Good day, and welcome to the Euronav Fourth Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Brian Gallagher, Head of Investor Relations. Please go ahead.
Thank you. Good morning and afternoon to everyone, and thanks for joining Euronav's Q4 2021 earnings call. Before I start, I would like to say a few words. The information discussed on this call is based on information as of today, Thursday, the 3rd of February 2022, and may contain forward-looking statements that involve risks and uncertainties. Forward-looking statements reflect current views with respect to future events and financial performance, and may include statements concerning plans, objectives, goals, strategies, future events, performance, underlying assumptions and other statements which are not historical statements of fact.
All forward-looking statements attributable to the company or the persons acting on its behalf are expressly qualified in their entirety by reference to the risks, uncertainties and other factors discussed in the company's filings with SEC, which are available free of charge on SEC website at www.sec.gov, and on our own company's website at www.euronav.com. You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement, and the company undertakes no obligation to publicly update or revise any forward-looking statements. Actual results may differ materially from these forward-looking statements. Please take a moment to read our safe harbor statement on page two of the slide presentation. I will now pass over to Chief Executive, Hugo De Stoop, to start with agenda slide on slide three. Over to you, Hugo. Thank you.
Thank you, Brian. Welcome to our call today wherever you are. In terms of the agenda, I will firstly run through the Q4 highlights and some comments on what was, in the end, another challenging quarter after an encouraging start. I will then turn over to Brian Gallagher, our head of IR, to run through some market slides before Lieve Logghe, our CFO, highlights some important accounting changes we are announcing today. I will then return to outline how the Euronav platform is positioned for the coming cycle, not only on a standalone basis, but how we compare with our peers before finishing off with our traffic lights and a Q&A session. Turning on to the next slides, the highlight slides. We stress in our Q3 call that we felt we had reached a trough in this cycle during the late summer month of 2021.
We stand by that view. The recovery we saw from late August into when we reported in early November was tangible and reflected in better freight rates. However, with the rapid spread of the Omicron variant from late November, the associated rapid restrictions in economic activity and the lack of confidence in the business cycle, we saw this recovery stall in what seasonally is the most important period of the year. This was very frustrating and overall tanker activity has yet to really recover. However, freight rates, whilst under pressure, have not revisited the low levels of late summer, and we remain with the conviction that a recovery has only been deferred.
Unlike the situation 12 months ago, we face the coming year with strong oil supply growth forecasted by the leading agencies, a further rebound in demand, and a pressing requirement to address low crude inventories levels at some point in the future. Our low cash breakevens, coupled with our strong balance sheet, enable us to manage through the current market, and we are positioning for the next structural phase of the cycle as we recently took delivery of two new super-eco Suezmax, the Cedar and the Cypress, at the same time as redelivering four non-eco older VLCCs. Don't get me wrong, we, along with all of our stakeholders, remain extremely frustrated with this pause that the tanker market has taken on our recovery journey.
We continue to expect the freight market to improve to healthy levels, even though this is now more likely focused on the second half of 2022. I will return to this later and now pass it on to Brian. Thank you.
Thank you, Hugo. The demand background remains very important for our markets, and the setup for 2022 looks far more encouraging than it did last year, with different and more numerous factors at play and largely in our favor. Firstly, it does appear that demand is finally expected to revisit or even exceed 2019 levels this year. The IEA, for instance, is forecasting a further demand snapback of 3.3 million barrels per day in 2022, implying over 100 million barrels per day of consumption for the first time since 2019, as the top left on slide 7 shows.
Top right, we show the growth which is leverage for all tanker companies and ourselves in particular, as every 1 million barrels per day of annualized expansion of demand historically is required between 30 and 40 VLCCs, and we believe this correlation will hold going forward. The bottom left chart looks at demand, which may also be further increased with a requirement to restock. If we remember that the story of 2021, which is shown bottom right, was that demand rebounded very, very strongly. Most of this demand was satisfied with inventory and draw down from local supplies, so therefore there was no need for shipping. The picture for 2022 looks very different. Inventories are currently at levels globally that we have not seen since 2011.
At some point, commentators such as the EIA advocate strongly that we'll see a big snap back in inventory rebuilds. We'll move from the stocking phase to a restocking phase sometime this year. This should be a further boost to tankers over and above the underlying demand snapback that we anticipate. We now turn to slide eight. We look at vessel supply. Vessel supply remains an issue and will clearly provide some headwinds, especially in the first half of this year. The top right slide illustrates how supply has largely stayed one step ahead of the recovering demand ever since we went into COVID-related restrictions early in 2020. The fleet has grown by around 50 VLCCs in that time, and there are another 40 expected to hit the waters this year. Most of this will happen before September.
Recovering demand will absorb some of this tonnage increase, but clearly not all. However, there are two factors that could redress this balance during the rest of this year. Slide nine, top left, shows that 2022 is a big year for special surveys. Nearly 10% of the sector will go into the yard this year, aged between 17.5 years and 22.5 years of age. Now, clearly, not all of these ships will exit the market, but it illustrates the soft underbelly of the tanker market, with 25% of the fleet already aged over 15 years of age and an average fleet age at 20-year highs. The catalyst of taking the decision whether to exit or not is twofold.
The steel price, which is the driver of scrap metals, and the cost of a survey, which at that age is considerable and somewhere between $3 million-$4 million for each survey. In other words, owners are faced with a choice of either spending a lot of dollars to remain in the market today to keep an old ship, which will only survey and have low utilization for the following 30 months, or receive a hefty capital injection, in terms of, in exchange for recycling that ship. This decision was skewed last year because a lot of these older ships could be sold to perform the so-called illicit trade, a murky business allowing those involved in it to pay a premium over recycling values.
We don't believe this will play a very big role going forward as this illicit trace, illicit trade rather, has stabilized in size, as shown by the slide on the bottom left, which will make it difficult for new entrants to enter this illegal trade. This illicit trade, it must be stated, remains a wild card for the tanker markets, but there is a pressing need for the IMO and others to apply the sanctions that are in place as this trade represents a huge risk for human life and also the environment because of this, the way this trade is operated and the age of the vessels that are engaged in this trade. The bottom right chart illustrates how dynamic tanker markets can be.
If one assumes that the 20- and 22.5-year-old vessels up for survey this year were to exit the trading fleet, then the fleet would actually shrink in terms of overall size. While very unlikely, it does illustrate the age profile of the VLCC at the current state and how dynamic this would be if recycling were to maintain the trend that was started in Q3 2021. With that, I'll now pass over to our CFO, Lieve Logghe, for some important changes in our accounting approach. Lieve, over to you.
Thank you, Brian. Today, we are announcing a number of important changes in our accounting policies and the way we report our figures in our P&L. We are reviewing on a regular basis our judgment and assessments made with the objective to continue to present a fair, exhaustive, and thorough view next to the fact that it's equally important for Euronav to be directly comparable to its peers. The key change is the adjustment we are making to our residual value accounting. After a thorough internal review, and with our auditors, we believe now is an appropriate time to update our assessments and to transparently share this with our stakeholders. Historically, our approach has been very simple. 20 years straight line depreciation to zero. However, there have been significant changes in shipping and steel markets in the past five years, which we believe necessitate a change in policy.
Steel is one of the most recoverable commodities in recycling and in a sustainable circular economy. Hence, the recycling of ships will become more important. With this in mind, we have decided to move to the following approach. We keep our depreciation policy over 20 years, but to a residual value basis, as opposed to what we had until now, which was a zero residual value. The residual value we will adopt will be an average of the key recycling market prices, which presently is around $500 per ton. Going forward, as slide 12 shows, this will reduce our depreciation charge annually by around $100 million from the current run rate of around $380 million, and places ourselves more in line with our quoted peer group.
On this slide, you can also look at how recycled steel prices have performed in the past decade and the reasoning behind choosing $390 per ton, which is equivalent to the four-year moving average. Other important changes in our P&L are some reclassifications we are making between revenues and cost lines in order to make us more market conform. TI pool administration fee has been reclassified out of G&A to revenues, whereas flag compensation is now directly integrated in our costs as an offset. Ship management overhead is now part of OpEx, as we recognize that the majority of market takes the ship management fees, especially when this is outsourced directly into the OpEx.
While those changes have no impact on EBITDA or the bottom line, it clearly shows that our system platform enables us to deliver top quality service at very reasonable costs, which can only be achieved with scale. We illustrate this point by showing how we compare to one of the most repeatable benchmarks produced by BCG in the tanker shipping industry. Another important feature worth mentioning is that Euronav's portion of debt hedged against interest rate hikes is now 60%. In an inflationary environment, we cannot just do nothing about it. I will now pass back to Hugo for the rest of the presentation and its conclusions.
Thank you, Lieve. I would like to finish up on a few slides outlining exactly where Euronav is positioned. Slide 15 illustrates a comprehensive platform we offer investors. Firstly, our operational performance is at the leading edge in our market. Our OpEx performance compare with the best in class and is backed by a strong balance sheet where we have the highest liquidity, both in absolute and relative terms, accompanied by one of the lower leverage ratio amongst the peer group. Finally, in terms of capital markets, investors looking to gain exposure to the tanker market at this stage should focus on two elements, the robustness of the company they invest in, as well as the operational leverage they acquire for when the cycle will turn. It should be clear to investors that Euronav offers the lowest entry point and therefore the highest upside.
In summary, on slide 14, we have a clear focus and strong platform at Euronav. Our operational structure is extremely competitive in cost terms and is fully integrated. Our large fleet is appropriately aged, and we have a balance sheet that retains two years liquidity runway. All of this supported by increasing sustainability credentials and proven record in terms of return to shareholder. Do we wish the freight market was more encouraging and in better health? Yes, of course. As no one can accurately predict the markets, we are always prepared for challenging markets even when we expect the cycle to improve, which is clearly the case for 2022. Let's move on to our traffic lights and another upgrade. We have upgraded our oil supply outlook driven by three factors. OPEC continues to deliver on its monthly production increase, as confirmed yesterday.
Non-OPEC is beginning to show signs of life with pockets of exports increasing from areas like Guyana, Brazil, or even the U.S., which are long ton-miles. Finally, inventory at our level where people will look more into replenishment than further drawdown. Elsewhere, the key traffic lights remain the same. In conclusion, Euronav remains constructive on the prospects for our market and its recovery. The setback that we saw in the second half of Q4 is just that, a setback. It will take time, but we remain confident for the recovery. That concludes our remark. Thank you for your attention, and I now pass back to the operator and look forward to your questions.
We will now begin the question-and-answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. The first question is from Randy Giveans of Jefferies. Please go ahead.
Howdy, team Euronav. How's it going?
Hi, Randy. How are you?
Doing well. I guess first on the accounting changes, knowing you're going now to a scrap value, residual value depreciation, makes sense. Any impact to the potential payout ratio, you know, if and when we get back to some pretty meaningful profitability here?
At the moment, we keep our policy. It's very clearly set out on the website, very similar to what we had in the past. You know that we are very shareholder focused, and we have tended to be very generous towards them, be it in dividend or in buyback. We continue to be frustrated with the share price. It continues to trade below NAV. Clearly we will need to make a choice between dividend and buyback, when we get to positive territory and we have something to return to shareholders.
Got it. Okay. In terms of your comments on inventories, I think, Brian, going back to 2011 levels. Clearly, with Brent at, I don't know, $88 today, this could continue to be some downward pressure on inventories. Do you see any kind of inflection point in the near term for that restocking that you mentioned? Or is it all just kind of supply driven?
It's a good question, though, Randy. I think that it would be the business cycle getting confidence. We were beginning to see that confidence return before Omicron began to bite in November. We're just not getting sort of any longevity in these recovery periods over the last two years. I think it's a question of that the business cycle getting back to more some form of normalization and therefore having the confidence to order, but also the price structure of oil itself. Clearly, it's in very deep liquidation at the moment, which moves against that inventory rebuild. Look, I think it's just a question of time getting through, and then as we get through better improved confidence, then we would expect that rebuild to start.
We are talking about very low levels, and that's the reason we wanted to highlight. If we take the EIA, you know, they're forecasting you know the rebuild to start as soon as this quarter. Let's wait and see. I think it's more a question of the business confidence and cycle returning to some form of normalization, and then we will expect the restocking to happen then.
I just would like to add maybe one color on this, which is world stability, yeah. We all know why those inventories exist, and it's because there is always a risk that the supply of oil is being disrupted by an event or another, which is clearly the case at the moment. It's very good to be able to draw on your inventories, but there's a limit to what you can do, and that limit is reached when you're confident that your supply chain is gonna be interrupted.
Yes. No, yeah, that's fair. If you don't mind, I'm gonna sneak in one last question here. Obviously, you're frustrated with spot rates. I think those sentiments are shared pretty widely. In terms of time charter rates, those have held in, you know, decently relative. Any appetite for just, you know, locking in some cash flows there while we continue to wait for the uplift in spot rates?
As we're concerned, we haven't seen anything short-term that was really attractive. I mean, yes, you can lock in sort of the low $20s for a year. Whenever you are crossing sort of the 30s, then you're talking about three years and usually one or two years option on the back of that at maybe $1,000 more. We have seen structure like $33,000 for three years and 34 for the fourth one as an option, 35 for the fifth one. When you read our thesis, which is obviously shared by a lot of people, we believe that when the market returns to positive territory, it's gonna be probably a longer cycle than what we have seen recently.
It's probably gonna be a like 2004 to 2008 type of cycle, relatively high rates, and relatively prolonged. I think that we should be prudent when we are looking at those rates, which today looks attractive, but quite frankly, at the back end of those five years, you may be a little bit regretful to have done it.
Yeah, that makes sense. With your balance sheet liquidity, you have the ability to wait. All good. Thank you again.
Thank you, Randy.
Thanks, Randy.
The next question is from Jonathan Chappell of Evercore. Please go ahead.
Thank you. Good afternoon, everybody. Brian, if I could start with you. You know, I found that there's been a pretty strong consensus from the public companies and most of the analysts looking for a recovery just any day now. But some of the like brokers maybe don't have any skin in the public game are quite more bearish. It feels like a lot of their negativity is focused on the supply side. If I can go to page 8 and look at that upper right-hand graph where you say it implies 60-80 excess VLCCs based on 2019 demand, what gives us confidence that 60-80 spread closes? I know there's some you know hope for scrapping, but scrapping is always a bit of a wild card.
Is that a demand-driven reversion? You know, anything you can point to that would maybe debunk that bearish thesis?
It's a very fair point, John, and I think what we tried to do maybe with the first slide before that was to try and just show that there are multiple elements to this. I think if I maybe give three sort of pushbacks on that. One would be on the supply side. Yes, supply has been patchy. We have to recognize that, and we haven't seen the supply growth that we'd have anticipated. If we take again the forecasts which independent commentators are giving, Platts, for instance, are talking about 1.5 million barrels per day increase from the U.S., although that is second half weighted. We're also looking at 0.7 million barrels per day from Brazil, Canada, and the North Sea, again, second half weighted.
Also, I think we have things like the standstill agreement that will come into place with the OPEC+ nations, which will. Well, potentially we'll see Russia, Saudi, the UAE, and Kuwait have 1 million barrels per day between them that they can increase their production. Now, that's important because obviously those nations have been the key drivers of the production growth that we've seen. We've seen other, in particular, West African nations, struggle to even grow their production. I think there's some really good grounds, albeit second half weighted for the supply side. The second answer would be, as Hugo said in his preparatory remarks, the demand we do believe is gonna gain, continue to gain traction.
There's some seasonality to that, so we shouldn't be surprised that again, that's gonna be more second quarter onwards, base. Lastly would just be the fact that we, you know, we have started to see, some of that recycling. I think it was, 11 VLCCs in the second half of last year, and I think a similar number of Suezmax. We've got a very big survey cycle here. I'd love to give you a magic bullet, John, and everyone else as again, as Hugo said in his call, that we're not happy with where we are. But we do believe we've seen the worst in the rearview mirror.
We do all we can point to is some of these factors that we see in front of us. We wish they were gaining traction more quickly than they are. We're gonna have to be patient, and I think that's the message we try to give in the commentary in the press release. We do see, you know, it's not just one factor that we're sort of hoping that will come through. We see multiple factors which will be supportive, and we believe those will combine to get traction as this year progresses. It's certainly probably gonna be more in the Q2, Q3, when we start to see that getting traction moving into the key winter period.
Look, we're comfortable and confident that that will come through, but I can't sugarcoat it to any degree that we've got some sort of hidden numbers that we're seeing. The pushback on that would be, well, the worse it gets or the more it continues to be very, very challenging, then you know you want to be exposed with those stocks that have got the best balance sheet and the best cash flows that can withstand that marketplace. The tougher it gets, then we think the more we'll start to see recycling come into play.
Yeah.
We do believe we're getting into the end of this particular sort of phase. But I don't know if Hugo's got anything to add to that.
No, I think you sum it up. I mean, there are so many moving parts, and obviously, John, I know that on the recycling side, it's very difficult to predict. I think what we've tried to put in the presentation is the opportunity that is there. I mean, if no one had to do a special survey, especially at 17.5 or 20 or 22.5 years, then I think that the hope to see a lot of scrapping would be gone. This year is particularly interesting from that point of view.
If you're faced with $3-$4 million dollar bill, and when you return to the market, it doesn't give you anything, because for this age profile, the return is literally zero at the moment, then I wonder what people are gonna do. Last year, they were selling their vessels to the illicit trade, but that part of the market seems to be well covered, and we haven't seen any ships going into this horrible business recently. We don't see any reason why it will continue. I think there is an existing fleet, and it services this part of the market.
I think Brian's point about just making sure you're aligned with the best balance sheets and liquidity is a very important one. If we can look at just a bit past the short-termism, I know we have a tendency to focus on the here and now. You know, if we get past 2022, the order book drops precipitously. I know that ship owners have a long history of saying, "Oh, you can't get a ship for three years," and then magically we find 30 slots in 18 months. It does seem that given the strength of the container ship ordering, the LNG ordering, even the LPG, that there is less availability in kind of the 2023, 2024 timeline.
Can you just speak to, in a very realistic manner, at a commercial scale, when would you realistically get, like, a 10 + 4 order of VLCCs or Suezmaxes? Do you have a great relationship with the Korean yard where you can sneak one in first half of 2024? Or even the best placed ship owners, you're looking at late 2024, maybe into 2025 and beyond?
If you're talking about one slot or two, I think that you can reasonably expect to squeeze maybe one or two slots, as I said, in at the back end of 2024, but it's certainly not a six, eight or 10 sort of ship slots, and that's in Korea. In China, it's a little bit more opaque, and so one never know. Quite frankly, if you look at what has been ordered in the past, it's very much for Chinese owners. Then Japan seems to be completely out of picture for VLCCs at the moment.
Quite frankly, if and when they return, it's also probably gonna be for Japanese owners who are not typically spot operators, and that's probably what we are looking at when we see new orders. Quite frankly, I think that a lot of the characteristic of the market that we're seeing now are very much the same as what we were seeing 2003, 2004. It's simply because, well, this time around, not us, but every bit of shipping is doing very, very well, and has placed an enormous amount of orders. I think people don't realize that those ships are being built in the same docks, I mean, literally in the same docks.
If the dock is busy building a container ship or a gas carrier or any other type that has been ordered, the slot is busy. Yes, you can gain some efficiencies. You know, the Koreans, they are pretty efficient people. Already efficient, what you can gain is maybe 5%, maybe 10%. Of course, in the other segments, certainly in the container, we don't expect reading the analyst comment that this sector will abate and the cycle will turn anytime soon. You continue to see orders, which means that even if there was a willingness of some owners, some tanker owners, to place orders in those yards, they would be competing with those ships.
Given that those yards are earning, well, better margin on container and certainly on the gas carrier, we don't believe that the price they would be offering us would be attractive for owners to place a large quantity of order. I mean, today, you can probably get a VLCC for $106 million, and that would be a very basic one not even one that could potentially be retrofitted later into one of the two or three technologies or fuel that we'll use in the future. I'm very positive, in fact, on that part of the market. Quite frankly, it's the most important part of market because the only reason why our markets are cyclical is simply because of the supply side.
Mm-hmm. That's fair. I appreciate the thoughts. Thanks to you. Thanks, Brian.
Thanks, John.
The next question is from Gregory Lewis of BTIG. Please go ahead.
Yeah. Hi, thank you, and good afternoon everybody.
Hi, Greg.
You know, you too, or Brian, I was hoping to get a little bit more color. You know, a typical question that we get a lot, you know, as people look at kinda headline rates, are those negative, you know, is it like a negative TD3? Clearly, your company has been able to generate a return over operating cash costs. Really, what I think people are trying to understand is, you know, there's been a lot of vessels that have had scrubbers installed, and so we have a scrubber fleet and a non-scrubber fleet.
You know, as you look at the market and track what you're seeing, do you get a sense that the utilization, it's almost a two-tiered market where the utilization of the scrubber fleet is significantly higher than the non-scrubber fleet? If that's, you know, and this is obviously beyond TI, but maybe broadly speaking, if that's the case, how much utilization bump do we need in the non-scrubber fleet to kind of, you know, get utilization to a point where you know, maybe those are the vessels that are setting the prices, and we can actually see upward momentum in rates?
Well, it's a very good question. It's certainly one that we are asking ourselves all the time. We do have a little bit of visibility because TI operates both scrubber ships, non-scrubber ship, old non-scrubber ship, old scrubber ship, the eco scrubber, non. So you have four categories, not two, in fact. What tends to happen in the market is that you would put the most economical vessel on the longest trade because you want the ships that are non-eco, non-scrubber, to do short voyages and then spend a lot of time in the terminals because they're not consuming a lot of energy, a lot of fuel, for obvious reasons. That's a little bit how the market is developing at the moment.
Very clearly, when you have an old vessel which is non-scrubber, and I'm talking here about, you know, something which is 11-12 years old and older, even with a scrubber, the economics looks horrible because you will consume 77-79 tons per day compared to 40-45 for eco vessels. That's already one element. The scrubber will help but will not compensate in full for the excess consumption. Of course, I just touched on that, but I'm gonna repeat what I said. There's a completely different utilization for the guys who are doing the illicit trade, and we're talking about 55, potentially 60 vessels, so it's quite a lot of vessels, where nobody talks about utilization because what they need to do is constantly change registration flag.
They do transshipment two or three times before they deliver the oil. I mean, that it's a game of hide and seek, which seems to work for them, obviously, but which means that the utilization is not really the element that you're looking at. 55-60 vessels on a market that is, you know, 830 vessels in operation, i.e. trading, it's not insignificant. It's very difficult to give you a straight answer to that. I think that the market always tries to adapt to what it's given. Every operator looks at its ship, its capabilities, efficiency, and then decide to do one trade or the other.
When Brian is talking, well, but Brian specifically in this slide is talking about the excess number of ships. I think we are very much talking about the older part of the fleet. If we would see that disappearing one way or another being scrapped or being used converted to FPSO or what have you, I think the market would quickly rebalance. That's the issue also that we have today, because the market is so patchy, i.e., with four sub-segments, as I said, the list of ships that can potentially do the cargo is very long.
Whereas we, along with other big operators, can really make the difference of, okay, but is that ship really the right one to do this cargo or not? A lot of the owners with very small exposure because they only operate two, three, four, five vessels, they don't have that kind of information, and they are completely being blurred by that list. They say, "Oh my God, I'm facing six, seven, eight ships that will compete with me, so I need to drop my pants, and I need to set a rate that is very low." Then they have set the rate very low. They don't get the business. Guess what?
The guys who was probably the only one or amongst the two ships who could do the business has to match that rate. That's really what's happening in the market on top of a lot of private cargoes not being shown to the market and only being revealed once they've been done to the regret of many people saying, "Oh, I thought there was far fewer cargoes." In fact, on the cargo side, we're not very far from 2019. There's a lot of things that needs to be correct, but it's no different than other cycles. Sorry for the long explanation, but the question was complicated, complex.
Yeah. No, no, absolutely. Thank you for that. That was super helpful. Just as we think about Iran, you know, clearly, you know, in the U.S. we hear, you know, what's in the newspapers, it seems like the U.S. is really gonna drive the, you know, maybe not the decision, but the event path of how Iran plays out. You know, in the event that the shadow trade kind of, you know, drifts away over time, how should we think about that kind of impacting the market? And is this something that, you know, just could be a 2022 event and it's part of the reason that you're as optimistic?
Is it something that is, you know, probably the way it plays out, it's more of a nice bump in the 2023, which is why, you know, I think you mentioned earlier that you're pretty bullish, you know, maybe not on today's rates but, you know, in the next few years?
We don't have a crystal ball and we've been there, you know, near an agreement and then it disappeared. I think the last time was just before the withdrawal of Afghanistan, and I guess the U.S. administration could not afford that kind of news right after that. No clue when it's gonna happen. We are reading the same sort of headlines. It's a wild card, and that's not part of the thesis. When we are looking at it, if it happens, we believe that the story is then very simple. You have 1.3 million barrels that are being traded today in those illicit trade. The capacity of Iran is probably around 2 million barrels, so even more than what is being traded today on illicit.
All of that would return to the regulated legal market. The ships that are currently doing it would immediately become commercially obsolete because nobody would touch them. You would have a double impact, which is more cargoes available for us to transport, for us and the rest of the regulated market. And at the same time, all those ships, which by then would be very worn out because they are, you know, 20, 21, 22 years. They are not being properly maintained. They don't have certificates. And the scrap prices are pretty high, so they would hit the scrap yards in no time, in our opinion. It's a double whammy. Again, it's a wild card and certainly not part of the thesis that we have shown to you today.
Okay, perfect. Super helpful. Thank you, everybody. Have a great day.
Thank you. You too.
The next question is from Chris Wetherbee of Citigroup. Please go ahead.
Yeah. Hey, thanks for taking the question. Hugo, just wanted to follow up going back a couple of calls ago to your comment about a cycle like 2004 to 2008 in tankers. I just wanted to get a sense of, you know, what do you think sort of the key of driving that degree and duration of strength? Is it really the sort of supply side that you had talked about earlier? I just wanna make sure I understand. It feels like demand has the potential to be a significant wildcard relative to what, you know, 2004 or 2008 was. I guess I just wanna make sure I understand, you know, how you guys are thinking about that.
Primarily, because of the supply side, very low order book, very low space in the slots in the yard, but also age profile of the fleet, 25% being already in the sort of age profile where potentially people are thinking about scrapping. Very high scrap price. Yeah, that's, I would say 70 or 75% of the reason why we believe it could be a prolonged cycle like 2004, 2008. Now, don't get me wrong, 2004 or 2008 was not only long, but it was, you know, always between $70,000 and $100,000 a day. That's not really what we're saying. What we're saying is that it's gonna be very good rates, and it should be very good rates for three or four, potentially fiv years.
Let's not be too excited, too carried away. I mean, when you get $100,000 a day, you indeed need both elements, which is super strong demand growth, and very limited capacity on the supply side.
Okay, that's helpful. I appreciate that clarification. I just wanted to ask a sort of detailed question about the accounting changes, if I could. I know we're going now to a residual value versus a zero residual value. I guess maybe two questions here. Are you moving from 20 years to 24 years to match peers? Number one. Then number two, when you're thinking about the residual value, are you taking the four-year average? Is that what you're suggesting to us? Or are you just taking a mix of multiple destination residual values at the current point? I guess I just wanna make sure I understand the couple of moving parts there.
Yes, Chris. Thank you for raising or asking the question. Indeed, to answer your first question, we keep our 20 years depreciation rate or 20 years. We are not moving there to 25 years. We keep the duration. Indeed, we changed from nil to a residual value of $390 per ton. How did we define this $390 per ton? We use there what we call the four-year moving average. Each year we will update with the new rates. There we are using a basket of scrap countries. I think Bangladesh. There are three countries there.
Yes.
India and Pakistan. There are three countries in there which we take as the reference. Based on this is how we will update on a yearly basis our assessment.
Okay. That's very helpful. Thanks for the clarification there. I guess last question, just when we're thinking about the debt profile, you got 60% fixed at this point. Is there an ability to move that higher? Or do you, I mean, obviously, that's a nice step up from where we were earlier in the year. Is there ability to move that higher? Or what are your expectations there?
For the moment, indeed, we have fixed what we could fix. Indeed we continue to look at what needs to be concluded in terms of new loans and then use our liquidity. From that perspective, we will follow closely what needs to be fixed. 60% is currently the best we can do, based on the loan portfolio and the loan diversification we are currently having.
Okay. That's helpful. Thank you very much for the time today. I appreciate it.
Yeah. Thank you.
The next question is from Chris Tsung of Webber Research & Advisory. Please go ahead.
Hi. Good afternoon. How are you?
Fine.
Hey. Wanted to ask about depreciation as well. Just looking at the chart that you guys have on slide 10, I understand it's a four-year moving average, but I guess, is there a floor or ceiling at what you guys would determine the scrap values to be at? Because I could just see, looking at this chart, in 2016, for instance, the four-year moving average is around 400 versus the current scrap, which is, like, 250 or so. I guess just in that scenario, you would be depreciating at a higher value than current market. I just wanna understand what goes into that process.
No, indeed, it's a good question, Chris. It's also a question that we discussed thoroughly with our auditors. Indeed, when we look over how the 20-year cycle, this $400 average is there. We had somehow to define an average which made sense. Looking indeed to the last years of high prices of scrap steel, you see there indeed the $600 per ton. We know that this is a bit too high and will not keep probably over the 20-year lifetime of a vessel. Hence, we have to monitor and see, compared to this 20-year average moving, compared to the four-year cycle, and then indeed to see how we can cap this.
Because indeed, I'll agree with you that we have to look to the tendency, and this tendency is based on the last 20 years, and we have to keep this as a cap moving forward. This is how we think about it. Indeed we have to test and to see how it works in reality. We did now our first step, and we think we are still conservative. Hence, something which we have to explore and see how it further works. Indeed, we are tending to keep the cap over the 20 years lifetime of the vessel as a moving average based on that principle.
By the way, this is very much the same for the other tanker companies, huh?
Yeah.
In the past, zero was zero. You don't need to,
Mm-hmm
to look at it on a yearly basis because that's your policy. Once you go to a scrap value, then obviously you need to look at the market. As Lieve explained, we didn't wanna bring more volatility into the P&L, far from it, or into the balance sheet. You need to look at it with certain number of years of average. That's what we're doing, but also taking into account, you know, the last 20 years, simply because 20 years is the lifetime of a vessel. Everybody is facing a little bit the same issue. I don't think that the market sees the little volatility when there is a small correction in the depreciation rate.
Yeah. It's because of the last years that the scrap price is so high that this topic came up as a and why we changed. Because of this high pricing of $600, this is why we had to change and move towards our peers in that direction. Hence this change now at this moment.
Okay. Thank you for the color on that. I just wanna move on to another point that you guys had in the press release. You guys were able to successfully trial the B50 biofuel, and I wanted to just understand, would you think B50 allow ENF to generally meet EEXI compliance, or will you guys be looking to trial, like, a higher biofuel blend?
I think the idea behind it is really to be helpful in the energy transition. Quite frankly, we don't believe that it's a long-term solution, biofuel. Certainly not given the quantity that will be produced and the competition that we will face with other industries. Nevertheless, it is helpful to see how it reacts in the engine. We didn't pay a premium to get that fuel, so that's also very important. There is an incentivization scheme that is present in Rotterdam, which meant that the Dutch state is indeed giving subsidies to the guys who are producing it. So the only thing that we did there is try something else. Then obviously you need to pay attention.
You need to have the chief engineer on board, making sure that everything is running smoothly, and then you deliver the data and whatever you have discovered to the people who are making that fuel. I think that while it's not a long-term solution, every little helps in the short term. To answer your question, first of all, happy to lower carbon emissions whenever we can, especially when we don't increase the cost. Secondly, as far as the regulators are concerned, this fuel is produced in Europe, in the Netherlands. And it remains to be seen whether it's gonna be acceptable or not. Well, there are three regulations that are coming into place from the EU perspective.
It's a little bit too early to tell you whether it can play a role or not, but the fact that we have tried it means that if it would be accepted, then obviously we would know how to handle it. If there is any issue, we would know how to mitigate them.
Perfect. Thank you. Thank you, Hugo. Just one last one I'm just gonna squeeze in. Just on the cadence of drydockings in 2022, I know there's 16. Is this going to be kind of front-loaded? Or, maybe you could tell me how the model is.
Yes, we are trying to front-load as much as we can because we are very optimistic about the second half of the year. Obviously you are always trying to take advantage of the low rate, if I may use that expression. It very much depends on the voyages, but the ambition is to try to front-load it as much as possible.
Great. That's it for me. Thank you, guys.
Yeah, we will update on a quarterly basis where we are on that program.
Great. Thank you, Hugo.
The next question is from Magnus Fyhr of H.C. Wainwright. Please go ahead.
Good afternoon. Just one question related to the supply of oil. You upgraded your outlook there. I was just curious, you know, with $90 oil, OPEC has all the incentive to increase production. January production was only 50,000 barrels compared to the 400,000 barrels announced. I would be somewhat concerned that OPEC is struggling to increase production. You know, the IEA is looking at 3 million barrels plus in 2022. What gives you confidence now on your upgrade there that the supply of oil is gonna increase?
Maybe if I can jump in there.
Yeah. Yeah. Go ahead.
I was gonna say in terms of similar sort of answers from before, you're absolutely right. We're obviously disappointed as well that it's been a very patchy level of production growth, as you say. In particular, the numbers for December seemed to be a little bit lower than we would have expected, in particular in areas like West Africa. Again, as I mentioned before, there are areas where we have seen sort of decent growth in Saudi and Kuwait and UAE, and that agreement changes under the OPEC+ terms in May. That's a potential 1.5 million barrels per day with Russia as well.
We'd love to see a bit of a situation where not only is the production growth coming through, but also it's coming through spread around the world so that that oil has to move even further. But the reason we upgraded is because we see this pressure, in particular in the second half, rising, as you say, because the rise of the higher oil price. Secondly, obviously we've got the return of, we believe, along with people like the EIA and Platts suggesting that we'll see more growth coming through from the U.S. Platts, for instance, are talking about 1.5 million barrels per day coming through from the U.S., again, second half weighted.
I think it's more a question of what we see in terms of some of the particular production growth areas, albeit a little bit specific, that we see that growth continuing. You're absolutely right to highlight that. It's been, if you like, the stop-start nature of this recovery has been reflected in the fact that the production growth has been so sporadic and so stop-start. We certainly get a sense not only from the official commentary but also from some of the conversations we're having with the client base, that supply growth will begin to translate into more sustainable levels of increase going forward.
All right. Thank you. I mean, we've been talking about Omicron virus having an impact on the market here. Don't you think it's more related to that OPEC has been unsuccessful in increasing production? I mean, if we could see another 500,000-1 million barrels, I mean, I think the tanker market look a little different.
I think personally, yeah, that's a very fair comment. At the same time, I think the two go hand in hand a little bit in that we're not really seeing the refinery participation in terms of border flows of cargoes that we would anticipate. That goes back because of that stop-start nature and Omicron reducing that demand and that business cycle, if you like, duration and confidence. I think you're right. I think it's a combination of the two. As you said right at the start, as Hugo said on the preparatory remarks, you know, the.
Don't get us wrong, we're not happy with where we are, and it's frustrating that all of these different factors and the moving parts that we always see in our market, that we're not getting maybe the full value from all of them. You know, we do anticipate that will come through. We're certainly hopeful as we now seem to be in a better phase with regard to COVID, in particular in Europe, as we come out of restrictions, that should start to get some traction. The oil price is clearly going up because of, if you like, the lack of equalization between the supply and the demand. We do anticipate that we're gonna start to see some proper benefits coming through from that.
We have to be patient.
All right. Thank you, Brian. Just one more question on the depreciation policy. Will that be effective as of second quarter, or when will we start seeing those changes?
It will be effective.
For first quarter.
Yeah, it's prospectively.
First quarter.
First Quarter. Yeah.
All right. Very good. Thank you.
Thanks, Magnus.
You're welcome.
This concludes our question and answer session and today's conference. Thank you for attending today's presentation. You may now disconnect.