Okeanis Eco Tankers Corp (ECO) 2020 Q3 法說會逐字稿

Welcome to OET's third-quarter 2020 financial results presentation. We will begin shortly. 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. I would like to advise you that this session is being recorded. John will begin the presentation now.

Hello, everyone, and welcome to the presentation of OET's results for the third quarter of 2020. We will discuss matters that are forward-looking in nature. These forward-looking statements are based on our current expectations about future events, including OEC's commercial performance, dividend policy, 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, we review the highlights of the quarter. We generated net revenue of $48 million, EBITDA of $36 million and adjusted profit of $17 million or $0.53 per share. Our Board of Directors declared a third consecutive cash dividend of $0.10 per share or $3 million. Year to date we'll have generated a 23% dividend yield for our investors.

In September, we took delivery of our final two Suezmax newbuilds and have thus concluded our growth program with our fleet now fully delivered and on the water. We also fixed one VLCC on a one-year time charter at $34,000 per day, a rate that is not repeatable today, and have thus considerably derisked 2021 for our investors.

Lastly, we hedge a significant portion of our floating rate debt exposure at 30 basis points all in for a term of three years. I'll now hand it over to Aristidis for an overview of our industry leading commercial performance on Slide 4.

Thanks, John, once again OET is trending as a top performer in the spot market for VLCCs and Suezmaxes. During Q3, we achieved a fleet-wide TCE of $35,600 per operating day net of 5% technical off-hire days. Our VLCCs generated $48,000 per day in the spot market, a 17% outperformance relative to our tanker peers that have reported Q3 earnings. We fixed longer West Africa to China runs to lock in the prevailing strong rate, maximize our eco and scrubber benefits and capture the TCE arbitrage between the West Africa and AG markets.

Our Suezmaxes generated $33,000 per day in the spot market, 32% higher than the tanker peer group average. We continued our strategy of trading Mediterranean to China route and mix in shorter voyages to avoid fixing longer at the market bottoms.

Lastly, our Aframax LR2 fleet generated $15,200 per spot day. We continue to be adversely impacted by relatively lower exposure to the more lucrative clean LR2 sector than our peers, but still managed to outperform peers trading in the dirty market by 9%.

On Slide 5, we provide guidance for our time charter equivalent revenue in the fourth quarter of 2020. We include only concluded fixtures in our guidance. We have covered all of our available VLCC spot days at $24,000 per day, 14% higher than the peer group average, base is 46% more coverage.

Moving on to the Suezmaxes, we have covered 70% of our available spot days at $17,000 dollars per day or 39% higher than the peer group average with 23% more days covered. We estimate current market TCEs of our next Suezmax fixture to be in the mid-20s per day.

Lastly, we have cover 40% of our Aframax spot days at $11,000 per day. We positioned the Nissos Schinoussa and Nissos Heraclea for their first special survey and scrubber retrofit and minimized the opportunity cost of off-hire. The [Heraclea] will redeliver to us at the yard next week and embark on her first spot voyage of the quarter and affirming LR2 market. We have focused on competing for Libya cargoes on Nissos Therassia.

With the delivery of Nissos Therassia, we've concluded our scrubber retrofit program. Our commercial performance ensures profitability in Q4. Back to John.

Thanks, Aristidis. Starting with our income statement on slide 6, I'd like to first reiterate our above consensus Q3 adjusted profit of $17 million. We adjust our profit for unrealized losses on our interest rate swaps and the expensing of deferred financing fees in connection with the refinancing of three Suezmax debt facilities during the quarter.

I'd also like to point out our industry low G&A of $505 per vessel day. Trailing 12-month earnings per share now totals $3.5 per share, which equates to a P/E ratio of less than 2x based on yesterday's closing price.

Moving to slide 7, we report book value of NOK115 per share. As guided last quarter, our leverage has peaked in Q3 at 68% or $848 million, backed by strong time charter coverage and a very young fleet. Debt will decrease by $11 million per quarter going forward.

On Slide 8, we summarize our cash flows. At quarter end, we had remaining CapEx of just $2 million, while our liquidity position stood at $41 million.

Shifting to Slide 9, we provide a comprehensive overview of our debt stack and daily cash breakeven by vessel. Our daily cash breakeven includes anticipated drydocking costs in 2021 for the Suezmax Milos and is based on LIBOR of 30 basis points.

Our all in cost of debt in 2021 is anticipated to be 3.5%, all eight of our time charters are extremely cash-generative and more than offset any cash burn from the Aframax and Suezmax spot fleet. Furthermore, since August, we have hedged $345 million of floating rate exposure on seven ships, four Suezmaxes and three VLCCs. We are likely to hedge the Nissos Anafi in the coming months as well. I'll now turn it back to Aristidis to walk you through our market outlook.

Thanks, John. I'd like to first focus on the VLCC market on Slide 10. OPEC compliance has been strong since May, leading to a 20% reduction in cargoes out of the AG. Oil in transit is at the same level as it was in 2016, albeit with more ton miles. At the same time, the VLCC tonnage list has been expanding steadily since July, as ships return to the spot market from floating storage and from previously deferred drydocks.

We had a peak of around 65 VLCCs floating in China for seven days or longer. And that figure is now down to about 20. We believe that the tightening of time spreads will lead to the drawdown of floating storage, which will cause near-term pain for VLCCs, but set the stage for a more robust recovery in the second half 2021.

Looking closer on Slide 11 at China's impressive oil demand recovery, we will see refinery runs and imports have been strong while floating storage has come down drastically since the peak in September. As mentioned, the rally in crude prices on the back of vaccine news will drain away any remaining floating storage.

In the immediate term, we expect Chinese import demand to move sideways as refinery utilization rates have stabilized. Product inventories still remain high and margins low. We expect the next round of Chinese crude purchases for arrival in January to begin soon as teapot import quotas reset and winter heating demand reduces oil product overhang.

On Slide 12, we illustrate that the key to a rebalancing of the oil market is recovery in jet fuel demand, which is the only major fuel type whose demand is still significantly below pre-Covid levels. We believe that a pent-up demand for air travel will be released as soon as the vaccine or therapy treatments become available. Currently, there are 40% fewer flights in operation globally than last year. A Covid vaccine will help clear jet fuel inventories and rebalance the oil market.

We present our estimates of cash breakevens for older debt-free VLCCs on Slide 13. We calculate that old VLCCs are burning $3 million to $9 million of cash per year in the current spot market, while also emitting 40% more greenhouse gases than OET's VLCCs. If they carry any leverage, cash burn is even higher. We also note a strong charter preference for eco tonnage such as ours. The combination of these factors leads us to conclude that scrapping should accelerate in the coming months and years. I'll now hand it over to John for a word about our valuation.

On slide 14, we focus on earnings over the next two years. Starting at the chart on the left and at the left most gray bar. Assuming OET generates a full year 2021 spot rate of $20,000 per day on the spot trading VLCCs, $18,000 per day on our four spot Suezmaxes and $15,000 per day on our Aframax LR2s, OET would still generate net income of $32 million, and that's currently trade at a PE ratio of around 6x.

If you plug in VLCC spot rates of $20,000 per day, Suezmax spot rates of $18,000 per day and Aframax spot rates of $15,000 per day into your models and don't get to $32 million of net income, please give us a call to help us fine-tune your model. It's also fair to say that if our eco scrubber fitted VLCCs are generating $20,000 per day in the spot market as a full year average, other tankers are barely covering daily OpEx.

Put another way, the spot rate environment that generates $32 million of profit for OET will also drive substantial scrapping of older tonnage. Even under the worst-case scenario for next year, OET will be cash generative, thanks to its charter portfolio and high quality fleet.

In 2021, free cash flow is $14 million less than profit, so that if we generate $32 million of profit, we will generate $18 million of free cash flow in 2021. In 2022, free cash flow is $11 million less than profit. So, at the midpoint of our rate estimate an $85 million of profit should equal $74 million of free cash flow in 2022. Back to Aristidis for slide 15.

On slide 15, we leave you with a summary of our thoughts on the market and the company. We expect the market to remain weak through the first half of next year. As such, our Board decided to take a more conservative approach with regard to capital allocation. Our thinking around the dividend today is very similar to how we thought about it back in Q1. We're concerned about the effect that lockdown in Europe and a big Covid resurgence in the US will have an oil demand and want to maintain at least $20 million of unrestricted cash on our balance sheet.

If our stance ultimately proves to be too conservative, we will distribute a cash [up] dividend to our investors, just as we did in Q2 of this year. As outlined in the previous slide, we were able to generate no less than $8 million as a bare minimum in 2021 and likely more given our commercial outperformance and potential for a strong winter market.

The fleet profile is attractive and, whether scrapped or marginalized, the pool of modern ships is shrinking. The key to recovery, though, is a return of OPEC to the market and increased molecules being transported at sea. With that, we'll be happy to answer some of your questions.

(Operator Instructions) Peter [Yazdi], [Fearnley] Securities.

Morning, guys. Just a few questions. First of all, I guess we've touched upon this plenty of times before, but you're still trading at a major discount to report intrinsic values and we have this year, coming into effect next year. I know that's not the only driver of whether you decide to sell or do something on the vessel side. But can you just talk a bit more about what you're thinking and seeing in the asset market and also the plans, if any, to divest assets?

Okay. I'd like to -- I can touch on the question with DCM, and then I'll turn it back to Aristidis to comment a little bit on what we're seeing in asset values. And so maybe to take a step back and address the DCM first, it's a commitment to formally valuate the option of selling ships at the Board level if our share persistently trades at a substantial discount to NAV. And that percentage discount is not fully defined. It's not an obligation or automatic trigger to sell ships, if we trade at a discount to NAV.

And I think here it's a little bit important to understand the context and background of the DCM. When we designed it in 2019, our view was that the market was going to be exceptional in 2020 and very good in 2021. As such, the timing of its implementation in Jan 2021 was chosen so as to allow us to enjoy one exceptional year of earnings in 2020 and then look to sell ships throughout 2021 in the context of a still strong physical and asset value environment in order to close any lingering discount to NAV and provide investors with an exit.

Covid has obviously upended the original timing of our planned ship sales. We believe that the market will improve from the second half of next year onwards, at which point we feel conditions will be better and more conducive for selling ships.

That being said, the DCM is still scheduled to come into effect in Jan 2021, and we remain open to ship sales even in the current weak physical asset value environment. I believe that ship brokers can confirm that. We are very cognizant of the accretion potential of selling ships and using the cash equity release to buy back our shares at today's price. And we continually weigh this alternative against the cash flows these ships can generate in a good market.

There is two considerations to take into account. First, given our leverage, our NAV is sensitive to changes in asset values. So, if the next sale of a 2019 build VLCC is concluded at a 5% discount to last done, what today can be considered a substantial discount to NAV may turn out to be a more modest discount. Our ideal scenario for buying back shares is at a substantial discount to NAV that persists in the context of rising asset values.

Secondly, our liquidity is roughly USD250,000 per day. Our Board owns 73% of the company. And we estimate that other long-term holders that aren't sellers at today's prices own another 10% of the company. So, the true free float of the company is somewhere between 20% and 25%. To buy back 20% of the company is 150 days' worth of trading liquidity.

Obviously, this isn't feasible, so we need to issue a tender offer. Now if we'd be able to buy back enough shares in the tender at a price that still represents a substantial discount to NAV to actually make a dent in our per-share accretion is very difficult to say. So with that on the DCM, maybe Aristidis you can comment a little bit on asset values.

Yes, sure, John, thanks. Since the beginning of 2020, obviously, asset prices have reduced significantly for all types of crude vessels and products and age as well. We have seen modern eco scrubber-fitted values come off I would say from the highs of 108 deals that were done once or twice early this year, down to Hunter's last sale of around 84.

We haven't seen as much liquidity in the market of S&P for Aframax and Suezmaxes of similar age tonnage. But generally, I feel that the decline in asset values for such modern tonnage is limited to go any further. I mean, we could see a bit more, but I think we reached near the bottom.

Since the summer where we've seen the yards extremely hungry for some prompt newbuilding deals, and they offered some very attractive prices to owners. Generally, especially in Korea, the prices have inched up since then. And that will help give a floor to modern asset values.

Where we see a big potential for decline in asset values is on over age tonnage, anything over 15 years old, which for the past year I would say, S&P of these types of ships has predominantly been used for trades that OET definitely doesn't engage in. And most serious owners don't either, whether that's Venezuela or Iranian related.

The buying interest for these types of vessels speaking with S&P brokers has dried up significantly recently. And I believe we'll start seeing a very strong deterioration in values on these ships that will bring them much closer to scrap levels than what we've seen previously.

So just to give a quick recap on asset values, I think on modern ships like ours, Eco and with scrubbers, we're pretty much near the bottom in where we could see values go. And I think that once we get into 2021, especially the second half, we'll see them increase significantly. And on older ships, I fear that there's still quite a bit of room for them to further decline.

Thanks. Just a final quick one in terms of -- I heard you mention it, but I didn't quite catch it. In terms of the -- you're fully booked on the VL side for 4Q, but on the Afra LR2s, just ballpark. It seems that you have two vessels due to be fixed quite shortly. Just ballpark where you see the market and what to expect here.

On the Suezmaxes, you said?

No, Afra LR2s.

On the LR2, I think we can expect something in the very high teens for the first voyage it has, and in the Aframax, something in the mid-teens I would say.

Thank you.

We also have one Suezmax that's opening up very soon in the [west]. And on this ship, I expect something in the mid- to mid-high 20s.

Great. Thank you.

Thank you.

And just one more thing.

Of course.

Sorry, one more thing to add, given that our fleet is so efficient, even in this market, we're still seeing some time charter opportunities that are attractive, and far above the rates that you would pay to a non-eco, non-scrubber ship. And we're examining each one based on how we think we can perform in the spot market. And if we think that we can find a time charter opportunity that will cover us until between the second half of next year and up to Q4 when we expect the market to improve. We'll take it.

Dennis [Angelopoulos], ABG.

Hey, guys. How are you doing?

Hi, Dennis, very well, thank you.

Just a question on -- surrounding the scrapping case that you're building. It looks like the older vessels, they are much less competitive on a cash breakeven level. But I'm just thinking about the mentality of a ship owner. If I had an older vessel, I had a party earlier this year. I put a lot -- not that much capital in to have this older vessel, I made a decent amount of money and it's going to be tough now, but I see an order book, which is quite low.

So, what's going to preemptively make me to scrap? Is it the fact I'm sitting on a cash cushion, I'm going to draw on that? What's the breaking point, is it going to be soon or is it going to be a year? How long -- do we have to burn through everything? Just your thoughts around that?

Hi Dennis, I think you have to ask yourself what type of trade you're going to plan on using that vessel for. So, once you get over the age of 15 years, the ship will -- It'll be very difficult to compete on anything that an OET ship will offer into. If you're willing to trade in more riskier business, then you still have potential.

Although with the elections in the United States, it seems that the sanctions on Iran and Venezuela could be relaxed and these trades could all of a sudden become normal trades again that normal owners can compete for. So, I mean, in the shorter term riskier business or if we can keep looking for storage opportunities and holding yourself over until the market firms.

But will they scrap vessels? That's the question I'm getting at. Is it really the market's so bad right now that people of -- owners of older tonnage are really looking at them, so saying should I scrap now or are we going to have to wait at least one, two, three more quarters before that really starts to sink in at these levels?

I think the passing of a winter market without any real firmness, that ought to be a catalyst to having more serious deliberations about scrapping for those owners of older tonnage. I mean, just now we're seeing spot cargoes get 10, 15 offers from owners for one AG cargo. So, that gives you a bit of an indication as to the state of the market now. And obviously, the owners of those older ships are going to be last in queue to get any cargo coming out of the AG or WAF for that matter.

So, it's a very difficult spot market. It's a very difficult market for young ships, and it's doubly difficult for any vintage tonnage. Obviously, the individual choice of owner, what they do -- when is the right time, what the trigger point for scrapping is, that's up to them. But the overall macro conditions in the physical market are conducive to scrapping.

Now just pivoting away to what you're seeing in the market. US crude exports have held up quite well, actually, even though production has fallen quite a lot. So, what's word on the street for you guys about what's happening in the United States? Is it -- what's happening? Is it that are they going to go down or are there a lot of long-term contracts there that's left to be lifted? Just your thoughts around that?

Right now, we understand that US exports are holding up because of the decline in refining utilization in the States. And that's really what's driving exports. Conversations we're having with market participants to understand that production is rolling over right now. So that's not really where it's finding support from. It's more on the refining side of things where utilization rates, CDU rates are quite low and that, in the absence of refining those barrels, they're being diverted to the export market.

And then just to wrap up, is that the US coming back? Is that the key driver you're looking to -- I'm talking about the shipping fundamentals. What's the key market that you're looking at where we should be paying attention to for shipping for the tanker space? What's the key thing we should be looking at to come back? Is it the US, is it Chinese demand continuing to grow? What's the thing that you focus on the most long term?

Long term, it's clear -- is obviously a rebalancing of the oil market. And for that to happen, you first need to clear the product inventory overhang and the product inventory overhang is a function of what's happening in the jet fuel market. So, that's really the biggest laggard in terms of demand relative to pre-Covid levels, is the jet fuel market.

It has a double negative impact on eco scrubber ships in that the product inventory overhang is also depressing -- artificially depressing VLSFO MGO pricing generally being diverted into the middle distillate pool. So, clearing this product inventory overhang will be very key for a fleet like ours.

And then once the rebound to the oil market is complete, that's when OPEC can begin bringing more barrels to market. So, the AG cargoes coming back into the market to support the VLCCs is something that needs to happen, but that can only happen after the oil market is rebalanced.

Thank you very much for the color, guys. Great quarter.

Thanks.

Erik Haavaldsen, Pareto Securities.

Yeah, hi. I just wanted to ask you one thing on the cash flow initially. Your working capital release was not as big as I expected maybe. Is there anything there we should expect in the fourth quarter that further releases?

Hi Erik, John here. The reason for that is because from the very hot market in Q2 and the early part of Q3, that a lot of our accounts receivable are demergers. And so, we don't collect them as normal spot freight that you collect 10 days after discharge. So, it essentially has to do with the heightened uncertainty on the timing of collection of demergers, and that's really the reason why the working capital release was lower than envisioned.

Right, but there's no concern on those receivables at all, right?

No, just that the timing is uncertain. We think that -- we'll certainly have some collections in Q4. But certainly, by Q1, we'll clear the backlog of receivables from demergers.

All right, perfect. And you stay very true to paying out basically everything in terms of cash flow. And now you end the quarter with $17 million of cash, that's $1 million per ship. Is -- that is lower than what you indicated previously. Should we assume that to go up a little bit? Or is that a level you are okay with?

Yeah. So, last quarter, when we distributed the big catch-up dividend of $24 million I think I guided on the call that our unrestricted cash balance should end Q3 at between $15 million and $20 million, and it ended up at $17.5 million.

As Aristidis mentioned in the concluding remarks on Slide 15, I think now we've given our heightened level of caution or concern about the West of Suez oil demand because of Covid, we'd like to maintain at least $20 million of unrestricted cash on the balance sheet. So, the higher end of the previously guided range.

Perfect. That makes sense. And just two questions on the market and your fleet. One with regards to your Suezmax spot performance so far this quarter, it's excellent. How much of that is equal advantage as you would -- in your opinion? And how much is pure skill?

Thank you for the nice comment. I think the eco and scrubber advantage is between $3,000 and $4,000 per day. And the balance is due to the types of voyages we choose and obviously the duration. And when we choose to make the longer voyages based on how we see the market moving.

Given the downtime that European refineries experienced in the quarter, there was a lot of excess crude in the [med] that presented us opportunities to take long voyages into China, which we did a lot. We did a lot of that route. And so, locking in those long voyages in a steadily declining market, taking long voyages whenever you could obviously leads you to outperform an owner that takes short voyages.

And it also helps us lock in that eco plus scrubber advantage on the longer sailing days. So, it's really a combination of those two factors, longer voyages that have been made into China and then, obviously, the eco and scrubber advantage utilizing that fully on the longer sailing distances.

Yeah, and that leads me to my second question because obviously, one effect of COVID-19 has actually been that European refining capacity is coming down and that looks to be permanent. So, is that over time going to be a threat to the Aframax trades, because there will be more efficient long-haul barrels going on VLCCs? Or is it like you say now, that most of those barrels will continue to go on Aframaxes just on longer voyages?

We did see an uptick in VLCC fixtures from the med to China in the quarter, which is something that -- not exactly a rarity, but it doesn't happen often, it's something that we have to monitor. It's really hard to extrapolate current 1Q trends into the future. As you do correctly point out though, European refining capacity being lower three years from now, five years from now than it is today is a distinct possibility.

And that's obviously something that we think about often and certainly in the context of thinking about which ships could make the most interesting sales candidates when the time is right. So, it's something that we consider and we evaluate all the time.

Just to add something that -- the Aframaxes that we own, one of them is trading clean. The other two are also LR2s, so they can be cleaned up and traded as LR2s as well.

Thank You. There are no further questions in the queue. So, I'll hand the call back to our speakers to conclude today's conference.

That's all from us. Thank you all very much for following our company and on the call. And please feel free to reach out to us via e-mail via call with any additional follow-up questions you may have. Thank you, everyone.

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