Okeanis Eco Tankers - Q1 2023

Transcript

Operator (participant)

Welcome to OET's first quarter 2023 financial results presentation. We will begin shortly. Aristidis Alafouzos, the CEO, Iraklis Sbarounis, the CFO, and Konstantinos Oikonomopoulos, the Chief Development Officer of Okeanis Eco Tankers will take you through the presentation. They will be pleased to address any questions raised at the end of the call. I would like to advise you that this session is being recorded. Iraklis will begin the presentation now.

Iraklis Sbarounis (CFO)

Welcome to the presentation of Okeanis Eco Tankers results for the first quarter of 2023. We will discuss matters that are forward-looking in nature, and actual results may differ from the expectations reflected in these forward-looking statements. We'll start with Slide 4 and the executive summary. During my first conference call with the company back in February, I was privileged to present our then strongest quarter since inception. I'm very happy to now present you the highlights of yet another record-breaking quarter in terms of revenue, EBITDA, and net income. The firm tanker market dynamics in combination with our eco, young, and fuel-efficient fleet has resulted in a fleet-wide time charter equivalent of $70,800 per vessel per day. That includes our fixed time charters.

We report net TCE revenue of over $88 million, an 80% increase from our fourth quarter of 2022, adjusted EBITDA of over $74 million, and adjusted net profit of $1.60 per share, marking yet another quarter-on-quarter growth. Our board has declared a fourth consecutive capital distribution of $1.60 per share. That is 100% of our EPS, a testament to our commitment to delivering value to our shareholders. In previous quarters, we made certain adjustments related mostly to our capital structure and then returned all remaining available value. Our current liquidity position, standing at levels of above $115 million as at the end of the first quarter, gave us the flexibility to return our full profit for this quarter.

We continuously monitor our performance, the crude oil tanker market outlook and fundamentals, global inflationary and interest rate dynamics, and naturally, our balance sheet. We plan on carefully balancing this in the future while staying true to our promise of delivering maximum available value to our shareholders. Our latest distribution annualized implies a yield against our current trading price of approximately 28%. We're now moving to Slide 5. On Slide 5, we summarize our corporate and capital structure as well as our employment profile. On the latter, the latest related to the Nissos Despotiko is that we expect her to be redelivered from our time charters in late June. The Milos is also expected to conclude its shorter-term time charter within the next few weeks. Both will join our other 10 vessels trading spots.

The two Suezmax long-term time charter vessels, Nissos Sikinos and Nissos Sikinos, are expected to be de-redelivered to us sometime within the fourth quarter of this year. While we're currently fully financed, we're constantly in discussions with our financing partners, both current as well as potential new ones. The current banking market, in combination with us being able to demonstrate to our financiers our solid track record and state-of-the-art fleet, may provide some opportunities to refinance certain vessels at accretive levels from a pricing and debt service perspective. Of course, we expect a meaningful improvement in our capital structure with the opportunity of the first purchase options coming up with respect to the Milos and the Poliegos in the first and second quarter of next year. I will now hand over to Aristidis for a commercial and market update.

The reason most of you have probably tuned into this presentation for.

Aristidis Alafouzos (CEO)

Thank you, Iraklis. Overall, it was another record quarter for OET. To give a recap of Q1, we began with weakness in the trade markets, which carried over from Q4, this rallied strongly towards the end of the quarter. The rally was driven by the Atlantic Basin exports, mostly on VLCCs to Asia and Europe. These cargoes are less systematic and often driven by arbitrage opportunities. At times, the trade seems binary. All of a sudden, the U.S. Gulf and West Africa come alive with 10 live cargoes, this creates great volatility and can quickly change the fundamentals of the market. Q1 Chinese crude oil imports were very high in March and marked a record month.

Chinese refineries go into maintenance in Q2, so the expectations that imports would come off before increase again once turnaround, after turnaround season. Chinese Golden Week holiday travel data show domestic tourist numbers increased by 70% year-on-year, recovering above 2019 levels, and this is from data from the Chinese Ministry of Tourism. Data from the Ministry also revealed that flight traffic jumped up 500% year-on-year and 4.2% above 2019 levels. We are more focused internally on Chinese transportation and travel demand as a post-COVID recovery driver of oil demand. On both segments, we look to take advantage of longer voyages when opportunities arose. We continued our strategy of maintaining a strong western presence on our VLCC fleet.

We put a lot of focus into optimizing our selections of voyages to limit waiting and maximize the speed during laden and ballast passages. These two factors can have a greater effect on the TCE of a voyage than small to medium fluctuations in market rates. This is even more apparent on shorter voyages. During the quarter, we have achieved a fleet-wide TC of $70,800 per operating day, including our time charge. Our VLCC generated $76,300 per day in the spot market, a 50% outperformance relative to our tanker peers that have reported Q1 earnings. Our Suezmaxes generated $95,900 per spot day, a 56% outperformance relative to our tanker peers who have also reported Q1 earnings. These numbers reflect our actual booked TC revenue within the quarter as per our accounting standards.

Moving on to the next slide for guidance and a market update on Q2. First, let's quickly recap what has changed since last week in the market. The weakness on the VLCCs in the West vanished, as well as all of the available tonnage, and rates have firmed from around $2.8 million for U.S. Gulf CDA voyage to $4 million in just under a week. Within less than a week, the U.S. Gulf, Guyana, and West Africa has absorbed a very overtonnage Atlantic Basin VLCC position. The positivity in the West and increase in rate has also give confidence, along with increased cargo inquiry in the East. Rates will increase now into the low 40s from the high 30s. Cargo allocation by suppliers in the AG is also expected to come out this Sunday. We expect more firm inquiry on Monday.

To give you an idea of how quickly the market fluctuated in the West, we put a ship on subs, which was the Nissos Kythnos, at almost $25,000 per day higher than what we would have fixed her two days earlier. The market snapped back in a little over a month since the OPEC voluntary cuts were announced. I find this positive, and we expect to see further volatility in the market going forward. Reviewing Q2 then. Q2 began with eventful news from OPEC that they will voluntarily cut oil production. As usual, and even more as it's voluntary, we expect OPEC+ overall to not cut the full extent stated in their afternoon, which ruined my Sunday, and I assume a lot of other Sundays as well. These cuts came at an inopportune time, though.

As rates were falling anyways for VLCCs, sentiment was weak, and refineries in Asia were going into maintenance. OPEC cuts will always have the greatest effect on the VLCC market, and as expected, that market weakened on a comparative basis much more than the Suezmaxes and Aframaxes. The VLCCs has found a floor, as we discussed earlier, and the East as well. The Suezmax market has also weakened, but is more resilient given its more regional trading and the cargoes from the non-OPEC nations.

Far in Q2, we have fixed 74% of our fleet-wide spot days at $82,800 per day, 72% of our VLCC spot days at $75,500 a day, an 11% outperformance relative to our tanker peers who have reported Q2 earnings, and 79% of our Suezmax spot days at $86,500 a day, a 61% outperformance relative to our tanker peers that have reported Q2 earnings. In Q2, Nissos as Iraklis mentioned as well, Nissos Despotiko redelivered to us following the completion of our three-year time charter. Therefore, we will have 100% of our VLCC fleet in the spot market. Milos will also redeliver from our short TC. Moving on to Slide 9.

We highlight our continued outperformance above our peers, which is consistent and which is a consistent 40% and 20% for the Suezmaxes and VLCCs respectively. Part of this outperformance is due to our assets. We are the only pure eco scrubber-fitted and youngest crude tanker company. Moving to Slide 10, we focus on the medium-term outlook. The OPEC voluntary cuts reduced available cargoes in the market and inevitably weakened the supply-demand balance. The silver lining here that this leads to global economy being undersupplied with crude oil. Inventories will drop, creating the foundations for much stronger fundamentals in the future. Q2 will counter-seasonally draw before accelerated draws in Q3 and Q4. What excites us the most is the expected seaborne crude tanker demand, which looks to have a 5% increase in tons transported, but more importantly, a 5.7 increase in ton-miles.

Ton miles have been a key factor in the strength of the market in 2022 and will be sustained through 2023. This growth occurs as the normal fleet loses ships to the gray fleet, and we effectively have a fleet contraction this year. We hold the view that the gray fleet cannot compete on normal business and becomes marginalized to only engage in gray and black trades. Moving on to Slide 11. As we have discussed consistently in the past, the key oil demand driver comes East of Suez, and China being one of the critical factors. Chinese crude imports are expected to surpass historic highs this year. As this inventory situation tightens in the second half, this demand will pull incremental barrels from the West, and especially the United States.

We expect to see a further increase in the East of Suez market share on the U.S. Gulf exports. Jumping to Slide 12. From a supply perspective, the fleet has never been more attractive in my career. Realistically, a delivery window for VLCCs or Suezmaxes from shipyards is into the second half of 2026. There may be a very finite number of berths available slightly earlier, but the number will be entirely negligible if you look at it on a whole fleet basis. If you want to order then, you're most likely to receive the ship in 2026, and yards are quoting prices in Korea of over $125 million for a VLCC. Zooming forward to 2026, 50% of the VLCC and Suezmax fleet will be over the age of 50 years, 15 years old.

The black and gray fleet lift sanctioned cargoes from Iran, Venezuela and Russia. The Iranian and Venezuelan lifters are classified as the black fleet. They have zero interaction with normal market participants such as owners, charters, agents, et cetera. The insurance classification and flags that they fly are worth nothing. Some ships may not even bother to have any of these. The gray fleet is different. It is of a non-European nexus and lifts non-price cap Russian cargoes. The quality of management on both fleets is questionable at best, and the tonnage is much older. Like the black fleet, the ownership structures are obscure and the insurance is debatable. This poses an environmental risk. If there is an incident, who will step forward to cover the pollution or damage?

The owner that owns a vessel through a single purpose vehicle based out of a Middle Eastern country? I assume the person with the money is not the person who appears on the corporate documents. Or the insurance. The insurance companies are not large P&I clubs that who use reinsurance and reinsure the risk all over the world like we do, but small marginal outfits who issue a certificate to facilitate trade and consider the consequences only once they've occurred. I'm convinced that the owner and likely the insurance cover would disappear and potentially leave the bill with the nations affected. We have an example now with the Aframax that blew up off Malaysia called the Pablo. Luckily, so far pollution has been minimal, but let's see who covers the bill and the recovery of the vessel.

The EU is considering legislation to not allow calls in Europe by the gray fleet, which would marginalize it further into a category closer to the black fleet. This is an effective removal of tonnage from the international white fleet. Although environmentally scary, all the above is extremely positive for the normal fleet. We have a rapidly aging fleet and a large gray/black fleet that keeps absorbing normal tonnage to meet the inefficient long-haul service demand. Beginning next year, the market will also have to consider the effects of the CII rating and the EU ETS. This will create barriers to the less sophisticated owners and even more so to the less efficient ones. We believe that our fleet will further develop a competitive advantage off this. Now handing you back to Iraklis for the financials.

Iraklis Sbarounis (CFO)

Thank you, Aristidis. Moving on to Slide 14, we summarize our income statement for the quarter. Our increased TC revenues translate to record EBITDA of over $74 million and net profit above $51 million or $1.60 per share. Moving to Slide 15 and our balance sheet summary. As of March 31st, we had cash on our balance sheet of approximately $118 million. Our debt stood at $727 million, reflecting approximately $12 million amortization since year-end. Our book leverage came in at 58%, while market adjusted NPV based on broker values stands at a very comfortable level of approximately 45%-46%. Moving further with our customary ESG reporting on the next couple of slides.

On emissions reporting, we publish our fleet annual efficiency ratio data and fleet energy efficiency operational indicator data, which are in line with guidance and our regulations. On Slide 18, we have the latest figures relating to benefits of our eco design and scrubber penetration within our fleet. We calculate our competitive advantage based on average bunker spread of around $150 per metric ton to stand at $17,000 per day for VLCCs and a little under $10,000 per day for Suezmax. Okeanis owns eco and scrubber-fitted vessels and holds a significant competitive advantage against 72% of the VLCC fleet and 83% of the Suezmax fleet. This concludes our presentation, and we're happy to answer any questions. Handing it back to you, operator. Thank you.

Operator (participant)

Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. We will take the first question from line, Peter Hogan from ABG. The line is open now. Please go ahead.

Peter Hogan (Analyst)

Hello, guys. A quick question, first. We have many shades in the, in the tanker fleet now. Could you just be specific in what you now label dark, gray and black? Or dark is perhaps not the color you use, but-

Aristidis Alafouzos (CEO)

No, I just. Hey, Peter.

Peter Hogan (Analyst)

Hi.

Aristidis Alafouzos (CEO)

Thanks for your question. I just wanted to point out that in the past, let's say a ship that was non-European in its ownership, insurance and financing banking was able to lift normal cargoes and also transport non-price cap cargoes. Going forwards, the European Union has stated that they don't want vessels who trade outside of the price cap to lift normal cargoes. We see that the gray fleet will be restricted to Or let's say the Russian non-price cap cargo fleet will be restricted to only Russian type cargoes.

Peter Hogan (Analyst)

Okay.

Aristidis Alafouzos (CEO)

Does that help?

Peter Hogan (Analyst)

The gray fleet is. Yeah, if I were to summarize, the gray fleet is those ships lifting more expensive than $60 Russian oil.

Aristidis Alafouzos (CEO)

Yes, that's correct.

Peter Hogan (Analyst)

Yeah. Okay. Understood. Well, Market-wise first, you now talked about volatility seen in the past couple of days and perhaps weeks. We are normally entering from a seasonal perspective, a week or summer market, and then it sort of, it seldomly turns earlier than, say, September. How do you think about the seasonality and the seasonal factors for the next, say, two quarters?

Iraklis Sbarounis (CFO)

I think that for sure, given the large U.S. production and the SPR and the ability for these barrels to be sold, when trading windows open, that this creates an additional element that may sometimes be contrary to the seasonality we're used to. I think that we will continue seeing that again this summer. We do expect that the VLCCs, you know, specifically will strengthen in the next weeks. I wouldn't be surprised if it, you know, quietens down or weakens. Again, I don't think that we will spend the rest of the summer in only a weaker, you know, and afterwards stable environment. I do think once it weakens, we'll see volatility again.

Yeah, I mean, I think that the U.S. Gulf and the long-haul cargos which tend to move at in certain windows will keep volatility in the seasonal weak part of the year.

Peter Hogan (Analyst)

Yeah, this is going to be some interesting months ahead for sure. More on the strategy now going forward on dividends. Nevertheless, it seems as if we're in a weaker market now than we were back in the winter months. In Q2, Q3, how should we think about the dividends from you guys now going forwards? Will we just put in 80% payout, or should we think something else?

Aristidis Alafouzos (CEO)

Yeah. Hi, Peter. It's Aristidis. Look, there's no, there's no magic number that I can give you on. I can definitely speak about how our strategy has been that we have, you know, we have been making certain adjustments, which we're well aware of, that have mostly to do with our capital structure in the previous quarters, and then try to give out as much as possible. This ended up being around the 80% that you mentioned in the previous quarter. In this specific quarter, our liquidity position, which was assessed against a lot of factors, including the market dynamics, and other, you know, global economic data, we've made a decision for this quarter that we have the flexibility to go a little bit higher up to the 100% of EPS that we issued.

I think we're gonna go through a similar thinking process the next few quarters. I think the baseline is something along the lines of what we have been doing so far, where it is likely that we might be looking at certain adjustments. It will also depend on what our balance sheet figures will look at that point, and of course, our expectation in market dynamics then. It hasn't really changed too much. This specific quarter, we have the flexibility given our balance sheet. Hope this answers your question.

Peter Hogan (Analyst)

Yeah. Yes. Well, thank you. Thank you. I suppose your investors, at least, appreciated those 100% today. One final question from me on the cost side. Your G&A was up this quarter. Could you just quickly explain why and then perhaps shed some light on what we should do with that number going forward in our modeling?

Aristidis Alafouzos (CEO)

Yeah. I think, I mean, the first quarter is slightly on the higher side. It also reflects, you know, certain personnel costs that are more particular at the beginning of the year. It admittedly the cost with regards to salaries have increased a little bit as we have ramped up a bit the number of the team. There will be a slight increase, not to the levels that we're seeing in this quarter, going forward versus last year. We also have had some a little bit of extraordinary, you know, more general and administrative and advisory type costs this quarter. I think...

I don't believe that this quarter is indicative of the rest of the year, but a slight increase versus last year is something that you should take into account.

Peter Hogan (Analyst)

Okay. Yeah. Well, it doesn't come for free to have those very good new CFOs. That's for sure. Okay. That was all for me for you guys. Thank you.

Aristidis Alafouzos (CEO)

Thanks, Peter.

Operator (participant)

Thank you. We will take the next question from line Clément Molin from Kepler Cheuvreux. The line is open now. Please go.

Clément Molin (Director)

Good morning. Thank you for taking my questions. I wanted to start by asking about a potential U.S. listing. This has been discussed in the past. Is this something currently on the table? If so, how should we think about timings?

Iraklis Sbarounis (CFO)

Yeah. Happy to take that. Look, we've been pretty vocal in the past that, we see a potential U.S. listing having the ability to unlock tremendous value from, for our stock, given, you know, the expanded investor base. We're seriously considering the process, along with our advisors as well. We hope to have some further updates, in the latter part of the year.

Clément Molin (Director)

Thanks for the color. A bit of a modeling question. How should we think about the amount of ballasting days on the back end of the quarter? I mean, that will depend on the exact voyages you end up doing but could you provide a rough approximation of what we should expect?

Iraklis Sbarounis (CFO)

Yeah. I mean, it's true that, with regards to Q1, the ballasting days were essentially around 6 days versus what we had guided earlier in the quarter. Specifically about this quarter...

Aristidis Alafouzos (CEO)

Yeah. I mean, I think that, Iraklis, Steve is here. I think that this quarter we will not have the negatives like impact like we did last quarter, which as Iraklis mentioned, that basically the spot three fixed days in our previous guidance because we loaded after the quarter finished were basically zero revenue or even had expenses that were incurred under the voyage that the ship was going to do but before she loaded. This quarter, I think that the number of ships that we will have load before the end of the quarter will be much greater. I don't expect a similar effect as last quarter.

Clément Molin (Director)

Thank you. Makes sense. That's all for me. Congratulations for another solid quarter.

Iraklis Sbarounis (CFO)

Thank you.

Operator (participant)

Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. It appears there's no further question at this time. I'll hand it back over to your host for closing remarks. Thank you.

Iraklis Sbarounis (CFO)

Yeah. This is Iraklis. I see from through the system, the web system. We have a question from Eirik Haavaldsen from Pareto. Let me just go through the question. The fleet is aging. What do you expect will happen to ships turning 25 years old? What will be the cost of a 25-year-old survey be in your opinion? Do we need to see significant accidents for scrapping to actually happen, or will there be a natural depletion almost regardless of market conditions?

Aristidis Alafouzos (CEO)

Well, it seems that historically, 25 years tends to be like the maximum age that ships do these long, you know, long voyages beyond coastal trading. I tend to agree that we will see 25 years for the black and gray fleets seems to be the upper limit. What is the cost? That's a difficult question. I mean, it depends a lot on the maintenance of the ship. A 25-year-old vessel will have a lot of extra expenses that, you know, a five or 10-year-old vessel wouldn't have. Whether, you know, there's a lot of replacement of steel expenses, both in the ballast tanks and in the cargo tanks that we don't have. If it's a lot of tons that need to be replaced, it could be, you know, in the multiple of millions of dollars.

Another thing is that these ships which are trading in these types of trade, I don't think they have access to spare parts that, you know, from makers. I wouldn't be surprised if we see issues concerning their major machinery like engines or boilers or generators because they can't KYC with the sellers of genuine spare parts. They may also have to buy imitation spare parts which also create further damages. I don't think that unfortunately, accidents will lead to somehow forcing these ships to be scrapped. I think that they will just generally create more scrutiny on the market and that fleet. From the point that these ships are all conducting trades for pariah states, you know, they're outside of the control of the West.

Unless, you know, countries like Singapore or Egypt get involved somehow and increase their, you know, quality concerns and environmental concerns, I don't see that it'll be easy to force scrap it. I think it'll be an, as you asked, a natural depletion as these ships going into their mid, low twenties, and they get scrapped.

Iraklis Sbarounis (CFO)

Okay. we've actually managed to go through the full thirty minutes. I think this concludes, our session today. Thank you very much for listening and, we'll touch base again in, early August. Thank you very much.

Operator (participant)

Thank you for joining today's call. You may now disconnect.