Euronav NV
Q1 2018 Earnings Call Transcript

Published: 25 Apr 2018

[Operator:]

Hello and welcome to the Euronav First Quarter 2018 Earnings Conference Call. All parties will be in listen-only mode for the presentation. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the call over to Paddy Rodgers. Please go ahead.

[Paddy Rodgers:]

Thank you. Good morning and afternoon to everyone and thanks for joining Euronav’s Q1 2018 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, Wednesday, April 25, 2018, 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 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 all 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 statements speak 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 those forward-looking statements. Please take a moment to read our Safe Harbor statement on Page 2 of the Slide Presentation. I will now pass you over to Euronav's CFO, Hugo De Stoop, to run through the first part of the presentation. Hugo?

[Hugo De Stoop:]

Thank you Paddy, good morning or afternoon wherever you are today, and thanks for joining our earnings call. As always, I would like to start with the agenda slide on Slide 3. Firstly, I will run through the highlights of our first quarter 2018, followed by a full financial review of the Euronav P&L and balance sheet key. Following that, I will handover to Paddy to run through a few current themes of the tanker market before summing up with an outlook for Euronav in the tanker sector. Moving on to Slide 4 and the key highlights from Q1. The first quarter was very challenging. The freight environment was impacted by an excess supply of tonnage making life difficult for tanker owners and operators. That is reflected in the rates shown on Slide 4 with both VLCC's and Suezmax rates below our P&L breakeven at just under $19,000 a day for VLCCs and $14,000 a day for the Suezmax. The challenging market continues into the second quarter with freight rates even below the level seen in the first quarter. So far, in the second quarter, we have booked 42% of the available spot days in tanker international VLCC pool just about $13,000 a day and 46% of the available Suezmax spot days around $12,300 a day. Also in the first quarter, we took delivery of the first of our four Suezmax vessels from Korea and the ship will start its long-term time charter contract of seven year towards the end of April after completion of its positioning voyage. Despite this harsh freight rate environment, we remain convinced that our proposed merger with Gener8 will create long lasting value for both companies and their respective stakeholders. The merger remains on schedule to close end of the second quarter as we highlighted with the announcement in December last year. Moving to Slide 5, showing our P&L for the quarter. The first quarter of 2018 was a very straightforward quarter with no exceptional items. Please note that the depreciation charges are lower than last year as a result of the sale of three vessels namely two VLCCs and one Suezmax during the fourth quarter of 2017. The dividends we announced in March will be subject to approval at our General Assembly of shareholders on the 9th May, with the $0.06 per share being paid at the end of May should it be approved. Moving on to Slide 6. Our balance sheet was further strengthened with the $220 million senior secured credit facility financing our FSO joint venture, half of it being our share. The facility consists of a term loan of $110 million and a revolving loan of $110 million. Euronav believes that this is prudent action to secure against this asset at this time in cycle and it boosts our liquidity well over 800 million at the end of the first quarter. Leverage for Euronav however remains at amongst the lowest in the tanker sector at 34% when marked to the books and 42% when mark-to-market against the value of the fleet. That concludes my remarks on the presentation and I will now pass back to our CEO Paddy Rodgers. Paddy, it’s over to you.

[Paddy Rodgers:]

Thank you Hugo. Despite trading within a range between $55 and $70 per barrel over the last nine months or so, the key agencies, IEA, EIA and OPEC have on average upgraded their demand for oil forecasts from around 1.4 million barrels per day to 1.6 million barrels per day for 2018. This is an encouraging background so early in the year and reflects strong trends for GDP expansion globally and balance demand growth for oil from both OECD and non-OECD nations. Whilst demand for shipping has continued to be impacted by the reduced export activity from Opec, this chart Slide 7 illustrates the robust demand drivers underpinning the tanker market. Moving on to perhaps the most commented feature of our market during Q1, the recycling of tonnage that has taken place in Slide 8 shows recycling on a half yearly basis. Q1 saw 20 VLCCs and Suezmaxs taken out of the market according to Clarksons, a figure which we anticipate will beat the 25 recorded for a half year on the first half of 2003. We packaged on once again opened the recycling, there is additional capacity and consequently attractive pricing for owners with older tonnage who otherwise face negative cash flow and regulatory pressure to invest capital in upgrades in 2019 and 2020. Once encouraging more rebalancing needs to be done before any traction can be seen in freight rates and the key reason for that is provided on Slide 9, the order book itself. It is not the size of the order book, but the concentration delivery schedule that the sector faces which is the key issue for tanker operators. To put that into context, the 17 VLCC as we saw exit the fleet during Q1 were replaced by nine new buildings. So the fleet size globally actually contracted, however 14 new builds are due for delivery during Q2, so unless we see more scrapping in Q2 then the fleet size will actually be higher than at the start of the year. That’s the bad news. The pace of delivery eases significantly during this year in VLCCs and even more so in Suezmax sector. With solid demand as described earlier and continued affirmative action in rebalancing the fleet via recycling then the tanker market and freight rate can recover quickly in the future. However, consistent progress on all fronts is required before this can happen. To illustrate a little more clearly the headwinds for tanker sector has faced it’s time to return to our bathtub on slide 10. This shows how the VLCC market remains out of balance based on developments year-to-date. There have been 20 VLCCs ordered already by the end of March according to Clarksons. For calendar 2018, Clarksons forecast 49 VLCCs will be delivered to the global fleet. And in addition there have been around 10 VLCCs moved out of storage into the main commercial fleet primarily as a result of the structure of the oil price which has been in backwardation since the third quarter of last year. Now if we move on to the green circle. We have 21 VLCCs removed from the global fleet year-to-date which is encouraging along with the strong demand background. If we take the IEA estimate of 1.5 million barrels demand growth for 2018. Euronav estimate this will require around 46 VLCCs during 2018 and still means we have an oversupply of around 12 VLCCs. The point of this exercise is to graphically illustrate that despite the uptick in scrapping activity that we have seen over the winter period more corrective action is required by owners to get the fleet back into balance. Until this happens, the freight market will remain challenging. As usual, we finished with our traffic lights, for which there is no change from Q4, 2017. Demand [indiscernible] has looked a little better and as shown earlier continues to see upgrades in line with the robust global GDP outlook. Supply of oil is little mixed, OPEC cuts holding firm but U.S. exports rebasing at a higher level, which is the 14 ton miles. Vessel supply however remains a headwind which is keeping downward pressure on the freight rate. Financing continues to be withdrawn from the banking sectors, which should help drive more rational behavior and pricing of capital. However, recent speculative orders from [Private] (Ph) not shipping capital sources are not helpful and may prove more difficult for the new owners to monetize that the private equity orders of 2014. So in summary, vessels supply remains the key focus for the next 12 months, and whilst there are early and encouraging signs of market rebalancing these need to be sustained if all the freight market can improve. That concludes the formal part of the presentation. And I will now pass back to the operator for questions and answers.

[Operator:]

Yes, thank you. We will now begin the question-and-answer session. [Operator Instructions]. And the first question comes from Chris Wetherbee with Citi.

[Christian Wetherbee:]

Yes hey thanks good morning, and good afternoon guys. I guess I just wanted to kind a get a big picture, start with the big picture and talk a little bit about sort of the market and some of the puts and takes that you see then there - from the rate perspective below breakeven or levels. I guess what are some of the near term sort of puts and takes that you think about second quarter specifically to maybe see if we can get rates back above those levels. I know, Paddy you have talked a lot about sort of the bathtub and the puts and takes there. Is there anything in the shorter term that we might see that might impact that for 2Q or is this still more of a wait and see for maybe 4Q in 2019?

[Paddy Rodgers:]

Yes, hi Chris. And thanks for joining us this morning. I think our view is that the pressure is mounting of course. It's a strange phenomenon really in the sense that there is no ratability between the number of ships waiting and the number of cargos in terms of what you end up with as a result. Normally it's really quite binary the outcome. But in fact we have too many ships, of course the rates fall and as owners get more desperate than of course down to cut none to bid all the time. So I think that the feature that’s particularly pressing the market is a lot of concentration at tonnage in the Arabia Gulf. A lot of that tonnage being very old and some of it having come out of storage and owner is desperate to get some sorts of cash flow to offset their optional gamble on holding that ship before scrapping it. Once they actually engage in discussions of scrapping, the ship will fall out to the commercial picture because no chance we will want to take it. So the strange thing is that just as the rates make you feel desperate, nevertheless that desperation is a sign that it’s a last act, it’s a last sort of roll of the dice. So when you see rates this low, I know it’s pretty unbearable maybe for some of the people who are investors, but they have to realize that this is a sign that you are probably closer to the turn than just jogging along at $18,000, $19,000 a day.

[Christian Wetherbee:]

That’s helpful. And when you think about sort of the release - of scrapping and obviously numbers have been elevated on a VLCC side, has that number picked up though when you think about the last few weeks and can you talk a little bit about the relative economics of you know scrap prices, just to get a sense of as we see these, are we getting that sort of expected reaction of acceleration scrapping maybe over the last month or so compared to the first couple of months in the year.

[Paddy Rodgers:]

Yes, I think what you will tend to see with scrapping and again it’s an important feature of the market is that it tends to come in little waves and the reason for that is it’s not a perfectly streamlined process based around economic value and cash plays a hugely important part. The people who normally are running this flat market, the players in it are very constrained by cash. So when they make a surge say in January to buy the number of ships. They really need to see that clear through into the scrap sale on to their [re-let] (Ph) buyer, or to their mill, or to their smelting mill in order to get the cash back to go again. So you kind of get this indigestion in the process. We will in May, June start to enter some of the monsoon disruption that comes as well, so we could see a slight slackening of. I don’t think that market watches should panic over that, they should recognize that this a surge effect and it doesn’t mean that somehow there has been a mood change, it simply means that the buyers out there are a bit cash strapped. So what I would recommend, is an open ended credit line from Citibank to anybody involved in the scrap trade to fund them through to buy more ships and you know you can own the idea yourself if you want to.

[Christian Wetherbee:]

That sounds good, thanks for the suggestion. I guess the two sort of part last - well one question on Opec and sort of your view in years with crude prices where they are in the international market. You know where do you think the likelihood of actually sort of reversing some of these Opec cut priorities being moved into the later third quarter, potentially fourth quarter. Do you think that’s going to happen and do you think that its most likely getting pushed up in 2019, what is your view?

[Paddy Rodgers:]

Well I think what I can tell you is that key members in Opec have been marketing themselves back into places that they had cut back on. So the process of unwinding the agreement is there. I think it will be a surprise to all of us, if there is an announcement that supply is going to be increased from an organization that’s designed to stabilize prices. So they are not going to suddenly announce there is going to be a supply increase. I think they will just quietly let the agreement fade. So I think the talk will be 2019 now, but the reality might be that more barrels get moved and I wouldn't be surprised at all that the talk about trying to cut out some Iranian trade doesn't actually support Saudi Arabia and the American producers. So all-in-all I wouldn't be too concerned about the announcement. I don't think you can wait and hope that you are going to get a big sudden announcement that 1.5 million barrels of oil is coming back to the market. But I think the market will feel a bit lose, people will feel there is more oil around and then maybe this drives some of the noise we hear.

[Christian Wetherbee:]

Okay. And last question for me, just as we are getting close to the shareholder vote here. When you think about sort of post-merger integration, what are the first steps in 3Q that you are going to take, can you talk a little bit about sort of fleet deployment and maybe commercial strategy? Any kind of thoughts there as we think about the second half of the year.

[Paddy Rodgers:]

There are no secretes really in the market. I think that what we will be looking to do is to try to replicate TI's business model on to the VLCC fleet and the Euronav business model on to the Suezmax fleet. And as we have age-for-age or pound-for-pound we have outperformed the market. I think we can feel comfortable. But we should get better returns. And so I think the current rate crises of course supports our transaction very strongly simply because this is by far, Euronav is by far the most cash liquid tanker company around. So this is definitely the right place. This is the right home, this is the right transaction.

[Christian Wetherbee:]

Great. Thanks very much for the time. I appreciate it.

[Operator:]

Thank you. And the next question comes from Jon Chappell with Evercore.

[Sean Morgan:]

Hi. This is Sean Morgan on for Jon Chappell. Just Paddy, you mentioned in the press release that you see vessel values creeping up a little bit and we are sort of - out on rates. You have a bit of a stronger balance sheet and you just mentioned you had some cash liquidity. How aggressive would you be sort of in light of the excess capacity that you mentioned in acquiring additional second-hand capacity or will you be with that more defensive now in sort of integrating Gener8?

[Paddy Rodgers:]

Well, I think inspiration is obviously critical. And I certainly think that we would want to see I think our shareholders have been very patient. So I certainly don't think that we will be in the market growing shares around post-integration. But of course if we saw something that came into our lap and we had a right structure for it then I think we would still be looking. I don’t I think our ambitions are over but this has been quite a lot of work, in our initial focus we are making sure we get good value out of what we have already acquired.

[Sean Morgan:]

Okay. Thanks. And then just as a quick follow up. With LIBOR rates and sort of long-term tenure treasury rates sort of moving up now. You guys have a lot of floating exposure. Are you thinking about implementing any hedging strategies or maybe some more permanent exchange of fix for floating deck?

[Paddy Rodgers:]

Well, first of all I would like to say let me show you that Hugo leaves no stone unturned when it comes to these aspects. But you will notice that we have done fixed rate bond and we've done some sale and leasebacks which already moved certain amounts of what we might call debt into fixed interest rate environment. I think we certainly look at value and see where we can get, and try and have a view it not that anybody is [indiscernible] but it's certainly not something that we would ever - it’s something that we look at regularly.

[Sean Morgan:]

Okay, alright. Thanks a lot.

[Operator:]

Thank you. And our next quarter comes from Fotis Giannakoulis with Morgan Stanley.

[Fotis Giannakoulis:]

Yes, hi gentlemen. Hi Paddy.

[Paddy Rodgers:]

Good morning Fot.

[Fotis Giannakoulis:]

Paddy I want to ask you, you mentioned about the [indiscernible] a floating start that has come down last year. I noticed some data that they show the short-term floating strategy in May, April has picked up. Can you explain to us why is this, is it a just because the vessels are very cheap for the shorter charters? What drives this pick-up in April?

[Paddy Rodgers:]

Well and certainly without seeing the data you are referring, I certainly wouldn’t have said that we feel that, we haven’t felt an increase in enquiry and haven’t seen that much interest, but I don’t think that you should ever - once you get down to talking about small changes from the very low base then you are really talking about occasional single shifts or so you are talking quite small numbers and that can just be about somebody hitting tank tops or not being able to move or sell products in the areas that they are in and having to take something in storage. So it is a very strong logistical element which isn’t always driven by market outlook.

[Fotis Giannakoulis:]

Thank you Pad. And one more about the fragmented markets seems so heavily over supplied right now. Despite the fact that we have seen scrapping being at the record levels, my next question is why is that, is it because older ships will become lower utilization, can you give us what is the equivalent of a [indiscernible] versus older ships in terms of replacement and also why we have this scrapping activity concentrated only on VLCCs and we haven’t seen much scrapping in Suezmax and Aframaxes and if you expect that this will pick up as well?

[Paddy Rodgers:]

This is quite interesting, I think there is probably a lot more appetite for the bigger ships from the buyers of scrap steel because it just cube out better in terms of the occupancy of space and the amount of steel that you will recover. So it goes through the pipeline a lot more effectively, so I think that’s a good point there. I think the way you have to - I know that people are big fans of efficiencies, I think there are efficiencies in terms of what impact in the marketplace you might have numbers of voyages or cargos performed. But the reality in today’s market with medium speeds, I mean people aren’t really going full blast and the cargo size is pretty uniform. So doesn’t get carried away too much with deadweight differentials. I think V is pretty much a V and as I said the issue in our market is not constant over supply, it’s just oversupply. And as long as you have somebody sitting in the AG willing to set the market by bidding low, it drags the rates down and it will drag them down to the point of breaking. I think the big thing that Vs have had which may surprise you has been the intervention from China of course on declining to accept anything over 15 year old vessels in most of its ports. And that has caused I think some of the VLCC analyst to be more willing to throw the towel in.

[Fotis Giannakoulis:]

Thank you very much Paddy. Thank you Hugo.

[Operator:]

Thank you. And the next question comes from Noah Parquette with JP Morgan. Please go ahead Mr. Parquette, your line is live.

[Noah Parquette:]

I’m sorry I lost that. I just wanted to get your thoughts on IMO 2020 regulations and its effect or what do you think would happen on the demand side for tankers?

[Paddy Rodgers:]

Well, I think it's been a very curious process, isn't it. And I think everybody has been left, I mean everybody has been left a little bit scratching their heads and wondering how this is going to work out. We were 18 months away from implementation. We have a described specification for compliant fuel. We don't have an ISO standard for it yet. And I think a lot of refiners are wondering about how they might make it or what impact it's going to have. I think there is no question that you could see that share prices of refiners with more complex refineries are now getting supported quite well. Those that don't have complex refineries everyone believes that they are going to be stuck having to buy more expensive sweeter grades of the oil. And as a result of that they are going to be less profitable and have to run on thinner margins. So we can see that already happening, and that will be disruptive for trade groups and then we have a whole question about how many ships would ultimately go for scrubbers, at the moment it looks quite light and how many of them can go to the compliant field, what will that mean for the switchover, it will be very difficult for the current logistical system to carry two grades in equal quantity. So unless one of them becomes a little bit - and I think it's going to be the heavy [indiscernible] heavy fuel oil becomes a little bit obsolete. In which case, there will be a switchover into complaint field and that's what we carried through most of the logistical system to delivery into the marine and the transport environment. So yes, it's going to be disruptive, yes, there are going to be good opportunities as well as some threats.

[Noah Parquette:]

Okay, thanks. And then I just have one follow-up on the bathtub with the oil demand absorbing 46 VLCCs. When you look ahead, what kind of risks do you see or inventory dry downs are meeting demand versus new production?

[Paddy Rodgers:]

I think that was yesterday's color. I think that the biggest shock that's liable to come from inventory is that if we return to a market with even the slightest contango and it looks like there is no risk in carrying oil or no risk in storing oil, because it doesn't mean that make you any money, but it could just be an option to see where it goes. And that doesn't cost you anything, because the market is not in backwardation. Then you could see the reverse effect like a gear on a bike where all of a sudden instead of getting 10 ships squeezed out you get 20 ships pushed in. And then that suddenly begins to flip you around quite fast. So that's the sort of at the turn of the pedal that could make the market rebound quite quickly if and when the structure changes.

[Noah Parquette:]

Okay, that makes sense. That's all I had, thank you.

[Operator:]

Thank you. [Operator Instructions]. And the next question comes from Cédric Duinslaeger with KBC Securities.

[Cédric Duinslaeger:]

Hey, good morning or good afternoon. I just have one small question regards from the Slide 10. What would be your current estimate or the number of VLCCs that are being used for storage? And what would be the possible range of these VLCCs coming into the global trading markets in the second half of 2018?

[Paddy Rodgers:]

Okay. So I think we are down to about 20. And I would think that most of those are in quite industrial settings in the sense they are not commercial they are logistical.

[Cédric Duinslaeger:]

Okay. So there is lower chance of this number rising then?

[Paddy Rodgers:]

Yes, so okay let’s just inverse our language the right way. The number of storage is most likely - the threat is - its an opportunity that it goes up rather than a threat that it continues to go down delivering more ships into the market.

[Cédric Duinslaeger:]

Yes, okay and it’s the other way round. So you have 20 at the moment being used for storage. Alright. Okay, that was just my question. Thank you very much.

[Paddy Rodgers:]

You are welcome.

[Operator:]

Thank you. And the next question comes from Quirijn Mulder with INJ. Please go ahead, your line is live. Okay, well as there are no more questions, I would like to turn the call to management for any closing comments.

[Paddy Rodgers:]

I think I would just like to thank everybody for attending and for asking relevant questions. Thank you all very much, it’s been a very pleasant afternoon.

[Operator:]

Thank you. The conference has now concluded. Thank you for attending today’s presentation, you may now disconnect your lines.