Earnings Call Transcript - STNG Q1 2021

Operator, Operator

Hello, and welcome to the Scorpio Tankers Incorporated First Quarter 2021 Conference Call. I would like to turn the call over to Brian Lee, Chief Financial Officer. Please go ahead, sir.

Brian Lee, Chief Financial Officer

Thank you, Stephanie, and thank everyone for joining us today. Welcome to the Scorpio Tankers first quarter earnings conference call. On the call with me are Emanuele Lauro, Chief Executive Officer; Robert Bugbee, President; Cameron Mackey, Chief Operating Officer; Lars Dencker Nielsen, Commercial Director; David Morant, Managing Director; and James Doyle, Senior Financial Analyst. 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 the information as of today, May 7, 2021, and may contain forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For discussion of these risks and uncertainties, you should review the forward-looking statement disclosure in the earnings press release that we issued today, as well as Scorpio Tankers' SEC filings, which are available on our website and at 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. There are slides available at scorpiotankers.com on the Investor Relations page under reports and presentations. Those asking questions please limit the number of questions so everyone has a chance. If you have specific modeling questions, you can contact me later and discuss offline. Now, I'd like to introduce Emanuele Lauro.

Emanuele Lauro, Chief Executive Officer

Thank you, Brian, and thanks everybody for being with us today. We can now see a rapid recovery in many major economies. We're seeing a rapid return to normalization with many countries having achieved significant milestones in their vaccination programs. This is happening in a relatively short time. In contrast, the situation in India does not go unnoticed to us, and our thoughts are with our Indian colleagues and their families. We continue to focus on what we can do to offer assistance and support to them both ashore and at sea. From a balance sheet perspective, our liquidity position has continued to strengthen, and our cash position is higher now than it was in February during our last earnings call. With a cash balance of $280 million and additional liquidity from committed financing and financing under discussion, our pro forma liquidity will be $367 million. We have confidence in the continued recovery. Inventories are rapidly normalizing and refinery throughput is forecast to rise by close to 7 million barrels per day between now and August. There has always been a higher correlation of product tanker rates to these rebounding GDP numbers. Seaborne product exports are expected to increase by as much as close to 7%, the high sixes, in 2021. There are other strong and more durable trends at play at the moment. For example, we believe a secular improvement in ton-mile demand will be one of the lasting impacts of the pandemic due to an acceleration in refinery closures through the period, combined with the opening of major new refineries, particularly the substantial projects in the Arabian Gulf. We see this as a shifted demand curve. The supply picture gives confidence that this recovery can be multi-year. In fact, the product tanker order book is at record low levels, with 6.4% of the fleet on order. The product tanker industry fleet is aging and new environmental rules will further challenge the economics of operating older tonnage, increasing scrappage in coming quarters. Fleet replacement costs are going up, and this, in turn, drives improvement in the mark-to-market value of our modern fleet. Yards are full of orders in other asset classes, lead times are increasing, and prices for new buildings are clearly escalating. The shortage of yard slots will have a clear impact on tankers. There have been only 19 product tankers ordered year-to-date. In our view, the product tanker fleet will struggle to demonstrate much net growth at all over the coming years. As many as 156 product tankers will turn 15 years old in 2021 alone. This is one of the most benign supply pictures on record. We think that the company is well positioned to capture the opportunities from the near-term rebound in demand, and we have increasing confidence this will proceed into a multi-year upswing. With that, my remarks are over, and I would like to turn the call to Robert.

Robert Bugbee, President

Hi, hello, everybody. I think the recovery has clearly started in world use of petroleum products. As far as the product tanker market and rates are concerned, it's a little bit like the quiet before the storm because the recovery we're seeing is being disguised in April simply by the very large turnaround and maintenance period that the world refinery complex has gone under. They just started to come back up this week. There's been an almost instant response and upward trajectory in demand. We've seen on the indexes 20% to 30% increases in MR rates just in the last two to three days. The markets are tightening in terms of demand for next week in Asia. Some people may feel that recovery is being delayed, but that's not the case. The recovery is there in terms of headline demand. We can see it: U.S. vaccinations are opening up. The U.S. is almost fully open now. Europe is in a much different position than it was just four weeks ago, and that's going to slowly open up. The Asian economies are doing well. Obviously, we're all concerned about India, but on a net basis, this market's demand side has been moving very solidly in the last few weeks, and rates are only going to go in one direction as refinery utilization comes back. There will be other times to talk through the call, but that's the major point I wanted to put in people's minds right now. I'll hand that over to Lars, the head of trading.

Lars Dencker Nielsen, Commercial Director

Great. Thanks, Robert. Going back 12 months ago, COVID-19 rattled global commodity markets. Global lockdowns created a negative oil demand shock, where the speed of decline in demand occurred much faster than the supply side could respond, sending oil prices into negative territory. This has now shifted decidedly into positive territory and benchmark crudes are pushing $70 with risk to the upside. Also, back then, global land-based inventories and refined products filled up. Customers turned to product tankers to store the excess supply, leading to a surge in floating storage across global inventories. Last May, refined product floating storage reached 109 million barrels. This has now shifted, and we are today at a 24 million-barrel level. Patience is a virtue and just as we all grow more eager each day for more normalcy, it's very much the same for the recovery in refined products and rates. The good news is that we do not have to be patient for too much longer. On a call last year, I said the catalyst for the recovery in product tanker demand and consequently rates was going to be vaccinations. We can see the increase in vaccinations translate to an immediate increase in personal mobility, which increases demand for gasoline, jet and diesel. We're now seeing this increase in vaccinations globally. There is still a way to go with an asymmetric pandemic recovery. It is clear as vaccinations increase in the population, with offices and businesses opening and much-delayed vacations booked, miles driven and flown are increasing. Consumers are stepping up, spending on a scale not seen for decades, led by the U.S. and China. With about 45% of the U.S. population having received one vaccine dose, refinery utilization and refined product imports have increased while inventories remain flat, suggesting the much-anticipated sharp increase in demand from an increasingly vaccinated population. In real terms, total U.S. refinery utilization since the polar vortex event in February has increased over 30 points to 87% as of last week. This is the highest level reported since March of 2020. Incidentally, the vortex also helped take out a staggering 60 million barrels of additional product storage. Several Gulf Coast refineries were offline due to emergency shutdowns, accelerating the rebalancing of Atlantic Basin product inventories. In addition to this increase in refinery utilization, market data show close to 6 million barrels of seaborne gasoline arriving into the U.S. Atlantic Coast last week and estimate another 6 million arriving this week. This is the largest influx reported since 2017, and bear in mind this didn't increase stocks, which remain at five-year average levels. As Robert mentioned, refineries are also coming out of maintenance. They were trying their engines at the end of the first quarter and early Q2 for the anticipated demand increase, and we calculated roughly 10 million barrels per day offline between March and May. The refiners will complete this maintenance work as the IEA oil market report indicates an increase of 6.8 million barrels per day in refinery runs by August, and at least a third of this volume we see hitting the export markets. We have noted lately an uptick in medium- to long-term time charter interest from major oil market participants, which also provides a strong leading indicator that an inflection point is near. Latin America will be an important area to follow as the continent begins to move out of its pandemic-induced lockdown. We can already see from mobility and traffic indices that cities in Mexico and Brazil are firming, and Chile is on the cusp. We experienced a shift in the product tanker trade already as Mexico has returned to importing cargoes in size. These indicators are key to understand what lies ahead, as much as the volatility we see now in the front end telling of rapid changes in supply and demand as economies start firing up on all cylinders and emerge out of lockdown. The latest example of this trend is the U.S. Gulf clean MR market spiking 30% after a prolonged low in activity due to the lockdown factors and the impact from refinery maintenance, which reduced overall seaborne volumes. Finally, I'd like to bring in the important factor of refinery closures and the positive impact this will have on increased ton-miles and additional tonnage demand, particularly in the eastern hemisphere. The overall pent-up demand driven by increased mobility in key regions, the new trading patterns from changes in the refining landscape, an increase in underlying ton-miles, the benign and historically low new build order book, and the rising price of steel, together with the role of vaccines and continued stimulus, mean we have remained patient, continually focused on operations and optimization, and now certainly look increasingly optimistic for a sustained recovery of the product tanker market. Thanks. That's all from me. Unless any of my colleagues have anything to add, Operator, we're ready to open up for questions.

Operator, Operator

Thank you. And your first question is from the line of Omar Nokta of Clarksons Platou.

Omar Nokta, Analyst

Thank you. Hey, guys. Good morning. I think you framed pretty nicely how the market is set up for a real recovery and I just wanted to ask how the state of Scorpio is at the moment. With regards to liquidity, it's remained pretty solid despite the fact that rates overall haven't really been that fantastic. There have been pockets of strength, but it's interesting that in February, your last earnings report, you showed a cash position of $204 million, and now it's risen to $280 million. Simply put, what's your comfort level with the current liquidity situation at Scorpio?

Robert Bugbee, President

I think that we're very comfortable right now. As we said back in February, you have to anticipate liquidity; you can't just lift liquidity when you feel like it. What you're seeing today is really the work that was done in February and March. In terms of comfort, four or five weeks ago people were worried about Europe and whether countries like Germany, France and Italy would get vaccinations. Germany is crossing 30% vaccinated now; they're even considering some opening up, the same as France and Italy, making great strides. Germany is vaccinating at a speed higher than the United States did, and we can see what happened in the United States in two to three months. Today, of course, it may look as if we've got too much liquidity, if that's possible for a shipping company. We feel that the spot market has already started to accelerate upwards out of this refinery season from Lars' presentation, and we're seeing confirming data in inventories and world product stocks. Very shortly we're going to reach a critical point for us, around $17,000 a day, where we're covering amortization and other costs. At that point, we'll start to build cash just through operations. We have clear positions. At that point we can have a combination of building cash, paying down debt, and buying back stock will be a clear incentive for the company, especially with our stock trading significantly below NAV. Look at the last two months: not only has the company built its liquidity, but its asset base has strengthened substantially. Assets are up 10% to 15%. The company's NAV is up trending on your own calculation somewhere between 35% and 45%. It's hard to get an NAV at the moment much less than $25 at the low side; if asset values go up another 10%, that takes NAV well into the 30s, along with the fact that even at current rates we're having some contribution to NAV. So we're in a very different environment now. We're through the refinery turnarounds and destocking. We're through the critical point of vaccinations in Europe. Yes, we're very happy with the liquidity the company has at the moment.

Omar Nokta, Analyst

Thanks, Robert. Maybe a follow-up. On the topic of too much liquidity: we're seeing a lot of activity in the shipping sale and purchase market, even in tankers, with many vessels changing hands at firm prices. There is upward pressure on NAV, and it seems like an opportunity to buy back stock. Given the dislocation between the stock price and NAV and your liquidity, is buying back stock something you see as an opportunity in the near term? Or do you want to wait for that $17,000 breakeven and then start to buy back stock? Any indication you can give on that front?

Robert Bugbee, President

I don't think it would be beneficial for us to anticipate the exact timing of when we would enter buybacks. The one luxury the company has is flexibility; we can buy in open periods without having to report every activity in advance. We've answered that as well as we can. At $17,000 plus, we'll be building more cash, so you almost have to start thinking about actions just prior to $17,000. Right now, we have $280 million of cash on the balance sheet, plus another $20 million coming Tuesday, so roughly $300 million, and then additional facilities. We do think the market is near a breakout. We're totally flexible; we can act proactively rather than wait. I hope that answers your question, Omar.

Omar Nokta, Analyst

It does. Thanks Robert. Well said. Thank you. I'll turn it over.

Robert Bugbee, President

And we would hope that the market would continue to provide us with the liquidity we would like.

Operator, Operator

Your next question is from the line of Jon Chappell of Evercore ISI.

Jon Chappell, Analyst

Thank you. Good morning or good afternoon. Robert, going on the previous topic that Omar brought up on liquidity: we've been talking about liquidity for 12 months now. Obviously, it was integral to staying afloat during a difficult time. You guys just laid out a very optimistic view of the market starting effectively today, but you're still planning on adding liquidity mostly through debt in the coming months and quarters. How does that line up? Don't you feel like you have enough at this point, and you should be thinking about deleveraging, which was your plan at this time last year, as opposed to adding more leverage if the future is so bright?

Robert Bugbee, President

Exactly right, Jon. We have clearly got choices. You don't expect, just as we saw in dry bulk in the first part of that recovery, that stocks will rationalize against NAV quickly. You'll be able to retire debt and fairly quickly, and at the same time have access, perhaps for a short time, to take advantage of a significant dislocation between pricing and NAV. You can do both. We couldn't do anything until now; the correct thing was to continue to build liquidity until we were confident. Go back seven to eight weeks ago when many were worried about Europe. We overshot in building liquidity, which was prudent. Now things have gone fantastic and the market is recovering nicely. Rates are going to start moving over the next days and weeks as refinery turnarounds finish. We can, and will, both pay down debt and consider buybacks when appropriate.

Jon Chappell, Analyst

Okay. Looking at Slide 12 with the step chart of liquidity you're taking on by the end of Q2, is it too late to walk away from some of those financings or would you just gather that cash and then, as you see earnings inflect, pay down other facilities?

Robert Bugbee, President

You may not want to walk away from those because they're being negotiated at very good terms. We don't have any bank or normal finance to do for two more years. These facilities reflect perhaps stronger terms than some of the ones before. So the ones negotiated in front of you would be less costly than what you could buy out from behind you.

Jon Chappell, Analyst

Like some of the bonds?

Robert Bugbee, President

Yes, some of the bonds and some of the lease positions too. It's fantastic to be in a position where we can discuss what to do with excess liquidity. Great for a company trading at a significant discount to NAV.

Jon Chappell, Analyst

Understood. All right. That's all I have. I'll turn it over. Thanks, Robert.

Robert Bugbee, President

Thank you.

Operator, Operator

Your next question is from the line of Greg Lewis with BTIG.

Greg Lewis, Analyst

Yes. Thank you and good afternoon and good morning everybody. Robert or Lars, I'm curious on your thoughts around the EEXI, the energy efficiency impact. Is that one of the main reasons you're calling out 15-year-old vessels as aggressively as you are in the slides? Any color on that? It seems like early days in that process. How should we be thinking about that?

Robert Bugbee, President

I'll answer first, then Lars. We really believe in the 15-year rule. We've made recent announcements from the pools that we're developing for vessels that are 10 to 15 years old and would not qualify for our own clean petroleum product pools. Those pools will be trading in different trades than our vessels. We're not the only ones who believe it. You've seen other owners like Ardmore, Hafnia, TORM and others aggressively sell product vessels as they approach 15 years. Financiers are looking at that 15-year rule for clean petroleum products. Most importantly, customers are doing this. Lars, would you like to add?

Lars Dencker Nielsen, Commercial Director

It certainly is. The EEXI, efficiency existing ship index, is followed by the Carbon Intensity Indicator, which is like a report card where a vessel is rated between A and E. There's still regulatory detail being finalized. This is expected to be adopted around June 2021 with entries going into force in January 2023. It aims to calculate carbon emission per deadweight. Modern ships are more efficient than older vessels, so there will be an increasing gap between Super ECO vessels and non-ECO vessels. That creates a competitive advantage for those with modern ECO fleets versus older vessels that will have difficulty complying. Options like energy-saving devices, reducing deadweight or reducing main engine output will all skew competitive advantage toward super ECO modern vessels. Many of our customers—the oil majors, oil traders—are pivoting away from older units and preferring modern units for time charter. This regulation will make a big difference in which vessels are competitive.

Greg Lewis, Analyst

Okay, great. One more: India has announced they'll start taking full allocations from Saudi Arabia. Are we starting to see activity around India ramping up crude demand, realizing they have to refine before they export? Are you seeing India ramp up?

Lars Dencker Nielsen, Commercial Director

In the short term, Indian crude demand should be flat or maybe slightly decreasing, but Indian refineries have generally been running between 95% and 100% utilization. Even if domestic demand decreases slightly, exports are a strategically important piece of the puzzle. I do not foresee refineries generally slowing down; they will look to increase export margins. We have seen some of the smaller refineries coming out offering additional cargoes in the May window of distillate and gasoline. From a product tanker perspective, India is very export-orientated and the refineries are still running at high utilization.

Greg Lewis, Analyst

Okay. Perfect. Thank you.

Operator, Operator

Your next question is from the line of Randy Giveans with Jefferies.

Randy Giveans, Analyst

Hi, gentlemen. How is it going?

Robert Bugbee, President

Hi, Randy.

Randy Giveans, Analyst

For the quarter-to-date rate guidance, this is well above some broker averages. Can you quantify that outperformance in terms of an ECO premium versus scrubber premium? Also, by looking at those quarter-to-date rates, it seems like Q2 should be much better than Q1. For the back half of the quarter relative to the first 50% that has been booked, what kind of rates do you see for the back half of the quarter?

Robert Bugbee, President

Randy, we don't give rate guidance, as you know. This quarter is going to be wide in its actual rate dispersion because of several factors. OPEC will be pumping more crude and crude equivalents every month through the quarter. Refinery utilization will step up between now and July–August on a weekly and monthly basis. Headline demand will keep going up as Europe opens and the U.S. moves into its traditional driving season. We are also seeing recovery in South American demand—Mexico, Chile—which adds to demand. Against this, we have a fixed supply curve with very few vessel deliveries coming into the market, refinery changes, older refineries closing, and the largest new refinery in the Middle East gradually coming up in Q2. We're already seeing a market balanced enough that modern MR rates in some regions are around $12,000–$13,000 a day, even before Europe has fully come back. It's reasonable to expect rates at the end of the quarter to be significantly higher than now, but it's hard to predict exact numbers because the market is dynamic. The third quarter is not likely to be the usual weak quarter this year because demand increases are expected through the year and into next year.

Randy Giveans, Analyst

Got it. And not asking for a forecast for the next few weeks, just making sure there wasn't some pull-forward or accounting or operational factor that the next few weeks are going lower?

Robert Bugbee, President

No. There's no pull-forward. The figures Brian has provided are reflective of what they are.

Randy Giveans, Analyst

One more: there's concern about liquidity, CapEx, and debt repayments. You mentioned rates at $17k–$20k/day will fix everything. If rates stay at current levels for an extended period, what other options do you have to raise capital to satisfy debt obligations other than issuing common equity? How would you rank options ahead of equity issuance?

Robert Bugbee, President

If someone suggests raising equity given today's starting point of $280 million, plus we expect more, they may not have been aware of our current liquidity. You start from a large amount of liquidity, $360–$370 million pro forma. If you take a very pessimistic view where there's no world growth or a severe crisis, we still have runway. We have other means besides equity. Options include selling ships, issuing similar instruments like baby bonds, doing sale-leasebacks, and refinancing existing deals rather than buying ships back. The scenario you're describing would be extreme and market-wide rather than Scorpio-specific.

Randy Giveans, Analyst

Sure. Good deal. Thanks so much.

Robert Bugbee, President

No problem. Thank you.

Operator, Operator

Your next question is from the line of Ken Hoexter with Bank of America.

Ken Hoexter, Analyst

Hey, good morning Robert. You mentioned no seasonality maybe looking through the pattern as reopening shifts. Is there anything you could talk about in the quarter that would not meet that expectation? Is the counter story that COVID shutdowns linger, or demand doesn't return, or the storage unwind continues to pressure rates? What could we come back and talk about in Q2?

Robert Bugbee, President

I think the refinery turnarounds were deeper than many expected. Part of that is the preparation for anticipated demand increases. These demand outlooks are huge. Opening up countries and the U.S. driving season can create volatility. There's a possibility inventories could continue to be drawn down and delay a spiky second quarter, but that would just set up greater volatility by July. The U.S. has borrowed product from imports in recent weeks and gotten away with not building ahead of gasoline season because of access to product from Europe, but as that access diminishes and the U.S. demand grows, pressures will increase.

Ken Hoexter, Analyst

To clarify on seasonality: you're still seeing sequential acceleration, ignoring normal seasonality, such that Q2 beats Q1 and Q3 beats Q2?

Robert Bugbee, President

Yes. We expect acceleration through the year. If you work it backwards, the first quarter of next year seasonally should be stronger than the fourth quarter, but prior to that it's not about seasonality; it's about reopening and travel. This has been delayed, but we anticipate continued acceleration in U.S. travel and Europe coming online, and then normal strong seasonality into the fourth quarter.

Ken Hoexter, Analyst

For my follow-up, any impact yet on the market from consolidation like Diamond S Seaways? As carriers get healthier with stronger balance sheets, do you see orders picking up and supply increasing like we saw in containers?

Robert Bugbee, President

Two great questions. Bookings for containers, dry bulk and LNG are large and are absorbing yard slots, which delays the ability to order product tankers in meaningful size. That combined with the aging fleet hitting 15 years creates a structural supply situation that benefits product tanker shareholders. Even if rates spike, it will be hard to increase supply fast because yard capacity is occupied. The consolidations we're seeing—Diamond S, some other transactions—are extremely good for pricing and market order. We're also seeing smaller vessel trades where stronger owners buy from weaker owners, which is healthy. Top commercial operators, including Scorpio group, are adding vessels to their pools, and charters and traders are seeking modern units on time charter. The product market is more consolidated now than a year ago and that helps support rates.

Ken Hoexter, Analyst

Wonderful. Thank you very much for your time.

Robert Bugbee, President

Thank you.

Operator, Operator

Your next question is from the line of Amit Mehrotra of Deutsche Bank.

Amit Mehrotra, Analyst

Thanks. Hi everyone. I want to go back to the liquidity question because something seems lost in translation. It sounds like you're very bullish about your liquidity and message is everything is fine, but based on my analysis it seems like you don't have enough liquidity. I want you to correct me if I'm wrong. Brian, the $360–$370 million pro forma, is that net of minimum liquidity covenants or not?

Brian Lee, Chief Financial Officer

It's not net. Minimum liquidity covenants are $60 million, and we don't subtract that out of the total cash.

Amit Mehrotra, Analyst

Okay, so you need to keep that $60 million on the balance sheet, which effectively makes the $360–$370 million into roughly $300–$310 million available. Against that pro forma $300–$310 million, you have $600 million of debt repayments over the next 12 months. Is there a way to restructure that $600 million, of which a big chunk is in Q2 next year? What do the debt repayments over the next 12 months need to be or can be relative to what they are today?

Brian Lee, Chief Financial Officer

On a normalized amortization basis, it's $70 million to $80 million per quarter; we call it $75 million, which is just under $300 million on a year. When facilities are coming due, we show it in that schedule. Facilities are coming due, and it's part of that number. From day one of this company, we've been able to refinance our debt when it comes due.

Amit Mehrotra, Analyst

So $75 million to $80 million is the number we should use. That implies the net liquidity you have today pro forma, roughly $300 million, would roughly smooth out normalized amortization over the next 12 months. So how do you have more liquidity than you need?

Brian Lee, Chief Financial Officer

We assume our vessels will earn some money along the way. That contributes to cash flow.

Amit Mehrotra, Analyst

You have assumed earnings for the last three years and that hasn't occurred on a sustainable basis. From a planning perspective, you have to plan that you might not earn $15k–$17k per day. What's Plan B and Plan C if rates stay low?

Robert Bugbee, President

Amit, I appreciate the question. A lot has happened in the last three months since you last looked. Primary thing: we have continued to increase liquidity while rates have been fairly low, and we have other sources to do it. We simply believe, for reasons we've detailed, that the market will not be at $9k–$10k per day all the way through next May. Now should we assume the worst-case scenario, we accept that would be extreme. At the beginning of the year and last year we continued to raise liquidity—October, November—vaccinations came along, but we continued to raise liquidity. Now we're at a point with more liquidity than before and the U.S. and Europe are in much better places. This is not just our view: OPEC, EIA, oil companies and market data corroborate this improving picture. We believe the market is improving and accelerating. If you don't believe in that, you shouldn't be invested here, but we do believe, based on empirical third-party data, the market is improving.

Amit Mehrotra, Analyst

I think the only difference is that you have to be right for the capital structure or equity to be protected. You have to be...

Robert Bugbee, President

Of course. If the world goes to hell, STNG would be challenged like many others. But if the market continues the improvement we're seeing, Scorpio Tankers, with its modern product-led fleet and gearing, is a strong investment because of operating and financial leverage. If you don't believe that, you should take a different view of the stock.

Amit Mehrotra, Analyst

Can I ask a quick housekeeping one? Robert said asset values have picked up, which is positive for NAV and debt management. Your net debt has been roughly flat. Does that give room for additional leverage on vessels if needed? What's LTV like today and how do appraisers and banks look at it?

Brian Lee, Chief Financial Officer

Values are going up. Net debt has been flat and values have risen, so on a relative basis the position has improved. We're in compliance with all loan-to-value covenants and have headroom in each. When vessels come up for refinancing, the higher asset values allow us to refinance at attractive rates whenever we want.

Robert Bugbee, President

It would be inconsistent to buy crude tankers without considering buying STNG. That would be an odd position.

Amit Mehrotra, Analyst

Okay. I'll take that into consideration. Thank you.

Robert Bugbee, President

Great. Thank you.

Operator, Operator

Your next question is from the line of Magnus Fyhr with H.C. Wainwright.

Magnus Fyhr, Analyst

Good morning. Robert, you laid out a bullish scenario on the recovery. I'm curious: we've seen charters in the market earlier in the quarter, but why aren't oil traders like Vitol and Trafigura being more aggressive in chartering more vessels? Do they have requirements already filled, or why don't you see them stepping up?

Robert Bugbee, President

Lars?

Lars Dencker Nielsen, Commercial Director

I consider Vitol, Trafigura and the others to be aggressive. They look at shifts every single day and, privately, have been taking positions. In general, they're interested in modern ships for long-term charter.

Magnus Fyhr, Analyst

Okay. You mentioned the shift toward long-term modern units. Also, you and James earlier have positioned the fleet as compliant with future carbon targets. How compliant are you relative to 2030 IMO targets?

James Doyle, Senior Financial Analyst

Yes, Magnus, it's James. We're 23% ahead of those targets. You can see details in the sustainability report on our website that we published.

Magnus Fyhr, Analyst

Okay, good. That supports a scenario where companies secure more modern tonnage and a two-tier market develops. We may need higher rates before that fully plays out. That's all I had. Thanks for taking my call.

Robert Bugbee, President

Thank you.

Operator, Operator

Your next question is from the line of Liam Burke with B. Riley.

Liam Burke, Analyst

Yes, thank you. Good morning. Robert, you talked about the shift in refinery capacity globally and a big redistribution coming in Q2. Are you seeing any benefit now, or is this something to look forward to later in the year as a further boost to rates?

Robert Bugbee, President

You're going to see it now and all the way through the year. We've already seen a steady effect. News from regions like South Africa and other shifts could be a huge boon to the product tanker market. Some are even talking that some European refineries that are down now might not come back, which would have a tremendous effect in the Atlantic and would require products to be sourced long-haul from Asia into the Atlantic Basin or from China to the U.S. across the Pacific.

Liam Burke, Analyst

Okay. Thank you very much.

Operator, Operator

That concludes our Q&A session for today. I'll turn the call back over to Brian Lee for any closing remarks.

Brian Lee, Chief Financial Officer

Thank you, Stephanie, and thank you, everyone, for joining us today. We hope to speak to you soon. Have a good day. Bye.

Operator, Operator

Thank you. This concludes today’s conference call. You may now disconnect.