Okeanis Eco Tankers Corp

OSE:OET

Earnings Call Transcript 2021-Q2

[Operator]

Hello, and welcome to the OET's Second Quarter 2021 Financial Results Presentation. We will begin shortly. Aristidis Alafouzos, COO; and John Papaioannou, CFO of Okeanis Eco Tankers will take you through the presentation. [Operator Instructions] I will advise you that this session is being recorded. John will now begin the presentation.

[John Papaioannou, Chief Financial Officer]

Welcome to the presentation of OET's results for the second quarter of 2021. We will discuss matters that are forward-looking in nature. These forward-looking statements are based on our current expectations about future events, including OET's commercial performance, dividend policy, projected dry dock schedules and anticipated debt capital commitments. Actual results may differ materially from the expectations reflected in these forward-looking statements.Starting on Slide 3, we review the highlights of the quarter. We generated net revenue of $35 million, adjusted EBITDA of $22 million and adjusted profit of $4 million or $0.11 per share. Currently, the only tanker company to post a profit in Q2. We distributed $24 million to our shareholders during the quarter. Since its inception, OET has generated a 35% total return for its shareholders.We took steps to optimize our VLCC fleet and charter portfolio. Specifically, we sold two 2019 built VLCCs, the Nissos Antiparos and Nissos Santorini for $90 million each. And acquired two 2022 built VLCCs for $97 million each. The 3-year age adjusted spread of $7 million per VLCC compared very favorably to a 3-year straight-line depreciation base spread of approximately $12 million per VLCC, thus making the transaction immediately accretive to NAV upon delivery of the ships in first half 2022.Furthermore, we replaced time charters on the VLCCs Nissos Rhenia Nissos Despotiko, with those on existing VLCCs, creating additional spot exposure for the company.Lastly, our Board of Directors have decided to postpone any further capital distributions until the aforementioned sale of the 2 VLCCs is completed. OET will distribute any excess cash buildup through the sale back to shareholders, as it has done previously.I'll now hand it over to Aristidis for an overview of our continued industry-leading commercial performance.

[Aristidis Alafouzos, Chief Operating officer]

Thank you, John. Once again, OET is trending as the top performer in the spot market for VLCCs and Suezmaxes in Q2 and Q3. During Q2, we achieved a fleet-wide TCE rate of $27,200 per operating day, net of 5% technical off hire days. Our VLCCs generated $14,300 per day in the spot market, a 22% outperformance relative to our tanker peers that have reported Q2 earnings.During the quarter, we took advantage of the weak market to make some light repairs on our VLCC fleet to prepare for uninterrupted winter trading. Our Suezmaxes generated $18,800 per spot day, 32% higher than the tanker peer group average. We benefited from several front-haul voyages to the east as well as a positive IFRS impact.Lastly, [indiscernible] generated $16,000 per spot day, 57% higher than the tanker peer group average. We delivered the Therassia and Schinoussa to their new owners and benefited from long-haul on the oil vessels last voyages. We were also able to capture some of the upside from a spike in the Med early in the quarter on 2 voyages. Overall, the market was characterized by weak sentiment and low volatility with an oversupply of ships prevailing in almost every trading basin. In this context, there were very few opportunities available to make money trading our fleet.On Slide 5, we provide an overview of our guidance for Q3. So far in Q3, we have fixed 43% (sic) [73%] of our VLCC spot days of $15,600 per day, with VLCC spot rates currently around $11,000 per day. 57% of our Suezmax spot days at $18,600 per day with Suezmax spot rates currently around $9,000 per day. And all of our Aframax spot days at $12,900 per day with the Heraclea will be delivered to her new owners next week.Based on the guidance and current spot conditions, we expect our Q3 TCE revenue to be in the mid low $20 millions. The bad news is as bad as we've ever seen the market. The good news is the reason why it's that, inventory drawdowns. Refiners are choosing not to import expensive spot for cargoes, but instead of drawing down on cheap crude, they bought last year in held in stores. The next round of refiner buying will have to be from the seaborne market, which will be very positive for tankers.On Slide 6, we provide an overview of our fleet and target portfolio. For full year 2022, we will operate 14 vessels, 6 Suezmaxes and 8 VLCCs. 2 of the 6 Suezmaxes and 1 of the 8 VLCCs will be on time charter, leaving 79% of available spot -- of available days on the spot market to capitalize on what we believe will be a very strong recovery in rates.And now back to John to walk you through the financials.

[John Papaioannou, Chief Financial Officer]

Thanks, Aristidis. Starting with our income statement on Slide 7. In Q2, daily OpEx, excluding management fees, averaged $6,700 per day, while daily G&A came in at an industry low $400 per day. So far, OET has been the only tanker company to remain profitable in Q2.Moving to Slide 8. We report book value of SEK 98 per share following a write-down of paid-in capital and distribution to our shareholders.Moving to Slide 9. We summarize our cash flows and CapEx commitments. Of the $194 million CapEx related to the acquisition of the 2 VLCCs, $17.4 million is payable to our Chairman by year-end, $141.5 million is due to the yard on delivery, and $35.1 million is payable to our Chairman and may be deferred at OET's sole discretion to any date before the end of June 2024, at a cost of 3.5% fixed interest per year on the outstanding amount commencing from the date of the new VLCCs' delivery. Against this CapEx, we have received firm indications for low cost, high LTV delivery financing from multiple large and reputable financial institutions and calculate that the anticipated capital structure of the new VLCCs will reduce cash breakevens by $3,100 per ship day and accelerate equity buildup by $1 million per year per ship relative to the current lease financing of the secondhand VLCCs, despite carrying roughly the same leverage.The sale and acquisition will also reduce the already industry low average age of the company's fleet and improve its emissions performance.Shifting to Slide 10. We provide a comprehensive overview of our debt stack. Our all-in cost of debt is roughly 3.5%. Our debt stood at $758 million at quarter end and is set to decline further to $560 million by year-end following the retirement of debt of 1 Aframax , Heraclea, and 2 VLCCs, the Santorini and Antiparos. Following the sale of the Aframax fleet, we now have no debt maturities until 2025.Back to Aristidis to walk you through our market outlook.

[Aristidis Alafouzos, Chief Operating officer]

Thank you again, John. Analysts estimate that the crude production will need to increase by 4 million barrels per day in the second half of '21 in order to not deplete inventories to critically low levels. Despite uncertainty due to the Delta variant, oil demand is holding up well and is forecast to increase to over 100 million -- million barrels per day by December.On Slide 12, we see that the crude production increase between now and the end of 2022 will be the biggest and longest increase in recent history. Increases in crude oil production and seaborne trade is a driver of tanker market strength. This was proven in the period 2013 to 2015. And again, in 2017 to 2018, when consistent growth in crude oil production lifted VLCC spot rates, as shown on Slide 13.So far, most of the increase in oil demand has been met by drawing down on inventories of cheap oil that were bought in the aftermath of COVID last year. Global crude oil inventories have now reverted to normal levels, signaling the need for seaborne imports to satisfy demand increases going forward. We continue to believe that we will experience a very healthy winter market this year, similar to what happened in the VLCC market in 2013 and 2018, as well as an exceptional 2022.Back to John for an overview of our cash flow generation potential and historical capital markets track record.

[John Papaioannou, Chief Financial Officer]

Thanks, Aristidis. On Slide 14, we present our projections for profit and free cash flow to equity in 2022 and 2023, assuming various VLCC and Suezmax spot rate scenarios. In 2022, our cash breakeven is forecast to be $23,400 per day, while profit breakeven is $20,900 per day. Overall, we can expect that between 2022 and 2023, OET will be able to return 20% to 130% of its market cap in earnings back to shareholders in profit.On Slide 15, we calculate our total returns since inception of 35% or SEK 25 per share for shareholders that bought into our primary and secondary issuance in 2018.I'll now turn the page to Slide 16 and leave with you some concluding thoughts while we open the line for questions.

[Operator]

[Operator Instructions] And our first question from the phone comes from the line of Dennis Anghelopoulos of ABG.

[Dennis Anghelopoulos, Research Analyst]

I hope everything is good with you guys. My -- so my sort of first thing -- question, of course, is congratulations on [indiscernible] profit in such a difficult market. You guys are talking about the market bouncing back. How soon do you really expect that to be? Do you think we're going to have to wait quite a lot like this until deep into Q4? Or are you guys already seeing some potential signs of improvement just around the corner, like a month from now?

[Aristidis Alafouzos, Chief Operating officer]

Dennis, it's Aristidis. Currently, we haven't seen any signs of improvement yet. We believe that the market will see significant improvements by October and November. And every month that goes by, [indiscernible] increase crude production as well as the annual seasonality, that will help us get us there.

[Dennis Anghelopoulos, Research Analyst]

Okay. And just a question for John maybe here. In your financial report, you guys state that there can be potential finance breakage fees from the termination of the bare boat charters that you guys have with Ocean yield. Do you have any idea of how high those could be? Or is it a negligible amount for us to consider?

[John Papaioannou, Chief Financial Officer]

I would err towards the side of saying it's negligible.

[Dennis Anghelopoulos, Research Analyst]

Okay. All right. And then on the topic of the bare boats from Ocean yield, you guys essentially replaced these 2019 vessels with 2022 brand-new and probably with better financing terms. What are your thoughts on potentially doing that again with the remaining Ocean yield vessels, the 2 Suezmaxes and the 2 VLCCs? Is that sort of a thought process as you have to sort of lower your financing costs and also rejuvenate -- continue rejuvenating your fleet?

[John Papaioannou, Chief Financial Officer]

No. I think that we found an opportunity to do it on the ships at -- the Despotiko and Rhenia. I don't think such an action is repeatable. But as we've always said, we're always looking at ways to lower our cost of capital and we think that, for example, the LTV that we achieved on the Suezmaxes Sikinos and Sifnos is probably more indicative of the kind of margin over LIBOR that a company like OET should be paying. And so we think that, that kind of financing structure and margin is doable again for the two 2022-build VLCCs that will join us next year.And as you pointed out, these ships will have a much more cash-generative capital structure that also builds equity faster. So the combined cash flow benefit of the retail VLCCs, we think, is somewhere around $2 million per year per ship relative to the Ocean yield VLCCs.

[Operator]

[Operator Instructions] At this time, we have no incoming questions on the phone. So we'll turn to those submitted via the webcast.

[John Papaioannou, Chief Financial Officer]

Yes. So the first question is, if we can give a little bit of color on our decision to upgrade the spot exposure.So I would say that the TC swap was a market call. There are certain decisions that we need to take based on what the market is doing today. Such as, for example, today's capital allocation decision to preserve liquidity. And there are some decisions that we need to take based on where we see the market going, such as the TC swap decision. Right now, we're in the seasonally weakest part of the year with the weakness being compounded further by heavy inventory destocking. It's obviously not a pleasant situation, but one that doesn't concern us much either. In that, I mean to say that we weren't expecting a strong Q2 or Q3 this year.If we end up in November, and the market is still at the current levels, then that would be concerning. And we don't think that will happen for the reasons we detailed on Slides 11 through 13. Really, cargo is king and when cargoes come to market, in the quantity and for as long consistently as they'll come through year-end 2022, good things tend to happen in the VLCC spot market. And what we're convinced of is that the recovery, when it does happen, will be stronger than people think, because of sentiment. Because when sentiment in the VLCC market switches from negative to positive, rates respond more strongly than fundamentals alone would suggest.And then we have a question from Peter Jarlsby at Fearnley, about the discrepancy between Chinese runs and imports over the past months. And he asks that, our thoughts on what's happening there and whether it's just an attempt to curb the prices and potential impact further down the road.I think it's the former. I think that right now, product pricing is still a little bit weak, particularly in Asia, because of the Delta variant. And I think that refiners are sort of deliberately staying out of the spot market and not wanting to buy spot oil cargoes at today's prices. And instead are drawing down on the cheap crude stocks that they accumulated last year. And that's evidenced, as Peter points out, between the discrepancy with very strong runs, but low imports.So we think that right now, heavy inventory destocking is taking place in China, which, of course, hurts the tanker market immensely in the near term, but is incredibly positive for the medium to longer term. And that's what we think is happening.And then there's a question on, to what extent buybacks are on the agenda, given where the equity is trading relative to steel.Great question. It's something that we consider all the time. We'd like to point out that insiders, rather the Board, owns 72% of the company. Some longer-term holders close to 10%. So that our true effective free float is somewhere around 20%. It's true that we believe that we trade below NAV. We just don't think that a tender offer would make much of a dent in terms of how much shares we'd be able to buy back in the open market. It's something that we do gauge from time to time. And I'd say that this is one of those times, given pricing relative to the 1- to 2-year forward outlook that makes buybacks much more interesting. And it's certainly something that we look at very closely.And then we had 1 question. How we see the market in 2022 and 2023 and how we're positioned vis-a-vis long-term contractors spot?So for next year, 2022, as Aristidis pointed out, we'll have close to 80% of our ship days in the spot market, and it will be a little bit more than that, somewhere in the mid-80s spot in 2023. So that should give you a sense of how optimistic we are about the next 2 years, and we're positioning our fleet to be able to capture the upside that we see coming over the -- until -- through 2023.And I think that's all we have. Yes, so -- please.

[Operator]

[Operator Instructions] And with that, I'll turn over to your presenters.

[John Papaioannou, Chief Financial Officer]

Thank you all very much for tuning in, and we look forward to chatting with you next quarter. Thank you.

[Aristidis Alafouzos, Chief Operating officer]

Thank you, guys. Have a nice afternoon.