Scorpio Tankers - Earnings Call - Q1 2025

Transcript

Operator (participant)

Hello, and welcome to the Scorpio Tankers Q1 2025 conference call. I would now like to turn the call over to James Doyle, Head of Corporate Development and Investor Relations. Please go ahead, sir.

James Doyle (Head of Corporate Development and Investor Relation)

Thank you for joining us today. Welcome to the Scorpio Tankers Q1 2025 earnings conference call. On the call with me today are Emanuele Lauro, Chief Executive Officer; Robert Bugbee, President; Cameron Mackey, Chief Operating Officer; Chris Avella, Chief Financial Officer; Lars Dencker Nielsen, Chief Commercial Officer. 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 1st, 2025, 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.

Call participants are advised that the audio of this conference call is being broadcast 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 Presentations. 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 two. If you have an additional question, please rejoin the queue. Now, I'd like to introduce our Chief Executive Officer, Emanuele Lauro.

Emanuele Lauro (CEO)

Thank you, James, and good morning and good afternoon to all. Thank you for joining us today. We are pleased to report another quarter of strong financial results. In the Q1, the company generated $123 million in adjusted EBITDA and $49 million in adjusted net income. More so now than ever, we find ourselves reporting results within an environment marked by both strong product earnings and persistent global uncertainty. On one hand, structural changes, such as refinery closures, are increasing demand for seaborn transportation of refined products. On the other, policy shifts, tariffs, and geopolitical developments continue to cloud visibility. In markets like these, we do not get the luxury of clarity, and we operate with ambiguity and must prepare accordingly. That is exactly what we have done. The company is financially, operationally, and commercially stronger than it was last quarter.

We have materially strengthened our balance sheet, reducing debt by $2.2 billion since 2022, expanding our revolving credit capacity, locking in low-cost capital, and lowering our daily cash breakevens to $12,500 per day. Our liquidity now stands at close to $1.4 billion, comprising nearly $400 million in cash, $838 million in undrawn revolving capacity, and our investment in DHT. Operationally, we completed the special surveys or dry docking of 10 vessels this quarter and 63 vessels over the last six quarters. These upgrades will enhance and have enhanced vessel efficiencies, eliminating the need for repositioning voyages solely for dry docking purposes that have historically impacted earnings. Commercially, we added one new vessel on time charter and had three LRT charters extended for one additional year.

Recently, we've taken a more conservative approach to capital allocation, not because of our view on the product tanker market, which remains constructive, but due to the broader global uncertainty that continues to persist. Our outlook for both crude and oil refined products remains positive. Product tanker rates have begun the Q2 of 2025 at higher levels than those seen in the Q1. With our balance sheets fortified, our fleet upgraded, and market fundamentals still in our favor, we are well equipped to navigate uncertainty and continue creating long-term value for our shareholders. My opening remarks are concluded, and I would like to turn the call to James Doyle, please. James.

James Doyle (Head of Corporate Development and Investor Relation)

Thanks, Emmanuele . Chris, would you like to proceed?

Chris Avella (CFO)

Sure. Thanks, James. Thank you, Emanuele. Good morning or good afternoon, everyone. As Emanuele emphasized, we are surrounded by uncertainty. This is why our focus has been on what we can control rather than what is outside of our control. In this regard, our strategic priority has been and continues to be the strengthening of our balance sheet. Slide five, please. This quarter, we generated $123.7 million in adjusted EBITDA and $49 million or $1.03 per diluted share in adjusted net income. We've secured additional time charter coverage with the one-year extensions on the charters for three LRT tankers at $31,000 per day, along with a new two-year time charter on one of our Handymax tankers at $24,000 per day. We recently paid $50 million into our $225 million revolving credit facility.

This amount covers all of the remaining quarterly principal amortization payments that were scheduled up until the loan's maturity in January of 2028. Subject to the same amortization profile, these amounts can be re-borrowed in the future under this revolving credit facility. This repayment follows our $200 million Nordic bond issuance in January, where a portion of the proceeds were used to redeem our then-existing senior unsecured notes, which were due to mature in June of 2025 for $70.6 million. Thus far this year, we increased our investment in DHT by purchasing an additional 4.3 million shares at an average price of $10.67 per share. This aggregate increase in ownership demonstrates our constructive view on the crude tanker market. We were also opportunistic, having divested 700,000 shares at $11.85 per share.

We highlight that this investment has the dual benefit of having meaningful exposure to the VLCC market while also having the liquidity to move in and out of the position as opportunities arise. Slide 6, please. The chart on the left shows our liquidity profile. As you can see, we have access to over $1.2 billion in liquidity as of today. This is approximately $1.4 billion if you include our investment in DHT. Our liquidity consists of cash of $397 million, along with $838 million of drawdown availability under three revolving credit facilities. This level of revolving debt was made partially possible by the February execution of our new $500 million revolving credit facility, which is secured by 26 vessels.

While it is currently undrawn, this facility bears a low cost of debt with a margin of 185 basis points when drawn and a seven-year tenor with no amortization in the first two years. This facility has enabled us to lock in low-cost secured financing through February of 2032, a date that is well past the 2028 maturities of the remainder of our secured bank debt. The chart on the right shows the progression of our net debt since December 31, 2021, which has declined almost $2.4 billion to a net debt balance of $535 million as of the date of this press release. In uncertain times such as these, we believe that it is important to maintain a diverse capital structure with multiple sources of funding and maximum flexibility. Slide 7, please.

The chart on the left breaks down our outstanding debt by type and illustrates our ongoing shift away from high-cost, inflexible lease financing towards lower-cost, more flexible bank lending. Starting at the bottom, we have $72 million of legacy lease financing obligations outstanding on three vessels that are financed with Ocean Yield. These leases are expensive, and under the terms, we will soon have a window to declare purchase options and repurchase two of these vessels within this year and the third within February of 2026. In the middle is our secured bank debt, with a lending group dominated by experienced European shipping lenders whom we have strong relationships with. All of this debt matures in 2028 and bears interest at margins below 200 basis points. These facilities can be repaid at any time without penalty, and we currently have significant headroom under all of the financial covenants.

Further to this, about $300 million of our secured borrowings is drawn revolving debt, an important tool that we can use if we want to repay the debt yet maintain access to the liquidity in the future. At the top is our recently issued $200 million five-year senior unsecured notes, which were issued in the Nordic bond market at a 7.5% coupon rate. These bonds were issued in January of this year, immediately prior to the tariff-driven turmoil that has consumed financial markets recently and significantly altered the landscape for new bond issuances. This bond issuance was a testament to our years-long efforts to strengthen our balance sheet and improve our credit profile. The bond issuance was well oversubscribed and set the record for the lowest credit spread for any shipping company issuing US dollar-denominated bonds in the Nordic bond market.

The chart on the right shows our actual outstanding debt from the end of 2021 through the end of April 2025, along with a bridge showing the changes in our estimated debt balance through the end of June 2025. The uptick in our gross debt over the first four months of this year resulted from the $200 million Nordic bond issuance, offset by the repayment of our then-existing senior unsecured notes, which were due to mature in June for $70.6 million, along with the recent $50 million payment into our $225 million revolving credit facility. Slide eight, please. Our debt repayment obligations from now until the end of the Q1 of 2026 are highly manageable at approximately $10 million per quarter. Additionally, since the beginning of last year, the company has recently completed the periodic special surveys on almost 60% of the fleet.

Our forward dry dock schedule is light as we come to the end of the year, with far fewer off-hire days as compared to last year. Additionally, the work performed during these dry docks is expected to enhance the operating efficiency of each vessel going forward. Slide nine, please. The strength of our balance sheet positions us to continue to generate excess cash flow even in challenging rate environments given our low cash breakeven levels. Further to this, our operating leverage positions us to benefit from spikes in spot market rates that have been commonplace over the past three years. To illustrate our cash generation potential, at $20,000 per day, the company can generate up to $271 million in cash flow per year. At $30,000 per day, the company can generate up to $632 million in cash flow per year.

At $40,000 per day, the company can generate up to $994 million in cash flow per year. This concludes our financial overview. I would now like to turn the call over to James, who will give an update on the product tanker market.

James Doyle (Head of Corporate Development and Investor Relation)

Thank you, Chris. Slide 11, please. As Emanuele highlighted, product tanker rates started the Q2 at higher levels than those seen in the first. Refinery maintenance occurred earlier this year, with peak maintenance in February and March as opposed to April and May. As capacity came back online in April, seaborne volumes increased and rates showed a steady improvement. Near-term catalysts, including higher naphtha volumes, increased OPEC output, and a swing of LRTs moving into the crude trade point to a strong market. However, policy shifts, tariffs, sanctions, and geopolitical cross-currents have made the macro backdrop less predictable. Until the fog lifts, our visibility into the back half of this year is limited, but fundamentals still look healthy. Demand for refined products remains robust, inventories sit below five-year averages, and refining margins have improved. Slide 12, please.

Seaborne refined product exports have been strong, averaging 20.8 million barrels per day in April, which is 1.2 million barrels a day above their April five-year average. Ton-mile demand has increased 13%, excluding Russia, and 19%, including Russia, compared to 2019 levels. Seaborne exports continue to increase and travel longer distances. Slide 13, please. We have seen limited changes to Red Sea and Russian refined product flows. Most product tankers still transit around the Cape of Good Hope, although Cape volumes have tapered since October. Russian barrels continue to move, but on longer voyages. Should a Russia-Ukraine peace deal be reached, many tankers servicing Russian trades would struggle to re-enter Western markets because of their age, operating history, and insurance or maintenance shortcomings. The limitation would favor conventional non-sanctioned vessels if Europe resumed Russian imports. Slide 14, please.

The USTR proposed port fees generated plenty of headlines, but the impact looks modest for product tankers. The first section, Annex 1, targets vessels that are owned or operated by a Chinese entity. The second section, Annex 2, targets vessels that are built in China. However, Annex 2 has several exemptions which reduce the impact on product tankers. Vessels under 55,000 deadweight tons, including MR tankers and below, are exempt. Ships arriving in ballast are also excluded. Roughly 90% of U.S. refined product imports and exports move on MR product tankers, and the United States is a major exporter. Thus, the impact on product tankers is expected to be minimal. Slide 15, please. Over the medium term, refinery rationalization is arguably one of, if not the most important drivers of refined product trade flows. We continue to see closures in global refining capacity.

Over the last five years, global net refining capacity growth has been 1 million barrels. Last week, Valero announced that they will close their 150,000-barrel per day Benicia refinery in California in 2026. Refineries face steep capital outlays to stay compliant with tightening regulations, and for older refineries, the economics may no longer work. We anticipate further closures, potentially at an accelerated pace if the economy softens. As we saw in Australia, refinery closures do not eliminate demand; they simply reroute it, and often across oceans and over longer distances. Slide 16, please. We thought it would be useful to look at refined product demand under different global economic slowdowns. After Iraq's invasion of Kuwait, the Asian currency crisis, and September 11/dot-com bubble, total refined product demand did not fall. It merely grew at a slower rate.

During the financial crisis, consumption dropped 0.7% in 2008 and 1.7% in 2009, before recovering in 2010. Essentially, outside of COVID, there was a relatively quick recovery in demand. What happened to seaborn exports and ton miles during these periods? Slide 17, please. Similarly, outside of COVID, in mild recessionary environments, seaborn refined product exports and ton miles experienced moderate declines followed by quick recoveries in demand. Interestingly, seaborn exports and ton mile demand increased through the global financial crisis. From 2007 to 2010, ton mile demand increased close to 19%. The challenge is typically the supply side. The best evidence of this is slide 18, please. From 2003 to 2010, the product tanker fleet grew 114%. In January 2007, the order book reached 63% of the existing fleet. Despite the 19% increase in ton miles during the global financial crisis, fleet growth outpaced demand.

Today, the order book is 20% of the existing fleet, and a good share of those new builds are LRTs that may end up in the crude trade. Layer on an aging fleet, and the supply picture looks far more modest. Slide 19, please. Half the product tanker order book is LRT vessels. As highlighted in the past, owners have opted to build coated LRT vessels over non-coated Aframax vessels to have the optionality to trade in clean products. As a result, 46% of the combined Aframax LRT fleet will be LRTs by 2028. The challenge with this is that four times as much crude oil is carried on Aframax LRT vessels compared to clean products. This is why 40%-50% of the LRT fleet has historically traded crude oil.

We expect this ratio to continue because it would be difficult for 46% of the Aframax LRT fleet to carry 20% of the overall volume. Slide 20, please. As one would imagine, older vessels carry less cargo and travel shorter distances. As the graph on the left highlights, a 20-year-old product tanker's ton mile demand declines 45% compared to a 12-year-old vessel. If it were not for older vessels servicing the Russian trade, the decline would be over 60%. Thus, even if the vessel is not scrapped, it's carrying significantly less cargo, reducing effective fleet growth. The significant fleet growth highlighted from 2003 to 2010 is turning 20 years old every year through 2030. In the right-hand graph, you can see the age profile. Including the order book, 17.5% of the fleet today is older than 20 years. By 2028, that number increases to 30%. Slide 21.

Given the age of the fleet and likelihood of LRT vessels trading crude oil, fleet growth could be lower than expected. In scenario two, we assume 40% of LRT new builds carry crude and scrapping remains minimal. If so, the product tanker fleet would increase by roughly 3% per year. In scenario three, using the same LRT assumptions, but accounting for capacity declines for vessels 21 to 27 years old, effective fleet growth drops to about 1% per year. By contrast, ton mile demand is compounded at a 3.6% annual growth rate since 2000. Strong demand, modest supply growth, and structural shifts in refining capacity continue to add ton miles. The balance of probability still points to a constructive outlook, but we remain mindful of the broader macro uncertainty and feel well-positioned with a young fleet and a strong balance sheet.

With that, we'd like to open it up for Q&A.

Operator (participant)

At this time, I would like to remind everyone in order to ask a question, press star and the number one on your telephone keypad. We ask that you limit your questions to two. We will pause for just a moment to compile the Q&A roster. The first question comes from Omar Nokta from Jefferies. Your line is open.

Omar Nokta (Managing Director)

Thank you. Hey, guys. Good morning. You know, today's report is just about as business as usual as you can get, especially with this backdrop of what's going on in the broader markets. You know, you entered into some nice charters. Just wanted to ask maybe, you know, in terms of ship values, clearly there's been a significant disconnect between where the equities are and tanker values. Obviously, not just for Scorpio, but across the board. It seems like something has to give at some point. You know, maybe they converge or one meets the other. You know, so far we're seeing tanker rates, as evidenced by your guidance so far, you know, they're rising. How are you thinking about where ship values are? Are you seeing them holding up? Is there transactions going on that can give you a barometer of what's happening?

What are you seeing from your vantage point there?

Emanuele Lauro (CEO)

I'll start, Omar, Emanuele here. I think that the correction that we've seen in ship values, it's closely correlated to the global uncertainty that has characterized the world in the last six months. The big correction has come and has been more pronounced as the global uncertainty increased. The way we see it is difficult to read at this stage as everything else, as we discussed in the opening remarks and in the presentations. The fundamentals remain positive. Like you just said, we think that something's got to give. We think that the values are going to be readjusted to match the rates as soon as the world gets some calm.

Omar Nokta (Managing Director)

Thank you. Thanks, Emanuele. Maybe just my second question. You know, clearly in a different world today with tariffs and ongoing trade war and whatnot, can you talk a little bit about what you've seen, if there's been any changes over the past few weeks or months or in chartering habits, especially as we think about what happened roughly about a month ago at the beginning of April when it felt like things had gotten to a standstill? Did you see any of that make its way into products and any shifts since then? Thank you.

Emanuele Lauro (CEO)

Lars, do you want to take this?

Lars Dencker Nielsen (CCO)

Yeah, yeah, I'm here. I think it's really interesting to see that when the tariffs really came into play, in particular on the gas side, what that really meant for naphtha. You know, there is, and there currently still is a rally going on with cracks and the time spreads. You know, they're hitting all-time highs for this year. We're seeing, and have also talked about in the past, about this perpetual west to east naphtha arc that's been moving. We can really start seeing that there is a lot of demand that is kind of coming in as naphtha probably is going to be favored over propane in terms of pricing. It certainly is the case right now that, you know, for the crackers and so on, that they are probably switching over to naphtha, which of course bodes well for, in particular, for the LRTs.

We're seeing a lot of naphtha being pointed towards China or Asia in general. We don't see that kind of changing in the short term. This is irrespective of the fact that ethane has been exempted from the tariffs. It could happen that propane as well is going to be played into that. As things stand right now, it turns to see that naphtha cracks have been remaining strong in the Asian markets.

Omar Nokta (Managing Director)

Great. Thank you. Thanks, Lars and Emanuele. I'll turn it over.

Emanuele Lauro (CEO)

Thank you.

Operator (participant)

The next question comes from Chris Robertson from Deutsche Bank. Your line is open.

Good morning, everybody. Thank you for taking my questions. Just wanted to focus a bit on the vessel OpEx came down pretty significantly, quarter-over-quarter, kind of normalizing back to levels seen in 2024. Can you just talk about kind of the change from 4Q to 1Q and what you think run rate OpEx will be going forward here?

Emanuele Lauro (CEO)

I'll take that one. Hi, Chris. Chris, obviously, we're happy to see the number come down. As I've said on previous calls, you know, one quarter doesn't necessarily set a trend. Of course, you know, we're happy with the results. If I were looking for a run rate, I would really use like a trailing 12-month average. To help with that, you know, for the LRTs, I'd say that's like slightly below or around $9,000 per day. For the MRs and the Handymaxes, I would say slightly below $8,000 per day on a normalized basis.

Okay, great. That's helpful. Going back to Omar's question a bit on naphtha versus some of the ethane-based crackers, do you have a sense of how many of the newer ethane-based crackers in China have some feedstock flexibility versus those that don't and kind of what the bigger market opportunity might be if the ARB is closed or it's better favorable economics for naphtha?

I can start, and then maybe James can follow on. I think that China has about 300,000 barrels per day propane to naphtha switching capability. I think overall in the complex, you have to look at the different markets that are kind of adjacent to them as well, where they can compensate for lower PDH run rates, which provides them higher naphtha imports. The fact of the matter is that, you know, where we kind of going into driving season would have seen a lot more naphtha, heavy naphthas moving into the gasoline pool in the west, we're seeing a greater amount of naphtha moving from the Med kind of naphtha loading ports and going around the Cape to destinations in Asia.

Okay, great. Thank you very much. I'll turn it over.

Operator (participant)

Again, if you have a question, kindly press star followed by the number one. The next question comes from Liam Burke from B. Riley. Your line is open.

Liam Burke (Managing Director)

Thank you. We've had more crude production, both from OPEC Plus putting out more barrels, plus non-OPEC countries coming online. How is that impacting your side of the market on the refined product side? I want to start with the first part of it, which is kind of pretty obvious, is that, you know, when we've been on these calls before, a lot of the questions have been about the crude clean switching and stuff like that and the risk of the kind of cross-cannibalization from the crude side. That for sure is no longer kind of an issue that we consider to be prevalent. The crude markets have increased substantially. Atlantic-based naphtha maxes are certainly very strong. We have seen over the last week, maybe 10 days, five LRTs going into dirty.

There's also quite clear that, you know, if the crude prices continue to drop, are we going into a kind of back to a contango market? You know, I think it's 400,000 barrels of kind of additional production that came into May. You know, obviously, everybody talks about what OPEC's going to be doing over the next two to three months in terms of unwinding their cuts. This, of course, is going to be a very strong sign for the VLCCs, but that obviously flows through down to the Aframaxes. That substitution for sure will be another positive sign for the LRTs. I think today, if we look at it, if I remember correctly, is that we're now at about 50-50 into the standard LRT versus Aframax fleet, whereas we've had over the last 12 months probably a stronger proponent of ships going in clean.

That has now reversed. I think also it's interesting to note that if you look at the new buildings, which has been the other issue that we've been facing from the vessels loading kind of with virgin tanks, cargoes loading out of Asia, I believe it's only five VLCCs that are going to be delivered this year. You know, we don't have the same issue as we saw the prevalent previous years. There's a lot of Suezmaxes as well that are being delivered this year. I think it's 23. However, you know, with all this additional oil that's very much a Suezmax focus, and particularly the stuff around Kazakhstan, will be very positive for that particular market. Most importantly, for our market, we'll not have this cannibalization substitution effect that we've seen in the previous years.

Omar Nokta (Managing Director)

Great. I would add to this, Liam, that obviously, you know, if you just look at the macro part of things, that more oil, more cheaper oil is, you know, obviously very good for the demand and, you know, puts pressure on alternatives. The second aspect is that we, as Lars is talking about, is the actual ships themselves and how that's related into their spreads. You know, it's only a positive, especially, and the third thing to remember here is that inventories are very low compared, you know, in crude or in products. They're significantly below five-year averages. As Lars said, if you take the trade into contango, then, you know, that would give the option for even extra barrels in demand required to rebuild storage on top of basic demand.

Liam Burke (Managing Director)

Great. Thank you, Robert. On the tariff front or the USTR, does that have any impact on the sale and purchase of Chinese vessels?

Omar Nokta (Managing Director)

I'm not sure. I think the actual USTR seems to be pretty insignificant for the product market.

Liam Burke (Managing Director)

Okay, fine. Thank you, Robert.

Omar Nokta (Managing Director)

No problem.

Frode Morkedal (Senior Equity Analyst)

The next question comes from Frode Morkedal from Clarkson Securities. Your line is open.

Hey, guys. Yeah, I guess you just said the USTR didn't matter that much, but I just wanted to follow up anyway because, yeah, thankfully the MRs are exempt more or less, like, so you can do triangulations without any problems. I guess LRTs and Aframaxes are not exempt. I just wanted to ask if there are any triangulations involving the US Gulf anyway. If so, maybe owners like you with a very high share of Korean vessels could benefit from that or not.

Lars Dencker Nielsen (CCO)

The first part, I'll just take that. Yeah, on the LRTs, the LRT market is insignificant when it comes to the US. You know, if it's Chinese-built, Korean-built, for the most part of the LRTs, that is not an issue. It becomes a greater issue, of course, on the Aframaxes. As you rightfully said, Frode, I mean, on balance, considering the fleet structure that we have in Scorpio, it's not going to present an issue for us.

Frode Morkedal (Senior Equity Analyst)

Okay, perfect. That's it for me. Thank you, guys.

Operator (participant)

That concludes our Q&A session. I will now turn the call over to Emanuele Lauro for closing remarks.

Emanuele Lauro (CEO)

Thank you very much for everybody's time today. I don't have any further remarks. Look forward to speaking with you in the future as the case may be. Thanks a lot for your time. Goodbye.

Operator (participant)

Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.