Torm PLC (TRMD) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the TORM's Annual Report 2019 Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today, Wednesday, the 11th of March 2020.

I would now like to hand the conference over to your speaker today, Morten Agdrup. Please go ahead, sir.

Thank you, and thank you for dialing in, and welcome to TORM's Conference Call regarding the results for the full year of 2019. My name is Morten Agdrup, and I'm Head of Corporate Finance & Strategy at TORM.

As usual, on these calls, we will refer to the slides as we speak. And at the end of the presentation, we will open up for questions.

Slide 2, please. Before commencing, I would like to draw your attention to our safe harbor statement.

Slide 3, please. With me today is Executive Director, Jacob Meldgaard; and our Chief Financial Officer, Kim Balle.

I will now hand it over to Jacob Meldgaard.

Yes. Thank you, Morten, and please turn to Slide #4. TORM successfully navigated a volatile product market here in 2019, which was impacted by the refining industries preparation for the IMO 2020 sulfur regulation.

Our results for the year were enhanced by our strong operational focus and our focus to maintain efficient operations and a low cost base.

Today, I believe that TORM's fully integrated One TORM platform contributes both to our low breakeven levels as well as our superior commercial performance relative to our peers. The product tanker market strengthened considerably as the year progressed, with a significant positive impact from the strong crude tanker market induced by sanctions on the COSCO fleet. The rates stabilized at lower, but still very profitable levels, and has, overall, remained at these levels since then. I will go through the details on the market shortly.

For the full year, TORM's product tanker fleet realized an average TCE rate of $16,526 per day, which is 27% higher than the corresponding figure from 2018. For the fourth quarter of 2019, the realized rate was $19,234 per day. We realized a positive EBITDA of $202 million for the year and a profit before tax of $167 million. Adjusted for an impairment reversal of $120 million, our profit before tax was $47 million or $0.62 per share.

The return on invested capital was positive at 4.9% for 2019, which is considered attractive in comparison to our peers. The estimated net asset value was just about $1 billion as of 31st December. And later in the presentation, Kim will take you through a breakdown of this particular metric.

Illustrating our continued focus on maintaining a solid balance sheet, the net loan-to-value was 46% at the end of the year and available liquidity was $246 million. In 2019, we devoted significant resources to optimize the fleet for IMO 2020 and beyond.

Including commitments made in the first quarter of 2020 to date, TORM has decided to install scrubbers on 49 vessels, including newbuildings, or slightly more than half of our fleet. Our approach has been balanced and thoughtful, and our decision to install scrubbers have been made on a case-by-case basis, taking reasonable fuel spreads assumption and vessel specifications into account. Even with the recent drop in the fuel spread, TORM scrubber investments are a profitable business case, with a combined payback time around 3 years.

In 2019, TORM continued to opportunistically grow and modernize the fleet. We took delivery of a total of 12 vessels, including 6 MR newbuilds, 2 LR1 newbuilds and 4 2011-built MR second-hand vessels. And here in the first quarter of 2020, we placed orders for 2 LR2 newbuilds. At the same time, we have sold 8 older vessels, including 5 MR vessels and 3 Handysize vessels. TORM has simultaneously taken steps to further strengthen the capital structure and the liquidity profile.

In 2019, we completed sale leaseback transactions for 8 vessels, providing total proceeds of $151 million.

Finally, here at the start of 2020, we've refinanced debt for a total of $496 million from leading ship lending banks for 2 separate term loan facilities and a revolving credit facility. These facilities replaced existing facilities and extended the majority of the debt maturities until 2026.

We believe that the actions position TORM to prosper, under the condition we expect for the market to be present in the coming years.

Slide 5, please. Now let me turn to the product tanker market. As mentioned, the product tanker fleet, in our case, average a TCE rate of $16,526 per day for the year. In the LR segment, we achieved LR2 rates of $19,730 per day, and LRs had rates of $17,102 per day. For our largest segment, the MRs, we achieved rates of $15,840 per day. And in the Handysize segment, the achieved rates were $14,965 per day.

At the start of the fourth quarter last year, rates for product tankers, particularly for larger vessel classes, were propelled higher due to strong sentiment in the crude tanker sector that resulted from the sanctions put on the cost of fleet. This triggered the switch to dirty trades for a number of LR2 vessels. Rates stabilized and at higher levels after the market absorbed the supply shock and product tanker rates benefited additionally from seasonal demand and multiple open arbitrage opportunities.

The strong finish to 2019 continued into the new year. LR2s continued to switch to dirty trades, resulting in the number of LR2s and clean trades declining by no less than 15% since the start of Q4 2019.

Rates in the West have been particularly strong, with MRs in the US Gulf currently earning around $30,000 per day, supported by massive delays in the Panama Canal, which is tying up tonnage and creating new longer-haul trade routes. We estimate that increased waiting time to transit the Panama Canal, due to the low water levels at the Lake Gatun, could potentially reduce the available MR tonnage supply by 2% on a global basis, while the impact in the Americas market alone is around 7%. Given the prognosis that it takes at least until May before the water levels start to increase in the area, that is a considerable distortion to the product tanker market.

In the East, we currently experienced increased product exports out of China as the COVID-19 has dramatically reduced oil demand in China and led to increased product inventories. Obviously, uncertainties around the COVID-19 impact on the global economy and oil demand remain. But so far, in the product tanker space, we have not seen negative impact from that. In fact, current rates in the East are, at the moment, around $22,000 per day for MR vessels, up from a level around $14,000 per day during the second half of January, where the virus was only starting to make headlines.

The above-mentioned developments are also reflected in our bookings. As of March 5, last Thursday, the total coverage for the first quarter of 2020 stood at 87% and at a rate of $23,818 per day. In our largest segment, the MRs coverage was also 87% and the rate achieved was $22,729 per day.

Slide 6, please. Along with a strong crude tanker market in the fourth quarter, a total of 40 LR2 vessels has switched from clean to dirty trades. And around 15% of the LR2 capacity has been removed from the clean trading fleet in total. In fact, the last time 50% of the LR2 fleet was trading dirty was all the way back in March 2013. If we look at the nominal number of LR2 vessels in the clean trade now, the last time we had so few vessels trading clean was in the second half of 2015. This is why the fleet itself has grown by around a 100 vessels over the period. This development will, in our opinion, support product tanker rates over the medium-term as switch impact from dirty to clean cannot happen very easily. Additionally, rates in the crude segment are still sufficiently healthy to allow owners to defer such a decision.

Slide 7, please. As already mentioned before, the positive rate development in the product tanker market have remained intact despite a negative sentiment related to the COVID-19. The outbreak of the COVID-19 in China and its spreading to the rest of the world has led to a downward adjustment of the global oil demand growth this year. Instead of a growth above 1 million barrels per day, most oil analysts and traders now expect a growth below 0.5 million barrels per day, and some even closer to 0 growth.

However, what is important to emphasize here is that the product tanker market is not directly affected by absolute oil demand and supply levels, but rather by imbalances between demand and supply in different geographical regions, and as a result, the product tanker market has not been negatively impacted by the COVID-19. In fact, the lockdown of cities in China, which has shaved off a considerable portion of China's oil demand, has resulted in higher product exports out of China.

As I mentioned earlier, MR rates in the East are currently higher than before COVID-19 [really to growth] in China. The same trend can be seen in our forward earnings for the first quarter of 2020, which are higher than our earnings in the fourth quarter, and we, in fact, looking into the strongest start to the year in more than a decade. Clearly, it is too early to predict the full impact of the COVID-19 on a global economic growth and many uncertainties remain.

Despite large downgrades, global oil demand is expected to rebound during the second half of the year. And we've seen early indications of government stimulus, not only China, but also from a number of other countries, which will likely mitigate the impact of the COVID-19 outbreak medium and long term. From the tonnage supply side, the situation will also have a positive short to medium-term impact on vessel supply as operations at shipyards in China have not yet returned to their normal state. This means that in general, delays will occur with respect to newbuilding deliveries, scrubber retrofits and ordinary scheduled dry docks.

Thanks to careful planning and the fact that most shipyards used by TORM have only been affected to a minor degree, our scrubber retrofits will only experience marginal delays.

Slide 8, please. Another factor causing turbulence on the market is the very recent collapse of the [OPEC] plus supply limiting collaboration, with Saudi Arabia announcing large pricing cuts and increase in its crude production to up to 12.3 million barrels per day from 9.7 million barrels per day in January. The immediate reaction to this was a sharp fall in the crude oil price, with Brent now trading at around mid-USD 30s per barrel. An increase in Saudi Arabia's crude output and the subsequent price cut is expected to boost Saudi Arabia's crude export, supporting the crude tanker market. Assuming all 1.6 million barrels per day of extra crude from Saudi is exported to the Far East, this corresponds to an additional demand of 37 VLCCs or an increase of 5% in VLCC fleet utilization.

The crude oil price, at the current low level and the forward curve in contango, also incentivizes for stock building and potentially for floating storage once onshore storage has been fully utilized. In fact, with such a large increase in crude supply at the same time as demand has been hit by the coronavirus, the amount of crude going into storage could be larger than seen in 2015 and 2016, the last time we saw strong increases in the Middle East crude production. This resulted in a strong oil contango, with an average of 40 VLCCs being involved in floating storage.

The positive developments in the crude tanker market are likely to spill over to the product tanker market as well. On the supply side, the stronger crude tanker market encourages LR vessels to stay in the dirty market. And on the demand side, lower crude oil prices boost refinery margins and encourage higher refinery margins, leading to more products that need to be transported from refineries to end consumers and eventually to inventory.

Slide 9, please. An important catalyst for the product tanker market remains the IMO 2020 regulation that has led to a shift from high-sulfur fuel oil towards cleaner fuels, including Marine Gasoil.

The first effect of this started to unfold already in October and November last year as vessels' tanks were cleaned and new fuels were loaded ahead of the regulation. The initial evidence suggests that while VLSFO gained a significant market share in Asia already in the last months of 2019, leaving the MGO uptake more limited, the MGO demand in Europe saw a 30% increase in November. Market sources indicate that several vessel loans in Europe have continued to offer MGO instead of VLSFO as a price difference between the 2 fuels has been very narrow, and at times, even negative, as can be seen on the upper graph on this slide.

It must also be noted that the availability of VLSFO, on a global scale, probably has been higher than most of the market players expected. However, we believe that the full effect of IMO 2020 on the demand of MGO and subsequently on clean trading is yet to unfold. We believe there is a potential for a larger MGO uptake in the second and third quarter when gasoline demand is expected to increase and refineries will reroute some of the feedstock that currently go to the VLSFO pool towards the production of gasoline, hence, lowering VLSFO availability in the market.

Slide 10, please. Now we turn to the supply side market factors. The product tanker order book to fleet ratio currently stands at 7%, which, I briefly mentioned earlier, is a 25-year historical low level. This reflects the low ordering activity we've seen most of last year, although interest for newbuildings picked up somewhat towards the end of the year driven by the higher freight rates experienced.

Nevertheless, we do not expect a quick run-off of the order book given the uncertainty around new potential regulations on vessel propulsion in connection with IMOs 2030 and 2050 CO2 targets. A lot of talk in the market has been on dual fuel vessels, but so far in the product tanker space, dual fuel orders have been very limited. We estimate that the product tanker fleet will grow at an average annual rate of 3% per year over the next 3 years compared to a fleet growth of 4.7% in '19 and an average of almost 6% during the previous 3 years.

It is also important to mention here that the actual fleet growth in 2020 might come in at a somewhat lower level due to vessels being temporarily removed from the market for scrubber retrofitting as well as delivery delays from Asian shipyards related to the impact of the COVID-19 on supply chains and workforce availability. The slowing fleet growth rate is a key point to the fundamental positive development that we expect for the product tanker industry.

Slide 11, please. To conclude my remarks on the product tanker market, TORM generally has a positive outlook, and we expect the growth in product tanker demand to exceed the supply growth in the next 3 to 5 years. The product tanker market is impacted by key economic indicators, such as underlying oil demand and a general state of the economy. And here, we clearly have entered into a period of short term uncertainty. The outbreak of the COVID-19 in China and it's spreading to the rest of the world has led to a downward adjustment of the global oil demand growth this year.

However, as I already mentioned, the product tanker market is not directly affected by absolute oil demand and supply levels, but rather, imbalances between demand and supply. And a good example here is indeed the current strength in China's clean product export, which has been the result of the collapse in China's oil demand due to the lockdowns and travel restrictions exceeding the corresponding costs that took place in the refinery production.

With the uncertainties in mind, we do believe that the growth in product demand and supply imbalances, the low order book, the high number of LR2s having switches to dirty trade as the crude market has strengthened, lower crude oil price and contango encouraging floating storage refinery runs, the continued refinery expansion in the Middle East, and finally, the still unfolding IMO 2020 effects are all supportive of a continued strong product tanker market medium to long term.

Slide 12, please. Looking at our commercial performance, we have, in our largest segment, MRs, outperformed the peer group averaged 14 out of 16 times since 2016. This translates directly into additional earnings of more than $90 million over the last 4 years. In the fourth quarter of 2019, we achieved rates of $18,111 per day compared to a peer average of $16,123 per day. In general, I am very satisfied that TORM's operational platform continues to deliver very competitive TCE earnings. And I believe TORM is well positioned to take advantage of the promising supply and demand fundamentals in our market.

Slide 13, please. A key deciding factor for delivering above average TCE earnings is driven by our continued focus on positioning our vessels in the basins with the highest earning potential. We have a balanced strategy where we generally do not position all our vessels in one basin, but instead, have some overweight in either East or West, depending on our expectations to the future market. In a scenario where the market is strengthening in the West relatively compared to the East, we want to increase our exposure to the West. To illustrate our strategy and choices, we have depleted our share of MR vessels positioned west of the Suez Canal, together with a measure of the premium the West market has realized over the East market.

Over the last quarters, the market West of Suez has been strongest, and especially so far in the first quarter of 2020, the West market has been trading at a premium to the East with measured using benchmark routes has been at around $12,000 per day. So far in the first quarter, we have had around 75% of our MR earning days West of Suez, providing us with a significant advantage compared to owners with a high exposure to the East market.

Let me now hand it over to Kim for a further elaboration of TORM's cost structure, the operating leverage and our balance sheet.

Thank you, Jacob. Please turn to Slide 14. Before reviewing our OpEx and admin expenses, I would like to remind you of TORM's operating model. We have a fully integrated commercial and technical platform, including all support functions, such as an internal sales and purchase team, which, we believe, is a significant competitive advantage for TORM.

Importantly, it also provides a transparent cost structure for our shareholders and eliminates related party transactions.

Naturally, we are focused on maintaining efficient operations and providing a high-quality service to our customers. Despite this trade off, we have seen gradual decreases of 17% in our OpEx per day over the last 6 years, which translates into a total decrease of around $33 million over an annual basis. OpEx was approximately $6,350 per day in 2019, which we find competitive in light of our fleet composition.

We also remained disciplined with respect to general and administrative expenses. We believe that the EBITDA breakeven rate of $8,700 per day and profit before tax breakeven rate of $14,700 per day achieved in 2019 reflects the efficiency of the One TORM platform and is highly competitive compared to other owners in the product tanker segment.

Slide 15, please. With our spot-based profile, TORM has significant leverage to increases in the underlying product tanker rates. As of 31st of December 2019, every $1,000 increase in average daily TCE rate achieved translates into an increase in EBITDA of around $25 million in 2020.

The corresponding figure increases to $38 million in 2021 and 2022.

In the bottom of the page, you can see that as of March 5, 2020, the coverage for the first quarter of 2020 was 87 -- or sorry, 78% at $23,818 per day. For the same individual segments, the coverage range between almost ranges between almost $20,000 per day for smaller Handysize vessels and up to $28,000 per day for the larger LR2 vessels.

Slide 16, please. I would now like to discuss our financial position in terms of key metrics, such as net asset value and loan-to-value. Vessel values have increased with around 6% during the fourth quarter of 2019. And the value of TORM's vessels, including newbuildings, was $1.8 billion as of 31st of December 2019. Outstanding gross debt amounted to $855 million as of December 31, 2019. Finally, we had outstanding committed CapEx of 51 -- sorry. Yes, $51 related to our newbuilding program as of December 31, 2019. This gives TORM's a net loan-to-value of 46% at the end of the fourth quarter, which we consider a conservative level.

The net asset value is estimated at $1.016 billion as per 31st of December 2019. This corresponds to $13.6 or DKK 91.1 per share. And just before commencing this call, TORM shares were trading at DKK 52.

In short, we have a balance sheet that provides us with strategic and financial flexibility. And on the following slides, I will give you some more insights into our debt profile, liquidity position and CapEx commitments updated as of in February 2020, as both our refinancing and recently ordered LR2 newbuildings are not included in the figures as of December 31, 2019.

Slide 17, please. As of December 31, 2019, TORM had available liquidity of $246 million, cash totaled $72 million and we had undrawn credit facilities of $174 million. This corresponding figure, as of 29 February 2020, was $297 million, which reflects both our finalized refinancing of existing bank debt, but also, our undrawn financing of our 3 remaining newbuildings.

Our total CapEx commitments relating to our newbuildings were $51 million as of December 31, 2019. The corresponding figure as of February 29, 2020 was $112 million, reflecting our recent order of 2 LR2 newbuildings with expected delivery in the fourth quarter of 2021. In addition to the CapEx related to LR2 newbuildings, we also expect to pay $33 million (sic) [$23 million] in 2020 for our retrofit scrubber installations on vessels on board. With some strong liquidity profile, the CapEx commitments are fully funded and very manageable.

Slide 18, please. As our finalized refinancing in the beginning of 2020, we have included the new financing profile [that sustains] at 29th February 2020. As seen in the graph, we have eliminated all major refinancing until 2026, which provides TORM with a financial and strategic flexibility to pursue value-enhancing opportunities in the market. As of 31st December, 2019, our outstanding debt stood at $850 million, and after the refinancing was concluded, the corresponding figure stood at $935 million.

With that, I will let the operator open up for questions.

(Operator Instructions)

Your first question comes from the line of Jon Chappell from Evercore.

Jacob, I know it's a very fluid market right now, both in tankers and oil in the world. So let me ask you a kind of a bigger picture operational question. You mentioned the geographic positioning of your ships. You also had the joint venture that provides the scrubbers for your own fleet. So kind of multipart here, how are you managing the business given kind of the disruption going on right now? Have you changed the way that you're actively managing the fleet in different regions given the outbreak? Have you thought twice about the timing around scrubbers? Just any kind of bigger picture management, operational, as it relates to what's going on in the world today?

Yes. Thank you, Jon. That is a very relevant question, obviously, and I think you can say that one of the things that we've experienced or benefit of our One TORM integrated platform is obviously that we can make these decisions almost on a, if not hourly, then on a daily basis, about adjusting our approach to all the operational elements where you are already touching upon some.

So I think if I start with the effect of the coronavirus, it obviously started with a direct consequence around China, how to mobilize vessels that were either on the way to China to drydock, to retrofit, how to actually get people in, get people out without compromising safety. We were lucky in the sense that the particular shipyard we are utilizing, predominantly for our scrubber retrofits, is actually an island where the government of China and the local government isolated the island by simply pulling down that you could leave the island, but you could not come to the island.

So in effect, that was not, by design, something we had anticipated. But by design, it was so that the spread of the virus didn't come to this particular area due to that decree, and that the workers that were there continued to work. So that has been -- on the margin, we have experienced some delay, but it's not something that has led us to change and make any other decisions if seen from that perspective. Right now, we have still a number of retrofits that are either going to take place as we speak or pretty soon.

I think what could happen with the current strength in the product tanker market is that we may choose to delay, maybe a couple of our retrofits on a case-by-case basis if, let's say, the current strength in the LR2 segment is so that you can achieve, let's say, 40,000-plus, if you do a voyage now, depending on your expectation for the future. It may be that instead of putting a scrubber on, which gives a benefit of, let's say, $5,000 per day, doing that today or waiting 2 months is a judgment call. But we may make those calls on our feet. So I think China is one isolated thing. Rest of the world so far has -- there has been less operational consequence. You'll still capable of taking our colleagues at sea on and off vessels. We've not experienced significant delays. Some additional operational cost in relationship to the [way] for safety measures we do from time to time, have people in 2-week quarantine, simply because they come from areas that could potentially be high-risk areas. But that's the extent of what we have. It doesn't mean -- now I'm not sort of saying that it doesn't have an impact on our daily life, but it does not have a financial impact on our results. And there, I think the bigger picture would be that we've actually seen the export volumes out of China, the reversal of from being refiners, being solely focused on delivering to the Chinese consumers, they have had to look outside, has actually been supportive. Our freight rates were impacted just as you -- when you were at the height of the Lunar holiday, let's say, early Feb until mid Feb, we saw that our rates came down. We have now experienced today that the rate environment is probably at or above what we had pre-corona. And that's -- we are, in that sense, very different than many other shipping sectors. And I'm not an expert on the others, but I can just see from the data points I get in that you would be more exposed if you were in the container business because there's not a movement in and out of China when this is taking place. We actually have movements that took place.

Yes, that makes sense. And it was very noticeable. And then as we kind of take the next step, which is the oil price war that's going on and I know you had a slide dedicated to this. I think we try to work off of past experiences, and this feels very similar to the post-Thanksgiving 2014 move by OPEC that lasted well through '15 and was incredibly supportive to the tanker industry across every segment. However, it feels a little different this time, just because in that environment, the demand for oil was still relatively robust. And now we're looking at, in absolute, opening of the spigots across the world, where demand may not be there. So I think it makes sense from a crude perspective to see how there's a direct benefit.

But from the product, it's maybe not as clear. So you mentioned on Slide 8, the refinery runs and refining margins will be higher, the lower feedstock cost will get that refinery runs. But is there any concern on your part that if the end user is not there, if the demand is not there itself, the crude just may be sitting at sea and not being utilized then by the refiners. So what's happening in the world, at least in the last 48 or 72 hours, is directly beneficial to the crude guys without maybe the same direct impact to product.

I hear your thought. I think I'm a little more refined in my thinking in as much as I think. When you have -- what we had, let's call it, a week ago or 72 hours ago, was an environment where, everything else being equal, crude tanker owners would potentially be looking at a scenario where they would have an incentive to actually cannibalize on the product tanker market. In terms of newbuilds, potentially moving into our trades; in terms of Aframaxes, potentially moving back into the LR2 segment. And when we look at the overall supply of tonnage in product tankers, we aggregate LR2s, LR1, MRs into one. And it is a significant a tailwind to our markets that we are, in nominal terms, that the biggest segment in terms of size of vessels, LR2s, is at the lowest level in nominal capacity since second half of 2015. So I think as a starting point, strength in crude, in absolute terms, takes away potential risk for cannibalization in terms of newbuilds from the crude tanker market penetrating clean, that's #1. And maybe more importantly, the incentive is today much less for owners who are currently trading crude to move over because you will see a benefit across the crude tanker space, in my opinion. So I think that's the supply side.

Then on the demand side, we've debated actually a lot since it happened on Sunday. We've had time to debate a lot internally around, okay, so one of the points that I've heard being argued from day one is that this will be devastating to the shale oil producers in the U.S. They are marginal cost compared to what they can sell it now. This is not going to be a tremendous good business model. Obviously, some of them may have hedged, and they will continue production. But apart from that, this is where we will see marginal CapEx and that the whole Saudi Arabia, Russia discussion is actually around that they would like to see potentially the U.S. environment around energy change, and that this is an opportunity to do that. And in effect, I -- [supply to] that maybe that will also lead to -- that this could be different than 2014, what I just described, because in effect, I think that this is actually a dilemma between U.S., as an energy producer in general, and Riyadh just as much as it is something between Riyadh and Russia. And with an election coming in the U.S., I think this is -- could be more short lift of a price war, in my opinion.

Anyway, even if it's not, then when you look at the refinery margins and the net cash margins profiles for producers on the refinery side across the world, then the highest margins is everything else, I mean, is outstandingly high in North America and even if the supply of the -- if we see that the shale production will fall off. In my opinion, in our opinion, when we do analysis, it will still be so that the North American refinery sector will be profitable even when they are going to be starting importing. So my biggest concern would have been that you would see a big drop in the North American sort of energy sector as a whole. But I think that refinery sector is actually not dependent on the shale. They -- why they have -- their ticket to play is much more -- their efficiency and then relatively high level of sophistication and a low cost base that they've got from modern refineries.

Your next question comes from the line of Espen Landmark from Fearnley.

Some pretty interesting slides you have in the deck today. I just wanted to follow-on on the last question, really. EIA just came out with a revision to U.S. crude production next year, 1 million barrels less. I mean is it possible to kind of quantify the impact the U.S. has had on the product trades for the last couple of years? And what the removal of 1 million barrels or more, potentially, could do?

So our opinion is that, as I said, we do not see a shortfall in production of shale in the U.S. It's not necessarily one-to-one leading to the same lower utilization in the refinery sector in the U.S. Part of the package that came out on Sunday is also that Saudi Arabia will offer a discount to exactly the customers we are discussing in the U.S. on crude in the coming months. So my interpretation of this would be that, yes, this is tough for shale, gas and oil producers in the U.S., a lower top line will immediately have a consequence and an estimate here that you bring is 1 million barrels. Let's see, but I think it's significant, higher. However, do not see that this input, competitiveness of the input, will be sufficient for the refinery sector not to continue because they are so profitable compared to other refiners that they will -- everything else we need to continue, more or less, at the same level. If that is not a correct thesis, then it would have an impact on the product tanker market.

Okay. That's interesting. And the -- lots of talk of floating storage now on the crude side. Is kind of forward prices on products supporting storage plays? Or if not, what is kind of needed for that to happen, you think?

Yes. So we are getting inbounds from clients, either on some of the vessels where we're already carrying cargoes, king cargoes, or whether it is the future place that people are looking at. I think that the contango clearly just needs to widen from where it is before we will see it in earnest. And another element is, of course, that we are, in a way, competing with land-based storage. And luckily, what happened after 2015, where we -- where the storage were being built up is that we've actually come back to a more normalized storage level. So I think if I'm a trader in this, I will -- obviously, our thinking is that we will potentially, after some time, benefit from storage. But that 2 things need to happen. The contango need to widen further, then the on-land cheaper facilities for storage need to be filled up. And then you will, in earnest, start to see that you can have a storage play. But that would be depending on that before you get to that, that Saudi Arabia, Russia, U.S. have not come through a new, how can I say, agreement around production and, therefore, also the pricing in the market. So we are not taking in any potential -- I mean, we see the potential. But currently, we are not taking in to our models that we will see significant storage place in product. That takes longer.

Yes. That's helpful. And finally on VLSFO supplies, consumption has been very high, I think, for -- and in comparison to what most people were anticipating, 70% of compliant mix in large bunk areas. But potentially, you mentioned at least MGO demand could go higher from here. I mean, are you seeing any change to that in the cargo mix that you have now or is that later down the road?

Yes. We are seeing that 2 things is playing out. One, I think that a lot of owners, operators across shipping have actually been opting for VLSFO grades even when MGO has been priced at, or only slightly above, the VLSFO. And according to our technical analysis, you would actually -- even when the prices -- even if MGO is slightly more expensive than VLSFO because of the caloric value is higher and that your main engine maintenance is lower, with MGO, you should actually be incentivized to use MGO. I think that out of the box, a lot of people have not been making this distinction because you sort of said we're going to go from high-sulfur, and then you sort of strategically that we are going to go to low sulfur or we're going to go to scrubber. And I think that the sweet spot for MGO is actually only being explored by a lot of people, including ourselves in now earnest because it is beneficial to also use MGO, not only in the mixing of products, but also just as your prime product when you're filling up the tanks. So in Rotterdam, we have -- so that's one element. And the other is that we have seen in Rotterdam that the utilization of MGO is significantly higher now than what it was pre IMO 2020. In Singapore, it's different. Their VLSFO has taken up a big share. Let's see how that plays out in a bit longer run, but that's what we see.

(Operator Instructions)

Your next question comes from the line of [Yorick Bach] from SEB.

I have 2, and the first 1 being on your OpEx. In Q3, you reported significantly lower OpEx, especially for the MRs and the LR2S compared to the 2019 average. And maybe you could just elaborate a bit about what -- why that is and what we should think about the run rate for 2020.

This is Kim here. Basically, when we consider OpEx, we find it important to consider on a yearly basis because quarter-by-quarter, it can fluctuate. So we -- basically, we are much more focused on the yearly number. There is not necessarily a direct link between each quarter. So please focus on the full number. There's no specific reason for why Q3 is deviating.

Okay. Then my second question is, you were alluding to that a lot of the LR2s, LR1s are trading dirty at the moment. Are any of your vessels trading dirty? Or do you plan to do so?

Yes. In the -- as such, we have some that are trading dirty, utilizing the markets as such. So we do have some. I don't have the specific number in front of me right now, but we do have some, yes.

There seems to be no questions from the audio. Please continue.

Okay. This is Morten, again, here. There's no questions from the web. So this concludes the earnings conference call for the full year 2019. Thank you for dialing in and participating. Have a good day.

That does conclude our conference for today. Thank you for participating. You may all disconnect.