Okeanis Eco Tankers Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 12, 2023

There are 5 speakers on the call.

Operator

Welcome to OET's First Quarter 2023 Financial Results Presentation. We will begin shortly, Aretidis Alafuzos, the CEO Heraklis Speranis, the CFO and Konstantinos Ichinomopoulos, the Chief Development Officer of Okeanos EcoTechers, will take you through the presentation. They will be pleased to address any questions raised at the end of the call. I would like to advise you that this session is being recorded. Heraklous will begin the presentation now.

Speaker 1

Welcome to the presentation of Kiannis Cycle Tankers' results for the Q1 of 2023. We will discuss matters that are forward looking in nature and actual results may differ from the expectations reflected in these forward looking statements. We'll start with Slide 4 and the executive summary. During my first conference call with the company back in February, I was privileged to present our then strongest quarter since inception. I'm very happy to now present you the highlights of yet another record breaking quarter In terms of revenue, EBITDA and net income.

Speaker 1

The firm tanker market dynamics in combination with our Echo, Yonge and Fuel Efficiency has resulted in a fleet wide time charter equivalent of $70,800 per vessel per day. That includes our fixed time charters. We report net TCE revenue of over $88,000,000 an 8% increase from our Q4 of 2022, adjusted EBITDA of over $74,000,000 and adjusted net profit of $1.60 per share, marking yet another quarter on quarter growth. Finally, our Board has declared a 4th consecutive capital distribution of $1.60 per share. That is 100% of our EPS, a testament to our commitment to delivering value to our shareholders.

Speaker 1

In previous quarters, we made certain adjustments Related mostly to our capital structure and then return all remaining available value. Our current liquidity position standing at levels of above $116,000,000 at the end of the Q1, give us the flexibility to return our full profit for this quarter. We continuously monitor our performance, the crude oil tanker market outlook and fundamentals, global inflationary and interest rate dynamics and naturally our balance sheet. We plan on carefully balancing this in the future, while staying true to our promise of delivering maximum available value to our shareholders. Our latest distribution annualized implies a yield against our current trading price of approximately 28%.

Speaker 1

We're now moving to Slide 5. On Slide 5, we summarize our corporate and capital structure as well as our employment profile. On the latter, the latest related to the initial despotico is that we expect her to be redelivered from our time charters in late June. The Milos is also expected to conclude its shorter term time charter within the next few weeks. Both will join our other 10 vessels trading spot.

Speaker 1

The 2 Suezmax long term time charter vessels, Nikos and Nissosikinos and Nissosikinos are expected to be delivered to us sometime within the Q4 of this While we're currently fully financed, we're constantly in discussions with our financing partners, both current as well as potential humans. The current banking market in combination with us being able to demonstrate to our financiers our solid track record and state of the art fleet may provide some opportunities to refinance certain vessels at accretive levels from a pricing and debt service perspective. Of course, we expect a meaningful improvement in our capital structure with the opportunity of the first purchase options coming up with respect to the Milos and the Polygos in the first and second quarter of next year. I will now hand over to Aristides for a commercial and market update. The reason most of you have probably tuned into this presentation for.

Speaker 2

Thank you, Eckley. Overall, it was another record quarter for OAT. To give a recap of Q1, We began with weakness in the freight markets, which carried over from Q4, but this rallied strongly towards the end of the quarter. The rally was driven by the Atlantic basin exports, mostly on VLCCs to Asia and Europe. And these cargoes are less systematic and often driven by arbitrage opportunities.

Speaker 2

At times, The trade seems binary. All of a sudden, the U. S. Gulf and West Africa come alive with 10 live cargoes and this creates great volatility and can quickly We changed the fundamentals of the market. Q1 Chinese crude oil imports were very high in March and marked the record month.

Speaker 2

Chinese refinery is going to maintenance in Q2, so the expectations that imports would come off before increase again once turnaround after turnaround season. Chinese Golden Week holiday travel data show domestic tourists numbers increased by 70% year on year, recovering above 2019 levels and this is from data from the Chinese Ministry of Tourism. Data from the ministry also revealed that flight traffic jumped up 500% year on year and 4.2% above 2019 levels. We are more focused internally on Chinese Transportation and travel demand is a post COVID recovery driver of oil demand. On both segments, we look To take advantage of longer voyages when opportunities rose, we continued our strategy of maintaining a strong Western presence on our VLCC fleet.

Speaker 2

We put a lot of focus into optimizing our selections of voyages to limit waiting and maximize the speed during late in and ballast passages. These two factors can have a greater effect on the TCE of the voyage than small to medium fluctuations in market rates, And this is even more apparent on shorter voyages. During the quarter, we have achieved a fleet wide TCE of $70,800 per operating day including our time charge. Our VLCC generated $76,300 per day in the spot market, 50% outperformance relative to our tanker peers that have reported Q1 earnings. And our Suezmaxes generated 95,900 For spot day, a 56% outperformance relative to our tanker peers.

Speaker 2

We have also reported 2 1000000. These numbers reflect our actual book TC revenue within the quarter as per our accounting standards. Moving on to the next slide for guidance and a market update on Q2. First, let's quickly recap what has changed since last week in the market. The weakness on the VLCCs in the West Bank As well as all of the available tonnage and rates have firmed from around $2,800,000 for U.

Speaker 2

S. Gulf CVA voyage to mid-four million In just under a week. Within less than a week, the U. S. Gulf, Guyana and West Africa has absorbed A very over tonnage Atlantic basin VLCC position.

Speaker 2

The positivity in the West and the increase in rate has also given confidence along with cargo allocation by suppliers in Asia is also expected to come out of Sunday, so we expect more from Enquire on Monday. To give you an idea of how quickly the market fluctuated in the West, we put a ship on subs, which was in English speaking, almost $25,000 per day higher than what we would have fixed here 2 days earlier. The market snap back In a little over a month since the OpEx voluntary cuts were announced. I find this positive and we expect to see further volatility in the market going forward. Reviewing Q2 then, Q2 began with eventful news from OPEC that they will voluntary cut oil production.

Speaker 2

As usual and even more as it's voluntary, we expect OPEC Plus overall to not cut to the full extent stated in their afternoon, Which ruined my Sunday and I assume a lot of other Sundays as well. These cuts came at an inopportune time though. As rates were falling anyways for VLCCs, sentiment was weak and refineries in Asia were going into maintenance. OPEC cuts will always have the greatest effect on the VLCC market and as expected that market weakened on a comparative basis much more than the Suezmaxes and The VLCCs have found the floor as we discussed earlier and the East as well. The Suezmax market has also weakened, but is more resilient given its more regional trading and the cargoes from the non OPEC nations.

Speaker 2

So far in Q2, we have fixed 74% of our fleet wide spot days at $82,800 per day, 72% of our VLCC spot days at 75,500 a day, an 11% outperformance relative to our tanker peers who have reported Q2 earnings And 79% of our Suezmax spot is at $86,500 a day, a 61% outperformance relative to our tanker period that are reported Q2 earnings. In Q2, and as Ijakrik mentioned as well, NISOS is particularly redelivered to us following the completion of our 3 year time charter. And therefore, we will have 100% of our VLCC fleet in the spot market. Milos will also redeliver from our short TC. Moving on to Slide 9.

Speaker 2

We highlight our continued outperformance above our peers, which is consistent and Which is a consistent 40% 20% for the Suezmax and VLCCs respectively. Part of this outperformance is due to our assets. We are the only pure eco scrubber fitted and youngest crude tanker company. Moving to Slide 10, we focus on the medium term outlook. The OPEC voluntary cuts reduced available cargoes in the market and inevitably weakened the supply demand balance.

Speaker 2

The silver lining here is that this leads to global economy being undersupplied with crude oil. Inventories will draw, creating the foundations for much stronger fundamentals in the future? Q2 will counter seasonally draw before accelerated draws in Q3 and Q4. What excites us the most is the expected seaborne crude tanker demand, which looks to have a 5% increase in tons transported, but more importantly, a 5.7 increase in ton miles. Ton miles have been a key factor in the strength of the market in 2022 and will be sustained through 2023.

Speaker 2

This growth occurs as a normal fleet loses shift to the great fleet and we effectively have a fleet contraction this year. We hold the view that the Great Lakes cannot compete on normal business and becomes marginalized to only engage in gray and black trades. Moving on to Slide 11. As we have discussed consistently in the past, the key oil demand driver comes east of Suez And China being one of the critical factors. Chinese crude imports are expected to surpass historic highs this year.

Speaker 2

And as this inventory situation tightens in the second half, This demand will pull incremental barrels from the West and especially the United States. We expect to see a further increase in the ease of Seward market share on the U. S. Gulf exports. Jumping to Slide 12.

Speaker 2

From a supply perspective, the fleet has never been more attractive in my career. Realistically, a delivery window for VLCCs or Suezmaxes from shipyard is into the second half of twenty twenty six. There may be a very finite number of berths available slightly earlier, but the number will not will be entirely negligible if you look at it on a whole fleet basis. If you want to order them, you're most likely to receive the ship in 2026 and yards are quoting prices in Korea of over $125,000,000 for VLCC. Zooming forward to 2026, 50% of the VLCC in Suezmax fleet will be over the age of 15 years old.

Speaker 2

The Black and Great Fleet lift sanctioned cargoes from Iran, Venezuela and Russia. The Iranian and Venezuelan lifters are classified as the Black Fleet. They have zero interaction with normal market participants such as owners, charters, agents, etcetera. The insurance classification and slacks that they fly are worth nothing. Some ships may not even bother to have any of this.

Speaker 2

The great fleet it different? It is of a non European exit and lifts non price cap Russian cargoes. The quality of management on both fleets is questionable at best Like the Black Fleet, the ownership structures are obscure and the insurance is debatable. This poses an environmental risk. If there is an incident, who will step forward to cover the pollution or damage?

Speaker 2

The owner that owns the vessel for a single purpose vehicle based out of a Middle Eastern country. I assume the person with the money is not the person who appears on the corporate documents Or the insurance. The insurance companies are not large P and I clubs that who use reinsurance and reinsure the risk all over the world like we do, but small marginal assets who issue a certificate to facilitate trade and consider the consequences only once they've occurred. I'm convinced that the owner and likely the insurance cover would disappear and potentially leave the bill with the nations affected. We have an example now with the Aframax that blew up off Malaysia called the Pablo.

Speaker 2

Luckily, so far, pollution has been minimal, but let's see who covers the bill and the recovery of the vessel. The EU is considering legislation to not allow calls in Europe by the grid fleet, which will marginalize it further into a category close to the Black Fleet. This is an effective removal of tonnage from the international wide fleet. Although environmentally scary, all the above is extremely positive for the normal fleet. We have a rapidly aging fleet and a large gray black fleet that keeps absorbing normal tonnage to meet the inefficient long haul service demand.

Speaker 2

Beginning next year, the market will also have to consider the effects of the CII rating and the EU ETS. This will create barriers to the less sophisticated owners and even more so to the less Deanshu:] We believe that Arati will further develop a competitive advantage off this. And now handing you back to Dhekely for the financials.

Speaker 1

Thank you, Aristides. Moving on to Slide 14. We summarize our income statement for the quarter. Our increased TCE revenues translate to record EBITDA of over $74,000,000 and net profit above $51,000,000 or $1.60 per share. Moving to Slide 15 and our balance sheet summary.

Speaker 1

As of March 31, we had cash on our balance sheet of approximately 118,000,000 Our debt stood at $727,000,000 reflecting approximately $12,000,000 amortization since year end. Our book levers came in at 58%, while market adjusted LVV based on broker values stands at a very comfortable level of approximately 45% to 46%. Moving further with our customary ESG reporting on the next couple of slides. On emissions reporting, we publish our fleet annual efficiency ratio data and fleet energy efficiency operational indicator data, which are in line with guidance and our regulations. On Slide 18, we have the latest figures relating to benefits of our eco design and scrubber penetration within our fleet.

Speaker 1

We calculate our competitive advantage based on average bunker spread of around $150 per metric ton to stand at $17,000 per day for VLCCs and a little under $10,000 per day for Suezmaxes. Okay. Amish owns Equin Scrubber Freated vessels and holds a significant competitive advantage against 72% of the VLCC fleet and 83% of the Suezmax fleet. This concludes our presentation and we'll be happy to answer any questions. So handing it back to you, operator.

Speaker 1

Thank you.

Operator

We will take the first question from line Peter Hogan from ABG. The line is open now. Please go ahead.

Speaker 3

Hello, guys. A quick question first. We have many shades In the tank complete now. So could you just be specific in what you now labeled dark, gray and black? Or dark is perhaps not the color you use, but

Speaker 2

No, I just hey, Peter. Thanks for your question. I just wanted to point out that in the past, let's say, a ship that was non European in its ownership insurance Financing Banking was able to lift normal cargoes and also transport non price cap cargoes. Going forward, the European Union has stated that they don't want vessels who trade outside of the price cap to lift normal cargoes? So we see that the great fleet will be restricted to pure or let's say the Russian non price cast cargo fleet will be restricted The only Russian type cargo.

Speaker 3

Okay. The grade fleet is if I were to summarize, the grade fleet is those ships lifting more expensive than $60 Russian oil?

Speaker 2

Yes, that's correct.

Speaker 3

Yes. Okay. Understood. And well, Market wise first, you now talked about volatility seen in the past couple of days and perhaps weeks. We are normally entering from a seasonal perspective a weaker summer market and then It seldom returns earlier than, say, September.

Speaker 3

How do you think about the seasonality and the seasonal factors for the next, say, 2 quarters?

Speaker 2

Well, I think that for sure given the large U. S. Production And the SPR and the ability for these barrels to be sold when trading windows open that This creates an additional element that may sometimes be contrary to the seasonality we're used to. And I think that we will continue seeing that again this summer. So we do expect that the VLCCs Specifically, we'll strengthen in the next weeks.

Speaker 2

I wouldn't be surprised if it quietens down or weakens. But again, I don't think that we will spend the rest of the summer in only a weaker and Afterwards stable environment. I do think once it weakens, we'll see volatility again. So yes, I mean, I think that the U. S.

Speaker 2

Gulf And the long haul cargoes, which tend to move at, in certain windows will keep volatility In the seasonal week part of the year.

Speaker 3

Yes. This is going to be some interesting months ahead for sure. More on the or on, I suppose, the strategy now going forward on dividends. So nevertheless, it seems as if we're in a weaker market now than we were back In the winter months. So in Q2, Q3, how should we think about the dividends from you guys Going forward, will we just put in 80% payout or should we think something else?

Speaker 2

Yes. Hi, Peter. It's Erakis.

Speaker 1

Look, there's no magic number that I can I can Definitely speak about how our strategy has been that we have been making certain adjustments, which we are well aware of That have mostly to do with our capital structure in the previous quarters and then try to give out as much as possible? This ended up being around the 80% that you mentioned in the previous quarter. In this specific quarter, Our liquidity position, which was assessed against a lot of factors, including the market dynamics another global economic data? We've made a decision for this quarter that we have the flexibility To go a little bit higher up to the 100% of EPS that we issued. I think we're going to go through a similar thinking process the next few quarters?

Speaker 1

I think the baseline is something along the lines of what we have been doing so far, Where it is likely that we might be looking at certain adjustments, but it will also depend on what our balance sheet figures will look at that point And of course, our expectation and market dynamics then. So it hasn't really changed too much. But this specific quarter, we have the flexibility given our balance sheet. Hope this answers the question.

Speaker 3

Yes. Well, thank you. Thank you. I suppose your investors at least appreciated Those 100% today. And one final question from me on the cost Your G and A was up this quarter.

Speaker 3

Could you just quickly explain why and then perhaps shed some light on What we should do with that number going forward in our modeling?

Speaker 1

Yes. I think I mean the Q1 is slightly on the higher side, it also reflects certain personnel costs that are more Particular at the beginning of the year. But admittedly, the cost with regards to salaries Have increased a little bit as we have ramped up a bit the number of the team. So there will be a slight increase, Not to the levels that you're seeing in this quarter going forward versus last year. And we also have had some a little bit of extraordinary More general and administrative and advisory type costs This quarter.

Speaker 1

So I think I don't believe that this quarter is indicative of the rest of the year, but a Slide increase versus last year is something that you should take into account.

Speaker 3

Okay. Yes. Well, it's not it doesn't come for free to have those very good new CFOs,

Speaker 1

that's for sure. Okay, that was all

Speaker 3

for me guys. Thank you.

Speaker 1

Thanks Peter.

Operator

Thank you. We will take the next question from the line of Clement Moelis from Value Investor. The line is open now. Please go.

Speaker 4

Good morning. Thank you for taking my questions. I wanted to start by asking about a potential U. S. Listing.

Speaker 4

This has been discussed in the past, but is this something currently on the table? And if so, how should we think about timings?

Speaker 2

Yes. Happy to take that.

Speaker 1

Look, we've been pretty vocal in the past that we see a potential U. S. Listing Having the ability to unlock tremendous value from for our stock given the expanded investor base, We're seriously considering the process along with our advisors as well. And we hope to have some further updates in the latter part of the year.

Speaker 4

Thanks for the color. And a bit of a modeling question, How should we think about the amount of ballasting days on the back end of the quarter? I mean, that will depend on the exact voyages you end up doing, but would you provide a rough approximation of what we should expect?

Speaker 1

Yes. I mean, it's true that with regards to Q1, the The ballasting days were most essentially around fixed days versus what we had guided earlier in the quarter. So specifically about this quarter.

Speaker 2

Yes. I mean, I think that Aristides here. I think that this quarter, we will not have the negative Like impact like we did last quarter, which as Iraklis mentioned that basically the spot to be fixed days in our previous guidance Because we loaded after the quarter finished, we're basically 0 revenue or even head expenses that were incurred it the under the voyage that the ship was going to do, but before she loaded. So this quarter, I think that the number of ships that we will have load before the end of the quarter, it will be much greater. And I don't expect a similar effect as last quarter.

Speaker 4

Thank you. Makes sense. That's all for me. Congratulations for another solid quarter.

Speaker 1

Thank you.

Operator

It appears there's no further question at this time. I'll hand it back over to your host for closing remarks.

Speaker 1

Yes. This is Erakis. I see it from through the system, the web system. We have a question from Erik Havelson from Pareto. Let me just go through the question.

Speaker 1

The fleet is aging, but what do you What will happen to ships turn 25 years old? What will be the cost of a 25 year old? Certainly, be in your opinion. Do we need to see significant accidents for scrapping to actually happen or will there be a natural depletion almost regardless of market conditions?

Speaker 2

Well, it seems that historically 25 years tends to be like the maximum age that ships Do these long voyages beyond coastal trading? So I tend to agree that we will see 25 years for the black and gray fleets seems to be the upper limit. What is the cost? That's a difficult question. I mean, it depends a lot on the maintenance of the ship.

Speaker 2

A 25 year old vessel will have a lot of extra expenses that a 5 or 10 year old vessel wouldn't have whether there's a lot of replacement of steel expenses, Both in the ballast tanks and in the cargo tanks that we don't have. And if it's a lot of tons that need to be replaced, It could be in the multiple of 1,000,000 of dollars. And another thing is that these ships which are trading in these types of trade? I don't think they have access to spare parts that for makers. So I wouldn't be surprised We see issues concerning their major machinery like engines or boilers or generators because They can't KYC with the sellers of genuine spare parts.

Speaker 2

So they may also have to buy limitations spare parts, which also create further damages? I don't think that unfortunately accidents Will lead to somehow forcing these ships, these craft. I think that they will just generally create more scrutiny on the market And that fleet, but from the point that these ships are all conducting trades for Pariah States? They're outside of the control of the West. So unless countries like Singapore or Egypt get involved somehow and increase their quality concerns and I don't see that it will be easy to force scrap it.

Speaker 2

So I think it will be as you ask the natural depletion Every ships see ships going to their mid low 20s and they get scrapped.

Speaker 1

Okay. We've actually managed to go through the full 30 minutes. So I think this concludes our session today. Thank you very much for listening And we'll touch base again in early August. Thank you very much.

Operator

Thank you for joining today's call. You may now disconnect.

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