d'Amico International Shipping SA

MIL:DIS

Earnings Call Transcript 2020-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the d'Amico International Shipping First Quarter 2020 Results Conference Call. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Paolo d'Amico, CEO of d'Amico International Shipping. Please go ahead, sir.

[Paolo d'Amico, executive]

Hello to everybody. Good afternoon, and thank you for being with us. Let's go straight to the executive summary. Net result, DIS posted a profit of $1.5 million in Q1 of 2020 versus a loss of $5.5 million last year. As an adjusted net result, so excluding nonrecurring and noncash items from both periods, the today result for Q1 2020 is $6.3 million against $4.4 million from last year. Therefore, excluding such nonrecurring effect, this result on Q1 on 2020 would have been $10.7 million higher than the same quarter of last year. And I would like to remember that this represent for DIS the second consecutive profitable quarter.

On time charter equivalent, DIS daily spot rate was $17,364 in Q1 2020 against $13,583 in Q1 '19. This is equivalent of 27.8%, or if you prefer, $3,700 improvement 1 year over the other one. If we blend that with the coverage of time charter contracts, this achieved a total daily average rate of $16,391 in Q1 '20 against $14,057 in Q1 '19.

Our leverage reduction -- the net financial position, excluding IFRS 16 to fleet market value ratio was 63.3% at the end of March 2020 versus 64% at the end of 2019 and compared to 72.9% at the end of 2018. As far as the market, at the beginning of the year, the general outlook was rather positive as we all expected.

I mean we had strong fundamentals with implementation of IMO 2020. We had very limited supply growth. And so we had the scrubber sanction element, which was still on, the scrubber installation keeping ships in shipyards. So all this was providing a very good support to the market. But unfortunately, provide coronavirus, as you prefer, started in China. And we had a very strong destruction, let's say, of the demand and refining production in working, that was -- well, is still today the largest crude importing nation. So the product tanker rates suffered out of that.

What really made since the oil scenarios in March -- early March, the struggle between, let's call it, the war between Saudi Arabia and Russia on the price, and Saudi Arabia, as you know very well, flooded the market, and put both crude oil and products in a very steep contango which has been pushing a lot of traders basically to heavily chartering ships for storage. And this, of course, clearly, has been beneficial to the market.

By the end of the second quarter, as much as 21% of a tanker fleet may be tied up in floating stores today.

So this is just a few, say, starting shots, I leave the word now to Carlos for the financials and then I will be back on the market in a more detailed way.

[Antonio Carlos Balestra Mottola, executive]

Yes. Hello to everyone, good afternoon. So we start, as usual, with a quick look at our fleet, which hasn't changed that much from 31st of December. We have one less vessel, it was a TC in short-term that was redelivered to owners. We now have 45.5 vessels, of which just over 50% owned. And we are an MR player, currently 32.5 MRs, with an almost equal number of LR1s and Handys, so 6 LRs and 7 Handys control.

As you know well, we have implemented an important newbuilding program. We started ordering vessels in 2012. And started taking deliveries in 2014 for 22 new buildings, which 10 MRs, 6 Handys and 6 LR1s. This program has terminated.

When we move on to the following page, we see here that we invested overall $755 million in direct payments to yards plus newbuilding supervision costs, cost of supply, extras. The overall investment figure was actually much higher than that to take delivery of these 22 new buildings. And from 2020, we are much lighter in terms of CapEx commitments. We have another $10 million this year, only related to maintenance of vessels, in particular, dry docks and installation of water balancing system, and this figure drops further in 2021 and '22 to around $4 million each year.

We are not only lighter in terms of CapEx. We are also lighter in terms of debt repayments. We finished reimbursing this facility we had with Intesa, which was in an addition to the traditional bank financing, and we started off at $75 million. We started -- we finished reimbursing it in December last year. And therefore, from 2020, our repayments on our loans, excluding the loans costs from $52.5 million to $35.5 million.

We have some balloon repayments in 2020. They are around $22 million, and they are linked to the vessels we own in JV with Glencore through Glenda International Shipping. And so we are working on that, 1 balloon has to be refinanced in September and 3 in December.

Next year, we also have some refinancing commitments on balloons on facilities, which mature in the beginning of the year, and we will also soon be starting to look at that with $21 million to be refinanced next year. So it's not a big number this year or next year. 2022 is more important in terms of refinancing for us.

Going on to the following page, our purchase options. We have now out of the 9 leased back vessels that we closed 6 already exercisable by May this year, so now -- and all of them are in the money or theoretically in the money. So this is a situation we are closely monitoring because this could be a potential use of funds for us to deleverage our balance sheet to reap and lower cost of financing at the right moment so depending also, of course, on the market developments and on the cash generation over the course of the next -- over the next few months.

Going on to the next page, we see the our coverage. We have a closer look at our coverage. And on a quarterly basis, we see how we actually have been quite covered in Q1 this year at 65% at an average of around 59%. Coverage falls throughout the year, but we are still quite covered also in Q2 at an average rate of around $16,200. And for Q3, we are just over 50% covered at a average rate of $16,400. And then that drops further 42% at an average rate of $16,600 in Q4 2020. But it is -- I think it is -- we are quite happy with this coverage, although the markets are extremely strong right now, and you will see later in the presentation. There's also a lot of uncertainty regarding how long these very strong markets can last. And so we -- if we want to experience a softening, we will be able to rely on this coverage to protect our cash flow.

And also, a positive is that the percent of Eco vessels in our fleet increases over the next few years as we dispose of some of the vessels that we intend to sell and that we have classified as held for sale, some of our older vessels.

Going on to the following page, we look at the fleet evolution. The fleet decreases slightly over the next 3 years as we did deliver some of our shorter-term TC-IN vessels and as we sell some of these older vessels that we already have declared an intent for sale.

Our profit for it, nonetheless, increases over the forecast period. Because as per previous slide, our coverage falls quite sharply in 2021 and in 2022. Before we have the sensitivity for every $1,000 per day change and $3,000 per day change to achieve payment earnings. For 2020, the $1,000 per day sensitivity is $5 million, which rises to around $10 million in 2021.

A closer look at the costs. We have also worked on the costs, not only on the top line, and we achieved -- we started -- we achieved some savings last year relative to Q1 '18, and Q1 '20 is even lower than Q1 '19 in terms of daily operating costs for our own vessels. And on vessels on the G&A front, we also achieved some savings. The savings have been driven on the operating cost front, have been linked to technological development, the use of commission-based maintenance, which allows us to better assess when to replace parts, reducing downtime on hires but also increase the average lifespan of spare parts.

It has been linked also to the strong dollar. Since we also have -- although most of our operating costs are in dollar, we do also have costs, which are in other currencies. And therefore, we have benefited in this respect from the stronger dollar, at the same -- and even more so applies to the G&A, where 75% of our costs are in currencies which are different from the U.S. dollar. So the strong U.S. dollar there definitely helped us as well as the reorganization of some of our activities which allowed us to obtain some savings. Of course, in Q1 2020, there are some additional savings, which are linked to the COVID outbreak, which we didn't plan on, but it did affect, of course, our traveling and entertainment budgets with some significant savings in that respect.

Going on to the next page, our net financial position to fair market value improved from 64% to 63%. So it's a marginal improvement since December '19. But if we look at the ratio at December '18, it was at around 73%. So we are talking about a 10% improvement in the ratio. And that is quite significant. It is a result of the stronger markets, which helped us to generate cash in the last 2 quarters. It is the result of the increase in vessel values, and of course, it is also the result of the capital increase that we pursued last year.

Also, important to note that we have now one vessel, which is completely debt-free, Cielo di Guangzhou, we paid balloon on this vessel in March, just at the end of the month. And now the vessel is completely debt-free. So that's an older Handy vessels in our Handysize vessel in our flee, which is classified as held for sale.

We also have another vessel, which -- in our fleet, which is debt-free and which we just announced the sale of, which is the Glenda Meredith, which we sold for around $19 million. And so the JV is owned 50% by us, so generating around $9 million in cash for us.

Going on to the following page the financial results, Q1 2020 bottom line, $1.5 million but -- which -- but excluding nonrecurring items, it is $6.3 million. So that's a much better figure. There were a number of nonrecurring items in Q1 2020, mostly linked to mark-to-market of interest rate swaps, which have not been hedged, which had a negative effect of around $2 million in our results. But also, asset impairments and result on disposal of vessels, which had an impact of around another $2.2 million and also the impact of IFRS 16, which was negative by around $0.4 million.

Overall, if we look, therefore, the nonrecurring results of 2020 and 2019, we see an improvement of $10.7 million, which is quite significant. And also, a very significant improved in terms of EBITDA, which rose by 47% relative to the first quarter of last year to $33 million.

Going on to the following page, we have a closer look at the daily average results of our vessels. And we see that the spot TC equivalent rate was of $17,300, which is good, and by historical standards and is in line more or less with the results we achieved in Q4 '19. We had a quarter which was -- there was quite a volatility, in fact, a lot of volatility beginning Q1. We had a very strong start to the quarter, but we also had some weakness around mid-February. And then rates recovered in the last part of the quarter as the Chinese economy started coming out from the coronavirus lockdown.

And the big surge in rates that we have seen has actually occurred only in April. So that didn't impact the Q1 results. Also, it's important to note that Q1 result was impacted by a nonrecurring adjustment of $0.9 million related to voyages performed last year. So if we exclude that, and we look only at the result of the voyages performed this year, we are closer to $18,000 because it had an impact of $600 per day on the spot voyage.

Overall, the blended result include the TC coverage has an average rate of around $15,900 was of around $16,400, which is also a good result and higher than Q4 '19.

I leave it to Paolo now for the market section.

[Paolo d'Amico, executive]

Thank you, Carlos. So if we look at asset value and if we start from -- as we did in all our presentation from where the bottom was in October 2016, we can see that the values have been recovering quite a lot. If we go for a 5-year-old MR with plus 36% and for a 10-year-old plus 23%. And then charter rates also improved, and we are currently 66% higher than cost base.

The impact of COVID-19 on our market, which has been, on one side, of course, the demand destruction because everybody has been locked down, and 60% of world population has been closing their door. But in the meantime, a series of factors happened. As we have said before, as you know very well, we had this struggle between Saudis and Russians, which made -- flooded basically the market with crude. And due to the stress that obviously the market created, which is basically end up on storage at the end of the day, a lot of clean ships, I'm talking about LR2s mostly, switched from dirty to -- sorry, switched from clean to dirty, creating tightening up more the clean fleet. So this was the first positive thing.

The second positive thing is in that the price of bunker went down and went extremely down, and the spread between the high sulfur, and the low sulfur went so narrow that I think a lot of people are postponing their investments in scrubbers or even canceling them altogether. It started also new sort of trades because NAFTA became extremely competitive against Italian LPG. And you know as NAFTA is a competitive where LPG as a feedstock for the petrochemical industry. And so we increased the demand of NAFTA on longer distance from the Middle East or Europe to Asia and even out of the United States.

And last, but not least, of course, what we will say we increased of floating storage and a series of nonefficiencies like quarantines. I mean, if a ship was arriving in a port where quarantine is required and the balance to that port was shorter than 14 days, the ship had to wait outside the port to consume the remaining days, up to 14 days before entering. And this is something which, especially in the nights where you have very short trips, was happening all the time. As a matter of fact, we clean trade in the night and the fewer trade in the night has been extremely strong.

Now it's a matter of fact that we had this big fall in refining volumes because, of course, refineries start cutting down once when we saw this situation. But with the storage element, it has been so strong that it's been offsetting this limitation on refining throughputs, and it's been strong enough to support the market and other people in smaller supply.

So it's clearly a situation where we have a big floating storage. We are leading that trade. I mean, we are leading this paradox the weak final demand rather now more controlled supply and the stronger demand on ships. And all this is to one element, which is storage in between. So it's clearly up to this situation, we'll continue -- we are going to have a certain type of positive, let's say, market.

How long it's going to be? This has to be seen. We have this first step now in May of 9.5 million barrels per day, which are coming in force. But clearly, the total is getting narrower and less attractive. But in the meantime, we are still producing more than what we are consuming or storing. So the yard somewhere has to grow.

Page 22, it was our, let's say, historical slide because that was risk was before, let's say, the pandemic because the pandemic clearly changed the whole thing. What we can say is still today that the refiner product participation to the oil trade, oil move actually is still very high, is 34%. So it's more than 1/3 of the oil moved around.

On a long term, we have a potential upside on asset values because we are still very low against what year in terms of time charter rates, and here in terms of 5-year-old and 10-year-old vessels value against the peak, I guess the last peak.

And then on Page 24 here, I think, is a key point because we have this growth in refining capacity. This globally refining capacity, which has been only in 2019 of 2 million barrels per day and we expect it's going to be 6 million barrels per day between 2020 and 2024. And this is going to be happening mostly in China and Middle East. So we are going to have this growth of refining plants which they will work, and we will compete against the European and Russian plants, which are more obsolete. So I think we were going to see a lot of changes in the refining world.

And this is repeated basically in Page 25. So certainly, somebody, somewhere, but probably in Europe has to shut down and probably is going to happen quite soon.

U.S. crude exports were rising, including the year-end of 2019. Of course, this price war put the sale of oil in distress because they cannot support this type of price. In America, even if Trump said that he was going to cut, it was -- he knew exactly what he was going to cut what he was going to go be bankrupt, basically. So -- because in America the government cannot control the oil production in Saudi Arabia and Russia and so on and so forth.

That are the producer of sale which are closing down wells because it doesn't make any more sense to put it to use. So the U.S. crude story for the future has been written altogether.

Page 27 is the fleet growth. And this is a very good element because there are some similarities between what happened in 2015 and 2016, if you remember, and to date. In 2016, we saw the -- again, drop of price per barrel. Everybody has been running like hell to buy oil and to move it around.

In 2016, we realized that we didn't consume, so the whole thing collapsed. But added to that, and aggravating that, I would say, was that in 2016, the growth of MR and LR1 deliveries, so we are talking about our segment, was 4.8%. So 4.8% of new ships coming in. Today, we are talking less of 1%. We're talking about 0.8%. So this is a point of strength to which we still have to have slippage, which obviously due to recent total shutdown of the Chinese shipyard for at least 6 months, and also not total shutdown, but big problems in Koreans because many Korean yards are using blocks which are built in China, so this supply chain was disrupted. So here again, I'll say this the delays of scrubbing can support the market and will support the market at least for the next 2 years.

There are no new building orders, I mean, not exaggerating new building orders in the pipeline. As far as I know, there is the Japanese, and then there is a number of methanol carrier, which are product carrier, but they do not do exactly the same job that we do. And then there is, let's say -- owners are not so keen to run for new buildings also for technological reason because IMO has very strong ambition on reduction of CO2. And I will even say that due to the pandemic, it looks like in area where we want -- even want to be most severe in some way, you can in a way to take advantage of this fact. But we like it or not, the air is cleaner today, but it's cleaner because nobody is driving, nobody is moving around, and nothing is happening.

So the tighter market is expected. We certainly think that the unwind of all the storage is going to be, let's call an adverse element. In my opinion, it's going to be by far less adverse on clean than on crude. And I think we can expect still on 2020, a good year.

I leave it to Carlos for the last points of the NAV evolution.

[Antonio Carlos Balestra Mottola, executive]

Yes, hello again to everyone. And now we look at this last slide, the NAV evolution. So in that, the positive aspect is that after bottoming and reaching trough, in December '16, the NAV started rising, not necessarily the NAV per share but the absolute number. We had capital increases in 2017 and '19, of course, which affected the per-share figure. But the per-share figure also started improving from June '19. And also, the overall NAV is now at $320 million around, and on a per-share basis, it is $0.26 per share after reaching a trough of $0.23 per share in June '19. So it has been slowly increasing, I would say, but nonetheless, increasing.

So our share price is currently at a very big discount to NAV. It was at a discount of 64% on the 31st of March for consistency purposes since our NAV was measured on the 31st of March, we use the share price at the same day to match the discounts. As of today, this discount is still very significant, but slightly smaller, around 55%, which we feel is not justified by the market developments we are currently experiencing with a very strong spot market. By the forward coverage we have, which guarantees quite a lot of visibility on profitable cash flows in the future and also by the general long-term fundamentals of the sector that we already mentioned, although there is quite a lot of uncertainty on the near-term and a correction could be on its way because of the overhang of stocks that is building up as we experienced in -- from 2016 to early 2019.

This time around this correction when it arises, it's likely to be shorter because as Paolo previously mentioned, the order book is extremely limited. It's at historical lows, and that was not the case in 2015.

And so we already entered, let's say, deal with very positive prospects. We expected the market to be strong, but for completely different reasons. And we believe those products that remain intact, if anything, actually, there has been many less vessels older than there with otherwise we have been because of this virus and which further dented appetite for new buildings. So as the demand recovers and we are likely to see the stocks going down quite fast and the adjustment not being -- not lasting too long possibly.

The following page, why invest in DIS. I would say it's the same key points that we usually highlight. So nothing there much has changed, and so thank you very much for your time.

And yes, pass it over to the Q&A session.

[Operator]

[Operator Instructions] First question is Matteo Bonizzoni of Kepler.

[Matteo Bonizzoni, analyst]

I have some questions, quick questions. The first one is related to the pattern of the rates on the product tankers. So we have seen a very strong April with rate -- spot rate exceeding $70,000 per day. Now we are seeing some correction, but I think we are still at satisfactory level around $30,000. So if we understood, we -- have understood correctly, your framework is that there should be further strength in the next weeks and then a normalization as soon as the floating storage is over, basically, or is gradually down. So compared to 2015, '16, I mean, what are the key differences? Should we expect, in the second half, rates to keep relatively satisfactory level? Or could we expect steep correction from this level? This is the first question.

The second one is on the fleet coverage. So we have seen that on Slide 18, you project that the 1-year time charter rate now close to $20,000 per day. So my question is the coverage for the Q2, Q4 is currently [indiscernible].

[Antonio Carlos Balestra Mottola, executive]

Matteo, can you repeat the last part of your question? We couldn't understand, the line was not very clear.

[Matteo Bonizzoni, analyst]

Yes. So the question is on the fleet coverage. You show that the 1-year time charter is close to $20,000 per day. The coverage for the second quarter to fourth quarter is nearly 53% for you. And 2021 is only 20%. So my question is, should -- do you have the opportunity to increase the level of coverage over the next 12 months, given the satisfactory 1-year time charter level?

The third question is on the financial charges. So the financial charges in Q1 were quite high, $12.3 million. There were some extraordinary issues that finalized the financial charges, again, a little bit comment about that. And what is the level of interest charges which we should expect in the next quarter?

Final question is in general. Related to current crisis. Are you observing or do you expect a more limited availability of banks to finance your business?

[Paolo d'Amico, executive]

I'll try to answer the first one and then I'll leave it to Carlos. I mean, as far as the rates, our coverage for 2020 is good enough to face, of course, a correction of the market. And I would like to say that we are keep looking to increase such a coverage, moving it in 2021. So we are not only looking to increase the coverage for the remaining part of 2020, but increase also the '21 and maybe -- not maybe -- on certain cases, even the '22 because we are looking at a few medium-term deals. So if these deals are coming in, the scenario will be changed quite positively.

I would say that time charter market itself, it didn't correct for the moment that much. So we are not losing elements because it was already, let's say, discounted against the spot rate. Let's assume that spot rate was paying you $35,000, $40,000 a day, the time charter was paying $20,000, $25,000. So even if from $40,000 is coming down, from 25,000, 20,000 is staying there. And we are trying to take opportunity out of that in way, I repeat, to cover more the 2020 and increase recovery on 2021.

How deep is going to be the correction due to the unwinding of the storage? This is only -- it's very difficult to say. I think also because clean products, they have a deterioration element. So they cannot stay on a ship forever. And they have to be used against crude, which can be sitting in the ship for years.

I think the unwind of the storage for clean cargoes, excluding diesel, which is -- that is not used [ in lubrication ]. The bulk of material, gasoline and jet fuel, will be as fast as possible. Because I repeat, you have a commodity problem, you have commodity quality problem. So you cannot keep the stuff on your ship forever.

As far as the financial, Carlos, you were saying.

[Antonio Carlos Balestra Mottola, executive]

Yes. On the financial part, on the -- I believe it was mentioned already during the call that we had a number of nonrecurring items. In particular, I mentioned that there were some interest rate swaps, the mark-to-market on some interest rate swaps, which are not being hedged, effective hedges, which pass-through our P&L. And the, of course, the movement in the forward curve of the U.S. dollar LIBOR had a big impact on this mark-to-market in this first quarter. And of course, we had a nonrecurring effect of around $2.3 million because of that. And otherwise, our expenses for -- the recurring financial expenses for the first quarter would have been around $10 million.

And that is the figure, more or less, which I expect going forward. Of course, as we amortize that, the interest expenses fall, and also, the U.S. dollar LIBOR came down during the quarter. So we are also expecting to benefit from that to a certain extent because our coverage to swaps is of around 75% of our investment. So the rate is exposed to floating rates. So although we had this negative mark-to-market, we are actually net -- we have a benefit from the reduction in the U.S. dollar LIBOR going forward.

And in terms of the financing, the availability of bank financing, it is true that generally banks' appetite for shipping has been falling. It has a lot to do with the great attention by regulators to shipping exposure because of the big losses that some banks had on their portfolios over the last -- during the last financial crisis, in particular, and then that expanded over the following years for some of these banks. There were, of course, some big excesses at the time. That were being financed at crazy valuations and at very high NPVs and with very low margin. So it was a recipe for disaster. And a lot of -- especially German banks had very big losses in shipping. A lot of them exited shipping altogether, sold all their portfolios.

Other banks in Northern Europe reduced, in any case, their portfolios quite significantly, and generally, shipping exposures today are more penalized. And in addition, banks -- the leading bank that finance this sector recently signed the Poseidon Principles, on which they commit to reduce the CO2 footprint of the vessels they finance. So they would be looking to finance younger tonnage, and older tonnage will be penalized.

And so these are all trends which we are seeing. It is also true, however, that the situation is different in China. There is a very vibrant sale and leaseback market there. The Chinese leasing houses, some of them are extremely big, have been moving into this sector and filling part of this gap. And also, there are banks in Japan, which have been quite active on a very selective basis. We are lucky to have good relationship in Japan. So we have been -- we have benefited from this.

Nonetheless, we also have very strong relationships with the European banks. So we believe we are amongst the fortunate shipowners that will be able to find bank financing still at attractive conditions. But there is, let's say, a 2-tier market that developed. And for the smaller less-structured owners, the more speculative owners, the financial owners that they will have to pay more for their bank debts. There are alternative funds, which are financing the sector. There are some smaller banks, which have moved in, but the margins they ask are significantly higher.

[Operator]

The next question is from Massimo Bonisoli of Equita.

[Massimo Bonisoli, analyst]

I have 3 questions. The first, if you can give us an indication of the spot rates realized on average in April.

And the second, how many of your vessels have been employed as a storage facility rather than transportation services over the past couple of months?

And the third, what are the implications for your economics of the very recent route changes in the sense that Asian refiners are ramping up again their wells, whereas the route Europe to U.S. for gasoline is clearly declining because of the drop in demand.

[Antonio Carlos Balestra Mottola, executive]

Yes. In terms of our results for the second quarter on the spot vessels, we have -- yes, we have a idea, approximate idea based on the current fixtures. We fixed -- we already mentioned we have 62% of our total employment base for the quarter, which are at the -- on period contracts at a rate of $16,200. And of the remaining spot base, we have 21%. So 55% of the total spot base available in Q2, which are at a rate of around $25,000 so far.

So this is a very strong result I would say. And yes, so we have still around 50% or 45% of our spot based to be fixed. But yes, and the market after peaking at very, very high levels have been softening a bit, but there's still a very strong rate, especially in the Middle East and Asia.

So yes, so we expect that if we stay at these levels, we would be able to -- we should be able to confirm at least these results for the full quarter. But there's a lot of uncertainty and a lot of volatility out there.

So in terms of vessels, which are being used for floating storage, we have 2 currently, which have been charted with the option of using it as floating storage.

[Paolo d'Amico, executive]

And let me add. There's also some not official storage. Let's put it this way, I mean, we fixed the ship for a trip. And this is happening to everybody. We arrived at discharge port, we entered in the March rates, and they keep us there for months. So at the end of the day, it's enough storage, but it's not officially a storage, but it's ongoing the March rate. That is a storage anyhow. So there is an official one and a concrete one, are both very remunerative anyhow.

[Massimo Bonisoli, analyst]

Regarding the implication on the change in the route.

[Paolo d'Amico, executive]

If Europe is going to move, I think, certainly, the States will take care of South America as it did up to now. But change -- again, change can be Europe in terms of refining capacity in Europe. I read a lot of articles where oil companies are rethinking their refining position. As you know, to close an refinery in Europe is not an easy game because there are many factors which -- from environmental to social and trade union sides.

But certainly, let's face it, Europe is the loser here in the refining game and, let's say, former Soviet Union. So that is going to happen. Who's going to substitute them? That would be Middle East and China. And they say that China certainly started as an idea of producing for their South, and of course, they exaggerated the capacity. And we started exporting to the close countries like Singapore, Indonesia, Philippines and so on and so forth. And then they understood that they could start selling to United States, here in United States because the West Coast of United States is totally insulated from the refining centers in the U.S. Gulf. So in some cases, it's cheaper for California to buy out of Korea, China than to buy from U.S.

And of course, Europe is important because Europe even with all this project of decarbonization on cars and so on so forth is the biggest diesel market in the world. So -- and will still be the biggest diesel market for quite a long time.

[Massimo Bonisoli, analyst]

If I may ask another question regarding more on the strategy. Given the increase in the value of the older vessels, does it change anything on your strategy? You very recently divested the vessel with Glencore on JV. Do you expect more divestment going forward given the higher value of those vessels?

[Paolo d'Amico, executive]

We have certainly sellers on our older ships, but importantly, and I can tell you, we have also a lot of interest on them. The problem is that due to flight restrictions, they are impossible to be inspected and really to sell a ship today is a problem, not only because she needs to be inspected by the buyer, and the inspector cannot get there. But we even have to find, once we sell her, a place where we can deliver the ship to the buyer and change the crew, and changing the crew is a real disaster.

For instance, we have many engines, and we cannot change Indians with Singapore because India doesn't want any more people coming in from everywhere, including Indians. The only place where we can change our Indian people is in an Indian port itself. Otherwise, we cannot -- we should park them somewhere and wait to see what to do. And it's extremely aggravating not too much for us, certainly but certainly, for them because we have people who did already their time on board. And I have to say we have a fantastic crew because they didn't create any problem. And -- but they are really looking forward to go home, and they cannot do it.

[Operator]

The next question is from Daniele Alibrandi of MainFirst.

[Daniele Alibrandi, analyst]

Yes. I have just 1 question, and the other 2 have been answered. Given the extraordinary dynamics we're seeing at the beginning of this year and lower oil prices likely to be here to stay, and this gives you a benefit on rates. And also considering that you are in a strong deleverage mode, I was wondering if -- which would be the safe level of leverage that you -- could bring you to make some consideration on returns to measure to shareholders? Or saying in other ways, I just wondering if you maybe can highlight your dividend policy that's in place.

[Antonio Carlos Balestra Mottola, executive]

Yes. We are -- Daniele, we are navigating, let's say, looking at the weather on a day-to-day basis and deciding then what is the best course to take. Because, as mentioned several times in the call, there is a lot of volatility, a lot of uncertainty.

Our priority now is to deleverage, but we also realize that for some investors, dividends are important. And for us, the most important thing, and when we say that we believe we are seeing that also in the interest of all investors is that the company first has a solid balance sheet, and then we can start also thinking about the dividends. That is because it would be in no one's interest for us in a few years' time to come back to the market, doing another capital increase and diluting investors again.

So we want to be on the safe side before. And we have a balanced commercial strategy to help us in this respect. But also, we need slightly lower remunerations for what we have now 63%. It's okay. We are, let's say, in terms of vessel values, I would say we are in mid-cycle. TC rates are well above mid-cycle spot, even 1-year period rates. But the vessel values haven't moved as much over the last few months. And therefore, I would say they are still around mid-cycle.

We would like to bring this leverage ratio probably around 50% before we start thinking of dividends. But we will also take other factors into consideration as our capital coverage has changed, what are the prospects for the market, then we take the decision to pay dividends or not when the time comes.

[Paolo d'Amico, executive]

If I could add something. It's also very much related at the previous question because if we are capable -- if we can, if we are in position to be more aggressive on the sale of the older vessels, creating more liquidity, of course, creating more liquidity, many things could start being easier. Let's put it this way.

[Daniele Alibrandi, analyst]

And is 1 of 5 vessels under -- I mean, I should say that as asset for disposal. So I mean -- so sorry for asking again, do you think that I mean we can expect something in -- within this year, given that, I mean, 1 out of 5 have been disposed?

[Paolo d'Amico, executive]

Yes. Certainly, yes. I think 1 out of 5 certainly has to go.

[Antonio Carlos Balestra Mottola, executive]

The Meredith was 1 of the 5 that already went. We would say at least another 1, we expect to be able to sell this year, if not 2, maybe.

[Operator]

[Operator Instructions] Gentlemen, there are no more questions registered at this time. Back to you for any closing remarks you may have.

[Paolo d'Amico, executive]

Let me thank you all for following us. Not too much I can say. I -- are difficult times -- even thank, God, are difficult times in cash-positive position but are still uncertainty out there, but I think we are very well equipped to navigate them and overtake them. So I'm not here with Carlos to make easy promises because it's not our case. And thank you again and to the next conf call. Thank you.

[Operator]

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.