Euronav NV

F:OCW

Earnings Call Transcript 2022-Q3

[Operator]

Good day, and welcome to the Euronav Third Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Brian Gallagher. Please go ahead.

[Brian Gallagher, executive]

Thank you. Good morning and afternoon to everyone, and thanks for joining our Q3 2022 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, the third of November 2022 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 statements of 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 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 these forward-looking statements.

Please take a note to read our safe harbor statement on Page 2 of the slide presentation. With that, I'll now pass over to Chief Executive, Hugo De Stoop to start with the content slide on Slide 3. Hugo?

[Hugo De Stoop, executive]

Thank you, Brian, and good morning or afternoon to wherever you are, and welcome to our call. I will run through the Q3 highlights before passing back on to Brian Gallagher, our Head of IR, who will then highlight some key in current trends in the winter market before I return to summarize our strategy where we are in the current cycle and our outlook.

Turning to Slide 5 and the Q3 highlights. In capital markets, today, everyone is looking for a pilot. Well, in tanker markets, especially in the larger VLCC segment, we finally got ours in freight rate, and this was the catalyst to drive us back to profitability. Since July, the substitution trade of VLCC ship supplying the lost seaborne barrels from Russia to the EU has really gained traction.

The [indiscernible] sector has experienced more impactful dislocation since April and has continued to see rates rise. And now VLCCs had largely called up over the third quarter. As experienced, watchers of shipping will know, the impact in our numbers is lagged as we are operating 6 to 8 weeks ahead of the current calendar. Hence, you can see from Slide 5, quarter-to-date numbers for Q4 reflect better the trends we have seen since the summer.

We at Euronav have also been busy. We have sold 3 older vessels this quarter and recycled the capsule into 2 new ECO Suezmax contract, which will be delivered ahead of the winter in 2 years from today. We now have 8 vessels under construction that will be delivered across what we believe is the starting of -- the starting quarter of a multiyear up cycle.

So a very pleasing operational quarter for us as we believe the cycle has turned and should last for the foreseeable future. Looking now at the financial on Slide 7. It was a relatively quiet quarter on the financials during Q3 with no exceptional items. Our leverage and our liquidity remains very robust and in line with previous guidance. We continue to work hard on adding additional sustainable financing, which we expect to complete very soon.

The 2 FSOs that we operate now fully are totally consolidated for an entire quarter and this, for the first time, since we acquired 50% of our partner on June 7, 2022. A Slide 7 also focuses on how much progress we have made year-to-date in fleet renewal with interest remaining high in the secondhand tonnage.

With that, I will now pass it back over to Brian Gallagher to give some thoughts on the current market cycle.

[Brian Gallagher, executive]

Thank you, Hugo. A key driver of the oil marketplace over the last 6 months is about to hit its last but very impactful phase in our view. This is the dislocation from the Russian crude flows. The European Union has already divested about 1 million barrels per day of seaborne imports from Russia and replace those largely from Atlantic and the Middle East locations.

We expect another 1 million barrels per day of the EU bound exports from Russia to follow a similar pattern over the next quarter ahead of the 5th of December deadline set with the EU to ban all oil shipped from the Russia to Europe. This will mean that the same volume of oil would travel approximately 3 to 4x the distance it previously did. We will continue to see the benefit of substitution trades from Atlantic to Middle East, oil being taken on a seaborne route to the EU.

This latter substitution trade will, in particular, benefit the larger customer sizes such as VLCCs. This trend has been very pronounced since July onwards. The chart on slide 9 illustrates both the distances involved and also the detail of the dislocation of these crude barrels. This brings us to the additional crude demand that we anticipate to see from further fuel switching on Slide 10.

Slide 10 is a slide we've used before, but which continues to have a very strong message with the current crude transportation market. Whilst volatility in energy prices has waned a bit recently, we continue to see the relative price of oil being cheap in comparison to other core energy sources.

All of the fuel prices illustrated on Slide 10 are represented on a per oil barrel equivalent and therefore, are completely like-for-like. Oil is, therefore, relatively cheap in terms of a source of fuel at the moment and power and consequently, we believe that we will see not only fuel switching during this winter, but continue to see this trend well into next year.

The impact of all of this on Slide 11 shows the impact on shipping itself. The dislocation and increased demand for oil is clearly illustrated on Slide 11. This shows the amount of oil and the water being transported in the dark blue line, the 1-year time charter rates for VLCCs given in the light blue line. Oil in seaborne transit is back to levels we have not seen since the very short spike we saw in March 2020, just ahead of the COVID pandemic kicking in.

With ton miles continue to be a key feature of the dislocation, we anticipate that we will continue to see growth in oil, in transit on seaborne routes on similar patterns. So in summary of our market views, we continue to remain very positive on the current trends and expect to see a sustained and strong winter period.

I'll now pass back to our Chief Executive, Hugo De Stoop to give some more medium-term thoughts about where we are in the cycle on our current outlook from the traffic light perspective. Hugo, over to you.

[Hugo De Stoop, executive]

Thank you, Brian. I'd like to sum up before we go to Q&A with 2 very general thoughts. Firstly, Slide 13 gives an indication of the parallels, but also the differences we see between this current cycle set up in previous sustained multi-quarter up cycles in the tanker market.

First, the valuation of the tanker sector in capital market terms is cheaper than what we have seen in previous upcycles in 2004, 2014 and 2019. Second, the average age of the global fleet is much higher than what we have seen in previous cycle. Finally, we are in a very different era in terms of the order book expressed in absolute numbers or as a percentage of the fleet in the larger tanker space.

Those different aspects gives a very supportive and constructive medium-term outlook. So moving on to the final slide, which is Slide 14. That allows me to focus on the traffic lights we give at the end of every quarter earnings call. Once again, we felt the market background deserves another upgrade. And this time, we are upgrading to ton miles.

The last phase of the Russian dislocation means that we expect to see further increases into miles, which bodes well for the tanker market this winter and for the coming medium term. You will have noticed on Slide 14 that our traffic lights on majority green. We still believe there is an upside as all of the recent up cycle has been delivered without any benefit coming through from Chinese consumption or Chinese oil demand growth.

So we still believe there is further to go and further potential for upgrades to our traffic lights. Thank you for your time and attention. With that, I will pass it back to the operator for questions.

[Operator]

[Operator Instructions] Our first question comes from Jon Chappell from Evercore ISI.

[Jonathan Chappell, analyst]

So first question Hugo on liquidity. Just curious, number one, is that pro forma for all the vessel sales that have been done plus the down payments on the new builds? And second of all, there's additional finance under discussion. Can you give us any sense to the magnitude of that and the terms given that you laid out, it was possibly going on to green financing?

[Hugo De Stoop, executive]

Yes, absolutely. Very good question. So indeed, EUR 355 million seems to be a little bit on the low side for Euronav. That is before we get cash from the vessel that we have -- that we are selling at the moment. All those vessels are the 3.

In Q4, we expect to get approximately EUR 160 million, EUR 159 million, so that will be added to the liquidity and then the new facility, which is EUR 377 million that we have a term sheet for and currently in the documentation, we expect that 330-ish of that will also be added to the liquidity in that because it's replacing a facility that has already expired.

And so that explains why EUR 355 million seems a little bit on the low side. So overall, we go back to EUR 800 million of liquidity, and that is before operating cash flow comes in, and we expect those to be significant and generous in Q4.

[Jonathan Chappell, analyst]

Okay. Yes, great. That's exactly why I asked it. The second question also has to do with capital, just keep it to your now specific. Clearly, most of the other publicly traded entities have kind of returned to the dividend model. I know the Vs have lagged and we're really not going to see the true impact of the V recovery until the fourth quarter.

I'm just wondering how you're considering capital allocation and kind of a twist on a question I've asked in prior calls, are you somewhat restricted on what you can do with capital, especially vis-a-vis dividend until there's some finality to the potential Frontline merger?

[Hugo De Stoop, executive]

Yes, absolutely. I mean when you do a merger and you calculate the economics, namely the ratio, you are normally freezing the dividends. So otherwise, the economics are changing. So what we have in the agreement is, obviously, we can continue to pay a minimum dividend, the EUR 0.03 that we pay every quarter, that's in the books.

But we are now moving to a market that should allow us to return more capital to the shareholders. And we will do so but only after we have the tender over -- the tender offer closed and that's obviously the same for Frontline, and they have paid a dividend in Q2 that was also agreed and calculated in the ratio. But then we should hold on paying dividends until the tender offer is closed and that we expect, as you've seen to be on in Q1.

So there might be a little lag of a quarter and even not a full quarter, I mean, probably 1 or 2 months if you look at your calendar and when we pay dividends related to every quarter.

[Jonathan Chappell, analyst]

All right. Well, great title on Slide 13.

[Operator]

The next question comes from Amit Mahotra from Deutsche Bank.

[Christopher Robertson, analyst]

This is Chris Robertson on for Amit. I wanted to ask about the expansion of the TI pool. Do you expect that will allow greater rate outperformance? Or how will that change things operationally?

[Hugo De Stoop, executive]

Operationally, I'm not sure that will change much. What we are trying to achieve there in the pool is to have a central point of contact for our clients to go -- I mean, at the moment, the market is very fragmented. So if you are a broker representing a client, what you do is -- you look at the different database that exists out there and some are more comprehensive than other.

And then you try to spot the vessels that can perform the cargo you are in charge of finding transportation for. So when you have a place which represents 65 and tomorrow, hopefully, 85, potentially 90, maybe one day even 100 ships. It makes the life of many people easier. And as far as the participants to the pool are concerned, what we are looking at is trying to optimize the voyage among the different vessels and also trying to find the appropriate vessel for -- the appropriate trade that we're doing because nowadays you have non-eco-ship, eco-ships, you have non-eco-ship with [indiscernible].

Every single voyage will have its particular properties. And so it's important to have a big pool of different vessels that can take those different voyages. So it's a mutual benefit, I would say, for the operator as much as for the clients. In the way that I have explained. And then if we play the game of triangulation, then normally indeed, and that's one of the goals, your net results should improve but not at the detriment of your clients.

Which is a very big benefit, again, for both parties. You pay the same and we get the benefit of size.

[Christopher Robertson, analyst]

Got it. Yes. follow-up question. On Slide 9, you talk about the Russian dislocation. I just wanted to ask on the Baltic loading for it, how many of those can accommodate VLCCs? And what -- are there going to be ship-to-ship transfers associated with the dislocation of Russian crude?

[Hugo De Stoop, executive]

Very few can accommodate these and the ones that can usually you cannot load to the top so yes, there is normally -- when the oil is moving far away or further away than it used to be, I mean, Europe was a close destination. And as we have explained in the introductory remarks, we're talking about 3x, 4x, potentially 5x the distance that we use to perform.

And on that kind of distance, it makes sense to lighter into a VLCC. So far, we have seen a few operations doing that. We expect that this will pick up dramatically in the winter. And why do we expect that to pick up dramatically is because in the winter, and here I'm not only talking about the Baltics. I'm much more talking about the northern part in the northern ports of Russia, you need ice [ carved ] vessels.

And when you look at what exists in the world and here I'm talking a few Suezmax and then many Aframax that are [indiscernible] that means that they can break the ice, they can load the oil and then they can go to their destination. But if you use those ships to do the long voyage over the all Africa and going to India, China and whoever is interested in taking that oil, then they won't be available to go for that distance, which is icy.

So we expect those ships to lighter into VLCC in non-ice waters and then to go back directly to the port where they are needed. That's why we're very optimistic about VLCCs in general.

[Christopher Robertson, analyst]

Got it. Yes, that makes sense. So in other words, they'll be traveling longer distances and it will take longer to load them because of the lightering.

[Hugo De Stoop, executive]

Correct.

[Operator]

The next question comes from Omar Nokta from Jefferies.

[Omar Nokta, analyst]

Good afternoon Hugo and Brian I just wanted to ask about the latest new buildings that you have for the 2 Suezmaxes you ordered recently. You got a nice delivery slot for the third quarter of '24. Those seem to be a bit earlier than what we thought maybe was available, are those -- were those option slots that you had? Or maybe can you just give some context as to how you got those slots? And then also, what does the picture look like from here if you were to place a fresh order today?

[Hugo De Stoop, executive]

Well, very good question. And in fact, we hesitate in making those remark in the press release because it's very important people understand what the current picture is about shipyards in general and that one in particular. So we're very much attached to the quality that Korea can deliver, and we monitor very much the Korean yards.

The 3 big ones, which are Hyundai, Samsung and Daewoo, they are completely full until '25. And when I speak about '25 Q2 for maybe 1 or 2 ships but it's mostly Q3, Q4. And they continue to receive orders from other segments. In particular, LNG is quite keen to continue to order obviously, for obvious reasons, the container side is slowing down on their pace of order. But to come back to the tanker space, that's what the picture is.

We also check what's going on in China, and it's very similar. And I'm not even talking about Japan because there is much worse. We're talking end '26, Daehan which is not part of the top 3, but it used to belong to Daewoo, so the quality is very good. We have had the opportunity to develop a very good relationship with them.

You remember that earlier this year, we took 2 Suezmax that was resale of contracts that we did last year. And in fact, that was -- that's very much what builds our relationship with them because we could act very, very swiftly. I think between the time they were in trouble with their existing clients and the time we took that contract in our own hands, there was maybe 2 weeks or something like that.

And we were relatively generous on payment terms, which was appreciated by the yard. So what happened on this occasion is that -- there were 2 options. If I'm not mistaken for product tankers that the ship owner for one and another reason couldn't lift and they became available. And the first party, they came to offer those slots was Euronav because of what I just explained.

And we grab them because indeed, we thought that the very interesting part was the time delivery. We haven't announced the price, but I can tell you that, that was also a very attractive price compared to what we could see being offered by other yards for what we believe is the same quality. So all in all, we believe it's a very good deal. Whether we're going to see more of those is a little bit difficult to say.

I know that people are trying to study options on the container side and see whether or not they could be transform it to tankers. I think that most of those studies are showing that it's difficult because it's always -- I mean, it's difficult because it's another type of ship, product to crude that's relatively easy, but container to tanker or dry bulk to tanker, it's -- it requires a lot of changes.

So it's not easy. So we don't expect to see many of those opportunities arising for us or for other people. And therefore, we believe that the first opportunity that we will see is '25, be it for Suezmax or VLCC.

[Omar Nokta, analyst]

Very helpful. And then I just wanted to follow up then, like the structural notation of these 2 Suezmaxes. You mentioned they're being designed to be LNG capable down the line after delivery. I mean you're also evaluating making them ammonia and methanol ready. Is it conceivable that you'd be able to pick, say, first off, you go back to the yard after delivery and you said, okay, let's put on the LNG component. And then maybe a few years later, you both on ammonia or methanol as that becomes more prevalent. Is it conceivable that you'd be able to have like a tri-fuel type of vessel with these Suezmaxes where it could do bunker fuel you could do LNG and then maybe down the line, you could bolt on, say, in methanol or ammonia, is that realistic? Or is that just too far fetched?

[Hugo De Stoop, executive]

From a technical point of view, everything can be done, especially on a tanker because we have a lot of space on our deck. So if you look at the ship the deck is relatively empty. I mean, there is obviously the 3 different lines to unload the cargo that we have.

Different from dry bulk because they have hatches that need to open. So the space is more restricted, completely different for container vessels because every single space is used for loading the containers. So from a technical perspective, yes, you could imagine doing that. But then from a cost perspective that is completely suboptimal, simply because we're talking about different type of fuel. I mean, methanol will continue to be liquid at ambient temperature.

LNG is definitely not liquid and ambient temperature, same for ammonia. On top of that, some of those products are more corrosive than others, which means that the piping that you need to put in place is more or less sophistic. By that, I mean, will be a specific type of metals to the piping. And then the way you will fill the engine is also very important because ammonia, for instance, is more toxic than any other target fuel that we are considering at the moment.

And so you really need to make sure that everything is completely water tied because you cannot afford to have any leak no matter how small that is. So from a CapEx perspective, I don't think that you're going to see a different type of fuel or tri-fuel as you name it. Dual fuel, that's the obvious conventional that we use today, plus one of the new fuel and transforming the ships, i.e., in the first place, you receive a conventional then potentially you transform it into, let's say, methanol because that's the closest to what we're using today.

And then at a later stage, let's say, 10 years down the road, Methanol is no longer the flavor of the day and you move to LNG on ammonia. That is also possible, but it will cost money. And so you've got to make sure that, that point in time. And when you take the decision, it makes sense to transform those vessels a second time in their lifetime as far as the fuel their consume is concerned.

[Omar Nokta, analyst]

Got it.

[Operator]

The next question comes from Chris Wetherbee from Citigroup.

[Chris Wetherbee, analyst]

Maybe apologize for what could be an obvious question first. Just want to clarify on the opportunity for the long haul from Russia from an ICE perspective. Do we -- is that a potential seasonal situation? Or do you see that being persistent beyond, say, first quarter as we think about 2023?

[Hugo De Stoop, executive]

Part of it should be permanent, part of it should be seasonal. Bt the season is forcing it to happen if you see what I mean. You have no choice. You need to use to the max dose icebreakers. I mean, to the extent that the weather, the temperatures are going to be that low.

And so there will be force if they want to export what they are producing today to do the lightering. On the long term, it continues to make sense from an economies of scale perspective and that's why VLCCs are usually used for long distance, Suezmax for shorter distance and Aframax for [ mutual ] to distance.

That's the name of the game to a certain extent. So definitely in the winter with a lot of legs for the long term.

[Chris Wetherbee, analyst]

Okay. That's helpful. I appreciate the clarification there. And then maybe thinking about sensitivity of demand. So going to your red light green light chart that you put in here and obviously, the only one that's sort of maybe not quite as constructive as demand for oil.

And I wanted to get your perspective if you think that the sort of economic dynamic is maybe as impactful to the overall market as it has been historically, just given all of the other potential constraints to both capacity and also there's the ton miles sort of multiplier here. Just want to get a sense we are concerned about the macro clearly, but we're wondering if we should -- if we think it's going to be quite as impactful as it historically is.

[Hugo De Stoop, executive]

Well, that's a great question to a certain extent. I love some of your colleagues to give me the answer. So it's almost like a gut feeling, but we are very simple people, and we are trying to look at very simple effect. The biggest effect, and we also mentioned that in our introductory remarks, sorry, is the demand that is coming from China.

And that is not yet back to pre-COVID level. And that's the minimum that we should see coming back when we speak about China. And then we believe that once these restrictions are being lifted in China, China will continue to grow, and you've seen it from GDP point of view, obviously, that country has slowed down.

There's certainly not negative GDP, but the complete slowdown compared to the growth numbers we used to see. So that already in itself, I can't tell you when it's going to happen. It should give a big boost to oil demand. You also know that they will start sort of restricting the usage of fossil fuel only by 2030.

Until then, they have declared that they want to max out the usage of fossil fuel. So I don't think that there is any concern coming from that region for this decade. And then for the remaining part of the world, I mean, clearly, you're talking about recession, we were talking about it in the last quarterly call.

And yes, that usually has an impact on the energy that is being used by the world in general. But there, where we are, I would say, maybe more positive than other sectors is the relative pricing of a kilowatt hour. Because you can translate that in oil barrels or in kilowatt hour or whatever unit you may choose. But it's true that the price of oil relative to the others and especially relative to gas is very cheap which means that anyone who has an opportunity to switch from gas to oil will do it.

The same could be said about coal, but I think that people are more and more reluctant to switch to coal because of the emissions and because of other type of pollution, not only CO2, but many types of pollution. So I think at the moment, oil is probably more protected than many other sources of energy even if we enter into a recession. But as you can see, I'm using very simple analysis.

[Chris Wetherbee, analyst]

Well, that's usually the right way to do it. So I appreciate the time.

[Operator]

The next question comes from Frode Morkedal from Clarksons Securities.

[Frode Morkedal, analyst]

Just a question on your -- the final leg, as you called it, the Russian oil embargo. Perhaps you can discuss the oil price cut, the potential of a shadow trade? And I guess the third alternative is that exports were down. Curious to know how you see this shaping up?

[Hugo De Stoop, executive]

Yes. Again, one would need to have a crystal ball. Why don't we start with the last one, which is cut in production. A lot of people were talking that potentially they would reach the maximum capacity of export to countries like India and China are already taking Russian oil. A Euronav, I think we believe that if the oil is cheap and certainly cheaper than what you can fetch in other place in the market, it will find a home.

We have many precedents that demonstrate this. And an oil cap, and I will come back to that, is another way to forcing a discount which is already happening because obviously, the freight is more expensive. So when Russia sells oil to China and India, no doubt that they sell it at a bigger discount than when they used to sell it to Europe. So from that perspective, I think that it's more physical operational restriction that will dictate whether or not Russia will have to shut in some of their oil field.

And by that, I come back to the comment that we made earlier on ice [ carved ] vessels capable of -- or being enough in numbers to go to Russian ports and then do the lightering and this is obviously a heavier operation than when you can just pick up the oil in a port and transport it to its destination without interruption. So that's what we believe at Euronav will happen. As far as the price caps, sanctions, we don't think that, that will stop the production of Russian oil.

And I'm not even sure that the world really wants less oil being put on the market given where pricing is and given the influence or the impact it has on general inflation, which is really problematic, as you know, in Europe and to a certain extent in the U.S.

[Frode Morkedal, analyst]

Yes. Just as a follow-up, do you have any idea how much Russian oil is being insured by Western companies. And there's also this down on insurance coming up. So how do you think that will affect the trading market and the tankers?

[Hugo De Stoop, executive]

So first part of the question, no idea whatsoever. Very difficult to know. Obviously, the restrictions or the sanctions are also coming up on the insurance world. I don't think that it will change a great deal what we're seeing today because if I look at the P&I, we are involved in.

They already did what many companies and banks have done, which is sort of self sanction or imposing already a great deal of restriction on what business they can or cannot do with Russians. So that's already the situation. And for the few cases that we have tried to analyze and we have heard of this is simply being replaced by less international insurance companies, namely insurance companies being located in Dubai, in China, in Hong Kong especially when the destination of the oil is or are those countries.

[Operator]

The next question comes from Chris Tsung from Webber Research.

[Chris Tsung, analyst]

I just wanted to pick back up on the Russian dislocation. And there's some talks about growing dark and shadow [ trade ], and we're seeing the pickup in S&P market for older tankers. Just curious on your views on how much tonnage could actually exit the market following sanctions in early December.

[Hugo De Stoop, executive]

Well, another one, I definitely should have brought my crystal ball here. First of all, you're absolutely correct. I mean, the pickup in the secondhand -- in the S&P market in secondhand vessels is definitely there. And when you look at the price, one cannot ignore and not imagine that some of that tonnage is not going to be dedicated to the trade with Russia.

I think that I'm not sure I would call it a shadow trade simply because well, up until 5th of December, it's allowed. I mean you obviously need to have an agreement with your finances and whatnot, but shipping is mostly private. That shouldn't be a problem. After that, it's the destination, which is a problem, right, and the ownership of the vessel.

But if your vessel is owned by the right entity, i.e., outside Europe, outside the U.S. or outside the U.K., then you can continue to trade. So I'm not sure I would call it a shadow trade like what we've seen happening with the oil coming out of Iran. So yes, it's a little bit -- it's very peculiar.

And I don't know how much vessels would be able to do that. I think that there will be a 2-tier market. It's going to be very difficult to have ships even if you are based outside Europe to achieve that do one cargo out of Russia and then the next one out of a place that is not under restrictions. So I think that the fleet will be more dedicated but difficult to tell you today how much tonnage, how much [ VOC ], how much Suezmax are going to be dedicated to that one.

[Chris Tsung, analyst]

Okay. Fair.

[Operator]

[Operator Instructions] Our next question comes from Thijs Berkelder from ABN AMRO.

[Thijs Berkelder, analyst]

Yes. Brian and Hugo. Question on windfall taxes. You have not made much profit in the past few years, but you are about to make big profits. Is there any country looking at potentially your kind of operations?

[Hugo De Stoop, executive]

Not that we know of, and you should know that on your based in Europe, which is the case of Euronav and it will be the case of the front line very soon. We are under a European regulation that is called the tonnage stack. And then the different countries being a member of the European Union have their own way of applying that directive as we call it, and we are based in Belgium, and we have already done our analysis in Cyprus. It's a very good system that everybody likes.

And I would be surprised if they wanted to change it. I mean, everything is possible. But at the moment, nobody is questioning that system. And the reason why nobody is questioning that system is simply because if it wasn't there in place in the European Union, I think that very, very few ships -- very few shipping companies would be based in Europe.

And as you know, it's very different to own a ship than it is to own a factory. I mean the factory, you can't just move it out of country overnight. That's more the case with the ship. I mean the ship, you decide on the flag, you decide on the registry, and you can also decide where the company is incorporated.

So I understand the question because that's very much talked about in the energy sector and we are very different animals. The reason why the energy sector is making a lot of profit is because of the characteristic of the energy market and very much what's going on because of the Russian-Ukraine crisis.

As far as shipping is concerned, yes, we are going to enter an up cycle, as we call it, but our business is full of up cycles and down cycles and therefore, very, very cyclical. And the benefit of the tonnage stacks for the states that are applied means that they get their tax even when we are loss-making. So that's it's just a different way of taxing an industry and one that has worked for more than a decade now. And from what we hear is there to stay. I mean, very few people question.

[Thijs Berkelder, analyst]

Okay. A follow-up question is the Frontline transaction has been slightly delayed into Q1. Can you maybe indicate what could further delay the transaction from happening? Also looking at the further increased stake by the family [indiscernible]?

[Hugo De Stoop, executive]

Yes. So maybe 2 questions. The first one is on timing. And initially, we had -- we were very ambitious, and we said that we should be able to close the transaction in Q4. Obviously, we had plans to use the full Q4 to do that. And what happened is that we could be in a position to launch the tender offer in Q4, but that would mean that we go over the Christmas period and the holiday period, which is suboptimal.

So today, we prefer to announce to the market that the idea is to launch the tender offer as early as possible in Q1 but then have the full period where the tender offer is open free of holidays, free of , I would say, bank holidays and people not maybe paying the same attention as they would in other periods. So that's very much the main reason. So we're not talking about a big delay. We're talking about a strategic delay, if I may use that term.

Other things that could delay the [ side ] well, there are things that we control and there are things that we don't control. And the things that we don't control is all the regulatory part. Most of the filings in the U.S. or in Belgium, they have -- the regulator has a certain time to analyze the files before we make them public -- before we or Frontline makes them public. That's on the first review.

The second review usually is not -- has no time limit. So if there is delay, then there is very little we can do, but most of the time, we don't expect to see one. So we are optimistic that we can meet the new time line that we have set to the market. And then on your last question, which is our largest shareholder at the moment, which is CMB, which has indeed bought more shares, and that's talking -- that, I suppose, they believe in the business, which is always great to hear, especially at those prices.

It means that, today, they have a position of 21%. And if we want to do a full merger with Frontline, i.e. create one big company we need 75% of the vote once someone has 21 or more votes, it becomes very difficult because not everyone is voting. And that's the reason why we have structured this transaction has a 2-step process.

The first step is a combination. So it's not a merger. We will be able to achieve, we believe, up to 90% of the synergies of a fully merged company. We will look at every single department, I would say, be it on the revenue side, be it on the cost side, the overhead and really act as one group. But indeed, in order to achieve a full merger, we will need to see what happened with CMB's stake and already how many shares we can collect in the tender offer.

So that's something that we will do at the second stage of the rocket, I would say, and certainly after the tender offer. I don't think that it matters a great deal to the investors, simply because for those who understand shipping, they will understand that once you control a company with more than 50% of the vote, you can do already a lot, if not everything that you would have done under a merger, and maybe the only thing that you cannot do is a delisting basically.

[Operator]

There are no more questions in the queue. This concludes our question-and-answer session. I'd like to turn the conference back over to Hugo De Stoop for any closing remarks.

[Hugo De Stoop, executive]

Not much to add. I think we've covered pretty much everything that we wanted to cover. So I thank everyone for participating to this call. See you next quarter. Thank you.

[Operator]

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