Scorpio Tankers Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 13 speakers on the call.

Operator

Hello, and welcome to the Scorpio Tankers, Inc. 2nd Quarter 2023 Conference Call. I would now like to turn the call over to James Doyle, Head of Corporate Development and IR. Please go ahead, sir.

Speaker 1

Thank you for joining us today. Welcome to the Scorpio Tankers 2nd quarter 2023 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 and Chris Abella, Chief Accounting Officer. Earlier today, we issued our 2nd quarter earnings press release, which is available on our website, scopiotankers.com. The information discussed on this call is based on information as of today, August 2, 2023, and may contain forward looking statements that involve risks and uncertainties.

Speaker 1

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' 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 Relations page under Reports and Presentation. These slides will also be available on the webcast. After the presentation, we will go to Q and A.

Speaker 1

Introduce our Chief Executive Officer, Emmanuel Alguerra.

Speaker 2

Thank you, James, and thank you for joining us today, everybody. We're pleased to report another quarter of strong financial results. In the Q2, the company generated $235,000,000 in EBITDA And $133,000,000 in adjusted net income. The product tanker market has been and continues to remain strong. And to put this into context, over the last 6 quarters, the company has generated $1,600,000,000 in EBITDA And $1,000,000,000 in adjusted net income, during which we have reduced our leverage by $1,300,000,000 And repurchased $582,000,000 of the company shares.

Speaker 2

Deleveraging and returning capital to shareholders Has been our primary focus. In the Q2, we repurchased $260,000,000 of the company shares. This is almost half of our total repurchases since July 2022. The increase in share repurchases reflects the progress we have made on deleveraging and refinancing the balance sheet. We view the repurchases as valuable for our shareholders given that the shares are trading at a large discount to the company's net asset value.

Speaker 2

Our balance sheet continues to improve. Today, we have $683,000,000 in liquidity. In July, we closed our $1,000,000,000 Term Loan and Revolving Credit Facility. We are in the process of closing a new $94,000,000 credit facility. These new facilities combined lower the company's interest margin, accelerate the repurchases of more expensive lease financing and increase the financial flexibility of the company.

Speaker 2

Looking forward, we expect low global inventories, robust demand And limited fleet growth to support strong product tanker fundamentals. We would like to thank you for your continued support. And I would like now to turn the call over to James for a brief presentation. James?

Speaker 1

Thank you, Emanuele. Slide 7, please. We've seen an elevated rate environment since Q1 of last year. And as Emanuele highlighted over the last six quarters, We've generated a little over $1,600,000,000 in EBITDA. And since July 2022, we have repurchased $582,000,000 of the company's shares And paid $49,000,000 in dividends.

Speaker 1

We have 15 vessels on time charter out contracts and the remaining 97 vessels operating in the spot market. Slide 8 please. We continue to repurchase vessels under extensive lease financing and have started to refinance some of these vessels Under new bank facilities with lower interest margin. To the right, you can see the list of vessels that have been repurchased and are upcoming. As of today, we have repurchased or repaid the outstanding debt on 46 vessels.

Speaker 1

In July, we closed our new $1,000,000,000 term loan facility We're in the process of closing a new $94,000,000 bank facility. The margin of lease financing ranges from LIBOR plus 350 to 525 basis points and our new wound facilities have a margin of sulfur plus 170 to 197 basis points. Slide 9 please. We've made significant progress in reducing expense of lease financing from $2,200,000,000 to $1,000,000,000 today. Timing differences between repurchasing vessels on lease financing and drawing down on new facilities means that at times it appears to be increasing.

Speaker 1

Vessels with lease financing are periods in which they can be repurchased. The majority of vessels under lease financing can be repurchased within the next 12 months And there are additional vessels that we expect to repurchase this year. And we will continue to reduce our leverage. I just wanted to highlight the timing. Given the strong earnings and proceeds from new facilities, we expect to have an elevated cash balance.

Speaker 1

But keep in mind, a portion of this will be used to repurchase more vessels on Financing. Today, as Emmanuel mentioned, we have $683,000,000 in cash. Slide 10 please. While gross debt will increase slightly in the 3rd quarter, net debt has remained around 1.5 $1,600,000,000 over the last three quarters. And as of today, it has declined and it's currently at $1,400,000,000 With no new buildings on order, we have minimal CapEx I feel very well positioned.

Speaker 1

Slide 11. The company has significant operating leverage. In Q2 so far, including time charters, the fleet is averaging $26,000 per day. But as you're aware, rates have increased significantly over the last 2 weeks And MRs are now at $34,000 a day and LRs north of $40,000 a day, we generate almost $800,000,000 of free cash flow per year And at $40,000 close to $1,200,000,000 These are certainly exciting times. Slide 13 please.

Speaker 1

In the Q2, significant refinery maintenance, lower refining margins and reduced our potential opportunities led to lower trading activity and a decline in rates. OR2 saw a larger decline as Asian refinery maintenance, limited naphtha arbitrage opportunities and competition from LPG This long haul volumes going from the Middle East to Asia. MR rates remain much more stable, reflecting the strong underlying global demand for consumer fuel such as gasoline and jet fuel. Despite these headwinds, rates remain well above cash breakeven levels And many of the headwinds in Q2 are in the process of reversing. Refining margins have seen a large increase in July and remain at very strong levels on a historical basis.

Speaker 1

The naphtha LPG spread has improved and the forward curve suggests naphtha substitution for LPG will occur over the next several months, which is very constructive for the LR2s. Unplanned refinery outages and historically low inventories create a scenario where any supply disruptions will need to Will lead to increased volatility and higher rates. And lastly, rates have increased significantly over the last few weeks and we think they're going to remain strong through the rest of the year. Slide 14 please. Global inventories are well below the 5 year average for gasoline and diesel.

Speaker 1

It doesn't matter what And typically diesel inventory is built in the southern summer months ahead of a Strong winter demand season and we have seen minimal builds have been in. This is very constructive for a tight market in the back half of this year It highlights how robust demand has been. Slide 15, please. Forecast for refined Product demand for the second half of this year and next year has been revised upwards. 2nd half twenty twenty three demand is expected to be 2000000 to 3000000 barrels a day higher this In our view, this is one of the most bullish drivers for strong freight rates, 2000000 to 3000000 barrels of additional demand year over year against historically low While diesel demand is expected to increase at a slower pace due to lower trucking activity, the demand for gasoline, jet fuel and naphtha are We are seeing this demand on the water today.

Speaker 1

Seaborne volumes remain extremely high And are averaging 1,000,000 to 1,500,000 barrels a day more than 2019 levels. Given low global inventories, the increased Consumption will continue to be met through imports with product tankers reallocating barrels around the world. Slide 16, please. While demand is above pre COVID levels, refining capacity is lower and more dislocated. Regional capacity changes are structural and will continue to drive ton models and flows for the coming years.

Speaker 1

The impact of new sanctions on Russia. Europe has increased its imports from the U. S. And Middle East by 600,000 to 1,000,000 barrels a day. All of these changes are driving an increase in ton miles.

Speaker 1

As ton mile demand increases, vessel capacity is reduced and supply tightens. Slide 17 please. Over the last few months, Russian exports and refined products have declined to more normalized levels. The Gray Fleet, our vessels that are servicing Russian volumes has increased significantly to 353 vessels today, Of which, 277 are Handymax and MR vessels. Vessels which move into sanctioned trades reduce the supply vessels in non sanctioned trades.

Speaker 1

The impact of vessels servicing Russia is expected to have a significant impact on the capabilities of the global fleet going forward. Many of the vessels which have moved in this trade are 13 to 15 years old and will likely not return to the premium trades given their age and trading history. Slide 18 please. If you recall in December rates reached record levels while the order book was near an all time low. And over the last 18 months, we have experienced a strong rate environment evidenced by the volatile blue line in the graph.

Speaker 1

From a cyclical perspective, hopefully we are in July 2003 or even July 2004. But Historically, as product tanker rates increased, so do orders from new vessels. Thus, it's not surprising that we have seen additional orders. The rationale for ordering, A strong spot market, healthy long term time charter rates, constructive demand outlook in aging fleet is a good reason. It's also a good rationale for investing in Product Tanker Company.

Speaker 1

Slide 19 please. The increase in the order book has largely been driven by LR2 orders, 49 vessels year to date. While LR2 orders are elevated, MR orders are below their 5 year average this year At well below historical averages. And up until this year, LR1 orders have basically been non existent with only 12 LR1s ordered from 2016 to 2012. So part of the increase in LR2s is to compensate for the aging LR1 fleet similar to how MRs have largely replaced Handymax vessels.

Speaker 1

And with an LR2, you have the optionality to trade it in a crude market, less than 50% of the LR2s on the water today are trading clean products. In addition, there are constraints to ordering new vessels. There are long lead times for the delivery of newbuild vessels. Orders placed this year were for the earliest slots at the shipyard. These slots are now gone.

Speaker 1

Newbuilds are expensive compared to historical levels and the cost of capital is higher with rising interest rates. A newbuild OR2 to $71,000,000 with the 2026 or 2027 delivery date will require a high breakeven rate And needs a constructive market. Lastly, there are still concerns about different propulsion systems, which are required to meet future environmental regulation. All of these factors act as a constraint. Slide 20, please.

Speaker 1

When thinking about newbuilding orders and fleet growth, The age and training profile of the fleet must be considered. The product tanker fleet continues to get older and age and this is important As a product tanker becomes older, the coatings, which make them a product tanker develop issues. Every product tanker on the water is Trading clean products, only 60% of the Handymax and LR2 fleets are trading clean products and 70% of the LR1 fleet. All their vessels move into trading dirty products or crude oil. Although you do see LR2 vessels move into these trades earlier, it does need to be accounted for.

Speaker 1

Given the age of the fleet, we expect more vessels to move into these crude oil trades as they get older, while the increasing number of vessels 20 years and older become scrap candidates. By 2026, the product tanker fleet will have 954 vessels that are 15 to 19 years old And 811 vessels 20 years and older, an increase from 3 49 today. These changes will have a material impact on the fleet. And last, scrapping is at an all time low and we do expect scrapping to increase as vessel age environmental regulations increase. Slide 21, please.

Speaker 1

Putting this all together, despite an increase in orders, the order book remains modest. Using minimal scrapping assumptions, on average, the fleet will grow less 2% a year over the next 3 years. We're using higher scrapping assumptions due to fleet age and upcoming regulation. The fleet will grow less than 1% Per year. Seaborne exports and tonne mile demand are expected to increase 4% and 11.9% this year And 3.4% and 6.3% next year, vastly outpacing supply.

Speaker 1

In addition, 1 3 year time charter rates remain at high levels, evidence that our customers' outlook is one of increasing exports And ton miles against the constrained supply curve. The confluence of factors in today's market are constructive individually, historically low inventories, Increasing demand, exports and ton miles, structural dislocations in the refinery system, rerouting of global product flows, Limited Facilities Growth and Upcoming Environmental Regulation. Collectively, they are on press deck. With that, I would like to turn it over to our President, Robert Bugbee.

Speaker 3

Hi, good morning, everybody. Thanks so much for joining. This is on behalf of all the management. This is a Great time to be invested in STNG and a great time to be further invested in STNG. We're happy with all the buybacks we've been able to do.

Speaker 3

I'd just like to point out a couple of things that I think So we think is really important and focus on is, first of all, the liquidity and the financing that's being done that gives us tremendous amount of We've shown during this quarter that we're willing, we're wanting to Sell older vessels to improve the arbitrage as well opportunity between NAV and the stock price. And the other thing is the rates. I think I'm going to borrow from Jon Chappell, One of our analysts, but it's most important where the market is going as an investor as opposed to where it's been. And the market right now is going up. It's inflecting upwards from a very, very strong Weaker period that we've had for a couple of months.

Speaker 3

I mean to average what we average in our booking and what is the weakest part The year is fantastic. Many for many, many years that would be a high number, the average that we've got. The next part of it is we're already earning a very large number as James had pointed out. The 30s, mid-30s in the MRs moving through into the 40s on the LR2s. The LR2s continue to go up today.

Speaker 3

So that creates a lot of confidence for the company going forward. And with that, I'd just like to Thank you all again and open it up for questions.

Operator

The first question comes from Omar Nochta with Jefferies. Please go ahead.

Speaker 4

Thank you. Hey, guys. Good morning and good afternoon. I wanted to follow-up a bit on just, Robert, your comments about where rates are and also I know James you touched on this. It seemed that product tanker rates have settled in here into the typical summer doldrums that we've seen in the past.

Speaker 4

And What we've actually seen over the past say 2 to 3 weeks is a real resurgence, and it's really across all the product segments. And this is happening while, we've seen some weakness Or further weakness in the crude tanker side of things. So just wanted to ask maybe a bit more if you could just dive a bit deeper into it. What's been driving the market here recently? What's behind the latest jump and what can we expect going forward here?

Speaker 3

Sure, James. I'll go first on this. I think that Look, the first thing we've seen is refinery margins really widened to the positive here. And we've seen, let's say, A change a big change in sentiment. I think we move from, oh, well, we really Like a recession review on oil and consumer demand in products, as Press by the paper market into the physical market now overwhelming things.

Speaker 3

I mean, is it a few people that demand is going up now? We're seeing this in this constant drawdown. And then as the prices of oil moved upwards and the prices of Refined products moved up even higher than the price of oil, then people are starting to They can't just sit there and do anything, nothing at that point. They have to start to engage in the market. And so I think as usual, all of these Except in periods of hurricanes or war, this has been demand led.

Speaker 3

And we had a market that was very tight anyway. As Explain this week with sort of doldrums was at very high levels with very high utilization. So as soon as you put this demand in, That was going to move the rates higher.

Speaker 4

Thanks, Robert. That's helpful. And then maybe just as my second question as a follow-up. Given the market Strength in Scorpio, you guys have a sizable critical mass across the LR2s and MRs. You in prior quarters were able to put away some of your shifts on period Contracts.

Speaker 4

How would you think about it now? I think it was 15 ships now that you've got on TC. What does the liquidity look like for that market at the moment given the sort of run up we've been seeing? And is there appetite for Scorpio to add more?

Speaker 3

Well, I think we've seen that the one of the other encouraging things and it's supportive to James' view of the long term fundamentals here is that 3 year forward rate has hardly changed in this period. So again, the physical market to just move through This period not referencing to the paper market. And right now is this is very, very strong move And it surprised us. We've had to act very quickly to do this. We knew the market would go up.

Speaker 3

You can never find that actually work out that exact inflection point. And then Inflection point started happening 10, 12, 13 days ago. Right now, it's just not the time to look to put Ships out on time charter. You got to let this come because we're really Europe has exposed itself now on diesel. The United States is Becoming exposed everywhere.

Speaker 3

We've got the movement. If we start seeing more movements from the Middle East of product And more movements from Chinese exports, then this market could really run as we start to move into the stronger season. So right now is not the time to negotiate time charters

Speaker 4

out. Thanks, Robert. Makes sense. That's all for me. I'll turn it over.

Operator

Our next question comes from Jon Chappell with Evercore ISI. Please go ahead.

Speaker 5

Good morning. James, I want to tie together a couple of Points that you brought up going into the second half of the year, both the low inventory starting point and then also the 2,000,000 to 3,000,000 barrels of incremental demand. We've been early before with inventories drawing below historical levels. Where is the incremental 2000000 to 3000000 barrels of supply going to come from? And when you think about that from a global map perspective, does it continue to extend the ton miles that we've seen over the last 6 quarters?

Speaker 5

Or is there a chance it could be a bit more regional, Given the, maybe panic going into the winter to meet that demand?

Speaker 1

Well, I think We have this scenario now where inventories are so low and we saw it last year, where any type of supply disruption, so there's been some impacts Some refineries in the U. S. Gulf, for example, will have to be met with inputs from different places. So I'd say It's going to be a combination of long haul and regional. I think if you're looking at remaining places with capacity, it's really the Middle East and China.

Speaker 1

Robert did mention that we could see Chinese exports increase here if they issue a new batch of quotas, which seems likely. And I think you do have some more capacity out of the Middle East. We have seen, for example, Al Zohr refinery, which has 2 out of the 3 CDUs up and fully running have a material impact on the export market. So, but I do think given how strong demand is, It's going to have to be a collective effort.

Speaker 5

Okay. But just to be clear, I mean, you do expect that incremental demand to be met with supply and not Further inventory draws below 5 year averages?

Speaker 1

The projections we're looking at, it's very close. So Obviously, for example, if you were to lose more Russian barrels or there were to be more disruptions in European or U. S. Refinery, things could be very difficult. You could see draws and we're seeing a lot of draws in the crude side right now as well.

Speaker 5

Okay. Second question relates to the fleet. You Sold the vessel just recently as I look at the fleet age. There's still a handful that are over or at or over 10 years old and then of course a much When you think about the ARB of the current stock price and asset values right now, Should we expect more maybe monetizing a bit of the older vessels as we go to the back half of the year if this arb remains?

Speaker 3

Yes. We will yes, as we stated on the last call that the last quarter And as we've evidenced by the sale of the first one, we're willing to do that. That's upsetting and that would be destructive. We're doing it slowly. Yes.

Speaker 5

All right. Thanks, Robert. Thanks, James.

Operator

Our next question comes from Ken Hoexter with Bank of America. Please go ahead.

Speaker 6

Hey, this is Nathan Hough dialing in for Ken. I just wanted to follow-up on Omar's original question on sort of the bifurcation between the crude and the product tanker markets. I mean, over the quarter, We've heard of some tankers, dirtying clean product vessels. Maybe if we could Some comments on just firstly the economics there and how we should think about the capacity tailwind that represents for the product tanker market?

Speaker 3

James, do you want to try that one?

Speaker 1

Sure. Well, Nathan, a lot of the switching From LR2s was really started kind of in Q4 last year. I'd say you'd probably seen at least 20 vessels move over into this trade and you have had a strong Aframax market. I think For these smaller, crude vessels, there's a lot of new capacity Coming online from Latin America, Africa, the U. S, which benefit these vessels and ton miles have obviously increased.

Speaker 1

I think on the clean side, what you've seen is obviously a challenging market due to kind of the naphtha arbitrage, And then obviously lower distillate volumes, but we see those things reversing. And so I think as we look forward, we expect both markets to be tight, Especially on the product side, which we know more about on the crude side, obviously, we know a little bit less.

Speaker 6

Got it. Okay. And just as a follow-up on capital strategy, just want to get a sense on how the team is looking at deleveraging Obviously, a lot of debt being shed over the past year and

Speaker 7

the past few

Speaker 6

quarters. Is there a target leverage level or is this more of a target vessel breakeven TCE goal that we're trying to achieve here? And maybe just also update us on where that 17,000 level could potentially trend, say, into 2024?

Speaker 3

So James, why don't you deal with the 17,000 and then I'll deal with the other answers?

Speaker 1

Yes. So we expect the breakevens to come down. They're probably a little bit higher than that $17,000,000 because of the timing of the lease repayments. So with the leases, we have to give notice and there is a specific period or time of the year, which you can repurchase the vessel. So as much as we'd like to go off and repay those vessels today, we can't do that.

Speaker 1

The good news is most of the lease debt Around $1,000,000,000 can be and most vessels associated with it can be repurchased over the next 12 months. So you will see continued announcements from us That will give you better insight as to how many vessels and the timing on that. But right now, we haven't disclosed it yet. But obviously, over the next 12 months, we do That breakevens to decline. And you have had higher interest rates as well during this period.

Speaker 1

And then Robert, I'll

Speaker 3

pass Yes. With regards to the debt level, that's not a question that we're ready to answer. We can see from the terms we've got Anyone can see from the terms of lenders that historically the debt level already is very low on a historical basis. But we will the question of how you can reduce continue to reduce the debt level is We've mentioned potential further sale of vessels. We've said how confident we are in the rate environment going forward.

Speaker 3

And I think that those 2 combined things Will lead to the ability to both repaid both lower debt plus do whatever else we want to do.

Speaker 6

Got it. Super helpful. Thanks, Robert. Thanks, James.

Speaker 3

Thanks.

Operator

Our next question comes from Sam Bland with JPMorgan. Please go ahead.

Speaker 8

Hi, morning. Thanks for taking the question. I've got sort of one question with 2 parts. First one is, can we just touch on The disruption and market tightening from sort of the Russian sanctions impact, is that whatever the impact is related to Russia, is that now Done. And we've sort of seen the full impact of that?

Speaker 8

Or is there some further market tightening related to Russia that May come through whether it's from the dark fleet or anything else. And the sort of the second part which relates to that is I see on Slide 21, there's another 6.3 percent ton mile demand expected in 2024. Where do you think that comes from? Is it sort of general Global growth or is it

Speaker 6

related to Russia or anything else? Thank you.

Speaker 3

James?

Speaker 1

Yes. The next year's forecast for ton miles Of the 6.3%, about 3.4% of that is just exports and the difference, the 2.9% is ton miles. And that's really going to be driven by Middle Eastern exports and the capacity coming online as well as some potential closures in Europe and Emerging market demand. So that is not including any displaced Russian volume. I still think there's more upside to The dislocation as a result of the conflict in Russia and Ukraine, but we have seen a majority of that impact.

Speaker 1

I think the biggest contribution from that will be what happens with the great fleet over time. So there's a lot of vessels, say 12 to 15 years old that have moved in to service these trades. Now these vessels are older and they'll have potentially dark trading history. So I think as you look forward and look at I mean, we're talking 10%, 11% of the MR fleet is servicing this trade. So it's going to have a long Standing impact on fleet supply and trading dynamics and that part I don't think we've seen yet.

Speaker 1

In terms of the volumes moving to the Middle East, Latin America and Africa, I think we have seen those. And obviously, we highlighted we've seen an increase in exports from the U. S. And the Middle East to Europe. So I'd say that part we have seen.

Speaker 8

Yes, understood. Thank you.

Operator

Our next question comes from Svein Morkodal with Clarksons Securities. Please go ahead.

Speaker 9

Thank you. Hi, guys. Good presentation and the question so far. Yes. I guess the key word so far is demand and you mentioned demand led.

Speaker 9

So I guess There's certainly many moving parts to the malls, right? You have the Chinese product exports that may return, Russian products exports, tonnages, new refining capacity, refinery maintenance, Islaity, Oil demand, of course, crack spreads, arbitrage trades, low inventories and

Speaker 8

on and

Speaker 9

on, right? So many Ben and the Malpractice. The question really is which one is the most important one Or should have the greatest impact in the near to medium term?

Speaker 3

Yes. I would say headline demand. I mean, I think the headline demand creates comfort For all of the players and creates urgency for those players who are perhaps short. So If we move continue to move from this first half recession fear that oil demand the headline oil And product demand will fall as a result of recession. And we move towards understanding And admittance by various sort of participants, whether they're governments or anything else, that's happening, then That creates an environment where if you're short products, if you're short diesel, for example, in Europe Going into winter, well, you better come forward and start buying.

Speaker 3

And so that I think is the most important thing because It forces the market to sort of act in a sort of a cohesive way. And it's too difficult to estimate anyway on a day to day basis whether that's going to be coming from the Middle East or China Or wherever. But I would start there.

Speaker 1

No, I agree.

Speaker 9

Okay. So keep an eye on the oil demand. My second question is on the Russian trades. It appears That crude exports are coming off the voyage, so to speak. But how's the situation for products now?

Speaker 1

You've seen similar to crude, you've seen products come down to the more normalized Part of that's probably due to OPEC, but I think part of it the increase we saw right after sanctions kind of in March where exports at 2,000,000 barrels a day was kind of a buildup that they had had and trying to put more on the market. Obviously, refineries have to go through maintenance. And even in the U. S. Gulf or other export regions, you can't run at 95% and High-90s for an extended period, which would suggest kind of the exports that they had.

Speaker 1

So I think we're going to see them at a more normalized level Similar to what we've seen historically maybe around 1,500,000 barrels a day. And this is sort of needed in the market?

Speaker 3

Yes. Frode, I think what will be interesting too is we approach InterChem winter is watching Europe now Because last year they were able to, let's say, pre stock ahead of Russian sanctions And at the same time had a very mild winter. So if you go in The winter with lower inventories than let's say last year in October and or more or less the same as last year And you have the Russian situation that you and James had described. It's going to be Plus the sanctions are in place, it's going to be much harder to pre stock to winter.

Speaker 9

Thanks. Great color. That's it.

Operator

Our next question comes from Sherif Almegawy with BTIG. Please go ahead.

Speaker 7

Hey, good morning. First drilling down a bit more on what's going on with Russia. Certainly, there's potential for more upside, but with Russian oil crossing the price cap, Are you seeing some tankers return to other trades because the Afro rates look like they've cratered in some places or some LR2 switching back to the clean trade Or is it too soon for that kind of shift?

Speaker 3

We haven't seen it.

Speaker 1

Yes. Sorry, Robert.

Speaker 3

I think it's too I think I think it's way too soon for that. And it's just not easy to it's not easy anyway To take a crude ship and throw it into and clean it up, You're not going to do it at the present spread. The older the ship is, the more difficult it gets and maybe Really difficult. And then some of these vessels that have traded to Russia They're almost certainly not going to be accepted by the charterers involved in the, let's say, the free market Clean petroleum trade.

Speaker 7

And then Thank you.

Speaker 3

There are 2 things. You got to clean up and then you've got to be allowed to trade the actual product itself.

Speaker 7

And then maybe to follow-up on vessel sales that we've seen the pace of newbuild orders really pick up over the last few months. How are you thinking about fleet renewal at this time, if you're thinking about it at all? I realize newbuild prices are looking pretty full.

Speaker 3

You mean STNG itself or general?

Speaker 7

Yes. We know we could do both, but I was meaning STNG

Speaker 3

We're not thinking about newbuild testing at all. I mean, it would be a Very, very low down on the capital allocation list. So it's much better to Buy your own stock than to order a vessel that probably wouldn't come until 2026 or whatever anyway. And I think that's the thing you have to realize here is the way that the newbuilding order book has been elongated in time too. So yes, there are more orders, but you haven't shifted what's coming in 'twenty three.

Speaker 3

You haven't shifted what's coming in 'twenty And you haven't shipped what's coming in the first half of twenty twenty five. So if you just do the simple math of take a dollar, do I want to Spend that dollar and have the vessel delivered in 2026 or would I take that dollar and put it STING, HAFNIA or AADMO, for example.

Speaker 9

All right.

Speaker 7

That's it. So you're getting

Speaker 3

a benefit to the cash flow right at the front, not a comparison, Especially with STNG as such a new fleet anyway.

Speaker 7

Okay. Thanks for taking my questions.

Speaker 3

No problem.

Operator

Our next question comes from Liam Burke with B. Riley FBR. Please go ahead.

Speaker 10

Thank you. Back on capital allocation, you've been clear about debt reduction, your buybacks. Earlier, I mean, last quarter, you bumped your dividend from $0.10 to $0.25 Is this a dividend you anticipate Is it cycle or are you going back and looking at that payout as possibly bumping it or maintaining it?

Speaker 3

I think a lot of that depends on where the stock price is right now. Again, at this particular point, I think an The investor as opposed to a speculator or whatever would really want the company to Use the cash flow or use the marginal dollar right now in Stock buybacks than paying out a dividend that everybody gets taxed on. The dividend part can wait. This is a situation where the company has just had a fantastic quarter. It's Great.

Speaker 3

Great cash flow. It's refinanced everything. The market is going upwards. We're going into a great future dynamic. We just felt that it just wasn't right to increase the dividend at this point With the stock trading at such a dislocation to the fundamentals.

Speaker 10

Fair enough. Thank you. And I guess this is for James. Things are getting a lot better at the macro. We're looking at a creeping order book here.

Speaker 10

Some of the offset would be recycling, but What gets that activity going? We haven't seen that in a few years.

Speaker 1

No, it's a great question. I think Just the number of vessels that will turn 20 to 25 years over the next 3 years is so massive that you're going to have vessels that kind of serve tertiary markets or trades. And those vessels are going to be scrapped. I really think you're going to see it first as a part of environmental regulations as well. But just it's a staggering, Staggering number of vessels, I think it was around 900 or 800 vessels will be 20 years and older by 2026, up from $350,000,000 today.

Speaker 1

So it's a massive number, so we do think those will be scrapped. And I think you also have to factor in The age of the fleet, right? There's a lot of vessels that are kind of 15 to 19 that are going to move into the crude oil trade. So We still think the order book is modest and fleet growth is extremely low, especially on a historical basis.

Speaker 10

Great. And then just as a follow on, as your vessels age into that category, I mean, it's been a while, do you ever think of the trade off between selling it To arb the NAV versus just throwing it into the crude market?

Speaker 3

That's what we are doing. That's what we have been doing and what we've just said we will continue

Speaker 10

Okay. Thank you, Robert. Thank you, James.

Operator

Our next question comes from Chris Robertson with Deutsche Bank. Please go ahead.

Speaker 11

Hey, good morning, everyone. Thanks for taking my questions. James, you kind of outlined minimal CapEx this coming quarter as well as next. And I'm wondering what does this translate into in terms of off hire days? And are there any utilization factors in terms of ships moving in and out of the pools in the coming quarters that could impact operating days?

Speaker 1

Chris or Brian, would you like to take that?

Speaker 12

Sure. We have the impact of All Fire

Speaker 3

go ahead, Chris.

Speaker 12

Sure, Brian. Yes, the off hire days are minimal. We don't have many dry docks in Next half of the year, in the next two quarters. We as you see in the table in the press release, fiscal 2024, It's more escalated because of just a number of vessels coming due for their special surveys. So for that reason, the CapEx is minimal in the coming quarters.

Speaker 11

Okay. Then in terms of the utilization, any impact there with regards to ships moving in and out of pools?

Speaker 12

I wouldn't say that's material.

Speaker 11

Okay. My second question is just around the step up in vessel OpEx From 1Q to 2Q, do you guys see any further cost inflation or pressures expected for the remainder of the year? I think Q2 is going to be

Speaker 12

a more normalized run rate for the remainder of the year As opposed to Q1.

Speaker 11

Okay, great. Yes, that's it for me. Thank you.

Speaker 1

Thanks, Chris.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Robert Bugbee for any closing remarks.

Speaker 3

Thank you, everybody. We appreciate your support and your interest. And Everybody enjoy the summer and we look forward to speaking to you again in the autumn. Thanks very much.

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Earnings Conference Call
Scorpio Tankers Q2 2023
00:00 / 00:00