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 touch tone phone. 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 Q1 2022 earnings call. Before I start, I would like to say a few words. The information disclosed and discussed on this call is based on information as of today, Thursday, 12th of May, 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 statements of historical facts.
All forward-looking statements attributable to the company or to persons acting on its behalf are especially qualified in their entirety by reference to the risks, uncertainties, and other factors discussed in the company's filings with the SEC, which are available free of charge on the SEC's 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, and 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 going forward. Actual results may differ materially from these forward-looking statements. Please take a moment to read our safe harbor statement on page two of this slide presentation. I will now pass on to Chief Executive Hugo De Stoop to start with the content slide on slide three. Hugo, over to you.
Thank you, Brian, and good morning or afternoon to wherever you are, and welcome to our first quarter earnings call. I will run through the Q1 highlights before passing on to Lieve Logghe our CFO to give more details on the financial with a focus on our balance sheet and P&L. Brian Gallagher, our Head of IR and Research, will then highlight some key trends in the wider tanker markets and Euronav's positioning within it before I return to summarize our strategy and outlook. Turning to slide four and the Q1 highlights. It was a busy quarter for Euronav on many fronts, but we're particularly pleased with our fleet modernization program, which has a strategic focus with nine vessels transacting during Q1.
Indeed, we sold four older VLCCs and acquired two modern ones, and we sold one Suezmax jointly owned and took delivery of two brand new Super Eco Suezmax that we had purchased last year as they were still under construction, but for a defaulted party. This in turn has improved further the age profile of our fleet. Freight rates were under pressure for most of the quarter, but the onset of the conflict in Ukraine in early March caused an important dislocation in the oil markets, which in turn has proved to be a positive catalyst for tanker markets. This has driven sequential improvement in freight rates across all segments, starting specifically with smaller ships benefiting from the Russian dislocation and gradually impacting larger ones.
While freight rates in absolute terms remain disappointing, the direction of travel is encouraging, especially in Suezmax, with rates on average at $20,000 per day for the current quarter. I will return later in the call to expand on our thoughts on some of these trends and the outlook, but I will now pass over to Lieve to provide more details on the financials. Lieve, over to you.
Thank you, Hugo. Before I start, you will have noticed our financing and market efforts are being recognized, which reflects on the hard work by our employees. Turning now to slide seven and the balance sheets. Focusing firstly on our balance sheet, which remains strong and supporting in financing the expansion of our platform. Our two-year liquidity runway remains core to our strategy. While lower than Q1, it is sufficient to deal with more duration to the current down cycle. Leverage has ticked up towards our self-imposed limit of 50%, but our availability of financing remains good. Optionality in further fleet recycling readily available given a buoyant sales and purchasing markets. I would now like to dive into our income statement and give more detail on Q1 performance on slide eight.
As Hugo highlighted earlier, while small, freight rates continue to sequentially improve quarter-on-quarter. Strong cost control has allowed us to progress in Q1 2022, even though we have had to incur some exceptional costs during the quarter related to our corporate background. As we highlighted in Q4, our depreciation approach has been updated, and it was pleasing to bank a capital gain on some of our legacy sales and leaseback arrangements during Q1, which we announced in early January. I would like to spend a brief moment on our fuel hedging, which continues to be a net benefit for Euronav. Euronav executes a 100% hedging program to manage volatility of the company's fuel stock.
The paper position, which is booked in the financial result of this quarter for a total amount of -$16.3 million, is more than compensated by the realized gains on consumption and the unrealized gains on the fuel stock for a total amount of $20 million, positives. I will now pass on onto Brian Gallagher to run through current thoughts on the tanker markets.
Thank you, Lieve. On slide 10, we look at the tragic events of Ukraine and the impact that they've had from the Russian dislocation, which has had a major impact on our market. Effectively, this catalyst has triggered a set of reactions which have been largely positive for tanker operators. Slide 10 shows the before and after effects of Russian dislocation and also looks at how we anticipate it developing. On the left-hand side, you can see the relatively stable 4.5 million bbl per day or so of Russian exports that were largely seaborne driven, that were made every single day before March. Most of this eastbound oil to Far East markets will continue to remain unchanged, albeit under some pressure from sanctions.
The key impact, we believe, has been, and will continue to be, in the Western or Baltic ports, which have traditionally exported between 2.5 million and 3 million bbl per day to the EU. This trade was performed by Suezmax and Aframax vessels. These ships are now sailing around Europe and directly into Far East markets, taking this Russian oil very long distances. To replace this lost oil, the EU is already taking more oil from the Middle East and from the Atlantic, namely Brazil, North Sea, U.S. ports, as well as West Africa. This trend we believe will deepen and strengthen, and then we also anticipate that Russian production will probably fall by around about 1.1 million bbl per day.
This has seen the sector benefit from slightly lower and smaller volumes of crude moving, but that crude is now moving much greater distances or ton miles. This impact still has some way to run, we believe, and will take over the summer months to fully impact the scale of this dislocation. Overall, it is a very strong positive for the tanker market sector. As you can see from slide 10, we believe the spillover effects are already starting to affect and will continue to be a positive effect on the VLCC market. It's important to remember that VLCCs cannot discharge or load in any of the Russian ports. Therefore, it's never really been a market for VLCCs. Hence, the impact has been largely seen on Aframax and Suezmax categories.
Catalyst, for want of a better word, has been the key feature in our market over the last quarter or so. If we now turn to slide 11, we can see other short-term signals which are largely positive. Four key factors we addressed in slide seven. Bottom left, U.S. crude exports have risen on a four weekly average basis by over 1 million bbl per day or 41% since mid-January, as a mix of increased production, release of strategic reserves, and attractive inter oil pricing has boosted exports. These barrels tend to be very long haul in transportation and support building of a better outlook when considered with top left and looking at the recycling activity. Top left shows that this has begun to rise again. In April alone, we saw six Suezmax exit the global fleet, which is a very large number on a month basis.
This follows the Aframax sector, which has been shedding tonnage historically earlier than VLCC and Suezmax in their recycling cycles. Top right underpins what we've been seeing on a day-to-day basis, volatile but rising crude volumes. April recorded the highest global volume on a monthly basis in two years. This is another encouraging data point. Finally, if we look at bottom right, we can show the direct impact of the Russian dislocation. Russian ships made up around about 7% of the Aframax fleet and about just under 3% of the Suezmax fleet. This is enough to have driven a much tighter market in those categories, and hence freight rates rising quickly and to extreme levels on specific routes. VLCCs cannot load, as I mentioned before, or discharge directly into Russian crude ports, so it's not had much of a direct impact.
We're now seeing a substitution effect as VLCCs are being used to replace the barrels lost from Russia to the European ports from the Middle East and from the Atlantic. We now turn to slide seven and the medium-term drivers which continue to build positivity for our largest crude tanker market. Slide seven is a slide which looks at the mix of the immediate future on the left, highlighting the still very heavy special survey program we have for older tonnage, namely those ships going through their 20-year special survey in the VLCC and Suezmax sector. This represents around about 4% of both categories alone over the next 12 months.
This is a very important point for owners to decide whether they want to continue to remain in the sector or take the very attractive scrap prices that are currently available. The right-hand part of the chart looks at the absence of new orders of VLCCs. We've not seen a VLCC order since early July and the reasons behind this. Some interesting work the Fearnleys scheduled this week indicates that it's not just an absolute dollar issue, although that is important. A brand new plain vanilla VLCC costs $150 million at the yards when reported today.
This also means that in order to make an economic return of 10%, the analysis that they conclude needs around about $46,000-$47,000 per day in terms of a freight rate in order to justify that entry price. With steel prices remaining high and the yards full in terms of the shipyards constructing ships, it's difficult to see how this barrier to entry is going to be lowered anytime soon. I'm now going to switch gears and look at what was an important milestone last week for Euronav, namely the unveiling of our decarbonization pathway that we now highlight on slide 30. In summary, there are two broad stages to our approach on decarbonization, which will end up with us being net zero by 2050, with an ambition to beat that timeline.
Between now and 2030, we are looking to reduce the energy we use, as well as investing in future technologies before the second stage from 2030 onwards, where the focus will be on adopting cleaner energy and scaling up that investment in technology. Reducing our CO₂ emission intensity by 2030 by 40% will be an important pathway and milestone on this journey and on our commitment to get in line with the Paris-set trajectory by net zero by 2050. We believe this is very, very attainable, and in fact, we're very confident we can actually beat this timeline, as I mentioned earlier. Euronav's attributes in managing the energy transition and decarbonization are, we believe, among the best in class already in the tanker sector, if not in a wider shipping community.
We encourage all who are interested in Euronav to review our 70-page presentation from last week, which is on our website with a transcript and a replay also available. I will now pass back to our Chief Executive, Hugo De Stoop, to give some concluding remarks. Hugo, over to you.
Thank you, Brian. The Euronav platform is working well. It's well equipped to deal with the next stage of the cycle with high quality assets, a strong balance sheet, and the right level of liquidity. We have addressed and will continue to address our fleet age profile as well as the positioning of that fleet. We have also laid out how this platform going forward will decarbonize and meet the challenges of the energy transition, and we have outlined this recently in our ESG event. We believe that our platform will deliver enhanced return for our stakeholders going forward. Let's now turn to the positioning in the past cycles on slide 16. Euronav continues to manage its business as we have always done in a disciplined and focused manner, applying high governance standards and a methodological approach across the platform.
As both Brian and Leiv have highlighted, we've been busy in positioning ourselves for the next stage of the cycle. It is important to remember that we are in a cyclical industry. Consolidation opportunities are often present, but timing is always the key. The chart on slide 16 smoothens out the VLCC resale price and the one-year time charter rates, which are two key variables within our markets. Historically, we have executed consolidation transactions at similar point in the cycle. Eight years ago, with the acquisition of the Gener8 crude tanker fleet and four years ago when we merged with Gener8. We're now proposing to merge with Frontline and to offer a material consolidation transaction in order to deliver further shareholder value as we enter into the next stage of the tanker market.
This exciting development and merger of two leading companies in the space is a strong signal of our confidence in the sector. Turning now to the summary slide and outlook on slide 17. Another upgrade is driven by the catalyst that has come in tragic circumstances from the dislocation from the Russian oil situation. This will drive, we believe, sustained change in ton miles, as Brian highlighted, in swapping out Russian barrels to Europe for those from Middle East and the Atlantic, and Russian barrels transported over much longer distance than before. Elsewhere, demand and supply of oil offers some encouraging data points with small but consistent upward trends. Vessel supply looks well underpinned, given the order book at 25-year lows and global fleet age profile at 20-year highs. Thank you for your time and attention.
With that, I will pass it back to the operator for your question.
We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question will come from Jonathan Chappell of Evercore. Please go ahead.
Thank you. Good afternoon. Hugo De Stoop, I understand there's sensitivities about what you can say regarding the proposed Frontline merger, but maybe you could just help us understand the next steps. I know the AGM is next week. What does the term sheet mean, you know, versus an actual closed deal? What steps need to be take to get the term sheet to a actual proposed deal? Is it just clearing the AGM and getting the board on board, so to speak? Just what are the other building blocks to bring this to finality?
Yeah. Thank you, Jon. Yeah, you appreciate that. There is a limited amount of information we can share on this call, but you're absolutely right. The first step is to go over the AGM next week, and then have the board reconfirm the merger, and then after that, we will update the market with the next steps, the timing, and some other bits and pieces that we've been working on, but we can only do that after the AGM.
Noted. I know this is a stock for stock deal, and you still are sitting on a fair amount of liquidity, but are you kind of in a strategic holding pattern until there's more clarity on this plays out, or can you continue the rejuvenation of the fleet, either through sales or purchases, as you know, until you get to the finish line on this deal?
No, absolutely. I mean, what you've seen is that we are not resting on our laurels. It was a very busy quarter on a number of ships transactions, as we have explained in the preparatory remarks. We have more in the pipeline, indeed. The two companies are being run independently until a merger happens. We will continue to work hard both on the spot market and TC front, but also on the fleet rejuvenation. That's something that we believe is the right time for. Values are already ahead of the market, as you've seen. I mean, very strong numbers for the vessels that we sold.
We found some opportunities at what we believe are attractive prices, especially when you bring in the element of consumption. Because it's true that the four vessels that we sold were designed to go at you know high speed that we were performing 10, 15 years ago. Whereas the two VLCC that we purchased were designed to go at the current speed and very economical with the latest eco design. The same for the two Suezmax. As you know, our VLCC fleet is relatively modern, but our Suezmax fleet needed some rejuvenation, and that's what we've done last year when we purchased and order a purchase contract and order three VLCC, so a total of five.
All of that is part of the strategy, and that strategy doesn't stop. To the contrary, I think that the more the merrier and hopefully the market appreciates it.
Okay, that's helpful. We'll call that my A and B to question one. My follow-up question for Brian. You know, this diesel shortage issue seems to be gaining a lot of momentum, and clearly, you know, your VLCCs and Suezmaxes carry crude. Have you thought about the secondary and even tertiary fallout of these global diesel shortages and what that may mean to the crude markets?
I mean, I think, as you know, Jon, better than anyone else on the call, you know, in our shipping markets, we work in weeks and months, and that's the duration of our voyages. Whereas obviously, capital markets see something today, and they want to know what the impact is tomorrow. We did try to stress on the call, we anticipate a lot of this Russian dislocation has still got some way to go. We're in the early stages of it from a shipping market perspective. In direct answer to the diesel side of things, yes, I think we're getting such an extreme element of dislocation there. You're seeing it with very high rates that I think we would expect to see some spill over. The arbitrage, quite frankly, can't last forever.
We're already seeing that arbitrage, which is beginning, doing some heavy lifting of the VLCC rates as we're seeing Suezmax and Aframax cargoes being merged into VLCC cargoes. I think you'll get some blurring at the margin with the product market as well. It's a bit early yet to have actually seen that. I think there's some way to go on the arbitrage within the tanker categories. If we have more duration, and it looks like it's likely into the summer months on this diesel side of things, then that certainly will come through.
You're hearing that from you know some of the players like Valero et cetera indirectly involved in that space that there does seem to be some duration. I think also one absolute outcome we would expect to see is further continuation of the U.S. exports of crude because there's obviously some slated deliveries from the strategic reserves. They are obviously gonna come over and a lot of that is being used as feedstock into the European refinery because we know exactly the U.S. refinery slate is already full and they don't need that oil that crude. Absolutely. There's some absolute and secondary benefits I think.
I think for the diesel side of things, I think we'll have to wait till next quarter before we can give it more clarity.
Okay, that's very helpful. Thank you, Brian. Thanks, Hugo.
Thank you.
The next question comes from Frode Mørkedal of Clarksons Securities. Please go ahead.
Thank you. Hi, guys.
Hey.
First question, regarding the proposed merger with Frontline, is it correct that the shareholder vote with 75% majority is needed to get it passed?
It's a little bit more technical than that. There are many ways to approach a combination. Obviously that's what we are working on at the moment. If you indeed think about, I would say a full-fledged merger, on day one, you need 75% of the votes that are being presented at a special meeting. As I said, I mean, there are other structures that could be contemplated which require a lower amount of votes.
Okay. Like an acquisition, I guess. Yeah.
Well, unfortunately, I cannot tell you much more about it, but you need a simple majority to just take control of a company, of course, and that's 50% and one share.
Yeah. Understood. Second question is on the market. Seems like the Russian oil exports have been holding up fairly well so far. According to the International Energy Agency, which had a report today. They said that on May fifteenth the major oil trading houses are supposed to have to halt all transactions with Russia, I guess. The question is, do you foresee any immediate impact on the tanker market from that winding down process?
I think it's fair to say that you have the effective sanctions, and quite frankly, people should make a difference between sanctions and an embargo. The sanctions is what we have seen in Venezuela and in Iran, which are supposed to cover everything on a worldwide basis using the currency as a way to prevent people from trading oil, namely the dollar. Whereas embargo means that you cannot export or import to Europe or to the U.S. the Russian oil. There is a series of so-called sanctions, but also embargo towards the end of the year that are being put in place.
You have a lot of people who have declared that they will do this or not do that as far as the Russian oil or other Russian commodities are concerned. As Brian said, we've seen definitely the first impact of that into the smaller side, the Aframax that has a spillover effect as you've seen in our numbers into the Suezmax. Quite frankly, we went out of the trough on the VLCC probably because of that as well. As Brian said, this is because of combination. To answer your question, yes, we should see more of that happening and therefore that should benefit the entire tanker market.
Again, in the same order, smaller ships because the Russian oil is usually transported on Aframax, LR2 type of vessels. With consequential consequences on the other market, because the longer the distance you need to transport the oil over, the bigger the ship you need for obvious reasons of economies of scale.
What we anticipate to see in the future is probably liftings being done on smaller ships and then lightered into VLCCs to go all around the world and probably the Far East, India and China, sort of places to carry the Russian oil where those people will be able to buy it, because as I said, this is an embargo, not strictly speaking, sanctions by the Americans.
Great. Thank you for the color. That's it for me.
Thank you.
The next question comes from Thijs Berkelder of ABN AMRO – ODDO BHF. Please go ahead.
Yeah. Good afternoon, gentlemen, and lady, of course. Three questions and coming back on the, let's say, the merger announcement. In last week's presentation, you again highlight that you expect significant synergies. Can you roughly quantify what is significant for you? Is that $10 million per annum, $30 million per annum or $100 million per annum? Then secondly, can you somehow give more clarity on and maybe quantify on your expected cost synergies and expected revenue synergies? Thirdly, what is still not clear to me, can you in any way explain where the merger ratio is coming from? Why 1.45 Frontline share for one Euronav share and not, for instance, something like two Frontline shares for one Euronav share? Those are my questions.
Yeah. Thank you very much for that. Again, we will give a lot more information about the merger after we have had our AGM. It is obvious that we expect significant synergies, and indeed there are different buckets. I think on the revenue side, it is about utilization. When you think about traditional tramp shipping, we usually carry oil from production place to the refineries, and then we come back empty. Obviously, the bigger the fleet, the more optionality you have on triangulation and these sort of things. We will come back with a hard number, even though that hard number will be an estimate, obviously. On the other items, the logical ones are G&A.
As we said, we don't expect a lot of synergies in the G&A, because two companies are structured in very different ways. Frontline is outsourcing part of the services, whereas Euronav is more vertically integrated, and the model that we are thinking of is a combination of both. There will be synergies that will be quantified, and we will announce it to the market with more precision and obviously how we get there. On the OpEx, again, this is very logical. When you're thinking about procurement, this is economies of scale. You are dealing with more volume in pretty much everything that you buy.
There are some bigger elements than others when you think about the fuel that we buy, when you think about the lube oils. Obviously this is a numbers game. As always, if you are a more important client for your service providers, then you can bargain a better price. Finally, and maybe importantly on the financing side, we believe that the platform will be very attractive to many people providing capital to companies, especially on the debt side. Here I'm thinking about the banking side, but also the bond side, which should benefit from an even better credit rating.
It's too early to give you hard numbers, but we are working and crunching the numbers and we'll communicate that in due course and certainly ahead of a merger proposal that will be put before both sets of shareholders. As far as the ratio is concerned, I think we didn't wanna come to market with the calculation behind it. That was a result of the negotiation. Usually when you do that in shipping, you look at the NAV of the two companies, and the NAV is relatively simple calculation because we have hard assets, ships, namely. And then we have a certain amount of debt, and that gives you the NAV number.
That is the starting point of any conversation, and the rest is about negotiation.
Okay. Clear. Thanks.
You're welcome.
This concludes our question and answer session. The conference has now also concluded. Thank you for attending today's presentation, and you may now disconnect.