Cmb.Tech NV - Earnings Call - Q3 2019

Transcript

Speaker 0

Good morning, and welcome to the Euronav Third Quarter twenty nineteen Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Mr. Hugo De Stoop and Mr.

Brian Gallagher. Please go ahead.

Speaker 1

Thank you. Good morning and afternoon to everyone, and thanks for joining Euronav's Q3 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, Tuesday, October 2939, and May contain forward looking statements that involve risks and uncertainties. The forward looking statements reflect current views with respect to future events and financial performance and may include statements concerning plans, objectives, goals, strategies, future events, performance, underlying assumptions, and other statements which are not statements of historical facts.

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, on our own company website at www.urinav.com. You should not place undue reliance on forward looking statements. Each forward looking statement speaks only as if of the date of the 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.

I will now pass on to Chief Executive, Hugo De Stoop, to start with the agenda slide on Slide three. Hugo?

Speaker 2

Thank you, Brian. I will run through the Q3 highlights and provide a full financial review of the income statement and balance sheet before looking at the current themes in the tanker market and Euronav's outlook before we take questions. Let's turn to Slide four. Generally, the tanker market for VLCCs and Suezmax was range bound and a little disappointing in a seasonally soft quarter for Q3. Refinery maintenance program continued to impact the market until August when freight rates enjoyed a counter seasonal rally, where with the exception of 2015, the market recorded the highest rates for August since 02/2008.

This reflected the robust underlying fundamentals of the market. The freight rate strengthened strength, sorry, has continued and even strengthened into Q4 with Euronav VLCC fleet delivering over $60,000 per day of earnings for 60% of our available days so far. Suezmax has fared less well, but specific transaction in this category have been strong. The good news is that we have 90% of our trading fleet exposed to the spot market for the entire winter period. Finally, the company is looking to apply the new Belgian company code, meaning we shall have the capability to pay quarterly dividends for the first time starting next year 2020.

This will allow us to align our business more closely with our stakeholders. Let's move to Slide five. Q3 was very similar to Q2 in many ways with a pronounced period of reduced activity as the refineries deliberately kept out of the markets to do the maintenance and preparation ahead of IMO twenty twenty. We nevertheless enjoy some strong pockets of freight rates of counter seasonal strength, which have illustrated the underlying foundations of market strength, which we'll come on to later. The year on year balance sheet remained robust as shown on Slide six.

This quarter, there is very little to report with only one asset sale, the VLCC VK Eddy, which we sold for conversion into an offshore project during Q3 for a very healthy premium. Leverage remains in the mid-forty percent range compared to our target of 50%. That concludes the financial section of the earnings call, and I will now pass back to Brian. Thank you very much.

Speaker 1

Thanks, Hugo. Turning now to Slide seven, I would now like to take a look at a number of key signals we are currently seeing from the tanker market. Firstly, a topic that many investors are looking for, consolidation. The tanker market is highly fragmented, and a complaint from many observers is a lack of consolidation. However, this process is already happening.

It's only 16 since we completed our merger with Generate Maritime, and during q three, we saw further commercial consolidation with the announcement of three additional owners opting to place their VLCCs, some of them scrubber fitted, into the Tanker International platform. This will see the TI structure have over 70 VLCCs under its umbrella when these vessels are all delivered. This low risk and tangible form of consolidation should provide more discipline for the tanker tonnage as it faces the longer term demand challenges and implementation of IMO regulations. Further development of the platform at TI is something we look forward to and to encourage. Turning to the fundamental foundations of our sector on slide eight, it illustrates the short term role that has been played by short term storage as a catalyst in our market.

Slide eight firstly shows the one year VLCC TCE since 2015, and this illustrates the challenging market in particular during 02/2018. However, this was helped with an adjustment in the global fleet of nearly 50 VLCC equivalents leaving the fleet during 02/2018. This rebalancing has helped underpin freight rates at better levels during this current calendar year with pockets of seasonal counter seasonal strength rather in Q one and lately in Q three. If we move on to slide nine, you can see that this market background has been augmented by IMO 2020 induced storage with the requirements of around about 30 VLCCs leaving the global fleet to to store various grades of fuel oil. This short term development has helped drive the freight market along with a better outlook and picture for second half demand for crude.

The key point here that this has come on top of the foundations already set in place in the tanker market that Hugo spoke of earlier. If we progress to the following slide on slide 10, the pockets of freight rate strength reflect a finely balanced market that the catalyst of storage restricting vessel supply has driven rates even further in Q4 into positive trading. This has been further boosted by the longer term fundamentals of limited fleet growth looking forward over the next two years. And with the order book below 20 below 10% and at a twenty five year low and a fleet age profile not replicated since the mid two thousands, this is a positive background. Every year for the next seven years, there will be at least 25 VLCCs hitting twenty years of age, adding further pressure for the fleet to reduce in size, providing good candidates to be recycled and to rebalance the market in case of freight rate weakness.

These fundamentals give Euronav the confidence that there are market conditions for a sustained rally in freight rates over the coming quarters. However, this does require continued restraint in vessel ordering and demand for and supply of crude not being impacted by trade tensions or further production cuts. Finally, on this section on slide 11, we show the short term picture, and in particular, the VLCC freight rates and how quickly they rose to a very high level as a number of short term temporary factors all combined in a short period of time to produce a perfect set of conditions to push freight rates to unsustainable levels. These factors all remain in place to a varying degree and may return over the coming winter period and beyond. However, it would be incorrect to look at these very elevated levels, which have persisted for a short period as the real focus.

The key focus in our view is the fact that freight rates have been boosted to profitable levels based on solid foundations. These fundamentals have credentials to remain in place for a sustained period, albeit tanker markets will always remain open to seasonal trading patterns given the way crude is moved around the world during the year. Now no quarterly results call will be complete without a slide in IMO 2020, and we provide provide hours on slide 12. A number of commentators have queried our decision to purchase in high volume, low sulfur compliant fuel ahead of January 2020. We very carefully undertook this decision in order to reduce the risk to our business and order to provide a safe secure source of supply of tested fuel during what we believe will be a very volatile period as IMO 2020 is finally implemented.

As our seminar on September 5 made clear, this compliant fuel has been purchased at a very competitive price, around a $100 below the current retail price in Singapore where our ULCC, the the Oceana, is storing the fuel. We have already begun to deploy this fuel onto our fleet and in preparation of January 2020, and we've been able to benefit from this cheap feedstock to be consumed when IMO is finally implemented from q one onwards. This means that for our vessels performing long voyages, the fuel needs to be purchased today and stored in separate bunker tanks in order to be ready for switching on or just before 01/01/2020. To sum up, we now move on to the outlook slide on slide 13 and an upgrade to our traffic light system. We maintain on slide 13 our constructive stance on the tanker cycle into 2020 and reflect this by upgrading our vessel supply sector to amber stroke green as highlighted in slide 13.

The rationale for this stems from a view that some of the vessel storing fuel oil will not return in full to the trading fleet and that retrofits are now likely to persist longer into 2020 as owners avoid retrofitting during an anticipated strong winter freight rate season. The other fundamentals of demand, oil supply, ton miles, and our own current balance sheet remain as they were. With that, I conclude our prepared remarks and pass back to the operator. Thank you.

Speaker 0

We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Please limit yourself to one question and one follow-up.

If you have any further questions, you may reenter the question queue. At this time, we will pause momentarily to assemble our roster. The first question comes from the line of John Chappell with Evercore. Please go ahead.

Speaker 2

You. Good afternoon, guys. Hi, John.

Speaker 3

Hugo, first question is around the new dividend policy and just some clarification around that. So when you say you can start paying the quarterly dividend in 2020, should we expect that to mean the dividend off the 4Q results? Will that be based strictly on 4Q? Or will that still be, the aggregation of 3Q and 4Q? And then also, there is no kind of payout ratio or update.

I know in the last cycle, you were at 1.8% payout ratio. I think you were down to 60 at one point. What's the target distribution ratio as you think about entering next year?

Speaker 2

Yes. Thank you for those two questions. The first one is a little bit mechanic. And so it's the law in Belgium is only changing in 2020. So we're talking about important dividends in 2020.

So Q3 and Q4 will still be consolidated in that regard. The second one is we have a dividend policy out there. In the last cycle, we had a dividend policy distributing 80% of our earnings, and then we changed it to make sure that we could still distribute some sort of dividend even when we were in loss making territory, which we did, and that's 12%. That's the minimum dividend. Above that, any extraordinary dividend can be distributed.

And you've seen that we have done a little bit more share buyback than what we have done in the history of the company. And the choice will always be there between dividends and share buybacks. So it really depends on where the share price is. But nevertheless, a big chunk of the earnings will be distributed as dividends. We know it is very important for our shareholders.

We don't want to set a percentage because we still want to have the flexibility between those two. And as of a total payout, we'll be generous. I mean, if you look at our history of fifteen years, history of a public company, we have always been very generous. And obviously, when you look at the balance sheet and when you look at our current leverage, there is no reason to use any of those earnings to decrease the leverage as we as it is low enough into a certain extent, maybe too low.

Speaker 3

Okay. No, that's I understand that. Thanks, Hugo. The second one is on a little bit of the timing of the IMO strategy. And Brian said that you've already started to deploy some of your inventory.

So I think in the September 5 update, you had said that roughly half of your bunker requirements for next year would be met by the inventory that you've already built up. Is that still the case? I mean should we think kind of through the first two months of next year? Or is that maybe a little less since you started to deploy already? And then another Part B, sorry, do you anticipate building more inventory either in that ULCC or another?

Or do you feel that you've already kind of taken advantage of the price arbitrage and now you're just gonna run down what you've already, aggregated?

Speaker 2

Yeah. The first question, we have started bunkering, some vessels that are, currently passing by Singapore. As you know, the the Oceania is located not very far from Singapore. Mhmm. And it's an ideal location and very safe where we can do those operations.

The first time that we're doing that on our own and for our own fleet, We have a dedicated barge to do that, to make sure that there's no contamination. We will continue to do that, until the end of the year and then obviously next year. It's not because we're starting to bunkering now, that it will limit, the amount of bunkers we use in time. So when we say six months, because we're not gonna start using those bunkers, ahead of the deadline, maybe a little bit ahead of the line deadline, you wanna make sure that you run out of HFO and switch to LSFO as close as possible to the December 31. But that does not change the amount that we will consume over the first six months.

And then last but not least, could be a little bit more than six months because, obviously, not all the ships in our fleet are passing by Singapore all the time, but we will try to maximize it. We believe that it's really the initial few months, probably Q1, Q2, maybe Q3 that are the most at risk in terms of price volatility and also price quality because it is a new fuel. So that's really what we wanted to be protected against. Now going on to your second question, we have learned a lot about bunker procurement, to be honest. We wanna complete the circle.

I we we bought it in one place. We transport it in another place. We're now bunkering the fleet. We want to make sure that everything is working fine before potentially moving to a more stable operation, which will probably mean that we are using that ship or maybe more on a permanent basis because there's certainly one advantage, in doing what we have done, and that advantage is volume discount. So, we will probably continue to do that, but let's make sure that we complete the circle, the first, well, cycle, in fact, and that everything runs smoothly.

The focus point is still there for the moment.

Speaker 3

All right. That's super insightful. Thank you so much, Hugo.

Speaker 4

Thank you.

Speaker 0

The next question is from the line of Mike Weber with Weber Research. Please go ahead.

Speaker 5

Hey, good morning guys. How are you?

Speaker 2

Hi, Mike. How are

Speaker 5

Hey, good. Good. I just wanted to maybe piggyback some market questions following John's stuff on the dividend. Your slide on VLCC storage is interesting and kind of helping to set the table for a pretty tight dynamic into Q4. I'm just curious, if you go with 30 VLCCs in storage now, I guess, and when do you think that ultimately peaks?

I know that's a difficult question to answer on the back end. But is that a number in terms of kind of baseline storage to handle that fuel transition? Do you think that number peaks in Q1 of next year? Or do think it could extend further up?

Speaker 2

Well, to a certain extent, it's linked to the previous question, and it's about LSFO, HSFO price stability, and to a certain extent, spread stability. I think people will use tonnage and the bigger the better, I. E, VLCCs or or maybe Suezmax to store LSFO ahead of the deadline and then right after that HSFO because it's quite difficult for a refinery to plan and be completely accurate on the demand that they're going to receive and especially on the location of that demand. So I think that it's very much linked to where we're going with the fuel. And there is another dimension, of course, now that the market is doing so well.

There's some people, if not a lot of people, certainly in our segment that have postponed the retrofitted corpus, which means that you have a part of the HSFO demand that has been eliminated and more LSFO demand that has been added on. So we'll it's an equation with many unknowns. And, again, I can only repeat myself. The reason why, we've done this and we have accumulated, you know, at least six months of fuel is not to be trapped in a very volatile market and knowing exactly what we've purchased in terms of quality and at what price, of course. Then you will need to look at the, the oil market because your market is also, from time to time, requiring storage, and god knows where the price of the oil is going, and is going to go next year.

So, unfortunately, I cannot be more accurate than that. Historically, there's there's always been some ships being taken on storage. And let's not forget that the first candidate to perform that service are the, older part of the fleet, which is good news because once you have performed a storage contract, especially if it's over several months, it's more difficult to bring your ship back into the trading fleet because you have no vetting, and so your ship is is usually not easily acceptable. And and, you know, having a ship that is standstill is not particularly good for that ship either.

Speaker 5

Got you. Okay. That's helpful. For the follow-up, I guess, maybe one a bit more in the weeds, but you may have made a point to call out TI, as kind of de facto consolidation on Slide seven. And I think earlier late last night or I guess earlier this morning, there's some news out around another competing pool that's kind of bleeding tonnage.

So I guess my question as it pertains to TI and IMO 2020,

Speaker 4

we spoke about this is still a bit up in

Speaker 5

the air. But in terms of differentiation,

Speaker 6

I guess maybe the right

Speaker 5

way to ask, is there a standardization among major pools around how they're treating pool points for scrubber equipped and nonequipped vessels? And is there an opportunity to differentiate TI from a flexibility standpoint, in terms of attracting new tonnage over the next year, year and a half because of maybe a kind of a well thought out flexible point system to to accommodate, kind of multiple, multiple classes of vessels.

Speaker 2

Well, I'm I'm I'm not entirely familiar with, what they're doing in all pools. Mhmm. I I can only speak about TI. And at TI, the decision that we have made was to split the accounting side of the pool. So we're not attributing pool points to vessel with Scrubble.

We're simply saying, okay, it's one pool, one manager, but splitting two different sub pool, one for scrubber fitted vessels and one for non scrubber fitted vessels. It's very important that all those vessels are under under the same hat, And and that's the reason why we have, we have pushed the pool, to attract new members, even though those new members had a scrubber. You know, last year, I think that Euronav was more portrayed as a a non scrubber, and therefore, the pool was portrayed as a non scrubber only. So that's a big change, and, but it's not very difficult. And and consolidation is important.

And if you can't, do it on the m and a front, it's very important that you do it on the commercial front. And to that extent, we welcome other pools because if there are other pools, it means further consolidation is good for the market, it's good for us. Right. We believe that TI is the best pool, and that's the reason why we put all ships in it. We don't own the pool.

We don't get any earnings from the pool, and that's one of the biggest benefit of the pool. It's a it's a owner's pool, I. It's a cost center. So you're not adding a layer of brokerage fees

Speaker 5

Mhmm.

Speaker 2

To your earnings. And and and for us, you know, it's very important.

Speaker 5

Gotcha. Okay. That's helpful. Appre appreciate the time, guys. Thanks.

Speaker 2

Thank you.

Speaker 0

The next question is from the line of Randy Giveans with Jefferies. Please go ahead.

Speaker 7

Howdy, gentlemen. How's it going?

Speaker 2

Hi, Randy. Very well. You?

Speaker 5

Excellent. Good.

Speaker 7

Good. Alright. So on Slide eight, you show the one year time charter kind of rates. We're also hearing of one year time charter rates of of higher than kind of these charts of 50, maybe even 60,000 for some eco VLCCs without scrubbers. So I guess, have you gotten any bids for some of your vessels at the 50,000 plus range for a one year time charter?

And then if so, you know, will you look to lock away some of your vessels on those time charters either for one year or maybe three years?

Speaker 2

We've not seen that. I think that there was one ship being done at '46, and that was for three years. And the one that has been rumored to be done above 50, to my knowledge, has not been confirmed. Maybe it has, maybe it has not. There are very, very few of those available.

I think if it's for one year, we are a little bit more optimistic than that. So the answer is no. If it's for three years, above 50,000, yes, we would definitely consider it. I mean, we have sent two vessels. And if we were not considering, locking some, of those under such a good rate, then we would be too greedy.

And unfortunately, greediness, very often leads to a wall, a brick wall. So, yes, but we haven't seen it in, more than one year.

Speaker 7

More than one year. Okay. That's fair. And then, I guess, on your specific fleet, you know, following the sale of the Eddie, you still have, I guess, one VLCC built in 02/2005, maybe five Suezmaxes over 15 years of age. At the same time, you know, you mentioned kind of ongoing consolidation.

So do you plan on selling some of these remaining older vessels in the coming quarters and replacing them with more modern tonnage? Or kind of where do you see your fleet over the next year? Maybe current levels, smaller, larger?

Speaker 2

Well, everything that you said is true, as far as the, the vintage of, of our fleet is concerned, but they're not that old either. Certainly, the TI LS, which is a 2005 build, is not yet fifteen years. She will become fifteen years next year. And I guess that all those vessels that you mentioned, and we have a few Suezmax which are slightly over 15, are candidates, to be sold. We are never desperate.

And when the market is that good, it either commends a better price as a as a sales candidate, or we keep it and and we enjoy the market.

Speaker 7

Sure. And then in terms of

Speaker 5

okay. So the fleet could go up to go down.

Speaker 2

That's Yeah. That that's on the sales side. I think that on the on the acquisition side, I mean, you know how opportunistic we are. If you're talking about a fleet, you know, if it's an acquisition, we think that the values are are are getting a little bit too high for our appetite. If it's a merger, it all depends on the way your share price is, I suppose.

Speaker 7

Sure. Hey, thanks again and congrats on solid quarter.

Speaker 2

Thank you.

Speaker 0

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

Speaker 8

Hey. This is Chris on for Amit. So the first question is on the physical market. Earlier this month, Sinopec, the China's largest refinery, announced it was going to reduce operations in response to higher freight rates. But recent data shows that Chinese imports were actually moving higher throughout the month and coming in at near record high levels.

Can you maybe just talk about what you're seeing here? Because there appears to be a disconnect.

Speaker 2

We are seeing it exactly the way you describe it, which means that we live in a world where you can make some declaration and not not follow it through. But I have to admit that they made the declaration when the market was supposed to be at, $250,000 or even $300,000 a day, all those fixtures were failed in the end. And I guess that their comments came up at that moment in time. Today, the market is probably more, you know, between eighty and hundred and twenty depending on where you trade your ships, and that might be the reason why they have reengaged in the market and and indeed booked a lot of vessels and have imported a lot of oil.

Speaker 8

Yes. Makes sense. Thanks for the color. And then just next question, can you maybe talk a little bit about the impact of IMO just as it relates to global crude oil demand? I mean, it feels like there could have been a headwind to 2019 demand as we've just seen elevated global refinery maintenance.

And then for 2020, potentially a tailwind with more waste in the refining process. Can provide any context to this or how you guys think about this shaking out?

Speaker 2

Well, we're not a refinery, so we can only tell you what we heard in the markets and but god knows that we have visited a lot of refineries, and they pretty much all told us the same. They anticipate that they will do additional runs to produce all the material that is required in the market, including LSFO. And the best estimate that we have seen ranges between an additional 400,000 on the low side to 700,000 barrels additional per day on the high side. And I suppose the truth will be a little bit in the middle. And it will also depends on the oil price itself.

We believe that there's going be a lot of material stranded. Obviously, there's going to be a period during which prices need to be adjusted according to the demand. But as I explained on the first question, it's a moving target because as people have postponed their stroke retrofit, it means that we'll have probably a little bit more demand on the NSFO initially, and certainly more than anticipated, but very quickly, it will catch up with what was planned. And so it will provide opportunities for ships to be used as storage, but I don't think that it will mean that the demand for oil by those refiners will go down.

Speaker 8

And have you guys seen anything in 2019? Obviously, like, demand 2018 has been pretty soft. You know, there's a lot of, you know, kind of factors at play, but just has this elevated global refinery maintenance year to date, you know, had any impact from what you guys are saying?

Speaker 1

Maybe, Chris, if I could jump in there, it's Brian Gallagher here.

Speaker 5

Go on. Go on. You go.

Speaker 1

Was just gonna mention, and I think I think we've seen that in q two and q three, and think I that's the point we wanted to try and make in our prepared remarks in that we did have a a pretty respectable market in Q1 and Q4 of last year, dollars 35,000 a day. And as we went into September and early October, again, we had a good market and a and a good setup for the winter program. I think it's been that refinery maintenance program, which has been very, very prolonged and also more assertive and more aggressive than we were all anticipating. And that's been almost certainly the key driver where we've had reasonably challenging markets in q two and q three. I say challenging, we were still, well, slightly loss making as we reported today.

The fact that underlying that, the market has had some sort of a reasonable balance between demand and supply. So our view would be is that Q2 and Q3 is what you saw was very much driven by the refiners, and now they're back in play and now ready for IMO 2020.

Speaker 5

I appreciate the color.

Speaker 8

That's it for me. Thanks for the time,

Speaker 4

guys. The

Speaker 0

next question is from the line of Ben Nolan with Stifel. Please go ahead.

Speaker 6

Thanks. Good afternoon, Hugo and Brian. So I have a well, my first question, you touched Hugo on this a little bit, I think on Randy's question, but there's been clearly some noise in the market about owners who have placed new buildings who are looking to sell those assets. Curious, and it sounds like they're the ask price is a bit too high for you. But how do you think about that more broadly as some of these speculative new builds look to be sold?

Is that something that you would be interested in doing at some point?

Speaker 2

It's very it's very, difficult to be accurate. Yes. There's a number of, VLCCs, particularly VLCCs, which have been built speculatively. Those vessels were earmarked for sale. Some of them have been sold, but you have to recognize that most of those, well, speculative units, have been or starting to be operating in in proper companies.

The pool is welcoming two of those, in the name of Hunter and Hartree, and that's because they have equipped themselves, with, you know, the necessary, people management systems in order to operate them. So I don't think that they are desperate. And and who knows? Maybe they want to become ship owners themselves. So it's it's quite difficult to read who wants what.

It's true that once once a vessel, and I think there was a rumor in the market today that one of those had been sold at, you know, way above $1.00 5, 105,000,000. It's true that for us, it's probably on the very expensive side. If it's a fleet, you can pay with shares. Your share price is potentially trading at at a premium to NAV, then it's something different. I mean, at Euronav, we always look, or we always take care of our shareholders, our existing shareholders, and we wanna make sure that whatever we do, we we create values.

But there is always a limit, to, the price that, that we are willing to pay.

Speaker 6

Okay. No, that's helpful. And I certainly, that discipline is something that you've shown in the past. My next question shifts a little bit, and it sort of ties in with the quarterly dividends, which I think, at least in The U. S, many people will appreciate.

But in the past, you guys have, in periods of strength, done the special dividend, that sort of thing. It looks like 4Q, based on the rates that you've locked in thus far and where the market is now, it should be one of those periods of time when things are pretty good. You mentioned earlier that the balance sheet is appropriately or maybe even under levered. If there is a windfall quarter or a couple of quarters, is special dividends sort of on the table? Or how are you thinking about the use of your capital beyond just the normal quarterly dividend?

Speaker 2

Yes, of course. I mean, whether you call them special extraordinary dividends, we're going to look at them on a quarterly basis going forward. As I mentioned earlier in this call, this is true for 2020 because the law is only changing in the January 1. So as far as Q3, that obviously we made a loss and q four are concerned, that will be the way we've done it in the past.

Speaker 5

Okay. Alright. Thank you, Hugo.

Speaker 9

Thank you.

Speaker 0

The next question is from the line of Omar Nokta with Clarksons. Please go ahead.

Speaker 10

Hi there. Hi, Hugo. Hi, Brian.

Speaker 2

Hi, Omar.

Speaker 10

Hi. Just yeah, I just wanted to just maybe revisit the, you know, the ULCC being used for storage of, of, low sulfur fuel. You know, you've discussed, I'd say, extensively on the call, and in the September 5, announcement as well that, you know, during the next, you know, two to three quarters or at least

Speaker 5

the first two to three

Speaker 10

quarters of, 2020, there's there's a lot of uncertainty of supply. You know, generally, over the past few weeks, there's been, you know, some reports that, you know, the concern over availability of the low sulfur fuel is maybe overblown and that the market may be okay. That's obviously in stark contrast to where things were six months ago. Of course, we're not gonna really know ultimately until we get into January, and have a better sense. But as we kinda think about it from Euronet's perspective, you know, you've got an embedded gain in that, in that bunker fuel.

The you got a lot of working capital tied up with that. Does it make sense at all if we get to the January time frame and and and sure enough, there is a good amount of supply available for low sulfur fuel. Does it make sense to accelerate the that discharge or sell as much as possible, that fuel and and maybe bring that ULCC back into the trading market?

Speaker 2

Yeah. So in fact, there there are two questions there. The first one is, clearly not. I mean, we're not traders, and we did not do that, to speculate. We did that primarily because we were worried about quality.

And, yes, there seems to have certain quantities of LSF four that have been stockpiled either on land or on ships, but that doesn't tell us anything about the quality. So, again, the first few months are gonna be about the availability, the quality, but also the pricing. At the moment, we're sitting in a project that is definitely in the money. We're happy about that. That that was not the primary goal.

I don't know where the pricing will go, and I don't know, in which location it may it may go up or down. Mean, obviously, we are in only one location, but we we can always swap product if we see that pricing are going all over the place in another region. As far as the vessel is concerned, it's a very good question. I'm very happy that you asked it because we have had it in the past and we've not been able to explain authority to the market. We're talking here about ULCCs.

ULCC can carry 3,000,000 barrel. They were built in 02/2002. We acquired them in 02/2004, and we trade them or we use them as trading ships until 02/2008. After 02/2008, two were converted into FSO and the other two were only used as storage units. So they have not been part of the trading fleet.

The reason is that the market structure is not made for a 3,000,000 barrel lot. So we are not missing out on those vessels of the goods markets that we're seeing on the VLCCs on the Suezmax. The the the top that we've earned on those two units, well, in fact, one because we only bought, the other one last year, in the last ten years, which since 02/2008, must be, in the low thirties. So our cost of lost opportunity is very minimal and we have calculated that when we were thinking about using those vessels and that's maybe also one of the reason why we're not using a VLCC and or Suezmax.

Speaker 10

Okay. Thank you. That that that that makes sense. And, I didn't realize actually that the ULCC hadn't traded, in the in the BL market since o eight. So thanks for that.

I do have just a follow-up on the guidance for the fourth quarter. Obviously, VLCCs looked generally, I'd say firm, especially relative to what we've seen in the past and how the market's averaged. When we think about the Suezmaxes at 27,300, you know, how do you feel about that? It seems a bit lighter than what we would have expected. I know, we're somewhat in uncharted territory here.

The, the the the past several weeks where rates that we've seen reported don't actually end up, you know, coming into fruition. But how how do you think about the 27,000? Is that really what you would say is reflective of where the market average has been, or or do you think there's something else?

Speaker 2

No. I think that we would tend to agree with you that, we are a little bit disappointed on the on the Suezmax front. But you're also correct to say that, in the last few weeks, the Suezmax market has rebounded and has caught up with the VLCCs relatively speaking, of course. So I think it's too early to draw conclusions. Let's not forget that the market received a lot more new building deliveries last year, did not recycle as many ships as what we have recycled on the VLCC.

But conversely, the order book is so much smaller than the VLCC, which is already at historically low levels, around 9% as we've shown on the slide. So it's true that we have not given you those data points, but I'm sure you have them. The order book on the Suezmax is even more attractive than on the VLCC. So if there was a disconnect with the VLCC market, I believe that you have to look at it, over more than a few weeks, and potentially more than than a quarter, because, it's a market that can come back, and to a certain extent, as I mentioned, has come back already.

Speaker 10

Got it. Okay. Thanks, Hugo, for that. Appreciate it.

Speaker 2

Thank you.

Speaker 0

The next question is from the line of Eric Havelson with Pareto Securities. Please go ahead.

Speaker 11

Yes. Hi, thank you. I just wanted to follow-up a little bit on the capital allocation because I think that's sort of the key theme in 2020. So you have the most conservative depreciation profile, which in a way punishes a little bit your net profit. So is there any reason not to expect you to pay out more than your full earnings next year?

Because you say you're not going to pay down debt, you're not going to buy ships, then where will sort of the cash go?

Speaker 2

It's a very good question, but you will have to wait until we cross those quarters and tell you how much we're to pay. I think that it's for a purpose that we have not limit ourselves to a to a certain percentage and that we are a little bit more flexible than in the past between, you know, share buyback and and dividends. But when it comes to depreciation, it's a funny game because, yes, we are maybe a little bit more conservative than the others. But when we sell the assets, obviously, we have depreciated them more than the others. So we are catching all of those profits back at the time of selling those vessels, and and you will recognize, hopefully, that we're not that bad at selling.

And usually, the profit that comes with the sales is is is pretty healthy. So I I don't think it's it's a real point. When you have a fleet of 72 vessels, you're probably selling a few, you know, a couple of them, a few of them every year. And when you do, you're catching back on your depreciation policy. We are discussing the depreciation policy with the board and we feel very, very comfortable about it.

So we will continue and maintain the depreciation policy.

Speaker 11

Yes. But it's you're completely obviously then I understand, aware of the difference between cash flow and net profit, obviously, and I think the investors should be as well. But just also one, on Slide 12, you have current HSFO price in Singapore at $545 a tonne. I just wonder a little it's coming from Okay. It's LSFO.

Yes. Because it says HSFO, but

Speaker 2

then it's misplaced. Okay. Thank you. Apologies for for this for this mistake. You know?

Absolutely. It's MSFO, and then it's well, it's it's a price that people are paying when they wanna bunker their ships in Singapore. And many many people are doing that at the moment. So the demand is picking up because on the large vessels, and that's maybe something that people don't understand, for the large vessels, if you want to have elicit for onboard, and obviously, you have to have elicit for onboard for the end of the year, if you're starting to perform a long voyage, you better book them now.

Speaker 11

Yeah. Perfect. Thank you, Hugo.

Speaker 2

Thank you, Rick.

Speaker 0

The next question is from the line of Greg Lewis with BTIG. Please go ahead.

Speaker 4

Yeah. Hi. Good. Thank you, and good afternoon.

Speaker 5

Hi. Great.

Speaker 10

Yeah. I was I was hoping I was hoping to talk a little

Speaker 12

bit more about the Suezmax market. You know, I remember going back to your the webinar presentation. You you talked about potential new routes developing for for Suezmaxes around IMO twenty twenty. Is that something that we're we're you've seen at all? Or or is is that something that kind of it it's still more of a wait and see?

Speaker 2

We've seen some of them. There's not been a long trades, certainly not as much as the VLCCs going out of The Gulf and going to the Far East. There's a lot of demand coming from Europe for whatever is exported from The U. S, and we anticipate that, that will continue because the European refineries are not very sophisticated, I. E, they will probably demand more lighter than what they have done in the past.

It's in addition to what we had because two, three years ago, we had no export from The U. S. There are other trading groups that we anticipate will develop. It's probably a little bit too soon. But again, I think that we are drawing conclusion a little bit too fast here.

As I mentioned, the market has caught up. There is a strong correlation with the VLCC market, and the strong correlation is coming from the fact that two Suezmax is one VLCC. So if the if the VLCC market is too high, then you split your cargo and you use two Suezmax. So there's there's always a correlation between the two markets. And, thankfully, we have seen that it's the the Suezmax who has gone up rather than the VLCC, being taken down by the Suezmax, and that's very positive.

Speaker 4

Okay. Thank you very much.

Speaker 5

Thank you, Greg.

Speaker 0

The next question is from the line of Chris Wetherbee with Citi. Please go ahead.

Speaker 13

Hi, guys. James on for Chris. I wanted to follow-up on that speculative newbuild question and ask about the current vessel technology. Are you confident that eventually the vessel today will meet regulations that might come down the line in like in about over the next decade, or is that a risk that you think might continue to curtail the order book?

Speaker 2

It's a very good, it's a very good question. I mean, as far as we're concerned, and I suppose everybody has, the same topic in their minds is The short answer is we don't know. Everybody believes today that LNG will be at least a transition and that the yards are telling us that as of 2022, they will only start LNG well, LNG uses fuel VLGC. And and and then we'll have to wait what the next technology is about. Today, the biggest problem that we all have is that comes with a a premium, and that premium is $15,000,000.

So if you if you set a a new building, a conventional DSC new building at 90 or 92,000,000, you have to add 40 or 50,000,000 if you want that ship to to be able to use LNG. And it's it's a significant premium. So in order to justify, either you you you need to make sure that the the fuel you're gonna use, in other words, the LNG price is gonna come at a big discount to the LSFO, or you sign a time charter which recognize that your ship is capable of using LNG as a fuel. And in other words, it's time charter that comes at a premium over a conventional vessel. As long as it stays such a big premium, it should refrain a lot of people.

It should refrain a lot of people ordering conventional vessels because they have no idea whether that vessel, when it gets delivered and there are only a few slots in 2021, so we are already contemplating the early slots of 2022. So when those vessels delivered, whether it's still going to be the technology that is accepted for a new building. And on the other side, the guys that want to jump on the board of the LNG fuel VLCC vessels are a bit reluctant to pay that premium. So we will see how the market evolves, but we are pretty confident that, it will indeed restrain a a lot of people until, well, either one of those, gets more clarity or cheaper. Got it.

Thank you.

Speaker 5

Thank you.

Speaker 0

The next question is from the line of George Berman with Cabot Lodge Securities. Please go ahead.

Speaker 9

Good afternoon. Thanks for taking my question.

Speaker 5

You're welcome. Hi, George.

Speaker 9

Glad glad you clarified the slide 12. The the it's not the high sulfur, but the low sulfur fuel oil trading at $5.45 right now, and your procurement apparently was around $445 So you're up about 100 a ton there.

Speaker 2

That's correct. Again, apologies for the type.

Speaker 13

Yes. Apologies for the type. Yes.

Speaker 9

The unexpectedly low procurement rate for your Suezmaxes here into the fourth quarter, is that partially due to most of your fleet having been on voyages when rates exploded higher here in the last couple of weeks?

Speaker 2

Well, we will need to see, what the others are doing on their Suezmax. To answer your question, yes, a lot of them were performing voyages as as they should because we like to utilize and to maximize the utilization of our ships. But it's also true that a lot of fixtures, were done at very high rates, were, canceled. So the first market that picked up was the VLCC. Then the Suezmax caught up.

But as you know, with the delay and what we see happening in the VLCC market and a lot of those fixtures, you know, between February and March being, failed as we call it, We we had the same phenomenon happening on the Suezmax. And so I think it's a question

Speaker 5

of,

Speaker 2

starting later and then being caught in the in the window of, canceling those fixtures rather than not being able to pick up any of those good grades.

Speaker 9

Okay. Has the continued export strength from The United States, Houston, Corpus Christi continued into the third and fourth quarter? Or have you seen slowdown there due to lower Chinese imports?

Speaker 2

No. We have not seen No.

Speaker 5

I'll take I'll take that one. You go ahead. Yeah.

Speaker 1

I mean, no. No, George. I mean, we saw I think it was last week, we saw a new 3,700,000 mark. So we we still anticipate we'll we'll have a 4,000,000 mark sometime in this quarter. So, no, we continue to see growth.

The recent panels that we've been appearing on would suggest that Corpus Christi is is really driving that, that growth.

Speaker 2

Okay. I think the reason sorry, just to add one element. I mean, the reason why you are asking the question is because we have seen in some reports or in some press articles that the growth rate was diminishing. But that's very different than the nominal growth, of course. If you have a growth rate of 10 or 15 year on year, and suddenly instead of 15% you only have 10%, you nevertheless continue to see a growth pattern, and that's what we're seeing.

Speaker 9

Okay. And your your Suezmaxes, are are they individually managed by yourself, or are they in a pool as as well?

Speaker 2

No. They are individually managed by our Suezmax desk, which is a in house operation indeed.

Speaker 9

Okay. Okay. And Suez is our the the primary source of exports from The US since they can only I think one port can only accommodate VLCCs. Right? Everything else has to be ship to ship transferred offshore.

Speaker 2

Yes. Which does not seem to be a problem. I think that when the distance is long enough, then it's still more economical to do lightering. Lighting means that you're bringing the oil to the VLCC with another smaller ship. It could be an Aframax or Suezmax.

And and and that's the reason why there are, well, a lot of VLCCs leaving The US Gulf Coast and and going to to the Far East. When it goes to Europe, it's true that it's it is more of a Suezmax trade. And and therefore, Suezmax are being used, and the Suezmax don't need to be lighted. So it's a it's a less complicated operation.

Speaker 9

Yeah. And then may maybe one final one. Comment on the export capacities and volumes out of Brazil currently. Recently, Petrobras, their big oil company, announced strong oil volumes. Have you seen any pickup there in in ex exports into the world?

Speaker 2

Yes. Definitely. As a matter of fact, when we when we talk about the export from, from the Atlantic, most of the time, we talk about, The Americas. And The Americas and and we call it carried because that's in our jargon. It's it's usually called carried Far East.

But carried means oil stretching from Brazil up up to the to the to the East Coast of the of The US beaten Gulf, albeit really on the East Coast. So that captures all of it. And it's true that the Brazilian had announced an increase in production. Most of that production is offshore. So it's something that is planned many, many years in advance and it requires a pretty heavy investment.

And it came online a little bit delayed compared to what they had told the market, but, nevertheless, it's a very it's a growing market and very interesting market to lift oil

Speaker 9

from. Okay. And the the carry trade, as you call it, from from the The Americas to to the East, remind me that's generally takes between sixty and ninety days. Yes.

Speaker 2

Well, it it depends where you're living from. Most of it, if not all of it, is going around Africa. The Suezmax Canal is limited to Suezmax size. And and, yes, it could be between seventy and and ninety days indeed. Okay.

Speaker 9

Great. Thanks very much, and look forward to a great fourth quarter for you guys. Thank

Speaker 2

you. We too.

Speaker 0

This concludes our question and answer session. I would like to turn the conference over back to Mr. Hugo de Stoop for any closing remarks. Thank you.

Speaker 2

Well, just would like to thank everyone who was on the call and for all the good questions and looking forward to the next one, which hopefully will bring even more good news. Thank you. Bye bye.

Speaker 0

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