Welcome to Hafnia's third quarter 2020 financial results presentation. We will begin shortly. You will be walked through the presentation by Hafnia CEO, Mikael Skov, CFO, Perry van Echtelt, EVP Commercial, Jens Christophersen, and EVP Head of Investor Relations, Thomas Andersen. We will be free to address any questions after the presentation. Should you have any questions, please press star one on your 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 Hafnia is unable to predict or control that may cause Hafnia's 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, no thing in this conference call constitutes an offer to purchase or sell, or solicitation of an offer to purchase or sell any securities. With that, I'm now pleased to turn the call to Hafnia CEO, Mikael Skov.
Thank you very much for that. My name is Mikael Skov, and I'm the CEO of Hafnia. I would like to welcome you all to the third quarter 2020 conference call. With me here today, I have our CFO, Perry van Echtelt, the EVP Commercial, Jens Christophersen, and EVP, Head of Investor Relations, Thomas Andersen. The four of us will present the 2020 third quarter financials for Hafnia. Moving on to slide number two. Please have a thorough look 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 ESG overview for Hafnia as well.
With that, let's move to slide five, which deals with the highlights from the third quarter. The first nine months of 2020 have been among the most extreme periods in the product tanker space, and I'm pleased that Hafnia delivered the best third quarter result in the last four years with a small positive result. However, due to COVID-19, 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 Hafnia Specialized Pool, adding an additional pillar to 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 two dual-fuel LR2 vessels that are chartered out to Total on long-term contracts. Finally, we have sold the LR1 vessel Hafnia America for $11.6 million, and the vessel was delivered earlier this week. I would very much like to thank all our employees, both at sea and at shore, for their extraordinary efforts during these challenging times, and stress that the priority for Hafnia will always be the health and safety of our employees. Moving into the highlights of the third quarter financials. The time charter equivalent earnings for Hafnia was $118.5 million for the quarter and $518.9 million for year-to-date. EBITDA was $51.7 million for the quarter and $327.2 million year-to-date. The commercially managed pool and bunker business generated an income of $5.2 million for the quarter and $18.5 million year-to-date.
In Q3, we achieved a net profit of $400,000, and our net profit for the first nine months of 2020 amounts to $175.2 million. Hafnia has invested $10 million together with a strategic joint venture partner for 3.33% of a pre-FID methanol project, converting regionally sourced natural gas to methanol with a 3.6 million tons per annum production capacity, of which the joint venture will be transporting one-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 third and fourth quarter? Thank you.
Thank you, Mikael. Overall, stressed product tanker earnings in Q3 2020 were attributed to a weak oil product demand, low refinery utilization from muted 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 while the fleet supply grows gradually. The product tanker 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.
Product tankers in the East faced fierce competition from VLCCs and Suezmaxes 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 two million 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, $14,698 per day for the LR1 segment, $12,709 per day for the MR segment, and $10,399 per day for the Handy segment. On slide seven, 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 second 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 in 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 freight 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-$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 far has been approximately $11,000 a day, with current average MR earnings of $10,000-$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-19. 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-$15,000 a day.
Bunkers, which make up a significant cost, are part of our expenses. In the first half of Q4 2020, 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. We still don't see any economic incentive for scrubber investment in medium-sized product tankers. Perry, why don't you take the next few slides?
Yes. Thanks, Jens. Good day everyone. If we move to page number eight for the financial summary. As Mikael correctly said, we managed to get a small profit of $0.4 million in the third quarter compared to a loss of $10.6 million the same time last year. We feel that we got a very good result of a net profit of $175.2 million for the first nine months of the year. Furthermore, the income from the management of third-party vessels and buying bunker on behalf of third-party clients is $5.2 million in the third quarter of 2020 and $18.5 million for the first nine months of 2020. I will explain more about the economics of the pools later on the next page.
The efforts result 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% and a cash position of $123 million by the end of the third quarter. 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 US dollar financing, we have also gradually increased our interest rate hedging to lock in lower interest rates to match the tenor of our debt profile. For the quarter, we will not pay any dividend.
The average estimated broker value of the owned fleet was $1.95 billion as of the 30th of September of 2020. At the end of the quarter, Hafnia 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, $5.2 million in the third quarter, $18.5 million for the first nine months of 2020. 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 $250 per vessel per day, and on top of that, a 2.25% of net time charter earnings made by the vessel in the pool.
As an example, where a vessel makes $20,000 per day, Hafnia will earn $250 fixed fee for the day, plus $450, totaling $700 per day. The fixed fee itself basically covers the fixed cost of running the pool for external vessels. The variable fee is on top of the fixed fee, which you could see as a profit. Based on a fleet of approximately 80 externally managed vessels, the TCE of $20,000 per day would give Hafnia an income of $30 million before tax on an annual basis. Mikael will now present the next page 10. Mikael?
Yes. 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 product tanker 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 $18.5 million in earnings for the first nine months from pools and other fee-generating activities. A very strong focus on ESG and renewables. In general, the 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% and 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 $18.5 million, and we have a strong focus on further expanding that business. We have in the third quarter focused on ESG, alternative fuels and long-term contracts. That has resulted in our investment in the methanol project and the dual fuel LR2 vessels. Jens will now take us through the next few pages.
Thank you, Mikael. On page 12, we have an overview of the fleet development as we see it. When looking at the global product tanker fleet and 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 new build capacity with today's technology, knowing that we will see some more competitive pricing on dual fuel vessels in the next four to five 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 MR 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 new build 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 second quarter. However, we have seen it peak in May and has by now reduced itself by approximately 100 million barrels since then. As an illustration, we're showing the drop in oil demand following the financial crisis in 2008 to 2010 versus the forecasted drop in oil demand in 2020. This is shown in the graph in the top right corner.
Global oil demand declined by approximately 4 million barrels per day from December 2007 to March 2009. It's expected to drop by 17 million barrels in the second quarter 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 of industrial stocks in the OECD region, we take note that the growth in inventory has plateaued over the summer, and we expect that it'll continue its downward trend 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. Mikael, I'll leave you to carry on with the next page.
Yes. Thank you. 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-19 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 COVID-19, but the way we look at the market going forward is that, with a pre-COVID-19 oil demand expected to reach those levels sometime by the end of 2021, our view is that with an order book being as low as it is right now, we're looking into a very interesting combination of supply-demand balance coming out of COVID-19, which is really based on assumptions that a vaccine will be available sometime mid-year next year. There's no doubt that this COVID-19 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 it be expected to have that as a live age. The increase in final outage in the early part of 2020. The ton mile growth is higher than fleet growth for 2021, the way that we see the market going forward right now. With that, we move on to slide number 18, to talk a little bit about the governance situation. At Hafnia, 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, an extensive authorization metrix, remuneration committee, and fully aligned incentives between management and shareholders with no fee leakage. It's all a very transparent structure, also it's guarding a best-in-class governance structure in general. If we move to slide number 19. As a final comment, as the world's leading product tanker company, Hafnia is uniquely positioned to help create the future of responsible and transparent maritime energy transportation to world markets.
Through innovation and collaboration, we're committed to being a trusted partner for the businesses and communities we serve, to save our world and ocean for future generations. We are very happy being part of Getting to Zero 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&A session now. Should you wish to ask questions, please press star one on your telephone keypad. Once again, to ask a question, it's star one on your telephone. We have our first question coming from the line of David Fassi from SEB. Please go ahead.
Yeah, thanks. Hi, all. I just had a question on the market here. 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.
Hi.
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. When we look ahead also into the near future, one of the interesting developments we are seeing is the dislocation of refinery production versus world consumption. Lately, 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 will have a significantly 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. We see more long-haul business. That's what we expect.
Okay, that's perfect. Thanks.
You're welcome.
Thank you. We have our next question from the line of Eirik Haavaldsen from Pareto Securities. Please go ahead.
Hi, guys. Two questions really. First on, your sale of the America was a good one. Any further opportunities in that direction as you see it? We've seen vintage, or at least decently older tanker values hold up quite well. What are you seeing there at the moment? Do you have a number of these ships that are approaching 15 years old? Second, it's been very quiet on regarding all the consolidation talk that happened earlier. Care to shed any light on what you're thinking or seeing or maybe even doing in that aspect?
Yeah, thank you for that. Well, I'll try to see if I can give you some more clarity on some of these issues. First and foremost, on the asset side, 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. We do have identified a certain amount of assets, and we'll be constantly looking to dispose of older 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. This will 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 Hafnia.
Moving on to your second question, as we also said in our statement, 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 scene, it's important to have scale and size to be able to make these investments to stay ahead of the development. For that reason, we'll continue to focus on that. We still have a strong, as you said, focus on looking at these consolidation items if they make sense from a financial and shareholder return perspective.
Okay. 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 let's say a Dalian 2006 build? Is it a big difference now?
Well, maybe Jens can add a bit on to it.
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. Yes, there is a difference between the 2006 built Dalian ship and a eco-efficient modern ship. We only tend to see sort of the 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. Everything has a price. I hope that answers your question.
You have a LR1 average fleet age of about nine, and your average for the quarter is nearly $14,000 a day. I was just wondering if kind of the bulk of the older ships were doing $10 and the rest $15, $16, or what the split is. That's fine. I guess I can make my own assumptions. Thank you very much.
No, the split is not that big at all. There is not that big of a difference.
Okay.
I'd say there's probably on average maybe 10% difference. It's down to consumption.
Okay. Yeah. Thank you.
Thank you. Once again, ladies and gentlemen, to ask a question, please press star one on your telephone. Once again, if you wish to ask a question, you may press star one on your telephone. We have come to the end of the call.
Okay, everyone. Yep. Thank you. It doesn't seem there are any questions.
Thank you. We have come to the end of today's presentation. Thank you for attending Hafnia's third quarter 2020 financial results presentation. More information on Hafnia is available online at www.hafnia.com. Goodbye.