Good day. Welcome to the Euronav Q2 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 touch-tone phone. To withdraw from the question queue, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Brian Gallagher, Head of Investor Relations. Please go ahead.
Thank you. Good morning and afternoon to everyone, and thanks for joining Euronav's Q2 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, Thursday, August the 8th, 2019, and may contain forward-looking statements that involve risks and uncertainties. Forward-looking statements reflect current views with respect to future events and financial performance and may include statements concerning plans, objectives, goals, strategies, futures events, performance, underlying assumptions, and other statements which are not historical statements of fact. 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 euronav.com.
You should not place undue reference or reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of a 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. With that, I will now pass back to Chief Executive, Hugo De Stoop, to start the agenda slide on slide three. Hugo, over to you.
Thank you, Brian. I will run through the Q2 highlights and provide a full financial review of the income statement and balance sheet before Brian looks at the current themes in the tanker market and Euronav outlook before we take questions. Turning to slide four and the highlights page. The tanker market for VLCCs and Suezmax during Q2 was weak, as expected with seasonal freight rate, but this was exacerbated by longer and deeper refinery maintenance and with OPEC production cuts reducing the number of available cargoes. This has been reflected in downward pressure on freight rates highlighted in slide four. The impact of the lower freight rates on our share price has given us an opportunity to utilize our balance sheet and liquidity strength during Q2. We have returned capital to shareholders via further share buybacks for a total of $10 million.
This is in addition to the share buyback done in Q1 and of course, on top of our fixed minimum dividend of $0.06 per half year, which we will pay in October, despite a challenging first semester for the company. So far during Q3, rates are at a similar level to those in Q2, and this is disappointing. With around two-thirds of the VLCC fleet booked at just over $20,000 per day and 60% of the Suezmax fleet at a touch below $15,000 per day. While it's disappointing not to see any traction in the freight market, yet we remain constructive on the tanker cycle for the last quarter of the year. Now turning to our income statement on slide five.
Our results are a reflection of the operational leverage of our business, with the lower freight rates bringing a P&L loss during Q2, and this offsetting the positive return from Q1 to bring an overall net income loss of $19 million for the first semester. Our balance sheet remains strong and robust, as shown on slide six. Let's take a look at slide six. Liquidity now stands at over $850 million, up by over $70 million from the end of Q1, and this was driven by two factors. Firstly, in June, we took the opportunity to increase the size and therefore the marketability of our 7.5% coupon bonds by undertaking a tap issue of 50 million to bring the bond size to $200 million. We believe this is competitively priced funding when compared to other funding sources and demonstrates Euronav access to another longer-term source of funding.
Demand was strong enough for us to issue the new bond at a premium of 1% over par value. Secondly, we have also taken an additional $100 million credit facility in order to assist us with the preparation for IMO 2020 and, in particular, our fueling strategy for our fleet. As the press release highlights, we shall give a separate webinar specifically on our IMO 2020 preparations on September 5th, and we look forward to updating investors and analysts in detail then. Euronav leverage remains amongst the lowest in the sector, and we have no outstanding CapEx linked to new buildings. We can now turn to slide seven, where Brian will look at three key signals we are currently seeing from the tanker market. Brian, over to you.
Thank you, Hugo. On to slide seven. This, we believe, is a very good summary of some of the headwinds that the tanker market had to face over Q2. Two essential and key drivers, U.S. crude exports, and those exports from the OPEC nations based in the Middle East, are represented in this chart. Each bar shows the month-to-month movement from each of those categories. On the Q1 call, we talked about the resilience of the tanker market, which had been supported by U.S. exports, which is shown as being particularly strong during February. Fast-forward to April and May, and both of these key export markets, when combined together, saw around 800,000 barrels per day of a reduction in cargoes. This was a difficult headwind for the large tanker market to withstand.
This challenging market was faced by all operators over Q2 and was exacerbated by the fact that we had 18 new VLCCs, or nearly 3% fleet growth, also hitting the market and the trading market at the same time during Q2. As slide seven also shows, as we exited Q2, it is encouraging to see growth returning in both of these segments. We now move on to slide eight, and some more optimistic noises coming from the contracting side in the tanker space. This chart shows the rolling 12-month run rate of confirmed orders of VLCCs according to Clarksons. As the chart makes clear, ordering has dropped to very low levels, with only 20 VLCCs being ordered over the last 12 months to the end of July. There are two factors to believe that this trend for reduced ordering is likely to persist.
Firstly, unlike Q4 2016, when the contracting run rate was last at these low levels, the regulatory and environmental background is far more demanding. Emission restrictions and targets going forward were not in place in 2016, the propulsion system used for tankers going forward will be a key consideration for any ordering that goes in place going forward. This should, in theory, restrict the level of ordering that we should see, given the higher cost involved. Secondly, with consensus forecasts for peak oil demand focused between 2030 and 2035, ordering a VLCC today with delivery in two years' time implies all ship owners need to be very careful in considering any contracting decisions.
Moving on to slide nine, what we wanted to talk about here is a more market discussion on what the potential disruption can be from the consequence of large-scale retrofitting of scrubbers, in particular, during Q4. Slide nine illustrates the disruption is very back-end loaded and focused on Q4 in particular. According to Clarksons, 73.5 VLCC equivalents will leave the operational fleet to retrofit during Q4 alone. That is split 55 VLCCs and 37 Suezmax. Depending on the amount of time taken to reposition and retrofit scrubbers to these ships, this could see the global available fleet days in both of these sectors reduced by around about 3%-5% during Q4 alone.
This disruption, whilst only temporary, has yet to really impact on our market, but it's important to highlight the potential scale of this factor, which will reduce the size of the global tanker fleet available at the very same time as seasonal demand will peak. With that, I now pass back to Hugo De Stoop to talk through the outlook slide on slide 10. Back to you, Hugo.
Thank you, Brian. We maintain our constructive stance on the tanker cycle into the next winter but keep our traffic lights unchanged for now. Oil demand forecasts have been reducing in recent months but remain ahead of the long-term trend, and vessel supply will remain elevated through to early 2020, but then will reduce. However, the tanker market should really start to see the impact of IMO 2020 regulations starting to bite in Q4, and longer-term positive drivers like the U.S. crude exports remain well supported. We were encouraged last week by Enterprise Products SPOT offshore terminal getting financing approval. This terminal will be able to load two VLCCs at the same time when it becomes operational. With that, I conclude our prepared remarks, and I pass back to the operator for the questions. 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 from the question queue, please press star then two. Please limit yourself to one question and one follow-up. If you have additional questions, you may re-enter the question queue. The first question comes from Jon Chappell of Evercore. Please go ahead.
Thank you. Good afternoon, guys.
Hi, Jon.
Hugo, first question is on operating strategy. You've laid out a very favorable near-term outlook, which is consistent with prior calls and with our views as well. It seems that there's been maybe a bit of a disconnect in the spot rate environment today and some of the time charter rate environment. Quick two-parter. One, is there a liquid time charter market for one to three-year charters? Two, would you be willing to give up some, maybe leverage, given the size of your fleet, to maybe lock in some of that arb that seems to exist between the time charter market and the spot market today?
Yeah. Thank you very much for the question. First of all, it's true that we are a little bit disappointed that some of the rates we had booked for Q3 are still at a low level. We expect the market to turn. As a matter of fact, it has already started to turn modestly, and we hope that the trend will continue to improve as we get nearer to the winter. We certainly see some refineries coming back after much longer preparation or maintenance program than usual. As far as the time charter market is concerned, it was a little bit strange what happened because maybe a month or two ago, we saw a number of players coming into the market and trying to lock in a lot of tonnage at what we thought were still very low rates, compared to what we expect to have, and only for one year.
You were being asked to give up what you expect to see in the stock market for something that was in the early 30s, between $30,000, $32,000, maybe $33,000. That didn't go well. I think very few owners accepted that, and certainly Euronav was not there to propose any ships. After that, we saw, again, a lot of activity at more elevated levels. That got confirmed by the ship owner side, and then for some reasons, nothing was lifted on the chartering side, and that's very unusual. It was in particular one oil company. During that activity that I would describe as chaotic, and I think that both sides of the market are looking at each other and trying to find a common ground. You had a few, but not many more than a few, time charter above 35, 36.
We booked one at $37.5 for one year. Finally, to answer your question comprehensively, we're not there to do a lot of ships, but obviously, when you see volume like that, and you have three or 43 VLCCs, it doesn't hurt to book a few ships at those levels. At the moment, we have four VLCCs that are on time charter at either nice fixed levels or at levels that includes a profit sharing, for which we will benefit from any market uplift.
Okay. That's it. Helpful information. Second question is along the same lines, different as it relates to capital allocation. You were pretty aggressive with the share buyback over the last three quarters. The price is all consistently in the mid to high $8s. You're sub $8 now. You've said there's some disappointment early part of this quarter. There's obviously greater geopolitical macro risks today than there were three quarters ago, let alone one quarter ago. How do you think about the share buyback when you're balancing your robust liquidity versus maybe some of the risks that are more difficult to handicap in the bigger picture?
I think we take a very opportunistic view, and if you look at what we have done, starting on 18 December, and in the first quarter, that was probably $1 lower than what we have done more recently, which confirms that despite the fact that we are seeing a lot of noise in the background, we continue to believe in the macro story as far as the tanker market is concerned. I think that we need to balance a little bit our acts between share buyback, and the dividends. At the moment, we are distributing still the minimum dividend that we have confirmed. We hope to be able to distribute more dividends when we return to profits, and hopefully that will come soon. Again, we certainly don't have the intention to issue a buyback program.
I think we are very opportunistic when we do it, and we have consistently done that way below what we see as our NAV, which means that de facto, we are creating value for our shareholders, certainly for the long-term shareholders. Can't really tell you when we will continue the buyback, but again, opportunistically, and when we see a share price diving, I think that you can expect us to react in one way or another.
The next question is from Amit Mehrotra of Deutsche Bank. Please go ahead.
Yeah, thanks, operator. Hi, Hugo. I just wanted to ask around the logistics around using the low sulfur fuel that you're currently storing in one of the two ULCCs. There were some reports that you're repositioning one of them, I think moving to Spain, then parking in Malaysia. Can you just give a little bit more color around that and then what the strategy is for the fuel, with respect to IMO 2020, your ability to kind of easily utilize those stockpiles, so to speak?
Yeah. Hi, Amit. Thanks for the question. I know that my answer will be a little bit frustrating for you or for the other guys on the call. If you read the press release, we have decided to communicate separately on what we do as far as compliant fuel is concerned, or any fuel that we have stored on that vessel, where it will be positioned, how we intend to utilize it, and for how long, and what we'll do in the future. If you allow me, I would prefer to defer those questions to September 5th, which is not too far away, and by then, we will have a more detailed call and a webinar talking about all those issues and our strategy when it comes to compliance generally 2020.
Okay, that's fair. Let me just ask about the relationship with the international pool. Just trying to understand. I know I asked a couple quarters ago, and that was something that the team was working on in terms of figuring out how the economics of that would work. Could you just talk about that, given some vessels in that pool might have scrubbers, some might not, and the economics in terms of TCE rates might be different. Just help us think about what that will look like going forward.
Yeah, absolutely. We are redrafting the pool rules as we speak. Basically, the pool will continue to form one pool, but we'll have two separate sets of accounts, one for the ships equipped with scrubbers and one for the ones that are not using or being equipped with scrubbers. That's the simplest way to be fair to both parties, because it's almost impossible to predict the pricing of each fuel, and therefore it's impossible to assign pool points to each different type of vessels. The easiest is to go with two separate accounting ways, but as far as marketability of the vessels are concerned, that will still be done by the pool as a uniform desk that will assign each ship on each trade.
The next question is from Christian Wetherbee of Citigroup. Please go ahead.
Hi, guys. James on for Chris. Wanted to ask about, basically slide seven. I wanted to get a sense of what your current expectations of U.S. Gulf Coast exports for the rest of the year were, and try to get a sense of how much of a rebound or how much growth in those exports is driving your expectations for a rate rebound across the back half of the year.
Well, James, maybe it's Brian Gallagher. Let me jump in. Hugo, do you want to go?
No, no. Go ahead.
Yeah. It's a very difficult number to get some accuracy on because obviously there's quite a range of facilities which are coming on and the pipelines which are feeding them. We've been making a working assumption, and you can go back to our presentations, that there's going to be at least another 1 to 1.5 million barrels a day of additional export capacity come on stream during the second half of this year. Of course, that has the effect of stretching the world fleet because there's obviously only one way to go out from that U.S. Gulf Coast exit, and that's to go long haul either to Europe or to the Far East. You can't go through the Panama Canal. We think that's a key driver.
Again, I'd refer you to, again, back to our presentation, where we give a ready reckoner in terms of where that demand will feed in. 1 million barrels a day is roughly equivalent to 30 VLCCs. That would obviously be a slightly higher number and multiplier effect coming through from the longer ton-miles that U.S. crude exports would follow. This is a difficult number to accurately estimate simply on the basis of there's so many different moving parts and different owners of those pipelines and export facilities. As Hugo said in the prepared remarks, we're very encouraged that last week we had the first financing or sign-off of a financing of one of these export terminals.
We don't see any reason why over the next two to three years we shouldn't see that trajectory rise to a capacity of somewhere between seven and eight million barrels a day.
I would just add to that, James, that every increase in production in the U.S., as long as it gets to the coast and to the Gulf, gets exported. It's not for usage or storage locally, which obviously for shipping is very important because it means that any increase that we see there will benefit shipping in general and probably the large size vessels in particular, if it's destined to a long distance.
Got it. Thank you for the color. Wanted to also ask about VLCC ordering. You pointed out that it's at a low level and likely to remain low for the foreseeable future. When might you reenter that, and possibly when do you think it'll, just broadly as a market, might come off the bottom?
It's a very good question. Well, first of all, I think the last VLCC, well, I know that the last VLCC we took delivery of was in 2012. The last VLCC we ordered was probably in 2009. That seems a long time away. Since then, we've continued to grow the fleet by buying secondhand and from time to time secondhand contracts, i.e., people who had ordered their ships and were not in position to take delivery of or didn't want to take delivery of, and were selling those contracts in the market that we picked up. Returning to the market is a big word, but I would therefore comment on what we see generally speaking in the market.
I think that with the IMO 2050 now, which is about the decarbonization of shipping in general, I think that people need to be very brave to go and order a conventional VLCC today. The life of such a ship is 25 years. If the life of such a ship is 25 years, it means that with a delivery probably in 2021 or 2022, you're going to have that ship in operation by 2047, very close to 2050. By 2050 you need to reduce the carbon emission of the entire market by 50%, which means that the ships that are still in existence at that point in time will probably be carbon neutral, i.e., they don't produce any CO2. Or they have largely reduced their emissions, i.e., they will consume probably 70% or 80% less than what they consume today.
Obviously, one of the solutions, certainly a transition solution, is to shift the fuel type that you are using. There is much talk about, in the market, of LNG. It's fair to say that the yards are extremely active marketing those VLCC, dual-fuel LNG, and conventional fuel vessels. They come at a price at the moment, and the price is much higher than if you were to order a conventional VLCC. The owners in general, and Euronav in particular, are certainly two minds. If it comes to ordering or buying a new VLCC, you're obviously thinking about what's going to happen in the next 10, 15, 20 years. Unfortunately, that's the horizon that we need to think about. Therefore, we don't see a lot of owners, even the speculators, to go to shipyards and order conventional ships.
We need for the price of the dual-fuel ships or the LNG-propelled ships to come down before you can go and place an order.
The next question is from Gregory Lewis of BTIG. Please go ahead.
Yes. Thank you, and good afternoon.
Hi, Greg.
Hi. Hugo, realizing a few days doesn't make a trend, could you talk a little bit about the strength that we've been seeing in the VLCC market over the last couple of days?
Yeah, absolutely. As you said, a few days doesn't make a trend, obviously it's going into the right direction, both in terms of rates and in terms of time that passes. First of all, we're getting nearer and nearer to the winter. I know it feels like the summer, but that's how people behave. Then, of course, we are seeing more activity, far more activity, in fact, which means that the refineries are coming back after a longer maintenance, as we said in the earlier remarks. When you see more activity, I think it used to differentiate different markets. At the moment, we have seen more activities in the Atlantic, not yet in the Middle East. I think it's fair to say that owners are maybe a little bit reluctant when it comes to the Middle East.
As far as we are concerned, we continue to go there on a regular basis. Obviously, we're taking a lot of precautionary measures, and the market in the Middle East has not picked up yet, so it's much more in the Atlantic, and we hope that the rest of the Middle East will go up as well. It's too early to see a big trend, but it's very encouraging. As Brian said, answering your previous questions on the amount of oil that will be available for export, we are pretty convinced that all of that oil will go long distance, and potentially will replace some of the oil coming from the Middle East, which is very good for ton-miles.
Okay, perfect. Thank you very much.
Thank you.
If you have a question, please press star then one. The next question comes from Randy Giveans of Jefferies. Please go ahead.
Howdy, gentlemen. How's it going?
Yes, very well. You, Randy?
Good. All right. Following the sale of the VK Eddie, you still have, I guess, one VLCC built in 2005, five Suezmaxes over 15 years of age. First, what was the sales price for the VK Eddie? Second, do you plan on selling these remaining older vessels in the coming months or operating them in 2020?
Okay. The VK, you're right, 2005 vintage. The TI Hellas is the other one that is a 2005 vintage. The VK Eddie price was $38 million sales, significantly higher than what you can see as market values or at least the market values as presented by the brokers.
Right.
Means one thing, and that is that we are very opportunistic when it comes to sales, especially as we feel the market will pick up in terms of the spot rate, which in turn should have an impact on the values of the vessels. We're not here yet to sell many ships at the present levels. If we were to see higher values, obviously the first candidates that would go would be the ships that you name, i.e., the Hellas when it comes to VLCCs, and the three Suezmax that are at or slightly above 15 years of age. Absolutely.
Sure. That's a pretty solid sales price. Okay. I guess one more question. As you mentioned, in the first half of the year, you repurchased, I guess, $29 million of stock. Additionally, on slide six, you have over $800 million in liquidity, and that's not including the $50 million tapped issue of the Euronav bonds. That being said, why borrow that $50 million at almost 750 basis points? I know the cost is a little less, as it was priced at a premium to par. I'm just trying to figure out why the additional $50 million in proceeds was tapped.
Yeah, that's for strategic reasons. We are constantly in the market, as you know, and we are in all sorts of markets. We're looking at the bond market, we're looking at the straight bank financing market, we're looking at the sale -and -lease back market. We always try to compare the different cost of capital. If you try to strip the bond into an equivalent bank financing, we obviously have to add to the bank financing the features of the bond, which are that you're paying a bullet, you're unsecured, and you are completely fixed in terms of interest rate, even though I know that the market probably expects the rates to come off. Those are the three features that you need to compare to. Then you are only slightly more expensive than bank financing.
I think for a company of the size of Euronav, it's very important to diversify its source of capital in general, in particular, the source of debt. As we are talking to the banks, and as we have a relatively large balance sheet, we're seeing the first signals that some of the banks that we are using or that we've been working with for many, many years are slowly but surely reaching their limits on counterparties. It has nothing to do with the creditworthiness of Euronav, it has to do with credit limits that they have overall in the market and cannot be exposed over a certain amount to a particular party. We're not there yet, but we can feel the first signs of that. We are trying to be very prudent and therefore decide to tap the bond.
The second reason why we tapped the bond is, when you look at the bond market, you can split it in different segments. The higher or the bigger the size of the bond, the better the marketability it can go on. $200 million was sort of always a target. We had raised initially $150 million. That was before the January transaction. I think we're now bigger, obviously. We wanted to reach $200 million. When we will refinance that bond in two and a half, three years down the road, it should be easier because we should be able to tap a bigger pool of investors, when it comes to unsecured bond, high-yield bonds. That explains what we have done there.
I would say that the overall pool of liquidity that we have, you understand that there's a part of cash, there's a part of that is parked on revolving credit line, which are committed for a number of years. There is a little bit of commercial paper, which is more short-term, then there is the bond. I think that as we can never predict what sort of market is awaiting for us, we have decided to have a policy of having around 50% leverage, then the liquidity that will enable us to operate for at least two years, in any sort of market. Obviously, what is in excess of that can be used on any sort of transaction where we like to act relatively promptly. You may remember that we snapped the Maersk fleet in just over two weeks.
You better have that liquidity available. When it comes to Gener8, I think it's fair to say that process was a little bit longer, but reaching the terms of the agreement was much shorter than closing the deal, I would say, with all the regulation and the public requirements that we had. It was also a transaction that we executed fairly quickly because we had the comfort of the liquidity that we had at that time.
This concludes our question and answer session. I would like to turn the conference back over to Hugo De Stoop for closing remarks.
Well, thank you everyone for your availability. We look forward to speaking to you on September the fifth, where we will have a special webinar about what we will do in terms of preparation IMO 2020, and the amount of fuel that we have accumulated and the price at which we accumulated it. Yeah, that's it for us today. Thank you very much, and talk to you soon.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.