Scorpio Tankers Inc (STNG) 2023 Q1 法說會逐字稿

Ladies and gentlemen, good day, and welcome to the Scorpio Tankers Inc. First Quarter 2023 Conference Call.

I would now like to turn the call over to James Doyle, Head of Corporate Development and IR. Please go ahead, sir.

Thank you for joining us today. Welcome to the Scorpio Tankers First Quarter 2023 Earnings Conference Call. On the call with me today are Emanuele A. Lauro, Chief Executive Officer; Robert Bugbee, President; Cameron Mackey, Chief Operating Officer; Brian Lee, Chief Financial Officer; Chris Avella, Chief Accounting Officer; Lars Dencker Nielsen, Commercial Director.

Earlier today, we issued our first quarter earnings press release, which is available on our website, scorpiotankers.com. The information discussed on this call is based on information as of today, May 2, 2023, and may contain forward-looking statements that involve risks and uncertainties. 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 as well as Scorpio Tankers' SEC filings, which are available at scorpiotankers.com and sec.gov.

All participants are advised that the audio of this conference call is being broadcasted 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. We will be giving a short presentation today. The presentation is available at scorpiotankers.com on the Investor Relations page under Reports and Presentations. These slides will also be available on the webcast. After the presentation, we will go to Q&A. For those asking questions, please limit the number of questions to 2. If you have an additional question, please rejoin the queue.

Now I'd like to introduce our Chief Executive Officer, Emanuele A. Lauro.

Thank you, James, and thank you for joining us today. In the first quarter, the company generated $286 million in EBITDA and $196 million in adjusted net income. This compares with the first quarter last year when the company generated an adjusted loss of around $15 million. So we're starting 2023 with $210 million more in adjusted net income compared to 2022. Today, we have $800 million of pro forma liquidity. We see an order book near record lows, an aging fleet, constructive demand for refined products, refinery dislocations and a time charter market with duration and high rates, which continue to improve.

Scorpio Tankers is a young and large fleet with significant operating leverage and most importantly, minimal CapEx. We do not intend to grow the company, rather we intend to harvest. The balance sheet has -- and we continue to see a reduction in leverage, but we will look to optimize it as well. Our new $750 million to $1 billion term loan and revolving credit facility, while still under discussion, can accelerate the repurchase of more expensive lease financing and it can create more balance sheet flexibility. The revolver increases the flexibility and efficiency of managing the 2 critical levers vital to shipping companies: leverage and liquidity.

While overall debt reduction continues to be our priority, our strong financial position continues to improve and has allowed us to start to return capital to shareholders. Since July 2022, we have repurchased 7.5 million of our common shares for $350 million. Today, we announced the renewal of our security repurchase program for up to $250 million and an increase of our quarterly dividend from $0.20 per share to $0.25 per share.

Finally, it is with mixed feelings that I must announce today that Brian Lee, our Chief Financial Officer, will be stepping down in September of this year. He will be replaced by Chris Avella, who has been with the company since 2010 and currently serves as our Chief Accounting Officer. Brian's leadership and experience has been instrumental in the growth and development of the company over the last 13 years. He's been with us since the beginning and leaves the company in its strongest financial position with a well-trained team poised to maintain high standards. Brian, I will miss you. We will miss you. We will miss your unparalleled work ethic, your temperament and character too. I'm truly grateful for your contribution to the company and wish you the best on a well-deserved retirement. And by the way, if you change your mind, now that the Chief Accounting position is open, I'm sure that Chris would hire you in a heartbeat.

With that, I'd like to turn the call to James for a brief presentation.

Thank you, Emanuele. Slide 7, please. We have seen an elevated rate environment since Q1 of last year. And over the last 5 quarters, we've generated a little under $1.4 billion in EBITDA, of which $1.1 billion has gone to debt repayment and as Emanuele mentioned, since July 2022, we've repurchased $350 million of the company's shares. We have 15 vessels on time charter on contract and the most recent charter was an LR2 for 3 years at $40,000 per day. The remaining 98 vessels are operating in the spot market.

Slide 8, please. We continue to repurchase vessels under expensive lease financing and have started to refinance some of these vessels with new bank credit facilities that have lower interest margin. To the right, you can see the list of vessels that have been repurchased and are upcoming. So far, we have given notice to repurchase 42 vessels. And when we say repurchase, it's really paying off the outstanding debt on the vessel. As of today, we have repurchased or repaid the outstanding debt on 28 vessels. And in Q2, we will repurchase 13 vessels on lease financing for $325 million. The margin on the lease financing ranges from LIBOR plus 350 to 525 basis points, and the new loan facilities have a margin of SOFR plus 190 to 197 basis points. Given the credit adjustment spread between SOFR and LIBOR, the LIBOR equivalent margin of our new financing is around 170 basis points. So Cameron, you have done a great job.

Slide 9, please. Timing differences between repurchasing vessels on lease financing and drawing down on new facilities, mean that, at times, it appears that is increasing. On the left, you can see the movements between the new facilities being drawn and debt being repaid. In the first half of this year, including drawdowns on new facilities, we expect to reduce our debt by $146.2 million. If you look at the graph on the right, compared to December 2021, by June 30 this year, the company will have reduced its debt by $1.4 billion and repaid $1.1 billion lease financing. Until recently, the debt repayments have been done primarily with free cash flow. However, with the new $750 million to $1 billion term and revolving loan facility, we can accelerate these lease purchases and optimize the balance sheet. The revolving component of the new loan will allow us to manage leverage and liquidity. After completed, the changes will translate to lower breakeven rates for the fleet as the amortization and interest costs decline.

Slide 10, please. Since December 31, 2021, net debt has decreased $1.5 billion. Today, on a pro forma basis, we have over $800 million of pro forma liquidity. And with no newbuildings on order, we have minimal CapEx. We are very well positioned.

Slide 11, please. In Q2, so far, including time charters, the fleet is averaging almost $40,000 per day. On an annual basis, this will translate to almost $20 per share in free cash flow or over a 38% free cash flow yield. These are exciting times.

Slide 13, please. Despite significant refinery maintenance in the first half of this year, a reduction in European imports after building inventory ahead of sanctions and a warm winter, rates have remained strong. European product imports have increased to normalized levels. Refinery maintenance will decline considerably over the next few months and global inventories remain well below 5-year averages. All of this leads to strong expectations for the remainder of the year, especially the back half and (inaudible).

Slide 14, please. Demand has been robust. And while we do expect slightly lower diesel demand due to less trucking activity, the increase in gasoline, jet fuel and naphtha demand more than offsets the lower distillate demands. We expect refined product demand to average 1.5 million to 2 million barrels per day and more from Q2 to Q4 than last year and go up throughout the remainder of the year. Seaborne volumes remain extremely high and are averaging 1 million to 1.5 million barrels per day more than 2019 levels. Given low global inventories, increased consumption will continue to be met through imports with product tankers reallocating barrels around the world.

Slide 15, please. While demand is above pre-COVID levels, refining capacity is lower and more dislocated. Regional capacity changes are structural and will continue to drive ton miles and flows for the coming years. After a brief surge in product exports at the end of last year, Chinese exports have now returned to normalized levels. And while OPEC cuts will restrict crude exports, they do not restrict products and the Middle East has been the incremental barrel of refined product. They're one of the few areas with refining capacity coming online for the export market, and most of these exports are going long haul to Europe and Asia. As ton mile demand increases, vessel capacity is reduced and supply tightened.

Slide 16, please. At the start of sanctions, Russian product exports declined, but over the last few months have been above pre-sanction levels. And prior to sanctions, most of the Russian exports were going to Europe, and now they are going longer haul to the Middle East, Africa, Asia and Latin America. Almost every replacement route that start in Turkey is longer than the previous route and these new flows will drive a significant increase in ton miles. And on the other side, Europe has to replace the lost Russian import and these will be from further away. Gravely, our vessels that are servicing Russia has increased significantly to 322 vessels today, of which 254 are Handymax and MR vessels. Once these vessels load at Russian ports, they are unable to service the U.S. or Europe. The impact of vessel service in Russia is expected to have a significant impact on the capabilities of the global fleet. While unclear if Russia will be able to maintain current levels, it's very clear, these volumes are needed, given the low inventories around the world.

Slide 17. I know there's been some more newbuilding orders over the last 2 months and probably more than in this graph but the overall order book as a percentage of the fleet still remains near historical lows. And in December, clean tanker rates reached record levels while the order book was at an all-time low. So we do expect additional orders, given the strong rate environment and aging fleet. However, there are still long lead times for the delivery of newbuild vessels, shipyards are busy with orders from other sectors, and vessels ordered today will not deliver until 2026. Also, newbuilds are expensive compared to historical levels and concerns about different propulsion systems to meet environmental regulation and the cost of these systems act as a constraint to ordering.

Slide 18, please. When thinking about newbuilding orders and fleet growth, the age profile of the fleet must be considered. On the lower left, you can see that from 2023 through 2026, 680 MR and LR product tankers will turn 15 years old. By 2026, there will be 815 product tankers, 20 years and older. And on a percentage basis, that means 50% of the Handymax fleet; 23% of the MRs; 29% of the LR1s; and 12% of the LR2s will be older than 20 years by 2026. While we always prefer to see low ordering activity, the number of vessels turning 15 and those that will be 20 and older is staggering and should be put into context.

Slide 14 (sic) [19], please. While the order book is at a record low, the spot market continues to remain at very strong levels. One and 3-year time charter rates are at high levels and evidence that our customers' outlook is one of increasing exports and ton miles against a constrained supply curve. What's different today is that typically, as rates improve, the order book builds and oversupply more than often leads to a decline in rates, but we have only seen modest order book growth. Using minimal scrapping assumption, the fleet will grow less than 1% over the next 3 years and using higher scrapping assumptions and pre-age due to upcoming environmental regulation, the fleet is likely to shrink over the next 3 years.

Seaborne exports and ton mile demand are expected to increase 4.4% and 11.5% this year and 4% and 7.1% next year, largely outpacing supply. The confluence of factors in today's market are constructive individually, historically low inventories, increasing demand, exports and ton miles, structural dislocations in the refinery system, rerouting of global product flows and limited fleet growth. But collectively, they are unprecedented.

And at last, but certainly not least, Brian, it has been a pleasure to work for you over the last 10 years. Thank you for being a great mentor, leader and a friend to so many of us. You have always been the last person in the office, the first to get credit and the last to take it. Your hard work, humble attitude and great sense of humor will be missed. I wish you the best in retirement.

With that, I'd like to turn it over to Q&A.

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

Thank you. Brian, to echo the comments, it's been a real pleasure, and you'll be missed. Maybe Lars, if we can pull you in here. James had some really great slides kind of explaining what's happened since the start of the year, but certainly some of the recent momentum, especially in the MR segment, has been somewhat seasonal, but maybe a little bit more extreme than anticipated a couple of months ago. Is it strictly a function of refinery maintenance, and that's what gives you a more optimistic view on the back half of the year? Or is there something else going on either seasonally or counter-seasonally in the MR market recently that's caused some weakness?

Jon, I think putting things in context, I think rates for the current quarter has actually held up quite nicely. The market is certainly a lot more volatile than we've seen when markets were poor, and we had a flatlining market. And I think that volatility really defines that tightness, but we are operating from a higher base in terms of earnings. A lot of the things that we're seeing right now has been in MR market, particularly in the Atlantic Basin, which we saw a little bit of a drop or a substantial drop from mid-April. But apart from the mid-April drop in the Atlantic Basin, I think it has performed quite well in the second quarter. And I would actually argue that rates in the Atlantic Basin have bottomed out. And I think even for this morning that the market for the TC2 has increased by 20 points in one go coming out of the box.

So as we start emerging out of this tremendous turnaround that James was talking about, I think we are coming into a season with -- in a very good place. I'm personally very constructive, the rate environment for the second half of the year, and also balance of the second quarter. And I think that the adage of the stronger for longer that people have been panting about, certainly is valid from where I sit. Generally speaking, as James was talking about, the stocks are low. Refining margins -- complex refining, but still positive. You've got a new capacity that's coming online.

And I think one of the key components in terms of where the market is, the connectivity in the regional markets is defining in a fundamental role that's underpinning by this tighter supply that we -- or tonnage that we've been seeing. So generally speaking, you're seeing a lot of imports coming further afield. The Russian sanctions that everybody knows about, they will continue to influence the supply chains. So I think a lot that we've seen -- just to answer your question, we've seen is the substantial turnaround in all 3 regions has been playing a big role.

I think in April, if I'm looking at my numbers, you had global refining maintenance topping at 9.4 million barrels. And I think by June, July, 6 million of those refining capacity will return to the market. You then add on the additional new capacity from Al-Zour, which is going to have its third train up and running in the third quarter, Jizan is at 50% at the moment, that's going to increase as well. So there's plenty of additional product that's there to be moved. And I think this is just a -- to be honest, a market correction in terms of the refining turnaround that particularly has been strong in April.

Okay. Super helpful. And my second question, I don't know if it's for James or Robert or may come back to you, Lars, it seems like the pace of your 1- and 3-year time charter contract had slowed a little bit from the back half of last year. But if I look at Slide 19 on the upper right-hand side, the rate for the MR 1-year and the 3-year for -- and the 1-year for LR2 has been pretty stable. So has that just been more of a strategic decision to hold on to more spot exposure as we go into the back half of the year that Lars just laid out? Or maybe those rates holding in there, but the liquidity has dried up a little bit?

Well, I think it's hardly that. I think that -- if I just take the first question, I think that the all weakness is relative, though I understand your point that the market may be slightly weaker than its all-time record highs, but we would hardly describe a market that's averaging $40,000 a day in the second quarter bookings as weak. I mean, that's huge, $20 annualized run rate on a $50-odd stock is, thank you very much. And that's important because we're seeing a very steep discount in many points during this first quarter of the actual 3-year charter rate to the actual spot market and what Lars, as you correctly pointed out, Jon, is indicating for the balance of this year.

And we don't -- and at the same time, our balance sheet is getting stronger and stronger. And therefore, the requirement or the need or the wish to seek the security of 3-year charters is less when we're getting such confirmation in the actual spot market and doing it. I mean we simply have an incredible situation where every single report that we're reading indicate that we're going to continue to see growth in product tanker demand, product demand, headline product demand around the world for the balance of the year regardless, if we're reading someone who's very pessimistic about the world economy thinking it's in recession or going into recession.

And we know that the actual fleet itself is fit, and we know that those ton mile multipliers related to refineries are going to continue. So I think a lot of it is we've been really choosy. We've hit the record rate on our 3-year charters on our LR2s, each point over these last 3 months. But there's no -- there's less of a need because I guess we're more optimistic about what's happening. I mean, think of all of the doubt we've been through in this first quarter, what you've been talking about, and we end up in the second quarter right now, that is really a terrific base for what we could see going forward. And we have $800 million of pro forma cash, and we're just about to do an incredible refinancing. So that balance to create time charter security is really just going now.

(Operator Instructions) Our next question is from the line of Omar Nokta with Jefferies.

Brian, congrats on the retirement. We'll miss working with you. You're leaving obviously the company in great shape with that pro forma $800 million of cash here. I wanted to just sort of ask about kind of priorities. And I think, Emanuele, you sort of outlined this early on, you've got the $1.4 billion of net debt. Can you maybe rank your priorities in terms of the use of cash for the next few quarters and if you guys have set yet a target of what you'd love that net debt number to get to?

We haven't set the target for the net debt, but we have said that we don't intend to go to zero. We're also creating a debt facility on top of other commercial lending debt facilities, which would probably, if you added those up, would give you some kind of base position, and then you're going to have normal amortization probably from that point, but there's no target yet set. So we're going to continue really with what we've done the last quarters where we're going to take down our total debt. And we are going to prioritize buying back those sale-leaseback too, and when the new facility is closed, that's going to really accelerate that base. But we still -- we're able to do all those things, and we still have ample capacity to take advantage and create value for our shareholders through buying back stock if the opportunity at what we see is very value-creating level remains. And we've -- that's why we've increased the -- gone back and we increased the share buyback. We -- I think we've shown the market that we're not increasing share buyback for show, we're increasing the share buybacks so that they can be used.

Yes. You bumped the dividend, then you've recharged the buyback, a clear indication there. And then maybe just second question would be asset values continue to push higher here. Does that change at all your view on how you've been conducting the business? Does it go from harvesting the assets today versus, say, monetizing down the line? How do you think about that in this context?

I think we're -- especially when you've got very large spreads now, I mean, the spread between our NAV or our calculated NAV and the stock price has only increased in the last 3 or 4 months as the cash you've seen has come in. And -- but we're open. And I think it's fair to say that we are prepared and are indeed in discussions when it comes to taking advantage and maybe selling a couple 2, 3, 4 or whatever the older vessels. That would just be a smart thing to do when you've got such a wide discrepancy at the moment.

Our next question is from the line of Sam Bland with JPMorgan.

The first one is, I guess, we're aware of the sort of more midterm supply and demand picture. But then you've got all these different sort of shorter-term effects like refinery maintenance and inventory levels. Do you -- can you just talk -- I know you touched on those in the opening comments, but where roughly do you think we are on those sort of shorter-term effects? Are we kind of at the peak sort of headwind phase and from here it turns to tailwind as refinery activity starts increasing? Or where roughly do you think we are in that cycle?

I'll start. Good question, Sam. Look, I think for almost 2 years, we've seen massive draws in inventory. And right now, we look at a market where Russia has been able to export more products than pre-sanctioned levels. But it's unclear if they'll be able to maintain those level of exports in the long term. And there's a lot of assumptions around those volumes being moved into the market. But I do think the inventory data, if you look specifically at the U.S., because it comes out weekly, diesel is 12% below the 5-year average, gasoline is something like 7% below the 5-year average. So we're seeing inventories continue to decline despite higher volumes. And so I think as we move to the back half of this year, demand is going to increase from a gasoline, jet, naphtha perspective, and it's going to be much more than a slight drop in, say, distillate demand from trucking. So we're still extremely bullish on the outlook, and we haven't seen anything in our market, whether it's flows or volumes, as shown in the graph, that suggest things are lower, and we do expect a stronger back half for demand this year.

Okay. Maybe I could ask a second one. It's on the order book number, I think it's 6% in the presentation. I mean that's come up very slightly. What's your sense of market participants? Are we starting to see a real acceleration in orders? Or would you say it's still quite subdued at the moment? And I suppose, where -- do you have any sort of feeling on where you'd be happy for that 6% number to go to and still think that the supply and demand was quite healthy?

Maybe I can try that one. I think that as the orders come in, they go further away. So the easy pickings, I would say, are more or less gone. And the easy pickings would have been the end of 2025 or maybe early 2026. So now each step would be more expected to even more expensive to go out. And I think that when you're booking forward the market 2.5 years, I think that you don't really begin to even think about things until you're up to a 10% total on order. And that itself wouldn't be very much. That's just 3% each year. And that would just be in historic terms. Now we have a situation where if you look at the graph that Brian and James put up, there's severe stress out about in the industry in terms of over-aging to the product fleet. So you've got to step that in the context of how many ships that are going to be turning 15 years old, turning older over this next 3, 4, 5-year period, and that's huge, way more than the 10%.

So I think that we can be -- I get the headlines, the headlines now look as if there's an acceleration, there is a little bit of an acceleration. It's kind of dramatic and it's, oh my god, what's happening. But when you put it in the perspective of the actual ongoing fleet, it's not something that we're concerned about at all. But I think that in general terms, you want to look at tanker fleets or any type of shipping fleet, once you cross 10%, and then you have to put it in the perspective of what's likely to be removed in the fleet going forward as to whether 10% is acceptable, above 10% is acceptable or not. But up until 10% here, we're all pretty safe.

Robert, Lars here. I mean, I just think -- I would just like to add, the shifts that you're talking about, they're also going to be struggling to meet the new carbon regulations that they kind of are being introduced in the coming years, right? So they will kind of be more inefficient and potentially will also kind of increase the scrapping element to it as we move along the line.

Yes. And I'd just like to highlight for everybody, these are the 2 red herrings we see. The red herring we see is the, oh my god, we're seeing these newbuilding orders. And the other one is just things to do with recession and headline demand, because just the increase in jet fuel going along around the world, which is tremendously important thing for the product market, especially new ship (inaudible). We can't get to a scenario over the next quarters where you don't get continued product tanker demand. And that's even without dealing with just trying to refill inventories, which is required.

Our next question is from the line of Ken Hoexter from Bank of America.

Brian, definitely good luck in the next phase, and thank you for all the help over the years. It's been a great education and learning about the business. So thank you to you and the team and good luck. Maybe, Robert, Emanuele, you're talking about the oldest fleet or the aging fleet, overall kind of very slim new orders, although some are coming on harvesting the fleet, maybe selling some vessels at the peak or selling some vessels. Are we then looking at the peak of the market if we're starting to see those new orders that you're talking about coming in, you're looking at maybe selling some vessels? Just how should we step back and think about that? And then as the second part to that, do you need to renew your fleet right as it starts to age here? Do you need to go in and maybe it's not expansion, but it's just simply renewal of the fleet? Is that something you'd look at? Or is it just more monetizing at strong levels?

Well, what we need to do is to provide our shareholders a return. And we can get selfish with it, we need to -- Jack Welch said, show me how a person is paid, and I'll show you how they manage. Well, insiders are the largest shareholder of Scorpio Tankers. So the idea of selling older vessels has nothing to do with whether or not we think the market has peaked, which we don't think the market has peaked. We -- it is all about the fact that as Lars has pointed out, older vessels are going to become harder to manage over the next couple of years, whereas older vessels, we could simply sell the older vessels, and you could use that capital to accelerate the debt payment or accelerate a stock repurchase, depending on if the stock continues to be massively discounted to its NAV. But there's no requirement for us to renew at all. And our fleet can quite happily age and go through for many years going forward here.

Okay. And then maybe, Brian, if I could bring you back in, the OpEx, I just want to run through. Obviously, you noted it was down because of the fewer vessels. You -- I guess, COVID costs came off. Maybe talk about what's going to happen with OpEx going forward, given inflation and your thoughts on OpEx into 2Q and second half?

That's exactly right, inflation. So there's still some inflationary pressure on delivery costs and things like that for goods being delivered. So we think it's going -- it may tick up a little bit higher from where it is here. So again, if it was less between this quarter last year -- this quarter, this year and last year is because less vessels, but we do disclose the average daily costs. So that's in there, and we think that, again, that's going to move up a little bit over the next few quarters here.

Can we put parameters on that or?

I mean how much inflation is going to be, where our equipment is going to be delivered, so you can look at it, I don't know, 2%, 3% for now.

Next question is from the line of Frode Morkedal with Clarksons Securities.

Lars, discussion on the refinery turnarounds and the product inventories, I guess I have a higher-level question on arbitrage trading. I guess, at least historically, it was fascinating to see, let's say, 1 barrel of jet fuel could be resold many times after it was produced. And that led to this very high multiplier maybe 4, 5x compared to oil demand in terms of trade. So I'm curious to see or know how prevalent is this phenomenon today? You actually see barrels moving from, let's say, Europe to New York and then being resold to other destinations and so on or is this something that could be forthcoming?

Hi, Frode, it's Lars here. I'm going to try and give a stab at that. I mean there is no doubt that the product market in general from a trading perspective is traded multiple times, and we have seen multiple times and throughout that we have a change of orders or there is a different trading behavior depending on where that particular arbitrage is. I mean, of late, there has been some spreads going on where you've seen a lot more Caribbean cargoes that have been destined to New York Harbor because of the pricing structure. That is a product that has initially come from the East of Suez, from India or whatever, and you then see them putting them into storage and then breaking bulk and moving different places. We see cargoes moving into the U.S. West Coast and in particular, into Mexico on the West Coast there, which previously would have been covered that have been sourced out of the U.S. Gulf, and we have seen throughout the first quarter a lot more cargoes suddenly being moved into Mexico and the West Coast out of North China and Southeast Asia in general.

So in terms of diversity of cargo base and in terms of how that moves around, we see a very healthy level of disparity around that. And obviously, this is one of the things that we and the product tanker market really enjoy is the ability to triangulate and that we certainly have been able to see at a large extent. And I've been talking about this before, in particular on the LR2s, we have been seeing that particular unit has moved from a one-dimensional latent ballast type of vessel into being a true arbitrage mover.

We are today moving LR2s into Japan or North Asia, then reloading in North Asia and China down into Australia. Then we then load again out of Australia and take it back up to North Asia or into the AG or even to West Africa and then we load out of West Africa, et cetera. So this whole kind of way of a fungible market in products is certainly still there. I think it's going to remain to stay. And because of the kind of very constrained logistical chains that are in place, we will start to see a lot more of cargoes double handling on the back of what we've seen with the Russian sanctions, and this obviously will increase ton miles as well.

Perfect. That's very good. My second question is on the new refineries in the Middle East. Any updates since the last time you talked about that? What do you see as an incremental effect on the product tanker market going forward?

So -- I mean, this is only what I have heard. And it's not something that is kind of reported officially, et cetera. But we know that the 2 out of the 3 trains of Al-Zour in Kuwait are up and running. I have heard that the third train is going to be up and running in the third quarter, and we will, at the end of the year, start seeing 640,000 barrels per day of product being shipped out of Kuwait, which is substantial. That incremental barrel, obviously, is going to make a marginal or a huge marginal change in the supply of vessels as these vessels that are loading out of Kuwait are all going to be going long haul for the large part, particularly the distillate will be going West of Suez and the light ends will be going East, which, again, is going to influence the ton mile in a very positive sense.

I've heard that the Jizan refinery is now up and running around 50%, and that also is increasing as we set out into the second half of the year. So there is a lot of additional capacity that is just about to come up and running. They are already open. We can see already on the volumes that are coming out of both of Kuwait and out of Jizan in the Red Sea has made a fundamental impact in product tankers, not only on LR2s, but also on the MRs. And that's certainly something that we are very happy with to see. That will increase again in the second half of the year.

Our next question is from the line of Sherif Elmaghrabi with BTIG.

I want to ask how are you thinking about returning capital going forward because the dividend saw a nice boost and also the share repurchase program got reset? Obviously, the sale-leasebacks are a priority, but it's looking like you have a line of sight on that now and which would free up more cash flows for other activities.

Sure. Well, I think it's -- I think we just -- look what we recently did is we bought back a lot of stock in the first quarter. And I can't remember exactly what it was, but it was 5%, 6% of the company. And we can see that we -- that is projected to be going down and the cash and liquidity is as high or higher than it was at the beginning of the first quarter, and the rate guidance is higher. The stocks moved nowhere. So you would expect that, that would be a strong priority of allocation of capital at the moment combined with the continued strategy of taking debt down. We thank you for observing the dividend, we said before that we're raising the regular dividend, we're doing it in increments that can be some kind of guide to the future, and we're not going to go to a percentage payout position, but we would always believe we're open if required to do extraordinary dividends.

But all of these, that really depends on where the value is in the stock price. You have a major dislocation right now between -- and I forget the actual NAV, that's one way (inaudible). As James pointed out, the present run rate, we're making $20, $21 a share in cash flow on a pretty new fleet. And that's on an annualized basis. And we then combine that with Lars' view of the market, if you forgot cash flow, you're basically indicating that, that is going to -- the value in the company is even going to be more discounted going forward. So that is an overwhelmingly high priority at the moment to do that or has been in that first quarter period.

Our next question is from the line of Liam Burke with B. Riley FBR.

Has there been -- I know time charter activity has sort of flattened out here, but has there been any recognition by your customers that there's an impending shortage as the MRs age for them to start time chartering either on longer durations or higher rates?

I just want to say that there is -- yes, there's still a decent quarter for TC business, even with kind of the very brief slowdown that we've seen. I think it's fair to say that end users share the same constructive view of longer-term market rates. And we see plenty of questions coming across rates still at elevated levels compared to last -- the last time I've seen this type of interest for 3- to 5-year time charters is probably mid-2000s. So there's plenty of interest out there.

Okay. Great. And the balance, I mean, you talked about the dividend and buybacks in terms of the balance. But is there an NAV for your fleet that you consider when looking at your buybacks? Or is it just stock price?

Yes, of course, there we look at the NAV and we look at the cash flow and we look at what we can afford. To go back to the question before, I mean, you can see what's happening in the balance sheet, and there's going to be -- we are not going to take the debt down to zero. You don't go and negotiate $570 million of bank credit and then negotiate up to $1 billion with the idea that you're going to pay the whole thing down in a year. That would be massively inefficient. So we're going to have a base level of debt. That level is going to be very low compared to not even the real long-term value, but it's going to be very low to the book value of the company, which is substantially lower than where the long-term value is. When that point is reached, obviously, if you still got a huge amount of cash, which we would hope to have too, all of the income coming in then become separate to what's happening.

So when you're measuring a buyback, the net asset value is only one guide. We are trying to model where the company is worth in the end of the year. We're also trying to -- in 2 years, 3 years, we're also trying to model it in terms of if we got something wrong, if there's something that we can't account for and let's say values were down 30% or something. So you look at it that way. At the moment, it's not too difficult to calculation either way.

Our next question is from Chris Robertson with Deutsche Bank.

Brian, good luck with retirement, best wishes towards you into the future. I just wanted to ask here around the scrubber fuel spreads come down a bit over the last few months. Can you comment about what's been driving that? Do you think this is a structural change? Or is this a seasonal effect?

I'll take that one. Chris, I don't think it's structural. I think if you look at the demand for high sulfur fuel oil, it's predominantly for vessels with scrubbers and for power generation in the Middle East. I think the pressure is coming from distillate and you've seen distillate cracks come down. You've seen diesel prices come down, and it's just a reversal of kind of what we've seen for the last 2 years, you've had a very, very strong and tight distillate market. People have been worried about shortages. And so it's probably an overreaction to that. But for the foreseeable future, we're still constructive on that spread. Does it hit the high-300s as it has in the past? Maybe not, but 100 to 250, I think, is a reasonable range.

Okay. And just following up on a few questions from earlier around kind of the newbuilding orders and this really relates to shipyard capacity. So as you look at the aging fleet, not only on the product side, but also the crude side, and in the dry bulk market as well, what are your thoughts about your capacity to be able to handle kind of these fleet renewal efforts that seem to need to be done? And shipyard capacity, can that be ramped up over the coming years to accommodate all these things? Or do you think there will be a crunch which further kind of limits fleet growth?

Well, I was actually looking at shipyard capacity. And if you compare to historical levels, it's certainly down. I wasn't looking at other stuff there, really looking at products. But if you look at the MR fleet that's on the water today, I think something like 800 are since delivered actually, so out of 2,200 ships, I think 800 are from shipyards that are no longer active. So there's certainly capacity, but I think the best answer to your question is, if you wanted to order a lot of ships today, they wouldn't come until 2026, right? And that's what you're seeing with the last couple of orders and 2025 is full. And so I do think there's going to be a constraint on the capacity side. But even if you were to order hundreds of ships, given the age distribution of the fleet, there's going to be more ships doing 15 to 20 years old, than it will be delivered over the next several years.

Thank you. This concludes our Question-and-Answer Session. I would like to turn the conference back over to Emanuele Lauro for any closing remarks.

We don't have any closing remarks rather than thanking everybody for their time today. So we'll speak to you soon. Thanks a lot. The call may be concluded.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.