Okeanis Eco Tankers - Earnings Call - Q2 2020

Transcript

Operator (participant)

Welcome to OET's second quarter 2020 financial results presentation. We will begin shortly. Aristidis Alafouzos, COO, and John Papaioannou, CFO 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. John will begin the presentation now.

John Papaioannou (CFO)

Welcome to the presentation of OET's results for the second quarter of 2020. We will discuss matters that are forward-looking in nature. These forward-looking statements are based on our current expectations about future events, including OET's commercial performance, dividend policy, projected dry dock schedules, and anticipated debt capital commitments. Actual results may differ materially from the expectations reflected in these forward-looking statements. Starting on slide three, we review the highlights of the quarter. We generated net revenue of $69 million, EBITDA of $57 million, and profit of $37 million, or $1.15 per share. We beat our own guidance, driven primarily by much stronger-than-expected profit share on the Suezmax Milos. Our board of directors declared a second consecutive cash dividend of $0.75 per share, or $24 million.

Combined with the $3 million of share buyback since inception and cumulative cash dividends of $40 million, OET has returned just shy of 20% of its market cap and 54% of year-to-date profits to its shareholders. In July, we fixed our two Suezmax newbuildings delivering in September on three-year time charters that will generate a combined $18 million of free cash flow, allowing us to recoup 81% of the vessel's equity. Lastly, we are very close to finalizing a $103 million loan for the newbuildings. The cost of this financing will be the lowest in the company's debt stack, as shown on slide nine. We anticipate the Suezmax newbuilding daily cash break-even to be below $21,000 per day. I'll now hand it over to Aristidis for an overview of our consistently outstanding commercial and cost performance.

Aristidis Alafouzos (COO)

Thank you, John. Our chartering and technical management departments continue their exceptional performance, so I'd like to extend a big public thank you to our team for their dedication and professionalism. OET achieved a fleet-wide TCE rate of $51,900 per operating day in the second quarter, net of 2% technical off-hire days. Our VLCCs generated $97,800 per day in the spot market, an 18% outperformance relative to our tanker peers. We fixed shorter voyages at the beginning of the quarter to capture the rising market and later shifted to longer West Africa to China runs to lock in the prevailing strong rates and maximize our Eco and scrubber benefit. Our Suezmaxe generated $54,500 per day in the spot market, 10% higher than the tanker peer group average. We were able to secure multiple lucrative Mediterranean to Far East voyages and benefited from strong profit share on the Milos.

In addition, Folegandros spent around two months on a very high demurrage rate waiting to discharge. Lastly, our Aframax LR2 fleet generated a strong $28,000 per day per spot day. We had relatively lower exposure to the more lucrative clean LR2 sector than our peers but still managed to lock in longer spot voyages structured as short TCs. On slide five, we provide guidance for our time charter equivalent revenue in the third quarter of 2020. We include only concluded fixtures in our guidance. We have covered 67% of our available VLCC spot days at $54,200 per day. We estimate next VLCC spot fixture to be in the low 30s per day, depending on positioning and route. Moving on to the Suezmaxe, we have covered 66% of our available spot days at a very high $39,600 per day.

We estimate current market TCs for our next fixtures to be in the high teens to low 20s per day for a vessel opening in the east and high 30s to low 40s per day for a vessel opening in the west. Lastly, we have covered 89% of our Aframax spot days at a cash generative $19,700 per day in the seasonally weakest quarter of the year. We have positioned the Thirasia out of the weaker Med market and onto a longer run to maximize her scrubber benefit, as well as Eco, while the Schinoussa will soon enter dry dock for special survey and scrubber retrofit. We continue to maintain a presence in the clean LR2 market with the Iraklia that has been trading in West Africa for the last six months. She will ballast for her special survey and scrubber retrofit in mid-September. Now back to John.

John Papaioannou (CFO)

Thanks, Aristidis. Starting with our income statement on slide six, I'd like to first clarify G&A for this quarter. OET takes advantage of a Greek tax law that incentivizes us to disperse salaries twice a year in Q2 and Q4, so that you should typically expect higher G&A during these two quarters going forward. In addition, we distributed bonuses to seafaring staff that have been impacted by COVID-19 crew change complications, which for some seafarers has meant staying at sea and away from their families for more than a year. We find a strong positive correlation between how well we treat our seafarers and how well they treat our assets, always within the realm of financial reason. Our trailing 12-month G&A of $918 per ship day is still the lowest in the tanker industry, despite the adverse impact of elevated legal fees and COVID-related costs this past year.

You should expect G&A to be lower in the next 12 months. I'd also like to reiterate our bump consensus Q2 profit of $37 million. Trailing 12-month EPS now totals roughly $3 per share, which equates to a P/E ratio of 2.7x based on Friday's closing price. Moving to slide seven, I'd like to first point out our book value per share of 121 NOK based on conservative asset values. We also expect debt to peak in Q3 at around $847 million as we draw down $103 million for the Suezmax newbuildings, repay their $46 million pre-delivery financing, and amortize $13 million of debt. Referring to both slide eight and nine, we provide an overview of our cash flows.

At quarter end, we had remaining all-in CapEx of $68 million, comprising $65 million for newbuilding installments and $3 million for scrubbers, which includes both equipment and installation costs, as well as about $1 million left to pay for special surveys. Adjusting for the financing we expect to achieve on our two Suezmax newbuildings, we have total liquidity of $105 million. With that, I'd like to hand it back to Aristidis.

Aristidis Alafouzos (COO)

Thanks, John. I'd like to run through the economics of our spot ships on slide 10 and how this informs our dividend decisions. Most market participants look at fleet-wide daily cash break-evens, but I feel that this is a bit misleading when evaluating OET's cash flows and runway, as our time charter fleet carries a higher break-even but still generates cash, particularly as it now benefits from the dramatic fall in Libor. We believe the more relevant number is the cash break-even of our spot ships, as this will be the source of incremental cash generation or burn. As you can see on the chart, the vast majority of our spot ships are cash generative. So even in the worst-case scenario in which our spot ships break even, our charter portfolio will still generate $10 million of cash flow in Q4.

And if our ships are breaking even, that means that the average tanker is burning cash, which will only catalyze scrapping. Looking at the scrap potential of the VLCC fleet on slide 11, we see that there are 120 or so scrap candidates through 2023 against a notable of only 80 VLCCs. It is highly likely that the net fleet growth could be flat to negative from 2022 onwards. Set against the normalizing oil demand environment, the tanker market looks set to tighten fundamentally within a year at the latest. If the market stays weak throughout 2021, we can expect an acceleration in scrapping, while OET can rely on our charter portfolio to provide strong cash flow support. On slide 12, we summarize our capital return track record.

We have now returned 19% of our market cap and 54% of our year-to-date profits to shareholders, and we are still not even fully invested. This is exactly what we promised our shareholders we would do. On page 11 of our Q1 presentation, we wrote that we would not allow excess cash to build on the balance sheet. True to our word, we are paying out all excess cash to our shareholders. I'd like to quickly hand it back over to John to summarize our thoughts on dividends going forward, but first, I'd also like to take a moment to address our discount control mechanism, which comes into effect in January 2021. While we are committed to the DCM, the first prerequisite for selling ships is strong asset values. In short, we will not sell ships in a weak asset value environment.

We are very confident about the medium-term outlook for tankers, and you can expect us to be very busy with asset disposals when we feel the time is right.

John Papaioannou (CFO)

Thank you, Aristidis. With this quarter's $24 million dividend, we expect cash at the end of Q3 to be between $15 and $20 million. We are perfectly happy to operate at this cash level going forward, and there are a few reasons why. Firstly, our two-year-long new build and scrubber CapEx program is finally set to conclude in October so that any operating cash flows are set to flow straight back to our shareholders from then on. Secondly, as mentioned before, even in the absence of any seasonal winter strength this year and the worst-case scenario in which our spot ships break even in Q4, our time charters will replenish cash by $10 million. And again, to reiterate, if our ships are breaking even, that means that the average tanker is suffering and what that would mean for scrapping.

Assuming a downside rate scenario in 2021 whereby our spot VLCCs earn 25K per day, our Suezmax is 20K per day, and our Aframax is 17K per day, we would still generate net income of $35 million or $1.10 per share, which equates to a P/E ratio of 6.9X, by far the lowest in the tanker peer group. Back over to Aristidis to conclude.

Aristidis Alafouzos (COO)

To summarize on slide 14, we are cautious for the next couple of months as stock draws continue impacting tanker demand. But the silver lining is the order book and the scrapping that we will see in a weak market. So we think we're in an excellent position with our charter coverage, our financing, and our fleet. In the meantime, we will continue paying out as much as we can to our shareholders and hope that our aggressive dividend policy and operational performance are what we come to be known for. We are particularly excited about the second half of 2021, where we expect a normalization in oil demand and a record low order book to create a very strong tanker market.

John Papaioannou (CFO)

With that, we'd like to hand it back over to the operator for opening up the line for questions, please.

Operator (participant)

We'll now open the line for questions. Please press star when on your telephone keypad if you'd like to ask your question through the phone line. We also kindly ask participants to submit questions via the webcast to phrase their comments in the form of a question and refrain from abbreviations. Thank you. We have no questions coming through on the phone lines.

John Papaioannou (CFO)

Nor on the webcast. So with that, we'd like to thank you all and look forward to speaking to you the next quarter. Thank you, everyone.

Aristidis Alafouzos (COO)

Thank you.