Cmb.Tech NV Q2 FY2023 Earnings Call

Good day, and welcome to the Euronav Second Quarter 2023 Earnings Call. Please note, this event is being recorded. I would now like to turn the conference over to Brian Gallagher. Please go ahead.

Thank you. Good morning, and afternoon to everyone, and thanks for joining Euronav's Q2 2023 earnings call. Before I start, I'd like to say a few words. The information discussed on this call is based on information as of today, Thursday, the 3rd of August 2023, and may contain forward-looking statements that may 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 now 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 website at www.sec.gov and on our own company website at www.euronav.com. You should not place undue attention or reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement, and the company undertakes no obligation to publicly update or revise any forward-looking statements. Actual results may differ materially from these forward-looking statements. Please take a moment to read our Safe Harbor statements on Page 2 of the slide presentation. I will now pass on to our Interim Chief Executive and CFO, Lieve Logghe, to start with the conference slide on Slide 3. Lieve, over to you.

Thank you, Brian, and good morning or afternoon to wherever you are, and welcome to our call. I will run through the Q2 highlights and financials before passing back to Brian, our Head of Investor Relations and Communications, to provide some further wider market thoughts. I will return to summarize the outlook. The current year continues to confound tanker market convention. It would be more usual to be discussing Q2 in the context of a slowdown in freight activity and refinery maintenance programs. However, the freight market for Q2 was very similar in outcome to Q1. This included a spike in rates towards the end of the quarter, reflecting a relative tight dynamic between supply of vessels and demand for crude movements. What these results also underline is the value of the Euronav platform and its striking ability to harness this market dynamic for the benefit of shareholders. This was our best ever Q2 operating performance outside the COVID pandemic. I'll say a bit more about operating leverage in a minute. With a new Supervisory Board in place, a strong balance sheet and good visibility on very positive medium-term fundamentals, Euronav investors stand to continue benefiting in dividend terms. The Q2 dividend of $0.80 per share reflects the Board's confidence in the Euronav platform and the strength of the current and upcoming tanker cycle. Turning now to the financials in more depth. This slide reflects the strength of the Euronav platform financially, operationally and strategically. Operationally, the operational leverage is reflected in strong returns with a net profit at $161.8 million similar to Q1 results. Financially, balance sheet leverage is at 47.5%. The finance team has further boosted our liquidity with a new facility to $742 million. Last but not least, strategically, the Euronav platform continues to grow. During the first half, we have added 3 brand new VLCCs with maximum optionality to deal with the challenges of fueling tankers going forward. Last month, we took delivery of a new Suezmax and look forward to adding 4 more such vessels in the next 12 months at the start of what we have consistently said over the past year is what we believe to be a multi-year upcycle for the large crude tanker markets. With that, I will now pass it over to Brian to give some further thoughts on the current market cycle.

Thank you, Lieve. The tanker markets continue to be very dynamic and also quite positive. The forecast for oil demand has steadily increased over the past 9 to 10 months, as shown on Slide 8. The IEA has made consistent upgrades to this forecast, which has supported the tanker markets along with improved ton mile development. On the left side of the slide, you can see that loadings west of Suez, heading to the Far East, have increased at the expense of loadings from other directions. In simple terms, crude is traveling much further than before, which is increasing demand for shipping, even with consumption and production levels remaining similar. On Slide 9, we discuss a project we’ve been involved with in recent months, specifically the salvage operation of the FSO Safer off the Yemeni coast. Euronav has provided a VLCC to the UN to remove 1.2 million barrels of oil from this site. This careful operation is ongoing, and Euronav continues to support and provide staff for the broader salvage effort. We are proud to be part of this initiative and hope for a successful conclusion in the upcoming weeks. On Slide 10, we address an ongoing concern for oil market and tanker investors: Iran. We highlight recent speculation regarding Iran's potential return to a more normalized oil market, which we believe could have a significant impact on tanker markets. As shown in the chart on Slide 10, Iran has increased its production to a five-year high of around 1.5 million barrels per day, most of which is being exported by the dark fleet. If Iran were to re-enter the global economy and be allowed to export crude using commercial vessels, this would create approximately 1.5 million barrels per day of export opportunities currently unavailable to commercial players like Euronav. The right side of the chart indicates that Iran has previously produced up to 3.5 million barrels per day. Iran is one of the few nations capable of quickly ramping up production. While it's uncertain, any increase in production would raise net supply for global consumption. The shipping impact could be substantial, benefiting from the current 1.5 million barrels per day that can't be accessed, and any uptick would greatly benefit tanker markets. Some of this shipping would come from Iran's own fleet, but Iran's potential return could be a significant positive for tanker markets and should not be overlooked. With that, I will turn it back to Lieve for any concluding remarks, and I'll focus on the traffic lights. Lieve, over to you.

Thanks, Brian. Q2 was the second-best quarter for rates since 1990. In VLCC terms, it was the seventh best. This gives context to how well underpinned and strong our markets are. Demand continues to remain robust supported by ton mile growth. OPEC cuts are beginning to gain traction but the impact needs to be seen against stronger seasonal demand, which we expect from later this current quarter. We've made no change to our traffic lights, but anticipate a positive seasonal trading pattern to emerge for this winter. So to sum up, the Euronav platform is in robust shape. We are positioned for further growth and have a balance sheet to support further strategic opportunities as they arise. And in the meantime, the platform is delivering returns to shareholders via dividends. All of this means that we can look to the future with confidence. And with that, Brian and I will be very happy to take your questions. So I'll hand it back to the operator for the Q&A.

And our first question comes from Jon Chappell from Evercore ISI.

Lieve, first question for you. I'm sure the answer is, it's a Board decision on a quarterly basis. However, noteworthy that the payout ratio has moved up to 100% this quarter, not just within the context of your liquidity being so strong and the market being as robust as it is, but also with the new Board members' intel. So should we read this as being a one-quarter anomaly and we'll take it as it goes? Or is this maybe the view of the new Board that given the market strength, the payout ratio could be above the 80% threshold?

Hi, Jon. Good to hear you. So indeed a very good question. We don't know if it's a one-off, but the Supervisory Board clearly has made a decision based on our current LTV, which is 30%. And they don't see bad days coming. So based on that the Q2 payout ratio was 100%. If this continues, it's something that we have to see and have a look at in Q3. But as you rightfully mentioned, in the past it was an 80% payout ratio. And we will look at what Q3 brings. Absolutely, it's like you say, it's the Supervisory Board decision. We propose but in the end the Supervisory Board representing the shareholders who are taking the decisions, and there you have our independent board members, but also our independent board members who are representing the minority shareholders. So it's a common decision, which is taken each quarter.

Okay. For my follow-up, Brian, as it relates to the back half outlook. So these Saudi cuts, it seems like they're finally biting from an output perspective, but maybe not so much on the tanker rates. How much of this is what's called substitution as you laid out kind of on Slide 8? And how much of it is more of the fact that just the demand is improving at a greater pace than people had expected and there's probably a little bit of inventory build ahead of the winter in the Northern Hemisphere?

I think it's both of those, Jon, but I think we factor in another situation, which is we felt there's been some buyers of the dark trade who've been warned off. There's been some sort of a crackdown now and then in China and in India that they've come back into the commercial fleet as it were, so they're buying barrels from more conventional sources and being shipped both from commercial players like us. They were not trading with us, obviously, we've not been doing those trades anyway, as you know. But those buyers of the dark trade, I think has been a third factor which is offset. So you've had ton miles and those 2 factors that you mentioned along with this sort of people jumping across the fence from the dark trade. So I think that's really negated almost all of the cuts that we've seen so far.

The next question comes from Amit Mehrotra from Deutsche Bank.

This is Chris Robertson on for Amit. How are you doing?

Hi, Chris. Good to hear you.

Yes, you as well. The question for either of you. This is just around the cash breakeven levels currently for the company. So if you could just walk through that.

Yes. So I'm the number cruncher here. So just the numbers, to give you an insight into this, Chris. So our Suezmax cash breakeven for the time being is $16,000 and VLCC is $19,000. So this is what we are currently having as a cash breakeven. The P&L breakeven was in the presentation, $18,000 Suezmaxes and $23,000 for VLCC.

Okay. Great. That's straightforward. Brian, this might be a question for you. So over the past few days, we've heard some of the product tanker companies talking about their aging fleet, especially as it relates to LR2s. And they've mentioned a few times about 15-year-old LR2s potentially going dirty and coming into the crude trade at some point. I just wanted to get your thoughts around that. And is there any worry from your end? I know you guys don't operate in the Aframax segment, but is there any worry on your end that that supply could be coming?

Not unduly. I think we've always had a strong view that we've never really understood the view that there'll be a lot of jumping between the two segments. And of course, it's quite costly, and operationally, you still have an asterisk against your name when you do flip between the two sectors. And there's always some of the product guys that talk about more than the crude guys. We don't really see anything of that. I still think, as you rightly said, we are not involved in the Aframax. You've got this potential another leg of growth for Aframax coming from the Canadian export market with some of the pipelines potentially opening there on the Pacific Coast. So, no, it's not something that keeps us awake at night, far from it. And we've always felt that any switching between the products and crude is reasonably marginal and reasonably specialized. And the trends are too great really that we're seeing to give us any sort of concern on that front.

The next question comes from Chris Tsung from Webber Research.

Good afternoon, Lieve and Brian. How are you?

Good. Thank you.

Good. Thank you.

I wanted to just ask about your fleet renewal. You guys have a few 17-year-old Suezmaxes. Like, how do you think about that in an era of firming asset prices?

Here, we will continue on our strategy. So indeed if there is an opportunity, we will grasp it and indeed continue the pathway we had previously indeed selling and then taking opportunities for newbuilds to come in. For your information, you've read, so we still have 4 to come on the water Suezmaxes, often the Suezmax which has been delivered in July. So we continue that strategy going forward. And if there are opportunities, we remain interested, and absolutely will propose this to our Supervisory Board.

Okay. Fair enough. And just as my follow-up. I noticed the G&A fell significantly. Is that more of an outlier? Or how should we think of it on like run rate going forward?

Yes, good question. Indeed, we touched upon it also last time. Our G&A is still a bit loaded with what we call corporate cost fee. In the first quarter, we still had those legal costs, which were kicking in, and also in Q2 we still have some extra load there. But indeed, it goes into the good direction. It's absolutely a very clear focus for us to have that cost under control as much as possible. But good shot.

The next question comes from Chris Wetherbee from Citigroup.

This is Matt on for Chris. If we could just go over to the red light, green light chart and just thinking about the demand for crude, specifically as you think about the state of the global macro playing out. Just wanted to get your sense of the puts and takes about the remainder of 2023 regarding any incremental changes that you might see specific to China as they attempt to emerge from a little bit of a weaker economic period. I know you noted in the past that China is a crucial swing factor. So I just wanted to hear any thoughts there as well as how Iran could play into the scenario.

Yes, that's a good question. Regarding China, we believe there are three key factors at play. Firstly, we don't just see Chinese demand as driven by GDP figures, even though that remains significant. Secondly, while it's difficult to quantify, China is still making strategic purchases as they build their reserves. Lastly, there's substantial refinery expansion ongoing in the country, which relies on crude as a feedstock to produce diesel and other goods for the global market. This diversity in China's approach provides a certain resilience. However, we cannot accurately predict if there will be a significant slowdown in their activity. We haven't observed signs of that yet and have confidence in these three factors. Many of us were surprised by the resilience of the global GDP over the last six months, a trend documented by the IEA, which has been consistently upgrading its forecasts since November. Recent weeks have also seen several investment banks revise their forecasts upward. Regarding Iran, we aren't dependent on that situation, but it keeps resurfacing. We were caught off guard when it was mentioned recently due to its potential for rapid production growth and subsequent exports. If there were a deal, it could potentially allow Iran to re-enter the market. We wanted to highlight this because there are limited sources to quickly increase oil supply, which could become crucial in the context of inflation management. As for timing and implications for Euronav and similar commercial players, any additional barrels from Iran, if they become available for shipping, would amount to a potential 1.5 million barrels per day that are currently unavailable to us. It's worth mentioning, though we have limited visibility on this situation. Nonetheless, we felt it was important to bring it up since it has recently gained attention.

I really appreciate that. Following up on the Iran comment, is there any timeline you are considering for when that potential benefit could become available? How would that specifically impact Euronav?

No, no. We've got no timeline. I mean, I don't want anyone on the call to think we've got a hotline to Mr. Biden or anything. But no, it's more to flag the potential changes that could happen. It's obviously the fact that there are very relatively few sources that can be tapped to immediately increase the supply of oil. And with the war against inflation, that could become a very important sort of factor. In terms of timelines on backgrounds to that, no, there's no sense of when it would happen, how it would impact on Euronav and other commercial players in the quoted space like ourselves is that you're opening up barrels, which are currently not available to us. If they are able to be shipped by Iran, then that's 1.5 million barrels per day of potential market which is completely blocked away from all of us on the commercial side at the moment. That's the reason to flag it. But look, it's a black swan if you like, a positive one, but one, which we don't have any greater visibility than anyone else. But we felt it was worth flagging given it's been a story which has sort of risen out of nowhere earlier in Q2.

The next question comes from Omar Nokta from Jefferies.

I just wanted to ask about how things are kind of operating from a corporate standpoint. Clearly, from the results today, things look like they're running quite well, but just wanted to ask given all the changes that have been taking place with Hugo gone and the new Supervisory Board in place. Has there been any changes in how the business Euronav is running day to day? And really, how involved is the new Board with management's decision-making?

So Omar, good afternoon. I want to emphasize that the current team's focus remains firmly on the strategy that's been consistently implemented in the past. This clarity is important not only for everyone at Euronav but also for our stakeholders. The new Supervisory Board is bringing a positive dynamic; it’s both professional and constructive, challenging us on costs and fleet renewal. They want us to excel in comparison to our competitors, which creates a strong focus on our future direction. This focus has contributed to our robust results, even exceeding expectations. Overall, I think this is a very positive aspect to highlight.

That's helpful information. I was considering the strategic direction of Euronav. You've mentioned the strategy regarding asset disposal and potential new builds. I'm curious if you think the restructuring of Euronav is inevitable, or can the company continue operating as is? Is there a broader strategic vision that might be revealed in the upcoming quarters or months that outlines Euronav's future plans? Based on your discussions with management and the Board, how would you describe the strategic landscape for Euronav in the near term?

So, Omar, seeing from that perspective, and I can understand the question because this is, I think, a lot of the shareholders and stakeholders here having that question on the top of their mind. But here, I can confirm to you that apparently, currently there is absolutely no change in strategy. We run the vertically integrated platform it's delivering, and this is where we continue our journey. And in case, I could imagine if there is a change, we will be informed and everything will be announced directly to the market. But for the time being, no changes. We continue and we enjoy the current upcycle. This is very standing for. And I cannot say more here than we continue the journey with the teams we have and the strategy which is in place.

No, that's helpful. I just wanted to hear your perspective on this sensitive topic. I'll pass it over.

The next question comes from Frode Morkedal from Clarksons Securities.

Could we discuss the impact of Russian crude exports? How are the cuts from August affecting the market? And what's your outlook for the situation going forward?

Hi, Frode. It's Brian here. As we mentioned earlier, we've noticed some evidence that during Q2, buyers who previously engaged in dark trade or sanctioned trade from Russia and India have started participating in the commercial market. They've engaged with commercial tanker companies like us and procured barrels likely from the Atlantic more than anywhere else. As Jonathan noted, there may be a substitution effect happening here, but this occurred before any significant reductions in production and exports from Russia. This trend is only getting stronger. We are not involved in that trade, as you might expect. Given the current pricing of crude against the euro, we anticipate that pressure will continue. We expect the dark fleet will have to handle a greater share of the diminishing trade—much of which they have been managing on their own—due to inefficiencies. We believe many of those players will form partnerships temporarily. Consequently, we anticipate a relatively muted impact on commercial players like us for now, unless the production cuts become extremely severe, which we don't foresee. Therefore, for the time being, we think the impact on us will be fairly limited.

Okay. Are there any other reasons for the weaker Aframax and Suezmax rates you've seen now? How do you see those relative to VLCCs? They used to trade with a premium to VLCCs, right? And do you expect they'll come back with that premium or is that now behind us?

Over time, we expect that the medium-term market structure and profile will return, with VLCCs likely taking a leading role. VLCCs have been gaining traction as a sub-sector, increasingly participating in STS trades and transferring oil to China or India. We anticipate the development of long-haul trades substituting from the Atlantic to the Far East, which should help reestablish the market. However, we will continue to see pockets of activity. The Aframax segment seems well positioned, particularly due to new growth opportunities from Canada. The Suezmax market will likely find itself in between these segments. It’s important to note that we don’t expect a quick return to an orderly market; we believe it will take another 6 to 12 months for that to occur. Nevertheless, we are confident that VLCCs will reassert their dominance, probably more so in 2024.

The next question comes from Ben Nolan from Stifel.

I believe there has been an expansion of Corpus Christi's export capacity that allows for greater loading of VLCCs, which reduces some of the reverse lightering dynamics. I'm trying to understand if you have thought about the impact of this. Will it attract more VLCCs and benefit the market, or will the inefficiency of reverse lightering negate that?

No, I think it's the same as before, Ben, in particular, from where we were, if you go back to sort of the ancient times, sort of 2017, '18, when there was like an arms race between each of the locations down there with Corpus Christi being one of the most prominent ones. We think it's sort of reestablishing itself now as a theme. I mean, we're consistently now in the high 4s, low 5 million barrels per day of U.S. exports. So now we think it's going to become a new growth road. And the good news for the commercial sector and in particular in those quoted companies is that, as you know, it's a reasonably focused market, and the players that can enjoy that market are those big commercial players like ourselves. So, no, we feel that's a trend that's really beginning to reassert itself again. And as we know that the marginal exports or marginal production of U.S. crude is being exported. So, no, it's a bit of a reheating and we actually did a paper in this in one of our annual reports, so I think it was in 2017. A lot of that was obviously taken away with COVID, but a lot of those things we worried about, Ben, we are relevant today again.

Okay. As it relates to the Advisory Board, I appreciate it. There is some uncertainty, and we'll see how it unfolds. Considering the fleet and acknowledging that it's business as usual, is it reasonable to assume that in the near term, there are unlikely to be any significant changes in the fleet mix aside from the new buildings, as you are not actively buying or selling anything? Is that a fair assumption?

Ben, again, I have a bit to repeat myself. Our Board members, and this is really a plus, have a strong understanding of our business. And they have an interest in maximizing value for Euronav and all its investors including themselves for sure. But here we are confident that if we come with good files, good things that there will be ears and eyes on a decision taken. So from that perspective, also, I only can reiterate what I'm saying is that having the Supervisory Board currently that if we come with good topics, they are absolutely supportive, and they'll contribute to the net bottom line.

And the next question comes from Thijs Berkelder from ABN AMRO - ODDO BHF.

Yes. Congratulations with the beautiful performance, especially you, Lieve, showing well as Interim or ad Interim CEO. Can you maybe give us a bit of an update on how we should look at the procedure of finding or appointing a new CEO and whether you are part of that procedure?

Thijs, good afternoon. The interim position is still in place. We are feeling a bit more confident due to the positive results and the efforts of the entire Euronav team. There's currently no urgency in either direction. The team is focused on maintaining the platform and delivering results for our shareholders. From that standpoint, there's no immediate urgency, and we'll see how things develop. We need to allow some reasonable time for all stakeholders to adjust and understand what may come next, but there’s nothing pressing on the horizon.

But it's not that, let's say, recruiters have been hired to find someone else or so?

Not that I'm aware of, Thijs. I think here, not that I'm aware of, Thijs. No.

Okay. Then a follow-up question on potential changes in strategies. Is it possible or happening already right now that you propose FSO CapEx in other FSO classes than VLCC or Suezmax?

Thijs, to be clear on this, we are Suezmaxes, VLCCs, so there we have absolute expertise. So you could imagine that if we go with files that this will be primarily oriented towards Suezmaxes, VLCCs. You never know that there is an interest in doing something else. But for the time being, we continue with our expertise that we have with the teams and which is very much focused on Suezmaxes and VLCCs.

The next question comes from Sherif Elmaghrabi from BTIG.

I wanted to ask about forward bookings, almost half of Q3 has been fixed at about $45,000 for scrubber-fitted VLCCs. Can you remind us how much of your VLCC fleet has scrubbers? And is there a program to outfit the rest of the fleet over time?

So currently, I see it as one Suezmaxes as well as the VLCCs. We will have 20 scrubber-fitted vessels on a total of about 70. So this is currently what we target. So a good diversification, well balanced from that perspective. So all our newbuilds have scrubbers. And we do indeed for some VLCCs who are below 10 years old, we have done some retrofitting with the scrubber. So in total 20 on the total fleet for the time being.

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

Thank you, Jason. So thank you to give me the opportunity to thank Brian and everyone to stand by my side for this call. I would like to thank the whole Euronav team for the quarter, which has been run very, very well and looking forward to what comes next. And I would like to thank all the listeners to this call for their interest in Euronav. I think as a concluding remark or conclusion, I can say the Euronav platform is well positioned to continue its journey for all its shareholders and taking advantage of the upcycle. Wishing you all a very good day and hear you next time. Thank you. Bye-bye.

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