Hafnia Ltd (HAFN) 2022 Q4 法說會逐字稿

Welcome to Hafnia's fourth-quarter 2022 financial results presentation. We will begin shortly.

You will be brought to the presentation by Hafnia CEO Mikael Skov, CFO Perry Van Echtelt, EVP Commercial Jens Christophersen, and EVP Head of Investor Relations Thomas Andersen. 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 a solicitation of an offer to purchase or sell any securities.

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

My name is Mikael Skov and I'm the CEO of Hafnia. Let me welcome and thank all of you for attending Hafnia's fourth-quarter 2022 conference call. With me here today I have our CFO, Perry Van Echtelt; Executive Vice President Commercial, Jens Christophersen; and Executive Vice President and Head of Investor Relations, Thomas Andersen. The four of us will present Hafnia's fourth-quarter and full year 2022 financials.

Today's presentation agenda consists of four key areas. We will begin with an overview and key highlights of Hafnia, followed by the financials for fourth-quarter and full year 2022. Next, we will provide commercial updates and an outlook on the product tanker market, and finally, conclude the presentation with key corporate updates.

Let's move to slide number 2. You should all be aware and take note of the mandatory disclaimer.

Moving on to slide number 3. Short overview of the agenda.

And moving on to slide number 4, we start with the overview. Hafnia is one of the world's leading tanker owners and operators within the product and chemical tanker market. We are fully integrated shipping platform with our own in-house technical management and chartering teams in Asia, Europe, the Middle East, and the USA.

At the end of 2022, Hafnia commercially operates a fleet of over 220 vessels. We own and have chartered in a diversified portfolio of 128 vessels. Our own vessels have an average broker valuation of $4.2 billion giving Hafnia a net asset value of around $3.3 billion. Hafnia's fleet's low average age of 7.9 years is a result of our constant fleet renewal strategy, allowing for better utilization and improved earnings for our fleet.

Our business model is also robust with diversified revenue streams such as our bunkering team. We're now buying bunkers for more than 1,000 vessels for our pool platform and third-party owners.

Hafnia, today, provides a much deeper value proposition. This has been achieved through our active management, understanding the market and the needs of all of our stakeholders. Since listing in late 2019, we have grown significantly, and we are now the world's leading product and chemical tanker company. We strive to maximize shareholder value and have recorded a total shareholder return of 209% in 2022.

The foundations for the product and chemical market remain strong, and being the operator with the lowest costs paves the way for strong earning potential. With a low order book of newbuilds, increasing oil demand, low product inventories in the Western Hemisphere, and changing oil trade flows as a result of EU sanctions on Russia, I'm confident the utilization of the product fleet will remain strong.

Moving on to slide number 5. I'm proud to announce that Hafnia has delivered yet another strong result in fourth quarter. In our last conference call, we informed shareholders of our updated dividend policy with the payout ratio adjusted according to our quarter-end net loan-to-value ratio.

With increasing asset prices and a higher earnings environment, cash flow from operations has been utilized to optimizing our capital structure. As a result, we have a strong capital structure. As a result, Hafnia's net loan-to-value ratio at the end of fourth quarter 2022 was 37.2%. This, compared to the beginning of 2022 where we had just concluded the acquisitions, have improved tremendously, and it is all down to our close monitoring of the financial market environment, actually working on refinancing deals to strengthen our balance sheet.

With that, a dividend payout ratio of 60% will be paid, corresponding to a dividend amount of $158.3 million or $31.57 per share. This brings Hafnia's full year 2022 dividend payout to $402 million, representing a payout ratio of 53.5%. We will continue to work on strengthening our balance sheet and believe this transparent and shareholder-friendly dividend policy underscores Hafnia's commitment to maximizing shareholder value.

Hafnia has concluded two key strategic acquisitions in 2022, added 36 modern vessels and approximately 13,000 earning days to our fleet. The record result that we see today has proved the strengths of our business model and the decisions that we have undertaken.

2022 net profit from the acquired fleet was above $190 million, including the gain from the sale of the stainless-steel vessels. The acquired fleet has also increased approximately $330 million in value, further strengthening our balance sheet.

The chemicals vessels, as part of the CTI acquisition, have also allowed us to gain significant operational synergies. With added capabilities as compared to product tankers, those chemical vessels are able to transport both clean petroleum products and chemicals, allowing us to switch between cargoes and limit balance time.

This also underscores Hafnia's commitment to decarbonization as these chemical vessels have transported renewable bioproducts, which furthers our transition towards a greener society. In 2022, 17% of the cargo transported by the chemical fleet was bioproducts.

I would like to take this opportunity to thank our team at Hafnia and our trusted partners. These results have been the culmination of everything that we have spent the last few years working so hard for, and every single one has played a big role in making all these achievements possible. Looking ahead, we will continue to build on this strong momentum to produce even greater results and shareholder returns.

Moving to slide number 6. So, let me move on by touching on Hafnia's ESG efforts in 2022. On top of excellent commercial performance and notable consolidation efforts, Hafnia has also had a strong focus on ESG.

The first thing I would like to touch upon will be the imminent delivery of our two LR2 newbuilds that were ordered as part of our Vista joint venture with CSSC Shipping. Two of the four newbuilds on order will be delivered in March, and this will take Hafnia another step forward in our journey of decarbonization.

These vessels, which are built in Guangzhou Shipyard, are equipped with dual-fueled, high-pressure LNG engines, which greatly minimizes greenhouse emissions. LNG is currently regarded as the most promising alternative marine fuel, up until when ammonia and hydrogen engines become commercially available. In anticipation of that, these vessels will also be able to accommodate carbon-neutral fuels with some engine modifications.

The shipping sector is getting increasingly under pressure to decarbonize, and I believe that Hafnia is on the forefront of such efforts. We are consistently working hard to reduce our environmental footprint by looking out for vessel optimization initiatives that reduces our emissions into the air.

For 2022, across Hafnia's own fleet, our carbon intensity, as measured by the annual efficiency, was 5.23 grams per ton-mile, 7.4% below the present IMO baseline. Hafnia plans to deliver at least a 40% carbon intensity reduction by 2028 on our scope 1 emissions, meeting the IMO's 2030 targets two years ahead of schedule, and we are well on track to achieve that. This is a result of the various initiatives that we have piloted, and you can see their effects on reducing our environmental impact.

Moving on, I'll leave it to you, Perry, to take us through the financials.

Thanks, Mikael. The spot market in the fourth quarter remains strong, on the back of an also very strong third quarter, reaching peak rates in December 2022. We see continued growth in oil demand and utilization of the product tanker fleet, as China continues to recover from restrictions and the trade recalibration as a result of the Russia sanctions. As a result, we are pleased to announce that Hafnia has delivered yet another strong quarterly result, rounding up Hafnia's best full-year results in the company's history.

The fourth quarter generated a TCE income of $427.4 million, bringing our full-year TCE income to $1,346.7 million, and an EBITDA for the full year of just over $1 billion. This results in a quarterly net profit of $263.8 million for Q4, and recording a net profit of $751.6 million for the full year.

The strong market environment and high utilization of product tankers have also benefited our fee-focused businesses, such as the management of third-party vessels through our various pools and buying bunkers on behalf of third-party clients, resulting in $13.9 million for the quarter and $40.5 million for 2022.

These strong results enable us to distribute $158.3 million in total dividends, or $31.57 per share to our shareholders, the highest distribution in a company's history. For the quarter, we also saw a return on equity of 67.6% and a full-year ROE of 48.2%.

Then moving to the next slide, our balance sheet remained strong with a cash position of $174.4 million and total liquidity of more than $450 million. With the increasing interest rates for US dollar financing, we have gradually increased our interest rate hedging position to 67% at the end of the year, at a weighted average hedge rate of 1.69%, locking in the rates to match the tenor of our debt profile. We will continue to navigate the high interest rate environment cautiously, so to ensure that we do not incur unnecessary interest rate risks and be able to lower breakeven levels and maximize shareholder value.

With higher asset prices and healthy cash flow from our operations, we were able to allocate more to reducing drawn amounts on our revolving credit facilities and therefore reducing debt, which have now all been paid off in terms of the revolving credit facilities. We're also constantly working on refinancing part of our balance sheet to reduce our funding costs and cash flow breakeven so that we build both market resilience and enjoy significant operating leverage in rising markets. As a result, we've noted a significant decrease in our net leverage ratio to 37.2% at the end of the fourth quarter, as compared to the start of 2022, where it was well above 60%.

If we then move on to the next slide, to the operating data. For 2022, our TCE income of a $1,346.7 million was on the basis of 44,475 earning days. This represents, on average, TCE of $30,274 per day for the full year. For the fourth quarter, we achieved a TCE income of $427.4 million, basis on 10,920 earning days. This is an average TCE of $39,323 per day.

For OPEX, which includes our vessel running costs and technical management fees, was based on 40,424 calendar days in 2022, resulting in an average of $7,098 per day. The fourth-quarter OPEX, which is seasonally higher than previous quarters, was $7,487 per day.

The cash flow breakeven for 2022 was approximately $15,200 per day. The acquisitions in early 2022 and the increase in base interest rates have increased our breakeven levels since then. We will continue our focus on bringing down our cash flow breakeven across the fleet to build operational resilience and position ourselves strongly for the future. Our full year 2023 forecasted cash flow breakeven level is approximately $14,200 a day, and in a continued strong market, the breakeven levels will reach a substantially lower level of roughly $13,500 per day by the end of 2023.

Moving on to our earnings coverage. As of February 20, 2023, (sic - see slide 11, "February 20, 2022"), 71% of the total earning days in Q1 2023 were covered at an average of $36,385 per day. For '23, 27% of the total earning days were covered at an average of $31,918 per day. Spot markets softened in the beginning of the year but have rebounded strongly and we can expect these rates to continue amidst low inventory levels in the Western Hemisphere and Russia exports now having to travel to locations further afield.

For the week beginning February 20, Hafnia's pools earnings have averaged for the various segments $69,824 per day for the LR2 vessels, $47,035 per day for the LR1 vessels, $50,345 per day for the MR vessels, $29,022 per day for the handy vessels, and then on to the chemical $27,195 per day for the chemical-MR vessels, and $42,186 per day for the chemical-handy vessels.

And if you look at the next page, as said, '22 has been a record year for Hafnia with the continued upturn in the product tanker market and strong foundations, we can expect '23 to be another strong year as Hafnia is well-positioned to take advantage of this elevated spot market. Looking at the various scenarios here on this page, you can see the high earnings consensus from analysts that cover Hafnia. And when we apply recently realized rates into a forecast, signaling another very strong year for Hafnia going forward.

Jens, why don't you take the next few pages on the market.

Thank you, Perry. The next few pages provide commercial updates and our expectations on the product tanker market looking forward. Market fundamentals globally support a more resilient clean products tanker market compares to its crude counterparts. When we look at cargo volumes and ton-miles, the clean market has experienced strong recovery over the past couple of years.

Despite DPP ton-mile recording marginal increases from 2019 levels, the cargo volumes in the DPP market still lay below 2019 and 2020 levels. CPPs, on the other hand, have recorded strong increases in both cargo volumes and ton-miles. With the embargo on Russian oil products now in effect, we can expect significant ton-mile growth in the horizon.

Slide 15. World CPP export volumes have also increased greatly, largely attributed to growth in exports from Russia and China. Russian clean products exports to Europe have gradually dropped but it's still hovering around 0.7 million barrels a day.

With the embargo now in effect, Russian exports to Europe will disappear. This represents increased utilization for the product fleet as replacement barrels into Europe will have to come from further afield such as the Middle East, China, and India. Similarly, CPP barrels from Russia will flow to markets outside the EU, thereby traveling significantly longer distances.

Chinese export licenses through Q4 2022 has been record high adding about 1 million barrels per day of increased transport demand to the worldwide balance and being one of the top drivers for the historical high earnings environment during December 2022. For Q1 2023 the Chinese government has announced export licenses close to Q4 volumes of last year. This leaves an expectancy for Far Eastern freight market rebound and strong conditions for the balance of the quarter.

Despite new refinery capacity of 2 million barrels coming online in the Dalian region during 2023, we do not anticipate current high export volumes to persist for the entire 2023 and a reduction will counterbalance some of the ton-mile gains that we have in the horizon. This will, however, benefit the crude tanker market.

Slide 16. Storage levels are also a significant driver for the overall tanker market. According to IEA, OECD oil product stocks have plunged by about 31.5 million barrels month on month in December, far outpacing the normal seasonal draw. However, oil and water, including floating storage for products, rose by 19.5 million barrels, largely attributed to an increase in diesel as European countries filled up with Russian oil products before the embargo came into effect. With increases in ton-miles to come, this drives a firm belief that oil and water is likely to persist and even exceed current levels.

Inventories for clean products in the west remain below the last-nine-year average whilst levels in the east remain on par. With a startup of significant volumes of new refining capacity in the Middle East, we can expect clean trade volumes to increase to replenish this drop. Historically, rates have been very strong when inventories are built. This will support the clean product tanker market segment due to long haul voyages, whereas it will have limited impact on the crude market due to the proximity with crude sources.

Slide 17, moving on to the refining sector. Global refinery runs fell month on month in January by 0.7 million barrels per day with the US activity still recovering from the outages caused during the arctic freeze. January tends to see a slowdown in activity, but this was aggravated by lower natural gas prices and warmer weather in Europe. However, with new capacity coming online in the Atlantic Basin and the Middle East, global refinery throughputs are forecasted to increase by 1.8 million barrels in 2023.

Saudi Aramco's Jizan refinery output has been increasing, reaching around 200,000 barrels a day, reflecting 50% of capacity. Meanwhile, KPC Al-Zour refinery in Kuwait is also increasing output. They have exported 140,000 barrels a day in December 2022, reflecting 25% of capacity. This will help Europe's diesel imports as they are increasingly looking to import from refiners in regions such as the Middle East to replace the lost volumes from Russia.

Slide 18. Current latent utilization of all clean segments, from handy up to LR2, are coming close to max utilization, keeping in mind that the industry average ballast and waiting time typically accumulate to about a third of total tonnage. With increases in ton miles to come, we can only expect the latent utilization to increase further.

Slide 19. Looking at the supply side of our business, we remain bullish on the tanker market with the declining order book levels and an aging fleet. The product tanker order book is at a historical low of 5% of the total fleet and we're already seeing an increase in scrapping activity over the past couple of years. This combined will represent a net addition of only 35 MR equivalents until the end of 2025.

We also do not see a sharp increase in ordering of product tankers due to the increasing newbuild prices. Our business has never really had a demand problem and the current order book points towards a fundamentally sound market for years to come.

Slide 20. To sum it up, I believe the strong fundamentals both in the demand and supply side sets the foundation for a strong 2023. The first half of January reflected a slowdown in cargo loadings across hemisphere and segments but have already rebounded strongly. This market correction from highs in December mirror historical seasonal swings mainly due to December holiday seasons and the Chinese New Year celebrations.

We remain positive that earnings for the remainder of the quarter will remain strong. New refineries, EU embargo, and limited tonnage growth will all have a more profound impact on the clean markets. Even when analyzing the macroeconomic impact on the tanker markets, we believe that swings in global oil demand will have a limited impact on clean trading markets, but more directly on the crude markets.

Mikael, over to you for the next couple of slides.

Thank you. Moving on to slide number 22. I would now like to talk about key corporate updates in Hafnia. Firstly, we have recently revamped our corporate website to allow a more intuitive and friendly interface for all stakeholders. On the website, you will be able to find key information such as our owned and commercially managed fleet, our bunker alliance, and our ESG strategy. We now also have a dedicated investor relations segment, where stakeholders can only easily find quarterly financial information and our relevant press releases.

Secondly, I'm proud to announce that Hafnia has qualified to also trade its shares on the OTCQX market. We are now available on OTCQX under the symbol HAFNF. We see several benefits to this as it will help provide transparent and easier access to US retail and institutional investors. This will, in turn, help to improve the marketability and liquidity of our share, which lower risks and ensure stable prices for our shareholders.

Finally, being on OTCQX being an OTCQX also indicates that a company meets high financial standards and follow best corporate governance practices. We look forward to welcoming a wider base of investors and believe that this will enhance the cross-border trading experience for investors.

And with that I'd like to open up the call for questions.

(Operator Instructions) (call ends abruptly)