Euronav NV

F:OCW

Earnings Call Transcript 2019-Q2

[Operator]

Good day and welcome to the Euronav Q2 2019 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I now would like to turn the conference over to Brian Gallagher, Head of Investor Relations. Please go ahead.

[Brian Gallagher, Head of Investor Relations & Communications]

Thank you. Good morning and afternoon to everyone and thanks for joining Euronav's Q2 2019 earnings call. Before I start, I would like to say a few words. The information discussed on this call is based on information as of today, Thursday, August 8, 2019, 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 not historical statements of fact. 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 our own company's website at euronav.com. You should not place undue reference or reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of a particular statement and the company undertakes no obligation to publicly update or revise any forward-looking statements. Actual results may differ materially from these forward-looking statements. Please take a moment to read our safe harbor statement on page 2 of the slide presentation. With that, I will now pass back to Chief Executive Hugo De Stoop to start the agenda slide on slide 3. Hugo, over to you.

[Hugo De Stoop, CEO & Interim CFO]

Thank you, Brian. I will run through the Q2 highlights and provide a full financial review of the income statement and balance sheet before Brian looks at the current themes in the tanker market and Euronav outlook before we take questions. So turning to slide 4 and the highlights page, the tanker market for VLCCs and Suezmax during Q2 was weak as expected with seasonal freight rate, but this was exacerbated by longer and deeper refinery maintenance and with OPEC production cuts reducing the number of available cargos. This has been reflected in downward pressure on freight rate, highlighted in slide 4. The impact of the lower freight rates on our share price has given us an opportunity to utilize our balance sheet and liquidity strength during Q2. We have returned capital to shareholders via further share buybacks for a total of $10 million. This is in addition to the share buyback done in Q1 and of course on top of our fixed minimum dividend of $0.06 per half year, which we will pay in October despite a challenging first semester for the company. So far during Q3, rates are at a similar level to those in Q2, and this is disappointing, with around two-thirds of the VLCC fleet booked at just over $20,000 per day and 60% of the Suezmax fleet at a touch below $15,000 per day. While it's disappointing not to see any traction in the freight market, yet we remain constructive on the tanker cycle for the last quarter of the year. Now turning to our income statement on slide 5, our results are a reflection of the operational leverage of our business, with the lower freight rates bringing a P&L loss during Q2 and this offsetting the positive return from Q1, to bring an overall net income loss of $19 million for the first semester. However, our balance sheet remains strong and robust as shown on slide 6. Let's take a look at slide 6. Liquidity now stands at over $850 million, up by over $70 million from the end of Q1, and this was driven by two factors. Firstly, in June we took the opportunity to increase the size and therefore the marketability of our 7.5% coupon bonds by undertaking a tap issue of $50 million to bring the bond size to $200 million. We believe this is competitively priced funding when compared to other funding sources and demonstrates Euronav access to another longer-term source of funding. Demand was strong enough for us to issue the new bond at a premium of 1% over par value. Secondly, we have also taken an additional $100 million credit facility in order to assist us with the preparation for IMO 2020 and, in particular, our fueling strategy for our fleet. As the press release highlights, we shall give a separate webinar specifically on our IMO 2020 preparations on September 5, and we look forward to updating investors and analysts in detail then. Euronav leverage remains amongst the lowest in the sector, and we have no outstanding CapEx linked to newbuildings. We can now turn to slide 7, where Brian will look at 3 key signals we are currently seeing from the tanker market. Brian, over to you.

[Brian Gallagher, Head of Investor Relations & Communications]

Thank you, Hugo. Now on to slide 7. This, we believe, is a very good summary of some of the headwinds that the tanker market had to face over Q2. Two essential and key drivers, U.S. crude exports and those exports from the OPEC nations based in the Middle East, are represented in this chart. Each bar shows the month-on-month movement from each of those categories. On the Q1 call, we talked about the resilience of the tanker market, which had been supported by U.S. exports, which is shown as being particularly strong during February. However, fast forward to April and May, and both of these key export markets when combined together saw around 800,000 barrels per day of a reduction in cargos. This was a difficult headwind for the large tanker market to withstand. This challenging market was faced by all operators over Q2 and was exacerbated by the fact that we had 18 new VLCCs, or nearly 3% fleet growth, also hitting the market and the trading market at the same time during Q2. However, as slide 7 also shows, as we exited Q2, it's encouraging to see growth returning in both of these segments. We now move on to slide 8 and some more optimistic noises coming from the contracting side in the tanker space. This chart shows the rolling 12-month run rate of confirmed orders of VLCCs according to Clarksons. As the chart makes clear, ordering has dropped to very low levels, with only 20 VLCCs being ordered over the 12 months to the end of July. There are two factors to believe that this trend for reduced ordering is likely to persist. Firstly, unlike Q4 2016 when the contracting run rate was last at these low levels, the regulatory and environmental background is far more demanding. Emission restrictions and targets going forward were not in place in 2016, and so the propulsion system used for tankers going forward will be a key consideration for any ordering that goes in place going forward. This should, in theory, restrict the level of ordering that we should see, given the higher cost involved. Secondly, with consensus forecasts for peak oil demand focused between 2030 and 2035, ordering a VLCC today with delivery in 2 years' time implies all ship owners need to be very careful in considering any contracting decisions. Now moving on to slide 9, what we're going to talk about here is more market discussion and what the potential disruption can be from the consequence of large scale retrofitting of scrubbers, in particular during Q4. Slide 9 illustrates the disruption is very backend loaded and focused on Q4 in particular. Again according to Clarksons, 73.5 VLCC equivalents will leave the operational fleet to retrofit during Q4 alone. That is split 55 VLCCs and 37 Suezmax. Depending on the amount of time taken to reposition and retrofit scrubbers to these ships, this could then see the global available fleet days in both of these sectors reduced by around about 3% to 5% during Q4 alone. This disruption, whilst only temporary, has yet to really impact on our market, but it's important to highlight the potential scale of this factor, which will reduce the size of the global tanker fleet available at the very same time as seasonal demand will peak. With that, I now pass back to Hugo De Stoop to talk through the outlook slide on slide 10. Back to you, Hugo.

[Hugo De Stoop, CEO & Interim CFO]

Thank you, Brian. We maintain our constructive stance on the tanker cycle into next winter, but keep our traffic lights unchanged for now. Oil demand forecasts have been reducing in recent months but remain ahead of the long term trend, and vessel supply will remain elevated into early 2020 but then will reduce. However, the tanker market should really start to see the impact of IMO 2020 regulations starting to bite in Q4, and longer-term positive drivers like the U.S. crude exports remain well supported. We were encouraged last week by Enterprise Products' SPOT offshore terminal getting financing approval. This terminal will be able to load two VLCCs at the same time when it becomes operational. With that, I conclude our prepared remarks, and I pass back to the operator for the questions. Thank you.

[Operator]

[Operator instructions] The first question comes from Jon Chappell of Evercore.

[Jonathan B. Chappell, Senior Managing Director]

Hugo, first question is on operating strategy. So you've laid out a very favorable near term outlook which is consistent with prior calls and with our views as well. But it seems that there's been maybe a bit of a disconnect in the spot rate environment today and some of the time charter rate environment, so a quick two-parter. One, is there a liquid time charter market for 1 to 3 year charters? And two, would you be willing to give up some maybe leverage, given the size of your fleet, to maybe lock in some of that arb that seems to exist between the time charter market and the spot market today?

[Hugo De Stoop, CEO & Interim CFO]

Yes. Thank you very much for the question. First of all, it's true that we are a little bit disappointed that some of the rates we had booked for Q3 are still at the low level. We expect the market to turn. As a matter of fact, it has already started to turn modestly, and we hope that the trend will continue to improve as we get nearer to the winter. We're certainly seeing some refineries coming back after a much longer sort of preparation or maintenance program than usual. As far as the time charter market is concerned, it was a little bit strange what happened, because maybe a month or two ago we saw a number of players coming to the market and trying to lock in a lot of tonnage at what we thought were still very low rates compared to what we expect to have, and only for 1 year. So you were being asked to give up what you expect to see in the spot market for something that was in the early $30,000s, so between $30,000, $32,000, maybe $33,000. That didn't go well. I think very few owners accepted that. And certainly Euronav was not there to propose any ships. After that, we saw again a lot of activity at more elevated levels. That got confirmed by the shipowner side. And then for some reason, nothing was lifted on the chartering side, and that's very unusual. And it was in particular one oil company. And then during that activity that I would describe as cultic, I think that both sides of the market are looking at each other and trying to find any common ground, you had a few, but not many more than a few time charter above $35,000, $36,000. We booked one at $37,500 for one year. And finally, to answer your question comprehensively, we are not there to do a lot of ships. But obviously, when you see volume like that and you have a fleet of 43 VLCCs, it doesn't hurt to book a few ships at those levels. So at the moment, we have 4 VLCCs that are on time charter at either nice fixed levels or at levels that include the profit sharing for which we will benefit from any market uplift.

[Jonathan B. Chappell, Senior Managing Director]

Second question is along the same lines but different as it relates to capital allocation. So you were pretty aggressive with the share buyback over the last 3 quarters, the prices all consistently in the mid to high $8.00 U.S. dollars. You're sub $8.00 now, but you've said there's some disappointment in the early part of this quarter. There's obviously greater geopolitical macro risks today than there were 3 quarters ago, let alone 1 quarter ago. So how do you think about the share buyback when you're balancing your robust liquidity versus maybe some of the risks that are more difficult to handicap in the bigger picture?

[Hugo De Stoop, CEO & Interim CFO]

I think we take a very opportunistic view. And if you look at what we had done starting on 18 December and in the first quarter, that was probably $1.00 lower than what we have done more recently, which confirms that, despite the fact that we are seeing a lot of noise in the background, we continue to believe in the macro story as far as the tanker market is concerned. I think that we need to balance a little bit our acts between share buyback and the dividend. So at the moment we are distributing still the minimum dividend that we have confirmed, but we hope to be able to distribute more dividends when we return to profits. And hopefully that will come soon. So again, we don't have and we've said we don't have the intention to issue a buyback program. I think that we are very opportunistic when we do it. And we have consistently done that way below what we see as our NAV, which means that the fact that we are creating value for our shareholders, certainly for the long term shareholders. So I can't really tell you when we will continue the buyback, but again opportunistically. And then where we're seeing share price diving, I think that you can expect us to react in one way or another.

[Operator]

The next question is from Amit Mehrotra of Deutsche Bank.

[Amit Singh Mehrotra, Director and Senior Research Analyst]

I just wanted to ask around the logistics around using the low sulfur fuel that you're currently storing in one of the 2 ULCCs. So there were some reports that you're repositioning one of them, I think moving to Spain then moving to -- then parking it in Malaysia. Can you just give a little bit more color around that and then the strategy, what the strategy is for the fuel with respect to IMO 2020, your ability to kind of easily utilize those stockpiles, so to speak?

[Hugo De Stoop, CEO & Interim CFO]

Yes. Amit, thanks for the question. I know that my answer will be a little bit frustrating for you or for the other guys on the call. If you read the press release, we have decided to comment it separately on what we do as far as compliance fuel is concerned, or any fuel that we have stored on that vessel, where it will be positioned, how we intend to utilize it and for how long and what we'll do in the future. So if you allow me, I would prefer to defer those questions to September 5, which is not too far away. And by then we will have a more detailed, well, call and a webinar talking about also those issues and our strategy when it comes to compliance fuel in 2020.

[Amit Singh Mehrotra, Director and Senior Research Analyst]

And then let me just ask about the relationship with the international pool. I'm just trying to understand. I know I asked a couple quarters ago, and that was something that the team was working on in terms of figuring out how the economics of that would work. Could you just talk about that, given some vessels in that pool might have scrubbers, some might not, and the economics in terms of TCE rates might be different? So just help us think about kind of what that will look like going forward.

[Hugo De Stoop, CEO & Interim CFO]

Yes. Absolutely. So we are redrafting the pool rules as we speak. Basically, the pool will continue to form one pool, but we will have two separate sets of accounts, one for the ships equipped with scrubbers and one for the ones that are not using or being equipped with scrubbers. And so that's the simplest way to be fair to both, partly because it's almost impossible to predict the pricing of each fuel and therefore it's impossible to assign pool points to each different type of vessel. So the easiest is to go with two separate accounting ways. But as far as marketability of the vessels are concerned, that will still be done by the pool as a uniform, well, desk that will assign each ship into its rate.

[Operator]

The next question is from Chris Wetherbee of Citigroup.

[Unknown Analyst]

James on for Chris. Wanted to ask about basically slide 7. I wanted to get a sense of what your current expectations of U.S. Gulf Coast exports for the rest of the year were, and try to get a sense of how much of a rebound -- or how much growth in those exports is driving sort of your expectations for a rate rebound across the back half of the year.

[Brian Gallagher, Head of Investor Relations & Communications]

Well, James, maybe at this point, Gallagher here, let me jump in. Hugo, do you want to go?

[Hugo De Stoop, CEO & Interim CFO]

No, go ahead.

[Brian Gallagher, Head of Investor Relations & Communications]

Yes. It's a very difficult number to sort of get some accuracy on, because obviously there's quite a range of facilities which are coming on and the pipelines which are feeding them. We've been sort of making a working assumption, and you can go back through our presentations, that there's going to be at least another 1 million to 1.5 million barrels a day of additional export capacity come onstream during the second half of this year. And of course, that has the effect of stretching the world fleet because there's obviously only one way to go out from that U.S. Gulf Coast exit, and that's to go long haul either to Europe or to the Far East. You can't go through the Panama Canal. So we think that's a key driver. And again, I'd refer you to, again, back to our presentation where we give a sort of ready reckoner in terms of where that demand will feed, in that 1 million barrels a day is roughly equivalent to 30 VLCCs. But that would obviously be a slightly higher number and multiplier effect coming through from the longer ton miles that U.S. crude exports would follow. But this is a difficult number to accurately estimate, simply on the basis of there's so many different moving parts and different owners of those pipelines and export facilities. But as Hugo said in the prepared remarks, we're very encouraged that last week we had the first financing, or signoff of a financing of one of these export terminals. So we don't see any reason why over the next 2 to 3 years we shouldn't see that trajectory rise to a capacity of somewhere between 7 and 8 million barrels a day.

[Hugo De Stoop, CEO & Interim CFO]

And I would just add to that, James, that every increase in production in the U.S., as long as it gets to the coast and to the Gulf, gets exported. So it's not for usage or storage locally, which obviously for shipping is very important because it means that any increase that we see there will benefit shipping in general, and probably the large size vessels in particular, if it's destined to long distance.

[Unknown Analyst]

And then I wanted to also ask about VLCC ordering. You pointed out that it's at a low level and likely to remain low for the foreseeable future. When might you reenter that, and possibly when do you think it just broadly as a market might come off the bottom?

[Hugo De Stoop, CEO & Interim CFO]

It's a very good question. Well, first of all, I think the last VLCC -- well, I know that the last VLCC we took delivery of was in 2012, so the last VLCC we ordered was probably in 2009. So that seems a long time away. And since then, we have continued to grow the fleet, but by buying secondhand and sometimes buying secondhand contracts, i.e., people who had ordered the ships and were not in position to take delivery of or didn't want to take delivery of and were selling those contracts in the market that we picked up.So returning to the market is a big word, but I would therefore comment on what we see generally speaking in the market. And I think that, with the IMO 2050 now, which is about the decarbonization of shipping in general, I think people need to be very brave to go and order a conventional VLCC today because the life of such a ship is 25 years. And if the life of such a ship is 25 years, it means that, with the delivery probably in 2021 or 2022, you're going to have that ship in operation by 2047, very close to 2050. And by 2050, you need to reduce the carbon emission of the entire market by 50%, which means that the ships that are still in existence at that point in time will probably be carbon-neutral, i.e., they don't produce any CO2 or they have largely reduced their emissions, i.e., they will consume probably 70% or 80% less than what they consume today. Obviously, one of the solutions, and certainly a transition solution, is to shift the fuel type that you are using. And there is much talk about in the market of LNG. It's fair to say that the yards are extremely active marketing those VLCCs dual fuel, LNG and conventional fuel, vessels. But they come at a price at the moment, and price is much higher than if you were to order a conventional VLCC. So the owners in general and Euronav in particular are sort of in two minds. I mean if it comes to ordering or buying a new VLCC, you are obviously thinking about what's going to happen in the next 10, 15, 20 years. Unfortunately, that's the horizon that we need to think about. And therefore, we don't see a lot of orders, even the speculators, to go to shipyards and order conventional ships. So we need for the price of the dual-fueled ships or the LNG propelled ships to come down before you can go and place an order.

[Operator]

The next question is from Greg Lewis of BTIG.

[Gregory Robert Lewis, MD and Energy & Shipping Analyst]

Hugo, realizing a few days doesn't make a trend, could you talk a little bit about the strength that we've been seeing in the VLCC market over the last couple days?

[Hugo De Stoop, CEO & Interim CFO]

Yes. Absolutely. I mean as you said, a few days doesn't make a trend, but obviously it's going to the right direction, and both in terms of rates and in terms of time that passes. First of all, we are getting nearer and nearer to the winter. I mean I know it feels like the summer, but that's how people behave. And then of course we are seeing more activity, and far more activity, in fact, which means that the refineries are coming back after longer maintenance, as we said in the earlier remarks. When you see more activity, I think that you have to differentiate different markets. At the moment, we have seen more activities in the Atlantic and not yet in the Middle East. And I think it's fair to say that owners are maybe a little bit reluctant when it comes to the Middle East. I mean as far as we are concerned, we continue to go there on a regular basis, but obviously we are taking a lot of precautionary measures. And the market in the Middle East has not picked up yet, so it's much more in the Atlantic. And we hope that the rest in the Middle East will go up as well. So it's too early to see a big trend, but it's very encouraging. And then as Brian said answering the previous questions on the amount of hull that will be available for export, we are pretty convinced that all of that oil will go long distance and potentially will replace all the oil coming from the Middle East, which is very good for ton miles.

[Operator]

[Operator instructions] The next question comes from Randy Giveans of Jefferies.

[Randall Giveans, Equity Analyst]

So following the sale of the V.K.EDDIE, you still have I guess one VLCC built in 2005, 5 Suezmaxes over 15 years of age. So first, what was the sales price for the V.K.EDDIE? And second, do you plan on selling these remaining older vessels in the coming months or operating them in 2020?

[Hugo De Stoop, CEO & Interim CFO]

Okay. So the V.K.EDDIE, you're right, 2005 vintage. The TI HELLAS is the other one that is a 2005 vintage. The V.K.EDDIE price was a $38 million sale, so significantly higher than what you can see as market values, or at least the market values as presented by the brokers, which means one thing. And that is that we are very opportunistic when it comes to sales, especially as we feel the market will pick up in terms of the spot rate, which in turn should have an impact on the value of the vessels. So we are not here yet to sell many ships at the present levels. But if we were to see higher values, then obviously the first candidates that would go would be the ships that you name, i.e., the HELLAS when it comes to VLCCs and the 3 Suezmax that are at or slightly above 15 years of age, absolutely.

[Randall Giveans, Equity Analyst]

So as you mentioned, in the first half of the year you repurchased I guess $29 million of stock. Additionally, on slide 6, you have over $800 million in liquidity, and that's not including the $50 million tap issue of the Euronav bonds. So that being said, why borrow that $50 million at almost 750 basis points? I know the cost is a little less, as it was priced at a premium to par, but I'm just trying to figure out why the additional $50 million in proceeds was tapped.

[Hugo De Stoop, CEO & Interim CFO]

Yes. That's for a strategic reason. So we are constantly in the market, as you know, and we are in all sorts of markets. So we're looking at the bond market. We're looking at the straight bank financing market. We're looking in the sale and leaseback market. And we always try to compare the different costs of capital. Now, if you try to strip the bonds into an equivalent bank financing, you obviously have to add to the bank financing the features of the bond, which are that you are paying a bullet, you are unsecured, and you are completely fixed in terms of interest rate, even though I know that the market probably expects the rates to come off. I mean those are the three features that you need to compare to, and then you are only slightly more expensive than bank financing. And I think for a company of the size of Euronav, it's very important to diversify its, well, source of capital in general and in particular the source of debt because as we are talking to the banks and as we have a relatively large balance sheet, we're seeing the first signals that some of the banks that we are using or that we have been working with for many, many years are slowly but surely reaching their limits on counterparties. So it had nothing to do with the creditworthiness of Euronav. It has to do with credit limits that they have overall in the market and cannot be exposed over a certain amount to a particular party. We are not there yet, but we can feel the first signs of that. And so we are trying to be very prudent and therefore decided to tap the bond. The second reason why we tapped the bond is, when you look at the bond market, you can split in different segments. And the higher or the bigger the size of the bond, the better the marketability can go. So $200 million was sort of always the target. We have raised initially $150 million. That was before the January transaction. We are now bigger, obviously, and so we wanted to reach $200 million. And when we will refinance that bond in 2.5, 3 years down the road, it should be easier because we should be able to tap a bigger pool of investors when it comes to unsecured bonds, high yield bonds. So that explains what we have done there. I would say the overall pool of liquidity that we have, you understand that there is a part of cash. There is a part that is parked on a revolving credit line, which are committed for a number of years. There is a little bit of commercial paper, which is more short term. And then there is the bond. And I think that as we can never predict what sort of market is waiting for us, we have decided to have a policy of having around 50% leverage and then the liquidity that will enable us to operate for at least 2 years in any sort of market. And obviously, what is in excess of that can be used on any sort of transaction where we'd like to act relatively promptly. You may remember that we snapped the Maersk fleet in just over 2 weeks, and so you better have that liquidity available. And when it comes to Gener8, I think it's fair -- well, it's fair to say that the process was a little bit longer, but reaching the terms of the agreement was much shorter than closing the deal, I would say, with all the regulation and the public requirements that we had. But it was also a transaction that we executed fairly quickly because we had the comfort of the liquidity that we had at that time.

[Operator]

This concludes our question and answer session. I would like to turn the conference back over to Hugo De Stoop for closing remarks.

[Hugo De Stoop, CEO & Interim CFO]

Well, thank you, everyone, for your availability. We look forward to speaking to you on September 5, where we will have a special webinar about what we will do in terms of preparation, IMO 2020 and the amount of fuel that we have accumulated and the price at which we accumulated it. And so yes, that's it for us today. Thank you very much and talk to you soon.

[Operator]

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