Euronav (EURN) Q1 2022 Earnings Call Transcript

Euronav (EURN -0.79%)
Q1 2022 Earnings Call
May 12, 2022, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Euronav fourth quarter 2021 earnings conference call. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Brian Gallagher, head of investor relations.

Please go ahead.

Brian Gallagher -- Head of Investor Relations

Thank you. Good morning, and afternoon to everyone, and thanks for joining Euronav's Q1 2022 earnings call. Before I start, I would like to say a few words. The information disclosed and discussed on this call is based on information as of today, Thursday,12th of May 2022 may contain forward-looking statements that involve risks and uncertainties.

Forward-looking statements reflect current views with respect to future events and financial performance and may include statements concerning plans, objectives, goals, strategies, future events, performance, underlying assumptions, and other statements, which are not historical statements of fact. Forward-looking statements reflect current views with respect to future events and financial performance and may include statements concerning plans, objectives, goals, strategies, future events, performance, underlying assumptions, and other statements, which are not historical statements of fact. All forward-looking statements attributable to the company or to persons acting on its behalf are expressly qualified in their entirety by reference to the risks, uncertainties, and other factors discussed in the company's filings with the SEC, which are available free of charge on the SEC's website at www.sec.gov and on our own company's website at www.euronav.com. You should not place undue reliance on forward-looking statements.

And each forward-looking statement speaks only as of the date of the particular statement, and the company undertakes no obligation to publicly update or revise any forward-looking statements. Going forward. Actual results may differ materially from these forward-looking statements. Please take a moment to read our Safe Harbor statement on Page 2 of this slide presentation.

I will now pass over to chief executive, Hugo De Stoop, to start with the slide on Slide 3. Hugo, over to you.

Hugo De Stoop -- Chief Executive Officer

Thank you, Brian, and good morning, afternoon to wherever you are and welcome to a first quarter earnings call. I will run through the Q1 highlights before passing on to Lieve Logghe, CFO, to give more details on the financial with a focus on our balance sheet and P&L. Brian Gallagher, our head of IR and research, will then highlight some key trends in the wider tanker markets and Uranus positioning within it. Before I return to summarize our strategy and outlook.

So turning to Slide 4 and the Q1 highlights. It was a busy quarter for Euronav on many fronts, but we are particularly pleased with our fleet modernization program, which has a strategic focus with nine vessels transactions during Q1. Indeed, we sold four older VLCCs and acquired two modern ones, and we sold one Suezmax currently owned and took delivery of two brand new super eco-Suezmax, that we had purchased last year as they were still under construction, but for the -- for a defaulted party. This in turn has improved further the age profile of our fleet.

Freight rates were under pressure for most of the quarter. But the onset of the conflict in Ukraine in early March caused an important dislocation in the oil markets, which in turn has proved to be a positive catalyst for tanker markets. This has driven sequential improvement in freight rates across all segments, starting specifically with smaller ships benefiting from the Russian dislocation and gradually impacting larger ones. While freight rates in absolute terms remain disappointing, the direction of travel is encouraging, especially in Suezmax, with rates on average a $20,000 per day for the quarter -- for the current quarter.

I will return later in the call to expand on our thoughts on some of these trends and the outlook. But it will now pass over to Lieve to provide more details on the financial lever. Lieve, over to you.

Lieve Logghe -- Chief Financial Officer

Thank you, Hugo. Before I start, you will have noticed our financing and markets efforts are being recognized, which reflects on the hard work by our employees. Turning now to Slide 7 and the balance sheets. Focusing firstly on our balance sheet, which remains strong and supporting and financing the expansion of our platform.

Our two-year liquidity runway remains core to our strategy, and while lower than Q1, it is sufficient to deal with more duration to the current [Inaudible] cycle. Leverage has picked up toward our self-imposed limit of 50%, but our availability of financing remains good, and optionality and further fleet recycling readily available, given a buoyant sales and purchasing markets. I would now like to dive into our income statement and give more detail on Q1 performance on Slide 8. As Hugo highlighted earlier, while small freight -- freight rates continue to sequentially improve quarter-on-quarter.

Strong cost control has allowed us to progress on Q1 2022, even though we have had to endure some [Inaudible] costs during the quarter related to our corporate backgrounds. As we highlighted in Q4, our depreciation approach has been updated and it was pleasing to bank a capital gain on some of our legacy sales and respect arrangements during Q1, which we announced in early January. I would like to spend a brief moment on our fuel hedging, which continues to be a net benefit for Uranus. Uranus executes a 100% hedging program to manage volatility of the company's fuel stock.

The paper position, which is booked in the financial results of this quarter for a total amount of minus $16.3 million is more than compensated by the realized gains on consumption, and the unrealized gains on the fuel stock for a total amount of $20 million positive. I will now pass on on to Brian Gallagher to run through current thoughts on the tanker markets.

Brian Gallagher -- Head of Investor Relations

Thank you, . Lieve. On Slide 10, we look at the tragic events of Ukraine and the impact that they've had from the Russian dislocation, which has had a major impact on our market. Effectively, this catalyst has triggered a set of reactions which have been largely positive for tanker operators.

Slide 10 shows the before and after effects of Russian dislocation and also how we anticipated developing. In the left hand side, you can see the relatively stable 4.5 million barrels per day or so in Russian exports were largely seaborne driven. There were made every single day before March. Most of this East [Inaudible] and Far East markets will continue to remain unchanged, albeit under some pressure from sanctions.

The key impact, we believe, has been and will continue to be in the Western or Baltic ports, which have traditionally exported between 2.5 million or 3 million barrels per day to the EU. This [Inaudible] was performed by Suezmax and Aframax vessels, these ships are now sailing around Europe and directly into Far East markets, taking this Russian very long distances. To replace the cost of oil, the EU is already taking more oil from the Middle East and from the Atlantic, mainly Brazil. North Sea, U.S.

ports as well as West Africa. This trend, we believe, will deepen and strengthen. And then we also anticipate the Russian production will probably fall by around about 1.1 million barrels per day. This has seen the sector benefit from slightly lower and smaller volumes of crude moving, but the crude is now moving much greater distances or tonne miles.

This impact still has some way to run, we believe, and will take over the summer months to fully impact the scale of this dislocation. But overall, it is a very strong positive for the tanker market sector. And as you can see from Slide 10, we believe the spillover effects are already starting to affect and will continue to be a positive effect of the VLCC market. Important to remember that VLCC cannot discharge a load in any of the Russian ports.

Therefore, it's never really been a market for VLCCs. Hence, the impact has been largely seen on Aframax and Suezmax categories. Catalyst, for wants of a better word, have been the key feature in our market over the last quarter or so. And if we now turn to Slide 11, we can see other short-term signals which are largely positive.

Four key factors we address on Slide 7, bottom left U.S. crude exports have risen on a full weekly average basis by over a million barrels per day, or 41% since mid-January as a mix of increased production, release of strategic reserves, and attractive into oil pricing has boosted exports. These barrels tend to be very long haul in transportation and support building of a better outlook. When consider the top left, I'm looking at the recycling activity.

Top left shows that this has begun to rise again. In April alone, we saw six Suezmax the global fleet, which is a very large number on a monthly basis. And this follows the Aframax sector, which has been shedding tonnage historically earlier than VLCC and Suezmax in every cycling cycles. Top right underpins what we've been seeing on a day-to-day basis, volatile but rising crude volumes.

In April recorded the highest global volume on a monthly basis in two years. This is another encouraging data point. Finally, if we look at bottom right, we can show the direct impact of the Russian dislocation. Russian ships made up around about 7% of the Aframax fleet, and about just under 3% of the Suezmax fleet.

This is enough to have driven a much tighter market in those categories and hence freight rates rising quickly and to extreme levels on specific routes. VLCC cannot load, as I mentioned before, all discharged directly to Russian [Inaudible] books. There's not had much of a direct impact. We're now seeing a substitution effect as VLCC are being used to replace the barrels lost from Russia to the European ports, from the Middle East, and from the Atlantic.

We now turn to Slide 7 and the medium-term drivers, which continue to build positive value for our large crude tanker market. Slide 7, which looks at the mix of the immediate future on the left, highlighting the still very heavy special survey program we have for older tonnage, namely those ships through the 20 year special survey in the VLCC in [Inaudible] sector. This represents around about 4% of both catalysts alone over the next 12 months. And again, this is a very important point for owners to decide whether they want to continue to remain in the sector will take the very attractive scrap prices that are currently available.

The right hand part of the chart looks at the absence of new orders of VLCC. We've not seen a VLCC orders since it's early July, and the reasons behind this. [Inaudible] is scheduled this week indicates that it's not just an absolute dollar issue, although that is important. A brand new plain vanilla VLCC costs $150 million at the ports when reported today.

And this also means that in order to make an economic return of 10%, the analysis that they conclude needs around about $46,000 to $47,000 per page of the freight rate in order to justify the entry price. With steel prices remaining high and the yards full of the shipyards constructing ships, it's difficult to see how this barrier to entry is going to be lowered any time soon. I'm now going to switch gears and look at what was an important milestone last week for Uranus, namely the unveiling of a decarbonization pathway that we now highlight on Slide 30. In summary, there are two broad stages to our approach on decarbonization, which will end up with us being net zero by 2050 with an ambition to beat that timeline.

Between now and 2030, we're looking to reduce the energy we use, as well as investing in future technologies before the second stage from 2030 onwards, where the focus will be on adopting cleaner energy and scaling up that investment in technology. Reducing CO2 emission intensity by 2030 by 40% will be an important pathway and milestone on this journey. And on our commitment to get in line with the Paris set trajectory by net zero by 2050. We believe this is very, very attainable and in fact we're very confident we can actually beat this time, as I mentioned earlier.

Uranus attributes in managing the energy transition of decarbonization are, we believe, among the best-in-class already in the tanker sector, if not in the wider shipping community. We encourage all of interested in Euronav to review our 70 page presentation from last week, which is on our website with a transcript and a replay also available. I will now pass it back to chief executive, Hugo De Stoop to give some concluding remarks. Hugo, over to you.

Hugo De Stoop -- Chief Executive Officer

Thank you, Brian. Euronav platform is working well, is well-equipped to deal with the next stage of cycle with high quality assets, a strong balance sheet and the right level of liquidity. We have addressed and will continue to address our [Inaudible] age profile as well as the positioning of that fleet. We've also laid out how this platform going forward will decarbonize and meet the challenges of the energy transition.

And we have outlined this recently in our ESG event. We believe that our platform -- will deliver enhanced returns for our stakeholders going forward. It's no turn on the positioning in the past cycles on Slide 16. Euronav continues to manage its business, as we have always done in a disciplined and focused manner, applying high governance standards and a methodological approach across the platform.

As both Brian and Leave have highlighted, we have been busy in positioning ourselves for the next stage of the cycle. It is important to remember that we are in a cyclical industry. Consolidation opportunities are often present, but timing is always the key. The chart on Slide 16 [Inaudible] the VLCC retail price and the one year time charter rate, which are two key variables within our markets.

Historically, we have executed consolidation transactions at a similar point in the cycle. 8 years ago with the acquisition of the most crude tanker fleet and 4 years ago when we merged with Generate. We now proposing to merge with Frontline and to offer a material consolidation transaction in order to deliver further shareholder value as we enter into the next stage of the tanker market. This exciting development and merger of two leading companies in the space with is a strong signal of our confidence in the sector.

Turning now to the summary slide and outlook on Slide 17. Another upgrade is driven by the catalyst that has come in tragic circumstances from the dislocation from the Russian oil situation. This will drive, we believe, sustained change in tonne miles, as Bryan highlighted, in swapping out Russian barrels to Europe for those from Middle East and the Atlantic. And Russian barrels transported over much longer distance than before.

Elsewhere, demand and supply of oil offer some encouraging data points with small but consistent upward trends. And some supply looks well underpinned given the order book at 25 year lows and global global fleet age profile at 20 year highs. Thank you for your time and attention. With that, I will pass back to the operator for your question.

Questions & Answers:

Operator

We will now begin the question-and-answer session. [Operator instructions] And our first question will come from Jon Chappell of Evercore. Please go ahead.

Jon Chappell -- Evercore ISI -- Analyst

Thank you. Good afternoon. Hugo, I understand there's sensitivities about what you can say regarding the proposed Frontline merger, but maybe you could just help us understand the next steps. I know the AGM is next week.

What does a term sheet mean versus an actual closed deal? What steps need to be take to get the term sheet to a actual proposed deal? Is it just clearing the AGM and getting the board on board, so to speak? And just what are the other building blocks that to bring this to finality?

Hugo De Stoop -- Chief Executive Officer

Yeah. Thank you, John. And, yeah, we appreciate that. There is a limited amount of information we can we -- can show on this call.

But you are absolutely right. The first step is to go over to the AGM next week, and then have the Board reconfirmed the merger, and then after that we will update the market with the next steps, the timing and some of the bits and pieces that we've been working on. But we can only do that after the AGM.

Jon Chappell -- Evercore ISI -- Analyst

OK. And then I know this is a stock-for-stock deal and you still are sitting on a fair amount of liquidity, but are you in a strategic holding pattern until there's more clarity on this plays out? Or can you continue the rejuvenation of the fleet either through sales or purchases as -- until you get to the finish line on this deal?

Hugo De Stoop -- Chief Executive Officer

No, absolutely. What you see is that we are not resting on our [Inaudible]. It was a very busy quarter on that -- on a number of ships transaction, as we have explained in the preparatory remarks. And we have more in the pipeline, indeed.

So the two companies are being run independently until a merger happens. And we will continue to work hard both on the stock market and DC front, but also on the fleet rejuvenation. And that's something that we believe is the right time for. Volumes are already ahead of the market, as you've seen.

I mean, very strong numbers from the vessels that we saw. And then it was -- we found some opportunities at what we believe are attractive price, especially when you bring in the element of consumption. Because through [Audio gap] the vessels that we sold were designed to what high speed, speed that we were performing 10 or 15 years ago, whereas the two VLCC that we purchased were designed to at the current speed and very economical with the latest eco design. The same for the two Suezmax.

And as you know, our VLCC feed is relatively modern, but also back fleet needed some rejuvenation, and that's what we have done last year when we purchased an order of purchase contract in order of three VLCC, so a total of five. So all of that is part of the strategy and that strategy doesn't stop to the contrary. I think that's -- the more the merrier and hopefully the market appreciates it.

Jon Chappell -- Evercore ISI -- Analyst

That's helpful. That -- we'll call that A and B to question one. My follow up question for for Brian, this diesel shortage issue seems to be gaining a lot of momentum. And clearly, your [Inaudible] crude.

Have you thought about the secondary and even tertiary fallout of these global diesel shortages and what that may mean to the crude markets?

Brian Gallagher -- Head of Investor Relations

Yeah. I think, as you know, Jon, better than anyone else on the call, we -- should be markets working in weeks and months and that's the duration of our voyages. Whereas off the capital markets see something today and they want to know what the impact is tomorrow. So we do try to stress on the call wins dissipate a lot of this Russian dislocation I still got some way to go.

We're in the early stages of it from a shipping market perspective, in direct answer to the diesel side of things, yes, I think we're getting such an extreme elements of dislocation now. You're seeing it with very high rates that I think we would expect to see some spillover. The arbitrage, quite frankly, can't last forever. We're already seeing that arbitrage, which is beginning of doing some heavy lifting of the VLCC rates as we're seeing.

So as mentioned, Aframax cargoes being merged into VLCC cargoes and I think you'll get some blurring at the margin with the product market as well. But it's a bit early yet. We've actually seen that. I think there's some way to go on the arbitrage within that, the tankers categories.

And if we have more duration and it looks like it's likely into the summer months on the diesel side of things, then it certainly will come through. And you're hearing that from some of the players like Valero, etc., indirectly involved in that space that there does seem to be some duration. But I think also on absolute in output we would expect to see is further continuation of the U.S. exports of crude because there's obviously some slated deliveries from the strategic reserves, and they are obviously going to come over and a lot of that is being used as feedstock into the European refiner -- refinery because we know expressly the U.S.

refinery slate is already full and they don't need that crude. So absolutely, there's an absolute and secondary benefits I think. But I think for the diesel side of things that we've got to wait till next quarter before we can give it more clarity.

Jon Chappell -- Evercore ISI -- Analyst

OK. That's very helpful. Thank you, Brian. Thanks, Hugo.

Operator

Our next question comes from Frode Morkedal of Clarkson Securities. Please go ahead.

Frode Morkedal -- Clarksons Platou Securities -- Analyst

Thank you. Hi, guys. First question regarding the proposed merger with Frontline. Is it correct that the shareholders voted 75% majority needed to get it passed?

Hugo De Stoop -- Chief Executive Officer

It's a little bit more technical than that. So there are many ways to approach a combination, and obviously, that's what we are working on at the moment. So if you need to think about, I would say, a full fledged merger on day one, you need 75% of the votes that are being presented at a special meeting. But as I said, on the structure that could become complete, which require a lower amount of votes.

Frode Morkedal -- Clarksons Platou Securities -- Analyst

OK. Like an acquisition, I guess. --

Hugo De Stoop -- Chief Executive Officer

Well -- I cannot tell you much more about it, but you need a simple majority to just take control of a company, of course, and that's 50% of one share.

Frode Morkedal -- Clarksons Platou Securities -- Analyst

That's understood. Second question is on the market, things like the Russian oil exports haven't been holding up fairly well so far. But according to the International Energy Agency which had a report today. They said that on May 15th, the major oil trading houses are supposed to have to halt all transactions with Russia, I guess.

The question is, you foresee any immediate impact on the tanker market from that winding down process?

Hugo De Stoop -- Chief Executive Officer

I think I think it's fair to say that you have the efficient sanctions and quite frankly, people if you make a difference between sanctions and an embargo. So the sanctions is what we have seen in Venezuela and in Iran, which are supposed to cover everything on a worldwide basis, using the currency as a way to prevent people from trading oil, namely the dollar. Whereas, embargo means that you cannot export or import European into the U.S., the Russian oil. So there is -- there is a series of so-called sanctions but also embargo toward the end of the year.

[Inaudible] in place and then you have a lot of people who have declared that they will do this or not do that. As far as the Russian oil or other Russian commodities are concerned. As Brian said, we have seen definitely the first impact of that into the smaller size, the Aframax that are the spillover effect, as you've seen in our numbers, into the Suezmax. And quite frankly, we went out of this trough on the VLCC probably because of that as well.

And as Brian said, this is because of combination. So to answer your question, yes, we should see more of that happening. And therefore, that should benefit the entire tanker market again in the same order, small ships, because the Russian oil is usually transported on Aframax and up to five vessels, but with consequential -- sorry, consequences on the other market, because the longer the distance you need to transport all loader, the bigger the ship you need, for obvious reasons, of economies of scale. So what we anticipate to see future is probably liftings being done on smaller ships, and then later the into VLCC to go all around the world and probably the Far East in India and China sort of place to carry the Russian oil where those people will be able to buy.

Because, as I said, this is an embargo, not the -- not strictly speaking, a sanctions by the Americans.

Frode Morkedal -- Clarksons Platou Securities -- Analyst

Right. Thank you for the color. That's it for me. Thank you.

Operator

The next question comes from [Inaudible] of ABN. Please go ahead.

Unknown speaker

Yeah. Good afternoon, gentlemen and ladies, of course. Three questions. And going back on the, let's say, the merger announcement.

In last week's presentation, you again highlight that you to significant synergies and you roughly quantify what is significant for you is that $10 million per annum, $30 million or $100 million per annum? Then secondly, can you somehow give more clarity on and maybe quantify on your expected cost synergies and expected revenue synergies separately? Third, what is, still not clear to me, can you in any way explain where the demerger ratio is coming from? Why 145 Frontline share for one [Inaudible] share and not for instance, something like, two Frontline shares for one year share? Those are my questions.

Hugo De Stoop -- Chief Executive Officer

Yeah. Thank. Thank you very much for that. Again, we will give a lot more information about the merger after we have had our AGM.

It is obvious that we expect significant synergies and indeed there are different buckets. I think along on the revenue side, it is about utilization. And so, when you think about traditional shipping, we usually carry over from production base to the refineries and then we come back empty. But obviously, the bigger the feed, the more optionality you have on triangulation and these sort of things.

So we will come back with a hard number, even though that hard number will be an estimate, obviously. On the other items. The logical ones are G&A. As we said, we don't expect a lot of synergies in the G&A because two companies are structured in very different ways.

So Frontline is outsourcing part of the services, whereas Euronav is more vertically integrated and the model that we are thinking of is a combination of both. So there will be synergies that will be quantified and we will announce into the markets with more precision and obviously how do we get there? On the opex, again, this is very logical when you are thinking about procurement. This is economies of scale. So you are dealing with more volume in pretty much everything that you buy.

There are some bigger elements than other when you think about the fuel that we buy. When you think about the [Inaudible]. So obviously, this is a numbers game. And as always, if you are a more important client for your service providers, then you can bargain a better price.

And finally, and maybe importantly, on the financing side, we believe that the platform will be very attractive to many people providing capital to companies, especially on the debt side. And here I am thinking about the banking, the banking side, but also the bond side, which should benefit from an even better credit rating. So it's too early to have numbers, but we are working and crunching the numbers and will communicate that in due course. And certainly ahead of a merger proposal that will be put before both sets of shareholders.

As far as the ratio is concerned, I think that we didn't really want to come to market with the calculation behind it. That was a result of the negotiation. Usually when you do that in shipping, you look at the energy of the two companies. In the end, it is relatively simple calculation because we have hard assets, ships, namely, and then we have a certain amount of debt and that gives you the NAV number, and that is the starting point of any conversation.

And the rest is about negotiation.

Unknown speaker

OK. Clear. Thanks. You're welcome.

Operator

[Operator signoff]

Duration: 33 minutes

Call participants:

Brian Gallagher -- Head of Investor Relations

Hugo De Stoop -- Chief Executive Officer

Lieve Logghe -- Chief Financial Officer

Jon Chappell -- Evercore ISI -- Analyst

Frode Morkedal -- Clarksons Platou Securities -- Analyst

Unknown speaker

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