Welcome to the third quarter presentation of Klaveness Combination Carriers. I'm Engebret Dahm. I'm the CEO of the company, and together with me, I have Liv Dyrnes, CFO. Please write in your questions on the webcast solution, and we will go through the questions after the presentation. To remind you, we are an owner and operator of combination carriers that are vessels that are both tankers and dry bulk vessels. In a dry bulk mode, our vessels compete against standard Panamax vessels. In a tanker mode, we compete against standard MR and LR1 product tankers. We have two different type of ships. We have our CABUs, which in tanker mode transport liquid caustic soda to the alumina industry, and on the return cargo, transports all type of dry bulk commodities.
Our new CLEANBUs can also transport caustic soda but have a much wider variety of tanker cargos to transport and can transport all dry bulk commodities. Our strategy is to employ our ships in trades where we transport wet tanker cargos into dry bulk export regions, where we can combine the dry and the wet cargos efficiently with limited ballast in between. In these trades, standard tankers and dry bulk vessels operate with long ballasts, and hence we can improve both earnings and the carbon footprint by our solution. Going back to the third quarter, it's been a spectacular good quarter in terms of market-wise. While product tanker market has remained flat at a poor level, we have had a spectacular run on the dry bulk market with increasing rates from August and September.
Following increased crude prices, also fuel prices have improved over the quarter. It's also been a strong quarter for KCC, where average earnings have increased by 7% to $21,950 per day, which is well within the guiding range of $21,600-$22,600 per day. The CABUs had strong earnings of close to $24,850 per day, up $2,900 per day compared to the second quarter and above the guiding range. Our CLEANBUs has been relatively flat at the earnings of $18,725, which reflects bringing the ships back to combination trading, fixing the ships and tanker trades into dry bulk regions where we get the payoff in the fourth quarter.
Looking at the EBITDA, strengthened by $2.6 million, 17% to $17.9 million for the third quarter, driven mainly by the strong cargo earnings, some negative effects of increasing OpEx due to the dockings. Dividends have been maintained at $0.045 per share after increasing dividends by 50% in the second quarter. There is substantial potential for increasing dividends in this company, and you will see likely substantially higher dividends for the coming quarters based on our policy of delivering 80% of free cash flow to the shareholders, strong guiding for the fourth quarter and optimism for 2022, and the sale of one vessel generating substantial cash flow. To summarize our business proposition, we have a future-proof and prosperous business model.
We have earnings that are far less volatile than the standard dry bulk and tanker markets, given that our earnings depend on both tanker, dry bulk, and the fuel markets. We have over time showed considerably higher earnings than standard tankers and dry bulk classes. Over the last five to six years, earned on average 1.6 above the dry bulk and MR tanker market. We have, not least, the lowest carbon shipping solution in our industry. Starting off with the fact that we have, depending on three markets, have a lower earnings volatility than standard markets. Looking first at the tanker market, falling down from very strong levels last spring and been at low levels more or less at or below cash break even since then.
The dry bulk market has had the opposite development, where from February the market has strengthened step by step up to record levels now in October. The same we see we have on the gray curve with the fuel markets driven by stronger crude prices. We see how two of three of KCC's markets are strong. We are now waiting for the tanker market to come, and we believe the opportunity in the tanker market is coming close. We see it now on the oil consumption getting closer and closer to pre-COVID levels. We see inventories are drawing down to historically low level. You see it in the light blue curve. The supply with limited ordering is controllable and at historical low levels.
The situation in the dry bulk market is different with a very strong demand driving strong booming dry bulk rates. We see strong grain season from the U.S. We see very strong coal shipments and those positive effects from the cap market in the seasonally high iron ore shipment market in the third quarter and the fourth quarter. The dry market is of course driven by the commodity boom, and we see how the price development of coal tripling over the last months. In fact, seaborne trade is actually restricted by supply of commodities at the moment. We also see the effects of increasing congestion in the dry bulk market, where effective supply has decreased by 5% this year due to congestion and despite increasing speed in the market.
Looking at how we are positioning our company, we are in the process of adding contracts on both the dry and tanker market, concentrating on index linked contracts to maintain upside potential in the market. Looking first on the tanker market, we see in the light blue the operational coverage, meaning the physical coverage we have on our ships, 76% covered for fourth quarter and fixed rate coverage of 62%. The difference is the index linked contracts. We have no fixed rate coverage for next year, an average around less than 10% operational coverage.
As mentioned, we are in the process of concluding several caustic soda contracts in the cargo segment after we concluded the large CPP contract with one of the major oil companies for the CLEANBU in early second quarter. We expect to bring up the operational coverage through these contracts up to around 40% at the end of this year, and the fixed rate coverage for the tanker sector will be around 25%, meaning we have a 75% market exposure in the tanker segment for 2022. Picture's a bit the same in the dry bulk market. Operational coverage close to 70%. 76% fixed rate coverage for the fourth quarter, which includes also the FFA book. For next year, we have no operational coverage.
We have some limited FFAs, accounting for 19% of the capacity, and we have recently entered into so-called collars options that gives some protection for falling market, but maintaining much of the upside potential in the dry bulk market for our company. We are in the process of concluding a long-term index-linked contracts that we hope to announce over the coming weeks. We have this quarter taken the decision to sell our oldest cargo vessel, MV Banasol. The asset values for our own private vessels more or less tripled over this year. The sale gives an estimated profit of around $6.5 million and a net cash effect of $10.6 million.
This is start of renewing the cargo fleet, and it improves our balance sheet and the possibility to pay dividends. This sale of vessel is linked to the decision to exit our cargo business in Brazil. After closure of a number of alumina refineries in East Gulf between 2016 and 2019 has underperformed. Our ships are traded to a large extent as tanker vessels in this trade. As you look at the main KPIs over the last two years, we see a substantially lower percentage in combination trade and higher ballast than our cargo business.
By selling this vessel and closing down the business in Brazil, we are actually removing the lowest earnings capacity in our business. As an average, we have over the last two years earned around $3,500 less in the Brazil trade than in our Australia trades. We have already started to exit from Brazil. In August, we subcontracted one of our contracts to a tanker owner in the poor tanker market at breakeven. We relocated one cargo vessel into the dry bulk, the Baumarine pool. We will exit the last vessel from this trade within early 2022.
Looking at the CABUs, we see the effect of putting one ship into the dry bulk pool with higher percentage of the capacity in dry bulk market. We see that the impact on days in combination trade and on ballast is very limited. Earnings for the CABUs increased by $2,000 close to $3,000 per day since second quarter, and which is primarily driven by strong dry markets. The CABUs earned around $35,000 per day in the dry market in the third quarter. We get negative effects from the poor tanker market and also FFA position. So the earnings are the best CABU results since 2015.
They outperformed the standard tanker market by 4.4 and are close to the earnings in the dry bulk market. year-to-date, earnings in the cargo market is around $21,200 per day, which is 3.2 x the MR market and very close to the Panamax earnings. Looking at the CLEANBU fleet, we have, as mentioned, when we presented the second quarter results, we have in this quarter taken an investment of putting the CLEANBUs back into combination trading and fixing the vessels in tanker trade into dry bulk export regions. We see the results hereby by the fact that tanker ships based in the tanker markets has increased from 14% in the second quarter to 52% in the third quarter.
We are positive to see that that implies that the percentage of time in combination trade increased from 30% to 63% from the second to third quarter, and also ballasts reduced substantially from 28% to 12% from second to third quarter. Earnings are flat, and as mentioned, this is a reflection of fixing the vessels in tanker trade. All ships have been fixed in the tanker market from the middle of August and September. As mentioned, we get the vessels into dry bulk regions, and we have fixed a large part of these ships in very profitable dry bulk trades, return trades, with average earnings to date between $45,000 and $50,000 per day for the fourth quarter.
The picture is a bit the same for year-to-date, earnings of $18,400 per day, which again outperforms the standard tanker market. It's still pretty close to the average for the dry bulk market. Liv, you will go through the figures.
Yes. Thank you. Yep, over to EBITDA. Adjusted EBITDA increased by 17% Q-on-Q and ended the quarter at approximately $18 million. The main drivers behind the increase is, as Engebret has mentioned, increased TCE earnings for the cargo vessels of close to $3,000 per day. We had, of course, an impact of a very strong dry bulk market, as well as continued very efficient combination trading. In the Pacific, where approximately 80% of the fleet is employed, we had as high as 85% combination trading. This is somewhat offset by more dry-docking days for the cargo vessels, amounting to an effect of approximately $1 million compared to Q2.
For the CLEANBU vessels, the higher TCE of approximately $200 per day is offset by somewhat higher operating expenses of approximately the same amount, $240 per day. Hence, the net effect of $2.3 million increased revenue and higher OpEx of $700,000. The net effect, $1.5 million. That's a result of a larger CLEANBU fleet. Hence, EBITDA adjusted for Q3 close to $18 million. Total off-hire days increased by 35 days, whereof 32 days related to Barracuda. Barracuda was waiting off China to dry dock. However, this dry docking was canceled as this region in China closed down due to increased infection numbers.
The vessel, after the cancellation, had to wait for spare parts, and in total waited 32 days for both happenings. Operating expenses per day, quite stable for both segments. The CLEANBU ended at $8,300 per day and the CABUs $7,400 per day. We had COVID-19 effects of approximately $1.5 million in Q3, down from $2.2 million in Q2. The main effect, or approximately 50% of these $1.5 million, is related to the Barracuda incident, as I mentioned, where we had lost earnings for 32 days. Depreciation and net financial items increased as a consequence of a larger fleet, higher drawdown on mortgage debt, as well as higher drawdown on the overdraft facility.
Profit for the quarter is $6.1 million, an increase of 74% from last quarter. Return on capital employed, on an annualized basis, close to 7%, up from 5.5% last quarter. The cash position increased by approximately $5 million. As you can see here, operating cash flow close to $14 million +, negatively impacted by working capital changes due to the trading pattern and type of contract. Cash flow from investments -$4 million, mainly related to dry docking and cash flow from financing activities -$4.7 million, included drawdown on the overdraft facility of $7.7 million. Cash position hence close to $36 million at the end of the quarter, while available liquidity included the undrawn overdraft capacity was quite stable.
Equity ratio has decreased over the last quarters as a consequence of the increased fleet. However, we can see that the trends turned slightly during third quarter and ended close to 33% at end of Q3. We expect this to increase over the coming quarters. The refinancing of the bank facility that falls due in Q1 next year is proceeding as planned. We have agreed a term sheet, and the facility has been credit approved by the banks, and we expect this to be finalized during fourth quarter. This refinancing has been illustrated in red in the graph to the right. Over to you, Engebret, for the next chapter.
Thank you, Liv. The trend towards decarbonization of the shipping industry has barely started. To see how these trends are emerging and solidifying, it's interesting to take a look on the S-curve. If you look on how climate policies has evolved over the. We see that the world has used 30 years to establish a framework for tackling climate change. When it comes to climate, the regulations for shipping, more has happened over the last three years than has happened over the last 30 years, and we believe this is just the start. Over the next five to 10 years, we are convinced there will be introduction of much stricter global and regional regulations for shipping, including a largely global carbon tax.
Together with increasing and stricter requirements from customers, we believe this can form a disruptive change in the shipping business over the next 10 years. We believe it's time to act. KCC has today a unique position being the lowest carbon shipping provider in our trades, delivering a 30%-40% lower carbon footprint than competing standard product and tanker vessels. With this trend coming, the value of our competitive advantage will become increasingly important. In KCC, we have set a strategy and a course to strengthen KCC's competitive advantage and expand the lead KCC has towards our competitors. We are scrutinizing every part of our business to deliver large cuts in carbon emission. We are investing in cost-effective and energy efficiency measures.
We are implementing operational efficiency initiatives, and we are optimizing our trading, including what we mentioned regarding concentrating our cargo business into Australia. This activity started back two years ago when we presented our environmental strategy. Where are we today? Looking at the average CO2 emission per ship, we are pleased to see a very positive development both for the cargo fleet and the CLEANBU fleet. During this year, we will see that all the efforts that we have initiated are bearing fruits. Average for the third quarter is CO2 emission of 17,600, which is well in line with the 2022 target of 17,700 tons per ship.
While the quarterly performance may vary, we are confident that the initiatives that are on the way will deliver the targeted performance in 2022. Looking at the carbon intensity, we have also shown improvements over the last years. While looking at the cargo fleet, we see some effects of decreasing trading efficiency due to COVID-19 effects and also the commodity boom and increasing congestion. Looking at the CLEANBU fleet, we are pleased to see positive effects of relocating the CLEANBU fleet into combination trading, where the EOI has fallen from 9.3 in second quarter to 6.5 in the third quarter. We believe that over the next year, we will show improving carbon intensity figures for our fleet.
It's seeing the effects of the ongoing efforts to decrease carbon emission on the fleet, the optimization of the cargo trading and the more efficient trading on the CLEANBUs. We hope to get close or to reach the 2022 target of an EOI of 5.8%. The cornerstone of this strategy is investing in energy efficiency investments on our existing modern fleet. We believe this forms an exciting potential to increase KCC's competitive advantage and our profitability. We have over the last two years identified and tested and started to implement a number of such cost-effective energy efficiency measures. We have here, as mentioned as Tier 1 initiatives, invested around $3 million in mainly low-hanging fruits to reduce hull resistance and optimizing energy management on our ships.
These initiatives should reach close to 10% emission reduction effect and have a very short cash-on-cash payback of around two years. We're also in the process of rolling out investments in energy-saving devices. We have taken decision to install Mewis Ducts on all fleets. We're also about to test out another important energy-saving device, which we hope to start implementing on the fleet next year. These two initiatives should reach emission reduction of around 10% and have a short payback on average of four years. Our strategy is to continue pursuing such energy efficiency measures which are profitable and which will become even more profitable ahead in time as carbon taxes arrive and customers show increasing willingness to pay for cutting carbon emissions.
We have and we will continue to follow closely new engine technologies and new type of fuels that can be implemented on new builds. At the moment, without solid customer support and increasingly stricter environmental regulations and carbon taxes, these measures are not profitable today. In our strategy, we focus on cost-effective and profitable energy efficiency initiatives while following closely the development of other possibilities. Summarizing, we have since listing the company back in May 2019 made substantial progress across our business. We have taken delivery of all the CLEANBU newbuilds and the newbuilding program is now completed. We have proven the CLEANBUs both technically and commercially with increasing customer support and good rating and performance of our ships.
We have delivered increasing fixtures of caustic soda cargoes into our main market in Australia and increasing market share. We have, with the sale of one vessel, starting to optimize the business with concentrating the activity in Australia. We are well on the way to deliver on our decarbonization targets and which will strengthen our position as the market leader in low carbon shipping. The outlook for fourth quarter is strong. We are guiding for the cargoes to maintain the strong earnings of the third quarter.
We are guiding that the clean earnings shall increase from $18,725 to between $23,500 and $24,500 per day in the fourth quarter, where we see the positive effects of combination trade and the dry bulk fixing of CLEANBUs for the return leg. On average, we see earnings increasing between $2,000- $3,000 per day on average for the company for the fourth quarter compared to the third quarter. This is in a situation where the tanker market still is expected to be very weak. Just imagine how this would have looked like if we had a strong tanker market as well.
Looking ahead for 2022, as we mentioned last time, we see increasing signs that the turnaround in the tanker market will happen over the next six to nine months. The strong outlook for the dry market continues, and the fuel prices seems to maintain strength. The outlook for 2022 is very strong, and it will be the first time since the China boom, where both the dry bulk and the tanker market is strong. Looking at the dividend sensitivity, we now have put up an updated dividend sensitivity based on the x-axis, the average earnings for the fleet.
Looking at the earnings achieved for the third quarter, if we translate this into next year, the dividend will increase to $0.37 per share, giving a yield of around 6% by the current share price. If we reach the top level of the guidance for the fourth quarter, you are at double-digit dividend yield. If we achieve gap support of a strong tanker market while maintaining the strength of the dry market, we can see a very exciting prospect for dividends for this company for next year. To summarize again, we believe we have a unique business model that are future proof and profitable with a lower earnings volatility, higher earnings than the standard markets over time, and the lowest carbon emission shipping solution in the industry. Thank you.
Yes. We've had several questions here, Engebret, so I'll take them in order. What explains the low dividend payout ratio, sorry? Is it due to a cash flow based dividend policy and build in working capital?
I think we are in line. If you look on the first three quarters, we are in line with the policy of 80% distribution of the free cash flow. I think that's but as a guide, we are guiding for a substantially stronger dividends for the fourth quarter.
This one is slightly longer, but will the decision to exit the CABU business in Brazil impact the remaining legacy vessels, Bangor, Barcarena, and Banastar? You also mentioned that this will free up liquidity for dividend payments. Should we also expect the proceeds from these CABU sales to fund new CLEANBU fleet expansion?
I think looking at the first, we are employing seven CABU ships in the trades today to Australia, which are three of the new CABUs and four of the older CABUs. With the sale of one vessel, we will add the eighth ship to the fleet, and we hope to get increasing caustic soda fixtures for next year. We will consider, depending on how the market moves, to sell further one ship, but that decision is not made and our preference is to maintain the eighth ship in trades to Australia, depending on availability of caustic soda cargoes. When it comes to the dividend, the strategy is very clear that the cash generated in the business shall be dividend to the shareholders.
Of course, this is up to the board to decide how it's made, but what I believe the cash proceeds from the sale of the Banasol will be distributed to the shareholders over time. That means that new investments will need to be capital will need to be raised by raising new equity in the market.
Yep. In order to reach your 2022 carbon intensity target of 5.8, what is needed in terms of operational metrics such as percentage in combination trade and ballast factor, et cetera?
I don't have the exact figure at hand. Again, we believe that the fact of concentrating the CABU business into Australia, where we today have had a ballast ratio of 10% or less, and getting the CLEANBU into combination trade where we saw that we had in the third quarter something like 12% ballast, I think is a good starting point. It's a combination of both the operational KPIs and also delivering on further cuts in carbon emission and energy efficiency of the ships that we are on the way to deliver.
Can you give an overview of where CLEANBUs are positioned in terms of combination trades going into next year and new contracts in the CPP market?
When it comes to new contracts in CPP market, as we announced in the second quarter presentation, we have entered into a contract with a major oil company which has a duration of 12 months with two years options. We expect coming into next year to build on this, increasing with further contracts. But it's a bit too early to say the exact capacity which will be booked up for the CLEANBUs. But we see that in today's markets, we operate two vessels in Atlantic. We operate the remaining vessels in the Pacific and in trades from typically Middle East, the Far East to Americas and Europe.
Congrats on the results and Q4 rate guidance. Sorry if I missed it. The Q4 rate guidance, what are the implied achieved tanker and bulker rates?
It is basically the current FFA markets that are assumed in the rates. We see now that a high proportion of the capacity is already booked. I believe I can't recall exactly the FFA rate for the fourth quarter in price. That's well above $30,000 per day for Panamax. For the tanker market, it's typically for the allowance, it's a Worldscale of 125, I believe, for TC5. It's a pretty poor tanker market assumed in this forecast and guide.
Yeah, that was it.
Okay.
Oh, sorry. One final question.
One more.
When will finally CLEANBUs have the required high rates versus CABUs?
I think, you know, the CABUs earnings reflects also that we had a contract coverage in this year that delivers a higher earnings in the tanker market than we have achieved by operating the CLEANBUs in the stock market and on index-linked contracts. So I think that explains part of the reason. Of course, also the trading efficiency is key. I think you're looking at the second half, and especially now the fourth quarter, we see that we are progressing quite a bit to improve earnings. Also both relates to the CLEANBU and the CABU earnings. Of course, we have had a negative effect of the FFAs in the dry market in this year.
I think coming into next year, I would expect that the CLEANBUs should deliver at least the same earnings as the CABUs and possibly more, and likely more if the tanker market improves.
Yeah, that's it. Thanks a lot.