Scorpio Tankers Inc

NYSE:STNG

Earnings Call Transcript 2023-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to the Scorpio Tankers Inc., First Quarter 2023 Conference Call.

I would now like to turn the call over to James Doyle, Head of Corporate Development and IR. 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; Chris Avella, Chief Accounting Officer; Lars Dencker Nielsen, Commercial Director.

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 information as of today, May 2, 2023 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, as well as Scorpio Tankers’ SEC filings, which are available at scorpiotankers.com and sec.gov.

All 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 website for approximately 14-days.

We will be giving a short presentation today. The presentation is available at scorpiotankers.com on the Investor Relations page under Reports and Presentation. 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. If you have any additional question, please rejoin the queue.

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

[Emanuele Lauro, Chief Executive Officer]

Thank you, James, and thank you for joining us today. In the first quarter, the company generated 286 million in EBITDA and 196 million in adjusted net income. This compares with the first quarter last year when the company generated an adjusted loss of around $15 million. So we are starting 2023 with $210 million more in adjusted net income compared to 2022.

Today, we have $800 million of pro forma liquidity. We see an order book near record lows, an aging fleet, constructive demand for refined products, refinery dislocations, and a time chapter market with duration and high rates, which continue to improve.

Scorpio Tankers is a young and large fleet with significant operating leverage, and most importantly, minimal [CapEx] (Ph). We do not intend to grow the company, rather we intend to harvest. The balance sheet has and we continue to see a reduction in leverage, but we will look to optimize it as well.

Our new $750 million to $1 billion term loan and revolving credit facility while still under discussion can accelerate the repurchase of more expensive lease financing and can create more balance sheet flexibility.

The revolver increases the flexibility and efficiency of managing the two critical levers vital to shipping companies leverage and liquidity. While overall debt reduction continues to be our priority, our strong financial position continues to improve and has allowed us to start to return capital to shareholders.

Since July, 2022, we have repurchased 7.5 million of our common shares for $350 million. Today, we announced the renewal of our security purchase program for up to $250 million and an increase of our quarterly dividend from $0.20 per share to $0.25 per share.

Finally, it is with mixed feelings that I must announce today that Brian Lee, our Chief Financial Officer, will be stepping down in September of this year. He will be replaced by Chris Avela, who has been with the company since 2010, and currently serves as our Chief Accounting Officer.

Brian’s leadership and experience has been instrumental in the growth and development of the company over the last 13-years. He has been with us since the beginning and leaves the company in its strongest financial position with a well trained team poised to maintain high standards.

Brian, I will miss you. We will miss you. We will miss your entire work ethic, your temperament and character too. I’m truly grateful for your contribution to the company and wish you the best on a well-deserved retirement. And by the way, if you change your mind now that the Chief Accountant position is open, I’m sure that Chris would hire you in a heartbeat.

With that, I would like to turn the call to James for a brief presentation.

[James Doyle]

Thank you, Emmanuel. Slide 7 please. We have seen an elevated rate environment since Q1 of last year and over the last five quarters we have generated a window under 1.4 billion in EBITDA, of which 1.1 billion has gone to debt repayment, and as Emanuel mentioned, since July, 2022, we have reed 350 million of the company’s shares. We have 15 vessels on time, charter out contract, and the most recent charter was in LR2 for three-years at $40,000 per day. The remaining 98 vessels are operating in the [spot] (Ph) market.

Slide 8 please. We continue to repurchase vessels under expensive lease financing and have started to refinance some of these vessels with new bank credit facilities that have lower interest margin.

To the right, you can see the list of vessels that have been repurchase and are upcoming. So far we have given notice to repurchase 42 vessels, and when we say repurchase, it is really paying off the outstanding debt on the vessel.

As of today, we have repurchase or repaid the outstanding debt on 28 vessels, and in Q2 we will repurchase 13 vessels on lease financing for 325 million. The margin on the lease financing ranges from LIBOR plus 350 to 525 basis points, and the new loan facilities have a margin of SOFR plus 190 to 197 basis points. Given the credit adjustment spread between SOFR and LIBOR. The LIBOR equivalent margin of our new financing is around 170 basis points. The team here have done a great job.

Slide 9 please. Timing differences between repurchasing vessels and lease financing and drawing down on new facilities mean that at times it appears debt is increasing. On the left, you can see the movements between the new facilities being drawn and debt being repaid. In the first half of this year, including draw downs on new facilities, we expect to reduce our debt by 146.2 million.

If you look at the graph on the right compared to December 2021, by June 30th this year, the company will have reduced its debt by 1.4 billion and repaid 1.1 billion of refinancing. Until recently, the debt repayments have been done primarily with free cash flow, however, with the new 750 million to $1 billion term and revolving loan facility, we can accelerate these lease purchases and optimize the balance sheet.

Revolving component of the new long haul allows us to manage leverage and liquidity. After completed, the changes will translate to lower breakeven rates for the fleet as amortization and interest cost decline.

Slide 10, please. Since December 31, 2021 net debt has decreased 1.5 billion. Today on a pro form a basis with over 800 million pro form a liquidity and with no new buildings on order, we have minimal CapEx. We are very well-positioned.

Slide 11, please. In Q2 so far, including time charters, our fleet is averaging almost $40,000 per day. On an annual basis, this would translate to almost $20 per share in free cash flow or over a 38% free cash flow. These are exciting time.

Slide 13, please. Despite significant refinery maintenance in the first half of this year, a reduction in European imports after building inventory ahead of sanctions and a warm winter, rates have remained strong.

European product imports have increased to normalized levels, refinery maintenance will decline considerably over the next few months, and global inventories remain well below five-year averages, all of this leads to strong expectations for the remainder of the year, especially in the back half and next.

Slide 14 please. Demand has been robust and while we do expect slightly lower diesel demand due to less trucking activity, the increase in gasoline jet fuel and naphtha demand more than offset the lower distillate demand. We expect refined product demand to average 1.5 million to 2 million barrels a day more from Q2 to Q4 than last year and go up throughout the remainder of the year.

Q1 volumes remain extremely high and are averaging one billion to 1.5 billion barrels per day more than 2019 level. Given low global inventories, increased consumption will continue to be met through imports with product tankers reallocating barrels around the world.

Slide 15, please. While demand is above pre-COVID levels, refining capacity is lower and more dislocated. Regional capacity changes are structural and will continue to drive ton miles in flows for the coming years. After a brief surge in product exports at the end of last year, Chinese exports have now regenerating on life levels.

And while OPEC cuts will restrict crude exports, they do not restrict products and the Middle East has been the incremental barrel of refined product. They are one of the few areas with refining capacity coming online for the export market and most of these exports are being long haul to Europe and Asia. As ton mile demand increases, vessel capacity is reduced and supply tightened.

Slide 16 plays. At the start of sanction, Russian product exports declined, but over the last two months have been above pre-sanction level. And prior to sanctions, most of the Russian exports were going to Europe and now they are going longer haul through the Middle East, Africa, Asia and Latin America.

Almost every replacement route aside from Turkey is longer than the previous route, and these new flows will drive a significant increase in ton miles. On the other side, Europe has to replace the lost Russian import, and these will be from farther away.

The gray fleet are vessels that are servicing Russia has increased significantly to 322 vessels today, of which 254 are Handymax and MR vessels. Once these vessels load at Russian ports, they are unable to service the U.S. or Europe.

The impact of vessels servicing Russia is expected to have a significant impact on the capabilities of the global feed, while unclear if Russia will be able to maintain current levels, it is very clear these volumes are needed given the low inventories around the world.

Slide 17. I know there has been some more new building orders over the last two months and probably more than in this graph, but the overall order book as a percentage of the fleet still remains near historical lows. And in December, clean tanker rates reached record levels, while the order book was at an all-time-low.

So we do expect additional orders given the strong rate environment and aging fleet. However, there are still long lead times for the delivery of new build vessels. Shipyards are busy with orders from other sectors, and vessels ordered today will not deliver until 2026.

All said, new builds are expensive compared to historical levels and concerns about different propulsion systems to meet environmental regulation and the cost of these systems acting as a constraint to ordering.

Slide 18 please. When thinking about new building orders and fleet growth, the age profile of the fleet must be considered. On the lower left, you can see that from 2023 through 2026, 680 MR and LR product tankers will turn 15-years old.

By 2026, there will be 815 product tankers, 20-years an older and on a percentage basis, that means 50% of the Handymax fleet, 23% of the MR, 29% of the LR1s and 12% of the LR2s will be older than 20-years by 2026. What we always prefer to see low ordering activity, the number of vessels turning 15 and those that will be 20 an older is staggering is cheap rate in the context.

Slide14, please. While the order book is at a record low, the spot market continues to remain at very strong levels, one and three-year time charter rates are at high levels and evidence that our customer’s outlook is one of increasing exports and ton miles against a constrained supply curve. What is different today is that typically as rates improve the order book builds and oversupply more than often leads to a decline in rate. But we have only seen modest order book growth.

Using minimal scrapping assumptions, the fleet will grow less than 1% over the next three-years and using higher risk scrapping assumptions and free age, due to upcoming environmental regulations, the fleet is likely to shrink over the next three-years.

Seaborne exports in ton mile demand are expected to increase 4.4% and 11.5% this year, and 4% and 7.1% next year, vastly outpacing supply. The confluence of factors in today’s market are constructive individually, historically, low inventories, increasing demands, exports and ton miles, structural dislocations in the refinery system, rerouting of global product flows and unlimited fleet growth, but collectively, they are unprecedented.

And at last, but certainly not least, Brian, it has been a pleasure to work for you over the last 10-years. Thank you for being a great mentor, leader, and friend to so many of us. You have always been the last person in the office, the first to give credit and the last to take it. Your hard work, humble attitude and great sense of humor will be missed. I wish you the best in retirement.

With that, I would like to turn it over to Q&A.

[Operator]

Thank you. [Operator Instructions] Our first question is on the line of John Chappell with Evercore.

[Jonathan Chappell]

Thank you good morning. Brian, to echo the comments. It has been a real pleasure and you will be missed. Maybe Lars, if we can pull you in here. James had some really great slides kind of explaining what has happened since the start of the year. But certainly some of the recent momentum, especially in the MR segment has been somewhat seasonal, but maybe a little bit more extreme than anticipated a couple months ago.

Is it strictly a function of refinery maintenance and that is what gives you a more optimistic view on the back half of the year or is there something else going on either seasonally or counter seasonally in the MR market recently that has caused some weakness?

[Brian Lee, Chief Financial Officer]

Hi Jon. I think putting things in context, I think rates for the current quarter has actually held up quite nicely. The market is certainly a lot more volatile that we have seen when markets were poorer and we had a flat lining market. And I think that volatility really defines that tightness. But we are operating from a higher base in terms of earnings.

A lot of the things that we are seeing right now has been in MR market, particularly in the Atlantic basin, which we saw a little bit of a drop or a substantial drop from mid-April. But apart from the mid-April backdrop in the Atlantic Basin, I think it has performed quite well in the second quarter. And I would argue that rates in the Atlantic basins are buttoned out. And I think even for this morning, the market for the TC2 has increased by 20 points in one go coming out of the box.

So, as we start emerging out of this tremendous turnaround that James was talking about, I think, we are coming into a season with in a very good place. I’m personally very constructive of the rate environment for the second half of the year and also balance of the second quarter.

And I think that the adage of the stronger for longer that people have been banting about certainly is valid from where I sit. Generally speaking when - As per James was talking about the stocks are low refining margins, complex refines are still positive you have got a new capacity that is coming on online.

And I think one of the key components here in terms of where the market is, the connectivity in the regional markets is defining and a fundamental role that is underpinning by this tighter supply that we alternative that we have been seeing.

So generally speaking you are seeing a lot of imports coming further fields the Russian sanctions that everybody knows about, they will continue to influence the supply chains. So, um, I think a lot that we have seen, just to answer your question we have seen is the substantial turnaround in all three regions has been playing a big role.

I think, in April, if I’m looking at my numbers, you had global refining maintenance topping at 9.4 million barrels. And I think by June, July, six million of those refining capacity will return to the market.

You then add on the additional new capacity from AL Azure, which is going to have its third train up and running in the third quarter. Design is at 50% at the moment, that is going to increase as well. So, there is a plenty of additional product that is there to be moved. And I think this is just, to be honest a market correction in terms of the refining turnaround that particular has been strong in April.

[Jonathan Chappell]

Okay. Super helpful. Thank you, Lars. And my second question, I don’t know if it is for James or Robert or maybe come back to you, Lars. It seems like the pace of your one and three-year time charter contract has slowed a little bit from the back half of last year. But if I look at Slide 19 on the upper right hand side, the rate for the MR one-year and the three-year for and the one-year for LR2s have been pretty stable.

So is that just been more of a strategic decision to hold on to more spot exposure, as we go into the back half of the year that Lars just laid out or maybe those rates holding in there, but the liquidity is dried up a little bit?

[Robert Bugbee, President]

Well, I think it is partly that. I think that, if I just take the first question, I think that, all weakness is relative to the thermal point that the market may be slightly weaker than its all time record highs, but we would hardly describe the market that is averaging 40,000 a day in the second quarter bookings as weak.

I mean, that is huge 20 annualized run rate on a $50 odd stock is, thank you very much. And that is important because we are seeing a very steep discount in many points during this first quarter of the actual three-year charter rate to the actual spot market, and what Lars as you correctly pointed out, John, is indicating for the balance of this year.

And at the same time our balance sheet is getting stronger and stronger. And therefore, the requirement or the need or the wish to seek the security of a three-year charters is less when we are getting, such confirmation in the actual spot market and doing it.

I mean, we simply have an incredible situation, where every single report that we are reading indicates that, we are going to continue to see growth in product tanker demand, headline product demand around the world for the balance of the year.

Regardless, that we are reading someone who is very pessimistic about the world economy thinking it is in recession or going into recession. And we know that the actual fleet itself is fixed, and we know that those ton mile multipliers related to the binary - continue.

So I think a lot of it is we have been really choosy that we have hit the record rate on our three-year charters and our LR2s each point over these last three-months. But there is no - there is less of a need because I guess we are more optimistic about what is happening.

I mean think of all the doubt we have been through in this first quarter. What you have been talking about and we end up in the second quarter right now that is really a terrific basis that what we could see going forward.

[Jonathan Chappell]

Yes. That will make sense.

[Robert Bugbee, President]

And we have $800 million of pro forma cash. We are just about to do an incredible refinancing. So that balance to create on Charter Security is really just going now.

[Jonathan Chappell]

Thank you, Robert. Thanks, Lars.

[Operator]

Thank you. [Operator Instructions] Our next question is from the line of Omar Nokta with Jefferies. Please go ahead.

[Omar Nokta, Jefferies]

Thank you. Hey guys good morning. Also Brian, congrats on the retirement. We will miss working with you. You are leaving obviously the company in great shape. We have got pro forma 800 million of cash here. Wanted have to just sort of ask about kind of priorities, and I think Emanuele, you sort of outlined this early on. You have got the 1.4 billion of net debt. Can you maybe rank your priorities in terms of the use of cash for the next few quarters, and if you guys have set yet a target of what you would left that net debt number to get to?

[Robert Bugbee, President]

We haven’t fixed the target for the net debt, but we have said that we don’t intend to go to zero. We are also creating a debt facility on top of other commercial lending debt facilities, which would probably if you added those up would give you some kind of base position, and then you are going to have normal amortization probably from that point, but there is no target yet set.

So we are going to continue really with what we have done for the last quarters, we are going to take down our total debt and we are going to prioritize buying back those sale lease back too. And when the new facility is closed, that is going to really accelerate that basis.

But we still we are able to do all those things and we still have ample capacity to take advantage and create value for our shareholders through buying back stock. If the opportunity at what we continue see as very value creating levels remains.

And that is why we have increased the gone back and we increased the share buyback. I think, we have shown the market that we are not increasing share buybacks for show, we are increasing the share buybacks so that they can be used.

[Omar Nokta, Jefferies]

Yes. Thanks Robert. You bumped the dividend then you have recharged the buyback, the clear indication there. And then maybe just second question would be, asset values continue to move to push higher here. Does that change at all your view on how you have been conducting the business? Does it go from harvesting the assets today versus, say, monetizing down the line? How do you think about that in this context?

[Robert Bugbee, President]

I think, especially when you have got very large spreads now, I mean the spread between our NAV or our calculated NAV and the stock price has only increased in the last three or four months is the cash you have seen has come in.

And look, we are open, and I think it is fair to say that we are prepared and are indeed in discussions when it comes to taking advantage and maybe selling a couple, two, three, four or whatever of the older vessels. That would just be a smart thing to do with - when you have got such a wide discrepancy at the moment.

[Omar Nokta, Jefferies]

Yes. That is makes sense. Alright, well thanks Robert. I will turn it over.

[Operator]

Thank you. Our next question is from the line of Sam Bland with JP Morgan.

[Samuel Bland, JP Morgan]

Yes, thanks for taking the questions. The first one is, I guess we are aware of the sort of more midterm supply and demand picture, but then you have got all these different sort of shorter term effects like refinery maintenance and inventory levels. Could you just talk, I know you touched on those in the opening comments, but where roughly do you think we are on those sort of shorter term effects are we kind of at the peak sort of headwind phase and from here, it in terms of tailwind is refineries activity starts increasing or where roughly do you think we are in that cycle? Thanks.

[Emanuele Lauro, Chief Executive Officer]

Lars, James?

[James Doyle]

I will start. Good question, Sam. Look, I think, for almost two years we have seen massive draws in inventory and right now we look at a market where Russia has been able to export more product than pre sanction levels, but it is unclear if they will be able to maintain those level of exports in the long-term.

And there is a lot of assumptions around those volumes being moved into the market. But I do think the inventory data, if you look specifically at the US because it comes out weekly, diesel is 12% below the five-year average gasoline is something like 7% below the five-year average.

So we are seeing inventories continue to decline despite higher volumes and so I think as we move to the back half of this year, demand is going to increase from a gasoline jet NATA perspective and it is going to be much more than a slight drop in say distillate demand from trucking.

So we are still extremely bullish on the outlook and we haven’t seen anything in our market, whether it is flows or volumes as shown in the graph that suggest things are lower and we do expect a stronger back half for demand this year.

[Samuel Bland, JP Morgan]

Okay. Maybe I could, ask a second one. It is on the order book number. I think, it is 6% in the presentation. I mean, that is come up very slightly. What is your sense of market participants, are we starting to see a real acceleration in orders or would you say it is still quite subdued at the moment? And I suppose, do you have any sort of feeling on where you would be happy for that 6% number to go to and still think that the supply demand was quite healthy? Thank you.

[Robert Bugbee, President]

Maybe I can try that one. I think that, as the orders come in they go further away. So the easy pickings I would say more or less gone and the easy pickings would have been the filling in the end to 2025 - in the early 2026.

So now each step is even more expected to even more expensive to go out and I think that, when you are booking forward the market 2.5 years, I think that, you don’t really begin to even think about things until you are up to a 10% total on order and that itself wouldn’t be very much, now that is just 3% each year and that would just be in, in historic terms.

Now we have a situation where if you look at the graph, the grain change has put up. This is real stress out of that in the industry, in terms of over aging to the product fleet. So you have got to set that in the context of how many ships they are going to be turning 15-years old, turning older over this next three, four, five-year period and that is huge, way more than the 10%.

So I think that we can be - I get the headlines. The headlines now look as if there is an acceleration, there is a little bit of acceleration that is kind of dramatic and it is, oh my god what is happening. But when you put it in the perspective of the actual ongoing fleet, it is not something that we are concerned about at all.

But I think that in general terms, you want to look at tanker fleet or any type of shipping fleet once you cross 10. And then you have to put it in the perspective of what is likely to be moved in the fleet going forward, as to whether 10 is acceptable or above 10 is acceptable or not. But up until 10 here, we are all pretty safe.

[Lars Dencker Nielsen, Commercial Director]

Robert, Lars here. I mean, I just think also, I would just like to add the shifts that you are talking about. They are also going to be struggling to meet the new carbon regulations that they kind of are being introduced in the coming years, right. So there will kind of be more inefficient, and potentially will also kind of increase the scrapping element to it as we move along the line.

[Samuel Bland, JP Morgan]

Understood. Okay. Thank you very much.

[Robert Bugbee, President]

Yes. And I would just like to highlight for everybody. These are the two red lines we see. The red lines we see is the - oh my god, we are seeing these new building orders and the other one is this thing to do is recession headline demand. Because just the increase in jet fuel going along around the world, which is tremendously important thing for the product market, especially new ships or whatever is - we can’t get to a scenario in quarters, where you don’t get continued product tanker demand. And that is even without dealing with just trying to refill inventories, which is required.

[Samuel Bland, JP Morgan]

Thanks.

[Robert Bugbee, President]

Can we have the next question please?

[Operator]

Thank you. Our next question is from the line of Ken Hoexter from Bank of America. Please go ahead.

[Kenneth Hoexter, Bank of America]

Great. Good morning. Brian, definitely good luck in the next phase and thank you for all the help over the years. It has been a great education and learning about the business. So thank you to you and the team, and good luck.

Maybe Robert and Emanuele, you are talking about the oldest fleet or the aging fleet overall kind of very slim new orders some are coming on, harvesting the fleet, maybe selling some vessels at the peak or selling some vessels. Are you then looking at the peak of the market? If we are starting to see those new orders that you are talking about coming in, you are looking at maybe selling some vessels, just how should we step back think about that?

And then as the second part to that, do you need to renew your fleet right as it starts to age here, do you need to go in and maybe it is not expansion, but it is just simply renewal of the fleet. Is that something you would look at or is it just more monetizing at strong levels?

[Emanuele Lauro, Chief Executive Officer]

Well, what we need to do is to provide our shareholders a return and we can get selfish with it. We need to [Jack Welch] (Ph) said, show me how a person is paid and I will show you how they manage. Well, insiders are the largest shareholder of Scorpio Tankers.

So the idea of spelling all the vessel, that is nothing to do with whether or not we think the market has peaked, which we don’t think the market has peaked. It is all about the fact that as Lars pointed out, older vessels are going to become harder to manage over the next couple of years.

Whereas older vessels, we could simply sell the older vessels and you could use that capital to accelerate the debt repayment or accelerate a stock repurchase, depending on if the stock continues to be massively discounted to its NAV. But there is no requirement for us to us to renew at all, and our fleet can quite happily with age and go through for many years going forward here.

[Kenneth Hoexter, Bank of America]

Okay. And then maybe, Brian, if I could bring you back in the OpEx I just want to run through, obviously, you noted it was down because of the fewer vessels. I guess COVID costs came off. Maybe talk about what is going to happen with OpEx going forward, given inflation and your thoughts on OpEx into 2Q in second half.

[Brian Lee, Chief Financial Officer]

That is exactly right. Inflation, so there is still some inflationary pressure and delivery costs and things like that are goods being delivered. So we think it is going, it may take up a little bit higher from where it is here.

So, again, if it was less in between this quarter last year, this quarter this year, and last year is because less vessels, but we do disclose the average daily cost so that is in there. I think that, again, that is going to move up a little bit over the next few quarters here.

[Kenneth Hoexter, Bank of America]

Can we put parameters on that or.

[Brian Lee, Chief Financial Officer]

How much inflation is going to be where our equipment’s going to be delivered? So you can look at it. I don’t know, 2%,3% for now. Maybe around here.

[Kenneth Hoexter, Bank of America]

Okay. alright, great thanks for the time and that is it I guess.

[Brian Lee, Chief Financial Officer]

Thanks Ken.

[Operator]

Thank you. Next question is from the line of Frode Morkedal with Clarkson Securities. Please go ahead.

[FrodeMorkedal]

Thank you. My discussion on the refinery turnarounds and the product inventories, I guess, I have a high level question on arbitrage trading. I guess at least historically it was fascinating to see, let’s say one barrel jet fuel could be resold many times after it was produced. And that led to this very high multiplier maybe four times or five times compared to oil demand in terms of trade. So I’m curious to see or no, how prevalent is this phenomenal today? You actually see barrels moving from, let’s say, Europe to New York and then being resold to other destinations and so on or is this something that could be forthcoming?

[Lars Dencker Nielsen, Commercial Director]

Hi Ford, it is Lars here. I’m going to try and give you a stab at that. I mean, there is no doubt that the product market in general, from a trading perspective is traded multiple times and we have seen multiple times and throughout that we have a change of orders or there is a different trading behavior depending on where that particular arbitrage is.

I mean, of late there has been some spreads going on where you have seen a lot more Caribbean cargos that have been destined to a New York car because of the pricing structure that is product that has initially come from the east of sewers from India or whatever, and you then see them putting them into storage and then breaking bulk and moving different places.

We see cargos moving into the U.S. West coast and in particular into Mexico on the west coast there, which previously would have been cargo that had been sourced out of the U.S. Gulf. And we have seen throughout the first quarter a lot more cargo suddenly being moved into Mexico and the west coast out of north China and Southeast Asia in general.

So in terms of diversity of cargo base and in terms of how that moves around, we see a very healthy level of disparity around - and obviously this is one of the things that we in the product tanker market really enjoy, is the ability to triangulate and that we certainly have been able to see at a large extent, and I have been talking about this before.

In particular in the LR2s we have been seeing how that particular unit has moved from a one-dimensional latent - type of vessel into being a true arbitrage mover. You know, we are today moving LR2s into Japan or North Asia, then reloading in North Asia and China down into Australia. Then we then load again out of Australia and take it back up to North Asia or into the AG or even to West Africa and then load out West Africa, et cetera.

So this whole kind of way of a fungible market and products is certainly still there. I think it is going to remain to say, and because of the kind of very constrained logistical chains that are in place, we will start it to see a lot more of cargos double handling on the back of what we have seen with the Russian sanctions and this obviously will increase ton miles as well.

[FrodeMorkedal]

My second question is on the new refineries in the Middle East, any update since the last time you talked about that and what do you see as an incremental effect on the product tank market going forward?

[Lars Dencker Nielsen, Commercial Director]

So, I mean this is only what I have heard, and it is not something that is -- kind of reported officially, et cetera, but we know that the two out of the three trains that [indiscernible] are up and running, I have heard that the third train is going to become up and running in the third quarter.

And we will at the end of the year, start seeing 640,000 barrels per day of product being shipped out of Q8, which is substantial. That incremental barrel obviously is going to make a marginal - huge marginal change in the supply of vessels as these vessels, that are learning out of Q8 are all going to be going long-haul for large part, particularly the - will be going west of sewers and the light ends will be going east, which again is going to influence the turn mile in a very positive sense.

I have heard that the - refinery is now up and running around 50% and that also is increasing as we set out the second half of the year. So, there is a lot of additional capacity that is just about to come up and running they are already open. We can see already on the volumes that are coming out of both of Q8 and out of - and the Red Sea has made a fundamental impact in product tankers, not only on LR2, but also on the MRs. And that is certainly is something that we are very happy with to see. That will increase again in the second half of the year.

[FrodeMorkedal]

Perfect. That is great market color. Thank you.

[Operator]

Thank you. Our next question is from the line of [Cherif Al Megrali] (Ph) with BTIG. Please go ahead.

[Unidentified Analyst]

Good morning. Thanks for taking my question. I want to ask how are you thinking about returning capital going forward, because the dividend saw a nice boost and also the share repurchase program got reset. Obviously, the standard leasebacks are a priority, but it is looking like you have a line of sight on that now, which are free of more cash flows for other activities?

[Lars Dencker Nielsen, Commercial Director]

Sure. Well, I think we just look what we recently did. We bought back a lot of stock in the first quarter and I can’t remember exactly what it was, but it was 5%, 6% of the company. And we can see that is projected to be going down and the cash and liquidity is as high or higher than it was at the beginning of the first quarter and the rate guidance is higher, the stocks moved nowhere. So you would expect that, that would be a strong priority of allocation of capital at the moment, combined with the continued strategy of taking debt down.

We thank you for observing the dividend. We said before that, we are raising our regular dividend. We are doing it in increments that can be some kind of guide to the future and we are not going to go to percentage payout positions, but we would always leave it open, if required to do extraordinary dividends.

But all these, that really depends on where the value is in the stock price. You have a major dislocation right now between - don’t forget actual NAV that is one way of measuring it. As James pointed out to the present run rate, we are nearly making something $20, $21 a share in cash flow on a pretty new fleet, and that is on an annualized basis and we then combine that with the largest view of the market.

If you forgot cash flow, you are basically indicating that, that is going to - the value in the company is even going to be more discounted going forward, but that isn’t overwhelmingly high priority at the moment, because of that, or has been in that first quarter period.

[Unidentified Analyst]

Thank you very much.

[Operator]

Thank you. Our next question is from the line of Liam Burke with B. Riley FBR. Please go ahead.

[Liam Burke, B. Riley FBR]

Thank you. Has there been - I know time charter activity has sort of flattened out here, but has there been any recognition by customers that there is a impending shortage as the MRs age for them to start time chartering either on longer durations or higher rates?

[Lars Dencker Nielsen, Commercial Director]

I just want to say that there is still a decent inquiry for TC business, even with the kind of the slow - the very brief slowdown that we have seen. I think, it is fair to say that end users share the same constructive view of longer-term market rates. And we see plenty of questions coming across rates still at elevated levels compared to last. And the last time I have seen this type of interest for three to five year time charters is probably mid 2000s. So there is plenty of interest out there.

[Liam Burke, B. Riley FBR]

Okay, great. And the balance, I mean, you talked about the dividend and buybacks in terms of the balance, but is there an NAV for your fleet that you consider when looking at your buybacks, or is it just stock price?

[Lars Dencker Nielsen, Commercial Director]

No, of course. We look at the NAV, and we look at the cash flow, and we look at what we can afford to go back to the questionnaire before. I mean, you can see what is happening in this balance sheet, and there is going to be - we are not going to take the debt down to zero. You don’t go and negotiate $570 million of bank credit and then negotiate up to a billion with the idea that you are going to pay the whole thing down in a year. That would be massively inefficient. So, we are going to have a base level of debt.

That level is going to be very low compared to not even the real loan-to-value, but it is going to be very low to the book value of the company, which is substantially lower than where the loan to value is.

When that point is reached ,obviously, if you have still got a huge amount of cash, which we would hope to have too, all of the income coming in then become surplus to what is happening. So when you are measuring buybacks, the net asset value is only one guide. We are trying to model for where the company is worth in the end of the year.

We are also trying to - in two years, three years, we are also trying to model it in terms of if we got something wrong, if there is something that we can’t account for and let’s say values were down30% or something. So you look at it that way at the moment, it is not too difficult to calculation either way.

[Liam Burke, B. Riley FBR]

Great. Thank you Lars.

[Operator]

Thank you. Our next question is from Chris Robertson with Deutsche Bank. Please go ahead.

[Christopher Robertson, Deutsche Bank]

Hey guys, thanks for taking my question and Brian, good luck with retirement. Best wishes towards you into the future. I just wanted to ask here around the scrubber fuel spreads come down a bit over the last few months. Can you comment about what’s been driving that? Do you think this is a structural change or is this a seasonal effect?

[Lars Dencker Nielsen, Commercial Director]

I will take that one. Hey, Chris. I don’t think it is structural. I think if you look at the demand for high sulfur fuel oil, it is predominantly for vessels with scrubbers and for power generation in the Middle East. I think the pressure is coming from distillate and you have seen distillate parts come down, you have seen diesel prices come down, and it is just a reversal of kind of what we have seen for the last two years.

You have had a very, very strong and tight distillate market. You know, people have been worried about shortages, and so it is probably an overreaction to that. But for the foreseeable future, we are still constructive on that spread. Does it hit the high 300 s as it has in the past? Maybe not, but a 102, 250 I think is a reasonable range.

[Christopher Robertson, Deutsche Bank]

Okay, thanks for that. And just following-up on a few questions from earlier around kind of the new building orders, and this really relates to shipyard capacity. So as you look at the aging fleet, not only on the product side, but also the crude side and in the drywall market as well what are your thoughts on our capacity to be able to handle kind of these fleet renewal efforts that seem to need to be done and shipyard capacity can that be ramped up over the coming years to accommodate all these things or do you think there will be a crunch which further kind of limits fleet growth?

[Emanuele Lauro, Chief Executive Officer]

James?

[James Doyle]

Well, I was actually looking at shipyard capacity, and if you compare to historical levels, it is certainly down. I wasn’t looking at other sectors, I was really looking at products, but if you look at the MR fleet that is on the water today, I think something like 800 or since delivered actually. So out of 2,200 chips, I think 800 are from shipyards that are no longer active.

So there is certainly capacity but I think the best answer to your question is if you wanted to order a lot of ship today, they wouldn’t come till 2026. And that is what you are seeing with the last couple orders and 2025 is full.

And so I do think there is going to be a constraint on the capacity site. But even if you were to order hundreds of ships given the age distribution of the fleet, there is going to be more ships turning 15-years to 20-years old, then it will be delivered over the next couple years.

[Christopher Robertson, Deutsche Bank]

Got it. Alright, thanks for your time, I appreciate it.

[Emanuele Lauro, Chief Executive Officer]

Thanks Chris.

[Operator]

Thank you. This concludes our question and answer session. I would like to turn the conference back over to Emanuele Lauro for any closing remarks.

[Emanuele Lauro, Chief Executive Officer]

We don’t have any closing remarks. Rather than thanking everybody for the time today. So we will speak to you soon. Thanks a lot. The call may be concluded.

[Operator]

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.