Okeanis Eco Tankers Corp

OSE:OET

Earnings Call Transcript 2022-Q4

[Operator]

Welcome to the OET's Fourth Quarter and 12 Months 2022 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 would like to advise you that this session is being recorded. Iraklis will begin the presentation there.

[Iraklis Sbarounis, executive]

Welcome to the presentation of Okeanis Eco Tankers results for the fourth quarter of 2022. 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 glad to present the highlights of our strongest quarters since inception. The firm tanker market dynamics in combination with our Eco [indiscernible] and fuel-efficient fleet has resulted in a fleet-wide time charter equivalent of $63,800 per vessel per day, and that includes our fixed TCEs.

We report net TCE revenue of over $82 million, that is over 68% increase from our third quarter, adjusted EBITDA of approximately $70 million, that's over 86% up from Q3 and adjusted net profit of $1.51 per share, which is more than 2.5x compared to Q3, a trend that we have seen since earlier in the year.

Finally, our Board has declared a third consecutive capital distribution. The distribution, which relates to our fourth quarter performance, taking also into account what we expect to be a strong Q1 and adjusting for our capital structure considerations will be $1.25 per share or approximately $40 million. That implies a yield against our current trading price of approximately 24%.

We're now moving to Slide 5, where we wanted to illustrate what sets us apart from our peers. Having the advantage of a very young on our 3 years old fleet, which is fully scrubber-fitted and ECO-design, we're able to capture consistently superior results compared to the market and more on that performance later on.

On Slide 6, we summarize our corporate and capital structure as well as our employment profile. We are running on a fully delivered fleet of 6 Suezmax and 8 VLCC tankers. We have a mix of financing providers, both within the traditional banking sector as well as the sale and leaseback market. from both Europe as well as the continuously growing Asia market.

While our financing needs are pretty much covered for at least the short term, our track record and long-lasting relationships will provide flexibility for future needs as and when they arise.

Lastly, on the employment front that we will talk about more in the next few slides. Our long-term time-charter contracts remain 3 expected to run through the second and third quarter of this year. The remainder, of course, of our fleet is trading in the spot are under short-term time charters.

I will now hand over the presentation to Aristidis for our commercial and market update and what I think will be more interesting color than mine to our fourth quarter as well as Q1 of this year.

[Aristidis Alafouzos, executive]

Thank you, Iraklis. Q4 was another fantastic quarter with extremely firm spot rates for both our VLCC and Suezmax fleet. I would like to congratulate the whole OET team for continuing to outperform against our peers. The disruption of oil trade patterns plus the [indiscernible] releases resulted in significant increases in tonne-mile demand.

Oil on the water reached the post-COVID high. Chinese cargo pictures were also very strong in October and November, but subdued in December, which led to the weakening of the VLCC market.

We have guided from Q1 of 2022 that we believe there is superior value of trading our modern Eco scrubber assets in the west. We brought ship after ship to the west on backhaul voyages and we're very happy our strategy paid off so nicely. In Q4 alone, we created Western spot exposure of 5 VLCCs and 3 Suezmax voyages.

Having to position the fleet for the winter months, Q4's focus was on maximizing income. Our results would have been even higher, but we were a bit unlucky as 2 of our Western position VLCCs delay completing their previous voyage and got canceled for their next. These voyages were fixed TCEs of above $120,000 per day and the replacement voyages were fixed at slightly lower rates, but still very healthy.

We wanted to take advantage of the firm level in Q4 and fix a few longer voyages to lock in higher rates for longer periods. Two examples, [indiscernible] was picked on Brazil to Los Angeles voyage, which was a 120-day voyage inclusive of waiting time to discharge on the merge at 6-digit earnings.

The benefit of this voyage was that the position remained in the West when she was open. We picked on her next voyage from Brazil to Europe again at over $100,000 a day. Our VLCC Nissos Kea opened a need and was picked on a voyage from Turkey to China with a duration of over 110 days at again 6-digit earnings.

The Suezmax market was also incredibly firm and the ease of finding cargoes to triangulate is something I had not experienced before. To give you an example, in 2022, we picked the Kimolos from North Europe to China, followed by North Asia to India, followed by Iraq to U.S. Gulf followed by U.S. Gulf to Europe.

Our Suezmax Milos was picked on a 6 to 8 months short time charter. During the quarter, we achieved a fleet-wide TCE rate of $64,300 per operating day. Our VLCC generated $69,100 per day in the spot market, a 14% outperformance relative to our tanker period that have reported Q4 earnings.

Our Suezmax has generated $82,100 per spot day, a 44% outperformance relative to our tanker peers that have reported Q4 earnings.

Moving on to Slide 9 for guidance on Q1. The beauty of voyages is carrying over from 1 quarter to the next. Overall, the market weakened in December and until mid-January. Comparing unfixed available VLCC tonnage, mid-January was a peak with around 75 ships available for cargoes.

And the lows of late November was around 30 ships when the spot market hit peak. Since mid-January, the available tonnage has consistently eroded, breaching the lowest number we saw in November. This is very constructive given it's February. In addition, the United States has been extremely busy on VLCC.

We have seen 44 VLCC cargoes so far in March, which is a record. In comparison, March 2022 was only 27 cargoes and April 2022 was only 24 cargoes. This April, we are also expecting [SBR] to begin releasing again, so it should be another record month.

In Q1, we had Western spot exposure of 6 VLCCs and 4 Suezmax voyages. On our ships on a round voyage basis for the VLCCs, any fixture in the East is around $60,000 to $65,000 per day, while fixtures in the West today are around $85,000 per day.

While a 1-way voyage from the U.S. Gulf to China would earn between $85,000 and $90,000. We do not believe the spread between a west round voyage to a west to east voyage is large enough to justify giving up our position in the West yet.

So far in Q1, we have fixed 80% of our fleet wide spot day $100,200 per day. 78% of our VLCCs spot day is at $91,700 per day, a 65% outperformance relative to our tanker peers who have reported Q1 earnings. And 84% of our Suezmax spot day is at $118,600, a 127% outperformance relative to our tanker peers who reported Q1 earnings.

And we just repositioned another VLCC into the West and got the voyage confirmed about 2 hours ago. Moving on to Slide 10. Looking a few quarters ahead, we are in a lucky position to have the best fundamentals of my career. The order book is extremely low at a time when the fleet is the oldest as it has been for many years.

We have seen extremely limited newbuilding orders in the Suezmax and VLCC sectors. Almost all the orders have a long-term time-charter cash as well. The yards that can build these large cruise tankers are focused on more profitable segments, such as containers, VLGC, PCTC and LNG, which have continued demand.

The demand for these ships is robust and the preference of the yard is evident as in 2023, we have already seen 25 large containers, 8 LNG, 5 VLGC and 17 PCTC orders placed. These asset classes are built in berth that compete with Suezmax and VLCCs.

Current pricing in Korea for a VLCC and Suezmax is over $115 million and $82.5 million, respectively. The lack of new building delivering in '23 and '24 will lead to negative fleet growth. The demand for older tonnage for the black and gray fleet is very strong and the reason that asset prices are so high for overage tonnage.

My view is that once the ship enters the black or gray fleet, it no longer competes against us. If we look at the fleet from this perspective, we have seen a huge contraction of the international fleet as the black and gray fleet has grown significantly, and they estimated to be over 600 ships.

Furthermore, given the costs required for tonnage of such age and what we anticipate to be suboptimal levels of maintenance by such operators, it is likely that we will see in the future further tapping into the availability supply vessels.

Moving to Slide 10. We focus on the crude demand from China and the continued effect of the Russian crude dislocation. The increase in tonne miles due to Europe resourcing all of its crude away from Russia, while Russia is forced to sell to India and China huge.

This changed the VLCC trade complete with U.S. Gulf, Brazil and West Africa to Europe becoming common voyages, which we like very much, while imports from the Middle East, Europe on Suezmaxes have also trended up significantly.

So far, we have seen most of the Russian crude being sold into India, while we expect the Chinese demand to increase as they open up post COVID. China is an important driver of the tanker market and the incremental demand we see post COVID will be a prevalence of tonne mile.

Chinese refiners already have increased their utilization rates by 2 percentage points from Jan to Feb to 77% and runs it around 14.7 million barrels per day. Refinery maintenance is expected to begin in March and finish in May.

Even so, we expect refinery runs up in Q2 to be over 10% year-on-year higher. Crude imports will continue to rise in March and April and should be over 11 million barrels per day with an additional 1 million barrels per day growth in 2023 on a year-on-year basis. We also expect product exports to remain elevated from China in Q1 and Q2. The next batch of export quotas are expected to be released this May.

Moving on to Slide 12. We take a crack combining the 2 previous slides to produce a VLCC and Suezmax supply and demand anticipated balance. The signals are quite clear that '23 and '24 will be excellent years for us, allowing for significant earning capacity and shareholder returns.

I hand you back to Iraklis for the financial update.

[Iraklis Sbarounis, executive]

Thank you, Aristidis. Moving on to Slide 14, I will summarize our net income statement for the quarter. Our increased TCE revenues translate to record EBITDA of approximately $70 million and net profit just shy of $49 million or $1.50 per share.

Moving to Slide 15 and our balance sheet summary. As of year-end, we had cash at our balance sheet of over $88 million. Our debt stood at $739 million, reflecting approximately the $12 million amortization compared to the previous quarter.

Our book leverage came in at 61%, while market adjusted LTV based on year-end broker values stands below 50%. Moving on to our ESG section on Slides 17 and 18. On emissions reporting, we publish our fleet annual efficiency ratio data and fleet energy efficiency, operational indicator data, which are in line with guidance and regulations.

On Slide 18, this is something you've seen from us before. We calculate our competitive advantage based on average banker spread of around $260 per metric tonne to stand at $19,500 per day for VLCCs and approximately $13,000 per day for Suezmaxes.

Okeanis owns Eco and scrubber-fitted vessels and hold a significant competitive advantage against 73% of the VLCC fleet and 84% of the Suezmax fleet.

This concludes our presentation, and we'll be happy to answer any questions. So handing it back to you, operator.

[Operator]

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

[Petter Haugen, analyst]

Congrats with the fabulous Q1 guiding. It seems like Western positioned ships that is like [indiscernible] Are you capable of giving further guidance to the remaining 20% of your coverage for Q1? And also perhaps touch upon what you now, as opposed to some of your cargoes, is also an anticipation of what will be next and going into Q2? Yes. So guidance for the remaining approximately 20% for Q1 and what should we think about Q2?

[Aristidis Alafouzos, executive]

Petter, it's Aristidis. For Q1, I mean, to give you a rough idea, at the moment, we have 2 ships that will be fixed in the East and 1 ship that will be fixed in the West on the VLCCs. And on the Suezmaxes, we'll have 1 ship that's opening in the West and maybe 1 ship that's opening in the East. So it's fairly limited. .

And in terms of Q2, we're pretty positive because we think that the SPR will be a big driver of strength in the market. We see that the U.S. Gulf, let's say, U.S. Gulf China versus AG, China, there's a premium to it right now. And the market on the VLCCs and in general is much tighter in the West.

So we do think that will also tighten the overall balance of the global market. So I think we're pretty constructive on Q2 as well. I wouldn't be surprised if we see a spike on the VLCCs.

[Petter Haugen, analyst]

That's interesting. Going further, as you take yourself '24-'25 looks very tight. But no one is ordering. Why don't you order a few ships there?

[Aristidis Alafouzos, executive]

There has been some ordering. There's been ordering on other segments. So you have seen, like I mentioned, on LNG, et cetera, and MR2s and LR2s, there have been some orders. On the Suezmaxes, we've been very lucky that there has been such limited ordering.

And I think also because of the orders in the other asset classes that I mentioned, the order book has also been pushed out quite a bit farther than, let's say, the berth that are available for MR2s, LR2s. And why are we not ordering? Because at the moment, we're still focused on returning capital to shareholders, which we've said is the main intention of OET all along.

[Petter Haugen, analyst]

Yes, yes. And it doesn't take many quarters to do that with these rates. So -- but I read you that ordering ships here is still not something you actively think about.

[Aristidis Alafouzos, executive]

Yes, that's correct.

[Operator]

The next question comes from the line of Eirik Haavaldsen from Pareto Securities.

[Eirik Haavaldsen, analyst]

Again, a fantastic quarter. But on the dividend and the shareholder returns, it's sort of refreshing to see a constantly paying everything out basically. Should we think about your cash position now as a level that you're comfortable with going forward as well? So no need to -- given your stance and there was no need to accumulate further cash holdings. Is that the right way to think about it. So everything to that should be paid out?

[Iraklis Sbarounis, executive]

Yes. I'll take that. Eirik, this is Iraklis. Look, we're comfortable with our liquidity levels. But obviously, we continuously reevaluate our needs for the future. We take into account the increasing interest rate environment and global inflationary issues. There is no set amount over which we would have made the decision to proceed with the full payout of excess cash.

But we continuously assess and balance our current and future needs. Our expectation on the market and of course, if any accretive opportunities might arise in the future, we will always consider that.

With regards to the dividend decision itself for this quarter. Obviously, we took into account our performance in Q4. But we also had visibility on the anticipated strong Q1 quarter as well. And we are also considering a capital structure where our quarterly debt repayment exceeds our quarterly depreciation.

So taking all of that into account, we were comfortable with the number that were concluded. And we will be assessing in a similar way what we'll be doing the next quarter, which hopefully will be equally, if not better, in terms of numbers.

[Eirik Haavaldsen, analyst]

Fair. And as you mentioned the rising interest rates, you have -- I mean your one of a few companies that have had decent or still have a decent LTV, which I think is an asset in this market environment. But any plans or thoughts to refinance?

I mean you have [indiscernible] and so on. Anything there that might happen in the future?

[Iraklis Sbarounis, executive]

Yes. I mean, for the foreseeable future, we don't have any refinancing plans. The more expensive side of our capital structure, which is under the leases that we have, we will only be able to start exercising potentially purchase options starting next year. So this is still a bit further away, while the rest of our capital structure is actually quite healthy and competitive levels. So nothing for the foreseeable future. But starting next year, we will be exploring that further.

[Eirik Haavaldsen, analyst]

Okay. And one market related also, if I may. I mean there's a lot of talk about what happen to Russian exports from next month and them holding back cargoes or production issues or whatnot. Are you seeing anything here that could impact the Suezmax market at all? I mean it's been remarkably steady and solid for a long period of time now. So is that at all going to impact things, you believe?

[Aristidis Alafouzos, executive]

Eirik, this is Aristidis. I mean just thinking practically, I think that it's much -- it will be much more challenging for the Russian to export their products from the Western ports. So I wouldn't be surprised if we see production of, let's say, overall production will come off a little bit as they stated, but we see exports of crude remain pretty much flat, and they will slow down the refining capacity in the West. So...

[Eirik Haavaldsen, analyst]

Okay. So you're seeing signs of that?

[Aristidis Alafouzos, executive]

No, no, no. I'm noting any signs. I'm just saying that this is what I logically thinking this is what I would expect to happen that the cuts will reduce the refinery runs, and we'll see fewer Russian product exports rather than crude.

[Unknown Executive]

We have a web question from [Frederick Coaster] When your 3 vessels, which are currently on time-charters come off their charters, will you operate the entire fleet in the spot market or will you seek long-term employment for some vessels?

[Aristidis Alafouzos, executive]

I mean that's currently, I would say that 3-year deals on VLCC is around $50,000 a day and Suezmaxes are just below $40,000 per day for our ships. With the outlook that we have, we strongly believe that the rates that are being discussed today are considered market today undervalue the potential that we can earn in the spot market going forward.

So unless these rates materially change, the 3 ships that will be redelivered to us will be traded in the spot market. So we have included the short TCE Milos delivered early in Q2, the [indiscernible] which is on to Equinor for 3 years will finish sometime in June and the 2 Suezmaxes [indiscernible] will come back in Q4.

[Unknown Executive]

Another question from [indiscernible] You're guiding on TCE for Q1, is that on a discharge-to-discharge basis?

[Iraklis Sbarounis, executive]

Yes, yes. That is correct.

[Unknown Executive]

Follow-up question. Russian trades are very limited when it comes to transparency for those who are in the market. Given that you have done those kinds of trades, can you shed some color on what kind of TCE premium compared to our other trades?

[Aristidis Alafouzos, executive]

There's, as you said, there's very little transparency in this market. So it very much depends. It's a hard question to answer because you don't know exactly what you're comparing around voyage or discharge voyage.

[Operator]

Okay. That's all for the web questions. Back to you, Iraklis.

[Iraklis Sbarounis, executive]

Well, thank you very much, everyone, for listening to our Q4 presentation. We look forward to touching base again next quarter, hopefully, with even better news. Thank you very much.

[Aristidis Alafouzos, executive]

Thank you.

[Operator]

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