Euronav NV

XBRU:EURN

Earnings Call Transcript 2021-Q4

[Operator]

Good day, and welcome to the Euronav Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Brian Gallagher, Head of Investor Relations. Please go ahead.

[Brian Gallagher]

Thank you. Good morning and afternoon to everyone, and thanks for joining Euronav's Q4 2021 Earnings Call. Before I start, I would like to say a few words. The information discussed on this call is based on information as of today, Thursday, the third of February 2022 and may contain forward-looking statements that involve risks and uncertainties. Forward-looking statements reflect current views with respect to future events and financial performance and may include statements concerning plans, objectives, goals, strategies, future events, performance, underlying assumptions and other statements, which are not historical statements of fact. All forward-looking statements attributable to the company or to persons acting on its behalf are expressly qualified in their entirety by reference to the risks, uncertainties and other factors discussed in the company's filings with the SEC, which are available free of charge on the SEC's website at www.sec.gov and on our own company's website at www.euronav.com. You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement, and the company undertakes no obligation to publicly update or revise any forward-looking statements. Actual results may differ materially from these forward-looking statements. Please take a moment to read our safe harbor statement on Page 2 of the slide presentation. I will now pass over to Chief Executive, Hugo De Stoop, to start with the agenda slide on Slide 3. Over to you, Hugo. Thank you.

[Hugo De Stoop, CEO & Member of the Management Board]

Thank you, Brian. Welcome to our call today wherever you are. In terms of the agenda, I will firstly run through the Q4 highlights and some comments on what was, in the end, another challenging quarter after an encouraging start. I will then turn over to Brian Gallagher, our Head of IR, to run through some market slides before Lieve Logghe, our CFO, highlight some important accounting changes we are announcing today. I will then return to outline how the Euronav platform is positioned for the coming cycle, not only on a stand-alone basis, but how we compare with our peers before finishing off with our traffic lights and a Q&A session.So turning on to the next slide, the highlights slide. We stressed in our Q3 call that we felt we had reached a trough in the cycle during the late summer month of 2021. We stand by that view. The recovery we saw from late August into when we reported in early November was tangible and reflected in better freight rates. However, with the rapid spread of the Omicron variant from late November, the associated rapid restrictions in economic activity and the lack of confidence in the business cycle, we saw this recovery will slow in what seasonally is the most important period of the year. This was very frustrating, and overall tanker activity has yet to really recover. However, freight rates, whilst under pressure, have not revisited the low levels of late summer, and we remain with the conviction that the recovery has only been deferred. Unlike the situation 12 months ago, we face the coming year with strong oil supply growth forecasted by the leading agencies, a further rebound in demand and a pressing requirement to address low crude inventories level at some point in the future. Our low cash breakeven, coupled with our strong balance sheet, enabled us to manage through the current market, and we are positioning for the next structural phase of the cycle as we recently took delivery of 2 new super Eco-Suezmax, the Cedar and the Cypress, at the same time as redelivering 4 non-Eco older VLCCs. Don't get me wrong, we, along with all of our stakeholders, remain extremely frustrated with disposed the tanker market has taken on our recovery journey. But we continue to expect the freight market to improve to healthy levels even though this is no more likely focused on the second half of 2022. I will return to this later, and now I'll pass it on to Brian. Thank you.

[Brian Gallagher]

Thank you, Hugo. The demand background remains very important for our markets, and the setup for 2022 looks far more encouraging than it did last year with different and more numerous factors at play and largely in our favor.Firstly, it does appear that demand is finally expected to revisit or even exceed 2019 levels this year. The IEA, for instance, is forecasting a further demand snapback of 3.3 million barrels per day in 2022, implying over 100 million barrels per day of consumption for the first time since 2019, as the top left on Slide 7 shows. Top right, we show the growth, which is leverage for all tanker companies and ourselves, in particular, as every 1 million barrels per day of annualized expansion of demand historically is required between 30 and 40 VLCCs, and we believe this correlation will hold going forward. The bottom-left chart looks at demand, which may also be further increased with the requirement to restock. If we remember that the story in 2021, which is shown bottom right, was that demand rebounded very, very strongly. But most of this demand was satisfied with inventory and drawdown from local supplies, so therefore, there was no need for shipping. The picture for 2022 looks very different. Inventories are currently at levels globally that we have not seen since 2011. So at some point, and commentators such as the EIA, advocate strongly that we'll see a big snapback in inventory rebuilds will move from destocking phase to a restocking phase sometime this year. This should be a further boost to tankers over and above the underlying demand snapback that we anticipate. We now turn to Slide 8. We look at vessel supply. Vessel supply remains an issue and will clearly provide some headwinds, especially in the first half of this year. The top right slide illustrates how suppliers largely stay one step ahead of the recovering demand ever since we went into COVID-related restrictions early in 2020. The fleet has grown by around 50 VLCCs in that time, and there are another 40 expected to hit the waters this year. Most of this will happen before September. Recovering demand will absorb some of this tonnage increase, but clearly not all. However, there are 2 factors that could redress this balance during the rest of this year. Slide 9, top left, shows that 2022 is a big year for special surveys. Nearly 10% of the sector will go into the yard this year, aged between 17.5 years and 22.5 years of age. Now clearly, not all of these ships will exit the market, but it illustrates the soft underbelly of the tanker market with 25% of the fleet already aged over 15 years of age and an average fleet age at 20-year highs. The catalysts are taking the decision whether to exit or not is twofold. The steel price, which is the driver of scrap metals, and the cost of the survey, which at that age is considerable and somewhere between $3 million and $4 million for each survey. In other words, owners are faced with a choice of either spending a lot of dollars to remain in the market today, to keep an old ship, which will only survey and have low utilization for the following 30 months or receive a hefty capital injection in terms of an exchange for recycling that ship. This decision was skewed last year because a lot of these older ships could be sold to perform the so-called illicit trade, a murky business allowing those involved in it to pay a premium over recycling values. We don't believe this will play a very big role going forward as this illicit trade has stabilized in size, as shown by the slide on the bottom left, which will make it difficult for new entrants to enter this illegal trade. This illicit trade must be stated remains a wildcard with the tanker markets, but there is a pressing need for the IMO and others to apply the sanctions that are in place as this trade represents a huge risk for human life and also the environment because of the way this trade is operated and the age of the vessels that are engaged in this trade. The bottom-right chart illustrates how dynamic tanker markets can be. If one assumes that the 20- and 22.5-year-old vessels up for survey this year were to exit the trading fleet, then the fleet would actually shrink in terms of overall size. Whilst very unlikely, it does illustrate the OG profile of the VLCC at the current state and how dynamic this would be if recycling were to maintain the trend that was started in Q3 2021. With that, I'll now pass over to our CFO, Lieve Logghe, with some important changes in our accounting approach. Lieve, over to you.

[Lieve Logghe, CFO & Member of the Management Board]

Thank you, Brian. Today, we are announcing a number of important changes in our accounting policies and the way we report our figures in our P&L. We are reviewing on a regular basis our judgment and assessments made with the objective to continue to present a fair, exhaustive and thorough view next to the fact that it's equally important for Euronav to be directly comparable to its peers. The key change is the adjustments we are making to our residual value accounting. After a thorough internal review and with our auditors, we believe now is an appropriate time to update our assessment and to transparently share this with our stakeholders. Historically, our approach has been very simple: 20 years straight line depreciation to zero. However, there have been significant changes in shipping and steel markets in the past 5 years, which we believe necessitate a change in policy. Steel is one of the most recoverable commodities in recycling and in sustainable circular economy, hence, the recycling of ships will become more important. With this in mind, we have decided to move to the following approach: we keep our depreciation policy over 20 years, but to a residual value basis as opposed to what we had until now, which was zero residual value. The residual value we will adopt will be an average of the key recycling market prices, which presently is around $500 per ton. So going forward, as Slide 12 shows, this will reduce our depreciation charge annually by around $100 million from the current run rate of around $380 million and places ourselves more in line with our quoted peer group. On this slide, you can also look at how recycled steel prices have performed in the past decade and the reasoning behind choosing $390 per ton, which is equivalent to the 4-years moving average. Other important changes in our P&L are some reclassifications we are making between revenues and cost lines in order to make us more market conformed. TI Pool administration fee has been reclassified out of G&A to revenues, whereas flat compensation is now directly integrated in our costs as an offset. Ship management overhead is now part of OpEx as we recognize that the majority of market takes the ship management fees, especially when this is outsourced directly into the OpEx. While those changes have no impact on EBITDA on the bottom line, it clearly shows that our system platform enables us to deliver top-quality service at very reasonable costs, which can only be achieved with scale.We illustrate this point by showing how we compare to one of the most reputable benchmarks produced by BCG in the tanker shipping industry. Another important feature worth mentioning is that Euronav's portion of debt hedged against interest rate hikes is now 60%. In an inflationary environment, we cannot just do nothing about it. I will now pass back to Hugo for the rest of the presentation and its conclusions.

[Hugo De Stoop, CEO & Member of the Management Board]

Thank you, Lieve. I would like to finish up on a few slides outlining exactly where Euronav is positioned. Slide 15 illustrates the comprehensive platform we offer investors. Firstly, our operational performance is at the leading edge in our market. Our OpEx performance compare with the best-in-class and is backed by a strong balance sheet where we have the highest liquidity, both in absolute and relative terms, accompanied by one of the lower leverage ratio amongst the peer group. Finally, in terms of capital markets, investors looking to gain exposure to the tanker market at this stage should focus on 2 elements: the robustness of the company they invest in as well as the operational leverage they acquire for when the cycle will turn. It should be clear to investors that Euronav offers the lowest entry point and, therefore, the highest upside. In summary, on Slide 14, we have a clear focus and strong platform at Euronav. Our operational structure is extremely competitive in cost terms and is fully integrated. Our large fleet is appropriately aged, and we have a balance sheet that retains 2 years liquidity runway. All of this supported by increasing sustainability credentials and proven record in terms of return to shareholders. Do we wish the freight market was more encouraging and in better health? Yes, of course. But as no one can accurately predict the markets, we are always prepared for challenging markets even when we expect the cycle to improve, which is clearly the case for 2022. Let's move on to our traffic lights and another upgrade. We have upgraded our old supply outlook driven by 3 factors: OPEC, continues to deliver on its monthly production increase as confirmed yesterday. Non-OPEC is beginning to show signs of life with pockets of exports increasing from areas like Guinea, Brazil or even the U.S., which are long-term line. And finally, inventory at our level where people will look more into replenishment than further draw down. Elsewhere, the key traffic lights remain the same. So in conclusion, Euronav remains constructive on the prospects for our market and its recovery. The setback that we saw in the second half of Q4 is just that, a setback. It will take time, but we remain confident for the recovery. That concludes our remarks. Thank you for your attention. And I now pass it back to the operator, and look forward to your questions.

[Operator]

[Operator Instructions] The first question is from Randy Giveans of Jefferies.

[Randall Giveans]

I guess, first, on the accounting changes, I know you're going now to a scrap value, residual value depreciation. Makes sense. Any impact to the potential payout ratio if and when we get back to some pretty meaningful profitability here?

[Hugo De Stoop, CEO & Member of the Management Board]

At the moment, we keep our policy. It's very clearly set out on the website, very similar to what we had in the past. You know that we have very shareholder-focused, and we tend to be very generous towards and be it in dividend or in buyback, we continue to be frustrated with the share price. It continues to trade below NAV. And so clearly, we will need to make a choice between dividend and buyback when we get to positive territory and we have something to return to shareholders.

[Randall Giveans]

Got it. Okay. And then in terms of your comments on inventories, I think, Brian, going back to 2011 levels, clearly, what Brian said, I don't know, $88 today, this could continue to be some downward pressure on inventories. Do you see any kind of inflection point in the near term for that restocking that you mentioned? Or is it all just kind of supply driven?

[Brian Gallagher]

It's a good question, Randy. I think that how we would see it is would be the business cycle getting confidence. We were beginning to see that confidence return before Omicron began to bite in November. And we're just not getting sort of any longevity in these recovery periods over the last 2 years. So I think it's a question of one that the business cycle getting back to some form of normalization and, therefore, having the confidence in order, but also the price structure of oil itself. Clearly, it's been a very deep equation at the moment, which moves against that inventory rebuild. But look, I think it's just a question of time getting through. And then as we get through better improved confidence, then we would expect that rebuild to start. But we are talking about very low levels, and that's the reason we wanted to highlight. If we take the EIA, they're forecasting rebuild to start as soon as this quarter. So let's wait and see, but I think it's more a question of the business confidence and cycle returning to some form of normalization and then we will expect the restocking to happen then.

[Hugo De Stoop, CEO & Member of the Management Board]

I just would like to add maybe one color on this, which is world stability. We all know why those inventories exist, and it's because there is always a risk that the supply of oil is being disrupted by an event or another, which is clearly the case at the moment. So it's very good to be able to draw on your inventories, but there is a limit to what you can do. And that limit is reached when you're confident that your supply chain is going to be interrupted.

[Randall Giveans]

Yes. Yes, that's fair. And then if you don't mind, I'm going to sneak in one last question here. Obviously, you're frustrate spot rates. I think those sentiments are shared pretty widely. In terms of time charter rates, those have held in decently relative. So any appetite for just locking in some cash flows there, why we continue to wait for the uplift in spot rates?

[Hugo De Stoop, CEO & Member of the Management Board]

As far as we are concerned, we haven't seen anything short term that was really attractive. I mean, yes, you can lock in sort of the low 20s for a year. Whenever you are crossing sort of the 30s, then you're talking about 3 years and usually 1 or 2 years option on the back of that at maybe $1,000 more. So we have seen structure like $33,000 for 3 years and $34,000 for the fourth one as an option, $35,000 for the fifth one. And when you read out, which is obviously shared by a lot of people, we believe that when the market returned to positive territory, it's going to be probably a longer cycle than what we have seen recently. It's probably going to be like 2004 to 2008 type of cycle, relatively high rates and relatively prelaunch. So I think that we should be prudent when we are looking at those rates, which today looks attractive, but quite frankly, at the back end of those 5 years, you may be a little bit regretful to have done it.

[Randall Giveans]

Yes. That makes sense. So with your balance sheet liquidity, you have the ability to wait. So all good.

[Operator]

The next question is from Jon Chappell of Evercore. Please go ahead.

[Jonathan B. Chappell, Senior Managing Director]

Brian, if I could start with you, I found that there's been a pretty strong consensus from the public companies and most of the ALS looking for a recovery just any day now. But some of the brokers maybe don't have any skin in the public game are quite more bearish. It feels like a lot of their negativity is focused on the supply side.So if I can go to Page 8 and look at that upper right-hand graph, where you say it implies 60 to 80 excess VLCCs based on '19 demand, what gives us confidence that, that 60 to 80 spread closes? I know there's some hope for scrapping, but scrapping is always a bit of a wild card. Is that a demand-driven reversion? Anything you could point to that, that would maybe debunk that bearish thesis?

[Brian Gallagher]

So it's a very fair point, Jon. And I think what we tried to do maybe with the first slide before that was trying to show that there are multiple elements to this. I think on maybe give 3 sort of pushbacks on that. One would be on the supply side. Yes, supply has been patchy. We have to recognize that, and we haven't seen the supply growth that we would have anticipated. But if we take again the forecast, which independent commentators are giving. Platts, for instance, are talking about 1.5 million barrels per day increase from the U.S., although that is second half weighted. We're also looking at 0.7 million barrels per day from Brazil, Canada and the North Sea, again, second half weighted. But also, I think we have things like the standstill agreement that will come into place with the OPEC+ nations, which could see -- which will potentially we'll see Russia, Saudi, the UAE and Kuwait have 1.5 million barrels per day between them that they can increase their production. Now that's important because, obviously, those nations have been the key drivers of the production growth that we've seen. We've seen other, in particular, West African nations struggle to even grow their production. So I think there's some really good grounds, albeit second half weighted for the supply side. The second answer would be, as Hugo said in his prepared remarks, the demand, we do believe is going to gain -- continue to gain traction. There's some seasonality to that. So we shouldn't be surprised that, again, that's going to be more second quarter onwards based. And then lastly would just be the fact that we have started to see some of that recycling. I think it was 11 VLCCs in the second half of last year and I think a similar number of Suezmax, and we've got a very big survey cycle here. I'd love to give you a magic bullet, Jon and everyone else is -- again, as Hugo said in his call that we're not happy with where we are. But we do believe we've seen the worst in the rearview mirror, but we do -- all we can point to is some of these factors that we see in front of us. We wish they were gaining traction more quickly than they are. We're going to have to be patient, and I think that's the message we try to give in the commentary in the press release. But we do see -- it's not just one factor that we're sort of hoping it will come through. We see multiple factors which will be supported. And we believe those will combine to give traction as this year progresses. But it's certainly probably going to be more in the Q2, Q3 when we start to see that getting traction moving into the key winter period. But look, we're comfortable, we're confident that, that will come through. But I can't give you -- I can't figure to any degree that we've got some sort of hidden numbers that we're seeing. The pushback on that would be, well, the worse it gets or the more it continues to be very, very challenging, then you want to be exposed with those stocks that have got the best balance sheet and the best cash flows that can withstand that marketplace. And the tougher it gets, then we think the more we'll start to see recycling come into play. So we do believe we're getting into the end of this particular sort of phase. But I don't know if Hugo has got anything square to that.

[Hugo De Stoop, CEO & Member of the Management Board]

No, I think you sum it up. I mean, there are so many moving parts. And obviously, Jon, I know that on the recycling side, it's very difficult to predict. But I think what we've tried to put in the presentation is the opportunity that is there. I mean, if no one had to do a special survey, especially at 17.5 or 20 or 22.5 years, then I think that the hope to see a lot of scrapping would be gone. But this year is particularly interesting from that point of view. And if you are faced with $3 million, $4 million bill and when you return to the market, it doesn't give you anything because for this age profile, the return is literally 0 at the moment, then I wonder what people are going to do. And last year, they were selling their vessels to the illicit trade. But that part of the market seems to be well covered, and we haven't seen any ships going into this harb business recently. So we don't see any reason why it will continue. I think there is an existing fleet and its service this part of the market.

[Jonathan B. Chappell, Senior Managing Director]

I think Brian's point about just making sure you're aligned with the best balance sheet and liquidity is a very important one. If we can look at just a bit past the short-termism, I know we have a tendency to focus on the here and now. If we get past '22, the order book drops precipitously. And I know the ship owners have a long history of saying, oh, you can't get a ship for 3 years and then magically, we find 30 slots in 18 months. But it does seem that given the strength of the containership ordering the LNG ordering, even the LPG, that there is less availability in kind of the '23, '24 time line. Can you just speak to, in the very realistic manner at a commercial scale, when would you realistically get like a 10 plus 4 order of VLCCs or Suezmaxes? Could you -- do you have a great relationship with the Korean yard where you can sneak one in the first half of '24 or even the best place shipowners, you're looking at late '24, maybe into '25 and beyond?

[Hugo De Stoop, CEO & Member of the Management Board]

If you're talking about 1 slot or 2, I think that you can reasonably expect to squeeze maybe 1 or 2 slots as I said, at the back end of '24, but it's certainly not a 6, 8 or 10 sort of ship slots, and that's in Korea.In China, it's a little bit more opaque, and so one never knows, But quite frankly, if you look at what has been ordered in the past, it's very much for Chinese owners. And then Japan seems to be completely out of picture for VLCCs at the moment. And quite frankly, if and when they return, it's also probably going to be for Japanese owners who are not typically spot operators, and that's probably what we are looking at when we see new orders. So quite frankly, I think that a lot of the characteristics of the market that we see now are very much the same as what we were seeing in 2003, 2004. And it's simply because every bit of shipping and, well, this time around, not us, but every bit of shipping is doing very, very well and has placed an enormous amount of orders. And I think people don't realize that dual ships are being built in the same docks, I mean literally in the same dock. So if the dock is busy building a container ship or a gas carrier or any other time that has been ordered, the slot is busy. And yes, you can gain some efficiencies. But the Koreans, they are pretty efficient people. So already efficient, what you can gain is maybe 5%, maybe 10%. And then, of course, in the other segments, certainly in the container, we don't expect reading the analyst comment that this sector will abate and the cycle will turn anytime soon. So you continue to see orders, which means that even if there was a willingness of some owners -- some tanker owners to place orders in those yards, they would be competing with those ships. And given that those yards are earning, well, better margin on container and certainly on the gas carrier, we don't believe that the price they would be offering us would be attractive for owners to place a large quantity of order. I mean, today, you can probably get a VLCC for 106, and that would be a very basic one. So not even one that could potentially be retrofitted later into 1 of the 2 or 3 technologies or fuel that we will use in the future. So I'm relative -- I'm very positive, in fact, on that part of the market. And quite frankly, it's the most important part of the market because the only reason why our markets are cyclical is simply because of the supply side.

[Operator]

The next question is from Greg Lewis of BTIG.

[Gregory Robert Lewis]

Hugo or Brian, I was hoping to get a little bit more color. A typical question that we get a lot as people look at kind of headline rates are those negative -- or there -- is like a negative TD3. Clearly, your company has been able to generate profits over -- generate positive cash -- generate a return over operating cash costs.Really, what I think people are trying to understand is there's been a lot of vessels that have had scrubbers installed, and so we have a scrubber fleet and a non-scrubber fleet. As you look at the market and track what you're seeing, do you get a sense that the utilization, it's almost a 2-tiered market where the utilization of the scrubber fleet is significantly higher than the non-scrubber fleet, and if that's -- and this is obviously beyond TI, but maybe broadly speaking. And if that's the case, how much utilization bump do we need in the non-scrubber fleet to kind of get utilization to a point where maybe those are the vessels that are setting the prices and we can actually see upward momentum in rates?

[Hugo De Stoop, CEO & Member of the Management Board]

Well, it's a very good question. It's certainly one that we are asking ourselves all the time. We do have a little bit of visibility because TI operates both scrubber ships, non-scrubber ship, old non-scrubber ship, all scrubber ship, eco scrubber, on -- so yes, 4 categories, not 2, in fact. What tends to happen in the market that you would put the most economical vessel on the longest trade because you want the ships that are non-eco, non-scrubber to do short voyages and then spend a lot of time in the terminals because they are not consuming a lot of energy, a lot of fuel for obvious reasons. So that's a little bit how the market is developing at the moment. Very clearly, when you have an old vessel, which is noncurrent, I'm talking here about something which is 11, 12 years old and older, even with the scrubber, the economics looks horrible because you will consume 77, 78, 79 tons per day compared to 40, 42, 45 for eco-vessel. So that's already one element. So the scrubber will help, but will not compensate in full for the excess consumption. And then, of course, I just touched on that, but I'm going to repeat what I said, there's a completely different utilization for the guys who are doing the illicit trade, and we're talking about 55, potentially 60 vessels. So it's quite a lot of vessels where nobody talks about utilization because what they need to do is constantly change registration, flag. They do transshipment 2 or 3 times before they deliver the oil. I mean that it's a game of hide and seek which is -- which seems to work for them, obviously, but which means that digitalization is not really the element that you're looking at. And 55 to 60 vessels on a market that is 830 vessels in operation, i.e. trading, it's not insignificant. So it's very difficult to give you a straight answer to that. I think that the market always tries to adapt to what it's given every operator looks at a ship, its capabilities, efficiency and then decide to do one trade or the other. When Brian is talking -- when we all, but Brian specifically in this slide is talking about the excess number of ships, I think we are very much talking about the older part of the fleet. And if we would see that disappearing one way or another being scrapped or being used conversion in FPSO or what have you, I think the market would quickly rebalance. And that's the issue also that we have today. Because the market is so patchy, i.e., with 4 subsegments, as I said, the list of ships that can potentially do the cargo is very long. Whereas we, along with other big operators, can really make the difference of, okay, but is that ship really the right one to do this cargo or not? A lot of the owners who have very small exposure because they only operate 2, 3, 4, 5 vessels, they don't have that kind of information. And they are completely being blurred by that list and say, oh, my God, I'm facing 6, 7, 8 ships that will compete with me. So I need to drop my pant and I need to set a rate that is very low. And then they have set the rates very low, they don't get the business. But guess what, the guys who was probably the only 1 or amongst the 2 ships who could do the business has to match that rate. So that's really what's happening in the market on top of a lot of private cargoes not being shown to the market and only being revealed once they have been done to the regret of many people saying, oh, I thought there was far fewer cargoes. But in fact, on the cargo side, we're not very far from 2019. So there's a lot of things that needs to be correct, but it's no different than other cycles. Sorry for the long explanation, but the question was complicated, complex.

[Gregory Robert Lewis]

Yes. No, absolutely. That was super helpful. And then just as we think about Iran, clearly, in the U.S., we hear what's in the newspapers. It seems like the U.S. is really going to drive -- maybe not the decision, but the event path of how Iran plays out. In the event that the shadow trade kind of drifts away over time, how should we think about that kind of impacting the market? And is this something that just could be a 2022 event and it's part of the reason that you aren't as optimistic? Or is it something that is probably the way it plays out, it's more of a nice bump into 2023, which is why I think you mentioned earlier that you're pretty bullish, maybe not on today's rates, but in the next few years.

[Hugo De Stoop, CEO & Member of the Management Board]

We don't have a crystal ball, and we've been there near an agreement and then it disappeared. I think the last time was just before the withdrawal of Afghanistan. And I guess that the U.S. administration could not afford that kind of news right after that. So no clue when it's going to happen. We are reading the same sort of headlines. So it's a wildcard, and that's not part of the thesis. But when we are looking at it, if it happens, we believe that the story is then very, very simple. You have 1.3 million barrels that are being traded to those illicit trades. The capacity of Iran is probably around 2 million barrels, so even more than what is being traded today on illicit. And all of that would return to the regulated legal market, and the ships that are currently doing it would immediately become commercially obsolete because nobody would touch them. So you would have a double impact, which is more cargoes available for us to transport, for us and the rest of the regulated market. And at the same time, all those ships, which by then would have -- would be very worn and torn because there are -- 20, 21, 22 years, they are not being properly maintained, they don't have certificates and the scrap prices are pretty high. So they would hit the scrapyards in no time, in our opinion. So it's a double whammy. And again, it's a wildcard and certainly not part of the thesis that we have shown to you today. Okay. Perfect. Super.

[Operator]

The next question is from Chris Wetherbee of Citigroup.

[Christian F. Wetherbee, MD & Lead Analyst]

Hugo, I just wanted to follow up going back a couple of calls -- callers ago to your comment about a cycle like '04 to '08 in tankers. I just wanted to get a sense of, what do you think sort of the key of driving that degree and duration of strength? Is it really the sort of supply side that you talked about earlier? I just want to make sure I understand. It feels like demand has the potential to be a significant wild card relative to what '04 rate was. So I guess I just want to make sure I understand how you guys are thinking about that.

[Hugo De Stoop, CEO & Member of the Management Board]

Primarily because of the supply side, very low order book, very low space in the slots in the yard, but also age profile of the fleet, 25% being already in the sort of age profile where potentially people are thinking about scrapping high -- very high scrap price. And yes, that's, I would say, 70% or 75% of the reason why we believe it could be a prolonged cycle like '04, '08. Now don't get me wrong, '04, '08 was not only long, but it was always between $70,000 and $100,000 a day. That's not really what we're saying. What we're saying is that it's going to be a very good rate, and it should be a very good rate for 3 or 4, potentially 5 years. But let's not be too excited, too carried away. I mean when you get $100,000 a day, you indeed need both elements, which is super strong demand growth and very limited capacity on the supply side.

[Christian F. Wetherbee, MD & Lead Analyst]

Okay. Okay, that's helpful. I appreciate that clarification. I just wanted to ask a sort of detailed question about the accounting changes, if I could. I know we're going now to a residual value versus a 0 residual value. I guess maybe 2 questions here. Are you moving from 20 years to 24 years to match peers? Number one. And then number two, when you're thinking about the residual value, are you taking the 4-year average? Is that what you're suggesting to us? Or are you just taking a mix of multiple destination residual values at the current point? I guess I just want to make sure I understand a couple of moving parts there.

[Lieve Logghe, CFO & Member of the Management Board]

Yes, Chris. Thank you for raising or asking the questions. So indeed, to answer your first question, so we keep our 20 years depreciation rate or 20 years. So we are not moving there to 25 years. So we keep the duration, and indeed, we changed from 0 to a residual value of $390 per ton. And how did we define this $390 per ton? So we use there what we call the 4-year moving average. So each year, we will update with the new rates. And there, we are using a basket of scrapped countries, I think Bangladesh. There are 3 countries there, India and Pakistan. So there are 3 countries in there, which we take as we referenced. And so based on this, this is how we will update on a yearly basis our assessment.

[Christian F. Wetherbee, MD & Lead Analyst]

Okay. That's very helpful. And I guess last question, just when we're thinking about the debt profile, you got 60% fixed at this point. Is there an ability to move that higher? Do you -- I mean, obviously, that's a nice step up from where we were earlier in the year. Is there ability to move that higher? Or what are your expectations there?

[Lieve Logghe, CFO & Member of the Management Board]

So for the moment, indeed, we have fixed good fix. And indeed, we continue to look what needs to be concluded in terms of new loans and then -- and use our liquidity. So from that perspective, we will follow closely what needs to be fixed. But the 60% is currently the best we can do based on the loan portfolio and the loan diversification we are currently having.

[Operator]

The next question is from Chris Tsung of Webber Research & Advisory.

[Chris Tsung, Analyst]

I wanted to ask about depreciation as well. Just looking at the chart that you guys have on Slide 10, I understand it's a 4-year moving average. But I guess, is there a floor or a ceiling at what you guys would determine the scrap values to be at? Because I could just see, looking at this chart, in 2016, for instance, the 4-year moving average is around 400 versus the current scrap, which is like 250 or so. And I guess just in that scenario, you would be depreciating at a higher value than current market. So I just want to understand what goes into that process.

[Lieve Logghe, CFO & Member of the Management Board]

So indeed, it's a good question, Chris. It's also a question that we discussed thoroughly with our auditors. And indeed, when we look over the 10-year cycle, this $400 average is there. So we have somehow to define an average which made sense. And I'm looking indeed to the last years of high prices of scrap here, you see there indeed the $600 per ton. We know that this is a bit too high and then will not keep probably over the 20 years lifetime of a vessel. So hence, we have to monitor and see compared to the 20-year average moving compared to the 4-year cycle and then indeed to see how we can cut this because indeed, I agree with you that we have to look to the tendency, and this tendency is based on the last 20 years, and we have to keep this as a cap moving forward. This is how we think about it. But indeed, we have there to test and to see how it works in reality. We didn't know our first step, and we think we are still conservative, so hence, something which we have to explore and see how it further works. But indeed, we are tending to keep the cap over the 20 years lifetime of the vessel at the moving average based on that principle.

[Hugo De Stoop, CEO & Member of the Management Board]

And by the way, this is very much the same for the other tanker companies. So in the past, 0 over 0. You don't need to look at it on a yearly basis because that's your policy. But once you go to scrap value, then obviously, you need to look at the market. And as Lieve explained, we didn't want to bring more volatility into the P&L, far from it, or into the balance sheet. So you need to look at it with certain number of years of average, that's what we are doing, but also taking into account the last 20 years simply because 20 years is the lifetime of a vessel. But everybody is facing a little bit the same issue, and I don't think that the market sees the little volatility when there is a small correction in the depreciation rate.

[Lieve Logghe, CFO & Member of the Management Board]

Yes. And it's because of the last years that the scrap price is so high that this topic came up and why we changed because of this high pricing of $600, this is why we had to change and move towards our peers in that direction, so hence this changed now at this moment. .

[Chris Tsung, Analyst]

Okay. And I just want to move on to another point that you guys had in the press release. You guys were able to successfully trial the B50 biofuel. And I wanted to just understand, would that -- would you think B50 allow Euronav to generally meet the EXI compliance? Or will you guys be looking to trial like a higher biofuel plant?

[Hugo De Stoop, CEO & Member of the Management Board]

No, I think the idea behind it is really to be helpful in the energy transition. And quite frankly, we don't believe that it's a long-term solution, biofuel, certainly not given the quantities that will be produced and the competition that we will face with other industries. But nevertheless, it is helpful to see how it reacts in the engine. We didn't pay a premium to get that fuel. So that's also very important. There is an incentivization scheme that is present in Rotterdam, which meant that the Dutch State is indeed giving subsidies to the guy who are producing it. So the only thing that we did there is try something else. And then obviously, you need to pay attention to the chief engineer on board, making sure that everything is running smoothly, and then you deliver the data and whatever you have discovered to the people who are making that fuel. I think that whilst it's not a long-term solution, every little helps in the short term. So to answer your question, first of all, happy to lower carbon emissions whenever weak and especially when we don't increase the cost. Secondly, the -- as far as the regulators are concerned, this fuel is produced in Europe, in the Netherlands. And it remains to be seen whether it's going to be acceptable or not under -- well, there are 3 regulations that are coming in place from the EU perspective. So it's a little bit too early to tell you whether it can play a role or not. But the fact that we have tried, it means that if it would be accepted, then obviously, we would know how to handle it. And if there is any issue, we would know how to mitigate them.

[Chris Tsung, Analyst]

Perfect. And just one last one to squeeze in just on the cadence of dry docking in '22, I know there are 16. Is this going to be kind of front loaded? Or maybe you could tell me...

[Hugo De Stoop, CEO & Member of the Management Board]

Yes, we are trying to front-load as much as we can because we are very optimistic about the second half of the year. So obviously, you're always trying to see or to take advantage of the low rate and to final use that expression. It very much depends on the voyages, but the ambition is to try to front-load as much as possible. We will update on a quarterly basis where we are on that program.

[Operator]

The next question is from Magnus Fyhr of H.C. Wainwright.

[Magnus Sven Fyhr, Managing Director & Senior Maritime Analyst]

Just one question related to the supply of oil, you upgraded your outlook there. And I was just curious, with $90 oil, OPEC has already incented to increase production. But January production was only 50,000 barrels compared to the 400,000 barrels announced. And I would be somewhat concerned that OPEC is struggling to increase production, and the IEA is looking at 3 million barrels plus in 2022. But what gives you confidence now on your upgrade there that the supply of oil is going to increase?

[Brian Gallagher]

Maybe if I can jump in. I was going to say in a similar sort of answer to before. You're absolutely right, we're obviously disappointed as well that it's been a very patchy level of production growth, as you say. And in particular, the numbers for January look to be -- in December seem to be a little bit lower than we would have expected, in particular, in areas like West Africa. But again, as I mentioned before, there are areas where we have seen sort of decent growth, in Saudi, in Kuwait and UAE. And that agreement changes under the OPEC+ terms in May. That's a potential 1.5 million barrels per day with Russia as well. We'd love to see a situation where not only the production growth coming through, but also it's coming through a spread around the world, so that oil has to move even further. But the reason we upgrade it is because we see this pressure, in particular, in the second half rising, as you say, because the rise of the higher oil price. And then secondly, obviously, you've got the return of, we believe, along with people like the EIA and Platts suggesting that we'll see more growth coming through from the U.S. So Platts, for instance, are talking about 1.5 million barrels per day coming through from the U.S., again, second half weighted. So I think it's more a question of what we see in terms of some of the particular production growth areas, albeit a little bit specific, that we see that growth continuing. You are absolutely right to highlight that, again, it's been, if you like, the stop-start nature of this recovery has been reflected in the fact that the production growth has been so sporadic and so stop-start. But we certainly get a sense, not only from the official commentary, but also from some of the conversations we're having with the client base that, that supply growth will begin to transit into more sustainable levels of increase going forward.

[Magnus Sven Fyhr, Managing Director & Senior Maritime Analyst]

All right. I mean we've been talking about Omicron virus having an impact on the market here. But don't you think it's more related to that OPEC has been unsuccessful in increasing production? I mean, if we could see another 500,000 barrels to 1 million barrels, I mean, I think the tanker market look a little different.

[Brian Gallagher]

I think, personally, that's a very fair comment. But at the same time, I think the 2 go hand-in-hand a little bit and that we're not really seeing the refinery participation in terms of order flows of cargoes that we would anticipate. And that goes back because of that stop-start nature and Omicron reducing that demand in that business cycle, if you like, duration and confidence. So I think you're right, I think it's a combination of the 2. As you said right at the start, as Hugo said on the preparatory remarks, don't get us wrong. We're not happy with where we are. And it's frustrating that all of these different factors and the moving parts that we always see in our market that we're not getting maybe the full value from all of them. But we do anticipate that, that will come through. And we're certainly hopeful, as we now seem to be in a better phase with regard to COVID, in particular, in Europe, as we come out of restrictions, that, that should start to get some traction. So the oil price is clearly going up because of, if you like, the lack of equalization between the supply and the demand. But we do anticipate that we're going to start to see some proper benefits coming through from there. But we have to be patient.

[Magnus Sven Fyhr, Managing Director & Senior Maritime Analyst]

All right. Just one more question, on the depreciation policy, will that be effective as of second quarter? Or when we would start seeing those changes? .

[Lieve Logghe, CFO & Member of the Management Board]

It will be -- yes, first quarter, yes.

[Operator]

This concludes our question-and-answer session and today's conference. Thank you for attending today's presentation. You may now disconnect.