Euronav NV
Q3 2019 Earnings Call Transcript

Published: 29 Oct 2019

[Operator:]

Good morning and welcome to the Euronav Third Quarter 2019 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 Mr. Hugo De Stoop and Mr. Brian Gallagher. Please go ahead.

[Brian Gallagher:]

Thank you. Good morning and afternoon to everyone and thanks for joining Euronav's Q3 2019 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, Tuesday, October 29, 2019, and may contain forward-looking statements that involve risks and uncertainties. The 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 our own company 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 on to Chief Executive, Hugo De Stoop, to start the agenda slide on Slide 3. Hugo?

[Hugo De Stoop:]

Thank you, Brian. I will run through the Q3 highlights and provide a full financial review of the income statement and balance sheet before looking at the current themes in the tanker market and Euronav’s outlook before we take questions. Let’s turn to Slide 4. Generally, the tanker markets of VLCCs and Suezmax was range-bound and a little disappointing in a seasonally soft quarter for Q3. Refinery maintenance program continue to impact the market until August when freight rates enjoyed a counter seasonal rally. With the exception of 2015, the market recorded the highest rates for August since 2008. This reflected the robust underlying fundamentals of the market.The freight rates strengthened – has continued and even strengthened into Q4 with Euronav VLCC fleet delivering over $60,000 per day of earnings for 60% of our available days so far. Suezmax has fared less well, but specific transaction in this category has been strong. The good news is that we have 90% of our trading fleet exposed to the spot market for the entire winter period. Finally, the company is looking to apply the new Belgian Company Code, meaning we shall have the capability to pay quarterly dividends for the first time starting next year, 2020. This would allow us to align our business more closely with our stakeholders.Let's move to Slide 5. Q3 was very similar to Q2 in many ways with a pronounced period of reduced activity as the refiners deliberately kept out of the markets to do the maintenance and preparation ahead of IMO 2020. We nevertheless enjoy some strong pockets of freight rates of counter seasonal strength, which have illustrated the underlying foundations of market strength, which we'll come on to later. The Euronav balance sheet remains robust as shown on Slide 6. This quarter there is very little to report with only one asset sale. The VLCC VK Eddie, which we sold for conversion into an offshore project during Q3 for a very healthy premium. Leverage remains in the mid-40% range compared to our target of 50%.That concludes the financial section of the earnings call and I will now pass back to Brian. Thank you very much.

[Brian Gallagher:]

Thanks, Hugo. Turning now to Slide 7, I would now like to take a look at a number of key signals we are currently seeing from the tanker market. Firstly, a topic that many investors are looking for, consolidation. The tanker market is highly fragmented and a complaint from many observers is a lack of consolidation. However, this process is already happening. It's only 16 months since we completed our merger with Gener8 Maritime. And during Q3, we saw further commercial consolidation with the announcement of three additional owners opting to place their VLCCs, some of them scrubber fitted into the tanker and international platform. This will see the TI structure have over 70 VLCCs under its umbrella when these vessels are all delivered. This low risk and tangible form of consolidation should provide more discipline for the tanker tonnage as it faces the longer-term demand challenges and implementation of IMO regulations. Further development of the platform at TI is something we’ll look forward to and to encourage.Turning to the fundamental foundations of our sector, on Slide 8, it illustrates the short-term role that has been played by short-term storage as a catalyst in our market. Slide 8 firstly shows the one-year VLCC TCEs since 2015 and this illustrates the challenging market in particular during 2018. However, this was helped with an adjustment in the global fleet of nearly 50 VLCC equivalents leaving the fleet during 2018. This rebalancing has helped underpin freight rates at better levels during this current calendar year with pockets of seasonal, counter seasonal strength rather in Q1 and lately in Q3. If we move on to Slide 9, you can see that this market background has been augmented by IMO 2020 induce storage where the requirements were around about 30 VLCCs leaving the global fleet to store various greater fuel oil.This short-term development has helped to drive the freight market along with a better outlook and picture for second half demand for crude. The key point here that this has come on top of the foundations already set in place in the tanker market that Hugo spoke of earlier. If we progressed to the following slide, on Slide 10, the pockets of freight rate strength reflect a finely balanced market that the catalyst of storage restricting vessel supply has driven rates even further in Q4 with a positive trading. This has been further boosted by the longer term fundamentals of limited fleet growth looking forward over the next two years and with the order book below 20 – below 10% another 25 year low and a fleet age profile not replicated since the mid-2000s. This is a positive background. Every year for the next seven years, there will be at least 25 VLCC sitting 20 years of age, adding further pressure for the fleet to reduce in size, providing good candidates to be recycled and to rebalance the market in case of freight rate weakness.These fundamentals give Euronav a confidence that there are market conditions for sustained rally in freight rates over the coming quarters. However, this does require continued restraint in vessel ordering and demand for and supply of crude not being impacted by trade tensions or further production cuts. Finally on this section on Slide 11, we show the short-term picture and in particular the VLCC freight rates and how quickly that rose to a very high level as a number of short-term temporary factors all combined in a short period of time to produce a perfect set of conditions to push freight rates to unsustainable levels.These factors all remain in place to varying degree and may return over the coming winter period and beyond. However, it would be incorrect to look at these very elevated levels, which are persistent for a short period as the real focus. The key focus in our view is the fact that the freight rates have been boosted to profitable levels based on solid foundations. These fundamentals have credentials to remain in place for a sustained period, albeit tanker markets will always remain open to seasonal trading patterns given the way crude is moved around the world during the year.Now, no quarterly results call will be complete without a Slide on IMO 2020 and we provide ours on Slide 12. A number of commentators have cleared our decision to purchase in high volume, low sulfur compliant fuel ahead of January 2020. We very carefully undertook this decision in order to reduce the risk to our business in order to provide a safe secure source of supply of tested fuel during what we will believe will be a very volatile period as IMO 2020 is finally implemented. As our seminar on September 5 made clear this compliant fuel has been purchased at a very competitive price around $100 below the current retail price in Singapore where our ULCC, the Oceania is storing the fuel. We've already began to deploy this fuel onto our fleet and in preparation of January 2020. And we've been able to benefit from this cheap feedstock to be consumed when IMO is finally implemented from Q1 onwards. This means that for our vessels performing long voyages, the fuel needs to be purchased today and stored in separate bunker tanks in order to be ready for switching on or just before 1st of January, 2020.To sum up, we’ll now move onto the outlook slide in Slide 13 and an upgrade to our traffic lights system. We maintain on Slide 13 our constructive stance on the tanker cycle into 2020 and reflect this by upgrading our vessel supply sector to amber/green that's highlighted in Slide 13. The rationale for this stems from a view that some of the vessel storing fuel oil will not return in full to the trading fleet and that retrofits are now likely to persist longer into 2020 as owners avoid retrofitting during an anticipated strong winter freight rate season. The other fundamentals of demand oil supply ton miles on our own current balance sheet remain as they were.With that, I conclude our prepared remarks and pass back to the operator. Thank you.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of John Chappell with Evercore. Please go ahead.

[John Chappell:]

Thank you. Good afternoon guys.

[Brian Gallagher:]

Hi, John.

[John Chappell:]

Hugo, my first question is around the new dividend policy and just some clarification around that. So when you say you can start paying the quarterly dividend in 2020, should we expect that to mean the dividend of the 4Q results? And will that be based strictly on 4Q? Or would that still be the aggregation of 3Q and 4Q? And then also there was no kind of a payout ratio or update I know in the last cycle you were at 1.80% payout ratio. I think you were down to 60. At one point, what's the target distribution ratio as you think about entering next year?

[Hugo De Stoop:]

Yes, thank you. It was two questions. The first one is a little bit mechanic. And so, the law that was only changing in 2020, so we’re talking about quarterly dividend in 2020, so Q3 and Q4 will still be consolidated in that regard. The second one is we have a dividend policy out there. In the last cycle, we had a dividend policy distributing 80% of our earnings and then we change it to make sure that we could still distribute some sort of dividend even when we were in loss making territory, which we did in that 12% [ph]. And that's the minimum dividend above that any extraordinary dividend can be distributed and you've seen it we have done a little bit more share buyback that what we've done in the history of the company.And the choice we always be there between dividends and share buybacks, it really depends on where the share crisis, but nevertheless, a big chunk of the earnings will be distributed dividends. And we know it is very important for our shareholders. We don't want to set a percentage because we still want to have the flexibility between those two. And as of a total payout we'll be generous. I mean, if you look at our history of 15 years, the history as a public company we have always been very generous. And obviously when you look at the balance sheet and when you look at our current leverage, there's no reason to use any of those earnings to decrease the leverage as we – as it is slowing of and to a certain extent maybe too low.

[John Chappell:]

Okay. I understand that. Thanks, Hugo. The second one is on a little bit of the timing of the IMO strategy. And Brian you said that you've already started to deploy some of your inventories. So I think in the September 5th update, you had said that roughly half of your bunker requirements for next year would be met by the inventory that you've already built up. Does that still the case? I mean, should we think kind of through the first two months of next year? Or is that maybe a little less since you've started to deploy it already? And then another part B, sorry, do you anticipate building more inventories either in that ULCC or another? Or do you feel that you've already kind of taken advantage of the price arbitrage and now you're just going to run down what you've already aggregated?

[Hugo De Stoop:]

John, the first question, we have started bunkering some vessels that are currently passing by Singapore as you know the Oceania is located not very far from Singapore. And it's an ideal location, very safe where we can do those operations, the first time that we are doing that on our own and for our own fleet. We have a dedicated barge to do that to make sure that there is no contamination. We will continue to do that until the end of the year and then obviously next year. It's not because we’re starting to bunkering now that it will limit the amount of bunkers we’d use in time. So when we say six months, because we’re not going to start using those bunkers ahead of the deadline, maybe a little bit ahead of the deadline, you want to make sure that you run off out of HSFO and switch to LSFO as close as possible to the 31st of December.But that does not change the amount that we will consume over the first six months. And then last but not least could be a little bit more than six months because obviously not all the ships in our fleet are passing by Singapore all the time, but we will try to maximize it. We believe that it's really the initial few months, probably Q1, Q2, maybe Q3 that are the most at risk in terms of price volatility and also price quality because there’s no issue. So that's really what we want it to be protected against.Now, going on to your second question, we have learned a lot about banker procurement to be honest. We want to complete the circle, i.e., we bought it in one place. We transported in another place. We know bunker in the field. We want to make sure that everything is working fine before potentially moving to a more stable operation, which will probably a mean that we were using that ship or maybe more on a permanent basis because there is certainly on advantage in doing what we have done and that advantage is a volume discount. So, we will probably continue to do that, but let's make sure that we complete the circle, the first, well, cycle in fact and that everything runs smoothly. The focus point is still there for the moment.

[John Chappell:]

Right. That's super right insightful. Thank you so much Hugo.

[Hugo De Stoop:]

Thank you.

[Operator:]

Your next question is from the line of Michael Webber with Webber Research. Please go ahead.

[Michael Webber:]

Hey, good morning guys. How are you?

[Brian Gallagher:]

Hi, Mike. So good, how are you?

[Michael Webber:]

Good, good. I just want to maybe piggyback some market questions following John's stuff on the dividend. Your slide on VLCC storage is interesting and kind of helping to set the table for a pretty tight dynamic into Q4. I'm just curious, Hugo, with 30 VLCCs in storage now, I guess, how and when do you think that ultimately peaks? I know that's a difficult question to answer on the back end. But is that a number in terms of kind of baseline storage to handle that field transition? Do you think that number peaks in Q1 of next year? Or do you think it could extend further up?

[Hugo De Stoop:]

Well, to a certain extent it's linked to the previous question and it's about LSFO, HSFO price stability and to a certain extent price stability. I think people will use a tonnage and to be the better VLCCs or maybe Suezmax to store LSFO ahead of the deadline and then right after that HSFO because quite difficult for a refinery to plan and be completely accurate on the demand that they are going to receive and especially on the location of that demands. So I think that it's very much linked to where we’re going with the fuel and there's another dimension of course now that the market is doing so well. There are some people, if not a lot of people, certainly in our segment that have postponed the retrofit of scrubbers, which means that you have a part of the HSFO demand has been eliminated and more LSFO demand has been added on.So will – it's an equation with many unknowns. And again, I can only repeat to myself the reason why we've done this we have accumulated at least six months of fuel. It's not to be prior trapped in a very volatile market and knowing exactly what we have purchased in terms of quality and at price of course. Then you will need to look at the oil market, which is a market is also from time to time requiring storage and that knows where the price of the oil is going and is going to go next year. So, unfortunately, I can not be more accurate than that.Historically, there's always been some ships being taken of storage. And let's not forget that the first candidate to perform that service are the older part of the feet, which is good news because once you have performance storage contracts, especially if it's over several months, it's more difficult to bring your ship back into the trading fleet because you have no vetting, until your ship is usually not easily acceptable. And having a ship that is standstilled is not particularly good for that ship either.

[Michael Webber:]

Got it. Okay, that's helpful. Further follow up, I guess, maybe one bit more in the weeds, but you may have made a point to call out TI as kind of de facto consolidation on Slide 7. And I think earlier – late last night or I guess earlier this morning, there was some news out around another competing pool that's kind of leading tonnage. So I guess my question as it pertains to TI and IMO 2020, I mean, the last time we spoke about this is still a bit up in the air, but in terms of differentiation, I guess, maybe the right way to ask, is there a standardization among major pools around how they're treating pool points for scrubber equipped and non-equipped vessels? And is there an opportunity to differentiate TI from a flexibility standpoint in terms of attracting new tonnage over the next year, year and a half because of – maybe kind of a well thought out flexible point system to accommodate kind of multiple classes of vessels?

[Hugo De Stoop:]

Well, I'm not entirely familiar with what they're doing in all the pools. I can only speak about TI. And at TI the decisions that we have made was to split the accounting side of the pool. So we're not attributing pool points to vessel with scrubber. We’re simply saying, okay, its one pool, one manager, but speaking two different sub-pools, one for scrubber fitted vessels and one for non-scrubber fitted vessels. It's very important that all those vessels are under the same hats and that's the reason why we've pushed the pool to attract new members, even though those new members had the scrubber.Last year, I think that Euronav was more portrayed as a non-scrubber and therefore the pool was portrayed as non-scrubber only. So that's a big change, but it's not very difficult and consolidation is important. And if you can't do it on the M&A front, it's very important that you do it on the commercial front. And to that extent we welcome all the pools’ features. If there are other pools, it means further consolidation. It's good for the market. It's good for us.

[Michael Webber:]

Right.

[Hugo De Stoop:]

We believe that TI is the best pool. And that’s the reason why we put all the ships in it. We don't own the pool. We don't get any earnings from the pool. And that's one of the biggest benefits of the pool. It's owners pool i.e., it’s a cost center, so you're not adding a layer of brokerage fees to your earnings. And for us it's very important.

[Michael Webber:]

Got you. Okay, that's helpful. I appreciate the time guys. Thanks.

[Brian Gallagher:]

Thank you.

[Operator:]

Your next question is from the line of Randy Giveans with Jefferies. Please go ahead.

[Randy Giveans:]

How are you gentlemen? How's it going?

[Brian Gallagher:]

Going higher and well, you?

[Randy Giveans:]

Excellent. Good, good. All right, so on Slide 8, you’ve showed the one year time charter kind of rates. We're also hearing of one year time charter rates of higher than kind of these charts of 50,000, and maybe even 60,000 for some eco-VLCCs without scrubbers. So, I guess, have you gotten any bids for some of your vessels at the 50,000 plus range for one year time charter? And then if so, will you look to lock away some of your vessels on those time charters either for one year or maybe three years?

[Hugo De Stoop:]

We've not seen that. I’ve seen that there was one ship being done at 46 and that was for three years. And the one that has been a rumored to be done above 50 to my knowledge has not been confirmed, maybe it has, maybe it has not. There are very few of those are available. I think if it's for one year, we are a little bit more optimistic than that. So the answer is no. If it's for three years, above 50,000, yes, we would definitely consider it. I mean, we have sent some vessels. And if we were not considering, locking some of those at such a good rate, then we would be too greedy. And unfortunately greediness very often leads to a wall, a brick wall. So, yes, but we haven't seen it in more than one year.

[Randy Giveans:]

More than one year, okay. That's fair. And then I guess on your specific fleet, following the sale of the Eddie, you still have I guess one to VLCC built in 2005, maybe 5 Suezmaxes over 15 years of age. At the same time, you mentioned kind of ongoing consolidation. So do you plan on selling some of these remaining older vessels in the coming quarters and replacing them with more modern tonnage? Or kind of where do you see your fleet over the next year maybe current levels, smaller or larger?

[Hugo De Stoop:]

Well, everything that you said is true as far as the vintage of our fleet is concerned, but they're not that old either. Certainly, the TI HELLAS, which is a 2005 built, is not yet 15 years. She will become 15 years next year. And I guess that all those vessels that that you mentioned, and we have a few Suezmaxes which are slightly over 15 years, our candidates to be sold, we are never desperate. And when the market is that good, it either commence better price as a sales candidate, or with Jupiter (0

[Randy Giveans:]

Sure. And then in terms of – okay, so the fleet could go up or go down…

[Hugo De Stoop:]

Yeah, that's on the sales side. I think that on the acquisition side, you know how opportunistic we are. If you're talking about a fleet, if it's an acquisition, we think that the values are getting a little bit too high for our appetite, if it's a merger, it all depends on the way share price is, I suppose.

[Randy Giveans:]

Sure. Thanks again and congrats on solid quarter.

[Hugo De Stoop:]

Thank you.

[Operator:]

Your next question is from the line of Amit Mehrotra with Deutsche Bank. Please go ahead.

[Unidentified Analyst:]

Hey, this is Chris on for Amit. So the first question is on the physical market. Earlier this month, Sinopec, the China's largest refinery announced it was going to reduce operations in response to higher freight rates, but recent data shows that Chinese crude imports were actually moving higher throughout the month and coming in at near record high levels. Can you maybe just talk about what you're seeing here because there appears to be a disconnect?

[Hugo De Stoop:]

We are seeing it exactly the way you described it, which means that we live in a world where you can make some declaration and enough not follow it through. But I have to admit that they made the declaration when the market was supposed to be at $250,000 or even $300,000 a day, all those features were failed in the end. And I guess that their comments came up at that moment in time. Today, the market is probably more between 80 and 120, depending on where you trade your ships. And that might be the reason why they have reengaged in the market and indeed booked a lot of vessels and having bought a lot of ours.

[Unidentified Analyst:]

Yeah, it makes sense. Thanks for that color. And then just next question, can you maybe talk a little bit about the impact of IMO, just as it relates to global crude oil demand? I mean, it feels like there could have been a headwind to 2019 demand as we've just seen your elevated global refinery maintenance. And then for 2020, potentially a tailwind with more waste in the refining process, can you provide any context to this or how you guys think about this shaking out?

[Hugo De Stoop:]

Well, yes. We are not a refinery, so we can only tell you what we heard in the markets. But God knows we have visited a lot of refineries and [indiscernible] towards is the same. They anticipate that they will do additional runs, just produce old material that is required in the market including LSFO. And the best estimate that we have seen range between additional 400,000 barrels on the low side to 700,000 barrels additional today on the high side and I suppose the truth will be a little bit in the middle that will also depends on the oil price itself.We don't believe that there's going to be a lot of materials stranded. Obviously there's going to be a period during which price need to be adjusted according to the demand. But as I explained in first question it's a moving target because as people have postponed the retrofit, it means that we'll have probably a little bit more demand on the LSFO initially and certainly more than anticipated, but very quickly it will catch up with what was planned. And so it will provide opportunities for ships to be used as storage. But I don't think that it will mean the demand for oil by those refineries will go down.

[Unidentified Analyst:]

And have you guys seen anything in 2019? Obviously like oil demand in 2018 has been pretty soft and there's a lot of, kind of factors at play. But just has this elevated global refinery maintenance year-to-date had any impact from what you guys are saying?

[Brian Gallagher:]

If I could jump in that, Brian Gallagher here. I was going to mention and I think we've seen that in Q2 and Q3. I think that's the point we wanted to try and make it in our prepared remarks and that we did have a pretty respectable market in Q1 and Q4 of last year, $35,000 a day. And as we went into September and early October again we had a good market and a good setup for the winter program. I think it's been that refinery maintenance program which has been very, very prolonged and also more assertive and more aggressive than we were anticipating. And that's been almost certainly the key driver we had, reasonably challenging markets in Q2 and Q3. I’ll say challenging; we were still slightly loss-making as we reported today. The fact that underlying that the market has had some sort of a reasonable balance between demand and supply. So our view would be, is it Q2 and Q3 is what you saw was very much driven by the refiners and now that they're back in play and are ready for IMO 2020.

[Unidentified Analyst:]

I appreciate the color. That's it for me. Thanks for the time guys.

[Operator:]

The next question is from the line of Ben Nolan with Stifel. Please go ahead.

[Ben Nolan:]

Thanks, good afternoon. So I have – well my first question, you touched Hugo on this a little bit, I think on Randy’s question, but there has been clearly some noise in the market about owners who've placed new buildings, who are looking to sell those assets. I'm curious, and it sounds like they're – they ask prices a bit too high for you, but how do you think about that more broadly as some of these speculative new builds look to be sold, is that something that you would be interested in doing at some point?

[Hugo De Stoop:]

It’s a very difficult to be accurate. Yes, there's a number of VLCCs, particularly the VLCCs, which have been built speculatively. Those vessels were earmarked for sale. Some of them have been sold. But you have to recognize that most of those well speculative units have been or starting to be operating in proper companies. The pool is welcoming two of those in the name of Hunter and Hartree and that's because they have equipped themselves with the necessary people management systems in order to operate them. So I don't think that they are desperate and who knows, maybe they want to become the ship owners themselves. So it's quite difficult to read who wants what. It’s true that once a vessel and I think there was a rumor in the market today that one of those had been sold at – way above $105 million. It's true that for us, it's probably on the very expensive side. If it's a fleet, you can pay with shares, your share price is potentially trading at a premium to NAV, then it's something different. I mean that you are now, we always look or we always take care of our shareholders, our existing shareholders and we want to make sure that whatever we do, we create values, but there's always a limit to the price that we are willing to pay.

[Ben Nolan:]

Okay. Now that's helpful and I certainly know that discipline is something that you've shown in the past. My next question shifts a little bit and it sort of ties in with the quarterly dividends, which I think at least in the U.S. many people will appreciate. But in the past you guys have in periods of strength on the special dividend that sort of thing. It looks like 4Q based on the rates that you've locked in thus far and where the market is now, it should be one of those periods of time when things are pretty good. You mentioned earlier that the balance sheet is appropriately or maybe even under levered. If there is a windfall quarter or a couple of quarters, is special dividends sort of on the table or how are you’re thinking about the use of your capital beyond just the normal quarterly dividends?

[Hugo De Stoop:]

Yes, of course. I mean, why do you call them special call them special dividends or extraordinary dividend, we're going to look on a quarterly basis going forward. As I mentioned earlier in this call this is true for 2020 because the law is only changing the 1st of January. So as far as Q3 that obviously we made loss and Q4, I’m concern that will be the way we've done it in the past.

[Ben Nolan:]

Okay. All right. Thank you, Hugo.

[Hugo De Stoop:]

Thank you.

[Operator:]

The next question is from the line of Martin Haukebo with Clarksons. Please go ahead.

[Martin Haukebo:]

Hi there. Hi, Hugo. Hi, Brian.

[Hugo De Stoop:]

Good morning, Martin.

[Martin Haukebo:]

Hi. Yes, just wanted to – just maybe revisit the ULCC being used for storage of low sulfur fuel. You've discussed, I’d say extensively on the call and then the September 5th announcement as well that during the next two to three quarters or at least the first two to three quarters of 2020 there's a lot of uncertainty of supply. Generally over the past few weeks there's been some reports that the concern over availability of the low sulfur fuel is maybe overblown and that the market may be okay. That's obviously in stark contrast to where things were six months ago.Of course we're not going to really know ultimately until we get into January and have a better sense. But as we kind of think about it from Euronav's perspective, you've got an embedded gain in that bunker fuel. You've got a lot of working capital tied up with that. Does it make sense at all if we get to the January timeframe and sure enough there is a good amount of supply available with the low sulfur fuel? Does it make sense to accelerate that discharge or sell as much as possible that fuel and maybe bring that ULCC back into the trading market?

[Hugo De Stoop:]

Yes. So in fact there are some questions there. The first one is, clearly not, I mean we're not traders. And we did not do that to speculate. We did that primarily because we were worried about the quality and yes there seems to have certain quantities of benefit for they have been stockpiled either on land or on ships. But that doesn't tell us anything about the quality. So again the first few months are going to be about the availability of the quality team, but also the pricing. At the moment, we are sitting at a project that is definitely in the money. We are happy about that, but that was not the primary goal. I don't know where the pricing will go and I don't know in which location it may go up or down. I mean, obviously we are in only one vacation, but we can always swap products. If we see that pricing are going all over the place in other region.As far as the vessel is concerned, it's a very good question. I'm very happy that you ask because we have had it in the past and we've not been able to explain it already to the market. We're talking here about the ULCC. So ULCC can carry 3 million barrel. They were built in 2002. We acquired them in 2004 and we trade them or we use them as trading ships until 2008. After 2008 two where convert into FSO and the other two were only used as a storage units. So they've not been a part of the trading fleet. And the reason is that the market structure is not made for 3 million barrel lots.So we are not missing out on those vessels of the goods markets that we're seeing in the VLCC on the Suezmax. The top that we've earned on those two units, well in fact one because we only bought the other one last year. In the last 10 years, since 2008 must be in the low-30s. So our cost of – sorry, lost opportunity is very minimal and we have calculated that when we were thinking about using those vessels and that's maybe also one of the reason why we're not using a VLCC and Suezmax.

[Martin Haukebo:]

Okay. Thank you. That makes sense and I didn't realize actually that the ULCC had not traded in VL market since 2008. So thanks for that. I do have just a follow-up on the guidance for the fourth quarter. Obviously, VLCCs looked generally I’d say firm and especially relative to what we've seen in the past and how the market's average, but when we think about the Suezmaxs 27,300, how do you feel about that? It seems a bit lighter than what we would've expected. I know we're somewhat in uncharted territory here. The past several weeks where rates that we've seen reported on actually ended up coming into fruition. But how do you think about the 27,000? Is that really what you would say is reflective of where the market average has been? Or do you think there's something else?

[Hugo De Stoop:]

Well, I think that we would tend to agree with you that we're a little bit disappointed on Suezmax front. But you are also correct to say that in the last few weeks the Suezmax log has rebounded and has caught up with the VLCCs relatively speaking of course. So I think it's too early to draw conclusions, right? Let's not forget that the market we see a lot more a new building deliveries. Last year, did not recycle as many ships at what we have recycled on the VLCC. But conversely, the order book is somewhat smaller and the VLCC which is already at historically low levels of around 9%, as we've shown on the slide. So it's true that we have not given you those data point, but I'm sure you have them. The order book on the Suezmax is even more attractive than on the VLCC. So if there was a disconnect with the VLCC markets I believe that you have to look at it over more than a few weeks and potentially more than a quarter. Because it's a market that can come back and to a certain extent, as I mentioned has come back already.

[Martin Haukebo:]

Got it. Okay. Thanks, we go for that. Appreciate it.

[Hugo De Stoop:]

Thank you.

[Operator:]

The next question is from the line of Eirik Haavaldsen with Pareto Securities. Please go ahead.

[Eirik Haavaldsen:]

Yes. Hi. Thank you. I just wanted to follow-up a little bit on the capital allocation because I think that's sort of the key theme in 2020. So you have the most conservative depreciation profile, which in a way punishes a little bit of your net profit. So is there any reason not to expect you to pay out more than your full earnings next year because you say you're not going to pay down debt, you're not coming buy ships then where we'll sort of the cash goal?

[Hugo De Stoop:]

It's a very good question, but you will have to wait until we cross those quarters and tell you how much we get to pay. I think that it’s for a purpose that we have not limited ourselves to a certain percentage and that we are a little bit more flexible than in the past between you share buybacks and dividends. But when it comes to depreciation, it's a funny game because yes we are maybe a little more conservative than the others, but when we sell the assets obviously we have depreciated more than the others.So we are catching all of those profits back at a time of selling those assets, and you will recognize hopefully that we are not that bad at selling and usually the profit that comes with the sales is pretty healthy. So I don't think it's a real point. When you have a fleet of [indiscernible] (0

[Eirik Haavaldsen:]

Yes, but you're completely obviously and I understand you're aware of the difference between cash flow and net profit obviously, and I think the investors should be as well, which is also one on slide 12, you have current agent default price in Singapore at $545 a ton. I just wonder, let’s say, where we’re comfortable. Okay, so first of all yes because it says HSFO [indiscernible]. Okay, thank you.

[Hugo De Stoop:]

Apologies for this mistake. Absolutely, it’s LSFO and its, it a surprise that people think when they want to bring their ships in Singapore. And many, many people are doing that at the moment. So the demand is picking up because on the large vessels and that's maybe something that people don't understand. For the large vessels if you want LSFO more, and obviously you have to have LSFO on board before the end of the year. If you're starting to perform a long voyage, you better book than now.

[Eirik Haavaldsen:]

Yes, perfect. Thank you, Hugo.

[Hugo De Stoop:]

You're right.

[Operator:]

Your next question is from the line of Greg Lewis with BTIG. Please go ahead.

[Greg Lewis:]

Yes. Hi, good thank you and good afternoon.

[Hugo De Stoop:]

Hi, Greg.

[Greg Lewis:]

I was hoping to talk a little bit more about the Suezmax market. I remember going back to your – the webinar presentation. You talked about potential new routes developing for first Suezmax around IMO 2020. Is that something that you would seen at all or is that something that kind of, it's still more of a wait and see?

[Hugo De Stoop:]

We've seen some of them. There's not been a long trade, certainly not as much as VLCC. So going out with the golf and going to the Far East. There is a lot off demand coming from Europe for what it is exported from the U.S. and we anticipate that that will continue because the European refineries are not very sophisticated, i.e., there will probably been more light on them what they've done in the past. It's in addition to what we had, these two or three years ago we had no export from the U.S. there are other trading routes that we anticipate will level up. It’s probably a little bit too soon, but again I think that we are drawing conclusions a little bit too fast here. As I mentioned, the market last quarter, there is a strong correlation with the VLCC market and the strong correlation is coming from the fact that Suezmax is one VLCC. So if the VLCC market is too high then you split your cargo and you use two Suezmaxes. So there's always a correlation between the two markets. And thankfully, we have seen that it's the Suezmax has gone up rather than the VLCC being taken down by the Suezmax and that's very positive.

[Greg Lewis:]

Okay, thank you very much.

[Hugo De Stoop:]

Thank you, Greg.

[Operator:]

Your next question is from line of Chris Wetherbee with Citi. Please go ahead.

[Unidentified Analyst:]

Hi, guys. James on for Chris. I wanted to follow up on that speculative new builds question, any ask about the current vessel technology. Are you confident that potentially the vessel today will meet regulations and might come down align in like in about – over the next decade? Or is that a risk that you think might continue to curtail the order book?

[Hugo De Stoop:]

It's a very good question. As far as we're concerned and I suppose everybody has the same topic in their minds. The short answer is we don't know. Everybody believes today that an LNG will be at least a transition. And that's the yards are telling us that as of 2022, it will only start LNG while LNG uses fuel VLCC. And then we'll have to wait for the next technologies about. Today, the biggest problem that we all have is that comes out of premium and that premium is $15 million. So if you set a new building – a conventional VLCC new building at $90 million or $92 million, you have to add $40 million or $50 million. If you want that ship to be able to use LNG and – it's a significant premium. So in order to justify either you need to make sure that the fuel you’re going to use in other words the LNG price is going to come in a big discount to the LSFO or you signed a time charter, which recognize that your ship is capable of using LNG as a fuel. And in other words, it's time charter that comes out of premium over a conventional vessel.As long as it's – as it stays such a big premium, it should refrain a lot of people, it should refrain a lot of people that ordering conventional vessels because they have no idea whether that vessel, when it gets delivered, then there are only a few slots in 2021. So, we already contemplating the early sorts of 2022. So when those vessels delivered, where it's still going to be the air technology that is accepted for a new building. And on the other side, the guys don't want to jump on the board of the LNG fuel VLCC vessels [indiscernible] to pay that premium. So we will see how the market evolves. But we are pretty confident that it will indeed restrain a lot of people until – well either one of those gets more currency or cheaper.

[Unidentified Analyst:]

Got it, thank you.

[Hugo De Stoop:]

Thank you.

[Operator:]

Your next question is from the line of George Burmann with Cabot Lodge Securities. Please go ahead.

[George Burmann:]

Good afternoon. Thanks for taking my question.

[Hugo De Stoop:]

You’re welcome.

[Brian Gallagher:]

Hi, George.

[George Burmann:]

Glad you clarified that Slide 12, it's not the high sulfur, but the low sulfur fuel oil trading at $545 right now. And your procurement apparently was around $445, so you are up about a hundred bucks of a ton now.

[Hugo De Stoop:]

Yeah, that’s correct. Apologies for that typo.

[George Burmann:]

The unexpectedly low procurement rate for your Suezmax here into the fourth quarter. Is that partially due to most of your fleet having been on voyages when rates exploded higher here in the last couple of weeks?

[Hugo De Stoop:]

Well, we will need to see what the others are doing on the Suezmax. To answer your question yes, a lot of them were performing [indiscernible] because we like to utilize and to maximize the utilization of our ships. But it's also true that a lot of fixtures, which were done at very high rates, were canceled. So the first market that victim was the VLCC then the Suezmax caught up. With the delay and what we see happening in the VLCC market and a lot of those fixtures between 250 and 300 being a failed, as we call it, we had the same phenomenon happening on the Suezmax. And so, I think, it's a question of starting later and then being caught in the window of canceling those fixtures rather than not being able to pick up any of those good rates.

[George Burmann:]

Okay. As the continued export strengths from the United States, Houston Corpus Christi continued into the third and fourth quarter as you've seen a slow down there due to a lower Chinese import.

[Hugo De Stoop:]

So we have not seen…

[Brian Gallagher:]

Now, I will take that one, Hugo.

[Hugo De Stoop:]

Yes.

[Hugo De Stoop:]

I mean, no, George, when we saw – I think it was last week we saw a new 3.7 million mark. So we still anticipate we'll have a 4 million mark sometime in this quarter. So you know we continue to see growth in the recent panels. We'll be appearing onwards to suggest that Corpus Christi is really driving that that growth.

[George Burmann:]

Okay.

[Hugo De Stoop:]

I think the reason – sorry, just to add one element. I mean the reason why you are asking the question is because we have seen in some reports or in some the press articles that the growth rate was diminished. But that's very different than the nominal growth of course. If you have growth rate of 10% or 15% year-on-year and suddenly instead of 15% you only have 10%. You nevertheless continued to see a growth pattern and that's what we're seeing.

[George Burmann:]

Okay. And your Suezmaxes, are they individually managed by yourself or are they in a pool as well?

[Hugo De Stoop:]

They are individually managed by our Suezmax desk, which is an in-house operation indeed.

[George Burmann:]

Okay, okay. And Suezs are the primary source of exports from the U.S. since they can only – I think one port can only accommodate VLCCs, right? Everything else has to be shipped to ship transferred and to offshore?

[Hugo De Stoop:]

Yes, which does not seem to be a problem, and I think that when the distance is long enough then it's still more economical to do lightering. Lightering means that you are bringing the oil to VLCC with another smaller ship. It could be an Aframax or Suezmax. And that's the reason why there are – well, a lot of VLCCs leaving the U.S. Gulf coast and going to the Far East. When it goes to Europe, it's true that it is more of a Suezmax trade. And therefore, Suezmax have been using, the Suezmax don't need to lightered. So it's a less complicated operation.

[George Burmann:]

Yes. And then maybe one final one, comment on the export capacities and volumes out of Brazil currently, recently Petrobras and big oil company announced a strong oil volumes. Have you seen any pickup there in exports into the world?

[Hugo De Stoop:]

Yes, definitely. As a matter of fact when we talk about the export from the Atlantic, most of the time we talk about the Americas – and the Americans – and we call it carried because that's an old jargon. It's usually called carried Far East, but carried means oil stretching from Brazil up to the East Coast of the U.S. Gulf will be to really on the East Coast, so that captures all of it. And it's true that the Brazilian had announced an increase in production, most of that production is offshore, so it's something that is planned many, many years in advance and it requires a pretty heavy investment and it came online a little bit delayed compared to what they had told to market, but nevertheless it’s a very – it's a growing market and very interesting market to lift up from.

[George Burmann:]

Okay. And the carry trade as you call it from the Americas to the East, remind me that's generally takes between 60 and 90 days.

[Hugo De Stoop:]

Yes. Well, it depends where you’re leaving from. Most of these – all of it is going around Africa as Suezmax can HELLAS limited to Suezmax size and yes it could be between 70 and 90 days indeed.

[George Burmann:]

Okay, great. Thanks very much. And I look forward to a great fourth quarter for you guys.

[Hugo De Stoop:]

Thank you. We too.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference over back to Mr. Hugo De Stoop for any closing remarks. Thank you.

[Hugo De Stoop:]

Well, I just would like to thank you everyone that was on the call and for all the good questions and we're looking forward to the next one, which hopefully will bring even more good deals. Thank you. Bye-bye.

[Operator:]

This conference is now concluded. Thank you for attending today’s presentation. You may disconnect.