Scorpio Tankers Inc.
Q3 2014 Earnings Call Transcript

Published: 27 Oct 2014

[Operator:]

Good morning and welcome to the Scorpio Tankers Inc. Third Quarter 2014 conference call. Today’s conference is being recorded. I would now like to turn the call over to Brian Lee, Chief Financial Officer. Please go ahead, sir.

[Brian Lee:]

Thank you everyone for joining us today. On the call with me are Emanuele Lauro, Chief Executive Officer; Robert Bugbee, President; and Cameron Mackey, Chief Operating Officer. The information discussed on this call is based on information as of today, October 27, 2014, and may contain forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those put forward in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statement disclosures in the earnings press release that we issued today, as well as Scorpio Tankers’ SEC filings, which are available at scorpiotankers.com. Call participants are advised that the audio of this conference call is being broadcast live on the web and is also being recorded for playback purposes. An archive of the webcast will be made available on the Investor Relations page of our website for approximately 14 days. I’d now like to introduce Emanuele Lauro.

[Emanuele Lauro:]

Thank you, Brian, and thanks to everybody for joining us today. Before I pass the word to Robert, I’d like to share a few thoughts with you. At present, Scorpio Tankers operates a fleet of 46 fully-owned tankers and has an additional 29 vessels, new-building vessels which are expected to deliver throughout the fourth quarter of this year and the first two quarters of 2015. Our focus in the last months has been on execution. We are focused on executing the strategy which has been shared throughout with our shareholders and our lenders. Over the summer, we finally turned the corner of having more ships on the water than vessels under construction at shipyards. We’re still very confident in an improving product tanker market, and we are experiencing this as we speak with a considerable strengthening across all of the product tanker asset classes. The arbitrages of gasoline and fuel oil from Europe to the U.S. are currently open and have pushed MR rates in the Atlantic higher. At the same time, longer range vessels that are moving west to east with NAFTA have cleared the way for the medium range remaining in the Atlantic. We are at the beginning of what could be a strong winter season for product tankers and we believe the company is extremely well positioned to take advantage of it. We still have a lot of work to do in taking deliveries of the rest of the fleet and ensuring that the best possible professionals are going on board to look after our modern fleet. We look forward to June 15 taking delivery of our last new building. We are open, of course, to answer any questions you may have today and keeping you updated with the developments of the company in the next weeks and months. With this, Robert, the floor is yours.

[Robert Bugbee:]

All right, thanks Emanuele. Thanks everybody. We know it’s (indiscernible) out there for many of the shareholders, but if I could clear up one thing first. We intentionally omitted any discussion on the dividend in our press announcement. It’s certainly not management’s intention to give a wrong impression that we would cut the dividend. Simply, we haven’t met on this. We would not expect the dividend, once we finally determine what it’s going to be, to be less than the $0.10 that we’re currently on. We ourselves are just in very changing times and deciding what is the best use of capital with these new improved cash flows. Emanuele is really correct in that we are focusing on the execution, the execution in delivering this fleet, and the company is changing very fast. For example, in the fourth quarter we would expect to have over 1,500 extra revenue days as a result—compared to the third quarter as a result of these vessel deliveries. We intend to continue to maintain a strong and liquid balance sheet, and we intend to put ourselves—keep ourselves like we’ve shown in the third quarter, where we’re able to not just be in a position to buy back stock, to also increase dividends, but also to acquire, like we did in the third quarter, accretive assets that are accretive promptly, vessels that are delivering to us sort of, let’s say, within three or four months. I’d like if possible if we could keep the questions, which we’re going to go, to the modeling parts of the questions as offline to Brian as possible, and I would love to hear the bear case – bear case questions would be fantastic. We ourselves as a company have always said that we believe that 2015 is going to be the real year when the majority of our fleet is delivered, and we’re seeing the fundamentals play out, we’re seeing them finally play out through. There’s really nothing much more for us to say at this stage than thanks again and we’ll open up to questions straight away.

[Operator:]

[Operator instructions] We’ll go first to Ben Nolan at Stifel.

[Ben Nolan:]

Great, thanks. Well, I’ll have to think of a bear case question in just a second. My first question, I guess, for you guys is obviously we’ve seen—like you said, we’ve seen the RM windows open and rates are higher, even today they’re higher. How much of the recent improvement in rates would you sort of categorize as just sort of a shorter term arb opportunity versus something that is more fundamental in terms of the long-term growth of the business and that exceeding the available supply in the market.

[Robert Bugbee:]

Well, I think the way that we look at this is you’ve seen a steadily—a compound improvement. If you look at the Baltic tanker, Baltic Clean Tanker Index, you’ve seen an improvement, steady improvement all the way from July, really led to begin with from the LR2s, and it’s only really been in recent four or five weeks that that has moved from a steady improvement of a 45 degree angle into a parabolic position that we have now. So that tells us that really, it’s down the fundamentals because you can’t have a market that has such a broad-based demand across all sectors, all geographical areas, all sizes in the product market that is originally led by the biggest ship in the food chain, the LR2, without it being fundamentally demand driven. Now, that demand is being driven by two factors that we’re seeing for the first time, really, for many years – you know, seven, eight years or so, the Asian demand there, a strong fundamental Asian demand, and that’s as a result of not just economic growth but Australia switching from crude imports to more product imports. You’re really even seeing China now, as its refinery complex develops, China is sort of becoming short gasoline, long diesel. You’ve seen a normalization of the vegetable, the ancillary trades like vegetable oils and palm oils, and most important you have the catalysts. The catalysts have came in sort of four, five months ago, something that’s disappointed us because it’s taken them so long to come up in the preceding two years. Finally, though, that (indiscernible) refinery came up and now going forward, you’ve got this strong, consistent demand combined with the change in the refinery situation, increased refineries, Yanbu coming up, India expansion over the months, and the fundamentals are taking over. So yes, of course, you just had a little bit of a catalyst growing on top because you’ve got oil prices down, the derivatives of products down –that’s stimulating demand. The volatility is stimulating the arbitrage at this present time, combined with the aspects of having interest rates lower for longer. But right now, what we’re seeing in oil, this could turn out to be very similar to 1985 for the broad tanker market. It is very positive for crude and product.

[Ben Nolan:]

Okay, so I guess my next question is at least recently, we’ve seen the product outperforming the crude a little bit, and I think one of the—maybe one of the more bear case scenarios is that what if OPEC cuts oil production or something like that, which would be somewhat bearish for the crude market. Can the product market decouple, do you think, from the crude market?

[Robert Bugbee:]

Well, the product market has decoupled in the last months from the crude market, but I think the crude oil market, this could really (indiscernible) here. I mean, there’s no reason at the moment, and we don’t have a vested interest in the crude now that we’ve sold our tankers out, but the crude market itself is looking not just on the seasonal basis but a demand basis, bearing in mind this fleet has been static, as if that thing could start moving hard any minute. So—but in the bear case scenario of an OPEC cut, that actually has to be enforced, right – it’s not one where they just say, hey, we’re cutting 500,000. The product market will still have changed fundamentally to any historical point, because those same Arab countries, those same Arab areas are now having their refineries for export coming up online, so you would still see a better ratio of products to crude earnings than you’d ever had before, even in that scenario.

[Ben Nolan:]

Okay. That’s helpful. My last question is just seeing what you’re thinking with respect to your Dorian position. I know originally it said that you expected to be out of that by the end of the year. Is that still the case, or how are you thinking about that position?

[Robert Bugbee:]

Well I think the LPG market has, you know, on a year-over-year basis continued to strengthen, whether it’s headline rate or the actual capacity for the terminals coming on, and the LPG market especially where that stuff is priced at the moment on an investment basis is quite constructive. We will put ourselves in a position to be flexible – I mean, our lock-ups come off in—all the lock-ups come off in November 7, but if you were looking at a technical basis, we’re a much better buyer of that stock than we are a seller of that stock at the moment. So—and we don’t need it to fulfill—we don’t need the liquidity of that stock in forms of a sale to fulfill our strategic objectives at the moment, a fact that we’ve already shown in 3Q.

[Ben Nolan:]

Right. Okay, perfect. I’ll turn it over to somebody else.

[Operator:]

We’ll go next to John Chappell at Evercore.

[John Chappell:]

Thanks. Robert or Brian, I wanted to follow up on that liquidity comment you just made. It looks like your available credit facilities will cover the remainder of your capex. Your cash on the balance sheet could cover the remainder of your buyback program, so as it relates to any additional growth, dividend, et cetera, are you just kind of viewing cash flow from operations as the go-forward liquidity, or is there—I guess you have a couple more vessel asset sales. Could you speak to maybe the timing of those as well?

[Robert Bugbee:]

Well, I’ll take that, and you could take the details offline, but the absolute liquidity of the company, what you’re seeing today is not necessarily just what it is. I mean, the company has such a strong balance sheet that there are other facilities that you could look at that include working cap positions you actually have once those lock-ups come off on the 7th and Dorian. That thing is unleveraged on margin, et cetera, et cetera, but you’re correct in saying in terms of the operating cash position – and this is part of our quandary at the moment, because despite the fact that we’ve been clearly bullish—I mean, you can see from our list of time charter in that we did in the third quarter, the acquisition of a vessel, stock buyback, this company, not saying that these rates would be repeated but if you took the rates that they were Friday across the market, this company has moved from something like $0.00 a share in earnings to somewhere around $0.025 a week in earnings related to the spot market. So that’s where we’re seeing overall liquidity here, plus the access that the company has to—you know, for example, the baby bond markets, et cetera like that. So we’re confident amongst all the different weapons we have that we can continue this strategy that we’ve got.

[John Chappell:]

And on the time charter in strategy, I thought the plan originally was as you took more delivery of your new builds, you’d start to layer out a little bit of the time charter in strategy. So have you found a way, your bullishness on the (indiscernible) market today versus delivery of your new fleet being completed in eight months?

[Robert Bugbee:]

Well, I think the only way you can say it is we’ve clearly gotten more constructive as we felt that there’s catalysts coming up over the summer, and if you can see the actual rates that we have either extended those charters or entered charters on, we simply said look, the commercial business opportunity is so—we think is so big and the weighted risk going into your strongest season is so high in favor of doing this, that we decided fine, we’ll just extend those charters.

[John Chappell:]

Okay, but do you expect to continue to add more, not maybe just extending but also adding new tonnage—

[Robert Bugbee:]

No, I think you’re done. I mean, the market has moved, it’s gone. You’ve got a complete, very wide spread bid to offer on the charter market. As you can see, most of the things that we did were extensions. We got very lucky in a time charter, that modern vessel. They’re not there, they're not there at those value points any longer.

[John Chappell:]

Right. Okay, one last strategy one and then I’ll let other people ask about the market. Just on the dividend for this upcoming quarter, I assume you already had your board meeting, so when do you anticipate the timing of an announcement on the dividend, and will it be paid in calendar ’14 or will it carry over into next year?

[Robert Bugbee:]

Well, whatever dividend will be paid in calendar ’14, and the board has not had its formal meeting on the dividend. As we said, we will evaluate that depending on our information over the next two to three weeks. We’ve been locked out. Would we have liked to have bought more stock down at these levels? Of course we would have done. Despite our attempts to do an early press release, we have been pretty well locked out of buying stock in the company. First off, we were locked out earlier because of volume-weighted positions. When the volume creeped up, we then started getting locked out for whatever other reasons related to announcements and earnings. But to give you some idea, we now have the capacity when we come out of lock-up, we can buy a million shares. Well, we don’t know really a couple of things over the next two, three weeks. We believe that this market can be sustained, not necessarily in its upwards intensity but in its fundamental change to where it was in the third quarter, but we don’t know. We haven’t got a clue what the stock price will be at the end of 24 hours, so the board chose to use its ability to wait, and even if we made an announcement on that in two or three weeks, we would still have ample time to pay that dividend within this year, right about December 10, December 14.

[John Chappell:]

Understood. Just one more clarification on something you said on the different periods of lock-up. The press release says you’ve acquired 67.5 million of your own stock since July 28. Has there been any since the end of third quarter, or have you effectively been locked out for the month of October?

[Robert Bugbee:]

No, we have managed to buy 2-point—are we allowed to say? Okay. We’ve managed to buy 2.641 million shares at $7.69 through October.

[Brian Lee:]

John, that amount that remains includes this 2.6 million that we bought in October.

[John Chappell:]

Got it.

[Robert Bugbee:]

So I think what you can see is where we turn out with now—you know, the plus for, let’s say—obviously we’d like to buy less stock, but the plus is that you’ve got a balance sheet there and a positive cash environment that really can go either way here.

[John Chappell:]

All right, thanks for your help, Robert.

[Robert Bugbee:]

Thanks.

[Operator:]

We’ll take our next question from Matthias Detjen at Morgan Stanley.

[Matthias Detjen:]

Good morning guys, and thank you for the update. You talked a bit about how—I mean, spot rates have obviously come up quite a bit, and you talked a bit how the bid ask on the time charter is quite wide. When do you expect the time charter rates to come up more substantially, and seeing that’s a fundamental shift, I guess you would have to expect those to come up soon. Have you seen any deals being done at higher levels, or is that something that might come later?

[Robert Bugbee:]

Okay, you’ve started to see higher deals already in the LR2s, but it’s a little bit difficult in the MRs because first of all, charterers are pretty reluctant now to go in and take non-eco ships, likely into the face of all the environmental changes coming in January. Secondly, there’s really not even an offer on the eco ships because anybody who’s got (indiscernible) eco ship in the spot is pretty well a strong player because some of the weaker owners, the six to nine-month, one year charters earlier in the year on eco, but what is left is the people who have had ships being delivered are the Shells, the Vitals, the Valeros, and us, none of which are interested in even quality quick charters at the moment. Then the velocity of the movement so far in the, let’s say—you know, there will always be a couple of people, traders who are willing to take the non-eco MRs and a couple of owners willing to do it. When you can fix U.S. Gulf to (indiscernible) and back again with a non-eco ship in the 20s, where is the bid offer when the last done one-year charter was somewhere around 13,750?

[Matthias Detjen:]

Yeah, that is (indiscernible).

[Robert Bugbee:]

Yeah, so that starts a substantial shift, but it’s going to take a little time for people to do it. The same with asset prices – I mean, I think it’s absurd to look at a company like Scorpio Tankers on NAV, but if you think about what’s going on on asset values, it’s that most people have in their figures the asset values that were done in the rock bottom of the markets in June, July and quite August. We could pretty well guarantee that right now as we’re speaking, asset values are firming. They’re certainly firming from the offer side, and they will firm from the bid side as people start getting cash flow. So it’s like what happens in these companies if you suddenly get a 5% increase in growth assets combined by positive cash flows? You all will just have to wait, but underlying you can pretty well guarantee that bids and offers are wide but moving upwards, whether or not its in time charters or in asset values.

[Matthias Detjen:]

So have you seen any high asset value transactions yet, or again—

[Robert Bugbee:]

Oh yeah, but I can’t tell you about it.

[Matthias Detjen:]

Oh, okay – you can’t tell us.

[Robert Bugbee:]

That’s why I’m saying, why I’m saying is the physical market is responding pretty well, because this product market hasn’t just been strengthening last week. This has been going on since July, and if you look at the supply side, nobody has ordered any product tankers really in the last six months. The supply side is great news. The supply side, all these new buildings in the shipyard are getting delayed and delayed and delayed and delayed. We ourselves—I mean, you don’t see it in our earnings release or our deliveries because we gave you all such conservative delivery times, but internally we’re getting delivered ships between six and eight weeks late sometimes, and we’re at the front of the traffic jam. So imagine what it’s like if you’re at the back of this traffic jam – I mean, you saw us navigate product on a six, seven month delay out of China. Maybe it’s only six or seven months, and maybe they get the ships – who knows? But between the first class shipyards in Korea delivering late and the Chinese still not decided, the supply side is much less coming in than what the market appears.

[Matthias Detjen:]

Okay, well thank you very much for all that. That’s it for me.

[Operator:]

We’ll go next to Herman Hildan at RS Platou.

[Herman Hildan:]

Good afternoon guys. I guess like—I wonder if you could go back to the dividend. The last six, seven quarters, you’ve been raising your dividends by a cent or so per quarter. Since you’re now—

[Robert Bugbee:]

I think you should try a different question, because I think I’ve said all I can really say on the dividend. Shareholders should be happy that they’ve got a company with rising cash flow, that they are not going to get really less than the $0.10. And if you’re short and you’re to try to work out your borrow, hard luck, right?

[Herman Hildan:]

Yeah, the question was more kind of whether we should expect a significant increase, given—

[Robert Bugbee:]

And that’s just a (indiscernible). The board (indiscernible).

[Herman Hildan:]

Good. Well I guess the second question I had, which we have basically touched on before, could you give some insight to how the market behaved during the time where (indiscernible) prices were falling significantly?

[Robert Bugbee:]

Well, the last time, unfortunately, the present sort of—you know, the present generation, if we go back to 2000 but before that, we’d got very used to a pretty highly correlated link between crude oil prices, product rates, and crude oil tanker rates. That was really because there was so much demand going on in the 2000s that you could match oil price up as a result of huge amounts of demand. Then obviously you had a demand chop – goodnight. But back in 1985, the people get comforted into thinking that lower prices are bad for tankers, and this is crude as well as product, and high prices are good. But the last time we had a supply-led down drop in oil prices, which is really what this is – this is the Saudis and Kuwaitis reminding the world that they’re important, too. This happened in 1985, and at that time you still had somewhere between 65 and 70% of the crude oil tanker fleet laid up in fjords and off Greek islands, and the Saudis took oil price down by saying we want to defend more market share, and that was such a huge stimulus to just basic demand and to sea-borne ton miles because it was the longest shipping route. If you think about that today, I think all of us in shipping would gladly sacrifice a million barrels of shale oil going into those northeast U.S. refineries for an extra million barrels of product and/or crude coming out of the Middle East. On the demand side. I mean, my mother who is 85 gets it straight away. Yesterday, she’s telling me how U.K. gallon—a U.K. liter of gasoline, which she calls petrol, has fallen 8 pence in two weeks, and the government and people are promising more falls to come, and on that basis she took some of her friends out for a two-hour car ride. That’s what happens – people who have heating oil bills, they feel heating oil bills are going to come down. They will keep the temperature in the house. It’s an immediate response to the consumer. But most importantly, look at a country like India. Look at the repercussions going on for an India or a China, these importing nations, or a Japan or a Korea. Their GDP immediately gets affected positively when you get lower commodity positions.

[Herman Hildan:]

So you’re effectively saying that oil demand has picked up significantly recently, and that’s why rates are kind of going up as much as they are?

[Robert Bugbee:]

No, I’m not saying recently. We have said look at the charts – the fundamentals in products have led to demand increases all the way since July, since we normalized from the horrific first six months we had and the refineries come online. Going forward—not today, they’re not reacting to it today at all. This will come, but over the coming weeks and months. The demand side for crude and the demand side for products is going to increase as a result of lower, more available supply of crude oil.

[Herman Hildan:]

And when you look at the behavior of charterers, do you see any major changes in heavy trading—

[Robert Bugbee:]

Yeah, the one change that you’re seeing already, which is also a very nice thing, is that charterers are already trying to work ships further out, so instead of just working prompt they’re willing to work deep into next week in some areas of the market. That isn’t normally the positive thing too. And charterers take in—you’ve seen people like Glencore take in LR2s, take in MRs. Even Morgan Stanley has been taking in MRs over the last three, four months, up until sort of two, three weeks ago when the bid offer went haywire.

[Herman Hildan:]

And you—

[Robert Bugbee:]

It’s hard to explain. Sorry – is there what?

[Herman Hildan:]

Is there any rate where you will be willing to charter out your ships?

[Robert Bugbee:]

Herman, you’re determined to keep asking this question, and we’re full of time charters.

[Herman Hildan:]

Okay, let’s forget about that. Just a last one, I guess. You initially (indiscernible) mentioned that 2014 has been a year where there’s been focus on execution. Looking into 2015 and ’16, what’s the kind of headline focus for the company?

[Emanuele Lauro:]

Still execution. We are receiving the last ship in June ’15, so we are very much focused on that. As Robert was saying in previous comments during the call, the way we’re going to utilize the cash flow generation is still to be seen and discussed, and we’re going to look at what to do going forward. But execution has to be still at the top of the book of our priorities, and we’ll make sure it stays there (indiscernible).

[Herman Hildan:]

Okay, thank you very much, guys.

[Operator:]

As a reminder, if you have a question, press star, one. We’ll go next to Noah Parquette at Canaccord.

[Noah Parquette:]

Thanks. I just wanted your thoughts on the LR2 market. How much of coated tankers are turning dirty now, and have you seen them starting to switch back, and how do you see that playing out over the year?

[Robert Bugbee:]

We had a lot of coated tankers move from dirty to clean in the last parts of ’13. I think that most of those vessels that are capable of doing it, are modern enough to do it have already done so. If you have a huge persistent, wide spread, then maybe you can have two, three, four, five more, but where the Afromax market is and where we think it’s going, we don’t see that as a factor.

[Noah Parquette:]

Are you worried about ships going back to the clean trade?

[Robert Bugbee:]

No, that’s what I’m saying. No.

[Noah Parquette:]

Okay, thanks.

[Operator:]

That does conclude the question and answer session. At this time, I’ll turn the conference back over to management for any closing remarks.

[Robert Bugbee:]

Emanuele?

[Emanuele Lauro:]

No further closing remarks. I’d just like to thank everybody for taking the time to be with us today, and look forward to speaking with you in the next days. Thanks very much.

[Operator:]

That does conclude today’s conference. Again, thank you for your participation.