Hafnia Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 5, 2024

There are 6 speakers on the call.

Operator

Welcome to Hafnia's 4th quarter 2023 financial results presentation. We will begin shortly. You will be brought through the presentation by Hafnier's CEO, Michael Skov CFO, Peri Van Eckdelt EVP, Commercial, Jens Christoffersen and EVP, Head of Investor Relations, Thomas Anderson. They will be pleased to address any questions after the presentation. Should you have any questions, you can submit them via the chat function or use the raise hand function to be unmuted to ask your questions verbally.

Operator

Questions will be answered at the end of the presentation. You will receive further instructions as required. Certain statements in this conference call may constitute forward looking statements based upon management's current expectations and include known and unknown risks, uncertainties and other factors, many of which HAFNE is unable to predict or control that may cause HAFNE's actual results, performance or plans to differ materially from any future results, performance or plans expressed or implied by such forward looking statements. In addition, nothing in this conference call constitutes an offer to buy or sell or a solicitation of an offer to buy or sell any securities. With that, I'm pleased to turn the call over to Hafnia CEO, Michael Skov.

Speaker 1

Thank you, and hello, everyone. My name is Michael Skov, and I'm the CEO of Hafnia. Allow me to extend a warm welcome to each of you for joining Hafnia's Q4 2023 conference call. With me here today are our CFO, Perfern Ecktild EVP, Commercial, Jens Christoffersen and EVP, Head of Investor Relations, Thomas Anderson. We will present Hafnia's performance for the Q4 2023 together.

Speaker 1

Today's presentation agenda will cover 4 key topics. As a start, I will provide an overview and highlight key corporate developments during the quarter. Following that, we present the 4th quarter and full year financial performance. Subsequently, we will provide commercial updates and an outlook on the product tanker market and finally concluding the presentation with Hafnier's ESG overview. Let's move to Slide number 2.

Speaker 1

Before proceeding, you should all be aware and take note of the mandatory disclaimer. Certain statements in this conference call may constitute forward looking statements, and it's crucial to recognize that these statements involve some inherent risk and uncertainties. You should also be reminded that nothing in this conference call constitutes an offer to buy or sell or a solicitation of an offer to buy or sell any securities. Thank you for your understanding and let's begin with the presentation. Slide number 3.

Speaker 1

Let us start with an overview of Hafnia and the key highlights in the Q4 2023. Moving to Slide number 4. Hafner is one of the world's leading tanker owners and operators within the product and chemical tanker market. As owners and operators of more than 200 modern vessels across 8 pools, we offer a fully integrated shipping platform, including tentacle management, commercial and chartering services, pool management and an extensive bunker procurement desk serviced over 1400 vessels within our pool platform and for external ship owners in 2023. With a robust business model, Hafner has maintained its position as one of the foremost players in the shipping industry.

Speaker 1

At the end of the quarter, we owned and chartered a diversified portfolio of 130 vessels. With an average broker valuation of $4,900,000,000 for Hafnier's owned vessels, it gives an approximately net asset value of $3,900,000,000 at the end of 2023. This represents an NAV per share of around $7.7 or NOK 78.9. Since the merger with BW Tangers back in 2019, our net asset value in 5 years have approximately quadrupled from $1,000,000,000 which illustrates the significant growth of Hafnia. By implementing our fleet renewal strategy, we can maintain Hafnia's fleet at a low average age of 8.3 years to enhance its utilization and improve earnings capability as well as our environmental footprint.

Speaker 1

Moving to Slide number 5. At Hafner, we maintain a proactive approach to market evaluation, continuously seeking advantage opportunities

Speaker 2

as part of

Speaker 1

our active management strategy. We started the joint venture with CSSC in 2018 and subsequently Andromeda in 2021. In 2022, we have acquired a total of 32 chemical and product tankers through Chemical Tankers Inc. And its subsidiaries and 12 LR1 product tankers from Scorpio. We also concluded a joint venture with Socata last year with an order of 4 dual fuel methanol MR newbuilds.

Speaker 1

Our fleet, which include our owned and commercially operated vessels, has steadily increased from 176 to 210 over the past 5 years, representing a growth of 19% in overall. We remain committed to pursuing strategic acquisitions and joint ventures that drive sustainable growth and position us for the long term success. Moving to Slide number 6. Moving on, I would like to update some key corporate updates for Hafnia over the Q4. Firstly, I'm proud to announce the newly launched Panamax pool, partnered with Mercuria to bridge the gap across a rapidly aging segment.

Speaker 1

Ten vessels with an average age of 13 years will be delivered to the Hafner Panamax pool aiming to capitalize on the combined expertise and resources of both companies. Next, in alignment with our dedication to sustainability, we are venturing a joint venture with Big Hill on the development of hydrocarbon fuels plant to produce low CI blue methanol and sustainable aviation fuel at a later stage. Still subject to FID, this project will develop new sustainable shipping opportunities within the CO2 and methanol and sustainable fuel sector. Lastly, Hafner collaborated with Hafner Bunker Alliance member, Unigas and the supplier of Finco Energy's good fuels in sustainable biofuel bunkering. During the year of 2023, we have facilitated 7 deliveries of biofuels ranging from B30 to B100 for the Unigas fleet.

Speaker 1

Per will take you all through the financials in the next section. Thank you.

Speaker 3

Thanks, Mikael. Despite the unprecedented disruptions in supply chain and the challenging geopolitical conditions we experienced in 2023, Hafnia continues to deliver strong results. We achieved a net profit of $176,400,000 for the Q4, bringing our net profit for the year to $793,300,000 This represents Hafnia's highest full year result for the 2nd consecutive year, further building on the strategic growth we've set out earlier. With a strong commitment to enhancing shareholder value, we optimized our balance sheet by reducing our leverage further. Our net LTV ratio continued to decrease from 27.4% to 26.3% in the 4th quarter due to accelerated debt repayment and improved asset prices.

Speaker 3

Over the year, our net LTV ratio has been reduced by more than 5%, reducing financing expenses further in a high interest rate environment. In line with our dividend policy, I'm pleased to announce a dividend payout of $0.2431 per share or approximately NOK2.57 for the quarter. That means we will distribute a total of $123,500,000 in dividends on a dividend payout ratio of 70%. This brings Hafner's total dividends from 2023 earnings to be more than $500,000,000 representing an average payout ratio of 6 4.1%. We'll continue to optimize our balance sheet to further reduce our leverage and simultaneously deliver strong shareholder returns.

Speaker 3

We then move to the next page. For the Q4, we generated a TCE income of $330,000,000 bringing our full year TCE income to $1,367,000,000 As mentioned earlier, we've also taken the IFRS 15 principles of load to discharge adjustments into our financials and this resulted in a negative TCE adjustment of $11,700,000 Including this, we achieved an EBITDA of $234,500,000 for the 4th quarter and a full year EBITDA of just over $1,000,000,000 In Q4, we have generated $8,800,000 from our commercial pool and bunkering business, which is continuously to perform well. Financial expenses reduced as we also recognized a portion of the market value of our interest rate hedges in our income segment, resulting in a reduction of $6,600,000 in net financial expense. All in all, we've reported a record net profit of $793,300,000 as I said, Hafner's best year to date. Our return on equity accounted to 37.4% for the full year.

Speaker 3

We had a cash balance of $142,000,000 at the end of the year and maintained a total liquidity of over $460,000,000 including undrawn facilities of $321,000,000 At the end of Q4, around 75% of our loans was hedged at a weighted average of 1.62 base rate. This hedging strategy has largely protected us against the strong increases in interest rates and thereby controlling the financing costs. As a forward looking company, we will continue monitoring our key leverage ratios and cash breakevens. This strategy will ensure the resilience of our balance sheet and enabling us to seize upon any opportunities that arise in the market. If we then move on to the operating summary, in the Q4, our TCE was based on 10,732 earning days and we generated an average TCE per day of $30,732 This improved from 28 $1,954 per day in the Q3, over the full year 2023 the average TCE stood at $32,326 per day.

Speaker 3

Then OpEx costs, which consists of our vessel operating costs and technical management expenses were based on 9,006 101 calendar days in the quarter, leading to an average of $7,764 per day, lower than the $8,160 per day in the previous quarter. For the full year 'twenty three, the OpEx costs were $7,760 per day based on almost 38,000 calendar days. The reduction is mainly owing to delay in some supply due to trading patterns and no major repairs of vessels for the year. Then moving on to the fleet coverage for 2024, the product tanker market has remained strong through 2023 due to factors like increased refinery throughput, shifts in refining capacity and higher trade volumes. In the beginning of 2024, the market has been heavily impacted by the situation in the Red Sea, resulting in rerouted, the longer voyages and spikes in earnings.

Speaker 3

As of 29 February 24, 80% of the total earning days in Q1, 2024 have been covered at an average of $37,668 per day. This represents a significant increase compared to the previous quarters. For 2024, 30% of the entire earning days were covered at an average of $33,419 per day. If we then move to the next page, benefiting from solid fundamentals and anticipated increased oil demand, we can expect 2024 to yet be another strong year. We are well prepared for this market through our strategically positioned fleet and high spot market exposure.

Speaker 3

This page presents a comparative analysis of 3 scenarios outlining Hafner's potential earnings for this year. These scenarios include firstly, the consensus forecast from the equity analysts. Secondly, an extrapolation of the Q1 covered rates applied to the variable earnings days in 2024. And then a third scenario based on the 2024 covered rates similarly applied to the available earning days in 2024. In each of the three scenarios, the indications show yet another exceptionally robust year for Hafnia.

Speaker 3

We move to the next page. Jens will then be sharing the industry review and market outlook.

Speaker 4

Thanks, Barry. The next few pages provide commercial updates and our expectations on the product tanker market. Since the beginning of 2024, the product tanker market has been significantly impacted by the attacks on vessels in the Red Sea and Gulf of Aden. This have led to several tanker owners and charterers deciding to avoid transits through the area by rerouting onto longer voyages via the Cape of Good Hope. From the graph and table below, we can see that this rerouting would on average add 15 voyage days, representing a 57% increase in east to west voyage lengths, which will support the product tanker demand and ton miles.

Speaker 4

Although the duration of this disruption remains unknown, this is already having a significant impact to the product tanker market. Slide 14. Looking at the effect on CPP movements, East to West, routing by a cable good hope is increasing. We estimate that transportation demand so far has increased by approximately 20 MR equivalents based on the beginning of 2024 cargo volumes, which were the lowest volumes compared to the last 2 years. We expect the full tonnage demand effect to be closer to 100 Mi Kerlan's based on historical average east to west volumes all rooted via Capel Good Hope.

Speaker 4

Slide 15. West to East cargo volumes remain resilient when compared to historical averages, but ruling have already heavily skewed towards cable good hope. This impact so far is approximately an increased demand of 30 MR equivalent and we estimate the full impact at about 60 MRs, keeping in mind that west to east volumes require more cubic capacity than east to west volumes. The volumes from the west to the east have a 15% lower specific gravity. Slide 16.

Speaker 4

Red Sea impacts aside, the product tanker demand outlook remains very positive for 2024. Despite Q4 2023 demand showing a dip, global oil demand has increased by 2,300,000 barrels per day in 2023, mainly due to China and non ECD countries. Global oil demand is also expected to further increase by 1,200,000 barrels per day in 2024 to 103,000,000 barrels per day, driven by an increasing dependence on petrochemical feedstocks such as LPG and NAFTA. CBP on water as a proxy for transportation demand have also surpassed all time highs, positively impacting the current supply demand balance. The growth in oil and water is driven by longer voyages, not only from the Middle East to the West, but example given also across the Pacific where the West Coast Americas are to a greater extent being supplied from the Far East.

Speaker 4

Specifically, EU inventory levels are below the 5 year average and whilst diesel and gas oil and water currently exceeds the 2023 average by approximately 20,000,000 barrels, the portion destined for Europe is only 4,000,000 barrels out of the 20. As such, we believe that we will see continued growth in oil on water if the Red Sea crisis is not solved. 4,000,000 barrels equals less than one day of European diesel demand. Slide 17. Following on, Europe diesel gas oil and jet inventory remains well below the last 5 year average due to continued drawdown across the year and low import levels as they continue to replace historical Russian import volumes.

Speaker 4

East to West distillate supply volumes have decreased from December 2023 highs. Middle East volumes reduced due to significantly elevated freight and refinery turnaround. The question now remains, how long Europe will accept inventory draws before east west arbitrases will open wider than they already have. Slide 18. The refinery landscape also supports a strong outlook for the product tanker market, driven by new refinery startups.

Speaker 4

In the Middle East, further expansion in refinery capacity and ramp up of throughput at recent startups is expected in Iraq, Kuwait and the UAE. Asian export growth is expected to be driven by a range of countries, notably India, where refinery capacity is continuing to expand and China amid robust export quotas for this year and new refinery capacity expansions. Meanwhile, product imports are expected to be supported by refinery closures in regions such as Japan, Europe and Australia. Refinery maintenance schedule is also potentially affecting trade routes and product ton miles. We expect U.

Speaker 4

S. Refinery maintenance to run through February and partly March, while European refinery maintenance commenced in March and runs through April, with an average of approximately 1,500,000 barrels outage for the year, which supports the expectation of increased imports during the coming months from eastern regions. Middle East refinery maintenance is expected to end shortly and Asia Pacific is entering maintenance season in April. During this period, Middle East to Far East supply will be required and this is the historical drive for stronger markets east of Suez during April May. Slide 19.

Speaker 4

Looking forward into 2024, we expect product demand and tonne mile growth for the upcoming year. The short term outlook shows promise due to disruptions in the Red Sea, prompting vessels to reroute onto longer voyages. The duration of this disruption remains unknown, but despite that, the longer term outlook remains positive, driven by refinery dislocations, heightened European imports and the impact of Panama Canal transit restrictions due to continuous broad issues. The tonnage supply side also remains subdued, expanding only by 2.1% in 2023 and we expect only a further 1.2% expansion in 2024. This together with the expected increase in oil consumption will help to increase the utilization of the existing fleet.

Speaker 4

Slide 20. 2023 saw an uptake in ordering activities, but the order book remains moderate at 13% of the fleet capacity. 2024 supply outlook remains limited as most of the orders placed are set to only materialize in 2025. Deliveries in 2023 were limited, falling by around 20% year on year, but scrapping activities were also muted amid strong market conditions and increased appetite in the secondhand market. This is also evident in the increased average demolition age of vessels.

Speaker 4

As an overview, the supply outlook remains positive as they are continuing and there are an increasing number of vessels approaching the older bracket. An increase in new builds will also push the older part of the existing product tanker fleet into crude trading, which has a very old Aframax and Panamax fleet. And Michael, over to you for the next few slides.

Speaker 1

Thank you. Next, let me take a change to share about Hafnier's ESG project. In 2023, we took a first step into the methanol landscape by concluding a joint venture with Socattra to order 4 chemical IMO 2 MR dual fuel methanol vessels. This is in line with Hafner's sustainability values and ambitions intransiting towards a greener future and maritime sector. We also partnered with industry peers, international organizations and other key stakeholders to solve both short and long term goals of the maritime sector such as the establishment of Digital Ventures Duo 3,050, implementation of optimization initiatives on our vessels and development of clean hydrogen ammonia production and transportation project.

Speaker 1

ESG remains a focal point on our agenda with 2023 serving as an important year for consolidating and furthering our sustainability strategy. We remain committed to work towards our net zero ambitions. Moving to Slide number 23. Looking ahead in 2024, I hold a positive outlook on Hafnia's ongoing commitment to fostering a greener maritime sector and leveraging our strategically positioned modern fleet. I would also like to take this opportunity to thank our team and partners for the exceptional results achieved in 2023.

Speaker 1

None of this success would have been possible without the dedication of our team, both onshore and at sea. Despite ongoing volatility in the future, I'm confident that Hafner has taken the necessary steps to further prove itself and is well prepared to navigate the challenges. This comes to the end of our presentation, and I would like to open up the call for questions.

Operator

We will begin our Q and A session now. So for the sake of good order, we'll take the questions, if any, in the Q and A or chat function. So if you have any you'd like to raise there, please do so now. I'm checking both and I actually don't see any there. So I'm going to move on to the raise hand function.

Operator

And, Jorde, I'm going to unmute you if you could please state your question.

Speaker 2

Yes. Thank you, guys. Just a quick question on the market. Given the rerouting around Africa, how do you explain the recent drop in L01 and L02? You've got to put your password in first.

Speaker 2

Your password.

Operator

Sorry, Frode. I think someone was not on mute, and I've just muted them. So please go ahead.

Speaker 2

Yeah, that was the first question. Thank you. Did you get it?

Operator

Yes, I believe. Jan, could you also

Speaker 1

Yes, I

Speaker 4

believe this. Hi, Paulie. Yes, got the question. Thank you very much. And there's probably a number of factors as to why the LR market has come off in the Middle East in the way that it has.

Speaker 4

But the key factor in our view is that the quick rise in freight that we saw at the back end of January where LR2 freight rose by almost $6,000,000 for a voyage from the Middle East to UKC. That, to some extent, closed the arbitrage of the trade. And we've seen diesel oil staying more local in the East rather than moving West at the volumes that it normally moves. And this also is the reason why we are of the opinion that we have not yet seen the full demand effect of the closure of the Red Sea.

Speaker 2

Yes. And what's going to change that for the better in terms of the price ARB?

Speaker 4

ARB? It would be a recalibration of diesel prices when Europe starts to realize that their stocks needs replenishment. And it will be a question of how much diesel oil is available in the U. S. Gulf to satisfy European demand, the balance will have to come from the East.

Speaker 4

It's worthwhile mentioning in this context that whilst we see a weakness in the LR market, we see quite a steady and strong MR market in the East, in particular in the Far East on the back of good volume and demand.

Speaker 2

Yes. How about the refinery turnarounds in the West? What's your outlook there and the implication for product tankers in the coming months? I do believe that refining runs are expected to increase, especially from the U. S.

Speaker 2

Gulf.

Speaker 4

Yes, but we share your view.

Speaker 2

Okay. Sounds good.

Speaker 4

Thank you. All right. Thank you.

Operator

Thank you, Frode. I think I'm going to unmute Eric. If you could please ask your question. And actually, Eric, you might have to unmute yourself.

Speaker 5

Sure. Thank you. Just on your LTV now, you're 26%. I think when you launched this dividend policy about 18 months ago, I don't think we expected you to reach the 20% limit as fast as you now are on the verge of doing. What comes after that, Michael, if I may ask?

Speaker 5

When you reach that level, I take it that given the tone of your presentation here, you're not really interested in new builds of size. You're not really interested in secondhand acquisitions. So then you will accumulate a lot of cash. So what do you intend to do with that?

Speaker 1

Yes. Thank you for that question and not a surprise one, I would say. So yes, so I think you're absolutely right. So, basically, I mean, our view is that there's still depending on what happens to the values overall and the earnings, there's still maybe a while ago before we break the 20% and goes into the 80% payout. But I do want to be clear on the fact that we don't have any intention to build up cash.

Speaker 1

And as you say, we are not looking to buy expensive vessels at this part of the curve unless they are part of any form of contract base where we can rent them out for many years. So fundamentally, our focus has not changed. It's just that we haven't found it necessary to address specific dividend policies yet because there's still some way to go. But the Board and the management is obviously not focused on building up unnecessary cash. So we will just continue to focus on distributing capital back to shareholders as Australia going forward.

Speaker 5

Thank you. And on the because the order book has increased a little, I think now if you're we're 13% and rising and of course the new build delivery pace for 2025 is a bit higher than what it was. What's your view there? I mean, are time charters becoming interested? You're quite open for 2025.

Speaker 5

What about a few of your older vessels, you've sold them in the past. Now you haven't done anything for some time. Are you watching the S and P market?

Speaker 1

Yes. So and we do that all the time basically. So we don't lock our self into a strategy where it's like, okay, we're going to be doing this for the next 1 or 2 years. So time charter versus spot is very much a moving target. So if we see 2 or 3 year time charter rates that we feel is exceeding our expectation for spot markets, then we have no problem in chartering out or do hedges via different instruments.

Speaker 1

So it's not like we're locked in no matter what. So it's simply just dynamic strategy that every time if we see that long term charters are paying more than our view on spot, we'll reverse and take more hedging. At the moment, we feel that spot markets are more beneficial and profitable than putting ships out, but that's something that's an ongoing thing for us. Same with selling of ships. We have a clear strategy of trying to extract more lifetime out of our assets in general.

Speaker 1

So we have quite a lot of initiatives ongoing so that the current asset base can hopefully trade longer by investing a bit more early and make them, if you like, more suitable for trading more than the regular period. But again, for shifts that we don't feel fit into our strategy or too old, we'll just continue to drop them off if we get the right prices for those particular assets.

Speaker 5

But there's so far no problem trading 15, 16 year old LR1. So at what point is a vessel becoming a problem to trade now?

Speaker 1

So I think there are a lot of different views on this in general and different clients have different views on it. But I think at least our experience is that when markets are high and the vessels are in proper technical condition, you can obviously push as far out as you can, right? So I don't think there's one particular threshold alone. I think one of the important criteria and Jens, you can maybe jump in here afterwards if you want to is, of course, that the environmental regulations and the various taxes that are now coming and being introduced over these years will of course make it more uneconomical for older vessels in general to be competitive with modern ships and that's why we still have a strong focus of keeping a fleet of a relatively young age. I mean now it's 8 point 3 years.

Speaker 1

And I think around that level, we are super comfortable in many years to come that we're going to have a competitive fleet. Jens, I don't know if you want to add to that?

Speaker 4

I think you covered it, Michael. Thank you very much. Yes, thank you, guys.

Operator

Okay. So I'm not actually seeing any more raised hand functions. So, last opportunity for any questions which can be raised in the Q and A or the chat or the raise function, raise hand function. No. Okay.

Operator

So we've come to the end of today's presentation. Thank you for attending Hafnia's Q4 2023 Financial Results Conference Call. You will find more information available online at www.hafneabw.com. Goodbye.

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Hafnia Q4 2023
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