Scorpio Tankers Inc
NYSE:STNG
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Scorpio Tankers Inc
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Hello, and welcome to the Scorpio Tankers Incorporated First Quarter 2021 Conference Call.
I would like to turn the call over to Brian Lee, Chief Financial Officer. Please go ahead, sir.
Thank you, Stephanie, and thank everyone for joining us today. Welcome to the Scorpio Tankers first quarter earnings conference call. On the call with me are Emanuele Lauro, Chief Executive Officer; Robert Bugbee, President; Cameron Mackey, Chief Operating Officer; Lars Dencker Nielsen, Commercial Director; David Morant, Managing Director; and James Doyle, Senior Financial Analyst.
Earlier today, we issued our first quarter earnings press release, which is available on our website, scorpiotankers.com. The information discussed on this call is based on the information as of today, May 7, 2021, and may contain forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements.
For discussion of these risks and uncertainties, you should review the forward-looking statement disclosure in the earnings press release that we issued today, as well as Scorpio Tankers' SEC filings, which are available on our website and at sec.gov. Call participants are advised that the audio of this conference call is being broadcast live on the internet and is also being recorded for playback purposes.
An archive of the webcast will be made available on the Investor Relations page of our website for approximately 14 days. There are slides available at scorpiotankers.com on the Investor Relations page under reports and presentations. Those asking questions please limit the number of questions, so everyone has a chance. If you have specific modeling questions, you can contact me later and discuss offline.
Now, I'd like to introduce Emanuele Lauro.
Thank you, Brian, and thanks everybody for being today with us. We can now see a rapid recovery in many major economies. We're seeing a rapid return to normalization with many countries having achieved significant milestones in their vaccination programs. This is happening in relatively short time.
In contrast, the situation in India does not go unnoticed to us, and our thoughts are with our Indian colleagues and their families. We continue to focus on what we can do to offer assistance and support to them both at shore and at sea. From a balance sheet perspective, our liquidity position has continued to strengthen, and our cash position is higher now than it was in February during our last earnings call. With a cash balance of $280 million and additional liquidity from committed financing and financing under discussion.
Our pro forma liquidity will be at $367 million. We have confidence in the continued recovery. Inventories are rapidly normalized and refinery throughput is forecast to rise by close to 7 million barrels per day between now and August. There has always been higher correlation of product tanker rates to this rebounding GDP numbers.
Seaborne product exports are expected to increase as much as close to 7%, high 6s in 2021. And there are other strong and more durable trends at play at the moment. For example, we believe a secular improvement in ton mile demand will be one of the lasting impacts of the pandemic due to an acceleration in refinery closures through the period, combined with the opening of major model refineries, particularly the substantial projects in the Arabian Gulf. We see this as a shifted demand curve.
The supply picture gives confidence that this recovery can be multiyear. In fact, the product tanker order book is at record low levels, with 6.4% of the fleet on order. The product tanker industry fleet is aging and new environmental rules will further challenge the economics of operating older tonnage and increased scrappage in coming quarters. Fleet replacement costs are going up, and this, in turn, drives improvement in the mark-to-market value of our modern fleet.
Yards are full of orders in other asset classes, and lead time is increasing and prices for new buildings are clearly escalating. The shortage of that will have a clear impact on tankers. There have been only 19 product tankers ordered year-to-date. In our view, the underwater product tanker fleet will struggle to demonstrate much net growth at all over the coming years.
As the 156 product tankers will turn 15 years old in 2021 alone. This is one of the most benign supply pictures on record. So we think that the company is well positioned to capture the opportunities from the near-term rebound in demand. And we have increasing confidence this will proceed a multiyear upswing.
With that, my remarks are over, and I would like to turn the call to Robert.
Hi, hello, everybody. Look, I think the recovery is clearly started in the world use of petroleum products. And I think that as far as the product tanker market is concerned and rates, it's a little bit like the quiet before the storm because the recovery that we're seeing is being disguised in April, simply by the very large turnaround and maintenance period that the world refineries complex they've gone under. They just started to come back up this week.
There's been an almost instant response and upward trajectory and demand. We've seen on the indexes 20, 30% increases in MR rates just in the last two, three days. And the markets are tightening in terms of demand for next week in Asia. So I think that it's very – some people may feel that recovery is being delayed, but that's not the case.
The recovery is there in terms of headline demand. We can see it, the U.S. vaccinations opening up. The U.S. is almost fully open now. Europe is in a much different position than where it was just four weeks ago. And that's going to slowly open up. The Asian economies are doing fantastic.
Obviously, we're all concerned about India, but on a net-net basis, this market's demand side has been moving very, very solidly in the last few weeks, and those rates were – are only going to go up in one direction as refinery utilization comes back. And that I know there'll be other times to talk through the call, but that's the sort of major thing I wanted to put in people's minds right now.
So I'll just hand that over now to Lars, the head of trading.
Great. Thanks, Robert. Going back 12 months ago, the COVID-19 rattled global commodity market. Global lockdown created a negative oil demand shock, where the speed of decline in demand occurred much faster than the supply side to respond, sending oil prices into negative territory.
This has now shifted decidedly into positive territory and benchmark crudes are pushing $70 with risk to upside. Also, back then, global land-based inventories and refined products filled up. The customers turned to product tankers, to store the excess supply, leading to the surge in floating storage that we sell and global inventories. Last May, refined product floating storage reached 109 million barrels.
This has now shifted, and we are today at a 24 million-barrel level. Patience is a virtue and just as we all grow more eager each day for more normalcy, it's very much the same for the recovery in refined products and rates. The good news is that we do not have to be patient for too much longer. On a call last year, I said the catalyst for the recovery in product tanker demand and consequently, rates were going to be vaccinations.
We can see the increase in vaccinations translate to immediate increase in personal mobility, which increased demand for gasoline, jet and diesel. We're now seeing this increase in vaccinations globally. There is still a way to go with an asymmetric pandemic recovery. It is clear as the vaccinations increase in the population with offices, businesses opening, the much-delayed vacations booked, miles driven, flown, are increasing.
The consumers are stepping up, spending on a scale not seen for decades, led by the U.S. and China. With about 45% of the U.S. population receiving one vaccine dose, refinery utilization and refined product imports have increased while inventories remain flat, suggesting the much-anticipated sharp increase in demand from an increasingly vaccinated population.
In real terms, total U.S. refinery utilization since the polar vortex event in February has increased over 30 to 87% as of last week. This is the highest level reported since March of 2020. Incidentally, the vortex also helped take out a staggering 60 million barrels of additional product storage.
Several Gulf Coast refineries were off-line due to the emergency shutdown, accelerating the rebalancing of Atlantic Basin product inventories. Now, in addition to this increase in refinery utilization, CAPLA data show close to 6 million barrels of seaborne gasoline arriving into the U.S. Atlantic Coast last week and estimate another 6 million would arrive this week. This is the largest influx reported since 2017.
And bear in mind, this didn't increase stocks, which remain at five-year average stock levels. Now, as Robert mentioned, refinery is also coming out of maintenance. They're trying their engines at the end of the first quarter and early Q2 for the anticipated demand increase, and we calculated roughly 10 million barrels per day off-line between March and May. The refiners will acquire this maintenance work as the IEA oil market report indicate an increase of 6.8 million barrels a day refinery runs increased by August.
And at least a third of this volume we see hitting the export markets. We have noted also lately internally an uptick in medium to long-term time charter interest from major oil market participants, which also provides a strong leading indicator that an inflection point is near. Latin America will be an important area to follow as the continent begins to move out of its pandemic-induced lockdown. We can see already from Apple mobility and traffic index that cities in Mexico and Brazil are firming, and Chile is on the cusp.
We experienced a shift in the product tanker trade already as Mexico has returned importing cargoes in size. And I think these indicators are key to understand what lies ahead as much as the volatility we see now in the front end telling rapid changes in supply demand as economies start firing up on all the cylinders and emerge out of lockdown. And the latest example of this trend is certainly the U.S. Gulf clean MR market, spiking just yesterday 30% after a prolonged low in activity due to the varying lockdown factors that I mentioned and the impact from the refinery maintenance, reducing overall seaborne volumes.
Finally, I'd also like to bring in the important factor of refinery closures and the positive impact this will have on increased ton-miles and additional tonnage demand. And we see a lot of that going, in particular, in the eastern hemisphere. Weather is the overall pent-up demand driven by the increased mobility in key important regions, the new trading patterns from changes in the refining landscape, an increase in underlying ton-mile or the benign and historically low new build order book and the rising price of steel, the vaccine role the continued stimulus, we have remained patient, continually focused on operations and optimization and now certainly look increasingly optimistic forward to sustain recovery of the product tanker market. Thanks.
That's all from me. And unless any of my colleagues have anything to add. Operator, we're ready to open up for questions.
Thank you. [Operator instructions] And your first question from the line of Omar Nokta of Clarksons Platou.
Thank you. Hey, guys. Good morning. I think you framed pretty nicely how the market is set up for a real recovery and just wanted to ask kind of how the state at Scorpio at the moment.
And with regards to liquidity, it's remained pretty solid, I think, despite the fact that rates overall haven't really been that fantastic. There've been pockets of strength, but it's very interesting that in February, your last earnings report, you had shown a cash position of $204 million, and now it's risen to $280 million. Just simply put, what's your comfort level with the current liquidity situation at that Scorpio?
I think that we're very comfortable right now. I think we're – as we said back in February, you have to anticipate liquidity. You can't just sort of get lifted liquidity when you feel like it. But back in – so what you're seeing today is really the work that was done in February as it were in March.
But the – in terms of comfort, look, in February, just four, five weeks ago, people were worried about Europe, worried about whether or not countries like Germany, France, Italy, would get the vaccinations. Germany is crossing 30% of vaccinated people now. They're even now considering some opening up, the same as France and Italy, great strides, almost that same speed and Germany is vaccinating at a speed higher than the United States did, and we can see what happened in the United States in two or three months. So today, of course, it probably looks as if we've got too much liquidity.
If that's possible for a shipping company. I think it's pretty clear that we feel that the spot market has already started to accelerate upwards out of this refinery season from Lars' presentation, and we're seeing really good confirming data in inventories, world inventories of products in United States, et cetera, et cetera. So I think that very shortly, we're going to reach that critical point for us of around $17,000 a day where we're covering everything amortization, as well as everything else. And then, clearly, we start to build cash just through operations.
And we have clear positions. We can, at that point, have a combination of building cash, paying down debt. Buying back stock will be a – and as we've said before, is going to be a clear incentive for the company, especially when already our stock is trading so significantly below NAV. I think we have to look at the last two months, not just that the company has built its liquidity, but its asset base has strengthened so much.
Assets are up 10%, 15%. And the company's NAV is up trending on your own calculation somewhere between 35%, 45%, very hard under any calculation to get an NAV at the moment that much less than $25 at the low side, if asset values go up just another 10%, then that's going to take the NAV well up into the 30s, along with the fact that at these rates – even at these rates we're having some contribution to NAV. So we're in a very different environment right now where we said, we're through the refinery turnarounds through the destocking. We're through the critical point of vaccinations in Europe. And yes, we're very happy with the liquidity that the company has at the moment.
Thanks Robert. So yes, just maybe a follow-up to that. The terms of too much liquidity. Clearly, as you just outlined, we're seeing a lot of activity across the shipping sale and purchase market and even in tankers, especially, there's been a lot of vessels changing hands at firm prices. So like you said, there is upwards pressure on NAV, and it's – as opposed to assessment, it's actually deals being done.
And maybe just for clarity, given the dislocation between the stock price and where NAV is and the plenty of liquidity that you have, buying back stock, is that something that you see as an opportunity to do here in the near-term? Or do you want to wait for that trigger of that 17,000 breakeven and then start to buy back stock? Any indication you can give on that front?
I don't think it would be beneficial for us to – our shareholders in terms of getting to prices to anticipate the exact time as to when we would enter. I think we – the one luxury the company has is it doesn't have to – all it has to do is buy in open periods, and it doesn't have to report its activities. So I think that we've given – we've answered that, as well as we can. At 17, we're just going to have – at 17 plus, we're going to be building more cash.
So you almost – you have to start doing things about it right prior to 17. Right now, you could just take the choice because looking at it, we've not just got $280 million of cash on the balance sheet, we've got another $20 million coming Tuesday. That's 300. And then, we've got the other stuff there, and we do think that this market is straight there.
So that's the wonderful position we're in now. We're totally flexible so we could anticipate things as opposed to wait for things. If that answers the question, you're asking, Omar?
It does. Thanks Robert. Well said. Thank you. I’ll turn it over.
And we would – in that case, we would hope that the short to continue to provide us with the liquidity that we would like.
Your next question is from the line of Jon Chappell of Evercore ISI.
Thank you. Good morning or good afternoon. Robert, going on that previous topic that Omar brought up on liquidity. I mean, we've been talking about liquidity for 12 months now.
Obviously, the most integral part to stay in the float, so to speak, during this difficult time. You guys just laid out a very optimistic view on the market starting effectively today, but you're still planning on adding liquidity mostly through debt in the coming months and quarters. How do that kind of line up? Don't you feel like you have enough at this point, and you should be thinking about deleveraging, which was your plan at this time last year as opposed to adding more leverage if the future is so bright?
Yes. I think exactly right, Jon. And let's try – I may not have made it clear to Omar, but we've clearly got those choices. As these rates go up now getting that mixture of – you don't expect in just the same as we saw in dry bulk in the first part of the recovery, stocks do tend to trade a lot below NAV and then they gather and then they start to match off against NAV.
So as I said – I hope I said the previous thing, you're going to have – be able to do both or one, you are going to be able to retire debt and fairly quickly. And you're going to, at the same time, have that access to perhaps just for a short time to take advantage of a quite a big dislocation between the pricing. You can do both. But we couldn't do anything until know.
The correct thing to do was to continue to build liquidity until we saw that we were 100% treating things, even – go back to seven, eight weeks ago when many of these things commenced were put in to create the liquidity. At that time, the world was worried about Europe, if you remember. Very worried about Europe. And the U.S.
only hadn't opened up, etc. So it's a little bit like government, you've got to overshoot we – what we've done is we – right now, things have gone fantastic. And as we said, the market is recovering nicely. Rates are really going to start moving over these next days and weeks simply because the refinery turnarounds will finish.
But we didn't think it was prudent to rely on that. You can always deal with a situation like we have now, where we would expect to have, in theory, too much liquidity. And that would be to pay off debt and/or buyback stock?
Okay. So as I look at this Slide 12, which has a nice little step chart of liquidity you're taking on by the end of the second quarter. I guess, is it too late to walk away from some of those or would you just gather that cash? And then as you see the inflection in actual earnings, then you start to pay down other facilities?
Yes. I understand. You may not want to walk away from those because those are being negotiated, they're very good figures. We don't have any bank or normal finance to do for two more years.
These ones are being reflecting perhaps stronger terms than some of the ones before. So you've still got a lot of – so what you've been negotiating in front of you would be less costly than what you could buy out from behind you.
Like some of the bonds?
Yes, some of the bonds, some of the – and some of the lease positions too. But I think it's a great thing. It's fantastic that we're both here chatting about what to do with excess liquidity. And that's great. Great for a company that's trading at 60% of NAV.
Understood. All right. That's all I have. I'll turn it over. Thanks Robert.
Thank you.
Your next question is from the line of Greg Lewis with BTIG.
Yes. Thank you and good afternoon and good morning everybody. Robert or Lars, I'd be kind of curious on your thoughts it's something that more people have been flagging to us around the EXXI, the energy, efficiency impact. Is that kind of one of the main reasons why you're calling out the 15-year old vessels as aggressively as you are in kind of these slides? Is that – any kind of color around that? How should we be thinking about that? It seems like it's kind of early days in that process. Just kind of curious on your thoughts around that.
I'd just answer the first, then Lars. So we really believe in this 15-year-old rule. We're developing – we've made recent announcements from the pools that we're – not for our ships, you know STING, but for other ships and we're opening pools and developing pools for vessels that specifically 10, 15 years old and would not be qualifying for our own clean petroleum product pools. And those pools will be trading in different trades than our own particular vessels.
And we're not the only ones who believe it. You're seeing other owners. You've seen Ardmore, Hafnia, TORM, all the product owners, Diamond S before they were sold, aggressively sell vessels, product vessels as they approach 15 years old. We're seeing financiers look at that 15-year rule for clean petroleum products.
But most importantly, the customers would do this. Lars, would you like to add to this?
It certainly is. I mean, taking a step back, just to understand that the EEXI, which is the efficiency existing ship index. Follow-on to that, you get something called a carbon intensity indicator, which basically is like a report card, where the vessel you have has a rating between A and E. There's a lot of kind of wood that's still being chopped on a government perspective.
And this whole thing is expected to be adopted on – I think it's in June 2021, with entries going into force in January 2023. And of course, what it's all about is trying to calculate the carbon emission per deadweight. And as modern ships are more efficient than older vessels, there is going to be an increasing gap between the Super ECO vessel and the non-ECO vessel that's going to play out as we go forward. So there's going to be a competitive advantage for those who have fleets with modern ECO vessels versus older vessels that certainly are going to have very great difficulty in not being able to comply.
So what do you then say, well, you can't comply with your baseline, where you've got to think about what to do. You could put in some energy-saving device. You can reduce your deadweight. You can reduce your main power output.
All three of those will skew the competitive advantage toward the super ECO modern vessels. And if I just take a stop here and say that this is also one of the reasons why that we can see for a lot of the customers that we have in the oil majors, oil traders and so on. They're all pivoting away from the older units and all when they want to look at time charters today, or want to go for modern units because this thing is going to come through a cinema near you, and it's something that's going to have a big difference in how you really want to say what is a competitive vessel and what is not a competitive vessel because some of them are going to have to make some drastic measures to actually reach their carbon calculation index.
Okay, great. And then – no, no. That was super helpful. And so, then, like, I guess there's some news now that India is – has announced that they're going to start taking the full allocations that they get from Saudi Arabia. Are we starting to see – I mean, realizing that they have to get crude refine it before they export it. Are we starting to see any activity around that, around India, in terms of them ramping up their crude demand again?
Well, I think in the short-term, we should expect that Indian crude demand is going to be flat and maybe slightly decreasing. But what's interesting here is that Indian refineries, in general, they always run or have been running for the last period, somewhere between 95 and 100% so even though that you can say that there's going to be a decrease naturally for import of internal demand. Export for India is kind of strategically put a very important piece of the puzzle.
And I do not foresee that refineries are going to be kind of slowing down as they will start increasing the exports margin. And we have seen some of the smaller [indiscernible]. They are coming out offering additional cargoes in the May window from distillate and gasoline. So it's for the product side, we don't do that much import into India. India is very much export orientated part of the world from a product tanker perspective. And the refineries, they are still going at full hilt.
Okay. Perfect. Thank you.
Your next question is from the line of Randy Giveans with Jefferies.
Hi, gentlemen. How is it going?
Hi, Randy.
So for the quarter-to-date rate guidance, obviously, this is well above some broker averages. Can you maybe quantify that outperformance in terms of an Eco premium versus scrubber premium? And then also, by looking at those quarter-to-date rates, it seems like 2Q should be much better, right, than 1Q. So with that, compared to the first 50% of the quarter that's been booked, what kind of rates do you see for maybe the back half of the quarter?
So Randy, we don't give rate guidance, as you know. But if you were to take a – this quarter is going to be very wide in its actual rate dispersion because what you have going on, if we start with the OPEC headline itself, they're going to be pumping more crude and crude equivalents every single month mounting it up all the way through this quarter itself. That the next part is of the equation is that everybody agrees that we are going to see more refinery utilization step up all the way through between now and July, August. And that is going to be happening again on a weekly, monthly basis.
The third thing that's going to happen is that we would expect headline demand to just keep going up to in, as Europe moves forward and as the United States moves to its traditional driving season as well. And then, we're also seeing on top of this, a – the beginnings is very exciting, which is beginning of the recoveries of South American demand, Mexico is opening up. Chile is opening up. These things are relentless.
And we are against this, we have a fixed supply curve, very little deliveries of vessels are coming into the market. We have refinery changes. We have older refineries, less efficient refineries, continuing their closing down. And the most efficient newest refinery in the – biggest refinery in the Middle East is gradually coming up in the second quarter.
So and we're already, as Lars is pointing out, we have a market, and you pointed out in your introduction. We've had a market that despite the refinery turnaround hasn't fallen around, fallen apart. And is showing signs of balance that's enabling a very wide, disparate, fragmented market under a lot of pressure that, i.e., the MR market in the U.S. Gulf to gap 30% in two or three trading days.
That tells you we're starting off with all by not great rates, but we're starting off with a market that is actually balanced. So you could see some pretty steep rates, but they're not going to – as they come out, they're not going to necessarily be in nice lines to predict. So I think that the – it's reasonable to expect that the rates at the end of the quarter are going to be significantly higher than right now. It's hard to work out exactly where that's going to be.
We've never faced a situation in our careers in our careers where you are just having a steady drumbeat of accelerated demand and accelerated ton-mile multiplier for such a long period, and it's not going to stop in August either. It's going to continue forward. And also, we don't know what's going to happen when the United – when Europe starts coming on, because think about it, the United States has imported an awful a lot of barrels of gasoline in the last few weeks to make up for its own shortfall in gasoline production-related to its burgeoning use of gasoline. So when Europe starts to step up and use gasoline and jet fuel itself.
Where does the United States get that from? If it has to go get it from Asia, then all bets are off at that point. And then, the last point is, we're so used to having the third quarter being a very quiet quarter, the worst quarter in the product market. That isn't going to be happening this year because you've just got this continued estimate of demand increases all the way through the year into next year.
Got it. All right. And not necessarily asking for forecast for the next few weeks. I'm just making sure there wasn't some like pull forward rating from either an accounting or an operation standpoint that the next few weeks are going lower?
No, I approach it. No. I mean, this is – there's nothing. There's no pull forward, nothing. We have haven't even rounded figures upwards, the figures that Brian has given the kind of what they are.
Okay. And then, I guess one more question. Obviously, much concern, and we've talked about it for a while here on the call about your liquidity position, upcoming CapEx, debt repayments a few minutes ago, you mentioned, yes, rates at 17%, 18%, 20% will fix everything, and I agree with that. But if rates stay at current levels for maybe an extended period of time, what other options do you have to raise capital to satisfy these debt obligations other than common equity issuance, right? That's a question we've been getting, when are they going to have to issue common equity? So how would you rank these other options ahead of that?
Okay. I would be fairly convinced that if the people who asked you about the equity thing certainly wouldn't be starting off with where we are, what we announced today with $280 million of cash. I would be really positive they had no idea that that was the starting point. So you're starting from a huge amount of liquidity to start with $360 million, $370 million.
There is – if you think what's happened in the balance sheet in the last 60 days, you're taking a super pessimistic view. So basically, you're intimating no world growth, there some real crisis that's going on, et cetera, et cetera. But you've still got runway in what we've been doing and we, by no means, have exhausted all of our means of getting liquidity other than – I mean, the raising of equity isn't anywhere in the position. So above that are selling ships.
You've got continuing what we've been doing before with the baby bonds, continuing what we've been doing before with the sale leasebacks. And then, we've got some refinancing of some of the deals in the past that instead of buying those ships back, which you would do on a – you'd use the call option to buy them back, you could use the call option either to sell or to refinance. But what you're indicating is a tremendously extreme situation that wouldn't be Scorpio specific, it would be the whole world market-specific.
Sure. Good deal. Well I think coded well. Thanks so much.
No problem. Thank you.
Your next question is from the line of Ken Hoexter with Bank of America.
Hey, good morning Robert. Robert, you just mentioned kind of no seasonality maybe looking through the pattern through the year as reopening shifts. Is there anything that we're going to talk about in the quarter that didn't meet that expectation? Is it just maybe the COVID shutdowns linger, or you don't see the demand return? Maybe is it the storage unwind of that 24 million barrels continues to pressure rates? Just want to see what the counter story could be that we could come back and talk about in the second quarter?
I think maybe – I think we've had some of that. I mean I think these refinery turnarounds were deeper than what people could have expected. And I think that – part of that is the sheer preparation that people are taking for what they anticipate is going to come in front of them. These demand outlooks for products are huge. You start opening up these countries as you start the U.S. driving season and things can get a little bit wacky. We've had the drawing down of the inventories. Yes, there's a possibility that people could continue to draw down those inventories.
And delay the spiky second quarter, but then they'd be setting themselves up super volatility in – once they get to July. So you're at that point where it's pretty important to realize that the U.S. has already been, let's say, borrowing from the imports that have come in from other areas, and we've been able to get away with not building in front of gasoline season so far because they've had access to this product from Europe, but as that goes away, as they grow and the U.S. continues to grow its use.
And just to clarify that then, Robert, on your seasonality comment. You're still seeing sequential acceleration ignoring seasonality as the second quarter beats the first, third quarter beats second.
Yes. We're seeing this all the way through. If we work it backwards, we expect the first quarter of next year seasonally to be stronger on its seasonality than the fourth quarter and the – but prior to the fourth quarter, it's not about the seasons. The seasons get trumped by the opening up of the of travel and petroleum product use. This has been delayed. I mean, if you're sitting in and we do anticipate that Europe will just be using more gasoline and jet fuel in the third quarter, then it would be using in the second quarter, and we see that U.S. travel, again, will just continue to accelerate. And then, you get into the fourth quarter after that, where you have the normal strong seasonality, so it's very quite…
I definitely want to get out and about. So for my follow-up, any impact yet on the market, or how you're going about, or you see business progressing on things like the Diamond S Seaways consolidation? And then is there a fear that as you get healthier carriers, stronger balance sheets, Emanuele mentioned kind of very light order book. Do you see the orders then start to pick up and end the parade as it gets started, just we can see that on the container side?
Again, two great questions. I'll take the last one first is the booking order, the bookings for containers, dry bulk, LNG, I mean, they're going to be – there's some huge LNG orders going into this market at the moment. And all of those bookings are driving any ability to order product tankers in a significant size, well, well away. And that in combination with the aging in the fleet coming to 15 years is what's creating a really critical situation and a great opportunity for the product tanker shareholders.
And I think that it's pretty much already at the level where I'll be self-deprecating to our shipowners, where we can't screw it up. Not even the shipowners can screw this up. There's I don't know where you would look to get a – to build an order book for products now until we get into 2024, where you can get back to the levels just to keep pace of the vessels that are turning 15 years old. So that part is sound.
It's very good in the sense that, yes, even if we do have rates that are going like nuts, it will be hard because of what's happening in containers and dry and gas for even us owners to screw the supply side up for a while. Now, in the front side, what owners are doing is very, very good anyway. So these consolidations we're seeing, you pointed out, Diamond S, INSW extremely good, extremely good for pricing, for actual assets extremely good for order in the market and consolidation in the market. And we're also seeing a lot of individual ones and two vessels being bought by stronger owners sold by weaker owners, that's good.
And you're seeing the top commercial operators, the Hafnias, the TORMs, the Maersks, the Northerns and the Scorpio group, adding vessels constantly to their pools, and that's a form of great consolidation. You're also seeing charters, traders, time charter vessels in, which also adds to the consolidation. So the product market is much more consolidated already than it was this time last year and continues to be so, which is also going to be an important factor in terms of accelerating rates outwards and maintaining strength of rates going through. That would indicate already that during this last three, four weeks, during the peak of the refinery turnaround, why product rates haven't really fallen apart like crude rates did because you really got some good consolidation in that product market now.
Wonderful. Thank you very much for the time.
Thank you.
Your next question is from the line of Amit Mehrotra of Deutsche Bank.
Thanks, operator. Hi, everybody. I wanted to go back to the liquidity question because I guess something is being lost in translation to me because it sounds like you guys are super bullish about your liquidity market and the message you're sending is everything is fine here when – based on my analysis, it just seems like that's totally false. I think you guys don't have enough liquidity. And I want you to give you the opportunity to correct me if I'm wrong. So first and foremost, Brian, the $360 million or $70 million of cash on the balance sheet that is pro forma for the additional levers, is that net of minimum liquidity covenants or not net of minimum liquidity covenants?
It's not net. Minimum liquidity covenants are $60 million, and we don't subtract that out of the total cash.
Okay. But you got to keep it on the balance sheet. So that $360 million, $370 million is basically now $300 million to $310 million, Okay? And against that $300 million to $310 million pro forma, you've got $600 million of debt repayments over the next 12 months. The question I have is where I could be wrong here, is there a way to restructure that $600 million of which a big chunk is in the second quarter of next year? Like what do you think the debt repayments over the next 12 months need to be or can be relative to what they are today, with just $600 million?
It's on a normalized amortization, $70 million to $80 million a quarter, we call it $75 million, just under $300 million on a year. When facilities are coming due, we show it in that schedule. Facilities are coming due. It's part of that number that we say it's coming due over the period of time. So that's why you see an elevated number in there. And as we have seen from day one of this company, we've been able to refinance our debt when it comes due. So we have that –
So $75 million to $80 million is basically the number we should use. So the implication is that the net liquidity you have today, pro forma, $300 million is basically equivalent to the pro forma smooth out debt maturities over the next 12 months. So how do you have a lot of liquidity then? How do you have more liquidity than you need?
We're going to assume that our vessels are going to earn some money along the way, right? So we know that 1,000 does a lot of damage, right? Those $48 million of revenue, so times up by 10 by 15, it comes up to be a pretty good number.
I know, but you've been assuming that for three years, and that hasn't really occurred on a sustainable basis. So the question I have is you plan out over the next 12 months, don't you have to plan that you don't earn 17,000 a day or 15,000 a day, hopefully, you do. And I really hope that everybody does in the market. But just given history, like from a planning perspective, don't you have to plan that you don't earn that much? So what's the plan B and plan C?
So I’ll add in Amit. Yes. I appreciate. A lot has happened in the last three months since we last spoke, where you looked at the company. And the primary thing, as you've seen, we continue to increase liquidity with rates being fairly low. But we have other sources to doing it. We just simply believe for the reasons that we've set out that the market is not going to be 9,000 to 10,000 a day all the way through until next May, we simply don't believe that is going to actually happen, okay? Now should we start to think that – so we're changing. So the beginning of the year and last year, we continue to raise liquidity and we've gone through that we raised liquidity in October.
There were no vaccinations even invented debt. November vaccinations came along. But we carried on raising liquidity. February, U.S. was nicely under way. But we didn't feel that we were out of the woods completely. Europe was a big question mark. So we carried on raising liquidity. Now, we're sitting in a point where we have more liquidity than any of those points. And we believe that the United States is in a much better place than it was in January. Europe is in a much better place than it was in February and March that we are seeing this. It's not just us making this up, Amit.
This is OPEC is saying this, EIA is saying this, the oil companies are saying this, investors in other ways are saying this, the oil price is saying this. We have reasonable pause to think that the market will be better going forward than at its worst point, in somewhere between the third and the fourth quarter last year. The market has been steadily improving already for five, six months. There is a point where it's irresponsible as I believe, Jon Chappell, earlier, who – he's a very cautious analyst.
He's taken a cautious position on rates and the improvement of the tanker market. But we could easily agree that there wasn't a question of if there would be a recovery, it would be when there would be a recovery and what the actual use of proceeds would be. It would be irresponsible right now for us to go and sell ships right at the breakout, just to put even more cash on the balance sheet. We fundamentally believe we're in a very open, honest way.
You opened with quite a derogatory statement. You are being false. We don't believe we're being false. We think we're being very genuine to what we believe, and we believe that based not on something here in the air, but a lot of empirical third-party data is out there at the moment to support the fact that the market is improving and accelerating. It's a really key thing that the MR market is already for a modern MR around $12, 000, $13,000 a day. And Europe is not yet really coming out. And we haven't – we're only just beginning to fight back from the refinery turnarounds?
Yes. I think the only difference, Robert, is that you have to be right for the capital structure of the company to be protected or the equity of the company to be protected. You have to be...
Of course, Omar – I mean Amit, of course, okay?
Omar is a lot smarter than I am. But Brian – can I ask you…
Omar just happens to show more interest than you. So I guess I remember his name more. But it's a – of course, you have to be right. If the world goes to hell, I'll say openly, if the world goes to hell, STNG is not necessarily a company that I would want to at that point to have a whole bunch of equity in. But my God, if it just carries on the improvement that it is right now, if you take the midpoint of – or even the lowest point of the IEA forecasters or the major banks forecasting to product tanker demand by the end of the day, Scorpio Tankers, especially with the product tanker leading is going to tear apart most of the other investments that you can make is absolutely the company you would want to be in, precisely because of it, multiple points of leverage.
First, the operating leverage that the company has to have any new ships. Secondly, the operating leverage that the company has of having those vessels all spot, no – straight feed through. And thirdly, the financial operating leverage that the company has, that you have pointed out with regard to the gearing, it'd be absolutely to be the investment. If you don't believe in that, then there's no point in that world economy, there's no point in any one being in Scorpio Tankers, you should not put a hold. You shouldn't even put a hold on this, which you have. You should put an outright sell, outright sell.
Yes, I think that's a – like, I think you're absolutely right. Like I think if everything goes really, really well, the stock is going to go higher, I agree with that.
Yes. The fact is most people in the market is supporting that, the product market is strongly doing that with the refinery turn. That's why product market has done better, let's say, in the crude. The crude will come, I'm actually very constructive about the crude. I think we've seen a wonderful game being played. I support Euronav and DHT. I have no problem in those two companies. They've been playing a good game, has a strong balance sheet. They've been conservative about the outlook, while buying ships and buying back stock. The crude market will turn too at some point.
Can I just ask a quick housekeeping one, and then I'll just hop off? Brian, I guess Robert had made the comment that asset values have picked up. That's obviously very positive, both from an NAV perspective, but also from just a debt management perspective. So I was wondering, I mean, your net debt has been flat kind of roughly over the period, the last period versus today. And that's not going up, does that give you more room for additional leverage on the vessels if you needed? And if you could help us where that LTV is today in terms of how the banks look at or the appraisers look at it?
Absolutely right. Value is going up. It's a very good point. It's something to keep in mind. If you're looking at our debt balance being, as you say, flat, net debt being flat there. It's a very good point. Values have gone up. So on a relative basis, it's been along that way. So we're not going to give asset values on all ships right now, but we are obviously in compliance with all of our loan-to-value and every other covenant out there. We have headroom in every single one of those. But we do have room, and we will – if we need to, we will look to do it. But also as when vessels come up for refinancing, it's very important now that asset value is coming up, we could refine at an attractive rate whenever we want to.
It is. And I would say the inconsistency that someone could have would be to have a buys on crude tankers without having a buy on STNG. That to me is inconsistent and fault.
Okay. Well, I'll take that into consideration. Thank you.
Great. Thank you.
Your next question is from the line of Magnus Fyhr with H.C. Wainwright.
Yes. Good morning. Just have one question left. Robert, you laid out a pretty bullish scenario on the recovery here forward, and just curious I mean we've seen the charters in the market, I guess, earlier in the quarter, but why aren't they being more aggressive, or can you kind of elaborate little bit what you see in them doing at these levels, talking about Vitol and Trafigura and the other guys.
Lars?
Well, I consider Vitol, Trafigura and the other guys to be extremely aggressive. But what do you mean by that? Aggressive is what?
Just chartering in more vessels. So do you think they have requirements already. Why don't you see oil companies stepping up here is sort of the battle here [Technical Difficulty]
Well, I mean, I can tell you that every one of those that you have mentioned, they look at shifts every single day, and they certainly, on the quiet, have been taking shifts on. And I think it's fair to say as a general statement is that they are interested in modern shifts for long-term charter.
Okay. And…
And the shift is being from – Lars, correct me if I'm wrong. But the shift is being from six to 12 months period to actually three to five years charter interest.
It's certainly moving to long-term modern units.
Right. I mean, if you have – if you look and you mentioned earlier about the carbon calculation index, I mean, you guys are definitely at the forefront of that with a very modern fleet, but if you know what guys on the fleet are compliant with 2030 IMO targets?
Yes, Magnus, it's James. We're 23% ahead of those targets. If you look at the sustainability report on our website that we put out.
Okay, good. So I mean, I guess that lays out a pretty strong scenario going forward with some of the other companies need to move on that line. So anyway, just like to see that scenario play out here where companies trying to secure more of the modern tonnage. So we see that two-tier market developing. But I guess, at these levels, we need to see the rates a little bit higher before then. That's all I had. Thanks for taking my call.
Thank you.
And your next question is from the line of Liam Burke with B. Riley.
Yes, thank you. Good morning. Robert, you talked about the shift in refinery capacity globally. You have a big redistribution coming up second quarter. Are you seeing any benefit now? Or is this something that you can look forward to later in the year and another further boost in rates or help boost rates again?
You're going to see it now all the way through. I mean we've seen it. This is just a steady thing that's adding with it, whether it's Australia or now the news from South Africa. And there is some schools – some people out there already. We're still analyzing it. And this would be a huge boon to the product tanker market. Some are talking that some of the European refineries that are down at the moment, they just might not come back. They might disclose earlier.
Now that happens, that's going to have a tremendous effect in the Atlantic. And that will guarantee that you have to bring in products from Asia long-haul into the Atlantic Basin, both and even maybe from China to the United States across the Pacific as well.
Okay. And – okay, Robert, thank you very much.
And that does conclude our Q&A session for today. I'll turn the call back over to Brian Lee for any closing remarks.
Thank you, Stephanie, and thank you, everyone, for joining us today. We hope to speak to you soon. Have a good day. Bye.
Thank you. This does conclude today’s conference call. You may now disconnect.