Euronav NV

F:OCW

Earnings Call Transcript 2018-Q1

[Operator]

Hello, and welcome to the Euronav First Quarter 2018 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I'd now like to turn the call over to Paddy Rodgers. Please go ahead.

[Patrick Rodgers, Chief Executive Officer and Director]

Thank you. Good morning, and afternoon to everyone, and thanks for joining Euronav's Q1 2018 earnings call. Before I start, I'd like to say a few words. The information discussed on this call is based on information as of today, Wednesday, April 25, 2018, and may contain forward-looking statements that 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, strategies, future events, performance, underlying assumptions and other statements, which are statements of historical -- which are not statements for historical facts. All forward-looking statements attributable to the company, or to persons acting on its behalf, are expressly 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 on the SEC's website at www.sec.gov and on our own company's website at www.euronav.com.You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement, and the company undertakes no obligation to publicly update or revise any forward-looking statements. Actual results may differ materially from those forward-looking statements.Please take a moment to read our safe harbor statement on Page 2 of the slide presentation.I will now pass you over to Euronav's CFO, Hugo De Stoop, to run through the first part of the presentation.

[Hugo De Stoop, Chief Financial Officer]

Thank you, Paddy. Good morning or afternoon to everyone, wherever you are today, and thanks for joining our earnings call. As always, I would like to start with the agenda slide on Slide 3. Firstly, I will run through the highlights for the first quarter 2018 followed by full financial review of the Euronav P&L and balance sheet. Following that, I will hand over to Paddy to run through a few current themes of the tanker market before summing up with an outlook for Euronav in the tanker sector. Moving on to Slide 4 and the key highlights from Q1. The first quarter was very challenging. The freight environment was impacted by an excess supply of tonnage, making life difficult for tanker owners and operators.That is reflected in the rates shown on Slide 4 with both VLCC's and Suezmax rate below our P&L breakeven at just under $19,000 a day for VLCC and $14,000 a day for the Suezmax. The challenging market continues into the second quarter with freight rates even below the levels seen in the first quarter. So far in the second quarter, we have booked 42% of the available spot days in tanker international VLCC pool, just above $13,000 a day, and 46% of the available Suezmax spot days around $12,300 per day. Also in the first quarter, we took delivery of the first of our 4 Suezmax vessels from Korea and the ship will start its long-term time charter contract of 7-year towards the end of April after completion of its positioning voyage. Despite this harsh freight rate environment, we remain convinced that our proposed merger with Gener8 will create long-lasting value for both companies and their respective stakeholders. The merger remains on schedule to close, end of the second quarter as we highlighted with the announcement in December last year. Moving to Slide 5, showing our P&L for the quarter. The first quarter of 2018 was a very straightforward quarter with no exceptional items. Please note that the depreciation charges are lower than last year as a result of the sale of 3 vessels, namely 2 VLCCs and 1 Suezmax during the fourth quarter of 2017. The dividend we announced in March will be subject to approval at our general assembly of shareholders on the 9th of May, with the $0.06 per share being paid at the end of May, should it be approved. Moving on to Slide 6. Our balance sheet was further strengthened with a $220 million senior secured credit facility financing our FSO joint venture. Half of it being our share. The facility consists of a term loan of $110 million and a revolving loan of $110 million. Euronav believes that this is prudent action to secure against this asset at this time in the cycle and it boosts our liquidity well over $800 million at the end of the first quarter.Leverage for Euronav, however remains at amongst the lowest in the tanker sector at 34% when marked to the books and 42% when marked-to-market against the value of the fleet.That concludes my remarks on the presentation. And I will now pass back to our CEO, Paddy Rodgers. Paddy, it's over to you.

[Patrick Rodgers, Chief Executive Officer and Director]

Thank you, Hugo. Despite trading within a range between $55 and $70 per barrel over the last 9 months or so, the key agencies, IEA, EIA and OPEC, have, on average, upgraded their demand for oil forecasts from around 1.4 million barrels per day to 1.6 million barrels per day for 2018.This is an encouraging background so early in the year and reflects strong trends for GDP expansion globally and balance demand growth for oil from both OECD and non-OECD nations. Whilst demand for shipping has continued to be impacted by the reduced export activity from OPEC, this chart, Slide 7, illustrates the robust demand drivers underpinning the tanker market.Moving on to perhaps the most commented feature of our market during Q1, the recycling of tonnage that has taken place in Slide 8 shows recycling on a half yearly basis. Q1 saw 20 VLCCs and Suezmax is taken out of the market according to Clarksons, a figure, which we anticipate will beat the 25 recorded for a half year on the first half of 2003. With Pakistan once again open for recycling, there is additional capacity and consequently attractive pricing for owners with older tonnage, who otherwise face negative cash flow and regulatory pressure to invest capital in upgrades in 2019 and 2020. Whilst encouraging more rebalancing needs to be done before any traction can be seen in freight rates and a key reason for that is provided on Slide 9, the order book itself. It is not the size of the order book though the concentrated delivery schedule that the sector faces, which is the key issue for tanker operators. To put that into context, the 17 VLCCs we saw exit the fleet during Q1 were replaced by 9 new buildings. So the fleet size, globally, actually contracted. However, 14 new builds are due for delivery during Q2, so unless we see more scrapping in Q2 then the fleet size will actually be higher than at the start of the year. That's the bad news. The pace of delivery eases significantly during this year in VLCCs and even more so in the Suezmax sector. With solid demand, as described earlier, and continued affirmative action in rebalancing the fleet by recycling, then the tanker market and freight rates can recover quickly in the future. However, consistent progress on all fronts is required before this can happen. To illustrate a little more clearly, the headwinds the tanker sector has faced, it's time to return to our bathtub on Slide 10. This shows how the VLCC market remains out of balance based on developments year-to-date. There have been 20 VLCCs ordered already by the end of March, according to Clarksons. For calendar 2018, Clarksons forecast 49 VLCCs will be delivered to the global fleet, and in addition, there have been around 10 VLCCs move out of storage into the main commercial fleet, primarily as a result of the structure of the oil price, which has been in backwardation since the third quarter of last year. Now if you move onto the green circle, we have 21 VLCCs removed from the global fleet year-to-date, which is encouraging, along with the strong demand background. If we take the IEA estimate of 1.5 million barrels demand growth for 2018, Euronav estimates this will require around 46 VLCCs during 2018 and still means we have an oversupply of around 12 VLCCs. The point of this exercise is to graphically illustrate that despite the uptick in scrapping activity that we have seen over the winter period, more corrective action is required by owners to get the fleet back into balance.Until this happens, the freight market will remain challenging. As usual, we finish with our traffic lights, for which there is no change from Q4 of 2017. Demand, if anything, has looked a little better, and as shown earlier, continues to see upgrades in line with the robust global GDP outlook. Supply of oil is a little mixed, OPEC cuts holding firm, but U.S. exports rebasing at a higher level, which is supporting ton miles. Vessel supply, however, remains a headwind, which is keeping downward pressure on freight rates. Financing continues to be withdrawn from the banking sector, which should help drive more rational behavior and pricing of capital. However, recent speculative orders from private, not shipping capital sources, are not helpful and may prove more difficult for the new owners to monetize than the private equity orders of 2014. So in summary, vessel supply remains the key focus for the next 12 months and whilst there are early and encouraging signs of market rebalancing, these need to be sustained before the freight market can improve. That concludes the formal part of the presentation, and I will now pass back to the operator for questions and answers.

[Operator]

[Operator Instructions] And the first question comes from Chris Wetherbee with Citi.

[Christian F. Wetherbee, Vice President]

I guess I just wanted to kind of get a big picture start -- start with the big picture and talk a little bit about sort of the market and some of the puts and takes if you see them here, troughing from a rate perspective below breakeven levels, I guess. What are some of the near-term sort of puts and takes that you think about second quarter specifically to, maybe, see if we can get rates back above those levels? I know, Paddy, you talked a lot about sort of the bathtub and the puts and takes there, is there anything in the short-term that we might see that might impact that for 2Q? Or is there still more of a wait-and-see for, maybe, 4Q in 2019?

[Patrick Rodgers, Chief Executive Officer and Director]

Yes. Chris. I think our view is that the pressure is mounting, of course. It's a strange phenomenon really in the sense that there's no rateability between the number of ships waiting and the number of cargoes in terms of what you end up with as a result. Normally, it's really quite binary, the outcome, but in fact, we have too many ships so of course, the rates fall. But as owners get more desperate, then, of course, they undercut and underbid all the time. So I think that the feature that's particularly pressing the market is a lot of concentration of tonnage in the Arabian Gulf. A lot of that tonnage being very old and some of it having come out of storage. And owners desperate to get some sort of cash flow to offset their optional gamble on holding that ship before scrapping it. Once they actually engage in discussions with scrapping, the ship will fall out of the commercial picture because no charter will want to take it. So the strange thing is that just as the rates make you feel desperate, nevertheless, that desperation is a sign that it's -- that it's the last act, it's the last, sort of, roll of the dice. So when you see rates this low, I know it's pretty unbearable, maybe, for some of the people who are investors, but they have to realize that this is a sign that you're probably closer to the turn than just jogging along at $18,000, $19,000 a day.

[Christian F. Wetherbee, Vice President]

That's helpful. And when you think about sort of the release off of scrapping and, obviously, numbers have been elevated on the VLCC side, has that number picked up though when you think about the last few weeks? And can you talk a little bit about the relative economics of scrap prices? Just to get a sense of as we see these are we getting that sort of expected reaction of acceleration scrapping maybe over the last month or so compared to the first couple of months of the year?

[Patrick Rodgers, Chief Executive Officer and Director]

Yes. I think that's you -- what you'll tend to see with scrapping, and, again, it's an important feature of the market, is that it tends to come in little waves. And the reason for that is it's not a perfectly streamlined process based around economic value and cash plays a hugely important part. The people, who normally are running the scrap market, the players in it, are very constrained by cash. So when they make a surge, say in January to buy a number of ships, they really need to see that clear through into the scrap sale on to their relet buyer or to their mill or to their smelting mill in order to get the cash back to go again. So you kind of get this indigestion in the process. We will, in May, June, start to enter some of the monsoon disruptions that come as well. So we could see a slight slackening off. I don't think that market watchers should panic over that. They should recognize that this is surge effect and it doesn't mean that somehow there has been a mood change. It simply means that the buyers out there are a bit cash-strapped. So what I would recommend is an open-ended credit line from Citibank to anybody involved in the scrap trade to fund them through to buy more ships. And you can own that idea yourself if you want to.

[Christian F. Wetherbee, Vice President]

That sounds like a very good idea. Thanks for the suggestion. I guess the 2, sort of, part -- well, one question on OPEC and sort of your view here is -- crude prices where they are in the international markets, what do you think the likelihood of actually sort of reversing some of these OPEC cuts are as we move into the later third quarter, potentially, fourth quarter? Do you think that's going to happen? Or do you think that it's most likely getting pushed out to '19? What's your view?

[Patrick Rodgers, Chief Executive Officer and Director]

Well I think it's a -- what I can tell you is that key members in OPEC have been marketing themselves back into places that they had cut back on. So the process of unwinding the agreement is there. I think it will be a surprise to all of us if there's an announcement that supply is going to be increased from an organization that is designed to stabilize prices. So they're not going to suddenly announce that there is going to be a supply increase. I think they'll just quietly let the agreement fade. So I think the talk will be '19 now. But the reality might be that more barrels get moved. And I'm -- I wouldn't be surprised at all that the talk about trying to cut out some Iranian trade doesn't actually support Saudi Arabia and the American producers. So all in all, I wouldn't be too concerned about the announcement. I don't think you can wait and hope that you're going to get a big sudden announcement that 1.5 million barrels of oil is coming back to the market. But I think the market will feel a little bit looser, people will feel there's more oil around and then, maybe, this drive some of the noise we hear.

[Christian F. Wetherbee, Vice President]

Okay. And last question from me just as we're getting close to the shareholder vote here. When you think about sort of post-merger integration, what are the first steps in 3Q that you're going to take? Can you talk a little bit about sort of fleet deployment and, maybe, commercial strategy? Any kind of thoughts there as we think about the second half of the year.

[Patrick Rodgers, Chief Executive Officer and Director]

There's no secrets -- there are no secrets really in the market. I think that's -- what we'll be looking to do is try to replicate TI's business model onto the VLCC fleet and the Euronav business model onto the Suezmax fleet. And as we age for age or pound for pound, we've outperformed the market, I think we can feel comfortable that we should get better returns. And I think -- so I think that -- and the current rate prices, of course, supports our transaction very strongly, simply because this is by far -- Euronav by far the most liquid -- cash liquid tanker company around. So this is definitely the right place, this is the right home, this is the right transaction.

[Operator]

And the next question comes from Jon Chapelle with Evercore.

[Sean Edmund Morgan, Analyst]

This is Sean Morgan on for John Chapelle. Just, Paddy, you mentioned in the press release that you see vessel values creeping up a little bit and we're sort of dropping out on rates, you have a bit of a stronger balance sheet. You just mentioned you had some cash liquidity. How aggressive would you be, sort of in light of the excess capacity you mentioned in acquiring additional secondhand capacity? Or will you be a little bit more defensive now and sort of integrating generates?

[Patrick Rodgers, Chief Executive Officer and Director]

Well, I think integration is obviously critical and I certainly think that we would want to see. I think our shareholders have been very patient, so I certainly don't think that we'll be in the market throwing chairs around post-integration. But of course, if we saw something that came into our lap, and we had a right structure for it then I think we'd still be looking. I don't think our ambitions are over. But the -- this has been quite a lot of work in our initial focus. We're making sure we get good value out of what we've already acquired.

[Sean Edmund Morgan, Analyst]

Okay. And then just as a quick follow-up. With LIBOR rates sort of long-term 10-year treasury rates moving up now, you guys have a lot of floating exposure, are you thinking about implementing any hedging strategies? Or maybe some more permanent exchange of fixed debt for floating debt?

[Patrick Rodgers, Chief Executive Officer and Director]

Well, first of all, I'd like to say I can assure you that Hugo leaves no stone unturned when it comes to these aspects. But you'll notice that we have done fixed-rate bonds and we've done some sale in lease banks, which already moved certain amounts of what we might call debt into fixed -- into a fixed interest rate environment. I think we'll certainly look at value and see where we think it is and try and have a view on it. Not that anybody is really certain, but it's certainly not something that we would ever -- something that we look at regularly.

[Operator]

And our next questions comes from Fotis Giannakoulis with Morgan Stanley.

[Fotis Giannakoulis, Vice President, Research]

Paddy, I want to ask you -- you mentioned about the inventories that we are dropping, the floating stock that has come down the last year. I noticed some data that they saw the short-term floating strategy in April has picked up. Can you explain to us why is this? Is it just because the vessels are very cheap for short charters? What drives this pickup in April?

[Patrick Rodgers, Chief Executive Officer and Director]

Well and certainly without seeing the data you're referring to, I certainly wouldn't have said that we feel that. We haven't felt an increase in inquiry and haven't seen that much interest. But I don't think that you should ever -- once you get down to talking about small changes from a very low base, then you're really talking about occasional single ships or so you're talking quite small numbers. And that can just be about somebody hitting tank tops or not being able to move or sell product in the area that they are in and having to take something into storage. So there's a very strong logistical element, which isn't always driven by market outlook.

[Fotis Giannakoulis, Vice President, Research]

And one more about the fact that the market seems so heavily oversupplied right now despite the fact that we have seen scrapping being at record levels. My question is why is that? Is it because older ships, they have lower utilization? Can we -- can you give us what is the equivalent of a modern ship versus older ships in terms of replacement? And also, why we have this scrubbing activity concentrated only on VLCCs and we haven't seen much scrapping in Suezmax and Aframax? And if you expect that this will pick up as well?

[Patrick Rodgers, Chief Executive Officer and Director]

This is quite interesting. I think there is probably a lot more appetite for the bigger ships from the buyers of scrap steel, because it just cube out better in terms of the occupancy of berth space and the amount of steel that you'll recover. So it goes through the pipeline a lot more effectively. So I think that's a good point there. I think on -- I think the way you have to, and I know there are people who're big fans of efficiencies, I think they're efficiencies in terms of what impact in the marketplace you might have on numbers of voyages or cargoes performed. But the reality in today's market with medium speeds, I mean people aren't really going full blast. And the cargo size is pretty uniform, so don't get carried away too much with deadweight differentials. I think a V is pretty much a V. And as I said, the issue in our market is not quantitive oversupply, it's just oversupply. And as long as you have somebody sitting in the AG willing to set the market by bidding low, it drags the rates down and it'll drag them down to the point of breaking. I think the big thing that Vs have had, which may surprise you, has been the intervention from China, of course, on declining to accept anything over the 15-year-old vessels in most of its ports. And that has caused, I think, some of the VLCC owners to be more willing to throw the towel in.

[Operator]

And the next question comes from Noah Parquette with JPMorgan.

[Noah Robert Parquette, Senior US Equity Research Analyst]

Sorry about that. I just want to get your thoughts on IMO 2020 regulations and its effect? Or what do you think what happen on the demand side for tankers?

[Patrick Rodgers, Chief Executive Officer and Director]

Well, I think it's been a very curious process, hasn't it? I think -- and everybody has been left -- I mean, everybody's been left a little bit scratching their heads and wondering how this is going to work out. We were 18 months away from implementation. We have a described specification for compliant fuel. We don't have an ISO standard for it yet. And I think that lot of refiners are wondering about how they might make it, or what impact it's going to have. I think there's no question that you could see that share prices of refiners with more complex refineries are now getting supported quite well. Those that don't have complex refineries, everyone believes that they're going to be stuck having to buy more expensive sweeter grades of oil and as a result of that, they're going to be less profitable and have to run on thinner margins. So we can see that's already happening and that will be disruptive for trade routes and then we have the whole question about how many ships will ultimately go for scrubbers. At the moment, it looks quite light. And how many are going to go for compliant fuel, what will that mean for the switch over. It will be very difficult for the current logistical system to carry 2 grades in equal quantity. So unless one of them becomes a little bit, and I think it's going to be the heavy sulfur becomes -- high sulfur heavy fuel oil becomes a little bit obsolete, in which case there will be a switchover into compliant fuel and that sort of will be carried through most of the logistical system to delivery into the marine transport environment. So yes, it's going to be disruptive. Yes, they're going to be good opportunities as well as some threats.

[Noah Robert Parquette, Senior US Equity Research Analyst]

Okay, and then I just had one follow-up on the bathtub with the oil demand absorbing 46 VLCCs. When you look ahead, what kind of risk do you see or inventory drawdowns or meeting demand versus new production?

[Patrick Rodgers, Chief Executive Officer and Director]

I think that was yesterday's color. I think that -- when we -- the biggest shock that is liable to come from inventory is that if we return to a market with even the slightest contango and it looks like there's no risk in carrying oil, or no risk in storing oil, because it doesn't even have to make you any money, but it could just be an option to see where it goes. And that doesn't cost you anything, because the markets not in backwardation then you could see the reverse effect like a gear on a bike where all of a sudden, instead of getting 10 ships squeezed out, you get 20 ships pushed in. And then that suddenly begins the flip view around quite fast. So that's the sort of the turn of the pedal that could make the market rebound quite quickly, if and when the structure changes.

[Operator]

[Operator Instructions] And the next question comes from Cedric Duinslaeger with KBC Securities.

[Cedric Duinslaeger, Equity Analyst]

I just have one small question regards to Slide 10. What would be your current estimates or the number of VLCCs that are being used for storage? And what would be the possible range of these VLCCs coming into the global trading markets in second half of 2018?

[Patrick Rodgers, Chief Executive Officer and Director]

Okay. So I think that we're down to about 20. And I would think that most of those are in quite industrial settings in the sense of not just be -- they're not just commercial, they're logistical.

[Cedric Duinslaeger, Equity Analyst]

Okay. So there's no chance of this number rising then?

[Patrick Rodgers, Chief Executive Officer and Director]

There's certainly a chance of the number -- so okay, let's just invert our language in the right way. The number of ships in storage is most likely -- the threat is that it's an opportunity that it goes up rather than a threat that it continues to go down delivering more ships into the markets.

[Cedric Duinslaeger, Equity Analyst]

Yes, Okay [ I figured ] and it's the other way around. So you have 20 at the moment being used for storage.

[Operator]

And the next question comes from Quirijn Mulder with ING. Please go ahead Quirijn, your line is live.Okay, as there are no more questions, I would like to turn the call to management for any closing comments.

[Patrick Rodgers, Chief Executive Officer and Director]

No. I think I just like to thank everybody for attending and for asking pertinent and relevant questions. Thank you all very much. It's been a very pleasant afternoon.

[Operator]

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.