Cmb.Tech NV Q1 FY2022 Earnings Call

Good day and welcome to the Euronav Fourth Quarter 2021 First Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. 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 Q1 2022 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 12th of May 2022, and may contain forward-looking statements that involve risks and uncertainties. Forward-looking statements reflect current views regarding future events and financial performance and may include statements concerning plans, objectives, goals, strategies, future events, performance, underlying assumptions, and other statements that 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 going forward. Actual results may differ materially from those forward-looking statements. Please take a moment to read our Safe Harbor statement on Page two of the slide presentation. I will now pass on to Chief Executive, Hugo De Stoop, to start with the content slide on Slide three. Hugo, over to you.

Thank you, Brian, and good morning or afternoon to everyone, and welcome to our first quarter earnings call. I will run through the Q1 highlights before passing on to Lieve Logghe, our CFO, to give more details on the financials with a focus on our balance sheet and P&L. Brian Gallagher, our Head of IR and Research, will then highlight some key trends in the wider tanker market and Euronav’s positioning within it. Before I return to summarize our strategy and outlook. So turning to Slide four and the Q1 highlights, it was a busy quarter for Euronav on many fronts, but we’re particularly pleased with our fleet modernization program, which has a strategic focus with nine vessel transactions during Q1. Indeed, we sold four older VLCCs and acquired two modern ones, and we sold one Suezmax that was jointly owned and took delivery of two brand new super Suezmax that we had purchased last year as they were still under construction but for a defaulted party. This has improved the age profile of our fleet. Freight rates were under pressure for most of the quarter. The onset of the conflict in Ukraine in early March caused an important dislocation in the oil markets, which has proved to be a positive catalyst for tanker markets. This has driven sequential improvement in freight rates across all segments, starting specifically with smaller ships benefiting from the Russian dislocation and gradually impacting larger ones. While freight rates in absolute terms remain disappointing, the direction of travel is encouraging, especially in Suezmax with rates on average at $20,000 per day for the current quarter. I will return later in the call to expand on our thoughts on some of these trends and the outlook, but I will now pass over to Lieve to provide more details on the financials. Lieve over to you.

Thank you, Hugo. Before I start, Hugo has noticed that our financing and market efforts are being recognized, which reflects the hard work of our employees. Turning now to Slide seven and the balance sheet. Focusing firstly on our balance sheet, which remains strong and supports the financing of our expansion platform. Our two-year liquidity runway remains core to our strategy, and while lower than in Q1, it is sufficient to deal with more duration in the current down cycle. Leverage has picked up towards our self-imposed limit of 50%, but our availability of financing remains good. There is also optionality for further fleet recycling readily available, given a buoyant sales and purchasing market. I would now like to dive into our income statement and give more detail on Q1 performance on Slide eight. As Hugo highlighted earlier, while small freight rates continue to sequentially improve quarter-on-quarter, strong cost control has allowed us to progress in Q1 2022, even though we have had to incur some exceptional costs during the quarter related to our corporate background. As we highlighted in Q4, our depreciation approach has been updated, and it was pleasing to bank a capital gain on some of our legacy sales and lease back arrangements during Q1, which we announced in early January. I would like to spend a brief moment on our fuel hedging, which continues to be a net benefit for Euronav. Euronav executes a 100% hedging program to manage the volatility of the company's fuel stock. The paper position, which is booked in the financial result of this quarter for a total amount of negative $16.3 million, is more than compensated by the realized gains on consumption and the unrealized gains on the fuel stock for a total amount of $20 million positive. I will now pass on to Brian Gallagher to run through our current thoughts on the tanker markets.

Thank you, Lieve. On Slide 10, we discuss the tragic events in Ukraine and the significant impact of Russian dislocation on our market. This situation has created conditions that have largely benefited tanker operators. The slide illustrates the changes before and after the Russian dislocation and how we anticipate further developments. The left side shows that Russian exports were previously stable at 4.5 million barrels per day, primarily via seaborne routes before March. While most eastbound oil to Far East markets will remain stable, it will face sanctions pressure. We believe the primary consequence has been, and will continue to be, felt in the western or Baltic ports, which have historically exported between 2.5 million and 3 million barrels per day to the EU. Suezmax and Aframax vessels typically handled this trade, but these ships are now navigating around Europe and directly to Far East markets, thus moving Russian oil over much longer distances. The EU is also sourcing more crude oil from the Middle East and the Atlantic, including Brazil, the North Sea, U.S. ports, and West Africa to replace the lost Russian crude. We expect this trend to strengthen, and Russian production may decline by around 1 million barrels per day. While the sector has experienced slightly lower volumes of crude moving, the transportation distances are now considerably greater. We believe this impact will continue to develop over the summer months, leading to a strong positive effect for the tanker market sector. As shown on Slide 10, we believe the spillover effects are already starting to influence the market and will positively impact the VLCC market. It's essential to note that VLCCs cannot load or discharge at Russian ports, making it largely irrelevant for them, and consequently, the impact is mostly seen in the Aframax and Suezmax categories. Catalysts have played a significant role in our market over the last quarter. Moving to Slide 11, we can see additional short-term positive signals. Four key factors addressed in Slide 7 indicate that U.S. crude exports have increased by over 1 million barrels per day, or 41%, since mid-January due to a mix of increased production, strategic reserves release, and attractive pricing that has bolstered exports. These barrels generally require long-distance transport and support a favorable outlook. On the recycling front, we've noticed an increase; in April, six Suezmax vessels departed the global fleet, which is noteworthy on a monthly basis, following trends in the Aframax sector, which has historically recycled earlier than VLCCs and Suezmaxes. Besides, the uptick in crude volumes recorded in April was the highest monthly figure in two years, adding to the positive indicators. On the bottom right, we see the impact of the Russian dislocation - Russian ships accounted for about 7% of the Aframax fleet and just under 3% of Suezmax, which is enough to tighten those markets, leading to rapidly rising freight rates on specific routes. Although VLCCs aren't directly affected, we observe a substitution effect as they are utilized to replace lost barrels from Russian to European ports from the Middle East and Atlantic. Now, looking at Slide 7, we explore the medium drivers positively influencing our largest crude tanker market. This slide outlines the immediate future, emphasizing a considerable special survey program for all tonnage, especially those ships undergoing their 20-year special survey in the VLCC and Suezmax sectors, which represents about 4% of each category over the next 12 months. This is crucial for owners weighing their options of remaining in the sector versus capitalizing on the attractive current scrap prices. The right side of the chart shows a lack of new VLCC orders; we haven't seen orders since early July due to various reasons. Notably, building a new VLCC currently costs around $150 million. To achieve a 10% economic return, an analysis suggests freight rates need to be around $46,000 to $47,000 per day to justify that investment. With high steel prices and full shipyard schedules, it's unlikely that this entry barrier will decrease soon. Lastly, I want to highlight a critical milestone for Euronav, the introduction of our decarbonization pathway on Slide 13. In summary, our decarbonization strategy comprises two major stages. By 2050, we aim for net zero emissions, aspiring to achieve that even sooner. From now until 2030, our focus will be on reducing energy use and investing in future technologies, followed by a shift from 2030 onward to cleaner energy adoption and scaling up that technology investment. Our goal is to reduce CO2 emissions intensity by 40% by 2030, a significant milestone that aligns with our net-zero ambition for 2050. We believe this objective is attainable, and we are confident in our ability to exceed that timeline. Euronav's capabilities in managing the energy transition and decarbonization position us among the best in the tanker sector and the broader shipping community. We encourage all interested parties to check our thorough presentation from last week, available on our website, along with a transcript and replay. I will now turn it over to our Chief Executive, Hugo De Stoop, for his concluding remarks. Hugo, the floor is yours.

Thank you, Brian. The Euronav platform is functioning well and is well equipped to face the next stage of the cycle with high-quality assets, a robust balance sheet, and the appropriate liquidity levels. We have addressed, and will continue to address, our fleet age profile, as well as the positioning of that fleet. We've also laid out how this platform will decarbonize and meet the challenges of the energy transition, which we have outlined recently in our ESG event. We believe that our platform will deliver enhanced returns for our stakeholders going forward. Now let's focus on our positioning in past cycles on Slide 16. Euronav continues to operate its business in a disciplined and focused manner, applying high governance standards and a methodological approach. As both Brian and Lieve have highlighted, we have been proactive in positioning ourselves for the next stage of the cycle. It is essential to keep in mind that we operate in a cyclical industry. Consolidation opportunities often present themselves, but timing is always key. The chart on Slide 16 illustrates the VLCC resale price and the one-year time charter rate, both of which are vital variables within our markets. Historically, we have engaged in consolidation transactions similar to this point in the cycle, including the acquisition of the Maersk crude tanker fleet eight years ago and our merger with Gener8 four years ago. We are now proposing to merge with Frontline, advancing a significant consolidation transaction aimed at delivering increased shareholder value as we enter the next stage of the tanker market. This exciting development and merger between two leading companies in the space send a strong signal of our confidence in the sector. Moving on to the summary and outlook on Slide 17, we see another upgrade driven by the catalysts emerging from the tragic circumstances surrounding the Russian oil situation. We believe this will sustain changes in ton miles, as Brian highlighted, transitioning from Russian barrels to those from the Middle East and the Atlantic. Additionally, Russian barrels are being transported over increasingly longer distances than ever before. In other developments, oil demand and supply present encouraging data points with slight but consistent upward trends. Vessel supply appears well underpinned given the order book is at 25-year lows while the global fleet age profile is at 20-year highs. Thank you for your time and attention. I will now pass back to the operator for your questions.

We will now begin the question-and-answer session. And our first question will come from Jon Chappell of Evercore. Please go ahead.

Thank you. Good afternoon. Hugo, I understand there are sensitivities about what you can say regarding the proposed Frontline merger. But maybe you could just help us understand the next steps. I know the AGM is next week; what does the term sheet mean versus an actual closed deal? What steps need to be taken to get the term sheet to an actual proposed deal? Is it just clearing the AGM and getting the board on board, so to speak? What are the other building blocks to bring this to finality?

Yes, thank you, Jon, and I appreciate that. There is a limited amount of information we can share on this call, but you are correct. The first step is to go over the AGM next week and then have the board reconfirm the merger. After that, we will update the market with the next steps, timing, and additional details we’ve been working on, but we can only do that after the AGM.

Got that. And then I know this is a stock-for-stock deal, and you still have a fair amount of liquidity, but are you kind of in a strategic holding pattern until there's more clarity on how this plays out? Or can you continue the rejuvenation of the fleet either through sales or purchases until you get to the finish line on this deal?

No, absolutely. We are not resting on our laurels. It was a very busy quarter in terms of vessel transactions, as I explained in my prefatory remarks. We have more opportunities in the pipeline indeed. The two companies are operating independently until the merger occurs, and we will continue to work hard both in the spot market and on the fleet rejuvenation front, as we believe now is the right time for such actions. Values are already ahead of the market, as you've seen, with very strong numbers for the vessels that we sold. We are identifying opportunities at what we believe are attractive prices, especially when considering elements of consumption. The four vessels that we sold were previously operating at high speeds typical of their age, while the two VLCCs we purchased are designed for current speeds and are very economical with their latest eco-designs. Our VLCC fleet is relatively modern, but our Suezmax fleet needed rejuvenation, which is what we accomplished last year when we purchased two VLCCs and ordered three more, giving us a total of five. All of this is part of our strategy, which will not stop; on the contrary, we believe that more is merrier, and hopefully the market will appreciate this.

Okay. That's helpful. My follow-up question for Brian, the diesel shortage issue seems to be gaining momentum, and clearly, you Vlcc and Suez carry crude. Have you thought about the secondary and even tertiary fallout of these global diesel shortages and how that may impact the crude markets?

Yes. As you know, Jon, we typically operate in weeks and months, which is how we see our markets, whereas capital markets generally look at immediate impacts. We try to convey that the Russian dislocation still has a long way to go; we are in the early stages from a shipping perspective. Regarding the diesel aspect, we're experiencing extreme elements of this dislocation. You're observing it with very high rates, and we expect to see some spillovers. However, the arbitrage may not last forever; we already see it affecting VLCC rates as Aframax and Suezmax cargoes are merging into VLCC cargoes. We must remain patient, as clarity will emerge over the coming quarters regarding diesel.

Okay. That's very helpful. Thank you, Brian. Thanks, Hugo.

Thank you.

The next question comes from Frode Morkedal of Clarksons Securities. Please go ahead.

Thank you. Hi, guys. First question regarding the proposed merger with Frontline: is it correct that the shareholders will need a 75% majority for the merger to proceed?

It's a little more technical than that. There are various ways to approach a combination, which is what we are currently working on. For a full merger on day one, a 75% majority is necessary among the votes presented at the special meeting. However, there are other structures that could require a lower percentage of votes.

Okay, acquisition again.

Unfortunately, I cannot provide much more information at this time, but you will need a simple majority to control the company, which is 50% plus one share.

Yes, understood. Second question is on the market. Yes, it seems that Russian oil exports have held up fairly well. However, according to the International Energy Agency, major oil trading houses are expected to hold older transactions with Russia, starting May 15th. Do you foresee any immediate impact on the tanker market from that winding-down process?

It’s fair to say that we should differentiate between sanctions and an embargo. Sanctions are enforced measures like those we've seen with Venezuela and Iran, intended to cover all worldwide trading activities by using currency as a leverage, such as the dollar. An embargo means you cannot export or import into the EU and the U.S. The sanctions and embargo set to take effect towards the end of the year will be significant. We've seen an initial impact on the smaller sizes, particularly the Aframax vessels, which spills over into the Suezmaxes. We would expect continued support for the entire tanker market as lesser efficient ships switch to smaller vessels, followed by larger ships carrying Russian oil over longer distances around the world, particularly to the Far East and China.

Great. Thank you for the color. That's it from me.

Thank you.

The next question comes from Thijs Berkelder of ABN AMRO - ODDO BHF. Please go ahead.

Yes. Good afternoon, gentlemen and lady, of course. Three questions regarding the merger announcement from last week's presentation. You mentioned again that significant synergies are expected. Can you provide a rough quantification of what significant means for you? Is that $10 million per annum, $30 million, or $100 million per annum? Secondly, could you clarify and possibly quantify your expected cost and revenue synergies? Lastly, can you explain your reasoning behind the merger ratio? Why one Frontline share for each Euronav share rather than something like two Frontline shares for each Euronav share?

Thank you for your questions. We will provide more information following our AGM. We do expect significant synergies across various categories. On the revenue side, this is primarily related to utilization rates; having a larger fleet increases our flexibility in triangulation and other logistical options. We will provide more precise estimates, although there will always be an element of uncertainty. We anticipate minimal G&A synergies due to the differing structures of our two companies; Frontline outsources some services, while Euronav is more vertically integrated. We expect some operational synergies from economies of scale in procurement, allowing us to negotiate better prices due to our increased volume, particularly on major items like fuel and other essential services. Importantly, we believe the combined platform will be very attractive to capital providers, especially on the debt and bond sides, potentially leading to an improved credit rating. While it's premature to present specific numbers, we are actively working on these estimates to present to our shareholders ahead of the merger proposal. The merger ratio reflects the negotiations based on the net asset value of both companies. We start with assets, mainly ships, and debt to arrive at the NAV, which serves as the basis for negotiations.

Okay, clear. Thanks.

You're welcome.

This concludes our question-and-answer session. The conference has now also concluded. Thank you for attending today's presentation. You may now disconnect.