Okeanis Eco Tankers Corp

OSE:OET

Earnings Call Analysis

Strong Performance and Expansion in the US Market

The company capped off a strong 2023 with record results, boasting a Time Charter Equivalent (TCE) revenue over $45,000 per vessel per day. Their strategic listing on the New York Stock Exchange has widened their investor base, as evidenced by a spike in trading volumes—about 50% increase post-listing, indicating increased investor confidence.

Record-Breaking Year with Solid Financials

Revenue for 2023 showed a significant uptick of 54% compared to the previous year, resulting in almost $300 million in TCE revenue. Adjusted EBITDA and net income saw an impressive 72% year-on-year increase, which underscores the strength of the tanker market and the company’s operational efficiency.

Optimized Capital Structure and Fleet Utilization

The company has been active in improving its capital structure; for instance, it closed a bank deal that reduced its capital costs for the vessel Milos and declared the purchase option for Poliegos, streamlining their leasing agreements and showcasing adept financial management. With all vessels now exposed to the spot market, the company remains agile and ready to capture market premiums.

Q1 Performance and Market Dynamics

Q1's Time Charter Equivalent (TCE) rates for the fleet have outperformed industry averages, especially with their VLCCs achieving a 37% outperformance relative to peers. The market dynamics, including adjustments due to the Red Sea diversion and the positioning of their fleet, have positioned the company to capitalize on market fluctuations and longer voyages.

Bullish Market Outlook and Supply-Demand Dynamics

The OPEC+ strategy and subsequent market response are expected to lead to a 'counter-seasonal' drying up of Q2. The analyst projects a market surge once OPEC+ starts reintroducing barrels to the market, potentially necessitating 48 more VLCCs. Venezuelan exports normalizing is also projected to boost demand for the company's vessels.

Long-Term Advantage due to Fleet Age and New Building Slots

A long-term advantage emerges as new building slots for VLCC and Suezmax are already limited up to 2027. With a significant portion of the fleet aging, the company's strategy positions itself advantageously in a future where younger, efficient fleets like theirs will be favored due to tighter efficiency and age standards.

Earnings Call Transcript 2023-Q4

[Operator]

Hello, and welcome to the OET's Fourth Quarter and Fiscal Year 2023 Financial Results Presentation. We will begin shortly. Aristidis Alafouzos, CEO; and Iraklis Sbarounis, 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. Iraklis will now begin the presentation.

[Iraklis Sbarounis, executive]

Hi, everyone. Welcome to the presentation of Okeanis Eco Tankers results for the fourth quarter and fiscal year 2023. We will discuss matters of the forward-looking nature and the actual results may differ from the expectations reflected in such forward-looking statements. Please read the relevant disclaimer on Slide 2.

We're going to start on Slide 4 and the Executive Summary. I'm pleased to present the highlights of the fourth quarter of 2023, finishing off a record year for us. We achieved fleetwide TCE of over $45,000 per vessel per day, and that includes for most of the quarter, our last 2 legacy Suezmax time charters. Spot days for VLCCs of $45,000 and spot Suezmaxes of $52,000.

We reported adjusted EBITDA of $44.2 million, adjusted net profit of $20.4 million and adjusted EPS of $0.63. Our Board declared the seventh consecutive capital distribution of $0.66 per share, which is 100% of our reported EPS, continuing the promise to deliver value to our shareholders. Over the last 4 quarters, we have distributed $4.36 per share against the earnings of $4.5 on both an adjusted and reported basis, i.e., approximately 97%. On [ a nominal ] basis, that's $140 million.

Our fourth quarter was of particular importance to us as in December, we affected the listing at the New York Stock Exchange. We're quite pleased with the early signs coming from New York. We have already seen an increase of approximately 50% in trading volumes since we became dual listed. And what is interesting to observe is that within 2.5 months, approximately 40% of total volume is traded out of New York. In February alone, this was already 45%. This gives us the confidence that expanding our investor reach in the U.S. is in the right direction as we take the platform forward. I will talk about our latest refinancings at a later slide.

So moving on to Slide 5. I've already went through the highlights of the fourth quarter, so let's spend a bit of time on 2023. We achieved record results in terms of revenue, EBITDA and net income. TCE revenue for the year stood at almost $300 million, that's a 54% increase from a strong 2022. EBITDA of $242 million, that's a 72% increase year-on-year and net profit of $145 million, also a 72% increase from 2022.

Our results took advantage of the strong tailwinds coming from the tankers market, [indiscernible] particularly modern and fuel efficiency. And as more of our vessels during the course of the year ended their time charters, our competitive commercial performance in the spot market.

Moving on to Slide 6 and our balance sheet. As of year-end, we had cash of approximately $55 million. That's complemented by a particularly larger than usual trade receivables balance of $57 million attributed to timing of payment of freight by our clients. Mostly, receivables have since been collected, of course.

Our debt as of end December stood at $693 million. Book leverage came in at 61%, while market adjusted LTV based on broker value stood at approximately 45% to 50%. On Slide 7, we summarize our corporate and capital structure as well as our employment profile. On that front, since late December, our entire fleet [indiscernible] is laid in the spot market.

In the last quarter, we talked about gaining momentum from our 2 refinancing transactions from the summer and October of last year as we negotiated the upcoming purchase options of the Milos and Poliegos from the legacy expensive leases. As promised, in February, we closed the transaction of purchasing back the Milos, executing a bank debt facility priced at 175 basis points over SOFR with maturity in 2030.

We have formally declared the purchase option for the Poliegos, which is due to close in June of this year. We're optimistic that we can continue utilizing the positive momentum, the excellent relationships with our financiers, both existing and new ones, as well as the position of the company in achieving at least similarly significant improvement in our capital structure as we did with the Milos.

Separately, but indicative of our ability to source accretive transactions within our capital structure, we also announced in January a set of transactions with our Chinese leasing financiers. We essentially negotiated the deal on our 2 existing leases on Nissos Kea and the Nissos Nikouria. [indiscernible] It will reduce pricing by approximately 60 basis points, extended maturities by 7 quarters to 2030 and 2031, respectively, and also increased flexibility for the future by dropping certain penalties in case of earlier financing.

We also brought in a third vessel in the portfolio of our Asian leased vessels, the Nissos Anafi, financing it at 190 basis points over SOFR with maturity in 2031. The transactions for all 4 vessels: Milos, Nissos Kea, Nissos Nikouria, Nissos Anafi, all closed earlier this month.

Overall, the transactions executed in the last 9 months have improved our cost of debt on average by approximately 1% on 9 of our 14 vessels. We expect the Poliegos milestone to further improve our interest cost, and we are continuously on the lookout for deals to opportunistically optimize our capital structure. I'm now passing over the presentation to Aristidis for the [indiscernible] part.

[Aristidis Alafouzos, executive]

Thank you, Iraklis. Looking at our commercial performance in Q4. Q4 rebounded with seasonal volatility after a week in relative terms Q3. Due to the extended OPEC+ cuts, we didn't get the Q4 that we're all dreaming of. But the silver lining of this is that the OPEC+ continues to focus on managing inventory levels, which we believe will continue to draw and eventually require more barrels to be brought back to the market. This would lead to the explosive market that we're all waiting for, and we'll expand on this a bit later in the presentation.

We continue to employ our strategy of predominantly positioning our fleet in the West and taking the opportunity when the market turns to fix longer voyages to the East. Nissos Sikinos and Nissos Sifnos were redelivered from their long-term time charters. And now the OET fleet is 100% exposed to the spot market. We also concluded our final dry dock of the first special survey of Kimolos, our 2018 built Japanese Suezmax.

We upgraded the [ paint ] specification on this vessel, which is currently performing about 7% better than the previous paint [indiscernible]. The vessel is actually more efficient today than she was when she was first delivered to us from the yard. We intend to use a similar [indiscernible] citation of paint on our VLCCs that are going through their dry docks this year, the five 2019 build ships and one in 2025.

During the quarter, we achieved a fleet-wide TCE of $45,400 per day, including our time charters. Our VLCCs generated $45,200 per day in the spot market, a 4% outperformance relative to our tanker peers that have reported Q4 earnings. Our Suezmaxes generated $51,800 per spot day, a 17% outperformance relative to our tanker peers who have reported Q4 earnings.

These numbers reflect our actual book PCE revenue within the quarter as per our accounting standards, which includes several days, especially related to our Suezmax [indiscernible] for which we did not record any revenue.

Moving on to Slide 10 for guidance on Q1. Q1 started with strength and volatility, which we're luckily able to capitalize on. The Red Sea deviations have so far benefited other segments of the shipping industry more than the crude fleet. Although -- due to the additional cost of diverting crude around Africa, the situation created most opportunities for VLCCs within the crude fleet.

We saw usual Suezmax [indiscernible] stems from the AG West, either being parceled up and moving on to VLCC, like we fixed on the Nissos Anafi or being sold to East instead and again being parceled up on VLCCs. Another effect was [ Medbase ] cargoes that are sold to East and transported via the Suez canal on Suezmaxes are also being parceled up on VLCCs and sailing around Africa, like we fixed on Nissos Despotiko.

We are pleased with Suezmax that we originally fixed the AG West via Suez to sail around Africa. Sorry, everyone. I mean, hopefully, the service who provides us the conference would solve this in a couple of seconds. Just give us a moment.

Hello. Apologies for that. So I guess, I just finished explaining that we've seen some changes in the way that the crude is moving due to the Red Sea diversion. It was moving on Suezmaxes and because of the efficiency of using a VLC around -- when you sail around Africa, we've seen more VLCCs being substituted into 2 Suezmax cargoes.

And that we've done one on Nissos Anafi to go AG West, that should have been too Suezmax cargoes, and we've also fixed on similar on Nissos Despotiko. That originally would have been 2 Suezmax cargoes from the Black Sea to Korea. It's now one VLCC cargo that's going to [indiscernible] go around Africa.

We also diverted 3 Suezmaxes that were originally fixed from the Arabian Gulf West via Suez. And instead, these ships will -- they have sailed around Africa. This did benefit us by prolonging the voyage and also increased the TCE because of the larger flat rate. I'm increasingly positive about the supply balance of the VLCC fleet as we see the recent spike in rates 2 weeks ago. This was led by tightness in the East rather than the West, which is the usual way it's been happening these past 18, 24 months, and then the East follows.

I think this bodes very well. So when OPEC+ desires to bring back barrels to the market because these barrels will predominantly be supplied from the AG. So we can see a lot more volatility driven out of the AG, while we will also see volatility out of the West. And this could be -- this will be very good for higher earnings.

We fixed some excellent longer voyages this quarter and locking in some great numbers. Our 2019 build VLCCs will go through their first special survey, as I mentioned earlier this year, and we'll have the benefit of positioning these ships to the dry dock location in China via very profitable front haul voyages as most of our ships are in the West.

This is like we've done on Nissos Despotiko, and we're going to do on Nissos Rhenia soon. So far in Q1, we have fixed 81% of our fleet-wide spot days is $66,800 per day. 76% of our VLCCs spot days is $73,900, which is a 37% outperformance relative to our tanker peers who have reported Q1 earnings, not including International Seaways who I think we've probably outperformed as well. And 88% of our Suezmax spot days at $58,800 per day and 9% outperformance relative to our tanker peers who have reported Q1 earnings, again, not including International Seaways.

Moving on to Slide 11. OET is in a unique position of being the only pure ECO scrubber fitted listed tanker platform. This has been an important factor in allowing our company to outperform our peers by an average of 21% and 42% on the VLCC and Suezmax segment. Other factors are getting quite lucky on our short-term tactical positioning ideas. Of course, the fantastic work of Chris and the commercial team and our optimum size, which is neither too small and subject to risk of volatility nor too big that would jeopardize our ability to take advantage of differentiating strategies when we see risk or [indiscernible].

On the following slide, we touched upon the OPEC+ cuts earlier. I believe OPEC+ main goal is to manage inventory levels to a point that the market begins to reflect this in the oil [ flat ] price. Q1 seems to be counter seasonally drying and an extension of the cuts into Q2, which is what we expect to happen, will put us far below historical inventory levels.

This should then lead OPEC+ bringing back barrels sometime in the second half of this year. We estimate that the complete reversal of the voluntary and OPEC+ cuts will create an additional 48 VLCC demand equivalents, which is huge. This will have an immediate impact on the tanker market and can set us up for the market that we've all been eagerly anticipating.

On Slide 13, we look a bit closer at the tension in the Red Sea and have some examples of those vessel demand by their avoidance or closure. The [indiscernible] has taken longer to develop on the crude segment than other segments in shipping. Initially, refiners needed to source immediate alternatives to delaying crude deliveries that could affect runs and this strengthened in the Atlantic-based relative crude grade.

This created opportunities for the VLCCs, as we previously mentioned with our [indiscernible]. Over time, I believe regional crude grades will have to adjust their pricing in order to sell into their normal outlets and this will reflect the longer voyages increased freight cost. This could create additional vessel demand equivalent as explained in the top right chart.

Unlike gas, crude grades vary tremendously. Refineries are built to burn specific crude that produce specific products. And [indiscernible], it may be forced to refine crudes that are not preferred to keep runs going. But over time, they'll have to revert the crude slate that produce economically efficient products.

On Slide 14, we look at another short- and medium-term bullish factor, and this is a normalization of Venezuelan exports. 2 years ago, all Venezuelan exports moved exclusively on extremely overaged [indiscernible] vessels. This number has dropped significantly and each normal cargo that is lifted from Venezuela creates new vessel demand for the normal fleet.

We anticipate that the main benefactor of continued Venezuelan exports will be the VLCC segment, with an expected creation of a VLCC demand equivalent this year alone. The Venezuelan loading process is also extremely inefficient, which we have not accounted for in these graphs. A vessel [indiscernible] wait for her cargo the same period of time as the duration of the voyage, increasing vessel demand and reducing supply.

On Slide 15, in the short term, we have all these bullish signals and opportunities while the long-term backdrop is even better. I strongly believe that the amount of available VLCC and Suezmax lots for delivery as new buildings in 2027 is very limited. In Korea, [indiscernible] will be able to allocate limited births for the second half of 2027, while China and Japan are mostly fully booked until 2028.

In my career, there has never been a 4-year runway with such limited deliveries. Against this, in 2027, over 54% of the fleet will be over 15 years old in the VLCC segment and 56% in the Suezmax. 15 years of the age is the first age hurdle where charters begin to view the vessel as overaged. These ships will lose efficiency and not be able to compete on all cargoes.

25% and 28% of the VLCC and Suezmax fleets will be over the age of 20 in 2027, which is the usual max age for all normal business. With this beautiful slide, we conclude the presentation and happy to answer any questions and handing it back to the operator. Again, apologies for the elevator music earlier.

[Operator]

Thank you. Once again, apologies for the interruption during the presentation. We will now open the line for questions. [Operator Instructions]. The first question comes from the line of [indiscernible] from ABG.

[Unknown Analyst]

I'm curious to hear because as you alluded to, the IFRS 16 effect is potentially substantial. And if I understand you correctly, you are showing here your TCE equivalents on the low to discharge basis in which you have lost some ballast days. So the question, is there a significant difference if you were to show your TCEs on a discharge to discharge basis?

[Iraklis Sbarounis, executive]

Look, it varies quarter-on-quarter. And as you have seen, whenever there is a higher effect coming in from the ballast space and the IFRS adjustments at the end of 1 quarter, you usually see that effect in the figures of the next quarter. As we anticipated and I think we alluded to it back in the previous quarter, and you've seen it since our commercial update in January and the results now, there was a bit of an effect in Q4, not as substantial as the previous quarter, which is then translated into Q1.

So there is a bit of a balancing between the transition from one quarter to the next. I cannot quantify it right now. Happy to take a comment and look at it a bit more. And then it really depends -- so for example, for this particular quarter in Q1, it really depends on the positioning of the vessels. At the moment, we are -- we do not expect that the impact may be too large as in some of the previous quarters, but it really will depend on whether some of the next [indiscernible] just actually get loaded within the quarter. So it's a bit of an unknown at the moment.

[Unknown Analyst]

Okay. I understood. And just in terms of sort of fleet composition here. So many of us have expected a better sort of at least relative VLCC markets compared to at least the Aframaxes and in particular, if you compare it to the [indiscernible] tankers, which has been just stellar.

So in terms of -- well, the examples you just gave, is it possible to give some sort of quantification of how much we should now expect and then, in particular, the Red Sea situation, to be a relative improvement for the VLCC and potentially then at the expense of Suezmaxes and/or Aframaxes. And so in plain English, how many sort of ship-to-ship operations filling up the VLs from the smaller sizes? Could we potentially see going forward if the Red Sea situation continues to be this?

[Aristidis Alafouzos, executive]

Peter, thank you for the question. I mean it's a quite complicated question to quantify, but there's a lot of changing dynamics because of this. And it also depends how long these tensions in the Red Sea lasts. I think that we probably will continue to see some parceling up of VLCC cargoes, especially from Kazakhstan, exports from the Black Sea, [indiscernible] because a lot of this is sold and some -- there are cargoes being sold into China and Korea, and I think this will continue.

So that we can see that continuing. [ CPC ] is a huge export terminal. So the -- whether it's 2 VLCCs or 3 VLCCs a month, I'm not exactly sure, but I wouldn't expect much more than that from [ CPC ] specifically. We could also see similar parceling up from Libya or Algeria to go around Africa.

In the inverse to come AG West, I think we won't see as much because the Mediterranean ports are not really built and designed for VLCCs. So we may see it occasionally if VLCCs are relatively cheaper to Suezmax in terms of freight and -- but I don't think it will be as common. Because once you account for STS and chartering 2 ships to lighter from the VLCC in Europe, I don't know if the efficiency of the VLCC is that great.

So I think initially, it was quite beneficial for the VLCCs. I think over time, as the tensions normalize, it will benefit also the Suezmaxes and Aframaxes as well.

[Unknown Analyst]

Okay. Understood. And then a final question. In terms of -- well, in the prolongment of this. In terms of adding new ships. So I'm not going to ask you if you will do that. But if you were forced to do so now, would you prefer to expand on your Suezmax fleet or your VLCC fleet?

[Aristidis Alafouzos, executive]

Look, I think if we were to be able to receive ships today in the water and ready to operate, I think the preference would be towards VLCCs at the moment. I think that Suezmaxes have had a very strong 2 years and the VLCCs have lagged behind them. And I really do believe that in the next 2, 3 years, that again, we'll go back to the more traditional historical markets where the leader in terms of earnings and strength will be the VLCC segment.

[Operator]

The next question comes from the line of Bendik Nyttingnes from Clarkson Securities.

[Bendik Nyttingnes, analyst]

Yes, I'll just have a follow-up on the Red Sea situation. We did see a slight drop in activity of crude tankers to [indiscernible] product tankers caught fire earlier this year. But since then, activity is more or less recovered to 2023 level. What do you think is sort of needed before operators will start going around the [indiscernible] in the crude space?

[Aristidis Alafouzos, executive]

Well, I think that if we look at what types of crudes are transiting the Suez as a percentage you'll see that by far the biggest is the Russian crude. And I don't expect that to stop. I mean only in extreme circumstances, I think that the Russian crude will divert around. And I think in most cases, the policy for this crude is that it must go through the Suez and they don't allow to be rooted via the Cape of Good Hope.

So straight off of bat, we have continued [indiscernible] going through the Suez. And then you have the threats from the Houthis that have been directed at either Israel, U.S. or U.K. interest. And I mean, I think to the greatest extent of what we've seen from attacks have been U.K., U.S., Israeli interest means management, listing, operating. It does not include things like insurance or banking.

So there's a big Greek fleet. There's a big Chinese fleet who don't have U.S., U.K., Israeli interest in terms of ownership and management. And they may feel that it's safe enough for them to transit because there is a premium to go through. And so I think that there's a big chunk of the market that still will go through.

And until the Houthis decide that perhaps that all coalition forces involved in the Red Sea, which does include German and Greek and the Italian Naval Forces, maybe that would force the Greek fleet to completely divert too. But for the time being, the focus has only been U.K., U.S. and Israel. So I don't see much changing at the moment.

[Bendik Nyttingnes, analyst]

That's great color. And if you share some comments on both 1Q bookings [indiscernible]?

[Aristidis Alafouzos, executive]

Can you repeat the question?

[Bendik Nyttingnes, analyst]

Yes, no. It wasn't a question. It was more -- you said you could send over some comments to Peter on the 1Q pictures. I think we would like to have also as well as we have lined up the same question.

[Aristidis Alafouzos, executive]

Sure, Ben. Let's touch base offline whatever you meant [indiscernible].

[Operator]

There are no further questions. So I hand you back to your host to conclude today's conference.

[Aristidis Alafouzos, executive]

Thanks, everyone, for listening in. We'll speak in next quarter. Thank you. Bye-bye.

[Iraklis Sbarounis, executive]

Thanks, guys. Appreciate it. [indiscernible].

[Operator]

Thank you for joining today's call. You may now disconnect your lines. Hosts, please turn the line and wait for the instructions.