Q2 2020 Scorpio Tankers Inc Earnings Call
Excuse me, ladies and gentlemen, today's conference is scheduled to begin momentarily until that time. Your life will remain on hold until called began thank you for your patience.
[music].
Cool I would now like to trying to call over to Brian Lee Chief Financial Officer. Please go ahead Sir.
Thank you operator, and thank everyone for joining us today looking to the Scorpio tankers second quarter earnings conference call on the call with me today or minority Chief Executive Officer, Robert Bugbee, President Cameron Mackey, Chief operating officer.
[music].
Commercial director, David Moran, managing director James Doyle supernatural.
Earlier today, we issued our second quarter earnings press release, which is available on our website. The information discussed on this call based on the information.
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620, 20 and may contain forward looking statements involve risk and uncertainties actual results may differ materially from both set forth.
For a discussion of these risks.
You should review the forward looking statement disclosure in earnings press release issued today as well as the Scorpio tankers that you see filings, which are available at Scorpio tankers dotcom NSC she'd like up.
Call participants are advised what the audio at this conference call is being broadcast live on the Internet and is also being recorded for replay by purpose is an archive of the webcast for made available on the Investor Relations page of our website for approximately 14 day.
On the call there will be a short presentation.
Which are available at Scorpio tankers dot com and the Investor Relations page under reports and presentation. If you have any specific financial modeling questions. You can contact me later and discuss off one now.
The world.
Okay.
Thank you, Brian good morning, or afternoon tool and thank you for your time today.
Firstly I'd like to.
[music] mentioning that we continue to stand with our employees [noise].
Especially our seafarers, whose life frame.
Negatively being affected by the pandemic.
Finally, as the business is concerned the second quarter as being a very eventful one for the company.
We have retired debt at the record pace nearly $230 million this quarter at home.
I'd be stage when training.
Close to $300 million, Oh, gosh on the balance sheet and the generated the best buy on 600 million long as should we be down in the last 12 months.
We are aware and respect for what is happening in the world. However.
Do you could the future with confidence.
In the first half of the year, we saw some of the highest rate ever achieved in the period. A this was due to the I could actually come down that way.
That's a persistent enjoyed markets at the same fine.
A significant dropping to the fusion many weeks summer months has been exacerbated by de stocking.
The mean regards.
And storage patterns normalize show.
We address used as much as we could add to.
To the significant work, we need to turn now to tolerate exposure during the first off of the year.
Lars will talk more two days and the opportunities that the market bullet PDP.
At present in during his remarks.
We're now in ER into third quarter, which is our seasonally weak period.
But we've made a good start and we do believe that current spot rates. Its found a support level. So by the time.
Of our next to report good earnings we expect the winter demand in the northern hemisphere, we'd start to beans.
And as other assets back Smartreach, ideally or maybe twice you mean.
I'll give you called read global GDP, we see Mark confidence I mentioned before is justified.
Our capital management message has been consistent and best promise dollar priority has been to de lever.
We're finding shine true chances to opportunistically creates value while doing so.
Such as you can get he sent to retirement of a portion of our outstanding convertible bonds.
We have also refinance some facilities as outlined in the earnings press release.
Raising liquidity inside that extending the funding profile of the business as our capex on wage reduces and normalizes over the next 12 months last 12 months, we just went through an impactful cop experience.
Let's see blocking program, probably the biggest in the industry to get on 70 vaccines, we changed faced special surveys ballast water treatment system installation and scrubbing installation. So the next 12 months would be much less intense from a topic standpoint.
Behind the spent on TGP and short Termism, the big trends start to swing as a powerful pay when do I business, namely the owners of new refineries and roots and be extremely constrained supply picture.
Against the backdrop on a rapidly aging fleet.
We'd be my remarks are compete in my opening remarks, I concluded that I would like to turn the call to Lars.
Hi, Thanks, Michael Good morning, everyone.
During the second quarter oil and refine part of markets experienced significant price volatility and logistical challenges as the result of covert 19.
Preventive measures to reduce the spread on the virus.
Subsequent declining economic activity created the dimensional well in refined products.
These challenges for the global refined products marketplace.
Resulted in surging demand for product tankers to be used and floating storage.
The impetus behind the product tanker floating storage demand was twofold, the flat price in contango, which was the collapsing pump oil prices the push refined products into a steep contango curve, thereby increasing demand emanating from traders who are looking to capitalize on profitable carry trades.
Secondly, the sudden necessity were insufficient land based storage was flexibility left limited options outside of product tankers distort excess inventory.
In addition to floating storage there were numerous examples of product tankers unable to discharge cargo was I have to be rerouted well wait and see onto land based inventories were drawn.
[noise] logistical constraints in demand floating storage tightening supply.
Well I didn't know vessel utilization at a time when ton miles an arbitrage trades were increasing which pushed product tanker spot in time charter rates <unk> unprecedented levels.
We knew floating storage inventories would eventually peak however, it was unclear when and how long me would take to return to normal levels.
This de stocking of floating storage occurred much faster than many anticipated.
Got a chunk of floating storage peaked in may with 105 million barrels and as with last week was down to 45 million barrels of refined products.
In addition products in transit the total amount of refined product being carried it was only 20 million barrels above historical averages.
This was largely due to a rapid recovery in demand and the initial lower refinery utilization rates.
So as vessels re entered the spot market from concluding floating storage contracts and refinery utilization rates remained a little levels the future benefit a rapid de stocking came at the price of lower spot rigs.
However, the launch decreasing floating storage rapid demand recovery and looking forward. The increase we now see and utilization rate is encouraging.
Not to mention the unprecedented level of global monetary and fiscal stimulus that has been announced.
[noise] refiners have now increased utilization rates as demand recovers and we're seeing an increase of exports at more normalized levels.
Indeed, this is evident in the relative strong am our rates currently trade unions Atlantic Basin.
Latin American Mexico increases imports.
On the larger units, we have seen potential for jet and you honesty storage a theme, which is likely to continue that's the marketplace tries to matching involving demand scenario as well as we now recognize an increase in time charter inquiries, which are often used as an indicator of general sentiment and future much.
<unk>.
Finally, the long term fundamentals are extremely strong.
Demand is expected to continue to recover with some estimates showing a 6% increase in seaborne refined product exports next year.
Against record low fleet growth of 2% a less per year over the next three years.
In addition, the fleet supply growth does not account for the aging fleet.
Compared to today, including all Newbuilding vessels on order today.
The percentage of vessels training 15 years old in the next three years well increased from 46% today to 69% what the Handymax fleet.
22% to 40% for the I'm awfully.
23 today present today to 51% for the L., a one fleet and finally, 15% today to 29% what do you elect to fleet.
And with that I'd like to thank you for your time and I'll hand over to Robert Buckley. Thank you.
Hi, good morning, everybody.
Last thank you very much a before I hand over to Brian just want to say a couple of brief things that you know obviously last time, we spoke in April we were right in the.
Real sort of peak of Max fear related to the Cobot 19, and no oil price said, no even gone negative and there was terrible.
Terrible concern is too you know literally would the third quarter would a point, where we would move to de stocking.
And you know would demand just completely diminishing would earnings go to zero and would that be.
Full bought at that time to thought that the second quarter could be pretty good would lead to are such that in the third quarter rights would go negative or do you just get the cash just pouring out of the company and we move now to a point, where no I think probably the most.
That's a pleasing, but the most comforting thing for us at the moment is that.
We've got a really good start to third quarter, it's a actually ironically better than the third quarter in comparison last year.
The company's being cash positive so far through the third quarter.
And that's really enabling us to move from appointed in April on our balance sheet, where.
You know we had to be concerned to you know where things would be.
We hadn't actually realized India. The cash we were running at that point to point now you can see with the balance sheet is really improved in it and its base liquidity. So much. So now that we've started to.
Shift.
The the tempo and instead of just preserving cash we've started recently.
Brian leading into earnings to start to buy back the most expensive debt on the balance sheet. Most of the convertibles. We will continue as you can see and the comments to create a.
Less expensive.
That too and keep liquidity very high in the 80 million wheat.
I intend to raise through financing some of the ships refinancing some of the ships and that of course will allow us even more freedom, whilst keeping strong overall liquidity and being cautious on this recovery in the month to continue to buy down the most expensive debt.
The company and with that.
I'd like to pass over to Brian for Brian to the detail Moldy.
And the improvements in the state of the balance sheet Brian.
Thank you Robert.
James Doyle I will go over the presentation, which is available on Scorpio tankers dot com on the Investor Relations page on to reports and presentation.
Turning to fly too we had or better.
Quarterly financial results in our history with the fleet Daily T. P. C. An average at that $29693 per day net income of 143.9 million an adjusted EBITDA.
Oh $252 million.
We've also between March 31st 2020, and August 15, yesterday, we paid down or net debt went down by $228.8 million.
As Robert mentioned in July remember repurchase some convertible notes day to face value of 13.8 for $12.2 million.
In May we repaid.
The baby bond that was outstanding and mature in May for $53.8 million and then later in the month, we issued another issued another baby bond for $28.1 million.
And again as Robert mentioned, we're currently in discussions for refinancing eight vessels up can increase liquidity of approximately $80 million than we have commitments for the scrubber.
Purchasing and installations of $56 million.
Our liquidity as of the close of business on October 2020, we had cash balance of $285.7 million.
On slide three we show the comparison.
Third quarter guidance that we issued day versus the third quarter guidance that we issued on July 31st 2019 in each segment.
Rates are higher in 2020.
In particular, they owe or one in l. or two rates are 50% higher.
On slide four see.
Some of the events that have taken place over the last 12, an 18 month.
You had income between June Thirtyth, and 2019 and June Thirtyth 2020 of $159 million EBITDA of $590 million.
And a reduction of the debt of 340 $342 million when you factor out the traffic or transaction, where we had the assumption of at least liability.
That transaction, we acquired thinking about one more be delivered in September.
And then the last 18 months beginning in January 2019, we paid about $324 million in dry dock scrubbers and ballast water treatment system. So quite intensive capex program and during that time 62 vessels have been dry dock, we put it installed 49 ballast water treatment systems and now we're currently 80.
Six vessels, which grew up with that I'd like to take.
During the presentation over to James though.
Thank you, Brian I'm, turning to slide five short and long term fundamentals I know wires covered most of these points. So I'll try to keep it short.
And the short term update we make side oversupply of refined products as result of coded and subsequent increase in floating storage push product tanker rates to record levels, a strong recovery in global demand for refined products, coupled with lower refinery utilization rates has led to the rapid reduction floating storage inventories as large mentioned we've gone.
From about 105 to about 45 million barrels.
As vessels reentered the spot market from concluding floating storage contracts and refinery utilization rates remained at low levels. The benefit of wrapping de stocking came at the price of lower spot rates. However, the large decrease in floating storage rapid demand recovery and higher utilization rates is encouraging looking for it as well as the macro stimulus that way.
Expect.
The long term fundamentals are extremely strong seaborne refined product exports are expected to increase 6% next year, the dislocation between refineries and the consumer continue to drive seaborne exports and ton mile demand, including Newbuilding deliveries a significant portion of the product tanker fleet will turn 15 years and older over the next three years and.
Hey, Newbuilding orders had kept the order book at all time lows or near line.
Turning to slide six you'll see that only 35 product tankers have been ordered year to date, which has kept the order book at 7.1% of the current fleet slightly above historical levels.
Turning to slide seven in wire said on many of these points, but including Newbuilding deliveries in the next three years, 69% of the Handymax fleet will be older than 15 years old 40% of DMR fleet, 51% of the L. or one fleet and 29% of VIP fleet with that I'd like to turn it over.
Acuity.
Thank you at this time, if he would like to ask a question. Please press star one on your telephone keypad again that is star one.
Your first question comes from the line of a Miss my role chat with Deutsche Bank.
Thanks, Operator, Brian just quick check you said net debt had declined by over 200 million I haven't at 132 million in terms of the beginning of May until yesterday, obviously missing something but can you just clarify that.
Well, yeah I'm using from March 31st.
Oh got it okay. Okay got it so from March to August God, Okay, Alright, just more of an important question I guess now.
Hi, manually and Robert it's obviously been.
Mr Ride over the last decade, with Scorpio tankers, but it feels like it just feels like this quarter.
You, just obviously announced there's a very real in tangible reduction in the net debt that we just talked about as well the dwindling capital commitment.
Yeah, I can't remember a time just seems like the first time, where net debt is coming down in capital commitments perspective, We're also going down so there's like a real opportunity here to get your financial house in order de risk the balance sheet in a way that's accretive to equity you're not dilutive to equity I.
I wanted to ask you can just expand on that a little bit and how you too and Brian are focused on executing in terms of what your priorities for cash or cash allocation and then just overall debt levels as well.
Robert you might be on mute.
Yes, I'll comment on it. Thank you. So much that said you know you I think you re observed thick really key points that you know it's been a.
A long time getting to this point you know, but we're now at this point older ships are in the water capex commitments coming down to produce de minimis level going forward and we have been paying off debt today that the amortizing debt up to speed higher than we've been depreciating recently, we will.
<unk> fairly consistent I mean, this last year every cool has been.
No. The use of proceeds is going to be too you know primarily to use of cash flow to use to reduce debt levels and that's what we've tried to do for sometime now.
And I think we're going to continue to do that you know I think that the you know the priority for cash.
Right now is it said is too is to start to make not only continue to reduce down that route to improve the the cost of that debt and I think that may have yet to matrix in terms of borrowing terms for lenders is has improved for the company.
As you reduced debt to reduce your internal ratings related to let lenders and that I think is being evidenced by.
You know what Brian is negotiating related to the refinancing now that will free up a further 18 million liquidity you know lenders are realizing the efforts of the balance sheet is coming down the consistency of management's policy.
And the the really new fleet that there's there that's allowing to do this.
So no we're going to continue as we all at this point.
But you know out degrees of freedom.
Opening up every day.
We know buying more ships is.
Certainly very low down on that list and who we do know fussy.
That at the moment, Oh, we do absolutely foresee.
Continuing to reduce all most expensive debt.
And.
I don't think there's anything much more to to add to that.
How does how does the new equity play into de risking the business you obviously.
I have more debt funded liquidity on the way, but that's not really answer.
Sure a debt problem with more debt you also tapped the.
But you're not you know you well your swapping out the difference I mean, if you look at it in a in a pretty simple time I mean, if you took for example.
There are currently about the ATM I mean, you've tapped the ATM very slightly it's not a big deal should just talk about that ATM and Mike how how you think about new equity or the need for new equity if there is any.
Sure.
I lost David sort of expand on that in a second but you know there's not a need for new equity.
Weve or you know a lot to time has passed and a lot of things have happened to the good.
Since.
You know a few months ago.
The company has.
De risk going forward.
But you know you're not swapping isn't up like you're taking debt you know, there's a huge spread between the cost of debt and the maturity of debt.
You know you have for example, the converts trading it.
Double digits to maturity in that maturity is you know is pretty short if you are taking on that for example that much less interest cost and.
You know the maturity that that is is then way down the line that itself is a pretty is pretty good swapping a pretty good strengthening of the balance sheet because you.
And the tenant.
The Dart regret question on the ATM I think David I'd like you to two onto that if you may please.
Yeah, no problem of it I had my lines plan and I'm at like Thanks for that question, then I'm, giving us a chance to tackle it at this point head on.
Because obviously it.
It's there in the release I think the best thing I can say about this is like in the Ti that's the kind that crisis with liquidity.
Drying up in the general market and looking at things, we should do responsibly for the company.
We have access to that the board of directors would expect us to use that and clearly we took a decision I think when I can say in the defense and that is we we took that decision we've advanced engines pretty quickly, particularly as it led to the outside the <unk> market than done markets where rebounding.
I think we could say if they see me repeat hits its probably not something we we David but but I think on top of that nothing I would add as Robert mentioned at least from a shareholder value in a navy perspective, we feel weve.
Albeit a very small print that but we've managed to neutralize that now with the the transactions we've taken a taken in the conductus wire bond. So I think I'm it to be Frank will hold a hand up to it its not a big number as you pointed out I think I'd like to see that decision in the context of the the time in which was taken but.
We've all got things, we could do differently. If we went back in history.
I appreciate that answer Okay. I think that's it for me I mean, I think I think you guys have really interesting opportunity.
To generate a lot of incremental equity value. The key is and this is unsolicited commentary, but the key is just maintaining.
Disciplined and consistent capital allocation strategy and I hope that you can commit to doing that because of all the upside and the opportunity that you guys haven't point of view and I'll just leave it at that thank you.
Sure enough I appreciate that very much on and we do too and we'd like to and we we agreed that you know <unk> about the consistency and we would point out that.
This isn't the strategy. This just happened this month with.
No avoided the temptation of you know raising dividends in the fourth quarter first quarter second quarter. Now we have you know with this is this a continuation of that strategy and we hope to show you that we were going to be very consistent on that we appreciate the question. Thank you so much.
Your next question comes from the line of can help us <unk> with bank of America.
Hey, good morning, and let me offer to a congrats on on the debt pay down and you know taking advantage of of this market in the right way to to restructure that that balance sheet.
Maybe I don't know, if its robert or or Brian maybe talk about the operating cost side, you know clearly surprise to the downside. So you know we knew rates were strong and they kind of came in a how you've been talking about it through the quarter and in line with our targets, but the cost continue to come in I think for a couple of quarters now surprising as downside is there something you've changed there in terms of being more.
Fluid with your cost side is there I don't know if there's any delays on on vessel operating costs that you're doing that that are going to come back maybe just talk about you know if there's any contractual ships on the cost side. Thanks.
I think bullet Cam start and then I'll fill in financial stuff I'm sure.
Thanks, Brian but.
Ken will of course, just take the obvious nobody's flying sold over a shipping business, we will rely on.
Air travel to get our crews.
Back and forth from the vessels.
And so the immediate impact in quarter, two was that nobody could be repatriated from the vessels and similarly nobody could.
Get to the vessels to get back to work being at home.
And that trickled through the income statement of course, so a big chunk of that quarter over quarter cost reduction.
I would count is somewhat temporary.
We're solving for those logistical issues.
In ways that wont necessarily show up with it and in immediate rebounded in the operating expense, whether it's through a charter flights or other other ways to manage those are those problems are those those obstructions and travel.
But similarly, if it's a hard time to get anything around the world spare parts.
People anything of that that nature, but like I said, we wouldn't expect an immediate snapped back more in attenuated recovery of those of those costs in the coming months.
Then there longer term benefits of having our fleet, obviously fully integrating some of the vessels getting them out of dry dock of course and running them.
Almost as this new.
Oh, which obviously has a beneficial impact on the operating expense line.
And can I just want to add that yeah, I think where we have an expectation that the Q3 well he got more of a normal it maybe even little bit higher normalize camera, saying because now we have the chance to.
Change cruise.
We're flying crews around it's a little bit harder to do it because not every place you can you can fly do so it's kinda cost a little bit more but the crew has to get home here if the change so but over the period of time over the last few years to your point is vessel expenses have been pretty much in line and coming down with.
Exclusive of onetime event in Q4 2019, there was a few issues there, but they've been consistent in coming down over the last few years.
Perfect and then just for a follow up Robert or maybe James I'm digging into the rate outlook and maybe the L.R. ones, maybe or just thoughts in general awareness storage and utilization rates looking now I mean, you mentioned that the decline and.
Average capacity is that still falling as you see now is that stabilized and maybe your thoughts on on that impacted the outlook.
Like I just want to be maybe you can have a go and then let laws follow if he could.
Sure.
Hey, Ken So as we mentioned the peak.
Floating storage was about a 105 million barrels and in early may and since that it's been quite a rapid reduction last week. We went from from about 52 to 45, So we definitely seen.
Good draws in terms of overall refined products on the water so not just storage, but vessels carry and cargo. We're at about probably 415 million barrels in the kind of last two year averages somewhere around 390. So overall volumes have have come down and this has really been driven by lower refinery.
Utilization rates and improving demand demand, obviously being the bigger driver there.
With that I'll turn it over to wires for the C.L.R. one question.
[noise] largely maybe I'm you.
Okay, sorry about that.
[laughter] right, Yeah, well I was on mute yeah. I mean recently you know the challenges for the larger units yellow once in a lot shoes is that they primarily been carrying a jet and also ultra low sulfur diesel and.
Clearly because all these situations that we have seen over the last month the.
The stay home et cetera has meant that we have this big demand destruction plus you have the contango curve now what we've seen over the last couple of months is of course that there has been a substantial de stocking that has been taking place.
That is continuing to do so however, there is clearly today still a underlying resurgence that we can see inquiry for storage taking place today. So you know just as the picture you can see over the last couple of weeks or you know the inquiry for larger units to extend the storages or too.
Make new storage contracts starting to percolate in the market as well. So that's why I was saying in mind.
Remarks that we're anticipating that this will continue to some to some degree in the future throughout the third quarter.
It's gonna be interesting to see as we go into the fourth quarter, a when the seasonal demand starts kicking in for the northern Hemisphere. How this plays out and I think the interesting point really to make is that when people expected the flat lining up a market in the third quarter because of all the issues that we all know about we have seen pockets of volatility that that has.
Come up what we also find quite interesting is that the demand that we have seen especially in the utilization rate from refinery.
No with bottomed out I think in April around 50% for gasoline, 70% for diesel in something like that those numbers today, you know they recovered quite considerably to 85% to 90%.
I, probably only with jet trailing behind that I think around 50.
What this means is that we started to see a lot of kind of interesting pockets of cargo moving again to other places. So as you have seen that probably on the reports you know the Atlantic basin, the U.S. golf in particular.
That's been a very positive sign we seem to be Arabian Gulf on the amounts as well suddenly having a lift we've seen markets today on the on the a lot twos and starting to show greater interest to move from the west back to ease because of increased and demand requirements.
In China in particular, so we're quite encouraged by these stronger than expected bites and utilization from the refinery.
I think I'd like to I'd like to add to that so that.
Naturally you know, which is a manual points on the opening beginning I mean, we were cognizant that the world is not.
Yet out of its troubles related to cope with 19. So we really do believes that its important that we continue this is strategy the headline to continue to strengthen the balance sheet.
We have a said ton going into phase two where were you know willing to use.
Some of that liquidity to two due to buy back you know more expensive debt levels.
But you know your that's because it's the sensible thing to do to retain that strong balance sheet can be be consistent and over time that itself will create.
You know more tools in that way, but when we look at the market itself, so separating the market from the balance sheet.
And the balance sheet allows the markets to go much weaker than where it is now allows it to really go into historical weakness with some time.
I will view of the spot market right now, though is really encouraging I mean, it is incredible that we can give this third quarter number for example on M. office with the amount of de stocking what's happened on M. AWS I mean, we've gone from something like 87 vessels, all the way down to into the low said.
These.
In these in de stocking and it's amazing the malls have held up in that way and we had previously hood.
You know Ardmore reports, so you should be getting a consistent picture that amounts of doing well in some cases them all as had been performing better than Vlccs that is an extraordinary thing to happen in the third quarter, a tool not not to mention in coated.
So there's plenty here too.
For us to actually be optimistic about even though we're taking a very cautious view related to the balance sheet.
The stocking you can't continue to to take steps back ultimately run out to them as laws says major customers, who now started switching the other way looking to take you know time charters and we look forward to it's not very long now before we approach winter.
Which traditionally we'll we'll give a lift anyway.
To any form of market.
Thank you very much next question please.
Thank you bye.
Your next question comes from the line of Ben Nolan with Stifel.
Yeah. Thanks.
So [laughter] Robert I believe in the last call you sort of intimated that you were looking to or expecting to sign some.
Time charter contracts on some of that's one thing to see any those on the fleet list.
I'm.
Just curious sort of where that what what happened what transpired around that or maybe it was just a misunderstanding on my part I don't know.
Now we have done that's in the inclusion of the.
I think we have to remember for example.
Yeah My market is.
You know started off the quota I mean way back in June which you would have used to fix for July numbers. The end of June.
A very early July the IMO market was you know <unk> pretty tragic as you Dusty expectation you would have had is de stocking would happen.
And just the same as Ardmore said the actual you know the numbers that we've we've given for Gordon said don't necessarily so all this all the some portal all the developments in the current am on market and those numbers being where they are and where they are on the a lot.
Twos, <unk>, which only recently as long as said have started to move back up again.
Those numbers or whether they are you know.
Largely because of the time charters that we've put in place.
And but what we have we've decided not to do is is which is.
It's actually detail out all of those time charters I think it's fair to say the do you know we do have an optimistic view related to.
The ended the fourth quota.
School to next year.
So youre going to see a tailing off you know I don't think the I think is reasonable enough to say that from.
The first quarter, there is no less time charter coverage than whats in.
The into positions right now, but we haven't and don't intend to detail out the time until the coverage.
I see that's that's so it's it's.
Ambiguous within the pools somehow or another but it probably makes your.
Takes an element of volatility out of the spot rates that we should think up for the back half a year.
Correct and I think its fed fit to say and that's why you know why looking at the markets. If you want to take clarksons levels fixing or someone to anyone else's any independent market report you see very very low am all rights at the end of June early July.
You see the same on a law twos in those market reports and you can see that we've significantly outperformed.
Those markets you know.
Third quarter guidance, we've given and that is as a result of partly of.
That chartering strategy that we gave.
And also in this last sort of period, where for example was starting to get the benefit of the.
Steep improvement to NIM on market.
Okay, and just sort of lastly on that you should we think that those charters are sort of relatively equally spread oclaro across the asset classes or is there.
Particular concentration in one of one of the areas relative to the other.
I have to have to Las <unk> keep you know confidentiality what what are you prepared to say or allow them to be set on that.
I would say that.
We have a cover on all asset classes with percentages that are different.
Okay [noise].
Alright, well then lastly from me I'm just from a big picture kind of a strategic question obviously.
Doing a hangover sort of the new strategy at salt, but at staying you guys are pretty substantially that the market leader in the product tanker business with pretty substantial market share all things considered.
Im curious from a big picture perspective, whether you you think that.
Really put staying in a position where you there there's really no or at least no foreseeable reason why you wouldn't want to you know distract or dilute or whatever that that product tanker pure play strategy.
No I think you're seeing is in a great position I think that's part of it and I think that we've spoken previously before about how.
<unk> markets are very different no the dry cargo market in the product tanker market I mean, I think that we Ah you know I know, there's other thoughts out there, but you know we really believe in the benefits of consolidation of product market and we think that consolidation.
Obviously, it's happening I mean, the last three years, we've had a number of M&A changes at the asset level income one companies buying other companies companies merging.
And this has continued in a different way in <unk>, we haven't seen necessarily announcement related to companies merging but we've seen a series of announcements of.
Smaller companies.
Realizing the benefits for example of pooling, we ourselves have seen a.
The steep increase and we would expect to continue to see that increase in a in the coming weeks of smaller players seeing the benefit of attaching themselves to two large pools.
And so that product market, we'll have that benefit. We also have the benefit here of a greater information the balances of.
Information it is much better when you've got these larger fleets and we can we feel we can clearly see.
The benefit of having a larger fleet in the commercial market in terms of results.
And we would start to explain we would see that going forward to continue to expand and the outlook for the <unk> market is fantastic I mean, if the product market is very different into.
To many of the other markets I mean, no market really has a commercial guillotine a you know in a clean petroleum product for 15 years old no.
No market has the in major markets and crude markets have a.
Order book dynamic that is so wonderful is the product market.
The these off you don't know market has to go back to the consolidation is going on in the product tanker market and no company as the age profile.
The we have I mean, we do not have any requirement to do any renewals and very little capex.
And you know our competitors, they're going to have to why the.
You know I don't know what some of them again do I frankly have no idea, how they're going to be a to renew their aging fleets 15 years old is great.
Okay. That's helpful and I'm, Don I did want to say that I appreciate David a your your candor and Matts question I thought that was it was nice.
Thank you.
On behalf of David Thank you.
Thank you then thanks very much.
Your next question comes from the line of Jon Chappell with Evercore.
Yeah.
Thank you. Good morning, good afternoon large if I can start with you you talked about the logistical issues in a in second quarter is there anyway to kind of gauge your judge how that's transpired thus far in the third quarter. Robert had made mention to the number of them are that have come off storage, but the <unk> and even the E.
I had mentioned in their recent monthly updates and still elevated onshore storage just wondering how that's playing into conjecture logistical issues.
Its obviously very complex answer which is gonna be difficult get probably but you know we do still see quite a bit of challenges that are vessels are finding finding homes.
And it depends a little bit more on the on the product that they're carrying a in terms of that well. We do know is not there is more storage that is being made available, particularly on the continent. A there is obviously with the increase in demand in the eurozone in particular that has helped out a bit so we perceive still a substantial destocking.
Primarily on the.
The light ends to take place and we're talking about that previously however, we are seeing as I think I mentioned as well.
Increase in the inquiry on the vessels asking to kind of go long way around meaning round. The people good hope rather than going through the Suez, which obviously extends and you won't gauge the voyage length.
Which in itself, obviously, you can strikes or the supply. So these things are interesting to follow.
And we're pretty positive that this continues.
Okay. That's helpful and then Brian you've obviously made an effort to pick away at the most expensive debt in the capital structure, I think that 13 million or so on the convert is a good headstart is there any constraints either the amount of liquidity you want to keep handy or from a cash cost.
Active or with the cadence of the convert and that would keep you from escalating that as we go through the third and fourth quarter.
Hey, John No. We're always open to looking to take care of our most expensive that we will continue to look at that make sure. It's available we will purchase I know its availability is is made to us.
So yeah market function as opposed to limit that that you're looking at.
Correct, Yeah, I was yeah I was about to two to two into seed to oversee that subject to price, but Brian it added that.
The expensive parts, if you get to a situation you know that comes down to pricing and alternatives, but the overarching I don't want to equip would get you I don't want to be.
You know anywhere and a half White house you know the the strategy right now is to.
Reduced the leverage of the company.
That is what we're doing and we now have the degree of freedom to move to actually not worrying as you're pointing out the not in for Brian not to worry about how much cash you get so pure.
Pure available liquidity he can move to retiring.
Debt.
That is expensive.
For more expensive.
That's different you caught you know we issue the convertible.
Right Okay.
Okay. Thanks, Robert Dine in March.
Good.
Your next question comes from the line of Randy gave ends with Jefferies.
Oh, the gentleman has gone.
All right Randy how are you.
Doing all right see I appreciate coordinate rate guidance as you mentioned well above the benchmarks or I guess, a few questions on that what kind of rate are you fixing kind of most recently or the above or below that posted a coordinate number also can you quantify the outperformance in in terms of an eco premium.
Versus a scrubber premium.
James 20, you deal with the general scrubber being a premium I mean, obviously point here that the the you know the premium is less obviously that was in earlier in the year, but.
Just to say what is in a moment is still obviously positive.
Sure Randy so at at the current spreads you're you're probably looking at between 1000 $2000 a DAF savings.
Obviously spreads have come off but you know we've spent a lot of this call talking about floating storage inventories and land base inventories and just how high they have been and that they're coming off. So so realistically every refined products commodity is over supplied from from this demand shock. So obviously.
You have to work through that and as we look forward. We are still quite positive bought on on scrubbers and the savings.
Especially in a world a year from now where you have a significantly less number of scrubbers installed on ships and while there is limited, but still some sort of demand for high sulfur fuel oil for power generation in the middle east outside of vessels with scrubbers and that there really aren't alternative uses so while we are still confident we think that.
Spreads will will come back yeah in the future maybe six to 12 months from now.
And keep in mind Bristol's still saving money every every day, there's still cash that that is being accrued from from these savings.
Great and then then laws perhaps.
Pull loves ounces the of the <unk>.
To that so present spot markets.
I would put on a straightforward caveat here. So that people you know people shouldn't really focused so much and direction.
Of course rates are going to be weaker than where they are in the second quota for the most important thing is that this traditionally this next two weeks. So the present weeks into this customer now in this last week of.
July through to let's say the last week of August is traditionally the absolutely dog days. This summer for the product market traditionally has been extremely low.
So when we are optimistic about the the structure is put in the relative to that not in the absolute numbers. So with that statement laws, if you'd like to talk about the president marketplace.
Thanks, Robert Yeah, I, just want to reiterate that you know the third quarter is typically the weakness and you know this seasonal weakness, we certainly can feel and exacerbated by the de stocking.
Look at the end launch as an example, the U.S. golf today on some other words as we're doing we're probably doing between 18 and $20000 today Mark is strong if you look at the the Tctwo Tcfourteen combo Atlantic Basin, it's probably falling off a little bit at the moment, it's probably still doing around 15000, we view the combination if you look at.
<unk> Asia. The market has dropped substantially has been weak throughout the summer and certainly has been.
Been lackluster and is probably trading for us or around the 10000 dollar Mark what do you put them together as we have kind of disperse the fleet globally in a balanced way you can make the assumptions that you know we're looking pretty okay.
On the lot choose I'll use on the other example.
If you have a lot shoes in the ones that you're going east that's the arbitrage Yobs opened at the moment, a you're looking at 21 $22000 a day.
People are doing or asking for storage is as I mentioned at the moment and all of those storage contracts that will be looked at the moment starts with the too.
$20000 today, so that gives you an idea however for the benchmark route Agee, Japan to TC, one or with the combination of Backhauls and stuff like that coming from Korea, or China down and do the combination. There are you looking at around 15. So.
In the context of where the market has been why we're hearing I am encouraged by where the market is.
On the the Handys on the other hand, which always seasonally is very weak as you can see from the previous.
Orders that we've had in the third quarter, we're doing substantially better than we have done the last couple of years, So that's encouraging as well.
And on the other ones, we have been quite fortunate and being able to triangulate quite well. So it is a more question of how you arbitrage. Your vessels around then just doing a eight would be in back to any.
I hope that answered the question that does the very much. So thanks, so much of that I guess the follow up with all that being said how have asset values kind of been impacted and his current market. You know you mentioned, obviously still trading at a steep discount to NAV. So just trying to get a better sense for an updated or kind of asset value estimate.
And then auto how liquid is that second hand market in this obviously tough operating environment.
I think that <unk> first of all the way you got a bifurcated market I mean I.
Clearly vessels that are you know age you know certainly vessels over 10 years old would would you know the tree did more like options. So yes, there's been some weakness in those places you know naturally.
The holiday.
The hardest to finance.
They have less practical use of life.
And you know that probably more and they're going to be more expensive to run.
And there would be less desirable to the customers if it comes to securing fixed fixed revenues.
But in the new side of the the market you.
It's thing is not the only company that that making money in a record rates and driving great cash flow you know I'm very very show that happening, we're going to come out with some fantastic results tomer going to come out with fantastic results. He knows the.
I can imagine that there's a product tanker ono with with modern tonnage that hasn't done great and continues to do great and that's the whole point is that from a physical point of view right now.
Third quarter, you know is really comforting to that idea no. One here is a full seller in the times of the modest market.
They don't have to sell to renew assets and they don't have to sell to bolster their balance sheets. The second quarter came on top of.
A record first quarter for these modern product tanker owners the record first quarter came on top of a profitable fourth quota.
So there isn't much to sell and at the same time, none of us really without stocks being so below in a V or.
Uhhuh investor concerns related to the navy stretching out to buy.
So it's almost like a non market.
So do you know perhaps on the margin.
You know because people are worried the asset values may have come down a little bit, but very hard because they're they're really no real transactions going on.
The closest to be sold to a transaction was.
Hafnia trying to you know by tool on which to buy a S C which is again.
Forget the pricing off what are the way to calculate price you've just got to plays affirming.
Very optimistic view related to assets.
And.
Yeah.
That's how it would look at it.
Hi, good deal will think so thanks again, congrats obviously on the record core.
Thank you.
Your next question comes spend a line of Greg Lewis, what's the T.I.E.G.
Hi, Thank you and good morning, good afternoon, everybody I'm just one quick one for me I'm Lars.
Yeah.
Well this year's variable.
Cool or.
For paying refineries to kind of you know whether they are shutting their doors are starting to scale down or just kind of.
Yeah.
Providing low.
Fine products or the market has any of that in light of what's happened with his pandemic has any of that maybe help explain why.
Rates or you know little little bit in the Atlantic have been better over the last better than maybe I think people were expecting over the last I don't know month or so and then just as we think about this and obviously you're in they're talking to you know all of these companies you know what sort of the outlook is as the world return.
As to what will be a new normal in terms of.
You know is it something where Europe is just not gonna have you know that refinery output that used to have as we think about this in one or two years from now.
That's all for me thanks.
Hi, Greg or you were a little bit gobbled in the beginning so im just going fine.
Make a standalone answering your question, which I think it is first of all you know when you closed on refineries and there's been some talk over the last couple of quarters on or refineries closing down the latest something was there much units.
In California, and so on and that's been a lot of talk over the years, Oh refineries closing down in Europe, because they're inefficient than you had refineries closing down in Australia, and they have close down in Australia.
For various reasons as well at the same time, you've got to refineries big refinery opening up in Saudi Arabia, Kuwait, India, China just to name a few let's say that's interesting is that those are fine results are going to service. The end users in Europe and in America in other places where there is a high demand for hydrocarbons.
So for the product tanker owner this is great news or because what it really means is that the ton mile element is going to increase so the voyage length for moving the exact same product that you would have moved from Martinez down to Mexico for example.
And as an example, you know you can get that now from Korea or from China, or something like that and you're seeing a lot more different cargos moving around the world that we've been seeing that over the last 18 months to be honest.
That is just a microphone. So you know as the the ramp up in the U.S. refineries come along it's obviously a function of different things.
And you're starting to see no for the U.S. Gulf perspective, you know huge increase in exports and you know the same thing goes on but China, having been shut down because of the flooding that they've had there are now starting to ramp up as well. So you know where it's going is depending on the price of the day well.
One thing that's for sure as you look at this over a trend line, you're seeing extended an increase ton miles, which is very good news for the product synchronoss.
I hope I answered the question Greg.
Your next question comes spend a line of Omar not <unk> with Clarksons plateau.
Hi, guys. Thank you just a couple of follow ups, just that Robert back to the consolidation topic that has been more seats as you said coming together, especially in the and the MRF space, which has historically been very fragmented or at least the most fragments as part of it the tanker business.
No obviously, that's going to have positive effects over time on the trading dynamics and earnings potential well how do you. How do you think sting participates in this you said earlier in the call that obviously, you know acquiring vessels as far down on the list of options available to you which makes sense.
Do you think about the whole the charter in business. We've seen some reports publicly the scorpio pools, bringing in tonnage how do you see that playing out from a distinct perspective.
Well set festival.
You know it.
It is of course, it's still fragmented, but it but it's been rapidly you know consolidating and becoming less fragmented the others thought it is there a lot to market.
The most consolidated.
Marketing hold of tank as crude and wet. So you know we have a little bit of a balance and that's always see where will you know where we're focused on and trying to think in coverage.
You know participants fellow competitors to you know to continue that consolidation on and in the M. AWS.
As we specifically take part in it festival. The scope. Your group is you know has been as you can see from announcement.
Adding you know quality tonnage, where we can see it don't own is where we can see that too to create a like minded positioned to consolidate and that will continue I mean, I'm confident that in both the handys and the and mouse.
We will.
The group will be.
Making further announcements you know shortly probably next week and the week often so the group is doing that Sting is is helping obviously.
We we.
We have cells historically have provided that gravity and I think that.
It's there will be a point where.
We will go the other way I mean, I think that we've set does we tried to indicate earlier, we stepped off charter book. So the main point to coverage would be over the third the bulk of the coverage.
Would be over the ended the second quarter third quota.
And the.
First real heavy part to the fourth quarter and we were lightening the time caustic soda coverage from let's say Thanksgiving onwards.
Well, if we continue to see the data points that we're seeing.
You know there's no reason to think that.
Thing itself will follow.
In the improvement to follow.
Our customers.
In perhaps adding time charter coverage and obviously by definition day, you would consider.
We continue to consolidate to margin. The other thing I think we're doing is just with the results themselves, which are better than companies that are running just a few ships or whatever we're helping as a public company, we're helping that get into the market itself.
As I say well focus is going to be on the m. aren't hani market. I don't think there is a you know it's pretty hard to to to make significant consolidation any longer on the I love to which is the most consolidated school.
Got it okay. Thanks, Robert I was very very helpful. Unclear you know one more just kind of going back separate topic to the balance sheet.
Built up a nice cash position, you're at 285 million as of yesterday, and you know that you've identified the converts as the most sort of expensive part of the but that.
Position at least at based off the current price is there. Another part of the you know that that structure that looks attractive to want to prepay.
Hi, plus or minus.
I think the <unk> the convert isn't just constructive <unk> related to pricing at the moment. It's the it's the debt that is do you first is the largest you know it's the only outstanding debt that we have.
That is of a large amount of money that is deliverable I mean, that's again, that's not really that's not due until may 2022, so it's not like it's imminent, but if you start to.
You know get into this boy you start to you know really opening up and you're not reliant on anything any no vulnerable. If there is a a you know a melt down later and I think that you know you want to be showing that you really got to where we're able to to cover thing. So there's other ancillary Ben.
If it's to that too.
Inside of the.
You know the sale leasebacks themselves, though was that put on when interest rates a significantly higher so one of the important things of refinancings that we're doing at the moment.
Is.
The president refinancing, we're doing and if this goes back to the question related to value actually.
Is that is that we're able to take vessels that obviously have finance someone that moment.
And reef and refinance allowing.
More liquidity out.
And refinance using the benefits of the the low interest rates.
So you know it happens so to you'll just do the in the next layer and there's a whole bunch of.
Financings that would done at times, where interest rates was significantly higher in the companys.
Balance sheet on a credit basis wasn't as good as it is now we have to remember that equity markets are forward looking and a launch the a lot of that analysis is backward looking looking to see what your trailing four quarters if need be dahua.
And those are not obviously after this announcement is looking great.
Right, Yes, and yeah. So it sounds obviously more to come and you guys. So that's why I staffing it's difficult is quite different <unk> really go you know you into the C for details, but it's kind of it's a logical thing that that the lending side has been looking at this companies.
Progress now for well over a 12 month since the 12 months has seen it consistently look to increase the balance sheet increasingly its debt ratios have got bedroom bedroom better.
And now where the net debt to equity is well below the 6% Blayne shooting to cross below you know 55 towards the low fiftys on a very new fleet. It's.
It's just looking better from a a lending profile and I think that's important is that net debt to equity ratios.
Oh and leverage ratios matta matters, how older ship is.
So if you have a company that has 40% that but that fleet is.
You know average age over 10 years old.
Mm that I think is a much more leverage company than a company that has.
You know, who actually debt to 60% and the fleet is less than five.
Especially in the product market with the 15 year rule.
Right, Yeah tremendous optionality in comparison.
Good alright, Robert Thank you for that that's it for me.
Thank you.
Your next question comes spend a line of Liam Burke with B. Riley.
Yes. Thank you Robert you mentioned, a hedging sleep bifurcated market.
How are you looking at the potential of increased scrapping is further benefiting the supply side of the equation.
Not really we don't really count the scrapping is frankly not that important to maybe important into crude fleet.
Crude market, but you know the product market.
You know festival.
Why would anyone scrap when right so substantially above opex, there's no pressure to do that secondly.
Its not really scrapping they're already gone out of all markets really by the time it comes to scrapping age because you know.
You don't really scrap at 15 years old, but they get removed from the premium product trades. So at 15, they are effectively commercially become scrap to us.
So we don't really focus on the idea of scrapping so all of our supply and demand because going forward.
You know really they exclude scrapping they don't consider scrapping they consume <unk>. They include what laws and James as said assumptions related to the fleet coming to 15 years, plus and I think this is.
This is something that is so overlooked by the general community is that this profile in the product market is very very different and age profile to the of the shipping markets. You know we've already seen other public companies now ardmore looking to sell vessels just before they get to 15.
No tome hafnia doing the same it's real and those numbers. The laws gave in his speech and what James is doing a really going to start to come home to roost.
You know from the end of this year early next year, but scrapping we just don't don't do you take is a factor.
Okay.
Are you building liquidity Youre, a new vessels are low on the capital allocation list when we're looking at returning cash to shareholders.
What triggers a decision there on how you would either increased dividend or a look at a buyback.
That's a that's a fair question anything right now said, we're focusing on.
We moving through let's say the phases phase one as being make sure liquidities that too you know deal and stay humble in the face of code with 19 distinct <unk> just in case. The World is you know.
Remain you know goes weaker and rates go substantially weaker we have that covered and then when moving now to the second phase where we can you know start to.
Yeah as the buyback the more you know more expensive debt.
Obviously convert since I have some equity component to it.
And then.
The other the other part you have to we think you have to earn your way into that position.
Once you've got the leverage into into a sufficient place you know I think that if the three phases phase. One is just every piece of cash Sidney you need for liquidity, you know delay expenses to late delay whatever you're doing phase two year comfortably dealing you're doing normal operations and you're choosing what that's do phase three.
He is.
No way you really have a balance sheet.
And Doris certainty of outlook.
That means you can move too you know acquiring stock for example, or paying great to dividends. So what would be required is clearly we believe we have to lower than that debt to equity.
And all have a.
You know greenlight on you know on on the World itself I mean, if.
You know I think everyone would feel a whole lot more comfortable if if we knew there was a vaccination out there that really worked and what's going to become available I don't think.
Our outlook you know I don't think we need the whole world vaccinated to improve your outlook you just need to have the vaccination there or cure that takes death off. The table. Then you can immediately start saying Wow you know the demand overall for this world with all the refineries coming on the resurgence all the money coming in.
To boost the economies.
Yeah, you you'd be able to you'd be able to switch to phase three perhaps a little quicker than.
That would probably be more of.
You know offensively buying stock then it wouldnt say immediately putting up a dividend.
Sure.
Great. Thank you very much.
Thank you.
There are no further questions in queue I would like to turn it back over to Mr., Brian Lee CFO.
Thank you operator, and thank everyone for joining us today, we'll have to season. Thank you have a good day.
Ladies and gentlemen. This does concludes today's call you may now disconnect.