Scorpio Tankers Inc

NYSE:STNG

Earnings Call Analysis

Scorpio Tankers' Strong Q3 Performance

Scorpio Tankers has had another strong quarter in 2023, notably generating $200 million in adjusted EBITDA. Key to its success have been high global demand for refined products, a dislocated refining capacity, and a constrained maritime supply. The company has significantly improved its balance sheet, reducing its net debt to $1.3 billion and RSA leaseback financing from $2.3 billion in 2022 to €730 million. They plan to repay an additional $460 million in financing this fourth quarter. Scorpio Tankers repurchased nearly $80 million in shares this quarter, totaling over $530 million returned to shareholders year to date. The quarterly dividend has increased from $0.25 to $0.35 per share. Looking forward, strong fundamentals in global product tanker markets—low inventories, robust demand, and limited fleet growth—are expected to continue driving growth.

Robust Performance with Positive Outlook for Product Tanker Fundamentals

Scorpio Tankers Inc. has reported a strong financial performance in the third quarter of 2023, with the company generating $200 million in adjusted EBITDA. This stands as a significant achievement, particularly as the traditional slow season and refinery maintenance periods have come to pass. The persistently high rate environment observed over the last six quarters has shown no signs of waning and continues to bolster Scorpio Tankers' financial results.

Aggressive Debt Reduction Strategy and Rewarding Shareholder Confidence

The company's aggressive approach to managing its debt is evident in the reduction of RSA leaseback financing from a towering $2.3 billion in 2022 to a much more manageable EUR730 million. This aggressive decrease is complemented by the planned repayment of an additional $460 million in financings, strongly underlining the robust health of the company's balance sheet. In parallel, demonstrating confidence in its financial stability and future prospects, Scorpio Tankers has not only renewed its securities repurchase program for up to $250 million but has also raised its quarterly dividend from $0.25 to $0.35 per share, signaling a healthy and positive stance towards rewarding its shareholders.

Consistent Rate Improvement Fuels Optimism

An upward trajectory in rates since early July has been both consistent and broad-based, an optimistic sign that underscores the company's strong operational performance. To capitalize on these favorable market conditions, the company has initiated a vessel repurchase strategy. 56 out of 76 targeted vessels have been repurchased, providing Scorpio Tankers with more control over its assets and potentially lower interest costs following refinancing activities.

Solid Balance Sheet and Promising Free Cash Flow Generation

Scorpio Tankers' balance sheet strength is further highlighted by an impressive reduction in net debt by $1.6 billion, with net debt sitting at $1.3 billion. Additionally, the company boasts $521 million in unrestricted cash and $280 million available under its revolving credit facility. With no imminent capital expenditures due to the absence of newbuilds on order, the company generates around $800 million in free cash flow per year. The enduring strength in tanker rates, with spot rates for different tankers well above the $30,000 per day mark, coupled with low inventories and high demand for tankers, propels the company into a formidable position.

Demand Surge and Tanker Rate Dynamics

The company anticipates a surge in fourth quarter demand for refined products, with expectations set at 2.6 million barrels a day higher than the previous year. This is set to continue into the following year, with average demand expected to rise by 1.3 million barrels in comparison to the 2020 period. With year-to-date Clean Petroleum Product (CPP) exports averaging 1.4 million barrels a day, the company positions itself strategically within a market ripe for growth, ready to meet the infusion of international demand through tanker imports.

Industry Dynamics Steering Towards Higher Demand

The industry landscape is shifting, with significant changes such as the need to replace refinery production lost in Australia, leading to a stark 48% increase in product imports since 2020. This, combined with various regional demands, refinery configurations, and increased long-distance exports from the Middle East, primes the product tanker market for escalated demand and utilization. The product tanker industry, thereby, finds itself at the center of an intricate balancing act, tasked with navigating the complexities of surplus and deficits across global regions.

An Aging Fleet Amidst Regulatory Changes

The product tanker fleet is aging, with the average vessel nearing 13 years old, and a sizable proportion set to cross the 20-year threshold in the coming years. Regulatory pressures bound to enforce stricter environmental standards place additional scrutiny on the older segments of the fleet, hinting at a future where fleet growth could markedly slow down. It's expected that by 2026, 9.3% of the fleet will be older than 20 years, signalling a likely shift towards younger and more environmentally compliant vessels over time.

Constrained Fleet Growth Superseded by Rising Demand

The coming years are poised to see a modest fleet growth, predicted to be only 0.5% next year, the lowest since 2000. This subdued growth in fleet size stands in stark contrast to the projected increases in exports and ton-mile demand, which are expected to greatly outstrip supply, with ascents of 3.5% to 3.6% in exports and 6.3% to 12.1% in ton-mile demand. The disparity between apparent vessel count and service demand is positioning Scorpio Tankers to potentially benefit from this conducive environment, which could lead to increased utilization rates and a further strengthening of the tanker rate market.

Earnings Call Transcript 2023-Q3

[Operator]

Hello and welcome to the Scorpio Tankers Inc. Third 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, executive]

Thank you for joining us today. Welcome to the Scorpio Tankers Third 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; Chris Avella, Chief Financial Officer; Sean Hager, Head of U.S. Chartering.Earlier today, we issued our third 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, November 9, 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. 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 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. 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 2. If you have an additional question, please rejoin the queue.Now, I'd like to introduce our Chief Executive Officer, Emmanuel Lauro.

[Emanuele Lauro, executive]

Thank you, James. And thanks, everybody for joining us today. We are pleased to report another quarter of strong financial results. In the third quarter, the company generated $200 million in adjusted EBITDA. And despite the conclusion of summer driving season and elevated refinery maintenance, rate experienced a steady and sequential increase throughout the quarter.Today, this increase continues and is driven by the same factors which have led to an elevated rate environment for the last 6 quarters. These factors are strong global demand for refined products, dislocated refinery capacity and a constrained maritime supply.The cash flows have been significant and transformative for the company. The quality of Scorpio Tankers as an investment is improving each day. Deleveraging and returning capital to shareholders is our primary focus. Our balance sheet continues to improve and the company has today a net debt of $1.3 billion. We have reduced RSA leaseback financing from $2.3 billion in 2022 to $730 million as of today.In the fourth quarter we expect to repay a further $460 million in lease financings, of which $196 million have already been repaid. We have more than $800 million in liquidity consisting of $520 million in unrestricted cash and nearly $300 million available under our revolving credit facility.In the third quarter, we repurchased close to 80 million of company shares. Year to date, we have returned over $530 million to shareholders. Of these, $490 million in share repurchases and $40 million in dividends.Today, we have announced the renewal of our securities repurchase program for up to $250 million and we have increased our quarterly dividend from $0.25 to $0.35 per share. Looking forward, we expect low global inventories, robust demand and limited fleet growth to support strong product tanker fundamentals.With this, I finished with my remarks and I would like to turn the call to Robert. Thank you.

[Robert Bugbee, executive]

Hi, thank you Emanuele. Good morning, everybody. It's really a fantastic start to the quarter. We're really happy with the way that the market has been shaping up. It's already great springboard for the potential substantial rate improvement when the winter season kicks off in 3 to 4 weeks' time. And that's exactly what we expect.Rates have steadily improved since early July. Neither the OPEC cuts, nor the weaker season have halted it. Headline demand for products has improved steadily as well. World demand for product crude is expected to continue to grow further. And this is as a result of post-COVID economic activity, low inventory and is not at the moment is a result of fear for example in the Middle East or war escalation. This is just pure economic demand and activity.Present spot markets in all our categories according to Clarksons and indeed our own trading desks are above the guidance we have given today for the start of fourth quarter. We're truly very optimistic that the developments through the next month as we enter the strongest season.This is a very consistent, strong and broad rate increase. That's very important to know, July has been better than June, August better than July, September better than August, October better than September, and November better than October. When it comes to the strongest season coming, I am extremely confident that once again winter will come the Northern Hemisphere, I base this confidence primarily on historical precedent. There is now quite a lot of data going back a few years showing that winter has come every year.Furthermore, the scientific community, weather forecast, Druid priests, solstice worshippers and young children are in general agreement with the scientific community that winter will come, therefore, increasing the rate of demand growth. There is much less certainty of product tonne mile decline as a result of recession. As the weather turns, this fear of demand slowdown will, we believe, be but a candle in the winter wind.Just for those people who are new to the product tanker market or new to STING, for those of you who may have forgotten as it's nearly a -- we started winter was nearly a year ago, winter is good. It's really good for the product market and product rates.Thank you very much again for your support. And I'll turn it over to James.

[James Doyle, executive]

Thank you Robert. Slide 7, please. As Emmanuel said, cash flows from a strong rate environment have been significant and transformative for the company. Over the last 7 quarters we've generated $2.5 billion in EBITDA, reduced outstanding debt by $1.3 billion and returned $710 million on share repurchases and dividends.Slide 8, please. We continue to reduce our expensive lease financing and have given notice to repurchase 76 vessels of which 56 have been repurchased as of today. After repurchasing, these vessels are either encumbered or refinance at lower interest margins in new facilities.Slide 9, please. While the year-to-date debt repayment has been slightly lower due to timing of lease repurchases, in the fourth quarter we will repay $527 million in outstanding debt. As you can see from the graph on the left our estimated December 31 debt balance is expected to be $1.55 billion. And on the right we have refinanced a significant amount of lease financing, taking it down from $2.2 billion to $739 million today.Slide 10, please. Since the December 2021, our net debt has improved by $1.6 billion and today is at $1.3 billion. With no new buildings on order we have minimal CapEx. Today, we have $521 million in unrestricted cash and $280 million available under our revolver. The company is well positioned.Slide 11 please. The company has significant operating leverage. In Q3 so far, including time charters, the fleet is averaging close to $33,000 per day. At $30,000 per day the company generates almost $800 million in free cash flow per year, and at $40,000 almost $1.2 billion. This would equate to $14 and $22 per share in free cash flow, a 26% or 41% free cash flow yield.Slide 13, please. For the last 6 quarters rates have defied seasonality, refinery maintenance and other short term headwinds. As refinery maintenance concludes this month, we expect fundamentals and rates to improve. Over the last week, we have already started to see it. Today, spot LR2 rates are at $42,000 per day and MRs at $34,000 per day.Global inventories remain extremely low, requiring an increase in product exports for more immediate consumption. In the U.S. and in the rest of the world, distillate inventories are well below their 5-year average, which could create a very tight market as heating oil and jet fuel demand increase in Q4 and Q1.Slide 14, please. Year over year, we expect fourth quarter demand for refined products to be $2.6 million barrels a day higher than last year. And next year, on average we expect demand to be 1.3 million barrels above 2020 period. The increase in demand is leading to higher seaborne exports. Year to date CPP exports an average 1.4 million barrels a day above 2019 level and in September average 1.8 million barrels.Given low global inventories, increased consumption will continue to be met through imports with product tankers, reallocating barrels around the world, not only have exports increased, but barrels are travelling longer distances.Slide 15, please. While demand is above pre-COVID levels refining capacity is lower and more dislocated. The impact of new export oriented refineries coming online has led to an increase in exports and ton miles. Since 2017, Middle East product exports have increased 30%, while ton miles have increased 78%. Refinery closures have also created the need to replace lost production in places like Australia, where product imports have increased 48% since closing 2 large refineries in 2020. All of these changes are driving an increase in ton miles as ton mile demand increases, vessel capacity is reduced and supply tight.Slide 16, please. And it's not just about refining capacity closing and opening. In each region, there are different refinery configurations, domestic needs and regulatory requirements. Product tankers are the conduit for rebalancing surplus nap in the Middle East Asia, surplus gasoline from Europe to Asia. And in many cases some of the largest product exporters are also the largest importers like the U.S., UAE and South Korea. This dynamic creates increased triangulation of fleet which leads to higher utilization and rate. We expect this to continue.Slide 17, please. Russian exports of refined products have declined to more normalized levels of around 1.4 million barrels a day. The grey fleet or vessels that are servicing Russia currently stands at 453 vessels. Many of these vessels which have moved into this trade are 13 years and older and will likely not return to the premium trades given their age and trading history. This has and will continue to benefit the supply vessel servicing non-sanctioned trade.Slide 18, please. Today the order book is 10% of the current fleet, while the average age of the product tanker fleet is close to 13 years old. The strong spot market, healthy long-term time charter rates, constructive demand outlook and aging fleet has led to more new building orders. But there are constraints to ordering. New builds are expensive, there are long lead times for delivery and uncertainty about propulsion systems to satisfy future environmental regulation. That said, without new building orders, this year, the fleet was expected to shrink over the next few years. Starting next year, 8 million deadweight tons per year of product tankers will turn 20 each year, the equivalent of 160 MRs. By 2026, 9.3% of the fleet will be 20 years and older. The age of the fleet and upcoming environmental regulations will have a material impact on the fleet going forward.Slide 19, please. Next year's fleet growth is expected to be 0.5%, the lowest fleet growth since 2000. Seaborne exports and ton-mile demand are expected to increase 3.5% and 12.1% this year and 3.6% and 6.3% next year, vastly outpacing supply. Using minimal scrapping assumptions on average, the fleet will grow less than 3% and 2% in '25 and '26 and less than 2% per year using higher scrapping assumption.In addition, 1- and 3-year charter rates remain at high levels, evidence that our customers' outlook is one of increasing exports and ton miles against the constraint supply curve. The confluence of factors in today's market are constructive individually, historically low inventories, increasing demand exports and ton miles, dislocations in the refining system, rerouting of global flows, limited fleet growth and environmental regulations. Collectively, they are unprecedented.With that, I would like to turn it over to Q&A.

[Operator]

[Operator Instructions] Our first question comes from John Chappell with Evercore ISI.

[Jonathan Chappell, analyst]

James, if I could pick up where you left off a little bit on the winter preparations and especially the inventories. I think a lot of people forget that the sanctions on Russian diesel didn't go into effect until February 5 of this year, so they effectively had access. Europe effectively had access to Russian diesel all through last winter, which was warm. It feels like the inventories are just as low entering this winter. You don't have access to Russia, and I'm not sure anyone can underwrite back-to-back warmer than normal winter. So have you started to see any sense of urgency from Europe as a continent as a whole to prepare for winter? Or is there maybe a little bit of lax expectations that have the potential to make the market incredibly tight if there's an early cold snap this winter?

[Robert Bugbee, executive]

James, I'll answer that if you don't mind. So John, thank you. First of all, congratulations from all of us at Scorpio on your award being the #1 shipping analyst. Well done on that.Look, I think we look generally across the -- we still think there's quite a lot of complacency -- full stop. Whether it's Europe or whether it's the rest of the world, the sort of -- despite the lower inventories, despite the -- it doesn't matter whether you really believe in recession or not, everyone is still saying that oil and product tanker demand is going to grow. It's just an argument as to what the rate of growth will be. And inventories, as you point out, across the whole space are low. And we're sensing a just everyone's pretty relaxed right now. Now we think what will happen is that they're acting as if it's like any other winter. And what normally happens is that the first pulse will come and then people wake up and start to do things. So they're denying the risk they have in their inventories, the risk that's going on in the world, whether it's Russia, Ukraine, whether it's Israel, Palestine or the risk of that spreading. But I think it will come -- everything comes home to roost, the moment the weather turns cold.That's why we're very confident. We're very confident there's nothing in this market. This market is just steadily got stronger and stronger and stronger without any kind of action or preemptive moves to ship product.

[Jonathan Chappell, analyst]

Got it. That makes complete sense. Just for my second one, shifting gears to Scorpio specifically, you have a lot of debt repayment coming up in the next couple of months. As we think about target leverage, I know it's a number that you haven't tried to identify in the past, but just watching the buyback activity accelerate, looking at the dividend moving up again this quarter, maybe unexpectedly, do you feel that you have line of sight on over the next quarter or 2 puts you in a comfortable enough leverage position where maybe the focus shifts a little bit more away from deleveraging to capital return at this point of the cycle?

[Robert Bugbee, executive]

Yes, I think so. And I think that we had said previously that once we've crossed September and in this earnings call, we would elaborate a little bit more on leverage targets, et cetera. So I think our thinking has developed in the following way, is we'd like to get the leverage of the company pretty much down to around scrap value of the fleet. At that point -- that's around $800 million, $850 million, $900 million. And at that point, I think it's unarguable that the company would have very low leverage and be in a really safe position. And whatever it does at that point, whether it's buying stock, whether it's increasing dividends, et cetera, et cetera, it would be really playing with our shareholders' money, our money. We're not risking a bank loan, et cetera.The other thing is the tremendous benefits going forward if we were to get there because of these interest rates. If we were to halve our interest in principal repayments, our breakeven would collapse and we would end up being not only have the newest product fleet there is out there, but we'd always have -- also had the lowest operating cash. And I think that operating cash breakeven. And I think that's great because now we're getting even more for us as shareholders going through. I think that's pretty achievable with very moderate positions. I mean it's not too far to go to drop down another $400 million by -- you could do that by March 31.And I think that we've already got $25 million. We're selling a ship. We'll get the net $25 million of that. So that's a $375 million to go. And we haven't certainly excluded selling 2 or 3 other ships. So between earning something like 35 to 40 a day, the market doesn't even have to improve. If you ran your model and said, well, the market is going to continue just as it is that winter doesn't come and we carry on. And we sell a couple of assets we'll be there by that March 31. Now that can come earlier depending on if and what we sold. And if rates do what we think they will do, which would be to accelerate higher.

[Jonathan Chappell, analyst]

Yes, that all makes a lot of sense. Yes, big time.

[Operator]

Our next question comes from Omar Nokta with Jefferies. Please go ahead.

[Omar Nokta, analyst]

Yes, just as a follow-up to that line of discussion regarding the debt reduction, it looks like that's obviously top of mind here and perhaps the buyback takes a bit of a backseat. Robert, you mentioned perhaps $850 million to $900 million of leverage at the company. Just to frame that, just so I understand that it sounds just from your commentary with that March 31 target. Is that a net debt target? Or is that just total debt outstanding to get down to that $850 million.

[Robert Bugbee, executive]

That's a net debt target. It's net debt because I think that -- we would all agree that if that net debt is backed by the scrap value of fleet that is still relatively new, that's -- we're pretty damn conservative at that point. And we also, with the debt facilities we're putting in, that would be at a very efficient rate. And we would still have -- that would be well within our revolving credit line. So you -- that would also imply extra liquidity, too. It's a net debt target with a company that's got a lot of liquidity.

[Omar Nokta, analyst]

Yes. And then, Robert, you mentioned the breakeven has come down. Are you able to venture sort of any kind of assuming you put down $400 million or $500 million from here, what kind of effect that will have on breakeven on a per day basis?

[Robert Bugbee, executive]

Well, on the interest, it's the interest itself is going to come down into a level, but I would think you'd be dropping the net cash breakeven between the debt -- between principal and interest somewhere in the region of $4,000, $4,500 a day.

[Omar Nokta, analyst]

Yes, that's significant.

[Robert Bugbee, executive]

Huge...

[Omar Nokta, analyst]

Yes. So I guess maybe just one final one. Just in terms of once you finally get there, so let's say it's March 31 or perhaps in the spring, it definitely feels like it's sooner, much sooner rather than later. What happens once you get to that point? How do we think of the strategy of deploying capital? Is it buybacks? Is it acquisitions? You've got -- obviously, the share price looks very attractively priced relative to NAV. Just give me a sense, if you don't mind, kind of what happened?

[Robert Bugbee, executive]

I don't think -- look, we're not interested in speculative new buildings. We don't -- we don't need to buy any ships. To earn enough money, we're making considerable cash flow, considerable earnings on the fleet we have. We don't have -- because we don't have extraordinary maintenance CapEx or whatever. We've done all the scrubbers that we intend to put in, et cetera. So one way or other, it's -- the capital is going to go to us as shareholders at that point. And it's a pretty pointless activity to anticipate what will happen later. It's -- I don't even think that an NAV calculation would be relevant for a company that is -- has a new fleet and very low leverage. You should be moving away from -- it's not a question of how do we close the NAV gap. The NAV gap is, let's say, the least of our valuation worries. Of that kind of structure, we should be looking to close some form of free cash flow valuation gap because you would expect that any multiple you want to put on free cash flow would increase as you lower or improve the actual investment itself. So we've got a lot of work to do in that regard.

[Omar Nokta, analyst]

Yes. No. It sounds like a very interesting setup as we get into the next few months. I'll turn it over.

[Operator]

Next question comes from Ken Hoexter with Bank of America. Please go ahead.

[Ken Hoexter, analyst]

Great... So Robert, first, I wanted to check on the winter is going to come. Was that a scientific poll? I just want to check on the math there. But I just wanted to understand the phenomenal rates, right? If you think about scrapping activity still somewhat moderate, anything that drives the scrapping or demolitions going forward just in this rate environment? Maybe is there anything different this cycle? Do we see them just sticking around longer? And I'm setting that up in the backdrop of a rising order book that's gone from 2%, 3% now to 10% or 11%. So I guess, ultimately, if maybe that's the winter that's kind of the overhang that is coming in a different kind of winter backdrop? Just want to understand your thoughts there.

[Robert Bugbee, executive]

I think the first thing you want to do is to look at the order book in perspective of, you know, first of all, not all the orders that are LR2s are going to end up trading as LR2s or even necessarily built as LR2, the contract is the ability to build an LR2, but some may not be coded and many are likely to go into the Aframax trade anyway. But first of all, I don't think the order book is in product is as high as 10% or 11%. And the order book is not 1 year. The order book is stretched over a period of 2004, 5 and now pretty much 3/4 of 2006. So the order book is still very contained, even if it's around 2%, 3% average through that period. The exact point at which we know that -- James has been very conservative talking about the number of ships that turn 20, and that's been the point of scrapping. But we also know that when these ships turn to 16, 17, that they're not able really to be competitive and trade properly in the premium clean petroleum fleet.So we think the order book is very contained at the moment, and it's going to be because you just don't have the yard capacities, and the question is whether or not owners want to do things. So that's our perspective, and that's what's creating the prospect for a multiple years of a good market and the proof of people's expectation and what they're willing to pay for secondhand modern ships, which have been rising a lot in the last month and the forward time charter book. So we're in a pretty good shape. We haven't had a bull market like this in the last sort of 30, 40 years where there's been so little yard capacity at this stage in prompt in the curve.

[Omar Nokta, analyst]

So let's flip that around too then. Are you seeing vessels may be actively leaving and going to dirty given the rates are even like higher over there? Is that...

[Robert Bugbee, executive]

Well, there's 2 things. They're not -- if you've got an older product tanker -- they're not just higher in certain cases there, but it's easier to trade. The other reason we're seeing that is the whole of this Russian, what we call, the dark fleet, the Russian trade, people like us can't participate in. The people who are buying, they've been buying the older ships because they don't have the same criteria to carry dirty trade or sanction trade. So it's much of the fleet that's being bought and being removed from, let's say, the international market or free market has gone into those things. But what's -- and that drove their prices up. But what's interesting in the recent developments in the last 3 months, has there been a lot of activity from our practice of more modern product tankers as evidenced today by TORM's acquisition of their LR2s and evidence in the last 3, 4 months of many vessels built '12, '13, '14, '15, '16, they've been changing hands, because buyers in the non-Russian trade have had more confidence in securing longer time charters for 2, 3, 4 years and more confidence in the length of the stronger market, along with their ability, of course, to order new ships.

[Omar Nokta, analyst]

So just, I guess, for my second one, then you mentioned kind of selling vessels. Maybe talk about your philosophy on what gets you to do that versus in this kind of market, maybe just locking those older vessels up for longer time charters. Obviously, you still have stayed on the spot exposure. So is there a thought to shift and lock in at these levels with some of the older vessels and then sell them off? Or it sounded like you have maybe thoughts on selling some in the near term.

[Robert Bugbee, executive]

I think the older vessel is like an easier situation. You're getting enormous price, you're getting a record prices for these things. And you -- your ships that you are -- your modern ships or whatever, we have -- don't think we have any problem there to serve customers and you'll see us probably out of 2 or 3 time charters here. We do that fairly regularly on -- we like to keep a lot of spot vessels, but we're happy to keep 10% or so in the time charter market. But with the older vessels, it's great. Off you go if the ship is already 11 years old, 12 years old or -- then fine, you're getting a great price, and you can put the money to work brilliantly in either reaching that deleverage target or as we've been doing in before, buying stock pretty cheaply.

[Omar Nokta, analyst]

Great. Robert, appreciate your thoughts as always. Congrats on the solid build up of cash.

[Robert Bugbee, executive]

Thank you.

[Operator]

Our next question comes from Greg Lewis with BTIG.

[Gregory Lewis, analyst]

I guess I wanted to talk a little bit more about Slide 11 and the free cash flow. Probably for James. As we look at the -- I guess, the right side of the slide and cash flow generation, what is kind of like dry-docking off-hires, is that kind of all baked in for -- are we looking at a slide for 2024 or just an illustrative slide? And if we are looking at '24, like what does that assume in terms of maintenance CapEx and just that kind of ongoing CapEx. Is there kind of a number you can talk to?

[James Doyle, executive]

Yes. So it's just going to be an illustrative -- so it's not going to factor in, for example, the time charters, right, which would reduce breakevens or anything like that. It is going to take the next 4 quarters of debt, but it doesn't have the off-hire in there. It is something that we could show or with the maintenance CapEx maybe next quarter, we do put it in the press release and in the presentation on a different slide, though.

[Gregory Lewis, analyst]

Okay. Yes, absolutely. And then Robert, you mentioned thank you for the Q4 guidance as always. And also, you kind of highlighted where rates are today, and it's interesting, right, because it's people talk about now, people talk about cash flow. I mean, just looking at where rates are right now, it looks like your cash flow yield is around 20%. And so how do you balance that free cash flow yield that the stock is trading at? And I mean, it seems like this is an attractive time to be buying back stock, as -- just thinking about that. Is it possible that we focus more on buying back stock as opposed to deleveraging just given where we are right now?

[Robert Bugbee, executive]

No. I think -- look, we -- look, we bought $490 million worth of stock ahead, right? We said great, we're going to anticipate the market is going to stay strong. And instead of paying down all that in debt, we said, no, the valuation, and we want to buy that stock early. So we've been very heavy in buying stock back. In the last, whatever it is, months, interest rates have risen dramatically and quite high. The risk out there, the little box of product tanker land is really -- we've really got a great deal of confidence in. I mean it's -- the fundamentals look fantastic. The market is fantastic even before the season starts. But we'll be respectful and humble enough to understand that the big box world economics, world financial markets, geopolitical events is less certain, that there is risk out there. We have no interest in driving the stock up. We've been very disciplined in the way we bought stock. We're not that buying at the top of the upper band, et cetera, et cetera. We're there to buy with great value. So the default position for us is to drive this debt down to around this net debt scrap value as fast as we can because that's going to permanently reduce our operating cash breakeven at any point going forward. And therefore, that's going to create better free cash flow. We should be able to get a better multiple on that free cash flow. The investment itself should have much higher quality. And -- but at the same time, as we've shown all the year, if Wall Street sells STING down, dislocating it for its own reasons, whether it's fear of recession and oil will never be used again and the fundamentals remain intact, we'll be there to buy stock and create great value for our shareholders. And as soon as we've accomplished what we need to accomplish, then yes, it will be how do we return the capital to shareholders that we're generating at that point.

[Operator]

Our next question comes from Frode Morkedal with Clarksons Securities. Please go ahead.

[Frode Morkedal, analyst]

Just a quick market question for me. The Panama Canal does that have any impact on the product tankers at all? Or I guess, obviously, it's the larger ships in other segments that benefit directly, but I suppose that canal delays could impact the MR market in the U.S. Gulf, and possibly the -- across the Atlantic in general. What's your thought there?

[Robert Bugbee, executive]

Sean. I'd just like to introduce Sean. Some of you have met him, some of you haven't. He's head of our trading for the North Americas. He's ideally best to answer this question.

[Sean Hager, executive]

Yes. Thank you, and thank you for the question. It's certainly interesting times in the Panama Canal and it's very dynamic and fluid as things are evolving kind of every day. But to answer your question, is there an impact in the MR space, there absolutely will be, I think. So you're seeing a reduction in the number of transits that can happen and effectively like the economic impact in order to get an MR through is going up substantially starting yesterday. So in the canal, there's a reduction of water in the reservoirs that feed the lock system to move the ships through.So traditionally, you move kind of 36, 37 ships through the Panama Canal on any given day, and that's any type of asset class of ship. And that's already reduced to 24 today. Panama is ending the rainy season, which is what they need to replenish those reservoirs. And October is generally the rainiest month on record historically for them. And this past October has been the driest month that they've had since they have been keeping records in the Panama Canal. And so the expectation is for those 24 current transit slots to continue to reduce down to a low of 18 starting February 1. So what we're seeing is a couple of different factors. One is like the cost for a charter to ship a vessel through the Panama Canal is starting to rise quite a bit as the impact of this is being digested by the marketplace. And then second, the expectation for how long you wait to go through the canal either in ballast or laden is, frankly, a bit of a question mark and can be quite expensive to get through. And so what you're looking at is ballast alternatives to get back to the next load port.So just some rough numbers. If you do like a Quintero, Chile and you ballast to Houston going through the Panama Canal with no delay, that's 14 days direct. And if you send that same boat down through the Magellan Strait, it's 30 days. So you've got an incremental 16 days to get back into the Gulf or if you sent that boat to jib to load in the Med, that'd be 26 days or if you ballast it transpacific, it would be 33 days.So there's obviously a lot of different factors here. There's an economic factor where the Chile, Peru, Ecuador, West Coast Central America and West Coast Mexico rely heavily on imports in order to stay supplied. So whether these imports come from Asia, whether they continue to come from the U.S. Gulf, those type of things and how flat price plays into it will play out over the coming days, weeks and months. But there will be an impact to the MR fleet and the number of ships available will be less efficient than what we have today.

[Operator]

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

[Liam Burke, analyst]

Yes. The EU is looking to enforce the Russian price cap. How do you expect that to affect your vessels?

[Robert Bugbee, executive]

Sean, Do you want to take that? Whatever...

[Sean Hager, executive]

Sure, I can take it. Obviously, Liam, there has been some leakage in so far as sanctions have not been strictly enforced. So it's not a bright line between, say, our market and the dark fleet. Anything that creates a stronger fence or moat between the 2, obviously, will tighten up our market because you'll have less tonnage toggling back and forth. So we welcome strict reinforcement of sanctions and the price cap by the EU.

[Liam Burke, analyst]

Great. And there was -- during the prepared comments and in the Q&A, you talked about time chartering on the small -- on typically smaller vessels. Why would you think that there is more interest by the shippers to lock in smaller vessels on longer terms? Is that a scarcity problem? Or is it just something that the operators need to do based on the age of the fleet?

[Robert Bugbee, executive]

Just... First of all, look -- optically it looks that way because there's just many, many more smaller vessels than the larger LR2s, many more. And secondly, the LR2 owners are -- I'm not saying they're stronger, but they're just playing harder. They're not feeling the requirement. They see a lot of potential upside here between what they can do in the product market and what they can do trading in crude. So they're probably more reluctant in the LR2 market to fix out to these levels. And they're lesser than to buy. So in the product MRs, we've seen a lot of people buy modern ships and then turn around and fix those 2, 3 years for the cash flows and the purchase.

[Operator]

Our next question comes from Sam Bland with JPMorgan.

[Samuel Bland, analyst]

I just have one, please. It's on Slide 18, you've got this 9% of ships to be more than 20 years old by 2026. To what extent do those ships sort of fall out of the supply and demand balance as far as Scorpio is concerned, once they sort of get over that 20 years, limit. Is that almost equivalent to those ships having been scrapped or not as far as the rate is concerned?

[James Doyle, executive]

I think that's a good way to put it. We've done some work looking at older vessels. And what we've seen is that a lot of the older tonnage kind of 20 years and older, carrying crude oil or dirty products like fuel oil, where there's not as strict requirements around coatings and things like that. And then there's a fair bit of coastal trade. So Indonesia, India, where you've got kind of a 21-year-old product tanker that's carrying diesel from one refinery to another and just diesel. But you're right, in many ways, those vessels are not kind of competing with the Scorpio Tankers vessel or some of our peers kind of in these premium trades. So it's going to be pretty significant because while we're just focusing on that 20-year mark, it's probably a little bit earlier, somewhere between 15 and 17 too, that these vessels start to move out. So on an effective basis, even with the additional orders, the fleet is probably still going to shrink over the next few years.

[Samuel Bland, analyst]

And have you seen any willingness sorry...

[James Doyle, executive]

Sorry, I was also going to add and Cameron, please elaborate a few wishes that there's a lot of cost involved too going through maintenance, dry dockings more than it's not a straight line. It gets much deeper once you cross 20 years old.

[Cameron Mackey, executive]

Yes. Just to elaborate, the amount of steel that has to be replaced on a whole, that gets past the third special survey starts to take your dry docking and maintenance costs, not linearly up but almost parabolically up.

[Samuel Bland, analyst]

Yes. And has there been -- have you seen any willingness by charters to look at older ships as the rates have moved up sort of artificially increased supply...

[Robert Bugbee, executive]

Happy to take a stab at that one. I mean you will see some charters take a look at those boats. I mean some of it depends on the rigors of their betting systems. -- times it depends on their internal policies, but they definitely become harder and harder to trade as you get to that point. So the trade efficiency of those boats goes down quite a bit.

[Operator]

Our next question comes from Chris Robertson with Deutsche...

[Robert Bugbee, executive]

Just one thing I'd like to add to this whole thing to go back to this the scrapping or the -- just understand that the new buildings are really spread over a large amount of time. And the supply side is very, very compelling. If you just take your asset test, just assume something is very, very unlikely ,that there are no scrapping, 0 scrapping during that period and/or there are no removals from the product trade during that period, and still, you're going to get to a pretty good supply and demand curve.Sorry, next question please.

[Operator]

Our next question comes from Chris Robertson with Deutsche Bank.

[Christopher Robertson, analyst]

Guys, I just wanted to go back to a follow-up on Omar's question around the breakevens. If you could comment where the breakeven is maybe today or at least at the end of the quarter? And then just to confirm, that could come down by another 4,000 to 4,500 per day, should you be able to deleverage down to the targets that you talked about earlier --

[Chris Avella, executive]

Robert, you want me to take that one?

[Robert Bugbee, executive]

Yes, please Chris.

[Chris Avella, executive]

Yes, Chris, the breakevens today probably in the 17, a little bit higher range per day. We're -- as Robert has been saying, we're still in the middle of this deleveraging cycle. And so we have a big amount of debt to be repaid between now and, say, the middle of the first quarter. And there's still some expensive leases on our books that we can target to bring down that number further. So right now, it's -- I would call it a bit of a moving target, and we're working on it, but incrementally.

[Christopher Robertson, analyst]

Sure. Yes. But it sounds like a pretty compelling inflection point for the company over the next few quarters here. So I think it is definitely an important point.

[Robert Bugbee, executive]

It is. But what Chris is telling you is that you're looking at -- I'm looking -- what I'm saying is an end position once it's finished. And then the math is real simple, right? You've got -- you were taking $1.3 billion worth of debt, and you're chopping that down to $500 million. And I was -- what I said was the combination between the principal and the interest. And at the same time, you're knocking out debt that is much more than what debt is coming in at -- so you have 2 things working. So I don't really -- he'll be able to give proper even better [ cuts ] coming down to January, but you can just take the number and just produce the actual principal by the halves and it's not too hard to get to that approximate figure that I'm giving at the end of the process. But the most important thing is not the accuracy of it because that's sometime in the future. No way you can create a model for this quarter or the start of next quarter because I gave so many caveats to how we get to that level at around 800, 900 by the end of March next year. But you're going to significantly drop your daily dollars per day breakeven because your debt is quite significant at the moment, and interest rates are very high with the legacy leases as well.

[Christopher Robertson, analyst]

Yes, it makes a lot of sense. I guess final question for me, just turning back, sorry to belabor the point on the older ships here. But I mean, it just sounds like it's really going to have more of an impact on the dirty trade on the crude fleet more than anything. But just to drill down a little bit more. Is there anything that...

[Robert Bugbee, executive]

Wait, wait, wait, wait... That's just the way that James framed his slide about the ships turning 20. You could also frame a slide that talks about ships turning 15 years old over the next months, years too...

[Christopher Robertson, analyst]

Sure. And that goes to my question, Robert. Is there anything owners can do today or at least with the cash available that they have today at these rates that they can better maintain ships past that traditional 15 years of age? Or has technology not really changed or the landscape not really changed too much and it's kind of like that's still a good hard and fast rule to look at. I'd leave that to Rob...

[Chris Avella, executive]

Rob, do you want to take that.

[Robert Bugbee, executive]

Yes, please. Yes, please. Yes. So just simplistically, a vessel is a steel box girder subjected to corrosion and fatigue. And the customers, our clients, the oil majors don't count the dollars they spend on a time charter or a particular spot fixture, they count the liability in the case of an existential event like the Erica or the Exxon Valdez. And this type of enterprise risk has established an enormous structure around vetting and compliance within our customers. And there is very little that an owner can do to preemptively strengthen the steel or protect the steel from that type of wear and tear.The technology around coatings, around surveys, around intermediate surveys, all of that is advancing, but it doesn't do a material or make a material difference to the overall life expectancy of a vessel, particularly given the type of conditions of vessel, basis and service.

[Operator]

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

[Emanuele Lauro, executive]

Thank you, operator. We do not have any closing remarks, apart from thanking everybody for your time today and looking forward to speaking with you all soon. Have a good day.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.