Good morning, and welcome to the Euronav third quarter 2019 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 touchtone 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 Mr. Hugo De Stoop and Mr. Brian Gallagher. Please go ahead.
Thank you. Good morning and afternoon to everyone, and thanks for joining Euronav's Q3 2019 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, Tuesday, October 29, 2019, and may contain forward-looking statements that involve risks and uncertainties. The 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 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, on our own company 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. 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. I will run through the Q3 highlights and provide a full financial review of the income statement and balance sheet before looking at the current themes in the tanker market and Euronav's outlook before we take questions. Let's turn to slide four. Generally, the tanker market for VLCCs and Suezmax was range-bound and a little disappointing in a seasonally soft quarter for Q3. Refinery maintenance program continued to impact the market until August, when freight rates enjoyed a counterseasonal rally, where with the exception of 2015, the market recorded the highest rates for August since 2008. This reflected the robust underlying fundamentals of the market. The freight rate strength has continued and even strengthened into Q4, with Euronav VLCC fleet delivering over $60,000 per day of earnings for 60% of our available days so far.
Suezmax have fared less well, specific transaction in this category have been strong. The good news is that we have 90% of our trading fleet exposed to the spot market for the entire winter period. Finally, the company is looking to apply the new Belgian Company Code, meaning we shall have the capability to pay quarterly dividends for the first time starting next year, 2020. This will allow us to align our business more closely with our stakeholders. Let's move to slide five. Q3 was very similar to Q2 in many ways, with a prolonged period of reduced activity as the refiners deliberately kept out of the market to do their maintenance and preparation ahead of IMO 2020. We nevertheless enjoy some strong pockets of freight rates of counterseasonal strength, which have illustrated the underlying foundations of market strength, which we'll come on to later.
The Euronav balance sheet remained robust, as shown on slide six. This quarter, there is very little to report, with only one asset sale, the VLCC V.K. Eddie, which we sold for conversion into an offshore project during Q3 for a very healthy premium. Leverage remains in the mid 40% range compared to our target of 50%. That concludes the financial section of the earnings call, and I will now pass back to Brian. Thank you very much.
Thanks, Hugo. Turning now to slide seven, I would now like to take a look at a number of key signals we are currently seeing from the tanker market. Firstly, a topic that many investors are looking for, consolidation. The tanker market is highly fragmented and a complaint from many observers is a lack of consolidation. However, this process is already happening. It's only 16 months since we completed our merger with Gener8 Maritime, and during Q3, we saw further commercial consolidation with the announcement of three additional owners opting to place their VLCCs, some of them scrubber-fitted, into the Tankers International platform. This will see the TI structure have over 70 VLCCs under its umbrella when these vessels are all delivered. This low risk and tangible form of consolidation should provide more discipline for the tanker tonnage as it faces the longer-term demand challenges and implementation of IMO regulations.
Further development of the platform at TI is something we look forward to and to encourage. Turning to the fundamental foundations of our sector, on slide eight, it illustrates the short-term role that has been played by short-term storage as a catalyst in our market. Slide eight firstly shows the one-year VLCC TCE since 2015. This illustrates the challenging market, in particular, during 2018. However, this was helped with an adjustment in the global fleet of nearly 50 VLCC equivalents leaving the fleet during 2018. This rebalancing has helped underpin freight rates at better levels during this current calendar year, with pockets of counter seasonal strength, rather, in Q1 and lately in Q3.
If we move on to slide nine, you can see that this market background has been augmented by IMO 2020 induced storage, with the requirements of around about 30 VLCCs leaving the global fleet to store various grades of fuel oil. This short-term development has helped drive the freight market, along with a better outlook and picture for second half demand for crude. The key point here, that this has come on top of the foundations already set in place in the tanker market that Hugo spoke of earlier. If we progress to the following slide, on slide 10, the pockets of freight rate strength reflect a finely balanced market that the catalyst of storage restricting vessel supply has driven rates even further in Q4 into positive trading.
This has been further boosted by the longer-term fundamentals of limited fleet growth looking forward over the next two years, and with the order book below 10% and at a 25-year low, and a fleet age profile not replicated since the mid-2000s, this is a positive background. Every year for the next seven years, there will be at least 25 VLCCs hitting 20 years of age, adding further pressure for the fleet to reduce in size, providing good candidates to be recycled and to rebalance the market in case of freight rate weakness. These fundamentals give Euronav the confidence that there are market conditions for a sustained rally in freight rates over the coming quarters. However, this does require continued restraint in vessel ordering and demand for and supply of crude not being impacted by trade tensions or further reduction cuts.
Finally, on this section on slide 11, we show the short-term picture and, in particular, the VLCC freight rates and how quickly they rose to a very high level as a number of short-term temporary factors all combined in a short period of time to produce a perfect set of conditions to push freight rates to unsustainable levels. These factors all remain in place to a varying degree and may return over the coming winter period and beyond. It would be incorrect to look at these very elevated levels, which have persisted for a short period, as the real focus. The key focus in our view is the fact that freight rates have been boosted to profitable levels based on solid foundations.
These fundamentals have credentials to remain in place for a sustained period, albeit tanker markets will always remain open to seasonal trading patterns, given the way crude is moved around the world during the year. No quarterly results call will be complete without a slide on IMO 2020, and we provide ours on slide 12. A number of commentators have queried our decision to purchase in high volume, low sulfur compliant fuel ahead of January 2020. We very carefully undertook this decision in order to reduce the risk to our business in order to provide a safe, secure source of supply of tested fuel during what we believe will be a very volatile period as IMO 2020 is finally implemented.
As our seminar on September 5 made clear, this compliant fuel has been purchased at a very competitive price, around $100 below the current retail price in Singapore, where our ULCC, the Oceania, is storing the fuel. We have already begun to deploy this fuel onto our fleet and in preparation of January 2020, and we've been able to benefit from this cheap feedstock to be consumed when IMO is finally implemented from Q1 onwards. This means that for our vessels performing long voyages, the fuel needs to be purchased today and stored in separate bunker tanks in order to be ready for switching on or just before 1st of January 2020. To sum up, we now move on to the outlook slide on slide 13 and an upgrade to our traffic light system.
We maintain on slide 13 our constructive stance on the tanker cycle into 2020 and reflect this by upgrading our vessel supply sector to amber/green, as highlighted in slide 13. The rationale for this stems from a view that some of the vessel storing fuel oil will not return in full to the trading fleet, and that retrofits are now likely to persist longer into 2020 as owners avoid retrofitting during an anticipated strong winter freight rate season. The other fundamentals of demand, oil supply, ton-miles, and our own current balance sheet remain as they were. With that, I conclude our prepared remarks and pass back to the operator. Thank you.
We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Please limit yourself to one question and one follow-up. If you have any further questions, you may reenter the question queue. At this time, we will pause momentarily to assemble our roster. The first question comes from the line of Jonathan Chappell with Evercore ISI. Please go ahead.
Thank you. Good afternoon, guys.
Hi, John.
Hugo, the first question is around the new dividend policy and just some clarification around that. When you say you can start paying the quarterly dividend in 2020?
Should we expect that to mean the dividend off the 4Q results? Will that be based strictly on 4Q, or will that still be the aggregation of 3Q and 4Q? Also, there was no payout ratio or update. I know in the last cycle, you were at 1.80% payout ratio. I think you were down to 60% at one point. What's the target distribution ratio as you think about entering next year?
Thank you for those two questions. The first one is a little bit mechanic, the law in Belgium is only changing in 2020. We're talking about portion dividends in 2020. Q3 and Q4 will still be consolidated in that regard. The second one is, we have a dividend policy out there. In the last cycle, we had a dividend policy distributing 80% of our earnings, then we changed it, to make sure that we could still distribute some sort of dividend, even when we were in loss-making territory, which we did, that's the minimum dividend. Above that, any extraordinary dividend can be distributed. You've seen that we have done a little bit more share buyback than what we have done in the history of the company. The choice will always be there between dividends and share buyback.
It really depends on where the share price is. Nevertheless, a big chunk of the earnings will be distributed as dividends. We know it is very important for our shareholders. We don't want to set a percentage, because we still want to have the flexibility between those two. As of a total payout, we will be generous. If you look at our history of 15 years, history of a public company, we have always been very generous. Obviously, when you look at the balance sheet and when you look at our current leverage, there is no reason to use any of those earnings to decrease the leverage as it is low enough in terms of earnings and maybe too low.
Okay. No, I understand that. Thanks, Hugo. The second one is on a little bit of the timing of the annual strategy. Brian said that you've already started to deploy some of your inventory. I think in the September 5th update, you had said that roughly half of your bunker requirements for next year would be met by the inventory that you've already built up. Is that still the case? Should we think through the first two months of next year, is that maybe a little less since you started to deploy already? Another part B, sorry. Do you anticipate building more inventory either in that ULCC or another? Do you feel that you've already taken advantage of the price arbitrage and now you're just going to run down what you've already aggregated?
On the first question, we have started bunkering some vessels that are currently passing by Singapore. As you know, the Oceania is located not very far from Singapore.
It's an ideal location, very safe where we can do those operations. The first time that we're doing that on our own and for our own fleet, we have a dedicated barge to do that, to make sure that there is no contamination. We will continue to do that until the end of the year, and then obviously next year. It's not because we are starting to bunker now, that it will limit the amount of bunkers we use in time. When we say six months, because we're not going to start using those bunkers ahead of the deadline, maybe a little bit ahead of deadline. You want to make sure that you run out of HFO, and switch to LSFO as close as possible to the 31st of December. That does not change the amount that we will consume over the first six months.
Last but not least, could be a little bit more than six months, because obviously not all the ships in our fleet are passing by Singapore all the time. We will try to maximize it. We believe that it's really the initial few months, probably Q1, Q2, maybe Q3, that are the most at risk in terms of price volatility, and also price quality because it is a new fuel. That's really what we want to be protected against. Going on to your second question. We have learned a lot about bunker procurement, to be honest. We want to complete the circle, i.e., we bought it in one place, we transported in another place. We're now bunkering the fleet.
We want to make sure that everything is working fine before potentially, moving to a more stable operation, which will probably mean that we are using that ship or maybe more on a permanent basis. There's certainly one advantage in doing what we have done, and that advantage is volume discount. We will probably continue to do that, but let's make sure that we complete the circle, the first cycle, in fact, and that everything runs smoothly. The focus point is still there for the moment.
All right. That's super insightful. Thank you so much, Hugo. Thank you.
The next question is from the line of Michael Webber with Webber Research & Advisory. Please go ahead.
Hey, good morning, guys. How are you?
Hi, Mike. Very well, and you?
Hey, good. Just wanted to piggyback some market questions following John's stuff on the dividend. Your slide on VLCC storage is interesting and helping to set the table for a pretty tight dynamic into Q4. I'm just curious, Hugo, with 30 VLCCs in storage now, I guess, how and when do you think that ultimately peaks? I know that's a difficult question to answer on the back end. Is that a number in terms of baseline storage to handle that fuel transition? Do you think that number peaks in Q1 of next year, or do you think it could extend further out?
Well, to a certain extent, it's linked to the previous question, and it's about LSFO, HSFO price stability, and to a certain extent spread stability. I think people will use tonnage, and the bigger, the better, i.e., VLCCs or maybe Suezmax, to store LSFO ahead of the deadline and then right after that, HSFO, because it's quite difficult for a refinery to plan and be completely accurate on the demand that they're going to receive, and especially on the location of that demand. I think that it's very much linked to where we're going with the fuel. There is another dimension, of course, now that the market is doing so well.
There's some people, if not a lot of people, certainly in our segment, that have postponed the retrofitted scrubbers, which means that you have part of the HSFO demand that has been eliminated and more LSFO demand that has been added on. It's an equation with many unknowns. Again, I can only repeat myself. The reason why we've done this, and we have accumulated at least 6 months of fuel, is not to be trapped in a very volatile market and knowing exactly what we've purchased in terms of quality and at what price, of course. You will need to look at the oil market, because the oil market is also from time to time requiring storage, and God knows where the price of the oil is going, and is going to go next year. Unfortunately, I cannot be more accurate than that.
Historically, there's always been some ships being taken on storage. Let's not forget that the first candidate to perform that service are the older part of the fleet, which is good news, because once you have performed storage contracts, especially if it's over several months, it's more difficult to bring your ship back into the trading fleet because you have no vetting, and so your ship is usually not easily acceptable. Having a ship that stands still is not particularly good for that ship either.
Got you. Okay. That's helpful. With a follow-up, I guess, maybe one a bit more in the weeds, but you made a point to call out TI as kind of de facto consolidation on slide seven. Late last night or I guess earlier this morning, there's some news out around another competing pool that's kind of bleeding tonnage. I guess my question as it pertains to TI and IMO 2020, I think the last time we spoke about this, it was still a bit up in the air. In terms of differentiation, I guess maybe the right way to ask it, is there a standardization among major pools around how they're treating pool points for scrubber-equipped and non-equipped vessels?
Is there an opportunity to differentiate TI from a flexibility standpoint in terms of attracting new tonnage over the next year and a half because of maybe a well-thought-out flexible point system to accommodate multiple classes of vessels?
Well, I'm not entirely familiar with what they're doing in other pools. I can only speak about TI.
Sure.
At TI, the decision that we have made was to split the accounting side of the pool. We're not attributing pool points to vessels with scrubber. We're simply saying, okay, it's one pool, one manager, but split in two different sub-pool, one for scrubber-fitted vessels and one for non-scrubber-fitted vessels. It's very important that all those vessels are under the same hat, and that's the reason why we have pushed the pool to attract new members, even though those new members had a scrubber. Last year, I think that Euronav was more portrayed as a non-scrubber, and therefore, the pool was portrayed as non-scrubber only. That's a big change, but it's not very difficult. Consolidation is important. If you can't do it on the M&A front, it's very important that you do it on the commercial front.
To that extent, we welcome other pools, because if there are other pools, it means further consolidation. It's good for the market, it's good for us.
Right.
We believe that TI is the best pool. That's the reason why we put our ships in it. We don't own the pool. We don't get any earnings from the pool. That's one of the biggest benefits of the pool. It's an owner's pool, i.e., it's a cost center. You are not adding a layer of brokerage fees to your earnings. For us, it's very important.
Got you. Okay. That's helpful. I appreciate the time, Guy. Thanks.
Thank you.
The next question is from the line of Randy Giveans with Jefferies. Please go ahead.
Howdy, gentlemen. How's it going?
Oh, hi, Randy. Very well. You?
Excellent. Good. All right. On slide eight, you show the 1-year time charter kind of rates. We're also hearing of 1-year time charter rates of higher than kind of these charts of $50,000, maybe even $60,000 for some Eco VLCCs without scrubbers. I guess, have you gotten any bids for some of your vessels at the $50,000-plus range for a 1-year time charter? If so, will you look to lock away some of your vessels on those time charters, either for 1 year or maybe 3 years?
We've not seen that. I think that there was one ship being done at $46,000, and that was for three years. The one that has been rumored to be done above $50,000, to my knowledge, has not been confirmed. Maybe it has, maybe it has not. There are very, very few of those available. I think if it's for one year, we are a little bit more optimistic than that. The answer is no. If it's for three years, above $50,000, yes, we would definitely consider it. We have sent two vessels, and if we were not considering locking some of those under such a good rate, then we would be too greedy, and unfortunately, greediness very often leads to a brick wall. Yes, but we haven't seen it in more than one year.
More than one year. Okay, that's fair. I guess on your specific fleet, following the sale of the Eddie, you still have, I guess, one VLCC built in 2005, maybe five Suezmaxes over 15 years of age. At the same time, you mentioned ongoing consolidation. Do you plan on selling some of these remaining older vessels in the coming quarters and replacing them with more modern tonnage? Where do you see your fleet over the next year? Maybe current levels, smaller, larger?
Everything that you said is true, as far as the vintage of our fleet is concerned. They're not that old either. Certainly the TI Hellas, which is a 2005 build, is not yet 15 years. She will become 15 years next year. I guess that all those vessels that you mentioned, and we have a few Suezmax which are slightly over 15 years, are candidates to be sold. We are never desperate. When the market is that good, it either commands a better price as a sales candidate, or we keep it, and we enjoy the market.
Sure. Okay, the fleet could go up, could go down.
Yeah, that's on the sales side. I think that on the acquisition side, you know how opportunistic we are. If you're talking about a fleet, if it's an acquisition, we think that the values are getting a little bit too high for our appetite. If it's a merger, it all depends on where your share price is, I suppose.
Sure. All right. Thanks again, and congrats on a solid quarter.
Thank you.
The next question is from the line of Amit Mehrotra with Deutsche Bank. Please go ahead.
Hey, this is Chris on for Amit. The first question is on the physical market. Earlier this month, Sinopec, China's largest refinery, announced it was going to reduce operations in response to higher freight rates. Recent data shows that Chinese crude imports were actually moving higher throughout the month and coming in at near record high levels. Can you maybe just talk about what you're seeing here? There appears to be a disconnect.
We are seeing it exactly the way you describe it, which means that we live in a world where you can make some declaration and not follow it through. I have to admit that they made the declaration when the market was supposed to be at $250,000 or even $300,000 a day. All those features were failed in the end. I guess that their comments came up at that moment in time. Today, the market is probably more between $80 and $120, depending on where you trade your ships. That might be the reason why they have reengaged in the market, and indeed, booked a lot of vessels and have imported a lot of oil.
Yeah. Makes sense. Thanks for the color. Just next question, can you maybe talk a little bit about the impact of IMO just as it relates to global crude oil demand? It feels like there could have been a headwind to 2019 demand, as we've just seen elevated global refinery maintenance. For 2020, potentially a tailwind with more waste in the refining process. Can you provide any context to this or how you guys think about this shaking out?
Well, we are not a refinery, so we can only tell you what we heard in the markets. God knows that we have visited a lot of refineries, and they pretty much all told us the same. They anticipate that they will do additional runs to produce all the material that is required in the market, including LSFO. The best estimate that we have seen ranges between an additional 400,000 on the low side to 700,000 barrels additional per day on the high side. I suppose the truth will be a little bit in the middle. It will also depends on the oil price itself. We don't believe that there's going to be a lot of material stranded. Obviously, there's going to be a period during which price needs to be adjusted according to the demand.
As I explained on first question, it's a moving target because as people have postponed their scrub retrofits, it means that we'll have probably a little bit more demand on the LSFO initially, certainly more than anticipated. Very quickly, it will catch up with what was planned. It will provide opportunities for ships to be used as storage. I don't think that it will mean that the demand for oil by those refineries will go down.
Have you guys seen anything in 2019? Obviously, oil demand 2019 has been pretty soft. There's a lot of factors at play. Just has this elevated global refinery maintenance year to date had any impact from what you guys are seeing?
Maybe, Chris, if I could jump in there. It's Brian Gallagher here. Go on. Go on, you go.
No, go on.
I was just going to mention, and I think we've seen that in Q2 and Q3.
I think that's the point we wanted to try and make in our prepared remarks, in that we did have a pretty respectable market in Q1 and Q4 of last year, $35,000 a day. As we went into September and early October, again, we had a good market and a good setup for the winter program. I think it's been that refinery maintenance program which has been very prolonged and also more assertive and more aggressive than we were all anticipating. That's been almost certainly the key driver where we've had reasonably challenging markets in Q2 and Q3. I say challenging, we were still, whilst slightly loss-making, as we reported today, the fact that underlying that, the market has had some sort of a reasonable balance between demand and supply.
Our view would be is that Q2 and Q3 is what you saw was very much driven by the refiners, and now they're back in play, and now ready for IMO 2020.
I appreciate the color. That's it for me. Thanks for the time, guys.
The next question is from the line of Ben Nolan with Stifel. Please go ahead.
Thanks. Good afternoon, Hugo and Brian. My first question, you touched, Hugo, on this a little bit, I think, on Randy's question. There's been clearly some noise in the market about owners who've placed new buildings who are looking to sell those assets. Curious, it sounds like the ask price is a bit too high for you, how do you think about that more broadly, as some of these speculative new builds look to be sold? Is that something that you would be interested in doing at some point?
It's very difficult to be accurate. Yes, there's a number of VLCCs, particularly VLCCs, which have been built speculatively. Those vessels were earmarked for sale. Some of them have been sold. You have to recognize that most of those speculative units have been or are starting to be operating in proper companies. The pool is welcoming two of those, in the name of Hunter and Hartley, and that's because they have equipped themselves with the necessary people management systems in order to operate them. I don't think that they are desperate, and who knows, maybe they want to become shipowners themselves. It's quite difficult to read who wants what. It's true that once a vessel, and I think there was a rumor in the market today that one of those had been sold at way above $105 million.
It's true that for us, it's probably on the very expensive side. If it's a fleet, you can play with shares. Your share price is potentially trading at a premium to NAV, then it's something different. At Euronav, we always take care of our shareholders, our existing shareholders, and we want to make sure that whatever we do, we create values. There is always a limit to the price that we are willing to pay.
Okay. No, that's helpful, and certainly, that discipline is something that you've shown in the past. My next question shifts a little bit, and it sort of ties in with the quarterly dividends, which I think, at least in the U.S., many people will appreciate. In the past, you guys have, in periods of strength, done the special dividend, that sort of thing. It looks like 4Q, based on the rates that you've locked in thus far and where the market is now, it should be one of those periods of time when things are pretty good. You mentioned earlier that the balance sheet is appropriately or maybe even underlevered. If there is a windfall quarter or a couple of quarters, is special dividends on the table, or how are you thinking about the use of your capital beyond just the normal quarterly dividends?
Yes, of course. Whether you call them special dividends or extraordinary dividends, we're going to look at them on a quarterly basis going forward. As I mentioned earlier in this call, this is true for 2020 because the law is only changing on the 1st of January. As far as Q3, that obviously will be a loss, and Q4 are concerned. That will be the way we've done it in the past.
Okay. All right. Thank you, Hugo.
Thank you.
The next question is from the line of Omar Nokta with Clarksons. Please go ahead.
Hi there. Hi, Hugo. Hi, Brian.
Hi, Omar.
I just wanted to just maybe revisit the ULCC being used for storage of low sulfur fuel. You've discussed extensively on the call, and in the September 5th announcement as well, that during the next two to three quarters, or at least the first two to three quarters of 2020, there's a lot of uncertainty of supply. Generally, over the past few weeks, there's been some reports that the concern over availability of the low sulfur fuel is maybe overblown and that the market may be okay. That's obviously in stark contrast to where things were six months ago. Of course, we're not going to really know ultimately until we get into January and have a better sense. As we think about it from Euronav's perspective, you've got an embedded gain in that bunker fuel. You got a lot of working capital tied up with that.
Does it make sense at all if we get to the January timeframe, and sure enough, there is a good amount of supply available of the Low Sulfur fuel?
Does it make sense to accelerate that discharge or sell as much as possible, that fuel, and maybe bring that ULCC back into the trading market?
In fact, there are two questions there. The first one is clearly not. I mean, we are not traders, and we did not do that to speculate. We did that primarily because we were worried about quality. Yes, there seems to have certain quantities of LSFO that have been stockpiled either on land or on ships. That doesn't tell us anything about the quality. Again, the first few months are going to be about the availability, the quality, but also the pricing. At the moment, we are sitting on a product that is definitely in the money. We are happy about that, but that was not the primary goal. I don't know where the pricing will go, and I don't know in which location it may go up or down.
I mean, obviously we are in only one location, but we can always swap products, if we see that pricing are going all over the place in another region. As far as the vessel is concerned, it's a very good question. I'm very happy that you asked because we have had it in the past, and we've not been able to explain that thoroughly to the market. We're talking here about ULCCs. ULCC can carry 3 million barrel. They were built in 2002. We acquired them in 2004, and we trade them, or we used them as trading ships until 2008. After 2008, two were converted into FSO, and the other two were only used as storage units. They've not been part of the trading fleet. The reason is that the market structure is not made for a 3 million barrel lot.
We are not missing out on those vessels of the goods markets that we're seeing on the VLCCs, on the Suezmax. The top that we have earned on those two units, well, in fact one, because we only bought the other one last year, in the last ten years, so it's since 2008, must be in the low thirties. Our cost of lost opportunity is very minimal, and we have calculated that when we were thinking about using those vessels, and that's maybe also one of the reason why we're not using a VLCCs and/or Suezmax.
Okay. Thank you. That makes sense. I didn't realize actually that the ULCC hadn't traded in the VL market since 2008. Thanks for that. I do have just a follow-up on the guidance for the fourth quarter. Obviously VLCCs looked generally, I'd say firm, especially relative to what we've seen in the past and how the market's averaged. When we think about the Suezmaxes at $27,300, how do you feel about that? It seems a bit lighter than what we would've expected. I know we're somewhat in uncharted territory here, the past several weeks, where rates that we've seen reported don't actually end up coming into fruition. How do you think about the $27,000? Is that really what you would say is reflective of where the market average has been? Do you think there's something else?
No, I think we would tend to agree with you that we are a little bit disappointed on the Suezmax front. You are also correct to say that, in the last few weeks, the Suezmax market has rebounded, and has caught up with the VLCCs, relatively speaking, of course. I think it's too early to draw conclusions. Let's not forget that the market received a lot more new building deliveries last year, did not recycle as many ships as what we have recycled on the VLCC. Conversely, the order book is so much smaller than the VLCC, which is already at historically low levels, around 9%, as we've shown on the slide. It's true that we have not given you those data points, but I'm sure you have them. The order book on the Suezmax is even more attractive than on the VLCC.
If there was a disconnect with the VLCC market, I believe that you have to look at it over more than a few weeks, and potentially more than a quarter, because it's a market that can come back, and to a certain extent, as I mentioned, has come back already.
Got it. Okay. Thanks, Hugo, for that. Appreciate it.
Thank you.
The next question is from the line of Erik Hovi with Pareto Securities. Please go ahead.
Yeah. Hi. Thank you. I just wanted to follow up a little bit on the capital allocation, because I think that's sort of the key theme, in 2020. You have the most conservative depreciation profile, which in a way punishes a little bit your net profit. Is there any reason not to expect you to pay out more than your full earnings next year? Because you say you're not going to pay down debt, you're not going to buy ships, then where will sort of the cash go?
It's a very good question, but you will have to wait until we cross those quarters and tell you how much we're going to pay. I think that it's for a purpose that we have not limited ourselves to a certain percentage, and that we are a little bit more flexible, than in the past between share buyback and dividends. When it comes to depreciation, it's a funny game because, yes, we are maybe a little more conservative than the others. When we sell the assets, obviously, we have depreciated them more than the others. We are catching all of those profits back at the time of selling those vessels, and you will recognize, hopefully, that we're not that bad at selling. Usually, the profit that comes with the sales is pretty healthy. I don't think it's a real point.
When you have a fleet of 72 vessels, you're probably selling a couple of them, a few of them every year. When you do, you're catching back on your depreciation policy. We are discussing the depreciation policy with the board, and we feel very comfortable about it. We will continue and maintain the depreciation policy.
Yeah. You're completely, obviously then, I understand, aware of the difference between cash flow and net profit, obviously, and I think the investors should be as well. Just also, one, on slide 12, you have current HSFO price in Singapore at $545 a ton. I just wonder a little.
LSFO.
Where that comes from. Okay. It's LSFO. Yes. It says HSFO. It's misprint. Okay. Thank you.
No. Apologies for this mistake.
Yeah.
Absolutely. It's LSFO, and it's a price that people are paying when they want to bunker their ships in Singapore. Many people are doing that at the moment. The demand is picking up because on the large vessels, and that's maybe something that people don't understand. For the large vessels, if you want to have LSFO on board, and obviously you have to have LSFO on board for the end of the year, if you're starting to perform a long voyage, you better bunker now.
Yeah. Perfect. Thank you, Hugo.
Thank you, Erik.
The next question is from the line of Greg Lewis with BTIG. Please go ahead.
Yeah. Hi, good. Thank you, and good afternoon.
Hi, Greg.
I was hoping to talk a little bit more about the Suezmax market. I remember going back to the webinar presentation, you talked about potential new routes developing for Suezmax around IMO 2020. Is that something that you've seen at all, or is that something that it's still more of a wait and see?
We've seen some of them. There's not been a long trade, certainly not as much as the VLCC, going out of the Gulf and going to the Far East. There is a lot of demand coming from Europe for whatever is exported from the U.S., we anticipate that that will continue because the European refineries are not very sophisticated, i.e., they will probably demand more lighter than what they have done in the past. It's in addition to what we had, because two, three years ago, we had no export from the U.S. There are other trading routes that we anticipate will develop. It's probably a little bit too soon, again, I think that we are drawing conclusions a little bit too fast here. As I mentioned, the market has cooled off.
There is a strong correlation with the VLCC market, and the strong correlation is coming from the fact that two Suezmax is one VLCC. If the VLCC market is too high, then you split your cargo, and you use two Suezmax. There's always a correlation between the two markets. Thankfully, we have seen that it's the Suezmax who has gone up rather than the VLCC being taken down by the Suezmax, and that's very positive.
Okay. Thank you very much.
Thank you, Greg.
The next question is from the line of Chris Wetherbee with Citi. Please go ahead.
Hi, guys. James on for Chris. Wanted to follow up on that speculative new build question and ask about the current vessel technology. Are you confident that eventually a vessel today will meet regulations and come down the line in about over the next decade, or is that a risk that you think might continue to curtail the order book?
It's a very good question. As far as we are concerned, I suppose everybody has the same topic in their minds, is the short answer is we don't know. Everybody believes today that LNG will be at least a transition, that the yards are telling us that as of 2022, they will only start LNG. Well, LNG-fueled VLCC . Then we'll have to wait what the next technology is about. Today, the biggest problem that we all have is that comes at a premium, that premium is $15 million. If you set a new building, a conventional VLCC new building at $90 million or $92 million, you have to add $40 million or $15 million if you want that ship to be able to use LNG. It's a significant premium.
In order to justify, either you need to make sure that the fuel you're going to use, in other words, the LNG price, is going to come at a big discount to the LSFO. You sign a time charter which recognize that your ship is capable of using LNG as a fuel. In other words, it's time chartered that comes at a premium over a conventional vessel. As long as it stays such a big premium, it should refrain a lot of people ordering conventional vessels because they have no idea whether that vessel, when it gets delivered, and there are only a few slots in 2021. We are already contemplating the early slots of 2022. When those vessels deliver, whether it's still going to be the technology that is accepted for a new building.
On the other side, the guys that want to jump on the boat of the LNG fuel VLCC vessels are a bit reluctant to pay that premium. We will see how the market evolves, but we are pretty confident that it will indeed restrain a lot of people until either one of those gets more clarity or cheaper.
Got it. Thank you.
Thank you.
The next question is from the line of George Berman with Cabot Lodge Securities. Please go ahead.
Good afternoon. Thanks for taking my question.
You're welcome.
Hi, George.
Glad you clarified slide 12. It's not the high sulfur, but the low sulfur fuel oil trading at $545 right now, and your procurement apparently was around $445. You're up about $100 a ton there, huh?
Yeah, that's correct. Again, apologies for the typo. Yeah, apologies for the typo.
The unexpectedly low procurement rate for your Suezmaxes here into the fourth quarter, is that partially due to most of your fleet having been on voyages when rates exploded higher here the last couple of weeks?
Well, we will need to see what the others are doing on their Suezmax, to answer your question. Yes, a lot of them were performing voyages as they should, because we like to utilize and to maximize the utilization of our ships. It's also true that a lot of fixtures, which were done at very high rates, were canceled. The first market that picked up was the VLCC, then the Suezmax caught up. With the delay and what we see happening in the VLCC market and a lot of those fixtures between $250 and $300 being failed, as we call it.
Yeah
We had the same phenomenon happening on the Suezmax. I think it's a question of starting later and then being caught in the window of canceling those fixtures, rather than not being able to pick up any of those good rates.
Okay. Has the continued export strength from the United States, Houston, Corpus Christi, continued into the third and fourth quarter, or have you seen a slowdown there due to lower Chinese imports?
We have not seen-
No, I'll take that one. You go on.
Yeah.
No, George. I think it was last week, we saw a new 3.7 million mark. We still anticipate we'll have a 4 million mark sometime in this quarter. No, we continue to see growth. The recent panels that we've been appearing on would suggest that Corpus Christi is really driving that growth.
Okay.
Sorry, just to add one element. The reason why you are asking the question is because we have seen in some reports or in some press articles, that the growth rate was diminishing. That's very different than the nominal growth, of course. If you have a growth rate of 10 or 15% year-on-year, and suddenly instead of 15%, you only have 10%, you nevertheless continue to see a growth pattern. That's what we're seeing.
Okay. Your Suezmaxes, are they individually managed by yourself, or are they in a pool as well?
No, they are individually managed by our Suezmax desk, which is an in-house operation indeed.
Okay. Suez is the primary source of exports from the U.S. since, I think, one port can only accommodate VLCCs, right? Everything else has to be ship-to-ship transferred offshore.
Yes, which does not seem to be a problem. I think that when the distance is long enough, then it's still more economical to do lightering. Lightering means that you're bringing the oil to the VLCC with another smaller ship. It could be an Aframax or Suezmax. That's the reason why there are a lot of VLCCs leaving the U.S. Gulf Coast and going to the Far East. When it goes to Europe, it's true that it is more of a Suezmax trade. Therefore, Suezmax are being used, and the Suezmax don't need to be lightered. It's a less complicated operation.
Yeah. Maybe one final one. Comment on the export capacities and volumes out of Brazil currently. Recently, Petrobras, their big oil company, announced strong oil volumes. Have you seen any pickup there in exports into the world?
Yes, definitely. As a matter of fact, when we talk about the export from the Atlantic, most of the time we talk about the Americas. The Americas, we call it Carib, because that's in the oil jargon. It's usually called Carib, Far East. Carib means oil stretching from Brazil up to the east coast of the U.S., be it in Gulf or be it really on the East Coast. That captures all of it. It's true that the Brazilian had announced an increase in production. Most of that production is offshore, so it's something that is planned many years in advance, and it requires a pretty heavy investment. It came online a little bit delayed compared to what they had told the market. Nevertheless, it's a growing market and very interesting market to restore it from.
Okay. The Carib trade, as you call it, from the Americas to the East, remind me, that generally takes between 60 and 90 days, huh?
Yes. Well, it depends where you are leaving from. Most of it, if not all of it, is going around Africa, as the Suez Canal is limited to a Suezmax size. Yes, it could be between 70 and 90 days indeed.
Okay, great. Thanks very much. Look forward to a great fourth quarter for you guys.
Thank you. We too.
This concludes our question and answer session. I would like to turn the conference over back to Mr. Hugo de Stoop for any closing remarks. Thank you.
I just would like to thank everyone who was on the call, and for all the good questions, and looking forward to the next one, which hopefully will bring even more good news. Thank you. Bye-bye.
This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.