Hafnia Ltd

OSE:HAFNI

Earnings Call Transcript 2021-Q4

[Operator]

Welcome to Hafnia's Fourth 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. [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'm now pleased to turn the call over to Hafnia's CEO, Mikael Skov.

[Mikael Opstun Skov, executive]

Thank you for this. My name is Mikael Skov, and I'm the CEO of Hafnia. Let me welcome you to Hafnia's Fourth Quarter 2021 Conference Call. With me here today, I have our CFO, Perry Van Echtelt; EVP Commercial, Jens Christophersen; and EVP, Head of Investor Relations, Thomas Andersen. The 4 of us will present the fourth quarter 2021 financials for Hafnia.

Today's presentation agenda consists of 3 key areas. We will begin with an overview of Hafnia and key highlights of the fourth quarter, followed by commercial updates on the product tanker market and finally ending off with our ESG overview.

Before we move on, this is an extremely worrying and distressing time for everyone and especially for our Ukrainian and Russian seafarers. We're doing all that we can to support our seafarers during these difficult times. We will continue to follow all international rules and regulations, and we stress that the priority for Hafnia will always be the safety of our crew.

Let's move to Slide #2. And I just want you all to be aware and take note of the mandatory disclaimer.

Moving on to Slide #3. I would just begin by giving an overview of Hafnia and the key updates on the fourth quarter. And by that, moving into 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 2021, we owned and had chartered in a diversified portfolio of 102 vessels across 4 product tanker segments. Our fleet has since grown to 151 vessels after the conclusion of recent transactions, which we will show more in detail later.

Apart from being a shipowner, we have a global commercial platform with chartering teams in Asia, Europe, the Middle East and U.S.A. We also have our own in-house technical management and bunker procurement team. Our technical management team ensures that the highest safety and environmental standards are maintained onboard, while our bunker team is now buying bunkers for more than 550 vessels for our pool platform and third-party owners.

Fee revenue from our bunker and pool business has been strong and consistent. In 2021, our commercially managed pool business generated an income of $21.7 million. And based on this success, we will continue to develop these adjacent businesses.

These various operational segments make Hafnia a fully integrated platform, highlighting several key value propositions. Firstly, Hafnia is now the largest operator of product and chemical tankers in the world. Our fleet's low average age of 8.3 years and unparalleled scale makes Hafnia business robust and sustainable, enabling better utilization and improved earnings capability through the shipping cycle.

We continue to focus on having the lowest operating and funding cost. Our operating cash flow breakeven was $13,086 per day for the year. Strong relationships with our stakeholders, such as banks and industry partners, giving us access to industry-leading debt financing and our solid balance sheet are key contributors to our competitiveness.

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.

Moving to Slide #5. Let me move on by giving an overview and update of the recent activities Hafnia has been involved in. Firstly, Hafnia's acquisition of CTI, with a fleet of 32 vessels through a share issuance, has been concluded on the 27th of January 2022. The CTI transaction was concluded on an NAV-to-NAV basis. And as a result, the CTI shareholders now represent 21.5% of Hafnia's shareholder base.

Recently, Hafnia also acquired 12 modern LR1s. The fleet is young, all built in 2016 except for one that is built in 2015, and they will all be delivered by May 2022. We have also further improved our liquidity and cash position by $135 million through a few debt financing transactions.

The 12 LR1 vessels that we have acquired will be funded with a sale and leaseback facility with ICBC. These transactions highly underscores the strong ongoing engagement we have with our lenders, which gives us access to industry-leading debt financing and breadth of capital sources, thereby improving our success and access to liquidity. The CTI and the LR1 fleet acquisition, Hafnia now has a modern product and chemical fleet, and we'll focus on optimizing synergies and earnings potential. We have a good public track record of swift and successful integration after significant transactions. And likewise, for these, the integration of CTI and 12 LR1 vessels are well on track.

As a result of these strategic transactions occurring at a period when half year was trading at a large discount to NAV, Hafnia has seek out alternative channels to a capital raise and, hence, increase our leverage. In this regard, we will also be focusing on reducing our financial leverage to pre-deal levels through a combination of retained earnings and sale of noncore vessels when the markets are right.

Moving on to Slide #6. After the conclusion of recent transactions, apart from being the largest product and chemical tanker operator, we have also expanded the range of cargoes we can transport. With the added capabilities of the chemical fleet, which comprises vessels with high-spec coated tanks, they can transport chemicals in addition to clean petroleum products, which gives us more trading flexibility, resulting in better utilization of the vessels.

Looking at the potential trading routes of the chemical tankers, you can see how we are now able to unlock operational synergies and limit better time by switching between the type of cargoes transported. We will be uniquely positioned to offer customers across the product and chemical tanker industry the required reliability to operate successfully in both markets.

We have recently opened a new office in Dubai, which will oversee the trading of our chemical fleet. The Middle East is a very important region for chemical production and export, and we believe this will open new doors and trading opportunities for our existing product fleet.

And Perry will now take us through the financials.

[Perry Van Echtelt, executive]

Thank you, Mikael. If we move to the next page. As global demand recovered at the end of last year, rates improved, which is why Q4 improved significantly compared to the previous 3 quarters. The fourth quarter saw a TCE income of $112.6 million and a net loss of $7.9 million. For the full year, we saw TCE income of $402.9 million, and this, combined with the write-off of $3.1 million on assets held for sale, resulted in a loss of $55.5 million for the full year.

Despite this, we remain positive of the product/tanker market going into 2022 as we expect increased cargo volumes and longer voyages to meet increasing oil demand and replenish low inventories. We've also seen accelerated levels of scrapping of older tonnage.

Income from the management of third-party vessels and buying bunker on behalf of third-party clients was $21.7 million for the full year. We continue to see strong access to the banking environment. And with the increasing interest rates for U.S. dollar financing, we've also continued to gradually increase our interest rate hedging position to lock in the rates to match the tenor of our debt profile. We are constantly evaluating our performance by benchmarking ourselves, and I'm pleased with our performance relative to peers under these challenging circumstances. This results from the quality in our daily commercial decision-making and the understanding of the market conditions.

The graph on this page further reinforce this. For 2021, we benchmarked some key metrics against our peers. And you can see that Hafnia stands out from the rest in all these segments. For 2021, we saw a return on equity of negative 4.9%, but the balance sheet remains strong with a cash position of $100 million. As Mikael already mentioned, we have also further strengthened our liquidity position through the refinancing of our $266 million MR facility, an amendment of the $216 million LR2 facility. This is a combination of both refinancing and amendment of terminal facilities and creating more flexibility in our balance sheet through revolving credit facility and the elements. This provides a very cost efficient and flexible source of liquidity.

Then on the fleet, the average estimated broker value of the owned fleet was $2.1 billion as of the 31st of December 2021.

If we then move on to the next page on the operating data. For 2021, we saw a TCE revenue of $402.9 million, on the basis of 33,188 earning days. This represents an average TCE of $12,141 per day across the segments. This is $23,382 per day on the LR2s; $11,254 per day on the LR1 vessels; $11,845 per day on the MR vessels; and finally, $10,353 per day on the Handy vessels. As of March 14th of 2022, 85% of the total earning days in Q1 '22 were covered at $15,889 per day.

The situation in Ukraine has led to significantly higher oil prices amid concerns about the Russian oil supply. As a result, refined oil products are already starting to be transported over longer distances to meet an expected shortfall of supply of oil to the Atlantic hemisphere, which has been positive for freight rates.

Then looking at OpEx, which includes our vessel running costs and technical management fees, it was $207.8 million for the year on the basis of 30,255 calendar days, resulting in an average of $6,868 per day. G&A per day for the year was $948.

Then moving on to the next page before Jens guides us through the commercial developments, I will bring you through our combined fleet breakdown and our pool economics. As of the start of March, we operate a combined fleet of 225 vessels under commercial management, of which 135 are owned or chartered in either through long-term time charters or bareboat charters across the 5 different segments. This is excluding the acquired LR1 fleet, which we expect to be delivered in the coming weeks stretching into May. And the 4 LR2 newbuilds that we own through our Vista joint venture, which we expect to be delivered in 2023.

Hafnia currently operates vessels in 4 pools, which range from the largest product tankers to specialized tankers of just under 20,000 deadweight tons. Our highly specialized chartering and commercial teams are responsible for developing, marketing, negotiating and executing all contracts for vessels that the pools operate in. Hafnia receives pool management commission in the form of a fixed fee and a percentage of all net pool income as outlined on this page. Working capital upon entering the pool also ranges across the different sectors from $750,000 for the LR pool to $250,000 for the specialized pool.

Vessels under commercial management have been increasing steadily over the years. And 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.

Then Jens, why don't you take the next couple of pages.

[Jens Christophersen, executive]

Thank you for this, Perry. These next few pages show the global oil look -- global oil outlook and our expectations for the product tanker market.

If we can move one page. Global oil demand has recovered in the fourth quarter in 2021, rising by 1.5 million barrels a day, mainly due to the milder-than-expected negative impact of the Omicron variant and the energy crisis leading to the soaring natural gas prices. This has led to a widening gas price premium over oil products, causing fuel switching from natural gas to clean, low sulfur oil products for power generation in Europe and China. As long as the gas markets remain tight and at a price premium to oil products, this will add to oil demand, and we expect this to continue through the first quarter of 2022 in the heating season.

On the supply side, global oil production has also increased in the fourth quarter and is expected to increase going into 2022. The OPEC+ alliance have continued to pump below target levels and see market share dropping, largely due to technical issues and capacity constraints. As a result, producers outside the alliance has been responsible for the majority of recent growth in supply as U.S. shale continues to respond to higher prices. Despite that, the global oil supply is still forecasted to grow from 98.1 million barrels a day in Q4 to 101.5 million barrels a day in 2022.

Global oil demand has been recovering well in recent months and is expected to reach pre-pandemic levels in the second quarter of 2022. Compared to its predecessors, which saw many governments lay stricter rules to avoid a collapse of the health care systems, the COVID Omicron variant had a muted impact on global activities and oil demand. Towards the tail end of 2021, we've seen the gradual reopening of many countries, borders and vaccinated travel lanes set up amongst many countries. Mobility indicators worldwide have also remained robust, where the number of international flights and driving indices are on an upward trajectory. These the support to the demand of both motor gasoline and jet fuel, which are still below pre-pandemic levels in 2021 to increase in 2022.

Overall, we expect oil demand to overtake pre-pandemic levels this year, rising by 3.3 million barrels a day to 100.6 million barrels a day in 2022.

Oil production has not kept pace with oil demand, and consequently, oil inventory levels have been declining rapidly to levels below the last 5-year range. OECD countries are 355 million barrels lower than a year ago with product stock accounting for most of the decline. Total inventory levels now stand at 2,680 million barrels, one of the lowest levels seen during the past decade, and it only covers 59.6 days in terms of forward demand. Product stocks dropped by 30 million barrels in December to 1,377 million barrels, with middle distillates declining by 13.9 million barrels when they typically built by a seasonal average of 11.2 million barrels. With this improvement in oil demand and rapid drawdown of inventories, we do not expect to see a reversal in stock levels in the coming months.

Cargo volumes for CVPs and chemicals have also steadily recovered from the effect of the pandemic, reaching 445.5 million barrels in January 2022 from 428.6 million barrels in January 2020. Likewise, tonne-miles have also surpassed pre-pandemic levels, reaching 280.9 billion tonne-miles in January 2022. In short, with oil demand expected to grow, this bodes well for the tanker trade volume, which is expected to grow further in 2022.

Moving on, the refining sector is recovering well with a major ramp-up in global refining activity at the end of 2021. However, this was not enough to curb the decline in product inventories. Total refinery throughput recovered by 3 million barrels a day in 2021 to reach 77.8 million barrels a day and is expected to surpass pre-pandemic levels at the end of 2022.

There's also the continued trend of refinery closures with 2.8 million barrels a day of closures in 2021, mainly in Europe and Asia. The closures are expected to drive further growth in imports into these regions with longer-haul exports from the Middle East expected to fill much of the supply gap following the start-up of significant volumes of new refining capacity in the Middle East region.

We expect continued growth in naphtha trade to East Asia, largely on longer haul routes from the Middle East, owing to the start-up of new petrochemical capacity with flexible feedstock capability in China and South Korea. As a result, this will positively impact the product tanker demand with increased seaborne volumes of refined products and tonne-miles.

On the supply side, growth was moderate with capacity increasing by 2% in 2021. Looking at the age profile of oil tankers while the majority are still in the younger age range, we can expect the profiles of the aging fleet to increase due to the low order book for tankers in recent years. 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 older tonnage is increasing. We've already seen this trend in 2021, where a total of 3.7 million deadweight was scrapped up from 1 million in the whole of 2020. Scrapping levels for the following years are also expected to remain high as steel prices are likely to remain high and owners face increasing environmental regulations from the introduction of EEXI and CII regulations in 2023, suggesting a more positive period for the tanker market as it potentially encourages accelerated scrapping.

Now I'd like to touch on the Russia and Ukraine conflict that has been creating a volatile shipping market. Russia in 2021 is estimated to account for about 9% of global seaborne crude and 11% of global seaborne product exports. Total Russian seaborne product exports amounted to 108 million tonnes, with Europe and U.S. being the major destinations. There could be a certain degree of tonne-mile impact for product tankers if European buyers replace Russian diesel and fuel oil with longer haul imports from the Middle East and the Far East. The situation is fluid and holds considerable uncertainty.

Since the week leading up to the 24th of February, we've already seen around a 40% drop in total tonnage within the Black Sea, and we can expect to see a further decrease. With sanctions and buyers avoiding Russian cargoes, we can expect European refineries to be affected due to the resulting lower availability and higher cost of crude oil. Here at Hafnia, we continue to trade our ships in compliance with all international sanctions and laws, and crew safety remains a priority.

And Mikael, I'll hand it over to you for the next couple of slides.

[Mikael Opstun Skov, executive]

Thank you for this. And moving on to Slide #18, as you can see. So the shipping industry is facing increasing pressure to decarbonize towards a net zero emission future. In Hafnia, we're always on the lookout for potential partnership opportunities to accelerate our environmental initiatives. We are currently partnering with Diginex Solutions, a world-leading sustainability-focused impact tech company, to bolster the digital collection, management and reporting of our ESG data. We are also in full compliance with the IMO 2020 regulations on sulfur emissions.

For 2021, across Hafnia's own fleet, our carbon intensity as measured by the annual efficiency ratio was 5.4 grams per tonne-mile, which is 6.4% better than the present IMO baseline. The target ratio has been lowered by around an additional 3% since the CTI acquisition. Still, Hafnia is committed to transitioning into a zero emission world as a leading transportation company. We have set a goal to reach IMOs 2030 target of a 40% reduction in the carbon intensity of the fleet 2 years in advance, and are well on track to achieve that.

Moving on to Slide #19. Looking ahead, the future remains volatile and uncertain due to rising geopolitical tensions, but we believe Hafnia is well equipped to face it. We expect to see a strong rebound in the product tanker market going forward, with an increase in products and tonne-mile trade. Hafnia, being the largest operator of product and chemical tankers, has expanded the range of cargoes that we can transport, reaching out to a wider customer base. We have also increased our geographical presence, which will open doors to new trading opportunities and improved earnings capabilities.

Lastly, shipping has always been under the spotlight to decarbonize its operations. With the increasing impact from environmental regulations, Hafnia is well equipped to face it, and we'll continue to strive and expand our sustainability capabilities by seeking out potential innovations or collaborations.

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

[Operator]

[Operator Instructions] We'll start with David Bhatti.

[David Bhatti, analyst]

This is David Bhatti from SEB. So you've increased your leverage on the back of the recent vessel acquisition. So what's your new cash breakeven going to be when the fleet is fully integrated?

[Perry Van Echtelt, executive]

David, it's Perry here. Including the new acquisitions for both the LR1s and the chemical tankers, given the financing that we have on these ships, the cash flow breakeven will go up. It will go towards around probably $14,000. But if you want, we can give you the exact numbers later on.

[David Bhatti, analyst]

All right. So that's up from the current $13,000 level and up to $14,000 give or take?

[Perry Van Echtelt, executive]

Give or take.

[Operator]

Next question from [ Frode Markitel ].

[Unknown Analyst]

I'm not sure if you have published a pro forma balance sheet, including CTI. If not, could you give the debt levels, cash level as of, I don't know, maybe end of 2021? That will be helpful.

[Perry Van Echtelt, executive]

[ Frode ], It's Perry again. The acquisition of CTI will be included in the Q1 financials as we closed the deal in January, and part of the LR1 fleet will be there as well. We gave pro forma numbers when we announced the transaction with the net asset values and the outstanding debt. So for now, we'll work with those numbers.

[Mikael Opstun Skov, executive]

And you can also find more information on that in the prospectus we released following the transaction some 2 weeks ago.

[Unknown Analyst]

Okay. Yes, I think it was $710 million net debt. So just...

[Perry Van Echtelt, executive]

For CTI, yes.

[Unknown Analyst]

Yes, exactly. Anyway, I'll look for updated number when you have it. Curious about the pool operations you have. Can you shed some light on the net earnings or EBITDA from that business?

[Perry Van Echtelt, executive]

Yes, I don't think we have broken down it in EBITDA. But yes, it was $21.7 million in revenue from third-party pool participants. I think that's the closer we've ever said publicly on that.

[Unknown Analyst]

Okay. I'll put it differently, how much of your G&A is tied to pool operations?

[Perry Van Echtelt, executive]

That's a good question. But it's -- probably 40% of that will probably go to EBITDA. That's at least historically. We haven't done the analysis for 2021. But the 2020 levels, in that neighborhood.

[Unknown Analyst]

Okay. I know it's just -- you're just taking over CTI, but I'm curious to know if you have any, let's say -- has this met your expectations so far? And what's your current take on the chemical tankers market development?

[Mikael Opstun Skov, executive]

I think, Jens, maybe you want to tell a little bit about the expectations in the market. I can say -- this is Michael, that yes, so far, definitely, it has lived off to our expectations. I think it's been a -- as we also stated, it has been a smooth process so far. And I think we're -- actually, maybe even positively surprised about, let's say, the period from doing the transaction until where we are today. So that has been good. So if anything, it's only been more positive than when we did the transaction. But maybe, Jens, do you want to add a bit of color to the commercial side of it?

[Jens Christophersen, executive]

Yes, I can add that we're in the process of building our organization, and we feel very comfortable about that. We've opened up an office in Dubai, where we will have a presence towards the important customers in that part of the world. In terms of the market prospects for chemicals, we do see over a really long-term view that there is a significant growth in this segment. In the short-term view, the chemical markets will also be impacted by a stronger clean petroleum market.

[Mikael Opstun Skov, executive]

Any more questions?

[David Bhatti, analyst]

Yes, one more from me, please. David at SEB again. For Jens, what trade rates and products are kind of driving the current increase we're seeing in the product tanker rates?

[Jens Christophersen, executive]

The biggest difference we've seen is that we have started to see higher volumes and longer tonne-miles of diesel oil and gasoline moving from the Eastern Hemisphere towards the Western Hemisphere. That has been one major route that's been significantly impacted already, and this started out in the LR segment and has by now spilled over to the MR segment in the East. So we are seeing significant strength in the East. And in the West, we've also seen good strength with very high activity out of the U.S. Gulf. So the West is also in a good place from an earnings perspective.

[Operator]

Next question is Håvard Lie.

[Håvard Lie, analyst]

This is Håvard from Danske Bank. You mentioned that you would sell noncore vessels at the right time to reduce leverage. Would that be older vessels in general? Or for example, would you look at selling the 25k stainless steel vessels, for example?

[Jens Christophersen, executive]

Yes. So actually, that's exactly what we are referring to. So I mean, the oldest part of our fleet, we've always had targeted for sale. So when prices improve a bit on the back of a stronger market, then that will be our target. And also, the 25 thing will also probably going forward, again, provided pricing is right is something we would consider. So that's exactly how we look at it.

[Operator]

Next question is Eirik Haavaldsen.

[Eirik Haavaldsen, analyst]

Can you maybe comment a little bit on your MR bookings because they are quite spectacular, if I can use that word, for Q1 so far? So anything in particular that you've done there?

And second, can you also maybe explain to us now what the spread between your, let's say, '07 built Dalian vessels and your newly -- or the ones you're now taking delivery from Scorpio, how big is the sort of daily spread in earnings right now on those vessels?

[Jens Christophersen, executive]

All right. Good questions. First of all, on the MRs, the earnings that we are reporting for Q1 are also being reported towards the end of a quarter where we've seen significant strength in the month of March. So that probably explains some of the reason for the number behind it.

Secondly, on the LR1 and the spread between the 2007 built Dalian ships and the 2016 built ships we bought from Scorpio that's fixed with scrubbers, I mean this very significant. I don't have the exact number on my hands here. But in an oil price environment where bunker prices have been touching $1,200 a tonne and today are down between $900 and $1,000 per tonne, it varies quite significantly. The scrubber value has also increased over the past months as oil prices have gone up and it's widened significantly.

[Eirik Haavaldsen, analyst]

Okay. And then if I may follow up. So when you say, of course, I mean, rates have improved strongly towards the end of the quarter, but they started off -- or at least the kind of mid-quarter was kind of weak. So where are you then booking MRs at the moment? I mean then, Q2, if you were to start guiding for Q2 now, I then imagine the average rates would be substantially higher then again. So that's a question.

And then second, I mean you're referring to when the pricing is right for older assets, I think most analysts have your -- again, your vintage, if we can say that, LR1s at the moment, marginal premiums to scrap value scrapping an alternative of '06, '07 built LR1s in this bunker price environment? Or are there sellers at levels well above scrap -- or buyers well above scrap at the moment?

[Jens Christophersen, executive]

Okay. To comment first on the LR1s and the older ships, we believe our ships are in good shape and suitable to trade. So we'll continue to trade them. And in a strong market, also older ships will generate decent earnings. So that -- hopefully, that answers that question.

With respect to the MR, it's true that the quarter started out significantly lower than where it is today. But it's also worthwhile to note that some of the fixtures that are being done today in the U.S. Gulf are -- well, has been done in the U.S. Gulf area since the middle of February have been very high. So that's probably contributed a fair bit to our MR results for the quarter as we continue to position for that.

[Eirik Haavaldsen, analyst]

Okay. But I mean, just to ask you directly then, I mean, the current average assessments from brokers where they are saying eco and large with scrubbers, they should be earning $30,000, $40,000 a day and MRs on average with strength basically in every region should be earning, well, $20,000 or $16,000, $17,000, $20,000 a day, is that according to your view as well?

[Jens Christophersen, executive]

Yes, that's not off the mark. In terms of MR, so I'd say, whether you're east or west, you should be above $20,000 a day. On a modern LR1 that's trading in the East, yes, you're above $30,000 a day on new business that you're entering into.

[Operator]

The next question is from Ola.

[Unknown Analyst]

Congratulations on the perfect timing on the Scorpio Tanker buy. And I want to just ask quickly, are you confident to make a profit in the Q2 this year?

[Mikael Opstun Skov, executive]

Yes. Thank you all for your question. I don't think we are giving guidance on Q2. So if we had to do that, we will send out a stock announcement on it. So don't do that in this call.

[Operator]

There are no more questions pending at the moment. [Operator Instructions]

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