Good morning, and welcome to the Euronav First Quarter 2021 Earnings Conference Call. 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, thanks for joining Euronav's Q1 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 May 6th 2021, may contain forward-looking statements that involve risks and uncertainties. Forward-looking statements reflect current views with respect to future events and financial performance 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 expressly 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. 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 on to Chief Executive, Hugo De Stoop, to start with the agenda slide on slide three. Hugo.
Thank you, Brian. Welcome to our call today. As usual, I will firstly run through the Q1 highlights and some comments on our active capital allocation during the cycle before passing on to Lieve, our CFO, who will provide a review of the financial statements. Brian, our Head of Investor Relations, will then look at the current themes in the market before I return again to discuss our outlook and traffic lights before we take questions. Turning to slide four and the highlights page. Q1 was admittedly one of the toughest freight market we have had in recent years. Market recovery has yet to gain traction as either barrels were repeatedly kept out of the market or demand rises failed to materialize as COVID-related restrictions were applied again. As we say in our press release today, available tonnage is abundant.
There are simply too many ships and not enough cargoes. There are, however, encouraging signs with the tapering of OPEC+ production, which we hope will translate into more export barrels. This is encouraging, but our visibility on this recovery remains low. Our sector is cyclical, and when it is bad times to be an operator, you need to think about the future, hence we have taken the opportunity to invest countercyclically at what we believe is a low point in terms of value and have invested in the latest VLCC and Suezmax vessels and are closely cooperating with the shipyards to ensure they can maximize their potential role in the energy transition and emissions reductions. I will now pass over to our CFO, Lieve, to walk through the financial highlights. Lieve, over to you.
Thank you, Hugo. On slide five, I wanted to cover a number of points when looking at our financials for Q1. Our P&L was clearly challenging with sustained freight rate pressure that Hugo spoke of earlier. This slide gives the details on how challenging it has been. Whilst our leverage has risen to just under 42%, that remains well below our self-imposed limit of 50%. Liquidity remains the strongest in the sector, with over $1 billion available for our funding facilities and cash. Finally, we have been very active during this quarter and will be during 2021 in utilizing a challenging freight rate market to undertake and even accelerate our dry docking program. This will ensure when the cycle returns, the profitability Euronav will be optimally placed. Looking now in more detail at the underlying cash generation on slide six. Euronav remains focused on cash generation.
We have driven further improvements in our working capital to the tune of EUR 36 million, as slide six illustrates. This was improved further from the sale and leaseback of VLCC Newton during Q1, releasing further cash, thus allowing the payment of our fixed cash dividend commitment of EUR 6 million for Q1. This underlying cash generation has assisted in our wider fleet renewal program, which our balance sheet has the capability to manage. Our funding sources remain key to driving our business forward, and slide seven looks at how we continue to diversify our funding source. We increased during the quarter our activity on our sustainability financing. We signed an extension and upsized an unsecured facility to include a number of other banks. As the slide shows, it has a number of features, including reduced interest rates if emission targets are beaten.
An additional feature specific to us is the facility is priced in euros, not dollars, which is helpful as EUR 80 million of our costs are euro denominated. A third of our funding sources are now sustainability-linked, an important milestone for Euronav. I will now hand over to Brian Gallagher, our Head of Investor Relations, to run through a couple of current market themes.
Thank you, Lieve. Capital allocation has remained active with our countercyclical investments, continuing with two Suezmax and two VLCC contracts that we announced during Q1. This complements the four VLCCs we took delivery of during this quarter and is part of a coordinated approach to fleet renewal. In the past 18 months or so, we have sold a range of older tonnage, either directly into rising steel values or forward selling via sale and leaseback structures. Recycling this capital into more operationally efficient vessels will significantly improve our emissions profile in terms of CO2 emissions. We remain on trajectory with our commitments to the Poseidon Principles.
An additional recycling, as we have just executed during this cyclical low in our freight market, will allow Euronav to remain on course to simultaneously improve the earnings power of our fleet, whilst maintaining a strong balance sheet, and meet our emissions goals and targets. Turning now to slide nine and ensuring our capital allocation at Euronav meets those strategic goals. Slide nine shows the AER, or the annual efficiency ratio, record of the global VLCC fleet in a very simplistic way, but also shows the trajectory that Euronav is on target to meet its 40% reduction obligation as part of the CO2 emissions target set by the IMO for 2030. In our view, this is a realistic and achievable target.
Our recycling of capital in selling nine older vessels in the past 20 months or so and recycling that capital into seven new vessels is a key part of our compliance, which we are looking to accelerate. Now turning to two key themes we expect to remain in place for the rest of the year. On slide 10, firstly, Iran. The Iranian situation in terms of tankers remains fast-moving. Commentary earlier this week suggested that some timetable of a return to Iran to the oil markets could be agreed very soon. This will be a positive, we believe, for our markets overall, as it should bring some much needed barrels back into the commercial fleet and at the same time reduce the need for the so-called illicit trade of largely older tankers, which have taken up sanction trades over the last 12 to 18 months.
If that were to happen, we believe, as many commentators agree, that we would then start to see this older tonnage move to the recycle yards. Finally, from me, we return to a theme of the OPEC barrels, which have been missing from the marketplace for the last two years or so. We believe this will continue to be a key feature on slide 11 for the rest of this calendar year. As the slide shows, OPEC + production cuts are scheduled to start tapering later this month and continue well into July, bringing potentially 2.1 million barrels per day back into crude transit. Clearly, the very difficult circumstances with COVID in key markets like India make it difficult to predict how much of this tapering will actually impact crude export markets.
As a rule of thumb, every 1 million barrels per day of production turning into exports requires a need of around about 30 VLCCs on an annualized basis. We leave with a tangible and encouraging sign and signal to finish with, and I'll now pass on to Hugo to sum up where our traffic lights are currently sitting at the end of Q1. Hugo, back to you.
Thank you, Brian. As Brian just alluded to, the scheduled tapering of OPEC+ production cuts is sufficient for us to push through a mild upgrade in our traffic light. Provided additional prolonged COVID restrictions do not defer or delay this rise in output, this move by OPEC could start to reduce the surplus amount of tonnage in the large crude tanker fleet. This is our first positive change in our traffic light since Q2 last year, it does reflect the start of a recovery process in our markets. This is likely to take some time, we continue to remain confident in the medium-term prospect for the tanker market, that is reflected in the fleet renewal we have engaged in not just during Q1, also over the past 12-18 months. With that, I will pass it back to the operator to receive questions.
Thank you very much for your attention.
Thank you. 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're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Please limit yourself to one question and one follow-up. At this time, we'll pause momentarily to assemble the roster. Our first question today will come from Randy Giveans with Jefferies. Please go ahead.
Howdy, team Euronav. How's it going?
Yeah, very well. You, Randy?
Oh, hanging strong. All right. I guess first question around the acquisitions, right? You bought some of the Suezmaxes, a couple new building VLCCs, LNG ready, maybe ammonia ready. I guess why kind of go with that route instead of participating in some of the longer-term LNG-fueled VLCCs that some of the oil majors had put out there. When it comes to expanding the fleet from here, is it further new builds or are modern second hands more attractive?
Thank you for your question. First of all, let's be very accurate. The Suezmax were resale, you can consider them as secondhand.
Okay.
The fact that we grabbed them before they are even built is probably better, because then we can slightly change the specification, which we hope are very unique to Euronav and can bring further advantages to us. As far the VLCC, you're right. It's a new building, but those were the sort of abandoned slots, when the 10 VLCC were canceled earlier this year. I think if you go to the yard today, the timing may be very well be different. It may be already in 2024. We see that also as some sort of an advantage. The resale, we had no option but to take what had been ordered by the previous buyer. The VLCC, that was obviously a little bit more our spec, even though the yard had a sort of a preconceived idea of what they wanted to build.
Building a LNG dual-fuel vessel will take more time, and so that slot was probably not available because they are busy, as you know, with many of the other sectors. Having said that, we are very happy with what we have because it gives us maximum flexibility. In previous call, we have said that we were ready to build dual-fuel LNG vessel, provided that we get a contract against it. As you know, the LNG is a transition fuel, and so you better make your return on the LNG part during the duration of the contract, and have a vessel that is, for that part, fully amortized. We have participated to the tender or the exercise that were put out there by respectively, TotalEnergies and Shell.
The reason why we are not part of the ones, I would say, who won that tender is because our ideas of return were different. It didn't meet our expectation, and we thought we were better off doing what we are doing today. As far as the future is concerned, I think Euronav will continue to scrutinize what is available secondhand, in order not to add to the order book. It's also true that when you are in transition, and we are very much in a propulsion of fuel transition, whatever you want to call it, the flexibility may be the best choice that you have, and decide later, when you have the opportunity to charter those ships out.
If it's to play them on the spot market, decide later when the infrastructure will be in place, and what will be the best return for your investments.
Wow. Yeah, no, that all makes sense. Thanks for the color there. I guess one more question just on fleet management, right? In terms of the numerous dry dockings you have this year, are you willing and able to maybe pull those forward to today or June, the sooner the better, right, before the market turns? With that market strength likely later this year, how do you look at time charters at kind of current levels?
Our program of 27 dry docks, that's almost one third of the fleet. We did already quite a lot of management around the timeframe that you can do a dry dock, which is roughly speaking, 18 months, a year and a half. We have pulled many of those early because we didn't have a very high expectation in 2021. We have done already a number of vessels. We have indicated how many vessels remains to be done. Let's not forget that it's a full optimization that you need to do. I guess what I mean by that is you need to find the voyage that will take you near the dry dock at the time where you have a slot. That will play a big role in the economics.
If you have to take your ship with, let's say no cargo, on a lay up just to go to the dry dock, you are also leaving a lot of money on the side, even if it is in a low market, because obviously any contribution is better than nothing. You can rest assured that this is an analysis that we do permanently. When we lock a slot in a dry dock, there is a degree of flexibility, and we will always accommodate that with all the circumstances that are around that dry dock, including the positioning voyage and potentially, the prospect that we have when the ship is leaving the dry dock and does not have a vetting, which is another consideration that we need to take into account.
Got it. Quickly on time charter appetite.
Time charter, they are interesting, and maybe we don't advertise that too much, but we have a number of ships that are on time charter at the moment. Some of them are long-term time charter, two, three, four years. Some of them are much shorter time charter. Our policy is that we always look at what the best employment for the vessels are. As far as time charter, with a forward start, they are concerned, and we've seen a number of those being done in the market. I think when you look at those levels, against the type of vessel, i.e., the most modern, most eco type of vessels, these are levels that are compared to historical levels, not very interesting.
Starting in 2023, for the delivery of a modern ship, having a fixed-time charter in the low 30s, compared to what we hope we can do in the market, that's not specifically, or that's not particularly attractive to us. I think on the short-term, it's a very different picture. As I said, we don't consider 2021 will be a great year. We have taken some of those. We continue to look in the market of what is available. You may have seen in the press that, for instance, our new building deliveries, you know that we have taken four ships that we acquired as a resale last year. Those are particularly attractive to some people. At the moment they are all on short-term time charter, which are paying more than the spot market. We are doing our fair share.
Perfect. Hey, thanks so much for the time.
You're welcome.
Our next question will come from Omar Nokta with Clarksons. Please go ahead.
Thank you. Hi, Hugo. Just maybe wanted to follow up on the new buildings. Can you maybe just give us a sense of what the process would entail for those VLs to have the LNG and ammonia-ready structural notation? It sounds like these will deliver with conventional fuel and then afterwards go back for installation, depending on how things are playing out. Is there any sort of estimates you can give on what the cost or the timeline is for installation of such a system?
The LNG, it's probably better known because those ships exist, and you can retrofit ships already today. If they are level one ready, there are three levels, and the higher the level, the more sort of specifications are there, the lower the modification would be. If we take the most important one, which is the level one, we're talking here about structural readiness. What do we mean by that? The tankers, the VLCC, Suezmax, will need to be equipped with tanks that can hold either the LNG or the ammonia. Those tanks have a certain weight, and they will be put on the deck. If you need to touch the structure of a ship in order to accommodate those heavy equipment, you are opening the ship, as you can understand, that's never a very good idea.
The priority is really to make sure that from a structural point of view, the ship is ready. The second thing that you can do is already prepare for some of the piping that will lead the fuel to the engine space. Of course, here you need to think about what type of gas, I mean, it would be liquid, but what type of molecule you're going to drive to the engine. Some of them are more corrosive than others, and that will define the type of piping that you will do. Last but not least, you will need to prepare the engine, and that's probably way too early, because, as far as ammonia is concerned, that doesn't exist yet for our segment. As far as the LNG is concerned, we know what it is.
It's probably today too early to make those modifications for the ship. If you were to go to a level three, then you're better off doing a full dual-fuel LNG today. That will preclude you from converting into ammonia, because then the amount of modifications of the retrofit will be far more expensive, and you would have wasted quite a lot of capital that you're not sure you will use. If I can translate that in numbers, the readiness is probably something that is in the region of EUR 500,000 to EUR 1 million. If you want to be ready for both LNG and ammonia, then that's probably a little bit north of that. It's not excessive, and the advantages you get are quite enormous, especially when you look at the next 20 years, which is the normal life of a ship.
From that level, today, if you need to modify it into LNG, you will probably spend another EUR 12 million-EUR 14 million, that will depend on the size of your tanks, and some other bits and pieces that you may choose from. On ammonia, I cannot tell you what it will be. I believe, or we believe that it's going to be in the same region, but the classification society will come up with the notification, and the notification will tell you exactly what you need to foresee. Of course, on ammonia, because it's more toxic than the LNG, you also need to do a full study on the hazard, which is basically the safety around manipulating that fuel. Of course, people get a little bit skeptical about it, but let's not forget that ammonia has been transported as a cargo for more than 40 years.
A lot of that is known, and it's more a question of, how can we make sure that if we use that as a fuel, the safety concerns are fully measured and fully expected and therefore prepared for. Again, we're talking EUR 10 million, EUR 15 million modification after the event. When that will happen, it really depends when the market will be ready. As you know, LNG infrastructure is there for the most part in the Americas. Certainly in the U.S., they are still building it, but we expect it to be in place in 2023. Ammonia is more of a long-term project, but you will also need to analyze what is the demands that you have from your customers. Some customers will want to have a zero-emission fuel like ammonia. Some customers will prefer to use LNG because that's what they produce.
The demand and the interest from our customer base will determine when, and I would say if and when, we convert those vessels into a dual-fuel, conventional fuel plus ammonia or conventional fuel plus LNG. I don't think that you're going to see ever in the market a tri-fuel ship that can burn ammonia, LNG, and conventional fuel. You will have to make up your mind when you decide that it's the right time to convert it into something else. In terms of future-proof, that's very important, because even if it costs a relatively high amount of capital, it's not going to be a stranded asset, and that's very, very important.
Thanks, Hugo. That's quite clear there. Just to summarize my understanding, it sounds like it's basically $500,000 , just to have the structural flexibility, and then post-delivery, going back to install, say, an LNG system. It's $10 million-$15 million, which is effectively what it is now at a shipyard to be done during construction. Really the only difference is time at the yard post-delivery.
Your understanding is absolutely correct with maybe a caveat, which is that if you build a dual-fuel LNG VLCC vessel today, it's probably south of EUR 14 million. EUR 14 million was the number we were given, I would say last year. Shell, together with some owners, including us, have done a fantastic job working with the shipyards and trying to minimize those costs. When you see what the guys who have won the tender with Shell are paying, you're probably more in a region of EUR 10 million-EUR 11 million as a surplus to your conventional vessels. A little bit cheaper, but not that much.
Yeah. Got it. Just one quick follow-up. Obviously, these ships, you mentioned that they're going to be significantly more advantageous, eco and carbon friendly than the ships that they're going to replace. Just wondering, I think you made that comment in the release announcing the order regarding in comparison to the ships that they'll replace. Just wanted to ask you, are you saying that these vessels, as they deliver, you will be scrapping some of your older ships on, say, a one-to-one basis? Or are you just making a general comment that they're going to force out some of the older tonnage in general?
I would say both in a certain way. As you know, we tend to sell our vessels before they reach their end of life, and so that will depend on each vessel. It's true that when you look at the sale and leaseback that we have done over the years, and in total, we have eight vessels on sale and leaseback. When you look at their time of redelivery, and those are very special sale and leaseback because there is no purchase obligation on the part of Euronav, which means that at the end of the contract, the owner takes the vessel back and then does whatever he wants with it. For us, it's no longer a liability, and it's a sort of way of protecting the residual value that we may call residual value risk. They will come at the same time as the new vessels arrive.
I was more talking about fleet management, not so much about scrapping, because those vessels, when they are redelivered to their owner, they will be 15 years old, but they will be of age category and sort of consumption category. Definitely non-eco, but also part of a fleet that used to consume a lot more. From our perspective, it's definitely fleet management. From a global fleet perspective, I cannot assure you that those ships will be scrapped at exactly the same time. They probably won't be scrapped at the same time.
Understood. Well, thanks, Hugo. I'll turn that over.
Thank you very much.
Our next question will come from Jon Chappell with Evercore. Please go ahead.
Thank you. Good afternoon. Brian, on slide nine, you said you're trying to accelerate your move down to the bottom right of this graph. In addition to just ordering these new ships with better emissions, is there any other strategic play that you're thinking about to move Euronav closer to that blue dot in a quicker manner?
It's a good question. We want to try and sort of highlight the capability with this slide that shipping has got generally, but also in the progress it's made already. To stylize the direction it's got. Yes, there are a number of strategic things. For instance, Hugo talked about a third of our fleet undergoing dry dock this year. We spent a lot of money on research and development last year with, what sounds a very simple thing, but just on paint. We had a selection process which has identified that, which we think is going to save an investment of between $300,000-$400,000, will save us a multiple of that with regard to CO2 emissions. There are some things that we can do in terms of self-help.
Of course, it is also largely, as you identified, about the structure of the fleet and the age. It's just to try and get everybody sort of understanding that shipping can deliver on its 2030 objectives. That does, again, dovetailing with what Omar and Hugo have just been discussing, put an awful lot of emission pressure on the older tonnage. Of course, if we get the IMO vote to put through EEXI next month, that's going to be some regulation with some real teeth that will kick in in 2023. The simple answer to your question, Jonathan, is that, yes, there are some things that we can do, but it is all largely about the age of the fleet, and the focus on the most efficient fleet, which obviously is going to be lower emitting.
Jon, if I can just add or complement what Brian said. Obviously, when we take those ships on dry dock, we do a lot of things that goes beyond the specific survey that we are doing the dry dock for. For the last two years, we have developed softwares and hardwares. We have equipped a lot of our vessels, already two-third of the fleet, with the sensors. Those sensors are sending a lot of data. We've co-developed with our people systems that can crunch those data. The collaboration between the operation onshore and the people on deck has never been better than today because everybody has the same focus, which is to reduce the consumption and therefore reduce the emissions. There's a number of things that will save you 1% here, 2% there, et cetera.
The collection of those percentage is quite significant at the end of the day. Yes, there are a number of things that you can call strategic. We call them just part of the business. When you are running a large fleet, all of those things get better returns on investment than when you are running a very small fleet and you have to spend the exact same amount of money on those software. Even Brian was talking about paint. Obviously, if you are going to paint 27 vessels, the discount that you can get from the supplier is quite significant.
Understood. For my follow-up, I don't want to get too in the weeds here, so bear with me for one second. When you do a sale and leaseback, how does that reflect into your emissions as well? You don't own the ship, technically, but you are operating it still. The reason I ask is, I know the Newton's only one ship, but sale and leaseback tend to be transactions that companies do when they're starved for liquidity, which you are most certainly not. It raises your breakeven. Just kind of an odd transaction when you're sitting with over $1 billion of liquidity, and I'm wondering if that has a dual purpose of giving you a little bit of money on the front end, but also helping with the emissions as well.
No, it doesn't help on emissions. When you have to report your emissions, people treat a sale and lease back as a way of financing your fleet, so it's still an integral part of your fleet. As I said, we are redelivering those ships upon their 15-year anniversary, so you're saving on that dry dock. You make sure that these vessels are leaving your fleet. When you measure the emissions or the consumption of those vessels compared to the most modern one, it's really something that you want to see out of your fleet by the time they get redelivered. We have some that will redeliver at the end of the year, some next year, and then the last four probably in 2023. That's very much the reason why we do those sale and lease back. You never know what holds in the future.
Values at which we sold them were pretty good. I think that the rate we got, taking them back, knowing that there is no purchase obligation, so there is a little bit more risk on the counterparty side, means that it's still good value for us, taking into account everything that I just mentioned.
I got it. All right. Thank you, Hugo. Thanks, Brian.
Our next question will come from Greg Lewis with BTIG. Please go ahead.
Yes. Thank you, good morning, good afternoon, everybody. Hugo, I wanted to dig in a little bit around ton-miles and volumes. It seems like, at least it was reported in late April, that U.S. crude exports really accelerated. Realizing the market's pretty loose, was there any impact in that increase in U.S. crude volumes in terms of activity around the Gulf of Mexico?
Yes, we saw an acceleration of U.S. crude exports. Problem that we have, or that what we see, is that there's really no stability, those exports. One month can be up, next month can be down. It's difficult to see a trend there. As you may very well understand, there's quite a lot of geopolitical events driving the export of one country versus another country. Here I'm alluding to going to China, which is the longest voyage, the better ton-mile. Of course, if our Chinese friends decide to buy more of Venezuelan or Iranian crude because they found a way to do that precludes you from transporting the U.S. barrels to China. I think that it's going to be very interesting in the next few months, what happens and what the Biden administration does in terms of sanctions.
I think that from there on, we should hope to see not only some tonnage disappearing because they would really have no reason to exist, but on top of that, getting back some of the barrels that are longer ton-miles versus the shorter ton-miles. Let's never forget that there is a quality difference. There are lighter barrels, there are heavier barrels. What is happening right now may not be optimal for the refineries that are buying those barrels.
Okay. You kind of just touched on it, but kind of curious. Definitely everyone's hearing a lot about vessel discrimination, the vessels that are moving the Iranian volumes, there are vessels that are moving the Venezuelan volumes. I imagine at least the companies looked at the types of vessels that are doing that, whether they're owned by the national oil company of Iran. Is there any way to think about on a percentage basis of the types of vessels that are doing these trades? It sounds like you almost expect some of those vessels to just leave the market. Any kind of more detail or color you can give around that?
I think I will kick that one to Brian because we do have specific numbers on the age profile of those vessels.
Greg, we touched a bit on slide 10. The numbers from Gibson Shipbrokers are telling us that there's up to 54 VLCCs in the Iranian trade that they've monitored over the last 13 months, and 20 from the Suezmax fleet. You're looking at, including the Venezuela trade, about 8% of the VLCCs and 5% of the Suezmax. Some of the excellent work we've seen from Lloyd's List as well in terms of the analysis and monitoring of ships that have engaged in that sort of behavior, of turning signals off and monitoring those ships. They all have a very common element that they all tend to be over 17 or 18 years of age, at least. They've recently traded and been sold to private owners. It's not immaterial, because these are relatively large numbers.
Our view would be, if you're going to legitimize the trade and bring Iran back into the world fold, then these ships don't have any natural advantage. Most of them, if not all, have very little insurance coverage or class society ratings, some, or ratings. I think it's a natural assumption, given the high scrap price as well, that they're clearly engaged in a lucrative trade today, which will disappear tomorrow if Iran's brought back into the fold. We would expect them, I think as most commentators would, to see them disappear. They're not technically working, if you like, on a like-for-like basis against us at the moment. There would be maybe a lag effect.
It is something that's surprising to us as well, that the sanctions that have been in place for a long time have not really been policed or effectively controlled as we would have expected. It is disappointing that this has actually sort of developed.
Okay. Just to clarify, these are not Iranian NITC-owned-
No
vessels.
No.
Okay. Okay.
There's a huge amount of ships, huge number of ships which have gone into private hands over the last, since the start of 2019. These are largely those. There's some reputable owners who've sold them to owners expecting them to go to the scrapyard themselves, maybe after a couple of trades. They've popped up in this. I can take it offline. This is independent, accredited work on a ship-by-ship basis. We feel it's pretty solid intellectual backing.
Super helpful. Thank you very much, everybody.
Thanks.
Thank you very.
Our next question will come from Amit Mehrotra with Deutsche Bank. Please go ahead.
Hey, this is Kevin on for Amit. I just had two questions. The first question was, Hugo, when do you think the market will be fairly balanced and rates can kind of get back to that $25,000-$30,000 level? There's obviously a recovery occurring in demand. Supply will also improve. When do you think the market will really come into balance?
I was going to ask you the same question. I was hoping you were going to give me the answer. No, I think that, at Euronav, we have built almost a reputation for not being foolish. I think that this market is extremely difficult to call. You have a number of pieces that need to fall into place, before you see an improvement in market. We're certainly hopeful that if the 2.1 million barrels coming from OPEC, releasing some of the cuts, will have a positive impact on our market. It's not going to be enough, it's unlikely to be enough to go to positive territories, 25,000 +. You have the winter with more demand. You have the COVID restrictions being lifted in many parts of the world. All of that needs to have an impact. I cannot predict exactly when international travel will completely resume.
I cannot predict when Europe will lift their restrictions like the U.S. is doing at the moment. If you give me those dates, then I can probably give you a more accurate picture. Absent of that, I think we need to be patient. We know that it's going to happen, that's for sure. When exactly is it going to happen? That's very difficult to tell you.
Okay, great. My second question was, what are you seeing in the market in terms of being able to accelerate the fleet renewal efforts? Euronav's in the fortunate position to have capital to deploy. Are you seeing more sellers in this market given the more difficult operating environment?
We're not seeing distress situation, that's for sure. Let's not forget that we are just a few months after one of the best years shipping or tanker shipping has ever gone through. You cannot go from that situation to a distressed situation in over a few months. I think we have picked up some assets for which the value was still in what we call the low part of the cycle. We know how high it can go. We continue to be interested in all sorts of deals, be it secondhand, resale of contracts, et cetera. We, together with other people, have picked up pretty much everything that was there to pick up in the market. You've seen those transactional market being relatively transparent.
Some people who are not distressed are interested in selling their vessels simply because when they look at the time they bought them, what they've earned in operating them, and what the prospects are, and this unknown factor of when is it going to turn better or return to better territory, they just don't want to guess, and they prefer to take their profit and leave the market. The problem there is that the values are going up way ahead of the earnings, and so it is difficult to meet the bid-offer spread on many of those assets.
All right, great. Thanks for the color.
Our next question will come from Mike Webber with Webber Research. Please go ahead.
Hey, good morning, guys. How are you?
Yeah, very well. You?
Good, thanks.
Good. Actually, Hugo, that last question was a good segue. I wanted to loop back to some of the economics around the dual-fuel ships and the general economic case. You mentioned, I think even in your deck, and just in your previous answer, that we've obviously seen some asset inflation ahead of what would be supported by cash flow, and certainly seems like the market has turned a corner into a different paradigm when it comes to commodity inflation in general. I'm just curious, as you think about that economic decision to either order or step into second-hand dual-fuel ships, how does that, those varying degrees of inflation as it stands today, does it help or hurt the economic case for stepping into that kind of tonnage?
Obviously, the asset itself is going to be more expensive at the yard because you've got a pretty steady ramp in pricing there. There's a higher degree of vol, I guess, associated with the underlying fuel. Just curious what, from a dynamic perspective, I guess, is it helping or hurting the economic case for those dual-fuel ships as it stands today?
There are many elements as you point out. The steel is more expensive today than it was two months ago, three months ago, or five months ago. It seems that there is no limit on the increase. That's why you see also on scrap values. Definitely when we speak to the yard, they're saying that where we're selling them, the steel has increased the price month on month. When is it going to stop? To a certain extent, I want to give the floor to Lieve, because she's coming from the steel industry. I think all sources are telling you that at some point, capacity is coming back.
Indeed. We see that indeed, the steel market is mainly now affected by, indeed, capacity increasing, but not fast enough for following the demand. Hence this friction and this high pricing environment for steel.
Right
even prices as high as 2008, so very, very high. Normally, the turning point should come at the moment.
More capacity is going to come online.
Absolutely.
But the problem is that-
Yeah
in order to bring the capacity online, you take several months. I mean, it's not like a tap that you open and close, and it's even slower than the oil, for instance.
Sure.
For the other elements, I think the other elements are more fuel oriented, and people get a little bit carried away with the fact that LNG is cheaper than the fuel oil at the moment. They're not taking into account the price of the delivered LNG on board the vessel. Because LNG is a gas, and when it's a liquid, it needs to be refrigerated, and obviously those bunker barge are far more expensive. The price that we see on board is very much the same as the fuel today. You don't have any economic advantage if you switch to LNG, which is something that some people said a few months ago, a few maybe years ago, that it was an advantage. When we look at really what you have to pay, that's not the case, and who knows what it's going to be later on.
The other element is obviously that we know many carbon tax, carbon levy, ETS system are going to come or are already in place. Europe is definitely thinking about it, will probably going to be affected by it in 2023. Whether it will be limited to Europe or whether it will be for all ships going in Europe is still a question. I think the Biden administration is thinking about a scheme. The Chinese have a scheme in place.
All of that will affect the price of the fuel, as it relate to their emissions, the CO2 emissions. The next question is it going to be CO2 emission carbon levy, or is it going to be CO2 equivalent? In that case, it's all the greenhouse gas, including methane. As we all know, LNG is far better on CO2, but they suffer from methane slips, and methane is far more damaging to the environment on a per gram or per kilo or per ton basis than what the CO2 is. There's a lot of uncertainty, which means that I can't really answer your question. Those are all the elements that you have to take into account. Again.
Yeah
The flexibility that we bought into those ships and making sure that they can be prepared for any type of fuel that we can choose from in the future is, for me, a big advantage.
Yeah. I get the premise is that you get the immediate visceral reaction and inflation in the ship price, but the forward curve is a little bit slower to react. Near term, there's a bit of a headwind on those economics. To your point, you've got the opportunity. You built in the optionality for yourself to pick and choose your timing for that. Out of curiosity, do you have a sense yet of that, the kit required in that conversion process, for lack of a better term? Do you think it's more or less commodity driven, more sensitive than the underlying ship itself? Is it more service oriented or commodity oriented in terms of how you think about that price fluctuating, say, if you didn't make that call a year or two from now relative to a ship?
No. Quite frankly, that's more a question of are you going to put your ship on time charter or are you going to play it on the spot? If you think about the future, let's say that we project ourselves 10 years down the road, and there are still some conventional ship, eco ship, obviously, but still conventional, using fuel oil, then you have LNG and probably ammonia at the same time. The market will probably still be a Worldscale market. You will get a certain amount of freight, and then the price of the fuel will be different, and your return will therefore be very different. Your TC will be different. It's very complex, and that's also why not many people dare to dip their toes into the new building market, because they don't know what to buy.
Yeah. No, it definitely can't be a tourist in that market for sure. Okay. That's all I've got. I appreciate the time, guys. Thanks.
Thank you.
Our next question will come from Ben Nolan with Stifel. Please go ahead.
Hi, this is Frank Galanti on for Ben. I wanted to follow up on reaching lower emission targets. How much can a vessel sailing speed affect the absolute level of emission and I guess more importantly, the efficiency ratio? It feels like renewing the fleet is going to be a big strategy to keep up with these ever lowering emission targets. For older tonnage, can those vessels simply go slower to meet IMO 2030?
Yes. Speed has definitely a role to play. In fact, in our industry, we prefer to speak about the load that you put on the engine. It's a little bit like the round per minute of your car rather than the speed you do. Of course, if you are in a descent with your car, you don't need to push so much on the accelerator to arrive to a certain speed. When you are uphill, you will need to push far more on the accelerator to maintain your speed. It's a little bit the same in the shipping space. It depends on the current, it depends on the weather, the wind, and many other factors.
In fact, that's where the digitalization and the efforts we're doing on the software/hardware front, is going to pay off more and more going forward because you will adapt your speed according to those elements, but also according to what you expect to have in the next couple of days. You can go slower because you know that the current is with you, or you know that the current will be with you in a couple of days and still meet the laycan. The laycan is the time at which you need to arrive at the port. To be precise on your question, yes, if they put less load on the engine, they will save fuel, but they will become relatively inefficient.
Also, let's not forget that when you take a cargo, you sign a contract, and that contract tells you the speed that you are supposed to, as well as the date upon which you have to arrive. Put yourself in the shoes of a client, and he needs to transport a cargo, and most of the industry is a little bit, or is very close to what I would call a just-in-time industry. He wants that cargo to arrive within a certain window. He cannot afford to take the older ship that will go so much slower that it will arrive a week later. Otherwise, it's going to be too complex for them to juggle between ships that go at a normal speed and the older ship that goes at slower speed because the just-in-time doesn't work like that. I hope it was clear.
Yeah, definitely. That's a good perspective. I guess, my second question, I wanted to ask about the FSOs. There was news out yesterday, International Seaways was potentially interested in divesting its stake, and the JV. Is that other half of the contract something Euronav would be interested in buying? I guess, longer term on the FSO business, are there other opportunities to grow that outside those two vessels?
Before I answer those two questions, I will first tell you, God knows that I'm not going to mind INSW business, when you are in a merger, I guarantee you, because we've been there with Gener8, I guarantee you that there will be a lot of conversation around the true value of those assets. I think that the market underestimate those values even on a cash flow basis, they underestimate the value. If you can't reach a value, what you do is, well, if I realize that value and it's higher than what you believe it is, let's make sure that my shareholders get that benefit. Obviously, that window stops when the merger is completed. So we had exactly the same mechanism, when we did the merger with Gener8.
If we had sold those vessels to any party at that time, and we would have realized a gain that is far in excess of the book value, then we would have distributed a special dividend, and we would have been authorized to do that. I think that the market is picking up a little bit too much speculation on what is, to my mind, unlikely to happen certainly before they complete the merger. That's my opinion, and it's maybe not INSW opinion. Now, talking about that, are we interested in buying our partner out? If they give us a discount, we are always interested in good deals. Frankly speaking, I think we are very happy with the partner. I think both of us have very similar ideas around value, so there is not really much we can gain from buying them out.
If we do something, it's probably going to do something that we do together, but it's a stable stream of cash flow. Before we sell that, we really need to see a full value, and we also need to make sure that our customer is happy with whoever would be interested in buying those units. It's very different than a vessel. It's not a decision that you take overnight, and you ask a broker to just market them.
Yeah. No, that makes a lot of sense. Thanks very much for the time. Appreciate it.
Thank you.
Our next question will come from Chris Wetherbee with Citigroup. Please go ahead.
Yeah. Hey, thanks for taking the question. I guess I wanted to ask a conceptual question around the financing capacity for yourself, specifically at Euronav, but maybe more industry-wide as we think about sort of the need to rejuvenate the fleets. Kind of broadly, at a point where rates are obviously quite low and leverage is arguably running quite high even for yourself at Euronav, your net debt to EBITDA is on the elevated side as it stands right now. I know you have liquidity here. I'm kind of curious how you think the sort of financing market is available and open, and how much liquidity there really is in the market to be able to help support some of these pretty important financing needs that'll be occurring over the course of this year, next year and beyond.
Yeah. I may not answer your question, Chris. I will say this. Your net debt to EBITDA is not something that we use in our sector because the EBITDA is too volatile. If you look at the net debt to EBITDA based on one last quarter, it is ridiculously high. If you base your net debt to EBITDA last year, it is ridiculously low. We cannot change the leverage of the company every time we go through a cycle. That is a little bit obvious. The more important question that you are asking is, are we going to be able to continue to finance the company going forward?
Not so much because of the volatility, because the volatility has been there for quite a long period of time, if not forever, but more because, the providers of capital are more and more scrutinizing the oil industry and the oil service industry, of which we're part of. I think that's a little bit the challenge. What we are seeing now, and as Lieve said in her comments prior to the questions, it's obvious that at least you need to have the Poseidon Principles as a clause in your loan agreement, which means that you can demonstrate to the banks that you're going to continue to follow the trajectory, and you're going to meet the requirements of the IMO 2030, but many other requirements.
Believe me, that jargon is becoming very complex because there's so many people that are sort of trying to translate the Paris Agreement into a different set of KPI. I think that Euronav is relatively well-positioned, if not very well-positioned, to continue to meet those targets. We are ahead of the curve. We are very conscious that we need to renew the fleet, we do that, and you've seen that we were doing that from a basis of already having a very modern fleet because the majority of our vessels are eco type. The ones that are not are going to leave the fleet and probably leave the world fleet before we reach 2030. We are also thinking about beyond 2030, as we commented earlier, we're buying type of assets that can be retrofit, can be transformed into something that does not emit anything.
I think that that part, together with the rest of the ESG, i.e. the social part and the governance part, is going to play a key role in your ability to finance your company. That's why we've been relatively focused on that, but not because it's a trend, simply because it's in our DNA, and we were always very aware that those three elements were very important, even before the terminology was created, like the ESG terminology was created. We feel relatively comfortable where we are, and when we look at the future, we feel that this represents a competitive advantage that we certainly going to play out in our efforts to grow the company and consolidate the market.
Okay. That's a really good answer. I appreciate that insight. I guess when you think, just taking that a step further and think about the potential competitive advantage for you, do you think that if we play this out over the course of the next couple of years, that there would be a material shortfall in capital available to finance a fleet for players who are not in the same position as you are from an eco perspective and sort of progressing from an emissions perspective and just sort of generally an ESG perspective?
We talked for years and years about sort of the availability or lack thereof of financing. It hasn't necessarily sort of really changed the industry in terms of the ability to kind of add vessels and ultimately add to the order book over time, maybe on the margins. Do you think it becomes a bigger story as we move forward?
Well, first of all, I certainly hope so. It's true that we've been talking about it in the past decade, and we've seen it, but on the margin, you're absolutely right. I think that there will be a flight to quality, and that flight to quality will mean that the relatively cheap capital that is available will be taken by the big companies who can demonstrate that they are doing an effort and that it's not superficial, it's really deep, and you can measure it. As I said earlier, I think it's a lot easier for big companies to go into programs over multiple years to decrease the emissions of their fleet. I don't believe that we will have so many problems.
I don't believe either that people will not find the capital, but I think that the price of that capital, the spread between what we pay and what they pay, is going to increase and is going to materially increase compared to what we have seen in the past, simply because the providers of capital depend themselves on their investors, and I think that their investors are demanding more and more to see where that capital is going and what is it funding. If you have scarcity on that end, then it will be reflected in the pricing, and I have no doubt and a lot of hope that that spread will increase and therefore will drive people out of the market.
Let's not forget that coupled with the volatility that we have, the pricing of capital is very important in a capital-intensive industry such as the tanker shipping.
Okay. That is very helpful. I appreciate the insight. Thank you.
Thank you.
Our next question will come from Magnus Fyhr with H.C. Wainwright. Please go ahead.
Yeah, good afternoon. Question for either Hugo or Brian. Going back to slide nine, the industry has set out some pretty aggressive carbon emission goals by 2030. In order to get there needs to start replacing some of these older VLCCs, and I guess there are about 400 VLCCs built before 2010. When you're talking to the oil companies, and we've seen both Shell and TotalEnergies award some contracts, but what's the appetite or urgency to start securing some of these non-eco ships or award more contracts for dual-fuel vessels?
I think that the trend is on. This year, well, to a certain extent, it started the middle of last year, you've seen those companies moving to awarding contracts for which the term, i.e., six, seven, eight years, is quite impressive because we hadn't seen those type of contract for a very long time. What we used to call long-term contract was maybe three years. Certainly on the longevity of those contracts, it was required in order to motivate the owners to build those ships. You will see more. Let's not forget that those oil majors certainly have a vested interest into pushing the LNG story as a transition fuel because they are themselves the producers of LNG, they invest quite a lot of capital into that. It will be natural.
Next to them, you have a number of clients, may represent in fact a majority, who are much more focused on the emissions themselves and are sort of fuel neutral from their perspective, i.e., they are not producer of LNG and are really awaiting what the potential of ammonia can give. I think once the first ships that are dual-fuel ammonia will hit the water, we will really be able to assess whether there is an interest into taking those ships on time charter and for which period of time. That will obviously depend on the pricing or the pricing difference between ammonia and LNG, ammonia and fuel oil, LNG and fuel oil. Absent of carbon tax, I don't think that ammonia will be a big success.
As I said, there's more and more talks about different type of carbon tax and different type of mechanism to equalize the price of those different fuels.
Thank you. I guess the longer the conversation's going on, the longer we wait to build these ships, the better it is for the industry. You have a couple of new builds on order. As far as yard capacity, what do you see now as far as ordering new ships, with delivery times, slots filling up from the container industry?
On the VLCC front, there are just a handful of yards that can build those ships. There are, to a certain extent, interest in building those ships. They are also the same yards that can build container vessels and gas carrier. We've seen that all the other shipping segments have seen the profitability surge in recent months. Particularly the container segment, where more than 10% of the world fleet has been ordered in the last five months. That's very, very impressive. That means that the yards we are going to order our VLCC, Hyundai, Samsung, Daewoo, they are extremely busy. The order book is relatively long now on those vessels. There's been a first wave of LNG carrier. The second wave is coming, especially the Qataris are going ahead with their idea of building 50 option 50 carriers. I repeat that, 50 option 50.
You can understand what it does to the order book of the yards. Let's never forget that the yards, they need to retain capability of building different type of ships. If you have nothing in your order book in terms of tankers, then you're losing your know-how, and some of the workers will leave. They always keep some slots available for building tankers, for building the different type of ships that they're building. Saying that the order book is full for containers until 2025, and therefore it's full for everybody until 2025, is wrong. The amount of ships that you can build from, let's say, a 50-vessel capacity per year, you're probably down to 15 vessels per year instead of 50.
I'm not saying that you're not going to see orders being placed for very late 2023 and certainly 2024, but I'm saying the capacity to overbuild the order book is very much impaired by the fact that they have received so many orders and are likely to receive many more orders from the container and the LNG sector.
Right. I guess that begs the question on the inflation of new build cost. At EUR 92 million for a basic VLCC, what's the profit margin now with steel prices going up? I would think, what's your view on pricing there?
Well, I think the EUR 92 is gone, to be honest. We are always in the yards. We're always asking those questions. For a similar spec of ships that we have announced, today the price is, the last one that we received, in fact, this week, is EUR 99.7. I cannot tell you what the level of profitability is at the yard. That's probably a very well-kept secret. You're right, the steel represents 35% of the building cost of a ship, so you can make the math that when those 35% is going up by 20%, well, guess what? It's a couple more millions. That gets translated into the price that they can offer you.
Great. Well, thanks for answering my questions.
Thank you.
This does conclude our question and answer session. I'd like to turn the conference back over to the management team for any closing remarks.
Closing remark would be thank you very much for your interest. It's always a pleasure to be on those earnings calls.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.