Cmb.Tech NV - Earnings Call - Q4 2019
April 29, 2020
Transcript
Speaker 0
Hello, and welcome to the Euronav Q4 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 Head of Investor Relations, Brian Gallagher.
Please go ahead.
Speaker 1
Thank you. Good morning and afternoon to everyone, and thanks for joining Euronav's Q4 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, January 2020, 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, 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 the 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 at www.euronav.com. You should not place undue reliance on forward looking statements. Each forward looking statement speaks only as 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.
With that, I will now pass on to Hugo De Stoop, our Chief Executive, to start with the agenda slide on Slide three. Hugo, over to you.
Speaker 2
Thank you very much, Brian. I'm very pleased to introduce our new CFO, Lever Lager, who is with us for the first time on this call, and I'm equally pleased to have Rustin Edwards with us, who is our Head of Fuel Procurement. I will run through the Q4 highlights before passing on to Lever, who will provide a financial review of the income statement and balance sheet. We will then together look at the current themes in the tanker market and take your questions at the end of our prepared remarks. Let's turn to Slide four.
Q4 saw the strong freight markets we had been expecting through most of 2019. The underlying fundamentals have been the key driver behind the remarkable rate increases we saw in Q4. The demand coming from the refineries was strong as they returned from a prolonged period of maintenance and preparation for IMO twenty twenty. During the quarter, demand growth running at an annualized rate was more than 1,500,000 barrels per day. Of course, a number of exceptional factors drove the spot market to very high rates during October, but on average, the rates for both VLCCs and Suezmax were the highest seen for a quarter since 02/2008.
This elevated rate environment has continued into 2020, which is yet another sign that the fundamentals of our markets have improved as normally rates soften over the Christmas holiday period. On another note, we are pleased to confirm that Euronav will adopt the new Belgian Corporate Code in 2020, allowing us to pay dividends on a quarterly basis. This will permit us to better align the cash flows from our business with our shareholders. In addition, today, we announced our proposal to pay €0.29 dividend per share covering the second half of twenty nineteen. This will bring the total dividend for the year at €0.35 per share.
This is indeed 80% of our net income after adjusting for capital gains. In addition to dividends, in fact, Euronav bought back the equivalent of $30,000,000 worth of shares. So in fact, just for the year 2019, we are returning to our shareholders $105,000,000 or almost $0.50 per share. The good news is that the first quarter of twenty twenty so far is even stronger than Q4 twenty nineteen. We have booked around 60% of the quarter at close to $90,000 per day for VLCCs and $57,000 per day for our Suezmax.
Recently, rates have softened, but are still at decent levels around $45,000 per day for VLCCs. The sentiment has shifted for the moment much because of the outbreak of a respiratory virus, the coronavirus in China. The full macroeconomic impact is still being assessed at the moment. With that, I will pass on to Lever, who will run through the financials.
Speaker 3
Thank you, Hugo. I'm very excited to join Euronav, and I look forward to meeting most of the people present in the call in the near future. Let us have a look at the P and L. The operational leverage of our business is clearly illustrated in Slide five. Euronav booked a spectacular profit in Q4 amounting to $160,000,000 compared to breakeven result in Q4 last year with a similar cost base.
More over, a capital gain was realized on the sale and leaseback of three of our older VLCCs just before year end. We sold those ships at $23,000,000 above their book values. In accordance with IFRS 16, a capital gain of $9,300,000 will be booked as it represents the portion related to the rights retained in the underlying assets by the buyer at the end of the lease. The remainder of the $23,000,000 will be recognized over the leasing period. The Euronav balance sheet remains strong and robust as shown in Slide six.
Leverage on mark to book values remains in the mid-forty percent, which leaves a lot of flexibility. Our cash position at year end was $297,000,000 which is slightly more than prior years as it was augmented at year end, thanks to the sale and leaseback. Euronav has no outstanding CapEx when it comes to newbuildings, whilst in 2020, we will take 60 ships through their regular survey in dry dock. Six of those ships will require installations of ballast water treatment system. I will now pass back to Reston to run through current issues, starting with the fuel spreads post IMO twenty twenty.
Speaker 1
Good afternoon. The development of the
Speaker 4
fuel markets leading into and after the IMO twenty twenty transition have been remarkable. High sulfur fuel oil was looking to follow the predictions of most analysts in November as high sulfur fuel oil crack was steadily dropping, collapsing low minus $30 per barrel. And the high sulfur fuel market structure moved to a $45 per met ton contango for calendar twenty twenty. Very low sulfur fuel conversely increase in value on a wholesale basis, especially as shipping companies began to work to supply ships with compliant fuel in late November. December, however, painted a much different picture than what people were expecting, and that picture continues to develop today.
The upper left chart shows that in early December, high sulfur fuel commenced to rally with a prompt month crack moving from a minus 30 US dollars per barrel to a minus $17 per barrel of a high from the last week. The market structure foot contained in the backwardation and remains in backwardation. The upper right chart shows that very low sulfur fuel predictably started to rally in early December, spiking in early January as shippers scrambled to get compliant fuel bunker supplied to their ships. But and it has started to reach a market equilibrium as in the initial panic buying has waned and now very low sulfur fuel supply and demand has steadied out. Why such an emerging story?
The refinery sector is very efficient setting up and executing the transition into IMO 2020. Refiners were able to find alternative crude slates that dramatically reduce their high sulfur fuel oil yields. As an example, The US Gulf Coast refining system retooled in q three to to bring in high sulfur fuel oil for full destruction, increasing coke utilization and moving out light sea crudes in the process. The Indian refining sector also played a part as well ramping up the refining of high sulfur fuel oil into distillates. So in the end, the Russian refining system, which was long high sulfur fuel oil, found a home for the fuel that they produce and have has been shipping large parcels into The US Gulf Coast.
And the Middle East refiners long high sulfur fuel have also a taker in the Indian refiners for the residual that was not going to be consumed by the scrubber fitted vessels. Very low sulfur fuel oil has been well supplied in most market regions resulting in a steady supply of compliant fuel, although with a variety of specifications depending on the blend. Price wise, the spread between high sulfur fuel oil and very low sulfur fuel has been volatile as can be seen in the chart on the lower left. It had a spike in the December and in the January up to $320 per ton, but is now coming off as the stronger than expected high sulfur fuel oil market has moved the spread into an average of $225 a ton in the prompt. The calendar 2020 spread is now at a $195 per ton, and the cal twenty one is marked around a $145 a ton.
The forward market is showing a continuous squeezing of the high sulfur fuel versus low sulfur fuel spread as higher demand for high sulfur fuel oil is substituting the current very low sulfur fuel demand, and that's gonna be seen in the bottom right chart. From a price perspective, Euronav has been insulated from these market moves from the stocks that we have on the Oceana, which were purchased at $47 over high sulfur fuel oil in early twenty nineteen. Some of the predicted quality issues from the transition have materialized in the very low sulfur fuel oil market. There has been quality issues as blenders were more focusing on meeting a sulfur specification rather than the holistic fuel oil quality. Asphalting fallout seems to have the majority of issues, but also some performance specifications are becoming problematic.
Blenders have been mixing large amounts of distillates into the very low sulfur fuel oil, which results in a very low fuel oil, which can be used for a short duration, but for most ships require special handling if being used at load over a long voyage. This has prompted Platts to start enforcing a minimum viscosity requirement for the merchantability of very low sulfur fuel oil traded in the market on closed window process in Houston, Rotterdam, Singapore. Euronav again has been protected from this as we have our known quality at hand that we have tested, and we've been having negligible impact to our operations. We continue to be able to have our vessels perform their charters to our customers safely and efficiently as we always have.
Speaker 1
Thank you, Rusty, for that thorough run through and through the fuel spread issues and Euronav's positioning within it. This is Brian Gallagher, Head of Investor Relations at Euronav, and I'd now like to move on to Slide eight in the presentation deck. On our website and in the press release today, we have highlighted that Euronav has today given an update on the IMO webinar from September so investors can assess how our outlook has progressed and how it compares to what we said on September. One feature we did highlight as a potential driver was the development of China looking to produce compliant low sulfur fuel oil. Early this month, China announced that it was taking away a levy and VAT duties on the domestic production of low sulfur fuel oil.
We believe this is a very important development. Over the next twelve months, around 1,000,000 barrels per day production of this new compliant fuel could come into play. This out output is important, but it's also important to stress that it will not be available on the world's markets to buy, but only available to Chinese shippers. However, this potential increase in compliant fuel availability is material and something we highlighted five months ago. This is also given more detail on slide eight.
Moving on to slide nine. In the large tanker shipping vessel market, supply is everything and is a key variable to focus upon. 2020 will again see sustained levels of disruption, which we highlight in this slide. 42 vessels are due for delivery during this year, which is a headwind. But if the IA demand forecast is correct for 1,200,000 barrels per day, we estimate this will require 36 VLCCs itself to meet this increased demand.
Beyond that, the Iranian vessels, IMO related storage, long term storage, the Costco VLCCs, and VLCCs leaving the fleet for retrofits will, on an annualized basis, take out around about a 120 VLCCs over the course of 2020, as you see on slide nine. In addition, 28 VLCCs will reach their twentieth anniversary during this year and will require a special survey of which the owner will have to make significant potential capital investments in a vessel with a limited addressable market. It is very encouraging that three such VLCCs have already, this calendar year, gone to the scrapyard despite base of high freight rates. As the slide shows, over 70 vessels in all, including these 28, will be aged over twenty years during 2020. That is more than the current order book of 64 VLCCs according to Clarksons.
Finally, there's a lot of speculation regarding the 26 Costco VLCCs, which have been out of action since October. We would like to make two points here. These ships are all anchored in the Far East, and it will take time for them to return to the global fleet fleet as and when sanctions are lifted. So this will not be an instant return. Secondly, it's highly likely their return will coincide with phase one of The US China trade deal announced recently, meaning that some of these vessels will be absorbed into this trade accord.
Now moving on to slide 10 and the share liquidity and a big change for Euronav during q four twenty nineteen. On slide 10, we focus on share liquidity, which is something that investors have correctly focused upon for a long period of time. Euronav is now the most liquid share in the large tanker space with around about $50,000,000 worth of value traded each day on average in our shares year to date. This is across two exchanges. With a market cap over $2,000,000,000 and trading liquidity meeting many of our investor thresholds, this will allow investors to participate in what Euronav will be at the early inning of a sustained take tanker cycle.
With those remarks, I'll now pass back to our chief executive, Hugo De Stoop, for an executive summary. Hugo, over to you.
Speaker 2
Thank you, Brian. We are now on Slide 11. Euronav maintains a very constructive stance on the tanker cycle for the next years to come with all of our traffic lights showing green or green amber. As mentioned, 2020 has started strongly and whilst we can continue to expect volatility in freight rates throughout the period, we believe that rates will be strong on averages. Our markets will however and as always be influenced by external geopolitical and macroeconomic factors, which are hard to predict, but we believe that the fundamental pillars present today should enable the industry to cope with those with much more flexibility than what we have had in the last decade.
The order book for large tankers is at twenty five year low. Vessel ordering remains limited and the age profile of the world fleet is very constructive. In addition, the recent Phase one of The U. S.-China trade agreement should support our markets as an important feature of the deal itself is about export of energy into China. With that, I conclude our prepared remarks and I pass back to the operator.
Thank you.
Speaker 0
Yes, thank you. We will now begin the question and answer session. At this time, we will pause momentarily to assemble the roster. And the first question comes from Randy Giveans with Jefferies LLC.
Speaker 5
Howdy, gentlemen. How are you doing?
Speaker 2
How are you, Andy?
Speaker 5
Great. And, yeah, congrats on the new role, Lever. You know, the the last CFO left you with a pretty low bar, so I'm sure you'll do better than him. So just getting
Speaker 2
through that.
Speaker 3
Our best. Thank you.
Speaker 2
We do really because someone much better than the previous CFO. I can tell you that.
Speaker 5
For sure. For sure. Alright. So quick question on the LSFO that you bought forward. You know, how much of an impact has that kind of prepurchased fuel had on your time charter equivalent in the fourth quarter and especially in the first quarter to date?
And then what's the plan kind of going forward with that LSFO that you still have? Is it solely going to be used on your own vessels, or are you gonna kinda take advantage of the high prices and sell it to third parties now?
Speaker 2
Well, Randy, that's a that's a very good question, but it's a little bit of question, certainly, in the first part, which is, impossible to answer. And the reason why it's impossible to answer is because I mean, in the presentation and you've heard Rustin, there's been quite a lot of volatility in the price of LSFO, in the price of HSFO. And obviously, these are the two prices that we compare ourselves because when we purchased this LSFO sort of early and middle of last year, it was at a price that seemed at that time very attractive and which since has been even more attractive. But in order to quantify exactly the advantage, you would need to look at the market almost on a daily basis, and you are not fixing ships on a daily basis. So you can only compare to averages.
And as I said, the average so far is probably too early to tell because we have started the quarter on relatively high spreads, and the spread was made of a relatively high LSFO price. So you know the price at which we have acquired our LSFO. We have repeatedly said on many occasions that it was €4.48 So at times, during the quarter so far, so during the month of January, it was up to $150 lower than the peaks that we have seen. But then who has bought that material at that peak? That's a little bit the question.
And the same goes if you want to compare us to the guys equipped with the scrubber. Well, it depends when they bought their own fuel and at what price it was at that time. So I think we will have to wait until the end of the quarter to see the real difference than we have with our peers. And as you know, our peers have mixed fleet, fleet with scrubbers, fleet without scrubbers. And I think at that time, we'll be able to say, okay, our advantage was so much on average for the quarter compared to non scrubber ships and our disadvantage because for sure there will be some disadvantage in pricing will be so much.
And then we'll be able to see going forward whether the strategy continues to make sense, if we need to buy more because there is continuously arbitrage in the market depending on where you buy the LSFO or whether we need to look more seriously at a scrubber strategy, which we have said for a long time now that we continue to assess the benefits of, and we will, decide when we see some sort of stability in the market. To answer the second part of your question very quickly, yes, that fuel is only for us. Sorry, guys. We're very selfish.
Speaker 5
Noted. Alright. And then I guess just following up on kind of the the new dividend policy, obviously, the the 80% of net income going forward. Mhmm. How do share repurchases kind of factor into that?
Like you mentioned, you purchased a bunch in 2019. Share prices obviously pulled back here in the last month. So how do you share repurchases in accordance with the 80% dividend payout policy?
Speaker 2
Yes. So two things to mention there, thank you for asking the question. That gives us the opportunity to clarify it. 80% is the total return to shareholders, and we consider share repurchase as part of a return to shareholders. So you have seen that in sorry, in 2019, we far exceeded our policy because we are returning 80% of our P and L.
And in addition, we have done €30,000,000 worth of share repurchase. It doesn't mean that we will always do that. We have indicated a target, and the target the word target was precisely chosen because that's what we are aiming at. But obviously, if we can do more, we will do more. I think that, the big change in 2020 is the fact that we can distribute dividends, on a quarter to quarter basis, which quite frankly is an advantage for the investors because, as opposed to what we have done in the past, we are looking one quarter at a time.
In the past, we are more looking at the year, and so the of the profits were compensating some of the losses. Going forward, that's not gonna be the case. You look at the quarter, you distribute your target of 80% for that quarter. You distribute it, and if the next quarter you do a loss, then, you only have the fixed dividend, but you don't get back you've already distributed. So I think that's significant advantage in a volatile market, and it gets our results closer to the shareholders.
Then, of course, on share repurchase, I think the philosophy of this company has always been the same, which is we don't rush to buy back our shares. So if there is a weakness in the share price, I think that we want to see a little bit whether it's a temporary weakness or whether it's more permanent. And if it's more permanent, then obviously we are thinking very seriously about it. We can come back on that, but at the moment, weakness in the share price is pretty recent. We were actually quite upbeat about the share price performance in the latter part of last year and certainly in the first ten days, two weeks in January, where we're finally getting share prices was above our NAV, which is always our objective.
So we're disappointed about what's going on at the moment, but we also understand that there are exceptional circumstances around here, and that's true for everyone. So before deploying some capital on share repurchase, I think that we see we need to see how long and how deep it will go. Because if you buy today, and maybe tomorrow it will be weaker, or maybe tomorrow it's it's gonna be stronger. But if it's stronger tomorrow, then it was just a temporary weakness. If it's deeper tomorrow, then you better wait before, deploying your capital.
Speaker 5
That makes sense. Well, hey. Thanks for the great color, and, yeah, congrats again on the the stellar quarter.
Speaker 2
Thank you so much.
Speaker 0
Thank you. And the next question comes from Michael Webber with Webber Research Advisory.
Speaker 6
Good morning, guys. How are you?
Speaker 2
Hey, Mike.
Speaker 6
Guido, I wanted to touch base first on the impact of initial versus subsequent loadings of different blended fuels. It's a little bit early to see an impact yet, but I'm just curious, we're hearing some rumblings that it's causing an issue and it's going be a bit unpredictable. But I'm curious, as you look at Q2 and maybe Q3, do you think those issues could create a measurable impact in terms of available tonnage? And how do you think the sector ends up responding to that?
Speaker 2
I think it's a bit early to tell. I mean it's true that what we are seeing, the material that we are seeing in the market is a mix of straight fronts that have been accumulated over the year 2019. That was certainly the case for us. But as you know, there were a number of ships out there with LSFO material waiting to be consumed after the deadline of December 31. I think going forward, you will continue to see a number of refineries producing straight runs of LSFO.
That shouldn't be a problem. Then you're going to have probably more material hitting the market that are the result of a blend. And indeed, our experience in the past has showed us that you need to be extremely prudent with those blends. If the if the seller and you wanna get as close as possible to the people who are mixing it, basically, who are blending it. Mhmm.
But if the seller has demonstrated to you that this product has been blended in very similar way than in the past, it has been sold and marketed with no issue, then then you can be confident that chances are there there will be no issue. But I agree with you that q two and q '3 may see a little bit more untested material, and we can only advise people starting with ourselves to be prudent on what they buy. Obviously, everything that we have on the Oceania has been thoroughly tested. We have we have we have mentioned that many times. And we're good to go for at least q one, q two, and probably a little bit more than that.
Anything else that you want to add, Justin?
Speaker 4
Well, just on the quality issues that are existing in the market today, I mean, are a lot of issues around stability that have popped up. It's been reported in a lot of the different industry publications as well as from the different testing societies such as VTS and Lloyd's. And that seems to be the predominant of the big of the biggest problems you're seeing where people are just blending for a sulfur, not blending for quality. Hopefully, time goes on, you know, people will get better at what they're doing and the stability issue should go away. But as cost is always a big driver to the blender's p and l, maybe not.
Speaker 6
Okay. No. That that's helpful. I appreciate that. It's it's not an easy question to tackle.
Just as follow-up, you know, Hugo, just with with with respect to the the fuel hedge, you know, and what we're looking at right now in terms of a almost a bit of an exogenous demand shock in terms of coronavirus kind of layered on the Chinese New Year. Is there a scenario where we see prices collapse to the point where you would consider re upping that fuel hedge and extending it further? And how realistic do you think that is?
Speaker 2
I mean, you know us I think we can we can call ourselves very opportunistic. We have a a team that is fully dedicated to fuel at the moment, and Rusty is heading the team. And we are in the market not only in front of the screen, but also talking to people's time. As I mentioned earlier on the first question, we see quite a lot of arbitrage from time to time. Certainly, the markets are behaving very differently between the Far East Singapore and The Atlantic, specifically in Rotterdam.
So yes, yes, why not? I think that we might do it in in a slightly different way because the first time, when we did last year, our objective was to fill up the ship. Here, it's gonna be more opportunistic around, you know, one cargo at a time and and and make sure that when we buy that cargo, we are as close as possible of consuming that cargo. So we are not taking, you know, sort of time risk that are unnecessary.
Speaker 6
Right. They would would it be fair to assume you need to be near your original cost basis? It's a question that wasn't really pertinent in earlier in January, just given the severe discount we've seen since it's going come back on the radar?
Speaker 2
Well, we're still very far from the $4.48 that we reported. And don't forget that the $4.48 we reported is including a lot of extra cost to deliver the material, set up, I mean, to clean up the ship in order to make sure it wasn't contaminated. So the real cost of the fuel itself is probably lower than that. So we are very far from hitting those territories, for sure. But rest assured, I mean, are paying attention.
Speaker 6
Fair enough. Great. Thanks for the time, guys. Appreciate it.
Speaker 2
Thank you.
Speaker 0
Thank you. And the next question comes from Jon Chappell with Evercore.
Speaker 7
Hi, guys. This is Sean Morgan on for Jon today. So we know it's obviously pretty early and difficult to gauge the impact of coronavirus. But as part of TI, your major VLCC operator, do you think there's any impact on your business so far? Have you seen any impact on chartering or any disruptions to the port in terms of loading or unloading?
Speaker 2
The short answer is no. But why don't I take this opportunity a little bit to share our view on the coronavirus? I mean, first of all, it's bad news. Let's not pretend that it's anything else than bad news. It's especially a disaster for those who are affected.
So let's let's think about them for a minute. The impact is definitely uncertain. In the short term, it's negative. It's certainly not positive, but that's in the short term. In the long term, I guess that everybody's convinced that it will be contained.
So to a certain extent, you want those measures to be as strong as possible so that the virus is contained as quickly as possible. And, I mean, believe us, it may take time. It may take a little bit of time, but it will be contained. The third point that is very important to mention is that Euronav business model is to be able to weather all storms because we know that there is always something that can affect us or that can affect our markets that is completely unpredictable. And I think that the the model has demonstrated its strength in the past and will continue in the future.
So that's probably the the only assessment that we can do at the moment, but there's always, you know, the sort of long term positive sides to it. First of all, if you think about what happened in just the first initial days of the year, there was a pretty big heat up on the values of vessels. I mean, VLCCs have been exchanged at a 107,000,000, and you compare that to a a 90,000,000 that you can get at the shipyard fourteen months down the road. That's $40,000 per day of profit. $40,000 per day above your OpEx, so $70,000 TCE that you need to print on average for fourteen months to justify that price.
I think those prices were probably exacerbated by the excitement around the race, but quite frankly, we don't believe that they were justifiable. The second potential positive news is that, as Brian said, there are 28 ships turning twenty years, twenty years old in 2020. I think that we're making the decision to recycle them a little bit easier if the market goes through a a more difficult times for a few months. Because at least it will demonstrate that the market is still volatile, and if you want to invest a lot of money to pass that survey, you better make sure that you're gonna have a return for your buck. Two weeks ago or even last week, there was a couple of reports pretending that 46 Costco ships were gonna return to the market.
Well, first of all, it's 26. That's the only number of ships that have been idle. Believe me, with the virus, they are unlikely to come back very soon. The next one is the next point is probably that, if we look at other, terrible viruses that have spread out, in the past, what we know for sure is that once it's contained and things go back to normal, they don't go back to normal. There's a huge stimulus usually made by China, but also by other economies to try to catch back a little bit what has been lost during the period.
And so if you predict that it may take a few weeks or a few months, what you have today is a fantastic Q1. I mean, no matter what the rest of the quarter will be, it will be a great Q1. Then you will have the summer, which is never the period for which we we count to make the year. And then chances are, we're back in winter with a super strong market. So, depending on how how things turn out, it should be a great year.
And as far as capital markets are concerned, and this is the purpose of the of the call, this is a fantastic entry point in tanker shipping companies. And with Euronav, of course, you have a guarantee to be paid because we just announced we're gonna pay a dividend. We have announced that we'll pay quarterly dividends, so you're gonna be paid for '19. You're gonna be paid for '20. So you're gonna be paid for to wait until there is the upside.
And if that upside is not as quickly coming as I just expressed, you are in a company with a super strong balance sheet that can weather any storm. So, yes, it is a terrible news. Yes, it is completely unexpected. But quite frankly, if I was an investor and I was attracted by the sector, I know where I would put my money.
Speaker 7
Okay. Great. So sounds like a pretty comprehensive answer, but no disruption so far. So I guess we'll we'll continue to monitor that. You did mention in in your response the Costco ship.
So I guess that kind of is a good lead into my second question. Supply is obviously an important driver of the cycle. Of those 120 vessels from Page nine that are out of trading, what's the base case return, number you guys are thinking in terms of those 120 vessels that will return sometime this year? Like, what's your base case?
Speaker 8
Well, Sean, it's Brian Gallagher here. And, I think what we wanna try and get across with the, the slide here is to say that this disruption is, as it says on the on the slide, going to be, constrained and probably sustained. The 26 ships, as Hugo said in his remarks as well, we would expect to see some flowback of those. There potentially will also be some flowback from ships which have been driven by and motivated by IMO, motivated storage. But apart from that, it's very difficult to see the other categories
The VLCC retrofits is an annualized number based on consensus figures of, I think, 96 fees to go and be retrofitted over this year. So I think the only real, element we would see of that one twenty is is that is of those Costco ships. And, of course, that is wound up with the, US China phase one deal, and the fact that they're they're positioned in the Far East. And as Hugo said as well several times on this call already, we don't expect those ships to return back to the market very quickly as and when they are given permission to do so. So that would be the only real moving part we would see out of the 01/20.
Speaker 7
Okay. Great. So about 75% of those, will remain out for the year. Alright. Thanks.
That's that's all I have.
Speaker 2
Thank you. Thank you.
Speaker 0
And the next question comes from Chris Chris Pellerbee with Citi.
Speaker 9
Hi, guys. James on for Chris. Wanted to touch on the scrubber installations in your walk. I think you called out 16. I wanted to get a sense of when those 16 vessels might be returning to the market and if there might be another wave of scrubber installations on the back of that as well?
Speaker 2
Well, that's a very similar question to the one we just answered. But so the 16 is an annualized number. So in fact, it's close to a 100 ships that have order scrubbers, and that needs to be a scrubber fitted. So they they they will go in the yard. They will return from the yard after the the retrofit, which on average, we understand is thirty five to forty days.
That that's the figure that we got from the market, obviously, not from our own experience. And then who knows? I mean, depends where the spread is going. I mean, there there's there's, I suppose, lot of people like us, who are, waiting to see where the spread stabilize, in order to take their decisions. But, the odds are far less busy than than they were last year, so things should should get better and better.
And then the the total number of retrofits will depend on where the spreads have gone.
Speaker 9
Got it. And then in terms of dry docking, I think you called out 16 vessels that will be drydocked in 2020. What level of off hire should we expect for that? And then what would that be relative to what you experienced in 2019?
Speaker 2
In 2019, it was a very light year. We only had one well, almost two drydens. I mean, one was over the year end. So nothing to compare one year with the other. In 2020, it's 16 ships.
On average, they stay VLCCs. It's twenty one days. Suezmax are a little bit quicker, eighteen, nineteen days. But six of those 16 ships will require a ballast water treatment system to be installed. And so we are likely to take four to five additional days compared to a normal dry dock to do that.
Speaker 9
Got it. Thank you.
Speaker 0
Welcome. Thank you. And the next question comes from Brent Nolan with Stifel.
Speaker 10
Hey, good morning or afternoon, guys. So I had a first of all, just sort of given the outlook that Brian laid out with the green lights and amber and so forth, I'm curious how you think about asset values here. Obviously, you're optimistic with respect to the current market and the outlook and everything else. Do you feel that's appropriately reflected in asset values? Or would you potentially be buyers of assets in this market?
Speaker 2
Well, we we partially answered the question earlier with the when I mentioned that one zero seven, when you compare that to a a brand new ship that you can order in current shipyard at 90,000,000, it's very difficult to justify. And that's a little bit the nature of the market at the moment. If you look at the TCA, if you look at the historical asset value performance versus the spot market, then we should probably be a little bit higher than what we are today. But that's not really how it's going to play out this time because the yards are, I wouldn't say, pretty empty, but the order book is pretty low, as you know, and as we mentioned in the presentation, which means that we are unlikely to see any inflation in the prices of new buildings. So that will probably anchor down the potential increase in values of the secondhand tonnage.
So it'll you will always have a premium to pay when the market is good because, well, the asset is on the water and ready to earn immediately. But, nevertheless, it's gonna be trapped by the fact that the first berth available for new buildings are, you know, fourteen or or fifteen months down the road. And so you just made the calculation that I just did for you. Other than that, I think we have already seen a pretty nice uptick compared to the bottom of the market. So we don't expect to see much more.
And quite frankly, for the the prompt super modern sort of resale of new deliveries, it's likely to go down. Are we buyers? I think that we are opportunistic, and so it depends. And some of those ships are are called ships for shares, and so it depends where your your share price is trading. I mean, obviously, we're not happy at all with our share price at the moment.
But if we were to trade at NAV or above NAV, would we exchange it for a ship at NAV? Why not? Our purpose is still to consolidate. When it comes to cash payments, then we need to be more conservative than the numbers we've seen so far this year.
Speaker 10
Okay. That's very thorough. I appreciate that, Hugo. And then just as my follow-up, in the past, particularly in the Suezmaxes, you guys have taken The market's pretty good.
Have you been at all active in that, any thoughts on potentially doing so?
Speaker 2
The volume of time charter contracts that are available in March is very thin. So that you you don't have so many opportunities, and in fact, you probably have less opportunities in the last three months or four months simply because the market has been extremely volatile extremely volatile on the way up. I was, you know, quick quickly going to to to the $100,000 a day, very little distraction over the Christmas holiday, and then suddenly a massive drop. So I think that everybody is looking at each other in the eyes and thinking on one side, this is too wide, on the other side, this is too low. And that's what we call the bid off of spread.
And we need to see little bit more stability, and I know it's asking a lot for our markets because most of the time, we don't see that. But but at least some visibility, and I think that some of the events affecting the market at the moment, and we spoke a lot about the virus, is just too unpredictable, for people, to start signing long term contracts.
Speaker 6
Sure. Okay. I appreciate it. Thank you, Hugo.
Speaker 2
You're welcome.
Speaker 0
Thank you. And the next question comes from Greg Lewis of BTIG.
Speaker 2
Hi, Greg.
Speaker 0
Please go ahead, Mr. Lewis. Your line is open. Yes, we're moving on. The next question comes from Amit Mehrotra with Deutsche Bank.
Speaker 11
Thanks, operator. Hi, Hugo. So I guess there were some trade reports ten days ago or so that Euronav was carrying out inquiries with scrubber suppliers. I just wanted to know if you expand on that, either confirm or deny that. And then I understand the spread has come in.
Think that's obviously clear. But maybe one of the issues can be because the price of crude oil is down over 15% since January. So I want to understand your thinking around scrubbers. You kind of alluded to it a little bit earlier, but I would like you to expand on it because the premium that's currently being achieved, there is a sizable premium, at least on a TCE basis, for scrubber fitted vessels. And the fact of the matter is the spread could just be a reflection of some transitory reduction in input costs and can kind of widen that back out.
So it'd be great to just get your perspective on that.
Speaker 2
Yeah. No. Absolutely. So the the the first part of the question is whether or not we're gonna install scrubbers, and and and the answer is the same as we have mentioned since September. We're not against scrubber, we're not pro scrubber, but we're certainly against speculative investment because we're speculative enough in our traditional business, I would say.
So we are looking at the market. We look at the price of HSFO. We look at the forward curve of LSFO. And then we look at the time that it would take to install a scrubber. We want to minimize the time as much as possible.
The only way to minimize the time is to be prepared. How do you prepare yourself? Well, you make the planning for the ships, certainly the ships that are going to dry dock because, obviously, you don't want to take a ship out of the trading fleet when the market is good. And in order to do that, you need to go and contact dry docks, shipyards. You need to go and contact the scrubber manufacturers, and you probably need to go and contact some consultants who are specialized and who have gained the experience so that if you decide to do it, it's going to be done in a very smooth way.
So it's totally normal that the market is talking about Euronav engaging with scrubber specialists. And I'm sure, and I I would be pleased to hear that that that you continue to hear that because that's absolutely true. We're taking the matter very seriously, just to minimize the time that it would take us to install in case we see an economic benefit and also in case we can, to the extent possible, lock in that economic benefit and despeculate the investment. As far as the second part of your question, maybe I should give the word to Rusty, but I will maybe introduce, the spread has nothing to do with the oil price. The movement of each individual pricing of each individual product, sorry, has to do with the oil price, but the spread has nothing to do with the oil price.
Am I my
Speaker 4
Well, in relation to the value of high sulfur fuel oil, it has appreciated greatly in value versus crude, and that was happening even before the sell off in the in the crude over the last two weeks. And, again, if you look at the back of the high sulfur fuel crack in the prompt in December, it was minus 30. At the December, minus 20. Last week or even yesterday, it was pricing around minus $0.17 and $0.25 So in that case, it is the relative value that high sulfur has appreciated in value, and it's not it has very little to do with the actual flat price movement on crude. It has more to
Speaker 2
do with So gas and
Speaker 11
Do you have a fundamental view that the price of high sulfur fuel oil is going up when half of demand for high sulfur fuel oil is going away?
Speaker 0
Yes.
Speaker 2
Okay. So the answer is yes, and everybody around the table is saying yes. But maybe we should tell you a little bit more because in your question, you imply that half of the demand is going away. And that's maybe where we defer because in our opinions, of course.
Speaker 4
So you've had a fair amount of high sulfur fuel that's been destroyed through refineries switching of crude slates. You also have a fair amount of demand that's increased from the high sulfur feedstock side from refineries, especially in The U. S. Gulf Coast and India, where the refineries are fully utilizing cokers to destroy high sulfur fuel and make distillates. Part of the reason why the distillate crack has weakened is the fact that the cokers are being fully used, destroying high sulfur fuel and producing distillate which is feeding into the 0.5 and the low sulfur markets.
On the third side, on a forward view, you have a fair amount of residual destruction capacity coming online in Asia with all the new RDS program that's going to be coming online from the PRC refiners of both South Korea, and they're going to need feedstock as well. And their feedstock is going be, again, high sulfur straight run. So when you start having that extra demand pull come into the market, you could see more appreciation in high sulfur cracks, especially in Q3 and Q4 of this year.
Speaker 11
Okay. All right. I'll move on. I mean, I'll take it offline. Maybe I have to get smarter on it.
But you know, if you just if you just take a a line chart of crude oil prices against a line chart of the spread average in 2020, it's like a 90% correlation since July of last year. It's like the two lines are basically on top of each other. But anyways, I maybe I have to get smarter on it. I'm clearly not an energy analyst. Hugo, the other question I had is just maybe more philosophical.
You know, it's interesting because like you and maybe like one other company in the space actually have these capital structures that are sustainable, low breakevens. It gives you a lot of options where you can pay down debt and kind of get to a net debt neutral position. You can issue dividends in the hope that you get credit for that in the equity markets and your currency appreciates. So I want to check your temperature on kind of your philosophy on capital because you're generating a lot of cash flow, but you're deciding to focus on dividends instead of basically getting to a net debt neutral position, which would obviously further lower your breakevens and possibly even help your currency relative to NAV. So if you can just expand on that, and what does Euronav's capital structure look like twelve, eighteen months from now?
Is it basically at the current LTV levels? Or just help us think about your philosophy there.
Speaker 2
Yes. Thank you. Well, a little bit surprised by your question because I'd hope that our capital structure, certainly the leverage when it's mark to book and not mark to market, that's very dangerous, of course. And capital allocation has been clearly communicated to the market. So we want to be between 4050%.
Speaker 11
Well, it's clear, but you said you can do between dividends and share buybacks. I'm just trying to understand, like, what does the sense to the mean? What does it mean to the end, so to speak?
Speaker 2
I think that well, when we speak to shareholders, and then obviously we take this feedback home, We clearly see that people want us to return capital, especially for this kind of business where the cash generation is just huge when the market is high. So you take that home and then you decide what percentage you want to return to the market. That's the first decision that you need to take. And why did we take 80%? Well, relatively similar to last time we did 80%, We saw that with the depreciation policy that we have and the 20% that we reserve, we have enough to not only renew the fleet, but also to add more on an organic way.
So that's the philosophy behind the 80%. And we can be more generous when the market permits, and we've demonstrated that in 2019. As far as the choice between dividends and share buyback, I think it is pretty clear. You you need to pay dividends. I mean, there there's a lot of people who are asking for the dividends.
And then so let's say that this is 50% of the of the 80%, so not 40%, but a real 50% of of net profit that will probably always be returned as dividend. And then with the the remaining 30%, we can probably play between share buyback and and dividends. And as I just mentioned on an earlier question, I think when it comes to share buyback, you should not rush into a decision. I mean, you should not every time the the the share is weak, then you intervene. And the reason why you shouldn't do that, maybe something we didn't explain, is simply because a lot of time, you cannot do that.
I mean, the the the full month of January, we are in a closed period. So there's nothing we can do there. And so if the market anticipates you to overreact every time there is a weakness in the share price, then when you don't do it, they're going to start wondering why you're not doing it immediately, especially because in Belgium, we need to declare that within seven days. We are, I think, a very stable company. We're a group of people with a lot of experience.
I think we've demonstrated that when we do share buyback, it's a real opportunity. It's really creating value for the shareholders and we will continue to have that philosophy. So now we have seen share price weakness for the last maybe ten days or 10 sessions, not even, as a matter of fact. Let's see where the market takes us. Let's see how capital markets react to this virus and the continuous flow of news that we're going to receive.
And let's see what happens to the tanker market and to the tanker values to really see where we are compared to the NAV. It's all the kind of analysis that we are doing. And in the meantime, people know that we are dedicated to return a certain amount of capital and a big portion of that capital will be dividends.
Speaker 11
And Brian, just to yep. No. I get it. And Brian, just to confirm, the dividend that you're going pay in May is going to reflect the first quarter plus what you just declared this morning for 2019. So you get like a double benefit in the month of May.
Is that right?
Speaker 2
Correct.
Speaker 11
Okay. Thanks, guys, for answering my questions. I appreciate it.
Speaker 2
Thank you. Thanks, Evan.
Speaker 0
Thank you. And the next question comes from Omar Nokta with Clarksons.
Speaker 12
Hey, guys. Thank you. I've covered, obviously, a lot of ground, but I just wanted to follow-up. Maybe on just a couple things. You know, the the JV to buy those two Suezmaxes at the end of last year was, you know, seemingly timed quite well.
And you used the word opportunistic earlier in your comments as as as you think about Euronav in general. But you when you think of the company, going forward, do you see yourselves doing these types of investments, a bit more? And when it comes to, say, acquiring older tonnage, do you prefer to do that in, say, a JV format and then maybe keeping the overall Euronav platform available for more modern sort of high end spec ships?
Speaker 2
No. Clearly, that's not the case. I mean, it was opportunistic because someone had an option and required the capital to exercise that option. It's as simple as that. We had the capital.
We liked the partner. We know them for a long time. We've been working with them, albeit on different business, but certainly through the pool. So we had no problem entering into a joint venture with those guys, a bit after a bit Rich Berry, by the way. And the opportunity was clearly in their hands, not in ours.
When they were looking for a partner that could execute the deal very quickly because I think that when they approached us, there was less than six weeks before the expiry of the option. They clearly found a partner that could act promptly. That's why we call it opportunistic. Would we have done that on our own, on our own balance sheet despite the age of the assets? Yes, of course.
We need to be opportunistic, especially at a time when we have at least two Suezmaxes which are slightly older, reaching 15 years of age, that's the age where we want to dispose them because of their age profile, at a time when we are very confident that the market is going to be rewarding, then it makes a lot of sense to replace one old ship with another one that is slightly less old, in this case, two years younger, just to be able to benefit from those two years. So that's a little bit the philosophy, but it's not it's certainly not a policy of saying when it's too old, we will park them in joint venture. And when it's young enough, we will put them in our platform because the reality is that it is the platform who has bought those ships together with a partner. In other words, it's the platform who is commercially managing those ships. We provided the capital.
We provide this. We provide that. So, no, It's opportunistic, and, we are happy about it.
Speaker 12
Okay. No. Thanks thanks for that. And, you know, maybe you know, this is maybe a bit more open ended question, but, you know, as you mentioned, you know, the the leverage is on the low end, and your VLCC fleet is is fairly modern. And as you said, the Suezmaxes or a handful Suezmaxes are on the older side.
You know, you you talked about selling an older vessel and then acquiring one that's a couple years younger. That seems a bit more tactical and near term in nature. How do you think a bit more broadly about the fleet renewal within the Suezmax segment, especially with the backdrop of uncertainty with propulsion systems systems going forward? Any color on that would be helpful.
Speaker 2
It's it's the good news and the bad news to a certain extent because the reality is that Euronav is no different than the other players in the market. We don't know what the next technology is going be. We don't know who's going to win this battle of our own different propulsion systems. And so when it comes to renewing the fleet, yes, we can buy second hand. And to a certain extent, we would be better off buying second hand because at least it would be a couple of years older than if we buy a new building in the sense that then they will arrive to their twenty year anniversary quicker than if we buy a new building.
But the reality is that we don't know what technology is going to win. And I think that despite the fact that our Suezmax fleet is a little bit older and is getting a little bit older than what we would like to see, we're going to be very disciplined about it, which is good for the overall market because the rest of the market is like us. I mean, we cannot just go to the shipyard and order existing technology because that one we know is probably not going to thrive. And we cannot buy LNG just yet because the premium that is being asked, and that's true for Suezmax and VLCC, is just too big for us to absorb on a speculative basis. So very happy to do that together with an all major who believes in the technology and who benefits from selling more LNG, for instance.
But on our own, like all the other owners, we believe that the premium is to be.
Speaker 12
Okay. Thank you, Hugo, that. Thank you.
Speaker 0
Thanks. Thank you. And the next question comes from Estern Landmark with Ferdly.
Speaker 13
Hey, good afternoon. A question on refining margins. I mean, maybe it's a bit off topic, but they're quite weak at the moment for several reasons. But maybe it's a bit worrying given it tends to be a decent indicator for activity and freight. Mean, the floating volumes out of Singapore will be unwind at some point.
Is that something moving the needle positively for margins?
Speaker 4
So in the first part of your question there, on the floating storage that's in Singapore, a lot of that has actually been worked off into the market, and the floating stocks have been reduced greatly, mainly on demand pull into secondary markets outside of Singapore itself that were looking for 0.5 fuel in December and January. So the latest estimate, I think, I read from Clarksons was that there was about 1,000,000 tonnes left in floating outside of the large overhang that was developed in Q3 and Q2 of twenty nineteen. On the forward refining margins, yes, they've been under pressure here as of late. It's no question that part of that impact is due to the issues going on with China and the coronavirus outbreak. But we're also going into that time of year where we're going to start seeing refineries start going through their Q1, Q2 turnaround period.
And so there will be a slop off in demand for crude.
Speaker 13
That's helpful. Maybe on that last point, I mean, views on whether we're going to see another extended kind of maintenance season this spring? Or is it to
Speaker 2
be
Speaker 13
a more normalized one, seeing refiners are better prepared now?
Speaker 4
From what I've seen on the data, the turnaround period this year in Q2 is not going to be as robust as it was last year. I don't have the number off the top of my head, so I do apologize, but it is not as big as it was last year.
Speaker 0
Yes. That's helpful. Thank you.
Speaker 2
Yes, which is normal because the refineries who had switched to LSFO no longer need to prepare, which was cleaning of the tanks, cleaning of the piping, etcetera, to avoid contamination. And there are still a number of refineries who will, for the first time, produce LSFO. And so for those guys, outage may be a little bit longer. But obviously, vast majority of the market prepared for IMO 2020 ahead of 2020. So you're only looking at a few exceptions here.
Speaker 0
Makes sense. Thank you, Hugo. Yes. Thank you. And the next question comes from Manny Garcia with Anchorage Capital.
Speaker 12
Hi, guys. Two questions. Can you give some color on ordering activity for VLCCs and Suezmaxes during the fourth quarter and first quarter this year? And then also, I think last year, was a lot of speculation and issues with scrubber installations during the dry docks. Any kind of updates or stories about that more recently?
Thanks.
Speaker 8
Yeah. This is Brian Gallagher here. Two things. Yeah. I mean, on our latest presentations, which are not on on on the website for our normal presentations, We'll focus on the fact that the run rate is is at twelve month lows in terms of VLCC ordering.
So over the last twelve months, we've had 24, these have been ordered, which is a very, very low number in the context of the demand background. So we continue to see a big reluctance in ordering, as Hugo talked about earlier, because of the uncertainty with regard to meeting emission standards and fuel propulsion systems to meet that. And in terms of disruption from scrubbers, obviously, wouldn't we maybe be the most obvious company to to talk about on that. But there does seem to be evidence from some of our peers that, the disruption is is reducing, modestly. And I think the numbers we're hearing is somewhere between thirty five and forty days as an off hire in terms of getting your scrubber fitted, which is coming in from sort of a number which is mid to high forties in the middle part of last year.
But, obviously, some of that's been driven by, less congestion, and obviously less people looking to retrofit those scrubbers.
Speaker 2
I just would like to add one, one little note, which is a side note, obviously. Most of the the shipyards that have executed the retrofit of, scrubbers are located in China. And so at the moment, they continue to be closed down. So that could create a delay for the shift that we're looking into entering those yards at the moment or even the shifts that are currently in the yards. So that can create a delay, which is not due to the complexity of the installation or the problems that people have encountered last year, but much more to the fact that at the moment, there's a lot of travel restrictions.
There's a lot of workers that went back home to celebrate the New Year and are not returning to the shipyards or to the factories. So that can create further delays indeed.
Speaker 12
Great. Thank you.
Speaker 0
Thank you. And this concludes our question and answer session. I would like to turn the conference back over to management for any closing comments.
Speaker 2
Well, to add. I think we have covered a lot of grounds. And anyway, if you have additional questions, you know where to find us. Thank you very much. Bye bye.
Speaker 0
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.