have very high expectations in '21. We've done already a number of vessels. We have indicated how many vessels remain to be done. And let's not forget that it's a full optimization that you need to do. What I guess what I mean by that is, you need to find the voyage that will take you near the dry dock at the time where you have a slot. And that will play a big role in the economics because if you have to take your ship with, let's say, no cargos on a ballast just to go to the dry dock you're also leaving a lot of money on the side, even if it's in a low market because obviously, any contribution is better than nothing. So you can rest assured that this is an analysis that we do permanently. When we lock a slot in a dry dock, there is a degree of flexibility. And we will always accommodate that with all the circumstances that are around that dry dock including positioning, and potentially the prospect that we have when the ship is leaving the dry dock and does not have a vetting, which is another consideration that we need to take into account.

Got it. And then quickly on time charter appetite.

Time charters are interesting and maybe we don't advertise it too much. But we have a number of ships that are on time charter at the moment. Some of them are long-term time charters for 2, 3, 4 years. Some of them are much shorter time charters or policies that we always look at what the best employment for the vessels are. So our concern, and we've seen a number of those being done in the market. I think when you look at those levels, against the type of vessels, either most modern or most equal type of vessels, these are levels that are compared to historical levels, not very interesting, starting in '23 for the delivery of a modern ship, and then having a fixed time charter in the low 30s. Compared to what we hope we can do in the market, that's not particularly attractive to us. I think on the short-term, it's a very different picture. As I said, we don't consider '21 will be a great year. So we have taken some of those and we continue to look at in the market what is available. You may have seen in the press that for instance, our new building deliveries, we have taken four ships. We acquired as a resale last year. Those are particularly attractive to some people. And at the moment, they are all on short-term time charters, which are paying more than the spot market. So, we're doing your first year.

Perfect. Thanks so much for the time.

You’re welcome.

And our next question will come from Omar Nokta with Clarksons. Please go ahead.

Thank you. Hi, Hugo. Just maybe wanted to follow up on the new buildings. Can you maybe just give us a sense of what the process would entail for those VLs to have the LNG and ammonia ready, structural notation? It sounds like these will deliver with conventional fuel and then afterwards go back for installation depending on how things are playing out. Is there any sort of estimate you can give on what the cost or the timeline is for the installation of such a system?

On the LNG front, it's more recognizable since those ships are already in existence and can be retrofitted today. If they meet level one readiness—there are three readiness levels—the higher the level, the more specifications need to be met and the more significant the modifications. At level one, the focus is on structural readiness. This means the tankers, or VLCCs, must be fitted with tanks capable of holding either LNG or ammonia. These tanks come with a certain weight and will be mounted on the deck. If any structural changes are necessary to support this heavy equipment, it poses risks since altering the ship’s structure is generally not advisable. Therefore, the primary task is ensuring that the ship is structurally sound. The next step involves preparing some piping to transfer the fuel to the engine area, while considering the type of gas being used, as some are more corrosive than others, influencing the piping requirements. Additionally, engine preparation is crucial, though it's premature as ammonia options are not yet available in our segment while we have a good understanding of LNG. Modifying a ship to compliant LNG specifications at this moment is likely too early. If you were to pursue level three readiness, opting for a full dual fuel LNG conversion makes sense now, but that would hinder future ammonia conversion due to higher retrofitting costs and potential capital losses. In terms of numbers, achieving readiness could cost between 500,000 and 1 million, and preparing for both LNG and ammonia may exceed that slightly. This expense is not overly burdensome, especially considering the substantial benefits over a ship's typical 20-year lifespan. Should you modify for LNG later, you might incur an additional cost of 12 to 14 million, with variances based on tank size and other factors. I can't specify the ammonia modification cost, but we assume it will be around the same so long as the classification society provides detailed guidelines. Also, since ammonia is more toxic than LNG, comprehensive safety assessments will be necessary, which might raise concerns. However, it's worth noting that ammonia has been safely transported for over 40 years, and our goal is to address and prepare for any safety challenges when using this fuel. Ultimately, we're discussing a modification cost between 10 to 15 million after the fact, with timing dependent on market conditions. Currently, LNG infrastructure mostly exists across the Americas, particularly in the U.S., where developments continue, with expectations for completion soon. Conversely, ammonia represents a more long-term initiative. Customer demand will play a significant role in this transition, as some may prefer zero-emission fuels like ammonia while others lean towards LNG based on their production capabilities. Thus, our customer interest will dictate if and when we convert vessels to dual fuel systems combining conventional fuel with either ammonia or LNG. I don't foresee, however, a future where tri-fuel vessels capable of burning ammonia, LNG, and conventional fuels will be available. Therefore, a critical decision has to be made regarding the optimal timing for any conversions. Considering the future potential, it is essential to note that despite a higher capital expenditure, these assets will not become obsolete.

Thanks, Hugo. That's quite clear there. So just to summarize my understanding, it sounds like it's basically $0.5 million to $1 million just to have the structural flexibility. And then post delivery going back to install say an LNG system, it's $12 million to $15 million, which is effectively kind of what it is now at a shipyard to be done during construction. And so really, the only difference is time at the yard post delivery.

So your understanding is absolutely correct, with maybe a caveat, which is that if you build a dual fuel LNG VLCC vessel today, it's probably south of $14 million. So $14 million was the number we were given, I would say last year, then Shell together with some owners, including us have done a fantastic job working with the shipyard and trying to minimize those costs. And when you see what the guys who have sort of won the tender with Shell are paying, you're probably more in the region of $10 million to $11 million as a surplus to your conventional vessel. So a little bit cheaper, but not that much.

Yes, I understand. I have a quick follow-up. You mentioned that the new ships will be significantly more advantageous, eco-friendly, and carbon-efficient compared to the ones they are replacing. I recall that statement in the order announcement. Are you indicating that as these new vessels are delivered, you plan to scrap some of your older ships on a one-to-one basis, or is this a general comment about their ability to phase out some of the older tonnage?

I would say both in a certain way. As you know, we tend to sell our vessels before they reach their end of life and so that will depend on each vessel, but it's true that when you look at the sale and leaseback that we have done over the years and in total we have eight vessels on sale and leaseback, when you look at their time of redelivery and those are very special sale and leaseback because there is no purchase obligation on the part of Euronav, which means that at the end of the contract, the owner takes the vessel back and then does whatever they want with it. For us, it's no longer a liability and it's sort of a way of protecting the residual value that we may call residual value risk, they will come at the same time as new vessels arrive. So, I was more talking about fleet management, not so much about scrapping because those vessels when they are redelivered to their owner, they will be 15 years old, but they will be of age category and sort of consumption categories that will definitely be eco but also part of the fleet that used to consume a lot more. So from our perspective, it's definitely fleet management. From a global fleet perspective, I cannot assure you that those ships will be scrapped at exactly the same time, they probably won't be scrapped at the same time.

Understood. Thanks, Hugo. I will turn it over.

Thank you very much.

And our next question will come from Jon Chappell with Evercore. Please go ahead.

Thank you. Good afternoon. Brian, on Slide 9, you mentioned that you're trying to accelerate your move down to the bottom right of this graph. Besides just ordering these new ships with better emissions, is there any other strategic approach you're considering to move Euronav closer to that blue dot more quickly?

It's a good question. We want to emphasize that while shipping has generally declined, there has been significant progress. There are strategic initiatives in place, such as a third of our fleet undergoing dry-docking this year. We invested heavily in research and development last year. This might seem straightforward, but it doesn't fully capture the effort involved. We conducted a selection process that is expected to save us between $300,000 and $400,000, and this could lead to a much larger reduction in CO2 emissions. There are actions we can take to improve our situation, but as you noted, the age and structure of the fleet play a major role. It's important for everyone to understand that shipping can meet its 2030 goals. This aligns with what Omar and you have discussed about the emission challenges facing older vessels. If we secure the IMO vote next month, new regulations will come into effect in 2023 with significant implications. In summary, there are initiatives we can pursue, but the focus remains on the age of the fleet and ensuring we operate the most efficient vessels that will naturally have lower emissions.

Jon, if I can just add a compliment for what Brian said. I mean, obviously, when we take ships on dry dock, we do a lot of things that go beyond the specific survey that we are doing the dry dock for. For the last 2 years, we have developed software and hardware, we have equipped a lot of our vessels, already two-thirds of the fleet with sensors, those sensors are sending a lot of data. We have co-developed with our people, and systems that can crunch those data and the collaboration between the operation onshore and the people on deck has never been better than today, because everybody has the same focus, which is to reduce consumption and therefore reduce the emissions. So there's a number of things that will save you 1% here, 2% there, etcetera, etcetera. But the collection of those percentage is quite significant at the end of the day. So, yes, there are a number of things that you can go strategic, we call them just part of the business. But when you're running a large fleet, all of those things get better returns on investment than when you're running a very small fleet and you have to spend the exact same amount of money on those software or even Brian was talking about paint, well obviously if you're going to paint 27 vessels, the discount that you can get from the supplier is quite significant.

Understood. For my follow-up, I don't want to delve too deeply here, so please bear with me for a moment. When you engage in a sale and leaseback, how does that impact your emissions? You technically don’t own the ship, yet you are still operating it. The reason I ask is that I know the Newton is just one ship, but sale and leaseback transactions are often pursued by companies looking for liquidity, which you definitely aren’t. It seems to increase your breakeven point, making it an unusual transaction when you have over $1 billion in liquidity. I'm curious if this serves a dual purpose by providing some initial cash while also addressing emission concerns.

No, it doesn't help on emissions. And so when you have to report your emissions, people treat sale and leaseback as a way of financing your fleet, so it's still an integral part of your fleet. But as I said, we are redelivering those ships upon their 15-year anniversary. So you’re saving on that dry dock. You make sure that these vessels are leaving your fleet, and when you measure the emissions or the consumption of those vessels compared to the most modern ones, it's really something that you want to see out of your fleet by the time they get redelivered. So we have some that will redeliver at the end of the year, some next year and then the last four, probably in '23. So that's very much the reason why we do sale and leaseback. You never know what holds in the future. The values, which we sold them for were pretty good. I think that the rate we got taking them back, knowing that there is no purchase obligation, so there is a little bit more risk on the counterparty side means that it's still good value for us taking into account everything that I just mentioned.

Got it. All right. Thank you, Hugo. Thanks, Brian.

And our next question will come from Greg Lewis with BTIG. Please go ahead.

Yes. Thank you and good morning, good afternoon, everyone. Hugo, I had a couple of questions. I wanted to explore a bit more about ton miles and volumes. It was reported in late April that U.S. crude exports significantly increased. Considering the market conditions, was there any effect from that rise in U.S. crude volumes on activity around the Gulf of Mexico?

We observed an increase in U.S. crude exports, but there's a lack of stability in those exports. One month may show an increase, and the next could show a decrease, making it challenging to identify a trend. Various geopolitical factors are currently influencing which country's exports are favored. For instance, if China opts to purchase more crude from Venezuela or Iran, this could limit U.S. exports to China. The next few months will be crucial to see how the Biden administration addresses sanctions, which might lead to a reduction in certain shipments. Additionally, there may be a shift back towards barrels with longer ton life. It's important to remember that there is a quality difference between lighter and heavier barrels, and the current situation may not be ideal for refineries procuring these barrels.

Okay. You touched on this, but I’m curious about vessel discrimination, specifically regarding those transporting Iranian and Venezuelan crude. I assume companies monitor the types of vessels involved, particularly those owned by the National Oil Company of Iran. Is there a way to estimate the percentage of vessels involved in these trades? It seems you might expect some of those vessels to exit the market. Can you provide any additional details on this?

I think I will kick that one to Brian, because we do have specific numbers on the age profile of those vessels.

Yes, Greg, we mentioned this on Slide 10. Our monitoring indicates that there are up to 54 VLCCs involved in the Iranian trade over the past 13 months, along with 20 from the Suezmax fleet. This includes about 8% of the VLCCs and 5% of the Suezmax vessels in the Venezuela trade. We've conducted thorough analysis and monitoring of ships that engage in behaviors like turning off their signals. A common factor among these ships is that they are generally over 17 or 18 years old and have recently been sold to private owners. This situation is significant due to the substantial numbers involved. We believe that if the trade is to be legitimized and Iran is integrated back into the market, these ships will have no inherent advantages. Most of them have minimal insurance coverage or poor class society ratings. Therefore, based on what we've observed in other market segments, it’s reasonable to conclude that these ships may vanish from the market if they’re not permitted to trade.

And just to clarify, these are not Iranian NITC owned vessels, these are…

No, no.

A large number of ships have transferred to private ownership since the beginning of 2019, and many of these are included. There are reputable owners who have sold them to others expecting they would eventually go to the scrap yard, possibly after a few trades. This will be discussed further offline. The evaluation is based on independent accredited work conducted on a ship-by-ship basis, so we believe it is well-supported and credible.

Super helpful. Thank you very much, everybody.

Thank you.

Thank you, Greg.

And our next question will come from Amit Mehrotra with Deutsche Bank. Please go ahead.

Hey, this is Kevin on from Amit. I just had two questions. The first question was, Hugo, when do you think the market will be fairly balanced in rates and kind of get back to that $25k to $30k level? And there's obviously like a recovery occurring in demand supply also improved, but when do you think the market will really come into balance?

I was going to ask you the same question. I was hoping you were going to give me the answer. I think that at Euronav we have built all the reputation for not being foolish. I think that this market is extremely difficult to call. You have a number of pieces that you need to fall into place before you see an improvement in the market. We certainly hopeful that if the 2.1 million barrels coming from OPEC, releasing some of the cuts will have a positive impact on our market. It's not going to be enough, it's unlikely to be enough to go to positive territories $25,000 plus. But then you have the winter with more demands, you have the COVID restrictions being lifted in many parts of the world. All of that needs to have an impact. I cannot predict exactly when international travel will completely resume. I cannot predict when Europe will lift their restrictions, like the U.S is doing at the moment. So if you give me those dates, I can probably give you a more accurate picture. But absent of that, I think we need to be patient, we know that it's going to happen, that's for sure. But when exactly is going to happen, it's very difficult to tell you.

Okay, great. And my second question was, what are you seeing in the market in terms of being able to accelerate the fleet renewal efforts? Euronav's in the fortunate position to have capital deploy. Are you seeing more sellers in this market given the more difficult operating environment?

We're not seeing a distress situation, that's for sure. I mean, let's not forget that we are just a few months after one of the best years shipping or banker shipping has ever gone through. So you cannot go from that situation to distress situation over a few months. I think we have picked up some assets for which the value was still in what we call the low part of the cycle. We know how high it can go. We continue to be interested in all sorts of deals, be it second hand, resale of contracts, etcetera. And we together with other people have picked up pretty much everything that was there to pick up in the market. So you've seen those transactions, the market being relatively transparent. Some people were not distressed are interested in selling their vessels simply because when they look at the time they bought them, what they've spent operating them and what the prospects are. And this unknown factor of when is going to turn better or return to better territory, they just don't want to guess and they prefer to take their profit and leave the market. The problem there is that the values are going up way ahead of the earnings. And so it's difficult to meet a bit of a spread on many of those assets.

Right. Great. Thanks for the color.

And our next question will come from Mike Webber with Webber Research. Please go ahead.

Hey, good morning, guys. How are you?

Hey, very well. You?

Good. Thanks.

I wanted to revisit some of the economics related to dual fuel ships and the overall economic case. You mentioned in your presentation and earlier that we've seen asset inflation that outpaces cash flow, indicating the market has shifted into a new phase regarding commodity inflation. I'm curious about the economic decisions surrounding ordering or purchasing secondhand dual fuel ships. With the current varying levels of inflation, does it enhance or diminish the economic case for acquiring that type of tonnage? Clearly, the asset will be more expensive to acquire due to consistent price increases at the shipyard, but there's also a higher level of volatility related to the underlying fuel. So, I wonder how these dynamics currently affect the economic case for those dual fuel ships.

Well, there are many elements as you point out. So the steel is more expensive today than it was 2 months ago, 3 months ago, or 5 months ago, I mean, seeing that there is no limit on the increase, that's why you see also on scrap values. But definitely when we speak to the yard, they're saying that we're selling them, the steel price is increasing month on month. When is it going to stop to maybe the floor to leave because he's coming from the steel industry. And I think your sources are telling you that at some point capacity is coming back.

Yes, indeed, the steel market is mainly now affected by indeed capacity increasing, but not enough for fulfilling the demands, and hence this disruption and this high pricing environment for steel, we see no levels of high as 2008. So very, very high. Normally, the turning point should come …

Because more capacity is going to come online.

Sure.

For the other elements, it seems people are getting a bit too optimistic about LNG being cheaper than current fuel prices. However, they often overlook the cost of delivering LNG to the vessel, as LNG requires refrigeration when in liquid form, making the bunker barges significantly more expensive. Currently, the pricing is not much different from traditional fuel, meaning there’s no real economic benefit to switching to LNG, despite some earlier claims suggesting otherwise. There's also uncertainty regarding future prices influenced by emerging carbon taxes and ETS systems in Europe and potentially elsewhere. The Biden administration is considering a related scheme, and China has already implemented one. These factors will certainly impact fuel prices in relation to emissions. There is still ambiguity around whether carbon levies will be based on CO2 emissions alone or include CO2 equivalents, encompassing all greenhouse gases like methane. LNG has advantages on CO2 emissions but is also associated with methane releases, which are more harmful to the environment. Given this complexity, it's difficult to provide a definitive answer, but these factors must be considered. The flexibility we've incorporated into our ships to accommodate various fuel options in the future is a significant advantage.

Yes, I guess the premise is that you get the immediate visceral reaction and inflation and in the ship price, but the forward curves a little bit slower to react. So near-term, there's a bit of a headwind on those economics. But to your point, you've got the opportunity. You got to build in the optionality for yourself to pick and choose your timing for that. At a curiosity, do you have a sense, you had a comment on the kit required in that conversion process, or I could better term it. Do you mean it's more or less commodity-driven, more sensitive than the underlying ship itself? This is a more service-oriented or commodity-oriented in terms of how you think about that price fluctuating, say, if you didn't make that call a year or two from now, relative to a ship?

No, I mean, and quite frankly, that's more a question of, are you going to put your ship on time charter? Or are you going to play it on the spot, because if you think about the future, let's say, that we project ourselves 10 years down the road, and there are still some conventional ships, eco-ships, obviously, but still conventional using fuels, then you have LNG and probably ammonia at the same time, the market will probably still be a world scale market, and so you will get a certain amount of freight. And then the price of the fuel will be different. And your return will therefore be very different. Your TC will be different. So it's very complex. And that's also why not many people are prepared to dip their toes into the new building market because they don't know what to buy.

Yes, now, it's definitely can't be a tourist in that market for sure. Okay, that does that. I appreciate the time, guys. Thanks.

Thank you.

And our next question comes from Ben Nolan with Stifel. Please go ahead.

Hi, this is Frank Galanti on for Ben, I wanted to follow-up on our reaching lower emission targets. How much can a vessel failing speed affect the absolute level of emissions? And I guess more importantly, the efficiency ratio, it feels like renewing the fleet is going to be a big strategy to keep up with these ever-lowering emission targets. But for older tonnage, can a vessel simply go slower to meet IMO 2030?

So, yes. I mean, speed is definitely a role to play. But in fact, in our industry, we prefer to speak about the load that you put on the engine. So it's a little bit like the round per minute of your car rather than the speed you do. And of course, if you're in the descent with your car, you don't need to push so much on the accelerator to arrive at a certain speed. When you are uphill, you will need to push far more on the accelerator to maintain your speed. So it's a little bit the same in the shipping space. It depends on the currency and depends on the weather, the wind and many other factors. And in fact, that's where the digitalization and the efforts we're doing on the software, hardware front is going to pay off more and more going forward because you will adapt your speed according to those elements but also according to what you expect to have in the next couple of days. So you can go slower because you know that the current is with you or you know that the current will be with you in a couple of days and still meet the contractual time at which you need to arrive at the port. I mean, to be precise on your question. Yes. If they put less load on the engine, they will save fuel. But they will become relatively inefficient. And also, let's not forget that when you take a cargo, you sign a contract. And that contract tells you the speed that you're supposed to as well as the date upon which you have to arrive. So if you're put yourself in the shoes of a client, and he needs to transport a cargo, and most of the industry is a little bit or is very close to what I would call a just-in-time industry. So he wants that cargo to arrive within a certain window, and he cannot afford to take the older ship that will go so much slower that it will arrive a week later. Otherwise, it's going to be too complex for them to juggle between shifts that go out to normal speed and all the sheets that go the slower speed. Because the just-in-time doesn't work like that. I hope it was clear.

Yes, definitely. That's a good perspective. And I guess my second question, I wanted to ask about the FSOs. There's news out yesterday, International Seaways was potentially interested in the vessel at stake. In the JV, is that other half of the contract something you're an avid be interested in buying? And then I guess longer term on the FSO business? Are there other opportunities to grow that those two vessels?

Yes. Before I answer those two questions, I will first tell you and God knows that I'm not going to line on FSO business. But when you are in a merger, I guarantee you, because we've been there with January. I guarantee you that there will be a lot of conversation around the true value of those FSOs. And I think that the market underestimates those values zero, cash flow basis, they underestimate the value. So if you can't reach a value, then what you do is, well, if I realize that value, and it's higher than what you believe it is, then let's make sure that my shoulders get that benefit. And obviously that windows stops when the merger is completed. And so we had exactly the same mechanism when we did the merger with Gener8. If we had sold those vessels to any party at that time, we would have realized, again, that far in excess of the book value than we would have disputed a special dividend. And we would have been authorized to do that. So I think the market is picking up a little bit too much speculation on what is, to my mind likely to happen, certainly before they complete the merger. But that's my opinion. And it's maybe not INSW opinion. Now talking about that, are we interested in buying your partner out? If they give us a discount, we're always interested in good deals. But frankly speaking, I think we're very happy with the partner. And I think both of us have very, very similar ideas around values, so there's not really much we can gain from buying them out. And if we do, something's probably going to do something that we do together. But it's a stable stream of cash flow. So before we sell that, we really need to see a full value. We also need to make sure that our customer is happy with whoever would be interested in buying those units. So it's very different than a vessel. I mean, it's not a decision that you take overnight, and you ask a broker to just market them.

Yes, that makes a lot of sense. Thanks very much for the time. Appreciate it.

Thank you.

And our next question comes from Chris Wetherbee with Citigroup. Please go ahead.

Hey, thanks for taking the question. I guess I want to ask a conceptual question around the financing capacity. For yourself specifically, and maybe more industry-wide as we think about sort of the need to rejuvenate the fleet kind of broadly, at a point where rates are obviously quite low and leverage is arguably running quite high, even for yourself and Euronav, your net debt to EBITDA, along the elevated side as it stands right now. So, I know you have liquidity here. I'm kind of curious how you think that the sort of financing market is available and open and how much liquidity there really is in the market to be able to help support some of these pretty important financing needs that will be occurring over the course of this year, next year and beyond.

Yeah. I may not answer a questionnaire. I will say this. Your net debt to EBITDA is not something that we use in our sector because the EBITDA is too volatile. So if you look at the net debt to EBITDA based on last quarter. Then it's ridiculously high. If you base your net debt to EBITDA last year, then it's ridiculously low. And so, we cannot change the leverage of the company every time we go to cycle. And that's really, really obvious. The more important question that you're asking is, are we going to be able to continue to finance the company going forward? Not so much because of the volatility, because volatility has been there for quite a long period of time, if not forever, but more because the providers of capital are more and more scrutinizing the oil industry and the oil service industry in which we operate. And I think that that's a little bit of a challenge. And what we're seeing now and as Lisa said in her comments, prior to the questions, it's obvious that at least you need to have to proceed and principle as a clause in your own agreement, which means that you can demonstrate to the banks that you're going to continue to follow the trajectory, and you're going to meet the requirements of the IMO 2030. But many other requirements. And believe me, that jargon is becoming very complex, because so many people are sort of trying to translate the Paris Agreement into a different set of KPIs. I think that Euronav is relatively well-positioned, if not very well-positioned to continue to meet those targets. We are ahead of the curve. We are very conscious that we need to renew the fleet. And we do that. And you've seen that we were doing that from a basis of already having a very modern fleet because the majority of vessels are eco-type. And the ones that are not are going to leave the fleet and probably lead the world fleet before we reach 2030. We also think about beyond 2030 years, as we commented earlier and we bind type of assets that can be retrofit can be transformed into something that does not emit anything. I think that part, together with the rest of the ESG, i.e. the social part, and the governance part is going to play a key role in your ability to finance your company. And that's why we've been relatively focused on that. But not because it's a trend, simply because it's in our DNA. And we were always very aware that those three elements were very important even before the terminology was created, like ESG terminology was created. So we feel relatively comfortable where we are. And when we look at the future, we feel that this represents a competitive advantage that we certainly are going to play out in our efforts to grow the company and consolidate the market.

That’s a really good answer, and I appreciate the insight. If we consider the potential competitive advantage for you, do you think that over the next couple of years there will be a significant lack of capital available to finance fleets for companies not as advanced as you in terms of ESG and emissions? We've discussed the availability of financing for years, and while it hasn't drastically changed the industry's ability to add vessels, do you believe it will become a more significant issue as we move forward?

Well, first of all, I certainly hope so. And it's true that we've been talking about it in the past decade, and we've seen it, but on the margin, you're absolutely right. I think that there will be a flight to quality. And that flight to quality will mean that the relatively cheap capital that is available will be taken by the big companies who can demonstrate that they are doing an effort and that it's not superficial, it's really deep, and you can measure it. And as I said earlier, I think it's a lot easier for big companies to go into programs over multiple years to decrease the emissions of their fleets. So I don't believe that we will have so many problems. I don't believe either that people will not find the capital. But I think that the price of that capital, the spread between what we pay and what they pay is going to increase. And it's going to materially increase compared to what we've seen in the past, simply because the providers of capital depend themselves on their investors. And I think that their investors are demanding more and more to see where that capital is going and what it is funding. So if you have scarcity on that end, then it will be reflected in the pricing. And I have no doubt and a lot of hope, that spread will increase and therefore will drive people out of the market because, let's not forget that coupled with the volatility that we have, the pricing of capital is very important in a capital-intensive industry such as tanker shipping.

Okay, that's very helpful. I appreciate the insight. Thank you.

And our next question will come from Magnus Fyhr with H.C. Wainwright. Please go ahead.

Yes, good afternoon. Question for either Hugo or Brian. Going back to Slide 9, I mean, the industry has set out some pretty aggressive carbon emission goals by 2030. But in order to get there, I mean, there needs to start replacing some of these older VLCCs. I guess, since there's about 400 VLCCs built before 2010. When you're talking to the oil companies, and we've seen both Shell and Total award some contracts, but what's the appetite or urgency to start securing some of these non-eco ships or award more contracts for dual fuel vessels?

I think that the trend is on. And this year started the middle of last year. You've seen those companies moving into awarding contracts for which the term, i.e., 6, 7 ages is quite impressive because we hadn't seen that those types of contract for a very long time in what we used to call, long-term contracts was maybe 3 years. So certainly on the longevity of those contracts, what's required in order to motivate the owners to build those ships. You will see more, and let's not forget that those major companies certainly have a vested interest into pushing the LNG story as a transition fuel because they are themselves the producers of LNG, and they invest quite a lot of capital into that. So it will be natural. Then next to them, you have a number of clients who represent, in fact, the majority, who are much more focused on the emissions themselves, and are sort of fuel-neutral from their perspective, i.e., not producers of LNG, and are really awaiting what the potential level of ammonia can give. And I think once the first ships that are dual fuel ammonia, we will hit the water, we will really be able to assess whether there is an interest into taking those ships on time charter and for which periods of time. That will obviously depend on the pricing or the pricing difference between ammonia and LNG, ammonia and conventional fuels. So absent of carbon tax, I don't think ammonia will be a big success. But as I said, there's more and more talks about different types of carbon taxes and different types of mechanisms to equalize the price of those different fuels.

Thank you. I mean, I guess the longer the conversation is going on, the longer we wait to build these ships, the better it is for the industry. I mean, you have a couple of new builds on order. As far as yard capacity, what do you see now as far as ordering new ships, with delivery times, slots filling up with other from the container industry?

On the VLCCs, prompt just a handful of yards that can build those ships, and are to a certain extent interested in building those ships. And they are also the same yard that can build container vessels and gas carriers. We've seen that all the other shipping segments have seen the profitability surge in recent long-term in, particularly the container segment where more than 10% of the world fleet has been ordered in the last 5 months. That's very, very impressive. And that means that the yards we are going to order our VLCC, Hyundai, Samsung, Daewoo, they are extremely busy. The order book is relatively low now on those vessels. There's been a first wave of LNG carriers. The second wave is coming especially the Qataris are going ahead with the idea of building 50 option 50 carriers, I repeat that 50 option 50, and you can understand what it does to the order book of the yard. Let's never forget that the yard they need to retain capability of building different types of ships. If you have nothing in your order book in terms of tankers, then you're losing your know-how and some of the workers will leave. And so they always keep some slots available for building tankers, and for building different types of ships that they're building. So saying that the order book is full for containers until '25, and therefore it's full for everybody until '25 is wrong. But the amount of ships that you can build from, let's say, a 50 vessel capacity per year, you're probably down to 15 vessels per year kind of 50. So, I'm not saying that you're not going to see orders being placed for very late '23 and certainly '24. But I'm saying the capacity to overbuild the order book is very much impaired by the fact that they have received so many orders and are likely to receive many more orders from the container and the energy sector.

Right. And I guess that takes the question on the inflation of the new build cost. I mean, at $92 million for basic deals to see. I mean, what's the profit margin now with steel prices going up? So I would think, what's your view on pricing there?

Well, I think a $92 million is gone to be honest. We are always in the yards. We're always asking those questions. For similar spec of ships that we have announced. Today, the price is the last one that we receive, in fact this week is 99.7. I cannot tell you what the level of profitability is at the yard. I mean, that's probably a very well-kept secret. But you're right. I mean, steel represents 35% of the building cost of the ship. So you can make the math that when those 35% is going up by 20%. Well, guess what? It's a couple more millions. And that gets translated into the price that they can offer you.

Great. Well, thanks for answering my questions.

Thank you.

This does conclude our question-and-answer session. I'd like to turn the conference back over to the management team for any closing remarks.

Closing remarks will be thank you very much for your interest, and it's always a pleasure to be on those earnings calls.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.