Scorpio Tankers Inc
NYSE:STNG
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Scorpio Tankers Inc
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Hello and welcome to the Scorpio Tankers Inc. Second 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.
Thank you for joining us today. Welcome to the Scorpio Tankers, second quarter 2023 earnings conference call. On the call with me today are, Emmanuel Lauro, Chief Executive Officer; Robert Bugbee, President; Cameron Mackey, Chief Operating Officer; Brian Lee, Chief Financial Officer; and Chris Abella, Chief Accounting Officer.
Earlier today, we issued our second 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, August 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 andsec.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 in not 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 scorpiatankers.com on the Investor Relations page under Reports and Presentations. These 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 an additional question, please rejoin the queue.
Now, I'd like to introduce our Chief Executive Officer, Emmanuel Lauro.
Thank you, James and thank you for joining us today, everybody. We are pleased to report another quarter of strong financial results. In the second quarter, the company generated $235 million in EBITDA and EUR 133 million in adjusted net income. The product tanker market has been and continues to remain strong. And to put this into context, over the last six quarters, the company has generated $1.6 billion in EBITDA and $1 billion in adjusted net income, during which we have reduced our leverage by $1.3 billion and repurchased $582 million of the company shares.
Deleveraging and returning capital to shareholders has been our primary focus. In the second quarter, we repurchased $260 million of the company shares which is almost half of our total repurchases since July 2022. The increase in share repurchases reflects the progress we have made on deleveraging and refinancing the balance sheet. We view the repurchases as valuable for our shareholders given that the shares are trading at a large discount to the company's net asset value.
Our balance sheet continues to improve. Today, we have $683 million in liquidity. In July, we closed our $1 billion term loan and revolving credit facility. We are in the process of closing a new $94 million credit facility. These new facilities combined lowered the company's interest margin, accelerate the repurchases of more expensive lease financing and increase the financial flexibility of the company. Looking forward, we expect low global inventories, a robust demand and limited fleet growth to support strong product tanker fundamentals. We would like to thank you for your continued support.
And I would like now to turn the call over to James for a brief presentation, James?
Thank you, Emmanuel. Slide 7, please. We've seen an elevated rate environment since Q1 of last year. And as Emmanuel highlighted, over the last six quarters, we've generated a little over $1.6 billion in EBITDA. And since July 2022, we have repurchased $582 million of the company's shares and paid $49 million in dividends.
We had 15 vessels on time turnout contracts and the remaining 97 vessels operating in the spot market. Slide 8, please. We continue to repurchase vessels under expensive lease financing and have started to refinance some of these vessels under new bank facilities with lower interest margins. To the right, you can see the list of vessels that have been repurchased and are upcoming. As of today, we have repurchased or repaid the outstanding debt on 46 vessels.
In July, we closed our new $1 billion term loan facility and we're in the process of closing a new $94 million bank facility. The margin of lease financing ranges from LIBOR plus 350 to 525 basis points and our new one of facilities have a margin of SOFR plus 170 to 197 basis points.
Slide 9, please. We've made significant progress in reducing expense of lease financing from $2.2 billion to $1 billion today. Timing differences between repurchasing vessels on lease financing and drawing down on new facilities means that at times, it appears increasing. Vessels with lease financing with periods in which they can be repurchased. The majority of vessels under lease financing can be repurchased within the next 12 months and there are additional vessels that we expect to repurchase this year. So, we will continue to reduce our leverage. I just wanted to highlight the timing.
Given the strong earnings and proceeds from new facilities, we expect to have an elevated cash balance but keep in mind, a portion of this will be used to repurchase more vessels on lease financing.
Today, as Emmanuel I mentioned, we have $683 million in cash. Slide 10, please. Well, gross debt will increase slightly in the third quarter. Net debt has remained around $1.5 billion to $1.6 billion over the last three quarters. And as of today, this declined and is currently at $1.4 billion. With no newbuildings on order, we have minimal CapEx and feel very well positioned.
Slide 11. The company has significant operating leverage in Q2 so far, including time charters that is averaging $26,000 today. But as you're aware, rates have increased significantly over the last two weeks and MRs are now at $34,000 a day and now August north of 40. At $30,000 a day, we generated almost $800 million of free cash flow per year and at $40,000 close to $1.2 billion. These are certainly exciting times.
Slide 13, please. In the second quarter, significant refinery maintenance, lower refining margins and reduced our betas opportunities led to lower trading activity and a decline in rates. MR 2 saw a larger decline as Asian refinery maintenance, limited naphtha arbitrage opportunities and competition from LPG reduced long-haul volumes going from the Middle East and Asia.
MR rates remain much more stable, reflecting the strong underlying global demand for consumer fuels such as gasoline and jet fuel. Despite these headwinds, rates remained well above cash breakeven levels and many of the headwinds in Q2 are in the process of reverse.
Refining margins have seen a large increase in July and remain at very strong levels on a historical basis. The naphtha LPG spread has improved and the forward curve suggests Naphtha substitution for LPG will occur over the next several months which is very constructive for the LR2s.
Unplanned refinery outages and historically will inventories create a scenario where any supply disruptions will lead to increased volatility in higher rates. And lastly, rates have increased significantly over the last few weeks and we think they're going to remain strong through the rest of the year.
Slide 14, please. Global inventories are well below the 5-year average for gasoline and diesel. It doesn't matter what region or what product they're extremely well. And typically, diesel inventory is still in the summer months ahead of a strong winter demand season and we have seen minimal builds at the name. This is very constructive for a tight market in the back half of this year and highlights how robust demand has been.
Slide 15, please. Forecast for refined product demand for the second half of this year and next year have the revised upwards. Second half 2023 demand is expected to be 2 million to 3 million barrels a day higher this year than last. In our view, this is one of the most bullish driver for strong freight rates, 2 million to 3 million barrels of additional demand year-over-year against historically low inventories. While diesel demand is expected to increase at a slower pace due to lower trucking activity, the demand for gasoline, jet fuel and naphtha are expected to see large increases. We are seeing this demand on the water today.
Seaborne volumes remain extremely high and are averaging 1 million to 1.5 million barrels a day more than 2019 levels. Given low global inventories increased consumption will continue to be met through imports with product tankers reallocating barrels within the world.
Slide 16, 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 and flows for the coming years. The impact of new export-oriented refineries coming online like Australia and Kuwait have led to an increase in export in the Middle East. We are also seeing the impact of European sanctions on Russia. Europe has increased its imports from the U.S. and Middle East by 600,000 to 1 million barrels of bags. All of these changes are driving an increase in ton miles as ton mile demand increases, investment capacity is reduced and supply tightens.
Slide 17, please. Over the last few months, Russian exports and refined products have declined to more normalized levels. And greatly, our vessels that are servicing Russian volumes has increased significantly to 353 vessels today, of which 277 are Handymax and MR vessels. Vessels which move into sanctioned trades reduced the supply of vessels in non-sanction trades. The impact of vessel service in Russia is expected to have a significant impact on the capabilities of the global fleet going forward. Many of the vessels which have moved in this trade are 13 to 15 years old and will likely not return to the premium trades given their age and trading history.
Slide 18, please. If you recall, in December, rates reached record levels while the order book was near an all-time well. And over the last 18 months, we have experienced a strong rate environment, evidenced by the volatile blue line in the graph. From a cyclical perspective, hopefully, we are in July 2003 or even July 2004. But historically, as product tanker rates increase, so the orders from new vessels. Thus, it's not surprising that we have seen additional orders.
The rationale for ordering, a strong spot market, healthy long-term time charter rates, constructive demand outlook and aging fleet is a good reason. It's also a good rationale for investing in product tanker company. Slide 19, please. The increase in the order book has largely been driven by LR2 orders, 49 vessels year-to-date. While LR2 orders are elevated, MR orders are below their 5-year average this year and well below stoical averages. And up until this year, LR1 orders have basically been nonexistent with only 12 LR1s ordered from 2016 to 2012. So, part of the increase in LR2s is to compensate for the aging LR1 fleet, similar to how MRs have largely replaced Tani Max vessel. And within LR2, we have the optionality to trade in the crude market, less than 50% of the LR2s on the water today are trading clean products.
In addition, there are constraints to ordering new vessels. There are long lead times through the delivery of newbuild vessels. Orders placed this year were for the earlier slots of the shipyard. These slots are now gone. New bills are expensive compared to historical levels and the cost of capital was higher with rising interest rates. A new build LR 2to $71 million with the 2026 or 2027, delivery date will require a high breakeven rate and needs a constructive market.
Lastly, there are still concerns about different propulsion systems which are required to meet future environmental regulation. All of these factors act as a constraint. Slide 20, please. When thinking about new building orders and fleet growth, the age and training profile of the fleet must be considered. The product tensile fleet continues to get older and age and this is important because as the product tanker becomes older, the coatings which make them a product tanker develop issues.
Every product pancan the water is not trading clean products. Only 60% of the Handymax and LR2 fleets are trading clean products and 70% of the LR1 fleet. Older vessels moving to trading dirty products or crude oil. Although you do see our two vessels move into these trades earlier, it does need to be accounted for. Given the age of the fleet, we expect more vessels to move into these crude oil trades as they get older, while the increasing number of vessels years and older become scrap candidates.
By 2026, the product tanker fleet will have 954 vessels that are 15 to 19 years old and 811 vessels 20 years and older, an increase from 349 today. These changes will have a material impact on the fleet. And last, scrapping is at an all-time well and we do expect scrapping to increase as vessel age and environmental regulations increase.
Slide 21, please. Putting this all together, despite an increase in ore in orders, the order book remains modest, using minimal scrapping assumptions on average, the fleet will grow less than 2% a year over the next three years, using higher scrapping assumptions due to fleet age and upcoming regulation, the fleet will grow less than 1% per year. Seaborne exports and ton-mile demand are expected to increase 4% at 11.9% this year and 3.4% and 6.3% next year, vastly outpacing supply.
In addition, 1-year and 3-year time charter rates remain at high levels, evidence that our customers' outlook is one of increasing exports and ton miles against the constrained supply period. The confluence of factors in today's market are constructive individually, historically low inventories, increasing demand, exports and time miles, structural dislocations in the refinery system, rerouting of global product flows, limited fleet growth and upcoming environmental regulations. Collectively, they are unprecedented.
With that, I would like to turn it over to our President, Robert Bugbee.
Good morning, everybody. Thanks so much for joining. On behalf of the management, this is a great time to be invested in STING and a great time to be further invested in STING. We're happy with all the buybacks we've been able to do. I'd just like to point out a couple of things. I think that we think is really important and we focus on is, first of all, the liquidity and the financing that's being done, that gives us tremendous amount of flexibility going forward. We've shown during this quarter that we're willing, we're wanting to sell older vessels to improve the arbitrage as well opportunity between NAV and the stock price.
And the other thing is the rates is, I think I'm going to borrow from John Chappell here, one of our analysts but it's most important where the market is going as an investor as opposed to where it's been. And the market right now is going up. It's inflecting upwards from a very, very strong weaker period that we've had for a couple of months, I mean, to average what we've averaged in our booking in what is the weakest part of the year is fantastic. Many for many, many years, that would be a high number, the average that we've got.
The next part of it is we're already earning a very large number, as James has pointed out, the 30s, mid-30s in the MRs moving through into the 40s on the LR2s, the LR2s continue to go up today. So, that creates a lot of confidence for the company going forward.
And with that, I'd just like to thank you all again and open up for questions.
We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Omar Nokta with Jefferies.
I wanted to follow up a bit on just, Robert, your comments about where rates are. And also, I know James, you touched on this. But it seemed that product tanker rates have settled in here into the typical summer doldrums that we've seen in the past. And what we've actually seen over the past, say, two to three weeks is a real resurgence and it's really across all the product segments. And this is happening while we've seen some weakness or further weakness in the crude tanker side of things. So I just wanted to ask maybe a bit more if you could just dive a bit deeper into it. What's been driving the market here recently? What's behind the latest jump? And what can we expect going forward here?
Sure, James. I'll go first on this. I think that the first thing we've seen is refinery margins really widened to the positive here. And we've seen, let's say, a change, a big change in sentiment. I think we've moved from all, we really like a recessionary view on oil and consumer demand in products as is expressed by the paper market into the physical market now overwhelming things. I mean is the refutable that demand is going up now. We're seeing this in this constant drawdown. And then as the prices of oil moved upwards and the prices of refined products moved up even higher than the price of oil than people are starting to -- they can't just sit there and do anything, nothing at that point. They have to start to engage in the market. And so, I think as usual, all of these things except in periods of hurricanes or war, this is being demand-led. And we had a market that was very tight anyway, as explained this week we saw the doldrums was at very high levels with very high utilization. So, as soon as you put this demand in, that was going to move the rates higher.
Thanks, Robert. That's helpful. And then maybe just as my second question as a follow-up, given the market strength in corp, you guys have a sizable critical mass across the LR2s and MRs. In prior quarters, we're able to put away some of your ships on period contracts. How would you think about it now? I think it was 15 ships now that you've got on TC. What does the liquidity look like for that market at the moment given the sort of run-up we've been seeing? And is there appetite for Scorpio to add more?
Well, I think we've seen that one of the other encouraging things and the supportive to James' view of the long-term fundamentals here is that 3-year forward rate was hardly changed in this period. So again, the physical market to just move through this period, not referencing to the paper market. And right now, this is a very, very strong move and it's surprised us we've had to act very quickly to do this. We knew the market would go up, you can never find that actually work out that exact inflection point. And then inflection point started happening 10, 12, 13 days ago. Right now, it's just not the time to look, to put ships out on time charter. You've got to let this come because Europe is exposed itself now on diesel. The United States is becoming exposed everywhere we've got the movement. If we start seeing more movements from the Middle East or product and more movements from Chinese exports, then this market could really run as we start to move into the stronger season. So right now, it's not the time to negotiate time charter out.
Thanks, Robert. It makes sense. That's all for me. I'll turn it over.
Our next question comes from John Chappell with Evercore ISI. Please, go ahead.
James, I want to tie together a couple of points that you brought up going in the second half of the year, both the low inventory starting point and then also the 2 million to 3 million barrels of incremental demand. We've been early before with inventories drawing below historical levels. Where is the incremental 2 million to 3 million barrels of supply going to come from? And when you think about that from a global map perspective, does it continue to extend the ton miles that we've seen over the last six quarters? Or is there a chance it could be a bit more regional, just given the maybe panic going into the winter to meet that demand?
Well, I think we have this scenario now where inventories are so low and we saw it last year, where any type of supply disruption. So there's been some impacts to some refineries in the U.S. Gulf, for example. We'll have to be met with imports from different places. So I'd say it's going to be a combination of long-haul and regional. I think if you're looking at remaining places with capacity, it's really the Middle East and China. Robert did mention that we could see Chinese exports increase here if they issue a new batch of Cordis [ph] which seems likely. And I think you do have some more capacity out of the Middle East. We have seen, for example, Al Zour refinery which has two out of the three CDUs up and fully running, have a material impact on the export market. But I do think given how strong demand is, it's going to have to be a collective effort.
Okay. But just to be clear, I mean, you do expect that incremental demand to be met with supply and not kind of further inventory draws below 5-year averages?
The projections we're looking at, it's very close. So obviously, for example, if you were to lose more Russian barrels or there were to be more disruptions in European or U.S. refinery, things could be very difficult. You could see draws. And we're seeing a lot of draws on the crude side right now as well.
Okay. Second question relates to the fleet. You've sold the vessel just recently as I look at the fleet age, there's still a handful that are over or at or over 10 years old and then, of course, a much greater handful to become 10 next year. When you think about the ARB of the current stock price and asset values right now, should we expect more maybe monetizing a bit of the older vessels as we go to the back half of the year if this areas?
Yes. But as we stated on the last call that the last quarter and as we've evidenced by the sale of the first one, we're willing to do that. That would be disruptive, we're doing it slowly.
Yes, all right. Thanks, Robert. Thanks, James.
Our next question comes from Ken Hoexter with Bank of America.
This is Nathan Ho dial in for Ken. I just wanted to follow-up on Omar's original question on sort of the bifurcation between the feed and the product tanker markets. I mean over the quarter, we've heard of some tankers dirtying clean product vessels. Maybe if we could just get some comments on just firstly, the economics there and how we should think about the capacity tailwind that represents for the product tanker market?
Sure. Well, Nathan, a lot of the switching from LR2s was really started kind of in Q4 last year. I'd say you've probably seen at least 20 vessels move over into this trade. And you have had a strong Aframax market. I think for these smaller crude vessels, there's a lot of new capacity coming online from Latin America, Africa and the U.S. which benefit these vessels and ton miles have obviously increased. I think on the clean side, what you've seen is obviously a challenging market due to kind of the naphtha arbitrage and then obviously lower distillate volumes but we see those things reversing. And so I think as we look forward, we expect both markets to be tight, especially on the product side which we know more about on the crude side, obviously, we've been a little bit less.
Got it. And just as a follow-up on capital strategy. Just want to get a sense on how the team is looking at deleveraging from here. Obviously, a lot of debt being shed over the past year and the past few quarters. Is there a target leverage level? Or is this more of a target vessel breakeven TCE goal that we're trying to achieve here? And maybe just also update us on where that 17,000 level could potentially trend, say, into 2024?
So James, why don't you do with the 17,000 and I'll deal with the other answers.
Yes. So we expect the breakeven to come down. They're probably a little bit higher than that '17 because of the timing of the lease repayments. So, with the leases we have to give notice and there is a specific period or time of the year which you can repurchase the vessel. So as much as we'd like to go off and repay those vessels today. We can't do that. The good news is, most of the lease debt around $1 billion and those vessels associated with it can be repurchased over the next 12 months. So, you will see continued announcements from us that will give you better insight as to how many vessels and the timing on that. But right now, we haven't disclosed it yet. But obviously, over the next 12 months, we do expect breakeven to the client. And you have had higher interest rates as well during this period.
Yes. With regards to the debt level, that's not a question we ready to answer. We can see from the terms we've got anyone can see from the terms of lenders. Historically, the debt level already is really low on a historical basis. But we will -- the question of how you can reduce continues to reduce the debt level as we've mentioned potential further sale of vessels. We've said how confident we are in the rate environment going forward. And I think that those two combined things will lead to the ability to both repay, both lower debt plus do whatever else we want to do.
Our next question comes from Sam Bland with JP Morgan.
I've got sort of one question with two parts. First one is, can we just touch on the disruption and market tightening from sort of the Russian sanctions impact. Whatever the impact is related to Russia, is that now done and we've sort of seen the full impact of that? Or is there some further market tightening related to Russia that may come through, whether it's from the dark fleet or anything else? And the sort of the second part which you related to that is I see on Slide 21, there's another 6.3% tonne-mile demand expected in '24. Where do you think that comes from? Is it sort of general global growth? Or is it related to Russia or anything else?
Yes. The next year's forecast for ton miles of the 6.3% to about 3.4% of that is just exports and the difference, 2.9%, is ton miles. And that's really going to be driven by Middle Eastern exports and the capacity coming online as well as some potential closures in Europe and emerging market demand. So, that is not including any displaced Russian volume. I still think there's more upside to the dislocation as a result of the conflict in Russia and Ukraine. But we have seen a majority of that impact. I think the biggest contribution from that will be what happens with the gray fleet over time. So there's a lot of vessels, say, 12 to 15 years old that have moved in to service these trades. Now, these vessels are older and they'll have potentially a dark trading history.
So, I think as you look forward and with the fleet, I mean, we're talking 10%, 11% of the MR fleet is servicing this trade. So, it's going to have a long standing impact on fleet supply and trading dynamics. And that part, I don't think we've seen yet. In terms of the volumes moving to the Middle East, Latin America and Africa, I think we have seen those. And obviously, we highlighted we've seen an increase in exports from the U.S. and the Middle East to Europe. So I'd say that part we have seen.
Our next question comes from Frode Morkedal with Clarkson Securities.
Good presentation on the question so far. Yes. I guess the key words so far is demand and you mentioned demand led. So I guess there's certainly many moving parts to demand, right? You have the Chinese product exports that may return, Russian products, exports, some mining shift, new refining capacity, refinery maintenance is malty oil demand, of course, crack spreads, arbitrage trades, low inventories and on and on, right? So many vendor demand factors. The question really is which one is the most important one or should have the greatest impact in the near to medium term?
I would say, headline demand. I mean, I think the headline demand creates comfort for all of the players and create urgency for those players who are perhaps short. So if we continue to move from this first half recession fear that older the headline oil demand and product demand will fall as a result of recession. And we move towards understanding and immittance by various sort of participants, whether they're government or anything else that's happening, then that creates an environment where if you're short product, if you are short diesel, for example, in Europe going into winter, while you better come forward and start buying. And so that, I think, is the most important thing because it forces the market to sort of act in a sort of cohesive way. And it's too difficult to estimate any way on a day-to-day basis, whether that's going to be coming from the Middle East or China or wherever but I would start there.
My second question is on the Russian trades. Our peers that crude exports are coming off the boys to speak. But how is the situation for products now?
You've seen similar to crude, you've seen products come down to the more normalized levels. Part of that is probably due to OPEC. But I think part of it is the increase we saw right after sanctions kind of in March where exports at 2 million barrels a day would kind of a buildup that they have had and trying to put more on the market. Obviously, refineries have to go through maintenance. And even in the U.S. Gulf for our other export regions, you can't run at 95% and high 90s for an extended period which would suggest kind of the exports that they had. So, I think we're going to see them on a more normalized level similar to what we've seen kind of historically maybe around 1.5 million barrels a day.
And this is related in the market?
Yes. Frode, I think what will be interesting to is we approach at where is watching Europe now because last year, they were able to esprestock ahead of Roxane sanction and at the same time, had a very mild winter. So if you go into the winter with lower inventories than, let's say, last year in October and or more or less the same as last year and you have the Russian situation that you do and James described, it's going to be put the sanctions are in place. It's going to be much harder to pre-stock to winter.
Our next question comes from Sherri Elmaghrabi with BTIG.
First, drilling down a bit more on what's going on with Russia. Certainly, there's potential for more upside. But with Russian oil crossing the price cap, are you seeing some tankers return to other trades because after rates look like they've created in some places? Or are some LR2s switching back to the clean trade? Or is it too soon for that kind of shift?
I think it's way too soon for that. And it's just not easy to it's not easy anyway to take crude ship and throw it into and clean it up. You're not going to do it at the present spread. The older the ship is, the more difficult it gets and may be really difficult. And then some of these vessels that have traded to Russia, are almost certainly not going to be accepted by the charters involved in the, let's say, the free market clean petroleum trade. You've got to clean up and then you've got to be allowed to trade the actual product itself.
And then maybe to follow up on vessel sales, we've seen the pace of new build orders really pick up over the last few months. How are you thinking about fleet renewal at this time if you're thinking about it at all? I realize newbuild prices are looking pretty full.
You mean STNG itself or general?
Yes. We know we could do both but I was meeting STING specifically.
We're not thinking about new build this thing at all. I would be very, very low down on the capital allocation list. So much better to buy your own stock than to order a vessel that probably when you come until 2026 or whatever anyway. And I think that's the thing we have to do to realize here is the way that the new building order book has been elongated in time to. So yes, there are more orders that you haven't shifted what's coming in '23. You haven't shifted what's coming in '24 and you haven't shipped what's coming in the first half of '25. So, if you just do the simple math of take a dollar, do I want to spend that dollar and have investor delivered in 2026? Or would I take that dollar and put it in staying Apnea or Admo for example getting a benefit to the cash flow right at the front is not a comparison, especially when STING has such a new fleet anyway.
Our next question comes from Liam Burke with B. Riley FBR.
Back on capital allocation, you've been clear about debt reduction, your buybacks earlier. I mean last quarter, you bumped your dividend from $0.10 to $0.25. Is this a dividend you anticipate paying through the cycle? Or are you going back and looking at that payout as possibly bumping it or maintaining it?
I think a lot of that depends on where the stock price is right now. Again, at this particular point I think an investor, the investor as opposed to a speculator or whatever would really want the company to use the cash flow or use the marginal dollar right now in stock buybacks than paying out a dividend that everybody gets taxed on. So, the dividend part can wait. This is a situation where the company has just had a fantastic quarter. It created great cash flow. It's refinanced everything. The market is going upwards. We're going into a great future dynamic. We just felt that it just wasn't right to increase the dividend at this point with the stock trading at such a dislocation to the fundamentals.
Fair enough. And I guess this is for James. Things are getting a lot better at the macro. We're looking at a creeping order book here. Some of the offset would be recycling. But what gets that activity going? We haven't seen that in a few years.
No, it's a great question. I think just the number of vessels that will turn 20 to 25 years over the next two years is so massive that you're going to have vessels that kind of serve tertiary markets or trades and those vessels are going to be scrapped. I really think you're going to see it first as a part of environmental regulations as well. But it's a staggering number of vessels, I think it was around 900 or 800 vessels will be 20 years and older by 2026, up from 350 today. So it's a massive number. So we do think those will be scrapped. And I think you also have to factor in the age of the fleet. There's a lot of vessels that are kind of 15 to 19 that are going to move into the crude oil trade. So we still think the order book is modest and fleet growth is extremely low, especially on a historical basis.
Great. And then just as a follow-on. As your vessels age into that category, I mean, it's been a while. Do you have to think of a trade-off between selling it to or the NAV versus just throwing it into the crude market?
That's what we are doing as we have been doing and what we just said, we will continue to do.
Our next question comes from Chris Robertson with Deutsche Bank.
James, you kind of outlined minimal CapEx this coming quarter as well as next. And I'm wondering what does this translate into in terms of off-hire days? And are there any utilization factors in terms of ships moving in and out of the pools in the coming quarters that could impact operating days?
Sure, Brian. Yes, the off-hire days are minimal. We don't have many dry docks in the next half of the year, in the next two quarters. As you see in the table in the press release, fiscal '24, it's more escalated because of just the number of vessels coming due for their special surveys. So for that reason, the CapEx is minimal in the coming quarters.
Okay. And then in terms of the utilization, any impact there with regards to ships moving in and out of pools?
I wouldn't say that's material.
Okay. My second question is just around the step-up in vessel OpEx from 1Q to 2Q. Do you guys see any further cost inflation or pressure is expected for the remainder of the year?
I think Q2 is going to be a more normalized run rate for the remainder of the year as opposed to Q1?
Okay, great. Yes, that's it for me.
This concludes our question-and-answer session. I would like to turn the conference back over to Robert Bugbee for any closing remarks.
Thank you, everybody. We appreciate your support and your interest. And everybody, enjoy the summer and we look forward to speaking to you again in the near term. Thanks very much.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.