Hafnia Ltd

OSE:HAFNI

Earnings Call Transcript 2022-Q2

[Mikael Opstun Skov, executive]

[Audio Gap] Potential -- so I don't think it's going to be in our arsenal in Europe.

Operating within the product and chemical tanker market. We have our own in-house technical management and global commercial platform with talent teams in Asia, Europe, the Middle East and U.S.A.

Our technical management team ensures that the highest safety and environmental standards are maintained on board, while our commercial team are managing more than 110 third-party vessels in the pools.

At the end of the second quarter, we own and have chartered in a diversified portfolio of 142 vessels. Our own vessels have an average broker valuation of $3.5 billion, given half year a net asset value of around $2.2 billion. Being the largest operator of product and chemical tankers in the world.

Hafnia's fleets low average age of 7.7 years, an unparalleled scale enables better utilization and improved earnings capability. Our business model is also robust with diversified revenue streams, such as our pool platform and [indiscernible] service.

With improving market fundamentals the market outlook in the coming months remains strong on the back of oil supply dislocation from oil consumption, leading to increasing ton mile demand.

At Hafnia we put people first. In addition to our valued employees, this also means maintaining strong relationships with our stakeholders, such as banks and industry partners giving us access to industry-leading debt financing to lower our operating costs.

Lastly, we also have a clear ESG profile with growing impact from environmental regulations and increasing demand for social and governance focus on Hafnia is well equipped and takes all matters that affect us and our stakeholders seriously.

Slide #5. Moving on, Hafnia today provides a much wider and deeper value proposition. Insisting in late 2019, Hafnia has grown significantly and is now the world's leading product and chemical tanker company. This has been achieved through thoughtful consolidations, understanding the market and the needs of all our stakeholders.

Over the last couple of years, Hafnia has concluded 2 key strategic acquisitions and 2 joint ventures, cementing our foothold in the market. It allows us to operate on a larger scale, seen by the strong increase in Hafnia's commercially operated fleet.

Growth in scale enabled us to unlock synergies in chartering, operations, bunkering, back office and urban Hafnia up to new trading opportunities. With a volatile global environment in the last couple of years, we had to ensure we navigate through them cautiously.

The various acquisitions have increased the overall leverage of Hafnia, raising our cash flow breakeven levels. As a result, we have been actively capturing synergies from the acquisitions working on our capital structure by reducing our leverage levels, refinancing deals and the capital raise.

This also allows us to be in a good position to take advantage of any future opportunities. Even in challenging markets, Hafnia has always demonstrated the ability to produce shareholder value. We have consistently been paying dividends of 50% of the net profit and have a total shareholder return of over 170% since the start of 2021.

Hafnia's ambition is to be best on water. These various factors not only underscore Hafnia's commitment to growing our platform to maximize stakeholder value, but also exhibit that we follow through on our intentions.

Moving to Slide #6. Let me continue by giving an update on the 2 key strategic acquisitions that we have executed earlier this year; the first being the acquisition of CTI with a fleet of 32 vessels; and second, being the acquisition of 12 modern LR1s from Corfield tankers. As an update, we have in June, completed the handover of all LR1 vessels from Scovel.

Apart from operating on a larger scale, we believe that the acquisitions have been executed at an impeccable timing due to the recent rise in freight rates and asset prices. Looking at lease in tanker rates, we can observe a great increase across all segments since the acquisition due mainly to increased oil consumption and relocation of supply because of the situation in Ukraine.

The chemical fleet has close to 90% spot market exposure and hence benefit significantly from an ability to trade clean petroleum products. Hafnia has been able to take full advantage of this, signaling strong earnings potential for upcoming periods.

For the second quarter, net income from the acquired fleet has been above $40 million with the chemical fleet and 12 LR1s, contributing $19.4 million and $21.3 million, respectively.

This corresponds to an annualized net profit of $162 million from the acquired fleet. The acquired fleet value have also increased greatly since. Based on second quarter average broker valuation, the acquired fleet has increased by 13% and with the chemical fleet increasing by $72 million and the 12 LR1s increasing by $64 million.

I would like to take this opportunity to thank our dedicated team and industry partners for their hard work and commitment to make all of this possible. Looking ahead, we will continue to utilize our well positioned modernly to take advantage of the continued upturn in the product tanker market and seek further opportunities to extend the level of services to all existing and new customers.

Perry, why don't you take us through our financials.

[Perry Van Echtelt, executive]

Yes. Thanks, Mikael. Despite increasing concerns of higher oil prices and potential economic slowdown or even a recession, the product tanker market remained robust in the second quarter as it continues to be heavily influenced by worldwide low oil stocks and the effective sanctions of Russian product exports, which increased the ton-mile demand.

As a result, we are pleased to announce that Hafnia has delivered the best quarterly results in our company's history. The second quarter generated a TCE income of $348.3 million, more than triple than what was made a year ago.

Building on that, we've recorded a net profit of $186.2 million for the second quarter of the year and for the first 6 months, it was $207.5 million. Under other income, we reported revenues from the management of third-party vessels and buying bunker on behalf of third-party clients which is $9.4 million for the quarter and $15.4 million for the first half.

This fee-driven business has profited both from the increase of activities and strong TCE rates. If we move to the next part of the result, we're happy to announce also a 50% dividend payout of $18.62 to per share for the second quarter, reinforcing our strong ability to produce shareholder returns.

For the quarter, we saw a return on equity of 53.5% and return on invested capital of 27.6%. The balance sheet remains strong with a cash position of $87.5 million. We've also noted a significant decrease in our net leverage ratio for the quarter, down from 64% to 55.7%.

This is mainly due to the strong increase in asset prices. As you can see, there's also been a strong buildup in working capital based on the strong increase in rates during the second quarter, and we expect that to normalize thereafter.

Cash flow from operations and the capital raise have been allocated towards reducing our revolving credit facilities as they have the highest flexibility in our capital structure. Meanwhile, we are also actively working on refinancing our balance sheet to reduce funding costs.

As Mikael already mentioned earlier, we will focus on the strong market on reducing our cash flow breakeven to the level from before the recent transactions. Then moving to our TCE breakdown. For the second quarter, we achieved an average TCE of $29,077 per day more than done in the rate a year ago, which is across the fleet.

From the graph, you can also see the rates have improved significantly from the previous quarters. Looking forward, we can expect high product tanker rates to continue to miss more restricted oil markets and longer trading routes. We already know now that the third quarter will prove significantly stronger based on the coverage rates.

As of the 23rd of August 2022, 72% of the total earning days in Q3 2022 were covered at an average of $36,540 per day. For the remainder of the year, we have covered 42% of our 24,089 total days at an average rate of $34,394 per day.

The widening gas premium of oil products, which has led to fuel switching from natural gas to oil products for power generation in Europe has led to increased oil transportation demand, which is positive for the freight rates.

For the week beginning 15 August, Hafnia's pools have earned an average of $60,370 per day for the LR2 vessels. $46,731 per day for the LR vessels, $30,994 per day for the MR fleet $20,430 per day for the Handy vessels, $45,792 per day for the chemical MR vessels and $33,125 per day for the chemical handy vessels.

Then next on to OpEx, which includes our vessel running costs and technical management fees was based on 10,952 calendar days, resulting in an average of $7,038 per day. All-in G&A expense per day for the quarter was $864 per day.

Our operating cash flow breakeven for the full fleet in the second quarter was $14,974 per day due to the leverage used or assumed in the recent transactions, this has also impacted the breakeven levels.

Next to that, the increase of base interest rates, LIBOR and SOFR have added to this. Our traditionally industry low breakeven levels and access to funding have enabled us to execute these strategic transactions, building to the record results we published today.

Going forward, we will strongly focus on bringing back our cash flow breakeven across the fleet and positioning for the future. We are constantly benchmarking our performance against our peers, and we're pleased with our relative performance.

The graph on this page reinforce this where we stand out in all areas. This comes from a good understanding of the market conditions and quality of daily commercial decision-making.

Then moving on to the next page. With the continued upturn in the product tanker market, we already know that Q3 will be significantly better than Q2, and this represents strong 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 and the dividend distribution potential Hafnia have for the year. The combination of the recent fleet acquisition and a large exposure to the spot market enable Hafnia to take full advantage of the upturn in the product tanker market and generate strong returns to dividends.

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 been recovering during the last quarter due mainly to the widening natural gas premium overall products.

This has led to increased gas to oil switching for power generation in Europe, boosting oil demand. Mobility indicators have also remained robust in 2022 as we see a rebound in air travel around the world, lending strong to board to the demand of jet fuel, which typically transported longer distances from refineries in the East to the West.

Despite that, high commodity prices, concerns related to a potential recession and resurgence in COVID outbreaks in China cast a cloud of uncertainty on future oil demand. Global oil demand is, however, still expected to increase by 2.1 million barrels in 2022 to 99.7 million barrels a day.

On the supply side, global production has been gathering pace and reached the post pandemic in July to $100.5 million a day. This was due mainly to rebound from maintenance in the North Sea, Canada and Kazakhstan. Further, OPAP has also agreed at its third August meeting to raise its supplier target by 0.1 million barrels for September.

Hence, despite an anticipated decline in Russian production, rising OP volumes and expanding non-OpEx supply could see global inventories building during the rest of the year. Weld oil production for the second half of 2022 is expected to grow by 7.1 million barrels a day, reaching 101.6 million barrels a day.

Slide 15. Global oil trade routes are being withdrawn as a result of EU sanctions and [ step ] sanctioning. So what is the impact on tanker earnings appears to be significant already now? The fact remains that the daily volumes of clean petroleum product loaded in Russia on tangles destined for the EU continues to be about 1 million barrels a day.

By February 2023, the EU will have to buy that cargo volume from the U.S. Gulf or more likely the Middle East which will result in significantly longer transportation distances for oil going into the EU as well as for Russian exports, which will be redirected towards the rest of the world.

Russian seaborne, clean petroleum product exports does not appear to have suffered significantly from the wall. On the contrary, Q3 exports are higher than in previous years. Slide 16. Moving on to the refining sector. Global refinery runs have been ramping up in line with seasonal trends and is expected to reach 82 million barrels a day in August, the highest level since January 2020.

The throughput is, however, expected to fall again in the fourth quarter due to seasonal maintenance. Looking at July export levels, we're still waiting for new refineries in the Middle East to operate at full capacity. Saudi Aramco's [indiscernible] refinery has reached 78,000 barrels per day in July, representing only about 17.5% of its capacity, and we expect them to reach full capacity in the fourth quarter.

Meanwhile, Kuwait has seen higher exports in recent months, but this was mainly attributed to higher utilization of existing refineries. The way petroleum companies new as oil refinery has received its first steps to clean the refinery, and we also expect them to reach full capacity of 7.6 million barrels per day in the fourth quarter.

Both refineries are pulled to produce ultra-low sulfur petroleum products and are intended to service the Western Hemisphere with about 1 million barrels of clean product in the next year.

Slide 17. With oil output set to increase in the Middle East, this will represent an increase in cargo volumes and some mile for product tankers, which has been increasing since the pandemic.

Cargo volumes and timelines for clean products and chemicals have already surpassed pre-pandemic levels compared to our crude counterparts. Sanctions on Russia supply has led to recalibration of the trading route, supported by strong demand of Middle East distillate bounds into Europe and Africa, having a positive impact on product ton mile.

In short, with steady growth in oil demand and opening and closures of refineries around the world. This bodes well for the Tanker trade volume, which is expected to grow further in 2022.

Slide 18. Storage levels is also a significant driver for the overall tanker market, global oil inventories, which have been drawn to below long-term averages are expected to build for the remainder of the year by approximately 0.9 million barrels per day, helping to alleviate market tightness and ease oil prices.

However, this is not expected to last as we expect oil demand to catch up by early 2023. Royalty and petroleum product inventories have been declining in recent quarters but this is not proportionate across regions. The dislocation between refining of clean products and end-user demand is gradually increasing due mainly to buildups in the Middle East and Southeast Asia and draws west of Suez.

This once again bodes well for the tanker trade volume as we can expect the volume of long-haul interbasin trade within petroleum products to increase, driven by these increasing flows from the East to the West following the start-up of significant refining capacity in the Middle East.

Slide 19. Looking at the supply side, we remain bullish on the tanker market with a declining order book levels and 18 fleet. Yards are fully booked until 2024, and the order book for new tender deliveries have been consistently declining over the last few years and is now at the lowest levels since the mid-1990s.

The capacity side is not going to change anytime soon, and this will push for higher utilization of existing vessels to meet rising oil demand. Additionally, we see significant differences between the level of new builds relative to the aging profile of product tankers.

The level of product tankers reaching scrapping age is set to increase greatly over the next 3 years. Ownership tend to be less efficient and with increased emission and efficiency targets, we will continue to put pressure on the older vessels, accelerating levels and further reducing the supply of tankers. Mikael, over to you for the next couple of slides.

[Mikael Opstun Skov, executive]

Thank you for this. We're now on Slide #21. I'm proud to announce that in the last quarter, Hafnia has set up 2 additional pool platforms in the LR2 and Chemical segments. This brings us up to a total of 6 pool platforms.

This will expand and fill the only gap in Hafnia's portfolio of product tanker pool and incorporate the added capabilities of our chemical fleet from our CTI acquisition. The LR2 pool is launched in collaboration with long-standing LR1 partners, Retelit North and Charles World, and we can expect significant synergies of the 2 pools due to significant overlap in both markets.

The Chemical pool has also welcomed TRF as its first partner. These partnerships and collaborations further reinforces the strength of Hafnia's reputation and ability in commercially managing vessels. We look forward to operating these new pools and believe our experience and the synergies with our existing business will further broaden our service offering and sector relations.

Secondly, following initial design and prototype testing, we are pleased to announce the launch of our very owned pool participant mobile app aimed to providing additional value to our pool members to enhance communication and information.

The application contains many features, which provides insight and updated information for all our pool members, such as fleet performance analytics and monthly pool earnings, improving the quality of our service to our partners and reducing any time lag in information.

Moving to Slide #22. On top of excellent commercial performance and notable consolidation efforts, Hafnia also has a strong focus on ESG. Demand for ESG information has been gaining traction over the past decade, and it is our responsibility to report comprehensively to ensure all stakeholders are clear on our strategy and performance in the respective areas.

Shipping is the backbone of the global economy and is facing increasing pressure to decarbon its operations. We are in full compliance with the IMO 2020 regulations on sulfur emissions, but are still always on the lookout for potential partnership opportunities to accelerate our environmental initiatives to improve our vessel efficiency.

For 2021, across Hafnia's own fleet, our carbon intensity, as measured by the annual efficiency ratio, was 5.22 grams per tonne mile, 10.9% better than the present IMO baseline. We are working hard to reduce our current fleet capital intensity to 4.35 grams per tonne mile by 2028, meeting the IMO 2030 target 2 years in advance, and we are well on track to achieve that.

The COVID-19 pandemic has put Hafnia seafarers around the world in procure situations, and it is our goal to foster an environment where all employees feel safe and valued. We strive towards a unified company culture and through this through extensive training at all levels, ensuring our employees physical and mental health and to encourage everyone to reach their full potential.

Hafnia is also committed to upholding the highest corporate governance standards and business integrity across all activities. Our highly reputable Board of Directors and seasoned management team is responsible for the company's overall management, focusing on the implementation of good governance and effective risk management that ensures the long-term sustainability of the company.

Moving to slide #23. Hafnia has a holistic approach to ESG -- the Board and leadership group anchors our ESG strategy and is responsible for the supervision and strategic direction. We have identified 19 material topics which we believe are most important to us and our respective stakeholders to ensure that Hafnia is aligned with our business priorities with a long-term focus on ESG.

We have an ESG function that assist the leadership group in tracking our ESG performance and progress, making sure everyone is accountable for executing the company's sustainability and visions. We have integrated sustainability into our core business principles, governing the way we strategize, make decision and carry out our daily routine.

That way, we can look towards a cleaner future dampened by everyone across the company. Looking ahead, global macro environment is expected to remain volatile on the back of deceleration of economic activity. However, I missed this considerable uncertainty, the oil and tanker market fundamentals remain strong and we believe Hafnia is well equipped to face the future.

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

[Operator]

We will begin our Q&A session now. [Operator Instructions]

[Mikael Opstun Skov, executive]

[indiscernible] Do you have a question?

[Unknown Analyst]

Yes. Just a quick one on the market. I mean this EU embargo coming up seems to be a big event really. So curious if you have done any sensitivity analysis or any -- I quantify that potential impact on tonnage.

[Jens Christophersen, executive]

It's a very good question, for the time being, the EU continues to import quite a large share of its diesel from Russia. And our numbers, which are tracked by using AIS and tracking ships that are loading out of the Baltic and the Russian Black Sea shows that Europe is still importing about 1 million barrels a day.

So if we just on the back of an envelope, try to convert that into MR tanker equivalents, it means that there's constantly about 3.5 MMA every day delivering cargo into Europe. The average voice duration is about 15 days. So it's fair to say that the current rate is a full 50 MI equivalent.

So from 1st of February next year, the lighter scenario is that Europe will have to buy diesel oil from the U.S. Gulf or from the Middle East. And that means at least a doubling up of voids distance. So instead of using 50 MRs to supply Europe, we believe that it would take 10 [indiscernible] the other side of the coin here is that in addition to this, we expect that Russia will continue to produce oil and refine oil and export it and he will now go -- we will travel further distance towards markets in Latin America, Africa and perhaps also the East.

So the Russian exports will probably also require more than a doubling up of what is currently being used. So to sum it up, we would expect an additional demand in excess of 100 MR equivalents and to put that into context, the current international MR fleet is about 1,500 ships.

So that's a good sort of 7% over the head calculation. And the market is already tight, so we believe it has a significant impact on the market.

[Unknown Analyst]

Interesting. That seems to be a huge one, yes, 7%. Given that backdrop. Do you actually see that in the fiscal market that, let's say, the charters are positioning for that event in terms of rates and willingness to buy ships, et cetera.

[Jens Christophersen, executive]

We see that there's still a fair gap between long-term time charter interest and current spot market earnings. Right now, we see that we are in a seasonally low quarter in Q3, and we expect the spot market to pick up and get the has not picked up significantly, but activity is increasing, and we expect that we will see this once everybody is back from holiday and realize that the market is going to be tighter.

[Operator]

Then we have a question from Sean Milton. Sean is asking, could you explain the drop in MR rates the last 2 weeks.

[Jens Christophersen, executive]

Yes. The drop in the MR rates, and I assume that you refer to the Atlantic Basin is explained by a transition of MR tankers from drop in handy rates over the last couple of weeks, I can see that is, I think, best explained by a simple lack of activity in Northwest Europe and across Mediterranean Sea from a half-year perspective, we look at that drop as something which is probably going to disappear sooner rather than later.

And the argument for that is that the Handy fleet is quite insignificant compared to the MR and the fleet, which right now is in a significantly stronger market. So it would not seem logical that the handy rates will stay down there for a long time. Does that answer the question? [Audio Gap] Any further questions?

I think when I look at the question again, perhaps it said, it looks to me that perhaps we're talking 37,000 tonnes gasoline traveling from Europe towards the states or MR and 38,000 tonnes diesel typically traveling from the U.S. Gulf towards Europe.

The backlog is a normal seasonality factor the way we see it. And when we look at -- when we look at the Atlantic market, we see that Europe is long on gasoline and the U.S. Atlantic Coast is short on gasoline in specific numbers, Europe is the Amsterdam, a lot of them into that area as long as our 3 million barrels of gasoline and the U.S. Atlantic coast is 16 million barrels gasoline short compared to 6 months ago.

So what we expect is that this is going to be a bit of a catch-up effect coming in. That will pick up on C2. And we think it's quite likely that the U.S. Gulf will pick up more or less on the same time.

[Operator]

Then we have a question from Nick. He's asking your debt will naturally reduce quickly from cash flow at current market rates. What that level would you think it doesn't make sense to reduce debt further? And so would you then need to reconsider shareholder distribution policy.

[Perry Van Echtelt, executive]

Yes. Good question. It's perfect here. Of course, we're in a strong market at the moment. We've also reconfirmed our dividend policy of 50% of annual profit that we're paying out quarterly. As you actually say, we have a normalized reduction in our debt portfolio.

But it is also indicated in the first quarter, our leverage increased quite a bit on the back of the acquisitions that we did earlier in the year. So going forward, we'll be looking at restoring leverage ratios back at the situation that we were before these transactions and importantly, also looking at the cash flow breakeven rates, having done these deals, largely we've assumed leverage and new sale and leasebacks.

We would like to bring our cash flow breakevens back to the industry load that we had before these transactions. And then, of course, ultimately, depending on the strength of the market, we always look at the combination of what our debt levels will be and shareholder distributions.

But that is something that will be evaluated on an ongoing basis. I hope that answers your question.

[Operator]

And then we have a question from Hamish. He's asking if you could get rates that were satisfactory to you to assume you won't share that number probably what percentage of the fleet would you be willing to lock up on long-term time charters in the coming 12 months.

[Jens Christophersen, executive]

Mikael, do you want to take that one?

[Mikael Opstun Skov, executive]

Yes. I mean I think it's -- yes, it's obviously an interesting question. So basically, when it comes to hedging, I mean, our view has always been that it's something that we will value as we go along and how we see markets develop.

But just to be clear, we came into this market with more than 90% available spot. But we've also seen different years where we've had off to maybe 30% coverage. So although we are not giving out any numbers, it's also clear that when we, at some point, feel that we can get really length, which is further out the curve of a number of years at good rates, we will be looking at taking off at that point and make sure that we protect the company in terms of good earnings going forward.

[Operator]

[Operator Instructions] One more question. Could you respond to the bear argument that a global recession could weaken demand. That's also from John.

[Mikael Opstun Skov, executive]

Yes. So I think when -- when we look at the market today and we look at Hafnia's business model, our view is that from an industry perspective, as we have explained also during the presentation, we feel that particularly because of the supply and demand balance that we'll look into an interesting period of time.

The real worry is though, as you mentioned, is if a deep recession would occur and consequent oil demand would really drop I mean, that's obviously -- that's a risk that we all have to relate to in terms of the macro environment.

What we do notice is that when we look at, for instance, what happened after the financial crisis, following 2008 and '09, actually turned out that oil demand only dropped about 2%, 2.5%. So we still think that it's unlikely we're going to see such a deep recession that is going to have an impact on demand that will, in a way, take away the advantage that we're seeing by very reduced supply coming into the market in the next 2 to 3 years.

[Operator]

Thanks, Mikael. Then we have a question from Nick. He's asking how long do you think it takes before chemical tanker rates reach MR rates or put another way, how much of the gap between current chemical MR and product tanker rates represents a time lag effect versus rates that are just likely to remain lower for chemical tankers.

[Jens Christophersen, executive]

It's a good question, Nick. And historically, when we look back, it's difficult for chemical rates to follow clean rates when they go really high and reversely in very low clean markets, chemical tanker rates seems to be more stable.

And the reason for that is multiple. It's a contracted market that holds a fair amount of contract coverage between charters and owners. Secondly, it's a more systemic trade, which is not necessarily driven by arbitrages. So for that reason, our expectation would be that chemical tanker rates wouldn't be catching up in such a high market as we are in today.

In fact, it could take a very long time before they do, and they would do so in smaller volumes. On the other hand, when the market turns around, these ships should be in a better place than the vessels that are very easy to be.

So in short, it could take years.

[Operator]

Then we have a present from [indiscernible]. He's asking some means scrapping will start when product tankers are 20 years or say, 15 years in views.

[Mikael Opstun Skov, executive]

Yes, one that's a good question. Our view is that ships can trade up to 20 years of age without any significant problems. The tradability of a vessel depends also on the quality of the vessel and the quality of the technical managers we are trading multiple ships above 15 years of age without any significant issues.

In the tight market, as we see today, it's -- we do also see that oil majors tend to accept all the ships. When we look at our different segments, we've seen the handy fleet, which is a fleet that is a worldwide average age of about 15 years.

It trades well amongst oil meters. And if we look towards some of the oldest sees a preference for ships are below 15 years of age. That presence is also driven a lot by trading regulations, in particular, naphtha, which trades on an open spec contract that stipulates that the ship must be 15 years of age or younger.

So we believe that it's the ship up to 20 years of age can well trade and international trades above 20 years, it's starting to become quite difficult, we would say.

[Operator]

And we have a question from Neils. What are the capital allocation priorities for cash that is not paid out in dividends.

[Perry Van Echtelt, executive]

Yes. Good question, Neils. Well, at the moment, any excess cash that we have is deployed towards the capital structure. We have a combination of term loans, leases and revolving credit facilities in our capital structure.

So in the short term, that will be used to reduce leverage and financial expenses by reducing the revolving credit facilities. And then we have a refinancing plan, especially for the acquired CTI fleet to reduce financing expenses.

So that's where in the short term, excess cash would go to? Thank you, Perry. And if there's no further questions, I think we will round it off for today and look forward to talk to you again next quarter.

[Operator]

There's a question from Nick. You mentioned that longer-term contracts are coming in chemical tanker segment, but you show very little coverage on chemical MRs and this past Q3 '22. Can you explain that apparent discrepancy?

[Jens Christophersen, executive]

Nick, we acquired the CTI feed our chemical ships only in the beginning of this year. And we'll take delivery of the ships in Q2. And therefore, we didn't have any contract coverage. So we are actually benefiting from our CPP trading skills and the high ITCs that are available in the clean market.

Over time, we expect to build a contract portfolio and to make sure that we can benefit from the combination trade between chemicals and DPP, which we think is a synergy for us as a company.

And I think that would be it for today.

[Operator]

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