Okeanis Eco Tankers - Earnings Call - Q4 2020

Transcript

Operator (participant)

Welcome to OET's Fourth Quarter 2020 Financial Results Presentation. We will begin shortly. Ioannis Alafouzos, Chairman and CEO, 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)

Thank you. Welcome to the presentation of OET's results for the fourth 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 $41 million, adjusted EBITDA of $28 million, and adjusted profit of $8 million or $0.25 per share. The top-line miss to our own guidance released in December was half driven by the incurrence of off-hire on the time chartered VLCC due to having the wrong type of COVID test for crews when entering Chinese ports.

The other half of the miss relates to an IFRS accounting charge on the ballast leg for sailing two Aframaxes to the shipyard for their first special survey in scrubber retrofits. Our board declared a fourth consecutive cash dividend of $0.10 per share, or $3 million. Since inception, we have returned $1.45 per share in cash to shareholders. As we have always promised, we recently uplisted to the Oslo Børs from the Oslo Axess market. Towards the end of 2020, and as previously announced, we took some short coverage at rates that are currently well in the money on two VLCCs, one Suezmax, and one LR2. Lastly, we hedged the floating rate debt of the Nissos Anafi. I'll now hand it over to Aristidis for an overview of our industry-leading commercial performance.

Aristidis Alafouzos (COO)

Thanks, John. Once again, OET is trending as the top performer in the spot market for VLCCs and Suezmaxes. During Q4, we achieved a fleet-wide TCE rate of $28,500 per operating day, net of 9% technical off-hire days. Our VLCC has generated $27,000 per day in the spot market, a 37% outperformance relative to our tanker peers that have reported Q4 earnings. We continued fixing longer West Africa to China runs on our one VLCC trading in the spot market, the Nissos Anafi. Our Suezmax has generated $16,000 per day in the spot market, 40% higher than the tanker peer group average. We continued our strategy of trading the Med China route and mixed in shorter voyages to avoid fixing long voyages at market bottoms. Lastly, our Aframax LR2 fleet generated roughly $10,000 per spot day.

Our Aframax fleet has now undergone its first special survey and been retrofitted with scrubbers, and we took some short-term time charter cover on our clean LR2, the Nissos Heraclea. Moving on to slide five, we provide guidance for our time charter equivalent revenue in the first quarter of 2021. We include only concluded fixtures in our guidance. We have covered all of our available VLCC spot days at $18,000 per day on a Brazil to China run. The VLCC market in the AG was flooded with older tonnage missing approvals, leading to discounted rates in that region and leading us to the Atlantic basin. Moving on to Suezmaxes, we have covered 90% of our available spot days at $17,000 per day. The last 10% of available spot days are allocated to Polyaigos, which will be in a position to fix a front-haul voyage with minimum ballast.

This voyage could conservatively make $30,000 per day for 40 days. Lastly, we covered 54% of our Aframax spot days at $14,600 per day. We estimate the next spot voyage to be in the mid-teens per day. Our commercial performance and time charter coverage comfortably ensures profitability in Q1. In the past weeks, we have seen higher interest in Eco Scrubber tonnage for longer-term time charter business at increasingly higher rates. When the big trading houses are looking for and taking in longer-term tonnage, it is a clear indication of where freight rates are headed. We have also seen strong interest in the S&P market for Eco Scrubber vessels. We believe that the Eco Scrubber values have bottomed in Q3 2020 and have since appreciated by 10%. With the new EEXI regulations, as well as increasing bunker prices, buying interest will focus more and more on OET-type tonnage.

On slide six, we quantify our commercial outperformance by taking the difference between our achieved spot rates and those of the tanker peer group, and by multiplying it by the number of spot days available to us. Our spot performance has generated more than $38 million in profit for our shareholders since inception. With our VLCCs outperforming the peer group average by $14,000 per day, our Suezmaxes by $9,000 per day, and our Aframaxes by $3,500 per day. OET has consistently outperformed the peer group, and now back to John.

John Papaioannou (CFO)

Thanks, Aristidis. Starting with our income statement on slide seven, we continue managing our costs well. In 2020, daily OPEX, excluding management fees, averaged $7,000 per day, while daily G&A came in below $800 per day. We generated total earnings of $3.20 per share, equating to trailing 12-month P/E ratio of 2.4. Moving to slide eight, we report book value of NOK 105 per share.

As guided last quarter, our leverage peaked in Q3 and has since declined to $835 million at year-end, backed by strong time charter coverage and a very modern fleet. Debt will decrease by $14 million per quarter going forward. On slide nine, we summarize our cash flows. Our liquidity position stood at $32 million at year-end, while we have concluded our growth CapEx and scrubber retrofit programs. The next ship due for her first special survey is the Suezmax Milos in the middle of 2021.

We are working on bringing this special survey forward to early mid-Q2 to capitalize on the current low market rates. Shifting to slide 10, we provide an overview of our debt stack and amortization by vessel. Our all-in cost of debt in 2021 is roughly 3.5%, and we expect to pay down $55 million of debt through the year. We have one debt maturity this year in Q4, the Nissos Thirassia. We have been approached by numerous lenders that are eager to refinance the ship with us, including its existing lender. We anticipate that we will be able to refinance relatively easily if the ship hasn't already been sold until Q4. Lastly, we have now hedged the debt of the fleet, excluding those on bareboat lease and the Aframaxes.

It is important to note that when entering into swaps, the timing must align with the amortization schedule of the ship and that hedging rates thus reflect the forward part of the curve and not spot three-month LIBOR. I'll now turn it over to Yannis to walk you through our market outlook.

Ioannis Alafouzos (Chairman and CEO)

Thank you, John. I'll start with a view on refinery runs between OECD and non-OECD countries. Non-OECD countries' refinery runs have now recovered to pre-COVID levels, last seen this time last year. The earliest refinery demand today is in OECD countries, and particularly in Europe, where lockdowns and mobility restrictions continue to impact demand and where we ultimately expect refinery closures, which is very beneficial for shipping, of course. We are confident that the vaccine rollout will release huge pent-up demand for air travel this year and that this recovery in aviation demand will eliminate whatever surplus is left, driving increased crude oil production and seaborne trade. On slide 12, we see that forward refining margins have also recovered to pre-COVID levels, indicating that product futures are pricing in a strong recovery in demand later this year.

Refinery profitability is a key leading indicator for tanker rates, and higher profitability means higher runs, higher seaborne inputs, and stronger tanker rates. On slide 13, we show that the global oil market rebalancing has made great progress and that the pace of stock draws will only accelerate throughout March. Floating storage and crude in transit are at normal levels, while only onshore storage remains slightly elevated.

There are also reasons to believe that China and India will hold structurally higher inventories going forward, suggesting that the rebalancing is more advanced than data suggests. On slide 14, we present an OPEC production forecast and what the incremental volumes mean in terms of VLCC demand equivalence. OPEC production has clearly bottomed out, and we expect Q2 to be 1.4 million barrels per day higher than Q1. To put this in perspective, this is the largest quarter-on-quarter OPEC production increase in history.

This will be led by the Saudis and exclude Russia, which we anticipate will also increase production in April. Through the end of the year, OPEC production will grow by three million barrels per day, generating the equivalent of 64 VLCCs of demand on an annualized basis. At the same time, the fleet is aging. Bunker prices are rising, and environmental regulations are increasing. 24% of the fleet is 15 years or older and highly disadvantaged in today's market. We estimate that the Eco and Scrubber savings on our VLCCs are about $15,000 per day. We believe that the spread will continue to widen. On slide 16, we want to point out that in a tight market, VLCC rates do not rise in a straight line but rise exponentially.

From the current low utilization of 83%, we expect the market will tighten to the high 80s by the end of this year and into the low 90s in 2022. To summarize on slide 17, crude oil trade, tanker rates, and asset values have bottomed. Charterers are actively looking for period tonnage with forward delivery. Our conversations with trading houses suggest that the refineries are scouring the market for oil and that the rebalancing will be complete by the summer. We're excited about the next couple of years in the tanker market. I think now we're ready to take, I guess, questions, huh?

John Papaioannou (CFO)

Yes.

Operator (participant)

We'll now open the line for questions. Please press star one on your telephone keypad to raise a question. We also kindly ask participants submitting questions via the webcast to phrase their comments in the form of a question and refrain from abbreviations. We do currently have a question on the phone line. This comes from the line of Peder Jarlsby from Fearnley Securities. Please go ahead.

Peder Jarlsby (Partner and Head of Shipping Research)

Hi, guys. Just a quick one in terms of your coverage. You obviously have quite substantial TC coverage relative to your peers. I know the kind of outlook for most is that we'll see a recovery in the second half of the year, but I think it's fair to say there's still quite a bit of uncertainty. Given that uncertainty, I'm just curious to hear how you think of managing those open vessels you have on a risk-reward basis. Are you looking for more charter coverage, or are you happy with kind of where you are in terms of your fleet composition at the moment?

Ioannis Alafouzos (Chairman and CEO)

We're very bullish on the market, and we intend to try and reduce our TC coverage as much as possible in the next months. We believe that the time for cover is over, effectively, and that now it's the time to increase our spot exposure. We really don't see any way that the market will be at current or weaker levels in the next quarter. As we said in our report, we expect OPEC to increase its oil production, and generally, there seems to, if you consider that outside Europe and the United States, effectively, that the rest of the world has reached pre-COVID levels in oil demand. Well, I think this answers everything, especially since Europe, as you know, plays a very small part in the oil demand in Europe has stopped increasing. It's quite stable.

We are also extremely confident that we will wake up in one or two months from now in a different world where substantial parts of the population will have been vaccinated, and I think we cannot envisage today the potential rebound in travel and in general activity that is coming. We can see an extremely bright future, not only for the end of this year but also for the coming years. We are very, very bullish. Thank you.

Peder Jarlsby (Partner and Head of Shipping Research)

All right. Thank you. Just one more quick one. In terms of the fuel spreads, I guess we don't talk as much as we used to do about them, but things are improving. And maybe for John, in terms of how you see, based on your oil market view going forward, how do you see the fuel spreads kind of playing out? Do you expect them to stay here, or are there any particular developments you're expecting to see going forward?

John Papaioannou (CFO)

We've understood that VLSFO refining margins are at very good levels for the Asian refineries. Demand has held up well in terms of bunkering demand, of course, so right now, things sort of present a very rosy picture for the VLSFO price in Asia. Sour crude, obviously, that market has been very tight, given that OPEC has been holding back production. And so there, with the return of sour barrels from OPEC, you can see more HFO production entering the market, which should maybe loosen fundamentals for HFO, so overall, we think here in the $100 to $120 spread range, I think this is a very comfortable place for spreads with the potential to widen structurally over the next couple of years.

Ioannis Alafouzos (Chairman and CEO)

Yeah. And if I may add, John, I think that historically, we have seen that spreads generally widen as the price of crude increases. And we expect an extremely firm crude price. I think we will probably exceed $100 per barrel. And I think at that stage, we might have massive differences between low sulfur and heavy sulfur fuel oil. Diesel will be in great demand with the economic recovery that's coming, and this will also impact the spreads further. Thank you.

Peder Jarlsby (Partner and Head of Shipping Research)

All right. Thanks very much, guys. That's all from me.

John Papaioannou (CFO)

Thank you.

Operator (participant)

The next question comes from the line of Eirik Haavaldsen from Pareto Securities. Please go ahead.

Eirik Haavaldsen (Head of Equity Research)

Yeah. Hi. I wanted to ask you on your emission reporting slides. I mean, 2023 is actually not too far away now. Are you sensing or seeing any change in the approach you have or the dialogue you have with charters with regards to this emission reporting and the energy efficiency indicators and so on? It would be interesting to just hear your views and thoughts on how things are going to play out here in a few years' time when this is, I mean, we're in a total ESG frenzy at the moment, and you are kind of on the forefront of this development in your market. So curious to just hear your thoughts and what you might see there because it's going to have an impact, right?

Aristidis Alafouzos (COO)

Hi. It's Aristidis. Look, I agree that charters and owners and the entire community are paying much more attention to the emissions that the vessels have and that in the future, the EEXI and the other indexes and regulations that will be put in place will have a greater impact on which vessels are chosen for business. I think at this point today, the decision on selection of a ship is still predominantly based on the fuel efficiency rather than the emission that the ship has.

So it's more of an economic decision, but I think generally, this is expected to change over time, and with the new EEXI, we'll see also that older ships, which, again, to our technical understanding as of today, our fleet won't require any retrofits to comply with the new regulations. Ships, let's say, built 10-15 years ago could have their speed reduced to comply with the regulation by up to even 25%-35%. This will create big issues for older tonnage. At this point, efficient ships with fewer emissions will have a huge advantage in the market.

Eirik Haavaldsen (Head of Equity Research)

But do you think it's really going to be speed reductions that's going to be the kind of only solution to this? And obviously, if all ships are 10 years older and slow down by 20% to 25%, I mean, how is that going to be economically feasible for the tanker market, do you think?

Aristidis Alafouzos (COO)

I mean, I think it needs to be considered about how you comply with this formula that derives the EEXI. You can put on a Mewis Duct or change the propeller or put on some expensive paint, but I don't think that these changes will ever achieve the emissions target that the vessel will require to have. Due to this, the only solution you have is to reduce the output of your engine so you can comply with the formula.

Ioannis Alafouzos (Chairman and CEO)

If I may add something, Aristidis, this is Ioannis. I would say that when a 2020 ship will be making, let's say, $60,000 a day, a 2011-built ship will be making $20,000. That's how this will be achieved, I guess.

Eirik Haavaldsen (Head of Equity Research)

Yeah. No, I agree. And I think this is something that hasn't been. We haven't talked enough about this. I guess this is something to talk about for 2021. Finally, one more, if I may. Your Aframaxes, LR2s, you previously talked about maybe selling them at some point. Two of them, at least, are in a difficult spot market. We've seen some increase in Eco ship values. You plan on hanging on to them given your market outlook?

Aristidis Alafouzos (COO)

Look, I mean, we've said multiple times that we're interested in selling the ships. We're just looking for the right opportunity that makes sense to us. We feel comfortable with the way that the market is developing, and we think that the prices will continue to appreciate.

Eirik Haavaldsen (Head of Equity Research)

Okay. Thank you very much, guys.

Ioannis Alafouzos (Chairman and CEO)

Thank you.

Eirik Haavaldsen (Head of Equity Research)

Thank you.

Operator (participant)

There are no further questions in the queue, so I will hand the call back to your hosts.

Ioannis Alafouzos (Chairman and CEO)

Okay. Well, thank you very much. I guess, gentlemen, I didn't hear of any lady being present. So we hope that next time and in a quarter from now, we will have more exciting news for all of us.

John Papaioannou (CFO)

Thank you.

Ioannis Alafouzos (Chairman and CEO)

Thank you.

Operator (participant)

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