Earnings Call: Q3 2020

Nov 20, 2020

Welcome to Hapnia's 3rd Quarter 2020 Financial Results Presentation. He will begin shortly. He will be brought through the presentation by Hafnia's CEO, Michael Skow CFO, 31 Eco EVP Commercial Jens Christoffer Finn and EVP Head of Investor Relations, Thomas Anderson. We will be free to address any questions after the presentation. Should you have any questions, please press star 1 on the telephone keypad or type your questions into the chat box on the website. 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. Hapneus is unable to predict or control that may cause Hapneus' actual results, performance or 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 solicitation of an offer to purchase or sell in security. With that, I'm now pleased to turn the call to Hapnia's CEO, Michael Kahl. Thank you very much for that. My name is Michael Skov, and I'm the CEO of Hafnia. And I would like to welcome you all to the Q3 2020 conference call. With me here today, I have our CFO, Per van Ecktild the EVP Commercial, Jens Christoffersen and EVP Head of Investor Relations, Thomas Anderson. The 4 of us will present the 2023rd quarter financials for Hafner. Moving on to Slide number 2. Please have a follow-up of the mandatory disclaimer and make sure that you have better understood it. Moving forward, the short agenda that shows what we're going to go through today. We will go through the Q3 highlights and overview. We will then talk a little bit about our view on industry and the market in general and end up with a governance and USG overview for half year as well. So with that, let's move to Slide number 5, which deals with the highlights from the Q3. So the 1st 9 months of 2020 been among the most extreme periods in the product tanker space, and I'm pleased that Hafsa delivered the best third quarter result in the last 4 years with a small positive result. However, due to COVID-nineteen, we're now all living with confinement restrictions leading to demand destruction and weak economic fundamentals. This negatively impacts our short to medium term market outlook. We're very proud of having established the Houghtonia Specialized Pool, adding an additional pillar our successful pool management business. In addition to that, we have, together with a strategic joint venture partner, invested in a methanol project, exemplifying our strategy to look at sustainable and modern shipping technologies as well as securing long term transportation contracts at guaranteed rates. In our Vista joint venture, we have invested in 2 dual fuel LR2 vessels that are chartered out to Total on long term contracts. Finally, we have sold the LR1 vessel, HAFNI America, for $11,600,000 and the vessel was delivered earlier this week. I would very much like to thank all our employees, both at Sea and the Shore, for their extraordinary efforts during these challenging times and stress that the priority for Hafner will always be the health and safety of our employees. Moving into the highlights of the 3rd quarter financials. The time charter equivalent earnings for HAFNIA was $118,500,000 for the quarter $518,900,000 for year to date. EBITDA was $51,700,000 for the quarter $327,200,000 year to date. The commercially managed pool and bunker business generated an income of $5,200,000 for the quarter and $18,500,000 year to date. In Q3, we achieved a net profit of $400,000 and our net profit for the 1st 9 months of 2020 amounts to $175,200,000 Hovne has invested $10,000,000 together with a strategic joint venture partner for 3.33 percent of a pre FID methanol project converting regionally sourced natural gas to methanol with a 3,600,000 tons per annum production capacity, of which the joint venture will be transporting 1 third on 19 year contracts. In addition to investing in the methanol plant, the joint venture will be building the vessels, transporting their share of the methanol. The exact vessel composition is still under negotiation. The investment shows the focus we as a company have on long term contracts and alternative fuel vessels being LNG, methanol or ammonia. Jens, why don't you talk us through the market on the 3rd Q4? Thank you. Thank you, Michael. Overall, 1st product tanker earnings in Q3 2020 were attributed to a weak oil product demand, low refinery utilization from new refinery margins and the buildup of active tonnage supply from the steady unwinding of vessels which were in floating storage. Oil demand has recovered throughout the quarter from its lows during Q2 2020 but continues to remain below 2019 levels whilst the fleet supply grows gradually. The bottomsanger market in the West outperformed the East during Q3, mainly driven by lower tonnage supply and good U. S. Gulf demand. Tonnage supply had migrated west to east during Q2 and could not find its way back to the west due to the scarcity of the usual jet and diesel trade, which under normal circumstances would bring tonnage from east to west. Faroe tankers in the east faced fierce competition from VLCCs and Sewer's MAXs newbuildings in the face of a weak crude tanker market. The U. S. Gulf market demonstrated strength during the beginning of Q3 as refineries increased production by more than 2,000,000 barrels per day towards the end of June. The increased refinery production caused the freight market to rise significantly until mid August when low refinery margins and the occurrence of hurricanes reduced refinery production significantly. Given the challenging market environment, we're satisfied with our TCE earnings of $27,702 per day for the LR2 segment, dollars 14,698 per day for the LR1 segment, dollars 12,709 per day for the MR segment and $10,399 per day for the Handy segment. On Slide 7, the product tanker market in Q4 2020 so far has been an extension of the suppressed market in Q3 2020. Oil demand continues to be weak on the back of the 2nd wave of coronavirus, particularly in the West. Similarly, the product tanker market outlook at present remains somewhat bearish in the short term due to the surging second wave of the pandemic in the West. However, current positive trends and drawdowns of product and crude oil inventories look likely to continue for the rest of 2020 and into early 2021, and while vessels will unwind from floating storage. This development was expected, and it is part of the road towards a more sustainable market environment. Winter seasonality is expected to have a positive impact on the product tanker market, which we continue to consider reasonably balanced as we register trade volatility despite the general suppressed earnings levels. Specifically to the Handy segment, the clean Handy markets in Europe suffered from low demand, and dirty markets have fared marginally better. The average quarter to date earnings in Q4 are approximately $10,000 a day, with current average earnings of $8,000 to $10,000 a day. The MR segment. MR rates east of Suez have improved marginally during Q4 as a result of improved oil demand. Western markets have suffered from lower oil demand and continue to be seasonally weak. The average quarter to date earnings so fast been approximately $11,000 a day, with current average MR earnings of $10,000 to $11,000 a day. In the LR1 segment, LR1 rates in the East have gradually picked up as a result of improved oil demand and higher Chinese exports. Western markets are suffering from low oil demand driven by COVID-nineteen. The average quarter to date earnings for the LR so far has been approximately $13,000 per day with the current average spot market of $13,000 to $15,000 a day. Bonkers, which make up a significant cost, a part of our expenses. In the first half of Q4 twenty twenty, the spread between high sulfur fuel oil and low sulfur fuel oil narrowed to $65 per metric ton. The spread for 2021 is currently $75 per metric ton. So we still don't see any economic incentive for scrubber investment in medium sized product tankers. Harry, why don't you take the next few slides? Yes. Thanks, Jens, and good day, everyone. If we move to Page 8 for the financial summary. As Michael correctly said, we managed to get a small profit of $400,000 in the 3rd quarter compared to a loss of $10,600,000 the same time last year. We feel that we got a very good result of a net profit of $175,200,000 for the 1st 9 months of the year. Furthermore, the income from the management of 3rd party vessels and buying bunker on behalf of 3rd party clients is $5,200,000 in the Q3 of 2020 $18,500,000 for the 1st 9 months of 2020. I will explain more about the economics of the pools later on the next page. The efforts resulted in an annualized return on equity of 20.4% year to date and an annualized return on invested capital of 12.3% for the same period. The balance sheet remains strong with an equity ratio of 45 percent and a cash position of $123,000,000 by the end of the Q3. And in terms of the maturity profile of our debt facilities, most of the refinancing has been done last year, and we don't have any major maturity until 2022 and continue to have strong access to the banking environment. With the substantially reduced interest rates for U. S. Dollar financing, we have also gradually increased our interest rate hedging to lock in lower interest rates to match the tenure of our debt profile. For the quarter, we will not pay any dividend. The average estimated broker value of the owned fleet was $1,950,000,000 as of the 30th September of 2020. And at the end of the quarter, Hafkin had a total of 103 vessels, of which 87 are owned and 16 are chartered in. If you then move to the next page, I'll explain a little bit more about the pool economics by highlighting that the pool business generated, as I said, dollars 5,200,000 in the 3rd quarter, dollars 18 point $5,000,000 for the 1st 9 months of 2020. And the economics works as such that ships that run-in the different pools are paying a fixed and a variable fee. The fixed fee is $2.50 per vessel per day and on top of that, a 2.25 percent of net time charter earnings made by the vessel in the pool. So as an example where a vessel makes $20,000 per day, Avian will earn $2.50 fixed fee for the day, plus $4.50 totaling $700 per day. The fixed fee itself basically covers the fixed cost of running the pool for external vessels. So the variable fee is on top of the fixed fee, which you could see as a profit. So based on a fleet of approximately 80 externally managed vessels and a TCE higher of $20,000 per day would give Hafnia an income of $30,000,000 before tax on an annual Michael will now present the next page, Page 10. Michael? Yes. So moving on to Slide number 10. Just going through some of the highlights of Hafnia and why we see Hafnia as being one of the leading products and other companies on a global basis. It is mainly due to having the best commercial platform. It is due to the lowest operating cost that we have as a business as well, the lowest cost of funding, the previously mentioned $18,500,000 in earnings for the 1st 9 months from pools and other fee generating activities a very strong focus on ESG and renewals in general, with dual fuel, LNG, methanol and ammonia and as well a stronger market fundamental medium to long term when we look ahead. We have a strong earning potential with a low cash flow breakeven of $13,800 per day expected for this year 2020, a number which we expect will be reduced for 2021. We have a balanced capital structure with a targeted fleet loan to value of between 50% 60%, a very highly attractive dividend yield, potential combined with a transparent dividend policy a target dividend payout ratio of 50% of annual net profit from operations with quarterly payments Our year to date cash flow from the pool and bunker operation was generating the $18,500,000 and we have a strong focus on further expanding that business. We have in the 4th quarter sorry, in the Q3 focused on ESG, alternative fuels and long term contracts. That has resulted in our investments in the Methanol project and the dual fuel LR2 vessels. Jens will now take us through the next few pages. Thank you, Nigel. So on Page 12, we have an overview of the fleet development as we see it. And when looking at the global product tanker fleet, the order book, it's assuring that the order book is merely 6% of the global product tanker fleet. Overall, we haven't seen such a small order book in the last approximately 20 years. In our view, the order book is very much influenced by new environmental regulations that make it difficult to justify investments in newbuild capacity with today's technology, knowing that we will see some more competitive pricing on dual fuel vessels in the next 4 to 5 years. We move on to Page 13. The scrapping of older tonnage remains low for larger vessels but has picked up in recent years for AMR vessels. However, the few larger vessels that have been scrapped have, on average, been younger. For the smaller Handy segment, we definitely see some scrapping potential as the fleet is relatively old, and we have not seen any newbuild activity in recent years. We move to Page 14, which deals with floating storage. In 2020, floating storage has been a significant driver for the overall tanker market with a massive increase in capacity used for floating storage in the Q2. However, we have seen a peak in May and has by now reduced itself by approximately 100,000,000 barrels since then. As an administration, we've shown the drop in oil demand following the financial crisis in 2,008 to 20 10 versus the forecasted drop in oil demand in 2020. It is shown in the graph in the top right corner. Global oil demand declined by approximately 4,000,000 barrels per day from December 2007 to March 2009, and it's expected to drop by 17,000,000 barrels in the Q2 into 2020. The most important element to note is that the expected oil demand in 2021 will be on par with 2019 oil demand. We move to Page number 15. This page deals with stocks. Looking at oil inventories on industrial stocks in the OECD region. We take note that the growth in inventory has plateaued over the summer, and we expect that it will continue its downward strength over the winter. The most important element to watch is the inventories measured in days of consumption, which has dropped from just below 80 to just above 70 from March till September. Michael, I'll leave you to carry on with the next page. Yes. Thank you. So we're moving to Slide 16, which basically summarizes some of the highlights and the views that we have on the market for this year, but also going forward. There is no doubt, as an initial comment, that entering 2020 and before the COVID-nineteen situation, that the low order book combined with normal demand growth indicated that we were looking into a stronger period for product tankers. This has been somewhat delayed due to the COVID-nineteen, but the way we look at the market going forward is that with a pre COVID-nineteen oil demand expected to reach those levels sometime by the end of 2021. Our view is that the with an order book being as low as it is right now, we're looking into a very, very interesting combination of supply demand banners coming out of a COVID-nineteen, which is really based on assumptions that a vaccine will be available sometime midyear next year. So there's no doubt that this COVID-nineteen situation has changed expectations for 2020. And we now expect that the growth in the seaborne product demand will be negative in 2020, but partly compensated by the increased floating storage, which we saw earlier this year. As mentioned, the order book has not developed. We're still seeing a similar pattern as before that it's difficult to order new ships knowing that they will last into an area where there's uncertainty as to what type of commodities will be transported when you are thinking about a lifetime of 25 years for a vessel as a product tanker, will we expect it to have that as a life age? The increase in final ounces in the early part of 2020 and the ton mile growth is higher than free growth of 2021, the way that we see the market going forward right now. So with that, we move on to Slide number 18 to talk a little bit about the governance situation. At Hafner, we have a strong focus on the corporate governance. We have a very highly reputable Board of Directors with a seasoned audit committee, internal audits and extensive authorization metrics, remuneration committee and fully aligned incentives between management and shareholders with no fee leakage. It's all a very transparent structure and also regarding a best in class governance structure in general. So if we move to Slide 19. So as a final comment, as the world's leading product tanker company, Hafner is uniquely positioned to help create the future of responsible and transparent maritime energy transportation to world markets. Through innovation and collaboration, we commit to being a trusted partner for the businesses and communities we serve to shape our world and oceans for future generations. And we are very happy being part of Getting to Siro Coalition as part of our ESG strategy, which is also focusing on particular that point. With that, I would like to open up the call for any questions you may have. Thank you. Thank you. We will begin our Q and A session now. We have our first question coming from the line of David Fazzi from SEB. Please go ahead. Yes, thanks. Hi, all. I just had a question on the market here because with refineries closing down in a lot of regions struggling with economics, are you seeing sort of any changes in trade flows or routes? Hi, David. This is Jens. It's a good question. And the answer is that I think for 2020 as a year in itself, it's been a different year from what we're used to. But when we look ahead also into the near future, one of the interesting developments we're seeing is the dislocation of refinery production versus world consumption. And lately, that discussion seems to or that development seems to accelerate. We have recently seen how refineries in Australia, New Zealand, Europe and also in the U. S. Gulf are considering to close down their production. That would have a significant positive impact on product tanker trade as most of the modern refineries of this world are being constructed in the Middle East, India and China. So we see more long haul business. That's what we expect. We have our next question from the line of Eric Hoverson from Pareto Securities. Two questions really. First on I mean your sale of the Americas was a good one. Any further opportunities in that direction as you see it? I mean we've seen vintage or at least decently older tanker values hold up quite well. What are you seeing there at the moment? You have a number of these ships that are approaching 15 years old. And second, it's been very quiet on regarding all the consolidation talks that happened earlier. Care to shed any light on what you're thinking or seeing or maybe even doing in that aspect? Yes. Thank you for that. Well, I'll try to see if I can give you some more clarity on some of these issues. So yes, so 1st and foremost, on the asset side, I mean, basically, we have a constant focus on trying to optimize on the fleet that we have, both in terms of what sectors we're in and in terms of age profile. So we do have identified certain amount of assets and will be comfortably to dispose of all the ships and just renew the fleet as we go along. We will, however, not be looking at selling at distressed levels or anything like that. So this would just be almost like us constantly being in the market, viewing the prices and always having a focus on keeping a modern fleet overall for half year. So moving on to your second question, as we're also saying in our statement, I mean, we do believe that there is a need for more consolidation, and it's not just driven by scale for the sake of scale alone. We actually also feel that when you look at certain platforms, it is difficult to be competitive, both on the cost side, but also particularly as you're moving into a situation now where environmental regulations, new technology, things that require more investments are coming to sea, and it's important to have scale and size to be able to make these investments to stay ahead of the development. So for that reason, we'll continue to focus on that. And we still have a strong, as I said, focus on looking at these consolidation items, if they make sense, from a financial and shareholder return perspective. Okay. And if I can follow-up on the first question then. Can you share some light on what different TC return you have on, for example, your VISTA LR1s and the, let's say, a Dalian 2,006 built? Is it a big, big difference now? Well, maybe Mike can add a few answers. Generally, when we look at how we trade our ships in the market, we find that any ship of good standing with the oil majors trades well, irrespective of whether it's a 10 year old ship or a modern ship. Secondly, a modern ship with a low fuel consumption will, of course, generate a higher TCE to us than the older ships they do, and the difference is determined between the difference in consumptions. So yes, there is difference between the 2006 built Dalian ship and an eco efficient modern ship. We only tend to see sort of a customer preference in terms of ships. When it comes to age, we see a slight difference between ships that are nearing 20 years of age versus younger ships. But everything has a price. I hope that answers your question. Yes. I mean you have LR1 average fleet age of about $9,000,000 And well, your average for the quarter is nearly $14,000 a day. I'm just wondering if kind of the bulk of the older ships were doing $10,000,000 and the rest 15, 16 or what split is. But that's fine. I guess I can make my own assumptions. The split is not that big at all. It's not that big of a difference. I'd say there's probably, on average, maybe 10% difference, And it's down to concern. Okay. Thank you. Thank you. Thank you. We have come to the end of today's presentation. Thank you for attending Hapnia's Q3 2020 Financial Results Presentation. More information on Hapnia is available online at www. Hapniacw.com. Goodbye.