Earnings Call Transcript - CMBT Q3 2022

Operator, Operator

Good day, and welcome to the Euronav Third Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I’d now like to turn the conference over to Brian Gallagher. Please, go ahead.

Brian Gallagher, Head of IR

Thank you. Good morning and afternoon to everyone, and thanks for joining our Q3 2022 earnings call. Before I start, I would like to say a few words. The information discussed on this call is based on the information as of today, Thursday, the 3rd of November, 2022, 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 that are not historical facts. All forward-looking statements attributable to the company or to persons acting on its behalf are especially qualified in their entirety by reference to the risks, uncertainties, and other factors discussed in the company’s SEC filings, which are available free of charge on the SEC’s website and on our own company’s website. You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement, and the company undertakes no obligation to publicly update or revise any forward-looking statements. Actual results may differ materially from these forward-looking statements. Please take a moment to read our Safe Harbor statement on page two of the slide presentation. With that, I'll now pass over to our Chief Executive, Hugo De Stoop, to start with the content slide on slide three. Hugo?

Hugo De Stoop, CEO

Thank you, Brian, and good morning or afternoon to everyone. Welcome to our call. I will go through the Q3 highlights before handing it over to Brian Gallagher, our Head of IR, who will discuss some key trends in the winter market. Afterwards, I will return to summarize our strategy, our position in the current cycle, and our outlook. Turning to slide five and the Q3 highlights, in the capital markets, there is currently a focus on private investments. In tanker markets, particularly in the larger VLCC segment, we finally saw an increase in freight rates, which has driven us back to profitability. Since July, the substitution of VLCC ships to replace lost seaborne barrels from Russia to the EU has gained momentum. The Suezmax sector has faced more significant disruptions since April and has continued to see rising rates. Meanwhile, VLCC activity has moderated over the third quarter. Notably, the impact on our financials tends to be delayed as we operate six to eight weeks ahead of the calendar. As shown on slide five, the Q4 numbers to date better reflect the trends we have witnessed since summer. At Euronav, we have been active and sold three older vessels this quarter, reinvesting that capital into two new eco-Suezmax contracts scheduled for delivery ahead of winter in two years. We now have eight vessels under construction that we believe will be delivered at the beginning of a multi-year upcycle. This has been a strong operational quarter as we believe the cycle has shifted and is expected to continue for the foreseeable future. Moving on to the financials on slide seven, it was a relatively quiet quarter in Q3 without any exceptional items. Our leverage and liquidity remain robust and consistent with prior guidance. We are actively pursuing additional sustainable financing, which we anticipate finalizing soon. Our two FSOs are now fully consolidated for an entire quarter, marking the first time since acquiring 50% of our partner on June 7, 2022. Slide seven also highlights the substantial progress made year-to-date in fleet renewal, with ongoing strong interest in secondhand tonnage. I will now hand it back to Brian Gallagher for insights on the current market cycle.

Brian Gallagher, Head of IR

Thank you, Hugo. A key driver of the oil marketplace over the last six months is about to hit its last but very impactful phase in our view. This is the dislocation from the Russian crude flows. The European Union has already diverted about 1 million barrels per day of seaborne imports from Russia and replaced them largely from Atlantic and Middle Eastern locations. We expect another million barrels per day of the EU-bound exports from Russia to follow a similar pattern over the next quarter, ahead of the December 5th deadline set by the EU to ban all oil shipped from Russia to Europe. This will mean that the sale in the world will travel approximately three to four times the distance it previously did. We will continue to see the benefit of substitution trades from Atlantic to Middle Eastern oil being taken on a seaborne route to the EU. This latter substitution trade will particularly benefit the larger custom sizes such as VLCCs. This trend has been very pronounced since July. The chart on slide nine illustrates both the distances involved and also the detail of the dislocation of these crude barrels. This brings us to the additional crude demand that we anticipate to see for fuel switching on slide ten. Slide ten is a slide we've used before, but it continues to have a very strong message with the current crude transportation market. While volatility in energy prices has weighed recently, we continue to see the relative price of oil being cheap in comparison to other core energy sources. All of the fuel prices illustrated on slide ten are represented on a per oil barrel equivalent and therefore are completely like-for-like. Oil is therefore relatively cheap in terms of a source of fuel at the moment and power, and consequently we believe that we will not only see fuel switching during this winter, but we will also continue to see this trend well into next year. The impact of all of this on slide eleven shows the impact on shipping itself. The dislocation and increased demand for oil is clearly illustrated on slide eleven. This shows the amount of oil in transit, shown in the dark blue line, and the one-year time charter rates for VLCCs shown in the light blue line. Oil in seaborne transit is back to levels we have not seen since the very short spike in March 2020, just ahead of the COVID pandemic kicking in. As ton miles continue to be a key feature of the dislocation, we anticipate that we will continue to see growth in oil in transit on seaborne routes on similar patterns. In summary, we remain very positive on the current trends and expect to see a sustained and strong winter period. I'll now pass back to our Chief Executive, Hugo De Stoop, to provide more medium-term thoughts about where we are in the cycle and our current outlook from the traffic light perspective. Hugo, over to you.

Hugo De Stoop, CEO

Thank you, Brian. I'd like to sum up before we go to Q&A with two very general thoughts. Firstly, Slide 13 gives an indication of the parallels but also the differences we see between this current cycle setup and previous sustained multi-quarter upcycles in the tanker market. First, the valuation of the tanker sector in capital market terms is cheaper than what we have seen in previous upcycles in 2004, 2014, and 2019. Second, the average age of the global fleet is much higher than what we have seen in previous cycles. Finally, we are in a very different era in terms of the order book expressed in absolute numbers or as a percentage of the fleet in the larger tanker space. Those different aspects give a very supportive and constructive medium-term outlook. So moving on to the final slide, which is Slide 14. That allows me to focus on the traffic lights we give at the end of every quarterly earnings call. Once again, we felt the market background deserves another upgrade. This time, we are upgrading to green. The last phase of the Russian dislocation means we expect to see further increases in ton miles, which bodes well for the tanker market this winter and for the coming medium term. You will have noticed on Slide 14 that our traffic lights are largely green. We still believe there is upside potential as all of the recent upcycle has been achieved without any benefit coming from Chinese consumption or oil demand growth. So, we still believe there is further growth and potential for upgrades to our traffic lights. Thank you for your time and attention. With that, I will pass it back to the operator for questions.

Operator, Operator

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

Jon Chappell, Analyst

Thank you. Good afternoon. So first question, Hugo, on liquidity. I am curious if that is pro forma for all the vessel sales that have been done plus the down payments on the new builds? And second of all, there’s additional financing under discussion. Can you give us any sense of the magnitude of that and the terms given that you mentioned it potentially going on to green financing?

Hugo De Stoop, CEO

Yes, absolutely. Very good question. So indeed €355 million seems to be a little bit on the low side for Euronav. That is before we get cash from the vessels that we are selling at the moment. For those three vessels, in Q4, we expect to receive approximately €160 million, so that will be added to our liquidity. Additionally, the new facility which is €377 million that we have a term sheet for currently in documentation, we expect that about €330 million of that will also be added to our liquidity, as it is replacing a facility that has already expired. This explains why €355 million seems a little bit low. Overall, we expect to return to about €800 million in liquidity, and that is before operating cash flow comes in, which we expect to be significant and robust in Q4.

Jon Chappell, Analyst

Okay. Yes, great. That's exactly why I asked. The second question also has to do with capital allocation now specifically. Clearly most of the other publicly traded entities have returned to the dividend model. I know the VLCCs have lagged and we're really not going to see the true impact of the VLCC recovery until the fourth quarter. I am just wondering how you are considering capital allocation and, kind of a twist on a question I've asked in prior calls, are you somewhat restricted on what you can do with capital, especially regarding dividends, until there’s some finality to the potential Frontline merger?

Hugo De Stoop, CEO

Yes, absolutely. I mean when you do a merger and you calculate the economics, namely the ratio, you are usually freezing the dividends. Otherwise, the economics are changing. So what we have in the agreement is that we can continue to pay a minimum dividend of €0.03 that we pay every quarter—that's in the books. However, we are now moving to a market that should allow us to return more capital to the shareholders. And we will do so only after we have the tender offer closed, and that's obviously the same for Frontline. They paid a dividend in Q2 that was also agreed and calculated in the ratio. But we should hold off on paying dividends until the tender offer is closed, which we expect to be in Q1. Therefore, there might be a little lag of a quarter, and perhaps not a full quarter; maybe one or two months, relative to the calendar and when we typically pay dividends.

Jon Chappell, Analyst

All right. Well, great title on Slide 13. And thanks for your time.

Hugo De Stoop, CEO

Thank you very much.

Operator, Operator

The next question comes from Amit Mehrotra from Deutsche Bank.

Chris Robertson, Analyst

Hey, gentlemen, good morning. This is Chris Robertson on for Amit. How are you?

Hugo De Stoop, CEO

Fine, yes.

Chris Robertson, Analyst

Good, good. I wanted to ask about the expansion of the TI pool. Do you expect that will allow greater rate outperformance, or how will that change things operationally?

Hugo De Stoop, CEO

Operationally, I'm not sure that it will change much. What we are trying to achieve in the pool is to have a central point of contact for our clients. At the moment, the market is very fragmented. So if you are a broker representing a client, what you do is look at the different databases that exist out there, and some are more comprehensive than others. You try to spot the vessels that can perform the cargo you are in charge of finding transportation for. When you have a pool that represents 65 and tomorrow, hopefully, 85, potentially 90, and maybe one day even 100 ships, it simplifies the process for many. As far as the participants in the pool are concerned, we aim to optimize the voyage among the different vessels and also find the appropriate vessel for the appropriate trade we are doing, since there are non-eco ships and eco-ships, with and without scrubbers. Every single voyage has its particular properties. Therefore, it’s important to have a large pool of different vessels that can handle those different voyages. It's a mutual benefit for both the operator and the clients in that respect. If we play the game of triangulation, then normally, indeed, and that is one of the goals, your net results should improve, but not at the detriment of your clients, which is a significant benefit for both parties. You pay the same, and we reap the benefits of size.

Chris Robertson, Analyst

Got it. Yeah. Thanks for that. Follow-up question. On Slide 9, you discuss the Russian dislocation. I just wanted to ask about the Baltic loading ports—how many of those can accommodate VLCCs? Are there going to be ship-to-ship transfers associated with the dislocation of Russian crude?

Hugo De Stoop, CEO

Very few can accommodate these, and the ones that can usually cannot load to the top. So yes, there is typically when the oil is moved further than it used to be. Europe was a close destination. As we have explained in the introductory remarks, we are talking about three, four, potentially five times the distance. In such cases, it makes sense to lighter oil into a VLCC. So far, we have seen a few operations doing that, and we expect this to pick up dramatically in the winter. The reason we expect that is that in the winter—here, I'm not only talking about the Baltics, but much more about the northern parts of Russia—you need ice-capable vessels. When you look at what exists in the world, we are talking about a few Suezmax and many Aframax that are ice-capable, meaning they can break the ice, load the oil, and then go to their destination. However, if you use those ships for long voyages, say, over to Africa and then to India, China, and others interested in that oil, they will not be available for that distance because of ice. So we expect those ships to lighter into VLCCs in non-ice waters and then go back directly to the required port. That's why we are very optimistic about VLCCs in general.

Chris Robertson, Analyst

Got it. Yeah, that makes sense. So in other words, they will be traveling longer distances and it will take longer to load them because of this lightering.

Hugo De Stoop, CEO

Correct.

Chris Robertson, Analyst

All right. Yeah. Thanks, guys. I appreciate the time.

Hugo De Stoop, CEO

Thank you.

Operator, Operator

The next question comes from Omar Nokta from Jefferies. Please go ahead.

Omar Nokta, Analyst

Hi. Thank you. Good afternoon, Hugo and Brian, I just wanted to ask about the latest new buildings that you have for the two Suezmaxes you ordered recently. You got a nice delivery slot for the third quarter of 2024. Those seem to be a bit earlier than what we thought could be available—were those option slots that you had, or could you provide context regarding how you got those slots? And what does the picture look like from here if you were to place a fresh order today?

Hugo De Stoop, CEO

Well, very good question. In fact, we hesitated to make those remarks in the press release because it is crucial for people to understand the current picture about shipyards in general and that one in particular. We are very much attached to the quality that Korea can deliver, and we closely monitor the Korean yards. The three big ones—Hyundai, Samsung, and Daewoo—are completely full until 2025. When I speak about 2025, I mean Q2 for maybe one or two ships, but it's mostly Q3, Q4. They continue to receive orders from other segments. In particular, LNG is keen to continue ordering for obvious reasons, while the container sector is slowing down in terms of orders. To return to the tanker space, that’s the picture. We also examine what's going on in China, and it’s very similar; I'm not even talking about Japan, which is in worse shape, with delivery dates pushed to the end of 2026. Daehan, which is not part of the big three, but previously belonged to Daewoo, has good quality. We have built a solid relationship with them. Earlier this year, we took two Suezmax that were resale contracts we did last year. That development fostered our relationship with them, as we could act swiftly—perhaps between the time they were in trouble with their existing clients and the time we took that contract in hand, there was maybe two weeks. We were generous with our payment terms, which was appreciated by the yard. So on this occasion, there were two options from product tankers that the ship owner could not lift for various reasons, and they became available. The first party they offered those slots to was Euronav, and we seized the opportunity because we thought the delivery time was very interesting. We haven't announced the price, but I can assure you that it was also very attractive compared to what we could see being offered by other yards for what we believe is the same quality. So all in all, we believe it’s a very good deal. Whether we will see more of those is a bit difficult to say. I know that people are trying to explore options on the container side to see if they could be transformed into tankers. However, most studies indicate that it is challenging, as converting from product tankers to crude is relatively simple, but container to tanker or dry bulk to tanker requires significant changes. Therefore, we do not expect many such opportunities arising for us or for others, and we think the next opportunity will arise in 2025, for either Suezmax or VLCC.

Omar Nokta, Analyst

Thanks, Hugo. Very helpful. I just wanted to follow up on the structural notation of these two Suezmaxes. You mentioned they are being designed to be LNG capable down the line after delivery. I mean, you're also evaluating making them ammonia and methanol ready. Is it conceivable that you'd be able to go back to the yard after delivery and say, okay, let's put on the LNG component? Then maybe in a few years later you could bolt on ammonia or methanol as that becomes more prevalent. Is it conceivable that you'd be able to have like a tri-fuel type of vessel with these Suezmaxes that could use bunker fuel, LNG, and then maybe down the line also have the option for methanol or ammonia? Is that realistic, or is that just too far-fetched?

Hugo De Stoop, CEO

From a technical point of view, everything can be done, especially on a tanker because we have a lot of space on our deck. If you look at the ship, the deck is relatively empty. There are the three different lines for unloading cargo, whereas dry bulk ships have hatches that need to open. So the space is more restricted. Completely different for container vessels, as every single space is utilized for loading containers. So from a technical perspective, yes, you could envision that, but from a cost perspective, it would be entirely suboptimal. We are discussing different types of fuel. Methanol, for instance, will remain liquid at ambient temperature, while LNG will not. On top of that, some of those products are more corrosive than others, meaning that the piping you need must use specific types of metals. The engine fueling is critical because ammonia, for example, is more toxic than any other fuel we are currently considering. You must ensure everything is completely water-tight, as you cannot afford any leaks, no matter how small. Thus, from a CapEx perspective, I don't think you will see a different type of fuel or tri-fuel as you named it. A dual fuel option—that's the typical approach today, plus one of the new fuels—could be an initial step, transforming the ship first into a conventional ship, then adding methanol later, for instance. Additionally, you could then move to LNG or ammonia down the line. That option is also plausible, but it will come at a cost. You need to ensure at that point in time when you make the decision, it makes sense to transform those vessels a second time regarding the fuel they consume.

Omar Nokta, Analyst

Got it. Thanks, Hugo.

Operator, Operator

The next question comes from Chris Wetherbee from Citigroup. Please go ahead.

Chris Wetherbee, Analyst

Hey, thanks. Good afternoon, guys. Maybe I apologize for what could be an obvious question first. I just want to clarify the opportunity for the long haul from Russia from an ice perspective. Is that a potential seasonal situation, or do you see that being persistent beyond the first quarter as we think about 2023?

Hugo De Stoop, CEO

Part of it should be permanent, while part of it should be seasonal. However, the season is forcing it to occur, if you see what I mean. There is no choice; you need to maximize the icebreaker usage. To the extent that the weather and temperatures are that low, they are compelled to lighter. Long-term, it continues to make sense from an economies of scale perspective; that's why VLCCs are typically used for long distances, Suezmax for shorter distances, and Aframax for even shorter distances. That's the name of the game to a certain extent. So, definitely in the winter, there’s a lot of potential for the long-term.

Chris Wetherbee, Analyst

Okay. That's helpful. I appreciate the clarification there. Then maybe considering demand sensitivity. Referring to your red light, green light chart, it seems the only one that isn't quite as constructive is the oil demand. I would like to get your perspective on whether you think this economic dynamic will be as impactful to the overall market as it has been historically, given all the other potential constraints regarding both capacity and also the ton-mile multiplier here. I want to understand if we are concerned about the macro, but we also wonder if it’s going to be as impactful as it has been historically?

Hugo De Stoop, CEO

Well, that's a great question, and to some degree, I’ll leave it to your colleagues to provide the answer. It's almost a gut feeling, but we are very straightforward in our approach to analyzing the situation. The biggest factor we also mentioned in our introductory remarks is the demand from China. That demand is not yet back to pre-COVID levels, and that’s the minimum we should anticipate returning as we speak about China. We believe that once these restrictions are lifted, China will continue to show growth. You know from a GDP perspective, that country has slowed down, but it is certainly not experiencing negative GDP. There is a slowdown, especially when compared to prior growth rates. That already in itself will give a significant boost to oil demand. Furthermore, it is worth noting they intend to maximize fossil fuel usage until 2030, so I do not foresee any concerns from that region for this decade. Regarding the remainder of the world, clearly, we are entering a recession, as we discussed in the last quarterly call, which usually influences energy demand globally. However, we seem to be more optimistic than other sectors due to the relative pricing of a kilowatt hour. You can translate that into oil barrels or any chosen unit. Yet, it’s true that oil prices in relation to others, especially gas, are extremely inexpensive. Therefore, anyone with the option to switch from gas to oil will do so. This could also apply to coal, but people are increasingly reluctant to turn to coal due to emissions and other types of pollution, not just CO2. Thus, I believe oil is likely more insulated than many other energy sources, even if we enter a recession. As you can see, I am using very simple analysis.

Chris Wetherbee, Analyst

That's usually the right way to do it. I appreciate the time you provided. Thanks so much.

Hugo De Stoop, CEO

Thank you.

Operator, Operator

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

Frode Morkedal, Analyst

Thank you. Hi, guys.

Hugo De Stoop, CEO

Hey.

Frode Morkedal, Analyst

Just a question on your—the final leg, as you called it, of the Russian oil embargo. Perhaps you can discuss the oil price cut, the potential of a shadow trade? And, I guess, the third alternative is that exports were down. Curious to know how you see this shaping up?

Hugo De Stoop, CEO

Yes. Again, one would need to have a crystal ball. Let's start with the last item, which is the cut in production. Many have suggested that they might reach maximum export capacity to countries like India and China, which are already taking Russian oil. At Euronav, we believe that if the oil is cheap—and certainly cheaper than elsewhere in the market—it will find a home. Numerous precedents demonstrate this. An oil cap is another approach, which forces a discount that is already occurring due to more expensive freight. When Russia sells oil to China and India, they undoubtedly sell it at a bigger discount than when they previously sold it to Europe. So from that perspective, we think it will be more physical operational restrictions dictating whether Russia will have to shut in some of their oil fields. As for the price cap sanctions, we don't believe they will stop the production of Russian oil. I’m not sure the world desires less oil on the market, considering pricing and its influence on general inflation—it's quite problematic, especially in Europe and to some extent in the US.

Frode Morkedal, Analyst

Yes. Just as a follow-up, do you have any idea how much Russian oil is being insured by Western companies? There’s also this sanctions deadline coming up. So how do you think that will affect the trading market and the tankers?

Hugo De Stoop, CEO

First, no idea whatsoever on that. It is very difficult to pinpoint. Obviously, the restrictions or sanctions also apply to the insurance industry. However, I do not believe it will change much of what we are currently observing. If I look at the P&I we are involved in, they have already implemented what many companies and banks have done, which is to self-sanction or impose restrictions on their dealings with Russians. This is already the situation. In the few cases we have tried to analyze, we have heard that this is simply being replaced by less international insurance companies—namely, insurance companies located in Dubai, China, and Hong Kong—especially when the destinations of the oil are those countries.

Frode Morkedal, Analyst

Yes. I see. Thank you very much.

Hugo De Stoop, CEO

You’re welcome.

Operator, Operator

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

Chris Tsung, Analyst

Hi. Good afternoon, Hugo, Brian. How are you?

Hugo De Stoop, CEO

Fine. You?

Chris Tsung, Analyst

Good. Thanks. I just wanted to revisit the Russian dislocation. There is some discussion about the growing dark and shadow fleet and a pickup in the S&P market for older tankers. I’m just curious about your views on how much tonnage could actually exit the market following sanctions in early December?

Hugo De Stoop, CEO

Well, another question that requires a crystal ball. You're correct; the pickup in the secondhand S&P market for secondhand vessels is indeed noticeable. When you look at the pricing, one cannot ignore that some of that tonnage is likely to be dedicated to trade with Russia. I’m not sure I would label it as shadow trade, mainly because up until December 5th it's permitted. You need to have agreements with your finances, but shipping is generally private. That should not pose an issue. Beyond that, it’s the destination that creates the problem, along with the vessel's ownership. If the vessel is owned by the right entity—namely outside Europe, the US, or the UK—then it can continue to trade. Thus, I don’t know if I would accurately describe it as shadow trade in the way we have seen with the oil flowing from Iran. It's quite peculiar, and I cannot quantify how much tonnage could be dedicated to that. I feel that there will be a two-tier market. It will be very challenging for ships—even if they are based outside Europe—to make one cargo out of Russia and then another in a place that is not under restrictions. It’s highly likely that the fleet will become more dedicated, but it's difficult to predict how much tonnage that could look like.

Chris Tsung, Analyst

Okay. Fair. Thanks for the color. That's it for me.

Operator, Operator

Thank you. There are no more questions in the queue. This concludes our question-and-answer session. I'd like to turn the conference back over to Hugo De Stoop for any closing remarks.

Hugo De Stoop, CEO

Not much to add. I think we've covered everything we wanted to address. I thank everyone for participating in this call. See you next quarter. Thank you.

Operator, Operator

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