Scorpio Tankers Inc

NYSE:STNG

Earnings Call Transcript 2022-Q1

[Operator]

Hello, and welcome to the Scorpio Tankers Incorporated First Quarter 2022 Conference Call. I would now like to turn the call over to James Doyle, Head of Corporate Development and Investor Relations. Please go ahead, sir.

[James Doyle]

Thank you for joining us today. Welcome to the Scorpio Tankers first quarter 2022 earnings conference call. On the call with me today are, Emanuele Lauro, Chief Executive Officer; Robert Bugbee, President; Cameron Mackey, Chief Operating Officer; Brian Lee, Chief Financial Officer. Earlier today, we issued our first quarter earnings press release, which is available on our Web site, scorpiotankers.com. The information discussed on the call is based on information as of today, April 28, 2022 and may contain forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statement disclosure in the earnings press release that issued today, as well as Scorpio Tankers SEC filings, which are available at scorpiotankers.com and sec.gov.

Call participants are advised that the audio of this conference call is being broadcasted 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 Web site for approximately 14 days. We will begin in a short presentation today. The presentation is available at scorpiotankers.com on the Investor Relations page under Reports and Presentations. The slides will also be available on the webcast. After the presentation, we will go to Q&A. For those asking questions, please limit the number of questions to two. We want all our analyst to have a chance to ask question. If you have an additional question, we are more than happy to answer, but please rejoin the queue.

Now, I'd like to introduce, our Chief Executive Officer, Emanuele Lauro.

[Emanuele Lauro, Chief Executive Officer]

Thank you, James. Good morning and good afternoon, to everyone. I'd like to start by saying that our sympathies and thoughts are with those are impacted by conflict around the world. The times in which we live are particularly uncertain, and the level of tragedy that the world is experiencing is far beyond anybody's imagination. As far as our business is concerned, when we last spoke, I said that, our top priority was to position the company, to create shareholders value in an improving market and for the next tanker cycle. This remains very much the case. And we felt that the best way to do this is through improving our balance sheet. And in order to do that, since January, we have announced the sale of 18 vessels. This sales increased liquidity, reduced overall debt and are a demonstration of the discount that our shares trade relative to an ever improving NAV.

In the first half of the year, we reduced our debt by more than $500 million through vessel sales and scheduled amortization. With a fleet potentially averaging $25,000 a day TCE in the second quarter, should that be the TCE for the second quarter, the company could finish the quarter with $450 million in liquidity. And this would result in a reduction in debt of over $730 million in the first half of the year. Last quarter, we said that the catalyst is simple, supplying incremental oil demand with inventory draws is not sustainable in the long-term. The timing less so but the inflection it was near. And this became apparent at the end of the first quarter, when the reopening of the global economy from the COVID-19 pandemic increased the demand for refined products, for seaborne exports, and rates on our vessels have reflected that.

So the mismatch between the supply and demand of refined products and the improving rate environment was apparent prior as well, but further exasperated by the conflict in Ukraine. Our thesis has not changed. But we are certainly more optimistic given the growing demand and increasing dislocation between producers and consumers. Refined products demand is expected to increase each quarter as the pandemic eases. And given historical low inventories, refinery burns and seaborne exports will it lead to increase the demand. This will provide a constructive environment for product tanker rates. Product tanker rates increase significantly at the end of the quarter and remain at elevated levels today. We are pleased with our second quarter guidance and excited that the thesis is finally starting to play out.

Given our positive outlook, we have no plans to sell additional vessels. But we will continue to reduce our leverage naturally through scheduled amortization and opportunistically through vessel refinings. That said, with a healthy liquidity position and significant operating leverage of the company, in a sustained rate environment, we will be looking to returning capital to shareholders in the most value creating way. For example, by looking to employ our $250 million security repurchase program. There are several reasons to suggest that a sustained rate environment will continue. And I would like to ask James to tell us why through our slides. James?

[James Doyle]

Thanks, Emanuele. Good morning and afternoon, everyone. Over the last two years, the recovery -- Slide 7, please. Over the last two years, the recovery in oil demand has been quite resilient, especially when considering that widespread vaccinations only started at this time last year. That said, the recovery has also been bumpy, varied by region, impacted by new COVID variants, restrictive measures. At any time demand exceeded supply, there were available inventories to draw. Thus, the improving demand, refinery rationalization, increasing ton miles that we have talked about so much did not have a material impact on rates, until it did. In January, we started to see a steady improvement in MR rates, which was prior to Russia's invasion of Ukraine and driven by increasing demand in Latin America, Europe, US and Africa. After Russia's invasion of Ukraine, we saw a significant increase in product tanker rates. But as you can see, it did not have a lasting impact on the LR2s, which increased for two weeks before declining.

For the MRs, the highest rate increase were for our vessels that were going from the US Gulf to Latin America, which has less to do with Russian and Ukraine and more to do with increasing demand. While MR Rates in the US Gulf declined from their record levels, they have increased in and substantially in the Middle East and Asia. We have seen a steady increase in LR2 rates over the last few weeks, as Asian demand has increased. As of today, spot rates are higher than currently presented in this graph with eco MR And LR2 rates in the Middle East and Asia trading well above $40,000 a day. The question then is, how did we get here?

Slide 8. Diesel demand has been robust and is already above pre-pandemic levels. Despite an increase in refinery runs last year, demand is continually outpaced supply, creating an extremely tight diesel market. As you can see by the graph on the lower right, the diesel shortage is not new to Europe. And by the graph on the top right that the shortage extends beyond Europe, the Latin America and Africa, which have similar diesel deficits. We expect the market to tighten further with increased competition for distillate molecules as jet fuel demand returns, and it is also having an impact on gasoline. With refiners running and max dist distillate mode, we are not building significant gasoline inventories ahead of peak driving season. This is very constructive for product tankers. As demand grows and inventories remain well, product tankers will need to be the conduit for filling the global supply demand imbalance of refined products.

Slide 9 please. The situation in Russia and Ukraine has exacerbated the global diesel shortage. Prior to the invasion, Russia exported around 1.5 million barrels per day of clean petroleum products, and the majority of this was 1 million barrels per day of diesel going to Europe. It's unclear how sanctions will play out but it's hard to see a scenario where it doesn't increase ton miles demand. If European countries were to ban Russian product imports, it's likely that these imports would go to Africa, Asia and Latin America. To replace the lost Russian imports, Europe will have to source barrels from the US Middle East, India and Asia. If this happens, there will be a substantial increase in ton miles, because in every scenario you are replacing a barrel from a location that's farther away.

Are we seeing this yet? Slide 11. Well, we have seen an increase in ton miles, but much of this has to do with refinery rationalization. When you factor in the refinery closures over the last few years, it compounds the supply demand balance in today's market. After a refinery closes, in most cases, the loss output needs to be replaced with imports. For years, we have seen export-oriented refinery capacity additions in the Middle East come online, while older and less efficient refining capacity has been closing in Europe. In addition, we saw significant refinery closures in the last two years in places like Australia, Philippines, Japan, US and Canada. As demand returns with the global reopening from COVID-19, these barrels need to be replaced. This loss production needs to be replaced. Over the last few weeks, we have seen record refined product exports out of the Middle East and close to record levels of diesel exports out of the US Gulf. This has supported the strong increases we are seeing in MR and LR2 rates today, a demand driven recovery.

Is this sustainable? Slide 12. Yes. But we do think the supply and demand balance for refined products is going to be extremely tight throughout this year. In 2021, seaborne CPP exports were around 700,000 barrel per day, lower than 2019 levels. In addition, there was roughly 500,000 barrels a day of refined product inventory draws. Thus, we were very close. And in April, CPP exports exceeded pre-COVID levels by 700,000 barrels per day. Our thesis hasn't changed. Looking forward, refined product demand is expected to increase 4 million barrels a day through the remainder of this year. If 25% of this increased demand is exported, seaborne exports of refined product will increase by an additional million barrels a day. With inventories at historically low levels, there is a limited ability to supply demand from draws and refinery runs will need to increase as well as product exports. This is extremely constructive, and it's expected that product exports and ton mile demand will increase by 5% to 14% this year.

Slide 13, please. The product tanker order book is at a record level with 5% of the existing fleet on order today. By looking at the order book, you would think that shipyards are desperate for orders, but it's quite the opposite. Other shipping segments have done so well, such as containers that the yards are fully booked. We do expect more product tankers or more product tanker orders, but if ordered today, these vessels would not be delivered until 2025. While the order book is at an all time low, scrapping last year was at an all time high and we expect this to continue throughout 2022. Unlike other sectors, product tankers were not building mass until the early 2000. So, scrapping has been minimal and basically everything that's been delivered hasn't left the fleet. Today, there are 255 product tankers, 20 years and older. By 2025, excluding scrapping, there will be 687 product tankers, 20 years and older. That additional new building orders more than half the fleet will be 15 years and older by 2025. Using modest scrapping assumptions, product tanker fleet growth, net fleet growth, is a little over 1% over the next two years before going negative. However, when we use a scrap rate, it reflects the age profile of the fleet, supply growth is essentially zero the next two years before going negative in 2025.

Financial highlights. Slide 14, please. To maintain liquidity, during the challenging rate environment as a result of the COVID-19 pandemic, we increased our leverage as opposed to raising equity. Prior to the increase in spot rates, our focus has been to improve the balance sheet, which as you can imagine, is difficult to do in a weak freight market. Since the start of the year, we have announced the sale of 18 vessels. These vessels increased our liquidity, reduced overall debt and are accretive transactions, given the discount our shares trade relative to the vessels sale prices. As Emanuele mentioned, we have no plans to sell additional assets. Through debt repayment related to vessel sales, scheduled amortization and our convertible bond, we will reduce our debt by over $500 million in the first half of this year. Given the improving rate environment, if the fleet average is $25,000 per day in the second quarter, we could have $450 million in proforma liquidity by the end of June. This would reduce net debt by over $700 million. In addition, we have refinance all the upcoming loan opportunities through 2023 aside for one. Given these points and our positive outlook for the market, we feel very well positioned.

Next slide please. Slide 15. Scorpio Tankers has tremendous operating leverage. Every increase in spot rates above are all in breakeven goes directly to the bottom line. So far in the second quarter, the fleet has booked an average PCU rate of close to $28,000 per day, close to double the prior quarter. Assuming rates would average $25,000 a day for the year, the company would generate almost $600 million in free cashflow before debt repayment or $10 a share, a 40% to 45% free cash flow yield. If you include debt repayment, the company would repay [4.50] a share in debt and then generate 330 million or [5.60] a share in free cash, adding $10 a share to the company's earning base.

Next slide, conclusion and investment highlights. Slide 17, please. The company owns and operates one of the world's largest product tanker fleets, comprised entirely of eco vessels. We have significant operating leverage, a $1,000 day change in product tanker rates equates to $41.2 million in annual cash flow. And as you are aware, rates don't usually move by just $1,000. We are in the process of de-leveraging the balance sheet and positioning the company to create value and improve the quality of the investment. We will reduce our debt by over 500 million in the first half of this year. Our shares trade at a steep discount to our net asset value, and we have a $250 million share repurchase program. The market inflection point has arrived and the long term supply demand fundamental suggests we could have an extended tanker cycle as well.

With that, I will turn it over to Robert.

[Robert Bugbee, President]

James, thank you very much. And firstly, thank you very much for all those analysts who've supported us in these months that we've been through, and those have been supporting us in the really dark times, such as last November. First, I’d like to thank all the blog chat rooms, especially tanker data, all you people have been really helpful in not providing encouragement and providing constructive criticism, and some that we've followed. Now I think James has laid out a pretty conservative but very reasonable position in his notes. And we can see that even if that was obtained there’d be substantial value derived in the stock. Emanuele has been very clear that we want to improve the quality of the investment by continuing to delever, and also being clear that we have the capacity with the stock authorization of $250 million to make significant inroads into the cash -- into the stock.

Now what we don't know is just how much. We don't quite know what the rates are going to be. And we know that there's huge differences and huge changes. We know that cash flow is huge even now. We know that cash flow is instantaneously dynamic and transforming. We know what's going to happen if the company gets cash flow. You can look across and see the container market time last year, some companies that went up more than 7, 8 times from February through to January. Some of even went up more. We seen the dry cargo market companies that Eagle, Star Bulk, Genco, all having substantial rise in their value of their stock as the cash flows came in, and their options came to either increased dividends or buyback stock. For us, whilst it is huge difference in NAV continues at the moment, we would rate our NAV pretty much around 35, 36, maybe even 37 level. It's very difficult to tell when things are marching up very quickly. There's no question that buying back stock would be the best use of excess capital.

And I would counsel everyone to look at the cash flow now. Long term fundamentals are fantastic. The cash flow at the moment has dynamics in it with change in trade routes that really unlikely could change. Every time we look at it and say or answer the question, it last two months, can it be sustained? The answer has really resulted as market has got stronger. This last week, the market has moved into a new stage, moved into a more world stage, moved into a stage where Asia is really driving rates right now in a huge way. And you have the LR2s at top of the pack that is so -- is the most industrial demand sensitive that's driving and driving higher into record rates.

In just this last week, those rates have moved up in the range of $30,000 a day or so. MRs also strengthening as well during that period from Asia. So don't get sort of fooled by the headlines that all the US Gulf is weakening. Even the US Gulf is starting to restrengthen again, but it's a much healthier market to have the natural order events, which is LR2s, the highest rate MR2 and Handys underneath that. We are going to see some relative weakness in the Handys, most probably going forward, partly because the heating season is ending, we're moving into summer and Handys -- those Handys they’re trading dirty are likely to be trading on a relatively weaker rate than those Handys that are trading in and between. Really that sort what I'd like to stay to open up with, I'm sure you have many questions. And so I'd like to open up for questions. Thank you once again.

[Operator]

[Operator Instructions] Our first question comes from Greg Lewis with BTIG.

[Greg Lewis, BTIG]

I did want to talk a little bit about the market. But before that, I did want to kind of ask about, I guess it was about a month ago, you did sell off another couple of vessels. Just kind of curious any color you can give around that, clearly, asset values have been rising. But just kind of, if you could talk a little bit how you're thinking about the fleet management of your assets, kind of how you're thinking about that given where we are today?

[Emanuele Lauro, Chief Executive Officer]

I think, as we stated, we are done with the sales. The market has moved quickly. Whether the fundamentals were pointing the direction in which we are now, this has happened quicker than we expected, triggered maybe by the geopolitical aspects that we are experiencing. However, as you know, selling a ship doesn't happen overnight. So the process of selling a number of vessels started months ago and sort of concluded with the last one vessel that you are probably referring to, Greg, at a time where we decided to proceed and go on with that transaction because it was the right thing to do. And the discussions were already well advanced in order for us to withdraw from it. So we basically executed on what the view or the vision was selling one more, selling one less didn't changed a whole lot from a balance sheet perspective. But we decided to charge on and now stop and look at the incredible cash flows that are coming in. And as we said, should those be sustained, which we expect them to be, as we expect them to be, then go on the other discussion, which is how to return capital to shareholders.

[Robert Bugbee, President]

I think, Greg, just one more thing I'd like to add to what Emanuele was saying is that, it's a case of accelerating that position where we know we are really strong, accelerating that position to where we got to now, because by adding those two ships, that ability to drop the debt down by that much, you kind of clear the watershed lines a little bit clearer, then you can just totally focus as Emanuele says, then on one thing, driving the company and driving the shareholder value.

[Greg Lewis, BTIG]

And then I did want talk a little bit about the market, realizing that it's fluid and it's kind of evolving on a daily basis. If you could provide a little bit of color, a little more color around what is happening in the LR2s? I mean, like the recent -- for leading edge scrubber rates for LR2s, it seems like they're the highest have been in quite some time. Realizing it's never just one thing. But if you talk a little bit about that strength in the LR2 market as things alluded to on the call at the start of the year, they were kind of lagging MRs.

[Robert Bugbee, President]

I think, the first thing is that, Lars is really busy -- and he's too busy to be on this call. And normally he'd be very important for us to have him on the call, and he's out in Asia trying to make sure he is right on top of that position and this new change that we're having in the LR2 market. And it really is very, very strong. And we have had fixtures just in this last week. I mean, it strengthened into the end of last week and has now just moved up virtually every single day. We still have a wide disparity, we have a market that's giving you returns and we are between 25 and 75. But it will start to fill into the different parts as we go through this week. And then find its level, which is almost certainly going to be higher again next week. And Emanuele?

[Emanuele Lauro, Chief Executive Officer]

Robert, I was just echoing what you were saying. I think that the market has started pumping on old cylinders, really in the US Gulf on the MR side. This has then triggered an interest of vessels that were located in the Mediterranean and in Northern Europe to actually look at repositioning themselves in the US Gulf. And of course, as you would expect this has actually raised the European market, let's call it, and then, adjusted with the influx of vessels from Europe into the US Gulf, adjusted the US Gulf market downwards and raised the European market. So we balanced things little bit. And when I say downwards, I mean, they're still -- I mean, MRs are still fixing at extremely healthy levels. Most of the times the TCEs numbers that are starting with the three in front. And at the same time, what was lagging behind was the Middle East, the long runs between the Middle East and Asia. So the Arabian Gulf and Japan, or Arabian Gulf and Singapore, and in conjunction with that was the Southeast Asia to Australia runs that were not kicking in, or have left a little bit behind.

But as Robert has mentioned, this has actually been a constant trigger or a daily increase in the last 10 days where you've seen that the structural, more industrial demand for LR2s has come in and suddenly the increase has been extremely apparent and felt. And this has not only come through a Middle East to Asia trade but also actually a lot of the US West Coast imports. So from Asia into California, for instance, we've seen a lot of runs going that way, which is quite symptomatic when MRs or LRs are going from Asia into the West Coast rather than coming back to pick up cargo in the Middle East are taking tonnage out for 50 days, really. And this creates the opening or the balance that we need to see in the increase in the Middle East. So that has been a little bit the dynamic, a lot of California runs, Australia, New Zealand, as well has played a big role. And this has helped a lot lifting what seems to be a sustainable upward trend.

[Robert Bugbee, President]

As Emanuele has been saying, the latest MR fixture this is what was lifted, subjects were lifted this morning was from [North Ages] to Los Angeles, as Emanuele pointed out, a very long route on MR at $72,000 a day. Now that's why it's very, very difficult for us to guess ourselves what cash flows are. All we know is we are in a strong market and it's hard to see the dynamics that would stop this market, not being generally firm, may not have market that averages $72,000. But there's not much there that we see changing the dynamic, we don't see the Russia, Ukraine situation changing very much in the next months. And we are coming into the gasoline season with inventories in diesel and gasoline that just didn’t miss.

[Operator]

Our next question comes from Ken Hoexter with Bank of America.

[Ken Hoexter, Bank of America]

Robert, just to understand there, we're supposed to take what $72,000 and put that in our MRs for a bottle now. Just on that…

[Robert Bugbee, President]

I said, no. I mean, you could put 25 -- we used to put 25,000 in the model and the model is great. So it give us an easy hurdle…

[Ken Hoexter, Bank of America]

So walk me through this part. So we've got excited over time that rates are finally here and you're on the cusp and you've kind of walked us through, hey, things are improving. What it is in three months that we come back? And I guess either what goes wrong from here or what's the postmortem that you come back and say, we should have seen that? I mean, I've heard James' story, in terms of, we don't have much of an order book for a while things are looking good. So what is it that you think can wrong from here or that you're more confident that this is finally that trigger…

[Robert Bugbee, President]

Well, first of all from your base position, a market that simply just supports that the stock should be trading towards its NAV, towards the mid 30s. It's quite difficult unless you see some really weird event that probably no one has thought to have happened, or some crazy escalation in geopolitical events. It's really hard because that scenario can sustain quite a large drop in demand or something. What could go wrong? I don't know. Perhaps people aren't allowed to use their cars in the United States or Europe except on odd days, or they're not to fly or go on holidays. Something has to happen to jolt the headline demand so much. It doesn't matter that the headline demand comes off a little bit, because everyone was using way more product even with that product demand increasing than they were before hence running down inventories. What you've got here is a real genuine change in the ton mile situation that’s coming at the same time with the long-term fundamentals, the refinery change where the refineries are opening up, where the refineries are closing.

So that base level to get to trading at 20,000 to 25,000 a day with a balance sheet that's got $400 million, $500 million, $600 million of cash sitting on it to not trade towards the NAV, it's pretty hard to see. Then we have to take the month by months after that, every month it gets, safer. The leverage is very high off this. I mean, it's nearly $40 million for every $10,000 improvement. So you get safer and safer literally every week that you're going along. So I can’t answer that, I can't think of anything, if something extraordinary that would take down versus every single stock that there is in the world for that to happen.

[Ken Hoexter, Bank of America]

So let's go to a different subject, which then is, I like Greg's question on the asset sale, because -- and Emanuele saying, okay we're done that. But it certainly showed your NAV capabilities to the market, right, when you are selling assets at the market level. So maybe the issue in terms of the stock, then, I don't know, do you ever think of M&A like you did with your prior firm in terms of you gaining scale, or recognizing it for bringing investors back in to be able to get that increased liquidity? What's your thought within this sector? Are there discussions at all or you are just saying, hey, we are finally at that point of making money?

[Robert Bugbee, President]

We’re at the point of making money and we got the newest fleet there is out there. We've got the largest fleet there is out there. We are number one in all the three remaining categories we are in right now, the Handys, the MRs and the LR2s. So we have no reason for information or customer service to acquire more assets or buy another company. Virtually every purchase, well, not virtually but almost, yes, every purchase of any other company would create an inferior fleet profile. And buying one or two ships is really no point and you're not -- I mean, it's not even being discussed. I think, it does bring up another point that we haven't really tuned yet, which I think is good, is that that's the beauty of where we are now. That's what's making it easier to manage, more predictable, is we don't have the CapEx. We have no new buildings on order. We have done our scrubbers and we have very little capital expense out there for the maintenance, because the fleet is so new and we have done so many drydockings already in preparation.

[Ken Hoexter, Bank of America]

I agree, it's just sitting and waiting for the rate inflection, which you are grabbing a hold of.

[Robert Bugbee, President]

And I think you too have partly started with. We have disappointed a lot of people in our fits and starts over the years, and none more so frankly than ourselves. I mean, we are vested quite heavily is inside, there’s management in the success through the stock of this company as is the board. So now we are seeing -- we would like payback this time too.

[Operator]

Thank you. Our next question comes from Ben Nolan with Stifel.

[Ben Nolan, Stifel]

So I've got a couple. I'll start maybe on little bit of a macro side. I think James you'd mentioned that you expect at some point that people are going to be ordering some more product tankers. And I appreciate that, that might be a very sort of long sided long view type profile. But when I look at where current prices are, where current new building prices are versus existing assets, and you can buy brand new ship in the water for less than it would cost you to order something and get it two and half years from now. I can't think of any reason in the world why anybody would be ordering a product tanker right now, unless the second hand values come up materially or the new building prices come down materially, which doesn't seem like it's very likely. Am I off on that or how do you think about that dynamic?

[James Doyle]

No, I think you're right on that, Ben. The only thing I would add is you could see, for example, certain owners look to order vessels with dual fuel technology and long term time charters, similar to what INSW has done. And that might make sense as you try to navigate what the next fuel will be. But that's the only caveat, but I do agree with you.

[Ben Nolan, Stifel]

Well, just to sort of follow onto that quickly. Are you -- I guess there's been a few of those on the Aframax or the LR2 side. But is there an appetite for by charters to do that for let's say a Handy or an MR to go? It just seems like it's being done on bigger ships, but it's a much more of a reach for smaller ships.

[James Doyle]

I'd say most of the interest so far from charters has really been for vessels on the water in the next few years here, because they like us think that maybe this inflection point now will lead to this longer term extended tanker cycle recovery, given the supply/demand fundamentals. So we haven't -- it doesn't mean they haven't reached out to other people. But as you point out, it would make more sense on an Aframax and MR with dual fuel -- if it was dual fuel LNG, it's hard to figure out where you would load LNG bunkers for an MR in Latin America, Africa, certain parts of Asia. So I think that's one of the challenges we see even for our own fleet in terms of meeting the new fuel types.

[Ben Nolan, Stifel]

And for my follow, just switch gears. You talk about the market being a lot better. You now have a lot of liquidity, which is great and have been able to monetize some assets. And then a few times now there's part of the conversation been looking to return capital to shareholders, I can't help with -- I mean, we just came through a pretty hard time here where it became somewhat necessary to sell assets to maintain liquidity. Is it maybe not unreasonable to think that the better thing to do is to just spend some time and serious capital to delever the balance sheet and just make sure that you are never in a place that that could happen again?

[Robert Bugbee, President]

Ben, I think that's correct. But remember, we've caveated everything with sustained superior earnings. So you're not sitting there saying, okay, 17 a day, you're going to buy another stock, but you are sitting there saying, at superior earnings, you'll have -- you're going to have room to pay down a reasonable amount of extra debt along with amortization, as well as take advantage at points along the way to buy back stock. And if you break into a sustained period of really crazy earnings, and obviously, that's going to determine it. So what's going to determine it is the actual rate levels you are going to get. I mean we've already, beyond what we've already -- we haven't even got paid for what we've already guided. April has been the first 33% where already the fixtures we've done in all our categories this week are higher than the average that we actually used for the guidance, because the guidance we stopped after Friday's fixtures. So it's not going to be a health letter, okay, let's go. It's exactly going to prioritize, making the quality of the investment better and safer, more sustainable as we were, responsibly taking advantage of what is an enormous spread in NAV.

[Ben Nolan, Stifel]

I mean, I get you, although, again, it's an unpredictable market. So it seems like better safe than sorry…

[Robert Bugbee, President]

I agree, but there becomes a point where if you remember your assets themselves are liquid. So what -- if you had something that was in the market that was going to suddenly some big event that was going to take down your confidence in the long-term fundamentals for some reason that was clearly there. You can -- doesn't mean that you -- you can change your mind then and you can sell two or three ships.

[Operator]

And our next question comes from Magnus Fyhr with H.C. Wainwright.

[Magnus Fyhr, H.C. Wainwright]

Just most of my questions have been answered, but kind of following up on Ken’s question about the risk going forward. I mean, you're paint a very strong demand picture, limited supply growth going forward. Also that the ton mile demand should offset reduced volumes. But do you think the biggest risk is that the refineries can't supply or is that the volumes will offset the ton-mile? I mean, is there -- where's the additional supply from the refineries coming from given that they're all running at pretty high levels?

[James Doyle]

Magnus , you're correct. Not at least in the first half of this year, but certainly in the second half, we're looking at a very tight refined product market. We do expect refineries to increase capacity 2 million to 3 million barrels a day, and that adjusts for a loss in Russian production. But we do expect increases out of Asia, out of the Middle East, which have been in maintenance. So you've seen them come off maintenance. That's why you've seen also another factor as to why the LR2s have improved, but we could have and are likely to have a very tight market. That being said, most of this incremental supply is going to need to go to places with deficits. So it should benefit product tankers, but I would say a super high oil price is a concern us.

As we get through this year, there's -- towards the end of the year and through next year about a million or so barrels of refining capacity coming online in the Middle East, which is fantastic and much needed in the market. And you might have a different picture in Russia at that point. So I do think at least for the second half of this year, things could be extremely tight but would benefit product tankers. And then next year, I think the refining system will figure out a way to make it a little bit less tight.

[Magnus Fyhr, H.C. Wainwright]

Just on the -- I mean, rates have picked up quite a bit. What are the conversations you're having now with some of the charters as far as securing tonnage? And given that it looks like the rates are going to stay very high here? Is there an appetite from your side or I mean more so from the other side to secure tonnage? Just curious to see if there's any conversation of longer-term charters here?

[Emanuele Lauro, Chief Executive Officer]

We're starting to see that’s increasing quite substantially and what was the interest for 12 months period is now shifted to actually -- started to shift into the 24 to 36 months. So these are conversations that usually, or signals that usually show the durable view of oil companies and oil traders. So we expect actually to see some action in the long term fixing going forward in the product tanker space over the summer, for sure. We are going to see that end users are going to start covering their books for, I would say, probably be 36 months ahead, or at least part of their books for 36 months ahead. So I wouldn't be surprised if we will see a number of these pictures going forward. We are not preparing it to sculpt tankers only, I'm saying in the product tankers space.

[Magnus Fyhr, H.C. Wainwright]

And from your point of view, would you prefer to stay spot or -- I mean, is there a preference in the duration of the charter? I mean, a 12 month charter doesn't really do much. So how do you look at that?

[Emanuele Lauro, Chief Executive Officer]

I think there is always a magic number, which we are not going to disclose here, because it would be not helping in negotiations, and probably a minimum of 36 months would be required to attract our attention. And we are getting there from on the demand side, as I just discussed. But yes, when we start seeing those magic numbers being mentioned and the period of 36 plus months, I think that it's wise to start looking at covering a portion of the fleet. And by the way for the first three, four, five pictures, we would hope to have been too conservative and fix the two little numbers, because it would mean that the thesis is coming as stronger than expected. So I don't know if Robert has anything to add to this, but that would be my view.

[Robert Bugbee, President]

I'm just waiting Emanuele to watch the discussion when one of the chartering guys is discussing with you to take a ship off a high rate and put it on a lower rate charter.

[Operator]

Our next question comes from Liam Burke with B. Riley.

[Liam Burke, B. Riley]

You have paid a dividend pretty consistently through the cycle, even through the last six quarters, which have been rough. You have been clear about the $250 million repurchase authorization. But is there any thought with the business getting stronger that the dividends through this cycle could come up from its current levels?

[Emanuele Lauro, Chief Executive Officer]

I think that with what we were the discussing with Ben or what Ben was actually, or what Ben has stated, I think that's a little premature to look at this now. But in the cycle, for sure. So it's specifically, we are looking at the tankers cycle, which we think we had ahead of us, for sure. It's part of the capital allocation of the company and returning capital to shareholders. We will look at the dividend adjustment upward. This is not something that we are discussing at present for the reasons that we’ve touched upon in terms of, we need to see this market to be sustainable. We expect it to be sustainable at this stage, but we need to have a few months of sustainable markets before we look into increasing or upping the dividends.

[Robert Bugbee, President]

And also just right now, it's not even being thought of because of the gap between the NAV and the stock prices. It's just too massive. In the pre in the previous company I was in the last cycle we had the same situation. What happened was, at this point, did not increase the dividend. Then at a later point, when we were buying back stock, even still buying back stock, but the gap to NAV had started to close. We then increased the dividend by a minimum of the proportion of the stock we had bought back, because you weren't then increasing your cost. And then you added a little bit for the improvement in the market and it looked as Emanuele is pointing out that that same case would start to apply.

[Liam Burke, B. Riley]

It’s probably a James question, but you're getting the full benefit, the full economics of your scrubber investment with the current spreads here. And some of the ports, are you having difficulty getting high sulfur fuel?

[Robert Bugbee, President]

Cam, would you like to take that one actually?

[Cameron Mackey, Chief Operating Officer]

Sure. No we're not.

[Operator]

Thank you. Our next question comes from Chris Robertson with Jefferies.

[Chris Robertson, Jefferies]

Robert, you had mentioned that Genco and Star Bulk. I know that you've spent some time talking about the dividend that it’d be premature to increase, fully clear on that, priority seems to be balance sheet strengthening and then maybe some opportunistic repurchases. But you did mention Genco and Star Bulk early on. They were able to come up with a dividend strategy that's a little bit more formulaic and articulated. Is that something that Scorpio would look at in the future in terms of a dividend policy versus kind of more ad-hoc increases?

[Robert Bugbee, President]

I mean, we've already said, it's a long time in the future. The actual dividend increase or dividend policy is just not being discussed at all right now. And what could happen in the future? Maybe I don't know. We'll get to that in the future.

[Chris Robertson, Jefferies]

James, this is a question for you. So you'd highlighted that the fleet TCE is currently around 28,000 a day. Can you talk about and contrast that with the current kind of average fleet cash breakeven and OpEx levels?

[James Doyle]

So the average fleet all in cash breakeven at 17,000, including debt. And if you were to do it without debt, it'd be around 11,000 per day. So well above that.

[Chris Robertson, Jefferies]

And I guess last question on our end. When looking at the vessels that are on sale lease back, how many of those have purchased options or obligations, and how are you thinking about fleet management in the context of reacquiring these vessels versus looking elsewhere in the second hand market?

[James Doyle]

We wouldn't be looking to buy any ships right now. We're constantly trying to say, we're not looking at buying companies. We're not looking at buying ships. We're not looking to order ships. We're looking at as low CapEx as we can maintain, so that we have as much cash flow for that repayment and stock purchases, that's the way to go as possible. So buying other vehicle ships is off the table. What we're going to do though is, as we pointed out quite correctly, is there are purchase options in some of the leases or all of the leases really, but some of those leases are more expensive than others. So one thing we're going to be able to do anyway is to make our financing more efficient by exercising some of those purchase options and replacing them with conventional bank debt. We'll be able to take benefits there, because we can afford to pay less leverage now to those tankers. So therefore, we should be getting less spreads and better terms.

So that would start to lower our breakeven.

[Operator]

Our next question comes from Omar Nokta with Clarkson Securities.

[Omar Nokta, Clarkson Securities]

I had one market question, if you look at the Russian owned vessels there are apparently increasingly being sanctioned. So this should be tightening vessel supply. But the question is really, can you see the effect today or is that something that is going to happen, or has it already happened in the market?

[Robert Bugbee, President]

In products or just generally?

[Omar Nokta, Clarkson Securities]

Yes, for products, of course…

[Robert Bugbee, President]

Emanuele, do you want to take it or want me to go?

[Emanuele Lauro, Chief Executive Officer]

No, it's fine. I'll start. First of all, on specifically on what you mentioned for the -- and thanks for the question. The product tanker per say, the product tank fleet has not been affected a great deal on the sanction simply because there are not that many Russian product tankers out there. So this is more affecting crude starting from the Aframaxes upwards. And the impact in the market for those sanctioned vessel has already trickled down, because of course, if there is an immediate effect on it, whether this is going to impact the crude market more going forward, yes, of course, that's the expectation. But there are a whole number of geopolitical or political aspects around it that are difficult to read at this point. So I wouldn't know how to elaborate further rather than on a very simplistic view. Of course, if you take Aframaxes and Suezmaxes off the market, this will benefit the crude tanker space.

[Omar Nokta, Clarkson Securities]

I think it also should affect the product more. So at least before I look at the statistics, there are around 2% of the product split above 25,000, that is directly owned by Russian companies. But anyway, it seems to be something that is going to happen and probably not yet…

[Robert Bugbee, President]

I think the important thing is, you are correct on the margin, it's going to be helpful anyway. And combine that with the lack of deliveries and the removal of product tankers from the premium trades, once they get to 2.15, along with ironically, it’s starting to get scrapping in product, all is just creating a very -- almost no growth in supply scenario going forward at the moment. And as you say, and there will be times when maybe it'll be negative too. And I think that your point in general supply of ships is probably the most under looked fundamental that's there. There is this lack of supply and lack of ability to replace in a short-term.

[James Doyle]

As far as I know, it's only two MRs for delivery in 2024, and only six LR2. So I mean, it's very few. Thank you. That's all I had.

[Operator]

Thank you. And this concludes the Q&A portion. I'd like to hand the conference back over to Mr. Lauro for any closing remarks.

[Emanuele Lauro, Chief Executive Officer]

No particular remarks. Thanks very much for being with us today, and look forward to speaking to you all in the next days and months. Thanks a lot.

[Operator]

Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Everyone, have a wonderful day.