Euronav NV
Q1 2022 Earnings Call Transcript

Published: 12 May 2022

[Operator:]

Good day and welcome to the Euronav Fourth Quarter 2021 [sic] [First Quarter 2022] Earnings Conference Call. All participants’ will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [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 Q1 2022 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 12th of May 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 statements of historical facts. 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 website, at www.euronav.com. You should not place undue reliance on forward-looking statements. And 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 [Technical Difficulty] going forward. Actual results may differ materially from those forward-looking statements. Please take a moment to read our Safe Harbor statement on Page two of the slide presentation. I will now pass on to Chief Executive, Hugo De Stoop, to start with the content slide on Slide three. Hugo, over to you.

[Hugo De Stoop:]

Thank you, Brian and good morning or afternoon to wherever you are and welcome to our first quarter earnings call. I will run through the Q1 highlights before passing on to Lieve Logghe our CFO to give more details on the financial with a focus on our balance sheet and P&L. Brian Gallagher our Hear of IR and Research will then highlight some key trends in the wider tanker market and Euronav’s positioning within it. Before I return to summarize our strategy and outlook. So turning to Slide four and the Q1 highlights, it was a busy quarter for Euronav on many fronts, but we're particularly pleased with our fleet modernization program, which has a strategic focus with nine vessels transactions during Q1. Indeed, we sold four older VLCCs and acquired two modern ones and we sold one Suezmax jointly owned and took delivery of two brand new super Suezmax that we had purchased last year as they were still under construction, but for a defaulted party. This in turn has improved further the age profile of our fleet. Freight rates were under pressure for most of the quarter to the onset of the conflict in Ukraine in early March caused an important dislocation in the oil markets, which in turn has proved to be a positive catalyst for tanker markets. This has driven sequential improvement in freight rates across all segments starting specifically with smaller ships benefiting from the Russian dislocation and gradually impacting larger ones. While freight rates in absolute terms remain disappointing, the direction of travel is encouraging, especially in Suezmax with rates on average at $20,000 per day for the current quarter. I will return later in the call to expand on our thoughts on some of these trends and the outlook, but I will now pass over to Lieve to provide more details on the financial. Lieve over to you.

[Lieve Logghe:]

Thank you, Hugo. Before I start, Hugo has noticed our financing and market efforts are being recognized, which reflects on the hard work by our employees. Turning now to Slide seven and the balance sheet. Focusing firstly on our balance sheet, which remains strong and supporting and financing the expansion of our platform. Our two-year liquidity runway remains core to our strategy and whilst lower than Q1, it is sufficient to deal with more duration to the current down cycle. Leverage has picked up towards our self imposed limit of 50%, but our availability of financing remains good. And optionality and further fleet recycling readily available, given a buoyant sales and purchasing markets. I would now like to dive into our income statement and give more detail on Q1 performance on Slide eight. As Hugo highlighted earlier, whilst small freight rates continue to sequentially improve quarter-on-quarter. Strong cost control has allowed us to progress on Q1 2022, even though we have had to incur some exceptional costs during the quarter, related to our corporate background. As we highlighted in Q4, our depreciation approach has been updated and it was pleasing to bank a capital gain on some of our legacy sales and lease back arrangements during Q1, which we announced in early January. I would like to spend a brief moment on our fuel hedging, which continues to be a net benefit for Euronav. Euronav executes a 100% hedging program to manage volatility of the Company's fuel stock. The paper position, which is booked in the financial result of this quarter for a total amount of minus $16.3 million is more than compensated by the realized gains on consumption and the unrealized gains on the fuel stock for a total amount of $20 million positive. I will now pass on to Brian Gallagher to run through current thoughts on the tanker markets.

[Brian Gallagher:]

Thank you, Lieve. On Slide 10, we look at the tragic events of Ukraine and the impact that they've had from the Russian dislocation, which is at a major impact on our market. Effectively, this catalyst has triggered a set of reactions, which have been largely positive for tanker operators. Slide ten shows the before and after effect of Russian dislocation and also looks at how we anticipate developing. On the left hand slide, you can see the relatively stable 4.5 million barrels per day also on Russian exports, they were largely seaborne driven, but we made every single day before March. Most of this East bound oils of far East markets will continue to remain unchanged, we’ll be under some pressure from sanctions. The key impact we believe has been and will continue to be in the Western or Baltic ports, which have traditionally exported between 2.5 million and 3 million barrels per day to the EU. This trade was performed by Suezmax and aframax vessels, these ships are now sailing around Europe and directly to Far East markets, taking this Russian oil very long distances. To replace this cost oil, the EU is already taking more well from the Middle East and from the Atlantic, namely Brazil, North sea, U.S. ports and as well as West Africa. This trend we believe will deepen and strengthen and then we also anticipate the Russian production will probably fall by around about 1 point million barrels per day. This has seen the sector benefit from slightly lower and smaller volumes of crude moving, but that the crude is now moving much greater distances or ton miles. This impact still has some way to run we believe and will take over the summer months to fully impact the scale of this dislocation. But overall, it is a very strong positive for the tanker market sector. And as you can see from Slide ten, we believe the spillover effects are already starting to effect and will continue to be a positive effect on a VLCC market. It's important to remember that VLCCs cannot discharge or load in the need of Russian ports. Therefore, it's never really been a market for VLCCs. Hence the impact has been largely seen on aframax and suezmax categories. Catalyst for once the better word have been the key feature in our market over the last quarter or so. And if we now turn to Slide 11, we can see other short-term signals, which are now be positive. Four key factors we addressed in Slide seven, bottom left U.S. Crude exports have risen on a full weekly average basis by over 1 million barrels per day or 41%, since mid-January as a mix of increased production, release of strategic reserves and attractive inter oil pricing has boosted exports. These barrels tend to be very long haul in transportation and support building of a better outlook, when considered the top left and looking at the recycling activity. Top left shows that this has begun to rise again in April alone we saw six suezmax exit the global fleet, which is a very large number on a month basis, and this follows the aframax sector, which has been shedding tonnage historically earlier than VLCCs and suezmax in their recycling cycles. Top right underpins what we been seeing on a day-to-day basis, volatile, but rising crude volumes and April recorded a highest global volume on a monthly basis in two years. This is another encouraging data point. Finally, if you look at bottom right, we can show the direct impact of the Russian dislocation. Russian ships made up roundabout about 7% of the aframax fleet and about just under 3% the suezmax fleet. And this is enough to driven a much tighter market in those categories and hence freight rates rising quickly and to extreme levels on specific routes. VLCCs cannot load as I mentioned before or discharge directly into Russian crude ports, so it's not how much of a direct impact, but we're announcing a substitution effect as VLCCs are being used to replace the barrels lost from Russia to the European ports from the Middle East and from the Atlantic. We now turn to Slide seven and the medium drivers, which continue to build positively for our largest crude tanker market. Slide seven is a slide, which looks at the mix of the immediate future on the left, highlighting a still very heavy special survey program we have for all the tonnage mainly those ships going through their 20-year special survey in the VLCC and suezmax sector. This represents roundabout 4% of both categories alone over the next 12-months. And again this is a very important point for owners to decide whether they want to continue to remain in the sector, or take the very attractive scrap prices that are currently available. The right hand part of the chart looks at the absence of new orders of VLCCs. We've not seen a VLCC orders since early July, and the reasons behind this. So mentioning that the furnace schedule this week indicates that it is not just an absolute dollar issue, although that is important, a brand new plain vanilla VLCC costs $150 million of the ports when reported today. And this also means that in order to make an economic return of 10% the analysis that they conclude needs around about $46,000 to $47,000 per days in terms of their freight rate in order to justify that entry price. With steel prices remaining high and the yards full in terms of the shipyards construction ships. It's difficult to see how this barriers of entry is going to be lowered anytime soon. I'm now going to switch gears and look at what was an important milestone last week for Euronav, mainly the unveiling of our decarbonization pathway that we now highlight on Slide 13. In summary, there are two broad stages to our approach decarbonization, which will end up with us being net zero by 2050 with an ambition to beat that timeline. Between now and 2030 we're looking to reduce the energy we use, as well as investing in future technologies before the second stage 2030 onwards where the focus will be on adopting cleaner energy and scaling up that investment in technology. Reducing our CO2 mission of intensity by 2030, by 40% will be an important pathway and milestone on this journey and on our commitment to get in line with the [indiscernible] trajectory by net zero by 2050. We believe this is very, very attainable and in fact we are very confident we can actually beat this time as I mentioned earlier. Euronav’s attributes in managing the energy transition and decarbonization or we believe amongst the best in class already in the tanker sector is not in a wider shipping community. We encourage all are interested in Euronav to review our 70 page presentation last week, which is on our website with a transcript and a replay also available. I will now pass back to our Chief Executive, Hugo De Stoop to give some concluding remarks. Hugo, over to you.

[Hugo De Stoop:]

Thank you, Brian. The Euronav platform is working well is well equipped to deal with the next stage of the cycle with high quality assets, a strong balance sheet and the right level of liquidity. We have addressed and will continue to address our fleet age profile, as well as the positioning of that fleet. We've also laid out how this platform going forward will decarbonize and meet the challenges of the energy transition and we have outlined this recently in our ESG event. We believe that our platform will deliver enhanced return for our stakeholders going forward. Let's now turn on the positioning in the past cycles on Slide 16. Euronav continues to manage its business as we have always done in a disciplined and focused manner, applying high governance standards and a methodological approach across the platform. As both Brian and Lieve have highlighted, we've have been busy in positioning ourselves for the next stage of the cycle. It is important to remember that we are in a cyclical industry. Consolidation opportunities are often present, but timing is always the key. The chart on Slide 16, smoothes the VLCC re-sale price and the one-year time charter rate, which are two key variables within our markets. Historically, we have executed consolidation transactions at similar point in the cycle. Eight years ago with the acquisition of the Maersk crude tanker fleet and four years ago when we merged with Gener8. We know proposing to merge with frontline and to offer a material consolidation transaction in order to deliver further shareholder value as we enter into the next stage of the tanker market. This exciting development and merger of two leading companies in the space with a -- is a strong signal of our confidence in the sector. Turning now to the summary Slide and outlook on Slide 17. Another upgrade is driven by the catalyst that has come in tragic circumstances from the dislocation from the Russian oil situation. This will drive we believe sustained change in ton miles as Brian highlighted in swapping out Russian barrels to Europe for those from Middle East and the Atlantic. And Russian barrels transported over much longer distances than before. Elsewhere, demand and supply of oil offer some encouraging data points with small, but consistent upward trends. Vessel supply looks well underpinned given the order book at 25 year lows and global fleet age profile at 20 year highs. Thank you for your time and attention. With that, I will pass back to the operator for your question.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Jon Chappell of Evercore. Please go ahead.

[Jon Chappell:]

Thank you. Good afternoon. Hugo, I understand there's sensitivities about what you can say regarding the proposed frontline merger. But maybe you could just help us understand the next steps. I know the AGM is next week, what does the term sheet mean versus an actual closed deal? What steps need to be take to get the term sheet to a actual proposed deal? Is it just clearing the AGM and hitting the board -- – on board, so to speak. And just what are the other building blocks to bring this to finality?

[Hugo De Stoop:]

Yes, thank you, Jon and you appreciate that. There is a limited amount of information we can share on this call, but you’re absolutely right. The first step is to go over the AGM next week and then have the board reconfirm the merger. And then after that, we will update the market with the next steps, the timing and somewhat of bits and piece that we've been working on, but we can only do that after the AGM.

[Jon Chappell:]

Got that. And then I know this is stock for stock deal and you still are sitting on a fair amount of liquidity, but are you kind of in a strategic holding pattern until there's more clarity on this plays out? Or can you continue the rejuvenation of the fleet either through sales or purchases as until you get to the finish line on this deal?

[Hugo De Stoop:]

No, absolutely, I mean, what you see is that we are not resting on our laurels. It was a very busy quarter on a number of ships transaction as we have explained in the prefatory remarks. And we have more in the pipeline indeed. So the two companies are being running independently until merger happens and we will continue to work hard both on the spot market and DC front, but also on the fleet rejuvenation and that's something that we believe the right time for. Values are already ahead of the market, as you've seen, I mean, very strong numbers for the vessels that we sold. And then it was -- we found some opportunities at what we believe are attractive price, especially when you bring in the element of consumption, because through the four vessels that we sold were decided to go at high speed that we were performing 10, 15 years ago, whereas the two VLCCs that we purchased were designed to do -- at the current speed and very economical with the latest eco-design. The same for the two suezmax and as you know our VLCC fleet is relatively modern, but our suezmax fleet needed some rejuvenation and that's what we've done last year when we purchase and order a purchase contract and order three VLCCs, so total five. So all of that is part of the strategy and that strategy doesn't stop to the contrary, I think that the more to merrier and hopefully the market appreciates it.

[Jon Chappell:]

Okay. That's helpful. And then we'll call that may A and B to question one. My follow-up question for Brian, that is diesel shortage issue seems to be gaining a lot of momentum and clearly, you Vs and Suez’s carry crude. Have you thought about the secondary and even tertiary fallout of these global diesel shortages? And what that may mean to the crude markets?

[Brian Gallagher:]

Yes. I mean, I think as you know, Jon better than anyone else on the call. We would [indiscernible] our markets we work in weeks and months and that's the duration of our voyages, whereas obviously capital markets see something today and they want to know the impact is tomorrow. So we do try to stress them the call wind to anticipate a lot of these Russian dislocation still got some way to go in the early stages of it from a shipping market perspective. And direct answer to the diesel side of things, yes, I think we're getting such an extreme elements of this location there you're seeing it with very high rates that I think we would expect to see some spill over. The arbitrage quite frankly can't last forever, we're already seeing that arbitrage, which is be getting -- doing in some heavy lifting of the VLCC rates as we're seeing suezmax and aframax cargos being merged into VLCC cargos. And I think you'll get some blurring at the margin with the product market as well. But it's a bit early to get -- to actually seeing that. I think there's some way to go on the arbitrage within the tankers categories. And if we have more duration and it looks like it's likely into the summer months on the diesel side of things. Then that certainly will come through and you're hearing that from some of the players like Valero et cetera, it directly involved in that space, that there does seem to be some duration. But I think also one absolute and output we would expect to see is further continuation of the U.S. exports of crude, because there's obviously some slate deliveries from the strategic reserves and they are obviously going to come over and a lot of that is being used as feeds stock into the European refinery, because we know expressly the U.S. refinery slate is already full and they don't need that all in that crude. So absolutely there's an absolute and secondary benefits, I think. But I think with -- for the diesel sort of things, I think we have to wait till next quarter for and give it more clarity.

[Jon Chappell:]

Okay. That's very helpful. Thank you, Brian. Thanks, Hugo.

[Hugo De Stoop:]

Thank you.

[Operator:]

The next question comes from Frode Morkedal of Clarksons Securities. Please go ahead.

[Frode Morkedal:]

Thank you. Hi guys. First question, regarding that proposed merger with frontline. Is it correct that the shareholder will 75% majority, if needed to get the impact?

[Hugo De Stoop:]

It's a little bit more technical than that, so there are many ways to approach combination and obviously that's what we are working on at the moment. So if you indeed think about I would say a fully fledged merger on day one, you need 75% of the votes that are being presented at special meeting. But as I said, I mean, there are other structure that could be [indiscernible], which require lower amount of woods.

[Frode Morkedal:]

Okay [indiscernible] acquisition again [Technical Difficulty]

[Hugo De Stoop:]

Well, unfortunately, I cannot tell you much more about it, but you need a simple majority to just control the company, of course. And that's 50% and one share.

[Frode Morkedal:]

Yes, understood. Second question is on the market. Yes, seems like the Russian oil exports have been holding up fairly well so far. But according to the international energy agency, which had a report today they said that on May 15th, the major oil trading houses are supposed to have to hold old transaction with, yes Russia, I guess. So the question is, do you foresee any immediate impact on the tanker market from that winding down process?

[Hugo De Stoop:]

Okay. I think it's fair to say that the efficient sanctions and quite frankly people should make a difference between sanctions and an embargo. So the sanctions, is what we've seen in Venezuela and Iran, which are supposed to cover everything on worldwide basis using the currency as a way to bring people from trading oil namely the dollar, whereas embargo means that you cannot export or import Europe and into the U.S. the rationale. So there a series of so called sanctions, but also embargo towards the end of the year that are being put in place. And then you have a lot of people, who have declared that they will do this or not do that, as far the Russian oil or other Russian commodities are concerned. As Brian said, we've seen definitely the first impact of that into the smaller size. The aframax that spillover effect as you've seen on our numbers into the suezmax and quite frankly, we went out of this trough on the VLCC probably, because of that as well. And as Brian said this is because of combination. So to answer your question, yes, we should see more of that happening and therefore that should benefit the entire tanker market. Again, in the same order, smaller ships, because the Russian rationale is usually transport on aframax and our two type of vessels, but with consequence -- sorry consequences on the other market, because along with the distance you need to transport the over the bigger the ship you need for obvious reasons of economies of scale. So what we anticipate to see future is probably lifting is being done on smaller ships and then lighted into VLCCs to go all around the world and probably the far east India and China sort of place to carry the Russian oil, where those people will be able to buy it because as I said, this is an embargo not strictly speaking sanctions by the Americans.

[Frode Morkedal:]

Great. Thank you for the color. That's it from me.

[Hugo De Stoop:]

Thank you.

[Operator:]

The next question comes from Thijs Berkelder of ABN AMRO - ODDO BHF. Please go ahead.

[Thijs Berkelder:]

Yes. Good afternoon gentlemen and lady of course. Three questions and coming back on the -- let’s say the merger announcement in last week's presentation, you again highlight that you expect significant synergies. Can you roughly quantify what is significant for you? Is that $10 million annum, $30 million or $100 million per annum? And then secondly, can you somehow give more clarity on and maybe quantify on your expected cost synergies and expected revenue synergies? Thirdly then what is still not clear to me, can you in any way explain where the merger ratio is coming from? Why 145 frontline share for one year run of share and not for instance something like two frontline shares for one year run of share? Those are my questions.

[Hugo De Stoop:]

Yes, thank you very much for that. Again, we will give a lot more information about the merger after we have had our AGM. It is obvious that we expect significant synergies and indeed are different buckets. I think on the revenue side, it is about utilization and so when you think about traditional [trend] (ph) shipping, we usually carry all from production phase to the refineries and then we come back empty. But obviously the big the fleet, the more optionality you have on triangulation and these sort of things. So we will come back with a hard number even though that hard number will be an estimate obviously. On the other items, the logical ones are G&A, as we said, we don't expect a lot of synergies in the G&A, because two companies are structure in very different ways. So frontline is outsourcing part of the services whereas Euronav is more vertically integrated and the model that we are thinking of is a combination of both. So there will be synergies that will be quantified and we will announce it to market with more precision and obviously how do we get there. And on the OpEx, again this is very logical, when you're thinking about procurement, this is economies of scale. So you are dealing with more volume in pretty much everything that you buy. There are some bigger elements than other, when you think about the fuel that we buy, when you think about the [indiscernible], so obviously this is a numbers game. And as always, if you are a more important client for your service providers then you can bargain a better price. Finally, and maybe importantly on the financing side, we believe that the platform will be very attractive to many people providing capital to companies especially on the debt side. And here I'm thinking about the banking side, but also the bond side, which should benefit from even better credit rating. So it's too early to [Technical Difficulty] have numbers, but we are working and crunching the numbers and we'll communicate that in due course and certainly ahead of a merger proposal that will be put before both sets of our shareholders. As far as the ratio is concerned, I think that we didn't want to come market with the calculation behind it. That was a result of the negotiation, usually when you do that in shipping you look at the NAV of the two companies and the NAV is relatively simple calculation, because we have hard assets, ships namely. And then we have a certain amount of debt and that gives you the NVA number and that is the starting point of any conversation and the rest is about negotiation.

[Thijs Berkelder:]

Okay. Clear, thanks.

[Hugo De Stoop:]

You’re welcome.

[Operator:]

This concludes our question-and-answer session. The conference has now also concluded. Thank you for attending today's presentation. And you may now disconnect.