Hafnia Ltd

OSE:HAFNI

Earnings Call Transcript 2021-Q3

[Operator]

Welcome to Hafnia's Third Quarter 2021 Financial Results Presentation. We will begin shortly. You will be brought through the presentation by Hafnia 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 CEO, Mikael Skov.

[Mikael Opstun Skov, Chief Executive Officer]

Thank you for this. My name is Mikael Skov, and I'm the CEO of Hafnia. So let me welcome you to our third quarter 2021 conference call. Along with me today, I have our CFO, Perry Van Echtelt; EVP, Commercial, Jens Christophersen; and EVP, Head of Investor Relations, Thomas Anderson. The 4 of us will present the third quarter 2021 financials for half year. Today's agenda consists of 3 key areas. We will begin with Hafnia and key highlights of the quarter, followed by commercial updates on the product tanker market and finally ending off with our ESG overview. Before we move on, I would like to take this opportunity to express my deep gratitude to all our employees, both at sea and shore and stress to prioritize our employees' health and well-being, so we can continue to serve our customers.Let's move to Slide #2. You should all be aware of the mandatory disclaimer that I will urge you to read. Moving into Slide #4. Let me begin by introducing Hafnia. Hafnia is a fully integrated shipping platform, with 100% aligned interest across all segments without any fee leakage. The headquarter in Singapore, with offices in 3 other key shipping hubs, mainly Houston, Copenhagen and Mumbai. We are listed on Oslo Stock Exchange under the ticker code, HAFNI.As for the third quarter ended 2021, we owned and have charted in a diversified portfolio of 98 vessels across 4 product segments and commercially managed an additional 99 vessels, bringing us to 197 vessels under commercial management. It's fully integrated shipping platforms with 6 key areas to our operations. Hafnia being shipowner, we have a global commercial platform, with chartering team in Asia, Europe and the United States, which [ occurs ] optionality and flexibility for our customers. 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. Our bunkering business is turning bunkers to more than 450 vessels for our pool platform and third-party owners.Fee revenue from our various operational segments has been strong and consistent. Based on this success, we will continue to develop our adjacent businesses.Lastly, we also have a strong focus on ESG. Besides reducing our emissions to air and sea, we also strive to meet our social obligations for sustainable development. We take all the responsibilities seriously and do our utmost to realize and environmental benefits.I would also like to take this opportunity to highlight 6 key factors why Hafnia is one of the leading tanker companies. Firstly, Hafnia is the largest operator of product and chemical tankers in the world. This control and scale will make the company more robust and sustainable, enabling improved earnings capability through the shipping and cargo.Next will be our continued focus to have the lowest operating and funding costs. Our operating cash flow breakeven was $12,917 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.Following that is our solid business model with diversified revenue streams. Earnings from our operating segments have been strong and consistent. We plan to expand these businesses further by adding more vessels to tools and focusing on new segments.We also have a strong relationship with stakeholders such as [ banks ] and industry partners, which gives us access to interest driving debt financing, including the cost of debt and breadth of capital sources.At Hafnia, we have a clear ESG profile. As a leading shipping company, Hafnia's goal is to provide safe, sustainable and efficient hydrocarbon transportation solutions, thereby contributing to the shipping industry's efforts to reduce environmental impact.Lastly, will be the positive outlook post COVID-19 rebound. With the recent increase in demand for refined products, leading to a sharp drawdown of inventories, we believe that the product tanker market will recover in the near future.Moving to Slide #5. The product tanker market was mostly subdued during the third quarter. Elevated crude oil prices attributed to OPEC+ decision to deliver the increase in order production rate resulted in large drawdowns of both crude oil globally. This adversely impacted product tanker transportation demand in the third quarter.Let me now bring you through some key financial metrics for Hafnia's third quarter. For the quarter we achieved time charter equivalent income of $88.7 million and an EBITDA of $29.7 billion. Following a difficult quarter for the product tanker market, we recorded a net loss of $20.7 million for the quarter. We will pay no dividends for the third quarter. While this is not satisfactory, we strive to continue controlling what we can. Over the years, we constantly benchmark ourselves against our peers to evaluate our commercial performance. When we look at these benchmarks, Hafnia stands at the absolute top in all of our segments. The excellent results from the quality of our daily commercial decision-making and constantly improving our understanding of the market conditions. The graph further reinforce this. For the third quarter of 2021, we benchmarked some key metrics to get to our peers, and we can see that Hafnia stands out from the rest in all segments. Moving on to Slide #6. Let me now bring you through a key event that we concluded earlier this month. Hafnia has entered into an agreement to acquire Chemical Tankers, or CTI, and its subsidiaries, including the fleet of 32 vessels through an issuance of new Hafnia shares. The number of shares to be issued and former ownership has been determined through an NAV-for-NAV framework based on respective balance sheets and the predefined vessel value methodology performed by a mutual agreed panel of 5 refutable shipbrokers. As a result, Hafnia will issue new shares to CTI shareholders, representing approximately 21.5% of the outstanding shares in the combined entity. Post transaction, Hafnia will own 133 vessels with more than 230 vessels under commercial management. The combined entity will continue to operate as Hafnia Limited and trade on the Oslo Stock Exchange with the ticker code, HAFNI. This transaction underscores Hafnia's commitment to growing its platform to maximize shareholder value. We can achieve improved earnings capability through the shipping cycle by complementing the existing commercial activities in the Handy and MR segments while enabling enhanced trading visibility through the ability to carry clean petroleum products and chemicals, limiting ballast time optimizing triangulation and offering material cost synergies.There are many other attractive synergies to be achieved from this transaction. With this improved operational scale, we can expect overall cost savings and improved access to capital. We can effect synergies in improving vessel utilization and TC earnings with COA-based chemicals trading with periodic cross-trading clean petroleum products on the commercial front. We can also expect synergies at Hafnia's existing and [indiscernible] to improve, in particular, during the low market cycle. With this increased scale of over 230 vessels for our pools, we can further expand our pool business into new segments to operate the vessels. This will help us to add additional pillars to our already successful tool business. We also expect to expand our bunkering business further for the chemical market participants once that has been established.With that, I will hand it over to Perry to take us through the financials.

[Perry Wouter Van Echtelt, Chief Financial Officer]

Thanks, Mikael. The third quarter continued to face pressure on rates due to weakened oil demand in Asia and the hurricane season in the U.S. This, combined with lower rates, resulted in a net loss of $20.7 million for the quarter and $47.6 million for the first 9 months. Despite this, the outlook for the fourth quarter onwards remains positive. Vaccination rollouts have been progressing swiftly in most economies, and this has resulted in the easing of movement restrictions in many countries as we are already seeing borders opening up in several countries. We have already seen an improvement in demand for jet fuel, and this is anticipated to continue. Seasonally, the fourth quarter also tends to experience higher demand for oil and oil transportation.Income from the management of third-party vessels and buying bunker on behalf of third-party clients was $4.5 million for the quarter, totaling $15.5 million for the first 9 months of the year, but more on pool earnings later. We saw a return on equity of negative 7.3% for the quarter and a return on invested capital of negative 1.6%. The balance sheet, though, remains strong with an equity ratio of 45.2%, and a cash position at the end of the quarter of $75 million. Moving on to the next slide. For the quarter, we saw TCE of an average of $10,643 per day, totaling $88.7 million for the quarter. This can be further divided into the key sectors that we operate in. The TCA was -- TCE was based on 8,337 billing days making $22,816 per day on LR2 vessels $9,828 per day on the LR1 vessels, a $9,955 per day in the MR segment and ultimately $9,275 per day in the Handy segment.Then OpEx, which includes our vessel running costs and technical management fees, was $51.4 million this quarter which results in an average of $6,813 per day across the fleet. The OpEx was based on 7,550 calendar days with $6,631 per day on the LR2 vessels, $7,027 per day in the LR1 vessels, $6,268 per day on the non-pool Panamax vessels and then $6,814 per day in the MR segment. And finally, $6,647 per day in the Handy segment. G&A per day for the quarter was $698 per day. We project our full year OpEx per day at cost of fleet to be $6,792 and G&A per day to be $824. Then move on to the next slide. Hafnia operates vessels in 4 pools, which range from the largest product tankers to small specialized chemical tankers of under 20,000 deadweight tons. Our highly specialized chartering and commercial teams 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 receives pool management commission in the form of a fixed fee and a percentage of all net pool income. Working capital upon entering the pool also ranges across the different sectors from $750,000 for the LR pool to $250,000 on the specialized pool. Pool earnings distribution occurs twice a month. The pools follow 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. And I want to highlight that Hafnia has recently reached a noteworthy milestone in our pools.In the past week, we enrolled vessel #200 into the pool fleet, and this represents a tenfold growth from the day of the establishment of Hafnia back in 2010. 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.Jens, why don't you take the next few pages?

[Jens Christophersen, Executive Vice President of Commercial]

Thank you for that, Perry. If we can move on to Slide 11. These next few pages shows the global oil outlook and our expectations for the product tanker market.The product tanker market remained under pressure during the third quarter, mainly due to virulent COVID Delta variant impacting domestic demand negatively, most profoundly in the Fare Eastern region. Hurricane season in the U.S. closed refining capacity for prolonged periods during the quarter, entering refining capacity and transport demand with further inventory draws covered by demand as a consequence. However, since then, the energy crisis revolving around coal and natural gas supply has led to soaring gas and crude oil prices. This surge in gas prices may have some strength to oil demand through gas to oil substitution in the power sector and can further boost oil demand by 0.5 million barrels per day through the winter months.Global oil production is also increasing. Despite OPEC+ disregarding pleas from major consumers to ramp up beyond monthly allocated 400,000 barrels per day to [ crude ] prices, the U.S. is now poised to provide the largest increase in supply of any individual country as they recover from the hurricane. We move on to Slide 12. Global oil demand is also on track to increase in the coming months and is expected to reach pre-pandemic demand in 2022. The vaccination rate is progressing well in most economies. We have already seen many countries reopening their borders. It has always been the slowest to recover, but this will support the demand for jet fuel as we see countries such as Australia, Thailand and Singapore finally lifting international travel restrictions. Apart from air travel, people are also driving more. Mobility indices for driving have shown strong recovery from the pandemic, and this helps to lend support for motor gasoline demand. The U.S. has seen very strong gasoline demand in September and October, while consumption in China and India is 10% above 2019 levels. Furthermore, seasonally, Q4 tends to see higher demand for oil and oil transportation, due mainly to higher energy consumption from increased heating requirements in the Northern Hemisphere. Overall, we can expect global oil demand to grow 3.4 million barrels per day to 99.7 million barrels per day in 2022, reaching pre-pandemic levels by Q3, Q4 2022. If we move on to the next slide. Storage levels are also a significant driver for the overall tanker market. OECD total industry stocks have declined for the fourth consecutive month in September, now at levels below the most recent 5-year range. Total industry stocks now stand at 2,763 million barrels, the lowest since first quarter of 2015. Product inventories also continued to be drawn down due to supply tightness with the majority of the decline coming from mid-distillates in Europe. Floating refined product inventories have decreased from 108 million barrels in May 2020 to around 27 million barrels in November 2021. However, we expect a recovery in inventories as refineries return after the scheduled maintenance and hurricane Ida outages, which will lead to higher refinery runs and seaborne exports. Carbon volumes for clean petroleum products have also steadily recovered from the effect of the pandemic, reaching 74.3 million metric tons in September 2021 from 65.5 million metric tons in September 2020. Likewise, tonne-miles of clean petroleum products have already surpassed pre-pandemic levels, reaching 255.6 billion tonne-miles in September '21. In short, we see demand exceeding supply already now, and even the slighter seasonal demand will kick off the market. Moving now to next slide. Moving on, the refining sector is recovering. The global refining throughout expected to ramp up and reach a new post-pandemic high of 80 million barrels, I think, in December. As part of the inventories are declining quickly with an increase in demand for refined products, this bodes well to both refinery margins and utilization, and we can expect higher refinery runs. You can see that utilization has also significantly increased compared to a year ago. Closures and reduction of old and inefficient refineries around the world remain evident despite improving refining margins. 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. This combination of refinery additions and closures will have a positive impact on the product tanker demand. We expect refining activities to cluster in regional hubs and increased seaborne volumes of refined products and thereby tonne-miles. Next slide. The outlook remains positive when we look at the global product tanker fleet as we expect an increased demand for refined oil products and slow vessel supply growth. The growth of the product tanker fleet is only expected to be at 1.8% in 2021 compared to 3.2% in 2020. Furthermore, the product tanker order book stands at only 6% of the existing fleet in November 2021, one of the lowest ever levels.With increased emissions and efficiency targets, it will continue to put pressure on older vessels, accelerating the turnover of the global fleet and slowing vessel supply. The world fleet is gradually becoming older and therefore, less efficient as older ships tend to have more waiting time and shorter voyages and modern vessels. With these various interlacing factors, the outlook remains positive, and we can expect product tanker fleet utilization to increase. So Mikael, over to you for the next couple of slides.

[Mikael Opstun Skov, Chief Executive Officer]

Thank you for this. We're now on Slide #17. And how to be committed to adapting to the constantly changing additions while delivering energy to sustain the world? So consciously, we have established clear and effective environmental management plans to ensure, we're fully compliant with all international and local relations while seeking to minimize our overall environmental impact. To illustrate this, in 2020, across Hafnia's own fleet, our carbon intensity, as measured by the annual efficiency ratio, was 5.6% below the IMO's current target. We have set a goal to reach IMOs 2030 target of a 40% reduction in the carbon intensity of the entire fleet 2 years in advance, i.e., by 2028. If we remove emissions for the year, we employ additional initiatives such as hub cleaning in addition to standard vessel optimizations. Furthermore, we're working with data from vessel-based sensors via SMARTShip to reduce fuel consumption. We also have an ongoing future for new and innovative alternate fuels.In addition, we have also partnered with Diginex Solutions, which is a world-leading sustainability-focused impact tech company, to bolster the digital collection management and reporting of our ESG data. The effect of this is to create an ESG reported framework, tailored to the nuances of the shipping industry. So as to continue improving our ESG initiatives too small, but impactful measures to deliver cargoes with the lowest possible footprint. Moving on to Slide #18. Hafnia's also fully focused on 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 Nomination Committee, also it's called best-in-class governance structure. Moving to Slide #19. Looking ahead, the future remains volatile and uncertain, but we believe we are well equipped to face it. With borders around the world easing and the seasonal increase in oil demand, we expect the global economy to improve going into 2022, leading support to oil demand and the product tanker market. We also believe that our chemical exposure with CTI would be beneficial going forward. We will be able to unlock advertise earnings through the cycle plus switching between chemical and product cargoes. Suppose earnings over sustained period for product tankers outperformed clinical tankers. In that case, the latter into the products trade much like the company's LR2 tankers between crude and product trades. This helps to protect our downside risks with potential. Shipping is the backbone of the global economy and is facing increasing pressure to decarbonize this operations. Hafnia will continue to drive and expand our sustainability capabilities by seeking out potential innovations and collaborations.Lastly, we believe that the product and chemical tanker markets will have significant consolidation and growth potential as there is a large fragmentation of ownership in both markets. Top 20 owners of the product and chemical tankers control less than 30% of the global fleet. We will continue to invest in scale in our business, while maintaining cost discipline. With that, I'd like to open up the call for questions.

[Operator]

[Operator Instructions]

[Perry Wouter Van Echtelt, Chief Financial Officer]

I see a question from Frederik Nash in the chat. Maybe, Thomas, you can take it. It refers to -- first of all, well, it's 2 parts actually. One is on preparing for EXI and CI and what our thoughts are on stalling efficiency improvement devices? And firstly, to get some more color on cost and commercial synergies for the transaction. Maybe I'll kick off on that one. And then maybe, Thomas, you can answer on the ESG benefits of the transaction itself. We see the financial benefits of this transaction is from a few angles. First of all, commercial by the combination of the access to clients, triangulation and having a more diversified access to cargoes on the commercial side, which would improve TCE, which we estimate to be around $500 a day across the CTI fleet. Furthermore, there is in-sourcing and doing the commercial management ourselves rather than having them in outside pools in terms of the cost and the pools fees that we save on a net basis, we expect another $500 there. So that is for $3,000 a day. And then overall, because the CTI company will be part of the enlarged scale of Hafnia itself, we expect overall our G&A to drop with another $100 per day. Of course, it will take some time for these synergies to utilize in full, but that will be on the commercial side, TCE cost saving $1,000 a day, which is close to $10 million a year. And obviously, on that fleet also the $100 a day on G&A. So once fully utilized, we would see close to $50 million of synergies on that fleet. Then maybe, Thomas, if you can give some color on the effect on ESG metrics of the transaction itself.

[Thomas Andersen]

Yes. Thank you Perry. And thank you, Fredric for the question. We do see improved you would say environmental ratios for the combined fleet compared to after stand-alone simply because the CGI fleet is on average newer than they have their fleet. And I think you're also asking us on thoughts on installing efficiency improvement devices going forward. That is, of course, something we're looking into and seeing how much each kind of thing can improve our environmental footprint. Of course, in theory, it looks like you can chase 2% there, 3% there and 5% there. But in total, it tends not to add up like that. So we are working on finding the optimal way to install, you would say, improvement devices, as you call it. Yes, can I think that was it.

[Perry Wouter Van Echtelt, Chief Financial Officer]

Okay. Thanks, Thomas. I see a question on cash outflows for investments in the third quarter from [ Chris Aristidou ].Yes, as you say in your question, this is indeed mainly related on the CapEx side on the investment in Andromeda that we concluded in the early Q3 -- And the other part, full financing that we have arranged on behalf of our pool partners. So there's quite a bit of working capital being consumed in the different pools what we have done is we have obtained an unsecured financing Hafnia, which is then on land on to pool partners.And we have one other question on the speed reduction from 2023. I think maybe Jens can take that one.

[Jens Christophersen, Executive Vice President of Commercial]

Yes. Frederic, this is a great question. I think many people are considering what does it mean? Across our fleet, we expect that we may have about 18 of about 120 owned ships, they may need to reduce speeds to comply in 2023, but we expect the reduction to be minimal. And if that's the case in our fleet, we expect that it will be pretty much a similar case across the world fleet. Of course, one of the consequences of reducing the engine capacity or limiting the engine output is that a number of ships will be unable to speed up. So in a market that potentially goes higher and where speed will be a vessels. This will be a disadvantage to the ships that have to degrade their engines. I hope that answers your question?

[Operator]

Okay. Thanks for the comment. Yes. Any further questions following this presentation?

[Perry Wouter Van Echtelt, Chief Financial Officer]

It looks like we have a question from someone on the phone with [phone], so if you can unmute yourself and ask your question.

[Operator]

Okay. If that is not getting through. Maybe any other questions, either directly unmute the phone and post the question, or post through the chat box, which is very easy for us to see actually. And if no further questions, I would like to thank everyone for joining this presentation on the third quarter financials of Hafnia. This presentation will be uploaded to our website. And of course, if there are any other questions that you may have, you can always reach us -- reach out to us for further discussion. Thank you very much.