Scorpio Tankers Inc. Q4 FY2024 Earnings Call

Good day, and welcome to the Scorpio Tankers Fourth Quarter 2024 Conference Call. All participants will be in a listen-only mode. Should you need assistance, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. 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. Thank you for joining us today.

Welcome to the Scorpio Tankers Fourth Quarter 2024 earnings conference call. On the call with me today are Emanuele Lauro, Chief Executive Officer; Robert Bugbee; Cameron Mackey, Chief Operating Officer; Chris Avella, Chief Financial Officer; and Lars Dencker Nielsen, Chief Commercial Officer. Earlier today, we issued our fourth quarter earnings press release, which is available on our website, scorpio tankers.com. The information discussed on this call is based on information as of today, February 13, 2025, 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 available at scorpio tankers.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 fourteen days. We will be giving a short presentation today. The presentation is available at scorpio tankers.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. Good morning or good afternoon, everyone. And thank you for being with us today. We are pleased to report a strong quarter and a strong year of financial results. In the fourth quarter, the company generated $105 million in adjusted EBITDA and $30 million in adjusted net income. For the full year 2024, we've generated $842 million in adjusted EBITDA and $513 million in adjusted net income. 2024 was another confirmational year for Scorpio Tankers financially, operationally, and strategically. We have significantly strengthened our balance sheet by reducing indebtedness by $740 million, expanding our revolving debt capacity, and lowering our daily cash breakevens to $12,500 per day. Our liquidity now stands at $1.3 billion, comprising $531 million in cash and $788 million in undrawn revolving capacity. For clarity, this excludes our investments in DHT. Operationally, we completed the special surveys and dry docking of fifty-four vessels during 2024. This is more than half of our fleet. Following the dry docks, these vessels will operate more efficiently and no longer need repositioning voyages solely for their dry dock, which adversely impacts earnings. In addition, we sold twelve vessels at attractive prices, many of which were older vessels, thereby improving the age profile of the fleet. We balance our constructive market outlook with the understanding that cyclical downturns in our industry are often triggered by unexpected black swan events, COVID-19 being a prime example. As a result, we want to maintain financial flexibility and position the company to thrive under any rate environment. That said, with a strong balance sheet, we can also act opportunistically. During the year, we returned $419 million to shareholders through $336 million of share repurchases and $84 million in dividends. Recently, we increased our stake in the crude tanker company DHT, capitalizing on its share price lag relative to improving market fundamentals and rates. We continue to view this as an attractive investment opportunity. Our outlook for both crude oil and refined products remains positive. With low leverage, strong liquidity, and a young fleet, we believe we are exceptionally well-positioned. With these, my remarks are concluded, and I would like to turn the call to Robert Bugbee.

Thanks, Emanuele. Good morning, everybody. Or good afternoon. I think this morning, what we're going to do is try and separate what we know about, what we believe or have strong conviction about, from the things that we really don't know, that are speculative or even hypothetical. What we know about our company is that on the Q1 book guidance, we can see that we are operating cash positive and profitable. The operating cash, remember, is what's actually given to us as shareholders. The operating cash for us is the most important metric as opposed to EPS. We have very strong current liquidity. We have even stronger undrawn liquidity. We are fully financed for years to come and have no new building CapEx requirements. We are completing an extensive period of dry dock in this quarter, which will result in lower dry dock costs, more on-hire days, and more efficient vessels over the next few years. So when you think of that in comparison to the last fifteen months, this is an asset going forward. We have very low cash breakeven operating cash breakeven, so we will work even to take those lower. This is what we know and are sure about the company. We also know that we have created optionality to make the best of the opportunity ahead. We are very constructive on the product market itself. However, we are also cognizant of our inability to either control, predict, or even understand right now geopolitical events or various announcements, changes in emotion, etc., or different tweets or policies. And it's not that we do not know the answers. Because in many cases, I do not think right now we even know the questions. So we see no urgency nor necessity to have nor to give clarity on capital allocation other than to say our present thinking is as follows. We will not change our dividend policy. We will not pay out an extraordinary dividend. We are not thinking of ordering or acquiring ships. We are ready, however, to buy our own shares if we think we should. We are willing to invest a small amount of cash capital in adjacent market companies. This is not an either-or choice. We can see from our balance sheet that, you know, we could have if we wanted to bought our own shares in addition to acquiring DHT. They are different, however. The former acquisition of DHT remained on the balance sheet as an asset. It is an asset. So for us, it's okay to go ahead and do this because it remains as an asset. We had prioritized very clearly creating an extremely strong balance sheet with great liquidity and the ability to take advantage of any opportunities. We will continue to monitor changing policy events and focus on the safe operation of our vessels. We simply cannot trade the change in short-term sentiment and emotion. But we do expect to be a beneficiary as the risk premiums in the future come down. Thank you very much, and I pass this over back to James and Chris.

Thank you, Robert. If we could please go to slide seven. As Emanuele and Robert highlighted, the market outlook is constructive. And at today's rates, product tankers are generating strong free cash flow. Recent shifts in political leadership coupled with tariffs, sanctions, and other geopolitical developments have increased uncertainty, not only in our markets but across global markets. This has created a volatile start to the year, but the underlying market fundamentals remain positive. Demand for refined products remains strong, Global inventories are below their five-year average. Refinery closures are accelerating, and the fleet continues to age. All of this contributes to a constructive outlook for the product tanker market. Slide eight, please. Demand continues to grow. This year, we expect demand for refined products to increase by close to a million barrels per day. We are seeing this demand strength in seaborne exports which averaged over twenty million barrels per day in January, near record levels. Furthermore, it's not just the volume of exports that has grown, but the distance these barrels are traveling has also increased. Slide nine, please. Compared to 2019 levels, last year, ton-mile demand increased fifteen percent excluding Russia, and eighteen percent when including Russia. Much of this is due to changes in refining capacity, which have been reshaping global trade flows over the last decade. This year, two million barrels of refining capacity are expected to close. And many of these older refineries require significant capital investment to remain operational. This makes it harder for them to compete with newer refineries in regions like the Middle East and Asia that have lower operating costs. As a result, we expect more refining capacity to close, which will add incremental ton miles as lost production is replaced with imports. Slide ten, please.

In early January, OFAC announced sanctions on an additional one hundred fifty-seven tankers, which were predominantly from 2024, China and India imported three million barrels a day of crude oil from Russia. Sixty percent of Russian crude exports. And last week, sanctions targeting individuals, companies, and tankers involved in shipping Iranian oil to China were announced. These actions are consistent with the strategy to put pressure on Iran and reduce its oil exports. Under the previous administration, Iranian crude exports fell to three hundred thousand barrels per day while rising to one point seven million barrels per day under the current administration. Today, the total sanctioned tanker fleet is almost eleven percent of the crude tanker fleet and five percent of the product tanker fleet. Any reduction in sanctioned vessels transporting crude and refined products is constructive for non-sanctioned vessels and can also accelerate the scrapping of older tonnage. Slide thirteen. Since the EU February 2023 price cap on Russian refined products, European imports have declined from one point one million barrels a day to four hundred thousand barrels per day. Nevertheless, Russian exports have remained steady with Africa, Latin America, and the Middle East absorbing more barrels. Four hundred and eighty-nine product tankers have carried Russian products since 2024, many of which are older vessels and predominantly loading Russian product. If there is a peace agreement, it's unclear whether Europe would increase Russian product imports, and if they do, many of the vessels that have been predominantly serving Russia will have difficulty serving western markets given their age, trading history, maintenance, and insurance limitations. The one point four million barrels of Russian product that exports per day could benefit non-sanctioned vessels, which have not been trading in Russia.

Hi, Omar. First of all, this is the second round of sanctions. Right? If we look at the first one, we only had thirty-four, thirty-five ships that were of interest under the first sanctions round, and that had a massive impact on the market. And as Robert said, it takes a little bit of time as that filters through. The second round of sanctions is hitting a lot more ships, in particular, the ships that are in the midsize. This region. And there's no doubt that we have seen ships turning around, finding other places. There is an increase in storage, and other ships are rerouting, doing floating off the Mediterranean waiting for STS of Turkey or Brazil, etc. I think also it's gonna be interesting to see the wind-down period in particular for India, which has been a significant buyer of Russian crude. There is no doubt that it's a lot of ships that are being sanctioned. There's a lot of ships. I think it's about seven percent of the entire fleet and of Aframaxes, probably overall thirteen point four percent of the sanctioned fleet. And we can see for sure that as we move into the next phase where this is being implemented in full, you will start seeing that there is gonna be a constraint in supply in that segment. So, you know, it is one to follow. We're not really seeing the actual hits on the rates yet, which we did not anticipate either, because this follows kind of more or less the same way that the first sanctions were hit as well. So you know, you put the OPEC sanctions on Russia and you see you've got the Iranian angle or you’ve got all the different angles. There’s no doubt that there is certainly a lot of interest in where this market might be heading.

Thank you. Hey, guys. Good morning. Good afternoon. A lot of things are happening on the geo-macro front, and Robert, appreciate your comments about basically, you know, sticking to the Scorpio strategy. That's been ongoing, you know, given all the unknowns. I guess, maybe just sort of in terms of, you know, the sanctions that we've seen, you know, James was talking about this in the presentation, you know, clearly a few weeks ago. A big chunk of sanctions were put in place, especially on that midsize Aframax LR2 segment which, if we count them, basically negate all the new buildings that deliver this year. I guess the kind of question is, have you noticed any change in trade flows as a result of this, whether from Russia or Iran, or anything that suggests that there's been an impact thus far? Thank you. Appreciate the comments. I'll turn it over.

Thank you. Good morning. Chris, Robert said in his comments that you're gonna continue to drive your cash breakevens lower. You've already done a ton of heavy lifting on the expense of lease financing. You've taken the new bond in Norway. There's cost inflation in the business. Can you help me understand how you're getting lower from the current levels from here? Is there anything you have to do with the capital structure, or is it more along the lines of maybe efficiency of the fleet, etc.?

Hi, Jon. Yeah. Well, efficiency of the fleet is one thing. I mean, I think you have to take into consideration that vessels coming out of dry dock are going to operate more efficiently. But the main thing is really in the financing, and I mentioned this that we have over $350 million of drawn revolving credit, and some of that is amortizing. So if we could drive down our breakevens, we could take our liquidity position and pay into that, we could even further. And I think that's really sort of the area we would target going forward. Just on those two credit facilities.