Scorpio Tankers Inc

NYSE:STNG

Earnings Call Analysis

A Strong Financial Rebound and Deleveraging

Following a strong market rebound after 2022, the company saw significant cash flows and reduced their gross debt by $1.6 billion, while increasing the quarterly dividend by 300%. With no new builds on the horizon, they've streamlined their balance sheet by shifting from expensive lease financing to more traditional bank financing, expecting to reduce leverage further by repurchasing $209 million of lease obligations by the end of Q2 2024. The firm is projected to generate up to $1.2 billion in free cash flow annually at a daily rate of $40,000, and they're focused on lowering cash breakeven rates responsibly.

Strong Financial Performance and Optimistic Outlook

The company has exhibited robust financial health, reporting $959 million in adjusted EBITDA and more than $570 million in adjusted net income for the full year 2023, indicating strong underlying business dynamics that have persisted over the last two years. The recent market environment has been particularly favorable, with operating leverage now allowing the company to generate substantial free cash flow; at a rate of $30,000 per day, the company can generate over $750 million per year, rising to almost $1.2 billion at $40,000 per day.

Aggressive Deleveraging and Debt Structure Improvement

The primary focus on deleveraging has led to a significant reduction of lease financing by almost $2 billion and total debt by $1.6 billion over the past two years. With plans to further repay debt in the first quarter of 2024, the net debt positioning stands strong at just below $1.1 billion. In addition, the company has transitioned from costly lease financings to traditional bank financing with more favorable terms and flexibility, enhancing the balance sheet's strength and simplicity.

Solid Returns to Shareholders

Reflecting the company's financial health and management's confidence, over $732 million has been returned to shareholders in the last two years, including substantial dividends and share repurchases. A remarkable $548 million or roughly $10 per share was returned in 2023 alone, accompanied by a recent dividend increase to $0.40 per share, showcasing the company's commitment to shareholder value.

Strategic Market Position Amidst Supply and Demand Dynamics

Strategically positioned in a favorable market influenced by increasing demand, low inventories, and limited fleet growth, the company has capitalized on structural changes in refining capacity and trade flows, along with geopolitical disruptions. This has resulted in enhanced rates, illustrated by an improvement to approximately $50,000 per day. Moving forward, demand for refined products is expected to remain strong with a projected average increase of 1.4 million barrels per day over 2023 levels, while disruptions such as those in the Red Sea have caused significant rerouting of global trade flows and elongated voyages, further tightening the supply-demand balance.

Outlook on Fleet Growth and Environmental Changes

With new orders slowing due to high new building prices and regulatory uncertainties, the fleet's overall growth is expected to be minimal. This limited growth, coupled with the aging fleet, positions the company well against a backdrop of increasing seaborne exports and ton-mile demand, projected to rise by 2.8% and 7.3%, respectively. Time charter rates remain high, affirming the market's positive outlook and the company's strategic foresight in navigating upcoming environmental regulations and market conditions.

Impact of Market Events and Future Financial Strategy

Cash flows have benefited significantly from a strong rate environment, evidenced by over $2 billion in EBITDA over the last two years and a 300% increase in quarterly dividend since the fourth quarter of 2022. The recent events in the Red Sea are expected to impact first quarter results, potentially affecting future financial decisions. However, the company maintains a cautious yet proactive stance, ready to adapt its capital allocation strategy amidst market volatility while prioritizing deleveraging and value creation.

Earnings Call Transcript 2023-Q4

[Operator]

Hello, and welcome today's Scorpio Tankers Inc. Fourth 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 Fourth Quarter 2023 Earnings Conference Call. On the call with me today are Emanuele Lauro, Chief Executive Officer; Robert Bugbee, President; Cameron Mackey, Chief Operating Officer; Chris Avella, 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 this call is based on information as of today, February 14, 2024, 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 Presentations. These slides will also be available on the webcast. After the presentation, we will go to Q&A. For those asking questions, please limit the number of questions to two. If you have an additional question, please rejoin the queue.

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

[Emanuele Lauro, executive]

Thank you, James, and thank you, everybody, for joining us today. We appreciate your time. We are pleased to report another quarter and another year of strong financial results.

In the fourth quarter of 2023, the company generated $237 million in adjusted EBITDA and more than $142 million in adjusted net income.

For the full year 2023, the company generated $959 million in adjusted EBITDA and more than $570 million in adjusted net income. The fundamentals, which have created a strong rate environment over the last 2 years remain intact. Those still are an increasing global demand for refined products. A dislocated refining capacity and a constrained maritime supply curve.

In addition to this, we've seen low water levels in the Panama Canal, attacks in the Red Sea and sanctions on Russia, which had led to the rerouting of vessels. This has made the fleet more inefficient and further tightened supply against a strong demand curve.

The cash flow from the elevated rate environments are significant. They have also been transformative for our company. The balance sheet and the quality of Scorpio Tankers as an investment has become stronger and continues to improve.

Deleveraging has been and remains our primary focus. Over the last 2 years, the company has reduced lease financing by almost $2 billion and our total debt by $1.6 billion. In the first quarter of 2024, we will repay $316 million in debt. And today, our net debt stands at just a shade below $1.1 billion, and we feel very well positioned at these levels.

Over the last 2 years, we have returned $732 million to shareholders. This has been returned through share repurchases and through dividends, which includes $548 million or roughly $10 per share in 2023 alone.

Today, we have announced another increase in our quarterly dividend, which is now $0.40 per share. This is our fourth increase since 2022. Looking forward, we expect low global inventories, robust demand and limited fleet growth to support the strong product tanker fundamentals, which we've experienced in the last 2 years.

I'd just like to thank you for your continued support, and I would like to now turn the call to James for a brief presentation. Thank you. James, please?

[James Doyle, executive]

Thank you, Emanuele. Slide 7, please. For the last 2 years, increasing demand, low inventories, refining capacity changes and limited fleet growth has led to a robust rate environment. In the fourth quarter, this continued. Our 2 rates improved through the end of December as Middle East refining runs increased after an early maintenance season moving from $36,000 up to [ $50,000 ] per day before any disruptions in the Red Sea. MR rates were lifted by the strength in the U.S. golf market, which offset slightly lower rates in Europe and Asia.

Today, Asia and Europe are lifting rates for MRs as peak refinery maintenance in the U.S. starts to wind down this month. With low global inventories, Middle East maintenance behind us in the U.S. working through peak maintenance now. The outlook for product tankers remains very constructive. As Emanuele mentioned, disruptions have led to new trade flows and rerouting of vessels, which has further tightened supply. However, this would not be possible without strong headline demand for refined products.

Slide 8, please. Global demand for refined products has been extremely strong, and we expect this to continue. 2024 refined product demand on average is expected to surpass 2023 by 1.4 million barrels per day and will be driven by increases in [indiscernible] [ edu naphtha ], diesel and gasoline as global demand has increased [ so of ] seaborne exports. January refined product exports averaged 20.6 million barrels per day, which is 1.3 million barrels per day higher than January 2019 levels.

Given the low global inventories, increased consumption will continue to be met through higher imports. And not only have imports increased, but barrels are traveling longer just into.

Slide 9, please. While demand is above pre-Covid levels, refining capacity is more dislocated. One of the biggest challenges has been diesel. Europe, Latin America and Africa all have a diesel deficit of 1 million barrels per day. Capacity closures in Europe, North America and certain parts of Asia have been offset by increases in export-oriented capacity in the Middle East and India. Opening of new export-oriented refineries and closing of older, less efficient refineries has led to an increase in seaborne exports, ton miles -- in ton miles. We have seen this in Australia where imports have increased -- is already above the lost production of proposing 2 large refineries in 2020.

Last week, it was announced at 150,000 barrel per day refinery in Scotland is expected to close and will be converted into a fuel oil terminal. Excluding the impact of Russian exports and ton miles, ton mile demand has increased over 7% compared to 2019 levels. In other words, the structural changes in refining capacity have and continue to reshape flows and increased ton miles. As ton mile demand increases, vessel capacity is reduced and supply tightened.

Slide 10, please. Disruptions have exacerbated the strong supply and demand fundamentals in our market. First, 485 product tankers of [ parried ] Russian refined product, many of which are older vessels that will have a difficult time returning to the premium trades given their age and trading history. This has and will continue to benefit the supply of vessels servicing non-sanctioned trades.

Second, lower water levels in the [ Gatan ] Lake, which feeds the Panama Canal has led to a reduction in the number of ships allowed to transit the canal from 36 to 24 per day. In the fourth quarter, this resulted in a reduction of 200,000 barrels a day of refined product moving through the Panama Canal and needing to travel longer discipline.

Third, the attacks in the Red Sea have reduced volumes going through the Suez Canal. Slide 11, please. Before the attacks on commercial vessels in the Red Sea, 2 million to 3 million barrels of refined product were [ transit ] Suez Canal each day, roughly 10% to 15% of the global seaborne product tanker trade. And this was about 1 million barrels a day higher than prior years because of the increase in distillate coming from the Middle East to supply Europe given sanctions on Russia.

Many vessels are going around the Cape of [ good Hope ] today with Canal volume dropping to around 200,000 barrels per day for the first week of February. Depending on the route, this can increase the voyage length by 30% to 70%. The rerouting of vessels has made the fleet more inefficient tightening supply and leading to higher rates.

Slide 12, please. New order book is 12% of the current fleet. New orders have started to slow given expensive new building prices long lead times for delivery and uncertainty about propulsion systems to satisfy future environmental regulation. In addition, the majority of the order book is LR2 vessels with 52% of the LR2 fleet trading and clean products today, the effective order book for vessels trading in clean is going to be less than the current 12%. Also, the fleet is aging. The average age of the product tanker fleet today is 13 years with 9% of the fleet 20 years and older. Starting this year, 8 million deadweight tons of product tankers will turn 20 years old each year, the equivalent of 160 MRs per year. By 2026, 21% of the fleet will be 20 years and older.

Slide 13, please. This year's fleet growth is expected to be the lowest fleet growth since 2000 and less than 1%. Seaborne exports and ton-mile demand are expected to increase 2.8% and 7.3%, respectively, vastly outpacing supply. Using normal scrapping assumptions relative to the age of the fleet, on average, the fleet will grow around 3% in 2025 and 2026 and close to 0 in 2027.

In addition, 1- and 3-year time charter rates remain at high levels. evidence that our customers' outlook is one of increasing export and ton miles against the constrained supply curve. The confluence of factors in today's market are constructive individually, low inventories, increasing demand, exports and ton miles structural dislocation in the refinery system, rerouting of global product flows, limited fleet growth, upcoming environmental regulations, collectively there and precedented. With that, I would like to turn it over to Chris to go through the financial slides.

[Chris Avella, executive]

Thank you, James, and good morning, good afternoon, everyone. Slide 15, please. As we have highlighted, cash flows from a strong rate environment have been significant and transformative for the company. Over the last 2 years, product tanker rates have been resilient. 2023 was a reflection of a strong market that found equilibrium after the events of 2022.

As the chart in the upper left illustrates the fourth quarter of 2023 and was marked by a normalized seasonal uptick in demand heading into the winter months. The impact of the recent events in the Red Sea will largely be seen in our first quarter results. Over the last 2 years, we have generated over $2 billion in EBITDA and reduced our gross outstanding debt by $1.6 billion. In addition to that, since the fourth quarter of 2022, we have increased our quarterly dividend by 300%. And during 2023 alone, we have returned $548 million or approximately $10 per share to shareholders in the form of dividends and share repurchases.

Slide 16, please. As we have stated in the past, deleveraging remains our primary focus, and we have made meaningful progress in this respect. As the chart on the left illustrates our gross outstanding debt at December 31, 2021, stood at $3.2 billion. As of today, this balance is $1.5 billion.

The chart on the right shows the same progression, but more importantly, highlights the shift in the mix and composition of our debt. transitioning away from expensive lease financing into more traditional bank financing with lower costs and greater flexibility.

Looking back, $1.7 billion of our outstanding debt at December 31, 2022, consisted of lease financing obligations bearing margins of over 350 basis points on average. Today, our lease financing obligations stand at just $294 million, and we have committed to repurchasing 12 more leased vessels between now and the end of the second quarter.

Once complete, these repurchases will bring our obligations under lease financing arrangements down to approximately $80 million. We have refinanced a considerable portion of our lease obligations into more traditional and lower-cost secured bank debt, which carries margins of less than 200 basis points on average.

We also want to highlight that the terms and conditions of this newer debt provide the company with greater flexibility, including the ability to repay these loans at any time and $500 million of revolving credit of which $288 million is available today.

In sum, we have not only reduced our leverage, but we've also simplified our balance sheet through more traditional forms of financing at lower cost and more flexible terms.

Slide 17, please. Looking ahead, we still have more work to do as we have committed to repurchasing $209 million of lease obligations between now and the end of the second quarter. This comes on the heels of $497.1 million in unscheduled debt and lease repayments in the fourth quarter of 2023. And $171.1 million of unscheduled debt and lease repayments thus far in the first quarter of 2024.

Over the same period, we drew $423.6 million from our $1 billion credit facility and $50.2 million from our $94 million credit facility, each carrying margins below 200 basis points. On a pro forma basis, after considering our committed lease repurchases, our gross and net debt stands at $1.3 billion and $1.1 billion, respectively.

Moreover, with no new buildings on order and the expiration of options to purchase and install scrubbers on 11 of our vessels, we have manageable CapEx requirements.

Slide 18, please. The company has significant operating leverage. Our first quarter of 2024 coverage across the fleet, including time charters is averaging close to $39,000 per day. At $30,000 per day, the company can generate over $750 million in free cash flow per year and that $40,000 per day, almost $1.2 billion. Additionally, our cash breakeven rate has declined, and we continue to seek ways to reduce it in a balanced and prudent manner. And with that, I'd like to turn the call over to Q&A.

[Operator]

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

[Jonathan Chappell, analyst]

I don't know who wants to take this one, kind of open it to the group. But clearly, as Chris just laid out, the targets on net debt are going to be achieved at some point in the early part of this year, if not at the end of the first quarter. There's a lot more uncertainty in the world right now, obviously. So there's been some turbocharge in rates, that's helped you kind of accelerate the debt repayment, but I think, a lot of uncertainty on how the world plays out from here.

So versus where we were 3, 6 months ago and you talked about target net debt levels and maybe shift in capital allocation, how do you see attaining those targets earlier versus maybe continuing to deleverage further just given a lot of the volatility in the markets today?

[Robert Bugbee, executive]

John, Robert. I think that's a great question. It's a question that we're obviously asking ourselves. I think that in a fortunate position with management of shareholders and that right now, this market is providing extraordinary returns. And so the one thing we know is the cash is coming in and our balance sheet is improving. We have really no idea as to whether or not this will continue, will the Red Sea will continue to be effectively closed and helping extraordinary earnings. And so I think that we haven't reached our target yet. We don't intend to comment on what we would do with regard to capital return when reaching the target. We're happy to say that we're not looking to do new buildings and I think that it is a difficult situation to make a lot of decisions in the market environment that you have right now.

So -- but at the same time, we're confident, as James has pointed out, in the long-term fundamentals. So the way I'd answer it at the moment is the basic operation -- basic operational position of the company at the moment is that, however, unrealistic that might be, we are running the company as if the Red Sea were to open tomorrow. And on that basis, we still think that the market will be very strong. It will take a time to wind down from where we are to, let's say, put the shipping routes together. And we're happy to share with everybody what we would call our base case of what we would think open days would be for the rest of the quarter. And so we were internally on our base case under that assumption, working assumption I've given you is we would expect product MRs to be around $35,000 a day for the unfixed days and a lot to is around $60,000 for the 6 days. So that's healthy. So I think the best thing to say is, yes, we are moving very fast towards a deleveraged state where the company can then have a lot of choices, but we're certainly not distracting ourselves right now on thinking what those -- what the best choices would be at that time. Whether -- whatever you do. And we just want to keep our eye on the goal right now and the mission of taking the debt down.

[Jonathan Chappell, analyst]

Okay. That makes sense. For my follow-up, this may seem like pretty small, but maybe it helps us shape your thoughts on strategy going forward as well. Letting those scrubber options expire. You guys were one of the first to implement scrubbers. You are very much behind that technology implemented on 86 of your vessels. By letting those options expire, do we read that to believe that you have enough exposure to the scrubbers and maybe the returns start to diminish going forward? Do you read that to believe that you'd just rather have those 355 days in this type of spot market environment and think the returns from operating those ships are much better than any scrubber premium? Or maybe are those just older ships that you may like to monetize in the secondhand market as they don't fit the core fleet going forward?

[Robert Bugbee, executive]

That's a good question, Cameron, would you like to start?

[Cameron Mackey, executive]

Sure. Thanks, John. It's yes to all. So it's obviously a number of considerations that go into us not declaring those options, and they had an expiration date. So it's not like we could further extend that optionality. But it's yes to all. The opportunity cost of installing scrubbers here is extremely high. The spreads have come down and are rather muted and are expected to stay that way. And obviously, we have a keen eye to the age of the fleet and the potential asset values here and potentially monetizing some more vessels through sale. So it really is yes to all your points.

[Operator]

Our next question comes from Omar Nokta with Jeffries.

[Omar Nokta, analyst]

Robert, just maybe just real quick, I wanted to ask, if you wouldn't mind just clarifying what you were just saying, I think, to John about how your operating assumption is for the rest of the perhaps quarter or for the rest of the year, you're assuming basically in your day to day that the Suez Canal or the Red Sea situation resolves itself tomorrow. And in that assumption, you believe that for the rest of the quarter beyond what you've guided, but for the rest of the quarter, do you think LR2s could earn $60,000 and the MRs could earn $35,000. Is that right? And that's above what you've earned thus far?

[Robert Bugbee, executive]

Correct.

We only have 1/3 of the quarter left. Just over 30% to 40%. So that's why you weighted it that way, and we know where the rates are right now and the rates right now are above those -- significantly above those numbers a lot, please. So that's how we -- it's not a perfect science, but that's where we would come out.

[Omar Nokta, analyst]

Yes. I guess I'm just looking at it from the perspective that those are above what you've guided thus far, which I guess the implication is that what you have booked thus far has seen a limited impact from the Red Sea.

[Robert Bugbee, executive]

Yes, the first 3, 4 weeks, there was no impact at all. Every day, we would answer questions to either analysts or shareholders, which would sell well, we're reading that the closure of the Red Sea and Seuz canal would affect the product market by x. Why isn't that happening? And we would answer because it takes a little time just because you -- you put an obstacle in the way of a group going to a bar and they have to take a longer route, it doesn't mean it changes the number of people standing at the bar waiting for drinks to begin with. So it took a little time. So in the same sense, we're saying that if you stopped it, if the Red Sea was open tomorrow, again, it would take a little time. So all we're doing is saying, what did we earn in the, let's say, the trailing 4 weeks, so what do we think we could earn at a minimum for the next 4 weeks, if you open the red sea tomorrow. That's more or less how that's calculated.

[Omar Nokta, analyst]

Okay. That makes sense. And I guess then just a follow-up just off of that. Sticking with the Red Sea, we've been seeing the diversions accelerate here in recent weeks at a bit of a slower start. In terms of, say, Scorpio's fleet deployment, I know James, you highlighted for the broader market, how impactful the Red Sea is. But just in terms of, say, Scorpio, how active is that of a region for you for Scorpio itself? And then is that an area, I guess, currently that you're avoiding given all the risks?

[Robert Bugbee, executive]

We do that back to front. So maybe -- the last question is more operational. So maybe, Cam, if you'd like to take that one.

[Cameron Mackey, executive]

Sure, happy to. So we avoid having a rigid policy with regards to the Red Sea, but it goes without saying that the risks there today are unacceptable for our vessels, cargo and particularly our personnel. So we are not fixing any vessels nor are we transiting the Southern Red Sea or the Western Gulf of Aiden today. And that's been true for about a month now. That being said, 2 observations, we don't avoid the Northern or middle Red Sea because it's obviously a very active area for our vessels to trade with Saudi Arabia.

And in addition, we cannot predict what conditions would change our posture of those of the market with regards to resuming transit to the Southern Red Sea. We just don't know. I don't think anybody knows. So every day we wake up, we look at the best and latest information we have. And we expect that to continue for the foreseeable future, but there is no policy per se. It's just assessing risk as we go. And as of today, the answer is no. We're not transiting something [ rate ].

[Robert Bugbee, executive]

Omar, then I'll go back to the first part of your question. I don't want people to get a strong look, we're very bullish. It's a -- these markets are super strong. The cash flow is enormous. And the other thing that you have to put in context here is that the last couple of weeks, the markets have had a negative overhang on them as with regard to U.S. with Gulf [indiscernible] refinery turnaround and Chinese New Year. So if you were to talk to our trading desk, if the conditions remain, they would expect that rates would start to firm up -- start firming next week. We have some very unusual situations going on. This is not like a light switch. The other day, when there was some tweet saying there could be piece in between Palestine and Hamas and Israel and we saw the stock sort of trend down to 10% down. It was like what [ pear ] they doing? What these people doing out there because the market will not react like a light switch. It will take time. The fleet itself is all over the place. You have really big changes. We are even booking from second quarter revenue right now we've had 2 MRs that we fixed for -- and we are not going to be any different. This is not special to Scorpio Tankers. I'm very sure that all of the leading product tanker companies will have the same type of profile in the fixing. And that is we fixed 2 product tankers from the U.S. Gulf, all the way to Japan, that is an awful long voyage. We have fixed product tankers from Singapore to Argentina, from China to [ Anchor ]. We have fixed product tankers just earlier this week, and this is mind blind from Singapore to New York. Those vessels are buried for a long time. For all intents and purposes for the balance of this quarter, those vessels may as well be scrapped. They're not going to be on any position list for the rest of this quarter. So that -- so the position I'm taking the assumption I'm taking is going to be closed tomorrow. But if it's not closed tomorrow and next week, is -- I mean, open tomorrow. If Suez and Red Sea still shut for transiting to the product market next week and refinery turnarounds go away and Chinese New Year is finished, you should expect on balance that the markets trade up even from where they are now.

So this is certainly not a -- we're not trying to be negative here. We're trying to show how strong this market is under almost any of the circumstances because of the fundamentals underneath. And we're trying to show that we will finish our mission to deleverage the balance sheet and play from enormous strength from that point.

[Operator]

Next question comes from Greg Lewis with BTIG.

[Gregory Lewis, analyst]

I guess you kind of started alluding to it, Robert, in terms of some of the longer voyages. Obviously, this is an exciting, interesting, disruptive time for rates where they are. What has kind of been the appetite? Or is there any appetite from some customers looking to maybe go longer i.e., what's kind of the opportunities and maybe the time charter market? And maybe not 6 months, but like maybe longer term, what -- any kind of depth in the 2-plus year charter market or anything like that?

[Robert Bugbee, executive]

I think that there's depth in the market. Their charters out there wanting to do things that they're there for yesterday's breaks, of course. And even at 2 years, the present front end, you would have to discount your rates so much. And that's simply because we haven't had this position for very long. And they themselves don't know what's going to happen out there.

So you have a situation where the charter wants to get on yesterday's market and the owner says, "Well, I need some recognition for where the market is right now because there's no point in me fixing a spot ship that if you could fix it $70,000, $80,000 a day for an LR2 for 2, 2.5 months, it's going to be a little bit tough to fix a way $30,000, $40,000 discount straight out of the gun for a 2-year charter unless that's reflected properly in a raised charter rate from where it was before. I think it's liquidity -- ironically, the S&P market is different. The S&P market is prices have gone up, prices are reflecting and the S&P market itself is reasonably liquid.

[Gregory Lewis, analyst]

Okay. Super helpful. And I know we've been talking a lot about the Suez Canal here. Could you talk a little bit maybe Cam or James or what you guys are seeing kind of in the Panama Canal. I mean it seems like water still low there. It seems like that could be more of maybe a longer-term issue that could be impacting rates in the Atlantic.

[James Doyle, executive]

Cam, would you like to take this?

[Cameron Mackey, executive]

Sure. Thanks, Greg. It absolutely is affecting rate structures in the Atlantic. Our analysis of the situation is it's exacerbated by El Nino, the Panamanians are trying to redirect water into the lake. The earliest we can see any improvement is later in the second quarter, but that is an educated guess and not something that we can plan on or forecast with any certainty. So we just don't know what it would take for the -- between the rainfall and the redirection of other water into the lake to allow the Panamanians to increase transits but that's our best guess.

[Operator]

We proceed with Samuel Bland with JP Morgan.

[Samuel Bland, analyst]

The first question is, I guess, on this -- on the Red Sea disruption, we've seen your very big reaction in LR2 rates but less of one in MR, is that what you'd expect to see, given the sort of trading patterns of each? Or I don't know, could the MRs go up in the coming weeks? And let's maybe take that one and then I'll ask the second one after that.

[Robert Bugbee, executive]

Yes, I think it's happened exactly as we would expect. First of all, the -- yes, there are less there are less LR2s. And when this thing -- when it first strikes, everybody wants to go to that vessel that carries the maximum cargo. And then what happens after that, it starts getting absorbed around, and we've seen the MR market actually move up now in the last couple of weeks. And that's moved up against the U.S. Gulf refinery situation plus the preparation for Chinese New Year. So that's like a very bullish sign.

And you've starting to see cargoes getting split -- so in the same way it took a little time for the LR2s to actually move. It takes a little time for the space to be filled for one to another way between the MRs and the LR2.

[Samuel Bland, analyst]

Okay. Understood. And the second question is on the net fleet growth graph on Slide 13. I just want on the footnote, there's this assumption of 30% slippage across 2024 to 2027, which I guess we're expecting those years to be good years. I can sort of see why you might get slippage in a band period, but why would we expect 30% slippage in what hopefully is going to be a strong market.

[James Doyle, executive]

Sam, you always get slippage at the end of the year on certain vessels, but there's a lot of vessels in the order book that don't have firm delivery dates. So there were a lot of vessels ordered maybe promising a Q4 delivery date in '25 or Q2 or something like that in the later years and we just don't have the specifics on it. So it's our best estimate of when these vessels will deliver.

[Operator]

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

[Ken Hoexter, analyst]

Robert or [ Jean ], can you talk about kind of breakeven levels now, right? So you've gone down to [ $ ]16,000 a day from[ $ ]17,000 last quarter. I guess where do you see that trending? You've talked before about kind of getting that a little bit lower. Maybe just talk about where you think it is now.

[Robert Bugbee, executive]

I think we're happy to give the [ $16,000 ] and we'll not talk about where we want to go. I think we'll just -- we'll say that we are focused on reducing our breakeven levels. And to the extent that you are paying down debt and reducing your amortization debt amortization and interest costs than that should happen. The exact -- I think it's better that we just say where they are rather than say, where they're going to.

[Ken Hoexter, analyst]

Okay. And just a lot on this Red Sea discussion. Maybe talk a bit about, I guess, is the impact to rates now? Is it still somewhat isolated in on certain lanes? Is it just rates globally have adjusted? I just want to understand the process on kind of timing and how well spread out that the rate adjustment is now.

[Robert Bugbee, executive]

All routes are up -- it's -- that's what's so strong. The depth of breadth across the product space is very strong.

[Ken Hoexter, analyst]

Okay. And then.

[Robert Bugbee, executive]

Many, many different routes. I mean, I've described some really crazy routes, the MRs. But inside of that, the Obviously, the Asia market has been stronger on the MRs and the U.S. Gulf is let's say, being the one that's not so strong, even though it's still very strong, but that's because of the refinery turnarounds in Asia, even though it's going through Chinese New Year has been assisted because talent is being drawn to Europe because of Europe situation.

And frankly, I think we're getting a little help from U.S. finally being tough on the sanction Russian oil and Russian trading ships. I think that's good, too.

[Ken Hoexter, analyst]

I guess, Robert, if we thought forward and you were talking about the Red Sea reopening kind of in your base model, right, in terms of assumption on pricing. What happens in terms of if Russia and Ukraine at some point, the war will end and you'll get what happens to those vessels? How quickly do they get reabsorbed into the market? I just want to understand timing.

[Robert Bugbee, executive]

Yes, of course. But I mean if you're looking for excuses to maintain your hold because you're now worried about Russia, I doubt whether Russia, Panama and Middle East will all get sold together very shortly. And there is Russia, we can be slightly more certain on because it's a phenomenon that's sort of been embedded. That position just doesn't seem to be getting any easier. As I said, the U.S. is getting tougher related to the sanction Putin is showing no interest in slowing down and Ukraine at the moment is showing no interest in giving up. So we also still have to accept the longer we go through the curve and time here the more that anyway, a[ rush in ] this going back -- I don't see how you go back to how it was before anyway. And even if you go back a little bit, I don't think that starts to affect things so much because you've got this aging of the fleet coming through, and then you've got the growth in other trades in the product market that have taken over and I just can't imagine that you're going to go back to, oh, yes, that's great. Thanks, Russia. We'll Europe just take everything again.

[Ken Hoexter, analyst]

So just help me understand the last part of your kind of argument, right, is if you are assuming a base case or return in your rate assumption, at elevated rates, tell me again why you would not want to start locking in any charter out contracts? Is it that they just don't adjust to where the market is in any relationship.

[Robert Bugbee, executive]

You're assuming a -- I've only talked about elevated rates related to the Middle East. I don't think that the market is that elevated any longer and over was related to the Russian thing. I think that was sort of a little bit over extended and the -- the reason is this is because the rates are very, very high right now. The charter is sitting there saying, so these are not the rates. But let's say, before all this happened, they ship would be $20,000 a day charter, for example. And right now, that vessel could earn, let's say, $30,000, $35,000, $40,000 a day because of the elevated rate. The charterer hasn't really moved. So now the calculation would be for a 2-year charter the owner would want to have more rather than give the ship away at the front at such a big discount. But the charter isn't yet ready to pay that rate because the charter does not have the certainty with all the different changes in the new announcement every 10 minutes of whether those very heightened rates will continue for a long time.

The same as nobody does. So therefore, it's almost like no trade in, let's say, stock market length, the bid offer is just too wide right now. But that will settle down some point over the next 3, 4 weeks, I would expect.

[Operator]

Our next question comes from Frode Morkedal with Clarksons Securities.

[Frode Morkedal, analyst]

Congrats for the strong quarter and even better first quarter. I guess coming back to the Red Sea, you talked a lot about it, but -- and I appreciate the $60,000 figure if it opens up tomorrow. But I'm curious to hear your upside case should this continue, right? I guess we haven't seen all ships that worked. So do you have any idea what the potential impact could be, how high rates could go should this last?

[Robert Bugbee, executive]

Well, I know that's going noway. As an analyst this company called [ Traxon ]. Norwegian guy names [ Frode ]. And he sort of said very early in the piece at the end of last year that we could see 2 rates at over $100,000 a day in certain fixtures and that person has been right [ Frode ]. So I think we've done quite well following your guidance, right? So I don't think we're going to comment on the upside. Upside can take care of itself.

[Frode Morkedal, analyst]

I guess.

[Robert Bugbee, executive]

Congratulations on your coal product.

[Frode Morkedal, analyst]

My final question is just on the new trade lanes you mentioned, we all observed the standard routes. So -- but curious to hear and if you -- what type of new routes do you see on the LR2s, for example, which are emerging.

[Robert Bugbee, executive]

You've just -- you're seeing some very -- LR2 are slightly more in order. You've just seen some were things that are very, very cool. So you've seen, for example, vessels that are discharging in Europe from Sorry, we have one chip, for example, it's gone from the AG loaded in the AG gone around the Cape going to Europe, and it's about to discharging Hamburg. It's going to reload in Amsterdam and then come all the way back around Cape and discharge in East Africa 6 days away from loading in AG. That is really kind of well, okay.

And then you've seen routes that are related out in Asia 2, where you're able to bring vessels back towards the AG or voyages to Australia and things that are out of the indexes that are very lucrative voyages.

[Frode Morkedal, analyst]

Perfect. That's very interesting Great.

[Operator]

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

[Liam Burke, analyst]

Your dividend payout has been steadily increasing from quarter-to-quarter. How much of that is a part of your capital allocation strategy as your debt levels start coming down? And how are you going to balance that between your buybacks where you have sort of a stated target as a percent of NAV.

[Robert Bugbee, executive]

We're simply not going to comment to capital allocation strategy until we achieve our goal and the [ human departmentation ] of what you would do just between stock buybacks and dividends. So -- right now, the -- we do -- we've always believed in regular dividends. And I think that the dividend increases is like a not or a recognition of the really improved underlying strength of the company. I wouldn't say it as anything other than that. We've been regularly increasing that dividend all through last year, and we're just adding it again to it now.

[Liam Burke, analyst]

Okay. Obviously, there's been a lot of talk about the Red Sea. How much has India as it stepped up as a -- both an importer or an export or import of crude and export or product tankers been to your advantage? And how do you see that shaking out over time?

[James Doyle, executive]

Robert, do you want me to take this?

[Robert Bugbee, executive]

Yes, of course.

[James Doyle, executive]

Liam, great question. Well, I think the answer is it's had a positive impact. We often focus just on the Middle East. And depending on the region, sometimes people will include India in that. But they have added very advanced refining capacity Jamnagar is probably the most advanced refinery in the world, one of the most complex refineries in the world, and they export around 1 million to 1.5 million barrels a day of product, and they're planning to add a fair bit of capacity. So similar to the impact of the Middle East, which is expanded ton miles, we have seen a similar impact in India, and that's probably the next growth region.

[Operator]

Our next question comes with Chris Robertson with Deutsche Bank.

[Christopher Robertson, analyst]

This is Ben Moore calling on for Chris Roberts here at Deutsche Bank. You've outlined very strong fundamentals in the market. And given the latest disruptions in the Red Sea, it's put upward pressure on tanker rates. We wanted to ask, what are your thoughts, especially on prioritizing maybe a special dividend over share repurchases, CapEx or debt pay down?

[Robert Bugbee, executive]

I'm really sorry, Chris. I missed the question. I'm really sorry.

[Christopher Robertson, analyst]

Oh, I'm sorry. We wanted to ask you've outlined very strong fundamentals in the market. And yes, given the latest assumptions in the Red Sea, that's put upward pressure on tanker rates, we wanted to ask, especially how you might be thinking about prioritizing a special dividend over other things like share repurchases, CapEx and debt paydown?

[Robert Bugbee, executive]

Yes. I will sort of restate this until we get to until we get to where we want -- we finish the mission of paying down debt, and we're really not going to really think about it ourselves. Now we have to see what the set of opportunities of -- and secondly, we're never going to telegraph it. It's not possible way. So I'm going to say it to everybody. There is no way that we're going to come out and say, "Oh, we're going to buy back this [ my start ] -- or we're going to pay out -- tend to pay out this much extraordinary dividend or we intend to raise the regular dividend to ex we're just going to act on whatever we have done. We've already got the stock buyback in place. So we're not going to -- we're not going to wake up one day and say, "Hey, guys, we're happy. Now this is going to be -- this is what we're going to do.

[Christopher Robertson, analyst]

And maybe as a follow-up, can you please discuss just your thoughts looking forward, whether we've reached peak disruption in terms of product tankers and how it might play out throughout the year, just at least from what you're seeing and hearing.

[Robert Bugbee, executive]

I think that's a wonderful wonderful wonderful question. When we've been through 2 years ago, we 2 years ago or 3 years ago, we wake up one morning in late February and see absolutely no cars on the road and no planes in the sky. And then we are sitting in a situation now where we've got a long-term walk between Ukraine and Russia, the Panama and Canal transit inhibited, Red Sea transit inhibited. And some argue that the Palestine-Israel situation, the whole Middle East situation is getting worse, not better. And -- no one talks about the risk of it spilling over into other areas. So I think it's impossible to say that we've reached the peak of the disruption because we're now way beyond 3 done deviation of disruption anyway right now.

So it's not Wall Street bank and all these new things is there's a complacency in the whole oil space as we look at price. And it's like Wall Street is really wishing hoping all the time on every announcement that's relatively dovish, but the facts are, if we go back talk October 7, virtually on a biweekly basis, the situation has got worse and not better. It's hard for me to say, yes, we've reached the peak of dislocation. We don't.

[Operator]

This concludes our question-and-answer session. I would now like to turn the conference back over to James Doyle for any closing remarks.

[James Doyle, executive]

Thank you all for listening. Hope you all have a great day.

[Operator]

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