Scorpio Tankers Inc (STNG) 2014 Q4 法說會逐字稿

Hello everyone and welcome to the Scorpio Tankers Incorporated fourth quarter 2014 conference call. This conference is being recorded. I would now like to turn the conference over to Mr. Brian Lee, Chief Financial Officer. Please go ahead sir.

Thank you, and thank everyone for joining us today. On the call with me are Emanuele Lauro, Chief Executive Officer; Robert Bugbee, President; and Cameron Mackey, Chief Operating Officer.

The information discussed in this call is based on information as of today, March 2, 2015, and may contain forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statement disclosure in the earnings press release that we issued today as well as Scorpio Tankers' SEC filings, which are available at scorpiotankers.com.

All participants are advised that the audio of this conference call is being broadcast live on the web and is also being recorded for playback purposes. An archive of the webcast will be made available on the Investor Relation page of our website for approximately 14 days.

Now I'd like to introduce Emanuele Lauro.

Thank you, Brian. Good morning to all and thanks for joining us today. The format of the call is known to most of you. Today as well, we would like to devote most of the call to Q&A.

We largely remain focused on execution, and whilst the majority of our fleet is now trading underwater, we are still taking delivery of 12 newbuildings in the next four months. The number of operating days quarter on quarter are increasing substantially, and Q4 has seen a few deliveries pushed into Q1 in order to have 2015-built vessels as opposed to December 2014 ones.

Demand for product tankers continue to increase at a rate which we see being healthy. This is evidenced by the year-over-year increase in rates across all product tanker classes.

Even at the peak of US turnaround season, high global refining margins have sustained refinery runs across all regions. This has contributed to a strong product exports and has pushed up product tanker demand. As refinery maintenance is now set to slowdown, we expect the product tanker market to remain tight for the foreseeable future.

In the months ahead we expect demand to further increase as mentioned as a result of new refineries coming online and demand increase due to the economic growth. The latter is being substantially helped by the lower oil price.

We further expect that the percentage of product tanker vessels on order versus the current fleet will continue to decline, rebalancing the supply and demand curves. With this, I don't know if Robert has something to add. Robert, otherwise, we can go to Q&A. Yes, correct.

Yes. I'd just add a few things. What we have in Scorpio is that we presented a positive investment thesis for the product market and we continue to see evidence that that thesis is unfolding. We don't believe that others are now in a position to replicate that. We've embarked on a strategy to put low cost, highly efficient steel on the water in front of what we expected to be a multiyear recovery in the CPP market. This recovery is expected to be driven from both cyclical and effective elements.

We've put in place a low-cost financing that has maximized the Company's degrees of freedom. We've already demonstrated the flexibility of that capital structure to take advantage of market opportunities, both in industry and in financial markets.

We've engaged in several accretive asset transactions when we were the only party with the available financing to conclude quickly. We sold assets however where we were able to high grade the overall fleet and release capital to use for our accretive newbuilding transactions and shareholder-friendly capital return activities.

We, for example, repurchased over 20% of our shares when Wall Street had lost sight of the Company's underlying value. We've returned over $115 million through dividend payments inclusive of what we've recently announced. This has enabled us to derisk our shareholders' investment and ensure that we are judicious with that capital.

Looking forward, we believe our best-in-class asset portfolio, low-cost financing and dedication to remaining opportunistic in the face of ever-changing opportunities, especially when it comes to capital return policy is set to drive attractive shareholder returns.

Management own significant amounts of stock. We wake up each day seeking to ensure that the Company has a solid financial footing to seize all opportunities, whilst at the same time weather any unexpected challenges and, b, to maximize the value of both our and your shares.

With that we would like to hand it over to questions.

Thank you. (Operator Instructions) Jon Chappell, Evercore ISI.

Robert, first question has to do with the first quarter to-date guidance you provided for the first time. 75% booked, I am just curious what's the calendar date or any rough guidance you can provide to when that 75% cut-off was. And the reason I ask is obviously DMR markets specifically has been incredibly strong over the last couple of weeks. So just trying to figure out how much of that recent strength is incorporated in that 75% number.

The calendar date would have been cut back by one week as of today. So it really would have been for estimated earnings up to and including Friday week last.

Okay, Friday, February 20th. Got it.

Correct.

All right. And then also, I've asked this before, but now the market's little bit different, so I am going to ask it again. A lot of the charter-ins start to roll off, and I guess most of them in the next four months or so. Now, I guess the original plan was kind of to let those roll off and become more of an owned ship operator as you take delivery of the newbuildings. But given the options that you have on some of those what's called the last year's rate levels, should we assume that at least from an option extension standpoint that you may look to keep some of those charter-ins for longer period of time?

I think we're going to be continue to be consistent where we've always said that where there are options that are clearly deep in the money, and, yes, we do have those that in an environment we see is actually continuing to improve long term that we would have no hesitation in exercising those options.

Yes. Last question, longer term strategic, as I went through this press release there is a lot of similarities to the OMI press releases, seven or eight years ago with the quarterly guidance, and also if you just go to the cash flow statement having big buybacks right on top of growing dividends. Absent the sale of the Company, which is obviously impossible to predict, what's kind of the next steps in the strategic playbook for replicating what happened in OMI middle of last decade?

I think you are seeing that first now during the first -- this first quarter which is this is really the first quarter that the Company has -- is going to have, let's say, significant EBITDA, significant sequential earnings gain, and what we're doing at the moment is, let's say, securing that and focusing on the quality of execution for this quarter. So we're focusing on as hard as we can on the daily nuts and bolts of Scorpio Tankers and focusing long term strategically on the quality of that balance sheet, that quality of that balance sheet that enables, I think OMI was a great comparison that then enables you to really tight concentrate then exclusively on value creation, whether it's through stock buyback to dividends, et cetera.

So this time now is like pressing the pause button on the investments in -- it's just very, very steady, just making sure on an operating basis that we are, as Emanuele said, taking delivery of these next 12 ships over this next four months and ensuring that we have a great start to this cycle that is playing out quite nicely at the moment.

Okay, I will turn it over from there. Thanks Robert.

Gregory Lewis, Credit Suisse.

Robert, I will be curious on your thoughts and what you're seeing in the market related to the issues with refineries on the US West Coast, is that creating -- what types of dislocations is that creating, is that creating an opportunity for you guys is or is just kind of at the moment taking volumes out of the market which potentially could come back later. Just any color you can provide around what that's doing to the market?

I think if we take it in general terms, as we got to this point now in the product market where supply and demand is reasonably balanced, and most importantly for the first time ever we've got a Northern Hemisphere market, a Southern Hemisphere market, an Eastern services market, a Western service max market, Western services market and you've got all four of the product tanker sizes functioning. Any dislocation is going to have more significance.

Now, right now it just so happens to be that the West Coast California is providing good demand. That demand is coming not just from the Caribbean area but you're even looking at way just all the way from Korea and Asia to meet California.

But it's just one thing. We would expect that maybe when California is cleared up and whenever it's going to be something else is going to happen. We've just got this increasing trend where you've got refineries slowly opening up in the Middle East and India combined with a very positive demand side as a result of economic growth and stimulation coming from the low oil price.

And then you've got countries like Australia, the switching from crude to product imports, you've got countries like Britain itself who is suddenly actually having to import, almost import more jet fuels and gasolines than it can produce itself. So here you are getting growth in those areas without even any underlying demand growth for the base product itself in those economies. And as this market continues to tighten any dislocation will create opportunity.

Okay, great. And then just following up on Jonathan's question, you mentioned that the 75% contract coverage in the press release. But I mean should we be thinking that the Handies have the most remaining Q1 market cap share versus the LR2s just given their sizes, or should we think about it being pretty equal across the board?

I think that's a good question. I would categorize the LR2, so if you took the midpoint at 75%, Handies would have probably at that date been 70%, 69%; LR2s could have -- would have been as high as 79%; LR1 77%, and MRs 73%, 74%.

Okay guys. Thank you very much for the time.

Thanks.

Ben Nolan, Stifel Nicolaus & Company.

Yes, Robert and maybe Cam, when I look at the first quarter so far, especially in the last two weeks or so when rates have really popped pretty nicely, at the same time that we're seeing pretty cold weather across the United States. Last year, the same time or actually a little bit earlier, the weather was really cold and it had a negative impact on the product tanker market. I am just trying to understand what is, how do you determine whether or not, say, a weather impact is going to be positively impactful or negatively impactful, what exactly is the determinant?

Well, I think last year we had a number of factors coming together. They were awful. You know you had terrible palm oil, you had terrible vegetable oils flooding in South America. You also had a -- you didn't have those first of those Middle East refineries coming online, allowing the freedom for exports coming from Europe. You also got an increase in exports from Russia into Europe which is allowing that ability for Europe to feed the US East Coast in its cold.

The other thing is the oil pricing is completely different from where it was this time last year. So those US East Coast refineries themselves are put under more pressure because their sourcing of crude oil is being less sufficient.

And in conjunction with that, the weather has been severe enough that they've even had delays in their operation of getting crude. So this year it's been largely positive.

One thing I would mention though is that right now the triangulation aspect in the Atlantic is very difficult because you haven't actually got much product coming from the US Gulf to Europe, you've got a lot of product going from Europe to the US East Coast and a lot of product coming out of the US Gulf to the developing economies in South America, Africa and even going to Asia.

So it's a very different year. Last year there was no ops, there was vegetable oil in a mess, the Asia market itself wasn't as strong. So you just had more ships with less demand being focused into that Atlantic Basin. Today the product market has developed so much more. Now, we can see just the difference in the LR2 rates at least of Suez this year compared to this time last year.

Okay, that's helpful. And then my next question I guess relates to the LR vessel, LR2 vessels that you guys are acquiring from [Seoul]. I know there were several options to acquire several more of those. how should we think about modeling those? I mean is that something that you at this point would see as accretive and something you'd move forward on or may be not?

An option is an option, there are two more options. And the declaration of those options don't come until May the 31st.

Yes.

So there has been no -- it's an option, there has been no discussion in management, no discussion in the Board related to those options at this point.

Yes. Maybe correlated to that, but not directly, we've seen pretty -- we've seen really good product tanker rates and a relatively modest increase in asset prices, although I guess I would say at the same time last year, if we would see, have seen rates like we see today, asset prices probably would have been substantially higher. Would you attribute the market as it stands right now on asset prices relative to charter rates? Is it a function of just less capital available to chase opportunities or am I completely off?

I think in many aspects, shipping or energy or anything from the capital market, there's been -- we had, let's say, hope right across shipping for a period. Then there was the disappointment, then there was the capitulation, liquidation from the general energy side. And that has created less, let's say, speculative capital. You've got the players, the stronger players whether they are the Maersks or the BWs and the Stings being very much more measured in their capital allocation.

And I think that the whole market itself has turned more to a show me market. So for us it's very understandable when we saw this in very, very similar to 2004-2005 where you had a breakout in the actual final underlying supply demand curves and rates. But it took a little while for asset values to catch up. So I think we've just simply turned from the hope trade to show it and prove it.

Right. And that I guess also translates into the relative lack of new vessel orders as a past item 12 months or so, just market has been very strong but no orders?

Yes. You've got that plus, the -- actually there is not that much yard capacity. You are seeing even our own vessels being delivering slightly later than we would've expected, and vessels at the back of the queue is going to deliver substantially later than when people expected across the board of products, that yards are generally booked up through till 2017 in that area, plus the stress on certain shipyards has meant that actually newbuilding prices themselves, the creditors of these yards are not willing to give vessels away at cheap pricing.

Plus I would say there is greater discipline from the capital allocation side in the product market. There are, the equity IPOs are being closed, so there's -- you're not having those speculative orders being put in at the moment.

Okay. And then last question for me, you guys have now sold or agreed to sell the final remaining LR1s, but you still have some charter-ins and you still have the pool, the Panamax pool. How are you thinking about that segment of the business going forward, is that something that is just being phased out overtime and you'll focus on the larger and the smaller end of the vessel assets?

Well, for Sting, it's -- for Sting, it's a lot to do with relevancy and where we see the returns. So, we've got this great position in the Handies, the ice-class ships highly regulated, requires a lot of operational intensity, we've got -- this in a large newbuilding fleet there and a fleet that doesn't have many ships on order. The MRs, we -- that's the work for the trading workers, and the LR2s is that expanding market driven by those Middle Eastern new refineries that adds that beta or real drive as the supply demand curves improve.

The LR1s, we just didn't focus on and I don't think there is any drive to do anything from Sting on that basis.

Okay. Sounds good. That does it. I'll turn it over for somebody else. Thanks.

Omar Nokta, Clarkson Capital Markets.

Robert, I just wanted to touch on the Atlantic Basin commentary you were giving. Few years ago the TC2 route became a bit of a question mark and so we started tracking the transatlantic triangle. What do you think going forward, is the TC2 coming back to relevancy? Is there a different route or what would you think in the Atlantic is probably the best barometer of vessels trading there?

I think it's really difficult for all the vessels in the moment. I mean we've got the very, very significant changes happening in the market itself, but while the WTI spreads, the currency dollar euro currencies, the pressure on those US East Coast refineries exist combined with the opportunities that the US Gulf refineries have to export to east or to Africa or to South America plus the strength in this new demand area, new markets in Asia. I think probably the better way that you could do this and a more conservative way you could approach this is take the totals, you take the markets individually whether its TC2, US Gulf, Asia, add a little bit for a modern fleet because it's going to get the occasional triangulation opportunity and leave it at that to the moment and then when we've all got a bit more better data, then we can finetune it.

Okay, yes, so just moving target again. And then with that the -- I know the markets become much more dynamic across all four product tanker segments. Are you able to give any geographical mix about where the, your fleet-wide operations are kind of -- or where the fleet is located currently or is it just too dynamic to get a handle on?

Well, I think you could be rest assured that after the Handies have completed the -- Handy ice-class ships completed their initial palm oil voyages, they would've been trading in Northern Europe, North Atlantic. The MRs are probably 75% -- on the spot side 70%, 75% right now Atlantic and Atlantic versus east spread. The LR2s are, you can't avoid them being in the East. East market is going to dictate the rates anyway, even if on occasion they're traveling into West Africa or into Europe.

Okay, thank you. That's real helpful. And then also just wanted to, I'm sure you've gotten asked this question before, but the drop in oil prices, has that in anyway changed your view on what conventional vessels look like from a return perspective? Obviously you and the team have been pioneers of the ECO story, but does the second-hand ships built with non-ECO specs, do those become more attractive or is it still ECO the way to go?

No, I think we will get -- we're doing -- do this transparency in bits and pieces. So right now you're seeing us come with these estimates related to book revenue, this is not really spread. But as we -- whether we do it on the first quarter call or into the summer in the conferences, its you still have a bunker differential anyway. But you still have much more than a bunker differential, you have actual headline revenue differences because of the specifications of the vessels that are beyond the bunkers.

So for us especially with the pricing that we got on this new fleet and what you're getting in general operations and ease of maintenance and customers, you top the list of customers. We will not be doing anything else but investing in ECO ships.

Very good, Robert, thanks very much.

Herman Hildan, Clarkson Capital Markets.

So year and a half ago you were pretty clear that first half 2015 was the latest you would have delivery of vessels given that you believe that that timing would be perfect in terms of recovery of the market. And I think you've been more right than you even believed at the time. But you've also seen last two months you guys had some 2016 deliveries. Now, you mentioned earlier on in the call you took a pause on the investment button. What kind of prices would you want to see, or rates, before you would alternatively change that strategy?

It's another question we've considered in the last week. It's not a pause on the investment button, we put a pause on the dividend button. What we wanted to do is right now to just have a period where we are just focusing on the execution and the delivering of the ships. The assets that we acquired back in December were so discounted against the actual value of the market that this came into the -- this were too good to pass bracket.

In theory, you're going to -- you will always make decisions based on what's your best allocation of capital, whether it's paying down debt, whether it's increasing dividends, whether it's buying back stock or whether its acquiring assets accretively.

Okay, thank you for that. And just going a bit back to Q1, I mean if you look at through DC 2014 rates in the Pacific, I think it's fair to say that 18,000 by March in Q1 is a bit of a disappointment. Is it possible to provide some color on why it could be that your guided rates in Q1 has been call it somewhat on the weak side of what we've seen on benchmark rates. This is, for example, more trade as vessel deliveries or?

Well, Herman, there is a couple of factors here. One is of course, as we've explained in the past, our newbuilding deliveries come on contract rates that was set some time ago just for positioning purposes from the yard to the west. So there is some -- you could call that a drag, you could also call it a secure positioning voyage. We are very pleased with the economics and the terms of those contracts. But frankly, it's below the current spot rate in the market. Okay. That's reason number one. Matter of fact, it's a large number of MRs that have just been delivered.

Reason number two is of course I would question the -- say, the standard practice of on paper calculating a triangulated voyage with perfect efficiency in -- on dates as a realistic benchmark. Of course sometimes as chance would have it, sometimes we will beat that benchmark, many times though that assumption of just going from A to B, B to C and C back to A on dates, the prevailing market rates on the day with very little waiting or demerge, no delays, et cetera, is frankly something I think could be reconsidered as a fair benchmark, which gets to Omar's question earlier.

I think I will also add that of course the -- we've already said that these were dated back to Friday a week ago, but I would also remind you that the US Gulf rate and even the TC2 rate was pretty dreadful for the fixing from January 20 through till February 16 or so, I mean, you had world scale 50, 60 in the US Gulf. So, yes.

Okay. And then moving over to my next question, in January you provided guidance $0.10 to $0.14 EPS for Q4. I thought there was this a unwritten rule that when you provide the guidance you come in at least the middle. Could you give us some color on that range and what -- and result within your I mean not middle -- at the end of the range relative to the higher end one year dividends.

I think we gave $0.10 to $0.14 and ended up right in the middle as per your conventional $0.12.

Okay. But it doesn't fit the high (multiple speakers) --

I mean, there is no -- look, I think you are not going to go into details, but we will -- Emanuele alluded, Cameron alluded that we took ships from December that should have delivered in December, moved them into January. We've always been very focused on making sure that the Company's breakout year was 2015, creating as clearer runway as possible then for the 2015 position.

And I think, looking forward, I would think that the skies above us are getting bluer every day related to the product market, the Company hasn't reached the beginning of runway yet, it's still just gently taxiing out as it's taking delivery of these last 12 vessels. But sometime in the next two or three months is going to be in that position where it can spread its wings and go down that runway. We have been far more focused in these last months on the core execution of delivering what is a huge fleet that that risk has taken away from all of us as shareholders and that's been accomplished, then whatever.

And on that note, I mean obviously you've taken the Company from a very small Company to a very large Company. And then in terms of fleet size, what's kind of the breaking level, would you say, before you really start to benefit from having a large fleet in terms of number of vessels?

Well, I think we are benefiting from that right now. At this point this month going forward, you had a tremendous amount being delivered in the last five, six months. But you are starting to get that benefit right now, you've seen in the 4Q numbers, general operating cost coming down, cost per vessels and different measurements coming down and we have got a great visibility with our customers and strong relationships with those customers as they enjoy the quality of these vessels.

On the cost side also, is it possible to provide some guidance on G&A, have you reached, call it, full invested G&A level or how would you guide on that going forward?

Well, we're not going to guide on it, but I mean as you -- as the more ships deliver, your cost per vessel continues to come down.

I meant more on absolute basis if you are going to go (inaudible) and everything that you need (multiple speakers) --

Yes, you pretty much got all the stuff that you would need and, yes, you have -- the marginal addition of 12 ships to the fleet doesn't create the same stress as going from 12 to 75.

Okay, thank you very much guys.

Magnus Fyhr, GMP Securities.

Just a couple of questions here. On the MR, so you've got about 25% of the bookings left for Q1. We have seen a lot of volatility in the market during the last week. How confident are you that you've gotten book these at a higher level than the 18,000 rate that you gave guidance on for the fleet booked so far?

I don't think that's a question that we are prepared to answer. I mean, I think we've given the -- at this stage what the Company has done is in its effort to give better transparency and visibility is we have told you what we've done and I think that we don't want to get into the speculation game at the moment.

All right, fair enough. Just switching gears to the time chartered-in vessels, you got -- you mentioned that you will look at them on an opportunistic basis. So there are two ships coming up for renewal here in the next couple of months, one older 2007 built and a newer built, any view on renewing either of those, I mean, say you'll put --?

This comes onto an area of commercial proprietary, I don't think it's the right thing to do to open your negotiations or not on a conference call.

Fair enough, all right. Well, thanks.

Fotis Giannakoulis, Morgan Stanley.

I would like to ask you, I notice that your Handymax vessels so far this quarter, they have been earning higher rates that the MR vessels despite the fact that the MRs are larger. Is there any reason for that, any particular route that has been driving with unusual differential?

I think only that the -- those Handy vessels are ice-class vessels. And that has been good trading in ice, good Russian volumes and we had cold weather. So, it's not unusual that a ice-class vessel will, Handy vessel will outperform an MR during the critical months of winter. And then of course it is unlikely to outperform an MR when the ice goes away.

Okay. Thank you. And my last question is about the dry bulk market and if there are any connection with the product tanker market and I am talking particularly in terms of ordering and potential conversions of dry bulk vessels to product carriers. Have you seen something like that, is this is something that, it might worries you and what would be the difficulties for dry bulk owner to convert his order into product carriers?

Fotis, it's Cam. We're probably both seeing the same type of behavior, which is of course from the perspective of the dry bulk market conversions are happening if and when owners are able to negotiate costs before them. This you've seen conversions into crude, into containers, into all different sectors. So product tankers are obviously one small piece of the puzzle which generally has to do with the shipyard's capability and most importantly, the timing to delivery because once you get into the period where shipyards starts to order steel or critical equipment for a ship, the cost of converting basically becomes prohibitive. So you need a long lead time to do it and then you need let's say, a common interest to go into product tankers. As a matter of course, we haven't seen many conversions, obviously there have been some of the size those as Scorpio Bulkers, but not enough to say, alarm us as far as the order book goes.

Okay, thank you Cameron.

Spiro Dounis, UBS.

Just two quick ones from me. So you mentioned in the release that a strategic focus is on reduced order book, and I guess outside of just not ordering more vessels at this point, I guess I suppose one option would be consolidation. But there really has been a large appetite for consolidation thus far I guess in product tankers, same we've seen in crude tankers. Just wondering if you could expand on that strategic goal?

I think that -- well, you have seen consolidation in the sense that people like AP Moller have been buying up ships on the side from small owners, we have even done the same. So it is a small consolidation like that. I mean we ourselves -- there can be consolidation and one hopes there is consolidation in, let's say, the non-ECO conventional fleets where companies that have -- they thought their strategic plan was to, for example, go public or IPO and we would hope that we believe that various discussions of some sorts has happened in those companies. And we would hope that some of those would consolidate and push together.

We have also seen consolidation on the margin. We even whereby stronger pools or stronger fleets have been taking over the management, commercial management of some of the weaker or smaller owners too. So it's gently generally.

Okay. And so with your ability to I guess manage the order book as a whole, how would you say you are able to impact that going forward?

I don't think there is much that we are going to do to try and impact that. I mean we are the market leader, we've got a -- we have enough ships, I don't think that we are wanting for size. And there's few opportunities in the new ECO vessels to even think about it.

That makes sense. And the last one, so I guess with two months of ECA regulations on our belts, I was wondering if you could talk to may be the actual impact these regulations have had so far and may be if you have seen some owners without a fuel advantage turndown exposure in the Atlantic trade?

I think that's a very good question. I mean we're seeing -- if you want to see and I apologize to Fotis because this would be another reason why the Handies ice-class ships have performed well. In those areas like the Handy Ice, they are more or less exclusively trading in those ECA areas. We are seeing a positive impact and that is going to just get stronger and stronger as we go through.

Great, thank you.

Thank you. Okay.

Thank you everybody for attending the call.

Thank you. And that does conclude today's conference. Thank you for your participation.