Scorpio Tankers Inc (STNG) 2018 Q1 法說會逐字稿

Hello, and welcome to the Scorpio Tankers Inc. First Quarter 2018 Conference Call. I would now like to turn the call over to Brian Lee, Chief Financial Officer. Please go ahead, sir.

Thank you, and thank you all for joining us today. On the call with me are Emanuele Lauro, our Chief Executive Officer; Robert Bugbee, President; and Cameron MacKey, Chief Operating Officer and Hugh Baker.

The information discussed on this call is based on information as of today, April 25, 2018, 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 we issued today as well as Scorpio Tankers' SEC filings, which are available at scorpiotankers.com and sec.gov. Call participants are advised that the audio of this conference call is being broadcast live on the internet and is also being recorded for playback purposes. An archive of the webcast will be made available on the Investor Relations page of our website for approximately 14 days. If you have any specific financial modeling questions later on you can contact me and discuss off-line. Now I'd like to turn the call over to Emanuele Lauro.

Thank you, Brian. Welcome to the call and good morning or afternoon to all. The format of the call is, I will have initial -- I will make my initial remarks and then we will open the call for questions. In the last 9 months, we've been presented with a test as far as the company is concerned and as far as the management team is concerned as the product tanker market wrestled with its lows. That said, we are satisfied with how we have adapted to these challenges. Importantly, we have done so whilst maintaining significant operational and financial flexibility. We appreciate how supportive our equity capital providers have been during these days. As a management team, we remain focused on delivering value from the anticipated market rebound. The medium-term outlook looks increasingly attractive. The IMO measures to move to low-sulfur fuels in 2020 should lead to a significant improvement for the product tanker market. And significant competitive advantages for STNG's modern ECO tonnage. Furthermore, we anticipate an acceleration in the volume driven by increased maritime demand for refined products from 2020.

Much has been written on this, and I will not add to that noise. However, I think it is sufficient to say that the direction of travel ahead of us is clear. In the meantime, we have work to do. Hope is not and has never been our strategy. The senior management team remains focused on positioning our balance sheet for any market. And our best-in-class spot market fleet, top-tier counterparties and the resumption of a secular growth in our product tanker markets.

Whilst we'll not be able to expand to a great extent on the important measures we are taking to enhance liquidity and financial flexibility, we are comfortable to say that we continue to enjoy and expand supportive relationships with top-tier lenders at competitive pricing. The company continues -- continuously evaluates potential financing transactions that it believes will enhance shareholder value and are in the best interest of the company, including the repayment or refinancing of its existing indebtedness.

More importantly, the company has signed term sheets or agreement terms for a series of bank loans and sale/leasebacks to refinance certain of its outstanding security indebtedness. These transactions, if consummated, will be expected to raise $334 million of liquidity after the repayment of the existing secured debts related to the specific vessels. We expect to make detailed announcement for the individual transactions in the coming weeks. As a management team, we are pleased to note this that in an era of financial repression in shipping, our capital providers recognize, as we do, that Scorpio Tankers is positioned as a winner in this space.

With this, operator, I would like to turn the call to questions.

(Operator Instructions) Our first question is from Jon Chappell with Evercore.

Emanuele, I don't want to equate what Scorpio Tankers has been going through in the last few quarters to exactly where Scorpio Bulkers was back in 2016, although the stock price indicates it was something similar. But in a lot of those drybulk recapitalizations, including your own, there was an equity pledge or a need to raise equity for the banks in order to kind of improve the terms and kind of provide a better runway. Is there a similar situation for STNG right now? And if not, why were you able to get this recapitalization plan underway without the pledge for new equity?

Let me answer that one Jon, it's Robert. First of all, yes, we raised equity with the [sulfur], at no time did we make -- did the banks ask us for a pledge or did we make a pledge. What we did was raise equity price at that position and then we got rewarded for that good behavior by the banks. And that's a very -- in a way a very similar occurrence as what has just happened with STNG. We already raised the equity. We did that in December and so we got ahead of the position. So the answer is, anyway in short terms, there is no pledge. There is no requirement. There is very little. We've been working really diligently on creating enough liquidity from present resources without the requirement to do a dilutive equity raise.

Okay. And then I understand, you can't really say too much until all the Is are dotted and Ts are crossed. But to put $334 million exactly in the press release you have to be pretty close on some things. Is there any way you can expand just a little bit on some of the arrows in your quiver that you've been able to use here?

Jon, yes, it's Hugh. Yes, I can expand on that. Just first to follow up on what Robert said. I think we would characterize the discussions with all the financial providers as being relatively routine. And I think we obviously are pleased with the terms and conditions we've received, but we were expecting that. And the discussions have been very moderate and we certainly haven't been -- had any demands placed on us. I mean, in terms of giving you more color on the transactions, I can probably go a bit further. Let me start with the bank facilities. All of the facilities, both the bank and lease facilities are involved in refinancing of existing secured financings that have a lower loan-to-value than what is replacing them. The discussions with the banks are such that we've -- as Emanuele said, we signed term sheets or agreed main terms with our lenders for separate credit facilities. And I can tell you that the advance rates for those have been around -- between 62.5% and 65% of vessels' fair market value. The loan margins for these loan facilities are expected to range between LIBOR plus 2.40% and LIBOR plus 2.60%. The credit facilities are being provided by existing lenders to Scorpio. And I think we have a strong and close relationship with these lenders. And we are very appreciative of their strong support. In terms of announcements, we would expect to announce the commitment of all of these credit facilities within May. In terms of the leasing facilities, the advance rates for these transactions are expected to range between 75% and 85% of vessels' fair market value. They are predominantly floating rate in nature, and bear interest between LIBOR plus 3% and LIBOR plus 3.70% -- 3.7%. Where we have negotiated a fixed rate of interest, the equivalent floating rate to today's LIBOR rates is also within this range. And these transactions are considered as finance leases for accounting purposes. In addition to that, we are negotiating, in fact we have agreed main terms with the leasing company for a sale of leaseback of certain of our vessels for a [higher] advance than what I've previously stated. And this transaction would be an operating lease for accounting purposes. I would characterize the lease facilities as being relatively flexible and nonrestrictive. And I say that by -- with reference to early purchase options, covenants and other features that position them much closer to bank debt than perhaps some respects have looked like in the past. And we're seeing sale/leaseback financing become a lot more flexible generally. We expect to update the market during May and June as to when approvals are achieved, and these transactions are definitively executed. We can't give any more details at this stage for modeling purposes. I'm afraid you're going to have to be patient with us and await further details in upcoming announcements and filings.

No, it's much more helpful than I would have imagined. Just one super quick last follow-up. As far as kind of additional firepower is concerned, do you think that you've done all that you can with these finance leases with loan-to-value kind of updates with the credit facilities or are there even a few more ships that could potentially go down either one of those paths?

We have the ability to do more, if we choose to do it. But I think what we're announcing is what we are doing.

Our next question is from Magnus Fyhr with Seaport Global.

I just had one question on the market. I mean, it's good to see that rates are picking up here, bookings for the second quarter are higher than the first quarter. I guess, it's just the LR2s that are slightly below the first quarter bookings. Can you talk a little bit about the -- I mean the longer haul market there for the LRs? You made an acquisition here to kind of lever into that market? Can you see -- can you kind of just go through the outlook here over the next couple of quarters? It would be interesting to see your views.

Magnus, it's James. I think what we saw with the LR2s was refinery maintenance in the Middle East, January, February. And it's important to keep in mind that these ships go on longer haul voyages. I think, overall, the LR market is strong. And I think that was reflected in the LR1 rates, but I would expect them to continue now that -- to continue to go up now that refinery maintenance has ended. There was also some competition from LPG, but I think triangulation of the LR2 voyages has increased and continues to increase and that should be positive for higher rates.

Okay. And I noticed that you chartered-in additional 2 vessels at $14,300 per day and at $14,000 per day. Can you kind of -- I mean, you have a lot of operating leverage already in this segment. Can you kind of just explain why you're adding 2 more vessels?

That is opportunistic, Magnus. And we see that at these levels with the optionality, which is provided to us in these contracts. There is more value in the company retaining the control of these vessels rather than finding them competing in weaker hands. And as I said, that's one reason and the other reason is specifically the attractiveness of the rate at a time and point where the optionality provided to us will hopefully result in good value and returns.

Magnus, I would also expand a little bit, but underneath this we're not going to go through it in detail, but key customers, especially in the Middle East in these modern LR2 craters, we have expanded recently forward positions related to contracts and the freightments that are all market-related and things like that. And I think that's a pretty good sign that the customer side of that market is stepping up and trying to secure access to modern tonnage.

Our next question is from a Amit Mehrotra with Deutsche Bank.

So just a few quick questions, hopefully. First one is on the liquidity -- the increased liquidity, just on the bank debt side. Is this a refinancing, I guess, with entirely new lenders? Is it existing lenders on the facilities that are being refinanced? And is the lender consortium more concentrated? Any color you could give there would be appreciated.

I can't give much more color, Amit. But they're all existing lenders there, in most cases new facilities, and there is quite a few of them. So it's generally existing lenders refinancing existing deals but certainly not refinancing their own deals.

Okay. Fine. So there is no risk that this goes to and there is a huge concentrated one bank that may when they go to committee something could change. I mean, it's pretty -- it's like a peanut butter spread across a bunch of different banks, is that correct?

That's correct.

Okay. Good. And then if you could just help us think about the use of proceeds. Obviously, the proceeds will be used to some degree to address the converts but it probably doesn't make sense -- I mean, correct me if I'm wrong, but it probably doesn't make sense to repurchase the entirety of the convertible notes? So I'm just trying to understand what the pro forma liquidity could be once you maybe address this "overhang." Any thoughts on how you're thinking about that would be appreciated.

We have lots of thoughts, but I don't think it would be appropriate to say them. I think that one of the great values, obviously, when you're dealing with the bank setups is you have liquidity of the timing of where it is. So we are focusing, as Emanuele started, with working and executing and creating as much flexibility without resorting to equity issues as possible. And I think -- it doesn't -- we appreciate the irony that in a short time we've gone from, and we appreciate you particularly being early in identifying this, that we've gone from a market where people were terrified that we could pay off the converts at all in July '19 to now probably wondering if we're going to start paying off converts right now. So we're not willing to go any further in those discussions for obvious reasons at the moment.

No. It's just my job to ask. But I certainly -- absolutely, just a couple of quick ones.

It's obviously, it's a trade. I mean, there is nothing -- we don't have to do anything. I mean, in one sense, it's really cheap money to -- 2 and something for another year and a quarter.

Yes, absolutely. One last one from me. Maybe 2 quick ones, if I could. If I look at the capital structure, I mean, what you guys are doing basically, I would term it capital structure gymnastics, right. I mean, the financial position of the company doesn't change. You're just going up higher up the capital structure in terms of where the debt lies pro forma. So with that respect, any thoughts, Robert, I mean I guess, through this experience or the experience of the bulker company over the years like where is STNG's capital structure going to actually jiggle out over time if things start to get a little bit better rates? And what's the right LTV for this company after the experience you have had?

Again, we're focusing on dealing with this present position. We're very cognizant of the perception out there as we wanted to just get rid of that. We haven't had that time of going through, looking at where we are going to be forward. What I would say though that's very interesting is the flexibility created for a company like STNG with a modern fleet is great that these leases that we are doing at the moment, as you pointed out, they're much greater resemblance to traditional bank debt in many ways, in many features and they're much more flexible than they've ever been historically. And I think that new methods of certain lenders, not necessarily in our facilities, but there are certain lenders in shipping come under issues and normal commercial lending comes up under issue, and obviously, a tremendous arbitrage. You can see clear arbitrage between the present capital markets as implied in where our converts are trading or our baby bonds are trading and where either lease or commercial lenders are going to lend at. And we just haven't had that -- we can see that now and we are using that arbitrage right at this moment, and using that change in modern leases. But we just haven't had time to go through and properly see long term where we want to end up. Obviously, we want to have where you started with, is you want to have a diversity. You never want to be dependent upon one lease provider or one lender.

Yes. And then quick one, Brian or Hugh. Is $13,000 a day the right number excluding debt repayments, I guess, but including the charter hire dividend debt service? Is, kind of, that the right number, the bogey if you will, in terms of the nondebt repayment cash breakeven number? Is that kind of a good rule of thumb right now based on where you are today?

That's okay. I would think it will be a little bit lower than that but we could go...

And especially if the charter hire comes down next year, I would imagine too, so that will take out maybe $1,000 a day out of it as well right?

Very good point, yes.

Our next question is from Randy Giveans with Jefferies.

Few quick questions just to be clear for the $334 million in aggregate new liquidity, not including any vessel sales, correct? Your operating fleet is going to be the same as it is currently?

Yes, correct. And not including the $150-odd million or whatever it was. What did you give in cash today Brian?

$151 million.

Yes, not including the $151 million cash. So not including any sales. So there is no diminution in operating leverage and in terms of ships. And it is on top of what we declared as cash today.

Excellent, excellent. And then I heard James on the call, so I'll throw a question to him as well. It seems like there is a pretty big disconnect between the Clarksons' and even Howe Robinson publish rates and what STNG's actually earning. So is this outperformance mainly ECO ships, variety of routes, triangulation trades, if you can touch on that a little bit. James, I'd like to hear from you again.

Randy, I think it's a combination of all. Definitely lend some credit to the commercial department of Scorpio, and also the ECO ships do provide a benefit. I think scale and size of the fleet definitely serve our customers very well, and offering all asset classes allows us to expand our customer base and have chartering departments in multiple places throughout the world, from Singapore to London to New York. So I would say, it's a combination of all those things. And what we've seen is kind of the market oscillate between $18,000 a day 1 week and $12,000 a day the other week. But I would say when you think about that is, when it does tighten up, we are reminded that the underlying demand is strong.

Our next question is from Max Yaras with Morgan Stanley.

So we've seen vessel values start to creep up even though resale activity looks low. I'm just wondering kind of what's driving that?

Well, I think there is a -- one of the things is that the customers are making it pretty clear in their conference calls, the CFOs being on conference calls to the general market, the commercial operations people talking to us in the case of Exxon going public, in the case of their actual actions meeting their words in the sense that they're looking at increasing the time charter in of modern tonnage, that their expectation is the product tanker market is going to recover and recover strongly and then get turbocharged as a result of tremendous increase in demand, as a result of the 2020 regulations. The low sulfur and the effect on the product market demand has to come much earlier than 2020 because they're anticipating that this low-sulfur fuel has to be distributed around the world much earlier in preparation for 2020. Combine that then with the fact that you've got rising bunker prices and greater regulation, the newer vessel and product, the vessel that is, traditionally calling the ECO vessel 2013 or younger, is in demand in that forward curve. And that's what's despite, and I think the great question is, so despite the weakness of the front end of the curve, that expectation from the customer side is so high that the prices of such that you've got that drag in the back of the curve for products right now.

I would add to Robert, replacement cost is also rising, if you look at the condition of the shipyard's availability of capital and pure cost pressures on manufacturing also helps to lift the front part of the curve for values.

Yes. It makes sense. Beyond the refinancing, how would you kind of rank your options for liquidity or further liquidity between maybe asset sales and the capital?

I don't think -- from today we don't want to -- what we've announced today is pretty significant. I mean, I think that the rule of math is pretty easy. It's pretty clear that you're covering present burn rates, you've got a curve going forward, and you can virtually do the math. But if you were to roll the baby bond, you've got enough cash on the balance sheet to go through that plus deal with paying the bond back in July '19. So we're going to focus right now on executing and getting out and announcing what we have in the bag. There are other things that Hugh says are available for us to do, which include continue to include the 3 levers that we're pulling on at the moment, which is sale of assets, leases and increasing bank debt from the lower LTV vessels, but we don't wish to add to what we are either looking or thinking about at this point.

Okay. And then just real quick about what level would the banks finance an ECO ship up to?

Did you miss the first part of the call?

I think we mentioned, we mentioned that we were -- we agreed terms with our lenders for various financings between 62.5% and 65% of vessels' fair market values for our bank facilities.

Yes. Just wondering the ECO ships specifically, would they go up to higher leverage levels on those?

It's all about the...

No. I think that they -- I'm sure they'd go to lower lever levels on non-ECO ships.

Yes, we only have ECO ships in our fleet. And with -- it's obvious that a vessel that's old at 5 and 6 years is not going to have the same type of ability to either do leases or bank debt in this because you've got a greater depreciating -- faster curve depreciating on your asset due to the 15-year rolls. You'd have concern about the expense ratio, putting in water ballast, and your fuel consumption is going to be so much higher that when we go to low sulfur, and -- I don't think that many people are going to take up the scrubbers at the end of the day. I think it's going to -- that's going to come its way and go. The cash flow at any point in the market is worse. So it's logical, therefore, that the lender or the debit side is going to be willing at any point to lend less of a percentage at the same rate. There is always fair price, right? It's a price that you could, I'm sure, borrow 65% at for an old asset, but you are starting to get to -- 2-tier market is starting to appear. I mean, it is coming through the capital structures first. I mean, the debt side first.

And I'm showing no further questions. I would now like to turn the call back to Brian Lee for any further remarks.

Thank you, operator. And thank you, everyone, for joining us today. We look forward to speaking to everyone soon. Have a good day.

Ladies and gentlemen, thank you for participating in today's conference. You may now disconnect. Everyone, have a great day.