Hafnia - Q2 2023

Transcript

Operator (participant)

Welcome to Hafnia's second quarter and half year 2023 financial results presentation. We will begin shortly. You'll be brought through the presentation by Hafnia CEO, Mikael Skov, CFO, Perry van Echtelt, EVP Commercial, Jens Christophersen, and EVP, Head of Commercial and Head of Investor Relations, Thomas Andersen. They will be pleased to address any questions after the presentation. Should you have any questions, you can submit them via the chat function or use the raise hand function to be unmuted to ask your question verbally. Questions will be answered at the end of the presentation. You will receive further instructions as required.

Certain statements in this conference call may constitute forward-looking statements based upon management's current expectations and include known and unknown risks, uncertainties, and other factors, many of which Hafnia is unable to predict or control, that may cause Hafnia's actual results, performance, or plans to differ materially from any future results, performance, or plans expressed or implied by such forward-looking statements. In addition, nothing in this conference call constitutes an offer to purchase or sell, or a solicitation of an offer to purchase or sell any securities. With that, I'm pleased to turn the call over to Hafnia CEO, Mikael Skov.

Mikael Skov (CEO)

Thank you. My name is Mikael Skov, and I'm the CEO of Hafnia. Let me welcome and thank all of you for attending Hafnia's second quarter 2023 conference call. With me here today are our CFO, Perry van Echtelt, EVP for Commercial, Jens Christophersen, and EVP, Head of Investor Relations, Thomas Andersen. The four of us will present Hafnia's second quarter and first half of 2023 financials. Today's presentation, we will be touching on four key areas. We will start off with an overview of the key highlights of the quarter, followed by the financials of the second quarter and first half of 2023. Next up, we will share on commercial updates and provide an outlook on the product tanker market before concluding the presentation with our ESG overview. Let's move to slide number two. You should all be aware and take note of the mandatory disclaimer.

Let me begin by giving an overview of Hafnia and the main highlights in the second quarter. Moving into slide number four. Hafnia is one of the world's leading tanker owners and operators within the product and chemical tanker market. Hafnia operates as a fully integrated shipping platform with our own in-house technical management and chartering teams in Asia, Europe, the Middle East, and the USA. With a robust business model, Hafnia has secured its position as one of the foremost players in the industry. Our shipping platform consists of diversified revenue streams, such as pool management and bunker procurement services. Our bunkering team has been actively procuring fuel for over 1,000 vessels within our pool platform and for external shipowners, whereas Hafnia operates a fleet of over 200 vessels commercially.

At the end of the quarter, we owned and chartered a diversified portfolio of 128 vessels. Our own vessels have an average broker valuation of $4.3 billion, giving Hafnia an estimated net asset value of $3.5 billion this quarter. This represents an NAV per share of around $7, or NOK 75.6 , representing significant upside in Hafnia's share. In Hafnia, we seek to consistently review the markets for any right opportunities as part of our active management strategy, and through our fleet renewal strategy, we can maintain Hafnia's fleet at a low average age of 7.9 years to enhance its utilization and improve its earnings. Moving to slide five. Moving on, I would like to provide some key updates on Hafnia for this quarter.

As part of Hafnia's continuous drive in transition towards a greener maritime sector, I'm proud to announce that Hafnia has successfully concluded a joint venture agreement with SOCAR. As part of the joint venture, we placed an order for four dual-fuel methanol chemical IMO2 MR new builds to be constructed at Guangzhou Shipyard International in China. Three of the vessels will be scheduled for delivery in 2025, with the fourth in 2026. On delivery, these vessels will be chartered out on long-term time charter arrangements to our long-standing partners, TotalEnergies. This represents another step in Hafnia's decarbonization journey and our first venture into a future green methanol landscape as an alternative marine fuel with a net zero trajectory. The use of green methanol will substantially reduce nitrogen oxides and CO2 emissions on a tank to wake when compared to traditional marine fuels.

While this is Hafnia's first investment into methanol as a fuel, this is not our first step in the dual fuel sector. As part of our Vista joint venture, we have, in the second quarter, already taken delivery of our second of four LR2 LNG dual fueled new builds. Additionally, aligning well with our fleet renewal strategy, we have, in the second quarter, welcomed the delivery of two MR IMO2 chemical vessels into our fleet, as well as another LR1 IMO2 chemical vessel in July. These acquisitions will strengthen our presence in the deep sea chemical market, enabling us to offer additional sailings and increase flexibility to our valued partners and clients. Perry, why don't you take us through our financials?

Perry van Echtelt (CFO)

Thanks, Mikael. Despite high volatility in the product tanker market in the second quarter, I'm happy to announce that Hafnia has delivered another quarter of solid earnings. For the second quarter, we achieved a net profit of $213.3 million, bringing our net profit in the first six months to $469.9 million. This also, also notably brings Hafnia's total profit in the last 12 months to over $1 billion. Amid this volatile quarter, we continue to optimize our balance sheet to reduce our leverage further. Our net LTV ratio continues to decrease in trend from 31.4% in Q1 to 30.1% in Q2.

Through the sale of vessels and repayment of loans, though this was partly counterbalanced by the recent acquisition of vessels and the drawing down of pool working capital facility. As previously communicated, we have now implemented a Disponent Owner Model for our larger pools, being the LR2, LR1, MR, and Handy pools. Hence, our balance sheet now includes all current working capital for these pools. That has increased our balance sheet by $261.3 million from both assets and liabilities and has no cash impact. With that, I'm happy to announce also a dividend payout of $0.2528 per share, or approximately NOK 2.6 for the quarter. This represents a 60% dividend payout ratio of $128 million in total, at a net LTV of 30.1%.

We are getting close to reaching the next threshold for our dividends. As you may be aware, our payout ratio will increase from 60%-70% once we are below the 30% net LTV threshold. This brings Hafnia's total dividends in the last four quarters to $581 million, representing a total payout ratio of 57.3%, and further reinforcing our ability to sustain and deliver strong shareholder returns. Moving on to the next page. The second quarter generated a TCE income of $349.3 million, and for the half year, a TCE income of $726.5 million. Our fee-focused business has also performed well, again, generating $10.1 million from our commercial pool and bunkering business.

This all leading to an EBITDA of $261.6 million. The results also show an annualized return on equity of 40.1% for the quarter. Our balance sheet keeps adding strength quarter-over-quarter, with a cash balance of $241 million and a total liquidity of $480 million when we add our credit lines. By the end of the quarter, 66.1% of our debt was hedged at a weighted average rate of 1.6% base rate. While we keep reducing our overall debt, this hedge position helps us in keeping finances, financing costs as low as possible and be protected against major swings in interest rates.

We will constantly monitor our key leverage ratios and break-even levels to ensure that Hafnia's balance sheet remains resilient and enabling us to navigate challenges and seize opportunities while safeguarding the long-term sustainability of our business. Then moving on to the operating data. For the second quarter, our TCE was based on 10,444 earning days, giving us an average TCE per day of $33,449. OpEx costs, which encompass vessel operational costs and technical management expenses, were based on 9,320 calendar days in the quarter, leading to an average of $7,728 per day, which is higher than the previous quarters.

The rise in OpEx primarily stems from extra crew costs due to trading demands, unanticipated expenses for spares and services due to unforeseen system conditions, and handover-related costs for our sold vessels. Despite these strong markets, it's very important that we focus on our cost levels, and Hafnia has consistently set new benchmarks for the industry. We constantly benchmark our performance against our closest peers and operate the business at the most competitive levels. Then moving on to our earnings coverage. Despite a slight decline in rates as compared to previous quarters, rates are still very high, especially looking at historical rates for a second quarter. Furthermore, market conditions are expected to be strong for the remainder of the year, mainly attributed to a strong rebound in oil demand and declining European product inventories.

The need for the Western Hemisphere to replenish inventory levels will also represent significant ton mile gain, and this historically will signal a high earning rate environment. As of the 23rd of August, 2023, 78% of the total earning days in Q3 2023 were covered at an average of $27,616 per day. For the remainder of the year, so Q3 and Q4 of 2023, 46% of the total earnings were covered at an average of $27,102 per day. Then looking at the various scenarios on the next page, given the robust underlying conditions within the product tanker market, our performance in the first half has been notably strong.

We anticipate a continued steady momentum in the second half of the year, as we thrive to strategically position ourselves to leverage on the freight market with our high spot market exposure. This page presents a comparative analysis of three distinct scenarios concerning the company's potential earnings for the entire year. These scenarios encompass consensus forecasts provided by the equity analysts, an extrapolation of the Q3 covered rate projected for the full year, and a third scenario based on the year-to-date figures extended through the entire year. Across all three scenarios, the indications suggest yet another exceptionally robust year for Hafnia. Then, Jens, why don't you take the next few pages on market?

Jens Christophersen (EVP of Commercial)

Thank you, Perry. The next few pages provide commercial updates and our expectations on the product tanker market looking forward. A year after Russia's invasion of Ukraine and subsequent embargo on Russian products, global oil markets have recalibrated, and since then, market inefficiencies have been alleviated and trading patterns have settled. We're in the third quarter and are already seeing a sharp increase in daily loadings of CPP and chemicals. August levels have already exceeded levels seen last year and are mirroring the same movements as we saw in Q4 2022. We can expect daily loadings to further increase into the winter months. With a strong rebound in China's economy, we're expecting global oil demand to reach record levels in 2023.

According to IEA, global oil demand reached record levels in June at 103 million barrels per day, mainly attributed to solid summer air travel and surge in Chinese petrochemical activity. For the year, global oil demand is expected to increase by 2.2 million barrels per day to an average of 102.2 million barrels per day, with China accounting for most of the growth. On the other hand, oil supply will see a slightly lower growth in 2023, expected to only increase by 1.5 million barrels to 101.5 million barrels per day in total. This is despite the persistent production cuts from the OPEX+ block and Saudi Arabia, with most of the increase contributed from non-OPEC and specifically the U.S.

We can expect the freight market to remain strong on the back of this high global oil demand, as we tend to see a high correlation between oil and water and freight rates. Slide 14. With this anticipated increase in oil demand and trade routes settling in, we can now see a proportionate increase in both ton miles and cargo volumes for both CPPs and dirty petroleum products, which includes crude oil, compared to previous years. We can expect these high levels of ton miles to continue as trading routes remain calibrated to accommodate for the dislocation between refinery production capacity and its end users. Storage levels are also a key indicator in signaling the ton mile gain on the horizon.

According to IEA, despite OECD oil product stocks rising by 1.4 million barrels in June, this overshadowed the large decline experienced in Europe, which saw product levels decline by 16.6 million barrels. The biggest drop occurred in middle distillates of 11.1 million barrels, while gasoline has dropped 2 million barrels to 80.7 million barrels, which is a record low level. European CPP imports are insufficient to meet demand, which will be leading to an increased drawdown of inventory levels. This represents a significant ton-mile increase on the horizon, and historically, freight rates increased significantly during stock building as both cargo volumes and transportation distance increase. Moving on to the supply side. Tanker newbuild orders have picked up, led by ordering appetite in the product tanker sector.

The product tanker order book, as a percentage of the fleet, has also ticked up to 9.5% as of August. There will, however, be a long lead time before we see these deliveries materialize, which we anticipate most to be delivered in late 2025 through 2026. Looking at the age profile of vessels, we also expect scrapping levels to increase in the coming years. Furthermore, when we look at the number of yards in China, Japan, South Korea and Europe, they have dropped considerably since the level seen in the 2000s. Yards are already operating near full capacity, dominated largely by containers, bulkers, and gas carriers. Increased emissions and efficiency targets will continue to put pressure on older vessels, accelerating the turnover of the global fleet and slowing vessel supply.

We have already observed significant de facto scrapping for aging vessels, where you can see a significant reduction in ton-mile utilization of vessels aged above 20 years compared to younger vessels, and this disparity has increased in the more recent years. The fleet profile is also getting increasingly old. When we look at the number of vessels that are above 20 years old in 2023, that number is set to double by 2027. The market will benefit from an increase in scrapping and from a less efficient and generally older fleet profile.... With these various interlacing factors, the outlook remains positive, and we can expect product tanker fleet utilization to increase. This slide assumes a scrapping age of 25 years for MRs and Handys, and 23 years for LR2s, LR1s, Suezmaxes, and VLCCs.

We anticipate the tonnage supply balance to drop significantly from 2023 into 2024, due to the aging global fleet profile and scrapping. Next slide. Apart from that, there's also a growing fleet trading Russian oil products. We estimate a fleet of approximately 640 MR equivalents trading on Russia, with a considerable portion being from blue chip reputable owners. Vessels operated by non-blue chip owners are unlikely to return to international trade should sanctions be lifted at some point in the future. Moving on to the refining sector. The global refinery landscape is evolving, with global refinery expansions of approximately 4 million barrels a day expected in 2023, mostly located in the Middle East and China. Two mega refineries, Saudi Aramco's Jazan and KPC's Al Zour refinery in Kuwait, have been increasing production in the past months.

Further expansion in capacity and ramp up of throughput is expected in the Middle East, with a focus on the production of middle distillates. Refinery margins today also supersede 2022 levels, following a spike in gasoline and diesel cracks. Refinery throughputs are set to peak in August at 83.9 million barrels daily. Refiners are struggling to keep up with the growth in oil demand, as shifts to new feedstocks, outages, and high temperatures have forced them to run at reduced rates. Looking at the market cannibalization levels of VLCCs and Suezmaxes, with only a handful of them left to be delivered for the remainder of the year and no new buildings coming the next year, we do not expect a significant level of cannibalization, which will lead to a higher utilization of the existing product tanker fleet. Slide 22.

Here in this slide, we're taking a stab at predicting what happens if sanctions on Russian oil are lifted. Our tonnage supply forecasts include the effects of newbuildings, scrapping, and importantly, the reduced tonnage efficiency of the rapidly aging fleet. Our base case scenario is a reduction in fleet supply of 362 MR equivalents by the end of 2024 compared to today. Looking further two years out, by the end of 2026, the fleet would have reduced by 347 MR equivalents, even taking into consideration that we have included an additional 100 MR newbuilding equivalents on top of known orders as of today.

So even if sanctions are lifted, the tanker market looks very promising for the foreseeable future, as we have not even factored in any extra transportation demand coming from growth in oil demand throughout the years 2024, 2025, and 2026 in this slide. The aging fleet will, in itself, lead to a tight market, even with zero growth in transportation demand, which we consider unrealistic in the first place. Slide 23. When we apply a similar methodology to the Suezmax and VLCC segments, our base case scenario, post-sanctions, looks promising for the large crude tanker segments.

Our base case predicts a reduction in tonnage supply of 145 Suezmax equivalents by the end of 2024, and a slightly larger reduction of 149 by the end of 2026, and we're factoring 90 additional new builds over and above today's known order book. Again, this slide does not factor in growth in transportation demand at all. So in our view, the product tanker segment will be well supported by the crude tanker segment for the foreseeable future. And now, Mikael, over to you for the next couple of slides.

Mikael Skov (CEO)

Thank you. Slide 25. Moving on, I would like to touch upon Hafnia's ESG performance. As we navigate through the evolving maritime landscape, Hafnia remains very committed to minimizing our environmental footprint, advocating for diversity and inclusion, and to uphold high standards of corporate governance. The new builds that we have on order mark our commitment in the decarbonization journey. Apart from that, we're also working to reduce our environmental footprint in our current fleet through vessel optimization initiatives. In 2022, across our own fleet, our carbon intensity was 5.25 g per ton nautical mile, which is 7.3% below the present IMO baseline. We very often partner with various industry peers, international organizations, and other key stakeholders to collaboratively address challenges our sector faces.

By aligning our intentions with our actions, we aim to demonstrate that excellent commercial performance and sustainability are not mutually exclusive, but rather they complement and reinforce one another. Next slide. Looking ahead, I'm optimistic that Hafnia will continue to make the right steps in our commitment to a greener maritime sector and in leveraging our strategically positioned modern fleet.... While the future remains volatile, I believe that Hafnia has future-proofed itself and is well-equipped to face what is to come. We will continue to build on this strong momentum to produce even greater results. This will allow us to pursue our objectives, invest in a greener future, and to also allow for greater shareholder returns. With that, I'd like to open up the call for questions.

Operator (participant)

We will begin our Q&A session now. Should you wish to ask questions, you can submit them via the chat function or use the Raise Hand function to be unmuted to ask your questions verbally. Thank you to those who have their hands raised or have submitted their questions. For the sake of good order, we will respond to the Q&A and chat questions first, then followed by the raised hand. In the meeting chat box, we have a question which reads: Hafnia only has a small percentage of LR2 trading dirty. At what point would you decide to switch from clean to dirty?

Jens Christophersen (EVP of Commercial)

Hi, Janet, this is Jens. Right now, we have seven LR2 tankers in our pool, and they are all trading clean. We're not averse to trade our ships in dirty trades, but we evaluate each and every opportunity to switch very carefully before doing so. The cost of going from dirty back to clean can easily run into $750,000-$1,000,000, so this is not something that we take lightly. I hope that answers your question.

Operator (participant)

Okay, so if we move on to the Q&A function, we have a question that reads: You still have a number of 15-year-old LR1 vessels in your fleet. Do you see these vessels remaining in your fleet, or is there appetite to sell them?

Mikael Skov (CEO)

Thank you for that question. It's Mikael. So we don't have any specific strategy that outlines that at a specific age, we will sell ships. So, but when they reach the 15 years of age, what we will do is take an individual look at the very vessels. And part of our strategy is actually to try to extend the lifetime of a lot of our vessels, because we feel that the markets are going to be strong for a number of years ahead. So it's more of an individual view on these ships, rather than a generic approach to 15 years or not, that will decide whether we will sell ships or not.

The likelihood is that as we go along, that there will be a few vessels now and then being sold and replaced by more modern ships, which will serve as a renewal of our fleet altogether.

Operator (participant)

So we will move on now to the Raise Hand function. May I ask, Eirik Haavaldsen to unmute himself? Eirik, can we ask you to unmute yourself to ask your question? Okay, I'll move on to the next question from Frode Mørkedal. If you could unmute yourself to ask your question.

Frode Mørkedal (Managing Director and Equity Research Analyst)

Yes. Can you hear me?

Operator (participant)

Yes.

Frode Mørkedal (Managing Director and Equity Research Analyst)

Perfect. Yeah. Hi, guys. The first question I had is this topic of cannibalization you had in one of the slides. Very briefly, you mentioned that, which is the phenomenon of, you know, basically crude tanker new builds taking clean cargoes on the maiden voyage, right? So that's a good point with no order book to speak of for VLCCs. You know, this should be very positive for product tankers, right? So do you have any idea what the potential impact could be?

Jens Christophersen (EVP of Commercial)

Yeah. Hi, Frode. We haven't calculated on the potential impact, but our records show that so far in 2023, these Suezmaxes and, the VLCCs have been loading on average about 200,000 barrels a day of CPP. So what we're expecting is, at that rate, those 200,000 barrels will be traveling to a much greater extent on, on coated product tankers when we get into 2024, and there'll be fewer newbuildings on the Suezmax and VLCC side. But an exact number, we haven't done that calculation. But it's a fair volume, as you point out.

Frode Mørkedal (Managing Director and Equity Research Analyst)

Yeah, exactly. So it should be definitely positive, I think. But anyway, second question I had is, on this new build with methanol capability. Is the use of methanol something that the charter requested or is something that you have a special belief in?

Jens Christophersen (EVP of Commercial)

Hi, Frode. This is Jens again. This is a project that came out of our discussion between ourselves and our long-term partners, Total. I'd rather not go into the details of exactly how did the project start, but we're very proud of it. Thank you.

Frode Mørkedal (Managing Director and Equity Research Analyst)

... Yeah. Okay, just more about the fuel transition and the use of methanol as a dual fuel. If that's something that you have a strong belief in. I guess you have some LNG dual fuel in the fleet. That was the real question I had.

Mikael Skov (CEO)

Well, I think, Frode, I can, I can maybe add to it, that, I mean, obviously from our point of view, one thing is obviously what, what the clients have a requirement, but of course, for us, it's also a strategic, a test of kind of how it works with dual fuel methanol. Yes, we do believe that methanol will be one of the solutions. We don't necessarily feel that there will be one solution in the future, there'll be more. So you can say it's a good, it's a good match for us to invest at the same time as we guarantee earnings and guarantee returns. So what we will not do, for instance, when it comes to these dual fuel and IMO II carriers in general, is to order them on spot basis.

So everything we've done that kind of in a way goes down the path of having a dual fuel propulsion is all based on covered contract that gives us a guaranteed yield. So that's the way we want to step forward on that, not by taking speculative orders into that space.

Frode Mørkedal (Managing Director and Equity Research Analyst)

That makes sense. It may be coincidental then, but it seems that you've been gearing up on this chemical tanker. You know, in these two new builds with the methanol, but also you have the LR1 you bought from Scorpio and a few other new builds, right? So, maybe you could talk about the attractiveness of the IMO II, and more broadly, the chemical tankers, the ability to carry chemicals and vegetable oils for your fleet.

Jens Christophersen (EVP of Commercial)

Hi, Frode. If we, if we go back to the business case that we built around the time when we acquired CTI, we fundamentally felt that the IMO II space offers a long and attractive runway, and we felt it was a good supplement to our existing fleet, where we could utilize the synergies between CPP and the IMO II, III space. That's worked out well for us, and that's why we've chosen to invest more one year.

Frode Mørkedal (Managing Director and Equity Research Analyst)

Okay. Thank you.

Operator (participant)

We have another raised hand from Erik Hovi. May I ask you to take yourself off mute?

Erik Hovi (Equity Research Analyst)

Hi, guys. Just a question regarding a bit of the booking and if it's sort of any if there's been more in normal operations or more a strategy into that. So comparing the coverage rates, obviously for Q3 and Q4, which are also provided in the report, it seems to have taken on some more coverage or into the other ones for the third and the fourth quarter. Is that more type of normal operations that you see that there are longer term time charters that you take on? Or is that sort of a hedge into the winter? Or how would you say you are positioning your fleet towards what you seem to believe is a very strong winter market?

Jens Christophersen (EVP of Commercial)

Yeah. Hi, Erik. We have not taken on any long-term charters on our spot trading fleet since we last spoke. We've concluded the two MR methanol charters. So we have quite a strong belief in the winter market that's ahead of us. So the coverage we have going into Q4 is the coverage from our existing long-term charters, and then it's coverage from longer spot voyages that stretches into Q4.

Erik Hovi (Equity Research Analyst)

Yeah. So you still will say you're fairly. But you have also not taken any, sort of, trying to be more open into the winter. It's more with the fleet size you have, I guess, it's more about having normal operations more than positioning yourself into potential peaks in the market. The spot market has been very volatile over the last year, basically. So I guess there is a lot of timing also involved with sort of getting higher rates. I just wonder if you have any, like, strategy or thoughts or if that's something you plan for as well.

Jens Christophersen (EVP of Commercial)

Our expectation is that the winter market will be strong. Stocks are low all over the world, and the oil market is tight and refinery margins are tight, so we can only see, really see volumes and shipping demand growing. We have not been seeking to cover any of our days throughout the winter in anticipation of a strong winter. We are as spot exposed as we can be.

Erik Hovi (Equity Research Analyst)

Yeah. Okay, perfect. Thank you.

Jens Christophersen (EVP of Commercial)

Thank you.

Operator (participant)

Okay, so we have another question in the chat. Do you see a threat for ships currently trading Russian crude getting pushed back into the mainstream market if product prices breach the caps? And do you see this happening already or not yet?

Jens Christophersen (EVP of Commercial)

Hi, this is a good question. We've seen Aframaxes trading Russian crude oil that are now entering the mainstream market, and I think that's had a negative effect on Aframax earnings in Europe, and to, you know, a greater extent, the entire Atlantic basin, compared to where that basin was before the oil price moved above the price cap. The question, I guess, is also what kind of development could we see on the product space if diesel and petrol prices moved above the price cap, and they're hovering just around it right now.

Our expectation is that it will have really a limited effect, in the sense that if the price stays above for a while, ships will be sold to trade on Russia, and if the price moves below again, the international fleet will get busy in carrying oil under the price cap.

... All in all, we think fundamentally, demand will remain intact.

Operator (participant)

Okay, we have another raised hand from Omar Nokta. May I ask you to take yourself off mute, please?

Omar Nokta (Managing Director and Senior Equity Analyst)

Hi there, thank you. I just really wanted to ask about your LTV, and obviously, you guys have paid very close attention to the balance sheet. You know, you ended the quarter at 30.1% on a net LTV basis, and you know, that compares to 55% a year ago, so it's come down quite a bit. Do you think based on what you're seeing so far, that you'll be able to get below that 30% threshold by the end of this coming quarter, and then thus put you in the next payout threshold of 70%?

Perry van Echtelt (CFO)

Hi, Omar. It's Perry here. Good question, and I'll answer this together with the question that Erik posted in the chat box. So, only nine months ago, after the third quarter, we introduced a new different payout policy with the structure where as Net LTV drops, the payout ratio will go up. It has indeed dropped quite significantly over time towards the 30.1% that we saw at the end of the quarter. In line with markets and values and cash flows going forward, it of course only needs a little bit of a tweak to get below that 30%. So we're definitely on track to get there next quarter.

In terms of Eirik's question regarding net debt levels, we don't have a target per say of where we want to be. Obviously, the higher the payout ratio, the lower the pace of the debt reduction. We're more focused on cash flow breakevens, as we indicated earlier this year. We want to get back to that, cash flow breakeven in the mid-13s, which we are well on track of to get there in a few quarters' time. So that is mainly the reason we think in an asset-intensive company like ours, debt has a good place to get the right returns on capital. So, no specific minimum levels on that, but of course, as the market progresses, we'll keep an eye on that.

Omar Nokta (Managing Director and Senior Equity Analyst)

Okay. Thank you, Perry, for that. That was good, good color. And maybe just one quick follow-up just in relation to the MR new buildings. I know don't wanna give too much, I guess, specifics on it, but any sense you can give us or any color on the duration of what that long-term charter looks like with Total? And then perhaps what kind of unlevered IRR you're expecting from the project?

Perry van Echtelt (CFO)

I think Jens or Mikael, in terms of duration of the contracts, we haven't disclosed much of that, neither on the IRRs.

Omar Nokta (Managing Director and Senior Equity Analyst)

Okay. I figured I'd ask.

Mikael Skov (CEO)

Exactly. I mean, all we can say is that it is a longer term charter, right? Which essentially means that it's, you know, it's more than five years.

Omar Nokta (Managing Director and Senior Equity Analyst)

Okay. In excess of five years. That, that's helpful enough. Thank you.

Operator (participant)

Going back to the chat box, we have a question from Oystein, saying: Considering the limited amount of NB deals out there, such as the methanol ships you just ordered, are you considering more scrubber investments?

Mikael Skov (CEO)

Thank you for that. It's Mikael here. No, those two things for us are actually not interlinked. Scrubbers as such are not really helping on much other than on the sulfur side. So, for us, when it comes to scrubbers, we were never convinced about the scrubber solutions for ships that are below LR1 size. We felt that the payback time was too long, and the access to high sulfur fuel oil that you need for smaller vessels, which travel basically worldwide and have so many bunkering ports where you wouldn't find availability, just didn't make any sense.

Quite frankly, when you look at the spread that most people ordered their scrubbers on the back of, back in 2020, 2019, 2020, and look at how it actually developed, the spread has been significantly below that. So the payback time has probably been even longer. So we have a few scrubbers on LR2s and a few LR1s, but it's not an area that we're looking strategically to increase investment of scrubbers at all.

Operator (participant)

We have another question from Nick on how much additional investment is required to make your new builds able to use methanol after they are delivered.

Mikael Skov (CEO)

Thank you for that, and it's actually a good question, because we see a lot of orders around being reported as being so-called ready, whether that is for methanol, N- LNG or other things. In our case, these vessels do not require any further investments. So when these ships deliver, they are fully able to burn methanol from day one.

Operator (participant)

Thank you. On to the last question from Vianai. We have: The order book has increased, mainly LR2s have been ordered. I'm just wondering to what extent these will all be used for the clean trade. As the dirty order book is so low, the LR2 seems to be the arbitrage play between clean and dirty. Do you expect a decent percentage to be used for the dirty trade?

Jens Christophersen (EVP of Commercial)

Yeah. Hi, Vianai, this is Jens. This is a good question, and yes, we do expect that a decent percentage of the new buildings in the LR2 segment will be used in dirty trades. Already today, a number of coated Aframaxes LR/LR2 are trading dirty. It's natural as the Aframax fleet is also aging. Thank you.

Operator (participant)

I don't see any further questions on the chat or the Q&A or the raised hand. We would be coming to the end of today's presentation. Thank you for attending Hafnia's second quarter 2023 financial results presentation. More information on Hafnia is available online at www.hafniabw.com. Thank you everyone, and goodbye.