Scorpio Tankers Inc. Q3 FY2022 Earnings Call

Hello, and welcome to the Scorpio Tankers Incorporated Third Quarter 2022 Conference Call. I would now like to turn the conference over to Mr. James Doyle, Head of Corporate Development and IR. Please go ahead, sir.

Thank you for joining us today. Welcome to the Scorpio Tankers third quarter 2022 earnings conference call. On the call with me today are, Emanuele Lauro, Chief Executive Officer; Robert Bugbee, President; Cameron Mackey, Chief Operating Officer; Brian Lee, Chief Financial Officer; Lars Dencker Nielsen, Commercial Director. Earlier today, we issued our third quarter earnings press release, which is available on our website, scorpiotankers.com. The information discussed on this call is based on information as of today, November 1, 2022, and may contain forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statement disclosure in the earnings press release, as well as Scorpio Tankers SEC filings, which are available at scorpiotankers.com and sec.gov. Call participants are advised that the audio of this conference call is being broadcast live on the Internet and is also being recorded for playback purposes. An archive of the webcast will be made available on the Investor Relations page of our website for approximately 14 days. We will begin with a short presentation today. The presentation is available at scorpiotankers.com on the Investor Relations page under Reports and Presentations. The slides will also be available on the webcast. After the presentation, we will go to Q&A. For those asking questions, please limit the number of questions to two. If you have an additional question, please rejoin the queue. Now, I'd like to introduce our Chief Executive Officer, Emanuele Lauro.

Thank you, James, and good morning or afternoon everyone. Thank you for taking the time to be with us today. This has been a great quarter for Scorpio Tankers. The company has generated its largest quarterly profit in the company's history. Significant cash flows from a strong rate environment are transforming the balance sheet and improving the quality of Scorpio Tankers as an investment. Our capital allocation prioritizes the balance sheet. As we've said before, year-to-date, we have repaid over $720 million in debt. Since June, we have given notice to exercise the purchase options on 22 leased vessels. We will reduce our debt by almost $1 billion this year, and in addition, we have returned capital to shareholders primarily through our buyback program. In fact, since July, we have repurchased $120 million of our common shares at an average price of $38.56. The company will continue to reduce its leverage, maintain a strong liquidity position, and opportunistically repurchase shares. Fourth quarter earnings have started strongly. We have booked $45,500 per day for 52% of the available days on the quarter. We continue to see global refined product inventories remain near historic lows, and supply remains very much constrained. So, the thesis of a changing refinery landscape, increasing exports, and ton-mile demand is actually playing out. Our customers expect these current market conditions to be sustained. This is evident by the increase in time charter rates and activity. Not only are the rates at which customers are willing to commit higher, but importantly also the period to which they are willing to commit is longer. We continue to agree with our customer's views, and as significant shareholders, we are excited about the constructive outlook for product tankers and remain committed to creating long-term shareholder value. I'd like to thank you for your continued support. And I will now pass it over to James, who is going to go through a brief presentation.

Thanks, Emanuele. Slide eight, please. Since March, the refined product tanker market has shown resilience. Rates have fluctuated between $30,000 and $60,000 per day, even during traditionally slower times like refinery maintenance. While our thesis and outlook have not changed, I must emphasize that the combination of factors affecting our markets is unprecedented. Slide nine, please. Demand for refined products continues to grow as the global economy rebounds from the COVID-19 pandemic. However, for several quarters, demand has exceeded supply, resulting in significant inventory draws. Since July 2020, the United States has depleted over 400 million barrels of crude oil and refined products. Globally, distillate inventories have fallen by over 200 million barrels and have not been replenished since 2020, despite decreased jet fuel demand and increased refinery utilization. With demand anticipated to rise through 2023, refinery output will need to increase to address additional demand. Low inventories, rising demand, and higher refinery output are all positive factors for product tanker demand. Slide 10, please. As of March, seaborne CPP exports have consistently exceeded pre-pandemic levels and recently have trended 500,000 to 1.2 million barrels a day above 2019 levels. With inventories at historic lows, the capacity to meet additional demand through inventory draws is limited. Consequently, product tankers are increasingly relied upon to fulfill immediate demand. The global mismatch in supply and demand for refined products is primarily influenced by refinery capacity closures, configurations, and dislocations, rather than the impact of Russia's invasion of Ukraine. New refining capacity will help alleviate global shortages, but the process will be challenging and will necessitate an increased demand for product tankers. Slide 11, please. While seaborne product exports have risen, so has the distance that cargoes must travel. As ton-mile demand grows, vessel capacity diminishes and supply tightens. Changes in the global refining system have significantly affected ton-mile demand in two primary ways: First, new export-oriented refining capacity has been established closer to the wellhead and further from consumers, particularly in the Middle East, and this trend will continue in the coming years. Second, when refining capacity is lost, investments tend to occur further away from consumers. Following a refinery closure, demand often requires importing some of the lost production, as witnessed in Australia. Both scenarios have led to significant increases in ton-mile demand and have fundamentally altered global trade dynamics for us. Although adjusting refining capacity in the short term is challenging, the new capacity being introduced in the Middle East will both address and enhance ton-mile demand. If Russian refined exports are diverted from Europe, markets could tighten even further. As of October, European imports of Russian refined products had dropped from 1.1 million barrels per day to 800,000. Until recently, we had not observed a substantial shift in Russian refined products being directed to Europe. Starting February 5th, any vessel transporting Russian refined products sold above a set price cap will be banned from European insurance and finance. The specifics of the price cap remain unclear, and various details still need resolution. Should Russian exports to Europe be redirected to other regions, ton-mile demand would rise significantly, as every replacement scenario necessitates transporting each barrel over greater distances. If these barrels are evenly distributed from Europe to other regions and countries, ton-mile demand could increase by over 6%. This also excludes the ton-mile impacts from Europe to substitute for the substantial Russian imports and the vessel capacity required to execute these trades. Supply constraints will continue to be a concern moving forward.

While demand looks robust, supply is equally if not more attractive. The order book is at a record low with 5% of the fleet on order. Newbuilding orders have been limited; meaningful shipyard capacity is not available until 2025, and more than half of the fleet will be 15 years and older by 2025. When assumed minimal scrapping, fleet growth will be 1% next year and 0 to negative in the years after. By using higher scrapping assumptions to account for the fleet age and upcoming environmental regulation, the fleet will likely shrink over the next few years. Seaborne exports in ton-mile demand are expected to increase 3.3% and 8% next year, outpacing fleet growth again. The confluence of factors in today's market are constructed individually: historically low inventories, increasing demand exports and ton miles, structural dislocations in the refinery system, potential changes to Russian product flows, and limited to shrinking fleet growth, upcoming environmental regulations, collectively they are unprecedented.

Slide 15, please. Significant cash flows are transforming the balance sheet of the company and improving the quality of Scorpio Tankers as an investment. Year-to-date, the company has reduced its debt by over $720 million. Net debt has decreased by almost a billion dollars. While we have and we will continue to prioritize reducing our leverage, the company repurchased $120 million of its own shares from July through October this year. At the same time, we have been able to maintain a strong liquidity position. With a fully delivered modern eco fleet, we have limited CapEx requirements going forward.

In addition to scheduled amortization, we are repaying lease and bank debt. Sale leasebacks are a form of financing. They are similar to bank financing; except the financial institution legally becomes the owner of the vessel during the lease period. In most sale leaseback transactions, the lessee has a purchase obligation at the end of the lease agreement. This is the same as a balloon payment at the end of a bank agreement. The early repurchase option of a vessel before the end of the lease is equal to the outstanding debt and can include an additional payment to the financial institution through the early termination of the agreement, typically up to 2% of the outstanding debt. After repurchasing the vessel, the vessel is unencumbered and could be refinanced at a later date at a lower loan-to-value ratio and margin. As we do this, our daily vessel principal and interest costs will decline. As of today, we have completed the repurchase of six sale leaseback vessels; we expect to repurchase 14 vessels in the fourth quarter which will result in a debt reduction of $219 million. Putting this all together, we will reduce our debt by close to $1 billion this year. In the first nine months of the year, we've repaid $685 million in debt. In the fourth quarter, we expect to pay $296.3 million in debt. Scorpio Tankers has tremendous operating leverage. So far in the fourth quarter, the fleet has booked an average time charter equivalent rate of $45,000 per day. The free cash flow sensitivity doesn't go out to $45,000 a day in this graph, but if the fleet were to average $40,000 per day for the year, the company would generate almost $1.2 billion in free cash flow before debt repayment or a little over $20 per share in free cash flow. These are certainly exciting times. And now, I would like to turn the call over to Robert.

Yes, hi everybody. Thanks very much for joining, and thank you for your continued support. I'm just going to speak briefly before we turn it over to Q&A. Now, these are record earnings, as Emanuele said earlier. Normally one might think that it doesn't really get better from here. However, what is so extraordinary is the third quarter is usually our seasonal weak quarter, and the fourth quarter has already, as usual, started much better than the third. So, yes, it looks like it is going to get better from here. I would simply suggest not shorting STNG, just take a look at the cash, and certainly not comparing us against being long crude oil tankers, as we can already see the crude market has moved up, shipping oil to China and India, and it's going to only be a matter of weeks or days before India and China step up their exports and products out. So, maybe the crude has moved and recovered a little bit earlier; that would be logical, ship the crude first before refining the product, and then refining the product. But we strongly expect that that product will start to flow very shortly, and that will be very constructive for ton miles. So, that's all. Thank you again very much. We would like to open up for Q&A now. Thank you.

We will now start the question-and-answer session. Your first question today is from Omar Nokta with Jefferies. Please go ahead. Omar Nokta, your line is now active.

Hey, sorry about that, I was on mute. Yes, just want to say congrats on another strong quarter, and based on guidance, it looks like things are going to be strong yet again. Obviously, a lot, I think, to hone in on and talk about, but I did want to just really quickly, Robert, ask you about the NAV comment you just made. What were you saying, you think NAV fairly soon we'll get to?

How it's moving along nicely towards $82. I mean we've already got a number now that is moving up strongly. If you add this quarter, you add the next quarter, and you have a little bit of increase in values which you're having, then those NAVs add up pretty quickly.

Okay. No, that's interesting. I mean that, obviously, that's a very nice outlook.

I was referencing some of your own reports that mentioned one-year targets of $70 or similar figures from analysts. Clearly, we have surpassed those expectations and will continue to exceed them in the future. Therefore, it seems reasonable to anticipate that we could reach an NAV of $82 or higher soon.

Yes, I wanted to inquire about the LR2s. The guidance for the fourth quarter seems exceptional, with $58,000 for more than half the quarter, significantly above the market average of $40,000-$45,000. This also surpasses the rates in the second and third quarters when prevailing rates were higher. Could you provide some insight into the performance and how to view these LR2s moving forward?

Lars, please?

Yes, hi, Omar. The leverage of the LR2 is often misunderstood when people focus solely on the TC1 index route for earnings. It's really about the diversity of our cargo base and the triangulation we can achieve. For instance, today we have been operating LR2s from North Asia to Australia, earning around $80,000 to $85,000 for that route. Additionally, we’re seeing more cargo coming out of Australia that allows for profitable backhaul trips to China. In the past, we would have been ballasted to the AG with less efficiency. Now, with the ability to triangulate between Asia, the AG, and the West back to the Far East, we've been able to maximize the potential of the LR2. The earnings reflect this successful strategy.

Thanks, Lars. Yes, so trade patterns that continue to evolve and triangulations just on the rise here; good. And one just final follow-up, I wasn't to ask just about the 23 ships that you've exercised option on the leasebacks. What are you guys thinking about those vessels as you start to take ownership of them, do you refinance those with bank debt? Do you keep them debt-free? Are they sales candidates, what do you think?

I think we can say we are determined to continue investing in more expensive lease finance. Now that our balance sheet is improving and we have strong earnings, we might be able to accelerate this process even further. We are receiving very attractive loan proposals from lenders with low margins and efficient terms. This means we could take some of those ships and secure credit lines against them, enabling us to combine this with the cash and the ships we already have the option to buy back, allowing us to accelerate our progress and reduce costs more quickly.

Yes, got it. Okay, thanks, Robert, appreciate it.

No problem.

All right, cool, I'll turn it over.

And our next question will come from Jon Chappell of Evercore ISI. Please go ahead.

Thank you. Good morning. Lars, since you're here, if I can tie together something that James had referenced in the presentation. Back in June, you had mentioned that the impact from Russian sanctions or even kind of self-sanctions hadn't really settled in the market yet, most of the ton-mile demand was driven by things outside of the war. As we approach the February set for the products' actual sanctions, I know there's a lot of moving parts, but can you give us any kind of sense as to what impact it's had thus far as far as preparations for potential sanctions? Is it a greater impact than it was back in June, but still kind of far from the full impact, just trying to get a sense of the next level of disruption?

Sure. Hi, Jon. I think there are two things to that. I mean, we can see that the Asian refiners are ramping up the export. I mean we can see that the fifth tranche of export quotas that were released at the end of September - October, that's coming about. We are seeing record amounts of volume coming up off of Asia. A lot of that is jet fuel. I think we are looking at about 6 million tons in November, which is record high. That's going to be moving primarily, I would imagine, to western destinations. So, there is certainly the kind of prep work from further afield that is going to obviously impact ton miles positively. In the prems, right now, we are still seeing the same molecules being moved from the Baltic and the Black Sea into the same places as they are obviously doing what they can do up to the 5th of February. But we are starting to see the early machinations of the cargos moving from Asia into Europe. We anticipate this to ramp up considerably in November.

Okay. And it may be difficult to answer, but James said about 6% ton mile impact if it's evenly distributed across the areas that we would think that cargos would go. Your best guess, have we seen half of that 6% already? Have we seen less than a quarter of it? Just, I mean it's an estimate but just your best guess?

That's a challenging question, Jon. From what I've observed, we have experienced an 8% increase so far this year, with a 6% increase anticipated moving forward. We're definitely noticing a lot more longer distance voyages. It's important to recognize that as this evolves, the voyages that would have previously taken 10 days on a round trip from a location to Rotterdam will now take 40 days when moving the same product from the Middle East. The difference in distance and requirements is significant. This will certainly have a substantial impact as we approach February 5th.

Okay. So, it sounds like Robert might get his Thanksgiving bounce this year, just a bounce of much higher level. One more question.

Jon, Robert has simply sort of said to himself that whether or not it's 8%, 6%, 3%, 2%, or 4%, the market is clearly whether it's in the low 90s in terms of utilization at the moment. So, maybe percentage, it's just 1% soft to have an exponential, you know, kicker on right structures at that point in shipping markets. We have seen that in dry containers and historically in tankers too.

Yes, clearly understand. It just seems like it's going from strength to strength before you can get to the seasonal impact or the full sanctions impact. Last question and I don't know who wants to take this. Maybe Brian, maybe James, you have laid out a clear path for the fourth quarter sale leaseback repurchases as well as the debt repayment. When we shift to '23 and I am not asking for a guide or anything. But when you think about '23 and capital deployment, is there a target leverage you are aiming for? And I feel like it doesn't need to be mutually exclusive, deleveraging with capital return in the form of buybacks? But just any type of ideas we can get to target leverage before maybe the capital return is kind of accelerated further?

I can address that, Jon. Right now, our focus will remain on deleveraging while opportunistically buying back stock, as Emanuele mentioned. We have made some progress, moving from no stock buybacks to being more aggressive in the third quarter. We are not entirely sure what opportunities will arise, but the majority of our cash flow, over 51%, will be directed towards repaying debt for now. At this stage, we don't need to determine our desired net or gross debt levels; that can wait for a few months. It's crucial to observe how our situation develops. Therefore, we will refrain from answering that question for the time being.

Sure. Thanks, Robert. Thanks, Lars.

Our next question will come from Ken Hoexter with Bank of America. Please go ahead.

Hi, this is Nathan dialing in for Ken Hoexter. Just noticed that there were quite a few vessels going out for three to five-year charter out agreements, and this is a little bit of a step up from your second quarter earnings. I want to get a sense from management that you have, still very positive spot market dynamics, but an attitude towards contracts spot mix, especially heading into 2023.

I think that we're overwhelmingly spot; I think that on a percentage basis, we're approximately 10% on charter for three years, very strong rates and 90% spot. So, going into 2023, we've been going along steadily, sort of adding two or three charters every couple of months or whatever, as the market has moved upwards. I think that we can say that going into 2023, we're going to probably be somewhere between 85% and 90% spot because we're very bullish on the actual market and the fundamentals going forward. But at the same time, there's a lot of benefit in just taking up secure revenue, especially if we go back to the previous question from Jon Chappell about where your ideal debt levels are, part of that it's a combination of what secure revenue you have. So, if you have very good contracts fixed forward for two and a half to three-year periods, you can afford to run with a higher debt level than if you were running spot. And so that's part of what we've been thinking here. And part of the reason why we're driving the deck is because we are running a predominantly, vastly, predominantly spot fleet at the moment. The reason we're doing that is we're so constructive and bullish about the period ahead. You should look at something between 85% and 90%, 85% and 90% spot going into '23.

Great, thanks. Yes and just following up on that, clearly, the market dynamics are very, very favorable on the product side, but just so we get a more comprehensive picture of all the factors, could I get a general sense on how operating costs have compared year-over-year? Obviously, fuel is a big component of that, but just maybe against 2021 and how that's contributing to TCE?

Brian, Cameron, do you want to deal with that one?

Hi, Nathan, so yes, obviously fuel has increased. Also, just the vessel operating expenses have increased a long way. You see that from our schedule or you put in our operating costs that have gone up, it's normal inflation costs, travel. Those have happened and fuel, of course, has been more expensive now. But it's because it's in demand. And that's good for business. So, that's been more than offset by the rise in revenues.

Okay, thank you.

Your next question comes from Liam Burke of B. Riley. Please go ahead.

Yes, thank you. The spot rate environment for the Handys still seems to be pretty strong. Why are they inordinately strong vis-à-vis the other vessels in the fleet?

Yes, okay. Hi, Liam. I mean first of all, you know you've looked at the age profile on the Handy fleet. It is a lot older than you would see on any other type of vessels, and it is certainly a fleet that over the last couple of years has been decreasing. So, quality units in the Handy fleet is not similar to what you've seen in the MRs and the LR2 segments. There has been a lot of product being moved regionally and to be honest, normally the third quarter would be a very weak quarter for Handys. We would wait until we get into the fourth quarter. Then certainly we would have a very strong market for the fourth quarter and the first quarter. But we have generally seen a very strong Handy market throughout the year, across all regions; it's not only in Continental and the Mediterranean, it has also been in Asia and the U.S. So, they certainly have been performing extremely well.

Great. With the disruption from Russia in 2023, do you anticipate any change in customers' hesitancy to use MRs that are over 15 years old, given that supply is expected to be quite limited next year?

Robert, you want to take this?

Sure.

Okay, go ahead.

It depends where it's going to go to and how tight it is. But I think the main message is that in order, I don't see the European and American managers changing their behavior; they're not going to try and save themselves a few dollars by taking an older vessel and going against their own environmental policies and risking an accident. But on the margin sure, if the rates go to high levels, then fine, people are going to scramble around to do whatever they can do.

Great, thank you.

Okay, I was going to go back to the Bank of America area where they're talking about costs, etc. Obviously, the actual cost structure of shipping is not immune from inflationary wage pressures, etc., or input pressures. But I think that we've got a very good situation and we have got a very new fleet. It's been recently drydocked. So, we have advantages there that we know it's homogeneous. We're less concerned about operating costs here than companies that have older fleets. And we also in terms of interest rate costs, we're taking down our total debt along the way to about $500 or so, including converters and our fixed interest rate costs. And as Brian said, we're an unusual industry, in that our revenues are so strong right now that they are overwhelming any increase in operating costs and any increases in interest rates at the moment. The next question please.

Our next question comes from Greg Lewis of BTIG. Please go ahead.

Yes, hi. Thank you. And good morning and good afternoon, and thanks for taking my questions. Robert, I did want to ask, I guess Jonathan's question a little bit different of a way. I know the leverage is coming down. As we think about breakevens and clearly, you've been through good times and bad times. And anyhow, I guess what I would say is even during the bad times, you were able to maintain the dividend. As we think about potential for dividend increases as the cycle continues to evolve, is there more around total leverage or should we be thinking about breakeven all-in breakevens driving that dividend and any potential dividend increases?

Well, we could, I mean, it's partly to do with that, Greg, but it's also right now, we clearly have a surplus cash with beyond what we consider is what needs to pay down debt because in three and a half months, we've used approximately $120 million to buy back stock. It's very simple that with the company trading consistently at a steep discount to NAV, and it's doing so. Again now, it's a better use of funds to buy back stock than it is to pay dividends. If we're a little all a little bit patient here, we'll have fewer shares that divide the free cash over here and we'll be in a much stronger position to pay dividend, if that's the course that we take here in a secure way. Not just okay, with one soft dividend and Oh, my God, the market falls and we have to cut that dividend.

Okay, great. And then James, I did thank you for slide 12. Clearly, it looks like new volumes are going to be coming out of, I guess, the Middle East here. Is there any way to quantify realizing that those numbers are always moving? Do we have any sense for how much capacity, refining capacity is in the Middle East in terms of like, as we look out in the next year, when the embargo comes in, like how much more ability is there for increased refined volumes out of the Middle East? Have you guys done any work on that?

Yes, so I would say with Jazan, which is about half of its capacity, it should get to full capacity by the end of this year or early next year, 400,000 barrels, and outsource 600,000 barrels, and then might come on a little bit earlier. You've got probably about 1.4 million barrels that could come online. Definitely one well, that's about 600,000 barrels of ultra-low sulfur diesel that the market really needs. Given where cracks are, I think you will see these refineries try to get to full capacity as quickly as possible. But outside of that, there's not much. I think the only other real region that has spare capacity right now is China. As Lars mentioned, we're seeing an uptick in volumes coming from China, and they will be necessary to kind of balance this global market.

Yes, and I know a question that I've been getting from at least a few investors is around. I think clearly part of the expectation in '23 assuming that Russian crude continues to be discriminated against is that maybe they send Russian crude into China, and then China turns around and exports it. There's I mean, realizing that I guess the developed world is buying Russian crude. That is not buying Russian crude. I guess once it's refined in China, that kind of I don't have a good word for it, but maybe that kind of washes it, is that kind of a fair assessment of what happened?

Cam, would you like to answer that?

Sure, Greg. At the moment that does sort of relieve further purchasers from sanctions, but we just don't know at the moment how things will evolve.

Okay. All right, guys. Thanks for the time.

Next question is coming from Ben. Please go ahead.

Hey, thanks. Can you guys hear me okay?

Yes, Ben.

Okay, great. So, I think it's pretty straightforward for Brian; considering all the sale leasebacks you’ve been acquiring and the decline in interest rates, can you provide any guidance on how we should approach depreciation and interest on a run rate basis from this point forward, assuming interest rate neutrality?

Depreciation will remain steady; it might vary between different line items, but it will align with the new accounting standards. If you own or lease a vessel, maintain your position. However, determining specific numbers is more challenging due to the rising LIBOR and interest rates. I don’t have an exact figure at the moment, but we are working on it. Debt is clearly decreasing, yet interest charges and rates are increasing.

Okay.

And we got to see more.

Okay, fair. And of your debt, or of your interest, any color as to how much of that is hedged premature?

The majority of it is floating. We stopped some fixed-rate debt out there, and not just notes that we have. We also have some sales leasebacks that are fixed. So, it's probably exclusive of the notes you pick them out. It's probably around 10% that is fixed.

Okay, all right. And then a little bit more strategically, Robert and Emanuele, clearly the company is in a dramatically different position than it was even six months ago, certainly a year ago. It sort of opens options that really even weren't worth contemplating in the past. Given that as you sort of look out into the future, I'm curious now if you have given any thoughts to how you envision what Scorpio will evolve into? Is it something where you sort of see it being the same as it is, sort of a spot arena product tanker pure play? Could you envision it being more than just product tankers? Do you see the company as a consolidator or just sort of playing in its name? Any change or lack of change that you can foresee developing now that you are sort on firm financial footing?

I believe we are witnessing a product market poised for a very favorable period. Currently, discussions are predominantly focused on Russia, especially concerning potential energy crises this winter. However, on a more specific level, the fundamentals remain strong. Throughout this year, the focus has been on these fundamentals. Our fleet is aging, there are very few vessels on order, and new builds have long lead times. The industry is still figuring out the necessary engine types and designs for new constructions. Demand is rising, and we could see an increase in ton miles due to refinery changes. Refineries are closing in regions where consumers are located, largely for efficiency reasons in Europe and environmental considerations in Australia and New Zealand. Conversely, new refineries are being established in export areas like the Middle East. Thus, the long-term outlook for products is exceptionally robust. Regarding consolidation, we have consistently stated that we have no intention to buy or order ships at this time. In fact, you might see us sell a couple of our older vessels soon, as market prices are very high. We are focused on reducing duplication to NAV and would like to maintain a younger fleet. Overall, the product market appears to have a bright future and likely stands out as the healthiest among all the major shipping markets in the coming years.

Got you. So, sort of no change in course then is sort of what I am hearing?

Of course, yes.

Okay, perfect. I want to ask about the diesel shortages we’ve been hearing about, as well as the potential for temporary waivers of the U.S. Jones Act. As an international tanker company involved in trading, do you think this matters? Will a temporary waiver of the Jones Act resolve anything or have any significant impact on your market?

I think it's an interesting political narrative that often arises before midterms regarding product exports and price capping at the pump. However, the likelihood of significant changes is very minimal. Implementing a Jones Act waiver would positively impact product tankers in international trade by allowing more ships to participate in that market. The political complexity surrounding this issue is so great that in many years, I've only seen it happen briefly once. I don't believe it would ultimately benefit Americans. International markets tend to be more efficient. The diesel shortage we've been experiencing is worsened by the situation in Russia, refinery closures, and post-COVID stock draws, creating a perfect storm. We will see more products being moved from further locations, such as the Middle East, India, and Asia, which will help alleviate that dislocation.

All right, I appreciate it. Thank you.

Our next question comes from Turner Holm with Clarkson. Please go ahead.

Hey, good morning, gentlemen. Thanks for taking the call. I just wanted to step back a little bit and think about what the risks in the market could be here. We talked about the 6% increase in ton-miles from Russia or those are the estimates out there. Have you ever seen a macro event or unforeseen circumstance where the market has managed to weaken or ton-miles have managed to go down despite such strong drivers like what we see out of Russia next year, because I am looking at the parts for 30 years and I don't see it?

There hasn't been any historical precedent for that, but it's difficult to predict what could cause a significant downturn. There are always unforeseen events that can impact demand in unpredictable ways, much like past events that were not anticipated until they occurred. While you’re correct that there’s no prior example, we should remain cautious and recognize that something negative could arise unexpectedly.

Sure. Emanuele opened the call discussing the increasing confidence from your customers, which is reflected in the rise of one-year time charter rates that have increased by 70% or 80% over the past six months, despite the OPEC cuts and the overall macro environment. Is this the best way for us to start considering rates for 2023? It certainly doesn't seem to align with what we can't identify.

It's one way to think about rates because, there, you've got what you would call a knowledgeable third party putting their money down. To the degree there, ExxonMobil is willing to pay X, Y, and Z for certain vessels for certain years, and that's an open market bid. So, you'll probably see more than just Exxon doing that rate; you'll see BP or Shell, and you'll see the traders too. We use that as a base because why shouldn't we, that those people have knowledge, it's the free market, and that's, let's say, what a market is. Now, you can then have your own position to model as to whether or not you are on the charter's side. So, the customers, actually, when they're taking shipping at 35, they obviously think the market's going to be higher than 35, otherwise they wouldn't be bothering to pay the shipping. Or you could take a more pessimistic view around that number, but it's a good base to take in terms of some kind of indication and to model.

Okay, thanks. I'm going to turn it back.

This concludes our question-and-answer session. At this time, I will now turn the conference back over to Mr. Emanuele Lauro, Chief Executive Officer. Please go ahead.

Thanks very much for everybody's time. We do not have any further comments. The call concludes here. Thank you for your time, and I look forward to speaking to you all in the next days and weeks. Thank you.