Okeanis Eco Tankers Corp

OSE:OET

Earnings Call Transcript 2020-Q3

[Operator]

Welcome to OET's Third Quarter 2020 Financial Results Presentation. We will begin shortly. Aristidis Alafouzos, COO; and John Papaioannou, CFO 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 would like to advise you that this session is being recorded.John will begin the presentation now.

[John Papaioannou, Chief Financial Officer]

Hello, everyone, and welcome to the presentation of OET's Results for the Third Quarter of 2020. 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 $48 million, EBITDA of $36 million and adjusted profit of $17 million or $0.53 per share. Our Board of Directors declared a third consecutive cash dividend of $0.10 per share or $3 million. Year-to-date, we have generated a 23% dividend yield for our investors.In September, we took delivery of our final 2 Suezmax newbuilds and have thus concluded our growth program with our fleet now fully delivered in normal water.We also fixed 1 VLCC on a 1-year time charter at $34,000 per day, a rate that is not repeatable today and have thus considerably derisked 2021 for our investors. Lastly, we hedged a significant portion of our floating rate debt exposure at 30 basis points all-in for a term of 3 years. I'll now hand it over to Aristidis for an overview of our industry-leading commercial performance on Slide 4.

[Aristidis Alafouzos, Chief Operating officer]

Thanks, John. Once again, OET is trending as a top performer in the spot market for VLCCs and Suezmaxs. During Q3, we achieved a fleet-wide TCE of $35,600 per operating day, net of 5% technical off-hire days. Our VLCC's generated $48,000 per day in the spot market, a 17% outperformance relative to our tanker peers that have reported Q3 earnings. We fixed longer West Africa and the China runs to lock in the prevailing strong rate, maximize our eco and scrubber benefit and capture the TCE arbitrage between the West Africa and AG markets.Our Suezmaxs generated $33,000 per day in the spot market, 32% higher than the tanker peer group average. We continued our strategy of trading Mediterranean to China route and mixed in shorter voyages to avoid fixing longer as the market bottoms.Lastly, our Aframax/LR2 generated $15,200 per spot day. We continue to be adversely impacted by relatively lower exposure to the more lucrative, clean LR2 sector than our peers, but still managed to outperform our peers trading in the dirty market by 9%. On Slide 5, we provide guidance for our timecharter equivalent revenue in the fourth quarter of 2020. We include only concluded fixtures in our guidance. We have covered all of our available VLCC spot days at $24,000 per day, 14% higher than the peer group average basis, 46% more coverage. Moving on to the Suezmaxes. We have covered 70% of our available spot days at $17,000 per day or 39% higher than the peer group average with 23% more days coverage. We estimate current market TCEs of our next Suezmax fixtures to be in the mid-20s per day.Lastly, we have covered 40% of our Aframax spot days at $11,000 per day. We positioned the Nissos Schinoussa and Nissos Therassia for their first special survey and scrubber retrofit and minimized the opportunity cost of off-hires. The Heraclea will redeliver to us XCR next week and embark on her first spot voyage of the quarter in affirming LR2 market. We are focused on competing for Libya cargoes on Nissos Therassia, with the delivery of the Nissos Heraclea, we have concluded our scrubber retrofit program. Our commercial performance ensures profitability in Q4.Back to John.

[John Papaioannou, Chief Financial Officer]

Thanks, Aristidis. Starting with our income statement on Slide 6. I'd like to first reiterate our above consensus Q3 adjusted profit of $17 million. We adjust our profit for unrealized losses on our interest rate swaps and the expensing of deferred financing fees in connection with the refinancing of 3 Suezmax debt facilities during the quarter. I'd also like to point out our industry low G&A of $505 per vessel day. Trailing 12-month earnings per share now totals $3.5 per share, which equates to a fee ratio of less than 2x based on yesterday's closing price. Moving to Slide 7. We reported book value of NOK 115 per share. As guided last quarter, our leverage has peaked in Q3 at 68% or $848 million, backed by strong timecharter coverage and a very young fleet. Debt will decrease by $11 million per quarter going forward. On Slide 8, we summarize our cash flows. At quarter end, we had remaining CapEx of just $2 million, while our liquidity position stood at $41 million.Shifting to Slide 9. We provide a comprehensive overview of our debt stack and daily cash breakeven by vessel. Our daily cash breakeven includes anticipated dry docking costs in 2021 for the Suezmax Milos and is based on LIBOR of 30 basis points. Our all-in cost of debt in 2021 is anticipated to be 3.5%. All 8 of our timecharters are extremely cash-generative and more than offset any cash burn from the Aframax and Suezmax spot lease. Furthermore, since August, we have hedged $345 million of floating rate exposure on 7 ships, 4 Suezmaxes and 3 VLCCs. We are likely to hedge the Nissos Anafi in the coming months as well.I'll now turn it back to Aristidis to walk you through our market outlook.

[Aristidis Alafouzos, Chief Operating officer]

Thanks, John. I'd like to first focus on the VLCC market on Slide 10. OpEx compliance has been strong since May, leading to a 20% reduction in cargoes out of the AG. Oil in transit is at the same level as it was in 2016, albeit with more tonne miles. At the same time, the VLCC tonnage lift has been expanding steadily since July as ships returned to the spot market from floating storage and from previously deferred dry docks. We had a peak of around 65 VLCCs floating in China for 7 days or longer, and that figure is now down to about 20. We believe that the tightening of time spreads will lead to the drawdown of floating storage, which will cause near-term pain for VLCCs, but set the stage for a more robust recovery in the second half of 2021. Looking closer on Slide 11 at China's impressive oil demand recovery. We will see refinery runs and imports have been strong, while floating storage has come down drastically since the peak in September. As mentioned, the rallying crude prices on the back of vaccine news will drain away any remaining floating storage. In the immediate term, we expect Chinese import demand to move sideways as refinery utilization rates have stabilized. Product inventories still remain high and margins low. We expect the next round of Chinese crude purchases for arrival in January to begin soon as teapot import quotas reset and winter heating demand reduces oil product overhang. On Slide 12, we illustrate that the key to a rebalancing of the oil market is recovery in jet fuel demand, which is the only major fuel type, whose demand is still significantly below pre-COVID levels. We believe that a pent-up demand for air travel will be released as soon as the vaccine or therapy treatment become available. Currently, there are 40% fewer flights in operation globally than last year. A COVID vaccine will help clear jet fuel inventories and rebalance the oil market. We present our estimates of cash breakevens for older, debt-free VLCCs on Slide 13. We calculate that old VLCCs are burning $3 million to $9 million of cash per year in the current spot market, while also emitting 40% more greenhouse gases than OET's VLCCs. If they carry any leverage, cash burn is even higher. We also note a strong charter preference for eco tonnage, such as ours, the combination of these factors leads us to conclude that scrapping should accelerate in the coming months and years.I'll now hand it over to John for a word about our valuation.

[John Papaioannou, Chief Financial Officer]

On Slide 14, we focus on earnings over the next 2 years. Starting at the chart on the left and at the left most gray bar. Assuming OET generates a full year 2021 spot rate of $20,000 per day on the small trading VLCCs, $18,000 per day on our 4 spot Suezmaxes and $15,000 per day on our Aframax/LR2s. OET would still generate net income of $32 million and thus currently trade at a P/E ratio of around 6x. If you plug in VLCC spot rates of $20,000 per day, Suezmax spot rates of $18,000 per day and Aframax spot rates of $15,000 per day into your models and don't get to $32 million of net income, please give us a call to find to help us fine-tune your model. It's also fair to say that if our eco scrubber-fitted VLCCs are generating $20,000 per day in the spot market as a full year average, other tankers are barely covering daily OpEx. Put in another way, the spot rate environment that generates $32 million of profit for OET will also drive substantial scrapping of older tonnage.Even under the worst-case scenario for next year, OET will be cash-generative, thanks to its charter portfolio and high-quality fleet.In 2021, free cash flow is $14 million less than profit. So that if we generate $32 million of profit, we will generate $18 million of free cash flow in 2021. In 2022, free cash flow is $11 million less in profit. So at the midpoint of our rate estimate, an $85 million of profit should equal $74 million of free cash flow in 2022. Back to Aristidis for Slide 15.

[Aristidis Alafouzos, Chief Operating officer]

On Slide 15, we leave you with a summary of our thoughts on the market and the company. We expect the market to remain weak through the first half of next year. As such, our Board decided to take a more conservative approach with regard to capital allocation. Our thinking around the dividend today is very similar to how we thought about it back in Q1. We're concerned about the effect that lockdown in Europe and a big COVID resurgence in the U.S. will have an oil demand and want to maintain at least $20 million of unrestricted cash on our balance sheet. If our stance ultimately proves to be too conservative, we will distribute a cash of dividend to our investors, just as we did in Q2 of last -- of this year. As outlined in the previous slide, we were able to generate no less than $18 million as a bare minimum in 2021 and likely more given our commercial outperformance and potential for a strong winter market. The fleet profile is attractive and whether strapped are marginalized, the pool of modern ships is shrinking. The key to recovery, though, is the return of OpEx to the market and increased molecules being transported.With that, we'll be happy to answer some of your questions.

[Operator]

[Operator Instructions] And we do have the first question from the audio line that comes from Peder Jarlsby from Fearnley Securities.

[Peder Nicolai Jarlsby, Equity Analyst]

Just a few questions. First of all, I guess we touched upon this plenty of times before, but you're still trading at a major discount to core intrinsic values. And we have, this year, and coming into effect next year. I know that's not the only driver of whether you decide to sell or do something on the vessel side. But can you just talk a bit more about what you're thinking and seeing in the asset market and also the plans, if any, to kind of divest assets?

[John Papaioannou, Chief Financial Officer]

Okay. I'd like to -- I can touch on the questions with DCM, and then I'll turn it back to Aristidis to comment a little bit on what we're seeing in asset values. And so maybe to take a step back and address the DCM first. It's a commitment to formally evaluate the option of selling ships at the Board level if our share persistently trades at a substantial discount to NAV. And that percentage discount is not formally defined. It's not an obligation or automatic trigger to sell ships if we trade at a discount to NAV. And I think here, it's a little bit important to understand the context and background of the DCM. When we designed it in 2019, our view was that the market was going to be exceptional in 2020 and very good in 2021. As such, the timing of its implementation in Jan '21 was chosen so as to allow us to enjoy one exceptional year of earnings in 2020 and and then look to sell ships throughout 2021 in the context of a still strong physical and asset value environment in order to close a new lingering discount to NAV and provide investors with an exit. Hopefully, that obviously appended the original timing of our planned ship sales. We believe that the market will improve from the second half of next year onwards, at which point we feel conditions will be better and more conducive for selling ships. That being said, the DCM is still scheduled to come into effect in Jan '21, and we remain open to ship sales even in the current weak physical asset value environment. I believe that ship brokers can confirm that. We are very cognizant of the accretion potential of selling ships and using the cash equity release to buy back our shares at today's price. And we continually weigh this alternative against the cash flow these ships can generate in a good market. There's 2 considerations to take into account. First, given our leverage, our NAV is sensitive to changes in asset values. So if the next sale of a 2019 built VLCC is concluded at a 5% discount to last done, with today can be considered a substantial discount to NAV makes turnout to be a more modest discount. Our ideal scenario for buying back shares is at a substantial discount to NAV that persists in the context of rising asset values. Secondly, our liquidity is roughly USD 250,000 per day. Our Board owns 73% of the company, and we estimate that other long-term holders that aren't sellers at today's prices own another 10% of the company. So the true free float of the company is somewhere between 20% and 25%. The buyback 20% of the company is 150 days worth of trading liquidity. Obviously, this isn't feasible, so we need to issue a tender offer.Now if we'd be able to buy back enough shares in the tender at a price that still represents a substantial discount to NAV, to actually make a dent in our first share accretion is very difficult to say. So with that on the DCM, maybe Aristidis you can comment a little bit on asset values.

[Aristidis Alafouzos, Chief Operating officer]

Yes, sure, John. Thanks. Since the beginning of 2020, obviously, asset prices have reduced significantly for all types of crude vessels and product and age as well. We have seen modern eco scrubber-fitted values come off, I would say, from the highs of 108 deals that were done once or twice early this year, down to last sale of around 84. We haven't seen as much liquidity in the market of S&P for Aframax and Suezmaxes of similar age tonnage. But generally, I feel that the decline in asset values for such modern tonnage is limited to go any further. I mean we could see a bit more, but I think we reached near the bottom. Since the summer, where we've seen the yards extremely hungry for some prompt new building deals, and they offered some very attractive prices to owners. Generally, especially in Korea, the prices have inched up since then, and that will help give a floor to modern asset values. Where we see a big potential for decline in asset values is on over age tonnage, anything over 15 years old, which for the past year, I would say, S&P of these types of ships has predominantly been used for trades that OET has definitely doesn't engage in and most serious owners don't either, whether that's Venezuela or Iranian-related. The buying interest for these types of vessels, speaking whether S&P brokers has dried up significantly recently. And I believe we'll start seeing a very strong deterioration in values on these ships that will bring them much closer to scrap levels than what we've seen previously. So just to give a quick recap on asset values. I think on modern ships like ours, echo and with scrubbers were pretty much near the bottom on where we could see values go. And I think that once we get into 2021, especially the second half, we'll see them increased significantly. And on older ships, I fear that there's still quite a bit of room for them to further decline.

[Unknown Analyst]

Right. Just a final quick one. In terms of -- I heard you mentioned it, but I didn't quite catch it. In terms of the -- you're fully booked on the VLCC side for 4Q, but on the Aframax/LR2, it's just ballpark, it seems that you have 2 vessels due to be fixed quite shortly. The ballpark where you kind of see the market and what you expect here?

[Aristidis Alafouzos, Chief Operating officer]

On the Suezmaxes you said?

[Unknown Analyst]

No, Afra, LR2s.

[Aristidis Alafouzos, Chief Operating officer]

On the LR2, I think we can expect something in the very high-teens for the first voyage she has. And in the Aframax, something in the mid-teens, I would say. We also have 1 Suezmax that's opening up very soon in the west. And on this ship, I expect something in the mid- to mid-high 20s.I mean there's one more thing to add that given that our fleet is so efficient, even in this market, we're still seeing some timecharter opportunities that are attractive and far above the rates that you would pay to a non-eco, non-scrubber ships. And we're examining each one based on how we think we can perform in the spot market. And if we think that we can find a timecharter opportunity that will cover us until -- between the second half of next year and up to Q4 when we expect the market to improve, we'll take it.

[Operator]

The next question comes from the line of Dennis Anghelopoulos from ABG.

[Dennis Anghelopoulos, Research Analyst]

Just a question on surrounding the scrapping case that you're building. It looks like the older vessels, they're much less competitive on a cash breakeven level. But I'm just sort of thinking about the mentality of a shipowner. If I had an older vessel, I had a party earlier this year, I put a lot -- not that much capital in to have this older vessel. I made a decent amount of money. And it's going to be tough now, but I see an order book, which is quite low. So what's sort of going to preemptively make me to scrap? Is it the fact I'm sitting on a cash cushion? I'm going to draw on that? Like what's the breaking point? Is it going to be soon? Or is it going to be a year? How long do you have to burn through everything? Just your thoughts around that.

[Aristidis Alafouzos, Chief Operating officer]

Dennis, it's Aristidis. I think it's -- you have to ask yourself what type of trade you're going to plan on using that vessel for. So once you get over the age of 15 years, the ship will -- it will be very difficult to compete on anything that an OET ship will offer into. If you're willing to trade in more risk to your business, then you still have potential. Although, with the elections in the United States, it seems that the sanctions on Iran and Venezuela could be relaxed. And these trades could all of a sudden become a normal trades again, that normal owners can compete for. So I mean, in the shorter term, risk your business or if you can keep looking for storage opportunities and holding yourself over until the market turns.

[Dennis Anghelopoulos, Research Analyst]

But will they scrap vessels? That's sort of the question I'm getting at, is it really -- is the market so bad right now that people the -- people -- owners of older tonnage are really looking at them saying scrap now? Or are we going to have to wait at least 1, 2, 3 more quarters before that really starts to sink in at these levels?

[John Papaioannou, Chief Financial Officer]

I think the passing of a winter market without any real firmness, that ought to be a catalyst to having more serious deliberations about scrapping for those owners of older tonnage. I mean, just now, we're seeing spot cargoes get 10, 15 offers from owners for 1 AG cargo. So that kind of gives you a bit of an indication as to the state of the market now. And obviously, the owners of those older ships are going to be last in queue to get any cargo coming out of AG or WAF, for that matter. So it's a very difficult spot market. It's a very difficult market for young ships, and it's doubly difficult for any vintage tonnage. Obviously, the individual choice of owner what they -- when is the right time, what the trigger point for scrapping is, that's up to them. But the overall macro; conditions in the physical market are conducive to scrapping.

[Dennis Anghelopoulos, Research Analyst]

All right. And just pivoting away to what you're sort of seeing in the market. U.S. crude exports have sort of held up quite well, actually, even though production has fallen quite a lot. So what sort of word on The Street for you guys about what's happening in the United States? Is it that -- what's happening? Is there -- are they going to go down? Or are there a lot of long-term contracts that's left to be lifted? Like just your thoughts around that.

[John Papaioannou, Chief Financial Officer]

Right now, we understand that U.S. exports are holding up because of the decline in refining utilization in the states. And that's really what's driving exports. We're -- from conversations we're happing with market participants, we understand that production is kind of rolling over right now. So that's not really where it's finding support from. It's more on the refining side of things, where utilization rates, CDU rates are quite low and that -- in the absence of refining those barrels, they're being diverted to the export market.

[Dennis Anghelopoulos, Research Analyst]

And then just to wrap up, is that sort of the U.S. coming back? Is that the key driver you're sort of looking to -- I'm just talking about the shipping fundamentals. What's the key market that you're looking at where we should be paying attention to for shipping for the tanker space? What's the key thing we should be looking at to come back? Is it the U.S.? Is the Chinese demand continuing to grow? What's sort of the thing that you focus on the most long term?

[John Papaioannou, Chief Financial Officer]

Long term, it's clear -- it's obviously rebalancing the oil market. And for that to happen, you first need to clear the product inventory overhang. And that product inventory overhang is a function of what's happening in the jet fuel market. So that's really the biggest laggard in terms of demand relative to pre-COVID levels is the jet fuel market. It has a double negative impact on eco scrubber ships in that. The product inventory overhang is also depressing -- artificially depressing the LSFO MGO pricing, generally, being diverted into the middle distillate pool. So clearing this product inventory overhang will be very key for fleet like ours. And then once the rebalance of the oil market is complete, that's when OPEC can begin bringing more barrels to market. So the AG cargoes coming back into the market to support the VLCCs is something that needs to happen, but that can only happen after the oil market is rebalanced.

[Operator]

The last question in the queue comes from the line of Eirik Haavaldsen from Pareto Securities.

[Eirik Haavaldsen, Head of Research]

I just wanted to ask you one thing on the cash flow initially. Your working capital release was not as big as I expected maybe. Is there anything there we should expect in the fourth quarter that further releases?

[John Papaioannou, Chief Financial Officer]

Eirik, John here. The reason for that is because from the very hard market in Q2 and the early part of Q3 that a lot of our accounts receivable are demurrages. And so we don't collect them as normal spot rate that you collect 10 days after discharge. So it essentially has to do with the heightened uncertainty on the timing of collection of demurrages. And that's really the reason why the working capital release was lower than envisioned.

[Eirik Haavaldsen, Head of Research]

All right. But there's no concern on those receivables at all, right?

[John Papaioannou, Chief Financial Officer]

No, no. Just that the timing is uncertain. We think that we'll certainly have some collections in Q4, but certainly by Q1, we'll clear the backlog of receivables from demurrages.

[Eirik Haavaldsen, Head of Research]

All right. Perfect. And you stay very true to paying out basically everything in terms of cash flow. And now you end the quarter with $17 million of cash, that's $1 million per ship. Is that -- is lower than what you indicated previously. Should we assume that to go up a little bit? Or is that a level you're okay with?

[John Papaioannou, Chief Financial Officer]

Yes. So last quarter, when we distributed the big catch-up dividend of $24 million, I think I guided on the call that our unrestricted cash balance should end Q3 at between $15 million and $20 million, and it ended up at $17.5 million. As Aristidis mentioned in the concluding remarks on Slide 15, I think, now, given our heightened level of caution and our concern about West of Suez oil demand because of COVID, we'd like to maintain at least $20 million of unrestricted cash on the balance sheet. So the higher end of the previously guided range.

[Eirik Haavaldsen, Head of Research]

Perfect. That makes sense. And just 2 questions on the market and your fleet. One, with regards to your Suezmax spot performance so far this quarter, it's excellent. How much of that is equal advantage, as you would see in your opinion? And how much is kind of pure skill?

[Aristidis Alafouzos, Chief Operating officer]

Thank you for the nice comment. We -- I think the eco and scrubber advantage is between $3,000 and $4,000 per day. And the balance is due to the types of voyages we choose, and obviously, the duration and when we choose to make the longer voyages based on how we see the market moving.

[John Papaioannou, Chief Financial Officer]

And given the downtime that European refineries experienced in the quarter, there was a lot of excess crude in the Med that presented us opportunities to take long voyages into China, which we did a lot. We did a lot of that route. And so locking in those long voyages in a steadily declining market, taking long voyage whenever you could, obviously, leads you to outperform an owner that takes short voyages. And it also helps us lock in that eco plus scrubber advantage on the longer sailing days. So it's really a combination of those 2 factors. Longer voyage out of the Med into China and then obviously, the eco and scrubber advantage utilizing that fully on the longer sailing distances.

[Eirik Haavaldsen, Head of Research]

Yes. And that leads me to my second question because, obviously, one effect of COVID-19 has actually been that European refining capacity is coming down, and that looks to be permanent. So is that, over time, going to be a threat to the Aframax trades because there will be more efficient kind of long-haul barrels going on VLCCs? Or is it like you say now that most of those barrels will continue to go on Aframax is just on longer voyages?

[John Papaioannou, Chief Financial Officer]

We did see an uptick in VLCC fixtures from the Med to China in the quarter, which is something that -- not exactly a rarity, but it doesn't happen often. It's something that we have to monitor. It's really hard to extrapolate current wonky trends into the future. As you do correctly point out though, European refining capacity being lower 3 years from now, 5 years from now than it is today, is a distinct possibility. And that's obviously something that we think about often and certainly in the context of thinking about which could make the most interesting sales candidates when the time is right. So it's something that we consider and we evaluate all the time.

[Aristidis Alafouzos, Chief Operating officer]

Just to add something that the Aframaxes that we own, the 3 -- one of them is trading clean. The other 2 are also LR2, so they can be cleaned up and trade as LR2s as well.

[Operator]

Thank you. There are no further questions in the queue. So I'll hand the call back to our speakers to conclude today's conference.

[John Papaioannou, Chief Financial Officer]

That's all from us. Thank you all very much for following our company on the call. And please feel free to reach out to us via e-mail, via call, with any additional follow-up questions you may have. Thank you, everyone.

[Operator]

Thank you for joining today's call. You may now disconnect. Hosts, please stay on the line and wait for the instruction.