Earnings Call Transcript - INSW Q4 2021

Operator, Operator

Hello, and welcome to the International Seaways' Fourth Quarter and Full-Year 2021 Results. My name is Katie, and I will be coordinating your call today. [Operator Instructions] I will now hand over to your host, James Small, General Counsel to begin. James, please go ahead.

James Small, General Counsel

Thank you. Good morning, everyone, and welcome to International Seaways' earnings release conference call for the fourth quarter and fiscal year 2021. Before we begin, I would like to start off by advising everyone with us on the call today of the following. During this call, management may make forward-looking statements regarding the company or the industry in which it operates. Those statements may include, without limitation, the following topics: Outlooks for the crude and product tanker markets; changes in oil trading patterns; forecasts of world and regional economic activity and of the demand for and production of oil and other petroleum products; the effects of the ongoing coronavirus pandemic; the company's strategy; the anticipated cost savings and other synergies and benefits from our merger with Diamond S; any plans to issue dividends; our prospects; purchases and sales of vessels; construction of new-build vessels and other investments; anticipated and recent financing transactions; expectations regarding revenues and expenses including vessel charter hire and general and administrative expenses; estimated bookings and time charter equivalent rates for periods in 2022; estimated capital expenditures for periods in 2022; projected scheduled drydock and off-hire days; the company's consideration of strategic alternatives; the company's ability to achieve its financing and other objectives; and other economic, political and regulatory developments around the world. Any such forward-looking statements take into account various assumptions made by management based on a number of factors, including management's experience and perception of historical trends, current conditions, expected and future developments, and other factors that management believes are appropriate to consider in the circumstances. Forward-looking statements are subject to risks, uncertainties, and assumptions, many of which are beyond the company's control, which cause actual results to differ materially from those implied or expressed by the statements. Factors, risks, and uncertainties that could cause International Seaways' actual results to differ from expectations include those described in our forthcoming annual report on Form 10-K, and in other filings that we have made, or in the future may make, with the U.S. Securities and Exchange Commission. Now, let me turn the call over to our President and Chief Executive Officer, Ms. Lois Zabrocky. Lois?

Lois Zabrocky, CEO

Thank you very much, James. Good morning, everyone. Thank you for joining International Seaways' earnings call to discuss our fourth quarter and full-year 2021 results. As we hold this call this morning, Russia continues its invasion into Ukraine. All of those affected by the violence, and all of those in danger's way are in our thoughts this morning. Turning to Seaways' results, 2021 was a pivotal year for International Seaways. As we strengthened our market position, we enhanced our ability to capitalize on an improving tanker market this year, and to create enduring value for our shareholders. Oil demand has returned. Projections indicate refinery runs are expected to increase by four million barrels per day, from March to July of this year. This increased pull from demand feeds our optimism for an improved tanker rate environment. Our ships are employed in top-performing commercial pools. With our significant operating leverage, we will take advantage of favorable market developments. Inventories are now at the lowest level since 2014. And oil demand, as we mentioned, is recovering. Inventory draws have continued. Oil production is expected to increase in 2022, with OPEC affirming their April cuts will unwind at 400,000 barrels per day. This pace should continue for the remainder of 2022, with 400,000 barrels per month. Non-OPEC United States, Canada, Brazil, and Guyana should add supply in 2022, at about 1.7 million barrels per day. Please turn to slide four, where we summarize our momentous year. This is highlighted by a substantial return to our shareholders. The completion of our transformational merger and our success optimizing the fleet is strengthening our balance sheet and our capital structure. Since becoming an independent tanker company over five years ago, we have built a track record of executing an accretive and balanced capital allocation strategy in order to maximize value for our shareholders. In addition to purchasing ships at cyclical lows, a key component of our proven approach has been returning capital to our shareholders. And this is outlined in the first series of bullets. We're proud to have returned $58 million to shareholders in 2021. This reflects $17 million of share repurchases in the fourth quarter, our regular quarterly dividend of $0.06, as well as the $31.5 million of special dividends that we paid in the third quarter. Combined with $37 million of returns in 2020, Seaways has returned nearly $95 million to shareholders over the last two years amidst challenging tanker market conditions, and importantly, while maintaining a very strong balance sheet. Turning to the next series of bullets on the upper right of the slide, we completed our merger with Diamond S in 2021, nearly doubling our net asset value and tripling our fleet size. Seaways is now the largest U.S. listed diversified tanker company. We expect to realize over $35 million in synergies in 2022. During our integration efforts, the teams performed a deep dive into cost structure and historic performance, which resulted in a refinement of our estimates. These synergies represent a permanent benefit to consolidation. After the merger, we implemented a fleet optimization program. This capitalized on healthy secondhand values and strong steel demand. This has resulted in the sale or recycling of 16 older tankers with an average age of approximately 16 years. We lowered the age of our fleet profile to below nine years and received aggregate net proceeds of $92 million after all costs including debt repayment of approximately $74 million. We have bolstered our Panamax presence in our strong earning niche joint venture, Panamax International. Earlier this week, we took delivery of the Seaways Eagle, a 2011 built LR1. And next week, we will deliver to the same counterparty a 2010 built MR. The Seaways Eagle will join the Panamax pool, where we have earned over $22,000 per day in the first quarter to date. We also agreed to sell a 2004-built Panamax for recycling in February. In line with our ESG commitment to responsible recycling, all recycled vessels have been processed under our oversight and in accordance with the Hong Kong convention. Moving to the bottom left-hand column of the slide, we have maintained a strong balance sheet further positioning Seaways for long-term success. We have made significant progress enhancing our capital structure and our financial flexibility this year, including a number of attractive financing initiatives that Jeff will discuss further in his portion of the call. Our net loan to value is at 45% and is balanced with largely senior debt, some leases with purchase options, and a small fixed bond. With year-end total liquidity of approximately $340 million, we have operated effectively in challenging tanker markets. Turning to our financial results, our fourth quarter net loss was $29 million or $0.57 per share, excluding merger-related costs and gains on vessel sales. Our full-year net loss was $86 million or $2.24 per share, excluding the same items. In a sustained weak rate environment, we generated adjusted EBITDA of $12 million for the fourth quarter and $40 million for the year. Turning to slide five, while the situation in Russia and Ukraine is creating tremendous volatility in the energy market, we address the fundamental tanker underlying driver providing a broad overview of the current oil supply and demand balance. With the fading impact of the pandemic on global oil demand, projections indicate 2022 oil demand increasing at over 3 million barrels per day to nearly 101 million barrels per day by the end of 2022. Oil production is expected to increase to all-time highs in 2022. We anticipate boosted production in the Western world as mentioned by the United States, Canada, Brazil, and Guyana contributing to this growth. While operating expense costs have fallen short of their production targets by country, compliance may be challenged in a very high oil price environment as seen today. Incremental production based on these dynamics is likely to be moved by sea, increasing the demand for tankers. We are closely watching the outcome of negotiations as the lifting of Iranian sanctions could increase commercial oil supply by over one million barrels per day by the end of the year, which would reduce tanker supply, which we will discuss in a moment. Looking at the bottom right chart, inventories have been reduced to the lowest levels in seven years providing 60 days of forward demand cover. With oil supply from Russia struggling to find buyers, western grades like WTI and Brent are in strong demand. We are seeing U.S. crude exports to Europe and even long hauls to the Far East that we've been missing in the marketplace. On slide six, we turn to vessel supply. As you can see in the bottom left chart, the global fleet has grown 3.8% since the start of the pandemic. At the same time, the average age of the tanker fleet has increased to nearly 12 years on average. We continue to believe recycling has the potential to limit fleet growth, particularly as we see recycled volume increase in the latter half of 2021 and into early 2022. Recycling values are at historic highs after adjusting for inflation. In terms of sanctions on Iranian oil, because the sanction trades are largely serviced by older vessels, we expect the removal of sanctions would lead to the recycling of these assets that are trading outside the normal international markets. The overall tanker order book stands at 7% by deadweight, the lowest level ever relative to the size of the fleet as several factors continue to limit supply. Foremost, reputable shipyards are filled with contracts for other shipping sectors, and the earliest newbuilding slots are often in late 2024 or in 2025. Secondarily, ordering has been tempered by uncertainty around future environmental regulations. Finally, newbuilding prices are near all-time highs, which has also limited tanker owners from ordering. I would now like to turn the call over to Jeff, who will provide us with a further dive on the financial review. Jeff?

Jeff Pribor, CFO

Thanks, Lois, and good morning, everyone. Let's move directly to reviewing the fourth quarter results in more detail. Before turning to the deck, let me just quickly summarize our consolidated results. In the fourth quarter, we generated an adjusted EBITDA of $11.9 million. The net loss for the quarter was $34 million or $0.68 per diluted share, compared to $116.9 million or $4.18 per diluted share in the fourth quarter of 2020. However, excluding the impact of the disposal of vessels, including impairments, loss on extinguishment of debt, write-off of deferred financing costs, and merger-related costs aggregating $5.1 million, the net loss would have been $28.9 million or $0.57 per diluted share. Now if you turn to slide eight, this slide summarizes the year-over-year results of our business segments for the fourth quarter located in the top half of the slide and full year at the bottom half of the page. The decrease in Q4 and the last 12 months revenue and EBITDA primarily resulted from the impact of the lower average blended rates in both crude oil and product sectors. Now if you turn to slide nine, we provide a fourth quarter review and first quarter 2022 earnings update as of this point. For bookings in Q1 thus far, we booked 64% of our available spot days for VLCCs at an average of approximately $12,400 per day, 77% of our available Suezmax spot days at an average of $12,800 per day, 68% of available Aframax/LR2 spot days at an average of $12,800 per day, and 73% of available Panamax spot days at an average of approximately $22,800 per day. Turning to the product side, we booked 68% of our first quarter MR spot days at an average of approximately $12,700 per day, and 72% of our handysize spot days at an average of approximately $14,300 per day. I would like to add that these rates should not be construed as guidance for the full quarter with global geopolitical events evolving rapidly, making the market subject to significant change in the immediate term. Turning to slide 10, the estimated cash cost TCE breakeven is provided for the full 12 months beginning January 1 as illustrated on this slide. The overall breakeven rate for International Seaways is estimated to be $70,200 per day for the next 12 months. As we always provide, these are all in daily costs that our fleet must earn to cover vessel operating costs, drydocking costs, cash G&A expenses, and debt service costs, which includes schedule principal and interest expenses. At this point, I'd also like to provide cost guidance for the year for your modeling purposes. So, for this year 2022, we expect regular daily operating expenses, which include all line costs, insurance, measured fees, and similar related expenses for our various classes, to be: for VLCCs $9,000 per day, for Suezmax $7,600, for Aframax $8,200, for Panamax $7,900, for MR $7,200, and for Handysize $7,200 per day. We expect drydock and capital expenditures to be $41.2 million and $34.4 million respectively. These costs are related to ballast water treatment systems and other upgrades in anticipation of 2023 EEXi Synergy Efficiency requirements. For details on projected drydock CapEx and off-hire days by quarter, you can refer to slide 17 in the appendix for an update. Continuing with cost guidance, we expect 2023 interest expense to be approximately $40 million to $45 million. For the year, we expect cash G&A to be in the region of $31 million. Finally, we expect about $15 million in equity income and approximately $113 million for depreciation and amortization. Now if I can ask you to turn to slide 11, we highlighted $25 million in cost synergies we expect to realize this year in connection with our merger last year with Diamond S. At the bottom of slide, you'll see an illustration of the general administrative synergies totaling more than $20 million. This includes over $15 million in savings related to the consolidated management team and board and other public company expenses such as audit fees, $3 million based on other office and administrative savings, and $2 million as a result of the termination of the capital ship management contract in connection with the merger. The remaining $500,000 in cost synergies are related to operating expenses, with $3 million of savings and technical management fees of $2 million based on consolidating insurances. These cost synergies are tangible savings to expenses that would have been incurred if the two companies were separate. There's a natural ebb and flow in the timing of these expenses, but we are very confident in saying that these will be realized in 2022. Finally, given the historical performance of pools compared with other commercial management, we believe that the tools in which we now deploy our vessels with the benefit of greater scale will generate over $10 million of revenue synergies compared to the rates earned by these vessels pre-merger. Typically, we do not recommend anyone modeling INSW to add $10 million to your TCE revenues. You have likely already captured this in your TCE estimates; we are just pointing out that there is added value in the pools versus historical performance. Now let's go to slide 12 for our cash bridge. Moving from left to right, we began the fourth quarter with total cash and liquidity of $173 million. During the quarter, our adjusted EBITDA was $12 million. Equity income from joint ventures decreased cash by $5 million, while the cash distributions from the joint ventures were a positive $3 million from the FFO JV. We've expanded $33 million at drydocking and capital expenditures, and we also paid $10 million in installments on our dual fuel LNG newbuilds. The liquidity enhancements totaled $91 million, which included proceeds from vessel sales, net of debt repayments, and proceeds from sale leaseback transactions that are debt repayments to pay down a swap in connection with the Sinosure facility, along with voluntary payments on revolving credit facilities. I'll discuss several of these financing issues in just a minute. Finally, taking into account the $53 million of debt service, the $20 million quarterly dividend and the $90 million impact of working capital and other changes, the result is that we ended the quarter with approximately $99 million in cash and $140 million undrawn revolver yielding total liquidity of $239 million at December 31. Before turning to slide 13, I'd like to briefly touch on the specifics of our fourth quarter balance sheet and liquidity enhancements. As Lois mentioned, we've implemented a fleet optimization program, which yielded net proceeds of $32 million in Q4. Additionally, as discussed in our previous earnings calls, I think in the last earnings call, we entered into a lease financing arrangement for the six VLCCs that collateralized the signature of our credit facility. The proceeds of this refinancing were used to prepay a $228 million outstanding loan balance under the Sinosure facility, and therefore, increased our overall liquidity by approximately $150 million, $100 million of which was used to repay our existing revolving credit facilities. Lastly, we refinanced two MRs and two Aframax through leasebacks; three of these transactions were completed in 2021, with net proceeds of $27 million and the fourth was completed in January. Now, I would like to turn to slide 13 to discuss our balance sheet a little more. As of December 31, we had $2.3 billion in assets compared to $926 million of long-term debt. In addition, as mentioned, we had $140 million of revolving credit facility renamed as undrawn as of December 31. As you can see on the bottom left of the slide, our net debt to total capital stands at 46%. While our net loan to value for the conventional fleet stands at 45%, the portion of our debt that is fixed or hedged is at 37%. Since year's end, I'd like to highlight that we completed the sale leaseback of a 2010 built MR in January, which increased our liquidity by approximately $6 million. It should also be noted that our final payment on the forthcoming LNG dual fuel newbuilds was made in February. These newbuildings are now fully financed under the previously announced leasing financing structure with BoComm. This finalizes the financing of our current newbuilding program for vessels that are built to better the environment and are attached to a 6-7 year earnings contract with Shell and noteworthy quality financing arrangements. Turning to slide 14, we look at our debt as of December 31, reflective of a completed merger. As you see, our total debt balance is $1.12 billion with $140 million of undrawn revolving capacity. As we continue to maintain a healthy balance sheet, our debt reflects a highly competitive cost of capital and a long-term maturity profile, with the vast majority of debt due in 2024 or later. That concludes my remarks. So, I'd now like to turn the call back to Lois for her closing comments.

Lois Zabrocky, CEO

Thank you, Jeff. On slide 15, we detailed Seaways’ internal highlights. Seaways continues to execute our disciplined and balanced capital allocation strategy, which enables us to create significant and enduring value for our shareholders. Since our spin-off in 2016, we have transformed the company into the largest U.S.-based diversified tanker company. We've been acting decisively to capitalize on attractive growth opportunities, complementing the $900 million of vessels that we purchased at cyclical lows, which was completed without issuing any equity. Our merger with Diamond S last year doubled our net asset value, tripled our fleet size, and significantly enhanced our scale and our earnings power. Returning capital to shareholders remains a central component of our balanced approach to capital allocation, and we're proud to have returned $95 million to our shareholders over the last two years in dividends and repurchases. Our commitment to upholding best-in-class ESG standards is another of Seaways' key differentiators. We believe that the diversity and the independence of our board, our commitment to the environment as demonstrated by our dual-fuel VLCC newbuilding order, and our status as the first shipping company to secure sustainability-linked financing, provides significant benefit to our customers, our shareholders, and our lenders. We have been ranked in the top three in the weather research ESG rankings for the past four consecutive years, supporting both our ESG initiatives, as well as our focus on meeting the exacting requirements of leading energy companies through our hybrid operating model focused on safety first and flexibility. At the core of this model is an unrelenting commitment to adhering to stringent safety and environmental standards, which is made possible by Seaways' dedicated seafarers. We rely on our seafarers to ensure the safe, reliable, and efficient transportation of energy cargoes for our customers. Amidst the global pandemic, the ship's crews have done a remarkable job adhering to the highest levels of safety and professional standards. We're particularly proud to share that we have reached a milestone of vaccinating over 83% of our 2,500 seafarers. This is a number that we're working to increase every day. In terms of our operating model, our sector-leading commercial pools, many with INSW ownership, such as Tankers International and Panamax International Joint Venture, provide a competitive advantage to Seaways. TI is one of the largest VLCC pool operators in the world, and as a founding member over 20 years ago, we have taken an active role to expand the global competitiveness of the pool. In 2020, we established TI's New York City office in Seaways headquarters. Another hallmark of Seaways' success has been our focus on maintaining balance sheet strength. We continue to take steps to enhance our balance sheet and our capital structure with one of the lowest net loan to asset values in the industry, as well as liquidity of $240 million. We're well positioned to operate in the diverse tanker environment. I'll end my remarks by briefly discussing Seaways' significant upside potential to an improving rate environment. As mentioned earlier on the call, we see a number of positive market developments that could translate to a stronger rate environment for us in the second half of 2022. Based on our sizable fleet of 84 conventional tankers, we have significant operating leverage to capitalize on this. I note that every $5,000 per day improvement in the time charter equivalent daily rate provides over $150 million to incremental EBITDA or about $3 earnings per share per annum. Thank you very much. And we would now like to open it up to questions.

Operator, Operator

[Operator Instructions] We'll take our first question from Randy Giveans from Jefferies. Please go ahead.

Randy Giveans, Analyst

Howdy, Lois and Jeff. How's it going?

Lois Zabrocky, CEO

Very good, Randy. How are you today?

Jeff Pribor, CFO

Hey, Randy.

Randy Giveans, Analyst

I'm doing well. First question, just around current rates, right, we're seeing some crazy jumps in the headline average rates, but most of those are being skewed by just a couple of kind of Black Sea routes. So, are you doing any cargoes in or around Russia, Ukraine? And I guess for INSW, more specifically, what levels of rates are you booking vessels at today for your various asset classes?

Lois Zabrocky, CEO

Okay. So, let's just take the first of your questions, Randy. Since Russia invaded Ukraine on the 24th, for the last week, at International Seaways, we have not booked any fresh cargoes loading from any Russian ports. This is a very fluid situation, and you're seeing sanctions and trading change every day. First and foremost at Seaways is, number one is safety, and then making sure that we're navigating the legal landscape out there. For sure, you have to make sure that you're able to receive payments. We understand that there are cargoes now where the Euros are trading in the Black Sea at a $20 discount, and some of these cargoes are going unsold. So, we are simply monitoring this situation extremely closely with each of our pools. Of course, all of our ships are effectively working. From a broader perspective, we have seen an increase in VLCC rates; you're looking at trade somewhere around $25,000 per day in that sector. When you come down to the Suezmaxes and Aframaxes, this is where you're starting to see a much broader differentiation between those that are potentially trading in the Black Sea, and those that are not. Derek, what would you say? I'm going to have Derek Solon, our Chief Commercial Officer, share a little bit of what you're seeing. I just wanted you to know, before Derek jumps in there and shares, we're seeing this change on a daily basis, and realize that some of the high levels that you see are very thin trading. So, I think it's just very important to keep in mind that the situation is highly changeable. Derek?

Derek Solon, Chief Commercial Officer

Thanks, Lois. So, Randy, can you hear me?

Randy Giveans, Analyst

Yes, I can.

Derek Solon, Chief Commercial Officer

Thanks, Randy. So, yes, I mean as Lois touched on, I think the uncertainty in the market, the risk in the market, because of the Russian aggression in Ukraine has led to all markets coming up from their low levels prior to the invasion. The fixtures out of Russia have seen real, real high rates; kind of headline-grabbing rates. But even on the back of that, the VLCCs have come up to around $25,000 a day, while the Aframaxes in and around the Mediterranean are earning a lot more money today, $30,000, $40,000, and that's impacted the Afra sector across the board. Same with the Suezmax sector; that's coming up under that pull that Russian risk has created, even though the West African markets are coming up to around $20,000, $30,000 a day, whereas before, we were fixing kind of four-digit numbers. This is kind of giving a lift to all vessels operating in this context.

Randy Giveans, Analyst

Okay.

Lois Zabrocky, CEO

Does that provide some clarity?

Randy Giveans, Analyst

Yes. So, we're definitely seeing some strengthening, which is understandable. But clearly, we can't just use average Suezmax at $80,000, well, that's because Black Sea is $200,000, so of course, the rest of the world is going to look more elevated. Okay, that's fair. And then I guess, following up on that, just the bigger picture question. In terms of disruptions from Russia and Ukraine, clearly, you have stated that you have not loaded any cargoes in and around that region for the last week or so. Any thoughts on potential implications if this conflict persists for weeks, if not months? What would be the kind of impacts to the tanker trade in your view?

Lois Zabrocky, CEO

I think we're starting to see it. WTI had been discounted to Brent by about $4 or $5 per barrel, which was a reestablishing of that. And now you see that spread widen; Brent this morning is at $113, and WTI at $112. I think you start to see demand for Western-based barrels really spiking. And it's going to affect trading patterns. If we can come along with another million barrels a day this year and let's say that this looks like 300,000 barrels a day per quarter, where those barrels go, I think you're going to see Europe fighting for them. We've also seen the reemergence of some of these longer haul trades, which had really been missing from the market for some time. The crude trading and product trading is all a bit upheaved, and you start to see trades reemerge that haven't been present for some time. While this can strain the oil supply, it also incentivizes everyone in non-OPEC. Even Saudis-OPEC+ came out and said they're going to deliver their 400,000 barrels per day, and I believe there will be pressure to increase those volumes.

Randy Giveans, Analyst

Yes, all right, that's fair. And then, yes, I certainly don't want to make this call about Russia. So, to finish on a more positive note, your balance sheet is in great shape; it keeps getting better. I guess, what is the plan for some incremental liquidity, either from additional vessel sales or what is now and should be profitable rates in the coming quarters? I know you mentioned debt repayments, so that's a priority. And then, obviously, great to see the ongoing share repurchases. Is that also likely to continue as your share price clearly remains undervalued here?

Lois Zabrocky, CEO

Yes, for sure. Returning capital to shareholders remains a priority, Randy. We're having constant conversations around looking at the fleet. When you start to tip into a market with the volatility that we're seeing right now, these vessels become real cash earners. We will carefully continue to look at pruning vessels, but now the scales may tip the other way, where you're really making a lot of cash on these ships. I would say that both restoring capital to shareholders and examining the vessels remains a priority. I will turn to Jeff to see if you want to add any further comments.

Jeff Pribor, CFO

No, I would just underscore what Randy mentioned. You just said we did a tremendous job expanding the fleet last year, including the merger with Diamond S and two new builds. We feel really good about how we have allocated capital to the fleet growth that corresponds with the bottom of the cycle. Not to say there aren't occasional extremely attractive deals to come up, but the priority is going to be debt repayment, as you said; that's taken care of in our schedule and amortization profile, followed by returning cash to shareholders. At this point, there's nothing more accretive that we could do than buying back shares. So that remains a very high priority.

Randy Giveans, Analyst

Great, yes, I would agree. And I'll conclude my interview there; sorry for all the questions. Thank you.

Jeff Pribor, CFO

Thanks, Randy.

Omar Nokta, Analyst

Thank you. Hi, guys. I thought Randy asked a pretty good series of questions covering everything. But I appreciate that comment. Yes, I'll go back to the queue. But I did maybe just a couple follow-ups. Maybe first, clearly, we've seen, as you mentioned, lowest rates of spikes here over the past several trading days. But your performance at least thus far into the quarter from your slide on the LR1 to the Panamax is $22,800 is pretty substantial. What was driving that that led to such a big increase in earnings power there?

Lois Zabrocky, CEO

That sector, Panamax International Joint Venture is something of a differentiator for us. I'm particularly proud of picking up this opportunity with the Seaways Eagle, then flipping out an MR that is one year older, and we also picked up, over the course of Q3 and Q4, three time charter-ins to really bolster our position in that fleet. Those vessels tend to trade a lot of fuel oil, as well as DTP in North and South America. That particular trade, particularly in the Caribbean, has performed better compared to the bigger sister ships, the VLCCs and Suezmaxes, which have faced more pressure. The Caribbean performed better in the first quarter, and Ecuador has come back with more barrels in January, where they had been negatively affected in Q4.

Jeff Pribor, CFO

Any Ecuadorian barrels are staying closer and staying within the hemisphere, as opposed to going increasingly on bigger ships. So, that's helped the Panamax now.

Omar Nokta, Analyst

Thank you. Thanks for that and on a different topic Randy, asked this. Just about the liquidity. Clearly, you've tapped into a bunch of different new sources of capital, and that big sale leaseback on the VLCCs has unlocked a lot of cash. How do you feel at this point? Clearly, you're in a much healthier and stronger position. I mean, you've generally been in a good position but now even more so, with earnings now potentially coming up, stronger liquidity. But do you feel there's more to do on unlocking liquidity or doing more debt refinance? And then the second, I guess, would be related to that is any thoughts about the FSO joint venture, any discussions there? I know it's brought up quarterly almost, but with that 10-year contract starting up soon, any securitization of that revenue stream on the horizon?

Lois Zabrocky, CEO

Before Jeff jumps in there to answer that, I'd start with, we noted it on the call, the remaining CapEx payments or newbuilding payments on the three VLCCs are fully funded at this junction. So, I think that's one thing; we have no unfunded newbuilding payments on our horizon. That is one thing that one of our team's achievements in 2021 to really set us up for 2022. I will now turn to Jeff to answer the question about whether there’s more to be done on debt and refinancing.

Jeff Pribor, CFO

Yes, sure. To give you some insight into the way things work, what we did is immediately post-merger, around July of last year, we selected a program of financings and refinancings that would add the dual benefit of diversifying our sources of financing, which is important because as great as our banks are, and we appreciate their support, we know we need to source more financings to build relationships. We also aimed to enhance liquidity by executing financings at a higher loan-to-value. So, we selected a program and executed it. We still have a couple of small transactions and smaller ships that remain; they'll probably be announced in the next quarterly call, but this is sort of the completion of the program. While that doesn't mean we aren't constantly looking to optimize our balance sheet or secure additional logistics, so we have a backlog of things to work on. But basically, we put a program in place and executed it, so I think we're satisfied with where we are now.

Lois Zabrocky, CEO

On the FSO, I'd say this is similar to past quarters — always under close evaluation with our partner. It's a very good asset that generates solid cash flow for us and our partner. If we can find appropriate monetization that benefits our shareholders and fully reflect the correct value, we expect to act on it. But I can't specify further; it continues to be a priority along with our partner. So, stay tuned.

Omar Nokta, Analyst

Thanks, Jeff. Okay, we'll stay tuned. Thanks, Jeff. I appreciate the insights there, and thanks, Lois. I'll turn it over.

Lois Zabrocky, CEO

Thank you.

Operator, Operator

We have a question from Ben Nolan from Stifel. Please go ahead.

Ben Nolan, Analyst

Hi, Jeff and Lois. You guys’ releases are very helpful, sort of highlighting a year into the Diamond S transaction, with the effective synergy results showing real money being spent. My thesis into the deal was very constructive and thought that hey, more liquidity, more free flow would help close the gap from a relative basis with respect to your peers. So far, that hasn't really helped as much as I thought it would have. I don't know if you can take it in hindsight and say, okay, well, it did not happen yet. Or how are you thinking about that thesis now that we're a year into the transaction?

Lois Zabrocky, CEO

I think that I would go with that. It's starting to happen, and the market is starting to shift. I think that once the tanker market begins a recovery, investors take a much closer look and start to differentiate and get interested in tanker stocks. So, I think we are just starting to see the types of benefits that will emerge in 2022.

Jeff Pribor, CFO

Absolutely, Lois. I'd say, just take a look at the average daily trading volume. That's step one. It was around 300,000 shares a day level more or less pre-merger; it's over 500,000, depending on how you measure it.

Lois Zabrocky, CEO

Yes, yesterday it was a million.

Jeff Pribor, CFO

But I'm talking not just the last couple of days, but that's like a 30-day average. So, that’s increased liquidity in the stock. As I have always said, you don't typically see a rewriting of your stock at the bottom of the market. So, what we would expect—I have been doing this for many years—is that when all stocks move significantly, a stock like ours, which is substantially discounted, will logically move forward when the market begins to change.

Ben Nolan, Analyst

All right. Well, clearly, from a profitability standpoint, there are benefits to recognize, and I get it. Let's say, you both make good points there. Switching gears a little bit, my second question is just something that occurred to me; we were talking about earlier, Lois, you are recycling the Panamax and have done a number of those already. Although, are you effectively overseeing the process yourself? The sound of it is that you are making sure that all of the environmental restrictions and regulations are done as they should be. Out of curiosity, is there a significant financial gap between doing that and maybe doing it less scrupulously by selling it to someone who might not follow those same standards?

Lois Zabrocky, CEO

Ben, the yards that are Hong Kong compliant are all in India. That is where we have been selling the vessels. There is a differential; it is probably about $50 per ton, perhaps a little more than that. We think that's well worthwhile to ensure that hazardous materials are being dealt with properly and disposed of with quality vendors, ensuring that there's a floor underneath these guys when they're working and disassembling the vessels. We think that the Hong Kong convention is driving actual change in safety on the ground and increasing certifications to improve recycling conditions.

Ben Nolan, Analyst

I agree. Thank you, guys. I agree, it's well worth it. I mean, literally saving people's lives. So, but just didn't know how to put that into context. It's helpful. I appreciate it.

Lois Zabrocky, CEO

Yes.

Ben Nolan, Analyst

That's it for my questions. So, thanks a lot, guys.

Lois Zabrocky, CEO

Thank you, Ben.

Jeff Pribor, CFO

Thanks, Ben.

Magnus Fyhr, Analyst

Yes, good morning, Lois and Jeff. Just a couple of questions, the vessel operating expenses jumped in the fourth quarter. I know you had a very busy drydocking quarter. Can you provide some breakdown on what was capitalized versus what was expensed? I know you had laid out the drydock and expense versus the CapEx?

Lois Zabrocky, CEO

Yes, clearly, Magnus, you're looking at the appendix, and indeed, in the fourth quarter, it was a very heavy drydocking and ballast water installation period. You'll notice we've provided you with 2022 projections where we have very low rate environments in Q1 and into Q2, where we have heavy drydocks and CapEx. As far as what is actually capitalized, I think I might have to have Jeff take that offline to provide an exact breakdown unless he’s able to do that now.

Jeff Pribor, CFO

We have a certain amount that all drydock and CapEx are capitalized; that's part of CapEx, so you'll recognize that before you break them out and later depreciate it. I don't think you're seeing anything systematic. Given that there was a heavy CapEx period in Q4, you may have seen variations in expenses, but I don't believe it affects anything structurally.

Magnus Fyhr, Analyst

All right. I just wanted on the OpEx, should we just assume that the difference there was mostly due to drydocking or the jump in OpEx? I mean, you provided guidance for 2022, which was significantly lower than the OpEx in the quarter.

Lois Zabrocky, CEO

Absolutely. We're going to hear from Bill Nugent.

Bill Nugent, CFO

Yes, there are some of the spares that we consume during the drydock periods. Our practice has been to include those in operating expenses, which led to the pop in OpEx as we refine some of the practices and policies between the two organizations as we merged. That's where I think the OpEx increase came from, but I'd emphasize that this is short-term.

Magnus Fyhr, Analyst

All right. And you laid out the 2022 drydocking schedule. You also painted a pretty bullish picture of the market. I guess concerning the Q3 drydockings, how do you feel about them? Also, how do you think the seasonality this year will play out as far as the market recovery? I know there are a lot of moving parts, considering what's going on now, but I'd like your thoughts on that.

Lois Zabrocky, CEO

Yes, there are many moving parts in the recovery, but I think the number that I gave there of refinery runs increasing by four million barrels a day from March to July tells the story where this is a year where you're just seeing demand rise. That was the number that came from our projection, and I think it's significant to witness such demand pulling through. You factor in seasonality into a year of increasing demand each quarter, and I think this is going to drive the tanker market's recovery.

Magnus Fyhr, Analyst

All right. And just last question, a follow-up on that: You've been very busy with your fleet optimization program. Are you happy with the fleet currently? It sounds like you’re pretty satisfied and have significant operating leverage through the vessels operating in the spot market. Any thoughts on chartering in vessels, or do you think you're content with the operating leverage that you currently maintain?

Lois Zabrocky, CEO

We like to opportunistically bring vessels into the fleet, and that's where we’ve seen great utility from our disposal of older Panamaxes. We look to acquire when we find value, and we're happy to bring in three time charters to fill in that pool where we operate with high confidence and expect differentiated earnings.

Magnus Fyhr, Analyst

Just one last question, if I may, concerning the merger. You're more than half a year into it; what’s your most positive surprise and the negative surprise over the last six months? And where do you think you can improve on that?

Lois Zabrocky, CEO

I think our most positive observation has been the integration of the teams. We’ve seen a high level of competence across commercial, operational, investor relations— all areas including finance and accounting. It's really been smooth, and knock on wood, external auditors have said that they have never seen the merger process work so well; it’s very pleasing. As for negative surprises, there’s always something that's more challenging; but it's hard work, a labor of efforts that doesn’t surprise us. We welcome hard work.

Jeff Pribor, CFO

It’s great to be here at the office again. We're in New York, and now all our offices opened up. It's wonderful to see Legacy Seaways and Legacy Diamond S employees together literally for the first day. It’s really good to see the fruits of this integration coming together under one roof.

Magnus Fyhr, Analyst

All right, great! That's all I had. Thank you.

Lois Zabrocky, CEO

Thank you.

Jeff Pribor, CFO

Thanks.

Liam Burke, Analyst

Thank you. Good morning, Lois. Good morning, Jeff. Lois, understanding there are lots of moving parts as we stage into the first quarter through this for the second half of 2022, in terms of your fleet, do you see any more need for any adjustments in the fleet as you see the recovery in the second half of '22?

Jeff Pribor, CFO

Let me pick that, Liam. Really, no; we feel really good about the fleet as it’s come together across the various sectors. We have strength in large crude; VLs and Suez are pretty interchangeable commercially. So, we have a strong position there. Obviously, we have a very strong position in MRs now with the legacy Diamond S fleet. And the niche LR1 Panamax fleet that we discussed on the call. We feel really good about it. Most notably, we have the augmentation we will have when the LNG dual fuel newbuilds arrive next year. We feel it doesn’t mean we won’t find moves to make; we are always looking, always open. But we’re positioned well to leverage the tanker recovery rally that’s coming.

Liam Burke, Analyst

Just to touch on that, Jeff, I mean you talked pretty specifically about capital allocation. When you mention you can make moves if you see them, what do you see out there? I mean, are potential opportunities available?

Jeff Pribor, CFO

Look, there is always something. That’s why we are always looking. However, I would note that vessel asset values are significantly higher now than they were a year ago. That's why it was important to make the moves we made back then. The cost of the dual fuel LNGs, for example, was $96 million each, and that today would be about 15% higher. So, that means looking at assets today; it will be challenging to find the kind of return that we found last year. That said, you do get opportunities like the one where we traded into the Eagle, which will go into the Panamax International pool. The returns balance out significantly, especially being able to do a swap where we trade one vessel in and out at the same time. We think that’s a particularly creative transaction. Overall, we will evaluate—it’s always a busy field, and there are always evaluations. However, we’re currently pleased with our position.

Liam Burke, Analyst

Great, thanks, Jeff.

Jeff Pribor, CFO

Thanks, Liam.

Operator, Operator

We have no further questions. I'll hand it back to our speaker team for any closing remarks.

Jeff Pribor, CFO

We'd just like to thank you very much for being with us here on our first day back in the office. We look forward to speaking with you, the analysts and investors, and potential investors in the quarters and years to come. Thank you very much, Operator.

Operator, Operator

Thank you for joining. This now concludes today's call. Please disconnect your lines.