Hafnia Ltd

OSE:HAFNI

Earnings Call Transcript 2021-Q2

[Operator]

Hello, everyone, and welcome to Hafnia's Second Quarter 2021 Financial Results Presentation. We're just having a slight technical difficulty with the sound. We'll begin shortly. [Technical Difficulty] Second quarter 2021 financial results presentation. We will begin shortly. You will be brought through the 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 turn the call over to Hafnia's CEO, Mikael Skov.

[Mikael Opstun Skov, Chief Executive Officer]

Thank you. My name is Mikael Skov, and I am the CEO of Hafnia. Let me welcome you to our second quarter 2021 conference call. Along with me today, I have our CFO, Perry Van Echtelt; our Executive Vice President, Commercial, Jens Christophersen; and Executive Vice President and Head of Investor Relations, Thomas Andersen. The 4 of us will present the second quarter 2021 financials for half year. Before we go into details for the second quarter, I would like to take this opportunity to express my deep gratitude for Hafnia employees, both at sea and at shore, for their exceptional efforts during these challenging times, and stress that we will continue to prioritize our employees' health and well-being so we can continue to serve the world and live up to our mission to be best on water. I would also like to highlight that you should all be aware of the mandatory disclaimer, which I would urge you all to read. Moving to Slide #4. So let me begin by introducing Hafnia. Hafnia is a ship owner, operating across all product tanker segments, providing marine transportation of refined products. We are a fully integrated shipping platform, with 100% alignment of interests across all segments and without any sea leakage. We're headquartered in Singapore, with offices in 3 other key shipping hubs, namely Houston, Copenhagen and Mumbai. We are listed on Oslo Stock Exchange under the ticker code HAFNI. We own or have charted in a diversified portfolio of 98 vessels across 4 product tanker segments and commercially manage an additional 86 vessels, bringing us to a total of 184 store vessels under commercial management. As a fully integrated shipping platform, we also have our own in-house technical management and bunker team. Our technical management team ensures that the highest safety and environmental standards are maintained on board. And our bunkering business are now buying bunker for more than 450 vessels, including third-party clients. Fee revenue from our commercial management, ongoing business and technical management have been strong and consistent. Based on this success, we will continue to develop our adjacent business in years to come. In Hafnia, we have focused on our carbon footprint. And in 2020 across Hafnia's own fleet, our carbon intensity was 5.7 grams per tonne nautical mile, 5.6% below the present IMO baseline. This progress is in line with our goal of reaching IMO 2030's target of 4.47 grams per tonne nautical mile already by 2028. Standard vessel optimization efforts to reduce emission to air will be supplemented with additional initiatives such as intermittent hull cleaning. In addition, we are working with data from vessel-based sensors via SMARTShip from Alpha Ori and vessel optimization to reduce fuel consumption. We also have ongoing fuel trial for new and innovative alternate fuels. Slide #5. Due to the global economic conditions, the total tanker market remained weakened in the second quarter. Lockdowns around the world impacted by COVID-19 variants continue to impede the rate of recovery for oil demand. Markets in the West, such as U.S. and Europe, continue to see improvements in [ optimization ] rates, which led to stronger mobility and oil demand. The outlook remains optimistic as global inventory overhang is going down to below 5-year average, leading to oil prices recovery. The second quarter has been eventful for Hafnia. And in the beginning of the third quarter, we signed $100 million unsecured term loan and revolving credit facility for our tools, the 2 MR newbuilds, charted out on 5-year contracts. And we exercised an option held in our joint venture, Vista Shipping, for 2 LNG dual-fuel LR2 tankers. Lastly, in line with our planned fleet renewal, we sold one additional older LR1 vessel to BW Amazon. Let me now bring you through some key financial metrics for Hafnia's second quarter. For the quarter, we achieved a TCE income of $101.6 million and an EBITDA of $37.9 million. This corresponds to a TCE income of $201.6 million and an EBITDA of $75 million for the first half of 2021. Following a difficult quarter for the product in the market, we recorded a net loss of $11.2 million for the quarter. We will pay no dividends for the second quarter of 2021. Moving to Slide #6. Let me now elaborate more on the key events during the quarter. As previously mentioned, we have in July concluded a joint venture agreement with Andromeda Shipholdings. Jointly, we have set up a 50-50 owned shipholding company named, H&A Shipping Limited. The joint company has acquired all the shares previously owned by Andromeda in Yellow Star shipping and Green Star Shipping, which each owns a Hyundai Mipo Dockyard, MR Newbuild. The first vessel, Yellow Stars, was delivered from the shipyard 30th of July 2021. The second vessel, MT PS Stars will be delivered from the shipyard on the 30th of January 2022. Both vessels are charted around on 5-year contracts. Additionally, in May, we have exercised an option held in our Vista joint venture for 2 additional LNG dual-fuel LR2 tankers with dual-fuel high-pressure LNG engines to be constructed at the Guangzhou Shipyard International in China at a price of $59 million. This high-pressure LNG engines release 97% less methane than a standard low-pressure LNG engine. The fuel system on-board have been prepared for future CO2 neutral fuel, with some engine modifications to be amended. The vessels are scheduled to be delivered in 2023 and 2024, respectively. Vista Shipping will now own 4 sister vessels of this type time. At delivery, the vessels will be chartered out for 5 years to an oil major at attractive rates. Perry, why don't you talk us through the financials in more detail?

[Perry Wouter Van Echtelt, Chief Financial Officer]

Thanks, Mikael. The second quarter, mentioned by Mikael already, was faced by pressure from continued weak oil demand as a result of COVID-19 variants and lockdowns from around the world. This, combined with lower rates and a write-off of $1.3 million on assets held for sale, resulted in a net loss of $11.2 million for the quarter and $26.9 million for the first 6 months of the year. Despite this, the positive outlook for the later part of 2021 is maintained from the back of accelerated vaccination programs in major economies. We anticipate social distancing measures to ease as the year progresses. And this would increase mobility, which translates into higher demand for transport fuels. Income from the management of third-party vessels and buying bunker on behalf of third-party clients was $5.4 million for the quarter and $10 million for the first half of the year. Economics of the pool earnings will be explained later. For the quarter, we saw a return on equity of negative 3.9% and the return on invested capital, or ROIC, of minus 0.3%. The balance sheet remains strong, with an equity ratio of 46.2% and a cash position of $86 million and a total liquidity position of more than $100 million. At the end of the quarter, Hafnia had a total of 98 vessels, of which 85 owned vessels and 13 vessels chartered in. The average estimated broker value of the owned fleet was just over $2 billion as of the 30th of June 2021. If we then move to the next slide. For the quarter, we saw TCE of an average of $12,400 per day across the fleet, totaling $101.6 million for the quarter. This can be further divided into the key sectors that we operate in. So TCE was based on 8,200 earning days, making $21,832 per day on the LR2 vessels, $10,825 per day on the LR1 vessels, $12,680 per day in the MR segment and $10,549 per day in the Handy segment. OpEx, which includes our vessel running costs and technical management fees, was $53.4 million this quarter, which results to an average of $7,054 per day. The OpEx was based on 7,566 calendar days, with $7,063 per day on the LR2 vessels, $7,354 per day on the LR1 vessels, $6,939 per day of nonpool Panamax vessels. Adjusted for the 2 vessels that were sold, and then the OpEx will be $6,754 per day, and then $7,049 per day in the MR segment and $6,592 in the Handy segment. G&A expenses on our own fleet per day for the quarter was $927 per day. And on the graph on the bottom right, we project our full year OpEx per day to be $6,867 per day and a G&A per day of $948. Moving on to the next slide. Again, let me explain a bit about the pool economics by highlighting that we generated $5.4 million per day in fee income for the second quarter, and this is adjusted for our own fleet. This includes pool fees, bunker services and technical management. As an introduction, Hafnia currently operates a fleet of 184 vessels, including newbuild and vessels charted out on long-term charter contracts in the 4 pools. They range from the large product tankers to small specialized chemical tankers of under 20,000 deadweight tonne. Our highly specialized and dedicated chartering and commercial departments are responsible for developing, marketing and negotiating all contracts for vessels that the pools operate. The diagram on the left shows key features of our pool economics. Firstly, Hafnia received pool management commission in the form of a fixed fee and a percentage of all net pool income. For LR, MR and Handy pools, we charge a fixed fee of $250 per day per vessel and 2.25% of net TCE earnings made by the vessel in commission. For the specialized pool, it is further divided into 3 sub-pools, where the small and city is charged a fixed fee of $300 per day and 3% of net TCE earnings, while the intermediate size carries a fixed fee of $275 per day and 2.75% of net TCE earnings. Working capital upon entering the pool also ranges across the different sectors. We have been working on lowering our working capital deposit requirements. And as of July 2021, the working capital deposit has been lowered to $300,000 for Handy pool, $750,000 for the LR pool and $600,000 and $1 million, respectively, before. Pool earnings distribution occurs twice a month. The pool follows a basic pool point distribution based on 2 core performance variables, fuel and time. As you can see, the number of commercially managed vessels in our 4 pools have been steadily increasing over the past years. With this success, we will continue to invest in our commercial platform to increase the service level and build scale in the pools through adding external vessels with the right pool partners. Mikael will now present the next page before Jens guides us through the commercial developments.

[Mikael Opstun Skov, Chief Executive Officer]

So we see 6 important reasons why Hafnia is one of the leading products in the companies. It's around best commercial performance, the lowest operating cost, the lowest cost of funding, $10 million in revenue from the pools in the first half of 2021, a strong focus on ESG, and finally, an expected post-COVID-19 rebound in demand. So before Jens takes us through the review and outlook for the product tanker market, let me just elaborate on these key differentiators for Hafnia. So if we start on top and focus on best commercial performance. Over the years, we've constantly benchmarked ourselves against our peers to evaluate our commercial performance. These so called apples-to-apples benchmarks, we are at the absolute top in all of our segments. This period of excellence is the result of the quality of our daily commercial decision-making and constantly improving our understanding of the product tanker market and a constant drive to benefit from economy of scale from operating a large fleet. Continued focus to have the lowest operating and funding costs. Our operational cash flow breakeven was $13,288 per day for the quarter. Our industry-leading financing costs, solid balance sheet and low G&A expenses are also key contributors to our competitiveness. The graph on the right further reinforces this. For the second quarter of 2021, we benchmarked some key metrics against our peers, and we can see that Hafnia stands out from the rest, in all segments. $10 million in fee revenue generated by our pool and bunker operations in the first half of 2021. We plan to expand these businesses further by adding more vessels to existing pools and by focusing on new segments. A clear ESG profile. As a leading shipping company, Hafnia's goal is to keep providing safe, sustainable and efficient hydrocarbon transportation solutions, thereby contributing to the shipping industry's efforts to reduce environmental impact. We are actively seeking any initiatives or vessel optimization measures that will help to reduce our carbon footprint. And finally, on the post-COVID-19 rebound in demand. While the challenging economic climate led to lower oil consumption and lower rates, we believe that the product tanker market will lead the recovery in the post-COVID-19 rebound of the oil market, due mainly to increasing demand for refined products and a low order book of product tankers. Before I give the word to Jens that will discuss the market in detail, I would like to highlight that the market East of Suez has improved significantly in August and is now at $17,000 per day for LR1 vessels and $15,000 per day for MR vessels, while the Western market for LR1 and MR vessels are around $7,500 per day and $8,000 per day, respectively. In addition, I would like to stress that the global oil inventories are at low levels and cargo volumes and tonne miles in July 2021 was close to July 2019 levels. Global oil consumption is now above 96 million barrels per day, and we expect that oil consumption is above 100 million barrels at the end of 2022, which, in addition to the future expected buildup of inventories and new export refinery capacity whilst small local refineries are closing, is a positive outlook for the global product tanker market. Moving slide, and I will hand it over to you, Jens, to go through the next few pages.

[Jens Christophersen, Executive Vice President of Commercial]

Thank you, Mikael. This page shows the demand for oil consumption and our expectations for the product tanker market. The product tanker market was challenging in the second quarter, with COVID-19 variants impeding the rate of recovery for oil demand. Oil demand has been steadily increasing in the second quarter is expected to continue rising and is expected to reach pre-pandemic levels in 2022. June saw oil demand surged to 96.8 million barrels a day as North America and Europe saw increased mobility, resulting in higher demand. However, July's demand reversed course as the rapid spread of COVID-19 Delta variant has impaired demand in Australia and other parts of Asia. Outlook for the remainder of the year remains positive, but uncertainty over the potential global impact of the Delta variant in the coming months is growing. We have already seen renewed restrictions in countries such as Australia and Japan. According to IEA, global oil demand is forecasted to rebound by 5.4 million barrels per day from 2020 to reach 96.2 million barrels in 2021 and 99.3 million barrels in 2022. While we expect a steady recovery of oil products, this recovery will be uneven amongst different sectors. In the second quarter, LPG and ethane used in the petrochemical sector has already surpassed pre-pandemic levels and is estimated to be about 5% higher than pre-pandemic levels throughout 2022. On the flip side, the aviation sector will be the last to recover as travel restrictions are likely to stay in place, owing to slow reopening of borders. As a result, jet fuel and kerosene are expected to still be below pre-pandemic levels in 2022. On the supply side, the global oil supply is ramping up fast to meet rising demand, largely due to OPEC+ agreeing on the new deal to unwind its output cuts. In July, the world oil supply increased by 1.7 million barrels per day month-on-month, as Saudi Arabia ended voluntary cuts and the North Sea bounced back from maintenance. From August, OPEC+ aims to further lift output by 0.4 million barrels per day a month to phase out the remainder of its cuts. This would be pivotal in restoring demand for crude tankers, and thereby rebalancing tonnage supply in the clean tanker market. Storage levels are also a significant driver for the overall tanker market. In the peak of 3,220 million last year, but has since been drawn down to 2,882 million barrels at the end of June. June levels saw a large drop of 50.3 million barrels month-on-month after an increase of 11.2 million barrels in May. Inventories at the end of June is 51 million barrels lower than 2 years ago in June 2019 and 66 million barrels lower than the pre-pandemic 2015 to 2019 average. In terms of forward demand, total industry stocks covered 62.9 days. Crude inventories fell by 34.3 million to 1,081 million barrels in June, 161.3 million barrels below the peak reached in second quarter last year. This was mainly due to OECD Americas, which saw higher refinery runs in the United States. Product stocks also fell counter seasonally, led by motor gasoline and middle distillate, which grew by 9.1 million and 5.9 million barrels, respectively. Cargo volumes for clean petroleum products have also steadily recovered from the effect of the pandemic, reaching 72.4 million metric tons in July 2021 from 64.2 million metric tons in July 2020. Likewise, for tonne miles of clean petroleum products, it has steadily increased since 2020 to reach 243.3 billion tonne miles in July 2021. Moving on in the refining sector, it's expected to remain under pressure. Following a large increase of 1.6 million barrels per day in June, global refinery throughput slowed in July, increasing by only 0.8 million barrels month-on-month as new waves of COVID-19 hindered fuel demand. However, we still expect a ramp-up in refinery runs for the remainder of the year to meet a further recovery in oil -- in demand for oil products and to replenish product stocks. In 2022, East of Suez crude throughput is estimated to reach a new record level at almost 39 million barrels a day. This will shrink the gap through the Atlantic Basin to just 3 million barrels a day, mainly due to the increase in China's annual average throughput rates, which reported record levels in June. There's also a continued trend of refinery closures and additions around the world. Closures tend to concentrate in Europe, the U.S. and Australia, and are due to a variety of reasons, such as weak refining margins and overseas competition, which prompt refinery owners to convert refineries to oil refined products, import and storage terminals. According to the IEA, global average utilization rates will only reach 78% of capacity in 2022, limiting the possibility of an increase in refinery margins from the depressed 2020 levels and remains a high likelihood of further capacity closures. At the same time, there are also many refining capacity additions and expansions. And the majority of this will come from China and the Middle East, more notably, Saudi Arabia's 450,000 barrel a day plant and Kuwait's 650,000 barrels a day refinery. This combination of refinery additions and closures will have a positive impact on the product tanker demand. We can expect refining activities to cluster in regional hubs and increase seaborne volumes of refined products and tonne-miles. When we look at the global product tanker fleet, outlook remains positive as we expect an increased demand for oil refined products and slow vessel supply growth. From the graph on the right, you can see that seaborne trade for products is expected to increase faster than crude and dry bulk in the next couple of years. Furthermore, the low order book that resulted in the lowest tanker fee growth for the next 2 years is also interesting to note. As you can see, the product tanker order book stands at only 7% in July 2021, one of the lowest ever. Net of scrapping effect, fleet growth is expected to be less than 1% per annum for the next 2 years. With increased emissions and efficiency targets, we will continue to put pressure on older vessels, accelerating the turnover of the global fleet and slower vessel supply. We can hence expect product tanker fleet utilization to increase in the coming years. Here, we see the extreme rates of the different sectors over the past 2 years, with both recorded highs and recorded lows. Rates across the different sectors remain below 5-year average. But with the oil consumption expected to recover in the second half of 2021, coupled with the dislocation between refinery and consumer, we expect to see a positive trend in rates, too. And now Mikael, over to you for the next few slides.

[Mikael Opstun Skov, Chief Executive Officer]

Thank you for that. Moving into Slide #18. In Hafnia, we are committed to adapting to the constantly changing conditions while delivering energy to sustain the world. We have established clear and effective environmental management plans to ensure we are in full compliance with all international and local operations while seeking to minimize our overall environmental impact. To reduce the level of greenhouse gas emissions of the maritime industry, IMO has developed effective targets to incentivize industry players to improve the energy efficiency of the fleet. In 2020, across Hafnia's own fleet, our carbon intensity, as measured by our annual efficiency ratio, was 5.6% below the IMO's current target. We have set a goal to reach IMOs 2030 target of 40% reduction in carbon intensity of the fleet 2 years in advance, i.e., by 2028. We strive to continue improving our existing vessels from small body impactful optimization measures that improve operational efficiency so that we can deliver cargoes with the lowest possible footprint. Moving on to Slide #19. Hafnia is also fully focused to upholding the highest corporate governance standards, professionalism and business integrity across all activities. In Hafnia, we have a highly reputable Board of Directors responsible for the company's overall management, supported by a seasoned Audit Committee, Remuneration Committee and recently established Nomination Committee to assist in evaluating operating effectiveness and suitability, all safeguarding a best-in-class governance structure. Moving to Slide #20. Looking ahead, the future remains volatile and uncertain, but we are well equipped to face it. Despite uncertainty over the potential global impact of the Delta variant, we expect global economies to recover by the end of 2021, largely attributed to rising vaccination rates and easing of social distancing measures, which will help raise mobility levels in countries, spur economic activities. We also anticipate product tankers to lead tanker market recovery due to various demand drivers, such as increased volumes of seaborne exports for refined products, dislocation between refineries and consumers, leading to increased tonne mile demand, and the low order book of product tanker fleet. Shipping is the backbone of the global economy and is facing increasingly pressure to decarbonize its operations. Hafnia will continue to strive and reduce our carbon footprint by seeking out potential innovations or collaborations to optimize our vessels operations. Lastly, we believe that further consolidation is needed within the product tanker sector. We will continue to search opportunities to fully unleash value and synergies from efficient operational scale and improve our overall competitiveness. With that, I'd like to open up the call for questions.

[Operator]

[Operator Instructions] David from SEB, you have a question it seems.

[David Bhatti]

Yes. Yes. It's David from SEB. I was wondering, what do you think is driving the spread between rates in the Atlantic versus the Pacific?

[Mikael Opstun Skov, Chief Executive Officer]

That's for you, Jens.

[Jens Christophersen, Executive Vice President of Commercial]

David, that's a good question. And I think if we start out, what are the drivers in the Pacific Basin? There's a multiple of drivers. And to me, one of the key drivers is the distribution of MR tonnage between the Eastern and the Western basins. The Eastern basin has been very weak during Q2. And for that reason, the number of ships have discounted themselves to move west. And we've actually seen a migration of about 75 MRs over the past 2 to 2.5 months. And that's a substantial amount of ships when you bear in mind that the total number of ships in the region is about 700. So tonnage supply is always is an important thing to look at. Secondly, we've seen more moves of the jet fuel from the Far East towards the U.S. These are nice long voyages, so it's good tonne mile demand. And lately, we've seen more exports from the Far East after a long quiet period where especially China did not export much. And now we're seeing that Korea and Taiwan is stepping to the plate. And actually, still today, we see diesel oil move on MRs from the Far East towards Chile. And So Those are some of the main factors. Smaller factors in the area could be that ships, generally speaking, are struggling with COVID-19 restrictions in the sense that many ports and countries have their own rules and regulations for what they permit. And for that reason, the supplier ships can become a little bit trickier for customers out there. They cannot just pick and choose any ship. When you look at the Atlantic Basin, it's, of course, suffering from the number of ships that has reached the basin. And in addition to that, we haven't really seen sort of significant amounts of demand in any area. We've seen a quite a high refinery utilization in the U.S. Gulf. And in our view, the Atlantic Basin has perhaps been more balanced than the actual numbers are telling us.

[David Bhatti]

And how are you positioned with your fleet between the East and the West?

[Jens Christophersen, Executive Vice President of Commercial]

On the MR side, we are tilted slightly towards the West. And on the LR side, we are almost balanced right now.

[Operator]

[Operator Instructions] We have another question from Eirik Haavaldsen.

[Eirik Haavaldsen, Head of Research]

I mean, you're renewing your fleet somewhat now with the JV investments and so on. But maybe been a little bit surprised by no further sales of all the tonnage. What's the market like there? And what are you thinking about all those 2004, '05, '06 vessels you have?

[Mikael Opstun Skov, Chief Executive Officer]

Yes. So thank you for that, Eirik. So basically, I mean our view kind of remains the same, right? That it's a constant focus of trying to sell older assets, but only to see attractive prices. And then we've basically been selling the vessels where we felt that the pricing to be obtained was satisfactory. But there also comes a time where you feel that the spread is so high that it's actually worthwhile to keep it. And we felt at some point that we couldn't really find sufficient attractive pricing for a lot of these ships. We're still making relatively good earnings even on older ships. So for us it's just a reevaluation of asset value if we sell versus potential earnings. And then for the time being, we've kind of sold what you've seen on the back of some of those [ vessels ] being value okay. But the strategy is still the same. So we will be looking at constantly renewing. But obviously, we always prefer to sell ships when secondhand prices are at visible levels. So it will just for us be a constant strategy really to monitor that as we go forward.

[Operator]

We have come to the end of today's presentation. Thank you for attending Hafnia's Second Quarter 2021 Financial Results Presentation. More information on Hafnia is available online at www.hafniabw.com. Goodbye, and have a good day.