Okeanis Eco Tankers Corp

OSE:OET

Earnings Call Transcript 2021-Q3

[Operator]

Welcome to OET's Third Quarter 2021 Financial Results Presentation. We will begin shortly. Aristidis Alafouzos, COO; and Thalia Kalafati, Interim CFO; Ioannis Alafouzos, 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 the session is being recorded. Thalia will begin the presentation now.

[Thalia Kalafati, Interim CFO & Treasurer]

Welcome to the presentation of OET's results for the third 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 schedule and anticipated debt capital commitment. 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 revenues of $24 million, adjusted EBITDA of $11.3 million and adjusted loss of $4.5 million or $0.14 per share. We brought forward the special survey of the Poliegos to benefit from higher spot rates in 2022. Lastly, our Board of Directors has decided to declare to return $15 million to the shareholders via a capital distribution of $10 million or $0.31 per share back to the shareholders, and the remaining $5 million will be in the form of share repurchases conducted in the market. I'll now hand it over to Aristidis for an overview of our commercial performance.

[Aristidis Alafouzos, Chief Operating officer]

Thank you, Thalia. Once again, OET is trending as the top performer in the spot market for VLCCs in Q3. During Q3, we achieved a fleet-wide TCE rate of $19,100 per operating day, net of 5% technical off-hire days. Our VLCCs generated $16,400 per day in the spot market, a 65% outperformance relative to our tanker peers that have reported Q3 earnings. We were able to secure voyages that have substantial demurrage as well as excellent triangulation on initial [indiscernible]. Our Suezmaxes generated $8,500 per spot day. We were adversely affected by positioning 2 of our spot Suezmaxes into the West for dry dock, as well as having a negative IFRS impact. This will be counterbalanced in Q4 once the vessels have completed dry dock and are in position to fix a front haul voyage back to the East. Lastly, our sole remaining LR2 generated $15,800 per spot day. We delivered her to her new owners and benefited from long haul -- from long front haul on the vessel's last voyage. 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 a few opportunities available to make money trading our fleet. However, OET managed under such conditions to outperform the market. On Slide 5, we provide an overview of our guidance for Q4. So far in Q4, we have fixed 84% of our VLCC spot days at $17,700 per day and 73% of our Suezmax spot days at $17,600 per day. We positioned our fleet to have vessels available in late November, early December, to capture unexpected seasonality. We benefited against our non-eco, non-scrubber peers due to extremely high bunker prices. High sulfur fuel oil is trading at a price around $450 per metric ton, and low-sulfur fuel oil at a price around $620 per metric ton. This gives a substantial spread of $170 per metric ton. Our quality and well-approved fleet enables us to compete for every cargo, which is critical in these depressed markets. In a weaker scenario where low rates persist, which coincidentally, we do not expect to occur, it is important to understand our cash position and liquidity runway looking forward. On the basis that spot rates average as OET has performed in 2021, the company forecast to have an operational cash burn of approximately $500,000 per day -- per month, excuse me, inclusive of dry docking and financing of our 2 newbuilding VLCC expenses. This is a figure that the company can comfortably sustain for the next 36 months while still maintaining cash balance at that point of $20 million. On Slide 6, we provide an overview of our fleet and charter 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 chart, leaving 79% of available days on the spot market to capitalize on what we believe will be a strong recovery in rates. Back to Thalia to walk through our financials.

[Thalia Kalafati, Interim CFO & Treasurer]

Thank you, Aristidis.Starting with our income statement on Slide 7. In Q3, daily OpEx, excluding management fees, averaged $7,900 per day while daily G&A came in at $800 per day. Moving to Slide 8, we report book value of NOK 98 per share following a write-down of paid-in capital and distribution to our shareholders. On Slide 9, we summarize our cash flows and CapEx commitments relating to the acquisition of the 2 VLCCs, we have $179 million CapEx due after the repayment of the $17.4 million to the sponsor, comprising of $141.5 million payable to the yard on delivery and $35.1 million payable to our Chairman that may be deferred at OET's sole discretion to any date before the end of June 2024. In addition, $2 million are allocated to the dry docking of the Milos and the Poliegos.In November, we delivered the 2 VLCCs to their new owners and generated $40 million in proceeds. Following the completion of the sales, we have reduced our fleet breakeven by about $575 per day. Against the VLCC CapEx, we have received firm indications from -- for debt financing of $140 million with a 6-year tenor, 15-year profile and an approximate interest cost of 2.15% of LIBOR. Shifting to Slide 10, we provide a comprehensive overview of our debt stack. Our all-in cost of debt is roughly 3.6%, and following the sale of the 2 VLCCs, pro forma most -- pro forma moves to about 3.1%. Our debt stood at $720 million at quarter end, and is set to decline further to $577 million by year-end following the retirement of the debt of the 2 VLCCs. Back to Aristidis to walk you through our market [ update ].

[Aristidis Alafouzos, Chief Operating officer]

Thank you, Thalia. Let's take a look at the tanker age profile as well as utilization. The tanker fleet is rapidly aging with over 25% of the Suezmax and VLCCs being over the age of 15, while the order book stands only around 8%. We have overlaid the drop in utilization that older vessels face, which effectively reduces tanker supply. VLCCs over the age of 15 have a 25% reduction in utilization, while over the age of 20, it jumps to 70%. Over the next 4 years, about 220 VLCCs will pass the age of 15 years old, over 25% of the global trading fleet. The statistics are even more bullish on Suezmax. Deliveries are high in 2022, but dropped aggressively into 2023. The current delivery position of the shipyard is the farthest out I've ever seen since I started my career. Due to the boom in container ordering and consistent LNG ordering, first-class shipyards cannot deliver a tanker before the end of 2024. Tankers are also the least preferred asset by these yards to build, and the newbuilding quoted prices are extremely high. On the previous slide, I focused more on the limitations of vessels turning the age of 15. But on Slide 12, we take a closer look at the scrapping potential of the fleet. We have almost record high scrapping prices and an extremely weak spot market, but we have not seen scrapping at the anticipated levels. This boils down to the vessels being used for illicit trading. I believe that the ships required for this trade is over tonnaged, and the appetite from these buyers is reduced, which will prompt more vessels to proceed for scrap in the next month. From 2023, EEXI, CII and the EU ETS will add a further burden to older vessels that may face significant CapEx costs or restrictions to their trading that will force them to also scrap. As in the previous quarters, 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 dropped below the 5-year average levels and below where we were prior to COVID, signaling the need for seaborne imports to satisfy demand increases going forward. Oil demand, as per OPEC, in Q2 2022 is expected to exceed oil demand from Q2 2019. On Slide 14, we look at refinery expansion projects which are primarily in China and Asia, which benefits ton-mile demand. These new refineries opening in the Middle East, they are also -- excuse me. There are also new refineries opening in the Middle East which will absorb some Middle Eastern crude. But the positive of this is that the Asian refineries will have to source their crude from further away in the West, again supporting ton-miles. A large refinery is being finalized in Nigeria, but most industry specialists believe that this will see significant delay even into the mid-late 2020s.On Slide 15, we take a closer look at the benefit that Okeanis Eco Tankers' pure eco-fitted fleet has. We have calculated our TCE, time charter daily equivalent, against eco but non-scrubber; scrubber but non-eco; and non-eco, non-scrubber vessels on the 2 main trading tanker indexes. The average ship of our peers flies somewhere in the shadowed gray box, where our ships would have an outperformance of about 160% to 400%. Additionally, non-eco tonnage for VLCC and Suezmax produce about 27% to 30% more CO2 emissions than our fleet. On Slide 16, we break down our outperformance on the VLCCs against peers that have reported Q3 earnings so far. It is evident that the economic aspects of our ships play a significant role, but the margin comes down to our commercial approach of choosing cargoes and timing fixing. I will hand you over to Thalia to recap our summary and outlook.

[Thalia Kalafati, Interim CFO & Treasurer]

Thank you, Aristidis. OET continues to distribute capital to its shareholders with a $10 million distributed in the form of cash payments of $0.31 per share, while the remaining $5 million will be in the form of share repurchases conducted in the market. Inclusive of the $24.3 million cash distribution made in June, total distributions to the shareholders from the asset sales in 2021 will amount to $39.3 million. This compares with net profits from asset sales of $67.6 million after the payment of the equity portion of the 2 new VLCCs. Rather than distribute the total net proceeds as originally contemplated, the Board of Directors has, for the time being, determined to retain approximately $28.3 million of cash on the balance sheet. While the intent was to distribute the total net proceeds from asset sales, the company recognizes that crude tanker markets have not developed as anticipated and that bolstering, by way of reducing our debt is the most prudent approach to address the current market conditions. The Board of Directors and management own 71% of the total shares outstanding, remains steadfast in their commitment to maximize shareholder value and look forward to returning capital to shareholders when market conditions permit. We will continue to take attractive sale at S&P and as well as chartering possibilities. We have fully amortized our scrubber investment and the income generated now is pure profit. Looking forward, it is clear that the world will remain -- will require more seaborne oil imports as inventories will steadily deplete. Oil demand and production continued to increase while margins are firm against an aging fleet that will continuously become more stringent in its environmental impact, OET is perfectly positioned for a very exciting and bullish market ahead. On our final slide, we report our emissions. We are committed to providing transparent information on our emissions. We remain focused on returning financial value back to our investors but our environmental impact is increasingly central to us. Over the following years, we believe the reduced emissions will generate in comparison, against our peers, will translate into a new income stream. To reiterate our commitment to our ESG profile, we will produce an annual ESG report from early 2022. Thank you for listening to our Q3 report.

[Aristidis Alafouzos, Chief Operating officer]

Any questions?

[Operator]

[Operator Instructions] No questions have been submitted on the line. So I'll hand back to your host. [Operator Instructions] The first question comes from the line of [ Herman Hilden ].

[Unknown Analyst]

Aristidis and Ioannis. Can you talk a bit about what you expect -- if you expect to see with the markets on the tanker side this year? Or whether we should wait until next year for the winter market on the tanker side?

[Ioannis Aristidis Alafouzos, Chairman & CEO]

Well, well, of course, we have the Omicron situation that is developing. But otherwise, I think we would have expected the market to turn probably in the second quarter. Right now, there's a lot of uncertainty out there, but we believe that '22 will be better than '21, let's put it this way. But definitely I expect we enter -- the last quarter should be very firm.

[Unknown Analyst]

That's what I was wondering about as well kind of how do you think about Omicron? And also kind of thinking about seasonality in 2022 and you have constantly rising global oil production? How should we think about the dynamics in 2022?

[Aristidis Alafouzos, Chief Operating officer]

[ Herman ], it's Aristidis. I think we saw some nice green shoots of volatility in the market towards the beginning of Q4 and late Q3. You saw that all the asset classes in 30 tankers worldwide, whether it was Aframaxes in the East or in the Mediterranean or in the U.S. Gulf, Suezmax is East and West and VLCCs, they all moved up from their lows into quite a bit above breakeven for eco scrubber-fitted ships like we own. Unfortunately, the market weakened a bit going into late November. And now with the news about the Omicron and sentiment being damaged, I'm not sure that we'll see another strengthening into December. But if oil production keeps increasing and the seaborne transit of oil keeps increasing into 2022, I expect that there will be more volatility in Q1 and Q2 and even more so in Q3 than what we saw in 2021. So as Ioannis said, I also believe that we will see rates higher than what we experienced these past 6 months, and we're quite confident on that.

[Operator]

There are no further questions. Thank you for joining today's call. You may now disconnect.