International Seaways - Earnings Call - Q4 2020
March 12, 2021
Transcript
Speaker 0
Good morning, and welcome to the International Seaways Fourth Quarter twenty twenty Earnings Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I'd now like to turn the conference over to James Small, Chief Administrative Officer and General Counsel.
Please go ahead.
Speaker 1
Thank you. Good morning, everyone, and welcome to International Seaway's earnings release conference call for the year ended 12/31/2020. Before we begin, I would like to start off by advising everyone on the call with us today of the following. During this call, management may make forward looking statements regarding the company or the industry in which it operates. Those statements may address, without limitation, the following topics: outlooks for the crude and product tanker markets changing oil trading patterns, forecasts of world and regional economic activity and of the demand for and production of oil and other petroleum products, the effects of the ongoing coronavirus pandemic, the company's strategy, purchases and sales of vessels, constructions of new build vessels and other investments, anticipated financing transactions, expectations regarding revenues and expenses, including vessel charter hire and G and A expenses, estimated bookings and TCE rates for the 2021 or other periods, estimated capital expenditures in 2021 or other periods, projected scheduled dry dock and off hire days, the company's consideration of strategic alternatives, the company's ability to achieve its financing and other objectives, and other economic, political and regulatory developments around the world.
Any such forward looking statements take into account various assumptions made by management based on a number of factors, including management's experience and perception of historical trends, current conditions, expected and future developments and other factors that management believes are appropriate to consider in the circumstances. Forward looking statements are subject to risks, uncertainties and assumptions, any of which are beyond the company's control, which could cause actual results to differ materially from those implied or expressed by those statements. Factors, risks and uncertainties that could cause International Seaway's actual results to differ from expectations include those described in our annual report on Form 10 ks for 2020 and in other filings that we have made or in the future may make with the U. S. Securities and Exchange Commission.
With that out of the way, I would like to turn the call over to our President and Chief Executive Officer, Ms. Lois Zabrocki. Lois?
Speaker 2
Thank you very much, James. Good morning, everyone, and thank you for joining International Seaway's earnings call to discuss our fourth quarter and our full year 2020 results. 2020 was a pivotal year for International Seaways. We benefited from our earnings power and our timely chartering decisions early in the year. During the period that started out very strong and became challenging and volatile for tankers, we locked in significant cash flows by extending our fixed employment on our FSO joint venture through 02/1932.
We transformed our capital structure in 2020. We significantly delevered our balance sheet. We repurchased 5% of our outstanding shares and we implemented a dividend during 2020. If you turn to Slide four, I review specific fourth quarter highlights and our year to date 2021 development. Starting with the first bullet, we increased our financial strength in the fourth quarter, during the weakening tanker market.
We signed a ten year contract extension on our FSOs, both custom built high specification units. These are the FSO Asia and the FSO Africa. This contract is in direct continuation of the current five year deal and the ten year extension produced significant locked in revenue and it crystallized their commercial value. The extensions generate approximately $20,000,000 annually in cash flow to Seaways through 2032 for a total of more than $320,000,000 in revenue over the life of the contract extension. We look forward to continuing to support North Oil Company on the field.
This is a joint venture of Qatar Petroleum and Total. During the fourth quarter, we generated in excess of $60,000,000 in cash proceeds from the sale of our three unencumbered vessels, further improving our fleet age profile. These sales included two older VLCCs and one older Aframax. This leaves us with 11 unencumbered ships in our Seaways fleet. We ended the quarter with 199,000,000 in unrestricted cash.
This includes and including our $40,000,000 revolver, which is undrawn, our total unrestricted liquidity was $239,000,000 representing a quarter over quarter increase of more than $60,000,000 in the fourth quarter. As further evidence of our financial strength and our flexibility, our net loan to value of 33% is still one of the lowest in the shipping sector. If you move please to the second bullet, we are so excited to announce our agreement this week to contract to build three LNG fuel dual fuel VLCCs from top tier Korean shipyard DSME for delivery in early twenty twenty three. This project puts Seaways on our future path. It enables us to achieve a number of critical strategic objectives.
First, adding these vessels to our fleet on seven year time charters to market leading customer shell provides strong stable cash flows with added upside. We are pleased to once again renew our fleet at the cyclical low and to access very competitive financing, combined schedule, which Jeff will detail further on the call. Second, these VLCCs being 40% more efficient than a ten year old vessel and 20% more efficient than the most modern Echo VLCCs on the water today. We expect they will remain well suited to adhere to future environmental regulations throughout their life. Importantly, these are highly efficient ships that will not just surpass today's IMO Energy Efficiency Design Index, but also substantially outperform the 2025 EEDI targets.
The environmental benefits of these three ships substantially reduces our carbon footprint and are in keeping with our commitment to ESG focused corporate citizenship. We're proud to continue to be at the forefront of sustainability initiatives in the maritime sector. This builds on our last year's signing of the first sustainability linked refinancing in the industry. Moving to the next bullet. We continue to implement our disciplined and accretive capital allocation strategy.
During 2020, we repurchased nearly 5% of our outstanding shares while paying 0.24 per share in quarterly dividends, including a fourth quarter dividend of $06 As we mentioned last quarter, our Board has authorized the increase of our share buyback program to $50,000,000 It is Seaway's intention to continue to return cash to shareholders in 2021. If you'll turn to the last bullet, in 2020, we had a net loss of $5,500,000 or $0.20 per share. Excluding onetime noncash items, we generated a record net income profit of $125,000,000 In a weakening rate environment, our fourth quarter net loss was $15,000,000 taking into account $86,000,000 in vessel impairments and $16,000,000 in noncash charges related to the FSO extensions. It's important to note that our success executing four very favorable VLCC time charters earlier in 2020 helped us to optimize revenue later in the year when oil inventory destocking adversely impacted tanker demand. In addition to generating strong cash flows from two of these time charters into 2021, the extensions of our FSO joint venture contracts in the fourth quarter bolsters our contracted cash flows through 02/1932.
Further, we concentrated many of our dry docking during the latter half of twenty twenty and into early twenty twenty one during the challenging market period. This bodes well for the year ahead capitalize on the coming tanker market recovery. Turning to Slide five, we provide an update on oil supply and demand. Based on its February forecast, the IEA estimates oil demand to increase point 4,000,000 barrels per day, recovering about 60% of the volumes that were lost in 2020. The IEA expects demand will increase to 99,000,000 barrels a day by the 2021.
The EIA expects a further 3,500,000 barrels per day of growth in 2022. While demand is recovering and rising, global oil stocks are 62,800,000 barrels below the May 2020 peak according
Speaker 3
to
Speaker 2
the IEA. We continue to believe that stock drawdowns are needed to set the stage for a tanker market recovery. While the decision by OPEC plus not to significantly increase production quotas, we know that this is putting pressure on inventory levels. Floating crude storage has already decreased to pre pandemic levels. If you'll turn to Slide six, we talk about ship supply.
As we have mentioned on former calls, the overall tanker order book remains at historic lows. Only 31 Bs were ordered in 2019, 41 ordered in 2030 orders were canceled recently. We believe that the uncertainty regarding the market as well as decarbonization regulations, higher steel input costs and already increasing newbuilding prices is tempering the ordering. Moving to the bottom half of the slide. Regarding the potential for recycling, the number of candidates based on the aging global fleet exceeds the VLCC order book by deadweight in the coming years.
As you can see in the chart on the right hand of the slide, a quarter of the existing VLCC fleet is now at least fifteen years old and 8% is already over is at least 20 or over, representing the entire VLCC order book. Another 13 Versus will reach 20 years old in 2021. As we have highlighted consistently, once vessels reach the age of 15, they're more expensive to operate, they have significant investment requirements to continue to trade. As ships reach their ballast water treatment deadlines, even greater capital investment is required to keep them trading. Based on these dynamics, the potential for recycling has been building.
Only four Versus were recycled in both of 2019 and 2020. Recycling is likely to increase, particularly given the current low spot rate environment and increasing recycle prices. Lastly, before I hand the call off to Jeff, I would like to take a moment to thank our seafarers. Amidst this global pandemic, our ship's crews continue to adhere to the highest levels of standards. We're very grateful for their remarkable efforts.
With seafarers playing an essential role in making global trade possible, we have shared responsibility to their health and their safety. In January, we signed the Neptune declaration on seafare well-being and crew changes in a worldwide call to action. The goal is to end the unprecedented crew change crisis caused by COVID-nineteen. At Seaways, we have taken important steps to repatriate our crews, things like deviating ship to more convenient ports for our seafarers, implementing extra measures to prevent the spread of the virus and arranging for private private charter flights where it's necessary. As the production and the distribution of vaccines increases globally, we look forward to seafarers' contribution as essential workers being recognized and getting them priority access to these critical medicines.
I'm going to turn the call over to Jeff, who will provide additional details on our fourth quarter results.
Speaker 3
Thanks, Lois, and good morning, everyone. Let's move directly to review in the fourth quarter and full year results and more to say. Before turning to the deck, me quickly summarize our consolidated results. For the full year 2020, our adjusted EBITDA was $220,100,000 our highest on record. In the fourth quarter, we had an adjusted EBITDA loss of $5,000,000 Both the full year and fourth quarter twenty twenty EBITDA numbers I've just cited are after the effect of a onetime noncash charge of $16,000,000 related to the FSO contract extension.
So you may want to take that into account in your modeling. Net loss for the fourth quarter was $116,900,000 or $4.18 per diluted share compared to net income of $19,000,000 or $0.67 per diluted share in the 2029. However, again, excluding the impact of the $85,900,000 impairment charge and $16,000,000 related to extensions, net loss was $15,000,000 or $0.52 per diluted share. Now please turn to Slide eight. I'll first discuss the results of our business segments beginning with the Crude Tankers segment.
TCEs for the Crude Tankers segment were $44,000,000 for the quarter compared to $93,000,000 in the fourth quarter of last year. The decrease primarily resulted from the impact of lower average blended rates in the VLCC Suezmax, Aframax and Panamax sectors. Turning to the Product Carrier segment, TCE revenues were $9,000,000 for the quarter compared to $25,000,000 in the fourth quarter of last year. This is due to lower period over period average daily blended rates earned by the LR2, LR1 and MR fleets and also a decrease in MR revenue days in the fourth quarter, primarily as a result of a new delivery of four time chartered in MRs to their owners between the 2019 and July 2020. Overall, as reflected in the chart top left, consolidated TCE revenues for the 2020 were $53,000,000 compared to $118,000,000 in the 2019.
The decrease was principally driven by substantially lower average daily rates earned across the crude fleet for this quarter compared to last year's fourth quarter. Looking at the chart at the top right of the page, adjusted EBITDA was a loss of $5,000,000 for the quarter compared to adjusted EBITDA of $72,000,000 in the 2019. And again, the decrease was principally driven by lower average daily rates and includes the effect of the one time non cash charge of $16,000,000 On the bottom half of the page, we look at our full year results on a year over year basis. Consolidated TCE revenues and adjusted EBITDA for 2020 were up from last year, increasing by $62,000,000 and $55,000,000 respectively. On the right hand side, we highlight our latest twelve month adjusted EBITDA of $220,000,000 Now turning to Slide nine.
We provide a fourth quarter review and first quarter twenty twenty one earnings update as of this point. The bookings in Q1 thus far, we have booked 93% of our available Q1 spot days for our VLCCs at an average of approximately $16,800 per day, 86% of our available Suezmax spot days at an average of $10,900 per day, 91% of our available Aframax and LR2 spot days at an average of $10,400 per day and 72% of available Panamax spot days at an average of approximately $13,000 per day. On the MR side, we booked 67% of our first quarter spot days at an average of approximately $9,400 a day. As a concrete example of the benefits of time charters that Lois mentioned entered into last year, if you look at the number on the top right hand side of the page, you'll see that the combined spot and time charter rates for our VLCCs are 22,200 for Q1 with 94% of days accounted for. Now, if I could ask you to turn to Slide 10.
The cash cost TCE breakevens for the twelve months ended 12/31/2020 are illustrated on this slide. International Seaways overall breakeven rate was $20,800 per day for that twelve month period. These rates are the all in daily rates our own vessels must earn to cover vessel operating costs, dry docking costs, cash G and A expense and debt service costs, which means scheduled principal amortization as well as interest expense. Of note, taking into consideration distributions from our FSO JV and the fixed time charter revenue, the overall breakeven rate for the last twelve months dropped to $17,100 per day. We've included on the far right hand side of the bar chart, the all in daily breakeven rates for the forward twelve months ending 12/31/2021.
Taking into consideration contracted revenue from the FSL JV and our time charters, the overall breakeven rate is $19,000 per day for the spot revenue days we have during the next twelve months. At this point, I'd like to provide cost guidance for the year for modeling purposes. For 2021, we expect regular daily OpEx, which includes all running costs, insurance, management fees and other similar related expenses for our various classes to be as follows. For VLCC $8,900 per day, for Suezmax $8,000 for Afamax 8,200 per day, for Panamax $7,900 and for MRs $7,600 per day, in each case excluding any impacts attributable to COVID-nineteen. We expect dry dock and CapEx expenses to be $24,500,000 and $9,900,000 respectively for the year.
For details on projected dry dock CapEx and off hire days by quarter, you can refer to Slide 15 in the appendix for an update. Continuing with cost guidance, we expect 2021 cash interest expense would be about 24,500,000.0 which compared to actual cash interest expense of $26,800,000 in 2020. For the year, we expect cash G and A to be in the region of $25,600,000 Finally, we expect about $21,100,000 in equity income and $67,100,000 for depreciation and amortization, which is about $7,000,000 below last year. Now, if we could go to Slide 11 for our cash bridge, moving from left to right. We began the fourth quarter with total cash and liquidity of $194,000,000 During the quarter, our adjusted EBITDA was a loss of $5,000,000 We added $12,000,000 in equity income from the JVs and the cash distributions from the JVs were $4,000,000 from the FSO JV.
We expanded 13,000,000 on dry docking and CapEx. Proceeds from vessel sales were 60,000,000 Cash interest and scheduled principal payments under debt was $6,000,000 Finally, taking into account $15,000,000 of principal repayment, dollars 2,000,000 quarterly dividend and the positive impact of working capital and other charges other changes of $29,000,000 the net result was at the end of the quarter with approximately $215,000,000 of cash and a $40,000,000 undrawn revolver, yielding total liquidity of $255,000,000 Please turn to Slide 12. I'd like to briefly talk about our balance sheet. As of December 31, we had $1,600,000,000 of assets compared to $474,000,000 of long term debt. In addition, we had $40,000,000 revolving credit facility that remained undrawn as of December 31.
As you can see on the right hand side of the slide, our net debt to total capital stands at 24%, while our net loan to value stands at 33%. As footnote one tells you, this is not taking account the value of our FSO. If you include that FSO book value, the net debt to value number drops to 29%. Further, our last twelve months adjusted EBITDA was a very strong $220,000,000 and therefore our net debt to last twelve months EBITDA was just one five point times. Before turning the call back to Lois, I'd like to briefly discuss this week's agreement to purchase three LNG dual fuel VLCCs.
As Lois mentioned, these vessels are on seven year time charters to a market leading counterparty in AA rated shell, which allows us to access very competitive financing as we renew our fleet at attractive levels and provide strong stable cash flows. The time charter is structured with a favorable base rate and a profit share, which provides added upside in a strengthening rate environment. Additionally, the payment is highly favorable with payments heavily weighted towards the back end. I've had a lot of questions already about this since the announcement. So I'd like to let me try to give you as much detail as I can, bearing in mind that the exact terms of the contract are P and C.
As I mentioned, payment terms are of the newbuilding contract are back end and favorable that way. So for your CapEx modeling for 2021, you should assume $30,000,000 in payments this year. In terms of financing, given the seven year time charter to highly rated Shell, there's a myriad of opportunities of finance that we've been shown in our evaluate. For sure, you can expect that this will have a very high advanced ratio thereby enhancing return on equity. Also expect a quite a low interest rate component.
Revenue of course doesn't start until 2023. I'm not sure that anyone is modeling 2023 numbers yet, but we're very comfortable telling you that we project that there will be a double digit return for this project for us. As I conclude my comments, I'd like to highlight our progress implementing our disciplined and accretive capital allocation strategy in '20. Earlier this year, we successfully completed our sustainability linked refinancing, which reduced our average interest rate by 3.5 percentage points and our annual interest expense by $25,000,000 enhanced our capital structure and enabled us to begin returning capital to shareholders. In addition to utilizing our strong cash flow to further prepay debt, we've been able to execute on our share repurchase program and pay $6 per share in quarterly dividends, as Otis mentioned earlier.
At the same time, we've grown our total liquidity and our net loan to value of 32.7% remains one of the lowest among our target peers. Regarding future share repurchases, I'd simply like to say that at these valuations relative to our net asset value per share, we view our share price as a highly attractive value. That concludes my remarks. I'd like to now turn the call back to Lois for closing comments.
Speaker 2
Thank you very much, Jeff. In 2020, we achieved solid results, generating significant EBITDA and record net income. We strengthened our capital structure and our balance sheet. We took important steps to unlock shareholder value. We ended the year by further increasing our financial strength during the weak market.
With our ten year contract extension on the episode, Seaways will generate approximately $20,000,000 annually through 2032 from these assets. During the quarter, we captured still elevated asset value by selling three unencumbered ships for $60,000,000 in cash. This increased our total cash position and total liquidity to $215,000,000 and $255,000,000 respectively. Yesterday, we announced our agreement to build three dual fuel LNG VLCCs that will commence seven year time charters with Shell. We're pleased to support Shell's leading efforts to significantly reduce the maritime industry's carbon footprint.
We're excited to partner with our long term close customer on these state of the art vessels that will be 40% more efficient than ten year old ships and 20% more efficient than modern Ecobee's. Going forward, our fleet will continue to drive earnings, combined with the strong cash flows from the remaining two favorable VLCC time charters. Then the extensions of our FSO joint venture contract bolster our contracted revenues for the next decade and beyond. We remain positive on the long term fundamentals and the outlook for the tanker market. And we believe that Seaways is well positioned to continue to create value for shareholders well into the future.
Thank you very much. And operator, we will now open for questions.
Speaker 0
We will now begin the question and answer session. The first question is from Liam Burke from B. Riley FBR. Please go ahead.
Speaker 4
Good morning, Lois.
Speaker 2
Good morning.
Speaker 4
When we're looking at the acquisition of the or the orders for the three new VLCCs, is this a dramatic change from how you're viewing management of the fleet? I mean, you get double digit returns. Typically, they would get competed away. But is this a major change in how you view managing the fleet away from the spot market?
Speaker 2
Thank you, Liam. No, no, absolutely not. I mean, as we go forward, our walking in of cash flows and our time charter approach is strategic in the sense that we try to go with the cycles and to take advantage of those and somewhat opportunistic. But what we love about this deal is that the dual fuel technology and this next step efficiency and decarbonization is now being underwritten somewhat by the seven year cooperation or time charter with Shell. And it sort of highlights what I think will be coming more important going forward where owners will benefit and customers will also benefit by working together and collaborating on as technological breakthroughs come through.
Speaker 4
Fair enough. And does it change your view on how you would like to weight the fleet between crude and product vessels?
Speaker 2
No, no. It's at heart, it is a VLCC. It's just much more efficient. And as you have noted, I mean, we have invested substantively in big crude in recent years. We still like product carriers.
And last year we bought an LR1. We still do appreciate the product fleet. It's where we think that the fundamentals will be strong going forward.
Speaker 5
Great. Thank you, Lois.
Speaker 2
Thank you, Luis.
Speaker 0
The next question is from Omar Nokta from Clarkson Plateau Securities. Please go ahead.
Speaker 3
Thank you. Hi, Lois. Hi, Jeff. Congratulations on the VLCC new building.
Speaker 2
Thank you, Omar.
Speaker 3
Thanks. So I just wanted to just I noticed in your 10 ks filing, total cost of the three ships is $290,000,000 which comes out to about $96,000,000 $97,000,000 a piece. It seems like a fairly good deal, I'd say, considering the LNG capability. There were a small handful of orders last spring, some closer to like 105,000,000 with the LNG piece kind of being around that 12,000,000 to $15,000,000 You've obviously paying less than that. How much of the construction costs would you say is attributable to the LNG component?
Speaker 2
I guess what I would say, Omar, is that and we have to give credit to the customer as well. I think that the ordering of these vessels absolutely captured the down the lowest point in the cycle. And so you have to take that into consideration. I don't think that the additional cost LNG has changed very much. I think it is still in that range that you were noting somewhere $13,000,000 to $15,000,000 for the LNG capability.
Speaker 3
Okay. And Lois, you mentioned it's a little bit just a few minutes ago talking about the contract underwriting the LNG capability. When we think about the seven year contract, do you feel that it sort of covers the entire cost of the LNG component during those seven years?
Speaker 2
What I will say is really in a very holistic sense, Omar, having the time charter there, also having projected substantive upside as well as the incredible efficiency produced by the engine. I think holistically as a VLCC purchase, we're going to look back and have been very happy at this. You could easily see just regular VLCCs with conventional engines costing over $100,000,000 to build.
Speaker 3
Yes, yes, yes. Thank you. And maybe just one more. And I guess, know that you mentioned Jeff, it's P and T and there's a lot of stuff that you can't disclose. But just generally speaking, when we think about the profit split on those ships, how do you think that gets calculated or how can we think about it being calculated?
Is it based off of the contract rate versus where spot rates are? Is it going to have an LNG price components or the spread between LNG fuel and bunker fuel? Any color
Speaker 2
you That's can give interesting. I think Jeff and I have to confer with our team because there are a lot of elements here that are under wraps and they will come on the water in very early twenty twenty three. So you'll have time to model them, Omar. But what I would say is that the consumption is very low and we are looking at that efficiency improvement over a typical V of equating to something like $7,000 per day. And so it just gives you a flavor of the possibilities, I think with these ships.
Speaker 3
Yes. Can I just add, Lois? I mean, the phrase that you and I have used and then the rest of the team many times is a win Our customer Shell is very committed to LNG, bunker fueling the strategy. So they'll be able to utilize these ships that I'm sure in a very attractive way for those seven years. But the charter that we the collaborative way we've come together in this charter is going to make it very attractive for us as well.
So it's really going to be win win on both sides. And as Lois said, we'll have some time to work on a little more detail to help you with your 2023 EBITDA net income numbers. Yes. I appreciate that you have some time.
Speaker 6
Well, congrats again. Thank you.
Speaker 2
Thank you, Omar. Thanks, Omar.
Speaker 0
The next question is from Randy Giveans from Jefferies. Please go ahead.
Speaker 3
Howdy, Lois and Jeff. How's it going?
Speaker 2
Hey, Randy. Very good.
Speaker 5
All right. Sounds like it. Yes. All right. So it sounds like you'll need about $100,000,000 in equity for the three VLCC newbuildings, maybe a little less $90,000,000 or so, dollars 30,000,000 this year, right?
So how does this impact the appetite or ability for share repurchases? And how do you view share repurchases going forward considering you didn't purchase any shares when they were $15 $16 $17
Speaker 2
Okay. So Randy, I'm going going to start that. But Jeff, I want you to come back to the way that Randy started on the assuming how
Speaker 7
they will not.
Speaker 2
Yes. So in the third quarter, Randy, what we were doing was two very material contracts. And the first thing including the FSO, right, where we were really able to crystallize what we have often said we believe to be about $150,000,000 probably more than $150,000,000 in asset value on that FSO. So we were doing that in the fourth quarter that was quite material to the size of International Seaway. As well, we were in the midst of the dual fuel Shell VLCC project, which Omar noted the cost of those vessels.
So we were in the midst of two material transactions, which makes it very challenging to go ahead and do buybacks when you're involved in material transactions. And then I'll turn it to Joe.
Speaker 3
Yes. Hey, Randy. You should not assume that that's $100,000,000 of equity that's required for this. Among the myriad of financing options we have, I mentioned that we will have the ability to look at a much higher advanced ratio than you would in a normal acquisition. So I think you should be focusing more like on the numbers in the 50 range, of which only 30 is this year.
And that segues me to the other thing that I like about this from a capital allocation point of view is starting the year with $200,000,000 in cash, geomarking $30,000,000 for fleet renewal in the form of this new building contract that we discussed to have all these other benefits, gets us a long way to any fleet renewal we would want to accomplish in this part of the cycle and leaves us a lot of liquidity to pursue returning cash to other capital allocation, which we find is equally attractive, which is returning cash to shareholders, which would most likely be in the form of share repurchase. So we had stuff we're working on, as Lois said, that just is what it is, but we've got the liquidity. We've nailed down fleet renewal. So we have a strong balance sheet even in a weak market. We remain committed to returning cash to shareholders.
Speaker 5
Got it. All right. Sounds good. And then I guess for the rest of your fleet, obviously, this is a big step in reducing your average fleet age and these things. Any additional sales coming?
And then any other appetite for maybe expanding your fleet or replacing some of the possible sales candidates with charter ins?
Speaker 2
Yes. So I would say, I mean, we have remaining in our fleet one older VLCC, the Kannabi, will conclude her $53,000 per day time charter in April and then we will look to monetize that ship. And indeed during this the market is really the rates are quite low today. I think it's wise that we have a strong balance sheet and then we will indeed be able to look at potentially bringing in time charters at today's lower levels and put them in or blend them into our fleet names.
Speaker 5
Got it. And then I guess briefly drilling down on Tsunade, it's almost twenty years old, nineteen, nineteen point five years. How does the current market value compare with scrap value?
Speaker 2
The current market value, we believe to be substantively higher than the recycling levels. Although what I will say is that recycled prices are a bit on the rise again, I think reflecting the increase of the demand and underlying price.
Speaker 5
Got it. The recycle, that's the word. All right. Sorry. Thank you so much.
Have a great weekend.
Speaker 2
Thank you, Randy.
Speaker 3
Thanks, Randy.
Speaker 0
The next question is from Ben Nolan from Stifel. Please go ahead.
Speaker 3
Good morning, Lois and Jeff. So
Speaker 6
just to again, appreciating that a lot of the details behind this contract are not able to be disclosed. I wanted to just clarify something that Jeff, you said that you're very comfortable that the return would be double digit. When you said that, we talking like a return on equity or a return on asset? Any color that you can give on sort of what you meant there?
Speaker 3
Yes. And then both.
Speaker 6
Perfect. Is that enough color
Speaker 8
that's great. Thanks.
Speaker 3
So I want to also
Speaker 6
bit about, obviously, for you guys certainly and generally in the industry, this is a bit of a departure moving towards the dual fuel LNG. I have a few questions here. But first of all, you mentioned certainly they'll comply with twenty twenty five new regulations. The tenor of the contract runs out in 2030 when the next big set of regulations are set to roll out. How does it fit on that basis with respect to its emissions?
These also comply with that?
Speaker 2
Ben, one of the ways that we are thinking about things and look at you have an 800 plus strong VLCC fleet. And on average, the tankers are recycling at an age of twenty two years. So when you look at the entire fleet and when we did these 2040% efficiency numbers, we're using generic averages. I mean, many cases, some of the bees that are on the water are consuming basically double what these ships will be consuming. So we sort we look at it from an asset perspective of these will be the lowest emitting VLCCs on the planet.
Bill, can you kind of give a little bit of I also want Bill just to hit on the emissions profile from a total greenhouse gases perspective and then just kind of discuss a little bit around what Ben is talking about, about regulations.
Speaker 3
Well, I'm going to flip that around, Lois,
Speaker 8
if I could. I'll do the regulations first. Thanks, Ben. Just for clarity, IMO hasn't agreed yet on what they're doing in 2023, let alone 02/1930, although I think everyone knows expects that the regulations are going to become more stringent. Really, what we anticipate happening over time is that regulations for higher CO2 producing fuel burning ships, so the fuels burning very low sulfur fuel oils, will be hit harder, right?
And that vessels with lower emissions will be less impacted by newer emerging regulations as the IMO and the globe tries to incentivize that move towards lower carbon producing fuels. And LNG produces 13% less CO2 than very low sulfur. And then when you combine that with a ship that is as a highly, highly developed hull form and advanced propeller, all the other kind of bells and whistles that go with that and a very, very efficient engine, you would get to that 2040% numbers that Lowe's is quoted. We actually anticipate that when we get past the twenty twenty five design index mark where this shift is 8% below that target, very low sulfur new, let's say, VLSFO burning, VLCC delivering in '26 or 2027, we have an enormous amount of difficulty meeting that standard. So I think we're coming at this two ways: a highly, highly efficient ship design coupled with a lower carbon fuel.
And that then results in the opportunity to continue to trade through this decade and then into the decades that follows.
Speaker 6
Okay. That's very helpful. I appreciate it. And then maybe combining that a little bit with the strategic plan here. I'm curious, maybe twofold.
If number one, I don't know if Equinor or SoCal or somebody else came and said, hey, sold that Shell deal, we'd like to do some with you as well. Are you open to that conversation at the moment? Or maybe looking at other things in the fleet and saying, maybe we could use a few more Suezmaxes. We were already sort of we're in on dual fuel. Would we maybe want to do that even without a contract?
Is there any appetite at all for that sort of thing?
Speaker 2
I mean, I think Ben that listen, we at Seaways have to be like a shark because in this business, have to keep moving. And we are open for business. So we're going to listen to our customers and respond to that. However, from a capital allocation perspective, I would go back to what Jeff said and say that we also feel that we are still undervalued from our shares perspective at this time.
Speaker 6
Okay. And maybe to the second part of that, I don't know if is there or let's sort of remove sort of the capital allocation relative to the shares part of the equation.
Speaker 3
Okay. You maybe is the only I guess the question is, is
Speaker 6
the only way that you would possibly consider doing anything on a dual fuel basis if you had that long term contract to sort of give you an extra cushion of protection at least for the next however many years? Or would you even be open to entertaining the idea of doing it without a contract?
Speaker 2
I would say that Jeff and I had spoken publicly previously about the fact that we would not order dual fuel engines naked without any kind of contract. And I guess it goes maybe to the bigger question of do you think that the whole world is going to just go and order dual fuel with no contracts? I really think there will be a reluctance to do that. And I think that bodes well for our fundamentals in the market and also for working more closely with customers, if that is the direction that they're willing to support.
Speaker 6
Got it. Okay. That's helpful. I appreciate it, Liz.
Speaker 2
No, thank you.
Speaker 0
The next question is from Craig Lewis from BTIG. Please go ahead.
Speaker 7
Yes. Thank you and good morning and good afternoon, everybody. I apologize, Jeff Lois. I missed the other gentleman's name that chimed in. But I guess I would just yes.
Great. I would like to ask him around those calculations, and it's very interesting. But like I guess, the Marshall Islands are out now talking about $100 per ton tax. And I think Trafigur has been out talking about a $250 to $300 Maybe we don't need to go through both of those, but if we were to just say, hey, the Marshall Islands push forward this $100 per ton tax, is there any way to kind of just loosely give off the savings between an LNG versus the new LNG versus the more conventional?
Speaker 2
You know what, the gentleman is Bill Nugent and he runs our technical division and he's also a naval architect. And his team is watching all the regulatory developments very closely. He and I saw that this morning on Marshall Islands, but it might be a little bit premature. Bill, did you have any observations on that at this point? Or do you feel it's early days on what per ton the cost on carbon is going to be?
Speaker 8
Look, it is early days. There's lots of developments and discussions around market based measures, whether that's Marshall Islands proposal or the trading schemes like what's being discussed but still not decided in the EU. And IMO has set a target for the second half of the decade to decide what that will look like. Marshall Islands is one of about two dozen proposals that's gone out to be tabled and discussed at IMO. So I think we're going to have to wait and see how this evolves.
And I think it's too early to say what the real impact will be.
Speaker 7
Okay, great. Thank you for that. And then just I guess this is kind of regarding as we think about the evolution of the fleet, I
Speaker 2
guess I'll just ask it
Speaker 3
this way. Are other established
Speaker 7
larger oil companies looking at dual fuel? In other words, is there a market beyond Shell for is there a current market beyond Shell for contracts for long term contracts for LNG fuel at this point?
Speaker 2
I guess the way I would respond to that would be that the two oil majors that you've really seen step out and make these investments are Total and Shell. So Total has contracted with AET and a couple of others on some dual fuel, a couple of these. There's been some Aframaxes from these two oil majors. And then it thins out a little bit, but I think that that's going to remain to be seen quite frankly as every each participant really in the market decides what is their go forward strategy going to be.
Speaker 3
And one thing, Lois. Greg, take a look at the Shell press release itself beyond ours. They mentioned that this satisfies the goal for them that in 2023, 50% of their LNGs that they're using contractually on time charters will be LNG fueled. So it's key to their strategy in this part of their business. So I think that's worth a look.
Speaker 7
Okay. Thank you for that. And then just as we think about it, it's interesting that sometimes the market hits an inflection point and just evolves quicker than we think. And I guess I'll ask it this way. Obviously, we're comfortable where the fleet is today.
But as INSW because as INSW thinks about adding tonnage, that's a new build or whether that's, hey, maybe it's vessel that's on the water that's less than a year old. Is what's happening if we know what the cost of a LNG new, the 13 to $15,000,000 that we talk about, does that impact how you think about buying tonnage? And in other words, I guess what I'm asking is when we think about the yes, like I mean, it's almost like one might argue that Yes.
Speaker 2
Think what you're getting to is every owner has to really look carefully at buying secondhand at the new billings. I mean, because to your point, Bill mentioned earlier, I mean, these regulations are you think you'll have a handle on them, they change. Every owner has to assess the shift that they that we have in our fleet. And part of that we do buy all these new efficiency programs that we are we have ongoing and scraping the bottoms and putting on foot paints and doing the native stocks to make our existing ship as efficient as possible. And absolutely for an owner, as you look at buying secondhand tonnage, which of course, International Seaways, I mean, this bill has over it has built or overseen for OSG, our previous company, over 50 new buildings.
So a bit serendipitous that we have him running the technical department as we pivot back to embracing this new project. But all the other vessels we bought have been modern secondhand. And for all the owners, have to weigh the fact that modern secondhand tonnage is going to be the most efficient purchase. And also think about, is that the move that you want to make or do you want to invest in a step change? But in today's world, hydrogen, ammonia, there's a lot of conversations, but there's no practical solutions today.
Speaker 7
Yes, that's definitely challenging. You guys definitely are facing a lot of challenging decisions here. So anyway, thank you very much for your time and have a great weekend.
Speaker 2
Thank you. And I'm sorry, I can't be more definitive This
Speaker 0
concludes our question and answer session. I would like to turn the conference back over to Lois Zabrocki for any closing remarks.
Speaker 2
I want to thank everyone for joining International Seaways on our call. We are in the midst of a very challenging tanker market environment. However, we have financial strength and we believe that as we look forward to a tanker recovery, 2021 is going to be a very interesting year. And we're super excited to share some of our recent achievements with you today. And thank you again.
Speaker 0
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.