Scorpio Tankers Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2024

There are 12 speakers on the call.

Operator

Please note this event is being recorded. I would now like to turn the conference over to James Doyle, Head of Corporate Development and IR.

Operator

Please go ahead, sir.

Speaker 1

Thank you for joining us today. Welcome to the Scorpio Tankers First Quarter 2024 Earnings Conference Call. On the call with me today are Emanuele Lauro, Chief Executive Officer Robert Bugbee, President Cameron Mackey, Chief Operating Officer Chris Avella, Chief Financial Officer Lars Denker Nielsen, Chief Commercial Officer. Earlier today, we issued our Q1 earnings press release, which is available on our website, scorpiotankers.com. The information discussed on this call is based on information as of today, May 9, 2024, and may contain forward looking statements that involve risk and uncertainty.

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' SEC filings, which are available at scorpiotankers.comandsec.gov. Call participants are advised that the audio of this conference call is being broadcasted live on the Internet and is also being recorded for playback purposes. An archive of the webcast will be made available on the Investor Relations page of our website for approximately 14 days. We will be giving a short presentation today.

Speaker 1

The presentation is available at scorpiotankers.com on the Investor Relations page under Reports and Presentation. The slides will also be available on the webcast. After the presentation, we will go to Q and A. For those asking questions, please limit the number of questions to 2. If you have an additional question, please rejoin the queue.

Speaker 1

Now I'd like to introduce our Chief Executive Officer, Emanuele Lauro.

Speaker 2

Thank you, James, and good morning to everyone, and thank you for joining us today. We are pleased to announce another strong quarter of financial results. In the Q1, the company generated $293,000,000 in adjusted EBITDA and $207,000,000 in adjusted net income. The market dynamics that have been driving the favorable rate environment continue. Global demand for refined products is robust.

Speaker 2

Refining capacity remains dislocated and the maritime supply chain is still constrained. In addition, geopolitical disruptions have tightened the supply curve further and the resulting cash flows from a high tender rate environment have been significant as well as transformational for Scorpio Tankers over the past few quarters. In Q1, we continue to focus on reducing our leverage. We made $262,000,000 in unscheduled repayments on our debt and are set to repay an additional $118,000,000 during the Q2. As previously mentioned, the balance sheet and quality of Scorpio as an investment improves each day.

Speaker 2

Today, our net debt stands at $811,000,000 which represents the lower end of our target debt level. We anticipate significant reduction in our cash breakeven starting in the Q3 of this year. In fact, we are working with our lenders to prepay existing debt, which would decrease our daily fleet operating breakevens to $12,500 per day, a figure near the lowest TCE rates earned during the COVID period and in the company's history. This breakeven once achieved, would be amongst the lowest in the industry, despite Scorpio Tankers actually still owning the most modern product tanker fleet out there. With net debt near scrap value, our modern fleet, low anticipated cash breakevens, we have positioned ourselves to act opportunistically to increase shareholder returns and further reduce debt.

Speaker 2

If things were to remain the same, given the share price discount to NAV, we would be buyback we would favor buybacks as we see them more accretive accretive to shareholders than further increases in regular dividends. As we look forward, we remain optimistic with low global inventories, robust demand and limited fleet growth who are all supportive factors for the continued strength in the product tanker rates. We remain committed to delivering value to our shareholders and appreciate your continued support and confidence in Scorpio Tankers. I would like now to turn the call to James for a brief presentation. James?

Speaker 1

Thank you, Emmanuel. Slide 7, please. Never have there been so many factors driving our business. Individually, these factors are positive. Collectively, they are unprecedented.

Speaker 1

Increasing global demand, low inventories and shifts in refining capacity have increased seaborne exports in ton miles. At the same time, the fleet has become bifurcated and supply growth has been limited. The result, product tanker rates have remained at high levels for the last 2 years. Today, spot rates for MRs are almost $40,000 per day and $50,000 for LR2s. While LR2s have captured robust underlying global demand for refined products.

Speaker 1

Of the robust underlying global demand for refined products. This continues today. Slide 8, please. Refined product demand has been extremely strong. We expect an increase of 1,500,000 barrels per day through year end, driven by increases in diesel, gasoline, jet fuel and naphtha.

Speaker 1

And yes, as global demand has increased, so have seaborne exports. Slide 9, please. The increase in demand has led to record levels of seaborne exports. In March, exports reached 21,100,000 barrels a day, an increase of 1,100,000 compared to last to 2019 levels and up 500,000 barrels a day year over year. The increase has been primarily fueled by heightened demand for diesel, gasoline and jet fuel.

Speaker 1

Moreover, not only have exports grown, but the distance these barrels are traveling has also significantly increased. Slide 10, please. As refineries have moved further away from the consumer, the distance the cargo needs to travel has increased. Refinery closures in Europe, U. S.

Speaker 1

And Australasia have decreased local output, increasing the need for imports. Conversely, new refining capacity in places like the Middle East have boosted production, leading to an increase in exports. The structural changes in capacity has and continues to reshape flows. As ton mile demand increases, vessel capacity is reduced and supply tightens. Slide 11, please.

Speaker 1

And demand for ton miles has notably increased. Excluding Russia, ton mile demand has increased by 21% since 2019. If you include Russia, ton mile demand increases an additional 6%. This suggests that it's not only geopolitical events driving ton miles, but changes in refining capacity and increasing export. That said, geopolitical events have required the rerouting of vessels, leading to a less efficient fleet that must cover longer distances.

Speaker 1

For instance, attacks in the Red Sea have reduced product tanker volumes to the Suez Canal by 75% and increased volumes around the Cape of Good Hope by 400%. These disruptions have exacerbated the Strong spot and time charter rates coupled with an aging fleet has led to an increase in newbuilding orders. Currently, the order book set to deliver over the next 3 years represents 14.8% of the existing fleet. Meanwhile, the fleet continues to age with the average age of the product tanker fleet now at 13 years. So what will the fleet look like in 2026 including newbuild?

Speaker 1

Well, by then, 50% of the fleet will be older than 15 years and 21% will exceed 20 years and older, positioning them as potential candidates for scrapping. Thus, using conservative scrapping assumptions, fleet growth looks modest over the next 3 years. Slide 13, please. This year's fleet growth is expected to be about 1.4% and with seaborne exports and ton miles expected to increase 2.6% 7% this year, it's vastly outpacing supply. Looking forward, we are very constructive on the supply demand balance.

Speaker 1

The confluence of factors in today's market are constructed individually, historically low inventories, increasing demand, exports in ton miles, structural dislocations in the refinery system, rerouting of global product flows and limited fleet growth. Collectively, they are unprecedented. With that, I would like to turn it over to Chris.

Speaker 3

Thank you, James. Good morning, good afternoon, everyone. Slide 15, please. The Q1 of 2024 combined another strong seasonal quarter with the dramatic expansion of ton mile demand that was triggered by the conditions in the Red Sea. Over the past 5 quarters, we have generated $1,300,000,000 in adjusted EBITDA and $777,000,000 in adjusted net income.

Speaker 3

These results have enabled us to reduce our debt by $557,000,000 pay $79,000,000 in dividends and purchase $490,000,000 of the company's stock in the open market at an average price of about $50 per share. Slide 16, please. Deleveraging has been our primary focus. And as of today, we have reached our net debt target. We've not only reduced our leverage, but we have also simplified our balance sheet through more traditional forms of financing at lower costs and more flexible terms.

Speaker 3

We have successfully refinanced almost all of our legacy lease obligations into more traditional and lower cost secured bank debt, which carries margins of less than 200 basis points. As shown in the chart on the right, our gross and net debt as of today stands at $1,400,000,000 $811,000,000 respectively. Slide 17, please. We are currently in discussions with the lenders on our $1,000,000,000 credit facility to make a prepayment of up to $223,000,000 on the term portion of this loan. This amount represents up to 2 years of term loan amortization, which is for the period commencing in the Q3 of 2024 through and including the Q2 of 2026.

Speaker 3

This prepayment remains subject to lender credit committee approval and the execution of definitive

Speaker 4

We are taking this

Speaker 2

step in an effort to

Speaker 3

We are taking this step in an effort to effect a significant and immediate reduction in our cash breakeven costs. Accordingly, we project that the company's daily cash breakeven costs, which include vessel operating expenses, cash G and A, interest payments and regularly scheduled loan amortization will come down to about $12,500 per day on a pro form a basis after giving effect to this prepayment. We expect to continue to pursue ways to reduce our daily cash breakeven rates additional debt and lease repayments. By pursuing a long term reduction in our cash breakeven rates, we have positioned the company to opportunistically increase shareholder returns. Slide 18, please.

Speaker 3

Our Q2 of 2024 coverage across the fleet, including time charters, is averaging close to $38,600 per day. These rates demonstrate the company's operating leverage. At $30,000 per day, the company can generate $547,000,000 in cash flow per year and at $40,000 per day, the company can generate 937 $1,000,000 per year. It is important to note that these estimates do not include any potential impact of the prepayment on our $1,000,000,000 credit facility. And with that, I'd like

Speaker 5

to turn the call over to Robert.

Speaker 6

Hi. Well, thank you very much, Chris. That's it's fantastic. I just want to say just how enthusiastic all of us here in the Skill Fear Group is. We know we've been climbing this mountain for a long time, many years.

Speaker 6

And we finally got to this incredible stage where we've generally got a lot of things going for us. We're the largest market cap company, in of pure product tanker companies. We have the highest liquidity in dollars per day trading volume. We have the newest fleet. We have the least need for fleet renewal and a sustainable dividend policy.

Speaker 6

And now we're ready to go. We're ready to go to the next place. As Chris pointed out, we're even going to be by the end of next week, we're going to be below our net date range that we set out. Emmanuel stated right from the beginning that with our stock trading well below NAV, our priority for return of capital would be share buybacks. Finally, we're expecting now through all this hard work with the delay of gratification that the shareholders have had in the last 6 months.

Speaker 6

We understand that that can be frustrating, but it's been worth it because these operating cash breakeven are really low right now. At $12,500,000 a day, that's like trough earnings. It's even lower if we actually looked at the breakeven related to the spot part of the fleet. But 12.5% that almost withstands anything. That withstands the COVID that terrible COVID year, the terrible 6 months to the worst period of the COVID year.

Speaker 6

And we're about to have our fair share of luck because right now the spot market is moving. It's moving upward strongly across all sectors. And as James pointed out, the factors out there are super favorable. And there's really no need for us to feel anything other than bullish. We observe that there is kind of fear the stock trades down all the tanker stocks are weak.

Speaker 6

Whenever there's a mention of a cease fire in Israel, Gaza, I guess it's because of a fear of opening up the Red Sea. But first of all, a cease fire in Gaza does not necessarily mean you open the Red Sea straight away. Secondly, let's look at that fear. If we look into 2023 where there was no disruption to the Red Sea, the MR market has been more or less the same in this Q1, this 1st 5 months as 2023. The LR2 market, depending on what quarter is maybe $5,000 to $10,000 stronger than 2023.

Speaker 6

But let's remember 2023 was an outstanding year. So it's not really something we should be afraid of, especially as the company's breakeven levels have dropped so much because of debt renewal. So it's arguable if we look at the data, historical data here, notwithstanding the fact that the market itself is fundamentally stronger today than it was in 2023, that the company could still earn pretty much would earn more than what it did in 2023 just because of the debt reduction. So I think that some of the fears out there are overblown. Either case, as Emmanuel said straight away, is the company is in great shape.

Speaker 6

It can face anything now and look at that situation as a great opportunity. With that, we're really excited. We're really bullish and just like to open that over to questions.

Operator

Our first question comes from Omar Khnath of Clarksons Platou Securities. Go ahead please.

Speaker 5

Thank you, operator. I've since moved to Jefferies. Hey, guys, good morning and good afternoon. First off, congrats on reaching your debt target. And Robert, as you mentioned, you've been climbing this mountain.

Speaker 5

Now you're here and every available play is there for you now both strategically and financially. I guess maybe first thing, now that you have reached this target threshold, does this change anything in how you're viewing the business? It sounds clearly that the buyback is now back in focus and

Speaker 4

the pause that we've seen

Speaker 5

for the past maybe 6 to 9 months as you focused on debt reduction has been well worth it. But in general, are there any kind of changes now that you've reached this target regarding the business that are coming?

Speaker 6

No. I mean, if you're asking, do we think it's worthwhile going out and order new buildings? No. Do we think it's worthwhile buying ships? No.

Speaker 6

Are we willing to continue while there's this spread to sell some of our older ships, sure. But as you see, it's not like a drastic situation. We're just doing it one at a time or whatever, just taking great advantage of strong prices. I think that if there was if I think one thing that may not really a change because it was just an extension of where we were before is that you are seeing these 3 year rates move up quite strongly, the 2 year rate quite strongly. And one of the things that our reduction in debt or reduction of costs and interest costs does do is that it makes now some of the charter levels look super compelling in just putting in some rates knowing where we are.

Speaker 6

If we knew a little bit more where our revenue line is that allows us to be more even more aggressive elsewhere. So if there was one thing, I think that it's that the lowering of our cost structure has changed if you think of it this way. If basically the Q3 last year, those numbers that we're talking about 12,500,000 were pretty close to 20 in effective terms. That delta is huge. That means that if you were fixing a ship out to $40,000 a day, you that cost you $18,000,000 you've changed your $19,000,000 you've changed your free cash flow from $21,000,000 to $29,000,000 That's enormous.

Speaker 6

That's the another real benefit of lowering these costs. And that will be the only change. But there's no rush to it. Look, we're very confident of the spot market too. So there's no rush to go out there and put pile on the time charters.

Speaker 5

Thanks, Robert. Yes. No, it's nice rising interest rates and lower breakeven, very, very different times. And I have

Speaker 7

a follow-up and just a

Speaker 5

bit more market related. Obviously, LR2s have been strong and they've really established a higher floor, higher ceiling this year, at least definitely relative to other segments in this, whether it's crude or product. Rerouting has obviously played a role, but I guess on that front, any color you can give on how much say LR2 capacity that had previously been trading dirty has come back into the clean trade to take advantage of this? And then I'm asking just simply because we now have also a lot of discussion on the TMX pipeline coming on. And does that perhaps change any of that cleaning up of dirty LR2s?

Speaker 5

And then perhaps do clean LR2s want to migrate into the dirty trade, take advantage of that TMX opportunity. Any color you can give on that Lars?

Speaker 8

Yes. I'll take it. I mean LR2 clean dirty trading has obviously taken place for years, right? I mean, and it oscillates. And I looked at this the other day.

Speaker 8

Can you hear me?

Speaker 6

Yes, we can.

Speaker 8

Yes, sorry. And it has oscillated up and down between 2 20 units, 2 50 units trading cleaned over the last 3 or 4 years. So there has been a number of ships that gone into cleaned from the dirty trade as they clean up. And you might recall, Omar, that it takes a little bit of time to do that. So it's obviously a big decision.

Speaker 8

If you look kind of more strategically in terms of number of vessels from a trading history perspective, it has kind of plateaued. It's not something that is a big issue for a LR2 owner to look at these things from an overall perspective, because clearly it's very decent and a very constructive market. I think it's fair to say before answering your question on TMX, which I think is a really important one is when I look at it holistically on the market, it's close to firing on all cylinders, notwithstanding what goes on with the Baba Mandeb and the not going through sewers, because we still have a lot of refining kind of output that is going to increase over the next couple of months in June, July as we go out of this kind of big turnaround season that has taken place in the Q1. And here we still had a very strong Q1. And now we're going into the Q2, we can start seeing that there's more runs being built up, which is great.

Speaker 8

So you look at Asia, MRs there have been trading. And I think as James was saying earlier on around 40,000 per day, those rates have been increasing. Transpac has been good rates as well. China exports is going to be a big thing as we move into the second and third quarter. And again, talking about the LR2s, we've seen rates now moving up strongly, I think, 15 points today at trading 225, 230 dollars Probably gainfully around $60,000 a day for ultra long haul business.

Speaker 8

Same time, Middle East has been good for MRs as well, trading probably $45,000 a day around voyage. The West has been a little bit slow, a little bit on the back of this refining turnaround. We've seen good activity this week as well. Rates have ramped up very much in the U. S.

Speaker 8

Gulf, couple of $100,000 for cross carobs. That's also now trending up towards $30,000 a day. So all of this is good stuff. James also talked about the new refineries and we see this every single day now. We live this every day and we can see how utilization levels have moved up on that.

Speaker 8

And also the disparity of the cargo selection that we can do, the triangulation availability, not only on MRs, but also now certainly on LR2s have impacted the way we do our business and certainly the ton miles. When you talk about TMX, I call that like one of the new dynamics, which is like Dangote, which is a big thing, Dos Bocas in Mexico, which is coming up end of the year and then this TMX. Now TMX is a big thing for Aframaxes. And because of Aframaxes, we also have a big thing for LR2s. If you ask TMX, they say that I think it's about 30 Aframax liftings per month out of Vancouver.

Speaker 8

And that's a lot of Aframaxes. And we've seen a couple of cargoes now. They've gone to Asia. If it goes long haul, it could be more than that. If it goes to California, it will be less than that.

Speaker 8

Whatever way you look at it, it's going to have a big impact on the Aframax market and through that also on the LR2s, because there will be additional bottlenecking around these things. And when you talk about forward LR2 supply, you need to look at the overall context and you have to include the Aframaxes. The Aframax order book today is extremely low when you combine it with the LR2. So you put all of this together with the fact that, you know, BLR2 and Aframaxes will reach 20 years of age. It doesn't equate to that.

Speaker 8

So I see this as a really strong kind of input or one of the new dynamics that really is going to improve the overall demand for Aframax stroke LR2s as we move into end of 'twenty four and beyond.

Speaker 5

Great. Thank you, Lars. That's a very, very obviously detailed and helpful color. So appreciate that. And Robert, thank you as well.

Speaker 5

I'll turn it over.

Operator

Our next question comes from Jon Chappell of Evercore ISI. Go ahead please.

Speaker 9

Thank you. Good morning. Quick follow-up on strategy as it relates to vessel sales. It seems like the pace of disposals have been picking up a little bit through some of the announcements you made today. By my count, 6 20122013 vessels lap.

Speaker 9

Clearly, you already have a lot of operating leverage. And per your commentary about your own NAV, there seems to be an arb there of potential sales. So should we expect those tax at the fleet at some point in this year? Clearly, you don't need it from a deleveraging perspective, but can only just add to the bounty for the second half buyback?

Speaker 6

I think that the better way to describe it is we'll deal with those opportunity not opportunity along the way. I don't think we want to discuss I just don't think it's useful for us to discuss actual types of vessels and what our plans would be. I think it's much better for us to all of shareholders to just accept that we'll carry on. If we see vessels that are bids that are attractive to us, then we might engage and do that. We don't have to, but we might want to.

Speaker 9

Okay. Then for a follow-up to go back to, I think, James' first chart. I think the LR2s get a lot of focus because of the volatility there. But as you noted, the MRs have been pretty consistent throughout. Would it be fair to characterize the LR2s to be more of the disruptedly impacted sector?

Speaker 9

But what's been happening in the MRs kind of slow and steady grinds higher is more structural and related to demand and the refinery dislocation. And therefore, if there were to be some perceived, I guess, piece across impacted regions, it would seem that the MRs would still have more of structural boost and maybe the LR2s would be the ones at risk?

Speaker 6

I'll let Lars answer in 2 seconds. But I think we just said we go into historically you still had a I just think you do have just a wider spread between MRs and LR2s to the benefit of the LR2s whilst the Suez Canal is we're not transiting that the owning group. And but you still had in these in 2023 quite a wide still quite a widespread to the LR2s in its favor. You also on the time charter market, it's difficult to determine. Remember the time charter market itself is saying that there is a quite a widespread again to the LR2's favor.

Speaker 6

So we're only saying we're not saying that the market thinks that the Red Sea will be transitable. It is just saying, look, some of this sort of worried really isn't that much of a worry. Lars, do you want to add to that?

Speaker 8

I think what we're seeing today also is that the LR2 is becoming more of a fungible unit. There is a lot more arbitrage that takes place on an LR2 today. The whole concept of what's going on going back to the TMX thing has meant that the crossover between an LR2 and Aframax is evident. You can see that on the time charter market. You can also see it in the ordering market for new builds where most owners considering where the price point is today will be willing to pay the marginal increase for LR2, which is limited now to have that optionality.

Speaker 8

So when you look at LR2 Aframax, you got to look them together holistically. I think that to your second point, Robert, where you talked about these factors of Bab el Mandeb and so on, obviously impacts the longer haul business, which of course impacts the LR2 by virtue of its size. And therefore, you have it outsized. I think under normal market conditions, there will be that spread. But I do think that they both are kind of very viable fungible tradable assets.

Speaker 4

Yes. I

Speaker 6

mean, if you've seen some recent verification in INSW's results yesterday where they have fixed MR and they have fixed MLR2. And that day you can see that positive spread, quite a wide positive spread to the LRT.

Speaker 9

Okay. That's all clear. Thank you, Lars. Thanks, Robert.

Speaker 4

Thanks.

Operator

Our next question comes from Greg Lewis of BTIG. Go ahead please.

Speaker 7

Yes. Thank you and good morning and afternoon. Thanks for taking my question. I guess my first one, Robert, James or Lars is around the time charter market. I mean, you called out the pickup and I guess rates in the more longer term 2, 3 year time charter market.

Speaker 7

Just kind of curious at a high level, what the appetite the appetite from those charters, is the impediment on getting deals done like how wide do think these bid asks are at this point?

Speaker 8

First of all, I'd say that the bid ask is very wide because deals are being concluded quite regularly at this moment at levels that are gainful both on LR2s and also on MRs. And there's quite a few out there looking consistently for longer term charters, charters between 2, 3, 4 or 5 years. And basically, the client base is wide. It is national oil companies, it's traders, it's end users and it spans the globe.

Speaker 7

And just a real quick on, is there a preference for scrubbers?

Speaker 8

There tends to be a preference for scrubbers, but it's not complete. I mean, there are definite. There are some who do not want, but I'll probably say 80 percent for scrubbers.

Speaker 7

Okay, great. Thanks. And then just one, I wanted to touch a little bit on Dan Goede, kind of where that seems like it has the potential as the year progresses and I guess really even in the 2025 to be a major driver of volumes. Any kind of updates you can share there or kind of what's been happening there as you see it develop? Is that as we think about the differences between MRs and LR2s?

Speaker 7

Is that do we expect that to kind of evolve in the more of an LR2 market? Is it going to be mixed? Kind of just any high level thoughts around that would be super helpful.

Speaker 8

So it's very early days still, Greg. Gangotia has just recently started up and I think it's currently around 300,000 barrels a day and I think there's a second distillation unit that's coming on stream in 6 weeks or something like that and it starts ramping up and then suddenly the product is going to become finished grade, which is not the case right now. We have seen exports. We have done a couple ourselves. There has been exports done on LR2s, long haul.

Speaker 8

There has been a lot of MRs being done as well out of Angola, which primarily has been going to some of the other West African countries, all very interesting from a product tanker owner perspective. As this startup has taken place, it almost seems right now at the startup stage that we've there's like this 3rd export market that's been created in the Western Atlantic together with the continent and the mid. So you have to bid the vessels. You have to start looking at pricing somewhat differently rather than being in the back order of West Africa where you tended to only have gone in with your imports. Obviously, you would anticipate some reduction of imports over time from the continent.

Speaker 8

But I think we talked about this before, but there is a logical value trade because the premium finished product that's coming out of BINGOTI is high grade, high value stuff that's ultra low sulfur diesel, 1 PPM gasoline and stuff like that, which obviously goes and fetches a premium in the States or in Europe and other OECD markets, whereas the products that you normally would use in Nigeria of lower grade. So it obviously remains to be determined if what are the political pressures around that and what that's going to be. And I think that remains to be determined at some way or form. The other issue as well when it comes to Dangote, which is also something we need to find out is the whole supply infrastructure is also a big question. And I think there's going to be some issues around bottlenecking and double handling that's going to pose.

Speaker 8

We can see that some of these things will need to have double handed. You need to have bigger ships into work as STS as they do already today. So it's going to be a really interesting thing to say and to see how that's going to develop over the next year. I think the final thing also that's quite interesting is that where it's placed, Angkodie has excellent potential as a Swain refinery. You can go east, west, you can do all these things.

Speaker 8

And I think I would imagine as this thing starts developing as a real up and running refinery with the size that it have, it would have a lot of potential because they will have a lot of naphtha that can be exported. They will have a lot of jet fuel as well that they would not require in the local market. So it's an interesting one. Headwinds in terms of product coming from the continent going down to West Africa, you could assume that. But I think there's a lot of other stuff considering the size of this refinery and the quality of product that it's going to produce that will kind of come up with some interesting determinants for the market.

Speaker 7

Super helpful. Thank you very much. Have a great day everybody.

Operator

Our next question comes from Ken Hoexter of Bank of America. Go ahead please.

Speaker 10

Hey, great. Good morning, Emmanuel A, Robert, James and Lars. Thanks for the update and Chris. So congrats on meeting the net debt NAV target. What a ride to get here.

Speaker 10

Just a minor one to start. Did you have fewer vessels in dry dock or were the planned dry docking quicker move through the quarter? It looked like it was a bit lower than what you had talked about last quarter. But then my question is, is rates for the MRs have improved on your quarter to date, little lower on LRs. Are you seeing any seasonal cooling off if we're looking at Q2?

Speaker 10

Is there just bigger demand near term? Just want to understand the very near term market where we normally get that seasonal pullback. Lars, if you have any thoughts on that?

Speaker 8

The short answer to the second part of your question is, I do not see seasonal pullback. I see a seasonal ramp up and I don't think that what we have seen in the past in terms of what we would historically look at the market seasonality, going back pre-twenty 19 being the case, I do see that we're probably going to have a stronger summer than we have anticipated before. One of course is because of the refineries that we can see from the output that's going to happen over June, July. I think another thing also which is variable from a market perspective as an ingredient is China exports. We've talked about this in the past as well.

Speaker 8

There's been the second quarter was issued. It's higher than it was last year. The thing that I find quite interesting in that context is that before we were kind of being cannibalized somewhat by the new builds, but I can see that there's only one VLCC that's put delivery in 2024. There's only 7 Suezmaxes I think that's being scheduled for the rest of the year. So there's limited competition for this kind of China long haul stuff that before we would talk about.

Speaker 8

It's not even something that I think about anymore. It's just it's another thing that just comes in and we're looking at some really kind of constructive stuff as we go into the Q2.

Speaker 10

Great. Chris, thoughts on the days?

Speaker 3

Yes. Ken, thanks for the question. There were slightly fewer dry docks. I'd also emphasize there were slightly fewer days of the dry docks that we had planned, which is good. There's dry docks are always going to move around, especially in this market.

Speaker 3

There's vessel positioning. We've had some get pushed back from Q1 to Q2 and some get pushed back from Q2 to Q3. So we'll just keep updating that. But short answer is yes.

Speaker 10

Perfect. Just looked a little different. And then Robert, I guess maybe just bigger picture or Emanuele, thoughts on cash, right? You've noted you're going to refocus on buybacks. But what's your vision for the fleet, right?

Speaker 10

You've got some opportunities you mentioned on potentially selling some of the older vessels. Do you look at this as an ongoing entity for the next 20, 30 years? Do you look at it as we kind of run it to the end of the fleet life and monetize that? I just want to understand your vision for what comes next. I mean, obviously, it's been a long ride to get here and to be able to have the optionality you now have.

Speaker 10

But just want to understand how you think the next phase of the company structure?

Speaker 6

I think you see it as an ongoing, but I don't think I know that we see it as an ongoing entity. I don't think that you I don't think running it off to nothing is not something that's being discussed. Obviously, the other obviously, there's always the public company, the alternative of someone wanting to buy the company, but other than that you look to carry the company forward?

Speaker 8

Well, I asked just because I

Speaker 10

want to understand the timing of then when you'd have to start reinvesting to replace the vessels. I think if I may, Robert,

Speaker 2

I think we act I mean the management team has I think shown that we act and live as if it was forever and we are opportunistic and reactive when we have to be on up markets and on down markets. So as far as fleet renewal, I think that we have quite a bit of time to think about that. We still are sitting on the most modern fleet that any public company out there owns. We now have the lowest leverage or actually the lowest breakeven that we've seen in our company history. And we the beauty of where we are is that we do not have to take a decision today.

Speaker 2

Robert was saying before, yes, if we are receiving offers on existing vessels that are attractive enough, we will look at them or consider them and maybe continue trimming the fleet. However, we are enjoying these markets that are improving. And as we've all heard Lars' comments on what the markets are doing as we speak. So we are very relaxed, aware and open to opportunities going forward knowing that we do not have to do anything for the coming quarters as I have to. But as I can do, yes, we have a lot of options ahead of us.

Speaker 10

Great. Appreciate the thoughts. Thanks guys.

Speaker 2

Thank you.

Operator

Our next question comes from Freud Margadel of Clarksons Securities. Go ahead please.

Speaker 4

Yes. Thank you. Hi, guys. Just a quick question on the market discussion you just had. It's interesting to note that rates have been fairly similar to 2023 despite this Red Sea disruption, right?

Speaker 4

You would have thought perhaps a bigger impact on rates because of the Ton Mile expansion. So just if you have any ideas on why rates haven't been higher, I guess part of the answer is related to refinery runs, but just curious if you have any other comments to that. That's the first part of it.

Speaker 8

I got to be honest. I'm pretty happy with the kind of the rate structure as things are right now. I mean, there obviously has been kind of the refining maintenance in the States earlier and then obviously the Middle East now and China also a couple of months ago. So all of that has been kind of front loaded to some extent. As for Q1, I think it's been absolutely fantastic.

Speaker 8

If I had to say, if there's something that I think probably would change, it would be to see some of the ARBs opening up from the West to the East. I mean, the NAFTA has been somewhat shut. I think a lot because of the distance and you had to go all the way around and the cost of opening up that arb simply was too dear and therefore that has been somewhat less. Skikta, for example, just looking at it from a very micro perspective is down for maintenance right now. So that refinery, which is very much naphtha related is not producing.

Speaker 8

So there's some other factors that you say, well, could there have been a bit more otherwise? I don't think it's a big thing to be honest. I think that rates generally have had from a very high point great volatility has been oscillating wildly in some markets. The U. S.

Speaker 8

Gulf as a case in point where you've seen rates move up $20,000 $30,000 a day within a week. The second one that has also been like a funky ride has been the Middle East on MIs has also moved up could move up 100 gross debt points also within a couple of days, creating this kind of uncertainty or how do you peg a market. So one thing I think is fair to say is that the underlying utilization level across the product tanker fleets is at a much higher level than we've seen before. So it doesn't take very much we have seen now. And the sentiment generally with the owners as well is that it doesn't take them very long time to turn into a bull, which we don't have to go back that many years where we're fat lining a lot and sentiment took a much longer time for it to kind of react to the fundamental prompt market dynamics.

Speaker 4

Yes. That's interesting. I mean, I was looking at the IEA data. Q1 refining runs globally was down year on year, roughly about 81,000,000 barrel per day. And then they predict a huge ramp up to 85,000,000 in August.

Speaker 4

Exactly. I was thinking like we've been lower than you should have expected. And what happened next in Q2 and Q3 when you have this ramp up if it happens? That's going to be very interesting, right?

Speaker 8

That's I think you hit the nail on the head there Frode. That's how I look at it too. It's quite interesting with all the things that took place in terms of maintenance and the pullback, you would have in previous markets going back the number of years seen a lot more disruption and destruction in rates, whereas we have been hovering very nicely at some very decent numbers in what tend to be a situation where rates would have reacted negatively. So if you add on all these elements, the stuff that you just talked about and also stuff around China that I just mentioned earlier and so on. We are so close to this capacity utilization where north of 90% or whatever that you just add a little bit to it and you start seeing extraordinary kind of increases that outsize the element of that because you're not trading at the margin.

Speaker 4

Indeed. Thanks. Thanks guys.

Speaker 6

Thanks, Frode.

Operator

Our next question comes from Chris Robertson of Deutsche Bank. Go ahead please.

Speaker 11

Hey, good morning everybody. Thanks for taking our questions. I'm really excited to see the breakevens here. Fantastic job, everybody just wanted to pass that along. But yes, my question is related to that.

Speaker 11

So if you engage in the prepayment, as

Speaker 4

you said, you could get

Speaker 11

to the 12.5 level. Just curious, what is the breakeven level today, before that prepayment?

Speaker 3

Hi, Chris. It's about $16,000

Speaker 11

Okay. Yes, got you. I'm glad that it has that potential of an impact here. So that's what we were trying to get at. My second question is kind of the often overlooked Handymax segment.

Speaker 11

Just noticing quarter to date rates have gone down a bit there. And there seems to be a case where there's a, I don't know, a consistent mismatch between what some of the brokers provide in terms of the global averages versus what you guys actually put up. So I wanted to better understand the dynamic in that particular segment.

Speaker 8

I'll start with that. I mean, I think the Handymax vessel or Handymarket is like a secret weapon. It's a small market, very aging market. It has the potential to ramp up extremely quickly. If you have a certain size and experience, you also have the ability to triangulate extremely well in terms of trading on the continent or the Mediterranean, which is the primary market.

Speaker 8

It also has 2 markets within that. 1 is clean and 1 is dirty. So you've got kind of like a 4 markets going on in an area where you can optimize around that. It is certainly very intensive business. So you need a lot of kind of focus around it.

Speaker 8

You need to have a number of ships to be able to optimize. It's not a market that I would suggest that you go in with 2 or 3 ships, but you need to have kind of critical mass. And that also is a market, which I didn't talk about it earlier when I was asked about the spot market, but that has also picked up a lot over the last couple of weeks or last week actually. And that's also trading probably on those 4 markets that I mentioned somewhere around $30,000 a day today, dollars 25,000 to $30,000

Speaker 11

Okay, great. Yes, thanks for that color. That's it for me. Thank you very much for the time.

Speaker 2

Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Emanuele Lauro, Chief Executive Officer, for any closing remarks.

Speaker 2

Thank you, operator. No closing remarks from our side. Just thanking you all for your time and attention today and looking forward to speaking very soon. Thanks a lot.

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Earnings Conference Call
Scorpio Tankers Q1 2024
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