Cmb.Tech NV Q3 FY2021 Earnings Call

Good day and welcome to Euronav’s Third Quarter 2021 Earnings Conference Call. Please note this event is being recorded. 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 Q3 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 4th of November 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 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 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. Hugo, over to you.

Thank you, Brian. Welcome to our call today, wherever you are. In terms of the agenda, I will first run through the Q3 highlights and make some comments about what we believe will be seen as a turning point of this tanker cycle. Brian, our Head of Investor Relations, will then look at the current themes and catalysts in the tanker market before I return to discuss more details of the strategy and outlook for the tanker sector. So, turning to Slide 4, and the highlights page. There were more lowlights than highlights during Q3, which was arguably the most challenging freight market in the last 20 years. This was driven by two key factors: a lack of commercially available barrels, even though OPEC+ stated their cuts, it didn't translate into enough barrels available for the independent fleet, such as Euronav. Furthermore, the illicit trade around sanctioned Iranian barrels took away what would have been otherwise barrels required to be transported by the regulated fleet. The market also suffered from an oversupply of vessels. However, this has started to be eroded as we exited Q3. We have continued to use the low freight rate environment to accelerate dry dockings and have now completed 23 year-to-date, whilst another four will be done by year-end. That's around 40% of our underlying fleet. However, the market has improved strongly since early September. The improvement in rates has come from a lower level of freight rates, but this sustaining improvement has sequentially improved each week over the past six to eight weeks. This has been driven by a number of factors and catalysts such as a greater number of barrels available for exports in both the Arabian Gulf and the Gulf of Mexico; an improved demand for oil, particularly fuel oil, as some additional demand came from customers able to switch between various fossil fuels and willing to do so because of the elevated gas prices; and finally, increased recycling activity in all tonnage. This gave a better balance between fleet supply and available barrels for exports. In recent earning calls and presentations, we have consistently stressed the constructive factors for the tanker market in the medium term. Factors such as fleet age, order book ratio, and incoming emissions regulations. It is encouraging as we move into a seasonally stronger trading period to see that the market is gaining traction and rates moving higher. All of this is good and goes in the right direction, but a return to profitability will require continued improvement on the oil demand side as the winter progresses. Turning to some of the financial aspects, our leverage stands at 48.7% and is supported at the end of September with $791 million of available liquidity. We were pleased to refinance our $200 million Nordic bonds at an improved coupon in early September, allowing us to ensure we continue to have access to alternative sources of capital, such as the Nordic bond market, where timing looks positive already as yields have risen steadily since. Despite the loss during Q3, we will distribute a $0.03 dividend per share as per previous loss-making quarters. With that, I will pass over to our Head of Investor Relations, Brian Gallagher, to walk you through some market highlights. Brian over to you.

Thank you, Hugo. I'm now going to run through some of the catalysts we've been seeing over recent weeks and months that Hugo alluded to earlier. The encouraging element of this feature is the fact that this has not been an exhaustive list. Other factors also apply beyond those highlighted on Slide 5. Recycling, for instance, September alone saw four VLCCs and Suezmax that were removed from the global fleet, which is a 1% reduction in the fleet size alone and has been followed up in October with another three VLCC equivalents that have exited the fleet. The huge squeeze in fuel prices, such as natural gas during Q3, has also driven some switching for both economic and security of supply reasons. Estimates vary, but there’s a consensus of between 0.5 million and a million barrels per day of additional crude demand coming from this fuel-switching source. This one-off factor is a very strong benefit to our marketplace. Thirdly, it's been frustrating in recent months that production rises in global crude have not always translated into a like-for-like increase in export barrels, but this feature has also started to change starting in late Q3. For instance, we saw in September that 550,000 barrels a day alone were exported from the Persian Gulf, and that has been followed up with nearly 700,000 barrels from the same region during October alone. Hopefully, further recovery of oil demand is expected to continue beyond this winter seasonality, as we see increases in areas like jet fuel continue their trajectory towards pre-COVID levels of consumption. Finally, and as a fifth point, at some point, the IEA argues the inventory build will have to begin. They themselves forecast that stocks will start to rebuild starting in January as global inventory in terms of oil and crude around the world is way below the five-year average to the end of 2019. Inventory builds have been very positive for tanker markets and provide further encouragement to our view that the market has now reached the trough. Moving on to Slide 6, these short-term catalysts are supporting a more general improvement in both the crude demand picture and also the supply dynamics. Slide six combines the trajectory of the IEA forecast for oil demand over the coming five quarters with that of the proposed OPEC Plus tapering projections. Unlike other industrial and shipping sectors, the late cycle nature of tanker shipping means that we have yet to regain the pre-COVID levels of consumption that other sectors have already enjoyed. But this slide illustrates clearly that the anticipated progression in the market recovery in both supply of oil and demand for oil should continue to drive tanker markets going forward. Euronav has the largest platform available to invest in this and is ideally placed to benefit from this recovery, as Slide 7 illustrates. This slide highlights the robust and yet diversified platform that we have built to navigate what we believe is the upcoming and next stage of the tanker cycle. Our large fleet has a core focus of 37 VLCCs, which are amongst the youngest in our competitive group at 6.7 years of age, on average. We're supported by multiple contractor revenue streams, which for 2021 will drive our cash breakeven rates to a very low but highly competitive level. Our strong balance sheet has allowed us to simultaneously invest in the future. We're expanding our core fleet, for instance, by 15% with eight anchored vessels that will start delivery in January of next year, and yet we retain a very conservative leverage ratio. Our fully integrated platform has been supportive of shareholders as well. We've returned over $1.2 billion of cash dividends since we listed in 2004. And alone, in the past 21 months, we've returned $2.04 per share by dividends and buybacks. Our platform will provide investors with a very strong exposure to the future development of the tanker market, as we now share a bit more detail on Slide 8. Slide 8 focuses on the free cash flow generation per share from Euronav and when we compare ourselves with our notable peers, it’s clear that returns will be highly competitive for the upcycle metrics, particularly our $50,000 and $75,000 per day. Euronav on that basis will then provide the highest potential return from the platform that we've built over many years and which we looked at in a bit more detail earlier. That concludes a very quick run through our market view and Euronav’s positioning. I'll now pass it back to Hugo for a summary.

Thank you, Brian. Our traffic lights on Slide 11 show a double upgrade of oil demand and oil supply. Demand has continued to grow albeit remaining below the pre-COVID levels of consumption. Production growth of crude continues steadily and now importantly is converting into an increase in exports. This is probably due to the fact that all inventories across the globe are now below the five-year average. Our other variables, while ton-miles and vessel supplies are unchanged, but here too, there are some positive signals. For instance, Q3 was the lowest quarter for tanker orders in 25 years with a yard full of orders from other shipping sectors and incoming environmental regulations that came with no surprise. The medium-term picture for vessel supply is particularly encouraging. As I said in my introductory remarks, we're not out of the woods yet, but given how low the freight rates were over the summer, we welcome the rebounding and hope to reach profitability levels in the not-too-distant future. We are of the view that Q3 will represent the trough of the cycle and our platform is very well positioned to benefit over the coming quarters from improved tanker fundamentals and the short-term catalysts as they gain traction. That concludes our remarks. Thank you for your attention. And I’ll now pass it back to the operator to take your questions. Thank you very much.

Thank you. We will now begin the question-and-answer session. And the first question comes from Jon Chappell with Evercore ISI. Please go ahead.

Thank you. Good afternoon. Hugo and Brian.

Hi, Jon.

Hugo, as the tone has shifted from maybe cautiousness to a consensus optimism, that things can only get better from here, it seems like some arbitrage opportunities have opened, meaning the time charter market seems to be moving up, while spot continues to ebb and flow around pretty weak levels, and also secondhand values have lifted as well. So, when you think about your next 12 months, understanding your backdrop of being optimistic, but we don't have a 100% line of sight. Have you thought about creating or taking advantage of some of those arbitrage opportunities by getting rid of some of the older ships as the new vintage comes on next year and/or putting some more ships on charter just to raise your breakeven at the beginning of the cycle?

Well, I mean, thank you very much for this very nice summary of where we are, because that's exactly where we are and where we feel we are. I think that fleet rejuvenation is always on the agenda. Now remember, that towards the end of the year, we will potentially lose four VLCCs because they are on a sale and lease back structure. With no purchase obligation at the end of the charter, they will reach 15 years, and we will have the opportunity to redeliver them just prior to their 15-year survey, which was by design. So, at the end of the day, the ships that we acquire at a similar time will compensate for it. So, if we don't do anything else, we are almost one-for-one in terms of fleet rejuvenation. Now in this market, you have to be opportunistic. So, you have to look at whatever you can do to create value for shareholders. That's hopefully what we do. And there are opportunities to extract more value from the market. As you said, we're looking to take advantage of arbitrage. We are seeing indeed increased activity in the time charter market, but I believe that’s only because charters are looking at a market that's on the rise. They want to lock in what they believe is great value and obviously being on the opposite side, which we believe is probably too low compared to what we could expect.

Okay. That makes sense, Hugo. And then Brian, one for you, the slide that lays out the short-term factors that are gaining traction. I mean, listen, I'm in the same boat as you guys, but have been continually disappointed in the pace of this recovery. COVID setbacks aside, what are some of the risks that can continue either to derail or delay the recovery that you've laid out here with all these other catalysts?

Yes, it's a fair point, Jonathan. As always, I think there are probably three key risks outside of COVID. Firstly, I think the recovery has been a bit patchy. We've seen some really strong numbers over the last three months now in terms of exports from the Arabian Gulf, but clearly that's not been followed by other parts of the OPEC Plus coalition. And that's probably down to production simply not being able to be raised in certain parts of the OPEC consortium. So, I think that is probably one risk that we don't get this uniform rise. A second risk is clearly going to be from OPEC Plus itself in terms of how it behaves and where it wants to see things develop. The last risk is obviously the oil price. We are reaching pretty elevated levels of any highs, and there’s been some headlines about how high the price is. We could always encounter demand destruction at these sorts of levels in the mid-80s. So yes, if we continue to see a higher oil price, that could also choke off some of that reasonably fragile demand recovery. So, it's not guaranteed. But I think the point we wanted to make is that pushing against those caveats is that we expect the seasonality will be slightly diminished as we get through the winter, simply based on the recovery we are witnessing. We also believe, as we've said in the last couple of calls, that ton miles will be a story for 2022. You're absolutely right that it is patchy, but there are also some very strong fundamentals that we are trying to reach from 2022 to 2023 onwards. The encouraging thing is that we didn't have to think hard to come up with these catalysts because we're seeing them every day over the last eight to ten weeks. But you are right to highlight that it isn't guaranteed, and some of these are a bit patchy. But we'll continue to focus and be driven, because we're seeing, as a run rate today, single voyages and round voyages being delivered at $20,000 a day plus, as a live number shown over the last few days. But the trajectory has continued since we started putting these numbers together.

Okay. That's great. Thanks so much, Brian. Thank you, Hugo.

Thanks, Jon. Bye-bye.

Thanks.

The next question comes from Randy Giveans with Jefferies. Please go ahead.

Team Euronav, how is it going?

Hey, very well, Randy. How are you?

Good. All right. So, I guess Brian, I know you've historically included some commentary regarding the Iranian fleet and maybe the potential impact of additional Iranian barrels coming to the market there. Wasn’t in the presentation this time, but any updated commentary on that situation and maybe the market impact of a new deal?

We have been focused on the situation and are gathering data from reliable sources, including UNAI. The potential benefits appear to be structural; we estimate there are about 45 to 55 very large crude carriers that are over 18 years old and are not actively engaged in commercial trade, coinciding with high scrap prices. Recent news indicates that the Iranians plan to engage with the Europeans on November 29th. If this leads to an agreement, we anticipate a positive impact from the older tonnage exiting the fleet, which represents around 5% of the global fleet potentially leaving quickly. On the operational side, it's widely accepted that there are still between 100,000 and 1 million barrels per day not in commercial use, which should logically be returned to players like us and our competitors. The Iranian fleet has a timeline of about nine months to resume full operations following the lifting of sanctions by President Obama some years ago. Recent data shows that Iranian trade with China has actually decreased. We don't expect this trade to grow. However, the situation of barrels being withheld by OPEC Plus and the delayed recovery from COVID-19 over the past 18 months makes a potential return of 1 million barrels a day quite significant for us. Thus, we foresee both structural benefits from older ships leaving the fleet and operational benefits as these barrels come back to the commercial market. The numbers haven’t changed much, but there appear to be strong factors that could positively influence the market in 2022.

Sure. Yes, no, that makes sense. Thanks for the color on that. And I guess secondly, Hugo, a big investor has taken a pretty large position in Euronav, right? So, there have been some rumors about Euronav possibly being acquired. So first, any comments on that possibility? And on the other hand, have there been any internal discussions about Euronav actually being an acquirer of a smaller player at this low point in the cycle?

Yes, I knew this one would spark interest. No, I was going to say I was surprised with the first thought pushed in. But that's probably because we had a one-on-one conversation with some of you prior to the call. So, you are absolutely right that this is an investment by John Fredriksen, who has used this as a vehicle to make investments, and it's not about acquiring shares of Euronav like we’ve seen in the past with other companies. The tanker shipping market is small, we come across each other all the time, we talk a lot to each other, and there's nothing unusual there. What people need to understand is that for John, it’s very difficult to add more to what he has in Frontline. So, we are very happy that he has chosen our platform to invest because he is bullish on tankers in general. I would say to all the investors on this call, if you have this kind of charismatic and knowledgeable person about the tanker market investing in Euronav, that’s a great investment. As far as consolidation is concerned, we set up this platform 15 years ago to pursue consolidation in the markets, and that strategy has not changed dramatically. We were on a panel with Frontline the other night and we both stated that what needs to be prioritized is the smaller players. Those are the people that are sort of hurting the market simply because they lack the capacity to gather the information that we do, being present in the market all the time. That should be our priority. We think that the market will consolidate further. We would like to be a participant in that consolidation, with a priority on consolidating smaller players. However, if you look at what we have done in the past, it’s more about seizing opportunities rather than deciding who to acquire at any given time.

Got it. No, that all makes sense. And thanks for the additional color there.

Thank you.

The question comes from Chris Tsung with Webber Research. Please go ahead.

All right. Good afternoon. How are you doing?

Hey, very well. Thanks. And you?

Great, thanks. I wanted to ask a bit about Slide Number 6 and the IEA demand forecast is also a bit down in Q1 before recovering. So, I wanted to get your view, do you think the tanker market recovery would follow this albeit with a slight lag? Or do you think it could possibly come sooner?

Yes, I'll take that one. So, we're just taking data points. The reason we're trying to emphasize that slide is that we want to show that the catalysts we’re witnessing clearly will be one-off, as you mentioned earlier, regarding some of the fuel switching; that's not going to be sustainable for more than this winter period. These are the official agencies giving the demand numbers from the IEA, and they expect to see less seasonality going into 2022, as we achieve that demand recovery. We are looking for the final building blocks, particularly less transportation, which accounts for about 55% of the end use of crude oil, not being reflected in increased demand for jet fuel; hence, refiners are using more crude as a raw product. So, what we're showing is a trajectory through the next four to five quarters, subject to the caveat that COVID doesn't return, there is a trajectory because we have to remember that the crude tanker market is very late-cycle compared to other shipping sectors. We haven't regained pre-COVID levels of consumption yet. So, we’re in a recovery phase that is being supported by tight supply and strong demand catalysts.

All right. Thanks, Brian. And just maybe one more from me. On the successful B30 biofuel trial, will Euronav have to choose other vessels, or is it limited to just the one?

We've done several trials and we continue to do so. The reason we are able to do this is that we have access to a biofuel priced at a very thin margin above VLSFOs in the market, because of specific subsidies available for European companies in the Port of Rotterdam. The reason we are interested in testing those fuels is that we believe they will be part of the fuel mix in the future. As we look towards decarbonization, if they can be priced similarly, then the choice is clear. Every time we shift fuels, we must be cautious and test it progressively over a short period, initially over the longer term. The final stage will be testing over the full duration of the voyage. That's exactly what we're doing. We’re very happy to be at the forefront of those trials, and we do that in cooperation with the fuel producers, sharing the results with them. That's very much how we are thinking about it.

Got it. Thank you.

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

Hey, good morning, guys. I wanted to start with something that Brian, you and I have talked about a little bit. It relates to the sort of the dividend policy and recognizing that at the moment there’s not a lot of free cash flow. Hopefully, as you guys lay out, that will improve over the course of next year. You guys are at a little bit of a tax disadvantage on the dividends given the dual listing. But the share price is now a bit higher. So, maybe the relative incentive to do share repurchases versus dividends is not as clear as it was. So, just thinking about how you anticipate addressing your dividends once cash flow is higher as we move forward?

Thank you for your question. It's important to understand that while we may face some challenges in Belgium, there are ways for foreigners to address or reclaim those issues. We don't view ourselves as at a disadvantage; it's a matter of completing forms to either avoid upfront payments or reclaim them, which is fairly simple. We've updated our website to help with this. For Belgian citizens, local taxes apply, similar to U.S. citizens paying taxes in the U.S. This is more of an administrative matter. The balance between share buybacks and dividends will depend on the share price relative to NAV, and we aim to use both methods to return capital to shareholders. Our experiences in 2020 helped us understand the impact of different return types and allowed us to reinvest in updating our fleet. We're entering a phase where initial measures from the MOD site will be implemented, and we're receiving positive feedback from clients interested in chartering lower-consuming vessels. As we renew our fleet, we must be cautious and consider whether to speed up that process. Our approach to capital allocation is flexible, taking into account all options, including reducing debt. Currently, our leverage is conservatively managed.

Okay. That's very helpful, Hugo. And then for my follow-up, just hopefully pretty straightforward: you said that, I think, 27 vessels were being drydocked this year, which is 40% of the fleet, and some of that's been brought forward. So, for next year, what’s the expectation here? How much less should we assume?

It's about – yes, Lieve?

Yes, I can help with this. We are currently making the budget, so we are planning to have about six dry bulk vessels scheduled for 2022.

Perfect. Thank you. And by the way, similarly to what we did this year, if it turns out to be a fantastic year, we can delay dry dockings because we have a window of six to eighteen months if we push to dry dock our vessels, especially those less than 15 years of age. So again, this is our plan for the budget, but we will be very dynamic in our thinking.

Yes, your mouth to God’s ears there, Hugo, I hear it. So, thanks.

Yes.

The question comes from Quirijn Mulder with ING. Please go ahead.

Yes, good afternoon. Can you hear me?

Yes, we can.

Okay, perfect. My question is about scrapping. We saw nice numbers in September, I think, four plus four. Can you update us on what you think is happening in the last quarter of 2021, and maybe in the first month of 2022, given that there was always a delay between, let me say low price and scrapping?

Yes. So, you are hitting the nail on the head there, Quirijn. There are a couple of factors. I mean, 2020 was a fantastic year in terms of earnings. After experiencing a booming year, it’s very difficult for some operators to shift from a good year to a very bad year and decide to stop their vessels. There’s always a time lag between a good year and the decision to scrap. Additionally, some people were willing to pay a premium for very old tonnage, using those vessels until their end of life in illicit trades. They were paying $1 million, $2 million, or even $3 million over scrap price for those older ships, which is lucrative but illegal, and certainly not an option for a company such as Euronav looking to transport Iranian oil. We believe that the U.S. is looking into this more closely than they have in the past. More importantly, there's been so much tonnage brought to that trade that there is now oversupply. The last few ships presented for sale or scrapping had no bids outbidding the scrap price, so they went for scrap. This signals that the appetite for these ships and these trades has vanished. Though there will always be a number of older vessels doing that, most of the fleet engaged in these practices is aging and the return of certain Iranian barrels to the commercial trade could substantially impact our markets positively. We believe Q4 and Q1 are going to be very interesting in terms of numerous units leaving the market.

What is the current number of tankers being used for storage, since as long as they are for storage, there is no concern about the status of the vessel?

That's correct. They can get a different type of certificate that’s much lighter, so they do not need to spend that amount of money. However, there are very few tankers used as storage units at the moment. We are generally talking about the 15-year or 20-year average, so you always have a number of vessels. In that number, you see a lot of the Iranian fleet, because they can choose their ships to trade in any way. They need those ships as a buffer for their oil production before it is exported to illicit channels. As Brian mentioned earlier, the minute we see sanctions being lifted or another policy applied to Iran or concentrating more strictly on how they trade oil, all of that should positively impact our market, and we are hopeful that something may happen soon.

Thank you.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Hugo De Stoop for any closing remarks.

Well, thank you everyone for attending this Q3 earnings call. We hope that the next one will bring improved market conditions and better news, as we noted earlier. Thank you very much, and I will talk to you next time.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.