Earnings Call: Q2 2020

Aug 28, 2020

Welcome to Hapnia's Q2 H1 2020 Financial Results Presentation. We will begin shortly. You will be brought through the presentation by Hafnier's CEO, Michael Skall CFO, Peruvian Ectai EVP, Commercial Enns Christopher Sen and EVP Head of Investor Relations, Thomas Anderson. They will be pleased to address any questions after their 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 Hephnia is unable to predict and control, that may cause Hephnia's actual results, performance or plans to differ materially from any future results, performance or plans expressed are impiled 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'm now pleased to turn the call over to Hapnia's CEO, Michael Skau. Thank you. Please go ahead, sir. Thank you very much for that, and thank you for the introduction. My name is Michael Skolv, and I'm the CEO of Partner. And I would like to welcome you all to the Q2, first half of twenty twenty conference call. As mentioned above, I have with you today a few of my colleagues, our CFO, Perrik Van Eckstel EVP, Commercial, Jens Christoffersen and EVP and Head of Investor Relations, Thomas Anderson. The 4th of us will present the financials for the Q2 and first half of twenty twenty for half year. So we're moving on to Slide number 2. I would like everyone to be aware of the mandatory disclaimer and recommend that you read it and understand it. Moving on to Slide number 3. So focusing on the highlights of the Q2 of 2020. So the 1st 6 months of 2020 have been among the most extreme periods in the product tanker stage, and I'm pleased to see that Hapnia delivered the best quarterly result in our company's history. However, due to the COVID-nineteen, we are now all living with confinement restrictions, which has led to unprecedented demand destruction and weak economic fundamentals. This negatively impacts our short- to medium term market outlook. We are now very proud of establishing the Hafner specialized pool, which is adding an additional pillar to our successful pool management business. In addition, 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. Finally, and particularly considering the difficult period we have been through, I would like to take this opportunity 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 Harsneur will always be the health and safety of our employees. Moving into the financials for the Q2, still on the same slide. The time charter equivalent earnings for Hafnia was $206,900,000 for the quarter and $400,400,000 for year to date and EBITDA was $145,900,000 for the quarter $275,500,000 year to date. When we look at our pool business, commercially managed pool business, that generated an income of $7,100,000 for the quarter $13,000,000 year to date. It meant that for the Q2, we achieved a net profit of $97,700,000 and will pay a total dividend of $38,600,000 Our net profit for the 1st 6 months of 2020 amounts to $174,800,000 Hubney has invested $10,000,000 together with a strategic joint venture partner for 3.33 percent of a PFID 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 onethree on 9 2 year contracts. In addition to investing in the methanol plant, the joint venture will be building these vessels, transporting their share of the methanol. The exact vessel composition is still under negotiations. The investment shows the focus, which we as a company have on long term contracts and alternative fuel vessels, being either LNG, methanol or ammonia. As a final bullet, Hapni has, in the 3rd quarter, sold the Hapni America for $11,600,000 net to the company. Moving on to Slide number 4 and talk a little bit about the market that we've been through. As the economic activity started to recover in China in April this year, many other economies in the West and parts of Asia went into lockdown. Globally, it is estimated that more than 4,000,000,000 people were under some form of lockdown in the early part of the Q2 in 2020. This led to a collapse in global demand for oil. Oil demand in April this year was estimated to have fallen by 21,800,000 barrels per day year on year, which is the single largest contraction in history. On the back of an oversupply of refined products from increased crude oil production by OPEC plus a super contango market structure emerged. Land based storage filling up rapidly, the steepening contango market led to a surge in demand for floating storage for crude oil and refined products. With active tonnage supply being further reduced by port congestion, freight rates across the product tanker segment soared to new historical highs in late April. The product tanker markets remained at elevated levels until mid May 2020 before higher oil prices primarily driven by OPEC plus production cuts of 2,000,000 barrels per day began to flatten the contango curve and diminish the viability of floating storage. Thereafter, demand for product tankers received significantly as inventories build up over the past few months started to be drawn down, triggering the unwinding of vessels in floating storage, which in turn placed further pressure on product tanker freight rates for the remainder of the second quarter in 2020. Moving into Slide number 5, we will talk a little bit more in detail about the Q3. So I'll hand it over to Jurgens to talk a little bit about that. Thank you, Michael. Market activities in the Q3. There was a notable rebound in freight rates in the U. S. Gulf in the early part of the quarter where more than 2,000,000 barrels per day of offline and degraded refinery capacity returned to the market. In response to this, the U. S. Gulf Coast airbag market rose by more than $13,000 a day between late June late July 2020. The clean product tanker market in the Middle East, in particular for LR, is termed in the middle of August on the back of a tighter tonnage availability, while freight rates to ship gasoline from Northwest Europe to the Atlantic Coast in the U. S. Recently saw it on the news of the U. S. Gulf Coast refinery shutting down ahead of Hurricane Nora making landfall. This happened only 36 hours ago, and today, again, the market looks different. The outlook for oil demand growth in the second half of twenty twenty remains uncertain. The resurgence of coronavirus infections in several parts of Asia and Europe suggests that the risk of an extended rebound period is ever present. A few comments on the individual markets where the company ships are employed. On the Handysize, 30 Handys markets outperformed the clean Handys markets in the first half of the third quarter. The average quarter to date earnings are approximately $10,000 a day, with current average Handy earnings of $8,000 to $10,000 a day. In the MR segment, MR rates in the U. S. Gulf climbed as previously mentioned as refinery utilization rose in the region and exports of products increased. Western markets have generally outperformed the Eastern market in the Q3. The average quarter to date earnings so far has been about $12,000 a day. The current average MR earnings across the world in the range of $13,000 to $15,000 a day. On the LR1 side, rates in the East were suppressed in the early part of Q3 due to excess tonnage availability and lower refinery runs but has improved mid August with a tighter tonnage list in the Middle East. Average quarter to date earnings so far in the LR1 segment has been about $15,000 a day, with current average LR1 earnings worldwide of $20,000 to $22,000 a day. Lastly, on the bunker side, in the first half of the quarter, spread between high sulfur fuel oil and very low sulfur fuel oil narrowed to $79 per metric ton. The spread for 2021 is currently about $80 per metric ton. And Perry, can you take the next few slides? Yes. Thanks for that, Jens. So if we continue on Slide number 6, we have the financial summary. As Michael correctly said, the Q2 was Hafnia's strongest quarter yet, where the industry benefited from the oil industry building floating storage. We feel that we got a very good result of a net profit of $97,700,000 for the quarter and $174,800,000 for the 1st 6 months of the year. We will pay a dividend in total of $38,600,000 or $10.06 per share for the Q1, So for Q1 and Q2 combined sorry, that's for the Q2. For Q1 and Q2 combined, we will then have paid a total of $77,200,000 or $0.222 per share, which is an overall payout of 44%. Furthermore, the income from the management of 3rd party vessels is $7,100,000 in the Q2 of 2020 and $30,000,000 for the first half of twenty twenty. Will explain more about the economics of the pools on the next page. EPS or earnings per share was $0.27 per share for the quarter and 0.48 year to date. This effort resulted in an annualized return on equity of 33.5% and an annualized return on invested capital of 18.3%. The balance sheet is strong with an equity ratio of 45.1% and a cash position of $148,000,000 In terms of the maturity profile of our debt facilities, we don't have any major refinancing coming up until 2022 and continue to have strong access to the banking market. With the substantially reduced interest rates for U. S. Dollar financing, we have also gradually increased our interest rate hedging position to lock in lower interest rates. At the end of the quarter, Hafnia had a total of 102 vessels, of which 87 are owned and 15 are chartered in. The average estimated broker value of the owned fleet was $2,200,000,000 as of 30th June 2020. If we then move to the next slide, Page number 7. Let me there explain a bit more about the pool economics by highlighting that the pool business, as I mentioned earlier already, generated $7,100,000 in the quarter and $13,000,000 for the 1st 6 months of 2020. If you look at the pool commission structure, the fee structure is twofold. So there is a fixed fee of $2.50 per vessel per day and on top of that, a 2.25 percent of net TCE earnings made by the vessel. So in an example where a vessel makes $20,000 per day, Hafnia will make $2.50 plus $4.50 totaling $700 per day. The $2.50 the fixed fee covers the fixed cost of running the pool for external vessels. So based on a fleet of approximately 80 externally managed vessels and a TCE hire of $20,000 per day gives Hafnia an annual income of $30,000,000 before tax. Any change of $1,000 of time charter equivalent will impact the bottom line with approximately $600,000 So this is also to show that it's a very attractive stream of fees that does not consume any capital for the company. With that, Michael, I would ask you to continue as of Page 8. Good. So turning to Slide number 8, where we are trying to highlight some of the important areas of focus in Hapnia. That is kind of the basic pillars of how we're trying to build our business and also the basic pillars that are the important parts of leading to these results that we're presenting today. So as you can see on the left side, we've listed the 6 important parts in terms of best commercial platform, the lowest operating cost and cost of funding, the fact that we, on the pool side, made $7,100,000 just in 1 quarter alone. Also, the focus on ESG and renewables, which will include dual fuel, LNG and methanol and finally, the strong market fundamentals. It's of all of these combinations that has the strongest focus in half year, and that's kind of where the continuous focus of the business will be. And when we talk about ESG, we have a few more slides later on, just as a general comment, we see this now as obviously an area that we have to invest time and money in. And the previously mentioned methanol project is one of hopefully more opportunities where we have sound business in terms of having secured revenue, but also at the same time learn and push forward against renewables, which ultimately will help the industry achieve all the environmental goals that we have set forward to do. If we look upright, another important part for being able to run ships in the spot market and thereby take advantage when markets are strong as we have just seen is to have a low cash flow breakeven. Half year for this year, we'll have $13,625 per day. In addition, we have a balanced capital structure with a targeted fleet owned to value of 50% to 60%. The dividend policy remains the same, which is a payout ratio of 50% of the annual net profit. So nothing can change as far as the annual net profit is concerned. And I think as far as the pools are concerned in generating extra fees, the important part is to understand that having established a new specialized pool, we hope will be another stream of earnings that we will continue to expand. There is no reason why the Hapnia brand should not be able to continuously find new pools in new areas where with very little investment, we're able to generate a good fee stream to the benefit of all the shareholders of the company. Moving on to Slide number 9, I think Jens you will take us through that. Yes. Thank you very much, Michael. Slide number 9 shows a time line from the autumn of 2019 up till today. And as the title on the slide says, IMO 2020 was a hot topic, and then came COVID-nineteen. A lot of different events led us through one of the highest markets we've seen in history. And in the beginning of the time line, you see the sanctions, the OFAC sanctions of the Korskoy VLCC fleet, which had a dramatic impact on the crude oil market. We had unrest in the Middle East with the bombing of an Aramco refinery and an Iranian tanker being bombed, with oil prices lifting itself to $61 a day. And in the beginning of 2020, we saw COVID-nineteen for the first time where China went into lockdown by the end of January. And eventually, Europe, U. S. A. And India followed. And the result of that was, amongst others, a significant drop in oil pricing where a barrel of West Texas Intermediate at some point in time cost minus $37 All of this led to a contango, which led to a buildup of land based stocks as well as floating storage as the world ran our land based stocks. At the peak of floating storage, we saw above 300 ships storing CPP. And now we are actively depleting that and 134 ships Boeing CPP. So if we go to the next slide. As we discussed on the previous page, the overall market has been influenced by many one offs in the last 8 to 10 months, and we have consequently seen increased trade rates that drop again. However, vessel values have seen little increase followed by following the increase in rates. And basically, it tells us that the indication was that everybody expected a short lived rate spike. And at the end of the quarter, we've seen secondhand values dropping a little. Taking you to the next slide. In today's environment of relatively high oil stocks, it's relevant for us to see what we can learn from the past. And in the last 20 years, we've identified 5 periods with 5 to 6 quarters of inventory draws. There's been various reasons for the inventory draws where the first ones at the very end of the 1990s, they were driven by economic setbacks and production cuts, while the later ones have been caused by a strong demand outpacing production growth. From 2010 onwards, tanker earnings had been hit before the market went into inventory draws due to production cuts and weak demand for oil, while the draws eventually took place as demand recovered. Most recent inventory draw we had was in 2014 2015 after the Saudi's market share campaign. And at the time, it was difficult to define as an oil market rebalancing as it was a bit off and on. However, it weakened the tanker market from 2016 initially from production cuts through much of 2018 and again in the summer of 2019. Looking at tanker sizes, we've seen a period of weak market when the oil market is in rebalancing mode. However, production growth far more important for the tanker market compared to demand growth for oil. Moving to the next slide. Floating storage in 2020 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've seen a peak in May and have reduced it by now by approximately 100,000,000 barrels. The graphs that you're seeing are showing crude as well as product and storage. And as an illustration, we have shown in the top right corner the drop in oil demand following the financial crisis in 2,008, which I think most of us experienced as being severe versus the forecasted drop in oil demand in 2020. And the global oil demand declined by approximately 4,000,000 barrels per day from December 2007 to March 2009. But in 2020, we expect it to drop by 17,000,000 barrels per day in the Q2 of this year, which is substantial. So what we've just gone through is dramatic and does not compare with what we have seen in the past. And Michael, I can ask you to take over. Yes. So we're moving to Slide number 13 in the presentation. And just to continue a little bit on what Jens just explained about the market situations, but maybe also to reflect a little bit of how we see the broader picture. But just to finalize on 2020 that due to the COVID-nineteen, the expectation for 2020 have changed somewhat. And it is now expected that the growth in the seaborne product demand will be negative in 2020, partly compensated by the increased floating storage. We're still seeing a historically small order book. We saw an increased refinery outage in the early part of 2020. And we've seen a ton mile growth higher than fleet growth when we look forward to 2021. I think it's important to have a look a little bit at the overall picture. So when we entered 2020, as Jens also mentioned, there was a lot about IMO 2020. But one of the important parts was that we were seeing an order book and a supply side that was rapidly decreasing. We've now been through a turbulent time, but one thing that has been the same and has only changed for the better is the order book. We are still not seeing any significant newbuilding orders at all in our sector. We are seeing a continuously falling order book. We are seeing certainly ours, particularly in China and other places, having filled up with noncommercial orders. So we feel that the overall story for 2020 and the part of 2021 will be about COVID-nineteen, construction of demand, but a lot of supply, including floating storage, a rebound of demand that is not entirely back to 2019. But more importantly, when we look ahead, we still see that the low supply will mean that even small demand increases will make this market spike. So I think it's an important part to keep in mind here that over the last 12 years, this industry has been suffering from a supply problem, not a demand problem. We've had steady demand, but we've had a supply side that was over ordered. So we don't feel that the overall view of this market in terms of coming behind the 2019 COVID-nineteen situation has changed. And we still feel that looking ahead that with the limited availability of finance and if you can't get finance for most people, it's more expensive, we'll keep the order book and the supply side under control. With that, we move into a slightly different topic in Slide number 14. And we just like to highlight that as far as the corporate governance is concerned, obviously, Hafner has a full transparent governance structure as we should have. And the company has a strong focus on the roles of Board of Directors and the management and also has a proper full rundown on authorization metrics, committees and fully aligned incentives where there's no fee leakages and basically all management teams are incentivized to be aligned with all the shareholders. So finally, moving on to Slide number 15, which shows a bit of a highlight on the ESG initiatives that I mentioned earlier. And again, just as an overall comment, we do feel that being one of the largest operators of product sales in the world that we also have an obligation to participate actively in moving the industry towards better times and to achieve the environmental goals that has been set out by the world in terms of 2030 and 2050. So part of this will be consisting of a lot of different work streams where we want to participate both with knowledge and time, but also in some situations with investments to try to push towards point number 1, a decarbonization route that eventually will lead us to alternative fuels for the industry, but also on other parts, which really means about cooperating of trying to improve what we have today, realizing that there's not going to be a new solution tomorrow. So we need to focus and continue to focus how can we improve on today's operation using new technology and continue to bring down not only consumption of oil, but overall the environmental footprint of the company. We're actually part of the Getting to Share Coalition, and we think that the industry collaboration on all these parts have moved in the right direction, which is positive. So with that, I would like to open up the call for questions. This is the end of the formal presentation that we have, and we're more than happy to answer any questions that may be from the audience. Thank you. Certainly. We will begin our Q and A session We have received a question from Anders Karlsson from Danske Bank. Anders, please go ahead. Yes, thank you. I grew up in Danske Bank. A little bit in terms of your vessel positioning currently. I mean, there's been a fairly widespread between East and West on the MR side, I think. How are your fleet or how is your fleet in terms of that, thinking about your Q3 guidance and what to think about the rest of the quarter's earnings? Yes. I think you should answer that. Yes. Thank you. The overall distribution between the MR and LR fleet between the Western and Eastern segments is about 60% to the East and 40% to the West. The Hafnia MR and LR fleet is a little skewed towards the East in the sense that we are sort of 63%, 64%, 65% East right now. Okay. And a little bit refinery outages are down, but in terms of maintenance, etcetera. But how is the throughput? Is that at normal levels or is that low levels reflecting that those effects should be 2.1? Could you just repeat the question? How is the what, sorry? I mean, refinery maintenance has come down if you look at the cost that you showed earlier. But But it's well on you that you're fundamentally system, but I guess the important part is the refinery throughput. How are you seeing that? Is that at low levels despite maintenance? Refinery Refinery, so refinery, food as a whole has been increasing gradually. And Q3 is typically the season where refineries on a worldwide basis is running at a higher level of utilization. The current situation is that the Chinese refineries are now exporting more carbon than they did only 1 month ago. We're also seeing more exports in the Middle East. The Indians are out and are expected to come back. Some of the Middle Eastern refining capacity is expected to go into maintenance. If we look at the Western Hemisphere, the U. S. Gulf returned quite quickly. And they're still expected to export a lot in the coming quarters, depending a little bit on the outcome of the hurricane Laura that hit the U. S. Gulf yesterday. Does that answer your question? Yes. And then one final question in terms of newbuilding orders. Your comment about methanol ships are noted, but there is also a move is about dual fuel fleet. Can you comment on that? Or how are you looking at newbuildings that hasn't come? I'll leave that for you. So yes, exactly. So yes, so my point is clearly is that, of course, there will be new boats as kind of fleet renewal by the Arizona. So I think that that's kind of a normal thing. But what we're referring to is really extraordinary newbuild activity that has ruined the market previously, which is more speculative ordering, etcetera, which we have seen none of really. So when it comes to Hafnia, I think we've been trying to be very vocal about one thing, which is that, Hafnay has 102 vessels financially committed these days. So our focus is really about shareholder value and returning capital to shareholders. Our view is not to start building a lot of new ships, etcetera. We will, of course, manage the fleet that we have, but to do new build orders as a regular type of investment is not what we're looking at. The dual fuel LNG or the methanol project that we talked about are both on the kind of same criteria that if you were to look at that, it will always be in the back of having secured revenues going forward and it should always be investments that would lead us towards a renewable path going forward. And therefore, either in terms of understanding, strategic repositioning, but those elements should be part of it. It would never be speculation in new growth for running in the spot market as a pure investment. Okay. Much appreciated. Thank you. Operator, there does not seem to be any more questions. So give it back to you. I think there is one more actually, right? I'm just picking one up, if I'm not mistaken, sir. Is that right? Yes, there's one question from the webcast. Yes, I'm just looking at that now. So there's a question here saying could you elaborate on your efforts to move towards using alternative fuels? What are the main opportunities and challenges? And how do you currently view the strongest fuel options among the hydrogen, biofuels, etcetera? Yes. So thank you for that question. And as I explained earlier, we don't think that there is, at the moment, one clear path or one clear solution to an alternative fuel. And therefore, we think it is important that there are different paths that we have to all of us basically as an industry has to pursue. We see different opportunities. I mean, in our view, there will be a bridge over a few years that will probably be dominated a little bit by LNG. And if you look at the latest technology on dual fuel engines, we actually have a very, very limited amount of methane emission, which has been one of its additional problems. We think that there are solutions there that will enable LNG to at least move us a step forward. Looking towards the further on the future, we think that methanol definitely, which is already around, is a product that will be one of the alternatives. The other one that we think be a potential win in this situation is ammonia. And if you haven't seen, you can go on the website. We have published together with a few other stakeholders a report a couple of weeks ago on ammonia where we have participated on the transportation side of input. But the report in the self, the white paper deals with all the aspects of ammonia as an alternative all the way from production, availability to our infrastructure, etcetera. So we do believe that ammonia has an element of interest. We think there are a lot of features in it will help. And therefore, we have also decided that as part of where we invest our time and energy would be towards the root of ethanol and ammonia. I think I don't know if we have any further I didn't see any further than the screen. So if not, Thomas, do you want to hand it back to the operator? I think so. Then we'll hand back the floor to the operator. Thank you. We have come to the end of today's presentation. Thank you for attending Hephnia's 2nd quarter 2020 financial results presentation. More information on Hephnia is available online at www.hefniabw.com. Goodbye.