Scorpio Tankers - Q1 2023

Transcript

Operator (participant)

Ladies and gentlemen, good day, and welcome to the Scorpio Tankers Inc. Q1 2023 conference call. I would now like to turn the call over to James Doyle, Head of Corporate Development and IR. Please go ahead, sir.

James Doyle (Head of Corporate Development and Investor Relations)

Thank you for joining us today. Welcome to the Scorpio Tankers Q1 2023 earnings conference call. On the call with me today are Emanuele Lauro, Chief Executive Officer, Robert Bugbee, President, Cameron Mackey, Chief Operating Officer, Brian Lee, Chief Financial Officer, Chris Avella, Chief Accounting Officer, Lars Dencker Nielsen, Commercial Director. Earlier today, we issued our Q1 earnings press release, which is available on our website, scorpiotankers.com. The information discussed on this call is based on information as of today, May second, 2023, and may contain forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statement disclosure in the earnings press release, as well as Scorpio Tankers SEC filings, which are available at scorpiotankers.com and sec.gov.

All participants are advised that the audio of this conference call is being broadcasted live on the Internet and is also being recorded for playback purposes. An archive of the webcast will be made available on the investor relations page of our website for approximately 14 days. We will be giving a short presentation today. The presentation is available at scorpiotankers.com on the investor relations page under reports and presentation. The slides will also be available on the webcast. After the presentation, we will go to Q&A. For those asking questions, please limit the number of questions to 2. If you have an additional question, please rejoin the queue. I'd like to introduce our Chief Executive Officer, Emanuele Lauro.

Emanuele Lauro (CEO)

Thank you, James, and thank you for joining us today. In the Q1, the company generated $286 million in EBITDA and $196 million in adjusted net income. This compares with the Q1 last year when the company generated an adjusted loss of around $50 million. We're starting 2023 with $210 million more in adjusted net income compared to 2022. Today, we have $800 million of pro forma liquidity. We see an order book near record lows, an aging fleet, constructive demand for refined products, refinery dislocations, and a time charter market with duration and high rates which continue to improve. Scorpio Tankers has a young and large fleet with significant operating leverage, and most importantly, minimal CapEx. We do not intend to grow the company, rather we intend to harvest.

The balance sheet has, and we continue to see a reduction in leverage, but we will look to optimize it as well. Our new $750 million-$1 billion term loan and revolving credit facility, while still under discussion, can accelerate the repurchase of more expensive lease financing and can create more balance sheet flexibility. The revolver increases the flexibility and efficiency of managing the 2 critical levers vital to shipping companies, leverage and liquidity. While overall debt reduction continues to be our priority, our strong financial position continues to improve and has allowed us to start to return capital to shareholders. Since July 2022, we have repurchased 7.5 million of our common shares for $350 million.

Today, we announced the renewal of our security purchase program for up to $250 million and an increase of our quarterly dividend from $0.20 per share to $0.25 per share. Finally, it is with mixed feelings that I must announce today that Brian Lee, our Chief Financial Officer, will be stepping down in September of this year. He will be replaced by Chris Avella, who has been with the company since 2010 and currently serves as our Chief Accounting Officer. Brian's leadership and experience has been instrumental in the growth and development of the company over the last 13 years. He's been with us since the beginning and leaves the company in its strongest financial position with a well-trained team poised to maintain high standards. Brian, I will miss you. We will miss you.

We will miss your unparalleled work ethic, your temperament and character too. I'm truly grateful for your contribution to the company and wish you the best on a well-deserved retirement. By the way, if you change your mind now that the Chief Accounting Officer position is open, I'm sure that Chris Avella would hire you in a heartbeat. With that, I'd like to turn the call to James Doyle for a brief presentation.

James Doyle (Head of Corporate Development and Investor Relations)

Thank you, Emmanuel. Slide seven, please. We have seen an elevated rate environment since Q1 of last year, and over the last five quarters, we've generated a window under $1.4 billion in EBITDA, of which $1.1 billion has gone to debt repayment. As Emmanuel mentioned, since July 2022, we've repurchased $350 million of the company's shares. We have 15 vessels on time charter out contract, and the most recent charter was in LR2 for three years at $40,000 per day. The remaining 98 vessels are operating in the spot market. Slide eight, please. We continue to repurchase vessels under expensive lease financing and have started to refinance some of these vessels with new bank credit facilities that have lower interest margin. To the right, you can see the list of vessels that have been repurchased and are upcoming.

Far, we have given notice to repurchase 42 vessels. When we say repurchased, it's really paying off the outstanding debt on the vessel. As of today, we have repurchased or repaid the outstanding debt on 28 vessels, and in Q2, we will repurchase 13 vessels on lease financing for $325 million. The margin on the lease financing ranges from LIBOR + 350-525 basis points, and the new loan facilities have a margin of SOFR + 190-197 basis points. Given the credit adjustment spread between SOFR and LIBOR, the LIBOR equivalent margin of our new financing is around 170 basis points. The crew and you have done a great job. Slide 9, please.

Timing differences between repurchasing vessels on lease financing and drawing down on new facilities mean that at times it appears debt is increasing. On the left, you can see the movements between the new facilities being drawn and debt being repaid. In the H1 of this year, including drawdowns on new facilities, we expect to reduce our debt by $146.2 million. If you look at the graph on the right compared to December 2021, by June 30th this year, the company will have reduced its debt by $1.4 billion and repaid $1.1 billion in lease financing. Until recently, the debt repayments have been done primarily with free cash flow.

With the new $750 million-$1 billion term and revolving loan facility, we can accelerate these lease purchases and optimize the balance sheet. The revolving component of the new loan will allow us to manage leverage and liquidity. After completed, the changes will translate to lower break-even rates for the fleet as amortization and interest costs decline. Slide 10, please. Since December 31, 2021, net debt has decreased $1.5 billion. Today, on a pro forma basis, we have over $800 million in pro forma liquidity, and with no newbuildings on order, we have minimal CapEx. We are very well-positioned. Slide 11, please. In Q2 so far, including time charters, the fleet is averaging almost $40,000 per day.

On an annual basis, this would translate to almost $20 per share in free cash flow or over a 38% free cash flow yield. These are exciting times. Slide 13, please. Despite significant refinery maintenance in the H1 of this year, a reduction in European imports after building inventory ahead of sanctions and a warm winter, rates have remained strong. European product imports have increased to normalized levels. Refinery maintenance will decline considerably over the next 2 months, and global inventories remain well below 5-year averages. All of this leads to strong expectations for the remainder of the year, especially the back half and next. Slide 14, please. Demand has been robust. While we do expect slightly lower diesel demand due to less trucking activity, the increase in gasoline, jet fuel and naphtha demand more than offset the lower distillate demand.

We expect refined product demand to average 1.5 million-2 million barrels per day more from Q2 to Q4 than last year and go up throughout the remainder of the year. Seaborne volumes remain extremely high and are averaging 1 million-1.5 million barrels per day more than 2019 levels. Given low global inventories, increased consumption will continue to be met through imports, with product tankers reallocating barrels around the world. Slide 15, please. While demand is above pre-COVID levels, refining capacity is lower and more dislocated. Regional capacity changes are structural and will continue to drive ton-miles and flows for the coming years. After a brief surge in product exports at the end of last year, Chinese exports have now returned to normalized levels.

While OPEC cuts will restrict crude exports, they do not restrict products, the Middle East has been the incremental barrel of refined product. They're one of the few areas with refining capacity coming online for the export market, and most of these exports are going long haul to Europe and Asia. As ton-mile demand increases, vessel capacity is reduced and supply tightens. Slide 16, please. At the start of sanctions, Russian product exports declined, but over the last 2 months have been above pre-sanction levels. Prior to sanctions, most of the Russian exports were going to Europe, and now they are going longer haul to the Middle East, Africa, Asia and Latin America. Almost every replacement route, aside from Turkey, is longer than the previous route, and these new flows will drive a significant increase in ton-mile.

On the other side, Europe has to replace the lost Russian imports, these will be from farther away. The gray fleet are vessels that are servicing Russia has increased significantly to 322 vessels today, of which 254 are Handymax and MR vessels. Once these vessels load at Russian ports, they are unable to service the U.S. or Europe. The impact of vessels servicing Russia is expected to have a significant impact on the capabilities of the global fleet. While unclear if Russia will be able to maintain current levels, it's very clear these volumes are needed given the low inventories around the world. Slide 17.

I know there's been some more newbuilding orders over the last 2 months and probably more than in this graph, but the overall order book as a percentage of the fleet still remains near historical lows. In December, clean tanker rates reached record levels while the order book was at an all-time low. We do expect additional orders given the strong rate environment and aging fleet. However, there are still long lead times for the delivery of newbuilding vessels. Shipyards are busy with orders from other sectors, and vessels ordered today will not deliver until 2026. Newbuildings are expensive compared to historical levels, and concerns about different propulsion systems to meet environmental regulation and the cost of these systems act as a constraint to ordering. Slide 18, please.

When thinking about newbuilding orders and fleet growth, the age profile of the fleet must be considered. On the lower left, you can see that from 2023 through 2026, 680 MR and LR product tankers will turn 15 years old. By 2026, there will be 815 product tankers 20 years and older, and on a percentage basis, that means 50% of the Handymax fleet, 23% of the MRs, 29% of the LR1s, and 12% of the LR2s will be older than 20 years by 2026. While we always prefer to see low ordering activity, the number of vessels turning 15 and those that will be 20 and older is staggering and should be put into context. Slide 14, please.

While the order book is at a record low, the spot market continues to remain at very strong levels. One and three-year time charter rates are at high levels and evidence that our customers' outlook is one of increasing exports and ton-miles against a constrained supply curve. What's different today is that typically as rates improve, the order book builds and oversupply more than often leads to a decline in rate. We have only seen modest order book growth. Using minimal scrapping assumptions, the fleet will grow less than 1% over the next three years, and using higher scrapping assumptions and fleet age due to upcoming environmental regulation, the fleet is likely to shrink over the next three years.

Seaborne exports and ton-mile demand are expected to increase 4.4% and 11.5% this year and 4% and 7.1% next year, vastly outpacing supply. The confluence of factors in today's market are constructive individually, historically low inventories, increasing demand, exports and ton-miles, structural dislocations in the refinery system, rerouting of global product flows, and limited fleet growth, but collectively they are unprecedented. At last, but certainly not least, Brian, it has been a pleasure to work for you over the last 10 years. Thank you for being a great mentor, leader, and friend to so many of us. You have always been the last person in the office, the first to give credit and the last to take it. Your hard work, humble attitude, and great sense of humor will be missed.

I wish you the best in retirement. With that, I'd like to turn it over to Q&A.

Operator (participant)

Thank you. We will now begin the Q&A session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question is on the line of Jonathan Chappell with Evercore. Please go ahead.

Jonathan Chappell (Senior Managing Director)

Thank you. Good morning. Brian, echo the comments. It's been a real pleasure, and you'll be missed. Maybe Lars, if we can pull you in here. James had some really great slides kind of explaining what's happened since the start of the year. Certainly some of the recent momentum, especially in the MR segment, has been somewhat seasonal, but maybe a little bit more extreme than anticipated a couple of months ago. Is it strictly a function of refinery maintenance, and that's what gives you a more optimistic view on the back half of the year? Or is there something else going on, either seasonally or counter seasonally in the MR market recently that's caused some weakness?

Lars Dencker Nielsen (Commercial Director)

Yeah. Hi, Jon. You know, I think putting things in context, I think rates for the current quarter has actually held up quite nicely. The market is certainly a lot more volatile than we've seen when markets were poor, and we had a flatlining market. I think that volatility really defines that tightness. We are operating from a higher base in terms of earnings. A lot of the things that we're seeing right now has been an MR market, particularly in the Atlantic basin, which we saw a little bit of a drop or a substantial drop from mid-April. You know, apart from the mid-April back drop in the Atlantic basin, I think it has performed quite well in the Q2.

I would actually argue that rates in the Atlantic basins have bottomed out. I think even for this morning that the market for the TC2 has, you know, increased by 20 points in one go coming out of the box. You know, as we start emerging out of this tremendous turnaround that James was talking about, I think we are coming into a season in a very good place. I'm personally very constructive the rate environment for the H2 of the year and also balance of the Q2. I think that the adage of the stronger for longer that people have been bandying about certainly is valid from where I sit. Generally speaking, you know, as per James was talking about, you know, the stocks are low.

Refining margins, complex refining margins are still positive. You got a new capacity that's coming on online. I think one of the key components here in terms of where the market is, the connectivity in the regional markets is defining and a fundamental role that's underpinning by this tighter supply that we of ton miles that we've been seeing. Generally speaking, you know, you're seeing a lot of imports coming further afield. The Russian sanctions that, you know, everybody knows about, they will continue to influence the supply chains. I think a lot that we've seen, just to answer your question, we've seen is the substantial turnaround in all three regions has been playing a big role. You know, I think the...

In April, if I'm looking at my numbers, you had global refining maintenance topping at 9.4 million barrels. I think by June, July, you know, 6 million of those refining capacity will return to the market. You add on the additional new capacity from Al Zour, which is gonna have its third train up and running in the Q3. Jazan is at 50% at the moment. That's gonna increase as well. You know, there is plenty of additional product that's there to be moved, I think this is just, to be honest, a market correction in terms of the refining turnaround. That particular has been strong in April.

Jonathan Chappell (Senior Managing Director)

Okay. Super helpful. Thank you, Lars. For my second question, I don't know if it's for James or Robert or maybe come back to you, Lars. It seems like the pace of your 1 and 3-year time charter contract has slowed a little bit from the back half of last year. If I look at slide 19 on the upper right-hand side, the rate for the MR 1 year and the 3 year for and the 1 year for LR2s has been pretty stable. Has that just been more of a strategic decision to hold on to more spot exposure as we go into the back half of the year that Lars just laid out? Or maybe those rates holding in there, but the liquidity's dried up a little bit?

Robert Bugbee (President)

Well, I think it's partly that. I think that if I just take the first question, I think that the, you know, all weakness is relative to understand the point that the market may be slightly weaker than its all-time record highs, but we would hardly describe a market that's averaging $40,000 a day in the Q2 bookings as weak. I mean, that's huge. $20, you know, annualized run rate on a $50 odd dollar stock is thank you very much. That's important because we're seeing a very steep discount in many points during this Q1 of, you know, the actual three-year charter rate to the actual spot market. What Lars, as you correctly pointed out, John, is indicating for the balance of this year.

At the same time, our balance sheet is getting stronger and stronger and stronger. Therefore, the requirement or the need or the wish to, you know, seek the security of a three-year charter is less when we're getting, you know, such confirmation in the actual spot market and doing it. I mean, we simply have an incredible situation where every single report that we're reading indicates that we're gonna continue to see growth in product tanker demand, product demand, headline product demand around the world for the balance of the year, regardless if we're reading someone who's very pessimistic about the world economy, thinking it's in recession or going into recession. We know that the actual fleet itself is fixed, and we know that those ton-mile multipliers related to refineries are going to continue.

I think a lot of it is we're being really choosy. You know, we've hit the record rate on our three-year charters on our LR2s each point over these last three months. There's no, you know, there's less of a need because I guess we're more optimistic about what's happening. Think of all the doubt we've been through in this Q1, what you've been talking about, and we end up in the Q2 right now. That is really a terrific basis for what we could see going forward.

Jonathan Chappell (Senior Managing Director)

Mm-hmm. Yep. That all makes sense.

Robert Bugbee (President)

we have, you know,

Jonathan Chappell (Senior Managing Director)

Thank you, Robert.

Robert Bugbee (President)

We have $800 million of pro forma cash, and we're just about to do an incredible refinancing. That balance to create time charter security is really just going now.

Jonathan Chappell (Senior Managing Director)

Mm-hmm. Yep. Thank you, Robert. Thanks, Lars.

Operator (participant)

Thank you. A reminder to all participants, if you have a question, please press star then one. Our next question is from the line of Omar Nokta with Jefferies. Please go ahead.

Omar Nokta (Managing Director)

Thank you. Hey, guys. Good morning. Also, Brian, congrats on the retirement. We'll miss working with you. You're leaving obviously the company in great shape. You've got pro forma $800 million of cash here. Wanted to just sort of ask about kind of priorities, and I think, Emanuele, you sort of outlined this early on. You've got the $1.4 billion of net debt. Can you maybe rank your priorities in terms of the use of cash for the next few quarters? If you guys have set yet a target of what you'd like that net debt number to get to?

Robert Bugbee (President)

We haven't set the target for the net debt, but, you know, we have said that we don't intend to go to zero. We're also creating a debt facility on top of other commercial lending debt facilities, which would, you know, probably, if you added those up, would give you some kind of base position. You know, then you're going to have normal amortization probably from that point. There's no target yet set. We're gonna continue really with what we've done for, you know, the last quarters, where we're going to take down our total debt and we are going to prioritize buying back those sale leaseback too. When the new facility is closed, that's going to really accelerate that basis.

We're able to do all those things, and we still have ample capacity to take advantage and create value for our shareholders through buying back stock. If the opportunity at what we see as very value-creating levels remains. We've that's why we've increased the gone back and increased the share buyback. We've shown the market that we're not increasing share backs for show. We're increasing the share backs, buybacks so that they can be used.

Omar Nokta (Managing Director)

Yep. Thanks, Robert. Yeah, you bumped the dividend, then you've recharged the buyback. Clear indication there. Maybe just second question would be, you know, asset values continue to move, push higher here. Does that change at all your view on, you know, how you've been conducting the business? Does it go from harvesting the assets today versus, say, monetizing down the line? How do you think about that in this context?

Robert Bugbee (President)

I think we're, you know. Especially when you've got very large spreads now. I mean, the spread between our NAV or our calculated NAV and, you know, the stock price has only increased in the last three or four months as the, you know, as the cash you've seen has come in. Look, we're open, and I think it's fair to say that, you know, we are prepared and are indeed in discussions when it comes to taking advantage and, you know, maybe selling a couple, 2, three, four, or whatever, of the older vessels. That would just be a smart thing to do with the when you've got such a wide discrepancy at the moment.

Omar Nokta (Managing Director)

Yeah. Yeah, makes sense. All right. Thanks, Robert. I'll turn it over.

Operator (participant)

Thank you. Our next question is from the line of Samuel Bland with JP Morgan. Please go ahead.

Samuel Bland (Equity Research Analyst)

Yeah, thanks. Thanks for taking the questions. The first one is, I guess we're aware of the sort of more midterm supply and demand picture, but then you've got all these different sort of shorter term effects like refinery maintenance and, you know, inventory levels. Can you just talk, I know you touched on those in the opening comments, but where roughly do you think we are on those sort of short term effects? Are we kind of at the peak sort of headwind phase, and from here it turns to tailwind as refineries activity starts increasing? Where roughly do you think we are in that cycle? Thanks.

Robert Bugbee (President)

Lars, James?

James Doyle (Head of Corporate Development and Investor Relations)

I'll start. Good question, Samuel Bland. Look, I think, you know, for almost 2 years we've seen massive draws in inventory. Right now we look at a market where Russia has been able to export more product than pre-sanction levels, but it's unclear if they'll be able to maintain those level of exports in the long term. There's a lot of assumptions around those volumes being moved into the market. I do think the inventory data, if you look specifically at the U.S. because it comes out weekly, diesel is 12% below the 5-year average. Gasoline is something like 7% below the 5-year average. We're seeing inventories continue to decline despite higher volumes.

I think as we move to the back half of this year, demand is going to increase from a gasoline jet and naphtha perspective, and it's going to be much more than a slight drop in, say, distillate demand from trucking. We're still extremely bullish on the outlook, and we haven't seen anything in our market, whether it's flows or volumes, as shown in the graphs, that suggest things are lower. We do expect a stronger back half for demand this year.

Samuel Bland (Equity Research Analyst)

Okay. Maybe I could ask the second one. It's on the order book number. I think it's 6% in the presentation. I mean, that's come up very slightly. What's your sense of market participants? Are we starting to see a real acceleration in orders or would you say it's still quite subdued at the moment? I suppose, do you have any sort of feeling on where you'd be happy for that 6% number to go to and still think that the supply and demand was quite healthy? Thank you.

Robert Bugbee (President)

Maybe I can try that one. I think that, you know, as the orders come in, they go further away. The easy pickings of, I would say more or less gone. The easy pickings would have been the filling in the end 25, 2, 225 birds in the early 2026 birds. Now each step is even more expensive to go out. I think that, you know, when you're booking forward a market 2.5 years, I think that you don't really begin to even think about things until you're up to a 10% total on order. That itself wouldn't be very much. Now that's just 3% each year. That would just be in historic terms.

Now, we have a situation where if you look at the graphs that James put up, there's severe stress out of that in the industry in terms of overaging to the product fleet. You've got to set that in the context of how many ships are gonna be turning 15 years old, turning older over this next 3, 4, 5-year period. That's huge, way more than the 10%. I think that we can be... I get the headlines. The headlines now look as if there's an acceleration. There is a little bit of acceleration. It's kind of dramatic, and it's, "Oh my god, what's happening?" When you put it in the perspective of the actual ongoing fleet, it's not something that we're concerned about at all.

I think that in general terms, you want to look at tanker fleets or any type of shipping fleet once you cross 10, and then you have to put it in the perspective of what's likely to be removed in the fleet going forward as to whether 10 is acceptable, above 10 is acceptable or not. Up until 10 here, we're, you know, we're all pretty safe.

Lars Dencker Nielsen (Commercial Director)

Robert and Lars here.

Robert Bugbee (President)

Okay.

Lars Dencker Nielsen (Commercial Director)

I mean, I just think I would just like to add, you know, the ships that you're talking about, they're also gonna be struggling to meet the new carbon regulations as they are being introduced in the coming years, right? You know, they will kinda be more inefficient and potentially will also kind of increase the scrapping element to it as we move along the line.

Robert Bugbee (President)

Understood. Okay. Well, I think. Thank you very much. Yeah. I'd just like to highlight for everybody, these are the 2 red herrings we see. The red herring we see is the, "Oh my god, we're seeing these newbuilding orders." The other one is this thing to do with recession, headline demand. You know, just the increase in jet fuel going along around the world, which is a tremendously important thing for the product market, especially new ships or whatever, is, you know... We can't get to a scenario over these next quarters where you don't get continued product tanker demand. That's even without dealing with, you know, trying to refill inventories which is required. Thanks. Enjoy the next question, please.

Operator (participant)

Our next question is from the line of Ken Hoexter from Bank of America. Please go ahead.

Ken Hoexter (Managing Director)

Great. Good morning. Brian, definitely, good luck in the next phase, and thank you for all the help over the years. It's been a great education in learning about the business. Thank you to you and the team, and good luck. Maybe Robert or Manuel, you're talking about the oldest fleet or the aging fleet, overall, kind of very slim new orders, although some are coming on, harvesting the fleet, maybe selling some vessels at the peak here or selling some vessels. Are you then, are we then looking at the peak of the market if we're starting to see those new orders that you're talking about coming in, you're looking at maybe selling some vessels? Like, just how should we step back and think about that?

As the second part to that, do you need to renew your fleet, right? As it starts to age here, do you need to go in and, you know, maybe it's not expansion, but it's just simply renewal of the fleet. Is that something you'd look at, or is it just more monetizing at strong levels?

Robert Bugbee (President)

Well, what we need to do is to provide our shareholders a return. You know, we can get selfish with it. You know, we need to, you know, Jack Welch said, you know, "Show me how a person's paid, and I'll show you how they're managed." Well, insiders are the largest shareholder of Scorpio Tankers. The idea of selling older vessels has nothing to do with whether or not we think the market has peaked, which we don't think the market has peaked. It is all about the fact that, you know, as Lars has pointed out, older vessels are going to become harder to manage over the next, you know, couple of years.

Older vessels, we could simply sell the older vessels, and you could use that capital to, you know, accelerate the debt repayment or accelerate a stock repurchase, depending on if the stock, it continues to be massively discounted to its NAV. You know, there's no requirement for us to have to renew at all. Our fleet can, you know, quite happily with age and go through for many years going forward here.

Ken Hoexter (Managing Director)

Okay. Then maybe, Brian, if I could bring you back in. The OpEx, I just wanna run through. Obviously, you noted it was down because of the fewer vessels. You, you, I guess COVID costs came off. Maybe talk about what's gonna happen with OpEx going forward, given inflation and your thoughts on OpEx into 2Q in H2.

Lars Dencker Nielsen (Commercial Director)

That's exactly right, inflation. There's still some inflationary pressure and delivery costs and things like that of goods being delivered. We think it may tick up a little bit higher from where it is here. Again, if it was less between this quarter, last year. This quarter, this year and last year is because less vessels. But we do disclose the average daily cost, so that's in there. I think that, again, that's gonna move up a little bit over the next few quarters here.

Ken Hoexter (Managing Director)

Can we put parameters on that or?

Lars Dencker Nielsen (Commercial Director)

Tell me how much inflation is going to be, where our equipment's gonna be delivered so you can look at it, I don't know, 2%, 3% for now.

Ken Hoexter (Managing Director)

Okay. All right, great. Thanks for the time and thoughts. Appreciate it, guys.

Lars Dencker Nielsen (Commercial Director)

Thanks, Ken.

Operator (participant)

Thank you. Next question is from the line of Frode Morkedal with Clarksons Securities. Please go ahead.

Frode Morkedal (Senior Equity Analyst)

Thank you. Hi, guys. Nice discussion on the refinery turnarounds and the product inventories. I guess I have a high level question on arbitrage trading. I guess at least historically, it was fascinating to see, let's say 1 barrel of jet fuel could be resold many times after it was produced, and that led to this very high multiplier, maybe 4 or 5 times, compared to oil demand in terms of trade. I'm curious to see or know how prevalent is this phenomenon today. Do you actually see barrels moving from, let's say, Europe to New York and then being resold to other destinations and on and so on? Or is this something that could be forthcoming?

Lars Dencker Nielsen (Commercial Director)

Hi, Frode. It's Lats here. I'm gonna try and give a stab at that. I mean, there is no doubt that the product market in general from a trading perspective, is traded multiple times, and we have seen multiple times and throughout that we have a change of orders or there is a different trading behavior depending on where that particular arbitrage is. I mean, of late, there has been some spreads going on where you've seen a lot more Caribbean cargos that have been destined to New York Harbor because of the pricing structure. That is product that has, you know, initially come from the east of Suez, from India or whatever, and you then see them putting them into storage and then, you know, breaking bulk and moving different places.

We see cargos moving into, you know, the U.S. West Coast and in particular into Mexico on the West Coast there, which previously would've been cargo that had been sourced out of the U.S. Gulf. We have seen throughout the Q1, a lot more cargo suddenly being moved into Mexico and the West Coast out of North China and Southeast Asia in general. In terms of the diversity of cargo base and in terms of how that moves around, we see a very healthy level of disparity around that. Obviously this is one of the things that we in the product tanker market really enjoy, is the ability to triangulate, and that we certainly have been able to see at a large extent.

I've talked about this before, in particular on the LR2s, we have been seeing how that particular unit has moved from a one-dimensional, laden ballast type of vessel into being a true arbitrage mover. You know, we are today moving LR2s into Japan or North Asia, then reloading in North Asia and China down into Australia. We then load again out of Australia and take it back up to North Asia or into the AG or even to West Africa, and then reload out of West Africa, et cetera. This whole kind of way of a fungible market and products is certainly still there. I think it's gonna remain to say.

Because of the kind of very constrained logistical chains that are in place, we will start to see a lot more of cargo's double handling on the back of what we've seen with the Russian sanctions, this obviously will increase ton-miles as well.

Frode Morkedal (Senior Equity Analyst)

Perfect. That's very good. My second question is on the new refineries in the Middle East. Any update since the last time you talked about that? What do you see as incremental effect on the product tank market going forward? Thank you.

Lars Dencker Nielsen (Commercial Director)

I mean, this is only what I have heard, and it's not something that is kind of reported officially, et cetera, but we know that the 2 out of the 3 trains at Al Zour in Kuwait are up and running. I have heard that the third train is gonna become up and running in the Q3, and we will, at the end of the year, start seeing 640,000 barrels per day of product being shipped out of Kuwait, which is substantial.

That incremental barrel obviously is gonna make a marginal or a huge marginal change in the supply of vessels as these vessels that are loading out of Kuwait are all gonna be going long haul for a large part, particularly the distillate will be going west of Suez and the light ends will be going east, which again, is gonna influence the ton-mile in a very positive sense. I've heard that the Jazan refinery is now up and running around 50%, and that also is increasing as we set out into the H2 of the year. You know, there is a lot of additional capacity that is just about to come up and running. They are already open.

We can see already on the volumes that are coming out of both of Kuwait and out of Jazan and the Red Sea, has made a fundamental impact in product tankers, not only on LR2, but also on the MRs. That's certainly something that we are very happy with to see. That will increase again in the H2 of the year.

Frode Morkedal (Senior Equity Analyst)

Perfect. That's good. That's great. Mark, I call out. Thank you.

Operator (participant)

Thank you. Our next question is from the line of Sherif Elmaghrabi with BTIG. Please go ahead.

Sherif Elmaghrabi (VP of Equity Research)

Good morning. Thanks for taking my question. I want to ask, how are you thinking about returning capital going forward? Also, the dividends saw a nice boost, and the share repurchase program got reset. Obviously, the stay on lease backs are a priority, but it's looking like you have a line of sight on that now, and which would free up more cash flows for other activities.

Robert Bugbee (President)

Sure. Well, I think if we just look what we recently did is we bought back a lot of stock in the Q1. I can't remember exactly what it was, but it was, you know, 5%, 6% of the company. You know, we can see that our debt, you know, our debt is projected to be going down and, you know, the cash and liquidity is as high or higher than it was at the beginning of the Q1, and the rate guidance is higher. The stock's moved nowhere. You know, you would expect that that would be, you know, a strong priority of allocation of capital at the moment, combined with a continued strategy of taking debt down.

We thank you for observing the dividend. We said before that, you know, the... We're raising a regular dividend. We're doing it in increments that can be some kind of guide to the future. We're not going to go to a percentage payout positions, but we would always leave it open if required to do extraordinary dividends. All these, you know, the... That really depends on where the value is in the stock price. You know, you have a major dislocation right now between... Now forget the actual NAV, that's one way of measuring it. As James pointed out, at the present run rate, we're nearly making $20, $21 a share in cash flow on a pretty new fleet. You know, that's, and that's on an annualized basis.

You then combine that with Lars' view of the market. If you forgot cash flow, you're basically indicating that the value in the company is even going to be more discounted going forward. That is overwhelmingly high priority at the moment because of that or has been in that Q1 period.

Sherif Elmaghrabi (VP of Equity Research)

Thank you very much.

Operator (participant)

Thank you. Our next question is from the line of Liam Burke with B. Riley FBR. Please go ahead.

Liam Burke (Managing Director)

Thank you. I know time charter activity has sort of flattened out here, but has there been any recognition by your customers that there's a impending shortage as the MRs age for them to start time chartering either on longer durations or higher rates?

Lars Dencker Nielsen (Commercial Director)

I just wanna say that there is Yeah, there's still a decent inquiry for TC business, even with the kind of the, you know, the very brief slowdown that we've seen. I think it's fair to say that end users share the same constructive view of longer-term market rates. We see plenty of questions coming across rates still at elevated levels compared to last. You know, the last time I've seen this type of interest for 3-5 year time charters is probably mid-2000s. There's plenty of interest out there.

Liam Burke (Managing Director)

Okay, great. I mean, you talked about the dividend and buybacks in terms of the balance. Is there an NAV for your fleet that you consider when looking at your buybacks, or is it just stock price?

Robert Bugbee (President)

No, of course, Dave, we look at the NAV, and we look at the cash flow, and we, and then we look at what we can afford to go back to the question of before. I mean, you can see what's happening on this balance sheet. There's going to be. We are not going to take the debt down to zero. You don't go and negotiate, you know, $570 million of bank credit and then negotiate up to $1 billion with the idea that you're gonna pay the whole thing down in, you know, a year. That would be massively inefficient. We're going to have a base level of debt.

That level is going to be very low compared to not even the real loan-to-value, but it's going to be very low to the book value of the company, which is substantially lower than where the loan-to-value is. When that point is reached, obviously, if you've still got a huge amount of cash, which we, you know, we would hope to have too. All of the income coming in then becomes surplus to what's happening. When you're measuring buybacks, the net asset value is only, you know, one guide. We're trying to model for where the company is worth in, you know, the end of the year.

We're also trying to in 2 years, three years, we're also trying to model it in terms of, you know, if we got something wrong, if there's something that we can't account for and let's say values were down, you know, 30% or something. You look at it that way. At the moment, it's not too difficult a calculation either way. Great. Thank you, Robert.

Operator (participant)

Thank you. Our next question is from Christopher Robertson with Deutsche Bank. Please go ahead.

Christopher Robertson (Equity Research Analyst)

Hey, guys. Thanks for taking my question. Brian, good luck with retirement. Best wishes towards you into the future. I just wanted to ask here around the scrubber fuel spreads come down a bit over the last few months. Can you comment about what's been driving that? Do you think this is a structural change or is this a seasonal effect?

James Doyle (Head of Corporate Development and Investor Relations)

I'll take that one. Hey, Chris. I, I don't think it's structural. I think if you look at the demand for high sulfur fuel, it's predominantly for vessels with scrubbers and for power generation in the Middle East. I think the pressure is coming from distillate and, you know, you've seen distillate cracks come down. You've seen diesel prices come down, and it's just a reversal of kind of what we've seen for the last 2 years. You've had a very, very strong and tight distillate market. You know, people have been worried about shortages. It's probably an overreaction to that, but for the foreseeable future we're still constructive on that spread. Does it hit the high three hundreds as it has in the past? Maybe not.

you know, 100 to 200, 250, I think is a reasonable range.

Christopher Robertson (Equity Research Analyst)

Okay. Yeah, thanks for that. Just following up on a few questions from earlier around kind of the newbuilding orders. This really relates to shipyard capacity. As you look at the aging fleet, not only on the product side, but also the crude side and in the dry bulk market as well, what are your thoughts on our capacity to be able to handle kind of these fleet renewal efforts that seem to need to be done, and shipyard capacity? Can that be ramped up over the coming years to accommodate all these things, or do you think there'll be a crunch which further kind of limits fleet growth?

Robert Bugbee (President)

Dan?

James Doyle (Head of Corporate Development and Investor Relations)

Well, you know, I was actually looking at shipyard capacity, and if you compare it to historical levels, it's certainly down. I wasn't looking at other sectors. I was really looking at products. You know, if you look at the MR fleet that's on the water today, I think something like 800, or since delivered actually. Out of 2,200 ships, I think 800 are from shipyards that are no longer active. There's certainly capacity, but I think the best answer to your question is if you wanted to order a lot of ships today, they wouldn't come till 2022, right? That's what you're seeing with the last couple orders and 2025 is full. I do think there's gonna be a constraint on the capacity side.

Even if you were to order, you know, hundreds of ships, given the age distribution of the fleet, there's going to be more ships turning 15 to 20 years old than there will be delivered over the next several years.

Christopher Robertson (Equity Research Analyst)

All right. Yeah. Got it. All right. Thanks for the time. Appreciate it.

James Doyle (Head of Corporate Development and Investor Relations)

Thanks, Chris.

Operator (participant)

Thank you. This concludes our Q&A session. I would like to turn the conference back over to Emanuele Lauro for any closing remarks.

Robert Bugbee (President)

We don't have any closing remarks other than thanking everybody for their time today, so we'll speak to you soon. Thanks a lot. The call may be concluded.

Operator (participant)

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.