Hafnia Ltd

OSE:HAFNI

Earnings Call Analysis

Hafnia's Strategic Moves Amid Market Turbulence

In early 2024, geopolitical tensions in the Red Sea led to rerouted tankers, extending voyages and spiking Hafnia's earning days' coverage at lucrative rates: 80% covered in Q1 '24 at $37,668/day and 30% covered yearly at $33,419/day. Despite temporary market volatility, expectations are for a strong tanker demand with a 20% increase in voyages, buoyed by global oil demand growth (2.3m barrels/day in 2023 and an anticipated 1.2m in 2024). Strategically, Hafnia has expanded into methanol-fueled vessels and emphasises ESG commitments, keeping its fleet young (average age 8.3 years) for environmental compliance. As for financial strategy, the company will continue to distribute excess capital to shareholders, resisting building cash reserves while not seeking expensive fleet expansions.

Navigating a Dynamic Product Tanker Market

In early 2024, the product tanker market witnessed significant disturbances due to geopolitical tensions in the Red Sea and Gulf of Eden. Attacks on vessels catalyzed strategic responses from tanker owners and charterers, who rerouted ships via the longer Cape of Good Hope route, adding an average of 15 days per journey and a 57% uptick in East to West voyage distances. This shift had profound implications, leading to an estimated 20 MR (Medium Range) equivalents increase in transportation demand, expected to rise closer to 100 MRs if the crisis persists. The recalibration may buoy tanker demands as Europe contemplates refilling depleted energy stocks and managing diminished imports that once heavily relied on Russian supplies.

Positive Financial Outlook Amidst Uneasy Seas

The financial landscape remains promising, backed by foundational market strengths and an anticipatory approach. Operational costs in 2023 were prudently managed at $7,760 per day, with expectations for a robust 2024 given favorable product demand and total mile growth. The early coverage of earning days for the first quarter in 2024 stands at 80%, with an impressive average of $37,668 per day, indicating strong performance ahead. Projected growth in oil demand, reaching an additional 1.2 million barrels per day by 2024, supports the notion that the year will uphold its strength in market conditions.

Subdued Supply Confluxes With Greener Initiatives

Supply expansion remained soft at a mere 2.1% in 2023 and anticipates a further modest growth of 1.2% in 2024. These figures, juxtaposed with upcoming increases in oil consumption, hint at a rise in utilization rates for existing fleets. Hafnia has channeled efforts into environmental stewardship by venturing into methanol-fueled vessels and partnerships oriented towards sustainability. These efforts harmonize with a modern fleet dynamic, strategically leveraging a sleek alignment with green maritime aspirations, and a positive supply outlook highlighted by a trend of aging vessels set for gradual replacement or conversion.

Proactive Future-Proofing Amidst Market Volatility

With a forward-looking vision, Hafnia's leadership expresses confidence in navigating through the volatile seas of the global tanker market. Their strategic focus is on long-term profitability and environmental compliance, with an eye on leveraging spot markets over time charters under favorable conditions. No intentions of hoarding cash reserves or embarking on expensive asset acquisitions without long-term contract support underscore their prudent fiscal approach, ensuring the primary focus remains on returning value to shareholders. The management stays attuned to the ever-evolving landscape, ready to adapt to changes, be it asset sales decisions or responding to market demands for cleaner and more efficient vessels.

Earnings Call Transcript 2023-Q4

[Operator]

Welcome to Hafnia's Fourth Quarter 2023 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] Questions will be answered at the end of the presentation. You will receive further instructions as required.

Certain statements in this conference call may constitute forward-looking statements based upon management's current expectations and include known and not 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 buy or sell or a solicitation of an offer to buy or sell any securities. With that, I'm pleased to turn the call over to Hafnia's CEO, Mikael Skov.

[Mikael Opstun Skov, executive]

Thank you, and hello, everyone. My name is Mikael Skov, and I'm the CEO of Hafnia. Allow me to extend a warm welcome to each of you for joining Hafnia's Fourth Quarter 2023 Conference Call. With me here today are our CFO, Perry Van Echtelt, EVP Commercial, Jens Christophersen; and EVP, Head of Investor Relations, Thomas Andersen. We will present Hafnia's performance for the fourth quarter 2023 together. Today's presentation agenda will cover 4 key topics. As a start, I will provide an overview and highlight key corporate developments during the quarter. Following that, we present the fourth quarter and full year financial performance. Subsequently, we will provide commercial update and an outlook on the product tanker market and finally concluding the presentation with Hafnia's ESG overview.

Let's move to Slide #2. Before proceeding, you should all be aware and take note of the mandatory disclaimer. Certain statements in this conference call may constitute forward-looking statements, and it's crucial to recognize that these statements involve some inherent risks and uncertainties. You should also be reminded that nothing in this conference call constitutes an offer to buy or sell or a solicitation of an offer to buy or sell any securities. Thank you for your understanding, and let's begin with the presentation.

Slide #3. Let us start with an overview of Hafnia and the key highlights in the fourth quarter 2023. Moving to Slide #4. Hafnia is one of the world's leading tanker owners and operators within the product and chemical tanker market. As owners and operators of more than 200 modern vessels across 8 pools, we offer a fully integrated shipping platform, including technical management, commercial and chartering services, pool management and an extensive bunker procurement desk serviced over 1,400 vessels within our pool platform and for external ship owners in 2023.

With a robust business model, Hafnia has maintained its position as one of the foremost players in the shipping industry. At the end of the quarter, we owned and chartered a diversified portfolio of 130 vessels. With an average broker valuation of $4.9 billion for half year's owned vessels, it gives an approximately net asset value of $3.9 billion at the end of 2023. This represents an NAV per share of around $7.7 or NOK 78.9. Since the merger with BW Tankers back in 2019, our net asset value in 5 years has approximately quadruple on $1 billion, which illustrates the significant growth of half year. By implementing our fleet renewal strategy, we can maintain Hafnia's fleet at a low average age of 8.3 years to enhance its utilization and improve earnings capability as well as our environmental footprint.

Moving to Slide #5. At Hafnia we maintain a proactive approach to market evaluation, continuously seeking advantage opportunities as part of our active management strategy. We started the joint venture with CSSC in 2018 and subsequently Andromeda in 2021. In 2022, we have acquired a total of 32 chemical and product tankers through Chemical Tankers, Inc. and it's [indiscernible] and 12 LR1 product tankers from Scorpio. We also concluded a joint venture with Socatra last year with an order of 4 dual fuel methanol MR newbuilds. Our fleet, which include our owned and commercially operated vessels has steadily increased from 176 to 210 over the past 5 years, representing a growth of 19% in overall. We remain committed to pursuing strategic acquisitions and joint ventures that drive sustainable growth and position us for the long-term success.

Moving to Slide #6. Moving on, I would like to update some key corporate updates for Hafnia over the fourth quarter. Firstly, I'm proud to announce the newly launched Panamax pool, partnered with Mercuria to bridge the gap across a rapidly aging segment. 10 vessels with an average age of 13 years will be delivered to the half-year Panamax pool aiming to capitalize on the combined expertise and resources of both companies. Next, in alignment with our dedication to sustainability, we are venturing a joint venture with [ Big Hill ] on the development of hydrocarbon fuel plant to produce low CI blue methanol and sustainable aviation fuel at a later stage.

Still subject to FID, this project will develop new sustainable sitting opportunities within the CO2 and methanol and sustainable fuel sector. Lastly, Hafnia collaborated with Hafnia Bunker Alliance member, Unigas, and the supplier of [ Finco Energies ] [indiscernible] fuels in sustainable biofuel bunkering. During the year of 2023, we have facilitated 7 deliveries of biofuels ranging from B30 to B100 for the Unigas fleet. Perry will take you all through the financials in the next section. Thank you.

[Perry Van Echtelt, executive]

Thanks, Mikael. Despite the unprecedented disruptions in supply chain and the challenging geopolitical conditions we experienced in 2023, Hafnia continues to deliver strong results. We achieved a net profit of $176.4 million for the fourth quarter, bringing our net profit for the year to $793.3 million. This represents Hafnia's highest full year result for the second consecutive year, further building on the strategic growth we've set out earlier. With a strong commitment to enhancing shareholder value, we optimized our balance sheet by reducing our leverage further.

Our net LTV ratio continued to decrease from 27.4% to 26.3% in the fourth quarter due to accelerated debt repayment and improved test prices. Over the year, our net LTV ratio has been reduced by more than 5%, reducing financing expenses further in a high interest rate environment. In line with our dividend policy, I'm pleased to announce a dividend payout of $0.2431 per share or approximately NOK 2.57 for the quarter. That means we will distribute a total of $123.5 million in dividends and a dividend payout ratio of 70%. And this brings Hafnia's total dividends from 2023 earnings to be more than $500 million, representing an average payout ratio of 64.1%. We'll continue to optimize our balance sheet to further reduce our leverage and simultaneously deliver strong shareholder returns.

We then move to the next page. For the fourth quarter, we generated a TCE income of $330 million, bringing our full year TCE income to $1.367 billion. As mentioned earlier, we've also taken the IFRS 15 principles of low to discharge adjustments into our financials, and this resulted in a negative TCE adjustment of $11.7 million. Including this, we achieved an EBITDA of $234.5 million for the fourth quarter and the full year EBITDA of just over $1 billion. In Q4, we generated $8.8 million from our commercial pool and bunkering business, which is continuously to perform well.

Financial expenses reduced as we also recognized a portion of the market value of our interest rate hedges in our income statement, resulting in a reduction of $6.6 million in net financial expense. All in all, we've reported a record net profit of $793.3 million, as I said, Hafnia's best year-to-date. Our return on equity accounted to 47.4% for the full year. We had a cash balance of $142 million at the end of the year and maintained a total liquidity of over $460 million, including undrawn facilities of $321 million. At the end of Q4, around 75% of our loans was hedged at a weighted average of 1.62 base rate. This hedging strategy has largely protected us against the strong increases in interest rates and thereby controlling the financing costs. As a forward-looking company, we will continue monitoring our key leverage ratios and cash break-evens. This strategy will ensure the resilience of our balance sheet and enabling us to seize upon any opportunities that arise in the market.

We then move on to the operating summary. In the fourth quarter, our TCE was based on 10,732 earning days, and we generated an average TCE per day $30,732. This improved from $28,954 per day in the third quarter, as at full year 2023 the average TCE stood at $32,326 per day. Net OpEx costs, which consist of our [indiscernible] operating costs and technical management expenses were based on 9,601 calendar days in the quarter, leading to an average of $ 7,764 per day, lower than the $8,160 per day in the previous quarter.

For the full year '23, the OpEx costs were $7,760 per day based on almost 38,000 calendar days. Reduction is mainly owing to delay in some supply due to trading patterns and no major repairs on vessels for the year. And moving on to the fleet coverage for '24. The product tanker market has remained strong through 2023 due to factors like increased refinery throughput, shifting refining capacity and higher trade volumes. In the beginning of 2024, the market has been heavily impacted by the situation in the Red Sea, resulting in rerouted longer voyages and spikes in earnings. As of 29 February '24, 80% of the total earning days in Q1 '24 have been covered at an average of $37,668 per day. This represents a significant increase compared to the previous quarters. For '24, 30% of the entire earning days were covered at an average of $33,419 per day.

If we then move to the next page, benefiting from solid fundamentals and anticipated increased oil demand, we can expect '24 to yet be another strong year. We are well prepared for this market through our strategically positioned fleet and high spot market exposure. This page presents a comparative analysis of 3 scenarios outlining Hafnia's potential earnings for this year. These scenarios include, firstly, consensus forecast from the equity analysts. Secondly, an extrapolation of the Q1 covered rates applied to the available earnings days in '24. And then the third scenario based on the 2024 coverage rates, similarly applied to the available earnings in 2024. In each of the 3 scenarios, the indications show yet another exceptionally robust year for Hafnia. We move to the next page, then we'll then be sharing the industry review and market outlook.

[Thomas Andersen, executive]

Thanks, Perry. The next few pages provide commercial updates and our expectations on the product tanker market. Since the beginning of 2024, the product tanker market has been significantly impacted by the attacks on vessels in the Red Sea and Gulf of Eden. This has led to several tanker owners and charterers deciding to avoid transits through the area by rerouting on to longer voyages via the Cape of Good Hope. From the graph and table below, we can see that this rerouting would, on average, had 15 voyage days, representing a 57% increase in East to West voyage links, which will support the product tanker demand and ton miles. Although the duration of this disruption remains unknown, this is already having a significant impact to the product tanker market.

Slide 14. Looking at the effect on CPP movements, East to West, routing via Cape of Good Hope is increasing. We estimate that transportation demand so far has increased by approximately 20 MR equivalents based on the beginning of 2024 cargo volumes, which were the lowest volumes compared to the last 2 years. We expect the full tonnage demand effect to be closer to 100 MI [ curlants ] based on historical average East to West volumes, all routed via Cape of Good Hope. Slide 15. West to East cargo volumes remain resilient when compared to historical averages, but routing have already heavily skewed towards Cape of Good Hope. This impact so far is approximately an increased demand of 30 MI equivalent, and we estimate the full impact at about 60 MRs, keeping in mind that West to East volumes require more cubic capacity than East to West volumes. The volumes from the West to the East have a 15% lower specific gravity.

Slide 16. Red Sea impacts aside, the product tanker demand outlook remains very positive for 2024. Despite fourth quarter 2023 demand showing a dip, global oil demand has increased by 2.3 million barrels per day in 2023, mainly due to China and non-ECD countries. Global oil demand is also expected to further increase by 1.2 million barrels per day in 2024 to 103 million barrels per day, driven by an increasing dependence on petrochemical feedstocks such as LPG and NAFTA.

CPP on water as a proxy for transportation demand have also surpassed all-time hikes, positively impacting the current supply-demand balance. The growth in oil and water is driven by longer voyages, not only from the Middle East to the West, for example, given also across the Pacific where the West Coast Americas are, to a greater extent, being supplied from the Far East. Specifically, EU inventory levels are below the 5-year average. And whilst diesel and gas, oil and water currently exceeds the 2023 average by approximately 20 million barrels, the portion destined for Europe is only 4 million barrels out of the 20 million barrels. As such, we believe that we will see continued growth in Oil & Water, if the Red Sea crisis is not solved, 4 million barrels equals less than 1 day of European diesel demand.

Slide 17. Following on, Europe diesel, gas oil and jet inventory remains well below the last 5-year average due to continued drawdown across the year and low import levels as they continue to replace historical Russian import volumes. East to West distillate supply volumes have decreased from December 2023 highs. Middle East volumes reduced due to significantly elevated freight and refinery turnaround. The question now remains how long Europe will accept inventory draws before East to West arbitrages will open wider than they already have. Slide 18.

The refinery landscape also supports a strong outlook for the product tanker market, driven by new refinery startups. In the Middle East, further expansion in refinery capacity and ramp-up of throughput and recent startups is expected in Iraq, Kuwait and the UAE. Asian and export growth is expected to be driven by a range of countries, notably India, where refinery capacity is continuing to expand, and China amid robust export quotas for this year and new refinery capacity expansions. Meanwhile, product imports are expected to be supported by refinery closures in regions such as Japan, Europe and Australia. Refinery maintenance schedule is also potentially affecting trade routes and product on miles. We expect U.S. refinery maintenance to run through February and partly March, while European refinery maintenance commence in March and runs through April with an average of approximately 1.5 million barrels outage for the year, which supports the expectation of increased imports during the coming months from Eastern regions. Middle East refinery maintenance is expected to end shortly, and Asia Pacific is entering maintenance season in April. During this period, Middle East to Far East supply would be required, and this is the historical driver for stronger markets east of Suez during April and May.

Slide 19. Looking forward into 2024, we expect product demand and total mile growth for the upcoming year. The short-term outlook shows promise due to disruptions in the Red Sea, prompting vessels to reroute on to longer voyages. The duration of this disruption remains unknown. But despite that, the longer-term outlook remains positive driven by refinery dislocations, heightened European imports and the impact of Panamax announced transit restrictions due to continuous broad issues. The tonnage supply side also remained subdued, expanding only by 2.1% in 2023 and we expect only a further 1.2% expansion in 2024. This, together with the expected increase in oil consumption will help to increase the utilization of the existing fleet. Slide 20. 2023 saw an uptick in ordering activities but the order book remains moderate at 13% of the fleet capacity.

2024 supply outlook remains limited as most of the orders placed are set to only materialize in 2025. Deliveries in 2023 were limited, falling by around 20% year-on-year but scrapping activities were also muted and in strong market conditions and increased appetite in the secondhand market. This is also evident in the increased average demolition age of vessels. As an overview, the supply outlook remains positive as they are continuing, and there are an increasing number of vessels approaching the older bracket. An increase in newbuilds will also push the older part of the existing product younger fleet into crude trading, which is a very old Aframax and Panamax fleet. And Mikael, over to you for the next few slides.

[Mikael Opstun Skov, executive]

Thank you. Next, let me take a chance to share about Hafnia's ESG projects. In 2023, we took a first step into the methanol landscape by concluding a joint venture with Socatra to order 4 chemical IMO-II MR dual-fueled methanol vessels. This is in line with Hafnia's sustainability values and ambitions in transiting towards a greener future and maritime sector. We also partnered with industry peers, international organizations and other key stakeholders to solve both short- and long-term goals to the maritime sector, such as the establishment of digital venture studio 30/50, implementation of optimization initiatives on our vessels and development of clean hydrogen ammonia production and transportation projects. ESG remains a focal point on our agenda with 2023 serving as an important year for consolidating and furthering our sustainability strategy. We remain committed to work towards our net zero ambitions.

Going to Slide 23. Looking ahead in 2024, I hold a positive outlook on Hafnia's ongoing commitment to fostering a greener maritime sector and leveraging our strategically positioned modern fleet. I would also like to take this opportunity to thank our team and partners for the exceptional results achieved in 2023. None of this success would have been possible without the dedication of our team, both onshore and at sea. Despite ongoing volatility in the future, I'm confident that Hafnia has taken the necessary steps to future-proof itself and is well prepared to navigate the challenges. This comes to the end of our presentation and I would like to open up the call for questions.

[Operator]

[Operator Instructions]. So for the sake of good order, we'll take the questions, if any, in the Q&A or chat function. So if you have any you'd like to raise there, please do so now. I'm checking both and I actually don't see any there. So I'm going to move on to the raise-hand function and order. I'm going to unmute you, if you could please state your question.

[Frode Morkedal, analyst]

Yes. Just a quick question on the market. Given the rerouting around Africa, how do you explain the recent drop in LR1 and LR2 [indiscernible].

[Mikael Opstun Skov, executive]

You've got to put your password in first. Your password.

[Operator]

Sorry, Frode. I think someone was not on mute, and I have just muted them. So please go ahead.

[Frode Morkedal, analyst]

Yes. That was the first question. Did you get it?

[Operator]

Yes, I believe, Jens, could you unmute?

[Jens Christophersen, executive]

Yes, got the question. Thank you very much. And there's probably a number of factors as to why the LR market has come off in the Middle East in the way that it has. But the key factor in our view is that the quick rise in freight that we saw at the back end of January, where LR2 freight rose by almost $6 million for a voyage from the Middle East to UKC, that to some extent closed the arbitrage of the trade and we've seen diesel oil staying more local in the East rather than moving West at the volumes that it normally moves. And this also is the reason why we are of the opinion that we have not yet seen the full demand effect of the closure of the Red Sea.

[Frode Morkedal, analyst]

Yes. And what sort of changed that for the better in terms of the price [indiscernible]?

[Jens Christophersen, executive]

It will be a recalibration of diesel prices when Europe starts to realize that their stocks needs replenishment and it will be a question of how much diesel oil is available in the U.S. Gulf to satisfy European demand. The balance will have to come from the East. It's worthwhile mentioning in this context that whilst we see a weakness in the LR market, we see quite a steady and strong MR market in the East, in particular in the Far East on the back of good volume and demand.

[Frode Morkedal, analyst]

Yes. How about the refinery turnaround in the West, what's your outlook there and the implication for product tankers -- tankers in the coming months? I do believe that refining rounds are expected to increase especially from the U.S. [indiscernible].

[Jens Christophersen, executive]

We share your view.

[Operator]

Thank you, Frode. I think I'm going to unmute Erik, if you could please ask your question. And actually, Erik, you might have to unmute yourself.

[Erik Hovi, analyst]

Sure. Just on your LTV now, you're 26%. I think when you launched this dividend policy about 18 months ago I don't think we expected you to reach the 20% limit as fast as you now are on the verge of doing. What comes after that, Mikael, if I may ask? When you reach that level, I take it that given the tone of your presentation here you're not really interested in new [ vaults ] of size, you're not really interested in secondhand acquisitions. So then you will accumulate a lot of cash. So what do you intend to do with that?

[Mikael Opstun Skov, executive]

Yes. Thank you for that question and not a surprise one, I would say. So yes, I think you're absolutely right. So basically, I mean, our view is that there's still -- depending on what happens to the values overall in the earnings, there still or maybe a while ago before we break the 20% and goes into the 80% payout. But I do want to be clear on the fact that we don't have any intention to build up cash. And as you say, we are not looking to buy expensive vessels at this part of the curve unless they are part of any form of contract base where we can rent them out for many years. So fundamentally our focus has not changed, it's just that we haven't found it necessary to address specific dividend policies yet because there's still some way to go. But the Board and the management is obviously not focused on building up unnecessary cash, so we will just continue to focus on distributing capital back to shareholders as [ Australia ] going forward.

[Erik Hovi, analyst]

And on the -- because the order book has increased a little, I think now, if you -- we're 13% and rising. And of course, the newbuild delivery pace for 2025 is a bit higher than what it was. What's your view there? I mean are time charters becoming interested, you're quite open for 2025? What about a few of your older vessels you sold them in the past, now you haven't done anything for some time, are you watching the S&P market?

[Mikael Opstun Skov, executive]

Yes. So -- and we do that all the time, basically. So we don't lock ourselves into a strategy where it's like, okay, we're going to be doing this for the next 1 or 2 years. So time charters versus spot is very much a moving target so if we see 2- or 3-year time charter rates that we feel is exceeding our expectations for spot markets, then we have no problem in chartering out or do hedges via different instruments. So it's not like we're locked in no matter what. So it's simply just a dynamic strategy that every time if we see that long-term charters are paying more than our view on spot, we will reverse and take more hedging. At the moment, we feel that spot markets are more beneficial and profitable than putting ships out but that's something that's an ongoing thing for us. Same with selling of ships. We have a clear strategy of trying to extract more lifetime out of our assets in general. So we have quite a lot of initiatives ongoing so that the current asset base can hopefully trade longer by investing a bit more early and make them, if you like, more suitable for trading more than the regular period. But again, for ships that we don't feel fit into our strategy or too old, we'll just continue to drop them off if we get the right prices for those particular assets.

[Erik Hovi, analyst]

But there's so far no problem trading 15-, 16-year-old LR1, so at what point is the vessel becoming a problem to trade now?

[Mikael Opstun Skov, executive]

So I think there are a lot of different views on this in general, and different clients have different views on it, but I think at least our experience is that when markets are high and the vessels are in proper technical condition, you can obviously push as far as you can, right? So I don't think there's one particular threshold alone. I think one of the important criteria and Jens, you can maybe jump in here, Echtelt if you want too, is of course, that the environmental regulations and the various taxes that are now coming and being introduced over these years will, of course, make it more uneconomical for older vessels in general to be competitive with modern ships. And that's why we still have a strong focus of keeping a fleet of a relatively young age. I mean, now it's 8.3 years and I think around that level, we are super comfortable in the many years to come that we're going to have a competitive fleet. Jens, I don't know if you want to add to that?

[Jens Christophersen, executive]

I think you've covered it, Mikael.

[Operator]

Okay. So I'm not actually seeing any more raised hand functions. So last opportunity for any questions, which can be read in the Q&A or the chat or the raised hand function. No. Okay. So we've come to the end of today's presentation. Thank you for attending Hafnia's Fourth Quarter 2023 Financial Results Conference Call. You will find more information available online at www.hafniabw.com. Goodbye.