Euronav NV
Q3 2016 Earnings Call Transcript

Published: 31 Oct 2016

[Operator:]

Good morning, everyone and welcome to the Q3 2016 Euronav Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Paddy Rodgers, CEO of Euronav. Please go ahead. And one moment everyone. Please remain patient. We appear to be having some technical difficulties. And pardon me, this is the conference operator. We have been able to join the speakers into the conference call and Paddy, you may begin.

[Paddy Rodgers:]

Thank you. Good morning and afternoon to everybody. Thanks for joining Euronav's Q3 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, Monday 31, October 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 facts. All forward-looking statements attributable to the Company or to persons acting on its behalf are expressly qualified in their entirety by reference to the risks, uncertainties and other factors discussed in the Company's filings with the SEC which are available free of charge on the SEC's website at www.sec.gov and on our own Company's website at www.euronav.com. You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement and the Company undertakes no obligation to publicly update or revise any forward-looking statements. Actual results may differ materially from these forward-looking statements. Please take a moment to read our Safe Harbor statement on Page 2 of the slide presentation. I will now pass you over to Euronav's CFO, Hugo De Stoop, to run you through the first part of the presentation. Hugo?

[Hugo De Stoop:]

Good afternoon wherever you are and thanks for joining our third quarter 2016 earnings call. Turning on to the agenda slide, that is Slide 3, I would like to take you through the highlights of our third quarter, followed by a full review of our key financial figures, before handing over to Paddy to take you through the latest market themes as we see them at Euronav. We will then turn over to the Operator for a Q&A session. Moving on to Slide 4, so despite the difficult quarter Euronav still managed to post the seventh consecutive quarter of net profit. In the third quarter we expected to see some weakness in freight rates as a result of seasonal trading patterns. However, a number of supply factors, like ships returning from dry docks, new builds entering the world fleet and all the tonnage remaining in the freight market exacerbated the pressure on the market. During the quarter we remained active in the sale and purchase markets. We acquired two further high quality VLCC through a resale of contracts and we then agreed with the yard who we have a very good relationship with to postpone the delivery of those vessels to the first quarter of next year, that is 2017, making them de facto a year younger. Also just after the end of the quarter we announced two seven-year time charter contracts for two new Suezmax Ice Class vessels that will be built and will be delivered in the course of the first quarter of 2018. Looking forward the fourth quarter we have so far booked 55% of our VLCC spot days at just under $24,000 a day and around 57% of our Suezmax spot days at a tad below $20,000 per day. I would now like to move on to the income statement on Slide 5. All figures have been prepared under IFRS as adopted by the EU and have not yet been audited. As the previous slide showed Euronav delivered a net profit despite a challenging operating environment in terms of freight rates. Part of the reason for this was a fixed income or time chartered portion of our business. The depreciation charge rose over 6% quarter-on-quarter as a result of the full impact for a quarter of delivery of the two VLCCs we took delivery of last quarter and of course our two Suezmax post the joint venture changes announced in Q2 which means that they are now fully consolidated. There were no other exceptional items for Q3. Now moving on to the Euronav balance sheet as at the end of September on Slide 6. This remains a critical slide in our presentation and all figures presented are at the end of September, on 30, September 2016. Euronav continues to retain a strong balance sheet in excess to high levels of liquidity. We believe this is key to the future success given the volatility of the tanker sector and changing structure of the financing of shipping in general. We retained a discipline approach to our capital structure with a limit on leverage at this point in the cycle. Currently, at the end of September our leverage was 40% of book values or 43% when we mark the values to market. Upon financing of the final part of two VLCC re-sales these numbers will move up, but will not affect the strength of our balance sheet. Q3 was a busy quarter. We returned 88 million in cash to our shareholders and partly paid for two VLCC acquired as resales of contract. But leaving the most important part to the end liquidity remains critical in the running of a successful tanker company and Euronav continues to have access to liquidity via the availability of funds parked in its three revolving credit lines. That concludes the financial section of the presentation and I will now hand over to our CEO, Paddy Rodgers to give you an update on current market themes and outlook as we see them. Paddy, over to you.

[Paddy Rodgers:]

Thank you, Hugo. I would like to start by reviewing our past on Slide 7. This graph shows Euronav since its listing on Euronext in 2004 with total debt, the share price and the number of vessels plotted. Interestingly, despite the number of ships doubling total debt within Euronav has remained at similar levels since 2004. In short, managing our balance sheet does not need to be boom and bust, but rather more charting a course through the cycle. As Hugo highlighted in detail earlier on, Euronav has some of the strongest capital ratios in this sector. Our view is that we must always be cognizant of ensuring Euronav can negotiate the cycle, no matter how prolonged or deep a downturn may be. We do not however anticipate a prolonged downturn, to the contrary, but we prepare for what we do not want or even anticipate. In fact, we believe, some very strong medium-term building blocks are being established, such as reducing contracting of new buildings down 77% year-to-date for VLCCs for instance. However, we have to be aware of the impact of vessel supply which in shorter periods can have an outsized impact on owner sentiment and ultimately freight rates. If the tanker market is robust through such periods Euronav is operationally geared with 80% spot exposure to deliver good returns. If not then we have good cash liquidity to rely upon. Moving on to the next slide and some commentary on asset prices, Slide 8. This chart shows the longer term price history for five-year-old VLCC in both nominal terms in blue and in green adjusted for inflation. We think we have some of the – some data and price discovery from our discussions regarding Suezmax Ice Class contracts that we announced last month. The shipyards are clearly in a very difficult position, in many instances both politically and financially. However, as we have made clear in our press release, we do not believe that this is going to manifest itself in aggressive price discounting from current levels for new building vessels. This is not to say we do not see the possibility of a little further downside in the second hand market, but we do think asset prices and values have reached their natural level for now in line with longer term inflation adjusted lows. Finally, moving on to the current outlook, Slide 9. Q4 so far has been encouraging and it is important to stress demand has not been an issue. It is only vessel supply side issues. Both for vessels and for the supply of oil that have impacted on freight rates. Q4 is shaping up to be a regular Q4. But looking forward vessel supply is likely to have pockets of elevated delivery which will likely impact the tanker market. Secondly, balance sheet strength remains as important as ever. We have a strong enough balance sheet to withstand any headwinds in the short term and ability to take advantage of opportunities to expand should we wish to and yet also high operational leverage to generate positive returns in positive rate environments. Finally whilst there were some issues with ton miles development and vessel supply medium-term the tanker sector is establishing some strong growth drivers as future vessel supply, ship yard flexibility and owner discipline look driven by financial restrictions which will auger well for the tanker sector from 2018 onwards. More specifically and recently in our presentations we have started to use a traffic light system to show where each of the five key drivers of a tanker business are currently showing. As this slide shows we think there are three green lights and two yellow. This is a change from September when we looked at ton miles as a red light. Clearly with an important OPEC meeting coming up, some of the supply of oil may change. But for now additional supply coming on stream from the Arabian Gulf and in particular, Iran and Iraq and the possibility of U.S. shale exports it seems unlikely that any [cup] [ph] would have a dramatic impact. For much of the past 18 months we would have had five green lights, demand for oil, supply of oil and financing still remain very positive in our view, specifically, the financing of the sector, which continues to get tougher. Ton miles is now [inaudible] but given a sharp reduction and dislocation we saw from Atlantic barrels in recent weeks, but it is coming back towards green as West African supply is back on. We see the vessel supply [inaudible] presently, clearly when short-term there are deliveries which will put pressure on freight rates. However owners will need to act rationally and look for the best return for their asset rather than focus on keeping ships occupied. Encouragingly, with the seasonal uptick in cargoes some canceled and deferred orders and improved sentiment rates can improve and the challenge is to retain this attitude during upcoming periods. I will now pass you back to the operator as this concludes the formal part of the presentation. Thank you for listening.

[Operator:]

[Operator Instructions] Our first question today comes from Mike Webber from Wells Fargo. Please go ahead with your question.

[Unidentified Analyst:]

Good morning, gentlemen. This is Donald [indiscernible] stepping in for Mike. Thank you for taking my questions. We've seen a sharp decline in dated Brent by crude differentials incentivizing Asian-Pacific [inaudible] increase light crude runs. Have you seen this in the market and was it responsible for the sharp uptick in rates that we've seen over the last call it four weeks?

[Paddy Rodgers:]

I wouldn’t really say that. I think what you missed, what I'd like to emphasize is that we've had extremely strong month-on-month cargo volumes all the year-long. And year-over-year compared to the similar months in previous year they've been higher. We had an absolutely outstanding 178 cargoes out of [BAG] [ph] in the last month. So what we're seeing is underlying very strong demand. We saw quite a bit of a disruption in the Atlantic particularly impacting Suezmax, but as most light oil [inaudible] is coming out of Angola. I wouldn’t say that there was a huge dislocation as a result of Nigeria for the VLCCs. So all in all what I would say is, I think it has been much more around owner sentiment and much more around the fear of having a ship that is new building coming from a shipyard which is not a favored ship, having a ship coming back from a drydocking or having a ship that's too old or unvetted, that has tended to pull down on the rates during Q3. So it is very much about the mindset of the owners than it is about the specifics of the mileage.

[Operator:]

Our next question comes from Gregory Lewis from Credit Suisse. Please go ahead with your question.

[Gregory Lewis:]

Yes, thank you, good afternoon gentlemen.

[Paddy Rodgers:]

Good afternoon.

[Hugo De Stoop:]

Hi Greg.

[Gregory Lewis:]

Hi, hey Hugo. I was a bit surprised, we are only through October, I guess we just finished October and it looks like the company is already booked well over 50% of its available bays, not only for VLCCs, but for Suezmaxes. Was there some sort of timing shift that's happened already? I'm just trying to understand I would have thought it would have been comfortably in the 40s, so I'm just trying to get a better understanding, was there something specific or opportunities or sort of that's just the way the timing of this quarter worked?

[Paddy Rodgers:]

Well, I think first of all I'm always a little bit reluctant to suggest that there is some sort of massive way that you can tactically play the market or the quarter. But I would say that we tended to go for longer voyages, positioning ourselves past for stronger half of the quarter and that's in our minds. But also don’t forget the quarter a little bit later this quarter.

[Operator:]

Our next question comes from Jon Chappell from Evercore ISI. Please go ahead with your question.

[Jon Chappell:]

Thank you, good afternoon guys. Just a couple slides, tied them together into my one question, there's pretty good opportunity it seems for you right now. Paddy just talked about the asset values being kind of near historical lows or cyclical lows and then you matched that up with the liquidity that Hugo talked about. How are you balancing, keeping precious cash on the balance sheet versus potentially taking advantage of a once in a cycle opportunity to acquire assets especially given your views that this may be a shorter-term blip than a prolonged downturn?

[Paddy Rodgers:]

Well, it's a very good point. And I think it's that's basically the subject matter of most of internal management discussion, is just trying to get the balance right. I think our view has always been that we shouldn't massively directionally trade our expectations of the market because we've learnt from the mistakes of so many ship owners before us that you can often be surprised by events. But getting that balance right between where you think the possibility is to sort of load the gun for the next uptick is a very, very important business decision that we have to make alongside the corporate decision of ensuring the company is at all times sustainable through any possible unforeseen developments.

[Operator:]

Our next question comes from Chris Wetherbee from Citi. Please go ahead with your question.

[Chris Wetherbee:]

Hey thanks, good afternoon guys. I wanted to touch on the vessel supply outlook, so you're trying to bridge the gap between short term headwinds and longer term more manageable you know maybe digging in a little bit on sort of how we think about 2017 might comp play out, maybe a little bit first half loaded on deliveries as we see some of these fourth quarter deliveries like yours get pushed out a bit? Help us a little bit understand how you might see next year kind of playing out from a supply perspective? Thank you.

[Paddy Rodgers:]

Well, again, I wouldn’t go into the business of rate prediction because I think it's a mugs game although I know unfortunately you suffer from being obliged to do that. But I think that the reality of it is that it's a very, very dependent, not only on the way that it actually plays out, but also in the way that it's perceived to play out. So I think that if see vessels drifting into Q1 then of course you will get slightly more lumpy deliveries. Not everything will split. Let - some people may be obliged to take delivery in Q4 regardless of the relative values simply because of their financing requirements, the need to get closed out before the year-end. So, there are lots of things that could impact on it and maybe don't make it completely natural that everything in Q4 slips to Q1. I think that naturally the market tends to soften as we go into Q2 and eventually of course we can see Q3 is the lowest of the year. I think against that backdrop what we would be hoping to see is the pressure would mount during the course of the year on older tonnage, tonnage due for either retrofitting or requiring additional major post 15-year drydocking, coming under huge amount of pressure as the year goes on and now it is really putting mind as to whether or not they want to continue or whether they want to retire the vessels. So I would expect there to be some rate weakness into Q2 and Q3 next year and that really providing a catalyst we would hope for real shift in people's view of value and of course for us we would hope that that would incline people to be looking forward then to the next cycle rather than being too concerned about the daily or weekly rates.

[Operator:]

Our next question comes from Amit Mehrotra from Deutsche Bank. Please go ahead with your question.

[Amit Mehrotra:]

Thank you, operator. Thanks everybody. So I just wanted to talk about the LTV of 43% Hugo. Can you just provide us with that number pro forma for the delivery of all the - of the new contracted vessels? And then Paddy, can you just talk about some of the regulatory issues facing the industry as it leads to ballast water and sulfur up, just how Euronav is positioned and then what do you think the impact of the overall supply picture can be? Thanks.

[Hugo De Stoop:]

Yes, Amit, thank you. Well it all depends on how much money we're going to make in Q4 because those ships delivered only in Q1, but normally it should not be more than 47% and I expect it to be 46%, 46.5% on a pro forma basis after the delivery of those ships.

[Paddy Rodgers:]

And as far as the regulatory question is concerned, of course Amit, you'll have to go and sit on the naughty step there for having put two questions into one. But I think our view is of course a lot of these things have been talked about, but eventually they are really coming to materialize. So water ballast treatment we now have the necessary signatures to the treaty and we also have the IMO showing some teeth on reducing the sulfur cap. It being shipping of course, it's never quite as simple as that. There still are issues around full approvals and agreement on what the systems should be that everybody should use the water ballast treatment and the second one of course is exactly how any of us are going to manage the sulfur cap which could go from using scrubbing equipment or alternatively buying low sulfur fuel oil which a number of suppliers have now said they will refine. So there's not a huge amount of clarity yet, but we do know that within a couple of years people will have to have made a decision about water ballast treatment and we do know that within three years we will move to a low sulfur environment and both of these of course are going to be developments which put pressure on speculators and encourage an industrial view of shipping. So as far as we are concerned we're in favor of cleaner air and cleaner seas. We're in favor of increased regulation. We're not frightened of the additional cost that may be implied by it and we believe it will take people out who are involved in the industry on a speculative basis and support and encourage a more industrialized and responsible approach to shipment.

[Operator:]

Our next question comes from Ben Nolan from Stifel. Please go ahead with your questions.

[Ben Nolan:]

Yes, thanks. Just really I was looking for maybe any update that you might have on the two FSOs now that the new contract has been awarded to Total, where do you guys see that playing out or any update on maybe the timeframe as to when we might expect to hear something there?

[Paddy Rodgers:]

We're not really in a position at the moment to give any updates on it. Things have obviously moved quite slowly and it was obviously a bit of a shock to a lot of people that the operation of the field was changed as late in the day as it was and that's obviously meant that there has been a slow start to entering into discussions with all the different suppliers who were running under the previous franchise. So I'm afraid we're really able to give an update to the moment, but as soon as we have something firm for course we will make an announcement.

[Operator:]

Our next question comes from Wouter Vanderhaeghen from KBC Securities. Please go ahead with your question.

[Wouter Vanderhaeghen:]

Yes, thank you, good afternoon, gentlemen. You have not disclosed the time charter rates for two Suezmaxes [indiscernible] so can you give us some more color how these time charter rates have been set in the market today where there is not really like a benchmark? Thank you.

[Paddy Rodgers:]

Well, I think we just took a project approach. Obviously it is one of our closest customers and our view on it was, they gave us a strong view on how they felt their requirement would develop and we work with them looking at sort of rate of return that would be required to make a long term commitment and we managed to find agreement and mutually satisfactory outcome. So we didn’t really look at across the market current rates.

[Operator:]

Our next question comes from Noah Parquette from JPMorgan. Please go ahead with your question.

[Noah Parquette:]

I just want to followup on the [indiscernible] regulations. What you see as kind of further out what kind of potential that has a [indiscernible] for ships and your designs and how will that play out? Thanks.

[Paddy Rodgers:]

Well, I'm not sure that LNG is top of anybody's list at the moment in terms of the solution to the low sulfur cap. That would be certainly not in our sector. I think obviously as a locally used fuel it is already in use locally in areas which are in acres or where there a particular requirement and where there is a reasonable infrastructure. So it is something that's a bit more like a line of trade. I think before you would see people stocking the kinds of volumes that a VLCC would need to burn it will be some way off. So I don’t see that as an immediate fuel switch. It is much more likely to come from either the use of equipment on board or alternatively through yet low sulfur, heavy fuel oil refined specifically for the purpose.

[Operator:]

Our next question comes from Fotis Giannakoulis from Morgan Stanley. Please go ahead with your question?

[Fotis Giannakoulis:]

Yes, hi Paddy. Can you please comment on the discussion about the potential OPEC, just you have seen any increase in the chartering activity over the last few weeks that is attributed to the possible OPEC on November 30, and onwards if you think that this has any impact in the market and also given the fact that we have plenty of new buildings 20 this year and another 47 next year, how much do you think that trade will need to grow in order to absorb these vessels and then what do you think it is going to make the market change and go back to the previous very strong levels?

[Paddy Rodgers:]

Now, I'm going to take that as one question, so you don’t have to join Amit on the naughty step. But I think that my view of it would be that the OPEC discussion or the OPEC let's call report correctly, the Saudi Arabia or Russian discussion looks like they had reached some form of agreement. That agreement looks like it is falling out of bed on the basis of the news that is coming from Vienna and of course the problem is not that fact that both the Saudis and the Russians are happy because they are pretty much maxing out on their production, but that the two growth players in the region, Iraq and Iran are not eager to start talking about cutting back. Iraq is extremely handicapped to calls with a split in its oil production into two different regions, so they also have to get domestic agreement between the Kurdish [indiscernible] and Basra. They also of course in Iran at the moment is still very much in the mood where it has lost chance to sell oil internationally again and it wants to make hay while the sun shines. Lying right at the high meta coast is the U.S. shale production capacity. So I think that the likelihood that this ends in a significant reduction of supply of oil into the marketplace and an increase in oil price is significant looked highly unlikely from where we are today. On that basis we think on the oil supply side there is no reason to have any great concern. We think there will be a lot of noise and a lot of owners might get nervous about it, but that goes to my view on sentiment pricing. In terms of new buildings coming certainly there are going to be some, but I honestly think that we'll turn the corner during 2017 as freight prices perhaps come under a little bit of pressure and as people also begin to go through third special survey, particularly with the first generation of Chinese ships. So I believe in the end rather more balanced.

[Operator:]

Our next question comes from Magnus Fyhr from Seaport Global. Please go ahead with your question.

[Magnus Fyhr:]

Yes, hi. Just a followup on Greg's question earlier about the average rates booked for the fourth quarter, I know there were a lot of timing issues with these coming up for renewals, but with rates, VLCC rates are 35,000 to 40,000 a day, are you guys confident that we should be closer to that number for the second portion of the ships being booked for fourth quarter?

[Hugo De Stoop:]

Well look, I mean, we're not, what I would say is that if the market, the answer is yes, if the market stays as it is.

[Magnus Fyhr:]

Very good. Thank you.

[Operator:]

[Operator Instructions] Our next question comes from Spiro Dounis from UBS Securities. Please go ahead with your question.

[Spiro Dounis:]

Hey Paddy how are you? Thanks for taking the question, really loving this new Q&A policy by the way. So I just want to start with I guess management for Suezmaxes are these charter Valero obliviously with the replacing two others I believe that are maybe a little bit older, I guess in terms of end-of-life for these vessels most likely what is the outcome as you see it, is it going to be potential sale or could we see these things be retrofitted maybe kind of some sort of permanent storage?

[Paddy Rodgers:]

That would be, I mean I think that would be the second of these options which would be the ideal outcome. I think that we have a pretty good record on the quality of these older ships, particularly the ones where we've managed them the whole of life and these ships look particularly good, very strong and we believe that people looking at them for the purposes of storage or for an offshore project would be quite attracted by the fact that they are pretty much in mint condition. So definitely be interested in taking something like that, but if not we have to bite the bullet and move on. We can't just preach scrapping for everybody else and not for ourselves, yes.

[Operator:]

And ladies and gentlemen, that does conclude today's question-and-answer session. I'd like to turn the conference call back over to management for any closing remarks.

[Paddy Rodgers:]

No, just to say thank you to all the participants and now we look forward to a strong fourth quarter.

[Operator:]

Ladies and gentlemen that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.