Hello, and welcome to the Scorpio Tankers Inc. third quarter 2022 conference call. I would now like to turn the conference over to Mr. James Doyle, Head of Corporate Development and IR. Please go ahead, sir.
Thank you for joining us today. Welcome to the Scorpio Tankers third quarter 2022 earnings conference call. On the call with me today are Emanuele Lauro, Chief Executive Officer, Robert Bugbee, President, Cameron Mackey, Chief Operating Officer, Brian Lee, Chief Financial Officer, Lars Dencker Nielsen, Commercial Director. Earlier today, we issued our third quarter earnings press release, which is available on our website, scorpiotankers.com. The information discussed on this call is based on information as of today, November 1, 2022, and may contain forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statement disclosure in the earnings press release, as well as Scorpio Tankers' SEC filings, which are available at scorpiotankers.com and sec.gov.
Call participants are advised that the audio of this conference call is being broadcasted live on the internet and is also being recorded for playback purposes. An archive of the webcast will be made available on the investor relations page of our website for approximately 14 days. We will be giving a short presentation today. The presentation is available at scorpiotankers.com on the investor relations page under Reports and Presentation . The slides will also be available on the webcast. After the presentation, we will go to Q&A. For those asking questions, please limit the number of questions to 2. If you have an additional question, please rejoin the queue. Now, I'd like to introduce our Chief Executive Officer, Emanuele Lauro.
Thank you, James, and good morning or afternoon, everyone. Thank you for taking the time to be with us today. This has been a great quarter for Scorpio Tankers. The company has generated its largest quarterly profit in the company's history. Significant cash flows from a strong rate environment are transforming the balance sheet and improving the quality of Scorpio Tankers as an investment. Our capital allocation prioritizes the balance sheet, as we've said before. Year to date, we have repaid over $720 million in debt. Since June, we have given notice to exercise the purchase options on 23 leased vessels. We will reduce our debt by almost $1 billion this year. In addition, we have returned capital to shareholders primarily through our buyback program.
In fact, since July, we have repurchased $120 million of our common shares at an average price of $38.56. The company will continue to reduce its leverage, maintain a strong liquidity position, and opportunistically repurchase shares. Fourth quarter earnings have started strongly. We have booked $45,500 per day for 52% of the available days on the quarter. We continue to see global refined product inventories remain near historic lows, and supply remains very much constrained. The thesis of a changing refinery landscape, increasing exports, and ton-mile demand is actually playing out. Our customers expect these current market conditions to be sustained. This is evidenced by the increase in time charter rates and activity.
Not only the rates at which customers are willing to commit are higher, but importantly also the period to which they are willing to commit is longer. We continue to agree with our customer views, and as significant shareholders, we're excited about the constructive outlook for product tankers and remain committed to creating long-term shareholder value. I'd like to thank you for your continued support, and I will now pass it over to James, who's gonna go through a brief presentation. James.
Thanks, Emanuele. Slide eight, please. Since March, the refined product tanker market has been resilient. Rates have oscillated between $30,000 and $60,000 per day, even during seasonally weaker periods such as refinery maintenance. While our thesis and outlook remains the same, it would be remiss of me to say that the confluence of factors and degree to which those factors are impacting our markets is unprecedented. Slide nine, please. Refined product demand continues to increase as the global economy reopens from the COVID-19 pandemic. However, for several quarters, demand has outpaced supply, leading to a period of significant inventory draws. Since July 2020, the United States has drawn over 400 million barrels of crude oil and refined product.
Globally, distillate inventories have decreased over 200 million barrels and have not been able to build since 2020, despite lower jet fuel demand and higher refinery utilization. With demand expected to increase through 2023, refinery output will need to increase to meet incremental demand. Low inventories, growing demand, and higher refinery output are all constructive drivers for product tanker demand. Slide ten, please. Since March, seaborne CPP exports have remained above pre-pandemic levels and more recently have trended 500,000-1.2 million barrels a day above 2019 levels. With inventories near historic lows, the ability to supply incremental demand from inventory draws is limited, and thus product tankers now more than ever, are being used to supply more immediate demand.
The global supply-demand mismatch of refined product has less to do with Russia's invasion of the Ukraine and more to do with refining capacity closures, configurations, and dislocations. New refining capacity will help to alleviate global shortages, but it won't be easy and will require increased demand for product tankers. Slide 11, please. While seaborne product exports have increased, so has the distance those cargoes need to travel. As ton-mile demand increases, vessel capacity is reduced and supply tightens. The changes in the global refining system have had large impacts on ton-mile demand, mainly in two ways. First, new export-oriented refining capacity, which is built closer to the wellhead and further away from the consumer. We have seen this in the Middle East, and we'll continue to see it over the next few years.
Second, when refining capacity closes and thus moves further away from the consumer. After a refinery closes, to maintain demand, it often needs to import some of the lost production. We have seen this in Australia. Both scenarios have led to significant increases in ton-mile demand and have structurally changed global trade flows. It's difficult to change refining capacity in the short term, but new capacity coming online in the Middle East is both needed and beneficial for ton-mile demand. If Russian refined exports are diverted from Europe, the market could get even tighter. Slide 12, please. As of October, European imports of Russian refined product had declined from 1.1 million barrels per day to 800,000. Thus, until recently, we have not seen a major shift in Russian refined products going to Europe.
Starting February fifth, any vessel transporting Russian refined product sold at a price above the predetermined price cap will be prohibited from European insurance and finance. It's unclear what the price cap will be, and there are still many details to be worked out. In the event Russian exports to Europe are rerouted to different regions, there would be a substantial increase in ton-miles. Every replacement scenario requires sending each barrel a longer distance. In the event these barrels are rerouted from Europe and split evenly between the regions and countries in the graph, ton-mile demand could increase over 6%. This also excludes the ton-mile impact from Europe to replace the lost Russian imports, as well as the vessel capacity able to complete these trades. Supply constraints will remain an issue going forward. Slide 13, please.
While demand looks robust, supply is equally, if not more attractive. The order book is at a record low with 5% of the fleet on order. Newbuilding orders have been limited, meaningful shipyard capacity is not available until 2025, and more than half the fleet will be 15 years and older by 2025. One assumes minimal scrapping. Fleet growth will be 1% next year and zero to negative the years after. Using higher scrapping assumptions to account for the fleet age and upcoming environmental regulations, the fleet will likely shrink over the next few years. Seaborne exports and ton-mile demand are expected to increase 3.3% and 8% next year, outpacing fleet growth again. The confluence of factors in today's market are constructed individually.
Historically low inventories, increasing demand, exports and ton-miles, structural dislocations in the refinery system, potential changes to Russian product flows, limited to shrinking fleet growth, upcoming environmental regulations. Collectively, they are unprecedented. Slide 15, please. Significant cash flows are transforming the balance sheet of the company and improving the quality of Scorpio Tankers as an investment. Year to date, the company has reduced its debt by over $720 million. Net debt has decreased by almost $1 billion. While we have and we will continue to prioritize reducing our leverage, the company repurchased $120 million of its own shares from July through October this year. At the same time, we have been able to maintain a strong liquidity position, and with the fully delivered modern eco-fleet, we have limited CapEx requirements going forward. Slide 16, please.
In addition to scheduled amortization, we are repaying lease and bank debt. Sale-leasebacks are a form of financing. They are similar to bank financing, except the financial institution legally becomes the owner of the vessel during the lease period. In most sale-leaseback transactions, the lessee has a purchase obligation at the end of the lease agreement. This is the same as a balloon payment at the end of a bank agreement. The early repurchase option of a vessel before the end of the lease is equal to the outstanding debt and can include an additional payment to the financial institution for the early termination of the agreement, typically up to 2% of the outstanding debt. After repurchasing the vessel, the vessel is unencumbered and can be refinanced at a later date at a lower LTV and margin.
As we do this, our daily vessel principal and interest costs will decline. As of today, we have completed the repurchase of 6 sale-leaseback vessels. We expect to repurchase 14 vessels in the fourth quarter, which will result in debt reduction of $219 million. Slide 18, please. Putting this all together, we will reduce our debt by close to $1 billion this year. In the first 9 months of the year, we've repaid $685 million in debt.
In the fourth quarter, we expect to pay $296.3 million in debt. Slide 19, please. Scorpio Tankers has tremendous operating leverage. So far in the fourth quarter, the fleet has booked an average TC rate of $45,000 per day. The free cash flow sensitivity doesn't go out to $45,000 a day in the chart, but if the fleet were to average $40,000 per day for the year, the company would generate almost $1.2 billion in free cash flow before debt repayment, or a little over $20 a share in free cash flow. These are certainly exciting times. Now I would like to turn the call over to Robert.
Yeah. Hi, everybody. Thanks very much for joining, and thank you for your continued support. I'm just gonna speak briefly before we turn it over to Q&A. You know, these are record earnings, as Emanuele said earlier, and normally one might think that it doesn't really get better from here. However, what is so extraordinary is the third quarter is usually our seasonal weak quarter, and the fourth quarter has already, as usual, started much better than the third. Yes, it looks like it is going to get better from here. I would simply suggest not shorting STNG. Just take a look at the cash. I'm certainly not pairing us against crude being long crude oil tankers.
As we can already see, the crude market has moved up, shipping oil to China and India, and it's gonna only be a matter of, you know, weeks or days before India and China step up their exports of product out. Maybe the crude has moved and recovered a little bit earlier. That would be logical. Ship the crude first before refining the product and then refining the product. We'd strongly expect that product will start to flow very shortly, and that will be very constructive for ton miles. So that's all. Thank you again very much, and we're, you know, super bullish. You know, the NAV is moving nicely along to soon probably be around $82 a share or so. Thank you very much. We'd just like to open it up for a Q&A now. Thank you.
We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please take up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. Looks like our first question today is from Omar Nokta of Jefferies. Please go ahead. Excuse me, Omar Nokta, your line is now live.
Hey, sorry about that. Was on mute. Yeah. Just wanted to say congrats on another strong quarter, and based on guidance, looks like things are gonna be, you know, strong yet again. Obviously a lot, I think, to hone in on and talk about, but I did wanna just really quickly, Robert, ask you about the NAV comments you just made. What were you saying you think NAV fairly soon will get to?
I was moving along nicely towards $82. I mean, you've already got a number now that is moving up strongly. If you add this quarter, you add the next quarter, and you have a little bit of, you know, increase in values which you're having, then, you know, those NAVs add up pretty quickly.
Okay. No, that's interesting. I mean, obviously that's a very nice number.
I was only following some of your own reports, talking about one-year targets of $70 or whatever, and out there from analysts, and they obviously have. We've obviously beaten those numbers. We're beating expectations going forward. Therefore, it's reasonable to think that it won't be long before you could get an NAV of $82 or above.
Yeah. Okay. No, exciting. Wanted to ask about the LR2s. The achieved guidance so far for the fourth quarter is, I would say pretty, I guess exceptional, right? $58,000 for over half the quarter. I'd say that's pretty well above maybe the $40,000-$45,000 maybe that the market quote-unquote has averaged. It's also higher than what you did in the second and third quarter when prevailing rates or at least quotes were higher. Can you help us maybe reconcile or maybe just expand a bit on the performance and how we should think about these LR2s going forward?
Lars, please.
Yeah. Hi, Omar. I mean, you know, this is pretty much kind of the leverage of the LR2 that people, when you look at the market reports, they don't really appreciate when they primarily look at the TC1 index route as a round voyage as the marker for earnings. You know, this is very much about how the diversity of the cargo base that we're seeing today and the ability of triangulation that we can see is now taking place. I can give an example just from today really. You know, we've been doing a lot of LR2s from North Asia down to Australia. They do, you know, nice $80 thousand-$85 thousand down to Australia.
We are seeing a lot of cargos now coming out of Australia as well, where we can do backhaul voyages back into China and do good backhaul money as well. Where in the past you would previously have ballasted to the AG and had a lot more ballast around, we can see today that on the LR2s, the way that we can triangulate out of Asia into the AG to the west, the west back to Far East, has really meant that we've been able to leverage the power of the LR2, and the earnings obviously are a testament to that.
Thanks, Lars. Yeah, so trade patterns that continue to evolve and triangulation is just on the rise here. Good. One just final follow-up. I wanted to ask just about the 23 ships that you've exercised options on the leasebacks. You know, what are you guys thinking about those vessels as you start to take ownership of them? Do you refinance those with bank debt? Do you keep them debt-free? Are they sales candidates? What do you think?
I think, you know, the one thing that we can say is we're determined to continue to let's say buy back our more expensive lease finance. Here, what we've got the opportunity to do now, as the balance sheet's improving and you've got strong earnings, you know, you can possibly accelerate that event even quicker. We're getting some very good loan propositions from lenders at, you know, very good low margins, very efficient. So you may actually take some of those ships and get, you know, credit lines on them in order to, in combination with the cash and the ships we've already had our option to buy back, accelerate further and, you know, be able to reduce that cost quicker.
Yep. Got it. Okay. All right. Thanks, Robert.
All right. Bye.
Appreciate it.
No problem.
All right. Cool. I'll turn it over.
All right. Our next question will come from Jonathan Chappell of Evercore ISI. Please go ahead.
Thank you. Good morning. Lars, since you're here, if I can tie together something that James had referenced in the presentation. Back in June, you had mentioned that the impact from, you know, Russian sanctions or even kind of like self-sanctions hadn't really filtered in the market yet. Most of the ton-mile demand was driven by kind of things outside of the war. As we approach the February fifth for the products, you know, actual sanctions, I know there's a lot of moving parts, but can you give us any kind of sense as to what impact it's had thus far, as far as preparations for potential sanctions? Is it greater impact than it was back in June, but still kind of far from the full impact?
Just trying to get a sense for, you know, kind of the next level of disruption.
Yeah. Hi, Jonathan. I think there's two things to that. I mean, we can see that the Asian refiners are ramping up the export. I mean, we can see that the fifth tranche of export quotas that were released was at end of September, early October that that's coming about. You know, we're seeing record amount of volume coming out of Asia, and a lot of that is jet kerosene. I think we're looking at about 6 million tons in November, which is record high. That's gonna be moving primarily, I would imagine, to Western destinations. There's certainly the kind of prep work from further afield that is gonna obviously impact ton miles positively.
In the prompt right now, we're still seeing the same molecules being moved from the Baltic and the Black Sea into the same places as the. You know, they're obviously doing what they can do up to the fifth of February. We're starting to see the early machinations of the cargoes moving from Asia into Europe, and we anticipate this to ramp up considerably in November.
Okay. I mean, this may be difficult to answer, but you know, James said about 6% ton-mile impact if it was evenly distributed across the areas that we would think that cargoes would go, and that's pretty consistent with what others in the industry have said. You know, your best guess, have we seen half of that 6% already? Have we seen less than a quarter of it? I mean, it's an estimate, but just your best guess.
That's a very difficult question to answer, Jonathan. I mean, I have read that, you know, we've seen 8% increase thus far this year, and the 6% is obviously going forward. We certainly see a lot of longer distance voyages taking place. The thing that's interesting, I think, for everybody to understand is that as this changes, you know, the voyages that you would have done in Europe previously would have taken 10 days on a round voyage from Primorsk into Rotterdam. If you wanna move the same product from the Middle East, you're looking at 40 days, right? The math is quite obvious in terms of the distance and what is required. It certainly will have a big impact as we move into the fifth of February.
Okay. It sounds like Robert might get his Thanksgiving bounce this year, just a bounce from a much higher level. One more question.
Robert, I mean, Jonathan, Robert is simply sort of saying to himself that whether or not it's, you know, 8%, 6%, 3%, 2%, 4%, when you know, the market is clearly, you know, in a, you know, whether it's in the low 90s in terms of utilization at the moment.
Mm-hmm.
Any percentage, just 1%, starts to have an exponential, you know, kicker on rate structures at that point in shipping markets.
Yeah.
We've seen that in dry containers, and historically in tankers too.
Yeah. No, completely understand. It just seems like it's going from strength to strength before we even get to the seasonal impact or the full sanctions impact. Last question. I don't know who wants to take this, maybe Brian, maybe James. You know, you've laid out a very clear path for the fourth quarter on the sale-leaseback repurchases as well as the debt repayment. When we shift to 2023, and I'm not asking for a guide or anything, but when you think about 2023 and capital deployment, is there a target leverage you're aiming for? You know, I feel like it doesn't need to be mutually exclusive, deleveraging with capital return in the form of buybacks.
Just any type of ideas we can get to a target leverage before maybe the capital return is kind of accelerated further.
I can answer that one, Jonathan. At the moment we're gonna, you know, we're gonna continue just focusing on deleveraging and as Emanuele said, opportunistically buying back stock. You can see that, you know, we've been doing that as we've moved through. We've recently, let's say, moved from zero stock to being more aggressive in the third quarter. We don't know exactly what opportunities we'll be given. But either way, the majority of the cash flow that we will use, i.e., you know, above 51% is going to be in. That's the cash flow in excess of, you know, breakevens is going to be used to repay debt at the moment. I don't think that at this particular point, we want to worry about working out what net debt or gross debt we want to get to.
I think that can, you know, that can wait for, you know, certainly for 2 or 3, 4 months. It's very important to see the type of curve that we have here. We'll pass on that question, if we may, at the moment.
Okay. Thanks, Robert. Thanks, Lars.
Our next question will come from Ken Hoexter of Bank of America. Please go ahead.
Hi, this is Nathaniel Healion for Ken Hoexter. Just noticed that there were quite a few vessels going out for 3- to 5-year charter out agreements. You know, this is a little bit of a step up from your second quarter earnings. Wanna get the sense of management's view of, you know, still very positive spot market dynamics, but attitude towards contract spot mix, especially heading into 2023.
I think that, you know, we're overwhelmingly spot. I think that on a percentage basis you know we're approximately 10% on charter for three years at very strong rates and 90% spot. Going into 2023, whether we. We've been going along steadily sort of adding you know 2 or 3 charters every you know couple of months or whatever as the market has moved upwards. I think that we can say that going into 2023, we're going to probably be somewhere between 85% and 90% spot because you know we're very bullish on the actual market and the fundamentals going forward.
There's a lot of benefit in just taking up your secure revenue, especially if we go back to the previous question of Jonathan Chappell about, you know, where your ideal debt levels are. You know, part of that is a combination of what secure revenue you have. So if you have very good contracts, you know, fixed forward for 2.5-3-year periods, you can afford to run with a higher debt level than if you're running spot. You know, right, so that's part of what we've been thinking here and part of the reason why we're driving the debt is because we are running a predominantly, vastly predominantly spot fleet at the moment.
The reason we're doing that is we're so constructive and bullish, you know, about the period ahead that you should look at something between 85%-90% spot going into 2023.
Great. Thanks. Yeah, just following up on that, clearly the market dynamics are very, very favorable on the product side. But just so we get a more comprehensive picture of all the factors, could I get a general sense on how operating costs have compared year-over-year? Obviously, fuel is a big component of that, but just maybe against 2021 and how that's contributing to TCEs.
Brian, Cam, do you wanna deal with that one?
Hey, Nathaniel . Obviously fuel has increased. Also vessel operating expenses have increased along the way. You see that from our schedule where we put in our operating costs that have gone up. It's normal inflation costs, travel. Those have happened. Fuel, of course, has been more expensive now, but it's because it's in demand, and that's good for business. That's been more than offset by the rise in revenues.
Okay. Thank you.
Our next question comes from Liam Burke of B. Riley Securities. Please go ahead.
Yes. Thank you. The spot rate environment for the Handysize still seem to be pretty strong. Why are they inordinately strong vis-à-vis the other vessels in the fleet?
You want me to take that, Robert?
Yeah. Okay. Yeah. Hi, Liam. I mean, first of all, you know, if you look at the age profile on the Handysize fleet, it is a lot older than you would see on any other type of vessel. It is certainly a fleet that over the last couple of years have been decreasing. So quality units in the handy fleet is not similar to what you've seen in the MRs and the LR2s or other segments. There's been a lot of product being moved into regionally. To be honest, normally the third quarter would be a very weak quarter for handys, and we would wait until we get into the fourth quarter, and then suddenly we would have a very strong market for the first or the fourth quarter and the first quarter.
We have generally seen a very strong Handysize market throughout the year across all regions. It's not only in the continent or in the Mediterranean, it has also been in Asia, it's also been in the U.S. They certainly have been performing extremely well.
Great. We've got a lot of disruption with Russia coming up in 2023. Do you see any change in the customers, you know, reluctance to use MRs that are over 15 years old, the fact that supply is gonna be pretty tight next year?
Robert, do you wanna take this?
Sure.
Okay.
Uh-
No, go ahead.
No, Lars, you're fine. You go ahead. If you wanna take it, take it.
No, no. No, go ahead, Robert. It's fine.
Look, it depends where it's going to go to and how tight it is. I think the main message is that I don't see the European and the American majors changing their behavior. You know, they're not going to try and save themselves a few dollars by taking an older vessel and going against their own environmental policies and risking an accident. You know, on the margin, sure, if the rates go to high levels, then fine people are going to scramble around to do whatever they can do.
Great. Thank you.
I think I'd like to go back to the previous. Sorry, Liam, what were you going to ask?
No, no, I'm all set. Thank you.
Okay. I was gonna go back to the Bank of America area where they're talking about costs, et cetera. Look, obviously the actual cost structure in shipping is not immune from inflationary wage pressures, et cetera, or input pressures. I think that we've got a very good situation in that we have a very new fleet. It's been recently dry-docked. So we have advantages there. It's homogeneous, so we're less concerned about operating costs here than companies that have older fleets. And we also, in terms of interest rate costs, we're taking down our total debt along the way.
Out of that, you know, 500 or so, 700, including convertibles, you know, fixed interest rate costs. As Brian said, our, you know, we're an unusual industry in that our revenues are so strong right now that they are overwhelming any increase in operations costs and any increases in interest rate costs at the moment. The next question, please.
Our next question comes from Gregory Lewis of BTIG. Please go ahead.
Yeah. Thank you, and good morning and good afternoon, and thanks for taking my questions. Robert, I did wanna ask, I guess Jonathan's question in a little bit different way. You know, I know the leverage is coming down. You know, as we think about breakevens and clearly, you know, you've been through good times and bad times, and anyhow I guess what I would say is even during the bad times, you were able to maintain the dividend. As we think about potential for dividend increases as the cycle continues to evolve, is it more around total leverage or should we be thinking about breakeven vessel all-in breakevens driving that dividend and any potential dividend increases?
Well, I mean, it's partly to do with that, Greg, but it's also right now, we clearly have the surplus cash beyond what we consider is our needs to pay down debt because, you know, in three and a half months, we've used $120-odd million to buy back stock. It's very simple that with the company trading consistently at a steep discount to NAV, and it's doing so, you know, again now, it's a better use of funds to buy back stock than it is to pay dividends.
If we're a little, all a little bit patient here, you know, we'll have less shares to divide the free cash over, and we'll be in a much stronger position to pay dividends if that's the course that we take here.
In a secure way, you know, not just okay one-off dividends and oh my god, the market falls, and we have to cut that dividend.
Okay, great. James, I did, you know, thank you for the slide 12. You know, clearly, it looks like new volumes are gonna be coming out of, I guess, the Middle East here. You know, global refiner utilization has picked up. Is there any way to kind of quantify realizing that numbers are always moving?
Do we have any sense for how much capacity, refining capacity is in the Middle East in terms of like, you know, as we look out in the next year when you know, when the embargo comes in, like how much more ability is there for increased refined volumes out of the Middle East? Have you guys done any work on that?
Yeah. I would say, you know, with Jizan, which is about half of its capacity, it should get to full capacity the end of this year, early next year. It's 400,000 barrels. Al Zour, 600,000 barrels, and then Duqm might come on a little bit earlier. You've got probably about 1.4 million barrels that could come online, definitely one will. That's about 600,000 barrels of ultra-low sulfur diesel that the market really needs. Given where cracks are, I think you will see these refineries try to get to full capacity as quickly as possible. Outside of that, there's not much. I think the only other real region that has spare capacity right now is China.
We have, Lars mentioned, seeing an uptick in volumes coming from China, and they will be necessary to kind of balance this global market.
Yeah. I know a question that I've been getting from at least a few investors is around, you know, I think clearly part of the expectation in 2023, assuming that Russian crude continues to be discriminated against, is that, you know, maybe they send Russian crude into China, and then China turns around and exports it. I mean, that realizing that, I guess, the developed world is not buying Russian crude, you know, I guess once it's refined in China, that kind of I don't have a good word for it, but maybe that kind of washes it. Is that kind of a fair assessment of what could happen?
Cam, would you like to answer that?
Sure, Greg. At the moment, that does sort of relieve further purchasers from sanctions, but we just don't know at the moment how things will evolve.
Okay. All right, guys. Hey, thanks for the time.
Next question comes from Ben Nolan of Jefferies.
Hey, thanks. Can you guys hear me okay?
Yes, Ben.
First one is real simple for Brian. Given all the sale-leasebacks that you guys have been or the options that you've been acquiring and the interest rate or debt coming down, is there any guidance you can give us on how we should think about depreciation and interest on a run rate basis from here? Obviously, interest rate neutral.
Depreciation's not going to change. It may switch from one line item to another, but it's going to be in line because that's the new accounting standard. That's how it works, right? It's just if you own a vessel or lease a vessel, it's same in line. Now, interest is a little bit harder because LIBOR and all interest rates have been increasing here. I don't have a number for you right now, but we'll work on something and put something out. Debt is obviously coming down, but interest charges and interest rates are going up.
Okay.
When we get some more.
Okay, fair enough. Of your debt or of your interest, any color as to how much of that is hedged by any chance?
The majority of it is floating. We still have some fixed rate debt out there, not just notes, that we have. We also have some leasebacks that are fixed. It's probably exclusive of the notes, you take them out, it's probably around 10% is fixed.
Okay. All right. A little bit more strategically, Robert Bugbee, clearly the company's in a dramatically different position than it was even six months ago, certainly a year ago. It sort of opens options that really weren't even worth contemplating in the past. Given that, as you sort of look out into the future, I'm curious now if you've given any thought to sort of how you envision what Scorpio will evolve into. Is it something where you sort of see it being the same as it is, sort of a spot-oriented product tanker pure play? Could you envision it being more than just product tankers? Do you see the company as a consolidator or just sort of playing in its lane?
Any change or lack of change that you can sort of foresee developing now that you're sort of on a firm financial footing?
Well, I think what we see is a product market that is, you know, at the beginning of, you know, a very constructive period for it. I mean, right now we're, you know, the particular moment, the conversation seems to be, you know, overwhelmingly about Russia for all good reason, and what the winter could provide or not in terms of, you know, potential energy crisis, et cetera. Underneath this, the fundamentals are very strong. Up until now, the, you know, most of this year it's been about fundamentals. We've got a fleet that's aging. We have a very few vessels on order. We have a long lead time to new buildings. We don't even really know as an industry what type of engines we need or what design those new buildings are gonna be.
We have demand rising and potentially rising over the years in terms of ton-miles because refinery changes. We have refiners continuing to close in areas where the consumers are due to inefficiencies like Europe or environmental reasons like Australia and New Zealand. We have new refineries opening up in places of export, such as the Middle East. The longer-term future for products for the foreseeable future is extremely strong. When it comes to consolidation, you know, we’ve said consistently this year we have no reason to buy ships. We have no reason to order ships. We're even willing to
You may see us, you know, in the weeks ahead, even, you know, sell a couple of the older vessels we have simply, you know, because the price in the market is so high and we have such a dislocation to NAV. Also, you know, we would be, let's say, trimming a little bit the older fleet, keeping our fleet age, you know, the youngest. As far as we can see at this point, the product market itself has a great future and probably, you know, the healthiest of futures among all the bulk shipping markets or the major shipping markets there is, the next few years.
Gotcha. No change in course then is sort of what I'm hearing.
Of course, yeah.
Okay, perfect. If I could slip one in just since Lars is on. The we've heard a lot about diesel shortages and angst about that sort of thing and also heard that, you know, the potential for temporary waivers of the U.S. Jones Act. I'm curious if how you as a international tanker company and somebody who's trading the markets and everything else, is that something that you think matters or does, you know, a temporary waiver of the Jones Act, does it fix anything or does it have any meaningful impact on your market at all?
Yeah. Hi, Ben. You know, I think, first of all, I think it's an interesting political narrative that takes place always before midterms in terms of what they wanna do, with product exports, et cetera, and capping of prices at the pump. I think the likelihood is very minimal. You know, putting a Jones Act waiver into place would have a tangible impact, positive tangible impact for product tankers in the international trade, as there'll be more ships that can be doing that. I think the complexity that's around it politically is so great that, you know, over the last many, many years I have seen it maybe once, for a very brief moment in time. I don't think it would help very much the American consumer ultimately.
You know, the international markets tend to be able to be much more efficient. I think that the diesel shortage that we've been seeing, exacerbated by the Russian situation, but also by refineries closing down and so on and post-COVID with the stock draws have just been a perfect storm. What we will be seeing is there's gonna be a lot more product that's gonna be moving further field, as we've been talking about earlier, from the Middle East, from India, and also from Asia. That's gonna be helping out that dislocation.
All right. I appreciate it. Thank you.
Hmm.
Our next question comes from Turner Holm with Clarksons. Please go ahead.
Hey, good morning, gentlemen. Thanks for taking the call. I just wanted to step back a little bit and think about what the risks for the market could be here. We talked about the 6% increase in ton-miles from Russia or those are the estimates out there. Have you ever seen a macro event or unforeseen circumstance where the market has managed to weaken or ton-miles have managed to go down despite such a strong driver like what we see out of Russia next year? Because I'm looking at the Clarksons data for 30 years, and I don't see it.
Sure. It hasn't been in the past, no. We, you know, we've never, ever. No one has ever predicted the thing that takes you down. I'm sure there's something out there that is potential that could happen that would create a, you know, demand destruction. Usually those, you know, whether it's what Saddam was saying going into Kuwait, whether it was the 1997 Asian currency crisis, whether it was 2001 or, you know, Lehman Brothers, they're pretty unpredictable things that don't tend to get discussed until they actually happen. You are correct that there is no historical precedent, but, you know, that's about as far as I would leave it.
We always have to stay a little bit humble and in front of the gods and, you know, at least anticipate that something crazy to the negative could happen that we can't think of, we can't foresee.
Sure. I mean, to that end, I mean, Emanuele opened the call and he was talking about the growing confidence from your customers as well. That's evidenced by the increase in one year time charter rates. I think they're up 70% or 80% in the last six months, despite the OPEC cuts and the weakening macro environment. I mean, is that the best way for us to begin thinking about rates for 2023? Because it certainly doesn't seem to be what-
It's one way to think about rates, because there you've got a you know what you would call a knowledgeable third party putting their money down. To the degree that ExxonMobil is willing to pay, you know, X, Y, and Z for certain vessels for certain years, and you know that's an open market bid. You know, you'll probably see more than just ExxonMobil doing that rate. You'll see BP or Shell and you'll see the traders too. You know, we use that as a base because why shouldn't you? You know, those people have knowledge. It's a free market and that's, let's say what a market is. Now you can have your own position to model as to whether or not you are on the charterers' side.
The customers actually, when they take a ship in at $35, they obviously think the market's gonna be higher than $35. Otherwise, they wouldn't be bothering to take the ship in. You could take a more pessimistic view around that number. It's a solid, you know, it's a good base to take in terms of a, you know, some kind of indication as a model.
Okay. Thanks so much. I'll turn it back.
This concludes our question and answer session. At this time, I'll now turn the conference back over to Mr. Emanuele Lauro, Chief Executive Officer. Please go ahead.
Thanks very much for everybody's time. We do not have any further comments. The call concludes here. Thank you for your time and look forward to speaking to you all in the next days and weeks. Thank you.