Ladies and gentlemen, thank you for standing by. I'm Natalie, your Chorus Call operator. Welcome, and thank you for joining TORM plc Q4 2021 results call. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question and answer session. If you would like to ask a question, you may press star followed by one on your touchtone telephone. Please press the star key followed by zero for operator assistance. I would now like to turn the conference over to Andreas Abildgaard-Hein. Please go ahead.
Thank you, and thank you for dialing in, and welcome to TORM's conference call regarding the results for the Q4 of 2021. My name is Andreas Abildgaard-Hein, and I am Head of Investor Relations at TORM. As usual, we will refer to the slides as we speak, and at the end of the presentation, we'll open up for questions. Please turn to slide two. Before commencing, I would like to draw your attention to the safe harbor statement. Please turn to slide three. The results will be presented by Executive Director and CEO Jacob Meldgaard and CFO Kim Balle. Please turn to slide four. I will now hand over to Jacob.
Thank you, Andreas Abildgaard-Hein, and good afternoon. Thank you all for dialing in. I'm pleased to be here today as we've now published our results for the Q4 of 2021. Although the market is still challenged due to the continuous stock flows, we did see signs of the market recovery already here in the Q4 of 2021, and we ended with an EBITDA of $42.9 million, and we had a loss before tax of $8 million. The return on invested capital ended at 0.8%. The product tanker fleet here we realized an average TCE rate of close to $14,000 per day. Our largest segment, the MR segment, achieved rates of $13,329 per day, whereas LR1 and LR2 segments obtained rates above $15,500 per day.
Here now looking into the Q1 of this year, at this stage, we've seen a further recovery and the bookings we've secured is around $15,500 per day. Here, once again, we have outperformed peers in the largest segment in the MRs. Now, early part of this year, we did close the last of the sale and leasebacks of nine MRs that we entered into late in Q1 last year on attractive terms, and thereby we have been securing a solid liquidity base and obviously also optionality during, and at the end of these leasing periods. In the Q4 of last year, we also increased our scrubber commitment to 57 scrubbers, thereby increasing our access to lower fuel, prices in the current quite volatile and uncertain market. Now, kindly turn to the next slide, to slide five.
The product tanker market, as I said, remained challenged here in the Q4 . Oil supply remained insufficient to keep pace with the demand recovery and therefore, logically, inventories continued to draw. The market here in the Western Hemisphere was nevertheless supported by US Gulf refiners that came back from after the outages related to Hurricane Ida, and it also coincides with strong import demand from South America and West Africa. On the other hand, we did see the market in the Eastern Hemisphere were negatively affected by low product exports, especially from China. Here, at the start of the Q1 , we've seen that there was a disconnect between, you know, the traditional rate spread with LR rates, especially in the east, falling actually below the MR earnings.
This mainly reflects that there has been a lack of trade on the traditional inter-basin LR routes as a consequence of tight product balances in both East and West. While what we experience on the MR rates is that they had continued support from robust trade flows within the Atlantic basin and also with port flows into especially Australia. Slide six, please. Clearly, when looking at the market, the past week has been an extreme week. When we look more at the current crisis caused by the Russian invasion of Ukraine and the consequent sanctions on Russia, this has increased uncertainty on the energy markets overall, and it has sent the price of crude, as we all can see, to the highest level now in 14 years.
Now, sanctions themselves enforced so far by Western countries are not directly targeting the oil trade, but the uncertainty and reluctance to transport and also to trade Russian oil has sent the crude tanker freight rates in the European market to the highest level seen since the beginning of the COVID-19 pandemic back in spring of 2020. On the product tanker market, we've also now, over the past 48 hours, started to see increased demand for middle distillate moving from the Middle East to Europe, and activity in the US Gulf has been increasing over the past days.
Right now, MR earnings have climbed in the US above $20,000 today, and in the Middle East, LR rates look to have taken a step up from the low $10,000 per day to around $30,000 today if you have a modern scrubber-fitted vessel in the trading window right now. Given the proximity of Russia to Europe, any rerouting of trade flows is most likely to involve oil flows over longer distances, so increasing the ton-mile demand for tankers. For example, if we look at Northwest Europe import diesel from the Middle East instead of Russian Baltic ports, it would increase the ton-mile for the same amount of fuel by around 3x . Obviously, right now the developments are unfolding. There is a high complexity around this very unfortunate situation.
It is too early to say what the impact it will be in the medium term, but right here and now, clearly the markets are up. In light of the Russian invasion on Ukraine, we have decided in TORM not to enter into any new business that involves Russian ports. We have also decided not to enter into any new agreements for Russian accounts. Please turn to slide seven. We've been discussing and underlining for some time the artificially low crude oil supply and the resulting inventory drawdowns have kept tanker markets rates at these subdued levels throughout the past 18 months if we look away from the events of the last week.
The recovery in global oil demand has not been met by a corresponding increase in oil supply, and this has resulted in a situation where oil inventories have simply continued to be drawn down, and in some regions to levels which are below pre-COVID lows. With the seasonal slowdown in oil demand at the same time as OPEC continues to add barrels to the market, the supply-demand balance is expected to turn over the Q1 of this year if we assume that the Russian oil output is not materially affected by the current crisis. Further, the Russia-Ukraine crisis and the consequent record high crude oil price reflecting oil supply concerns could potentially also accelerate a nuclear deal with Iran.
As a consequence, up to 1.3 million barrels per day of Iranian barrels could be added to this market, all potentially traveling longer distances than any lost Russian-European oil flows. At the same time, the lifting of sanctions on Iran could, and in our opinion, would accelerate scrapping of older crude tonnage, which is currently used to transport sanctioned Iranian crude, hence affecting the tonnage supply side positively as well. May I please turn to the next slide eight. Here, let me sum up the main demand drivers influencing the tanker market. We can see that significant progress has been made, not only from the peak of the COVID-19 crisis, but also from where we stood a year ago.
Although in many cases we are not back to pre-COVID-19 levels yet, the outlook for the next 12 months indicates further improvements, not least due to the continuing oil demand recovery. Although at higher oil price, this environment could potentially destroy some of the demand that we're seeing if prices on oil will continue to increase. Now, in addition to all of this, OPEC have decided and are continuously sticking to their plan of increasing the crude supply, and we expect that this will also support global refinery runs at large in the coming months.
Here, it should also be mentioned that with inventories now being drawn down to these low levels, they need to be built up again at some point, and which then will act again as a tailwind to tanker demand, in addition to some of the other factors I mentioned, more normal trade flows and potentially longer ton-mile for the substitution of Russian oil. Please turn to slide nine. If we turn to more medium and long-term demand drivers, the COVID-19 pandemic has accelerated the pace of refinery closures with more than 2 million barrels per day of refining capacity already having closed down permanently, and a further almost 0.5 million is scheduled to close down during this year and the next year. On top of that, another 1 million barrels per day of capacity could risk being shut down.
Most of the closed capacity is located in regions which are already large importers of refined oil products such as Europe, US West Coast, US East Coast, Australia, New Zealand and South Africa. At the same time, more than 4 million barrels per day of new capacity is scheduled to come online, mainly in the Middle East and China, regions which already today are large exporters of oil for us. Both these developments are positive for trade flows and ton-mile in the coming years, with only a few products, projects which are less positive for trade.
Here, Australia is a good example of a country where two out of the four refineries closed down during 2021, and refined oil products export for the year averaged already 13% higher than in 2019, even though oil demand in the country stayed at 11% below the 2019 level at the same time. Here, kindly turn to slide 10. Yes. Just for reference, kindly utilize the presentation that is available on our website rather than the presentation going live here. In the presentation on our website, please turn to slide 10. The positive outlook for demand for product tankers in the next three to five years coincides with the supply side, which is the most supportive for at least the past 25 years.
With record high newbuilding prices, limited shipyard availability, tanker ordering remains muted here in the Q4 of 2021. Consequently, the order book-to-fleet ratio for product tankers is continuously at a historically low level of 6%, further supported by similarly historically low 7% order book-to-fleet ratio for crude tankers. Further, we've seen surging scrap prices. This has incentivized scrapping of product tankers with the highest level of tonnage removed from the market in 2021 since 2010. These two drivers support the case of a very modest fleet growth over the coming two to three years, which we expect to be around 2% a year, only half the pace seen in the past five years.
Now, to conclude, my remark here on the product tanker market, we expect volatility on the market now due to the Russian invasion in Ukraine, with a potential for ton-mile increases due to crude and oil product trade rerouting. Continuing improvements in the global oil demand, increasing OPEC supply, as well as the need to rebuild depleted crude and product inventories support the tanker market here. Over medium and long term, the refinery dislocations, the low order book add an extra support for our markets. Slide 11. Now looking at our commercial performance here, I'm proud that once again, TORM has outperformed the peer average in 26 out of the last 28 quarters in our largest segment, the MRs. Here in the Q4 of 2021, we achieved rates of $13,929 per day.
Again, I can only congratulate everybody on the one TORM platform in our organization, whether on board our ships or in our offices, that we continue to deliver these outperformance on a day-to-day basis. Please turn to slide 12. One of the deciding factors for us when we are achieving our above average TC earning, this is driven by our continued focus on the positioning of our fleet in the basins where we have the highest earning potential. Here in the Q4 of 2021, we had in TORM an overweight west of the Suez, where we also saw an outperformance when looking at the full quarter. Now with that, let me hand it over to Kim Balle. Further elaboration here for structure, the liquidity position, and also our balance sheet. Over to you, Kim Balle.
Thank you very much, Jacob. Please turn to slide 13. At the end of 2021, we have, as Jacob mentioned, seen a recovery in the tanker market with rates reaching just below $14,000 a day in the Q4 of 2021, and a further increase going into Q1 of 2022, where we fixed 85% of our days at $15,569. In the Q4 of 2021 and in 2021 as a whole, our operating expenses increased mainly due to COVID-19 related expenses. When we correct for these expenses, our OPEX was slightly lower than the pre-COVID-19 levels of $6,354 a day, compared to $6,371 a day in 2019.
We will maintain our focus on cost optimization without jeopardizing quality and customer focus. Please turn to slide 14. Early in 2022, TORM reached the largest fleet ever with 85 vessels across the main tanker segments. A total of $320 million was invested in new and secondhand vessels in 2021, whereas we sold one vessel which was delivered to the buyer in 2021. We recently sold two older vessels with expected delivery in the first half of 2022. They were sold at attractive prices, so our expansion of the fleet was done while maintaining a conservative debt structure and keeping a strong cash position. Early in 2022, we ended our new building program by taking delivery of the last of the two outstanding LR2 scrubber-fitted vessels.
We are now ready to take advantage of a potential market recovery. Please turn to slide 15. As of end 2021, TORM had available liquidity of $210 million, cash total $172 million, and we had on top of that the undrawn credit facility of $38 million. The total cash CapEx commitments related to our new buildings and scrubbers were $48 million as of 31 December , 2021. With a strong liquidity profile, the CapEx commitments are fully funded, and we have a significant liquidity reserve. Please turn to slide 16. Looking at our debt maturity profile, we have no major refinancing until 2026, which combined with our strong cash position, provides TORM with financial and strategic flexibility to pursue value-enhancing opportunities in the market should they occur.
As displayed, we do not have any major repayments until 2026. Further, in the Q4 of 2021 and in early 2022, we have increased our interest rate hedges to 90% in the coming three years and 85% from three to five years. Thereby, we are prudently taking out the potential interest rate risk caused by the increases we have seen in inflation levels recently. Please turn to slide 17. Regarding metrics such as net asset value and loan to value, the value of TORM vessels, including new buildings, was approximately $1.9 billion by the end of the Q4 . Outstanding gross debt amounted to $1.148 billion as of 31 December 2021.
As mentioned, TORM's sale and leaseback of nine MR vessels ended up adding $74 million to the outstanding debt. With limited committed CapEx and a solid cash position, we have a net LTV of 52%. All in all, we have a strong and attractive priced debt structure with reputable banks and leasing institutions, and we have hence demonstrated our strong access to diversified funding sources in the market, and we are very satisfied with our debt situation. The net asset value was approximately $1 billion as of 31 December , 2021, and that corresponds to $12.5 or DKK 82 per share, or Danish kroner per share. I just checked before we started this call where TORM share, I'm sure you all know it and follow it, was at DKK 52.
I am, in conclusion, pleased that our conservative balance sheet supports our strategic flexibility as well as our financial strength. With that, I will let the operator open up for questions.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question is from the line of Jonathan Chappell from Evercore. Please go ahead.
Thank you. Good afternoon. Jacob, if I could start with you, kind of a two-parter on the market. Wanna re-ask the question I probably asked three months ago, which is we lay out, you know, such a favorable inventory situation, such a favorable supply side, demands recovering, OPEX producing, just kinda your views on, why we've yet to see a, event-less increase, substantial increase in the markets. Maybe my second part to that is, it was noteworthy to me that you called out Iran and OPEC, the Russian/Ukraine, a lot of things that impact the crude markets. Do you feel that you really need a crude market recovery before the product or even, you know, at the same time as a product tanker recovery, or can one do better without the other?
Thanks, John, and good morning. I think we probably need to, like, pretend that we have a world where the current crisis is not affecting the market. We fundamentally are sitting last Wednesday, where we had a discussion with our board about the low likelihood of a worsening crisis in Ukraine, which within 24 hours after that discussion proved to be wrong. Let's just if we pause and sort of set the time there, then I would say that what we experienced until that time is that inventories were actually still drawing rather than building, and that OPEC were under-delivering on the needs of the world. Clearly, oil prices, even without Russian invasion of Ukraine, have been creeping up over the past 12 months.
Of course, also because of the subdued answer, in terms of, ramp of production by OPEC. Now, that all leads me to that, what we have been experiencing is that crude tankers have still, up until this, let's say a week ago, been cannibalizing, into the product tanker space, leading also to what I described before around, you actually had this, rather unusual situation with the larger ships burning significantly below in the spot market what MRs or LR2s, significantly lower than MRs.
Also because of this cannibalization. I believe that fundamentally, we need that situation to change before you will see a real recovery in product tanker rates. That is my main thing. Now, fast-forward one week later, the world has, I think, dramatically changed because the whole ecosystem of crude and also refined oil products is right now under change because of that, ship owners, oil traders, and end users in general are taking a position, generally, to be very careful or even shying away from trade with Russian oil and/or transportation of the same oil. That is changing the landscape.
As we speak, freight rates for crude tankers have been going up, and it is also spilling into our segments, the LR, MR and the rate environment is today higher than what we have seen since early part of 2020.
Mm-hmm.
It is also raising the forward curve, significantly. Let's say a week ago, an LR2 could make probably $5,000 per day. Today, what is being discussed is a rate environment in the low 20, and if you add the scrubber premium, which is clearly going up, and it's probably around $8,000 on an LR2 today, then you add 30, and it was five.
Mm.
It's a significant step change.
Yeah, that's true. That scrubber premium, you're right, that's something that some good optionality. Super quick one for you, Kim. I was looking at the debt repayment schedule on slide 16. The 188 kind of stood out to me. I went back to look at your Q3 presentation, and it was only 133. It's up $55 million for this year. 12 million of that is the lease financing, which makes sense given the closing of the remainder of the sale and leaseback transaction. The debt, mortgage debt went up about $33 million as well. What was the reason for that kind of reset of the repayment profile in this year?
Yeah, you are sharp as always, Jonathan Chappell. We have the RCF that we had undrawn, and we intended to just draw it. It is basically equal to cash, but we decided to draw it, so it is cash at hand, and we can have it there or we can redeem that RCF once again. That's the reason.
Okay. Just the final one, if I can slip one more in. You've announced two more vessel sales. Makes sense. Asset values keep going up while the market remains, you know, relatively nailed to the bottom. Any more thoughts of kind of playing that asset arb, so to speak, of monetizing today with probably some of the older vessels, you know, before the rate environment kind of takes off?
Yeah, good point again. We will subscribe to that currently, that arb is open and that we are pursuing a couple of similar deals like the ones we've just done. Yeah, that is definitely high on the agenda.
Okay, great. Thank you, Jacob. Thanks, Kim.
Thanks. Have a good day.
The next question is from the line of Anders Karlsen from Kepler Cheuvreux. Please go ahead.
Yes, good afternoon, gentlemen. Just a little bit back to the market. I mean, rate levels are moving up, but are you seeing actual fixtures yet or is it just hearsay numbers?
In the clean, that's a good question, as I say, it has already proved to be real fixtures, especially in the crude Aframax segments. There we are seeing elevated fixtures being concluded. Of course, also in the larger segments in Suezmax and VLCC. So far, this is what is driving up also the LR2 rates that is being quoted. It is within the last 24 to 48 hours, so it's pretty new. Let's see where it settles. There is a strong push on rates being quoted right now, but nothing concluded.
Okay. That is interesting. In terms of if, you know, and I know this is a if and when and all things changes at every moment. You know, if you were to replace the Russian diesel volumes to Europe, is there sufficient capacity, you know, in other regions to fully replace that on a quick note? Or do you think there is gonna be a time lag to do so?
That is a very good question that we are also obviously looking into because for the refined oil from Russia, the impact on Russian oil is A, crude and then B, diesel. We would say that Russia would need to find new markets for the products that they are currently exporting into Europe and let's say the countries that are currently shying away. If I take it in a simple manner, if we start with crude, clearly today the biggest buyer of crude from Russia, one of the biggest is China. You could expect what we're seeing is that China is publicly articulating that they will not put sanctions on Russia.
They have also taken some of the Russian-controlled tonnage on period charters through UNIPEC, clearly signaling that they will continue the trade flow on crude between Russia and China. I think that there is a relatively high likelihood that it will increase from what it was a week ago. There's nothing that would indicate anything different. The question is, obviously, what will happen then with the volumes of diesel that is currently produced in Russia and being exported to Europe, what is the new home? I don't have the answer yet, but our opinion would be that some of it would flow to South America and other part of it would flow to West Africa. That would sort of, you know, make room for other diesel volumes that would normally go into those areas to then go into Europe.
For instance, US volumes that would no longer go to South America or West Africa, but they would be incentivized to sell into Europe to have a redistribution with longer ton-mile of the same volumes. That's our main, that's how we think that it could play out.
[crosstalk]The alternative is obviously that Russian refiners are no longer producing. I don't think that seems to be somewhere down the road because it's not in their, I mean, their motivation would clearly be even if they need to sell at a discount to other market participant, would be to continue the flow.
Yeah. I think it's along the lines that I'm thinking myself. One last question, it's on the refinery shutdowns. You're not listing any refinery shutdowns in China, but my understanding is that, you know, some of the new refineries may replace some of the old ones. Is that in line with your thinking or do you think it's just gonna be all refineries are gonna continue as they do today?
Yeah. Good point. The way we have described it, rather than having the gross new and the gross closure, we have netted it out in the description that we have on the slide. You see there that we have said that the refinery addition for the year 2020 to 2023 in China is about 1 million barrels per day, and that is net. There you have more additions, but you also have closures, that's the net addition.
Okay. Thank you. That's all for me.
Thank you very much. Thanks. Good questions. Let's see where it ends.
Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star followed by one on your telephone. The next question is from the line of Kumud Momins from Value Investors. Please go ahead.
Good morning. You conducted several acquisitions during 2021. Could you provide some commentary on your appetite to continue expanding the fleet? Are you seeing any attractive opportunities?
Yeah. We are constantly, obviously, following the opportunities that is in the market. Let's see. It's a very volatile market that we have entered into, so time will tell. We are always open for the type of opportunity that we saw last year. One, as you point to, we did a share-based transaction to acquire chemical tankers from, in cooperation with Team Tankers. B, we did enter into an agreement to buy not new, but relatively new tonnage in the LR2 segment. These type of deals would be examples of some that we are still interested in adding to the portfolio. I have nothing concrete at this stage.
All right. Makes sense. The current environment is exacerbating the positive impact the eco component and scrubbers have on relative performance. What kind of premium are you able to secure on your modern assets versus the older ones? Regarding Q1 guidance, could you approximately quantify the positive effect of scrubbers?
Yeah, on the modern versus old, actually, we have old tonnage in our fleet that have scrubber where the economics is the same as a modern vessel. I'm not really seeing a discrepancy in terms of this with age. It's more the characteristics around cubic and other things relative to whether it is young or old that is dictating the earning potential. Now, on the scrubber, currently, as I mentioned, the scrubber premium right now in Singapore, the spread is close to $300 on between high sulfur and low sulfur. This is only at the very beginning of the IMO 2020 implementation back in early part of 2020 that we have seen this.
If you use that as your calculation, then we estimate that LR2s are currently right now in that area of the world having a benefit of around $7,000 to $8,000, and LR1, $5,000 to $6,000, and an MR, $3,000 to $4,000.
Higher earning potential. This is very lately that we have seen this. Only over the past week has the level gone to that.
All right. That's helpful. Final question from me. You have a dividend policy of distributing 25% to 50% of net income as dividends. As you outlined, TORM is trading at a substantial discount on net asset value. Are share repurchases something you would consider in the current environment?
No. We are not contemplating a share repurchase as the world is right now. That has not been part of our discussions internally.
All right. That's all from me. Thank you for taking my questions.
Thank you very much. Have a good day.
There are no further questions at this time. I would like to hand back to Andreas Abildgaard-Hein for closing comments.
Thank you. We have one more question on the webcast from Danske Bank. Håvard Nesheim. It's for you, Kim. Can you comment on the sales price of the two vessels you have sold and the net cash effect?
The two divestments we've made is part of our ordinary replenishment focus. It's older vessels, and one Handy, one of them a Handy size that we have divested. We do not usually comment on the precise price that we have sold them for. Our reference point is, of course, the recent market values of the vessels, and we are very satisfied. Regarding proceeds, net proceeds, you know, net liquidity additions, I can disclose that it's in the level of $13.5 million.
Thank you, Kim. There are no further questions, so this concludes the earnings conference call for the Q4 2021 results. TORM's annual report will be released on 23rd of March, 2022. Thank you for participating.
Ladies and gentlemen, the conference is now concluded. You may disconnect the telephone. Thank you for joining, and have a pleasant day. Goodbye.