Q1 2022 Scorpio Tankers Inc Earnings Call

April 28, 2022

Yes.

Hello, and welcome to the Scorpio tankers incorporated first quarter 2022 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.

Thank you for joining us today welcome to the Scorpio tankers first quarter 2022 earnings conference call.

On the call with me today are Emmanuel de Lauro, Chief Executive Officer, Robert Bugbee, President Cameron Mackey, Chief Operating Officer, Brian Lee Chief Financial Officer.

Earlier today, we issued our fourth our first quarter earnings press release, which is available on our website Scorpio tankers dot com.

The information discussed on this call is based on information as of today April 28, 2022 and may contain forward looking statements that involve risk and uncertainty.

Actual results may differ material from those set forth in such statements.

For a discussion of these risks and uncertainties you should review our forward looking statement disclosure in the earnings press release issued today as well as Scorpio tankers SEC filings, which are available at Scorpio tankers Dot com and SEC Gov call participants are advised that the audio of this conference call is being broadcast live on the Internet.

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 Scorpio tankers dot 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 we want all our analysts to have a chance to ask a question do you have an additional question, we're more than happy to answer it but please rejoin the queue now I'd like to introduce our Chief Executive Officer.

Emmanuel and l'oreal.

Thank you James good morning, and afternoon to everyone.

I'd like to start by saying that our sympathies and thoughts go out to all those impacted by conflicts around the world.

<unk>, and which will leave our particularly uncertain and the level of tragedy that the world is experiencing these far beyond anybody's imagination.

As far as our business is concerned when we last spoke I said that our top priority was to position the company to create shareholders value and an improving market and for the next tanker cycle.

This remains very much the case and we felt that the best way to do this is through improving our balance sheet.

And in order to do that since January we have announced the sale of 18 vessels.

The sales increase liquidity reduce a little debt and a demonstration of the discount on our shares trade relative to in.

And ever improving NAV.

In the first half of the year, we will reduce our debt by more than $500 million through vessel sales.

Scheduled amortization.

With a.

Fleet potentially averaging $25000 a day TCE in the second quarter should be the TCE for the second quarter. The company could finished the quarter, we $450 million of liquidity.

And this would result in a reduction in debt.

Over $730 million in the first half of the year.

Last quarter, we said that the capital is the simple supplying incremental oil demand with inventory growth is not sustainable in the long term.

<unk> less so but the inflection point was near.

And this became apparent at the end of the first quarter when the reopening of the global economy.

The COVID-19 pandemic increase the demand for refined products.

Seaborne exports and.

The rates on our vessels have reflected that.

So the mismatch between the supply and demand of refined products and the improving rate environment was about and prior as well.

Further exasperated by.

The conflict in Ukraine.

Thesis has not changed but we're certainly more optimistic given the growing demand and increasing dislocation between.

Producers and consumers.

Refined products demand is expected to increase each quarter as the pandemic eases.

Given historical low inventories refinery runs in seaborne exports will need to increase to meet demand. This will provide a constructive environment for product tanker rates.

Product tanker rates increase significantly at the end of the quarter and remain at elevated levels today.

We're pleased with our second quarter guidance and excited that the theses is finally starting to play out.

Given our positive outlook, we have no plans to sell additional vessels.

We will continue to reduce our leverage naturally through scheduled amortization and opportunistically through vessel refinancings.

That said with a healthy liquidity position and significant operating leverage of the company.

In a sustained rate environment, we would be looking to returning capital to shareholders in the most value creating way for example by looking to employ our $250 million securities repurchase program.

There are several reasons to suggest that a sustained rate environment will continue and I would like to ask James to tell us why through our slides James.

Thanks, Emmanuel and good morning and afternoon everyone.

Over the last few years, the recovery slide seven place sorry.

Over the last two years the recovery in oil demand has been quite resilient, especially when considering that widespread vaccinations only started at this time last year.

That said the recovery has also been bumpy varied by region impacted by new Covid variance restricted measures and anytime demand exceeded supply there were available inventories to drop.

The improving demand refinery rationalization, increasing ton miles that we have talked about so much did not have a material impact on rates.

Until it did.

In January we started to see a steady improvement in MRO rates, which was prior to Russia's invasion of Ukraine, and driven by increasing demand in Latin America, Europe and Africa.

After Russia invasion of Ukraine, we saw significant increase in product tanker rates, but as you can see it did not have a lasting impact on the LR twos, which increase for two weeks before declining.

For the EMR has the highest rate increase for our vessels that were going from the U S. Gulf to Latin America, which has less to do with Russia, and Ukraine and more to do with increasing demand.

While EMR rates in the U S Gulf decline from the record levels. They have increased in Europe and substantially in the middle East and Asia, We have seen a steady increase in LR two rates over the last few weeks as Asian demand has increased.

As of today spot rates are higher than currently presented in this graph with <unk> rates in the middle East and Asia trading well above $40000 a day.

The question then is how did we get here slide eight.

Diesel demand has been robust and is already above pre pandemic levels. Despite an increase in refinery runs last year demand is continually outpace supply, creating an extremely tight diesel market.

As you can see by the graph on the lower right. The diesel shortage is not new to Europe and by the graph on the top right that the shortage extends beyond Europe , Latin America, and Africa, which had similar diesel deficit.

We expect the market to tighten further with increased competition for distillate molecules as jet fuel demand returns.

We're also having an impact on gasoline with refiners running and Max Distillate mode. We're not building significant gasoline inventories ahead of peak driving season.

This is very constructive for product tankers as demand grows and inventories remain low product tankers will need to be the conduit fulfilling the global supply demand imbalance of refined products slide nine please.

Okay.

The situation in Russia, and Ukraine has exacerbated the global diesel shortage prior to the invasion, Russia exported around one 5 million barrels per day of clean petroleum products and the majority of this was 1 million barrels per day of diesel going to Europe .

It is unclear how sanctions will play out, but it's hard to see a scenario, where it doesn't increase ton mile demand.

European countries, where the band Russian product imports, it's likely that these imports would go to Africa Asia and Latin America.

Replace the loss Russian imports Europe will have to source barrels from the U S Middle East, India and Asia.

This happens there will be a substantial increase in ton miles because in every scenario.

Replacing a barrel from a location that's farther away.

Are we seeing this yet.

11.

What we have seen an increase in ton miles, but much of this has to do with refinery rationalization. When you factor in the refinery closures over the last few years, a compounded to supply demand balance in today's market.

After a refinery closes in most cases the loss output needs to be replaced with imports for years, we have seen export oriented refinery capacity additions in the middle East come online, while older and less efficient refining capacity has been closing in Europe .

In addition, we saw significant refinery closures in the last two years in places like Australia, Philippines, Japan U S and Canada.

As demand returns with the global reopening from COVID-19, these barrels need to be replace this lost production needs to be replaced.

Over the last few weeks, we've seen record refined product exports out of the middle East and close to record levels of diesel exports out of the U S. Gulf.

This has supported the strong increases we're seeing in <unk> and <unk> rates today are demand driven recovery.

Is this sustainable.

Slide 12.

Yes.

But we do think the supply demand balance for refined products is going to be extremely tight throughout this year and.

In 2021, seaborne CPP exports were around 700000 barrels per day lower than 2019 levels. In addition, it was roughly 500000 barrels a day of refined product inventory draws. Thus we were very close in April CPP exports exceeded pre COVID-19 levels by 700.

<unk> thousand barrels per day.

Our thesis Hasnt changed looking forward refined product demand is expected to increase 4 million barrels a day.

The remainder of this year.

25% of this increased demand is exported seaborne exports of refined product will increase by an additional 1 million barrels a day.

Inventories at historically low levels. There is a limited ability to supply demand from draws and refinery runs will need to increase as well as product exports.

This is extremely constructive and it's expected that product exports and ton mile demand will increase by 5%, 14% this year slide.

Slide 13 please.

The product tanker order book is at a record well with 5% of the existing fleet on order today by looking at the order book you would think that shipyards are desperate for orders, but it's quite the opposite other shipping segments have done so well such as containers that the yards are fully booked we do expect more product tankers.

More product tanker orders, but if order today these vessels would not be delivered until 2025.

The order book is at an all time low scrapping last year was at an all time high and we expect this to continue throughout 2022.

Okay.

Unlike other sectors.

Product tankers were not building mass until the early two thousands scrapping has been minimal and basically everything thats been delivered hasn't left the fleet. Today. There are 255 product tankers 20 years and older by 2025, excluding scrapping there will be 687 product tankers 20 years and older that additional new building orders more than.

The fleet will be 15 years and older by 2025, using modest scrapping assumptions product tanker fleet growth.

Net fleet growth is a little over 1% over the next two years before going negative. However, when we use the scrap rate that reflects the age profile of the fleet supply growth is essentially zero. The next two years before going negative in 2025.

Financial highlights slide 14 please.

To maintain liquidity during the challenging rate environment as a result of the COVID-19 pandemic, we increased our leverage as opposed to raising equity prior to the increase in spot rates. Our focus has been to improve the balance sheet, which as you can imagine it's difficult to do in a weak freight market.

Since the start of the year, we have announced the sale of 18 vessels.

Vessels increase our liquidity reduce overall debt and are accretive transactions given the discount our shares trade relative to the vessel sale prices.

Emmanuel I mentioned, we have no plans to sell additional assets through debt repayment related to vessel sales scheduled amortization and our convertible bonds, we will reduce our debt by over $500 million in the first half of this year given.

Given the improving rate environment. It's a fleet average is $25000 per day in the second quarter, we could have $450 million in pro forma liquidity by the end of June this.

This would reduce net debt by over $700 million.

In addition, we have refinanced all the upcoming loan maturities through 2023 aside for one.

Given these points and our positive outlook for the market, we feel very well positioned next.

Next slide please slide 15.

Scorpio tankers is tremendous operating leverage every increase in spot rates above our all in breakeven goes directly to the bottom line.

So far in the second quarter. The fleet is booked an average.

TCE rate of close to $28000 per day close to double of the prior quarter.

Assuming rates would averaged $25000 a day for the year the company would generate almost $600 million and free cash flow before debt repayment or $10 a share.

A 40% to 45% free cash flow yield. If you include debt repayment. The company would repay $4 50, a share in debt and then generate $330 million or $5 60, a share in free cash, adding $10 a share to the company.

Next slide conclusion.

Investment highlights slide 17 please.

The company owns and operates.

One of the world's largest product tanker fleet is comprised entirely of eco vessels, we have significant operating leverage of $1000. A day change in product tanker rates equates to $41 $2 million in annual cash flow and as you are aware rates don't usually move by just $1000.

We are in the process of deleveraging the balance sheet and positioning the company to create value and improve the quality of the investment we would reduce our debt by over $500 million in the first half of this year.

Shares trade at a steep discount to our net asset value and we have a $250 million share repurchase program.

The market inflection point has arrived and the long term supply demand fundamentals suggest we could have been in tenders extended tanker cycle as well.

With that I will turn it over to Robert.

James Thank you very much.

Firstly, thank you very much.

All of those analysts to support us in these.

In the months that we've been through it.

<unk> been putting in there really dark times. So it has lots of November both.

I'd like to thank all the <unk>.

<unk> chat rooms, especially tanker data.

All you people have been really helpful in providing encouragement to broadening.

Truck criticism.

Some of it we followed.

No I think James has laid out.

Pretty conservative.

Reasonable.

Physician and his moat can.

Can we can see that even if that was obtained could be substantial value derived in the stock.

The money was being very clear that we want to improve the <unk>.

Two the investment, but continuing to de lever.

<unk> been clear that we have the capacity.

With the stock authorization $250 million to make significant inroads into the cash.

Into the stock now what we don't know.

Just how much.

Quite know what the rates are going to be and we know that there's huge differences in huge huge changes.

No that cash flow is huge even now we know that cash flow is instantaneous dynamic transformative.

We know.

What's going to happen if a company gets cash flow.

You can look across into the container market time last year.

Some companies that went up more than seven times.

February through to January .

Some even went up more we've seen in the dry cargo market companies like Eagle Star bulk.

Genco.

Having substantial rise in the value of the stock because the cash flows came in.

And then options okay.

While the increased dividends or buy back stock.

For us whilst this huge difference maybe.

Continuing the moment, we would write to our NAV.

Pretty much around 35, 36, maybe seven level.

Difficult to tell when things marching up very quickly.

There is no question that buying back stock could be that the best use of excess capital.

And.

I would count so everyone to look at the cash flow now long term fundamentals are fantastic.

The cash flow at the moment as dynamics change in trade routes.

Really unlikely to change every time, we look at it and say or answer the question last two months can it be sustained.

The answer is really a result of the market has got stronger.

This last week the market has moved into a new stage moved.

Moved into a more world stage moved into a stage where.

Asia is really driving rates right now in a huge way.

And you have the LR twos the top of the pack.

So is the most industrial demand sensitive draw.

Driving driving higher into record rates.

And just this last week those rates have moved up in the range of $30000 a day or so.

<unk> also strengthening as well during that.

Period from Asia.

Just don't get sort of fooled by the headlines of all the U S. Gulf is weakening.

Even in the U S Gulf is starting to strengthen again.

It's a much healthier market.

To have the natural order of events, which will go up to.

The highest rate.

Second.

Had these underneath that.

We are going to see some relative weakness in the handy.

Probably going forward, partly because.

The heating season is ending.

Moving into summer.

And the hand, if those handy trading dirty.

Are likely to be trading on a relatively weaker rate.

Trading in clean.

Really that sort of.

Well I'd like to open up with I'm sure you have many many questions.

A quick question. Thank you once again.

Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key please standby, while we compile the Q&A roster.

Our first question comes from Greg Lewis with <unk>. Your line is now open.

Yes, hi, Thank you. Thank you and good morning, everybody and thanks for taking my question.

Yes, I did want to talk a little bit about the market, but before that I did want to ask about I.

I guess it was about a month ago.

You did you did sell off another couple of vessels.

Just kind of curious any color you can give around that clearly asset values have been rising.

But just kind of if you could talk a little about how you're thinking about.

The fleet management.

Of your assets kind of how youre thinking about that.

Given where we are today.

Thanks for the question I think.

As we stated we're done with the sales.

The market has moved quickly where the fundamentals were pointing in the direction in which we are now.

This has happened quicker than we expected.

Three good maybe by the geopolitical aspects that we aren't experiencing however.

However.

As you know selling to shape it doesn't happen overnight.

The process of settling a number of vessels started.

Months ago, and sort of concluded with the loft.

One vessel.

Between.

That youre, probably referring to Greg.

<unk>.

At a time, where.

Yes.

We decided to proceed and go on with that transaction because it was the right thing to do and.

In the discussions we're already with.

Advanced in order for us to withdraw from it.

So we basically executed.

On look the view or the vision was selling one more selling one less didn't change a whole lot from a balance sheet perspective, but we decided to charge on announced stop.

Look at.

The <unk>.

Incredible cash flows that are coming in and as we said should those be sustain which we expect them to be as we expect them to be then go on the other discussion, which is how to return capital to shareholders.

I think Greg.

Greg one more thing I'd like to add sort of mining that was saying is that.

Yes.

It's a case of foot.

Accelerating that position, where we know were really strong.

Accelerates in a position to where we got to know because.

But adding those two ships that ability to drop that down by that much kind of clear the watershed line just a little bit clearer. Then you can just totally focus as Emmanuel said has been on one thing driving the company and driving the shareholder value.

Okay.

That's great to hear and then I did want to talk a little bit about the market realizing that it's fluid.

It's kind of.

Bob.

On a daily basis.

If you could provide a little bit of color a little more color around.

What is happening in the LR twos I mean like the recent.

Leading edge scrubber rates for LR twos, and it seems like the highest have been in quite some time.

Realizing it's never just one thing, but if you can talk a little bit about that strengthen the LRT market as James alluded to on the call at the start of the year they were kind of lagging mr's.

Sure I think both things first thing is that.

Losses really good news.

To be on this call normally be very important for us to have it on the call.

These out in Asia trying to make sure the right on top of that position on this new change that we're having in the yellow to market.

And it really is very very strong and.

We've had.

Fixed as just in this last week strength into the end of last week and is now just moved up virtually every single day.

We'll have a wide disparity we have a market that's giving you returns.

We're between 25 and <unk> 75.

But it will start to fill in.

The different products as we go through this week.

Then.

Find its level.

Which is almost certainly going to be higher again next week.

Okay.

Yes.

Sorry.

No no Robert I was just echoing what you were saying I think that the market has started.

Pumping on all ceiling bodes well in the U S Gulf from DMR side.

This has been triggered and interest on vessels that were located in the Mediterranean and northern Europe to actually look at repositioning themselves in the U S. Gulf and of course as you would expect visa has actually raised the.

The European market, let's call it.

Then adjusted.

Influx of vessels from Europe into the U S Gulf adjusted the U S golf market downwards.

And.

And raise that European market, so rebalance things, a little bit and when I say downwards. I mean, there is still margin still fixing is extremely extremely healthy levels.

Most most of the times in TCE number that are starting with a three in front.

And at the same time, what was lagging behind was the middle East.

The long runs between the Middle East and Asia.

The Arabian golf in Japan, or Arabian Gulf in Singapore, and in conjunction with that was the southeast Asia to Australia loans that were not kicking in or have lagged a little bit behind but as Robert has mentioned this has actually been a constant three going on a date.

The increase in the last.

10 days.

You've seen that the structural more industrial.

Demand for LR twos is coming and suddenly.

The increase has been extremely.

Pattern in phase and this is not only come through way.

Middle East too.

Asia rates, but also actually a lot of the U S West coast imports from Asia into the into the into California. For instance, we've seen a lot of runs going that way, which is quite seem to not seek win win and Mars or going from Asia into the west coast rather than coming back.

<unk> to pick up cargo.

And to be the least are taking tonnage out force 50, 50 days really and this creates the opening of the balance that we need to see in the increase in the middle East So that theres been a little bit.

Dynamic, Colorado, California around Australia, and New Zealand as well it plays a big role in this.

A lot of leasing.

What seems to be a sustainable upward trend.

Okay perfect.

Manuals can sign the latest stem optics to this is what was the subjects were lifted this morning.

As for North <unk>, Los Angeles, as Matt has pointed out to the long route.

So on M $72000 a day now.

It's very very difficult for us to do.

Guess ourselves.

Cash flow is all we know is we are in a strong market.

Hard to see the dynamics that would stop this market not being January firm may not have market averages 72.

Not much that we see changing the dynamic we don't see the Russia, Ukraine situation changing very much.

In the.

The next months.

And we are coming into the gasoline season with.

Inventories in diesel and gasoline just mess.

Yes, no absolutely definitely definitely.

Good time to be a product tanker owner, hey, guys. Thanks for the color as always thank you have a great record of that.

Thank you.

Our next question comes from Kenn Hoekstra with Bank of America. Your line is open.

Hey, great good morning.

Robert So just to understand there were supposed to take what 72000 and put that in Rms.

Fossil now.

Okay.

Yeah.

I would say no I mean do you think you could put 25, because we used to date.

Model and the model is great right.

So give us a little easy hurdle kit.

Yes.

So walk me through this part right. So we've.

We've got excited over time that rates are finally here and youre on the costs.

Kind of walked us through hey, things are improving.

Is it three months that we come back in.

I guess, either what goes wrong from here or what's the postmortem that you come back and say Oh, we should've seen that or.

What I mean I've heard James the story right in terms of we don't have much of an order book for a while.

Things are looking good so what is it that you think can go wrong from here or that you're more confident that this is finally that trigger point.

Well first of all from your base positioning so.

Our market simply just supports the stock should be trading towards it.

Okay.

Okay, maybe towards the mid thirties.

It's quite difficult unless you see some really weird event, probably not one that's going to have happen.

Some crazy escalation in.

Geopolitical events, it's really hard.

Because that can.

Scenario.

Quite a large drop in demand.

Demand or something.

What could go wrong I don't know.

Perhaps people aren't allowed to use that cause in the United States or Europe .

Except an odd days.

Allowed to fly it will go on holiday something has to happen too.

To jolt the.

The headline demand so much.

The headline demand comes off a little bit because.

Everyone was using.

Weighed more products, even with that product demand, increasing and they were before and it's running down inventories what you've got here.

A real genuine change of the ton mile situation.

That's coming at the same time as the long term fundamentals of refinery change.

The refineries.

Opening up whether upon closing.

So.

That base level too.

To get to.

Trading at 2000, 25000, a day with the balance sheet Scott.

400, 500 $600 million.

Cash sitting on it.

Trade towards it.

It's pretty hard to see.

Then we have to take.

The month by month.

Soft that every month they get.

The leverage is very high of nearly $40 million for every $10000 improvement.

You get safer and safer literally every week you're going alone.

So I call. It the answer is I can't think of anything.

Extraordinary that would take down every single stock.

In the world.

For that to happen.

So let's go to a different subject, which then is.

I like Greg's question on the asset sale because.

Emmanuel saying, Okay, we're done.

It certainly showed your your NAV.

Capabilities to the market right when youre selling assets at the market level. So maybe the issue in terms of the stock then I don't know if you ever think of M&A like you did with with your prior firm in terms of you gaining scale or recognizing it for bringing investors back in to be able to get that increase.

Liquidity.

What's your thought within the sector.

Are there discussions at all or Youre, just saying Hey, we're finally at the point of making money.

But the point of making money and we got the news there is out there.

The largest there is out.

As with <unk>.

One in all the three remaining categories. We're in right now handy.

And the <unk>.

We have no reason inflammation, all customer service to to acquire more assets or buy another company virtually every purchase.

Almost.

Yes every purchase of any other company would create an inferior.

Fleet profile.

And.

Buying one or two ships.

<unk>.

There's really no point in there mark.

<unk>.

I mean, it's not even being discussed.

Okay.

Well, great I know I appreciate the detail.

It does pick up bring up another point that we haven't really.

Yet, which I think is good is that that's the beauty of where we are now.

That's the that's what's making it easier to manage more predictable as we do.

Don't have the Capex, we have no new buildings on order dominant scrubbers.

We have very little.

Capital expense out.

The maintenance because the fleet is so new and we have done so in the dry dockings already in preparation.

No, it's just sitting and waiting for the right inflection, which.

Youre grabbing the holdup.

And I think.

I think it gives you a party started with we've disappointed.

We have disappointed a lot of people in fits and starts over the years, none more so frankly than ourselves I mean, we are.

<unk> quite heavily is.

Inside this management in the success through the stock because it's a company.

As is the God.

So.

We are seeing.

We would like payback at this time.

Yes.

Thanks, Mike I appreciate the time.

Thank you.

Our next question comes from Ben Nolan with Stifel. Your line is open.

Yes.

So I've got a couple.

Start maybe on a little bit of a macro side I think James you had mentioned that you expect at some point.

People are going to be ordering some more product tankers and I appreciate that that might be a very sort of long sided long view type.

Type profile, but when I look at where current prices are where current new building prices are versus.

Existing assets and you can buy you can buy a brand new ship in the water for less than it would cost you to order something and get it to five years from now I can't think of any reason in the world why anybody would be ordering a product tanker right now unless the.

The second hand values come up materially or the new building prices come down materially which doesn't seem like it's very likely.

Am I off on that or how do you think about that dynamic.

No I think youre right on that.

I think youre right on that then the only thing I would add as you could see for example.

Owners look to order vessels with dual fuel technology on long term time charters similar to what SWM is done.

And that might make sense since you tried to navigate.

What's the next fuel will be.

But that's the only caveat, but I do agree with you.

Just to sort of follow on to that quickly.

R R.

There's been a few of those on the on the Aframax or the LR two side, but.

Yes.

Is there an appetite for by charterers to do that for let's say, a handy or an MLR to go it just seems like it is.

It's being done on bigger ships, but it's much more of a reach for smaller ships.

I'd say most of the interest so far from from Charterers has really been for vessels on the water in the next few years here because they like US think that maybe this inflection point now will lead to this longer term extended tanker cycle recovery getting given the supply demand fundamentals. So we havent.

It doesn't mean, they havent reached out to other people, but as you pointed out would make more sense on an aframax and MLR with dual fuel.

After this dual fuel LNG. It is hard to figure out where you would load LNG bunkers for an EMR in Latin America Africa certain parts of Asia. So I think that's one of the challenges we see even for our own fleet in terms of meeting that.

Fuel types.

Alright.

Okay. So.

Then for my follow up just switch gears.

You're talking about the market being a lot better you know have a lot of liquidity, which is great and.

We have been able to monetize some assets.

And then a few times now there is part of the conversation been looking to return capital to shareholders.

How would you think I mean, we just came through a pretty hard time here where.

It became somewhat necessary to sell assets to maintain liquidity.

Yes.

Is it maybe not unreasonable to think that the better thing to do is to just spend some time and serious capital to delever the balance sheet and just make sure that you're never in a place that could happen again.

I think that takes it up to your wife in monthly correct Jamie.

Ben I think that's correct, but remember we've caveat everything with.

Sustained superior earnings.

No.

Are not sitting there, saying okay, yes.

2017, a day, you're going to buy on the stock that you are.

Also during that same.

At Superior earnings.

To pay down a reasonable amount of.

Of.

Extra debt, along with amortization as well as.

Take advantage.

Points, along the way to buy back stock.

If you break into a.

Sustained period.

<unk>.

Really crazy earnings and obviously, that's going to terminate so what's going to determine it is the actual rate that was going to get I mean, we've already.

Beyond what we already we haven't even got paid for what we've already guided.

April has been.

First 33%.

We're already with <unk>.

So as we've done in all our categories. This week can be higher than the average.

We actually use guidance because the guidance we stopped after <unk>.

Friday.

So it's not going to be a help to leather.

Let's go it's exactly going to prioritize.

Making quality the investment better.

Safer more sustainable.

Yes.

Responsibly, taking advantage of what is an enormous spread in there maybe.

Yes.

Although again, it's an unpredictable market right. So it seems.

Better safe than sorry.

I agree.

<unk> becomes a point, where you might be you asked themselves liquid so what what.

If you had something that was in the market there was suddenly.

Some big event that was going to take down your confidence in the long term fundamentals for some reason that was clearly.

Ethan.

That you.

You can change your mind, then you can sell two or three ships.

Sure.

Alright sounds good I appreciate it thanks.

Thanks.

Thank you and our next question comes from Magnus <unk> with H C. Wainwright. Your line is open.

Yes.

Yes. Thank you for taking my question just.

Okay.

My question has been answered but.

Following up on Ken's question about the risk going forward.

A very strong demand picture limited supply growth going forward.

Also that the ton mile demand should offset reduced volumes, but do you think the biggest risk.

Is the.

That the refineries can't supply or that the volumes will offset the ton mile I mean, it's there.

Whereas the additional.

Fly from the refineries coming from given that they're already running at pretty high levels.

Magnus your Youre correct not at least in the first half of this year, but certainly in the second half we're looking at a very tight refined product market.

We do expect refinery to increase.

Capacity, two to 3 million barrels a day and that adjusts for a loss in Russian production.

But we do expect increases out of out of Asia out of the middle East, which had been in maintenance and <unk> seen them come off maintenance. That's what you've seen also another factor as to why the LR $2 has improved.

But we could have a and are likely to have a very tight market.

That being said most of this incremental.

Supply is going to need to go to places with deficits. So it should benefit product tankers.

Would say.

Super High oil prices a concern for us as we get through this year. There is there is towards the end of the year and through next year about $1 million or so barrels of refining capacity coming online in the middle East, which is fantastic and much needed in the market and you might have.

A different picture in Russia at that point, So I do think at least for the second half this year things could be extremely tight but would benefit product tankers in the next year I think the refining system will will figure out.

A way to make it a little bit less tight.

Alright, alright, thank you for that answer just.

On the.

I mean rates have picked up quite a bit.

The conversations you're having now with <unk>.

Some of the charters as far as securing tonnage.

Given that it looks like the rates are going up.

Stay very high here is there an appetite from your side or more so from the other side to secure tonnage just curious if theres any conversation of longer term charters here.

Sure.

We're starting to see that thanks Magnus for the question, we're starting to see that.

An increase.

Increasing quite substantially and what was the interest for 12 months period has now shifted to actually.

Started to shift into the 24 to 36 months.

So these are conversations that usually signals thats usually show.

The durable view of.

The oil companies and oil traders.

So we expect actually to see.

Some auction in the long term fixing.

<unk> forward in the product tanker space.

Over the summer for sure.

We're going to see that.

And users are going to start covering their books for I would say probably 36 months ahead.

And as part of their books 436 months ahead, so I wouldn't be surprised if.

We will see it.

A number of these features going forward.

And from Europe , not preparing necessity to Scorpio tankers, only I'm, saying in the product tanker space right and from your point of view.

Would you prefer to stay spot or is there a preference in the duration of the charter I mean, a 12 month charter doesn't really do much so.

Do you look at that.

I think there is always a magic number, which we're not going to disclose year because it would be.

Not helping in negotiations and probably a minimum of 36 months would be.

Would be required to our product our attention and we're getting there from on the demand side.

As I just discussed.

But yes, when you start seeing those.

Those magic numbers being being mentioned in.

And the period of 36 plus months I think that is wise too.

Looking at covering a portion of the fleet and by the way for the first 345 fixtures, we would hope to have been too conservative and fix that too little numbers right because it would mean.

The season is coming is.

Stronger than expected so yes.

I don't know if Robert has anything to add to this.

My view.

Alright, Thank you Manuel.

Got it.

Okay, and great way to Emmanuel to what I'm, just waiting to Emmanuel to us the discussion.

One of the chartering guys discussing with you to take a ship for high rates and put it on a lower rate.

Okay.

Alright, Thank you Robert.

Thank you. Our next question comes from Liam Burke with B Riley Your line is open.

Yes. Thank you.

You have paid a dividend pretty consistently through the cycle we've been through.

The last six quarters, where it's been rough.

Clear about the $250 million repurchase authorization, but is there any thought.

With the business getting stronger that the dividend through the cycle could come up from its current levels.

Maybe I'll take a shot at it.

Liam.

Thing that with what we were.

Discussing we've been or what Ben was obsolete.

Ben has stated I think that is a little premature to look at this now but in the cycle for sure. So specifically we're looking at that.

The tanker cycle, which we think we have ahead of us for sure. It's part of the capital allocation of the company and returning capital to shareholders. We will look at.

At the dividend adjustment upward.

This is not something that we are discussing at present for the reason that.

We've touched upon in terms of we need to see this market to be sustainable we expect it to be sustainable at this stage, but we need to have.

A few months of sustainable markets before we look into <unk>.

Creasing or upping the dividend.

Yes.

Also just right now it's not it's not even being sort of because of the gap between the NAV.

The stock price.

Two methods.

Fair enough we got.

And the previous company. It was in the last cycle, we had the same situations.

And was.

At this point did not increase the dividend.

And then at a later point when.

Buying back stock.

Even still buying back stock.

<unk> started to close.

We then increase the dividend by a minimum of the proportion of the stock with World class.

Because you want that increasing your cost.

And then you add in little bit improvement in the market.

And it looks it looks as if <unk> was pointing out does that same case start to apply.

Great. Thank you.

Probably of James' question, but.

Youre getting the full benefit of the full economics of your scrubber investment.

Current spreads here.

Some of the ports are you having difficulty getting.

High sulfur fuel.

Kevin would you like to take that one actually.

Sure.

No we're not.

Okay.

Thank you.

No problem.

Thank you.

Our next question comes from Chris Robertson with Jefferies. Your line is now open.

Hey, guys. Thanks for taking my questions here, Robert You had mentioned Genco and Star book I know that you've spent some time talking about the dividend that it would be premature to increase.

Fully clear on that priority seems to be balance sheet strengthening and then maybe some opportunistic repurchases, but you did mentioned genco and star bulk early on they were able to come up with a dividend strategy, it's a little bit more formulaic and articulated is that something that Scorpio would look at it.

In the future in terms of a dividend policy versus kind of more ad hoc increases.

I mean, we've all.

He said its a long time in the future.

Dividend increase our dividend policy is not just not being discussed the tool right now.

And what could happen in the future maybe I don't know it will get to that in the future.

Okay fair enough.

James This is a question for you. So you had highlighted that the.

The fleet TCE is currently around 28000, a day can you talk about in contrast that with the current.

Kind of average fleet cash breakeven in Opex levels.

Sure. So the average fleet all in cash breakeven in 17000, including debt and if you were to.

Do it without that it would be around 11000.

Per day.

So well above.

Well above that.

Currently.

And I guess last question on our end.

When looking at the vessels that are on sale leaseback, how many of those have purchase options were obligations and how are you thinking about fleet management in the context of re acquiring these vessels versus looking elsewhere in the secondhand market.

We wouldn't be looking to buy any ships right now.

With constantly trying to say, we're not looking at buying companies, we're not looking at buying ships not looking to order ships.

Looking at that.

As lowest capex as we can maintain so that we have as much cash flow.

For debt repayment.

<unk>.

Yes.

Stock purchases.

The way to go as possible.

Buying.

<unk> is off the table, what we're going to do though is there are as we pointed out quite correctly.

Purchase options in some or all of the leases really.

But some of the leases are more expensive than others.

So one thing we're going to be able to do anyway is to make our financing more efficient by exercising some of those purchase options and replacing them.

With.

Conventional bank debt will be able to take benefit there because we can afford to pay less leverage now.

To those banks. So therefore, we should be getting less spreads in better times.

Yes, thats very cloud to lower start start to lower our breakeven.

Got it thank you Robert.

Thank you.

Question comes from.

<unk> <unk> with Clarksons <unk> Securities. Your line is open.

Thank you for taking my question.

I had one market question. If you look at the Russian owned vessels, they are apparently increasingly being sanctioned.

So this should be.

I think vessel supply.

But.

The question is really can we see the effects today or is that something that is good.

Going to happen or is it all going to happen.

In the market.

And product.

Or just generally.

We have a product of course.

Jamie when I go along in the Russian alone.

Yes sure.

Okay.

Emmanuel you want to take it or you want me to go.

Yes.

No it's fine.

I'll start.

First of all on specifically on what you mentioned for the and thanks for the question.

The product tanker per se the product tanker fleet, there has not been affected a great deal.

On the assumption simply because.

There are not that many Russian product tankers out there.

So this is more affecting crude starting from the Aframax is upwards.

And the.

Impact in the market.

Four of those sanction vessels already.

We called down because of course there is.

An immediate effect on it whether this is going to.

Impact the crude market more going forward.

Yes of course.

Spectation.

But there are there are a whole number of geopolitical political aspects around that that are difficult to read at this point, so I wouldn't know how to.

<unk>.

Elaborate further rather than on a very simplistic view of course, if you take.

Aframax and Suezmax is off the market.

This will benefit.

The crude tanker space.

Yes sure.

I think it should affect the product market at least as I look at the statistics there are around 2% of the product split above central part of it.

Direct loan by Russian companies.

It seems to be something that is going to happen then probably not yet.

Yes.

I think the important thing.

Photo Youre correct on the margin is going to be helpful anyway.

And combine that with the lack of deliveries in the.

And the removal of product tankers from the premium trades.

15, along with Ironically, we've signed to date scrapping.

Paul It's just creating a very.

Almost no growth in supply scenario.

Going forward at the moment.

And as you say and there'll be times, when maybe it will be negative two.

And I think you've pointed to some general supply of ships is proper.

The most under look.

And the look.

Fundamental.

The.

Is the lack of supply and lack of ability to replace in the short term.

Thank you.

As far as I don't know its solid two mris for delivery in 2024.

On the <unk>.

Very few.

Thank you that's all I have.

Thank you. Thank you and this concludes the Q&A portion I'd like to hand, the conference back over to Mr. <unk> for any closing remarks.

Yes.

No particular remarks, thanks, very much for being with US today and look forward to speaking to you all in the next days and months. Thanks a lot.

Ladies and gentlemen. This concludes today's conference call. You may now disconnect everyone have a wonderful day.

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