Torm PLC

CSE:TRMD A

Earnings Call Transcript 2020-Q1

[Morten Agdrup, VP and Head of Corporate Finance & Strategy]

Thank you for dialing in, and welcome to TORM's conference call regarding the results for the first quarter of 2020. My name is Morten Agdrup, and I'm Head of Corporate Finance and Strategy in TORM. As usual, we will refer to the slides as we speak. And at the end of the presentation, we will open up for questions. Slide 2. Before commencing, I would like to draw your attention to our safe harbor statement. Slide 3, please. With me today, I have Executive Director, Jacob Meldgaard; and Chief Financial Officer, Kim Balle. I'll now hand the call over to Jacob.

[Jacob Balslev Meldgaard, CEO & Executive Director]

Okay. Slide 4, please. And thank you, Morten, and good afternoon, all. Before we turn to the financial results and also the market, I'd like to take a short moment here to focus on safety. And safety is obviously top priority for TORM. It has had an even greater focus here during the COVID-19 pandemic. So as an integrated part of our culture, it has been relatively natural and easy for us to execute the precautionary measures such as work-from-home policies at early stages during this pandemic. I'm really pleased to note that our One TORM platform has secured the safe operations of our vessels without any major operational issues in this period. Please turn to Slide 5. So not alone have we navigated successfully on safety, we also navigated a volatile product tanker market here in the first quarter of 2020, that was especially impacted by COVID-19 and also the OPEC decisions. Our results for the quarter were enhanced by the strong operational focus and our focus on maintaining efficient operations despite the challenges that have stemmed from COVID-19. The product tanker market has experienced the strongest start to the year in more than a decade. And it's retaining the strength, experience that we -- in the last quarter of '19. So here in the first quarter of 2020, it has also been very volatile, influenced not only by the COVID-19 situation, the cool OPEC+ events, and the related oil price development but also by logistical inefficiencies and refinery maintenance. So far here in the second quarter, the market strengthened further. It was supported by increased interest for the floating storage, both on crude and on products due to the contango in the oil price. We'll go into the details on the market shortly. Zooming in on the first quarter, our product tanker fleet realized an average TCE rate of $23,643 per day. And here in the largest segment, the MRs, we realized an average TCE rate of $22,461 per day. In the first quarter of 2020, we realized a positive EBITDA of $102 million and a profit before tax of $57 million or $0.76 per share. This is a higher figure than our adjusted full year result for 2019. The return on invested capital was positive at 15.4% for the first quarter of the year, which I consider a really attractive level. Also here in the first quarter of 2020, we placed orders for 2 newbuilds that would be delivered in the fourth quarter of 2021. We, so far here in 2020, taking delivery of 4 newbuilds and delivered 1 older Handysize vessel to a new owner. We've been committing ourselves and have been installing scrubbers where we will have a total of 49 vessels, including newbuilds. As of today, we have installed 37 scrubbers. The remaining scrubbers will be installed throughout 2020, except for the previous mentioned 2 LR2 newbuilds, which is next year. Our approach has been balanced, and with just above half of the fleet having scrubbers installed. Finally, in January 2020, a significant event for us was that we refinanced debt for a total of $496 million from leading ship lending banks for 2 separate term loan facilities and a revolving credit facility. These facilities replaced existing facilities and extended the majority of TORM's debt maturities until 2026. I can see that our actions have really provided TORM with a solid foundation to prosper under both continued market -- positive market conditions and also under potentially less favorable conditions. Slide 6, please. To set the theme ahead of the walk-through of the market in the first quarter of 2020, I'd like to highlight the fact that the current situation is highly unprecedented. And throughout my more than 25 years in shipping, I've not experienced so many major drivers affecting the market at the same time. Slide 7, please. Now I'll turn to some of these drivers of the product tanker market. As mentioned, TORM's product tanker fleet realized an average TCE rate of $23,643 per day. In the LR segment, we achieved LR2 rates of $29,108 per day and LR1 rates of $24,329 per day. In the largest segment, the MRs, the achieved rate was $22,461 per day. And in the Handysize segment, we've received -- achieved rates of $20,649 per day. As already highlighted, the product tanker market saw quite some volatility here in the first quarter of 2020 with large differences in rates per segment and per geographical area. While the MR rates in the west were supported by weather-related delays and delays at the Panama Canal, LR1 rates in the east were affected by maintenance at several of the export-oriented refineries in the Middle East. Then the outbreak of the COVID-19 in China and the corresponding decline in the country's oil demand boosted product exports from China in the second half of the quarter. In early March, the collapse of the OPEC+ negotiations and the resulting price war boosted crude tanker earnings, which spread to the product tanker market at a time when more than 50% of the LR2 tonnage was trading in dirty. As the virus spread to the rest of the world, the impact of the COVID-19 and the measures taken to contain the virus considerably gained momentum in the second quarter. Especially 3 drivers have played a significant role here, sending the product tanker rates to all-time highs. Firstly, the unprecedented declines in oil demand have resulted in temporary trade boost from several export regions, most recently from China -- sorry, from India and the Middle East region. And as the local demand has been affected, cargo has needed to find home further away, thereby impacting the ton-mile positively. Secondly, as refinery runs have been slower to adjust to changes in the oil demand, this has resulted in unprecedented product inventory buildup, bringing the onshore storage capacity to its limits and increasing the interest for fixing floating storage. At the same time, the unprecedented declines in oil product demand have resulted in ullage issues at ports and terminals, which, in turn, have resulted in a spate of short-term logistical floating storage. Especially the latter type of floating storage has tied up a large share of product tanker tonnage accounting for around 90% of the total floating storage, which is currently estimated at 14% of the global fleet. Thirdly, the current situation has given rise to increasing inefficiencies in trading panels, such as vessels sailing around the Cape of Good Hope in order to take advantage of contango or cargo in the [ MRs ] trying to find new buyers further away. Just to give an example on the latter one, we have recently deviated a vessel that has loaded on the U.S. West Coast and was initially to discharge on the West Coast of Mexico. And this vessel was deviated to as far away as Australia. Another example, we had a vessel that loaded in the U.S. Gulf waited to discharge on the East Coast of Mexico. But after 8 days of waiting in Mexico, the vessel was sent to the Mediterranean instead. I'm sure we're not the only vessel owner experiencing this type of inefficiencies. At the same time, crude tanker market was similarly supported by strong crude inventory builds as over crosscut agreement was reached in April, and it came too late to avoid massive crude oversupply. Finally, it must also be mentioned that with product tanker rates climbing to a record high we also recently seen a number of LR2 vessels cleaning up or intending to do that at least. Nevertheless, the number of vessels that have switched back to clean is smaller than the net change to the dirty market that we saw during the fourth quarter of 2019 and the beginning of 2020. Hence, the tonnage supply side has remained favorable. Obviously, uncertainties around the COVID-19 impact on the global economy and the oil demand remain, with especially the timing and speed of oil demand recovery being a key factor for the product tanker market. However, while some of the COVID-19 related effects could peak soon, we believe that it will take some time before the inefficiency in the market will be cleared. The above-mentioned developments are also reflected in our bookings. And here, as of the beginning of this week, the total coverage for the second quarter of 2020 was 69% at $29,188. And in the largest segment, the MR segment, our coverage was 65% at $26,511 per day. Slide 8, please. In our opinion, it is clear that it is too early to predict the full impact of the COVID-19 on the global economic growth and many uncertainties remain. As I already mentioned before, the COVID-19 pandemic has tightened tonnage supply considerably and introduced increased inefficiency to trading patterns, which has resulted in the record high product tanker rates. In fact, should our MR Q2 to date rate continue throughout the quarter, we will obtain the highest MR rates since the third quarter of 2008. The main trigger for these developments has been the unprecedented decline in oil demand and the resulting oversupply of products. While estimates for demand disruption still vary widely, the consensus points towards a peak decline of almost 30% year-on-year in April. Refineries have reacted to declines in oil demand by run cuts and short shutdowns, but demand has fallen even faster and more sharply than refiners have been able to scale down their production. And this has led to record high product oversupply, fast inventory buildup, and the need for floating storage. From the TORM supply side of the situation, we also have a positive medium and long-term impact. As operations at shipyards in China have been interrupted by lockdowns, this has resulted in delays with respect to newbuilding deliveries, scrubber retrofits, and scheduled dry dockings. Thanks to careful planning and the fact that most shipyards used by TORM have only been affected to a minor degree, our scrubber retrofits will only experience minor delays. In the longer term, the uncertainties due to the COVID-19 have generally led to lower interest for newbuilding ordering, which ensures a modest fleet growth in the coming years at a time when the order book is already low in historical terms. Slide 9, please. Now let me come back to the development in product inventories, and this slide here illustrates the dynamics of the COVID-19 impact on oil demand, refinery runs, and changes in product stockpiles. As I already mentioned, the fact that refiners have not scaled down their production as fast and sharply as demand has declined has led to unprecedented inventory buildup, which has first filled most of the onshore space and subsequently required storage of products onboard of vessels. Several countries have started to ease these lockdown measures. And we have, therefore, seen some early signs of demand recovery and the pace of the inventory buildup has likely topped here in April. However, demand is expected to remain subdued for some time yet, and inventories continue to build, although at a slower pace. At one point, demand recovery reaches a point where stock building stops and product stocks will start to draw. There are still too many uncertainties to know when exactly this will happen. But when it happens, it will release the vessels in floating storage to the market and stock draws will lessen the need for transportation of products. And this will, of course, not be a positive factor for the product tanker market. But again, the extent and timing of this will depend also on the speed of demand recovery. Slide 10, please. Another way to look at the current oil oversupply situation is to look at the recent developments in the oil price structure in a historical context. This slide shows both crude and product price structures as the current oversupply is prevalent on both product and crude markets. The OPEC+ coalition reached an agreement enabled to cut its crude production by an unprecedented 9.7 million barrels per day in May and June. And earlier this week, Saudi Arabia even announced that they will cut crude output by more than they had already agreed. And this, together with market-driven costs by non-OPEC countries, such as the U.S., Canada, Norway, others has, however, not been enough to avoid onshore storage, spilling up fast and coming close to its limits. This situation led to contango in the oil price with levels similar to the ones last seen in 2008 and triggered a flurry of tankers being fixed on time charter for floating storage of crude and also products. Since then, contango has declined with the first signs of improvements in oil demand and subsequently in market balances. And also the number of storage fixes has come down significantly. Nevertheless, if we look at product tankers, it is actually not the committed storage deals that are the main factor for keeping tonnage supply tight. In fact, this is the logistical challenges that have had the strongest impact on the product tanker supply. Slide 11, please. Let me elaborate on this floating store situation. We estimate that currently, 14% of clean trading tonnage is tied up in floating storage, which has built over the past month. Here, we are defining floating storage as vessels with cargo on board and idle for at least 7 days. In terms of capacity, the current level of tonnage tied up in floating storage is 4x higher than what we consider a normal level. And around 90% to 95% of this are vessels in, so-called logistical floating storage, which means vessels not able to discharge because of storage tanks being full at terminals and refineries. The bulk of these vessels, baking difficulties with discharging are actually MR vessels. And this leaves 5% to 10% of vessels in committed storage deals. And nevertheless, we expect this figure to increase somewhat in the near future as it takes time before a vessel is fixed, load the cargo, and entered into the floating storage statistics. So we estimate that vessels fixed for floating storage and not yet in the statistics could add another 1 to 2 percentage points to the share of tonnage in floating storage over the coming weeks. It is also important to mention that while contango driven floating storage is set to unwind once the contango fades, the logistical inefficiencies could potentially last longer, supporting the market. Slide 12, please. Along with the strong crude tanker market, a total of 40 LR2 vessels have switched from clean to dirty trades in the past 6 months, leaving less than 50% of the vessels to trade in the clean market. With the clean tanker rates reaching the record high levels in April, we've seen a number of vessels switching back to clean. However, this number is much smaller than the net switch to dirty that we saw in the past 6 months. Our current estimates show that around 10 vessels have cleaned up and another 10 or so are intending to do that compared to 40 vessels that moved to dirty during the fourth quarter of last year. Clearly, switching back from dirty to clean is not a positive element for product tankers. But the share of LR2s in the dirty market is still at around 50% despite the recent switching. And the fact that it is more costly to switch from dirty to clean than the other way around, should award that too many vessels go back to clean. Slide 13, please. Now we turn to the longer-term supply-side market factors. The product tanker order book to fleet ratio currently stands at 8%, which is very low in a historical context. This reflects the low ordering activity we've seen most of last year, and which has carried over into this year, as the COVID-19 related uncertainty has kept most owners away from the newbuilding market. Also, we do not expect a quick runoff of the order book, given the uncertainty around new potential regulation on vessel propulsion in connection with IMOs 2030 and 2050 Q2 targets. A lot of talk in the market has been on dual fuel vessels. But so far, in the product tanker space, dual fuel orders have been very limited. So due to that, we estimate that the product tanker fleet growth to be on average of 3% per year over the next 3 years compared to a fleet growth of almost 5% in 2019 and an average of 6% during the previous 3 years. This slowing fleet growth rate is a key point to the fundamental positive development that we still expect for the product tanker industry. Slide 14, please. To conclude my remarks on the product tanker market, TORM expects to see volatility in the market in the short to medium-term related to the COVID-19 and its impact on global oil markets and economic activity. Aside the COVID-19 effects, we see a number of key market drivers for the next 3, 5 years to remain positive, such as the low order book, refinery dislocation, which will provide support to product tankers over the longer term. Slide 15, please. Looking at TORM's commercial performance, we have again in the first quarter of 2020 in our largest segment, MR, outperformed the peer group average. In the first quarter of 2020, we achieved rates of $22,461 per day compared to a peer average of $18,821 per day. This alone translate into additional earnings of $19 million in the first quarter, alone. So obviously, in general, I'm really satisfied that our operational platform continued to deliver these very competitive TCE earning. Slide 16, please. A key deciding factor for delivering above-average TCE earnings is driven by our continued focus on positioning our vessels in the basins with the highest earning potential. We have a balanced strategy where we generally do not position all our vessels in one basin, but instead, have some overweight in either East or West depending on our expectations to the future market. In a scenario where the market is strengthening in the west relatively compared to the East, we want to increase our exposure to the West. And to illustrate our strategy and choices, we've shown our share of MR vessels positioned west of the Suez Canal, together with a measure of the premium the West market has realized over the East market. Over the last quarters, the market west of Suez has been strongest and especially so far in 2020. The West market has been trading at a premium to the East, which measured using benchmark routes had been around $8,000 per day. So far, in the second quarter, we've had around 70% of our MR earning days West of Suez, providing us with a significant advantage compared to owners with a higher exposure to the East market. With that, let me hand it over to you, Kim, for further elaboration of the cost structure, the operating leverage, and obviously, the balance sheet.

[Kim Balle, Chief Financial Officer]

Thank you, Jacob. Please turn to Slide 17. With our spot based profile, TORM has significant leverage to increase in the underlying product tanker rates. As of 31st of March, 2020, every $1,000 increase in the average daily TCE rate achieved translate into an increase in EBITDA of around $19 million in 2020. The corresponding figure increased to $28 million in 2021 and 2022. As of 11th May 2020, the coverage for the second quarter of 2020 was 69% at $29,188 per day. For the individual segments, the coverage ranges from around $19,000 per day for the smaller Handysize vessels and up to around $36,000 per day for the larger LR vessels. Slide 18, please. As Jacob mentioned, TORM achieved a profit before tax of $57 million in the first quarter of 2020. This is higher than the adjusted full year result in 2019 of $47 million. The result corresponds to quarterly earnings per share of $0.76, which on an annualized basis, is $3 per share or around $20 -- DKK 20. Similar, if the first quarter result would continue throughout 2020, the profit before tax for 2020 would be above $200 million. We do obviously not know the exact development of the market at our earnings over the coming quarters. But for Q2, coverage until 11th May 2020, it provide us with a buffer to that number so far of approximately $25 million. As illustrated, TORM's financial results is very sensitive to changes in freight rates. Slide 19, please. Before discussing our cost structure, I would like to remind you of TORM's operating model. We have a fully integrated commercial and technical platform, including all support functions, such as an internal sales and purchase team, which we believe is a significant competitive advantage for TORM. Importantly, it also provides a transparent cost structure for our shareholders and eliminates related party transactions. Naturally, we are focused on maintaining efficient operations and providing high-quality service to our customers. Despite this trade-off, we have seen gradually decreases of 20% in our OpEx per day over the last 6 years, which translates into a total decrease of around $44 million on an annual basis. OPEC was below $6,100 per day in the first quarter of 2020, which we find competitive in light of our fleet composition. We believe that the EBITDA breakeven rate of $8,800 per day achieved in the first quarter of 2020 reflects the efficiency of the One TORM platform and is highly competitive compared to other owners in the product tanker segment. Slide 20. I would now like to discuss our financial position in terms of key metrics such as net asset value and loan-to-value. Vessel values have decreased by around 4% during the first quarter of 2020 and the value of TORM's vessels, including newbuildings, was just above $1.8 billion as of 31st of March, 2020. Outstanding gross debt amounted to $923 million as of 31st of March, 2020. Finally, we had outstanding committed CapEx of $112 million relating to our newbuilding program and cash of $129 million as of 31st of March, 2020. This gives TORM a net loan-to-value of 49% at the end of the first quarter, which we consider a conservative level. The net asset value is estimated at $993 million as per 31st of March, 2020, and this corresponds to $13.3 or DKK 19.5 per share. And just before commencing this call, TORM's shares were trading at DKK 54. In short, we have a balance sheet that provides us with strategic and financial flexibility. And on the following slides, I will give you some more insights into our liquidity position, CapEx commitments, and our debt profile. Slide 21, please. As of 31st March 2020, TORM had available liquidity of $273 million. Cash totaled $129 million and we had undrawn credit facilities of $144 million. Our total CapEx commitments relating to our newbuildings were $112 million as of 31st of March, 2020. In addition to the CapEx related to the LR2 newbuildings, we also expect to pay $21 million in 2020 for retrofit scrubber installations on vessels on the water. With some strong liquidity profile, the CapEx commitment are fully funded and very manageable. Slide 22, please. After having finalized the refinancing in the beginning of 2020, we have eliminated all major refinancings until 2026, which provides TORM with financial and strategic flexibility to pursue value-enhancing opportunities in the market. As of 31st of March, 2020, our outstanding debt stood at $918 million. With that, I will let the operator open up for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Jon Chappell from Evercore.

[Jonathan B. Chappell, Senior Managing Director]

Jacob, first question is on duration of contract coverage. So the 89% for the second quarter, obviously, makes sense given we're in mid-May. But if we look to 2021 in your presentation, it's only 2% of the LR2s and then 0% across the rest of the fleet. So what's your desire to lock in more duration during the elevated structure today and some [ sees ] about the medium term with the inventory destocking? And is that a strategic decision by TORM to not take any duration beyond 6 months? Or is it just a function of there's no liquidity in the market today?

[Jacob Balslev Meldgaard, CEO & Executive Director]

Yes absolutely -- good question, Jon, as usual. So I think it's fair to say that the liquidity, as we see it in the longer-term deals, have really been subdued. I think, as I see, the economic uncertainty, which is hitting all of us due to COVID-19. It has also hit, in my opinion, the shipping markets in respect of that most access in these markets have been really reluctant to go long on the curve even at discounted rates to the current elevated. So we've seen very few transactions that have been meaningful for longer-term cover. But we would obviously also engage in that type of dialogue with the right partners. I think one of the things that we also, of course, have to evaluate is that the risk on counterparty, we have not had any issues, but we do need to evaluate in the current environment. Where are you really in the value chain compared to operating ships? And -- so I think the liquidity is down and also our awareness around counterparty risk longer on the curve is, of course, increased in this situation.

[Jonathan B. Chappell, Senior Managing Director]

Okay. That makes sense. And then tying a couple things together. When we think about capital allocation, given the uncertainty that you just mentioned, given Kim's presentation about net debt maturities well into this decade. You only have 2 more ships to take delivery and [ mainly 2 months ] with scrubbers. But given, like I said before, the uncertainty, how do you think about your dividend policy? Do you still maintain the 25% to 50% and then use the excess cash from the mountain that you're probably building in the first half of this year to look at assets? Or do you maybe scale it back or go to the lower end just because you're not sure how the market plays out over the next 12 to 18 months?

[Jacob Balslev Meldgaard, CEO & Executive Director]

It's a very relevant question, but you're 3 months ahead of the curve, to be honest, Jon. So we will be evaluating that together with the Board at our meeting in August, once we have the full first half result. And currently, I think it's simply too early for us to speculate around how the world will look in August. So I simply reserve that. We will do what is right. Obviously, currently, our distribution policy is very clear, 25% to 50% of the net profit. Obviously, would we be in a world that is dramatically different than the one we anticipate? We need to evaluate that, but I think it's too early.

[Jonathan B. Chappell, Senior Managing Director]

Well, then I'll ask it again in August. And then in the meantime, let me just -- for me ask you're generating so much cash in the first half of the year. So dividend or even buybacks aside, do you look to rapidly delever the balance sheet in this type of environment? Or do you still think that asset values don't appropriately reflect the positive medium and long-term supply demand outlook laid out in this presentation?

[Jacob Balslev Meldgaard, CEO & Executive Director]

I think the same goes to this that -- I think we need to get a little more clarity and transparency around both the market development and also where asset prices are really clearing to give you the exact answers to that. So I think we are really flexible around this. Personally, I would like to see some of these events that have been unfolding, which relates, of course, to the buildup of floating storage, the dent in demand, and the slide that we discussed around economic recovery and therefore, also recovery in demand. How is that actually going to play out? What are the positive factors and what are the negatives? I've just seen a number of reports discussing. For instance, the gasoline consumption in the U.S. rebounding from the bottoms -- from the lowest in April already now before you have a real reopening of the economy. And everything else being equal, out of all global consumption of clean petroleum products, 10% is gasoline in the U.S. So that is a key fundamental driver to also understand what will happen, let's say, over the coming months. You will have an unwinding, everything else being equal of the operational inefficiencies, hopefully, with global economy coming back. And you could say that that would lead to a subdued rate environment. However, there are also indicators of that some of the consumer behavior will actually be to the benefit of us around separating yourself from other people in the society more than what we've been used to, i.e., take your own car, if that is a viable option for you. I think we need more clarity, Jon, to be honest, before we make these calls. And I think we're a bit early to do that. But it would be very interesting to know all.

[Operator]

Your next question comes from the line of Anders Wennberg.

[Anders Wennberg;Catella Hedge]

Anders Wennberg here from Catella. I just wonder a little bit about this level of fixings for Q2 seems fairly low compared to the extremely high [portraits] we've seen in the market. I realize there's delay effect. Also, there could be an effect of the demerge of ships maybe signed up in March that haven't offloaded yet and are running on the old deals made up in March at lower levels. Can you elaborate a little bit on the delay versus the spot market? And what you are realizing? So we better understand how this is being captured on this kind of time lag.

[Jacob Balslev Meldgaard, CEO & Executive Director]

I think you're pointing exactly to it that there's 2 elements to. We have -- I have to say, we are really very excited about the rates that we have on average because as you can imagine, Q2 starts in March for us, but that’s actually when you start booking the rates. So you will have March bookings that would be realized in April and May. So that's number one, exactly the way you describe it. And then there is also the fact that given that about 20% of our fleet is currently in, what we would call operational storage, all of those vessels are engaged in earning, as you described a lower than the spot market because they are entering into the demerge rates. So those 2 components together, blended with then bookings in the current rate environment gives exactly the sort of the blended rate that we have here. And I'm truly excited about that level, to be honest. I can understand that if you apply a snapshot of a spot market, let's say, of x, and you say that is what is attributable to the full fleet for the full quarter, then you will be -- then it would be a lower number that we realized. But that is a fact. These are the numbers, and I think we are doing well. When I compare to peers in our largest segment, I've not seen anybody realize higher numbers.

[Anders Wennberg;Catella Hedge]

So to turn the argument around, it's spot market would come down in the third quarter and the fourth quarter. There's probably going to be a similar delay going the other direction. Some ships not being able to offload the cargo and running on old rates tied up in April, May, at very, very high level, way above first level. Is that kind of a fair assumption that we can get perhaps out from this in Q3 and Q4?

[Jacob Balslev Meldgaard, CEO & Executive Director]

I think it's a bit early to say that. You could say the economic incentive for the people who would have had your vessel on at low rates to still utilize you sort of as a floating storage is, obviously, higher than somebody who has contracted you at a high rate in a low freight environment. Because there, they will have an uncertainty to substitute you for alternative floating storage capacity. So I'm not sure it works the way you describe it, I can hope, but I'm not sure that that would be the dynamic. Because there's fundamentally a different incentive for the charterer to actually offload your vessel and take another vessel as an alternative in this scenario you're describing, whereas that is obviously not the case if the alternative rate is higher.

[Anders Wennberg;Catella Hedge]

Okay. The cargo owners have a bit of optionality basically.

[Jacob Balslev Meldgaard, CEO & Executive Director]

You could say that because they can make a ship to ship transfer of the cargo that you have right now sitting. Let's say, that you contracted rate X already in March, and that rate X is lower than the current market, you would try to hold on to that. It's the other way around that you contracted in, let's say, in May at a very high number, and you're sitting and waiting. You would have an incentive if the market falls down to actually do a ship-to-ship transfer, rent another vessel from another shipowner at a lower rate, and take the savings.

[Operator]

The next question comes from the line of Ulrik Bak from SEB.

[Ulrik Bak, Research Analyst]

Also a couple of questions from my side. So you state that you have fixed 69% of your Q2 vessel days at just above $29,000 per day. So based on the current spot rate, do you expect this average rate to increase or decrease as we approach the end of Q2? And also if you can talk about what the spot rates you are fixing to right now for each segment, that would be appreciated?

[Jacob Balslev Meldgaard, CEO & Executive Director]

Yes. So if we take the bookings that we sort of entered into last week so that would be the latest data points that I have. I can give you the exact sort of level that we have there, just one second. Let me take it up here on my computer. So we booked MRs on average around $40,000 last week.

[Ulrik Bak, Research Analyst]

Okay. And for LR2, LR1?

[Jacob Balslev Meldgaard, CEO & Executive Director]

We didn't have any bookings.

[Ulrik Bak, Research Analyst]

Okay. Okay. But obviously, higher levels…

[Jacob Balslev Meldgaard, CEO & Executive Director]

I think what we are experiencing if you also see is that you have a falling tendency in the freight rate environment currently and very low liquidity. So I estimate that the current market on MRs sort of at a global level is probably sub 30 now. Let's say, high 20 would be the current market today.

[Ulrik Bak, Research Analyst]

Okay. And then a follow-up question. So there's a lot of talk about the oil market dynamics, and you alluded to it in your presentation as well with the supply and demand being out of sync. And while some sources indicate that supply and demand balance will be reached in August, September, others indicate that it will be reached as early as June. So what are your expectations? And what do you see as a floor for the MR rates once inventories begin to unwind given the tanker dynamics?

[Jacob Balslev Meldgaard, CEO & Executive Director]

I simply think it's too early to come up with precise data points on that. If I consider how many events that have been taking place over the last 2 months, and take that out on -- up until, let's say, the rest of this year, we will have a lot of volatility. And I expect more volatility due to oil price still potentially being, I would say, up against an environment that is unknown, uncharted for oil traders. Where oil price, on a day-to-day basis, can move in and out of contango easily. I also expect that the closure and then reopening of economies will not be just a stable ride. We've seen this tendency, especially in Southeast Asia. If you look at South Korea, you look at Singapore as examples of economies where you step out and you step out of the lockdown and into something more normal, but where you have to reset and go back into lockdown. So I think to now expect that this will be just a smooth ride with rates going in one particular direction is not the way I look upon this. I think it's too early for that type of an environment. And we're not planning in accordance to that. We're planning much more to that it is a very unknown environment over the coming months, and we're ready for that.

[Ulrik Bak, Research Analyst]

Okay, got it. Then also a question to this delay effect that was asked about previously. And so what are the average journeys for each segment? Just to get an idea so how long is this time lag between for voyage. So for the LR2s, I suppose voyages are longer than the MR. So -- and also in the current environment, where you say there are a lot of inefficiencies going on, ships sailing other routes than usual. So these voyages, have they increased significantly compared to what they usually are?

[Jacob Balslev Meldgaard, CEO & Executive Director]

Yes. So every voyage, every cargo that you have currently on average is longer, whether it's in the larger segment where you have longer trade routes, let's say, on LR2s, where you have generally voyages 40, 50 days. Or whether it is in MRs, where generally you have shorter, let's say, 25 to 30 days. Then in both cases, the average duration of a voyage is longer to carry the same amount of cargo because either of the destination being further away, as I described also, or in the case where you have operational inefficiencies and you arrive at the just port and you simply sit and wait for the terminal and the infrastructure to be ready. So yes, in general terms, on average, every cargo movement is longer. And that is, of course, taking out capacity on top of the other inefficiencies.

[Operator]

The next question comes from the line of Anders Karlsen from Danske Bank.

[Anders Redigh Karlsen, Analyst]

I was wondering a little bit about the logistical issues that you're facing. Can you say anything about -- is that increasing now that you see that the lineup in ports is actually growing? Or are you seeing signs that it's easing off? And a little bit follow-up to that, what kind of demerge rates are you seeing in the various segments these days? I guess that's -- that will be a reflection of waiting time going forward.

[Jacob Balslev Meldgaard, CEO & Executive Director]

I think it is eased a little off as of late, but not something dramatic. As you can also see from the figures that we have 14%, that is relatively high figure. As we mentioned, 4x what we would expect as the normal trend. Obviously, some vessels, they popped out of this lineup and others come in. But in aggregate, it's about 14%. I think this is around the level that we currently expect sort of the system to have. And that from there, you would expect that at a certain time when economies, they come back that it will ease off from this level. It's probably been the highest that we have observed was 15%. The demerge rates are in line with the market. So over the last couple of weeks, you would have -- if you book a cargo where the TCE equivalent, let's say, is $50,000, as an example, then you will have demerge rates that are very much in line with that. So they basically -- they're a bit lower when the market is high. And when the market is lower, let's say, that the market was 15,000, then you would probably achieve a demerge rate that was slightly higher. So that's the dynamic in that. But demerge rates tend to follow closely with the development in the freight rates and when freight rates are very high, demerge rates are slightly lower. When freight rates are in the lower range, demerge rates are slightly higher.

[Anders Redigh Karlsen, Analyst]

Okay. Are you seeing any particular regions where delays are higher than others? And are there regions where there is absolutely a full stop and others where you have some kind of movement in the lineups and others where there isn't any at all?

[Jacob Balslev Meldgaard, CEO & Executive Director]

Yes. We do see that you have more of the capacity in the West that is stuck into these 2 difficult issues rather than what has been the case in the East. But it is within a number of percentage points, but mostly west where the percentage is 3, 4 percentage points higher than the average of the fleet that is in the East. So it is worldwide.

[Operator]

And the next question comes from the line of [ George Wyman ] from [ CR ] Securities.

[Unknown Analyst]

Congratulations on a great quarter. I've got a quick question. You mentioned the switching of LR1s, LR2s from clean to dirty, and you mentioned a number of 50%, maybe as many as 40 or 50 actual tankers. How much of an aggravation is it for these once they go to 30 to move back to clean product tankers?

[Jacob Balslev Meldgaard, CEO & Executive Director]

Yes. So very good question, George. So as you point to when you move from clean to dirty, that is actually just a decision and the vessel will be ready to go into that cargo program with the charterer. When you want to move back, then generally, the requirement from charters to have a vessel in the clean petroleum trade is that the cargo background, the last 3 cargoes that you have traded should be clean. And obviously, by definition, if your large cargo is crude, you have not had a large 3 clean cargoes. So you need to find a way to come back and have a cargo background, where the charterer that you are engaging with is willing to utilize your dirty cargo background, even though they are now going to be carrying a clean cargo. And the charterer normally takes the advantage of that to have a discount for that particular type of business. And here, how that will evolve for the shipowner will, of course, depend on the negotiation power at that date between the owner and the charterer, how much of a discount from the general market are you willing to give to the charterer to induce them to use your vessel, as number one. And what is the duration of the cargo transfer? So it really depends, I think, normally, the rule of thumb in the marketplace has been $1 million sort of that you can apply of switching cost. But obviously, in the higher rate environment, it could be a higher contribution margin that you've given up potentially. But it's around that range in a normalized market.

[Unknown Analyst]

Yes. So there is no actual cleaning of the dirty vessel involved. You just kind of dilute it with 3 different voyages and hoped that everything is clean then?

[Jacob Balslev Meldgaard, CEO & Executive Director]

No, you do clean the vessel also the crew, and the vessel will clean its tanks and the tanks will be inspected after carrying the crude. But the cargo background on paper reached last 3 cargoes clean. And obviously, you have cleaned the tanks, but you have not -- last -- cargo background last 3 cargoes.

[Unknown Analyst]

I see, I see. So with major delays in various ports, various other things, I also noticed that your rates are far from what we're reading as being spot rates in the LR market, for example, of over $100,000, $150,000. That is just the fact that some of yours were on voyages engaged already will finish over the next few days or weeks and then hopefully get the advantage of the newer rates?

[Jacob Balslev Meldgaard, CEO & Executive Director]

Yes, you can say that. We've also engaged in charters that are slightly longer. Let's say, up to 6 months, where we have then engaged in freight rates for a longer period, which is not in the $100,000, but it's probably only $50,000. But then we have it on the fourth quarter.

[Unknown Analyst]

All right. I noticed that you had repurchased some common shares in the open market. Is there any way for you to buy additional chunks of stock back maybe from one of your larger shareholders at the current depressed prices?

[Kim Balle, Chief Financial Officer]

If you're asking if that’s a possibility as such, it is. But as Jacob alluded to earlier or described earlier, we have this dividend policy where we decide on the dividend distribution every 6 months. So that's basically our policy and that is how we operate.

[Unknown Analyst]

So you don't generally buy back shares in the open market then?

[Kim Balle, Chief Financial Officer]

No. No, not generally. We did -- after the annual report 2019, we did buy some back, bringing us up to a total distribution of 50% of our net earnings. So that was the idea. But we're not doing it on a day-to-day basis if that's your question. We do it when we evaluate our distribution policies.

[Unknown Analyst]

Okay. Because basically, what I'm alluding to is, if your stock price, obviously, does not reflect the realities of the current market or even of a future market, one might argue here, it might behoove you or be more advantageous for shareholders, for you to buy back and retire X amount of shares, leaving more for the rest of us. And maybe if your largest shareholder has an appetite to sell shares or whoever has appetite for selling shares, the company might buy those back rather than paying out the dividend. In turn, you obviously save the dividend on the shares that you bought back.

[Jacob Balslev Meldgaard, CEO & Executive Director]

Yes. It is absolutely a correct analysis. We are evaluating, as Kim mentioned on a semi-annual basis, our distribution policy. And at that time, we will evaluate whether distribution should be in terms of dividend or share buyback or a combination.

[Kim Balle, Chief Financial Officer]

I think there was a question on -- written question also asking about -- we have previously said that that share buybacks is a second priority. And of course, there is -- I just want to -- into -- of course, there is also a free float issue. I know you're addressing something else. But of course, liquidity is very important also. So that is a consideration also.

[Operator]

Thank you. There are no further questions at this time. Please continue. All right we do have one question. The operator is still getting the first and last name. Your next question comes from the line of [ Oli Larsen ] from Danske Bank.

[Unknown Analyst]

Just a follow-up question on the question just before about the capital distribution. Of course, you're generating a lot of cash at the moment, as we can see, maybe up to 20% of market cap in the first 2 quarters this year. Two days ago, you sent out that stock announcement saying that you're moving USD 900 million from -- to your free accounts and directly saying that this could be used for buybacks or dividends. Maybe you can shed some more light on this announcement?

[Kim Balle, Chief Financial Officer]

Yes. That was perhaps an over-interpretation in the short run at least, but it is more of technical reasons to be able to distribute dividends from our plc. So we're basically reducing the capital and allocating them to the free reserves to be able to distribute dividends and creating the flexibility we need. So that's the idea that there were historically not enough distributable dividends. That is the case now going forward.

[Unknown Analyst]

Okay. I think maybe last question. So when looking at your NAV this quarter, I was a bit surprised to see ship values decreasing from last year. I would have thought that in the best market in a decade, so we should see ship values actually increasing. Is there nothing going on in the second-hand market?

[Jacob Balslev Meldgaard, CEO & Executive Director]

I think things are going on in the secondhand market. But I think in this instance, vessel valuations at the end of last year were a little ahead of the curve, anticipating a stronger rate environment. And in a way, sort of you had the peak of vessel valuations at least in this curve towards the valuations end of Q4. And therefore, you've seen this slight decrease in vessel valuations going into the year, even though we obviously have a very strong freight rate environment. There are transactions taking place also in the secondary market at around the prices, which is reflected in our NAV.

[Operator]

Thank you. There are no further questions at this time. Please continue.

[Jacob Balslev Meldgaard, CEO & Executive Director]

Okay. So thank you very much for all the input. There is one question on the webcast, which has to do with whether our crews are increasingly stuck at sea due to COVID-19? And whether we foresee that it would be necessary to divert or have out of service to relieve our crews? And here, I think it's an important question about having the safety and our crews at the forefront of our operation. And what we have experienced so far is obviously that there are delays in having the crew changes that we normally have. So a number of our seafarers have been out longer than what we had expected and that they had anticipated. We have been able to relieve some of them when we've been in the jurisdictions where that has been possible, however, not to the same degree as we would normally. So we are in a very close dialogue with our crews on a daily basis around this. And at the same time, we are pushing an international forum via ICS the agenda around that internationally, you have 1.2 million seafarers that more or less need to have crew changes over time and that the current situation where you have lockdowns and that you are restricted from doing normal crude changes is not sustainable. So I think it's fair to say that we are pushing through the organizations and towards politicians and the individual nations to open up. And so we can have a gradual normality for the good of our seafarers. We have had crew changes, and we do not anticipate that it will be necessary to take our vessels out of survey to relieve our crews.

[Morten Agdrup, VP and Head of Corporate Finance & Strategy]

Okay. With that, I think we'll conclude the earnings call for the first quarter of 2021 -- 2020. Thank you very much for dialing in.