Scorpio Tankers Inc. Q1 FY2023 Earnings Call

Thank you for joining us today. Welcome to the Scorpio Tankers’ First 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; Chris Avella, Chief Accounting Officer; Lars Dencker Nielsen, Commercial Director. Earlier today, we issued our first-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, May 2, 2023, 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. All 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 be giving a short presentation today. The presentation is available at scorpiotankers.com on the Investor Relations page under Reports and Presentation. 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 any additional question, please rejoin the queue. Now I would like to introduce our Chief Executive Officer, Emanuele Lauro.

Thank you, James, and thank you for joining us today. In the first quarter, the company generated $286 million in EBITDA and $196 million in adjusted net income. This compares with the first quarter last year when the company generated an adjusted loss of around $15 million. So we are starting 2023 with $210 million more in adjusted net income compared to 2022. Today, we have $800 million of pro forma liquidity. We see an order book near record lows, an aging fleet, constructive demand for refined products, refinery dislocations, and a time charter market with duration and high rates, which continue to improve. Scorpio Tankers has a young and large fleet with significant operating leverage, and most importantly, minimal capital expenditures. We do not intend to grow the company; rather, we intend to harvest. The balance sheet has improved, and we continue to see a reduction in leverage, but we will look to optimize it as well. Our new $750 million to $1 billion term loan and revolving credit facility, while still under discussion, can accelerate the repurchase of more expensive lease financing and can create more balance sheet flexibility. The revolver increases the flexibility and efficiency of managing the two critical levers vital to shipping companies: leverage and liquidity. While overall debt reduction continues to be our priority, our strong financial position continues to improve and has allowed us to start to return capital to shareholders. Since July 2022, we have repurchased 7.5 million of our common shares for $350 million. Today, we announced the renewal of our security purchase program for up to $250 million and an increase in our quarterly dividend from $0.20 per share to $0.25 per share. Finally, it is with mixed feelings that I must announce today that Brian Lee, our Chief Financial Officer, will be stepping down in September of this year. He will be replaced by Chris Avella, who has been with the company since 2010 and currently serves as our Chief Accounting Officer. Brian’s leadership and experience have been instrumental in the growth and development of the company over the last 13 years. He has been with us since the beginning and leaves the company in its strongest financial position with a well-trained team poised to maintain high standards. Brian, I will miss you. We will miss you. We will miss your entire work ethic, your temperament, and character too. I’m truly grateful for your contribution to the company and wish you the best on a well-deserved retirement. And by the way, if you change your mind now that the Chief Accountant position is open, I’m sure that Chris would hire you in a heartbeat. With that, I would like to turn the call to James for a brief presentation.

Thank you, Emanuele. Slide 7 please. We have seen an elevated rate environment since Q1 of last year, and over the last five quarters, we have generated a little under $1.4 billion in EBITDA, of which $1.1 billion has gone to debt repayment, and as Emanuele mentioned, since July 2022, we have repurchased $350 million of the company’s shares. We have 15 vessels on time charter out contracts, and the most recent charter was in LR2 for three years at $40,000 per day. The remaining 98 vessels are operating in the spot market. Slide 8 please. We continue to repurchase vessels under expensive lease financing and have started to refinance some of these vessels with new bank credit facilities that have a lower interest margin. To the right, you can see the list of vessels that have been repurchased and are upcoming. So far, we have given notice to repurchase 42 vessels, and when we say repurchase, it is really paying off the outstanding debt on the vessel. As of today, we have repurchased or repaid the outstanding debt on 28 vessels, and in Q2, we will repurchase 13 vessels on lease financing for $325 million. The margin on the lease financing ranges from LIBOR plus 350 to 525 basis points, and the new loan facilities have a margin of SOFR plus 190 to 197 basis points. Given the credit adjustment spread between SOFR and LIBOR, the LIBOR equivalent margin of our new financing is around 170 basis points. The team here has done a great job. Slide 9 please. Timing differences between repurchasing vessels and lease financing and drawing down on new facilities mean that at times it appears debt is increasing. On the left, you can see the movements between the new facilities being drawn and debt being repaid. In the first half of this year, including drawdowns on new facilities, we expect to reduce our debt by $146.2 million. If you look at the graph on the right compared to December 2021, by June 30th this year, the company will have reduced its debt by $1.4 billion and repaid $1.1 billion of refinancing. Until recently, the debt repayments have been done primarily with free cash flow; however, with the new $750 million to $1 billion term and revolving loan facility, we can accelerate these lease purchases and optimize the balance sheet. The revolving component of the new loan allows us to manage leverage and liquidity. After completion, the changes will translate to lower breakeven rates for the fleet as amortization and interest costs decline. Slide 10 please. Since December 31, 2021, net debt has decreased by $1.5 billion. Today on a pro forma basis with over $800 million pro forma liquidity and with no new buildings on order, we have minimal capital expenditures. We are very well-positioned. Slide 11 please. In Q2 so far, including time charters, our fleet is averaging almost $40,000 per day. On an annual basis, this would translate to almost $20 per share in free cash flow or over a 38% free cash flow. These are exciting times.

Despite significant refinery maintenance in the first half of this year, a reduction in European imports after building inventory ahead of sanctions and a warm winter, rates have remained strong. European product imports have increased to normalized levels, and refinery maintenance will decline considerably over the next few months. Global inventories remain well below five-year averages; all of this leads to strong expectations for the remainder of the year, especially in the back half and next year. Demand has been robust, and while we do expect slightly lower diesel demand due to less trucking activity, the increase in gasoline, jet fuel, and naphtha demand more than offsets the lower distillate demand. We expect refined product demand to average 1.5 million to 2 million barrels a day more from Q2 to Q4 than last year and go up throughout the remainder of the year. Q1 volumes remain extremely high and are averaging 1 billion to 1.5 billion barrels per day more than 2019 levels. Given low global inventories, increased consumption will continue to be met through imports, with product tankers reallocating barrels around the world. While demand is above pre-COVID levels, refining capacity is lower and more dislocated. Regional capacity changes are structural and will continue to drive ton miles and flows for the coming years. After a brief surge in product exports at the end of last year, Chinese exports have now regenerated to life levels. While OPEC cuts will restrict crude exports, they do not restrict products, and the Middle East has been the incremental barrel of refined product. They are one of the few areas with refining capacity coming online for the export market, and most of these exports are being long-haul to Europe and Asia. As ton mile demand increases, vessel capacity is reduced and supply is tightened. At the start of sanctions, Russian product exports declined, but over the last two months have been above pre-sanction levels. Prior to sanctions, most of the Russian exports were going to Europe and now they are going longer haul through the Middle East, Africa, Asia, and Latin America. Almost every replacement route, aside from Turkey, is longer than the previous route, and these new flows will drive a significant increase in ton miles. I know there has been some more new building orders over the last two months and probably more than in this graph, but the overall order book as a percentage of the fleet still remains near historical lows. In December, clean tanker rates reached record levels, while the order book was at an all-time low. So we do expect additional orders given the strong rate environment and aging fleet. However, there are still long lead times for the delivery of new build vessels. Shipyards are busy with orders from other sectors, and vessels ordered today will not deliver until 2026. All said, new builds are expensive compared to historical levels, and concerns about different propulsion systems to meet environmental regulations and the cost of these systems act as a constraint to ordering. When thinking about new building orders and fleet growth, the age profile of the fleet must be considered. On the lower left, you can see that from 2023 through 2026, 680 MR and LR product tankers will turn 15 years old. By 2026, there will be 815 product tankers, 20 years and older, and on a percentage basis, that means 50% of the Handymax fleet, 23% of the MR, 29% of the LR1s, and 12% of the LR2s will be older than 20 years by 2026. What we always prefer to see is low ordering activity; the number of vessels turning 15 and those that will be 20 and older is staggering against the cheap rate in this context. While the order book is at a record low, the spot market continues to remain at very strong levels. One and three-year time charter rates are at high levels and evidence that our customers’ outlook is one of increasing exports and ton miles against a constrained supply curve. What is different today is that typically as rates improve, the order book builds, and oversupply more often leads to a decline in rate. But we have only seen modest order book growth. Using minimal scrapping assumptions, the fleet will grow less than 1% over the next three years and using higher risk scrapping assumptions and fleet aging due to upcoming environmental regulations, the fleet is likely to shrink over the next three years. Seaborne exports and ton mile demand are expected to increase 4.4% and 11.5% this year, and 4% and 7.1% next year, vastly outpacing supply. The confluence of factors in today’s market are constructive individually: historically low inventories, increasing demands, exports and ton miles, structural dislocations in the refinery system, rerouting of global product flows, and limited fleet growth, but collectively, they are unprecedented. And at last, but certainly not least, Brian, it has been a pleasure to work for you over the last 10 years. Thank you for being a great mentor, leader, and friend to so many of us. You have always been the last person in the office, the first to give credit and the last to take it. Your hard work, humble attitude, and great sense of humor will be missed. I wish you the best in retirement. With that, I would like to turn it over to Q&A.

Thank you. Our first question is from John Chappell with Evercore.

Thank you, good morning. Brian, to echo the comments, it has been a real pleasure, and you will be missed. Maybe Lars, if we can pull you in here. James had some really great slides explaining what has happened since the start of the year. But certainly, some of the recent momentum, especially in the MR segment, has been somewhat seasonal, but maybe a little bit more extreme than anticipated a couple of months ago. Is it strictly a function of refinery maintenance, and that is what gives you a more optimistic view on the back half of the year, or is there something else going on either seasonally or counter-seasonally in the MR market recently that has caused some weakness?

Hi Jon. I think putting things in context, I think rates for the current quarter have actually held up quite nicely. The market is certainly a lot more volatile than we have seen when markets were poorer and we had a flatlining market. I think that volatility really defines that tightness. But we are operating from a higher base in terms of earnings. A lot of the things that we are seeing right now have been in the MR market, particularly in the Atlantic basin, which we saw a little bit of a drop or a substantial drop from mid-April. But apart from the mid-April backdrop in the Atlantic Basin, I think it has performed quite well in the second quarter. I would argue that rates in the Atlantic basin are bottoming out. I think even for this morning, the market for the TC2 has increased by 20 points in one go coming out of the box. As we start emerging out of this tremendous turnaround that James was talking about, I think we are coming into a season with a very good place. I’m personally very constructive of the rate environment for the second half of the year and also balance of the second quarter. The adage of stronger for longer that people have been discussing certainly is valid from where I sit. Generally speaking, as per James was talking about the stocks are low, refining margins, and complex refineries are still positive. You have got new capacity that is coming online. I think one of the key components here in terms of where the market is, the connectivity in the regional markets is defining a fundamental role that is being underpinned by this tighter supply that we have been seeing. So generally speaking, you are seeing a lot of imports coming from further fields. The Russian sanctions that everybody knows about will continue to influence the supply chains. So, I think a lot that we have seen, just to answer your question, is the substantial turnaround in all three regions has been playing a big role. I think in April, if I’m looking at my numbers, you had global refining maintenance topping at 9.4 million barrels. I think by June, July, six million of that refining capacity will return to the market. You then add on the additional new capacity from Al-Azhar, which is going to have its third train up and running in the third quarter. Their design is at 50% at the moment, but that is going to increase as well. There is plenty of additional product there to be moved, and I think this is just, to be honest, a market correction in terms of the refining turnaround that has particularly been strong in April.

Okay. Super helpful. Thank you, Lars. And my second question, I don’t know if it is for James or Robert or maybe come back to you, Lars. It seems like the pace of your one and three-year time charter contracts has slowed a little bit from the back half of last year. But if I look at Slide 19 on the upper right-hand side, the rates for the MR one-year and the three-year for and the one-year for LR2s have been pretty stable. So is that just been more of a strategic decision to hold on to more spot exposure, as we go into the back half of the year that Lars just laid out, or maybe those rates are holding in there, but the liquidity has dried up a little bit?

Well, I think it is partly that. I think that if I just take the first question, I think that, while weakness is relative to the thermal point that the market may be slightly weaker than its all-time record highs, we would hardly describe a market that is averaging $40,000 a day in the second-quarter bookings as weak. I mean, that is a huge 20 annualized run rate on a $50 stock, thank you very much. That is important because we are seeing a very steep discount in many points during this first quarter of the actual three-year charter rate to the actual spot market, and what Lars, as you correctly pointed out, John, is indicating for the balance of this year. At the same time, our balance sheet is getting stronger and stronger. And therefore, the requirement or the need or the wish to seek the security of three-year charters is less when we are getting such confirmation in the actual spot market. I mean, we simply have an incredible situation where every single report that we are reading indicates that we are going to continue to see growth in product tanker demand, headline product demand around the world for the balance of the year, regardless of someone being very pessimistic about the world economy thinking it is in recession or going into recession. We know that the actual fleet itself is fixed, and we know that those ton mile multipliers related to the binary demands still continue. So a lot of it is we have been really choosy that we have hit the record rate on our three-year charters and our LR2s each month over the last three months. But there is less of a need because I guess we are more optimistic about what is happening. I mean, think of all the doubts we have been through in this first quarter. What you have been talking about and we end up in the second quarter right now that is really a terrific basis for what we could see going forward.

Yes. That will make sense.

And we have $800 million of pro forma cash. We are just about to do an incredible refinancing. So that balance to create on charter security is really just going now.

Thank you. Our next question is from Omar Nokta with Jefferies. Please go ahead.

Thank you. Hey guys, good morning. Also Brian, congrats on the retirement. We will miss working with you. You are leaving obviously the company in great shape. We have got pro forma $800 million of cash here. Wanted to ask about kind of priorities, and I think Emanuele, you sort of outlined this early on. You have got the $1.4 billion of net debt. Can you maybe rank your priorities in terms of the use of cash for the next few quarters, and if you guys have set yet a target of what you would like that net debt number to get to?

We haven’t fixed the target for the net debt, but we have said that we don’t intend to go to zero. We are also creating a debt facility on top of other commercial lending debt facilities, which would probably, if you added those up, give you some kind of base position, and then you are going to have normal amortization probably from that point, but there is no target yet set. We are going to continue really with what we have done for the last quarters: we are going to take down our total debt and we are going to prioritize buying back those sale leasebacks, too. When the new facility is closed, that is going to really accelerate that basis. But we still have been able to do all those things, and we still have ample capacity to take advantage and create value for our shareholders through buying back stock if the opportunity at what we continue seeing as very value creating levels remains. That is why we have increased the share buyback program.

Yes. Thanks, Robert. You bumped the dividend, then you have recharged the buyback, which is a clear indication there. And then maybe just second question would be, asset values continue to move to push higher here. Does that change at all your view on how you have been conducting the business? Does it go from harvesting the assets today versus, say, monetizing down the line? How do you think about that in this context?

I think especially when you have got very large spreads now. I mean the spread between our NAV or our calculated NAV and the stock price has only increased in the last three or four months; the cash you have seen has come in. Look, we are open, and I think it is fair to say that we are prepared and are indeed in discussions about taking advantage of maybe selling a couple, two, three, four or whatever of the older vessels. That would just be a smart thing to do with when you have got such a wide discrepancy at the moment.

Yes. That makes sense. Alright, well thanks, Robert. I will turn it over.

Thank you. Our next question is from the line of Sam Bland with JP Morgan. Please go ahead.

Yes, thanks for taking the questions. The first one is, I guess we are aware of the midterm supply and demand picture, but then you have got all these different shorter-term effects like refinery maintenance and inventory levels. Could you just talk – I know you touched on those in the opening comments, but where roughly do you think we are on those shorter-term effects? Are we kind of at the peak headwind phase and from here, it turns in terms of tailwinds as refinery activity starts increasing, or where roughly do you think we are in that cycle? Thanks.

Lars, James?

I will start. Good question, Sam. Look, I think for almost two years we have seen massive draws in inventory and right now we look at a market where Russia has been able to export more product than pre-sanction levels, but it is unclear if they will be able to maintain those levels of exports in the long-term. There are a lot of assumptions around those volumes being moved into the market. But I do think the inventory data, if you look specifically at the U.S. because it comes out weekly, diesel is 12% below the five-year average; gasoline is something like 7% below the five-year average. So we are seeing inventories continue to decline despite higher volumes and so I think as we move to the back half of this year, demand is going to increase from a gasoline, jet, and naphtha perspective and it is going to be much more than a slight drop in, say, distillate demand from trucking. So we are still extremely bullish on the outlook and we haven’t seen anything in our market, whether it is flows or volumes as shown in the graph that suggest things are lower and we do expect a stronger back half for demand this year.

Okay. Maybe I could ask a second one. It is on the order book number. I think it is 6% in the presentation. I mean, that has come up very slightly. What is your sense of market participants? Are we starting to see a real acceleration in orders or would you say it is still quite subdued at the moment? And I suppose, do you have any sort of feeling on where you would be happy for that 6% number to go to and still think that the supply-demand was quite healthy? Thank you.

Maybe I can try that one. I think that as the orders come in, they go further away. So the easy pickings, I would say, are more or less gone, and the easy pickings would have been filling in the end of 2025 - in early 2026. So now each step is expected to be even more expensive to go out in. I think that when you are booking forward the market 2.5 years, I think that you don’t really begin to even think about things until you are up to a 10% total on order, and that itself wouldn’t be very much. Now that is just 3% each year, and that would just be, in historic terms. Now we have a situation where if you look at the graph, the grain change has put up; this is real stress out of that in the industry in terms of over aging to the product fleet. So you have got to set that in the context of how many ships they are going to be turning 15 years old, turning older over this next three, four, five-year period, and that is huge, way more than the 10%. So I think that we can be - I get the headlines. The headlines now look as if there is an acceleration, there is a little bit of acceleration that is kind of dramatic and it is, oh my God, what is happening. But when you put it in the perspective of the actual ongoing fleet, it is not something that we are concerned about at all. But I think that in general terms, you want to look at tanker fleet or any type of shipping fleet. Once you cross 10%, we are all pretty safe.

Robert, Lars here. I just think also, I would just like to add the shifts that you are talking about. They are also going to be struggling to meet the new carbon regulations that are being introduced in the coming years, right? So there will be more inefficient vessels, and potentially, that will also increase the scrapping element to it as we move along the line.

Understood. Okay. Thank you very much.

Yes. And I would just like to highlight for everybody. These are the two red lines we see. The red lines we see are the, oh my God we are seeing these new building orders, and the other one is this thing to do with recession headline demand. Because just the increase in jet fuel going around the world, which is a tremendously important thing for the product market, especially new ships or whatever is - we can’t get to a scenario in quarters, where you don’t get continued product tanker demand. That is even without dealing with just trying to refill inventories, which is required.

Can we have the next question, please?

Great. Good morning. Brian, definitely good luck in the next phase, and thank you for all the help over the years. It has been a great education and learning about the business. So thank you to you and the team, and good luck. Maybe Robert and Emanuele, you are talking about the oldest fleet or the aging fleet overall, kind of very slim new orders. Some are coming on, harvesting the fleet, maybe selling some vessels at the peak or selling some vessels. Are you then looking at the peak of the market? If we are starting to see those new orders that you are talking about coming in, you are looking at maybe selling some vessels? How should we step back and think about that? And then as the second part to that, do you need to renew your fleet right as it starts to age here? Do you need to go in and maybe it is not expansion, but it is just simply renewal of the fleet? Is that something you would look at or is it just more monetizing at strong levels?

Well, what we need to do is to provide our shareholders a return, and we can get selfish with it. We need to, as Jack Welch said, show me how a person is paid, and I will show you how they manage. Well, insiders are the largest shareholders of Scorpio Tankers. The idea of selling all the vessels has nothing to do with whether or not we think the market has peaked, which we don’t think it has. It is all about the fact that as Lars pointed out, older vessels are going to become harder to manage over the next couple of years. Whereas older vessels, we could simply sell and you could use that capital to accelerate debt repayment or accelerate a stock repurchase, depending on if the stock continues to be massively discounted to its NAV. But there is no requirement for us to renew at all, and our fleet can quite happily age and go through for many years going forward here.

Okay. And then maybe, Brian, if I could bring you back in the OpEx; I just want to run through. Obviously, you noted it was down because of the fewer vessels. I guess COVID costs came off. Maybe talk about what is going to happen with OpEx going forward, given inflation and your thoughts on OpEx into 2Q in the second half.

That is exactly right. Inflation, so there is still some inflationary pressure, and delivery costs and things like that are goods being delivered. So we think it is going to take up a little bit higher from where it is here. So again, if it was less in between this quarter last year, this quarter this year, and last year is because of fewer vessels, but we do disclose the average daily cost so that is in there. I think that again, that is going to move up a little bit over the next few quarters here.

Can we put parameters on that?

How much inflation is going to be where our equipment is delivered? So you can look at it. I don’t know, 2%, 3% for now. Maybe around here.

Okay, alright, great thanks for the time and that is it I guess.

Thanks, Ken.

Thank you. Next question is from the line of Frode Morkedal with Clarkson Securities. Please go ahead.

Thank you. My discussion on the refinery turnarounds and the product inventories, I guess, I have a high-level question on arbitrage trading. I guess at least historically, it was fascinating to see, let’s say, one barrel of jet fuel could be resold many times after it was produced. And that led to this very high multiplier, maybe four or five times compared to oil demand in terms of trade. So I’m curious to see or know how prevalent is this phenomenon today? Do you actually see barrels moving from, let’s say, Europe to New York and then being resold to other destinations and so on, or is this something that could be forthcoming?

Hi Frode, it is Lars here. I’m going to try and give you a stab at that. I mean, there is no doubt that the product market in general, from a trading perspective, is traded multiple times. We have seen multiple times throughout that we have change of orders or there is a different trading behavior depending on where that particular arbitrage is. I mean, of late there have been some spreads going on where you have seen a lot more Caribbean cargos that have been destined to a New York car because of the pricing structure that is product that has initially come from the east of sewers from India or whatever. Then you see them putting them into storage and then breaking bulk and moving to different places. We see cargos moving into the U.S. West Coast and in particular into Mexico on the West Coast there, which previously would have been cargo that had been sourced out of the U.S. Gulf. We have seen throughout the first quarter a lot more cargo suddenly being moved into Mexico and the West Coast out of North China and Southeast Asia in general. So in terms of diversity of the cargo base and in terms of how that moves around, we see a very healthy level of disparity around - and obviously this is one of the things that we in the product tanker market really enjoy, is the ability to triangulate, and that we certainly have been able to see a large extent. I have been talking about this before. In particular in the LR2s, we have been seeing how that particular unit has moved from a one-dimensional latent type of vessel to being a true arbitrage mover. We are today moving LR2s into Japan or North Asia, then reloading in North Asia and China down into Australia. Then we load again out of Australia and take it back up to North Asia or into the AG or even to West Africa and then load out of West Africa, etc. This whole way of a fungible market and products is certainly still there. I think it is going to remain to say that because of the constrained logistical chains that are in place, we will start to see a lot more of cargos double handling on the back of what we have seen with the Russian sanctions, and this obviously will increase ton miles as well.

My second question is on the new refineries in the Middle East, any update since the last time you talked about that and what do you see as an incremental effect on the product tank market going forward?

So, I mean this is only what I have heard, and it is not something that is officially reported, etc. But we know that two out of the three trains at Al-Zour are up and running. I have heard that the third train is going to be up and running in the third quarter. We will, at the end of the year, start seeing 640,000 barrels per day of product being shipped out of Kuwait, which is substantial. That incremental barrel obviously is going to make a huge marginal change in the supply of vessels as these vessels learning out of Kuwait are all going to be going long-haul for a large part, particularly, the heavy ends will be going west and the light ends will be going east, which again is going to influence the ton miles in a very positive sense. I have heard that the refinery is now up and running around 50%, and that also is increasing as we set out the second half of the year. So there is a lot of additional capacity that is just about to come up and running; they are already open. We can see already on the volumes that are coming out of both Kuwait and the Red Sea have made a fundamental impact on product tankers, not only on LR2 but also on the MRs. That is certainly something that we are very happy to see. That will increase again in the second half of the year.

Thank you. Our next question is from Cherif Al Megrali with BTIG. Please go ahead.

Good morning. Thanks for taking my question. I want to ask how are you thinking about returning capital going forward? Because the dividend saw a nice boost and also the share repurchase program got reset. Obviously, the standard leasebacks are a priority, but it is looking like you have a line of sight on that now, which are free of more cash flows for other activities?

Sure. Well, I think we just look at what we recently did. We bought back a lot of stock in the first quarter, and I can’t remember exactly what it was, but it was 5% or 6% of the company. We can see that is projected to be going down, and the cash and liquidity is as high or higher than it was at the beginning of the first quarter. The rate guidance is higher, the stocks moved nowhere. You would expect that there would be a strong priority of allocation of capital at the moment, combined with the continued strategy of taking debt down. We thank you for observing the dividend. We said before that we are raising our regular dividend. We are doing it in increments that can be some kind of guide to the future, and we are not going to go to percentage payout positions, but we would always leave it open, if required, to do extraordinary dividends. But all these that really depend on where the value is in the stock price. You have a major dislocation right now between - don’t forget the actual NAV that is one way of measuring it. As James pointed out, to the present run rate, we are nearly making something like $20, $21 a share in cash flow on a pretty new fleet, and that is on an annualized basis. If you forget cash flow, you are basically indicating that the value in the company is even going to be more discounted going forward, but that isn’t overwhelmingly high priority at the moment, because of that or has been in that first quarter period.

Thank you very much.

Thank you. Our next question is from the line of Liam Burke with B. Riley FBR. Please go ahead.

Thank you. Has there been - I know time charter activity has sort of flattened out here, but has there been any recognition by customers that there is an impending shortage as the MRs age for them to start time chartering either on longer durations or higher rates?

I just want to say that there is still decent inquiry for TC business, even with the kind of the slow - the very brief slowdown that we have seen. I think it is fair to say that end users share the same constructive view of longer-term market rates. We see plenty of questions coming across at rates still at elevated levels compared to last. The last time I have seen this type of interest for three to five-year time charters is probably the mid-2000s. So there is plenty of interest out there.

Okay, great. And the balance; I mean, you talked about the dividend and buybacks in terms of the balance, but is there an NAV for your fleet that you consider when looking at your buybacks, or is it just stock price?

No, of course. We look at the NAV, and we look at the cash flow and we look at what we can afford to go back to the questionnaire before. I mean, you can see what is happening in this balance sheet, and there is going to be - we are not going to take the debt down to zero. You don’t go and negotiate $570 million of bank credit and then negotiate up to a billion with the idea that you are going to pay the whole thing down in a year. That would be massively inefficient. So, we are going to have a base level of debt. That level is going to be very low compared to not even the real loan-to-value, but it is going to be very low to the book value of the company, which is substantially lower than where the loan-to-value is. When that point is reached, obviously, if you still have a huge amount of cash, which we would hope to have, all of the income coming in then becomes surplus to what is happening. So when you measure buybacks, the net asset value is only one guide. We are trying to model for where the company is worth at the end of the year. We are also trying to, in two years, three years, we are also trying to model it in terms of if we got something wrong, if there is something that we can’t account for and let’s say values were down 30% or something. You look at it that way at the moment; it is not too difficult to calculate either way.

Great. Thank you, Lars.

Thank you. Our next question is from Chris Robertson with Deutsche Bank. Please go ahead.

Hey guys, thanks for taking my question, and Brian, good luck with retirement. Best wishes to you in the future. I just wanted to ask here around the scrubber fuel spreads that have come down a bit over the last few months. Can you comment about what’s been driving that? Do you think this is a structural change or is this a seasonal effect?

I will take that one. Hey, Chris. I don’t think it is structural. I think if you look at the demand for high sulfur fuel oil, it is predominantly for vessels with scrubbers and for power generation in the Middle East. I think the pressure is coming from distillate, and you have seen distillate prices come down. You have seen diesel prices come down, and it is just a reversal of kind of what we have seen for the last two years. You have had a very, very strong and tight distillate market. You know, people have been worried about shortages, so it is probably an overreaction to that. For the foreseeable future, we are still constructive on that spread. Does it hit the high 300s as it has in the past? Maybe not, but a range of 100 to 250 I think is reasonable.

Okay, thanks for that. And just following up on a few questions from earlier around the new building orders, and this really relates to shipyard capacity. So as you look at the aging fleet, not only on the product side but also the crude side and in the dry bulk market as well, what are your thoughts on our capacity to be able to handle these fleet renewal efforts that seem to need to be done, and shipyard capacity - can that be ramped up over the coming years to accommodate all these things, or do you think there will be a crunch which further limits fleet growth?

James?

Well, I was actually looking at shipyard capacity, and if you compare it to historical levels, it is certainly down. I wasn’t looking at other sectors; I was really looking at products, but if you look at the MR fleet that is on the water today, I think something like 800 or since delivered actually. So out of 2,200 ships, I think 800 are from shipyards that are no longer active. There is certainly capacity, but I think the best answer to your question is if you wanted to order a lot of ships today, they wouldn’t come until 2026. That is what you are seeing with the last couple of orders, and 2025 is full. So I do think there is going to be a constraint on the capacity side. But even if you were to order hundreds of ships, given the age distribution of the fleet, there are going to be more ships turning 15 to 20 years old than will be delivered over the next couple of years.

Got it. Alright, thanks for your time. I appreciate it.

Thanks, Chris.

Thank you. This concludes our question and answer session. I would like to turn the conference back over to Emanuele Lauro for any closing remarks.

We don’t have any closing remarks. Rather than thanking everybody for the time today. So we will speak to you soon. Thanks a lot. The call may be concluded.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.