Okeanis Eco Tankers Corp

OSE:OET

Earnings Call Transcript 2023-Q2

[Operator]

Hello to all and welcome to OET Second Quarter 2023 Financial Results Presentation. We will begin shortly. Aristidis Alafouzos, CEO; Iraklis Sbarounis, CFO; and Konstantinos Oikonomopoulos, Chief Development Officer of Okeanis Eco Tankers, will take you through the presentation. They will be pleased to address any questions raised at the end of the call. I want to advise you that this session is being recorded.

Iraklis will begin the presentation now. Please go ahead, sir.

[Iraklis Sbarounis, executive]

Welcome to the presentation of Okeanis Eco Tankers results for the second quarter of 2023. We will discuss matters that are forward-looking in nature, and actual results may differ from the expectations reflected in these forward-looking statements.

Starting on Slide 4 and the executive summary. I'm very pleased to present you the highlights of the third consecutive record-breaking quarter in terms of TCE revenue, EBITDA and net income. Q2 was a historically excellent quarter, especially accounting for seasonality. Our fleet achieved a fleet-wide time charter equivalent of $72,000 per vessel per day, and that includes our time chartered vessels Spot rate across both Suezmaxes and VLCCs stood at about $83,000 per vessel per day. We report net TCE revenue of over $90 million, a further increase from Q1, adjusted EBITDA of over $77 million and adjusted net profit of $1.65 per share. Finally, our Board has declared a fleet consecutive capital distribution of $1.50 per share. That is over 90% of our quarterly EPS and implies a non-realized yield of 24% against our current trading price. We continue to deliver on our promise to distribute all available value to our shareholders. Over the last 15 months, we have distributed approximately $5 per share or a total of $160 million.

As in every quarter, we very carefully evaluated all available information related to the market outlook, global economic data and our balance sheet, including preparing for the upcoming repayment of our $34 million sponsors debt by Q1 and Q2 of next year, as well as our current fixtures of Q3.

We're now moving to Slide 5. On Slide 5, we summarize our corporate and capital structure as well as our employment profile. Our track record, solid financial position and strong relationship with our financiers continues to pay off. We recently announced the refinancing of the Kimolos, Folegandros and Nissos Keros at very accretive terms and maturity in 2028. Furthermore, we have declared our first purchase option under our sale and leaseback financing of our Suezmax vessel, Milos. The transaction was closed in February. Our other Suezmax, the Poliegos Suezmax, with its purchase option kicking in in June. We expect to replace the debt that both the Milos and Poliegos are considerably improved terms.

On the employment front, foreign re-delivery from our charterers of the Nissos Despotiko. All our VLCCs are now trading in the spot market. Our 2 Suezmax long-term time charter vessels, Nissos Sikinos and Nissos Sifnos, are expected to be delivered to us some time within the fourth quarter of this year. More on that in the full commercial and market updates from Aristidis on the following slides.

[Aristidis Alafouzos, executive]

Thank you, Iraklis.

Again, it was another record quarter for OET. We entered Q2 coming off a very firm freight market, with VLCCs earning over $100,000 per day. The market was poised to adjust downwards, but it was further magnified by the announcement of the OPEC+ voluntary cuts. We found it very positive that VLCC freight took about 1 month to adjust before we saw another large spike in rate. This shows that even with the removal of barrels, and therefore, cargoes from the market by the OPEC+ voluntary cut, the fleet is well balanced and the ton-mile effective sourcing crude from farther distances give support.

As we approach the summer, we took the decision to lock in longer and higher paying front haul fixtures from our West position. Simultaneously, we try to reposition our Eastern position to the West when we find good opportunities. The Suezmax segment had a much stronger rally in the middle of Q2 than the VLCC and allowed us to lock in some very strong returns. Also, many of our fixtures in Q1 carried into Q2, which gave support to our final numbers. Milos was redelivered from her time charter and will now trade in our spot fleet.

During the quarter, we achieved a fleet-wide TCE of $72,000 a day, including our time charter. Our VLCC generated $74,800 per day in the spot market, a 30% outperformance relative to our tanker period that is reported Q2 earnings. Our Suezmax has generated $99,900 per spot day, a 60% outperformance relative to our tanker periods with reported Q2 earnings. These numbers reflect our actual book TCE revenue within the quarter as per accounting stats.

Moving on to Slide 8 for guidance on Q3. Once again, the Saudi's lollipop surprise oil cuts surprised the market and, cut reduction again going into Q3. The Saudi cuts and their high OSPs have created a situation where Dubai crude actually sells at a premium to Brent crude today. The arb is now open for sour crudes to move in the elastic base into the East. The headline news is negative, but the subsequent shifting of dynamics continues to give strong support to the VLCC market.

One other development on the VLCCs was that the amount of vessels fixing from the West, like Brazil, with [ that ] for the U.S. Gulf back into [ reduced ] as Asian demand for these barrels outpriced them. This caused more VLCCs to take longer voyages to the East and leave fewer ships open in the West. Not having as many natural Western VLCC positions to offer into Western cargoes, ballisters from the East would have to price Western cargoes in line with the similar TCE as AG cargoes. This gave further support to Western long-haul voyage [ bring ].

Taking this into account, we felt it was time to capitalize on summer strength and fix longer voyages to the East. We locked in 4 solid fixtures. In addition, we repositioned another 2 ships in the East that we're open to keep our Western presence.

Nissos Despotiko was redelivered from her time charter, and now, 100% of our VLCC fleet is trading spot. In addition, Nissos Sifnos and Nissos Sikinos entered their redelivery window from their long-term time charters, but we expect the vessel to be given back some time in Q4.

This is the first quarter since the war began where the Suezmaxes underperformed the VLCC fleet. This development was caused by the Western barrels that would have been sold into Europe on [ African ] Suez is being replaced by long-haul voyages on VLCC. But also, the Russian voluntary cut, which greatly reduced the amount of price gap voyages and less vessels competing for less business. And also, the continued outage of Kurdish barrels being exported from Turkey.

With oil approaching $90 a barrel, the return of Saudi, Russian and Kurdish barrels in Q4 can be the stimulus for a massive rally in freight. China is expected to receive 52 million barrels in oil cargoes in September, a 40% increase versus this month. With the weaker Suezmax market, we focused more on triangulating to optimize earnings. This quarter, we also have to dry-dock Kimolos and Folegandros in Turkey. Positioning for dry-dock in certain limitations on what cargoes we can fix for the first voyage post dry-dock will negatively affect our spot performance. We've decided to upgrade the [ space ] specification on these 2 vessels, and we expect to see a consumption reduction of between 7.5% and 10%.

So far in Q3, we have fixed 73% of our fleet-wide spot days at $63,200 per day. 76% of our VLCC spot base is $65,800 per day, a 46% outperformance relative to our tanker periods we have reported, and 65% of our Suezmax spot is at $55,600 per day, a 16% outperformance relative to our tanker periods we have reported in Q3 earnings.

We continue to outperform our peers both -- on both vessel segments, and we will do our best to keep this up in the future. Currently, our average outperformance since Q4 2019 is 40% on Suezmaxes and 20% on VLCCs when compared against our district peers.

Moving on to Slide 10. We again highlight the future ton-mile demand story with the continued total increase in world oil demand, while the majority of this will come from the Asia Pacific region. But as we see on Slide 11, cargo volumes will be added predominantly in the West. Given the current demand outlook and the inability for vessels to be delivered until 2027, vessel utilization, we expect will approach record percentages in '24 and especially in '25.

On Slide 12, we take a brief look at the effect of the voluntary OPEC+ cuts and the additional Saudi and Russia cut. OPEC stated earlier this week that the market may be undersupplied by almost 2 million barrels per day. The rate of stock depletion will require more supply to this market.

Moving on to Slide 13. Another short-term bullish indicator is the strength in refinery margins that are continuously strengthening at historically very high levels. This is another sign of the need of supply of both crude to be refined and lack of products in the market.

Now taking a look at the supply side on Slide 14, we wanted to highlight how different the fleet situation is since 2008. We almost had 0 order book with a rapidly-aging fleet, which only increases as we're going to the end of this decade. The amount of fleet renewal level we need for 15 years or younger fleet service the normal traded is astounding.

Having -- I'm now handing over to Iraklis for the financials.

[Iraklis Sbarounis, executive]

Thank you, Aristidis.

Moving on to Slide 16. To summarize our income statement for the quarter, our increased TCE revenues translate to record EBITDA of over $77 million and net profit of approximately $53 million or $1.64 per share, $1.65 on an adjusted basis.

Moving to Slide 16 (sic) [ 17 ]. As of June 30, we had cash on our balance sheet of approximately $86 million. The quarter end March unusually higher trade receivables than our previous quarters, which have since been collected. Our debt at quarter end stood at $714 million. The refinancing of the Kimolos, Folegandros and Nissos Keros was an aggregate down at approximately the same levels as its previous respective financings, pro forma to minor scheduled principal repayments are on the date of drawdown. I'm sorry -- on Slide 17, actually.

Our group leverage came in at 59%, while market-adjusted NPV based on broker value stands at approximately 46%, and that's not adjusting for receivables at the quarter end.

Moving on to Slide 18. We wanted to spend some time illustrating how we have been delivering on our promises. Since a year ago, with a full delivered fleet and taking advantage of the market result, we have essentially paid out most of the company's free cash flow to our shareholders. We have the most modern, eco-focused and fuel-efficient fleet across our peers, and we consistently achieve superior commercial performance. We have a best-in-class yield of around 24% and and are shown to be fully spot [ fleet ] will allow shareholders to capture what we expect to be an extraordinary crude oil time market beyond Q4 of this year, given the market fundamentals.

This concludes our presentation, and we will be happy to take your questions. Handing back to you, the operator.

[Operator]

[Operator Instructions] The first question comes from the line of [indiscernible] from ABG.

[Unknown Analyst]

And congrats on another very good quarter.

In terms of looking ahead, I guess, many of us start to understand what will happen if we see Russian volumes falling out either from sort of, well, more options or further regulations coming in place, or perhaps even a peace agreement which could allow them to export to them without the price cap. Could you sort of share your thoughts on the potential outcomes from whatever development we'll see in the Russian volumes?

[Aristidis Alafouzos, executive]

[ Peter ]. It was a bit blurred, but I think I understood your question.

I think in the medium term, if there is some sort of peace agreement, we won't see Europe and, I guess always to a lesser extent, the United States, purchasing Russian crude in large quantities in the short term. So we do expect that Russian crude will continue to go east to the buyers that we see today, like Turkey and -- but more so, India and China. So even with the peace agreement that we do expect the ton-mile effect to remain in place, definitely in the short to medium term.

Now I didn't get the first part of your question because it was blurry. But I think that -- just assuming what you had asked, if the price in brand is quite strong and it's above the price cap and the Russian charters aren't able to give attestations for this, then I think that we'll see a further increase in secondhand values, especially and maybe more so on slightly younger ships. I think this is the case because as the buyers in India and China are mainstream buyers of this Russian crude, they do have quite stringent requirements on the vessels. So it's not an Iranian type trade where they go and [indiscernible] the waters off Malaysia and they can use 20-year-old ships. So I think we will see the trend. If this happens that for them to grow the gray fleet, they'll have to be on younger vessels.

And if the price is within the price cap, I think that going into Q4, the Russians will increase volumes. The price is a lot higher than what it was earlier this year, so they will see more revenue from that, so there is incentive to increase volumes. And we should always remember that most of the Russian cargoes and all of the Russian cargo in the West do have huge delays in the winter. One, in the Black Sea because of the Turkish trade delays, which today may be 0 days of additional wait. But in the winter with the shorter day and the fog and the bad weather, it can easily go up to 15, 20 days going up and coming down, so that prolongs each voyage by 30 to 40 days and creates a lot longer, I guess, like usage days per voyage. And the same in the Baltic, with potential ice causing longer voyages and vessels slowing at slower speeds.

So we think currently, the outlook on the Russian volume is positive in most possible outcomes.

[Unknown Analyst]

Okay. That was helpful.

And the last 1 for me, we do see very good rate in the next 3 quarters. You will accumulate significant cash. What would you think would be sort of the payout ratio? In such a scenario, would you be tempted to do something within the newbuilding market?

[Iraklis Sbarounis, executive]

Yes. [ Peter ], let me take this.

In terms of the payout ratio, you're pretty familiar, we'll have a spelled-out policy in place. But we hope our track record speaks for itself.

Look, this quarter, and we're going to continue doing that in the next few quarters. We always take account -- take into account the performance in the particular quarter, anticipated market dynamics over the short and medium term and, as always, considering our capital structure. I can remind you that we do have a non-amortizing repayment of our sponsors debt, which is due by -- in 2 tranches by Q1 and Q2 of next year. So this is something we always take into account as well as with regards to our capital structure, the higher debt repayment profile compared to our depreciation. So it's -- it's a decision that we take on a quarter-by-quarter, but the principle remains that the strategy is to continue to deliver value to shareholders as much as possible.

In terms of looking at potential opportunities, obviously, we always are in the market and we always have our eyes and ears open to assess what's going on. Having said that, in terms of the newbuilding market -- and we have discussed this in the past, given where asset values are, given where the prices are, extended deliveries well into 2027 by now make us quite hesitant from getting to a position where we see that, in a sense. Obviously, in the future, things may change, but the current thinking is as such.

[Aristidis Alafouzos, executive]

And just to add 1 thing. I mean, 1 thing for sure, OET won't be buying Capes like some of the other Greek peers have.

[Unknown Analyst]

Okay. That's all me.

[Operator]

There are no further questions. [Operator Instructions]

The next question is from Climent Molins calling from Value Investor's Edge.

[Climent Molins, analyst]

I wanted to start by asking about the Nissos Sifnos and the Sikinos, which are expected to be redelivered throughout Q4. Once they are redelivered, you will have the whole fleet trading on spot. And I was wondering, is there any appetite to look for charter cover? Or do you prefer to write it out given your positive market outlook?

[Aristidis Alafouzos, executive]

Thanks for your question, Climent.

So the Sifnos and the Sikinos, they have a bit of a wide redelivery. We can get it any time back from today until towards the middle end of Q4. We expect that given the market, it will probably be towards the end of Q4 -- middle end of Q4.

And in terms of our TC policy, these last few quarters, they have -- the market has come off a little bit, and expectation was that it will come off. So the TC rates, I wouldn't say they weakened, but they don't currently reflect how we view the market for the next 2, 3 years. So at the moment, we don't see value in the time charter market and we think that the spot earnings that we can generate with our current outlook are much stronger, but that can change, and we're not focused on 1 or the other. And you saw that in 2020 and 2021, we had a very different blend of TC over spot. But I think for the next 2 quarters, we won't be significantly increasing our TC exposure at the moment.

We're very happy with our performance on the spot versus the current TC rates.

[Climent Molins, analyst]

I mean, no one can do, again, that performance.

And my second question is more on the model. The [indiscernible] impact with ballast legs on the back end of the quarter?

[Iraklis Sbarounis, executive]

Yes. Sorry, you broke up a bit. I think you were asking about the effect on the finished quarter with regards to certain ballast voyages towards the end of the quarter.

It's true that there was a slight effect that affected the numbers in the previous quarter. We didn't have such a strong impact in Q2. Obviously, this is not something that we can predict on a going-forward basis and it's always -- we always have to comply with our accounting standards.

With regards to Q3, there are certain voyages that we expect to be redelivered to us sometime in early September. So there is a chance that we might see some effect in Q3, but it's hard to predict at the moment.

Does that answer your question? Sorry, I couldn't hear the full question in the beginning.

[Climent Molins, analyst]

It does. I meant for Q3, so for the color. That's all for me. And congratulations for another excellent quarter.

[Iraklis Sbarounis, executive]

Thanks, Climent.

[Operator]

There are no further questions, so I will hand it back to your host to conclude today's conference.

[Iraklis Sbarounis, executive]

Great.

Thanks, everyone. I hope you have a good remaining summer, and we'll be in touch in the next quarter. Thank you very much. Bye-bye.

[Operator]

Thank you for joining today's call. You may now disconnect.