Cmb.Tech NV - Earnings Call - Q2 2019

Transcript

Speaker 0

Good day, and welcome to the Euronav Q2 twenty nineteen Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Brian Gallagher, Head of Investor Relations.

Please go ahead.

Speaker 1

Thank you. Good morning and afternoon to everyone, and thanks for joining Euronav's Q2 twenty nineteen earnings call. Before I start, I would like to say a few words. The information discussed on this call is based on information as of today, Thursday, 08/08/2019, and may contain forward looking statements that involve risks and uncertainties. Forward looking statements reflect current views with respect to future events and financial performance and may include statements concerning plans, objectives, goals, strategies, futures, events, performance, underlying assumptions, and other statements, which are not historical statements of fact.

All forward looking statements attributable to the company or to persons acting on its behalf are expressly qualified in their entirety by reference to the risks, uncertainties, and other factors discussed in the company's filings with the SEC, which are available free of charge on the SEC's website at www.sec.gov and on our own company's website euronav.com. You should not place undue reference or reliance on forward looking statements. Each forward looking statement speaks only as of the date of a particular statement, and the company undertakes no obligation to publicly update or revise any forward looking statements. Actual results may differ materially from these forward looking statements. Please take a moment to read our safe harbor statement on Page two of the slide presentation.

With that, I will now pass back to Chief Executive, Hugo Sloop, to start the agenda on Slide three. Hugo, over to you.

Speaker 2

Thank you, Brian. I will run through the Q2 highlights and provide a full financial review of the income statement and balance sheet before Brian looks at the current themes in the tanker market and Euronav outlook before we take questions. So turning to Slide four and the highlights page. The tanker market for VLCCs and Suezmax during Q2 was weak as expected with seasonal freight rate, but this was exacerbated by longer and deeper refinery maintenance and with OPEC production cuts reducing the number of available cargoes. This has been reflected in downward pressure on freight rates highlighted in Slide four.

The impact of the lower freight rates on our share price has given us an opportunity to utilize our balance sheet and liquidity strength during Q2. We have returned capital to shareholders via further share buybacks for a total of $10,000,000 This is in addition to the share buyback done in Q1 and of course, on top of our fixed minimum dividend of €06 per half year, which we will pay in October despite a challenging first semester for the company. So far during Q3, rates are at a similar level to those in Q2 and this is disappointing. With around two thirds of the VLCC fleet booked at just over $20,000 per day and 60% of the Suezmax fleet at a touch below $15,000 per day. Whilst disappointing not to see any traction in the freight market, yet we remain constructive on tanker cycle for the last quarter of the year.

Now turning to our income statement on Slide five. Our results are a reflection of the operational leverage of our business with the lower freight rates bringing a P and L loss during Q2 and this offsetting the positive return from Q1 to bring an overall net income loss of $19,000,000 for the first semester. However, our balance sheet remains strong and robust as shown on Slide six. Let's take a look at Slide six. Liquidity now stands at over $850,000,000 up by over $70,000,000 from the end of Q1, and this was driven by two factors.

Firstly, in June, we took increase the size and therefore the marketability of our 7.5% coupon bonds by undertaking a tax issue of $50,000,000 to bring the bond size to $200,000,000 We believe this is competitively priced funding when compared to other funding sources and demonstrates Euronav access to another longer term source of funding. Demand was strong enough for us to issue the new bond at a premium of 1% over par value. Secondly, we have also taken an additional €100,000,000 credit facility in order to assist us with the preparation for IMO twenty twenty and in particular, our fueling strategy for our fleet. As the press release highlights, we shall give a separate webinar specifically on our IMO twenty twenty preparations on September 5, and we look forward to updating investors and analysts in detail then. Euronav leverage remains amongst the lowest in sector, and we have no outstanding CapEx linked to newbuildings.

We can now turn to Slide seven, where Brian will look at three key signals we are currently seeing from the tanker market. Brian, over to you.

Speaker 1

Thank you, Hugo. Now on to Slide seven. This, we believe, is a very good summary of some of the headwinds that the tanker market had to face over q two. Two essential and key drivers, US crude exports and those exports from the OPEC nations based in The Middle East, are represented in this chart. Each bar shows the month for month movement from each of those categories.

On the q one call, we talked about the resilience of the tanker market, which have been supported by US exports, which is shown as being particularly strong during February. However, fast forward to April and May, and both of these key export markets, when combined together, saw around 800,000 barrels per day of a reduction in cargoes. This was a difficult headwind for the large tanker market to withstand. This challenging market was faced by all operators over q two and was exacerbated by the fact that we had 18 new VLCCs or nearly 3% fleet growth also hitting the market and the trading market at the same time during q two. However, as Slide seven also shows, as we exited Q2, it is encouraging to see growth returning in both of these segments.

We now move on to Slide eight, and some more optimistic noise is coming from the contracting side in the tanker space. This chart shows the rolling twelve month run rate of confirmed orders of VLCCs according to Clarksons. As the chart makes clear, ordering has dropped to a very low levels with only 20 VLCCs being ordered over the twelve months to the July. There are two factors to believe that this trend for reduced ordering is likely to persist. Firstly, unlike q four two thousand and sixteen when the contracting run rate was last at these low levels, the regulatory and environmental background is far more demanding.

Emission restrictions and targets going forward were not in place in 02/2016, and so the propulsion system used for tankers going forward will be a key consideration for any ordering that goes in place going forward. This should, in theory, restrict the level of ordering that we should see given the higher cost involved. Secondly, with consensus forecasts for peak oil demand focus between 2013 and 2035, ordering a VLCC today with delivery in two years' time implies all ship owners need to

Speaker 3

be very careful in considering any contracting decisions.

Speaker 1

Now moving on to slide nine. And what we want to talk about here is a more market discussion on what the potential disruption can be from the consequence of large scale retrofitting of scrubbers, in particular, during q four. Slide nine illustrates the disruption is very back end loaded and focused on q four in particular. Again, according

Speaker 3

to

Speaker 1

Clarksons, 73.5 VLCC equivalents will leave the operational fleet to retrofit during q four alone. That is split 55 VLCCs and 37 Suezmax. Depending on the amount of time taken to reposition and retrofit scrubbers to these ships, this could then see the global available fleet days in both of these sectors reduced by around about three to 5% during q four alone. This disruption, whilst only temporary, has yet to really impact on our market, but it's important to highlight highlight the potential scale of this factor, which will reduce the size of the global tanker fleet available at the very same time as seasonal demand will peak. With that, I'll now pass back to Hugo De Stoop to talk through the outlook slide on slide 10.

Back to you, Hugo.

Speaker 2

Thank you, Brian. We maintain our constructive stance of the tanker cycle into the next winter, but keep our traffic lights unchanged for now. Oil demand forecasts have been reducing in recent months, but remain ahead of the long term trend and vessel supply will remain elevated to the early twenty twenty, but then will reduce. However, the tanker market should really start to see the impact of IMO 2020 regulations starting to bite in Q4 and longer term positive drivers like The U. S.

Crude exports remain well supported. We were encouraged last week by Enterprise Products SPOT offshore terminal getting financing approval. This terminal will be able to load two VLCCs at the same time when it becomes operational. With that, I conclude our prepared remarks, and I pass back to the operator for the questions. Thank you.

Speaker 0

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you have additional questions, you may reenter the question queue. The first question comes from John Chappell of Evercore. Please go ahead.

Speaker 4

Thank you. Good afternoon, guys.

Speaker 2

Hi, Joey.

Speaker 4

Hugo, first question is on operating strategy. So you've laid out a very favorable near term outlook, which is consistent with prior calls and with our views as well. But it seems that there's been maybe a bit of a disconnect in the spot rate environment today and some of the time charter rate environment. Quick two parter. One, is there a liquid time charter market for one to three year charters?

And two, would you be willing to give up some, maybe leverage given the size of your fleet, to maybe lock in some of that arb that seems to exist between the time charter market and the spot market today?

Speaker 2

Yes. Thank you very much for the question. First of all, it's true that we are a little bit disappointed that some of the rates we had booked for Q3 are still at a low level. We expect the market to turn. As a matter of fact, it has already started to turn modestly, and we hope that the trend will continue to improve as we get nearer to the winter.

We're certainly seeing some refineries coming back after much longer preparation or maintenance program than than usual. As far as as the time charter market is concerned, it was a little bit strange what happened because maybe a month or two ago, we saw a number of players coming to the market and and trying to lock in a lot of tonnage at what we thought were still very low rates compared to what we expect to have and only for one year. So you were being asked to give up, you know, the what you expect to see in the spot market for something that was in the early thirties, so between 30, 32, maybe $33,000. That didn't go well. I think very few owners accepted that and and certainly what Duralna was not there to to propose any ships.

After that, we saw, again, a lot of activity at more elevated levels that got confirmed by the ship owner side. And then for some reasons, nothing was lifted on the chartering side, and that's very unusual. It was in particular one one oil company. And then during that activity that I would describe as as chaotic, and I think that both sides of the market are looking at each other and and trying to find a common ground, You had, you know, a few, but not not many more than than a few time charter above 35, 36. We booked one at 37 and a half for one year.

And finally, to answer your question comprehensively, we're not there to do a lot of ships. But, obviously, when you see volume like that and and you have a fleet of 43 VLCCs, it doesn't it doesn't hurt to book a few ships at those levels. So at the moment, we have four VLCCs that are on time charter at either nice fixed levels or at levels that includes a profit sharing for which we will benefit from any market uplift.

Speaker 4

Okay. That's helpful information. Second question is along the same lines, but different as it relates to capital allocation. So you were pretty aggressive with the share buyback, over the last three quarters. The prices all consistently in the mid to high eights U.

S. Dollars. You're sub 8 now. But you said there's some disappointment in early part There's obviously greater geopolitical macro risks today than there were three quarters ago, let alone one quarter ago.

So how do you think about the share buyback when you're balancing your robust liquidity versus maybe some of the risks that are more difficult to handicap in the bigger picture?

Speaker 2

Okay. We take a very opportunistic view. If you look at what we have done starting on eighteen December and in the first quarter, that was probably $1 lower than what we've done more recently, which confirms that despite the fact that we are seeing a lot of noise in the background, we continue to believe in the macro story as far as the tanker market is concerned. I think that we need to balance a little bit our acts between share buyback the dividend. So at the moment, we are distributing still the minimum dividend that we have confirmed, but we hope to be able to distribute more dividends when we return to profits, and hopefully, that will come soon.

So again, we don't have, and we certainly don't have the intention to, to issue a buyback program. I think we are very opportunistic when we do it, and we have consistently done that way below what we see our at our as our NAV, which means that the fact that we are creating value for our shareholders, certainly for the long term shareholders. So can't really tell you when we will continue to buy back, but again, opportunistically and when we see share price diving, I think that you can expect us to react in one way or another.

Speaker 0

The next question is from Amit Mehrotra of Deutsche Bank. Please go ahead.

Speaker 5

Yes. Thanks, operator. How you go? I just wanted to ask around the logistics around using the the low sulfur fuel that you're currently storing in in one of the two ULCCs. So there were some reports that you're repositioning them one of them, I think, moving to Spain, then moving to and parking in Malaysia.

Can you just give a little bit more color around that and and then, you know, the strategy, what the strategy is for the fuel with respect to IMO '20 20, if your bill your ability to kind of easily utilize those stockpiles, so to speak?

Speaker 2

Amit. Thanks for the question. I know that my answer will be a little bit frustrating for you or for the other guys on the call. If you read the press release, we have decided to communicate separately on what we do as far as a compliant fuel is concerned or any fuel that we have stored on that vessel, where it will be positioned, how we intend to utilize it, and for how long and what we'll do in the future. So if you allow me, I would prefer to defer those questions to September 5, which is, not too far away.

And by then, we will have a more detailed, well, call and a webinar, talking about also those issues and our strategy when it comes to compliance during 2020.

Speaker 5

Okay. That's fair. And then let me just ask about, the relationship with the international pool. Just trying to understand. I know I asked a couple quarters ago, and that was something that the team was working on in terms of figuring out how that the economics of that would work.

Can you just talk about that given, you know, some some vessels in that pool might have scrubbers, some might not, and the economics in terms of TCE rates might be different? So just help help us think about kind of what that what that will look like going forward.

Speaker 2

Yeah. Absolutely. So we are redrafting the the pool rules as we speak. Basically, the pool will continue to form one pool, but we have we'll have two separate sets of accounts, one for the ships equipped with the scrubbers and one for the ones that are not using or or being equipped with scrubbers. And so that's the simplest way to be fair to both parties because it's almost impossible, to predict the pricing of each fuel, and therefore, it's impossible to assign pool points, to, each different type of vessels.

So it's, the easiest is to go with two separate accounting ways. But as far as marketability of the vessels are concerned, that will still be done by the pool as a as a uniform, well, desk that will that will assign each ship on each trade.

Speaker 0

The next question is from Chris Wetherbee of Citigroup. Please go ahead.

Speaker 3

Hi, guys. James on for Chris. Wanted to

Speaker 1

ask about basically Slide seven. I wanted

Speaker 3

sense of what your current expectations of US Gulf Coast exports for the rest of the year were and and try to get a sense of how much of a rebound or how much growth in those export is driving sort of your expectations for a rate rebound across the back half of the year?

Speaker 1

Well, James, maybe it's Brian Gallagher here. Let me jump in. Hugo, do wanna go?

Speaker 2

No. No. No. Go ahead.

Speaker 1

Yeah. It's a very difficult, number to sort of get some accuracy on because, obviously, there's, quite a range of facilities which are coming on and the pipelines, which are feeding them. But we've been sort of making a working assumption. You can go back to our presentations that there's going to be at least another 1,000,000 to 1,500,000 barrels a day of additional export capacity come on stream during the second half of this year. And, of course, that has the effect in a of stretching the world fleet because there's obviously only one way to go out from that US Gulf Coast exit, and that's to go long haul either to Europe or to to the Far East.

You can't go through the Panama Canal. So we think that's a key driver. And, again, I'd refer you to again, back to our presentation where we give a sort of ready reckoner in terms of where that demand will feed in a million barrels a day is roughly equivalent to to 30 VLCCs, but that would obviously be a slightly higher number and multiplier effect coming through from the longer ton miles that, US crude exports, would follow. But this is a difficult number to accurately, estimate simply on the basis of there's so many different moving parts and different owners of those pipelines and export facilities. But as Hugo said in the prepared remarks, we're very encouraged that that last week we had the first financing or sign off of the financing of one of these export terminals.

So we don't see any reason why over the next two to three years, we shouldn't see that trajectory rise to a capacity of somewhere between seven and eight million barrels a day.

Speaker 2

And I would just add to that, James, that every increase in production in The US, as long as it it gets to the coast and to The Gulf, gets export. So it's not for usage or storage locally, which obviously for shipping is very important because it means that any increase that we see there will benefit shipping in general and probably the large sized vessels in particular if it's destined to a long distance.

Speaker 3

Got it. Thank you for the color. And then I wanted to also ask about VLCC ordering. You pointed out that it's at a low level and likely to remain low for the foreseeable future. When might you reenter that?

And possibly, when do you think the it'll just broadly as market might come off the bottom?

Speaker 2

It's a very good question. Well, first of all, I think the last VLCC well, I know that the last VLCC, we took delivery off, was in 2012. So the last VLCC we ordered was probably in 02/2009. So that seems a long time away. And since then, we have continued to grow the fleet by buying secondhand and from time to time, secondhand contract, I e, people who had ordered their ships and were not in position to take delivery of or didn't wanna take delivery of, and we're selling those contracts in the market that we picked up.

So returning to the market is a big word, but I would, I would therefore comment on what we see generally speaking in the market. And I think that, with the IMO 2050 now, which is about the decarbonization of shipping in general, I think that people, need to be very brave to go and order a conventional VLCC today, because the life of such a ship is twenty five years. And if the life of such a ship is twenty five years, it means that, with the delivery probably in '21 or '22, you're gonna have that ship in operation by 2047, very close to 2050. And by 2015, you need to reduce the carbon emission of the entire market by 50%, which means that the ships that are still in existence at that point in time will probably be, carbon neutral, I e, they don't, produce, any c o two, or they are largely, they've largely reduced their emissions, I e, they will consume probably 70 or 80% less than what they consume today. Obviously, one of the solution, certainly a transition solution, is to shift the fuel type that you're using, and there's much talk about, in the market of LNG.

I it's it's fair to say that the yards are extremely active marketing those VLCC dual fuel, LNG conventional fuel vessels, but they come at price at the moment, and price is, much higher than you were to order a conventional VLCC. So the owners in general and and Euronav in particular are sort of in two minds. I mean, if it comes to ordering or buying a new VLCC, you're obviously thinking about what's gonna happen in the next ten, fifteen, twenty years. Unfortunately, that's the horizon that we need to think about. And therefore, we don't see a lot of orders, even the speculators, to go to the shipyards and order conventional ships.

So we need for the the price of the dual fuel tubes or the LNG propelled ships to come down, before you you can, go and place an order.

Speaker 0

The next question is from Greg Lewis of BTIG.

Speaker 3

Hugo, realizing a few days doesn't make a trend, could you talk a little bit about the the the strength that we've been seeing in the VLCC market over the last couple days?

Speaker 2

Yeah. Absolutely. I mean, it's as you said, I mean, a few days doesn't make a trend, but, obviously, it's going to the right direction in in both in terms of, rates and in terms of time that passes. First of all, we're getting nearer and nearer to the winter. I mean, I know it feels like the the summer, but that's how people behave.

And then, of course, we are seeing more activity and far more activity impact, which means that the refineries are coming back after a longer maintenance as as we said in the early earlier remarks. When you see more activity, I think you have to differentiate different markets. At the moment, we have seen more activities in The Atlantic, not yet in The Middle East. And I think it's fair to say that owners are maybe a little bit reluctant when it comes to Middle East. I mean, as far as we are concerned, we continue to go there on a on a regular basis.

But but, obviously, we're taking a lot of precautionary measures, And the the the market in The Middle East has not picked up yet, so it's much more in The Atlantic, and we hope that medical medicine in The Middle East will will go up as well. So it's too early to to see a a big trend, but it's very encouraging. And then as Brian said, answering to previous questions on the amount of oil that that will be available for export, we are we are pretty convinced that all of that oil will will go long distance, and potentially will replace some of the oil coming from The Middle East, which is very good for ton miles.

Speaker 3

Okay. Perfect. Thank you very much. Thank you.

Speaker 0

The next question comes from Randy Giveans of Jefferies. Please go ahead.

Speaker 6

Howdy, gentlemen. How's it going?

Speaker 2

Yes. Very well. And you, Randy?

Speaker 6

Good. Good. Alright. So, following the sale of VK Eddie, you know, you still have, I guess, one VLCC built in 02/2005, five Suezmaxes over 15 years of age. So first, what was the sales price for the VK Eddie?

And second, do you plan on selling these remaining older vessels in the coming months or operating them in 2020?

Speaker 2

Okay. So the the VK EDI, you're right, 02/2005 vintage. The TI Hellas is the other one that is a tier 2005 vintage. The VK EDI price was 38,000,000 sales, so significantly higher than what you can see as market values or at least market values as presented by the brokers Right. Which which means one thing, and that is that we are very opportunistic when it comes to sales, especially as we feel the market will pick up in terms of spot rates, which in turn should have an impact on the value of the vessels.

So we're not here yet to sell many ships at the present levels. But if we were to see higher values, then obviously, the first candidates that would go would be the ships that you name, I. E, the Hellas when it comes to VLCCs and the three Suezmax that are at or or slightly above 2,000 sorry, 15 years of age. Absolutely.

Speaker 6

Sure. That's a pretty solid sales price. Okay. And then I guess one more question. So as you mentioned, you know, in the first half of the year, you repurchased, I guess, $29,000,000 of stock.

Additionally, on slide six, you have over 800,000,000 in liquidity, and that's not including the 50,000,000 tap issue of the Euronet bond. So that being said, you know, why borrow that 50,000,000 at almost 750 basis points? I know the cost is a little less as it was priced at a, you know, premium to par. I'm just trying to figure out why the additional 50,000,000 in proceeds was tapped.

Speaker 2

Yeah. That's that's for strategic reasons. So we are constantly in the market, as you know, and and we are in all sorts of markets. So we're looking at a bond market. We're looking at the the straight bank financing market.

We're looking at the same leaseback market. And we always try to compare the the different cost of capital. But if you try to strip the bonds into an equivalent bank financing, you obviously have to add to the bank financing the features of the bond before that you're you're paying a bullet, you're unsecured, and you are completely fixed in terms of interest rate even though I know that, you know, the market probably expects the the rates to come to come off. I mean, are the three features that that you need to compare to. And then you are only slightly more expensive than bank financing.

And I think for a company of the size of Eurodav, it's very important to diversify its source of capital in general, in particular the source of debt. Because as we are talking to the banks and as we have a relatively large balance sheet, we're seeing the first signals that some of the banks that we are using or that we've been working with for many, many years are slowly but surely reaching their limits on counterparty. So it has nothing to do with the the creditworthiness of of urinary. It has to do with, you know, credit limits that they have overall in the market and cannot be exposed over a certain amount to a particular party. We're not there yet, but we can feel the the first signs of that.

And so we are we are trying to be very prudent and therefore decide to to tap the bond. Second reason why we tap the bond is when you look at the bond market, you can split in different segments. And the higher or the bigger the size of the bond, the better the marketability can go on. So 200,000,000 was sort of always a target. We had raised initially 150,000,000.

That was before the January transaction. I think we're now bigger, obviously, and so we wanted to reach 200,000,000. And when when we will refinance that bond in two and a half, three years down the road, it should be easier because we should be able to tap a bigger pool of investors when it comes to unsecured bonds, high yield bonds. So that explains what we have done there. The I would say that the the overall pool of liquidity that we have, you understand that there's a part of cash, there's a part of that is sparked on revolving credit line, which are committed for a number of years.

There's a little bit of commercial paper, which is more short term, and then there's the bond. But I think that as we can never predict what sort of market is waiting for us, we have decided to have a policy of having around 50% leverage and then the liquidity that will enable us to operate for at least two years in any sort of market. And obviously, what is excess of that can be used on any sort of transaction where we'd like to act relatively promptly. You may remember that we snapped the the nurse fleet in just over two weeks, and so you better have that liquidity available. And when it comes to to generate, I think it's fair well, fair to say that the process was a little bit longer, but reaching the terms of the agreement was much shorter than than closing the deal, I would say, with all the the regulation and the the public requirements that we had.

But it was also a transaction that we executed fairly quickly because we had the comfort of the liquidity that we had at that time.

Speaker 0

This concludes our question and answer session. I would like to turn the conference back over to Hugo De Stoop for closing remarks.

Speaker 2

Well, thank you, everyone, for your availability. We look forward to speaking to you on September 5, where we will have a special webinar about what we will do in terms of preparation IMO twenty twenty and the amount of fuel that we have accumulated and the price at which we accumulated it. And so yes, that's it for us today. Thank you very much, and talk to you soon. Thank you.

The

Speaker 0

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