Okeanis Eco Tankers Corp (ECO) 2019 Q4 法說會逐字稿

Hello, and welcome to the Okeanis Eco Tankers fourth quarter and full year 2019 financial results presentation. Ioannis Alafouzos, CEO and Chairman; Aristidis Alafouzos, COO; and John Papaioannou, CFO of Okeanis Eco Tankers, will take you through the presentation. They will be pleased to address any questions raised at the end of the call.

(Operator Instructions) I would like to advise that this session is being recorded, and John will now begin the presentation. Thank you.

Thank you. Welcome to the presentation of OET's results for the fourth quarter of 2019 with financial period ending December 31. We appreciate your interest in our results and encourage questions at the end of the call.

We will discuss matters that are forward-looking in nature. These forward-looking statements are based on our current expectations about future events, including OET's commercial performance, dividend policy implementation, projected dry-dock schedules, and anticipated debt capital commitments. Actual results may differ materially from the expectations reflected in these forward-looking statements.

Starting on slide 3. Review the highlights of the quarter, which were exactly in line with our guidance of the market in January. We generated net revenue of $49.5 million based on daily rates of $38,400 for the VLCC segment, $49,500 for our Suezmaxes, and $41,200 for our Aframaxes with total time charter coverage of 57%. EBITDA came in at $39 million, and we generated a healthy profit of $18 million or $0.54 per share.

We took delivery of our final VLCC newbuilding from Hyundai and completed scrubber retrofits on our entire Suezmax fleet. Our Aframax/LR2 fleet is up next, and we anticipate retrofitting to be completed within Q2. The company lost its arbitration claim against Ocean Yield as we attempted to exercise a clause in the bareboat charter party that would have required Ocean Yield to sell four VLCCs back to us.

However, the arbitration tribunal decided that the wording in the contract was not sufficiently broad enough to trigger the clause with the main consequences in the tribunal decision being that the vessels remain on their bareboat charters. Lastly, our Board of Directors has decided to postpone the implementation of a dividend policy due to the highly uncertain and constantly evolving macro and energy backdrop. We'll come back to this later on.

I'll now hand it over to Aristidis for an overview of our outstanding commercial performance on slides 4 and 5.

Thanks, John. OET achieved a fleetwide TCE rate of $41,700 per operating day in the fourth quarter. Based on the utilization of 93% and net of technical off-hire days, the unutilized time is all attributed to the Suezmax scrubber retrofit program, which has now been completed. Our VLCCs op generated $63,800 per day in the spot market, a 21% outperformance relative to our tanker peers.

We chose to fix multiple AG-Korea runs, which are the longest runs from the Arabian Gulf, but much shorter than West Africa, Brazil, or US Gulf. We selected these runs in order for our ships to reopen quickly in a rising market. The extra length compared to an Arabian Gulf-Singapore run gave us additional eco and scrubber benefit.

Additionally, loading the vessel in the AG allowed us to procure the cheapest heavy sulfur fuel oil for our scrubber-fitted fleet in Fujairah, which had a spread of $70 to $90 difference with Singapore. Our scrubbers have been operating without issue and we have had no problems procuring heavy sulfur fuel oil.

We also took advantage of one ship's positioning after discharging in West Africa to book a lucrative Brazil-China run during the quarter. Our Suezmaxes generated $62,100 per day in the spot market, 51% higher than our tanker peers. We had two ships going into dry-dock in Turkey for their scrubber retrofits during the quarter, and we capitalized on their positioning to fix long-haul Black Sea cargoes to the east.

We are seeing evidence of longer sailing distances on our Suezmax fleet with multiple fixtures scheduled for discharge in China and Taiwan which bodes well again for our scrubber, eco Suezmax fleet.

Lastly, we are extremely pleased with our spot performance of our Afra in the LR2s, which generated $52,100 per day or 88% higher than our tanker peers.

Our strategy earlier in this quarter was to seek shorter voyages, offer dates, and re-fix into a rising market similar to the VLCCs. As the market strengthened into the start of the year, we took advantage by fixing multiple longer voyages.

On slide 5, we provide guidance for our time charter equivalent revenue in the first quarter of 2020 based on number of days coverage as well as anticipated daily TCE rates. We include only concluded fixtures in our guidance. We have covered 77% of our VLCC spot days at a market leading $100,200 per day, 18% higher than our peers. We estimate current market TCs of our VLCC fleet to be in the range of very high 30s to low 40s per day, depending on positioning and route.

Moving onto the Suezmaxes, we have covered 83% of our available spot days at a market leading, again, $76,500 per day, or 32% higher than our peers. We're excited to trade our Suezmax fleet unconstrained now that we have completed our scrubber retrofit program. We estimate current market TCs of our Suezmax fleet to be in the high 20s, low 30s per day.

Lastly, we have essentially covered the first quarter on LR2s at a market leading $46,500 per day, or 39% higher than our peers. The spot ships continue to trade in the 30s, and we estimate our current market TCs of our Aframaxes to be in the region of $20,000 per day.

I'll now turn it back to John to walk you through our financials.

Thanks Aristidis. Starting with our income statement on slide 6. Our very healthy profit of $18 million (sic - see presentation, "17.7") or $0.54 per share annualized would translate to a P/E ratio of 3.2 based on yesterday's closing price.

Fleet-wide OpEx, including management fees for the quarter, was $9 million or $7,500 per ship day, while G&A was $1 million or roughly $800 per ship day. For full year 2019, the fleet generated daily TCE revenues of $29,200 per day and daily fleet wide OpEx of $6,700 per day, excluding management fees of $600 per ship day.

Turning now to slide 7. Here we provide a snapshot of our balance sheet. Our leverage ratio stands at 68% as our indebtedness has increased in connection with the delivery of seven VLCC newbuildings throughout the year. Cash and equivalents at the end of the quarter was $17 million, while book equity stood at $342 million or NOK95 per share based on typically low asset values.

Turning to slide 8. We provide an overview of our cash flows. At quarter end, we had remaining all in CapEx, $186 million, comprising [$176 million] for newbuilding installments and [$10 million] for scrubbers, which includes both equipment and installation costs. This number has gone up by $2 million quarter-on-quarter due to the scrubber purchase we have committed to for the Nissos Schinoussa that will soon join our spot Aframax/LR2 fleet.

Adjusting for the financing, we expect to achieve on our two Suezmax newbuildings that we will update you on within March. We have total liquidity of $182 million. We take a closer look at our financing and remaining CapEx on slide 9.

In our debt snapshot, we see that we have $54 million of bank debt available for the VLCC are now fee that was drawn down in January as well as access to a $15 million shareholder loan that remains undrawn. We have no debt maturities until 2021.

Our CapEx and debt draw schedule includes installment in anticipated financing for the two Suezmax newbuildings and is adjusted for debt drawdown, net of repayment of pre-delivery financing for these two ships.

I'll now hand it back to Aristidis for a quick update on our scrubber retrofit projects.

Focusing on the bottom right-hand table, we have completed scrubber retrofits on our Suezmax fleet and our Aframax/LR2 fleet is up next. We are taking advantage of the [current] weakness in the market to conclude our scrubber retrofit program in Turkey where we are in the very fortunate position of facing no logistical issues related to labor or equipment arising from the coronavirus.

Our Aframax/LR2 fleet will complete their first special survey while in dry-dock as well. Despite tightening bunker spreads recently, we know charters preference is still very much for scrubber equipped tonnage and believe that the spreads will widen again once floating storage of compliant fuel in Singapore is drawn down as well as the coronavirus subsides.

With that, I'd like to hand over to Ioannis to conclude.

Thank you, Aristidis. I would like to start on slide 10 with an overview of some of the oil and tanker market forces currently in play. Of course, the big event that has impacted the energy market is the coronavirus. The International Energy Agency has revised its global oil demand growth forecast lower by 0.5 million barrels per day for 2020.

As a consequence, we are seeing refiners reducing throughput and ramping up maintenance. Margins fell dramatically but have recently started to stabilize. The low spot prices shifted the oil curve into small contango, though not yet deep enough for floating storage. Chinese teapot refiners took advantage of lower feedstock costs to increase purchases of crude with more VLCCs being fixed into China.

We saw this on one of our VLCCs fixed by the trading [arm] of a Chinese teapot recently. And we are seeing high inquiry from China for our ships in general. After the summer tanker deliveries are set to slow down dramatically and the order book is at an all-time low.

The silver lining from the highly unfortunate event is that new building orders have come to a full stop. Also ships in Chinese yards face massive delays for scrubber retrofits and dry-docks. These developments leave owners like OET with scrubber-fitted equal tonnage on the water in a highly advantageous position to capitalize on the extremely attractive supply-demand fundamentals of the tanker market.

The interesting thing to note is that even with so many negative factors in the market. Our spot ships still earn well above the cash breakeven. And, in fact, we have seen the market rebounding over the past week or so.

Moving to slides 11 and 12. I first want to point out that when we put out our guidance, it really is the most honest description of the types of discussions we have at the Board level and hope that through the guidance you can see the evolution of our thinking on matters such as dividend policy.

In the past, we provided dividend guidance in both our Q1 and Q3 earnings presentations. For a company that has grown tremendously over the course of 18 months that has incurred high capital expenditure to grow and modernize its fleet with scrubbers, it is important for us to stabilize our balance sheet and get our [house] in order before starting to pay dividends to investors.

We were ready to pay a dividend with the way the market was developing from October through mid-January. Actually, we can afford to pay a dividend even now. Clearly though the market has changed dramatically in a very period of time, but it is important to remember that when we listed [OET], our goal was to give investors exposure to a shipping company that was run with the same sense of care of a commercial performance and costs as a well-run private company would have. With the same sense for monetizing assets at the right point of in the cycle.

So, with this well-run private company mentality in mind, we will pay dividends as we have always promised, but the conditions for doing so need to be right. Here's the conditions we have to do with our financial position. The first being the need to build up some reserves to provide the buffer against uncertainty and the second being to have cash on hand for the remaining near-term capital expenditure to futureproof our fleet.

And last condition is one that is a bit more of subjective, but crucial, nonetheless. And that is to have some confidence in the near-term outlook for the market.

The situation with the coronavirus right now is just so uncertain, and it's constantly evolving for us to have any sort of conviction over the next three to six months. We can debate how serious the impact that the virus has on a personal health relative to a bad case of flu, for example. However, the very, very negative impact this virus and the precaution is being taken by governments across the world to stop it from spreading further. Having an oil demand are totally undeniable.

If local health authorities succeed in bringing the virus under control, and our sense ultimately proves to have been too cautious and conservative, then we will dividend out all excess cash buildup and be in a position to implement a sustainable dividend policy immediately. Due to the virus spreads further and global economic growth has severely impacted our capital buffer will be crucial in getting us through the challenging market.

Based on the current market spot rate guidance by Aristidis in slide 5, OET can generate enough cash to pay for the three debt maturity between 2021 and 2022 from cash on hand and not rely on the financing. We're extremely confident that we will finance our two Suezmax newbuildings at very attractive terms soon and believe that we have the optimal fleet to write the eventual market recovery.

We hope that our shareholders feel that we've delivered on many of our promises that we made when we listed and want to stress that the virus only postpones our plan to pay an aggressive dividend. It does not change our plans.

Slide 12 is a summary of many of the points I've just discussed. So, I'd now like to open the line for your questions.

Thank you. (Operator Instructions) Dennis Anghelopoulos, ABG. Please go ahead.

Good afternoon, gentlemen. First question surrounding dividends. Right now, your share price is at quite a steep level to net asset value. What are your thoughts around share repurchases?

I think the first part of your question, and we'd agree that we trade at a very steep discount to even a conservative estimate of our NAV. I think buybacks, as we've stated in the past, can be part of the mix of the total capital return to shareholders. And that will be discussed and evaluated at around the same time that the proper implementation of a dividend policy will be discussed.

So yes, it does form part of the mix of capital return to shareholders, a cash dividend buybacks. It's all part of our total capital term strategy. But again, as we've announced today, that decision has been postponed until we have a bit more certainty on what's happening in the market and with the virus situation globally.

And just following on your fleet, are you attracting offers currently? Would you say first potential purchase of your fleet and around what levels, if you could share?

Are you asking us about whether we're involved in M&A discussions?

Yeah. Just if you've another peer in this area involves M&A discussions, but just generally speaking, what's your opinion on them around the market around selling vessels? Do you think there's a big interest for vessels like yours and at what price levels?

I'd say that M&A interest has always been there, and that's why we set up the subcommittee for handling incoming M&A increase. We're happy to have done that. At times that committee has been busy, other times, not so much. I'd say, today it's probably somewhere in the middle.

Now, Aristidis. From a purely S&P perspective, we've had consistent interest in our fleet. I think currently, given the situation with the coronavirus, the buyer's ideas have become a bit more aggressive. But as I said previously, we've had consistent interest for all the sizes of our ships, Afra, Suez or VLCC.

Alright. Thank you, gentlemen. Have a good afternoon.

Eirik Haavaldsen, Pareto Securities. Please go ahead.

Hi. Can you maybe elaborate a little bit on the funding you're looking at for the Suezmaxes? Is that going to be traditional bank financing or higher leverage lease financing, for example?

Sure. I think in during the -- in the Q3 2019 earnings presentation, we had a slide on the illustrative debt financing we thought we can achieve on the two Suezmax newbuildings. And I think that's very much how you should look at what we're hoping to achieve for these two ships, and that would be traditional bank debt financing.

And maybe to discuss a little bit more on the Aframaxes and the scrubber retrofits there. I mean spreads narrowed the FFA or forward future market is pointing towards narrower spreads. Are you still -- you're going ahead, obviously, I assume you've ordered the equipment and so on but have your view at all changed a little bit given what we've seen?

Simply -- Aristidis -- our view no, it has not changed. We committed to a strategy that we believed in, and we continue to believe in. And certain times in the past three years, the future spread or today the actual spread has narrowed during different times, especially during shocks to the system, but we believe it will recover.

We continue to believe that in a normal oil consumption environment that the spread between heavy and low sulfur fuel oil will be considerable, giving us a quick payback, a repayment of our retrofit. And even today with a spread of about $150 on the Aframaxes, the payback is 20 months.

In addition to that, on the Aframaxes specifically, they've turned five years old this year. So, the scrubber retrofit is occurring concurrently with the vessel's natural special survey and this only extends the duration of the dry-dock by about 15 days.

And the narrowing of the spreads between low-sulfur and high-sulfur fuel oil is a result of the severe shock in demand and the severe drop in the price of oil, which sooner or later will normalize. So, we are very confident regarding the installation for our scrubbers in our Aframaxes as well as the rest of the fleet.

Okay. And finally, one way to de-risk a little bit, given the uncertainty, would have been to put a few of the vessels on time charters as you've done in the past, was that at all something you consider? I would assume not given your exceptional spot performance, but at all any thoughts about the time charter rates and our coverage and where would that potentially be at the moment?

No, we have no inclination to put any of our ships on period charter. So, we're very confident that our ships are efficient enough to earn well above their breakeven in circumstances that will be even worse than what they are today. So, in this context, we don't have any such thoughts because we want to keep our powder dry to maximize our returns once the situation is normalized, whether this is in one month and three months and six months or in a year. (multiple speakers)

To give you a relative understanding, the highest rate that were done for three to five years were currently fixing in line with those rates for the time charter. So, over the course of this year and next year, we strongly believe that we'll outperform them significantly and it gives you an additional flexibility in being able to sell the asset.

Completely agree. Okay. Well done. Thank you.

Thank you. (Operator Instructions) Frode Morkedal from Clarksons Securities. Please go ahead.

Yeah, hi, guys. On the reserves, can you quantify what type of reserves you need to have, if you like have minimum cash amount on the balance sheet?

It is like a minimum cash amount on the balance sheet. We don't have a hard number in mind. Obviously, it will move according to our near-term capital requirements. So, if we don't have any near-term capital requirements coming up, it could be a lower number.

But if we have, as we know now we have three special surveys and three scrubber retrofits to do, it will be a higher number. So, it's not a moving target, but it's definitely higher than where we ended the quarter with on a cash basis of $17 million. (multiple speaker)

We don't want to be like a typical number but it's a bit higher than where we ended up, but not too much higher.

And this is not to understand -- like everybody else, we're very concerned with the developments. And we cannot predict short-term development. So we want to be -- this is why we're being much more conservative than would have been had we not had the coronavirus.

Sure. So, if I look at the CapEx schedule you had, it's EUR186 million. And you have debt. So, it's like a $35 million equity need or cash need. So, of course, it's spread over 2020, but it is fair to assume that you need to have built up the whole amount?

Or could you look like -- are you're looking at the Q1 CapEx versus the new debt, the term on the debt and potential dividend?

We're looking at the year ahead relative to the spot rates that we're achieving today. And obviously, we take our cues from the paper forward curve as well. And that all comes under evaluation. So, it's not something that is as short term as the forward quarter.

Again, to implement a sustainable dividend policy that we wouldn't have the need to go back on or that would put us in a financially precarious position, you really need to take a much longer view than just the forward quarter. So, we're being a little prudent this quarter. I understand with some investors their frustration at not receiving the dividend.

We're managing this company. We have great visibility on our CapEx. We're very happy with our spot performance. We're taking a bit of a longer look at our capital requirements over the next 6 to 12 months. But right now, again, the spot market for us is at cash generative levels. We feel good about our ability to navigate the current market and we just ask for a bit of patience.

Okay, sounds good. Thank you.

We have no further telephone questions coming through at this time. So, we will now go to the questions that have been submitted via the webcast.

The first question is from the line of Øystein Vaagen from Fearnley.

And the question is, given the uncertain macro backdrop, could you update us on current achievable TCEs and how that compares to your cash breakeven and your chartering strategy for the coming months in the event of a further softening of rates? Thank you.

Hi, Øystein. For Q1, we don't have very many ships to fix left to cover the entire quarter. We have one VLCC -- two VLCCs, which we told you, when I was speaking earlier, that we expect numbers in the very high 30s, but probably in the low 40s because the [VEE] market has firmed a bit both out of West Africa and the AG.

On the Suezmaxes, we only have one ship that we need to fix. And it really depends whether we fix it back haul or longer voyage -- round voyage front haul. But if it's a back haul, which is probably our intention, we would expect high 20s to low 30s. And for the Aframax fleet, we're pretty much well covered, again, as we had said.

The breakevens?

The breakevens for the spot VEEs are in the low mid 20s per day. For the Suezmaxes, they are about 20 to 21,000 per day, depending on the ship, and they're in the high 10s for the Aframaxes. So, you can say that the VEEs and the Suez are well in cash generative territory. The spot TCEs and the Aframaxes are at breakeven to slightly above cash breakeven.

We have a question now from Ferd Martin from IS. And this question is why did OpEx go up this quarter?

Sure. I'll take that one. As we guided in our financial report that accompanied the press release, we had higher spare parts expenses for some of the older ships in the fleet, older, if you want to call them that.

But yeah, some some of the Suezmaxes had higher spare parts expenses and then there was bonuses to [sea going crew] at the end of the year. So, I think overall, throughout the year, our total OpEx across the entire fleet, excluding the ship management fee, was $6,700 per day.

(Operator Instructions) We do actually have no further questions coming through so I will now hand back to John for any concluding remarks.

Thank you all very much for your time today and please do feel free to reach out to me directly, jvp@okeanisecotankers.com, with any additional questions or feel free to call.

Thank you very much for your time.

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