Scorpio Tankers Inc. Q1 FY2024 Earnings Call

Hello and welcome to the Scorpio Tankers Inc. First Quarter 2024 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to James Doyle, Head of Corporate Development and IR. Please go ahead, sir.

Thank you for joining us today. Welcome to the Scorpio Tankers first quarter 2024 earnings conference call. On the call with me today are Emanuele Lauro, Chief Executive Officer; Robert Bugbee, President; Cameron Mackey, Chief Operating Officer; Chris Avella, Chief Financial Officer; Lars Dencker Nielsen, Chief Commercial Officer. Earlier today, we issued our first quarter earnings press release which is available on our website. The information discussed on this call is based on information as of today, May 9, 2024, 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' filings which are available on our website 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 be giving a short presentation today. The presentation is available on our website on the Investor Relations page under Reports and Presentation. These 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 2. 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 to everyone. We are pleased to announce another strong quarter of financial results. In the first quarter, the company generated $293 million in adjusted EBITDA and $207 million in adjusted net income. The market dynamics that have been driving the favorable rate environment continue. Global demand for refined products is robust. Refining capacity remains dislocated, and the maritime supply chain is still constrained. In addition, geopolitical disruptions have tightened the supply curve further, and the resulting cash flows from a heightened rate environment have been significant as well as transformational for Scorpio Tankers over the past few quarters. In Q1, we continue to focus on reducing our leverage. We made $262 million in unscheduled repayments on our debt and are set to repay an additional $118 million during the second quarter. As previously mentioned, the balance sheet and quality of Scorpio as an investment improve each day. Today, our net debt stands at $811 million, which represents the lower end of our target debt level. We anticipate a significant reduction in our cash breakeven starting in the third quarter of this year. In fact, we are working with our lenders to prepay existing debt, which would decrease our daily fleet operating breakeven to $12,500 per day, a figure near the lowest TCE rates and in the company’s history. This breakeven once achieved would be amongst the lowest in the industry despite Scorpio Tankers actually still owning the most modern product tanker fleet out there. With net debt near scrap value and our modern fleet, low anticipated cash breakevens, we have positioned ourselves to act opportunistically to increase shareholder returns and further reduce debt. If things remain the same, given the share price discount to NAV, we would favor buybacks as we see them more accretive to shareholders than further increases in regular dividends. As we look forward, we remain optimistic with low global inventories, robust demand, and limited growth supporting factors for the continued strength in the product tanker rates. We remain committed to delivering value to our shareholders and appreciate your continued support and confidence in Scorpio Tankers. I would like now to turn the call to James for a brief presentation.

Thank you, Emanuele. Slide 7, please. Never have there been so many factors driving our business. Individually, these factors are positive. Collectively, they're unprecedented. Increasing global demand, low inventories, and shifts in refining capacity have increased seaborne exports and ton-miles. At the same time, the fleet has become bifurcated, and supply growth has been limited. The result, product tanker rates have remained at high levels for the last 2 years. Today, spot rates for MRs are almost $40,000 per day and $50,000 for LR2s. While LR2s have captured headlines because of their higher volatility and impact from disruptions in the Red Sea, MR rates have shown remarkable consistency and serve as a clear indicator of the robust underlying global demand for refined products. This continues today. Slide 8, please. Refined product demand has been extremely strong. We expect an increase of 1.5 million barrels per day through year-end, driven by increases in diesel, gasoline, jet fuel, and naphtha. And yes, as global demand has increased, so have seaborne exports. Slide 9, please. The increase in demand has led to record levels of seaborne exports. In March, exports reached 21.1 million barrels a day, an increase of 1.1 million compared to 2019 levels and 500,000 barrels a day year-over-year. The increase has been primarily fueled by heightened demand for diesel, gasoline, and jet fuel. Moreover, not only have exports grown, but the distance these barrels are traveling has also significantly increased. Slide 10, please. As refineries have moved further away from the consumer, the distance the cargo needs to travel has increased. Refinery closures in Europe, U.S., and Australasia have decreased local output, increasing the need for imports. Conversely, new refining capacity in places like the Middle East has boosted production, leading to an increase in exports. The structural changes in capacity have and continue to reshape flows. As ton-mile demand increases, vessel capacity is reduced, and supply tightened. Slide 11, please. Demand for ton-mile has notably increased. Excluding Russia, ton-mile demand has increased by 21% since 2019. If you include Russia, ton-mile demand increases an additional 6%. This suggests that it's not only geopolitical events driving ton-miles, but changes in refining capacity and increasing export. That said, geopolitical events have required the rerouting of vessels, leading to a less efficient fleet that must cover longer distances. Slide 12, please. Strong spot and time charter rates coupled with an aging fleet have led to an increase in newbuilding orders. Currently, the order book set to deliver over the next 3 years represents 14.8% of the existing fleet. Meanwhile, the fleet continues to age with the average age of the product tanker fleet now at 13 years. By 2026, it is expected that 50% of the fleet will be older than 15 years and 21% will exceed 20 years in age, positioning them as potential candidates for scrapping. Thus, using conservative scrapping assumptions, fleet growth looks modest over the next 3 years. Slide 13, please. This year's fleet growth is expected to be about 1.4% and with seaborne exports and ton-miles expected to increase 2.6% and 2.7% this year, it is vastly outpacing supply. Looking forward, we are very constructive on the supply-demand balance. The confluence of factors in today’s market are constructive individually, but collectively they remain unprecedented. With that, I would like to turn it over to Chris.

Thank you, James. Good morning, good afternoon, everyone. Slide 15, please. The first quarter of 2024 combined another strong seasonal quarter with the dramatic expansion of ton-mile demand that was triggered by the conditions in the Red Sea. Over the past 5 quarters, we have generated $1.3 billion in adjusted EBITDA and $777 million in adjusted net income. These results have enabled us to reduce our debt by $557 million, pay $79 million in dividends, and purchase $490 million of the company's stock in the open market at an average price of about $50 per share. Slide 16, please. Deleveraging has been our primary focus. As of today, we have reached our net debt target. We have not only reduced our leverage, but we have also simplified our balance sheet through more traditional forms of financing at lower cost and more flexible terms. We have successfully refinanced almost all of our legacy lease obligations into more traditional and lower-cost secured bank debt, which carries margins of less than 200 basis points. Our gross and net debt as of today stands at $1.4 billion and $811 million respectively. Slide 17, please. We are currently in discussions with the lenders on our $1 billion credit facility to make a prepayment of up to $223 million on the term portion of this loan. This amount represents up to 2 years of term loan amortization, which is for the period commencing in the third quarter of 2024 through and including the second quarter of 2026. This prepayment remains subject to lender credit committee approval and the execution of definitive documentation. If approved, repayments would not be scheduled to resume again until September 2026. We are taking this step in an effort to effect a significant and immediate reduction in our cash breakeven costs. Accordingly, we project that the company's daily cash breakeven costs, which include vessel operating expenses, cash G&A, interest payments, and regularly scheduled loan amortization will come down to about $12,500 per day on a pro forma basis after giving effect to this prepayment. We expect to continue to pursue ways to reduce our daily cash breakeven rates through additional debt and lease repayments. By pursuing a long-term reduction in our cash breakeven rates, we have positioned the company to opportunistically increase shareholder returns. Slide 18, please. Our second quarter of 2024 coverage across the fleet, including time charters, is averaging close to $38,600 per day. These rates demonstrate the company's operating leverage. At $30,000 per day, the company can generate $547 million in cash flow per year and at $40,000 per day, the company can generate $937 million per year. It is important to note that these estimates do not include any potential impact of the prepayment on our $1 billion credit facility. And with that, I'd like to turn the call over to Robert.

If Robert is not available. I don't know, Robert, if you're on mute or something, but...

No, I'm sorry. Sorry. Well, I'd like to thank you very much, Chris. It's fantastic. And I just want to say just how enthusiastic all of us here in the Scorpio group are. We know we've been climbing this mountain a long time, many years, and we finally got to this incredible stage where we've generated a lot of things going for us. We're the largest market cap company of pure product tanker companies. We have the highest liquidity in dollars per day trading volume. We have the newest fleet. We have the least need for fleet renewal and a sustainable dividend policy. And now we're ready to go. We're ready to go to the next place. As Chris pointed out, we're even going to be, by the end of next week, below on that date range that we set out. Emanuele stated from the beginning that with our stock trading well below NAV, our priority for return of capital would be share buybacks. Finally, we're expecting, through all this hard work, with the delay of gratification that the shareholders have had in the last 6 months. We understand that can be frustrating, but it's been worth it because these operating cash breakevens are really low right now at $12,500 a day. That's like trough earnings. It's even lower if we actually looked at the breakeven related to the spot part of the fleet. But $12,500, that almost withstands anything, that withstands the terrible COVID year. We're about to have our fair share of luck because right now the spot market is moving. It's moving upwards strongly across all sectors. And as James pointed out, the factors out there are super favorable, and there's really no need for us to feel anything other than bullish. We observe that there is kind of fear the stock trades down. All the tanker stocks are weak. Whenever there's a mention of a ceasefire in Israel, Gaza, I guess it's because of the fear of opening up the Red Sea. But first of all, a ceasefire in Gaza does not necessarily mean you open the Red Sea straight away. Secondly, let's look at that fear. If we look into 2023 where there was no disruption to the Red Sea, the MR market has been more or less the same in this first quarter, this first 5 months as 2023. The LR2 market, depending on the quarter, is maybe $5,000 to $10,000 stronger than 2023. But let's remember, 2023 was an outstanding year. So it's not something we should be afraid of, especially as the company's breakeven levels have dropped so much because of debt renewal. It's arguable if we look at the data, the historical data here, notwithstanding the fact that the market itself is fundamentally stronger today than it was in 2023, that the company could still earn pretty much more than what it did in 2023 just because of the debt reduction. So I think that some of the fears out there are overblown. In any case, as Emanuele said straight away, the company is in great shape. It can face anything now and consider that situation as a great opportunity. With that, we're really excited and really bullish and just like to open that over to questions.

Our first question comes from Omar Nokta of Clarksons Platou Securities.

I've since moved to Jefferies. First off, congrats on reaching your debt target. And Robert, as you mentioned, you've been climbing this mountain. Now you're here and every available play is there for you now both strategically and financially. I guess maybe first saying, now that you have reached this target threshold, does this change anything in how you're viewing the business? It sounds clearly that the buyback is now back in focus and the pause that we've seen for the past maybe 6 to 9 months as you focused on debt reduction has been well worth it. But in general, is there any kind of changes now that you've reached this target regarding the business that are coming?

No, we don't believe it's worthwhile to order new ships or buy additional ones at this time. However, we are open to selling some of our older vessels as we take advantage of strong market prices. It's not a drastic situation; we are proceeding gradually. We've observed that 3-year rates, as well as 2-year rates, have increased significantly. Our efforts to reduce debt and interest costs have made certain charter levels very attractive. Knowing more about our revenue could allow us to be even more proactive in other areas. Overall, the reduction in our cost structure has brought about changes in our approach.

No, it’s nice to see rising interest rates and lower breakeven points during such different times. I have a follow-up that’s more market-related. Clearly, LR2s have performed strongly, establishing both a higher floor and ceiling this year, especially compared to other segments like crude or products. Rerouting has certainly played a part in this. However, I’m curious about how much LR2 capacity that was previously trading in dirty markets has returned to clean trades to capitalize on this situation. I ask this in light of the ongoing discussions about the TMX pipeline. Does this possibly affect the cleanup of 30 LR2s? Could clean LR2s potentially switch back to dirty trades to take advantage of the TMX opportunity? Any insights you can provide on this would be appreciated.

Yes, I'll take it. I mean LR2 clean-dirty trading has obviously taken place for years, right? I mean, it oscillates. And I looked at this the other day. Can you hear me?

Yes.

Yes, we can.

Yes, sorry. And it has oscillated up and down between 220 units to 250 units trading clean over the last 3 or 4 years. So there has been a number of ships that have gone into clean from the dirty trade as they clean up. And you might recall that it takes a little bit of time to do that. So it's obviously a big decision. If you look kind of more strategically in terms of number of vessels from a trading history perspective, it has plateaued. It's not something that is a big issue for an LR2 owner to consider because clearly, it's a very decent and a very constructive market. I think it's fair to say before answering your question on TMX, which I think is a really important one, is when I look at it holistically on the market, it's close to firing on all cylinders, notwithstanding what goes on with the Bab-el-Mandeb and not going through Suez because we still have a lot of refining output that is going to increase over the next couple of months in June and July as we go out of this turnaround season that has taken place in the first quarter. And here, we still had a very strong first quarter. Now we're going into the second quarter, and we can start seeing that there's more runs being built up, which is great. So if you look at Asia MRs, they have been trading, as James was saying earlier on, around $40,000 per day. Those rates have been increasing. Transpac has been good rates as well. China exports is going to be a big thing as we move into the second and third quarter. And again, talking about the LR2s, we've seen rates now moving up strongly. I think 15 points today trading to 25 to 30, probably gainfully around $60,000 a day for our ultra-long-haul business same time. The Middle East has been good for MRs as well, trading probably $45,000 a day round voyage. The West has been a little bit slow, a little bit on the back of this refining turnaround. We've seen good activity this week as well. Rates have ramped up very much in the U.S. Gulf, a couple of $100,000 for cross-curves. That's also now trending up towards $30,000 a day. So all of this is good stuff. And James also talked about the new refineries, and we see this every single day now. We live this every day, and we can see how utilization levels have moved up on that. And also the disparity of the cargo selection that we can do, the triangulation availability, not only on MRs, but also now certainly on LR2s have impacted the way we do our business that’s certainly in the ton-miles. When you talk about TMX, I call that one of the new dynamics, which is like Dangote, which is a significant development. If you ask TMX, they say that I think it’s about 30 Aframax liftings per month out of Vancouver. And that’s a lot of Aframaxes. We've seen a couple of cargos now that have gone to Asia. If it goes long-haul, it could be more than that. If it goes to California, it will be less than that. Whatever way you look at it, it's going to have a big impact on the Aframax market and through that also on the LR2s because there will be additional bottlenecking around these things. And when you talk about forward LR2 supply, you need to look at the overall context and you have to include the Aframaxes. So the Aframax order book today is extremely low when you combine it with the LR2. So you put all of this together, together with the fact that the LR2 and Aframaxes will reach 20 years of age; it doesn’t equate to that. So I see this as a strong input or one of the new dynamics that is really going to improve the overall demand for Aframax/LR2s as we move into the end of 2024 and beyond.

Great. That's very obviously detailed and helpful color. So I appreciate that. And Robert, thank you as well. I'll turn it over.

Our next question comes from Jon Chappell of Evercore ISI.

Quick follow-up on strategy as it relates to vessel sales. It seems like the pace of disposals has been picking up a little bit through some of the announcements you made today. By my count, 6 2012 and 2013 vessels left. Clearly, you already have a lot of operating leverage. Per your commentary about your own NAV, there seems to be an arb there of a potential sale. Should we expect those to exit the fleet at some point this year? Clearly, you don't need it from a deleveraging perspective, but can only just add to the bounty for the second half buyback?

I think that the better way to describe it is we'll deal with those opportunities opportunistically along the way.

I don't think it's okay.

We want to discuss. I just don't think it's useful for us to discuss actual types of vessels and what our plans would be. I think it's much better for us to all the shareholders to just accept that we'll carry on. If we see vessels that are bids that are attractive to us, then we might engage and do that. We don't have to, but we might want to.

Then for a follow-up to go back to, I think, James' first chart, I think the LR2s get a lot of focus because of the volatility there. But as you noted, the MRs have been pretty consistent throughout. Would it be fair to characterize the LR2s to be more of the disruptively impacted sector? But what's been happening in the MRs is kind of slow and steady, grinds higher, and is more structural and related to demand and the refinery dislocation. And therefore, if there were to be some perceived, I guess, peace across the impacted regions, it would seem that the MRs would still have more of a structural boost and maybe the LR2s would be the ones at risk?

I'll let Lars answer that shortly. However, I believe we mentioned that historically, there has been a wider spread between MRs and LR2s, which has benefited the LR2s, although we are not currently transiting the Suez Canal as the owning group. Nevertheless, in 2023, the spread continues to be quite favorable for the LR2s. It's challenging to assess the time charter market right now. From what I recall, the current time charter market indicates a significant advantage for the LR2s. We're not suggesting that the market believes the Red Sea will be navigable; it's more about the fact that some concerns may not be as significant as they seem. Lars, would you like to add anything?

I think what we're seeing today also is that the LR2 is becoming more of a fungible unit. There is a lot more arbitrage that takes place on an LR2 today. The whole concept of what’s going on, going back to the TMX thing has meant that the crossover between an LR2 and Aframax is evident. You can see that on the time charter market. You can also see it in the ordering market for newbuilds where most owners considering where the price point is today will be willing to pay the marginal increase for an LR2, which is limited now to have that optionality. So when you look at LR2/Aframax, you've got to look at them together holistically. I think that, to your second point, Robert, where you talked about these factors of Bab-el-Mandeb and so on, obviously impact the longer-haul business, which, of course, impacts the LR2 by virtue of its size, and therefore, you have it outsized. I think, on the normal market conditions, there will be that spread. But I do think that they both are kind of very viable, fungible tradable assets.

Yes. Recently, INSW provided clarification in their results where they fixed MR and are fixed at an LR2. On that day, there was a noticeable positive spread, quite a wide positive spread to the LR2.

Our next question comes from Greg Lewis of BTIG.

I guess my first one, Robert, James, or Lars, is around the time charter market. I mean you called out the pickup and I guess, rates in the more longer-term 2-, 3-year time charter market. Just kind of curious at a high level, what types of customers are looking for those? Is it kind of the usual suspects? And as we think about the appetite from those charters, is the impediment on getting deals done? Like how wide do we think these bid-asks are at this point?

First of all, I'd say that the bid-ask is not very wide because deals are being concluded quite regularly at this moment at levels that are gainful, both on LR2s and also on MRs. And there's quite a few out there looking consistently for longer-term charters, charters between 2, 3, 4, or 5 years. And basically, the client base is wide. It is national oil companies, it's traders, it's end users, and it spans the globe.

And just real quick, is there a preference for scrubbers?

There tends to be a preference for scrubbers, but it's not certain. There are some who do not want them, but I would say about 80% prefer scrubbers.

I wanted to touch on Dangote and its potential as the year progresses, and even into 2025, to be a significant driver of volumes. Are there any updates you can share regarding its development? As we consider the differences between medium range (MR) and long range 2 (LR2) markets, do we expect it to evolve more towards an LR2 market, or will it remain mixed? Any high-level thoughts on that would be very helpful.

So it's very early days still, Greg. Dangote has just recently started up. I think it's currently around 300,000 barrels a day. I think there's a second distillation unit that's coming on stream in 6 weeks or something like that, and that could start ramping up. Then suddenly, the product is going to become finished grade, which is not the case right now. We have seen exports. We have done a couple ourselves. There's been exports done on LR2s, long-haul. There's also been a lot of MRs being done as well out of Dangote, which primarily has been going to some of the other West African countries, all very interesting from a product tanker owner perspective. As this startup has progressed, it seems that we are at a stage where a new export market has emerged in the Western Atlantic, in conjunction with the continent and the Mediterranean. Therefore, you need to adjust vessel bidding or pricing strategies, moving away from the stagnant West Africa, where imports were typically the focus. It’s anticipated that imports from the continent will decline over time. We have discussed this previously, but there is a logical trade-off because the premium finished products from Dangote, like ultra-low-sulfur diesel and 1 ppm gasoline, command higher prices in markets such as the United States and Europe, compared to the lower-grade products usually used in Nigeria. So it obviously remains to be determined what the political pressures around that are going to be. I think that remains to be determined in some way or form. The other issue as well when it comes to Dangote, which is also something we need to find out is the whole supply infrastructure is also a big question. I think there's going to be some issues around bottlenecking and double handling, that's going to pose. We can see that some of these things will need to have double handling; you need to have bigger ships to work as STS as they do already today. So it's going to be a really interesting situation to watch develop over the next year. I think the final thing also that's quite interesting is that where it's placed, Dangote has excellent potential as a swing refinery. You can go east and west. I think as this thing starts developing as a real up-and-running refinery with the size that it has, it would have a lot of potential because they will have a lot of NAFTA that can be exported. It will have a lot of jet fuel as well that they would not require in the local market. So it's an interesting one. Headwinds in terms of product coming from the continent going down to West Africa, you could assume that. But I think there's a lot of other factors to consider, particularly the size of this refinery and the quality of the product that it’s going to produce that will determine market dynamics.

Our next question comes from Ken Hoexter of Bank of America.

So congrats on meeting the net debt to NAV target. What a ride to get here. Just a minor one to start. Did you have fewer vessels in dry dock or were the planned drydocking quicker moved through the quarter? It looked like it was a bit lower than what you had talked about last quarter. But then my question is, are rates for the MRs have improved on your quarter-to-date with a lower on LRs? Are you seeing any seasonal cooling off if we're looking at the second quarter? Is there just bigger demand near-term? Just want to understand the very near-term market, where we normally get that seasonal pullback. Lars, if you have any thoughts on that?

The short answer to the second part of your question is I do not see seasonal pullback. I see a seasonal ramp-up. I don't think that what we have seen in the past in terms of what we would historically look at the market seasonality going back pre-2019 is the case. I do see that we're probably going to have a stronger summer than we have anticipated before. One, of course, is because of the refineries that we can see from the output that's going to happen over June, July. I think another thing also which is a key variable from a market perspective as an ingredient is China exports. We've talked about this in the past as well. The second quarter results have been released, showing an increase compared to last year. What I find particularly interesting is that we previously faced challenges from new builds, but currently, there is only one VLCC set for delivery in 2024 and just seven Suezmaxes scheduled for the remainder of the year. This means there is limited competition in the long-haul market to China that used to concern us. It's not even on my radar anymore. Instead, we are focusing on some promising developments as we move into the second quarter.

Great. Chris, thoughts on the days?

Yes. Ken, thanks for the question. There were slightly fewer drydocks. I'd also emphasize there were slightly fewer days of the drydocks that we had planned, which is good. Drydocks are always going to move around, especially in this market. There's vessel positioning. We've had some get pushed back from Q1 to Q2 and some get pushed back from Q2 to Q3. So we'll just keep updating that. But short answer is yes.

Perfect. Just looked a little different. And then, Robert, I guess, maybe just bigger picture or Emanuele, thoughts on cash, right? You've noted you're going to refocus on buybacks. But what's your vision for the fleet, right? You've got some opportunities you mentioned on potentially selling some of the older vessels. Do you look at this as an ongoing entity for the next 20, 30 years? Do you look at it as we kind of run it to the end of the fleet life and monetize that? I just want to understand your vision for what comes next. I mean obviously, it's been a long ride to get here and to be able to have the optionality you now have, but just want to understand how you think about the next phase of the company structure.

I see it as an ongoing entity. We are not discussing running it down to nothing. There are always options with a public company, including the possibility of someone wanting to buy it. However, our focus is on carrying the company forward.

Well, I ask just because I want to understand the timing of then when you'd have to start reinvesting to replace the vessels.

A long one...

I think we act as if it’s forever, and we’re opportunistic and reactive when necessary in both up and down markets. Regarding fleet renewal, we have plenty of time to consider that. We still maintain the most modern fleet owned by any public company. Currently, we have the lowest leverage and breakeven point in our company’s history. The advantage of our position is that we don’t need to make a decision right now. Robert was saying before, yes, if we are receiving offers on existing vessels that are attractive enough, we will look at them or consider them and maybe continue trimming the fleet. However, we are enjoying these markets that are improving. As we've all heard Lars' comments on what the markets are doing as we speak. So we are very relaxed, aware, and open to opportunities going forward, knowing that we do not have to do anything for the coming quarters as we have to do. However, we can do so. Yes, we have a lot of options ahead of us.

Our next question comes from Frode Morkedal of Clarksons Securities.

Just a quick question on the market discussion you just had. It's interesting to note that rates have been fairly similar to 2023 despite this Red Sea disruption. You would have thought perhaps a bigger impact on rates because of the ton-mile expansion. So just if you have any ideas on why rates haven't been higher? I guess part of the answer is related to refinery runs, but just curious if you have any other comments on that. That's the first part of it.

I've got to be honest, I'm pretty happy with the kind of rate structure as things are right now. I mean, there obviously has been kind of the refining maintenance in the States earlier and then obviously, the Middle East now and China also a couple of months ago. So all of that has been front-loaded to some extent. As for the first quarter, I think it's been absolutely fantastic. If I had to say if there's something that I think probably would change would be to see some of the arbs opening up from the west to the east. I mean the naphtha arb has been somewhat shut. I think a lot because of the distance; you have to go all the way around, and the cost of opening up that arb simply was too dear. And therefore, that has been somewhat less. Skikda, for example, just looking at it from a very micro perspective is down for maintenance right now. So that refinery, which is very much naphtha-related, is not producing. There are various factors to consider, but I don't believe it's a significant issue. Generally, rates have shown considerable volatility after reaching their peak, fluctuating significantly in certain markets. The U.S. Gulf provides a clear example, where rates have surged by $20,000 to $30,000 a day within a single week. Similarly, the Middle East has also experienced erratic changes, especially with MRs, which can rise by 100 points in just a few days, leading to uncertainty in how to evaluate the market. So one thing I think is fair to say is that the underlying utilization level across the product tanker fleet is at a much higher level than we've seen before. So it doesn't take very much. We have seen now. And the sentiment generally with the owners is that it doesn’t take them very long time to turn into a bull, which we don't have to go back that many years where we were flat-lining a lot, and sentiment took a much longer time for it to react to the fundamental prompt market dynamics.

Yes. That's interesting. I mean, I was looking at the IEA data. Q1 refining runs globally were down year-on-year, roughly about 81 million barrels per day. And then they predict a huge ramp-up to 85 million in August. But I was thinking like we've been lower than you should have expected. And what happened in Q2 and Q3 when you have this ramp-up, if it happens, that's going to be very interesting, right?

I think you hit the nail on the head there, Frode. That's how I look at it, too. It's quite interesting with all the things that took place in terms of maintenance and the pullback. You would have in previous markets, going back to a number of years, seen a lot more disruption and destruction in rates; whereas we have been hovering very nicely at some very decent numbers in what tends to be a situation where rates would have reacted negatively. So if you add on all these elements and the stuff that you just talked about, and also the stuff around China that I just mentioned earlier and so on, we are so close to this capacity utilization. We're north of 90% or whatever, that you just add a little bit to it and you start seeing extraordinary increases that outsize the element of that because you're not trading at the margin.

Our next question comes from Chris Robertson of Deutsche Bank.

Really excited to see the breakevens here. Fantastic job. Everybody just wanted to pass that along. But yes, my question is related to that. So if you engage in the prepayment, as you said you could get to the $12,500 level. Just curious, what is the breakeven level today before that prepayment?

Chris, it's about $16,000.

Okay. Yes, I got you. I'm glad that it has that potential impact here. So that's what we were trying to get at. My second question is kind of the often overlooked Handymax segment. Just noticing quarter-to-date, rates have gone down a bit there. And there seems to be a case where there's, I don't know, a consistent mismatch between what some of the brokers provide in terms of the global averages versus what you guys actually put up. So I wanted to better understand the dynamic in that particular segment.

I think the Handymax vessel market is a significant advantage for us. It's a small and aging market with the potential for rapid growth. If you have the right size and experience, you can effectively navigate trading in the continent and the Mediterranean, which is the main focus area. This market also consists of two segments: clean and dirty. Therefore, you essentially have four distinct markets to optimize within that region. It is a demanding business that requires considerable attention, and having multiple ships is necessary to take full advantage of the opportunities available. It's not advisable to enter the market with just 2 or 3 ships. You need to have a significant presence. Additionally, I didn't mention this earlier when discussing the spot market, but it has gained momentum recently and is currently trading in the range of $25,000 to $30,000 a day across the four markets I referred to.

This concludes our question-and-answer session. I would like to turn the conference back over to Emanuele Lauro, Chief Executive Officer, for any closing remarks.

Thank you, operator. No closing remarks from our side. Just thanking you all for your time and attention today and looking forward to speaking very soon. Thanks a lot.

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