Hafnia Ltd

OSE:HAFNI

Earnings Call Transcript 2022-Q1

[Operator]

Welcome to Hafnia's First Quarter 2022 Financial Results Presentation. We will begin shortly. You will be brought through the results presentation by Hafnia's CEO, Mikael Skov, CFO, Perry Van Echtelt; EVP, Commercial, Jens Christophersen; and EVP, Head of Investor Relations, Thomas Andersen. They will be pleased to address any questions after the presentation. [Operator Instructions]

Certain statements in this conference call may constitute forward-looking statements based upon management's current expectations and include known and unknown risks, uncertainties and other factors many of which Hafnia is unable to predict or control that may cause Hafnia's actual results, performance or plans to differ materially from any future results, performance or plans expressed or implied by such forward-looking statements.

In addition, nothing in this conference call constitutes an offer to purchase or sell or a solicitation of an offer to purchase or sell any securities.

With that, I am now pleased to hand the call over to Hafnia CEO, Mikael Skov.

[Mikael Opstun Skov, executive]

Thank you for this. As mentioned, my name is Mikael Skov, and I am the CEO of Hafnia. Let me welcome you to Hafnia's First Quarter 2022 Conference Call. With me here today, I have our CFO, Perry Van Echtelt, our EVP Commercial, Jens Christophersen; and EVP and Head of Investor Relations, Thomas Andersen. The 4 of us will present the first quarter 2022 financials for Hafnia.

Today's presentation agenda consists of 4 key areas. We will begin with an overview and key highlights of Hafnia first quarter, followed by financials for the first quarter and then commercial updates on the product tanker market. We will then conclude our presentation with our ESG overview.

Let's move to Slide #2. You should all be aware and take note of the mandatory disclaimer. Thank you.

Slide #3. Let me now begin by giving an overview of Hafnia and key updates of the first quarter. Slide #4. Hafnia is a fully integrated shipping platform, operating within the product and chemical tanker market. We are listed on Oslo Stock Exchange under the ticker code HAFNI. At the end of first quarter 2022, we owned and had chartered in a diversified portfolio of 139 vessels. Our own vessels have an average broker valuation of $3 billion, giving Hafnia a net asset value of around $1.4 billion. We also have our own in-house technical management and global commercial platform with chartering teams in Asia, Europe, the Middle East and U.S.A.

Our technical management team ensures that the high safety and environmental standards are maintained on board while our chartering team are managing close to 100 third-party vessels in the pools. These various operational segments make Hafnia a fully integrated platform, highlighting several key value propositions. Hafnia is now the largest operator of product and chemical tankers in the world. Our fleet's low average age of 7.7 years and unparalleled scale makes Hafnia's business robust and sustainable, enabling better utilization and improved earnings capability.

With improving fundamentals, the market outlook for product tanker in the coming months remains strong on the back of significantly increasing ton mile demand. We continue to focus on having low operating and funding costs. This is made possible with strong relationship with our stakeholders, such as banks and industry partners, giving us access to industry-leading debt financing.

Our business model is robust with diversified revenue streams, such as the pool platform and bunkering service. Fee revenue from our bunker and pool business has been strong and consistent. In the first quarter, our commercially managed pool business generated an income of $5 million, while our bunkers team has generated an income of $1 million, buying bunkers for more than 900 vessels for our pool platform and third-party owners. With the recent increase in activities and rates, we can expect the fee income to further increase in the coming quarters. Based on this success, we will continue to develop these adjacent businesses.

Lastly, at Hafnia, we have a clear ESG profile. With growing impact from environmental regulations, Hafnia is well equipped and takes all responsibilities seriously to minimize our carbon footprint as well as ensuring the most optimal working environment for our organization.

Moving to Slide #5. So let me move on and give you an update of the key events that happened in the first quarter. I'm proud to reiterate that we have successfully executed 2 key strategic acquisitions. The first being the acquisition of CTI with a fleet of 32 vessels and the, second being the acquisition of 12 modern LR1s from Scorpio Tankers. As a result of these strategic transactions occurring at a period when Hafnia was trading at a large discount to NAV, Hafnia has seek out alternative channels to a capital raise to finance these transactions.

As a result, Hafnia's overall leverage has increased. With the subsequent improved fundamentals and outlook for the product tanker market, Hafnia's shares have been trading higher and closer to NAV. With that, we decided to execute $100 million capital raise, which was successfully completed on May 5. The capital raise allows us to optimize our capital structure and to strengthen the debt structure in our balance sheet following the previously mentioned 2 acquisitions.

Additionally, this also allows us to lower our cash flow breakeven and financing costs, increase the free float in our shares and continue to be in a good position to take advantage of future opportunities. We have seen greater volume traded in recent weeks, which improves our share liquidity. Our share price has also increased 54% since the start of the year.

I would like to take this opportunity to thank our dedicated team and industry partners for their hard work and commitment to make this happen. I'm also grateful for the continued trust from both our existing and new shareholders, further highlighting Hafnia's strong foothold in the market. Going forward, we will continue to focus on optimizing synergies and earning capabilities by utilizing our well-positioned modern fleet to take advantage of the continued expected upturn in the product tanker market.

Moving on to Slide 6, and I will hand it over to you, Perry.

[Perry Van Echtelt, executive]

Thanks, Mikael. Global oil demand has gradually recovered at the end of 2021 and into 2022. We saw rates improve significantly. The situation in Ukraine has also impacted trade upturns, increasing product ton mile demand. And as a result, the first quarter saw a TCE income of $163.4 million and a net income of $21.3 million. Income from the management of third-party vessels and buying bunker on behalf of third-party clients of $6 million for the quarter.

So for the quarter, we saw a return on equity of 6.8% and a return on invested capital of 5.1%. The balance sheet remains strong with a cash position of $74 million at the end of the quarter, and we continue to see strong access to the banking environment. And with the increasing interest rates for the U.S. dollar financing that we have, we have continued to gradually increase our interest rate hedging position to lock in the rates to match the tenor of our debt profile. And with this result, we are happy to announce a dividend of $0.021 per share in dollars for the first quarter, representing a payout ratio of 50% and further demonstrating our ability to produce shareholder value even in challenging markets.

Looking forward, we can expect high product tanker rates to continue amidst the more restricted oil market and also in trading returns. The increase in assets and cost debt is largely the result of the consolidation of the CTI acquisition from end January this year and the part delivery of acquisition of the LR1 vessels in the first quarter. The 8 S-class vessels that have been sold are now classified as assets held for sale until the vessels have been all delivered later this year.

As Mikael already mentioned, we've also further strengthened our balance sheet and liquidity position through the capital raise, which will be reflected in the financials of the second quarter. This allows us to reduce our leverage in the near term and enable us to continue to be in a good position to take advantage of any future opportunities.

Then if we move to the next page, we'll discuss a bit about the TCE breakdown. For the first quarter, we saw a TCE revenue of $163.4 million on the basis of 10,366 earning days. And this represents an average of $15,761 per day, which is a great increase from both year-on-year and quarter-on-quarter perspective. From the graph, you can see the rates have improved significantly from the previous quarters and the coverage rate for Q2 continued to be strong. So looking at those rates, as of the 20th of May this year, 70% of the total earnings -- earning days in Q2 were covered at an average of $27,193 per day. For the remainder of the year, we've covered 29% of our 38 to 279 total days at an average rate across the fleet of $25,455 per day.

Due to the supply situation in Russia, we find oil products have started to travel over longer distances to meet the shortfall of supply of oil to the Atlantic hemisphere, which is positive for freight rates. For the week beginning the 16th of May, Hafnia's pool earnings have averaged $34,011 per day for the Handy vessels, $32,646 per day for the MR vessels and $57,506 per day on the LR1s.

And if we move to the next page, a bit more on OpEx, which includes our vessel running costs and technical management fees, we spent in total $62.3 million for the quarter on the basis of 9,259 calendar days, resulting in an average of $6,723 per day. All in G&A expense per day for the quarter was $772 per day.

Our operating cash flow breakeven for the full fleet in the first quarter was $14,382 per day, one of the industry's lowest. We are constantly evaluating our performance by benchmarking ourselves. We're pleased with our performance relative to our peers. This comes from the quality in our daily commercial decision-making and keen understanding of the market conditions. The graphs on this -- on the below part of this page further reinforce this. For the quarter, we benchmarked some key metrics against the peers, and you can see that Hafnia stands out from the rest in all segments.

Then on Page 10, we show a few scenarios. So with the recent increase in rates in the product tanker segment, represents a significant earnings potential for the future. Looking at the various scenarios where we apply recent realized rates into our forecast for the remainder of the year, you can see the strong earnings potential Hafnia has for '22. So this page, you can see the impact, the open position of the fleet and the added capacity of the 2 acquisitions have on the P&L in different scenarios.

Hafnia is well positioned to take full advantage of the upturn in the product tanker market by optimizing synergies with a well-positioned fleet and capturing the strong market.

And if you continue, Jens, why don't you take the next few pages.

[Jens Christophersen, executive]

Thank you, Perry. The next few pages show the global oil outlook and our expectations for the product tanker market. Global oil demand has recovered towards the end of 2021 and into 2022, mainly due to the reopening of several countries' borders and resumption of air travel. However, recent escalating lockdowns in China, the world's second-largest oil consumer and surging commodity prices as a result of the situation in Ukraine have led to slow growth -- slower growth in global oil demand.

Despite of that, the impact has been mitigated by the continued strong recovery of oil use in the West. Mobility indicators have also remained robust, where the number of international flights and driving indices on an upward trajectory. This lends support to the demand of both motor gasoline and jet fuel, which are recovering strongly in 2022.

Overall, global oil demand is still expected to increase by 1.8 million barrels a day to 99.4 million barrels in 2022, slightly below 2019 levels. On the supply side, global oil production has fallen by 0.7 million barrels to 1 million barrels, mainly due to Russia which saw 1 million barrels go offline. OPEC members also continue to supply below target levels. This is offset by incremental production from the U.S., South America, North Sea and Middle East, and we anticipate that this increase should more than offset the lower Russian volumes in the coming years.

Move to Slide 13. From the beginning of the situation in the Ukraine, we've also seen an increase in latent utilization for product tankers. So far in May 2022, we've seen the utilization for MR increased by 5.5%, and the average ton mile per MR unit increasing by 3.3%. We expect this utilization to further increase, resulting in increased rates for the vessels.

On this slide, oil production for the last year has not kept pace with oil demand and consequently, all inventory levels have been declining rapidly to levels below the last 5-year range. However, total OECD industry stocks saw a marginal increase by 3 million barrels in March 2022 due to the emergency stock releases of 24.7 million barrels in March in the OECD. Total inventory levels now stand at 2,626 million barrels and only cover 57.7 days in terms of forward demand, that's 8.4 days lower than the 5-year average.

Of the industry stocks, crude inventories rose by 22.8 million barrels, in line with seasonal trends. But product stocks grew by 25.5 million barrels, mainly due to gasoline and middle distillates, which decreased by 12.1 million and 10.2 million barrels, respectively. Cargo volumes and ton miles for clean and chemicals are increasing steadily and have surpassed pre-pandemic levels compared to dirty counterparts. Situation in Ukraine has also impacted trade patterns around the world having a positive impact on ton miles from longer voyages to the Atlantic Hemisphere. In short, with steady growth in oil demand, this bodes well for the tanker trade volume, which is expected to grow further in 2022.

Moving on. The refining sector recovered well towards the end of 2021, but severe lockdowns in China has caused the global refinery throughput to plunge in April. U.S. refining activity also saw a counter seasonal fall in activity due to operational issues and tight available capacity. Despite that, we expect refinery throughput to increase in the later half -- the latter half of the year with new refineries coming online mainly in the Middle East, and Al-Zhour in Kuwait with a total capacity of 0.6 million barrels per day is expected to be fully operational early Q3 2022 and dedicated to exports.

Saudi Aramco's Jizan refinery is running at about 50% and estimated to deliver the balance 0.2 million barrels a day by the end of Q2 2022. These 2 new refineries will jointly add about 0.8 million barrels of product transport demand versus today, equivalent to a demand increase of 75 MRs. Current refinery margins are likely to speed up the completion process and drive high refinery utilization in all regions.

On the supply side, outlook remains positive with a slow fleet growth. Fully booked yards until the end of 2025 gives us high visibility on the supply of tankers. Looking at the order book for tankers, they are at historical lows, and we can expect this number to further drop in the coming years due to increasing newbuild prices and ambiguity around the future of propulsion systems, energy prices and regulatory environment.

With that, this will likely fuel further secondhand vessel price increases and market activity. Looking at the age profile of oil tankers. Worldwide clean and dirty fleet today is about 2 years older compared to what it was in 2008. During 2022 and 2023, combined, the product tanker fleet will reduce by about 75 MR equivalents due to aging. This further reinforces the importance of having a young fleet as older vessels tend to have more waiting time and shorter voyages.

Additionally, the scrapping of old alternative is increasing. We've already seen this in 2021, where a total of 3.7 million tons deadweight was scrapped up from 1 million tons in the whole of 2020. Scrapping levels for the following years are expected to remain at high levels as steel prices are likely to remain high.

So with this, I hand it over to you, Mikael.

[Mikael Opstun Skov, executive]

Thank you. And if we move to Slide #18. On top of excellent commercial performance and notable consolidation efforts, Hafnia also has a strong focus on ESG. We always on a lookout for potential partnership opportunities to accelerate our environmental initiatives in developing our company culture to deliberate and thoughtful leadership training programs. Hafnia's ambition is to be best on water. This means recognizing the role our business plays within the wider climate narrative and taking meaningful steps towards a net zero emission future.

We are in full compliance with the IMO 2020 regulations on sulfur emissions. 2021, across Hafnia's all fleet, our carbon intensity, as measured by the annual efficiency ratio, was 5.4 grams per ton mile, which is 6.5% better than the present IMO baseline. We are working hard to reduce our current fleet carbon intensity to 4.35 grams per ton mile by 2028, meeting the IMO's 2030 target, 2 years in advance, and we are well on track to achieve that.

Moving on to Slide #19. Looking ahead, the future strategy is to remain volatile on the back on geopolitical tensions and accelerating inflation, but we believe Hafnia has future-proofed itself and is well equipped to face what is to come. With the situation in Ukraine altering trading patterns, driving up exports and longer voyages, we expect strong product tanker rates to continue in the coming quarters.

Hafnia being the largest operator of product and chemical tankers, is well positioned to optimize synergies and earnings with our well-positioned fleet and expanded the range of cargoes that we can transport. With the increased focus from the political environment to reduce the tendency on Russian oil and products in the future, we foresee structurally longer-term mine transportation into Europe to remain a permanent positive factor.

The recent capital raise has also highlighted Hafnia's strong foothold in the market. I am immensely grateful to support a strong interest that we have received during the capital raise, and Hafnia will continue to take advantage of market synergies and opportunities to further demonstrate our ability to produce great shareholder value.

With that, I'd like to open up the call for questions.

[Operator]

[Operator Instructions]

[Thomas Andersen, executive]

Any questions? You have any hands raising? There, we have 1 from Magnus.

[Magnus Fyhr, analyst]

Thanks for the good presentation. I guess, Page -- Slide 11 or 10, I can't remember which one it was, but you painted 4 scenarios. It gave a very positive outlook for the rest of the year. Which one of these scenarios are you most comfortable with?

[Thomas Andersen, executive]

Mike, would you answer that one?

[Mikael Opstun Skov, executive]

Yes. So thank you for that. Well, that's obviously a very, very good question. I think quite frankly, we just wanted to show the sensitivity because as you know, I mean, when you have a full utilization of the fleet, sentiment plays a very important role as to how far rates could go. But our view at the moment is that we don't see this as a very short-term event that we are going through now. We see that there are changes that will become structural, i.e., in terms of longer ton mile driven by a forward situation where Europe will make itself independent of Russian oil.

So we for sure think that this market has more or less than just being a small peak that we're seeing here in Q2. That's probably as close we can get to giving any rate guidance, but that's kind of we're at, at the moment.

[Magnus Fyhr, analyst]

I figure I try. But anyhow, what do you see as the biggest risk in the second half of the year?

[Mikael Opstun Skov, executive]

So at the moment, the biggest risk as far as we're concerned is really more on the macro side of the whole situation. So this is really around inflation, potential downgrading of global growth, et cetera, and then a dramatic downturn in oil demand. It's not a scenario that we think is realistic at the moment in terms of a lot of reduction in oil demand simply because looking at previous situations like this, oil demand has actually shown a lot of consistency in terms of actual decrease. But those -- the macro risk is really kind of the main risk that we will be seeing when we look out for the rest of the year and onwards.

[Magnus Fyhr, analyst]

All right. And just 1 last question. So on the risk that you can control versus the market risk, what are you doing as far as interest rate risk fixing maybe some of your interest rates or fixing ships at these levels. What's in your control? What can you do to mitigate any downside?

[Mikael Opstun Skov, executive]

So Perry can afterwards maybe give a quick rundown and explanation on the interest side. But I think on the commercial side, I mean, quite frankly, one of the reasons why we have focused so much on our cost structure, both in terms of finance costs, but also on the SG&A side, is actually that we have wanted to run shifts in the spot market. In order to do that, you need a low cash flow breakeven.

So I think that's kind of the mitigating factor of news there. In terms of freight hedging, we think that is too early. So at some point, once we feel that there's more linked out there that you can cover freight rates, say, for maybe 3 years, we'll always have a look at it. But for the time being, that's not in the cards. We still feel that the spot market on the freight side is so strong that we should kind of still continue to be more exposed. So maybe Perry, you want to add something on the interest side?

[Perry Van Echtelt, executive]

Yes. So Fyhr, good question on interest rate hedging. We've typically been hedging around 50% of interest rate exposure in our portfolio. So that's an ongoing portfolio with the acquisitions of CTI and the 12 LR1 ships, we've also further increased the hedging on these financings that came in. So at the moment, we are just below 60% hedged in terms of interest rates, especially at hindsight where we are now at pretty attractive rates. So we try to be there at that 50% to 60% overall hedge position.

[Thomas Andersen, executive]

Good. And we have a question from Nick [indiscernible]. He's writing, I'm still trying to understand your recent equity raise. It looks like after selling the stainless ships, your net debt to ship value will be below where it was December '21, even without the equity raise. And what -- that is without the large Q2 cash flow. What was the point of the equity raise earlier in May? I don't know, Perry, is that something you can give a go?

[Perry Van Echtelt, executive]

Yes, sure. Thanks. I think as we stated, the reason of doing the capital raise is if we look at the financing that came in with the acquisition of CTI, which had quite a bit higher leverage than Hafnia already had in his balance sheet. And the 12 LR1s that we acquired were financed through a 100% sale on leaseback. So all in all, there was quite a big amount of equity that we didn't raise cash. So we issued shares for the [ all three ] transactions. And at that moment, the share price was so much below NAV that indeed it didn't make sense to raise any equity. But we have been able to do these transactions because we have a strong balance sheet, and we'd like to get back into that position as well.

So if you look at both transactions, the gap in leverage will be solved there by, say, $300 million of equity. So 1/3 of that we have solved by doing the equity raise and improved liquidity is also in the important element of that transaction. And the rest should follow indeed from retained earnings. And part of that is also the sale of the 8 stainless vessels. I'm not sure how you reason your part of that. But ultimately, the sale of the 8 vessels will bring in close to $50 million of cash. And the rest, of course, will be paying down the financing that was attached to those ships.

[Thomas Andersen, executive]

Then we have a question from [indiscernible].

[Unknown Analyst]

Just a quick question for me. I'm curious to hear if you have seen any, let's say, changing behavior from oil traders and, let's say, other truckers? But what's the appetite for longer-term time truckers today?

[Thomas Andersen, executive]

Jens, is that for you?

[Jens Christophersen, executive]

Yes. Thank you, Thomas. And that's a good question. The way we see it, we're still in an early phase of a spot market that has recovered and turned unexpectedly strong within a very short period of time. And for that reason, we have yet to see a large volume of long-term contract inquiries in the market. We're starting to see the first ones now where some of our customers are reaching out for 1-year charters and 3-year charters. And at the end of last week, the first [indiscernible], the 5-year [ MR ] charter was concluded on topics. So our expectation is that this will gain more momentum in the months ahead of us, and it's still an early time in the cycle. I hope that answers your question.

[Unknown Analyst]

Yes, that's interesting. And just what roughly rate levels for the 5-year charters you mentioned?

[Jens Christophersen, executive]

We've seen an MR go on topics for modern chip at 5 years at $17,500 a day. There are rumors in the market that the MRs available from yards for September delivery being negotiated between $18,000 and $20,000 a day. So it will be interesting to see when the deal service, what's actually going to be done. But given the present strength in the spot market, it's hard to believe that these levels for a 3-year deal are sustainable. In our opinion, they have to move up. Otherwise, people would be motivated to remain in the spot market.

[Thomas Andersen, executive]

And now we have a question from Adrian.

[Unknown Analyst]

Impressive figures, by the way. I have 1 question about your ESG strategy, which you put a lot of emphasis on. How is it that you are still rated a simple B by MSCI and therefore, not investable for many investors from an ESG point of view? What measures have you taken to change this? Because currently, sustainability criteria are not that important for investors. But I expect this to change again in the coming years.

And second question relates to your investment strategy. I want to know when do you reach your capacity limits, what new buildings you have planned for the next 3 years? And when do you expect the cycle to take off again?

[Perry Van Echtelt, executive]

Sure. I got to say, I've never seen the research paper you mentioned from MSCI. So that's difficult for me to comment on. But maybe I should see if I can get that and we then can comment on it. Investment strategy, and maybe that's for you to comment on, Mikael?

[Mikael Opstun Skov, executive]

Well, maybe I can just add a little bit to the ESG side. So I think if you look at the annual report that we just released you'll see that since last year, actually, we have established a strategic cooperation with Diginex with the full aim of having reporting, which basically caters for every demand out there. Because we have seen like, as I'm sure you're referring to, that lots of different consultants, different institutions are rating things very differently. And therefore, it could be very difficult sometimes to make comparisons.

So I don't know from when this was made that you referred to. But overall, I can say that as of the annual report, there would be -- the normal understanding should be about the ESG rating of half year. And at least when we look at our own rating where we are compare to standards, it would be the highest in our industry. So maybe this is a crossover timing rather than anything else. But going forward, that will be the way we will approach it. And you would basically be able to extract everything that you want to know about any of the E, S or Gs in any form that you would like stand-alone.

So going further on to the investment side. Well, as Perry also alluded to earlier, we've obviously done quite a lot in terms of adding these initially 44 vessels to Hafnia. And the whole, if you like, strategy now going forward is actually to focus more on returning capital to shareholders in some form or shape whether through dividends or share buyback, whatever makes more sense. But we are not out there to come up with a new message investment strategy, we're comfortable with the sites we have.

And I think looking at the earnings we see here, not just in Q1, but also in the sensitivity page that was referred to earlier, you can see how much the added vessels that we put into Hafnia means for the earnings potential. So there's no strategy about going on investing in buying stock. The only thing I could see happening mainly from a growth perspective is that there are more consolidating opportunities, but mainly on a share-for-share basis. That's something we will always look at if we feel it's value accretive. But nothing in terms of going out into partnerships.

[Thomas Andersen, executive]

Any other questions? If not, then the word is yours, [ Shina ].

[Operator]

We have come to today's -- the end of today's presentation. Thank you for attending Hafnia's First Quarter 2022 Financial Results Presentation. More information on Hafnia is available online at www.hafniabw.com. Goodbye.