Welcome to Hafnia's First Quarter 2022 Financial Results Presentation. We will begin shortly. You will be brought through the results presentation by Hafnia CEO Mikael Skov, CFO Perry van Echtelt, EVP Commercial Jens Christophersen, and EVP Head of Investor Relations Thomas Andersen. They will be pleased to address any questions after the presentation. Should you have any questions, you can submit them via the chat function or use the raise hand function to 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 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, 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 hand the call over to Hafnia CEO Mikael Skov.
Thank you for this. As mentioned, my name is Mikael Skov, and I'm the CEO of Hafnia. Let me welcome you to Hafnia's first quarter 2022 conference call. With me here today I have our CFO, Perry van Echtelt, our EVP Commercial, Jens Christophersen, and EVP and Head of Investor Relations, Thomas Andersen. The four of us will present the first quarter 2022 financials for Hafnia. Today's presentation agenda consists of four key areas. We will begin with an overview and key highlights of Hafnia's first quarter, followed by financials for the first quarter, and then commercial updates on the product tanker market. We will then conclude our presentation with our ESG overview. Let's move to slide number two. You should all be aware and take note of the mandatory disclaimer. Thank you. Slide number three.
Let me now begin by giving an overview of Hafnia and key updates of the first quarter. Slide four. Hafnia is a fully integrated shipping platform operating within the product and chemical tanker market. We are listed on Oslo Stock Exchange under the ticker code HAFNI. At the end of first quarter 2022, we owned and had chartered in a diversified portfolio of 139 vessels. Our own vessels have an average broker valuation of $3 billion, giving Hafnia a net asset value of around $1.4 billion. We also have our own in-house technical management and global commercial platform, with chartering teams in Asia, Europe, the Middle East and USA. Our technical management team ensures that the highest safety and environmental standards are maintained on board, while our chartering team are managing close to 100 third-party vessels in the pools.
These various operational segments make Hafnia a fully integrated platform, highlighting several key value propositions. Hafnia is now the largest operator of product and chemical tankers in the world. Our fleet's low average age of 7.7 years and unparalleled scale makes Hafnia's business robust and sustainable, enabling better utilization and improved earnings capability. With improving fundamentals, the market outlook for product tankers in the coming months remains strong on the back of significant increase in ton-mile demand. We continue to focus on having low operating and funding costs. This is made possible with strong relationship with our stakeholders, such as banks and industry partners, giving us access to industry-leading debt financing. Our business model is robust, with diversified revenue streams such as the pool platform and bunkering service. Key revenue from our bunkering and pool business has been strong and consistent.
In the first quarter, our commercially managed pool business generated an income of $5 million, while our bunker team has generated an income of $1 million, buying bunkers for more than 900 vessels for our pool platform and third-party owners. With the recent increase in activities and rates, we can expect the fee income to further increase in the coming quarters. Based on this success, we will continue to develop these adjacent businesses. Lastly, at Hafnia, we have a clear ESG profile. With growing impact from environmental regulations, Hafnia is well-equipped and takes all responsibilities seriously to minimize our carbon footprint, as well as ensuring the most optimal working environment for our organization. Moving to slide number five.
Let me move on by giving an update of the key events that happened in the first quarter. I'm proud to reiterate that we have successfully executed two key strategic acquisitions. The first being the acquisition of CTI with a fleet of 32 vessels, and the second being the acquisition of 12 modern LR1s from Scorpio Tankers. As a result of these strategic transactions occurring at a period when Hafnia was trading at a large discount to NAV, Hafnia has sought out alternative channels to a capital raise to finance these transactions. As a result, Hafnia's overall leverage has increased. With the subsequent improved fundamentals and outlook for the products in the market, Hafnia shares have been trading higher and closer to NAV. With that, we decided to execute a $100 million capital raise, which was successfully completed on May 5th.
The capital raise allows us to optimize our capital structure and to strengthen the debt structure in our balance sheet following the previously mentioned two acquisitions. Additionally, this also allows us to lower our cash flow break even and financing costs, increase the free float in our shares, and continue to be in a good position to take advantage of future opportunities. We have seen greater volume traded in recent weeks, which improves our share liquidity. Our share price has also increased 54% since the start of the year. I would like to take this opportunity to thank our dedicated team and industry partners for their hard work and commitment to make this happen. I'm also grateful for the continued trust from both our existing and new shareholders, further highlighting Hafnia's firm foothold in the market.
Going forward, we will continue to focus on optimizing synergies and earning capabilities by utilizing our well-positioned modern fleet to take advantage of the continued expected upturn in the product tanker market. Moving on to slide six, and I will hand it over to you, Perry.
Thanks, Mikael. Global oil demand has gradually recovered at the end of 2021 and into 2022. We saw rates improve significantly. The situation in Ukraine has also impacted trade patterns, increasing product ton-mile demand. As a result, the first quarter saw a TCE income of $163.4 million and a net income of $21.3 million. Income from the management of third-party vessels and buying bunkers on behalf of third-party clients was $6 million for the quarter. For the quarter, we saw a return on equity of 6.8% and a return on invested capital of 5.1%. The balance sheet remains strong with a cash position of $74 million at the end of the quarter. We continue to see strong access to the banking environment.
With the increasing interest rates for the US dollar financing that we have, we have continued to gradually increase our interest rate hedging position to lock in the rates to match the tenor of our debt profile. With this result, we are happy to announce a dividend of $0.021 per share for the first quarter, representing a payout ratio of 50% and further demonstrating our ability to produce shareholder value even in challenging markets. Looking forward, we can expect high product tanker rates to continue amidst the more restricted oil market and altering trading patterns. The increase in assets and gross debt is largely the result of the consolidation of the CTI acquisition from end January this year and the partial delivery of acquisition of the LR1 vessels in the first quarter.
The 8 S-class vessels that have been sold are now classified as assets held for sale until the vessels have been all delivered later this year. As Mikael already mentioned, we've also further strengthened our balance sheet and liquidity position through the capital raise, which will be reflected in the financials of the second quarter. This allows us to reduce our leverage in the near term and enable us to continue to be in a good position to take advantage of any future opportunities. If we move to the next page, we'll discuss a bit about the TCE breakdown. For the first quarter, we saw a TCE revenue of $163.4 million on the basis of 10,366 earning days.
This represents an average of $15,761 per day, which is a great increase from both year-on-year and quarter-on-quarter perspective. From the graph you can see the rates have improved significantly from the previous quarters and the covered rates for Q2 continue to be strong. Looking at those rates, as of the 20th of May this year, 70% of the total earnings earning days in Q2 were covered at an average of $27,193 per day. For the remainder of the year, we've covered 29% of our 38 to 279 total days at an average rate across the fleet of $25,455 per day.
Due to the supply situation in Russia, we find oil products have started to travel over longer distances to meet the shortfall of supply of oil to the Atlantic hemisphere, which is positive for freight rates. For the week beginning the 16th of May, Hafnia's pool earnings have averaged $34,011 per day for the Handy vessels, $32,646 per day for the MR vessels, and $57,506 per day on the LR1s. If we move to the next page, a bit more on OpEx, which includes our vessel running costs and technical management fees. We spent in total $62.3 million for the quarter on the basis of 9,259 calendar days, resulting in an average of $6,723 per day.
All in G&A expense per day for the quarter was $772 per day. Our operating cash flow break even for the full fleet in the first quarter was $14,382 per day, one of the industry lowest. We are constantly evaluating our performance by benchmarking ourselves. We're pleased with our performance relative to our peers. This comes from the quality in our daily commercial decision making and keen understanding of the market conditions. The graph on this, on the below part of this page further reinforce this. For the quarter, we benchmarked some key metrics against the peers and can see that Hafnia stands out from the rest in all segments. On page ten, we show a few scenarios.
With the recent increase in rates in the product tanker segment, represents a significant earnings potential for the future. Looking at the various scenarios where we apply recent realized rates into our forecast for the remainder of the year, you can see the strong earnings potential Hafnia has for 2022. This page, you can see the impact, the open position of the fleet, and the added capacity of the two acquisitions have on the P&L in different scenarios. Hafnia is well-positioned to take full advantage of this upturn in the product tanker market by optimizing synergies with a well-positioned fleet and capturing the strong market. If you continue, Jens, why don't you take the next few pages?
Thank you, Perry. The next few pages show the global oil outlook and our expectations for the product tanker market. Global oil demand has recovered towards the end of 2021 and into 2022, mainly due to the reopening of several countries' borders and resumption of air travel. However, recent escalating lockdowns in China, the world's second largest oil consumer, and surging commodity prices as a result of the situation in Ukraine, have led to slow growth, a slower growth in global oil demand. Despite of that, the impact has been mitigated by the continued strong recovery of oil use in the West. Mobility indicators have also remained robust, where the number of international flights and driving indices are on an upward trajectory. This lends support to the demand of both motor gasoline and jet fuel, which are recovering strongly in 2022.
Overall, global oil demand is still expected to increase by 1.8 million barrels a day to 99.4 million barrels in 2022, slightly below 2019 levels. On the supply side, global oil production has fallen by 0.7 million barrels, 1 million barrels, mainly due to Russia, which saw 1 million barrels go offline. OPEC members also continued to supply below target levels. This is offset by incremental production from the U.S., South America, North Sea, and Middle East, and we anticipate that this increase should more than offset the lower Russian volumes in the coming years. Move to slide 13. From the beginning of the situation in the Ukraine, we've also seen an increase in laden utilization for product tankers.
So far, in May 2022, we've seen the utilization for MR increase by 5.5%, and the average ton-mile per MR unit increasing by 3.3%. We expect this utilization to further increase, resulting in increased rates for the vessels. On this slide, oil production for the last year has not kept pace with oil demand, and consequently, oil inventory levels have been declining rapidly to levels below the last 5-year range. However, total OECD industry stocks saw a marginal increase by 3 million barrels in March 2022 due to the emergency stock releases of 24.7 million barrels in March in the OECD. Total inventory levels now stand at 2,626 million barrels and only cover 57.7 days in terms of forward demand. That's 8.4 days lower than the five-year average.
Of the industry stocks, crude inventories rose by 22.8 million barrels in line with seasonal trends, but product stocks grew by 25.5 million barrels, mainly due to gasoline and middle distillates, which decreased by 12.1 and 10.2 million barrels respectively. Cargo volumes and ton-miles for clean and chemicals are increasing steadily and have surpassed pre-pandemic levels compared to dirty counterparts. Situation in Ukraine has also impacted trade patterns around the world, having a positive impact on ton-miles from longer voyages to the Atlantic Hemisphere. In short, with steady growth in oil demand, this bodes well for the tanker trade volume, which is expected to grow further in 2022. Moving on. The refining sector recovered well towards the end of 2021, but severe lockdowns in China has caused the global refinery throughput to plunge in April.
US refining activity also saw a counter seasonal fall in activity due to operational issues and tight available capacity. Despite that, we expect refinery throughput to increase in the latter half of the year, with new refineries coming online mainly in the Middle East. Al Zour in Kuwait, with a total capacity of 0.6 million barrels per day, is expected to be fully operational early Q3 2022 and dedicated to exports. Saudi Aramco's Jazan Refinery is running at about 50% and estimated to deliver the balance 0.2 million barrels a day by the end of Q2 2022. These two new refineries will jointly add about 0.8 million barrels of product transport demand versus today, equivalent to a demand increase of 75 MRs.
Current refinery margins are likely to speed up the completion process and drive high refinery utilization in all regions. On the supply side, outlook remains positive with a slow fleet growth. Fully booked yards until the end of 2025 gives us high visibility on the supply of tankers. Looking at the order book for tankers, they are at historical lows, and we can expect this number to further drop in the coming years due to increasing new build prices and ambiguity around the future of propulsion systems, energy prices, and regulatory environment. With that, this will likely fuel further second-hand vessel price increases and market activity. Looking at the age profile of oil tankers, worldwide clean and dirty fleet today is about two years older compared to what it was in 2008.
During 2022 and 2023 combined, the product tanker fleet will reduce by about 75 MR equivalents due to aging. This further reinforces the importance of having a young fleet, as older vessels tend to have more waiting time and shorter voyages. Additionally, the scrapping of older tonnage is increasing. We've already seen this in 2021, where a total of 3.7 million tons deadweight was scrapped, up from 1 million tons in the whole of 2020. Scrapping levels for the following years are expected to remain at high levels as steel prices are likely to remain high. With this, I hand it over to you, Mikael.
Thank you. We move to slide number 18. On top of excellent commercial performance and notable consolidation efforts, Hafnia also have a strong focus on ESG. We're always on the lookout for potential partnership opportunities to accelerate our environmental initiatives in developing our company culture through deliberate and thoughtful leadership training programs. Hafnia's ambition is to be best on water. This means recognizing the role our business plays within the wider climate narrative and taking meaningful steps towards a net-zero emissions future. We are in full compliance with the IMO 2020 regulations on sulfur emissions. 2021, across Hafnia's own fleet, our carbon intensity, as measured by the annual efficiency ratio, was 5.54 grams per ton-mile, which is 6.4% better than the present IMO baseline.
We are working hard to reduce our current fleet's carbon intensity to 4.35 grams per ton-mile by 2028, meeting the IMO's 2030 target two years in advance, and we are well on track to achieve that. Moving on to slide number 19. Looking ahead, the future is expected to remain volatile on the back of geopolitical tensions and accelerating inflation, but we believe Hafnia has future-proofed itself and is well equipped to face what is to come. With the situation in Ukraine altering trading patterns, driving up exports and longer voyages, we expect strong product tanker rates to continue in the coming quarters. Hafnia, being the largest operator of product and chemical tankers, is well positioned to optimize synergies and earnings with our well-positioned fleet and expanded range of cargoes that we can transfer.
With the increased focus from the political environment to reduce dependency on Russian oil and products in the future, we foresee structurally longer-term oil transportation into Europe to remain a permanent positive factor. The recent capital raise has also highlighted Hafnia's strong foothold in the market. I am immensely grateful to the support and strong interest that we have received during the capital raise, and Hafnia will continue to take advantage of market synergies and opportunities to further demonstrate our ability to produce great shareholder value. With that, I'd like to open up the call for questions.
We will begin our Q&A session now. Should you wish to ask questions, you can submit them via the chat function or use the raise hand function to be unmuted to ask your question verbally.
Any questions? No, can't see any hands raising. There we have one from Magnus.
Yeah.
Magnus, please go ahead.
Thanks for the good presentation. I guess page, slide 11 or 10, I can't remember which one it was, but you painted, you know, four scenarios. You gave a very positive outlook for the rest of the year. Which one of these scenarios are you most comfortable with?
Mikael, would you answer that one?
Yes. Thank you for that. Well, that's obviously a very, very good question, Ryan. I think, quite frankly, we just wanted to show the sensitivity, because as you know, I mean, when you have a full utilization of this fleet, sentiment plays a very important role as to how far rates can go. You know, our view at the moment is that we don't see this as a very short-term event that we are going through now. We see that there are changes that will become structural, i.e., in terms of longer ton-mile driven by a forward situation where Europe will make itself independent of Russian oil. You know, we for sure think that this market has more legs than just being a small peak that we're seeing here in Q2.
That's probably as close as we can get to giving any rate guidance. That's kind of our view at the moment.
I figured I'd try. Anyway, what do you see as the biggest risk in the second half of the year?
At the moment, the biggest risk as far as we're concerned is really, you know, more the macro side of the whole situation. It's not a scenario that we think is imminent in terms of a lot of reduction in oil demand, simply because looking at previous situations like this, oil demand has actually shown a lot of resiliency in terms of absolute decrease. However, the macro risk is really kind of the main risk that we would be seeing when we look out for the rest of the year and onward.
All right. Just one last question. On the risk that you can control versus, you know, the market risk, what are you doing as far as, you know, interest rate risk, fixing, you know, maybe some of your interest rates or fixing ships, you know, at these levels? What's in your control? What can you do to mitigate any downside?
Perry can afterwards maybe give a quick rundown and explanation on the interest side. I think on the commercial side, I mean, quite frankly, one of the reasons why we have focused so much on our cost structure, both in terms of finance cost but also on the SG&A side, is actually that we have wanted to run ships in the spot market. In order to do that, you need a low cash or breakeven. I think that's kind of been the mitigating factor we use there. In terms of freight hedging, we think that is too early.
At some point, once we feel that there's more length out there, i.e., that you can cover freight rates, say, for maybe three years, we'll always have a look at it, but for the time being, that's not in the cards. We still feel that the spot market on the freight side is so strong that we should kind of still continue to be more spot exposed. Maybe Perry, you wanna add something on the interest side?
Yeah. Thanks. Good question on interest rate hedging. We've typically been hedging around 50% of interest rate exposure in our portfolio, so that's an ongoing portfolio. With the acquisitions of CTI and the 12 LR1 ships, we've also further increased the hedging on these financings that came in. At the moment we are just below 60% hedged in terms of interest rates, especially in hindsight where we are now at pretty attractive rates. We try to be there at that 50%-60% overall hedge position at the moment.
Great. Thank you. That, that's it from me.
Good. We have a question from Nick Gina-- Liam. He's writing: I'm still trying to understand your recent equity raise. It looks like after selling the stainless ships, your net debt to ship value will be below where it was December 2021, even without the equity raise. What, that is without the large Q2 cash flow. What was the point of the equity raise earlier in May? I don't know, Perry, is that something you can give a go?
Yeah, sure. Thanks. Yeah, I think that as we stated, the reason of doing the capital raise is, if we look at the financing that came in with the acquisition of CTI, which had quite a bit higher leverage than Hafnia already had in its balance sheet, and the 12 LR1s that we acquired were financed through a 100% sale-and-leaseback. All in all, there was quite a big amount of equity that we didn't raise cash, so we issued shares for the Oaktree transaction. At that moment, the share price was so much below NAV that indeed it didn't make sense to raise any equity.
We have been able to do these transactions because we have a strong balance sheet, and we'd like to get back into that position as well. If we look at both transactions, the gap in leverage will be solved by say $300 million of equity. One-third of that we have solved by doing the equity raise. Improved liquidity is also an important element of that transaction. The rest should follow indeed from retained earnings, and part of that is also the sale of the eight stainless vessels.
I'm not sure how you reasoned your part of that, but ultimately the sale of the 8 S-class vessels will bring in close to $50 million of cash, and the rest, of course, will be paying down the financing that was attached to those ships.
Thank you, Perry. We have a question from Paul. Paul?
Yeah. Thank you. Hi, guys. Just a quick question from me. I'm curious to hear if you have seen any, let's say, changing behavior from oil traders and, let's say, other charterers. Like, what's the appetite for longer term time charterers today?
Jens, was that for you?
Yes. Thank you, Thomas. That's a good question, Paul. The way we see it, we're still in an early phase of a spot market that has recovered and turned unexpectedly strong within a very short period of time. For that reason, you know, we have yet to see a large volume of long-term contract inquiries in the market. We're starting to see the first ones now, where some of our customers are reaching out for one-year charters and three-year charters. At the end of last week, you know, the first of lift on the five-year MR charter was concluded on subjects. Our expectation is that this will gain more momentum in the months ahead of us, and it's still an early part in the cycle. I hope that answers your question.
Yeah. That's interesting. Just, what's the rough rate levels for the five-year charters you mentioned?
We've seen an MR go on charter for a modern ship at five years at $17,500 a day. There are rumors in the market that MRs available from yards for September delivery are being negotiated between $18,000 and $20,000 a day. It'll be interesting to see when the deal is closed what's actually going to be done. Given the present strength in the spot market, it's, you know, it's hard to believe that these levels for a three-year deal are sustainable. In our opinion, they have to move up. Otherwise, people will be motivated to remain in the spot market.
Sure. Thank you.
Thank you, Paul. Now we have a question from Adrian. Adrian, the floor is yours.
Thank you. Thank you very much for the presentation. Impressive figures, by the way. I have one question about your ESG strategy, which you put a lot of emphasis on. How is it that you are still rated a simple B by MSCI, and, therefore not investable for many investors from an ESG point of view? What measures have you taken to change this? Because currently, sustainability criteria are not that important for investors, but I expect this to change again in the coming years. Second question relates to your investment strategy. Wanna know when do you reach your capacity limits, what new buildings do you have planned for the next three years, and when do you expect the cycle to take off again?
Sure. Thank you. I got to say, I've never seen the research paper you mentioned from MSCI, so that's difficult for me to comment on. Maybe I should see if I can get that and read it and then comment on it. Investment strategy, maybe that's for you to comment on, Mikael.
Thanks. Well, maybe I can just add a little bit to the ESG side. I think if you look at the annual report that we just released, you'll see that since last year actually, we have established a strategic cooperation with DNV, actually with the full aim of having a reporting which basically caters for every demand out there. Because we have seen, like, as I'm sure you're referring to, that lots of different consultants, different institutions are rating things very differently. Therefore, it can be very difficult sometimes to make comparisons. I don't know from when this was made that you referred to, but overall, I can say that as of that annual report, there would be no misunderstanding. Shouldn't be about the ESG rating of Hafnia.
At least when we look at our own rating where we are compared to standards, it's it would be the highest in our industry. Maybe this is a crossover timing rather than anything else. Going forward, you know, that would be the way we'll approach it, and you would basically be able to extract everything that you want to know about any of the ES or GS, in any format you would like, standardized. Going further on to the investment side, well, as Per also alluded to earlier, we've obviously done quite a lot, in terms of adding these initially 44 vessels to Hafnia.
The whole, if you like, strategy now going forward is actually to focus more on returning capital to shareholders in some form and shape, whether through dividends or share buyback, whatever makes most sense. You know, we are not out there to come up with a new massive investment strategy. We're comfortable with the size we have. I think looking at the earnings here, not just in Q1, but also the sensitivity page that was referred to earlier, you can see how much the added vessels that we've put into Hafnia means for the earning potential. There's no strategy about going out investing and buying stuff.
The only thing I could see happening when it's from a growth perspective is if there are more consolidation opportunities, mainly on a share-to-share basis. That's something we will always look at if we feel it's value accretive. Nothing in terms of going out and just buying ships.
Okay. Thanks. Great.
Any other questions? If not, then the word is yours, Gina.
We have come to the end of today's presentation. Thank you for attending Hafnia's third quarter 2022 financial results presentation. More information on Hafnia is available online at www.hafnia.com. Goodbye.