Earnings Call: Q2 2021

Aug 30, 2021

Welcome to Hafnia's Second Quarter 2021 Financial Results Presentation. We will begin shortly. He will be brought through the presentation by Apnea's CEO, Michael Scott CFO, Peri Van Ecktelt EVP, Commercial, Jens Christoffersen and EVP, Head of Investor Relations, Thomas Anderson. They will be pleased to address any questions after the presentation. Should you have any questions, you can submit them via the chat function For you, the raise hand function could be unmuted to ask your question verbally. Questions will be answered at the end of the presentation. You will receive further instructions as required. Certain statements in this conference call may constitute forward looking statements based upon management's current expectations and include known and unknown risks, uncertainties and other factors, many of which Apnea is unable to predict or control that may cause Apnea's actual results, performance for plans to differ materially from any future results, performance or plans expressed or implied by such forward looking statements. In addition, nothing in this conference call constitutes an offer to purchase or sell or a solicitation of an offer to purchase or sell any securities. With that, I am now pleased to turn the call over to Hafnia's CEO, Michael Scott. Thank you. My name is Michael Scoff, and I'm the CEO of Hafner. Let me welcome you to our Q2 2021 conference call. Along with me today, I have our CFO, Peri Van Eckthild Our Executive Vice President, Commercial, Jens Christoffersen and Executive Vice President and Head of Investor Relations, Thomas Anderson. The 4 of us will present the Q2 2021 financials for Hafner. Before we go into details for the Q2, I would like to take this opportunity to express my deep gratitude to all Hafner employees, both at Sea and Ashore, For their exceptional efforts during these challenging times and stress that we will continue to prioritize our employees' health and well-being, So we can continue to serve the world and live up to our mission to be best on water. I would also like to highlight that you should all be aware of the mandatory disclaimer, which I would urge you all to read. Moving to Slide number 4. So let me begin by introducing Hafnia. Hafnia is a shipowner operating across all product tanker segments, Providing marine transportation of refined products. We are a fully integrated shipping platform with 100% alignment of interests Across all segments and without any fee leakage. We are headquartered in Singapore with offices in 3 other key shipping hubs, namely Houston, Copenhagen and Mumbai. We are listed on Oslo Stock Exchange under the ticker code Hafme. We own or have chartered in a diversified portfolio of 98 vessels across 4 product tanker segments and commercially manage an additional 86 vessels, bringing us to a total of 184 vessels under commercial management. As a fully integrated shipping platform, we also have our own in house technical management and bunker team. Our technical management team ensures that the highest safety and environmental standards are maintained on board In our Bunkering business, we are now buying Bunka for more than 4 50 vessels, including 3rd party clients. Fee revenue from our commercial management, bunkering business and technical management have been strong and consistent. Based on this success, we will continue to develop our adjacent business in years to come. In Hafnier, we have focused on our carbon footprint. And in 2020, across Hafnier's own fleet, Our carbon intensity was 5.7 grams per tonne nautical mile, 5.6% below the present IMO baseline. This progress is in line with our goal of reaching IMO 2030's target of 4.47 grams per tonne nautical mile already by 2028. Standard vessel optimization efforts to reduce emission to air We'll be supplemented with additional initiatives such as intermittent haul cleaning. In addition, we are working with data from vessel based sensors via smart ship from Alpha Ori and vessel optimization to reduce fuel consumption. We also have ongoing fuel charter for new and innovative alternate fuels. Slide number 5. Due to the global economic conditions, The product tanker market remained weakened in the Q2. Lockdowns around the world impacted by COVID-nineteen variants Continue to impede the rate of recovery for oil demand. Markets in the West, such as U. S. And Europe, Continue to see improvements in vaccination rates, which led to stronger mobility and oil demand. Overall, the outlook remains optimistic as global inventory overhang is going down to below 5 year average, leading to oil prices recovery. The Q2 has been eventful for Hafnia. And in the beginning of the Q3, we signed $100,000,000 unsecured term loan And revolving credit facility for our Poons concluded a 50% joint venture With Andromeda for 2 MR newbuilds chartered out on 5 year contracts and we exercised an option Held in our joint venture, Vistra Shipping, for 2 LNG dual fuel LR2 tankers. Lastly, in line with our planned fleet renewal, we've sold 1 additional older LR1 vessel, the BW Amazon. Let me now bring you through some key financial metrics for Hafner's 2nd quarter. For the quarter, we achieved a TCE income of $101,600,000 And an EBITDA of $37,900,000 This corresponds to a TCE income of $201,600,000 And an EBITDA of $75,000,000 for the first half of twenty twenty one. Following a difficult quarter for the product tanker market, we recorded a net loss of $11,200,000 for the quarter. We will pay no dividends for the Q2 of 2021. Moving to Slide number 6. Let me now elaborate more on the key events during the quarter. As previously mentioned, we have in July concluded a joint venture agreement with Andromeda Ship Holdings. Jointly, We have set up a fifty-fifty old Chipotle company named HNA Shipping Limited. The joint company has acquired All the shares previously owned by Andromeda in Yellow Star Shipping and Green Star Shipping, which each owns The Hyundai Mipo Dockyard MR Newbuild. The first vessel, the Yellow Stars, was delivered from the shipyard on the 30th July 2021. The 2nd vessel, M2 PSDARS, Will be delivered from the shipyard on the 30th January 2022. Both vessels are chartered out on 5 year contracts. Additionally, in May, we have exercised an option held in our Vistachon venture The 2 additional LNG dual fuel LR2 tankers with dual fuel high pressure LNG engines To be constructed at the Guangzhou Shipyard International in China at a price of $59,000,000 This high pressure LNG engines release 97% less methane Then a standard low pressure LNG engine. The fuel system on board have been prepared for future CO2 neutral fuel with some engine modifications to be amended. The vessels are scheduled to be delivered in 2023 2024 respectively. Vista Shipping will now own 4 sister vessels of this type. At delivery, the vessels will be chartered out for 5 years to an oil major at attractive rates. Perry, why don't you talk us through the financials in more detail? Thanks, Michael. The Q2 mentioned by Michael already was faced by pressure from continued weak oil demand as a result of COVID-nineteen variance And lockdowns from around the world. This combined with lower rates and a write off of $1,300,000 on assets held for sale Resulted in a net loss of $11,200,000 for the quarter $26,900,000 for the 1st 6 months of the year. Despite this, a positive outlook for the later part of 2021 is maintained on the back of accelerated vaccination programs in major economies. We anticipate social distancing measures to ease as the year progresses and this would increase mobility, which translates into higher demand for transport fuels. Income from the management of 3rd party vessels and buying bunker on behalf of third party clients was $5,400,000 for the Q2 $10,000,000 for the first half of the year. Economics of the pool earnings will be explained later. For the quarter, we saw a return on equity of negative 3.9 percent and a return on invested capital or ROIC of minus 0.3%. The balance sheet remains strong with an equity ratio of 46.2%, a cash position of $86,000,000 and a total liquidity position of more than $100,000,000 At the end of the quarter, Hafnia had a total of 98 vessels, Of which 85 owned vessels and 13 vessels chartered in. The average estimated broker value of the owned fleet Was just over $2,000,000,000 as of the 30th June 2021. If we then move to the next slide. For the quarter, we saw TCE of an average of $12,400 per day across the fleet, Totaling $101,600,000 for the quarter. This can be further divided into the key sectors that we operate in. So the TCE was based on 8,200 earning days, making $21,832 per day on the LR2 vessels, $10,825 per day on the LR1 vessels, dollars 12,680 per day in the MR segment And $10,549 per day in the Handy segment. OpEx, which includes our vessel running costs and technical management fees, Was $53,400,000 this quarter, which results to an average of $7,054 per day. The OpEx was based on 7,566 calendar days with $7,063 per day on the LR2 vessels, $7,354 per day on the LR1 vessels, dollars 6,939 per day of the non POOL Panamax vessels, Adjusted for the 2 vessels that were sold and then the OpEx will be $6,754 per day and then 7,000 and $49 per day in the MR segment and $6,592 in the Handy segment. G and A expenses on our own fleet per day for the quarter was $9.27 per day and on the graph on the bottom right, We project our full year OPEBs per day to be $6,867 per day and a G and A per day of 9.48 Moving on to the next slide. Again, let me explain a bit about the pool economics by highlighting that we generated $5,400,000 per day in fee income for the Q2 and this is adjusted for our own fleet. This includes pool fees, bunker services And technical management. As an introduction, Hafnia currently operates a fleet of 184 vessels, including newbuild and vessels chartered Out on long term charter contracts in the 4 pools. They range from the largest product tankers to small specialized chemical tankers of under 20,000 deadweight ton. Our highly specialized and dedicated chartering and commercial departments are responsible for developing, marketing and negotiating all contracts for vessels that the pools operate. The diagram on the left shows key features of our pool economics. Firstly, Hafner receives pool management commission in the form of a fixed fee and a percentage of all net pool income. For LR, MR and Handy Pools, we charge a fixed fee of $2.50 per day per vessel and 2.25 percent of net For the specialized pool, it is further divided into 3 sub pools, Where the small and city is charged a fixed fee of $300 per day and 3 percent of net TCE earnings, while the intermediate size carries A fixed fee of $2.75 per day and 2.75 percent of net TCE earnings. Working capital upon entering the pool also ranges across the different sectors. We have been working on lowering our working capital deposit requirements And as of July 2021, the working capital deposit has been lowered to $300,000 for the Handy Pool, $750,000 for the LR pool and $600,000 $1,000,000 respectively before. Pool earnings distribution occurs twice a month. The pool follows a basic pool point distribution based on 2 core performance variables, Fuel and time. As you can see, the number of commercially managed vessels in our port pools have been steadily increasing over the past years. With this success, we will continue to invest in our commercial platform to increase the service level and build scale in the pools through adding external vessels with the right pool partners. Mikael will now present the next page before Jens guides us through the commercial developments. So we see 6 important reasons why Hafner is one of the leading products in the companies. It's around best commercial performance, the lowest operating cost, the lowest cost of funding, $10,000,000 in revenue from the pools in the first half of twenty twenty one, a strong focus on ESG And finally, an expected post COVID-nineteen rebound in demand. So before Jens takes us through the review and outlook for the product tanker market, Let me just elaborate on these key differentiators for HAFMEA. So if we start on top and focus on best commercial performance. Over the years, we constantly benchmark ourselves against our peers to evaluate our commercial performance. Looking at these so called apples to apples benchmarks, we are at the absolute top in all our segments. This spirit of excellence is the result of the quality of our daily commercial decision making and constantly improving our understanding of the product tanker market And a constant drive to benefit from economy of scale from operating a large fleet. Continued focus to have the lowest operating and funding costs. Our operational cash flow breakeven Was $13,288 per day for the quarter. Our industry leading financing costs, solid balance sheet And low G and A expenses are also key contributors to our competitiveness. The graph on the right further reinforces this. For the Q2 of 2021, we benchmarked some key metrics against our peers and we can see that HOPKIA stands out from the rest in all segments. $10,000,000 in fee revenue generated by our pool and bunker operations in the first half of twenty twenty one. We plan to expand these businesses further by adding more vessels to existing teams and by focusing on new segments. A clear ESG profile. As a leading shipping company, Hafner's goal is to keep providing safe, sustainable And efficient hydrocarbon transportation solutions, thereby contributing to the shipping industry's efforts to reduce environmental impact. We are actively seeking any initiatives or vessel optimization measures that will help to reduce our carbon footprint. So finally, on the post COVID-nineteen rebounding demand. While the challenging economic climate Led to lower oil consumption and lowered rates, we believe that the product tanker market will lead the recovery in the post COVID-nineteen rebound of the oil market, Due mainly to increasing demand for refined products and a low order book of product tankers. Before I give the word to Jens that will discuss the market in detail, I would like to highlight that the market east of Suez has improved significantly in August It's now at $17,000 per day for LR1 vessels and $15,000 per day for MR vessels, While the western market for LR1 and MR vessels are around $7,500 per day $8,000 per day respectively. In addition, I would like to stress that the global oil inventories are at low levels And copper volumes and tonne miles in July 2021 was close to July 2019 levels. Global oil consumption is now above 96,000,000 barrels per day, and we expect that oil consumption is above 100,000,000 barrels Again in 2022, which in addition to the future expected buildup of inventories and new export refinery capacity Whilst more local refineries are closing, gives a positive outlook for the global productivity market. Moving slide and I'll hand it over to you Jens to go through the next few pages. Thank you, Michael. This page shows the demand for oil consumption and our expectations for the product tanker market. The product tanker market was challenging in the Q2 with COVID-nineteen variance impeding the rate of recovery for oil demand. Oil demand has been steadily increasing in the Q2 and is expected to continue rising and is expected to reach pre pandemic levels in 2022. June saw oil demand surge to 96,800,000 barrels a day as North America and Europe saw increased mobility, resulting in higher demand. However, July's demand reversed course as the rapid spread of COVID-nineteen delta variant has impaired demand in Outlook for the remainder of the year remains positive, but uncertainty over the potential global impact The Delta variant in the coming months is growing. We have already seen renewed restrictions in countries such as Australia and Japan. According to IEA, global oil demand is forecasted to rebound by 5,400,000 barrels per day from 2020 to reach 96,200,000 barrels in 2021,390,900,000 barrels in 2022. While we expect a steady recovery of oil products, this recovery will be uneven amongst different sectors. In the second quarter, LPG and ethane's use in the petrochemical sector has already surpassed pre pandemic levels and is estimated to be about 5% higher than pre pandemic levels throughout 2022. On the flip side, the aviation sector will be the last to recover as travel restrictions are likely to stay in place owing to slow reopening of orders. As a result, jet fuel and kerosene are expected to still be below pre pandemic levels in 2022. On the supply side, the global oil supply is ramping up fast to meet rising demand, largely due to OPEC plus agreeing on a new deal to unwind its output curves. In July, the world oil supply increased by 1,700,000 barrels per day month on month As Saudi Arabia ended voluntary curbs and the North Sea bounced back from maintenance. From August, OPEC plus aims to further lift output by 400,000 barrels per day a month to phase out the remainder of its cuts. This would be pivotal in restoring demand for crude tankers And thereby rebalancing tonnage supply in the clean tanker market. Storage levels are also a significant driver for the overall tanker market. We've seen a peak of 3,220,000,000 barrels last year, but have since been drawn down to 2,882,000,000 barrels at the end of June. June levels So a large drop of 50,300,000 barrels month on month after an increase of 11,200,000 barrels in May. Inventories at the end of June is 51,000,000 barrels lower than 2 years ago in June 2019 and is 66,000,000 barrels lower than the pre pandemic 2015 to 2019 average. In terms of forward demand, total industry stocks covered 62.9 days. Crude inventories fell by 34,300,000 34,300,000 to 1081,000,000 barrels in June, 161,300,000 barrels below the peak Reach in Q2 last year. This was mainly due to OECD Americas, which saw higher refinery runs in the United States. Product stocks also fell counter seasonally led by motor gasoline and middle distillate, which grew by 9,100,000 and 5,900,000 barrels, respectively. Cargo volumes for clean petroleum products have also steadily recovered from effect of the pandemic, Reaching 72,400,000 metric tons in July 2021 from 64,200,000 metric tons in July 2020. Likewise, for ton miles of clean petroleum products, it has steadily increased since 2020 to reach 243,300,000,000 Ton miles in July 2021. Moving on, in the refining sector Is expected to remain under pressure. Following a large increase of 1,600,000 barrels per day in June, Global refinery throughput slowed in July, increasing by only 800,000 barrels month on month as new waves of COVID-nineteen hindered fuel demand. However, we still expect a ramp up in refinery runs for the remainder of the year to meet a further recovery in oil in demand for oil products and to replenish product stocks. In 2022, East of Suez crude throughput is estimated to reach a new record level at almost 39,000,000 barrels a day. This will shrink the gap with the Atlantic basin to just 3,000,000 barrels a day, mainly due to the increase in China's annual average throughput rates, which reported record levels in June. There's also a continued trend of refinery closures and additions around the world. Closures tend to concentrate in Europe, the U. S. And Australia and are due to a variety of reasons Such as weak refining margins and overseas competition, which prompt refinery owners to convert refineries to oil refined products import and storage terminals. According to the IEA, global average utilization rates will only reach 78% of capacity in 2022, limiting the possibility of an increase in refinery margins from the depressed 2020 levels and remains a high likelihood of further capacity closures. At the same time, there are also many refining capacity additions and expansions And the majority of this will come from China and the Middle East, more notably, Saudi Arabia's 450,000 barrel a day plant and Kuwait's 650,000 barrels a day refinery. This combination of refinery additions and closures will have a positive impact on the product tanker demand. We can expect refining activities to cluster in regional hubs and increase seaborne volumes of refined products and ton miles. When we look at the global product tanker fleet, outlook remains positive as we expect an increased demand for oil refined products and slow vessel supply growth. From the graph on the right, you can see that seaborne trade for products is expected to increase faster than crude and drybulk in the next couple of years. Furthermore, The low order book that resulted in the lowest tanker fleet growth for the next 2 years is also interesting to note. As you can see, the product tanker order book stands at only 7% in July 2021, one of the lowest ever. Net of scrapping effect, fleet growth is expected to be less than 1% per annum for the next 2 years. With increased emissions and efficiency targets, We will continue to put pressure on older vessels, accelerating the turnover of the global fleet and slow vessel supply. We can hence expect product tanker fleet utilization to increase in the coming years. Here we see the extreme rates of the different sectors over the past 2 years with both recorded highs and recorded lows. Rates across the different segments remain below 5 year average, but with the oil consumption expected to recover in second half of twenty twenty one, Coupled with the dislocation between refinery and consumer, we expect to see a positive trend in rates 2. And now, Michael, over to you for the next few slides. Thank you for that. Moving into Slide 18. In Hafslen, we are committed to adapting to the constantly changing conditions while delivering energy to sustain the world. We have established clear and effective environmental management plans to ensure we are in full compliance with all international and local regulations, while seeking to minimize our overall environmental impact. To reduce the level of greenhouse gas emissions of the maritime industry, IMO has developed effective targets to incentivize industry players to improve the energy efficiency of the fleet. In 2020, across Hafner's own fleet, our carbon intensity as measured by annual efficiency ratio Was 5.6% below the IMO's current target. We have set a goal to reach IMO's 2,030 target A 40% reduction in carbon intensity of the fleet, 2 years in advance, I. E, by 2028. We strive to continue improving our existing vessels through small but impactful optimization measures that improve operational efficiency so that we can deliver cargoes with the lowest possible footprint. Moving on to Slide number 19. Hafner is also fully focused to upholding the highest corporate governance standards, Professionalism and business integrity across all activities. In Hafner, we have a highly reputable Board of Directors Responsible for the company's overall management, supported by a seasoned audit committee, remuneration committee And recently established nomination committee to assist in evaluating operational effectiveness and suitability, All safeguarding a best in class governance structure. Moving to Slide number 20. Looking ahead, the future remains volatile and uncertain, but we believe we are well equipped to face it. Despite uncertainty over the potential global impact of the Delta variant, we expect global economies to recover By the end of 2021, largely attributed to rising vaccination rates and easing of social distancing measures, Which will help raise mobility levels in countries, spur economic activities. We also anticipate product tankers to lead tanker market recovery Due to various demand drivers such as increased volumes of seaborne exports for refined products, dislocation between refineries and consumers Leading to increased ton mile demand and the low order book of product tanker fleet. Shilling is the backbone of the global economy and is facing increasingly pressure to decarbonize its operations. Afton will continue to strive and reduce our carbon footprint by seeking our potential innovations or collaborations to optimize our vessels operations. Lastly, we believe that further consolidation is needed within the product tanker sector. We will continue to search opportunities to fully unleash value and synergies from additional operational scale and improve our overall competitiveness. With that, I'd like to open up the call for questions. We will begin our Q and A session now. Should you wish to ask questions, you can submit them via the chat function or use the raise hand function David from SEB, you have a question, it seems. Yes. Hi. Yes, it's David from SEB. I was wondering, where you think it's driving the spread between rates in the Atlantic versus the Pacific? Tony, got you, Jens? Hi, David. It's a good question. I think if we start out What are the drivers in the Pacific Basin? There's a multiple of drivers. And to me, one of the key drivers is the distribution of MR It's between the Eastern and the Western Basins. The Eastern Basin has been very weak during Q2, and for that reason, a number of ships discounted themselves to move west, and we've actually seen a migration of about 75 MRs over the past 2 to 2.5 months. And that's a substantial amount of ships when you bear in mind that the total number of ships in the region is about 700. So tonnage supply, it always is an important thing to look at. Secondly, we've seen more moves of jet fuel from the Far East towards the U. S. These are nice long voyages, so it's good to have mild demand. And lately, we've seen more exports from the Far East after a long quiet period where, especially China did not export much. And now we've seen that Korea and Taiwan is stepping to the plate. And Actually, still today, we see diesel oil move on EMAS from the Far East towards Chile. So those are some of the main factors. Smaller factors in the area could be that ships, generally speaking, are struggling with COVID-nineteen restrictions In the sense that many ports and countries have their own rules and regulations for what they permit. And for that reason, the supply of ships can become a little bit trickier for customers out there. They cannot just pick and choose any ship. When you look at the Atlantic basin, it's of course suffering from the number of ships that has reached the basin. And in addition to that, We haven't really seen sort of significant amounts of demand in any area. We've seen quite a high refinery neutralization in the U. S. Gulf and in our view the Atlantic basin has been more balanced than the actual numbers are telling us. Thank you. And how are you positioned with your fleet Between the East and the West? On the MR side, we are tilted slightly towards the West. And on the LR side, we are almost balanced right now. Or submit it via the chat. It looks like we have another question from Erik Havelson. Yes, hi. I mean, you are renewing your fleet somewhat now with the JV investments and so on, but Maybe been a little bit surprised by no further sales of all the tonnage. What's the market like there? And what are you thinking about all those Yes. So thank you for that, Eric. So basically, our view kind of remains the same, right, that it's a constant focus of You're trying to sell all the assets, but only to see attractive prices. And we've basically been selling The best is where we felt that the pricing will be obtained was satisfactory, but there also comes a time where you feel that the spread is so high that it's actually worthwhile to And we felt at some point that we couldn't really find sufficient attractive pricing for a lot of these ships. We're still making Relatively good earnings even on older ships. So for us, it's just a reevaluation of asset value if we sell versus potential earnings. And For the time being, we've kind of sold what you've seen on the back of some of those products as being fairly okay. But strategy is still the same. So we will be looking at constantly renewing, but obviously, we always prefer to sell ships when 2nd hand prices are at visible levels. So it will just be firstly a constant strategy. We need to monitor that as we go forward. Thank you. We have come to the end of today's presentation. Thank you for attending Hapnia's Q2 2021 financial results presentation. More information on Haphnia is available online at www.haphniabw.com. Goodbye and have a good day.