Q1 2022 Euronav NV Earnings Call
Good day and welcome to the Euro in the fourth quarter 2021 earnings Conference call.
All participants will be in listen only mode.
Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
To ask a question you May Press Star then one on your Touchtone phone.
To withdraw your question. Please press Star then two.
Please note this event is being recorded.
I would now like to turn the conference over to Brian Gallagher head of Investor Relations. Please go ahead.
Thank you.
Morning, and afternoon to everyone and thank you for joining <unk> Q1, 2022 earnings call.
Before I start we'd like to say a few words.
The information disclosed and discussed the Mexico based on information as of today Thursday nights when she joined the Mic Board.
These statements involve risks and uncertainties.
Forward looking statements reflect current views with respect to future events and financial performance and May include statements concerning plans objectives goals.
Future events performance underlying assumptions and other statements, which are not statements of historical facts.
All forward looking statements attributable to the company.
Oh, especially qualified in their entirety by reference to the risks uncertainties and other factors discussed in the company's filings with the SEC, which are available free of charge at Macy's website.
At Www, SEC Gov and on the company's website at Www dot.
You should not place undue reliance on forward looking statements each.
Each forward looking statement speaks only as of the dates of the particular statement and the company undertakes no obligation to publicly update or revise any forward looking statements.
Going forward.
Actual results might differ materially from these forward looking statements. Please take a moment to read our safe Harbor statement on page two of the slide presentation.
I will now puzzle did you predicted if you go to stoop to start with the content slide on slide three Hugo over to you.
Thank you, Brian and good morning, or afternoon to wherever you are and welcome to our first quarter earnings call.
I will run through the Q1 highlights before passing on to leave log or CFO to give more details on the financial with a focus on our balance sheet and P&L Brian .
Brian Gallagher, our head of IR and research will then highlight some key trends in the wider tanker market and your positioning within it.
Before I return to summarize our strategy and outlook.
Turning to slide four and the Q1 highlights.
It was a busy quarter for your NAV on many fronts, but we are particularly pleased with our fleet modernization program, which has a strategic focus with nine vessels transaction during Q1.
Indeed, we sold four older Vlccs and acquired two modern ones and we sold one suezmax jointly own and took delivery of two brand new Super acreage Suezmax that we had purchased last year. They were still under construction, but for the for a default to quality.
This in turn has improved further the age profile of our fleet.
Freight rates were under pressure for most of the quarter, but the onset of the conflict in Ukraine in early March caused an important dislocation in the oil markets, which in turn has proved to be a positive catalyst for tanker market.
This is driven sequential improvement in freight rates across all segments, starting specifically with smaller ships benefiting from the Russian dislocation and gradually impacting larger watts.
Whilst freight rates in absolute terms remained disappointing the direction of travel is encouraging, especially in suezmax with rates on average at $20000 per day for the quiet for the current quarter.
I will return later in the call to expand on our thoughts on some of these trends and the outlook, but we'll know pass over to leave it to provide more details on the financial leave it over to you.
Thank you Bill.
Before I start you will have noticed all of their financing and market efforts are being recognized which reflects the hard work by our employees.
Turning now to slide seven and the balance sheet.
Focusing firstly on our balance sheet, which remains strong and supporting and financing the expansion of our platform.
Our two year liquidity event, they remain core to our strategy.
And while lower than Q1, it is sufficient to deal with more duration to the current down cycle.
Leverage has ticked up to work our self imposed limit of 50%.
That's over and availability of financing remains good.
And the Optionality and further fleet recycling readily available given a buoyant sales and purchasing market.
I would now like to dive into our income statement and give more detail on Q1 performance on slide eight.
As you highlighted earlier.
Well, it's a small fry treat trade rates continued to sequentially improve quarter on quarter.
Strong cost control has allowed us to progress on Q1 2022.
Even though we have had to endure some exceptional cost during the quarter related to older corporate background.
As we highlighted in Q4, our depreciation approach hasn't been updated and it was pleasing to bank a capital gain on some of our legacy sales and leaseback arrangements during Q1, which we announced in early January .
I would like to spend a brief moment on our fuel hedging which continue to be a net benefit for.
You had enough to execute a 100% that hedging program to manage the volatility of the company.
Paul.
The paper position, which is booked in the financial result of this quarter for a total amount of minus $16 3 million. It's.
It's more than compensated by the realized gains on consumption and the unrealized gains on the fuel stock for a total amount of <unk>.
$90 million and poverty.
I don't know Boston onto Brian Gallagher to rent to current thoughts on the tanker market.
Thank you Lisa.
On slide 10, we look at the tragic events of Ukraine, and the impact that they've had some the Russian dislocation, which has had a major impact on our market.
Effectively this cancellation, that's triggered instead of reactions, which have been largely positive protect cooperators.
Slide 10 shows the before and after effects of Boston dislocation.
And it also looks at how we anticipate developing.
On the left hand slide you can see the relatively stable $4 5 million barrels per day with Russian exports.
Largely seaboard driven.
Every single day before March most of this eastbound oils. It's all these markets will continue to remain unchanged will be under some pressure from sanctions.
The key impact we believe has been and will continue to be in the western both reports, which have traditionally exported between two and a half million of 3 million barrels per day to the E U.
This trade was performed by Suezmax and Aframax vessels. These ships are now selling around Europe directly to far east markets. Thank you, Ms, Washington, or very long distances.
The replacement cost of oil that you use or what are you taking more of the oil from the middle East and from the Atlantic, namely, Brazil, North Sea U S sports as well as West Africa.
This trend, we believe will deepen and strengthen and then we also anticipate the Russian production will probably fall by around about 1.1 point 8 million barrels per day.
Yes.
This is seen.
The benefit from slightly lower and smaller volumes of crude movie.
Crude is now moving much greater distances or ton miles.
This impact still has some way to run we believe and we will take over the summer months to fully impact the scale of this dislocation, but overall it is a very strong positive for the tanker market sector and as you can see from slide 10, we believe the spillover effects already starting to affect and will continue to be a positive effect on the vlccs.
It.
Important to remember vlccs cannot discharge of loaded beneath the Russian ports. Therefore, it's never really been a market for vlccs and the impact has been on what you're saying.
Aframax and Suezmax.
Catch me.
The catalyst for want of a better word has been the chief feature in our market over the last quarter. So if we now turn to slide 11, we can see other short term signals, but you'll know if he calls it positive.
Four key factors, we addressing slide seven bottom left U S crude exports have risen on a full weekly average basis well have to grow.
Million barrels per day or 41% since mid January as a mix with increased production release of strategic reserves unattractive into oil pricing has boosted exports.
These borrowers tend to be very long haul in transportation and support building the better outlook when considered the top left and looking at the recycling activity.
Top left shows that this just becomes a rise again.
April alone, we sold six Suezmax exit the global fleet, which is a very large number on a month basis and this follows the aframax sector, which had been shedding tonnage.
Historically earlier them Vlccs and suezmax in their recycling cycles.
So bright underpins, what we've been seeing on a day to day basis volatile, but rising crude volumes in April recorded the highest global volume on a monthly basis in two years.
This is another encouraging data point.
Finally, if we look at bottom right. We can show the direct impact of the Russian dislocation.
Russian ships are made up around about.
70% of the Aframax fleet.
About just under 3% Suezmax fleet and this is enough to have driven a much trying to market in those categories and its freight rates rising quickly and some extreme levels on specific routes.
<unk> cannot node as I mentioned before discharged Russian crude books. So it has not had much of a direct impact, but we're now seeing a substitution effect as vlccs are being used.
Replace the powers loss from Russia to the European ports from the Middle East and from the Atlantic.
Yeah.
We now turn to slide seven in the medium to enjoy this which continued to build positive symphony FRA lobster crude tanker market.
Slide seven is a slide which looks at the mix of the immediate future on the left highlights you must still very heavy special survey a program we have the older tonnage, namely those ships going through the 20 year Special survey in the VLCC and Suezmax sector.
This represents around about 4% of both categories alone.
The next 12 months and again this is a very important point.
Points for owners to decide whether they want to continue to remain in the sector will take the very attractive scrap prices that are currently available.
Right hand, part of the chart looks at the absence of new orders of Vlccs, we've not seen the VLCC order since early July and the reasons behind this.
Some interesting fairless scheduled this week indicates that it's not just an absolute dollar issue. Although that is an important brand new plain vanilla VLCC costs $150 million at the ports when you reported today.
And this also means that in order to make an economic return of 10%.
Now they conclude needs a roundabout 46 to $47000 for the.
Page Fright nights in order to justify the entry price.
With steel prices remaining high in the yards full in terms of the shipyards constructing ships, it's difficult to see how these barriers to entry that comes below it anytime soon.
I'm now going to switch gears.
And look at what was an important milestone last week for you right now, namely the unveiling about decarbonization pathway, but we know how long it's like the tea.
In summary, there are two broad stages to our approach on decarbonization.
Which will end up with us being net zero by 2050 with an ambition to beat that timeline between now and 2030, we're looking to reduce the energy we use as well as investing in future technologies.
The second stage from <unk>, where the focus will be on adopting cleaner energy and scaling up that investment in technology.
Reducing our future emission intensity by 2030.
40% will be an important pathway a milestone on this journey.
On a commitment to get in line with the Paris that trajectory, but net zero by 2050. We believe this is very very attainable.
They're very comfortable we can actually beat this time as I mentioned earlier.
You would have the attributes you're managing the energy transition and decarbonization, all we believe amongst the best in class already and the tech sector.
One is shipping community.
We encourage all are interested in you and I have to review all 70 page presentation last week, which is on our website with a transcript and a replay also available.
I will now pass back to Chief Executive Hugo de Stoop to give some concluding remarks Hugo over to you.
Thank you Brian .
The euro enough platform is working well is well equipped to deal with the next stage of the cycle with high quality assets, a strong balance sheet and the right level of liquidity, we have addressed and we will continue to address all three age profile as well as the positioning of that fleet. We've also laid out how this platform going forward will decarbonize and meet the challenges of.
The energy transition and we have outlined this recent dean or ESG event.
We believe that our platform will it.
Will deliver enhanced returns for our stakeholders going forward.
It's still a ton on the the positioning in the past cycles on slide 16.
Do you not have continues to manage its business as we have always done in a disciplined and focused manner applying high governance standards and a methodological approach across the platform.
As both Bryan and leave it highlighted we've been busy in positioning ourselves for the next stage of the cycle.
It is important to remember that we are in a cyclical industry consolidation opportunities are often prison, but timing is always the key.
The chart on slide 16, smooth the field TCE resale price in the one year time charter rates, which are two key variables within our markets.
Historically, we have executed consolidation transactions at similar points in the cycle.
<unk> physical with the acquisition of the most crude tanker fleet and four years ago, when we merge with generate.
We know proposing to merge with frontline and to offer a material consolidation transaction in order to deliver further shareholder value as we enter into the next stage of the tanker market is.
This exciting development and merger of two leading companies in the space with the <unk> is a strong signal of our confidence in the sector.
Turning now to the summary, slide and outlook on slide 17.
Another upgrade is driven by the catalyst that has come in tragic circumstances from the dislocation from the Russian situation.
This will drive we believe sustained change in ton miles as Brian highlighted in swapping out Russian barrels to Europe for those from Middle East and the Atlantic and Russian barrels transported over much longer distance than before.
Elsewhere demand and supply of all offer some encouraging data points with small, but consistent upward trends since.
Supply looks well underpinned given the order book at 25 year lows and global.
Global fleet age profile at 20 year highs.
Thank you for your time and attention with that I will pass it back to the operator for your question.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Okay.
And our first question will come from Jon Chappell of Evercore. Please go ahead.
Thank you good afternoon.
Hugo I understand there's sensitivities about what you can say regarding the proposed frontline merger, but maybe you can just help us understand the next steps I know the AGM is next week.
What does it term sheet mean.
Versus an actual closed deal what steps need to be take to get the term sheet to a actual proposed deal is it just clearing the AGM in and getting the board on board so to speak and just what are the other building blocks to bring Mr. Finality.
Yeah. Thank you John and as you appreciate that.
There is a limited amount of information we can that we can share on this call, but you're absolutely right.
The first step is to go over the AGM next week and then have the board reconfirm. The the merger and then after that we will update the market with.
The next steps are the timing and some other bits and pieces that we've been working on but we can only do that after the AGM.
And then I know this is a stock for stock deal and you still are sitting on a fair amount of liquidity, but are you kind of in a strategic holding pattern until there's more clarity on this plays out or can you continue the rejuvenation of the fleet either through sales or purchases I'm as you know until you until you get to the finish line on this deal.
No absolutely I mean, what you've seen is that we.
We are not resting on our laurels and it was a very busy quarter on a number of our.
Ships transaction as we have explained in the preparatory remarks.
And we have more than pipeline indeed.
So the two companies are being run independently until a merger happens and we will continue to work hard both on the on the spot market in D. C from but also on our fleet rejuvenation and that's something that we believe is the right time for our values are already ahead of the market as you've seen I mean very strong numbers.
The vessels that we sold and then it was we found some opportunities are at what we believe are attractive price, especially when you bring in the element of consumption.
Because through the fall.
That we sold were designed to go out.
Hi speed speed that we were performing at 10 or 15 years ago.
Whereas the two VLCC that we purchase where.
Designed to go at the current speed and very economical with the latest eco design.
The same for the two suezmax.
And as you know our VLCC fleet is relatively modem, but oh suezmax fleet need.
I needed some rejuvenation and that's what we've done last year, when we purchased in and order a bunch of contract and order a previous he sees a total of five so all of that is part of the strategy and that strategy doesn't stop to the contrary I think that.
The modem area and hopefully the market appreciated okay. That's helpful and that we'll call that my a and B to two question. One my follow up question for for Bryan. This diesel shortage issue seems to be gaining a lot of momentum and clearly you know your vs. In Suez is carry crude have you thought about the secondary.
And then even tertiary fallout of these global diesel shortages and what that May mean to the crude markets.
Yeah, I mean, I think as you know John better than anyone else Monaco Nicola.
We can also be markets were working in weeks and months and Thats the duration of our voyages, whereas if the capital markets see something today and they want to know what the impact is tomorrow. So we did try to stress on the co in anticipated low this Russian dislocation I still got some way to go in the early stages of it.
From a shipping market perspective in direct answer to the diesel side of things, Yes, I think we're getting such an extreme.
Elements of this location now you're seeing it with very high rates that I think we would expect to see some spillover the arbitrage quite frankly can't last forever, we're already seeing that arbitrage, which is beginning is doing some heavy lifting of the VLCC rates as we're seeing of Suezmax and Aframax cargos.
They merged into into VLCC cargoes.
Youll get some blurring.
The margin with the product market as well, but it's a bit early yet to say that's the thing that I think there is some way to go on the arbitrage within the tankers categories and.
And if we have more duration and it looks like it's likely into the summer months on the diesel side of things then that certainly will come through in your own you're hearing that from you.
Some of the playbook, Valero et cetera, and directly involved in a space that there does seem to be some duration, but I think also one.
Absolute and output.
Output, we would expect to see.
Further continuation of the U S exports of crude because there's obviously some slated deliveries from our strategic reserves.
And now Youre, obviously going to come over a lot of that is being used as feedstock into the European refiners refinery.
As we know expressly the U S refinery slightly is already full and they don't need that to where that crude so absolutely. There's some.
Absolute.
And secondary benefits I think but I think for the.
These are sort of things I think we have to wait until next quarter before we can give more clarity. Okay. That's very helpful. Thank you Brian Thanks Hugo.
Thank you.
The next question comes from Florida, more Codell of Clarksons Securities. Please go ahead.
Thank you hi, guys.
First question regarding the proposed merger with frontline.
Is it correct that the shareholder vote.
75% majority it needed to get it back.
It's a little bit more technical than that so many ways to approach a combination.
And obviously, that's what we're working on at the moment.
So if you are if you indeed to think about Oh to full fledge merger on day, one you need 75% of the votes that are being presented at a special meeting.
As I said I mean on the structure that could be contemplate which required.
Lower amount of food.
Okay.
Acquisition I guess.
Unfortunately I cannot.
Ill tell you much more value, but are you need a simple majority to just take control of the company of course, and that's 50% and one chair.
Yeah understood.
Understood.
Second question is on the on the market.
And yes, it seems like the Russian.
The Russian oil exports have been holding up.
Okay, and then well so far.
According to the International Energy Agency.
Yeah.
Which had a report today, they said that they're on May 15.
Then.
Major oil trading houses are supposed to do.
The whole ultra section.
Russia I guess.
The question is.
Do you foresee any immediate impact on the tanker market from that winding down process.
Okay.
Yeah.
Yeah.
Well I think it's fair to say that.
Patients sanctions and quite frankly people should make a difference between sanctions in an embargo. So the sanctions is what we have seen in Venezuela and Iran.
Which are supposed to cover everything on a worldwide basis using.
Currency.
As a way to preempt people from trading oiler, namely the dollar.
Whereas embargo means that you cannot export or import Europe into the U S.
Rationally. So there is a there's a series of.
So called sanctions, but also in <unk> towards the end of the year.
You can put in place and then you have enough people, who have declared that they will do this or not do that as far as the rationale or the Russian commodities are concerned.
As Brian said, we have seen.
Sure.
The first impact of that into the smaller size.
Aframax that a spillover effect as <unk> seen our numbers into the Suezmax.
And quite frankly, we went out of the trough on the VLCC, probably because of that as well and as Brian said. This is because a combination so to answer your.
Question, Yes, we should see more of that happening.
And therefore that should benefit the entire tanker market.
Again in the same order.
The smaller ships because the Russian are rationalized.
The rationale is usually transported on the aframax.
There are two type of vessels.
But with considered consequential consequences are inconsequential consequences.
On the auto market because the longer the distance you need to transport the all over the bigger the ship you need for obvious reasons of economies of scale. So what we anticipate to see future is probably <unk>.
Lifting is being done on smaller ships and then lighted into Vlccs to go all around the world and probably the far east in India, and China sort of fleece.
Carey, the rationale or where those people will be able to buy it because as I said this is an embargo north.
Not strictly speaking of sanctions.
The Americans.
Great. Thank you for the color that's it for me.
Okay.
Thank you.
The next question comes from Chip Bergh Hilder of ABN, MRO, Oh D. D O BHF. Please go ahead.
Yeah, good afternoon gentlemen.
And lately of course.
Three questions and coming back on the let's say the merger announcement.
In last week's presentation, you again highlight that you expect significant synergies.
Can you roughly quantify what is significant for you wish to 10 million per annum $30 million or 100 million golar spray in them.
And then secondly can you somehow give more clarity.
And maybe quantify on your expected cost synergies and expected revenue synergies.
Theoretically.
And what is still not clear to me.
Any way explain.
Where does the merger ratio is coming from why 145 frontline shares for one your I'm not sure and not for instance, something like do frontline shares for one year now sure.
Those are my questions.
Yes, thank you very much for that.
Again, we will give a lot more information about the merger.
After we had our AGM.
It is obvious that we expect significant synergies and indeed the different buckets.
I think on the.
Revenue side it is about utilization.
And so when you think about.
Traditional Trump shipping.
We usually a carryall from prediction phase to the refineries and then we come back empty.
Obviously to be the feed the more options you have on triangulation and these sort of things.
So we will come back with a with a hard number even though it is hard number would be an estimate obviously.
On the on the other items.
The logical ones our G&A as we said, we don't expect a lot of synergies in the G&A.
Two companies are structured in a very different way so.
Frontline is oh.
Outsourcing part of the services, whereas.
Your NAV is more vertically integrated in the <unk>.
And are we thinking of is a combination of both so there will be synergies that will be quantified and we will announce them to the market.
With more precision and obviously, how do we get there.
On the Opex.
Again this is a very logical when you were thinking about procurement.
This is economies of scale. So you are dealing with more volume and pretty much everything that you buy there are some bigger elements in other when you think about the fuel that we buy when you think about the lube bonds.
So obviously this is a numbers game in.
As always if you are more important clients for your service providers, then you can and talking about a better price.
Finally.
Importantly on the financing side, we believe that the platform will be very attractive to.
Too many people providing capital to the company, especially on the debt side and here I'm thinking about the banking.
The banking side, but also the bond side.
Which should benefit from.
Even better credit rating.
It's too early you hard numbers, but we are working and crunching the numbers and we'll communicate that in due course and certainly ahead of.
He merger proposal that will be put before.
Both sets of shareholders.
As far as the ratio is concern.
We didn't we didn't want to come market with.
The calculation behind it that was a result of a negotiation.
Usually when you do that in shipping you look at the NPV of the two companies and <unk> is relatively simple calculation, because we have a hard assets ships, namely.
And then we have a certain amount of debt and that gives you the number.
And that is the starting point of any conversation and the risk is a is about negotiation.
Okay.
Clear thanks.
Youre welcome.
This concludes our question and answer session. The conference has now also concluded. Thank you for attending today's presentation and you may now disconnect.
Okay.
[music].