Scorpio Tankers Inc

NYSE:STNG

Earnings Call Transcript 2021-Q4

[Operator]

Hello and welcome to the Scorpio Tankers Inc. Fourth Quarter 2021 Conference Call. I would now like to turn the call over to James Doyle, Head of Corporate Development and Investor Relations. Please go ahead.

[James Doyle]

Thank you for joining us today. Welcome to the Scorpio Tankers fourth quarter 2021 earnings conference call. On the call with me today are, Emanuele Lauro, Chief Executive Officer; Robert Bugbee, President; Cameron Mackey, Chief Operating Officer; Brian Lee, Chief Financial Officer.

Earlier today, we issued our fourth quarter earnings press release, which is available on our website, scorpiotankers.com. The information discussed on the call is based on information as of today, February 14, 2022 and may contain forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For discussion of these risks and uncertainties, you should review the forward-looking statement disclosure in the earnings press release that we issued today, as well as Scorpio Tankers SEC filings, which are available 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 available on the Investor Relations page of our Web site for approximately 14 days. We will begin in a short presentation today. The presentation is available at scorpiotankers.com on the Investor Relations page under Reports and Presentations. The slides will also be available on the webcast. After the presentation, we will go to Q&A. For those asking questions, please limit the number of questions to two. We want all analyst to have a chance to ask question. If you have an additional question, we are more than happy to answer, but please rejoin the queue.

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

[Emanuele Lauro, Chief Executive Officer]

Thank you, James, and good morning and good afternoon to everyone. Thank you for your time today. For the last six quarters product tanker rates have remained below our all-in cash breakeven levels. There is no sugarcoating it. The weakness in the product tanker market and prolonged recovery has been frustrating.

I would like to thank our shareholders for their support and patience during the past year, which unfortunately has been another COVID year. Scorpio Tankers finished 2021 with more cash on the balance sheet than in 2020. We continue to focus on what we can control. In January 2022 we agree to sell 14 vessels. This sales increase liquidity. They reduce overall debt and highlight both a significant increase in asset values as well as the discount our shares trade to these higher asset values themselves.

The decision to sell assets is consistent with our efforts to maintain a strong liquidity position and significant operating leverage in a challenging market. Our top priority remains the same, position the company to create shareholder value in an improving market and for the next tanker cycle. We feel the recovery is close and the next tanker cycle not far behind.

As far as demand is concerned, oil demand increased by 19 million barrels a day since May 2020, and is expected to surpass pre-COVID levels this year. At the same time, refined product inventories are at historically low levels and through 180 million barrels from January through November 2021.

So, the catalyst is simple, supplying incremental oil demand within inventory draws is just not sustainable in the long-term. The timing is less simple to read, but the inflection point is near. In December product tanker rates reached their highest level since the start of Covid. While the spread of the Omicron variant slowed the momentum, there is several reasons to suggest it will return this year.

I would like to now turn the call to James Doyle, who has been recently promoted to the position of Head of Corporate Development and Investor Relations. He will now walk you through a brief presentation as he discussed in his opening remarks. James, congratulations, please go ahead.

[James Doyle]

Thank you, Emanuele. Good morning and afternoon, everyone. At the end of the fourth quarter, we started to see a material improvement in rates specifically in December and it seemed as if the inflection point was finally here. Even with significant inventory draws rates push higher. However, by early January, the rapid spread of Omicron variant had impacted our markets and rates began to slow.

Recently, our smaller vessels the Handymax and MRs have shown more of an improvement because of the demand strength we're seeing in the U.S., Latin America, Africa and Europe. On the other hand, the LR2s have been slower to recover and this is largely due to lower demand in Asia, and a reduction in arbitrage opportunities. Since Q3, we have seen 19 LR2 switch from trading clean to dirty, which is the equivalent of about 8% fleet reduction and creates a favorable supply demand setup as Asian demand returns.

If there's any evidence of the demand recovery in refined products in 2021, it's the draws we saw in gasoline and distillate inventories. From January through November, we drew 181 million barrels of gasoline and distillate. Inventories are now at historically low levels and we feel the headwind is behind us. While Omicron delayed the first quarter recovery, we are optimistic for 2022.

So, the question is how close are we? Well, in 2021, ton mile demand exceeded pre-COVID levels, which may seem surprising when you look at rates. The driver behind the ton mile demand growth has been refinery closures. Over the last 2 years we've seen a significant number of closures. These are often older, less efficient or poorly located refineries. Weak operating margins and maintenance CapEx to keep these refineries operating doesn't make sense.

For the first time in 30 years refinery closures outweighed new capacity in 2021. After refinery closes, in most cases, the lost output needs to be replaced. The most favorable example is Australia, which closed 2 of its 4 refineries last year, and has since increased its product exports by 200,000 barrels a day in November to make up for this lost production.

On the volume side, refined product exports for around 1 million barrels per day lower than pre-COVID levels. However, from a demand perspective, when you account for the inventory draws that occurred last year, it's about half that. In other words, without inventory draws we are only about 500,000 barrels a day of low 2019 levels.

So, will 2022 be the year refined product exports exceed pre-COVID levels? We think so. While jet fuel may take until 2022 -- 2023, 2024 to fully recover, the increase in gasoline, diesel and naphtha have offset lower jet fuel demand. Crude oil and refined product demand is expected to increase by 4 million barrels a day this year. If 25% of this increased demand is exported, seaborne exports of refined products will increase by 1 million barrels per day. Also, this excludes the additional demand of around half a million barrels that was supplied with inventory draws last year.

Timing is always challenging, but we expect a sequential improvement in demand each quarter throughout the year. Inventories are at historically low levels and have declined as refinery utilization has increased. So, the ability to draw from inventories has reduced substantially. Thus, given the low inventory levels to meet the increased demand this year, we expect higher refinery runs and consequently product exports. Refined product exports and ton mile demand are expected to increase 6% and 7% this year, one could argue by the end of the year it will be higher.

Supply. The product tanker order book is at a record low with 5.3% of the existing fleet on order today. By looking at the low order book, one might think that shipyards are desperate for orders, but it's quite the opposite. Other shipping segments have done so well such as containers that the yards are fully booked. We do expect more product tankers to be ordered, but in order today these vessels would not be delivered until 2025.

While the order book is at an all-time low, scrapping is at an all-time high. This is due to higher steel and scrap prices, but also the age distribution of the fleet. Unlike other sectors, product tankers were not built mass until the early 2000s. So, scrapping has been minimal and basically everything that's been delivered hasn't left the fleet. However, this will start to change and we saw the start of this last year with 48 product tankers scrapped.

Today there are 267 product tankers 20 years and older. By 2025, excluding scrapping there will be 687 product tankers 20 years and older. And this is not including the roughly 1,000 product tankers that will be 15 to 19 years old. Now additionally, building orders more than half the fleet will be 15 years and older by 2025. Using modest scrapping assumptions product tanker net fleet growth, it's around 1.3% the next 2 years before going negative. However, if we use a scrap rate that reflects the age profile of the fleet, supply growth is essentially zero for the next 2 years before going negative in 2025.

Financial highlights. While, everyone is focused on rates and liquidity, there's been a substantial increase in asset values. Rising steel and labor costs as well as new building orders from other segments, it's still available yard capacity, driving prices higher and delivery dates later. Since January 2021, 5-year-old LR2s have increased 12.5 million per vessel. We apply this increase to Scorpio Tankers 42 LR2 vessels that would increase gross asset value alone of the LR2 fleet by 525 million. It also means your LTV is decreasing.

In January, we announced the sale of 14 vessels. These sales increase our liquidity, reduce our debt and crystallize the steep discount our shares trade relative to our net asset value. After the completion of the sales, the company will have over $460 million in pro forma liquidity. As Emanuele mentioned, to maintain liquidity with rates below all-in cash breakeven levels, we have refinanced vessels as opposed to raising equity and also sold some.

If we look at the debt repayment schedule which excludes amortization for the 14 vessels that will be sold, the company has two maturities in the next eight quarters. The convertible bond which will be repaid in Q2 and a credit facility that matures in Q4 2022. In the past, we've seen different comments and figures around the debt that's due in a given period for the company.

So, for clarity, if we use the credit facility that's due in Q4 as an example, which is the blue box in the repayment graph, before this facility matures, we arrange to refinance the vessel in the facility with the new lender. Thus, when the facility matures in Q4 we repay the $16.9 million debt balance and then draw down on a new loan facility. Alternatively, we could sell the vessel, repay the debt and collect the proceeds. If this happens to be in LR2, so current prices would generate significant liquidity.

If you look at the company's balance sheet over the last six quarters, you will see a significant change. However, our view of the balance sheet is that after several challenging quarters LTVs have decreased, we have $600 million in pro forma liquidity which creates flexibility in the event of a longer market recovery. We have refinanced essentially all of our upcoming maturities and have minimal CapEx. We will repay $485 million of debt in the first half of this year from scheduled amortization associated with vessel sales and the convertible bond maturity. Given these points and our positive outlook for the market, we feel well-positioned.

To wrap it up, the Company has the largest product tanker fleet in the world comprised entirely of ECO vessels. We have significant operating leverage, $1,000 a day change in product tanker rates equates to $42.7 billion in annual cash flow. We know rates don't usually move by $1,000 a day. We have positioned the balance sheet to provide flexibility with increased liquidity and a plan to delever. Our shares traded at a steep discount to our net asset value. The market inflection point is close and the long-term supply demand fundamentals suggests we could have an extended tanker cycle not far after.

With that I will turn it over to Q&A.

[Operator]

[Operator Instructions] Our first question comes from Omar Nokta with Clarksons Security.

[Omar Nokta, Clarksons Security]

Thank you. Hey, guys. Good morning. Good afternoon. James, thanks for that. I think a pretty good run through of things. Clearly liquidity has been a focus for the past year and a half or so. And you managed really to continuously enhance your cash position with debt refinancing. Aside from sale leaseback, actual sales have not been something you've done in the past or recent past. So just regarding the LR1 deal, we've gotten used to seeing when an owner sells ships at a tough earnings environment, especially an unblocked fleet and an all-cash deal, they usually come at a discount of sale price. But your LR1s got a pretty hefty premium, I'd say. Can you talk a little bit about how that transaction came about? And what really compelled you to move forward with it?

[Robert Bugbee, President]

Sure. Okay, I think the easiest thing to first understand is that, as James pointed out, prices have been moving up and moving up quite strongly. So, you've got a -- quite a strong sound purchase market to start with. So, you may have had the vessels sold at a surprisingly high price in the market as changes inferring that, we strongly believe even now that net asset values have been adjusted up high enough. And that doesn't just apply to us that applies to other product tanker companies with modern fleet. Now those vessels -- those less than 10 years, 7, 8 years old.

So, the first thing is we had a market that was very strong. It came about through a very competitive basis. I mean, we've indicated in a couple of quite large conference calls, and in the press that we would be willing to sell vessels as part of the liquidity position that it's a win-win for us, because, first of all, it increases liquidity. But second, I mean, it's a very rational thing for a management to do when you -- when they -- when you think your NAV is trading above 30 and your stock is trading below 50% of net asset value. And you believe that the fundamentals are very strong, but you have an uncertain point to recovery, you first get the sort of a knockout of you don't have to worry about liquidity anymore.

The second thing you get is an offensive position where we've always said to the degree that, we -- that we're earning above our all-in breakeven 17 a day and we're going to start looking to buying stock back as an alternative. So, in an offensive position, the strengthening and putting cash on their balance sheet and getting the situation where -- when that market turns, the next question that analysts and I'm sure you itself will ask is this, you've now probably got too much liquidity, what are you going to do with it comes at a much earlier point in the cycle and we've had previous experience of the benefits of that. So that's really how it came about.

[Omar Nokta, Clarksons Security]

Thanks, Robert. Good color there. And I guess, yes, just on the context of being offensive and having too much liquidity, clearly now you perform a cash position is well over $400 million, which I think is the highest in many years. The question, obviously now is, how do you feel now with that position ahead of a recovery? And do you foresee future sales to maybe take advantage of that NAV arbitrage?

[Robert Bugbee, President]

Sure. I mean, at the moment what we see, especially as Omicron seems to be going away even faster than some people hope, and we're getting some analysis that actual tank -- actual headline demand for products and crude is much higher than people thought. So, we look at this in the glass half full way. It's actually pretty incredible that you've had -- apart from the United States, really not much flying going on in the world. You've had a -- some form of restrictions going on in the last 4, 5 weeks, even in the freest COVID country. And yet, the demand for oil and its derivatives have been so strong, very strong. And you've got, as James pointed out, multiyear levels of inventory turn down.

So that really sets up a situation where you've got this very long-term great market, and it's just a question of when that's going to happen. I think to your second part, that we're really comfortable in the actual liquidity part. We would not sell further vessels, because we have to for liquidity. But I think it still holds true that maybe we would sell some more vessels just simply again, because once you have an NAV over 30 into a rate rising market, that you're able to establish over and over again with sales, there's nothing wrong and actually, let's say, piling on the cash and the optionality, especially when we are the company with the amount of vessels that we have doesn't -- it just doesn't affect our operating level at all. I mean, we're not married to any particular ship.

[Omar Nokta, Clarksons Security]

Understood. Thanks, Robert. Good color and those are my two questions. I'll turn it over.

[Operator]

Our next question comes from Randy Giveans with Jefferies.

[Randy Giveans, Jefferies]

Howdy, gentlemen, how's it going?

[Brian Lee, Chief Financial Officer]

Hi, Randy.

[Emanuele Lauro, Chief Executive Officer]

Good. Thank you, Randy.

[Randy Giveans, Jefferies]

Hey, so first on your quarter to date rates, much stronger than the negative rates that headline markets are showing. So, with that, should we expect the rest of the quarter to be below these levels as most of that strength was from maybe December, let's call it? Or are the actual current rates much stronger than the headline rates that we're seeing?

[Emanuele Lauro, Chief Executive Officer]

That's a great question. The question we ask ourselves, because it's all over the place. I mean, you can see extreme volatility. You have -- you actually had a lot of headway last week in MRs, for example, which we're starting to trade quite firmly and out of the U.S. side and West of Suez and was actually starting to pick up a bunch of speed in the East. We're actually even starting to pick up a couple of jet fuel cargoes, we even load a big jet fuel cargo for the first time in many, many weeks out of the AG on one of the big ships. And it's literally -- you've got this inventory situation, you've got a very turbulent market. So, you really don't know, to be honest, is the answer as to when the exact time this market is going to spin upward. It's very tight. So, to work out, whether or not the next 50% is going to be the same, worse materially better than the last 50% is quite difficult.

I think we can be confident that, overall, it's going to be -- our overall rates are going to be above, let's say, 10. And that's going to -- and that adds to our let's say NAV value anyway to the degree the prices of vessels are not going to go down. But we don't know it's the absolute answer in this, but it's just -- we see it as just time now. These markets are tight as the winter is shown and those rates that we're showing the type. So, by saying we don't know, I wouldn't take that as a negative position in the future.

[Randy Giveans, Jefferies]

Yes. No, that's fair. Hard to prognosticate from here. Second question, following the vessel sales, which would certainly be accretive if you use those for share buybacks. But your fleet still massive, obviously, a little bit of your operating exposure has been reduced. So, with that, we looked at charter in vessels to maybe increase that spot exposure, or on the other hand, our time charter rates too high, and you're actually maybe looking to charter out some tonnage to secure some cash flow.

[Emanuele Lauro, Chief Executive Officer]

We're not looking to charter out, 100%. We are -- and I'll say it for the first time on this call today and even at the risk of being criticized, we are very bullish, extremely bullish, supremely bullish, whichever bullish you want to put we're there, right? I could say we are bullish 82 times over, okay? And -- right, so no chartering out. We are always looking for charter in opportunities. So far, we kind of been disappointed in that sense, because rates add save and purchase rates for good quality ships are actually quite fun. There is a -- it's clearly not only us, that is bullish. You have a very strong S&P market and despite what we've had even through all of Omicron, you've had a pretty strong food market, certainly in contango to the spot market.

[Randy Giveans, Jefferies]

Got it. All right. Bold up, noted. James, congrats on the promotion. Great role, well deserved. Thanks again.

[James Doyle]

Thank you, Randy.

[Operator]

Our next question comes from Jon Chappell with Evercore.

[Jonathan Chappell, Evercore]

Thank you. Good morning. Hey, James, so you laid out a good profile of what's going on with the inventories. I think Robert said something important, which was that the U.S is basically the only country where you're seeing kind of normalized flying. Age has been the big growth area for a long time now. What are you seeing there as it relates to inventory versus OECD flying activity, other modes of transportation. Is it possible that we're so focused on the Western world coming out of the virus that Asia can continue to be a drag, and that's one of the reasons that the recovery continues to get pushed to the right?

[James Doyle]

No, I think what's happened with Asia is obviously over the summer, the Delta variant, the Omicron variant, this winter they impose a lot stricter travel restrictions, and really, everything is tied to personal mobility, right, on the consumption side here. When you restrict that, obviously, demand goes down. And Asia, though, prior to Omicron was actually starting to be quite strong again. So, I think, for the current time, you've got obviously the impact of Omicron, you had winter, New Year, you've got the Olympics. So, I do think Asian demand is going to come back here. I also think there's probably a difficult component to factor in with rising natural gas prices that have affected refineries differently, which is leading to a lot of volatility. But I think, looking at the demand side on Jet, we're probably 1.5 million barrels away from where we were pre-COVID. But on the [indiscernible] water, it's probably only say, 200,000 barrels. So, I think we will see the return here. I just -- it's hard -- the timing is hard.

[Robert Bugbee, President]

I would add, John, that you, yourself, I think have a really incredibly interesting graph the other day, talking about the -- where it showed, these real drawdowns that are going on, the inventories. And if you -- I think that's something while running, I'm highlighting you because you really did encapsulate it very well on this table that there really has been a lot of missing barrels in the demand for the tankers, whether it's products or crude as a result of these inventory draws. And that just can't go on forever. If you simply went to stopping inventory draws, forget about rebuilding multi decade lows, you would expand even the Asian demand very, very quickly, straightaway.

[Jonathan Chappell, Evercore]

Yes, thanks for highlighting that. I think the inventories are the most important thing to watch right now and see if there's any presentation. James for my follow-up, you get the promotion, you get the hard questions. I think there's this view that an Iranian sanctions lifting positive for crude. Maybe not a clear-cut answer if it means anything for the product. Also, I think there's been some a little bit of publicity that if there were a geopolitical event with Russia and Ukraine, possibly good for tanker ton miles. But of course, that doesn't take into account a rising oil price might do. Any work that you've done or thoughts on those two geopolitical events and what that could do to the timing of the recovery or the magnitude?

[James Doyle]

Sure. When it comes to Iran, the benefit would be increased condensate exports, which would benefit the LRs. It depends where sanctions would be, but certain LR2 vessels will carry that cargo and actually there are South Korean petrochemical plants designed to run that condensate as feedstock. So, I think it's somewhere around 300,000 to 400,000 barrels a day of exports for the LR2 fleet, which would be beneficial. When it comes to Russia and the Ukraine, it's hard to say what will happen. But what I can say is obviously Russia is a large exporter of crude oil at 4.2 million barrels a day and refined product exports probably around 1.5 million barrels a day. Most of this is trading, are going to Europe and Asia. But obviously, if there were a conflict, we'd have to factor those numbers into our analysis.

[Jonathan Chappell, Evercore]

Got it. Thank you, James. Thanks, Robert.

[James Doyle]

Thank you.

[Operator]

Our next question comes from Greg Lewis with BTIG.

[Gregory Lewis, BTIG]

Hey, thank you. Thank you and good day, everybody. I guess my first question is around, there was a lot of news and reports about refinery closures, really ongoing throughout the pandemic, whether it was in Australia, parts of Europe, a lot of refinery closures happened. And that was expected to create dislocations, ton miles. Is it possible or how should we think about just given the slow recovery in some of these parts of the world? I guess what I'm wondering is, has the full benefit of these refinery closures been realized? Do we think across global product tanker seaborne ton mile demand?

[Robert Bugbee, President]

Not yet. Part of it, yes. But when you draw 181 million barrels of global gasoline and distillate inventories, everything is a little bit muted. And then you factor in that just overall demand is slightly below pre-COVID levels. So, I think we've certainly seen it when we look at how much volumes gone to Australia. But when you start and we've probably seen some of it with U.S East Coast imports after the closure of the Canadian refinery. But I think we'll really start to see the impact as demand kind of gets back to pre-COVID levels, and it'll be essentially a multiplier to that.

[Gregory Lewis, BTIG]

Okay, great. And then just one more for me around the -- congrats on the vessel sales, previously announced. One of the questions we always get is around the depth of the S&P market. And really, I think I'd be curious to hear, beyond the actual buyers, how competitive was that process and any way to quantify how much interest there were from the broader industry for the vessels that were eventually sold?

[Emanuele Lauro, Chief Executive Officer]

I'll take that, Greg. The competitive process was pretty vast in the sense that as Robert alluded to just a few minutes ago on this call, we were vocal about the fact that we were selling -- we're going to sell ships. And this has created by itself a competitive process with all the interested parties coming in. There were pockets of buyers interested in MRs, LR2s, one or two on the Handys and more than we expected on the LR1s.

The reason we chose to do the transaction we did, it's because it was a clean transaction with a natural buyer that has appetite for that specific fleet, being a market leader in the LR1 segment, which appreciated the design features of our LR1 fleet being modern ECO wide beam, and all of the features that they didn't have in their fleet themselves.

So, when we started negotiating with Hafnia, it became apparent that it was a good fit for both companies, and we enjoy a good relationship and a good working relationship with them, and decided that was going to be our main transaction, fairly early in the process once we saw that we could have executed on that.

[Gregory Lewis, BTIG]

Okay. Thank you, Emanuele. Have a great day everybody.

[Emanuele Lauro, Chief Executive Officer]

Thank you.

[Operator]

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

[Kenneth Hoexter, Bank of America]

Hey, good morning and good afternoon. So, it looks like on the selling of vessels, you mentioned you get a few months runway of cash you get through some of the repayments. Rates here are starting off a bit weaker than I guess you would have expected. Emanuele, you were more sanguine to start the call. I know you're -- Robert, you're super uber bullish. I've been on these calls for years. I don't think you've never not been uber bullish. So, what is getting you that bullish here? Is it the setup of lower inventories? It doesn't seem to have monetized for years, right. We've been talking about, James have been talking about the drawdown of inventories, the setup of low fleet low order book. So, what needs to happen here in order to start seeing this to come to reality in terms of the rates and moving above cash cost and starting to not worry about the refinancing and debt pay down?

[Emanuele Lauro, Chief Executive Officer]

I will start and …

[James Doyle]

Go on, Emanuele.

[Emanuele Lauro, Chief Executive Officer]

I was just saying that I think James mentioned this on a few minutes ago on this call. I think that mobility is affecting demand -- product tanker demand. And that is the main catalyst on which we will be seeing a recovery. I agree with what James said a few minutes ago. Mobility is the one that we are -- the main catalyst we're waiting for. Having said that, all the fundamentals and I think you would agree with us are pointing in the right direction. So, it's on the demand from things are looking okay, on the supply from things are looking okay, on the inventory side, things are looking okay. So, all the fundamentals are there. Mobility needs to kick in for the market to read.

[Robert Bugbee, President]

I think also, Ken, I think we should remember that why, let's say I’m uber bullish is, in your words, I think that's a great word or a great phrase is that 2 years ago, the beginning of 2021, the stock was over $40, rates were really moving strongly across every sector of the product market. And what James is indicating is we're going to get a return to that demand level and in fact higher in terms of ton miles, because we expect demand headline to be higher and we expect these refinery changes to increase the ton mile position. But supply itself partly because of regulation, partly because of a lack of order book and partly because of aging and scrapping it's more or less going to be the same not much different.

So, therefore we kind of know where that market is going to, what's going to happen at that point. We know that in the dull market that we have with all the inventory draws against us, all the demand headwinds, that the rates are what they are that we put out today. And we have seen what that market is likely to be. And on top of that inflation and yard tightness at the moment and the lack of ability to order ships and the fact that yard prices have gone up since that period 2 years ago, your actual asset values are higher than where they were 2 years ago too. So that I think is a very strong reason to be uber bullish as you put it.

[Kenneth Hoexter, Bank of America]

Yes. It's just the setup, right? It always seems to be there. We just need I guess you [multiple speakers] mobility up.

[Robert Bugbee, President]

Yes, but I don't think anybody predicted the COVID in January 2021, right.

[Kenneth Hoexter, Bank of America]

So just a minor -- thanks, Robert and Emanuele. A minor, I guess some balance sheet question if I can, Brian. Account payable seem to be going up significantly. Accounts receivable, I think it only minorly changed. Is there any change in -- is that seasonal? Is there -- there's something to be -- the highlight on the balance sheet?

[Brian Lee, Chief Financial Officer]

Its timing differences, Ken. Nothing there. I just thought you said our liquidity goes for a few months, it goes up for more than a few months. If we look at it, at the lowest rates as a company we ever had of 10,100 in Q3 of this -- of 2020. We look at those rates compared to our breakevens, we get 8 months of time. If we look at it, what we're currently doing, we get almost 17.5 months. So, it's a little bit more than a few months. I know that's just a phrase you threw out, but I just want to make it clear to everybody on that.

[Kenneth Hoexter, Bank of America]

Okay. Yes, no, I was commenting from what you got -- I thought you guys had said when you did the vessel sales and put us out a couple months on cash flows. I get your [multiple speakers].

[Brian Lee, Chief Financial Officer]

Right. To see additional liquidity on top of what we have now, it goes up quite a bit. So …

[Kenneth Hoexter, Bank of America]

Great. Thanks for the time.

[Brian Lee, Chief Financial Officer]

Thanks, Ken.

[Operator]

Our next question comes from Ben Nolan with Stifel.

[Benjamin Nolan, Stifel Financial Corp]

Hey guys. First, congrats, James. It's quite a step up. So, nicely done. Also nicely done on the -- all of your presentation today. The -- my first question goes back to, you discussed the LR1 sale a little bit and it seemed opportunistic. Just confirming, there was nothing structural about LR1s that you think okay, well, we prefer LR2s or MRs or something like that was just that's where the best buy interest is that, is that fair?

[Robert Bugbee, President]

No, no, no. I think that there was in terms of valuation there was -- first of all, there's buying across the board -- across all the site and this is universally across modern tanker, modern product tanker, the prices have moved upward. I think what's so rational for us in the LR1s was that here we could do the job on the balance sheet and giving us the strategic freedom later, hopefully to create some real value. But at the same time, the LR1s is the one grouping, the one size range that we ourselves that don't have, let's say, leadership position.

We have a leadership position in the Handy, in MRs and the LR2s. In the LR1s, we had a good position, but not a leadership position. And the best dynamic for us overall, only was as Emanuele pointing out, where it was Hafnia, the best -- it was a solid buyer. It also became which he didn't explain the best alternative that -- alternative at even prices across other vessels because here you were able to -- we believe very much in consolidation. We've spoken about this before. And we were able to place those vessels into the hands of the number one owner and operator of LR1s, thereby consolidating as opposed to fragmenting that market. And that market sits between even though it's a smaller market in MRs and LR2s, it is important in -- that it sit in between MRs and LR2s. So, anything we can do to help strengthen that dynamic in the LR1 market will be beneficial to us, MR and LR2 market.

[Benjamin Nolan, Stifel Financial Corp]

Okay, that's very clear. Thanks, Robert. And then for my second question, notice that you guys are continuing to add scrubbers especially on the MRs. Obviously, the fuel spreads have widened back out. I guess my question is, you talked about shipyard tightness on the new builds, obviously there are supply chain issues. Is there -- are you running into -- with the wider margins I would imagine there's other people also out there looking to install scrubbers. At this point is there -- how hard is that to do? Is it challenging to get shipyard space for repairs and discover installations are hard to get the equipment itself? Any chance of delays or inflation in that respect?

[Robert Bugbee, President]

Cameron?

A - Cameron Mackey

I can take that if you like, Robert. As you know, Ben, the yards that are in new construction and those that are in repair and retrofitting are fundamentally very different yards. And so, there's not a lot of overlap in that capacity with the tightness that we've seen in containers and dry bulk. There isn't a raft of inquiry coming from those sectors around retrofitting right now. So, there is capacity available. And then when it comes to supply chain concerns, or inflationary pressures, they are modest at best, there are always risks, of course, but right now given that the manufacturing of scrubbers is largely located in Asia, and China specifically, the same place where the shipyards reside, we don't ourselves see great risks in either the logistics or the inflationary pressure just now.

[Benjamin Nolan, Stifel Financial Corp]

All right. Thanks, Cam.

[Operator]

Our next question comes from Magnus Fyhr with H.C. Wainwright.

[Magnus Fyhr, H.C. Wainwright]

Yes, good morning. Just a question on the overall market. I agree with your bullish view. But is there something we're missing here? What besides another Omicron variant, is there anything else that concerns you? I mean, oil prices have crept up to your as of late at 7-year highs? I mean, could that eventually eat into refinery margins and user demand? Or is this something else we're missing?

[Robert Bugbee, President]

It could be. There are lots of goods [ph] in this one. Even the Ukraine Russia situation. I mean, traditionally, war has always been good for the tanker market in the short-term. But if that led to something wider and something extremely disruptive to tanker demand, then that would be a negative. But we don't know, Magnus, the answer to that thing it is -- it could knock this demand scenario away because what we're basing it on, as Emanuele and James said is the -- is what we see all around us, which is that when Omicron passes, people become more mobile. And they want to get out there and spend their money and do things and travel to friends and spend time doing things again.

[Magnus Fyhr, H.C. Wainwright]

All right. Thanks for that color. And just on the near-term outlook based on the graphs that you showed, I mean, the IEA has demand picking up pretty nicely each quarter going forward. Is there any seasonal demand? Or the seasonality playing out different this year than other years?

[Robert Bugbee, President]

Well, it could do to the extent that you're going into it would appear at the moment unless something dramatic starts to happen very quickly. And I mean, very quickly, you're going to go into increased jet fuel demand and increased gasoline demand off the side of the low inventory base. So, you may not have in a weird way that normally some form of weakening period as we go into the spring, but that is likely to -- we would anticipate that likely to be muted in an environment where there's growing entries already into an increasing seasonal demand aspect, plus Omicron coming out aspect for jet fuel.

[Magnus Fyhr, H.C. Wainwright]

Again, one area we haven't mentioned, I mean, the IEA took their numbers out. I mean, they just did 15 years of demand numbers. They partly said that petrochemical demand, especially NAFTA demand is very strong. Is there anything in there that could surprise on the upside?

[Robert Bugbee, President]

Yes, I mean, look, it's always good to have, that's great. That's encouraging that petrochemical demand is strong because on the margin in a weak market, you don't want to have those chemical tankers coming into the product trade. So, it's great that the petrochemical demand is going up and getting stronger.

[Magnus Fyhr, H.C. Wainwright]

Thank you, Robert.

[Robert Bugbee, President]

Thanks.

[Operator]

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

[Liam Burke, B. Riley]

Thank you. The operating cash flow for the fourth quarter, Brian was very strong in conjunction with the improvement of sequential step up in rates. When you're looking to buy back shares, are you anticipating be able to generate internal cash to the course of '22? Or do you look to borrow to buy back the shares opportunistically?

[Brian Lee, Chief Financial Officer]

I think the only statement that we've made on -- said is that would be considered -- strongly considered once we see the visibility of rates at 17,000 or above.

[Liam Burke, B. Riley]

Okay, fair enough.

[Brian Lee, Chief Financial Officer]

And we're not going to -- we would give very little information to the market on buybacks or strategy, et cetera, et cetera, in the same sense as we're going to give very little detailed information on NAVs, because we've been here that the management has been in another company, another cycle, going through that company had a huge buyback. And we -- when it was very successful because the priority was to buy the shares as low as we could. It was not to telegraph certain points at which we would buy or place restrictions on that buying, or expectations on that buying.

[Liam Burke, B. Riley]

True. Fair enough. And, James, you were mentioning an aging fleet to your obvious competitive advantage with the -- with your vessels. How does the percent of vessels over 15 years old that are not scrapped benefit you guys as well? Or is that just a neutral?

[James Doyle]

Well, certain customers of ours will have rules around 15 years, right? They won't take a ship older than that, and it's not everybody. And structurally, the ships are fine. I think they -- the older ships find themselves in tertiary markets, it could be cabotage trade and other places, or they -- one of the easiest things they can do is carry fuel oil and crude oil, because there's no risk of contamination. I think, obviously, the distribution of the fleet is massive, right, because nothing was really scrapped in what was delivered. And so, I think with a super low order book care as we kind of go forward, this increase in scrapping will happen, right, these vessels moving over to dirty will increase. And with the yards being backed up, it's hard to materially change the supply, at least to 2025.

[Liam Burke, B. Riley]

Great. Thanks, James.

[Operator]

That concludes today's question-and-answer session. I'd like to turn the call back to Robert Bugbee, for closing remarks.

[Robert Bugbee, President]

Thank you very much. I think we've covered everything that we've covered, that we need to cover and as Emanuele says, we appreciate everybody's support and patience as well. And just trust that management looks forward as much as all of our shareholders out there to as earlier recovery in these rates as possible, because that's really all that is required to set this company and the valuation on the stock and the ability for us to really create some value here in a much significantly stronger share price by the end of the year. It's just simply that opening up the mobility and the opening up of demand and thereby rate. So, thank you very much again.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.