Okeanis Eco Tankers Corp. Q2 FY2024 Earnings Call

Welcome to OETs Second Quarter 2024 Financial Results Presentation. We will begin shortly. Aristidis Alafouzos, CEO; and Iraklis Sbarounis, CFO of Okeanis Eco Tankers, will take you through the presentation. They will be pleased to address any questions raised at the end of the call. I would like to advise you that this session is being recorded. Iraklis will begin the presentation now.

Thank you. Welcome to the presentation of Okeanis Eco Tankers' results for the second quarter of 2024. We will discuss matters of a forward-looking nature, and actual results may differ from the expectations reflected in such forward-looking statements. Please read through the relevant disclaimer on Slide 2. So starting on Slide 4 and the executive summary. I'm pleased to present the highlights of the second quarter of 2024. We continue on the track of strong commercial and financial results. Since the beginning of the year, we are effectively fully spot exposed. We achieved fleet-wide time charter equivalent of about $65,000 per vessel per day. Our VLCCs were at $73,000 and our Suezmaxes at $55,000. We report adjusted EBITDA of $63.9 million, adjusted net profit of $39.7 million, and adjusted EPS of $1.23. Fully committed to our strategy of delivering value to our shareholders, our Board declared a ninth consecutive capital distribution of $1.10 per share, which is about 90% of our EPS. On a 4-quarter rolling basis, we have distributed $3.46 or 93% of our adjusted net income. During the quarter, we have successfully completed our 5-year drydock for the Nissos Keros and Nissos Despotiko, with four more of our VLCCs expected to complete the drydocks in the next couple of months. Furthermore, during the quarter, we announced three new financing transactions, further optimizing our capital structure. I'll go into further details on this in a couple of slides. On Slide 5, we show the detail of our income statement for the quarter and the half year. TCE revenue for the 6-month period stood at over $160 million. EBITDA was close to $130 million, and net income was approximately $80 million or $2.50 per share. Moving on to Slide 6 and our balance sheet. We ended the quarter with $98 million of cash. Our balance sheet debt stood at $669 million, translating to book leverage of 57%, while market adjusted net LTV based on our most recent broker values has continued to decrease, now standing at approximately 38%. On Slide 7, we have our usual slide summarizing our corporate and capital structure. Since our last update in May, we have executed three new transactions and have also fully repaid the sponsored debt when that became due. In May, we refinanced our VLCC Nissos Kythnos with pricing of SOFR plus 140 basis points. We also amended our existing facility on the Nissos Donoussa, reducing the price to SOFR plus 165 basis points. Finally, we executed on the highly anticipated purchase option of the Poliegos. We closed the transaction on the first day of July, opening up a new financing market and improving significantly the pricing, now standing at SOFR plus 160 basis points. These transactions marked the completion of the full refinancing of our fleet except for the two VLCCs, Nissos Rhenia and Nissos Despotiko, whose purchase options kick in the first half of 2026. This is a good segue into the next couple of slides as we want to demonstrate the value creation achieved by all these transactions. So Slide 8. We only have to look back a year to have things due in June of 2023, prior to any of these transactions and before the transition from LIBOR into SOFR. On the left, during the LIBOR era, our banking cost of debt on a weighted average basis stood at 3.22% over LIBOR. Assuming the application of a credit adjustment spread of 26 bps across our facilities to compare apples to apples post the SOFR transition, our overall implied cost stood at 3.48% over SOFR. All our financings and amendments, of course, eliminated the credit adjustment spread. Along with the new margins negotiated with our financiers, we reduced the effective weighted pricing to 2.39% above SOFR. This takes into account our latest expensive leases that still remain outstanding and which offer a great opportunity for further optimization in 2026. All that translates to an improvement of 110 basis points across the entire fleet or 130 basis points against the 12 refinanced vessels. Assuming our current outstanding bank debt of $675 million, we achieved a direct reduction on a breakeven of $1,700 per day on each of the 12 vessels at $7.4 million in a year. On top of the cost reduction exercise, moving on to Slide 9. We have also added flexibility in optimizing our structure. We have fully started all the loans previously scheduled between 2024 and 2026. All the opportunity to refinance the Rhenia and Despotiko. We have no maturities before 2028. All of them must stagger between 2028 and 2032, providing for both a significant runway, but also a balanced and extended time frame to pursue further extensions or refinancings in an optimal way. Overall, we're very pleased with the effect of these transactions with improvement on the cost side, the extended maturities and the flexible assets. We will continue to be on the lookout for accretive deals, but the benchmark is not set at a very different level. We very much look forward to bringing the outliers Rhenia and Despotiko back along with the rest of our vessels at competitive terms. I'm now passing over the presentation to Aristidis for the commercial aspects.

Thank you, Iraklis. In Q2 2024, this was the second quarter of our fleet having 100% spot exposure. The main objective of this quarter, as we had alluded to in Q1, was to favorably position our VLCCs that require special surveys and complete the company's drydock requirements during the weaker summer months. This was planned and organized well in advance, which required close coordination between the commercial department and the technical manager to time the vessels to have staggered deliveries at the shipyard and avoid delays. We also brought some drydocks forward and off-hire during the weaker summer months instead of during the winter. Given OET's preference to trade our VLCCs in the West, which outperforms the East market, we were able to fix many long high-earning front haul voyages for our drydock positionings. We also took advantage of the strong spring market to fix front haul business on our VLCCs that did not require drydock to cover for the weaker expected summer as well. The West to East fixtures we concluded loaded from the North Sea, the Mediterranean and South America. A number of these fixtures only occurred because of the Red Sea avoidance and voyage economics, which made more sense to parcel the cargo up on a VLCC and sail via the Cape around Africa in comparison to fixing two Suezmaxes also via the Cape around Africa. The disruptions due to the Ukrainian war and Houthis in the Red Sea created many triangulation opportunities that allowed us to trade the ship of VLCC much more like a Suezmax. Seeking these opportunities and being comfortable with the trade of VLCCs outside the usual TD3 or West to East round voyages produced significant outperformance for us, and we're happy we took these risks. An unexpected highlight of the quarter was progressively turning our dirty trading VLCCs into LR4s. I will go into more depth about the idea and process later in the call. There was a huge spread between crude oil and product freight rates, though, which made the cleanup trade profitable for the trader when he incorporated the cost and time of cleaning up the crudes and the cost and time of the inefficiencies of lightening to load and discharge a vessel. Cleaning terminals at the load and discharge ports were not all designed to fully load VLCCs with diesel. We successfully cleaned up three VLCCs on a spot basis. Why do we do this? It generated premium time charter equivalent rates relative to the crude trade. It extended voyage duration during the seasonal weaker summer months, covering us for a longer period of summer than the crude voyage would have done and simultaneously positioned our vessels in the West. We have the added bonus of a future clean trading optionality, but this is not our base case scenario. To date, we have cleaned up four ships, one of which has ventured into dirty trade already. We are now experiencing the process and trusted by our counterparties. We spend a lot of time and effort commercially and technically to get these deals concluded. Two out of the six VLCCs planned for this year to drydock completed their drydocks during the second quarter being the Despotiko and Keros, with the latter sailing in early July. The remaining three are planned for Q3 and one in early Q4, aiming to have the ships ready for a strong Q4. Given we do not transit the Red Sea and the decrease in Suezmax stems from the AG that are sold to the West, we have found it more challenging to trade our Suezmaxes East of Suez. Before the Red Sea situation developed, it was very easy to find backhaul cargoes, repositioning the vessels from the AG to Europe. Now this is more challenging in their fewer cargoes. We could not risk having multiple Suezmaxes open in the East and compete against each other and the market for backhauls. Therefore, we had to calculate earnings on the Suezmax front haul voyages from West to East with a long ballast reposition back to a location where we were comfortable finding cargoes like West Africa. This deteriorates the time charter equivalent earnings significantly and in most cases, will not outperform trading the ships locally in the West. For this reason, we strongly focused on keeping them in the West with only one vessel being fixed East where we found a lucrative opportunity in comparison to the Western market earnings. Despite the seasonal weakness prevailing in both segments towards the end of the quarter, we achieved a fleet-wide TC rate of $64,900 per day. Our VLCCs generated $73,300 per day in the spot market, a 39% outperformance relative to our tanker peers that are reported in Q2 earnings. Our Suezmaxes generated $54,600 per spot day, a 17.5% outperformance relative to our tanker peers in Q2 earnings. These numbers reflect our actual booked TCE revenue within the quarter as per accounting standards. Moving on to Slide 11 for guidance on Q3. Q2 was a relatively strong quarter, which mitigated some of the Q3 seasonal weakness, which we had done by fixing long-hauls on haul voyages to drydock and cleaning up the three VLCCs. This positive trend continued into Q3, where we cleaned up an additional VLCC for product trading with one more ship in the works. As mentioned previously, this move generated a premium time charter equivalent and extended the trading duration compared to accrued backhaul trade. Additionally, as again mentioned previously, we positioned ourselves back in our beloved West market for Q4. We hope to find market outperforming opportunities to continue trading clean following this charge of the first clean cargo, but this is not a given. In Q3, we continued our focus on positioning the remaining four VLCCs that are due for drydock with long-haul voyages East and discharging in proximity to the yard. For our Suezmaxes, we focused again in the West and on voyage optimization by limiting waiting times and balance days. Given the seasonally weaker summer in both segments, our focus and strategy now is to conclude the remaining drydocks. Already one vessel, the Nissos Rhenia, has completed drydock, while the remaining two are scheduled for the latter part of the quarter and one will enter in the beginning of Q4. Meanwhile, we maintain a wet positioning on the trading fleet to capitalize on seasonality changes. Once we complete the drydocks on the VLCCs, we will likely return to minimizing ballast and focus on trading our VLCCs in the West. Current Q3 rates have weakened significantly with VLCC round voyages trading around $25,000 per day for AG East and $30,000 for U.S. Gulf PA, while Suezmaxes are earning in the low 20s on a round voyage basis. So far in Q3, we had 56% of our fleet-wide spot days is at $51,300 per day. 58% of our VLCC spot days is at $46,100 per day, a 24% outperformance. 53% of our Suezmax spot days is $58,000 per day, a 39% outperformance relative to our tanker peers that have reported in Q3 earnings. On Slide 13, we demonstrate how our ability to adapt and capitalize on the market opportunity is proven with consistent outperformance relative to our tanker peers in almost every turn of the market. We are very focused on maintaining this consistency going forward. I would like to note that the outlook for the next year is great, and our outperformance grows in a front market environment. Significant softening has been seen into the summer, mainly driven by weaker Chinese crude exports, weak refining margins, and ongoing OPEC+ cuts. The outlook and conditions remain firm in the crude tanker market for the winter, and seasonality provides for meaningful upside. Rates in both segments are at quite healthy levels and way above the 2019 to 2023 average, while expectations for seasonality boost should start appearing on the horizon soon. Global oil demand is expected to continue its upward trend with the IEA forecasting an increase of 1.1 million barrels per day in 2024. This growth is bolstered by increased production in the Americas, particularly the U.S.A., Canada, Brazil, and Guyana. However, OpEx production is expected to remain relatively stable, which may limit some of the supply increases from this group. In addition to the above, ongoing geopolitical instabilities are forcing tankers to take longer routes to avoid higher risk areas. This rerouting is expected to continue increasing ton-mile demand significantly, contributing to higher shipping volumes and sustaining higher freight rates. In recent years, we have seen the winter market arrive later in Q4, but also extend deeper into Q1. We are confident seeing a strong winter market and are perfectly positioned to capture this with our 100% spot fleet and no planned drydocks. Moving on to the following slide, I want to explain in greater detail about our decision to put so much focus into our cleaning of the VLCCs into LR4s in Q2 and Q3. The summer is always the most challenging period of the year in terms of freight, and we look for ways to protect ourselves from this. Other than the vessels requiring drydock, we also fixed two VLCCs from our fleet. We had a large Eastern presence with the strategy to reposition them in the West for the winter. In addition to this, a vessel sailing from drydock will always have to fix at a discount to avoid a vessel that's not in drydock for the first voyage. We saw in the market that traders like Mercuria and Trafiguria fixing dirty trading Suezmaxes on time charter and proceeding to clean them up and trade them in the clean market. A similar voyage for a crude cargo on a large dirty ship was cheaper freight than a clean cargo on a smaller clean ship. Our VLCC for the same phrase could carry 3x to 3.5x the cargo of a product carrier. As our Suezmaxes were trading in the West and these opportunities developed in the East, it was not an option for our Suezmax fleet. Also at the time, the spread between the clean and dirty Suezmax market was not large enough to make sense for us. The VLCC dirty market, though, was comparatively weaker, and the freight we believed we could earn if we cleaned up the vessels was significantly higher. This is where we had to start taking some commercial risks. We did not market the VLCCs we had for crude business. Instead, we worked with specialists, and we started cleaning up the VLCCs on spec while trying to develop cargoes. A vessel that is trading dirty will have cargo tanks covered in crude oil, a thick waxy substance. Each tank on a VLCC is about 28 meters tall, and there are 17 of them. Every surface needs to be cleaned until it's pure bare metal. This involves hot water washing, sludge removals, chemical washing and at times having over 120 people on board scraping, cleaning and removing all the crude residue. On each ship, we removed an average of around 150 tons of sludge in sludge disposal and also in garbage-sized bags. This was a huge feat. The total cleaning process took about 20 days, which is factored into our TCE, and the total cost is amortized in the single spot voyage. We assured our charters of the quality of the work we've done and secured the business. Instead of fixing the traders, we aimed to work with the refiners who own the cargoes and do not have to develop the trade as extensively, thereby reducing our risk of the voyage not materializing. There is not an independent owner that has been able to clean up over 50% of their VLCCs fleet on a spot basis. Chris and the team did an excellent job executing this plan. If we fix on a time charter basis instead of a spot basis, we would have given up optionality and extended duration to the charter. Now let's discuss why we did it, which we mentioned earlier as well. The market was weak and the drydock ships would need to be discounted. So the CTP opportunities allowed us to outperform the earnings of all the different crude voyages, whether a backhaul or a round voyage. Incorporating the time to clean and the slower discharge in loadings due to multiple SPS lengthen the voyage to take a season into the seasonally firmer Q4. The demerge rate was much higher than the crude, so inefficiencies in discharge will only improve the voyage economics. The voyages were all for discharge in the West, which is exactly what we wanted to do to reposition our ships for Q4, and we have the future clean trading optionality without any cleaning costs or time. As already discussed, we have cleaned up four vessels so far, and hopefully one more soon, showcasing our operational flexibility and adaptability to market conditions for the benefit of our shareholders. Lastly, on Slide 16, we look at the setup that as we discussed in the previous quarter, seems still too good to be true. An aging fleet with no order book, especially for the VLCCs and no yard capacity in Tier 1 yard until at least before 2028 creates the perfect supply scenario, especially for Okeanis Super Eco modern fleet. For 2025 onwards, we observed a significant increase in scrap candidates, especially for vessels over 20 years old in both segments, which can easily absorb the incoming deliveries. Handing you back to the operator. Thank you.

Our first question comes from Liam Burke with B. Riley. Your line is open. Please go ahead.

Yes, thank you and good afternoon.

Hi Liam, good morning.

The conversion you mentioned, where you transformed your VLCCs from dirty to clean on spec and achieved excellent economics, justifying the time and investment for cleaning, is noteworthy. As we approach another seasonally slow quarter next year, considering your experience with this process, do you expect to repeat it and possibly deploy more VLCCs for clean trade?

Hi, and thank you for your question. Yes, I mean we're willing and always going to evaluate every commercial opportunity we get. It really depends on the strength in the clean market. So if an LR2 is as firm as it was this year sometime next year, and there's a seasonal weakness again on the VLCCs, for sure, we'll consider doing it again.

And do you have to have a newer vessel to be able to do this? Or could it be done with any type of VLCC?

Well, I mean the older vessels, they may have more residue stuck inside. I mean on the private side, we have a 13-year-old ship that we cleaned up and we did it successfully as well.

And just on the macro, you highlighted weakness in the VLCCs on the China trade and the OPEC+ cuts of production cuts. Is there anything else out in the market that is creating any pressure on the VLCC rates?

I mean, obviously, the OPEC cuts and the reduced cargoes from the AG play a large role. The yards not being open as much, especially to the East, have reduced the amount of available cargoes that are going long-haul business from the Atlantic as well. And there's a general impact just from OPEC+ reducing exports. Russia has been over compliant as well, and that's been affecting the Aframax and Suezmaxes as well.

Okay. Great. Well, thank you very much.

Thank you.

We now turn to Petter Haugen with ABG. Your line is open. Please go ahead.

Hi, Petter.

Petter, your line is open.

I'm sorry, I'm sorry, that was my mistake. I was muted. So, good afternoon, and congratulations on those clean fixtures. It's something I never heard about before, to be honest. And while you answered many of my questions in your detailed walk through, there are a couple of those remaining. So just in terms of what type of products did you actually transport? Is this sort of the very clean jet fuels of the world? Or is it a condensate type of qualities?

No, I don't think that we'd be able to carry jet fuel unless it was used for blending purposes. All the ships that we've done have carried diesel except for one that also carried some naphtha. You have a diesel car, you may be burning OET's cargo this winter in Europe.

If I find myself caught between home and my office, I’ll hold you responsible for the contaminated diesel. My second question is whether all the clean voyages have been completed and if the cargo owners are satisfied with the quality delivered.

None of the cargoes are discharged. But the way we have structured the contracts is that the responsibility for any cargo contamination is with the charter. So together with the charter and our specialists, the ship is inspected prior to loading, it's deemed acceptable. Then within the contract, there is the liability for any future damages or discoloration or contamination of the cargo, and it's not our responsibility. So you would have to pick up any issues with your car with the charters.

Okay, I'll do that. Does this mean it would be easier to attempt another clean cargo now that you've discharged this one? Wouldn't it be likely that you could achieve the same result with the same ship?

Yes, you could. I just want to understand like geographically, let's say, Singapore where the previous voyage ended to the AG as a ballast is much shorter than the vessel opening up in, let's say, Rotterdam, ballasting all the way back around Africa to the AG loading a cargo and going back. So we won't have that benefit of a shorter ballast, which we did. It will be an around voyage. But even more importantly, clean freight has come off very significantly since then. So I think that the rate that we could fix has fallen materially as well. So at the moment, the clean cargoes are not as easy because of the weakness or the relative weakness compared to two months ago in the clean market.

Understood. And that also brings me to my other question. Could you share your sort of round voyage equivalent TCEs for these clean fixtures?

I mean, yes, the first one was in the mid-50s. That was like very good timing, and the following two were in the mid-, high-30s and low-40s.

Yes, it's likely one of the reasons for our performance. We were somewhat surprised by your Q2 earnings and the guidance provided for Q3.

The benefit of these voyages is that if there are any inefficiencies during the discharge because a VLCC cannot enter and discharge at some smaller ports in Europe that usually receive 30,000 or 40,000 tons of diesel, we will need to lighter in Malta or head to Rotterdam. If there are weather delays or if we cannot source vessels for lightering, we may accumulate demurrage, which is significantly higher than the time charter equivalent rate. Therefore, as the voyage is extended due to inefficient discharge, we will enhance our time charter equivalent for the voyage.

And this is going directly actually to what I was coming to. Any guidance for the remaining 40%-plus of the days for Q3? Yes, because my understanding from your earlier comments was precisely that it could be better than at least the current spot and FFA market for the latter part of Q3 is suggesting today.

I mean, I mentioned that on a round voyage basis today, these are somewhere between $25,000 and $30,000, and Suezmaxes are in the low 20s. Now we'll do everything we can to outperform this like we try to always do. But if we were just fixing around the voyage, that's where the rates would be for the balance of Q3.

Right. Understood. But if instead, you're slow moving outside Malta, you would have 2x to 3x those $25,000 per day, if I understand you right?

Yes, that's correct.

Okay, this was very interesting. Have you seen any other shipowners doing it at the same scale as yourselves?

I think the only other companies managing to be so active have been the traders like Trafigura and Mercuria. There are other owners that have done that one or two ships, but I'm not aware of anyone else doing more than that.

Do you think that the influx of crude tankers entering the product trade is contributing to the declining product tanker rates?

It definitely affected product tanker rates in the East because there are currently about 10 to 12 VLCCs and even more Suezmaxes competing for LR2 and LR1 business, so it definitely impacted that.

Understood. Well, so, but I think that was all from me. Thank you so much.

Thank you. Have a nice afternoon.

We now turn to Bendik Nyttingnes with Clarksons Securities. Your line is open. Please go ahead.

Hi guys. Congratulations on another strong quarter. I just have some questions on the fixtures for Q3. Last quarter, you had quite a large portion of your VLCC coverage, and now that portion seems quite a bit smaller. I mean besides the slightly earlier reporting date, are there any fundamentals driving that decrease in coverage?

In terms of time charter coverage or the percentage of the spot fixed?

The percentage of the spot fixed?

I think definitely one impact is that we have two ships going to drydock. So instead of being able to be commercially chartered, they're in the process of being drydocked. The Suezmaxes, as I mentioned earlier, they're staying local in the West. So they're doing shorter voyages overall. So they're coming open quicker. If we had fixed something U.S. Gulf, China or Brazil, China, and Suezmax rather than Turkey to Europe, it shows you the difference. And we're also reporting slightly earlier as well. So those two impacts.

Yes, that makes sense. And another question. Previously, you've been really good at finding routes that are sort of niche and higher earnings. And recently, we've seen, I guess, the tension in the Middle East increasing. Are you experiencing any change in competition for those more niche routes as potentially in the MEG increases?

I mean I think like most Western owners, especially listed owners, the Red Sea has been an area that we've stopped trading through. And it's been a while now that we've transited the Red Sea. So there are some niche businesses that go through the Red Sea, like fuel oil that gets delivered into the Red Sea or AG to Red Sea business that we can't do. And there are even some European charters who still like to transit via the Red Sea with their cargoes. So I would say the impact of the tension in the Middle East and the Houthis closing the Red Sea for a large part of the fleet has impacted everyone and opportunities have formed because of this. One of these niche markets that we had found was that while Europe had come accustomed to importing Iraqi crude on Suezmaxes via the Suez, while they were transitioning and finding alternatives to this crude. Instead of taking one Suezmax, they were parceling up two Suezmax cargoes onto VLCCs. So in Q1 and Q2, we were quite quick to fix a couple of those voyages and take two Suezmax cargoes and the VLCCs from Basrah to Europe around Africa. In addition to that, there were also cargoes from Europe that were going to Korea to China on Suezmaxes. Again, it became inefficient to go around Africa, and we were quick to grasp opportunities to parcel up two Suezmax cargoes and go around the Cape on VLCCs. So we look for opportunities. And for sure, all these conflicts create them.

Okay. Thank you.

This concludes our Q&A. I'll now hand back to Iraklis for closing remarks.

Thanks, everyone, for dialing in. I wish you the best for the remainder of the summer and look forward to speaking again in November. Bye, everyone. Thank you.

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.