Hafnia Ltd (HAFN) 2020 Q1 法說會逐字稿

Welcome to Hafnia's Q1 2020 financial results presentation. We will begin shortly. You will be brought through the presentation by Hafnia's CEO, Mikael Skov, CFO, Perry Van Echtelt, VP Commercial, Søren Winther, and EVP, Head of Investor Relations, Thomas Anderson. They will be pleased to address any questions after the presentation. (Operator Instructions)

Certain statements in this conference call may constitute forward-looking statements based upon management's current expectations and include known and unknown risks, uncertainties, and other factors, many of which Hafnia is unable to predict or control that may cause Hafnia's actual results, performance, or plans to differ materially from any future results, performance, or plans expressed or implied by such forward-looking statements. In addition, nothing in this conference call constitutes an offer to purchase or sell or solicitation of an offer to purchase or sell any securities.

With that, I'm now pleased to turn the call over to Hafnia's CEO, Mikael Skov.

Thank you very much. As mentioned, my name is MIkael Skov. I'm the CEO of Hafnia. I would very much like to welcome you all to our first quarter 2020 conference call. As mentioned, I have today with me our CFO, Perry Van Echtelt, Vice President of Commercial, Søren Winther, and the Executive Vice President and Head of Investor Relations, Thomas Anderson. The four of us will present the Q1 2020 financials for Hafnia.

So we'll move on to slide number 2 which is the disclaimer slide, which I would like everyone to be aware of the mandatory disclaimer that we have, and direct you to read it very carefully.

We move on to slide number 3. And to talk a little bit about the first quarter 2020 highlights. So first of all, we addressed the first quarter financials. And the time charter equivalent earnings for Hafnisa was $193.5 million and EBITDA was a $129.6 million. The commercial and managed pool business generated an income of $5.9 million, and the overall net profit for the company was $77.1 million. EPS or earnings per share was $0.21 per share.

We had a return on equity of 27.3%, and a return on invested capital of 14.3%, both on an annualized basis. At the end of the quarter, Hafnia had a total of 102 vessels, here of 87 owned and 15 chartered in. The average estimated broker value of the owned fleet was $2.3 billion. As of May 15, 70% of the total earned days in the second quarter were covered at $28,921 per day. Hafnia will pay a cash dividend of $0.1062 per share.

We move on to slide number 4. So in the first quarter of the product in the market was very heavily influenced by the very tragic COVID-19 outbreak. Countries all over the world adopted various containment and lockdown measures to limit the spread of the virus. The virus and the consequent lockdown had a historical dampening effect on the demand for refined oil products.

We saw that members of OPEC plus failed to reach an agreement on crude production cuts, which resulted in an all-out price war as it members were no longer bound by output restrictions. This created a dramatic oversupply of oil and oil products, which both benefiting high grades.

The demand for jet fuel was most significantly impacted on as international air travel was paralyzed by global travel bans. Reduced domestic line based travel also saw that demand for gas oil fell correspondingly. The dramatic fall in crude prices on the back of weak consumption environment created trading opportunities where spot oil prices were lower than Q2 prices (inaudible) and the buildup of inventories, which led to strong demand for floating storage, benefiting the [China] market in general.

Move on to slide number 5. So focusing on the market activities in the second quarter of 2020. We saw economic activity started to recover in China in April, while many economies in the West and other parts of Asia went into lockdown, resulting in an additional decline in demand for refined products, leading to land storage filling up, while container movement fueled further demand for floating storage for refined products.

As tonnage supply was reduced by port congestion, freight rates across most plain clean tanker routes rose to an all-time historical highs in late April 2020. In the second half of May, frieght rates experienced downward correction. We agreed production cuts of 9.7 million barrels per day by OPEC+ members in April, started to play a part in improving supply-side fundamentals of the oil market, while the rate of recovery of oil demand in the medium term triggering a destocking of floating storage.

Maybe a little bit into the various segments and what effect that had. We see the following. The Handy segment benefited from the filtered down effects of the larger vessel segments on the European continent and the Mediterranean, which includes demand quarterly. The average year-to-date clean and dirty handy earnings are in the range of $20,000 to $25,000 a day.

Looking at the MR and the LR1 vessels trading west of [Suez]. The flow of naphtha and gasoline from Europe to Asia on MRs sold in April as the airlines were diverted to load in the Middle East, and tied up in floating storage. The average year to date earnings are $22,000 per day for MR vessels, and $30,000 per day for LR1 vessels.

Looking at the same sizes in MR and LR1s, but (inaudible), we sold at low crude prices, excess crude supplies from onshore storage, and demand destruction from the coronavirus created a steep contango structure leading to increased demand for floating storage.

We have had year-to-date earnings for MRs in the Far East of $25,000 per day. For MRs in the Middle East, about $24,000 to $26,000 per day, And LR earnings around $35,000 per day.

Looking at another important part of the business which is the bunker side, we saw that end of the first quarter, the spike between high-sulfur fuel oil and very low-sulfur fuel oil was $80 per metric ton. The spike narrowed to $48.5 per metric tons with falling crude oil prices, but rebounded to $68 in Singapore as the overall price had made some recovery.

That was the end of the commercial view on Q1 and Q2. So Perry, why don't we move on to the next few slides?

Yes. Thanks, Mikael. And good day to everyone on the call. As Mikael correctly said, the first quarter was Hafnia's strongest quarter yet, where the industry benefited from a winter market in combination with the oil industry building floating storage. We feel that we got a very good result of a net profit of $77.1 million and pay a dividend of in total $38.5 million or $0.1062 per share.

The income from the management of third party vessels of our pool business in the first quarter was $5.9 million. The efforts resulted in an annualized return on equity of 27.3% and a return on invested capital of 14.3%. The balance sheet is strong with an equity ratio of 41.9% and a liquidity position of $128 million. The increase of working capital is mainly a result of higher freight rates. Say for two LR1s in our (inaudible) joint venture, there is no further CapEx for newbuilds. The remainder of the investments for these two vessels will be drawn from the arranged bank financing.

And zooming in on the next page, on page 7, on the pool economics, let me explain it a little bit further. Hafnia charges a commission for the management of external ships based on two elements, a fixed fee of $250 per day per vessel, and 2.25% of net TCE earnings made by the vessel. So in an example where vessel makes $20,000 per day, Hafnia will make $250 plus $450 totaling $700 per day. The $250 fixed fee basically covers the fixed cost of running the pool for external vessels. Based on a fleet of 80 external managed vessels and the TCE hire of $20,000 per day, Hafnia generates an income of $13 million before tax. And as I said for the quarter, the pool business generated $5.9 million before-tax.

Mikael will now present as of slide number eight.

Yes. So moving on to slide number 8, talking a little bit about some of the reasons for Hafnia's position today and the strong result that we have presented. The result is not just a consequence of one thing alone, but a combination we feel of six very important items. It's a very strong commercial platform, a combination of the lowest operating cost and lowest cost of funding in the sector, no fee leakage, which is from the line (inaudible) between all stakeholders, including management and shareholders. Very good stewards of capital and obviously, very strong market fundamentals.

So we believe in general that the company has a very strong earning potential with a low cash flow breakeven of $13,625 to date expected for the year, a very balanced capital structure with a targeted fleet loan-to-value of between 50% and 60%, and a highly attractive dividend yield, potentially combined with a transparent dividend policy -- sorry, potential combined with a transparent dividend policy. So the target dividend payout ratio of 50% of annual net profit from operations intented with quarterly payments.

Moving on to slide number 9. So as the title on the slide says, IMO 2020 was supposed to be the hot topic in 2020. But it was turned out to be anything but a hot topic. The real world has changed so dramatically in the last six months with the following main events happening. Part of the cost per tanker fleet being OFAC listed, the attack of the ARAMCO refinery, bombing of an Iranian tanker, oil price going up above $60 per barrel, China lockdown due to COVID-19, the performative COSCO OFAC has been lifted, Europe, US and India went into lockdown due to COVID-19. And a barrel of WTI crude oil would cost a minus of $37. Who could have foreseen that. And definitely a good reflection of the world that we've been through over the last two quarters.

We move forward into slide number 10. And basically, as discussed in the previous slide, the overall market has been influenced by many of one-offs in the last six to eight months. And we have constantly been seeing increased freight rates, although with plenty of volatility. However, the vessel values have seen little change as an indication of an expectation of a short lived frieght (inaudible).

Move on to slide number 11. So in the last 20 years, we've basically seen five periods of five to six quarters of inventory draws. There have been various reasons for the inventory draws, where the first ones were driven by economic setbacks and production costs, while the later ones have been caused by strong demand outpacing production growth.

Looking at tanker size in general, we've seen a period of weak market while the oil market is in rebalancing mode. However, the production growth is by far more important for the tanker market compared to demand growth for oil.

Moving to slide number 12. As I think everyone is aware, the floating storage has in 2020 been a significant driver for the overall tanker market with a massive increase in capacity used for the storage in the second quarter. However, we have seen a few weeks ago, and it seems to be changing all slightly.

As an illustration, we've shown a drop in oil demand following the financial crisis in 2008 to 2010 versus the forecasted drop in oil demand in 2020. And global oil demand declined by approximately 4 million barrels per day from December 2007 to March 2009, and is expected to drop by 25 million barrels per day in the second quarter of 2020.

Moving to slide number 13, due to the COVID-19, which the season for 2020 have changed somewhat and is now expected that growth and expected seaborne product demand will be negative in 2020, but partly compensated by increased floating storage. We still have a historically small order book. We had a lot of increased refinery outage in the early part of 2020. And ton-mile growth is higher than the fleet growth for 2021. So these are the main highlights really of how we look at the demand and supply situation.

Also, Kevin, taking a little bit of a forward move into 2021, and we still like to focus on the fact that before we came into 2020 and before we had the current situation with fraud in-store at the supply of vessels, i.e., the order book was historically low and we still start, you know, so you are leaving and training all adeno from store situation. We're still going to be in a very beneficial position as far as new tonnage and supply is concerned.

We move into slide number 14. I can speak a little bit about governance. And I have that we have a very strong focus on our corporate governance and things we'd like to highlight in this presentation are as follows a highly reputable Board of Directors. We have a strong seasoned Audit Committee, internal audit, extensive authorization metrics, clearly identifying the authority throughout the entire organization, remuneration committees and fully aligned incentives between management, stakeholders, shareholders and with no fee leakage, all safeguarding to be a best in class covenant structure.

Move to slide number 15 and look a little bit at the ESG side. I would like to say finally is as the world's leading (inaudible) company, Hafnia should be positioned for the future of responsible and transparent maritime energy transportation to the world market. Innovation and collaboration to commit to be a trusted partner for the business and communities we serve, and to shape our world and oceans [considerations]. We're very happy to be part of the (inaudible) correlation, and that's an important part of our ESG strategy as well as many other initiatives that we're currently focusing on.

So this kind of forms the last slide of our presentation. And with that, I'd like to open up the call for questions from the investors and other people on the call.

We will begin our Q&A session now. (Operator Instructions)

Ryan Flynn.

Yes, thank you. You've helpfully provided information on where the vessels were covered at and as of May 15. I'm curious if you could give us some directional information on when during the periods those vessels were covered and whether you expect that figure to fall now that rates in general have dropped back from previous peak.

And my second question would be regarding the share buyback. I note that you've been active in the market repurchasing shares and that forms the second part of the capital allocation policy in addition to the dividend. So what are your thoughts regarding the buyback going forward? Thank you.

Yes, thank you for the questions. And I think maybe Perry, if you want to say a few words on the share buyback, I could start maybe by talking a little bit about the DoD side of it.

So basically, maybe just elaborate a little bit when you pick a date like May 15, that's basically, we've been trying to highlight what the situation looks like as of that date. So basically go into a little bit aggressive in the broker valuations into what the current market was up until that day. And that's what it's going to reflect. So the balance 30% is really just going to be a combination of how we see and how margins will develop basically from the last week and a half, and the balance of the period.

But I think that the -- what you're going to be seeing as far as earnings are concerned is that the biggest shift, for instance, we fixed on very long voyages, which basically means that when you have stronger market, the period will drag out. And that means you're going to have a longer benefit of that. Whereas on the very smaller ships, you have a more quicker change of earnings reflecting where markets go because the boards is very short. And so basically, we're not going to really comment on whether the average number we gave is going to be higher or lower, which is more the fact the fact that we are so far into the future that we have very good visibility as we mentioned that the Q2 quarter will be a strong one as well.

Okay. Understood on that point. Thank you. And sorry, did you mention you were going to comment on the buyback?

Yes. Maybe maybe I can do that, Mikael. So the share buyback that we announced in February after the full year results was to cover basically 2% ultimately of a share buyback. We purchased 7 million shares and spent around $12.6 million on those shares. And that basically covers the mandate for the share buyback going forward. So as of now, there is no -- there are no plans for further buybacks.

Understood. Thank you for taking my questions.

Thank you. (Operator Instructions)

Yes, this is (inaudible). I think we received the question from Anders Karlsen from live webcast. He's asking if you can elaborate a bit on how we see (inaudible) situation currently. I guess that would be for maybe Søren or Mikael?

And I think Søren should take that.

I can do that. We have seen a very strong and very long delays on import, delays or waiting outside ports. It is coming off a little bit now as the demand for products is increasing. And that's really the -- what you're seeing on the overall floating storage numbers that is being reported around the world. We still have quite a few products sitting outside jet, and ULSD being the most oil products, and gasoline and naphtha being the products with the most turnaround or the quickest turnaround, if you like.

You have a strong carryover of demurrage from very high market back in early May and end April. So overall, you're looking at a mix of demurrage rates fixed back then. And if you take there (inaudible), (inaudible) in particular, you're talking very, very high and close to $100,000 in some of them. On the margins, obviously lower. And as we go on with new fixtures, it becomes lower. I would guess on average is about $40,000.

Good. I think we have one more question on that. (multiple speakers)

We are still getting orders for deviation. It is not as pronounced as it was. Many manufacturers in end of April and all the way through May would have been (inaudible) fixed as directed by a Cape of Good Hope. The sheer volume of long distance cargoes in that sense with or without the ton-mile has come up, but the activity has also come up. So you're not getting the same amount of questions now as we had.

Thank you. And we received a question from (inaudible), is asking what is your approach to term charters in the current market?

Yes. Maybe I could just give an overall view on that. So thank you for the question. So basically, our view is, and always has been, is that we'll be constantly value and do value than the current forward market for either time to others or other ways of hedging our earnings and compare that to our view on spot market. And so we have actually been doing a bit of term coverage. But so far, it's still predominantly (inaudible) spot. And our view has not changed in the sense that if we feel that the forward curves and the forward time generate higher than how we since spot mines develop, we're going to increase the amount of hedging accordingly. So that is our kind of fundamental strategy and one that we'll continue to follow.

And then we received a question from Gabriel (inaudible) from Trikon energy. Gabriel?

Yes, hi. I wanted to have your view on the second half of the year and the expectation of the refinery run versus whatever is sitting on floating storage, which one will kick in first?

Thank you for that. (inaudible) can just give a little bit of the view on how we see that situation develop.

Yes, there's no doubt that a lot of the products that we are storing now outside forces already sale to areas where it's needed. Hence, you -- one would have to assume that you have products ready available for supply and consumption increase. We actually think that the refinery runs will come back to some extent. And we are already seeing, for instance, South African refiners trying to file the refineries again. They are having problems. And instead of actually using their own refineries, they're now looking for imports coming out of the [AG] because they can't produce the right product. So we are seeing slowly refineries coming back. As to how fast they will get up to a high run percentage, that still remains to be seen.

Thank you. (multiple speakers)

Do we have any further questions?

Doesn't seem to be the case. Operator, there are no further questions from the webcast.

We have come to the end of today's presentation. Thank you for attending Hafnia's first quarter 2020 financial results presentation. More information on Hafnia is available online at w.w.w.hafniabw.com. Goodbye.