Euronav NV
Q1 2016 Earnings Call Transcript

Published: 28 Apr 2016

[Operator:]

Welcome to the Euronav Q1 2016 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Paddy Rogers. Please go ahead.

[Paddy Rogers:]

Thank you. Good morning and afternoon to everyone and thanks for joining Euronav's Q1 2016 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, 27th of April 2016 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 expressed qualified in their entirety by reference to the risks, uncertainties and other factors discussed in the Company's filings with the SEC which are available free of charge on the SEC's website at www.sec.gov and on our own Company 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 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 De Stoop:]

Thank you, Paddy and good morning or afternoon wherever you are. Thanks for joining our first quarter 2016 earnings call. Turning to the agenda slide, I would like to take you through the highlights of our first quarter earnings, followed by a full review of our key financial figures, before handing over to Paddy to take you through the latest market developments and themes as we see them at Euronav. We will then turn over to the operator for a Q&A session. Moving on to slide four, 2016 has started very strongly. Rate volatility has continued from the end of 2015, reflecting the tight market we commented upon in January's call. This is a positive background for tankers which is reflected by the average spot rate of nearly $60,700 per day for VLCCs and nearly $38,400 per day for Suezmax. These rates are much higher than those achieved in Q1 last year and reflect the underlying strength of our market. Our EBITDA in the first quarter is just under $164 million and our net income of $113 million is better than any of Q1, Q2 or Q3 of 2015 and this suggests that the tanker cycle is strengthening and has not peaked as a number of commentators have advocated. In an historical context, Q1 of this year in 2016 is the strongest first quarter Euronav has had in seven years. Euronav continues to be active in managing its portfolio. We sold a VLCC, Famenne, for a capital gain of $13.8 million. This is, of course, part of our strategy to manage our portfolio of ships, where we look to sell all the tonnage when the price is right. The outlook for second quarter 2016 is positive. It should be remembered that seasonality in tanker rates during Q2 and Q3 tends to average lower in absolute freight rates. Despite this, we have booked so far 43% of the available VLCC spot days at rates of more than $59,000 per day and nearly 42% of the available Suezmax spot days, at an average of more than $32,500 per day. Therefore, on the current run rate, Euronav is on course for sequential growth, Q2 on Q2, reflecting the sustainability in the current rate cycle. I would now like to move on to the income statement on slide 6. All figures, as usual, have been prepared in the IFRS, as adopted by the EU and have not yet been fully audited. Currently, we have four Suezmax, one VLCC and two FSOs that are owned in joint venture structure with partners of equal share. These will be accounted for using the equity method for joint arrangements. Our EBITDA during Q1 came in at just under $164 million, including the capital gain on the Famenne and represent the best first quarter performance by the Group since the famous year that was 2008. Other points worth highlighting are the following. As covered in the last quarterly call, the tax charge has reduced to a more normalized level, now that the vast majority of our ships are under the tonnage tax regime. This should now also be the case going forward. Dividends, whilst there is no dividend specifically for Q1, as we pay them twice yearly, I wanted to highlight the upcoming dividend next month related to the financial year 2015. Euronav remains committed to its distribution policy of returning 80% of net income to shareholders, excluding capital gains on asset sales. This coming dividend of $0.82 per share we announced in late March will be presented for approval at the shareholders meeting on May 12th and trade ex-dividend on May 17th, with payment on May 26th. Now, let's turn to the balance sheet on slide 7. Our pro forma leverage position on book values at 31 March, taking into account the last newbuilding delivery set to occur in May and the dividend that we will pay in May, will be around 40%. Cash generation continues to be strong in this rate environment. In other words, Euronav is appropriately leveraged and has no need in its current structure for any additional financing, either through debt or equity. Capital gains on sale of tonnage is used mostly for fleet renewal at Euronav, so not available for distribution to shareholders under normal circumstances. The cash capital gains are used to de-lever the Company until an investment to renew tonnage is made. The way we do this is by paying down our revolving facility which remains fully committed and available to us. We now turn to fleet operating days at Euronav, slide 8. The split between tanker spot days and days under time charter contract, including FSO, for Q1 was maintained at the same level than in Q4, 20% fixed and 80% spot, as slide 8 shows. On a full-year basis, we expect to have a similar split between our fixed and spot days. For 2016, we expect to drydock 8 Suezmax, of which 2 that we own in joint venture and 4 VLCCs. The split per quarter will be a function of expiration of current certificates, market conditions and positions of ships. That concludes the financial section of the presentation. I will now hand over to our CEO, Paddy Rogers, to give you an update on the tanker market and current market themes. Paddy, over to you.

[Paddy Rogers:]

Thank you, Hugo. Several factors need to be assessed when looking at the order book. Firstly, supply of vessels can only be properly analyzed in the context of anticipated demand. As slide 10 makes clear with day, as always, supplied by Clarksons, a net 40 VLCCs and 24 Suezmaxes are expected to be delivered during 2016. Those numbers, in isolation, are often used to build a negative case against tankers. However, with anticipated demand of 1.2 million barrels per day per annum, an IEA estimate, we believe this translates into demand for around 50 VLCCs per annum, as we believe the vast majority of incremental oil demand will be long-haul transported on VLCCs to emerging markets, primarily in the Asia-Pacific region. Therefore, supply of vessels and demand for vessels are broadly in equilibrium. Secondly, the shape and age of the fleet needs to be assessed properly. The large tanker business is a highly regulated sector. Ships, once they move past 15 and 20 years in age, move into reduced markets, as many customers will not take ships over a certain age and also have significantly increased operating expenses to go with their reduced earnings. Thirdly, like any capital and equipment intensive industry, tankers have a natural replacement cycle. The natural life for a large tanker is around 20 years. So, the global fleet, assuming a uniform year of delivery, will mathematically see 5% natural wastage every year. Given the lead time to order and take delivery of a new vessel is generally around three years, it is natural for our sector that this implies an order book of around 15% of fleet size, just to achieve a steady-state requirement. The VLCC and Suezmax order books currently sit at 19.3% and 23.3%, respectively, implying very little growth compared to predicted demand. Indeed, both of these ratios improved during Q1 as the newbuildings absorbed were higher than orders in both segments. Lastly order book growth, as we cover later in this presentation, has slowed substantially in recent months. Euronav are not complacent on this critical issue, but feel it's important to constantly point out that all factors need to be considered when assessing the order book, not just specific numbers in isolation. Moving on to the next slide and time charter rates, slide 12, time charter rates -- this slide shows indicative rates for 1, 3 and 5-year time charters for both VLCC and Suezmax. As is clear from the charts, there has been downward pressure on TC rates since about October 2015 and, interestingly, the 1, 3 and 5-year rates for both VLCC and Suezmax were close together, with little or no inquiry for the longer periods. We believe this does not reflect market expectation as much as market focus, as most of our customers are making their profits in refining and trading, with its typically short term outlook. Liquidity has reduced considerably since October in time charter market, after a relatively high level of activity during 2015. Our strategy remains unchanged in that we look for longer periods at rates that are profitable and by locking in more of our fleet on time charter, Euronav is not calling the market. This is simply, as a large ship owner, active management of our portfolio. If it looks like sensible business, we do it. We move now on to vessel values. Slide 13, vessel values -- the profound changes in the financing of the shipping sector and distress in other shipping segments, are the key drivers behind asset prices currently. We currently see a two-tier market. Newbuilding remains under pressure in both segments, as the chart shows and, yet, 5 and 15-year-old values are holding up relatively well. Scrap values are, of course, a direct derivative of the steel price. Euronav is fully funded and, beyond next week, has no capital commitments when we take delivery of our final resale from Metrostar. As we have shown during Hugo's comments, we remain active in managing our portfolio and remain vigilant for opportunities. This active management of our portfolio is something Euronav management has always engaged in, as it reduces our average fleet age, rejuvenates the portfolio and provides options for management with the proceeds. Now, on to our current market themes on slide 14. Slide 14, current themes -- the return on Iran, again. Investor focus on Iran remains high and understandably so. We commented in recent result presentations that we expected Iran's eventual return to global oil and tanker markets as neutral and we broadly retain this view. The integration of Iran back into the global financial system and tanker markets has taken time and we do not expect full integration until later this year. However, we would expect, now, to see a wider global tanker fleet to benefit from Iran's introduction to global oil markets, as Iranian oil will increasingly be shipped on the world fleet. We expect Iranian tankers to take much longer to integrate than Iranian oil. In time, we would expect Euronav to be part of this. Oil supply and inventory, the global oil markets are more balanced than many commentators believe, in our view. If this was not the case, then we would have expected to see high inventory levels employing tankers for storage and high level of contango in oil pricing, this has not transpired. Production of oil remains at high levels, with specific regions increasing output to record levels in anticipation of a possible production freeze being agreed and potential for further global supply growth as Iran fully re-enters the global oil markets. Recent evidence suggests where output is falling, the U.S. and China, crude oil consumption is being replaced by imports rather than inventory which is positive for tankers and for ton-mile development. Global inventory levels, whilst above their historical averages, remain a limited issue so far as tankers are concerned, because a large proportion of inventory is strategic, not commercial. Most inventory is held in OECD and, therefore, not located where incremental demand growth is situated. And with vessel supply and demand largely at equilibrium, any inventory drawdown is likely to act as a cap on the oil price. We do not believe there is a large inventory in crude oil available to be drawn down to satisfy higher demand. It is, in our view, estimates of this crude inventory is largely a statistical issue and, in reality, does not directly correlate on a one-for-one basis with oil in storage. Freight rate volatility, Q1 saw a higher level of volatility in freight rates than we have seen in recent quarters. As a tanker operator, this is, in our view, positive and reflects the tightness in the market. An additional 10 VLCCs were absorbed into the global fleet during Q1 and yet rates for VLCCs were on a par with those in Q4 2015 and ahead of Q1 2015. Investors should recognize that such developments only occur when supply and demand are in close proximity. I would now like to turn to a further slide reflecting the strength of our market during Q1 on slide 15. Slide 15, tanker cycle, further progress in Q1, we wanted to further emphasize the progress made in our markets in recent months with three charts. First, comparing freight rates in the VLCC space with the last year and the last 5-year average, showing how strong Q1 was and the positive start, on a comparative basis, made in the first part of Q2. Chinese demand for crude continues to rise. Euronav believes this growth is underpinned and, more importantly, diversified as it comes from several different sources, firstly, teapot refineries being licensed for import; secondly, whilst growth in percentage terms is lower than before, China consumes nearly 12 million barrels of oil, so the growth in absolute terms is greater; thirdly, strategic petroleum reserves; and fourth, increased oil imports as domestic output falls. We cover these drivers in more detail in our investor presentations on our website. Finally, the financial thesis we have highlighted over the past regarding tighter financial conditions for the tanker and shipping sectors is now showing evidence of its bite. Just one global order for a VLCC during Q1 compares with 17 in the same period last year. I will now move to look at the outlook summary on slide 17. Slide 17, in terms of the outlook for Euronav, we would pass three comments on three topics. Firstly, the development of more restrictive financing impacting shipping is now showing real evidence of beginning to bite. This thesis which we have been advocating would come for some time, can now be seen in play, with almost the complete absence of newbuilding orders for large tankers during the first quarter. This reflects a wider slowdown in both VLCC and Suezmax ordering since Q2 of 2015. The decision we took not to follow through and take delivery of 4 more VLCCs from Metrostar in October last year, was based on a number of factors, not least anticipated downward pressure on asset values, but also on the long delivery schedule for these vessels into 2017. To be clear, Euronav had funding in place for this transaction, but we believe the decision not to proceed has been fully vindicated by the market developments on asset values since then. Euronav is fully funded and after next week will have no capital commitments beyond ordinary drydock schedule obligations. We firmly believe in the merits of pooling ships and the success of the TI pool in driving key agendas within the VLCC global fleet which has been reflected in part by the sustained strong rates we have seen over the past 15 months. This year, Euronav has written its annual paper on the benefits of pooling, available under special reports on our website which I would encourage you to read and to engage in a dialogue with the Company over. Pools run by owners benefit all participants and initiatives such as the TI app prove the merits of pooling. Finally, Euronav continues to retain a disciplined approach to our stewardship of capital and remain committed to our return policy of 80% distribution of our net income to investors. We believe it is fundamentally important to reward our shareholders but to manage our balance sheet in an efficient manner. Q1 we undertook a small share buyback program and continue to actively assess the most appropriate return measures with our shareholders. Moving on to slide 18, we remain positive on the wider market outlook. Slide 18, market outlook -- there has been a lot of commentary on the oil price in capital markets in recent months, but it is worth remembering the oil price started Q1 at around $40 and exited Q1 at more or less the same level. This historically low level is a clear positive for the tanker sector. In our investor presentation pack, we highlight an oil range price of $30 to $65 where we believe demand is actively stimulated by price. Q2, as Hugo highlighted, has got off to a strong start in what is traditionally a weaker quarter. The fact that the run rate of Q1 and Q2 freight rates for 2016 is ahead of 2015 reflects stronger tanker market fundamentals. China's oil import and economic numbers over Q1 showed renewed strength and often overlooked the role of India's growing importance in crude which we expect to expand further with economics growth and develop initiatives such as India's own SPR. The current structure of oil markets remains supportive for tankers. The lower oil price is placing pressure on domestic output in regions such as North America and China requiring additional imports by shipping. The elevated levels of supply look likely to remain which with the slow -- with the introduction of Iran to global markets provides further backing for a lower for longer oil price, causing a stronger tanker market. That concludes the formal part of the presentation. Thank you for listening. I will now pass you back to the operator.

[Operator:]

[Operator Instructions]. The first question comes from Noah Parquette of JPMorgan Securities. Please go ahead.

[Noah Parquette:]

My first question, you know that stat you give on the 1.2 million barrels per day translating to about 50 VLCCs, I thought that was interesting. Can you talk a little bit about assumptions you make behind that calculation so we can understand the moving parts there? Thanks.

[Paddy Rogers:]

Yes. Well, actually on our website we have a slide that breaks it down in detail and our view is it based on the incremental demand growth essentially going on VLCCs. Most of it is going from the Atlantic Basin into the Asia-Pacific region and as a result of that it's long tonne-miles. We have quite a lot of round-trip basis expectation, as well. And the critical thing, of course, the critical thing for us is that on arrival we're seeing some significant delays now in China. So, it means that we're expecting only 4.5 voyages per VLCC a year. So, the slide that we have on our website that you can pick up there, just shows a breakdown of 1.2 million barrels a day times 365 days, giving 440 million barrels. Assuming that that goes on VLCCs at 2 million barrels of capacity, we get 220 cargoes and at 4.5 annual voyages a year for a VLCC, that gives 49 VLCCs.

[Noah Parquette:]

So, the important variables are, it's all going on VLCCs, basically it's all going on long-haul voyages?

[Paddy Rogers:]

Yes. And just for your information, one of the things that we're seeing, of course, is a widening differential between Suezmax and VLCC, simply because in the past there would have been an arb between Suezmaxes and Vs. We're seeing that arb disappearing, simply because port congestion is so important now. Port turnaround times are so important now for the receivers that if they're going to take a ship in, they want the ship to carry 2 million barrels, not 1 million barrels.

[Noah Parquette:]

Okay. And can you help me understand -- so, in IEA estimates now there's a significant overproduction of oil. I think it's 1.9 million barrels per day. So, as this demand grows, how does that translate to shipping demand. I mean, how does that translate to shipping demand. I mean, how does that rebalancing happen in terms of what you see?

[Paddy Rogers:]

Well, let's just be clear. The number that you just gave there was an overproduction number.

[Noah Parquette:]

Yes.

[Paddy Rogers:]

1.9 million barrels and the current demand estimate for this year and for the next four years is 1.2 million barrels on demand side. So, we're already seeing that we think the logistic chain, of which shipping makes up, of course, the vast bulk for the movement of crude oil, is being used as a way of managing the differential between production and demand, as, a result of that we're seeing, as we've said in the past, that we're not going at full speed. We're being asked to keep our speeds reduced when laden and that we're finding often that we're waiting at load port and discharge port. So, there is an element in which we're a kind of elastic band. The voyage is a kind of elastic band that's being either stretched or shortened, depending on how the individual charterer wants to manage its own positions and many of them will use that flexible voyage time as a way of playing a contango or forward market play, waiting to see a carried value in being able to play the incremental time of a week or two that they might have on their hands during the voyage.

[Noah Parquette:]

That makes sense and it's interesting, but I guess my concern is that, as demand grows and that imbalance kind of goes away, does that inefficiency you talk about kind of lessen, as well? I mean, how do you think about that?

[Paddy Rogers:]

Yes, no. I think that that may well be true. It's difficult to see how it's going to play out, but I would say that if you see demand grow very aggressively, you'll see the oil price recovery, but equally you should see freight strengthen as well. And I think that's the point at which it's actually a win/win for everybody.

[Operator:]

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

[John Chappell:]

Paddy, I wanted to ask about two things that we've read about in the press somewhat recently as it relates to Euronav and I understand you probably can't comment on the specific issues, but maybe just some thought process and commentary around the broader issue. So, first is, there's been some talk that maybe you're in the market for some long term business that would require some newbuilding. So, I wanted to ask this in two ways. One, you had mentioned that demand for longer term -- or the liquidity for longer term contracts has been somewhat muted relative to short term contracts. So, when you look at industrial-type activity with good counterparties, what type of duration are we talking about? And then, the part B to that would be, why would those necessarily require newbuildings as opposed to ships that are already on the water?

[Paddy Rogers:]

Well, I'm glad you asked that question, because I think it's been one of the areas in which we've been something of a preacher against newbuilding orders on a speculative basis. We've built in the past to order for oil majors or for major customers of ours and it's always been on the basis that, of course, the term of contract would have to be long enough to justify a capital view of the project. So, normally, there's a good length on the charter business that we do. An example might be a couple of VLCCs that we built for Total back at the end of the last decade where we had 7-year charters. So, we would like to look for that. If we would see it as an industrial decision, we'd focus very much on capital cost. Therefore, we would need to see a long-enough period for the return on capital to get properly rewarded and in addition to that, the only reason for doing it at all would be that there was something specific required about the ship and, as you know, our views on that, we mean something properly specific about the ship, not generally just that it's new, but also that it would need certain features and that's really been our focus. And we would encourage everybody else to take the same view.

[John Chappell:]

And then, the second thing, I read in an oil industry piece last night that Maersk seems to be the front-runner now for the recontracting of the field in Qatar. So, obviously, you can't comment on that bidding process or Maersk's ability to win it, but what I was more concerned about is exactly how it plays out for Euronav under a couple different scenarios. If Maersk were to win, I guess it's considered a rebid, does the FSOs associated with that automatically extend to Maersk? Or is that up for a rebid, as well, for the assets? And then also, on the other hand, if Maersk weren't to win that bid, could the FSOs still be offered, then, to the new winner of that field or would they have to be redeployed somewhere else?

[Paddy Rogers:]

I think it's a very interesting question. I wish I had an informed answer on it. I think that, as you can imagine, the assets are field specific. I think that whoever ends up winning and being in charge of the field as the field operator, is likely to look to the FSOs and Euronav as a continued solution for dealing with surface water on the field. And what will be the driver for that will be the fact that during the contract period, we have had zero downtime. And despite the significant length of these contracts, eight and a half years, we've had zero downtime and that we have a very, very good personal injury record on board, the best on the field. So, I think at the moment we've done everything we can to position Euronav in the right position to remain on that field and I believe that position will be respected by anybody who's a committed operator of a safe operation. So, we've done everything we can to put ourselves in the right place. I absolutely could not comment on whether or not Maersk will win the tender of not. That's not something that we have access or are privy to. And, as far as we're concerned, the important thing is to focus on the work, rather than to focus on the companies or the people.

[Operator:]

The next question comes from Chris Wetherbee of Citi. Please go ahead.

[Chris Wetherbee:]

I wanted to talk a little bit about the order book, in particular, for 2016. What are your views on slippage? We do have financing constraints in the market. Historically, there's always been a piece of the book that does not deliver. How do you guys see that playing out in 2016 and '17.

[Paddy Rogers:]

So, the numbers that we've given you, we know that when Clarksons compiled them, they had already allowed for slippage on an averaging basis, I think. The way they did it was to look at what they'd seen as typical slippage. So, there is already slippage in the book or in the slide that we've shown you. I think that what Clarksons would not have done, because it wouldn't really be within their remit, is to try to anticipate what the impact could be on a case-by-case basis with anybody who was struggling with funding. And I just have to reemphasize that this is a very important point and I think a lot of people commenting on the sector just aren't aware of how it works. In the shipping industry, when you send a draw-down notice to your bank for your financing, you will also have to append to it an up-to-date valuation and if it falls below the valuation that was expected or anticipated, at the time of the loan agreement, then it may well impact the amount of cash that can be drawn down. Now, that will be a case-by-case, relevance to different companies, according to their ability to meet any funding gap that comes as a result of the significant reduction in values that we've seen over the first half of the year. So, I think that it could be another wild card on the supply side and it's not something that you could put a finger on, but I suspect there are a few CFOs out there right now who are a little bit hot under the control when they see the sort of numbers coming out of vessel values and other reliable indexes for the momentum in values.

[Chris Wetherbee:]

And then just a question in terms of the depth of the charter market, so, we've seen what you've highlighted, the liquidity in those markets have come down over the last several months. But we've also seen deliveries be met with still-strong spot rates and I think there's this sense in the market that with a back-half-weighted order book, we're going to see some weakness there and maybe there's reluctance of charters to go along, because of an anticipated weakness in rates in the back half of the year. If we get into 3Q and 4Q, we see some better rates, better sustainability there. Do you think that opens up a nice opportunity to maybe seem some term or liquidity come back to the term market and maybe provide you guys an opportunity to further sort of diversify the fleet a little bit further on to the charter market? I guess I'm trying to just understand how you might think the cadence of that market developing as we move through 2016.

[Paddy Rogers:]

Yes, I think it's an question, Christian, because I think that the way that we would see it is specifically from talking to charterers and I can think, certainly of two big oil majors who are in the shipping business. And their view is not trying to call the market. Their view is simply that the focus is not so much on global economic outlook or on big feature macro stuff where they can say, oh, we think it's growth all around and everything's going well. So, it's not a very classic market normally at the moment. So, if you're in that kind of market, you might think, well, what could go wrong? Well, I've got certain margins and freight could be a serious risk on that margin. I mean and I think that, then, people start to look out and say, yes, well, I think I'd better lock in for five years. I think that what people are doing at the moment is they're saying this is a very unusual market and I think that's the starting point everybody should have in their minds. Nobody's suggesting that this is a plain sailing market, because we haven't got the global economic growth that you would want for that. But those oil majors have had really quite good results on the back of trading and refining and the trading and refining concern is a 6 months to a year concern, not a 5-year concern. So, they'll leave that bit to E&P or a general economic outlook, neither of which are there in the way that they might want. So, everybody's focus has been pulled in, just simply because of the volatility within the oil price market, rather than in the shipping market.

[Chris Wetherbee:]

Last question, I just want to understand sort of your comments a little bit about Iran and how to think about the uptake of crude versus the tanker fleet there. I think there has been some, at least we've heard, chatter, some reluctance of taking some of these cargoes. I guess I just want to get a sense of sort of how you see that initial re-entry into the market over the last few months playing out and sort of maybe how it kind of progresses? And sounds like it's net neutral is sort of generally the way that you're still thinking about it. But just initially in these last couple of months, how is that, sort of logistically, the uptake of those cargoes playing out?

[Paddy Rogers:]

Yes, I think Iran's a really -- again, it's a very interesting story, isn't it? I mean, what we've seen is I wouldn't say that we have perfect visibility on the cargoes that go east. But we don't think there has been that big an increase of cargoes delivery China, South Korea or Japan since the start of the year. Remember, they were all not subject to the sanctions program, in any event and had a steady involvement. But we have seen since the lifting that a lot of cargo has moved into the West. Specifically, it's gone to Europe and the prime receiver, of course, is France, with Spain, Italy and Greece all taking some cargoes, as well. And, broadly speaking, we can match up where we -- the numbers of cargoes that we think we've seen and the amount that they're proposing as a daily rate that's been produced. So, it all seems to add up. I don't think there's reluctance to take the cargo from the Europeans. I think it's quite difficult because dollar payments are still difficult, they still can't be made to Iranian-associated entities. So, if you're going to do this, you're going to need a euro -- you're going to have to receive your payments or make your payments in euros. And certainly as far as the ship owners are concerned, there are still some issues about the risks associated with carriages. So, I think the insurance risk that we were concerned about at the start looks like it's been deal with by the IHEA negotiating additional reinsurance cover for the American underwriters in the reinsurance contracts. So, that's been solved. There's still a problem on dollar payments, of course and also there is a slightly gray area around what the reception will be for any tanker that wants to call to Saudi Arabia, Bahrain or other Gulf states after they have been to Iran. So, there's still a bit of color around that, as well.

[Operator:]

The next question comes from Gregory Lewis of Credit Suisse. Please go ahead.

[Gregory Lewis:]

Paddy, could you talk a little bit about what's going on in the May fixing cycle? Just as we look at May, it's kind of not really developed in terms of activity to the point where it looks like, at least this month, sequentially it's going to be challenged. It just seems like there's just not a lot of activity happening in the market. Is there some sort of delay that's driving that? Is it a lack of available tonnage. I mean, it doesn't look that way from rates. Is it buyers holding back? Is there just not a lot oil flowing in the Arabian Gulf right now?

[Paddy Rogers:]

Well, first of all, we're talking -- what we're looking at on May loadings is that they're currently being fixed for the first decade of May and you're absolutely right that there's been some very quiet days in the market where the charterers have held out. Now, it seems that there might be some refinery outages that have impacted that, but most of it still looks like it's a rather tactical approach. So, we could expect to see some softness in the voyage-specific rates that fixed in the coming days or day or two. But essentially, this isn't the first time we've seen this, this year and what we saw, in fact, was that in earlier months where this happened the rates snapped back hard and fast and we're not seeing an over-tonnaging of the market. We're seeing some very, let's say, broad-minded charterers who can accept what we might call handicapped ships. So, if somebody's got an older ship it happens to be that a couple of people in the market at the moment can take ships of pretty much any age, with very limited vesting and so, they naturally pick up the bottom feeders who have picked up waiting time. So, there is a little bit of -- this is the volatility we talked about earlier on. We feel quite sanguine about it because it's the way that our business works. It's not exceptional. It's happened earlier this year and we believe that also we'll find very fast snapback once we've cleared away that first decade of May.

[Gregory Lewis:]

And I just wanted to revisit Jonathan's question, just simply because there's been some chatter about some newbuilds being placed, potentially on the back off contracts and clearly that's the view. You mentioned something specific about building industrialized projects, doing the contract, potentially, for an industrialized project. Could you just give some examples of what specifically -- what that asset would require, as opposed to just getting a relatively modern vessel on the water and doing any adjustments to it? Does that just tend to be cost prohibitive? Or would that be something that potentially could be considered in this market?

[Paddy Rogers:]

No, it's not physically possible. I mean, the sort of modifications we're thinking of are essentially structural. So, I think that the background to this is that we don't really like to talk -- as you'll understand, as business people, we don't talk about business that's under negotiation or hasn't been done or isn't firmly concluded. The chatter around this, in fact, came because all of the shipyards were very eager to try and claim that they were still in negotiation for major contracts and partly it was them whistling in the dark about how dismal the start to the year has been for them. So, it's become a kind of reverse story. They started it because they wanted to say we're much busier than you think we're and they identified Euronav as a major orderer. This is not a major order. This is a little bit of business as usual. I mean, essentially, if I can use a cricketing term, if it goes ahead, it will just be us clipping it down to fine leg and walking for the single.

[Operator:]

The next question is from Mike Webber of Wells Fargo. Please go ahead.

[Donald McLee:]

This is Donald, stepping in for Mike. The majority of my questions have been answered, but I'll switch to asset values for a moment. Can you comment on where you think we're in the asset value cycle, having undergone several quarters of downward pressure from deflation and, as you mentioned, narrowing of financing available to ship owners? Are you close to the bottom here? And how much lower do you think theoretical newbuild values could go at Korean yards?

[Paddy Rogers:]

I think you asked if we could answer it and I think the answer is no. I think the only thing I'd say is this. The reason that you'd have to say no is that -- and it goes to the heart of one of the reasons why we're so hot on wanting to discourage people from speculative newbuilding orders is that the newbuilding sector is one that's driven a lot by government policy, I mean, as an employer of large numbers of people. And so, you end up in the situation where if we were talking about proper businesses, i.e., that had normal balance sheets, a requirement to meet profitability or, at least, maintain cash flow on the P&L and which weren't supported by nation states, then we could make some sort of estimate about what the cost acceptability would be for building just to not shut the yard. But unfortunately, we're not. So, I believe it's perfectly possible to see one or two orders at startlingly low numbers. But watch out to see whether they can actually, after they've booked the contract, get a refund guarantee. And, ultimately, if it looks anything like what we saw in Japan in the late 1990s, those cheap newbuildings tend to be in penny numbers. It won't be -- because it's not sustainable on a cash basis, it basically means that you'll get one or two as a shipyard tries to save itself, but in the end the country can't carry on financing it. So, I don't think that there's a huge way to go, but we've certainly seen some lively quotes.

[Donald McLee:]

And then just one more question on banks constraining financing. Can you talk a bit more to the barriers of entry created by a lack of financing? And is it just for potential new market entrants or smaller players? Are you actually seeing banks constrain their balance sheets for existing large and liquid public and private players?

[Paddy Rogers:]

Well I don't think that a company like Euronav would find itself constrained on new borrowing, but I equally don't think that banks would be too excited about trying to lend more than 65% or 70%. I think that, even for us, that would be asking quite a lot of the bank. I think that they'll look -- they may take a broader view on your whole -- on the total leverage across the company. But it really is going very fast. This is not last year's story. This has been a story that's been in place since 2008, really accelerated, I think, in 2013. It's had a lot of added momentum as a result of what's happened in offshore, but the banks are coming under a lot of pressure this year. So, I believe that a lot of them will be wondering whether they can stay in the asset-backed finance business for shipping, because it's simply getting too high a risk rating internally which mean they're having to allocate too much capital to it and particularly at a time when the SEC gave a nice piece recently, a couple weeks ago, just saying they thought the European banks were going to have to go to the market for $200 billion of additional financing. Well, you know, if that's going on at the same time that people are risk rating shipping to the point where more capital is required to be allocated to support their loans, then I think that it may well be that they would rather get rid of the shipping business, then to go to the market to try to raise more capital to stay in it.

[Operator:]

The next question comes from Amit Mehrotra of Deutsche Bank. Please go ahead.

[Amit Mehrotra:]

Paddy, most of the analysts on this call are in the U.S., so, maybe we'd appreciate a baseball reference next time. More seriously, though, I want to go back to the slide that you were referencing earlier in terms of how incremental demand will be absorbed by supply. And my question is, isn't that slide basically painting the most rosy picture for how things play out in terms of voyages per year and the assumption that 100% will get put on VLCCs, when you think last year Vs accounted for 50% of the total seaborne crude trade. So, I don't mean to get into the weeds on this, but it's really sort of the most important issue, isn't it, from the standpoint that just small changes have basically -- small changes in the assumptions basically have huge implications on sort of the conclusions you come to with respect to movements and capacity utilization? So, maybe you could just reconcile that for me or maybe correct me if I'm wrong in terms of how I'm thinking about new demand versus how that gets absorbed by the supply?

[Paddy Rogers:]

So, we've just covered the structure as to why we're inclined to say that most of the -- effectively here, all the growth will go on VLCCs. But I don't want to -- I don't want to miss the opportunity to say that, of course, we're optimistic and, of course, we're having an outlook which is -- if you say -- you might say overly weighted toward VLCCs, but that's not based on just a willingness or wishing and shutting our eyes and hoping. We've been told by the analysts in the marketplace for the last seven quarters that this market didn't have legs and everybody's looked at the market and we've all been, I think, probably supportively surprised by what's developed. And time and time again, people come back and say, we're not quite sure how the world has absorbed 650 VLCCs with the amount of oil that we think is being moved. And our answer is, well, we'll try and analyze it for you and try and explain it from our viewpoint. But the starting point is this, Amit. Look at the CCE numbers. These ships are being absorbed and they're being absorbed in a structure which, as I've said before, please don't misunderstand me, this is not a classic bull market. We're not looking at 5% GDP growth on a global basis with every manufacturing industry in the world going great guns and with the shipyards building hundreds of container ships and hundreds of dry cargo ships. So, it's not that kind of feeling that you might have had in 2006-2007. Nevertheless, the ships are coming, getting absorbed and the market's staying up. Now, it seems to me that a lot of people don't like that. They feel that somehow it doesn't fit the models that they've built or it doesn't fit the story that they tell, but all I can say is, it's what we're seeing and it's the way that it seems to be working out. In the first quarter of this year, everybody told us that a freeze agreement between Russia and Saudi Arabia was the first step towards an OPEC cut. Well, quite the contrary has happened. In fact, what we've seen is just an acceleration of a market share war. And, again, nobody's quite certain where demand is during the year, but they'll keep revising it upwards, I'm sure, but we're definitely seeing the market for shipping remaining strong.

[Amit Mehrotra:]

Yes.

[Paddy Rogers:]

People were frightened of the order book growth and yet at the start of this year we've had no build at all in the order book. We've actually had the order book significantly decreasing and then we have the Iranian supply growth coming on and it doesn't go east and reduce tonne-miles. It ends up going into Europe, i.e., west and actually improving the picture. So, it's just trying to look, all around, yes. Look at it and say, how is it working out and how do we think it continues to work out and that's basically the way that we approaching writing our graph on slide 5.

[Amit Mehrotra:]

Okay. Let me just ask if I could, can I just ask you a follow-up on asset values? And I completely agree that the decline in values year to date is actually probably good for the sustainability of the market and maybe you get an elongated up cycle and maybe a re-acceleration in 2018 and '19. But speaking sort of more near and midterm, the effect of lower asset values also has the effect of basically reducing the net asset value of the Company. And also, with respect to that, lowering the threshold at which the Company may be willing to engage with equity capital markets to sort of fund accretive growth. So, given your conviction, Paddy, of the market which is clear and concise, are you more willing now than you were sort of three or four months ago, given this what you call dislocation in the market, to maybe make another bold or large investment in assets that you see are really sort of dislocated and maybe sort of be greedy when others are fearful? Does that open the possibility of that?

[Paddy Rogers:]

Well, if replacement cost -- asset values for us is a replacement cost issue. So, as a company that manages--

[Amit Mehrotra:]

It could also be a growth issue, though.

[Paddy Rogers:]

Oh, no, sure.

[Amit Mehrotra:]

It could also be for growth.

[Paddy Rogers:]

Yes. No, if you give me two secs, I'll come to that, as well.

[Amit Mehrotra:]

Sorry. I apologize.

[Paddy Rogers:]

It's a replacement cost issue, so, essentially, we know we have to replace assets, because we're in a wasting industry. So, seeing the assets decline doesn't affect us, as long as we have the earnings as they currently are, it's simply improving the yield on the assets that we acquire for replacement purposes. In terms of growth, of course, it's also dropping the bar for meeting the requirements for making sure that any transaction for growth is accretive to current shareholders. So, that's a relative issue and as long as we can sustain the levels of debt associated with any acquisition so that the combined entity is resilient and sustainable through a cycle and at the same time we think that the shares that have to be issued for the equity portion would be accretive to the value of our current shareholders, then you're absolutely right. It won't really matter to us what the absolute number of capital expenditure is, as long as those requirements are met. We look at the breakeven level of leverage and whether or not the deal's accretive to any stock that's issued.

[Operator:]

The next question comes from Ben Nolan of Stifel. Please go ahead.

[Ben Nolan:]

I have two hopefully pretty quick questions, but related, I guess, to the macro. The first one is something that Paddy brought up earlier about the level of port congestion and I was wondering if it's at all possible if you could quantify exactly how much, incrementally, you think the market is -- has become inefficient or how many vessels, per se, how many VLCCs, if you want to quantify it in that way, are -- have been incrementally tied up as function of port congestion and how likely that is to continue, going forward?

[Paddy Rogers:]

Well, as I said, first of all, no I can't quantify it. What I can say is that, as I mentioned earlier on, if you -- I think a lot of the time spent, either waiting or on voyages is used effectively by the traders or by the people involved in the sale -- the purchase and sale of the oil, to their own advantage to take benefits from the market. So, I think that it's not completely redundant or pointless use. So, it's not a dead or inefficient use of time of the vessel, as far as the person who's paying for it is concerned. And I think that the risk is that getting too focused on total waiting time, this doesn't look like a dry cargo market where you might have had in the boom days, you know, 30 Capesizes waiting off a port in Australia and the average time being 30 days. We're not talking about anything like that. So, everyone was very excited about Basra, for a while, having a three-week delay. But Basra has two terminals, one for light oil, one for heavy oil. There were delays in the light oil terminal and there were three-week delays on the heavy terminal and the number of ships tied up wasn't that great. So, I think that it's -- it's playing a part and from time to time these lists go up and then and then sometimes they come down again. So, it's a bit like the way that the inventories have been going. Sometimes the inventories appear to build. You'll suddenly find that there's a balloon up in diesel and then you'll suddenly find, greatly to your surprise, it's no longer as big as everybody thought it was. So, it's a really weird thing. I mean, I do think that the logistic chain is acting in a way where it expands and contracts all the time trying to absorb these flows. And at the moment, generally speaking, managing it. We're not stacking up towards an impossible position.

[Ben Nolan:]

And then, secondly, something else that I know you guys talk to is the average age or the maturity, the useful life of a vessel being about 20 years. We've not seen any Suezmaxes or VLCCs scrapped in over a year and there, I guess, close to 40 of them that are over 20 years old. What's the catalyst, I suppose, that causes people to actually take action removing those vessels?

[Paddy Rogers:]

It's the drydock. It's the survey dates and the drydocking. So, I mean, the critical thing, really, is that at 15 years you'll stop be available to certain major charterers, even for spot voyages and, surprisingly enough, PetroChina is one of those. And after 15 years, you don't drydock every five years, you drydock every two and a half years and you start a whole cycle of having to have the strength of the ship -- fitness gaugings done to judge the residual steel strength of the ship. And if you fail one of those tests, then you're no longer really in charge of the drydock. You have to start replacing steel and as you start to replace volumes of steel, it not only drives up the cost of the drydock, it drives up the amount of time you have to spend in there, because that's quite intensive work, as people have to replace not just plates of steel, but often shaped parts. So, that's the big thing that starts to happen and then you end up in a situation where you're -- you get sort of triple whammy, because you get increased costs in the docking, you get a loss of time in the docking and you get less time to earn money on voyages. So, you get less income, more expense and I think that it -- average scrapping age over the last 20 years has been in a range for tankers between 18 and 22 years and, naturally enough, 18 years has been more likely when the market has been weak and 22 has been more likely when the market has been strong.

[Ben Nolan:]

And I said two, but I have one last one. It relates to Amit's question on your potential appetite to be acquiring assets. It seems, to me at least, that asset values have been falling because there is a lack of potential buyers, more so than a lack of potential sellers and -- although neither have been very fluid. Is there much in the market? Are there many people out there at the moment making good money that are looking to sell assets at pretty low prices or is that just not --

[Paddy Rogers:]

Not at low prices, anybody who is in the tanker business is not actually -- they don't have a negative carry on their existing tanker position. they might need the cash for other parts of the business, but they're underpinned by their own cash requirement. So, there's no point dropping your price to clear the market if the result of that is you don't get the capital that you needed to fund, maybe, CapEx expenditure on your container or dry cargo fleet. So, it's created this kind of bid/offer spread and the bid/offer spread is so wide that there's no liquidity and very little gets transacted.

[Operator:]

The next question comes from Fotis Giannakoulis of Morgan Stanley. Please go ahead.

[Fotis Giannakoulis:]

Paddy, I want to ask you about the shrinking of contango. How do you think that this affects your business, if you can find any link between the more narrow contango with the recent decline in spot rates. And how would you respond to those that they are talking about, inventory withdrawals and the very high inventories that they can potentially impact the market on the months going forward?

[Operator:]

This is the operator. Mr. De Stoop, are you able to take that question? It looks like the other speaker line dropped. Let me open the backup. Just a moment, please.

[Hugo De Stoop:]

Sure. Fotis, can you repeat the question? This is Hugo speaking?

[Fotis Giannakoulis:]

Yes. I want to ask about the narrow contango, the last month we have seen the short end of the curve getting into backwardation, if you think that this is one of the reasons why we have seen the last few days the spot rates weakening and how do you respond to those people that they are talking about potential inventory withdrawals that they might affect the tanker market and that's how the growing demand is going to be met in the future?

[Hugo De Stoop:]

And as Paddy mentioned early in the call, we don't believe that contango has played a significant role so far in the market. So, what we're seeing now is something that we can't analyze, [Technical Difficulty] has been too short to analyze [Technical Difficulty]. Okay, so we don't believe it has an impact. Of course, a charter always playing a hide-and-seek game and that's why we need more time to analyze, but fundamentally, we believe the demand is there. It has been there for a long period of time and we don't see it decreasing. We can't take -- I mean, come to a conclusion after only one or two weeks of activity. That happened already in the past and it wasn't linked to contango.

[Fotis Giannakoulis:]

And can you give us a little bit of color? We heard about a lot of supply disruptions, both in West Africa or in Iraq because of the strikes and there are also some concerns about the Venezuelan production, because of the electricity shortages. Have you seen any impact on the tanker market and how soon do you think that these disruptions might come back.

[Paddy Rogers:]

I'm sorry about that. We had a backup line, but the backup line was -- didn't work, either. So, my apologies for that.

[Fotis Giannakoulis:]

My question was about the supply disruptions that we have seen the last few weeks in Iraq with the strikes and the potential of a disruption in Venezuela because of electricity shortage and also in West Africa. Is this something that you have some color that you can talk about, because this is more interesting, also, for oil prices.

[Paddy Rogers:]

Well, I don't think that we have a huge amount of it, of dialogue on it, because I don't think that -- we haven't seen a massive impact on the Iraqi situation and I think that on Venezuela, it's been worrying people for a long time. I mean, they cut down -- they had a spill on one of their berths which they haven't cleaned up. So, they're not moving shipping in and out of Venezuela and that's reduced -- or as quickly as they used to and so, that's reduced some of their exports. If things get worse in Venezuela, then I think that the piece that we see taken out is liable to be large quantities that go north into the States, still and if that happens, then, of course, then we might see some more appetite for buying heavy crudes out of the Gulf. So, that's really as much as I could say on that at the moment. Just to catch up on your -- I don't think there's any correlation between contango and the last -- and the first 10 -- the first decade of May loadings. I don't think those two are connected. I think it's -- as I said earlier on, I think that the buyers, obviously the charterers, the buyers of our services, are holding out of the market and testing it and a couple of people who are in there actively marketing in that period can accept vessels of all quality and of all ages. So, it naturally pulls in the loose ships that haven't been fully active.

[Fotis Giannakoulis:]

So, that means that you haven't seen any change in the number of cargoes the last few days and these cargoes you are expecting that they will come into the market pretty soon. Is that correct?

[Paddy Rogers:]

We believe they'll come into the market very soon. Yes, that's right, but we think the market will rebalance so the cargoes will come back in.

[Fotis Giannakoulis:]

So, can I interpret it that's bearish call for oil prices and this recent rally you think that is going to come back?

[Paddy Rogers:]

Fotis, you know so much more about the oil market than I do in terms of the barrel price, that I think I better not comment.

[Operator:]

The next question comes from Wouter Vanderhaegen of KBC Securities. Please go ahead.

[Wouter Vanderhaegen:]

Two questions from my side. First, could you update us on the sale process for the 4 Suezmax vessels? And wouldn't you prefer, rather than participate in sales to swap for two fully owned vessels? That's the first question. And then secondly, on the pooling topic, you're still operating your Suezmax vessels independently on the spot market and are you taking any initiatives to set up a pool or put them into a pool? Thank you.

[Paddy Rogers:]

I'm sorry. Wouter, you've asked such good questions that I can't answer either of them and not because I don't want to, but because I just don't it'd be appropriate to comment on the business at this time.

[Operator:]

The next question comes from George Berman of IFS Securities, Raymond James. Please go ahead.

[George Berman:]

All my questions have pretty much been answered. Thank you very much for a great quarter. You commented a little bit about the possibilities of adding to your fleet. With your pristine balance sheet right now, are you actively looking for, possibly, acquiring other companies whose valuations are even lower than yours in the marketplace and are there any opportunities in this area for you?

[Paddy Rogers:]

I think we're in a perpetual state of readiness, so always keeping our eyes open for any opportunity and, as we said earlier on, the issue about any merger or acquisition is the combined entity has to be stronger and more resilient and the return to the shareholders of Euronav pre any combination needs to be improved as a result of the combination.

[Operator:]

There are no additional questions at this time. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.