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Euronav NV (EURN) Q2 2019 Earnings Call Transcript

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Euronav (NYSE: EURN)
Q4 2017 Earnings Call
Aug. 08, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Euronav Q2 2019 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the * followed by 0. After today's presentation there will be an opportunity to ask questions. To ask a question, you may press * then 1 on your touchtone phone. To withdraw from the question queue please press * then 2. Please note, this event is being recorded.

I would now like to turn the conference over to Brian Gallagher, head of investor relations. Please go ahead.

Brian Gallagher -- Head of Investor Relations

Thank you. Good morning and afternoon to everyone and thanks for joining Euronav's Q2, 2019 earnings call. Before I start, I would like to say a few words.

The information discussed on this call is based on information as of today, Thursday, August the 8th, 2019, and may contain forward-looking statements that involve risks and uncertainties. Forward-looking statements reflect current views with respect to future events and financial performance, and may include statements concerning plans, objectives, goals, futures events, performance, underlying assumptions, and other statements, which are not historical statements of fact. All forward-looking statements attributable to the company or to persons acting on its behalf or expressly qualified in their entirety by reference to the risks, uncertainties, and other factors discussed in the company's filing with the FCC which are available free of charge on the FCC's website at www.fcc.gov, and on our own company's website at euronav.com. You should not place undue reference or reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement and the company takes no obligation to publicly update or revise any forward-looking statement. Actual results may differ materially from these forward-looking statements. Please take a moment to read our safe harbor statement on Page 2 of the slide presentation.

With that, I will now pass back to Chief Executive, Hugo de Stoop to start the agenda on Slide 3. Hugo, over to you.

Hugo de Stoop -- Chief Executive Officer and interim Chief Financial Officer

Thank you, Brian. I will run through the Q2 highlights and provide a full financial review of the income statement and balance sheet before Brian looks at the current themes in the tanking market and Euronav outlook before we take questions. We're turning to Slide 4 and the highlights page.

The tanker maker for VLCC's and Suezmax in Q2 was weak as expected with seasonal freight rate, but this was exacerbated by longer and deeper refinery maintenance. And with OPEC prediction cuts reducing the number of available cargos. This has been reflected in downward pressure in freight rate highlighted in Slide 4.

The impact on the lower freight rate on our share price has given us an opportunity to neutralize our balance sheet and liquidity strength during Q2. We have returned capital to shareholders via further share buy backs for a total of $10 million. This is in addition to the share buy back done in Q1 and of course on top of our fixed minimum dividend of $0.06 per half share, which we will pay in October despite a challenging first for the company.

So far, during Q3, rates are at a similar level to those in Q2 and this is disappointing, with around two thirds of the VLCC fleet booked at just over $20,000 and 60% of the Suezmax fleet at a touch below $15,000 per day. While it's disappointing not to see any traction in the freight market, yet we remain constructive on the tanker cycle for the last quarter of the year.

Now turning to our income statement on Slide 5. Our results are a reflection on the operational leverage of our business, with the lower freight rates bringing a P&L loss during Q2, and this offsetting the positive return from Q1, to bring an overall net income loss of $19 million for the first semester. However, our balance sheet remains strong and robust, as shown on Slide 6.

Let's take a look at Slide 6. Liquidity now stands at over $850 million, up by over $70 million from the end of Q1 and this was driven by two factors. Firstly, in June we took the opportunity to increase the size and therefore the marketability of our $0.075 coupon bonds by undertaking a tack issue of $50 million to bring the bond size to $200 million. We believe this is competitively priced funding when compared to other funding sources and demonstrates Euronav access to another longer-term source of funding. Demand was strong enough for us to issue the new bond at a premium of 1% over par value.

Secondly, we have also taken an addition 100 million credit facility in order to assist us with the preparation from IMO 2020 and in particular our fueling strategy for our fleet. As a press release highlight, we shall give a separate webinar specifically on our IMO 2020 preparations on September the 5th. And we look forward to updating investors and analysts in detail then.

Euronav leverage remains among the lowest in sector and we have no outstanding capex linked to new buildings.

We can now turn to Slide 7, where Brian will look at 3 key signals, we're currently seeing from the tanker market. Brian, over to you.

Brian Gallagher -- Head of Investor Relations

Thank you, Hugo. Now on to Slide 7. This, we believe, is a very good summary of some of the headwinds the tanker market has faced over Q2. Two essential and key drivers, U.S. crude exports and those exports from the OPEC nations based in the Middle East are represented in this chart. Each bar shows the month for month movement from each of those categories.

In the Q1 call, we talked about the resilience of the tanker market, which had been supported by U.S. exports, which is shown as being particularly strong during February. However, fast forward to April and May, and both of these key export markets, when combined together, saw around 800,000 barrels per day of a reduction in cargos. This was a difficult headwind for the large tanker market to withstand. This challenging market was faced by all operators over Q2 and was exasperated by the fact that we had 18 new VLCCs or nearly 3% fleet growth also hitting the market and the trading market at the same time during Q2. However, as Slide 7 also shows, as we exited Q2, it's encouraging to see growth returning in both of these segments.

We now move onto Slide 8 and some more optimistic noise is coming from the contracting side in the taker space. This chart shows the rolling 12 month run rate of confirmed orders of VLCCs according to Clarkson's. As the chart makes clear, ordering has dropped to very low levels with only 20 VLCCs being ordered over the 12 months until the end of July. There are two factors to believe that this trend for reduced ordering is likely to persist.

Firstly, unlike Q4 2016, when the contracting runway was last at these low levels, the regulatory and environmental backgrounds is far more demanding. Emission restrictions and targets going forward were not in place in 2016, and so the propulsion system used for tankers going forward will be a key consideration for any ordering in place going forward. This should, in theory, restrict the level of ordering that we should see given the higher cost involved.

Secondly, with consensus forecast for peak oil demand focused between 2030 and 2035, ordering of VLCC today with delivery in 2 years' time, implies all ship owners need to be very careful in considering any contracting decisions.

Now moving on to Slide 9, and what we're going to talk about here is more market discussion and what the potential disruption can be from the consequence of large-scale retrofitting of scrubbers in particular during Q4. Slide 9 illustrates the disruption is very backend loaded and focused on Q4 in particular. Again, according to Clarkson's, 73.5, the VLCC equivalence, will leave the operational feed to retrofit during Q4 alone. That is split 55 the VLCC's and 37 Suezmax. Depending on the amount of time taken to reposition and retrofit scrubbers to these ships, this could then see the global available fleet date in both of these sectors reduced by around about 3% to 5% during Q4 alone.

This disruption, while only temporary, has yet to really impact on our market. But it's important to highlight the potential scale of the factor, which will reduce the size of the global tanker fleet available at the very same time as seasonal demand will peak.

With that, I'll not pass back to Hugo de Stoop to talk through the outlook slide on Slide 10. Back to you, Hugo.

Hugo de Stoop -- Chief Executive Officer and interim Chief Financial Officer

Thank you, Brain. We maintain our constructive stance on the tanker cycle into the next winter but keep our traffic lights unchanged for now. While demand forecast have been reducing in recent months but remain ahead of the long-term trend. And vessel supply will remain elevated through early 2020, but then will reduce.

However, the tanker market should really start to see the impact of IMO 2020 regulations starting to bite in Q4, and longer-term positive drivers like the US crude exports remain well supported.

We were encouraged last week by enterprise products, SPOT offshore terminal getting financing approval. This terminal will be able to load two VLCCs at the same time when it becomes operational.

...

With that, I conclude our prepared remarks and I pass back to the operator for the questions. Thank you.

Questions and Answers:

Operator

We will now begin the question and answer session. To ask a question, you may press * then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press * then 2. Please limit yourself to 1 question and 1 follow up. If you have additional questions, you may reenter the question queue.

The first question comes from John Chappell of Evercore. Please go ahead.

Johnathan Chappell -- Evercore ISI -- Analyst

Thank you. Good afternoon, guys. Hugo, first question is on operating strategy. So you've laid out a very favorable new term outlook, which is consistent with prior calls and our views as well. But it seems like there's been maybe a bit of a disconnect in the spot right environment today and some of the time charter rate environment. So a quick two partner, 1.) is there are a liquid time charter market for 1 to 3-year charters? And 2.) would you be willing to give up some, maybe leverage, given the size of your fleet to lock in some of that arb that seems to exist between the time charter market and the spot market today.

Hugo de Stoop -- Chief Executive Officer and interim Chief Financial Officer.

Yeah, thank you very much for the question. It's first of all, true that we alluded to the point that some of the rates we've booked for Q3 are still at a low level. We expect the market to turn, as a matter of fact, it has already started to turn modestly. And we hope that the trend will continue to improve as we get nearer to the winter. We certainly are seeing some refineries coming back after much longer preparation or maintenance program than usual.

As far as the time charter market is concerned, it was a little bit strange what happened, because maybe a month or two ago we saw a number of players come into the market and try to lock in a lot of tonnage at what we thought were still very low rates compared to what we expect to have and only for one year. So you were being asked to give up what you expect to see in the spot market for something that was in the early $30's. So between $30 and $32 maybe $33,000. That didn't go well. I think very few owners accepted that and certainly Euronav was not there to propose any ships.

After that, we saw again, a lot of activity at more elevated levels. That got conformed by the ship owners' sides. And then for some reason, nothing was lifted on the chartering side. And that's very unusual. It was in particular one oil company. And then during that activity that I would describe as cultic and I think that's both sides of the market are looking at each other and trying to find a common ground, you had a few but not may more than a few time charter above 35, 36. We booked one at 37.5 for one year. And finally to answer your question comprehensively. We're not going to do a lot of ships, but obviously when you see falling like that and you're a fleet of 43 VLCCs it doesn't hurt to book a few ships at those levels. So at the moment, we have 4 VLCCs that are on time charter on either nice fixed levels or levels that include a profit sharing from which we will benefit from any market uplift.

Johnathan Chappell -- Evercore ISI -- Analyst

Okay. That's helpful information. Second question is along the same lines, but different as it relates to capital allocation. So you were pretty aggressive with the share buyback over the past 3 quarters. The prices all consistently in the mid to high $8s. You're sub $8, but you said there's some disappointment early part of this quarter. There's obviously greater geopolitical macro risks today then there were 3 quarters ago, let alone a quarter ago. So how do you think about the share buyback when you're balancing your robust liquidity versus some of the risks that are more difficult to handicap in the bigger picture?

Hugo de Stoop -- Chief Executive Officer and interim Chief Financial Officer

I tell you; we take a very opportunistic view and if you look at what we have done starting on 18 December and in the first quarter, that was probably a dollar lower than what we have done recently. Which confirms that despite the fact that we are seeing a lot of noise in the background, we continue to believe in the macro story as far as the tanker market is concerned. I figure we need to balance maybe our acts between share buyback and the dividends. So at the moment we are distributing still the minimum dividend that we have confirmed. But we hope to be able to distribute more dividends when we return to profits and hopefully that will come soon.

So again, we don't have the intention to issue a buyback program. I think we are very opportunistic when we do it and we have consistently done that way below what was see as our LNV. Which means that the factor that we are creating value for our shareholders, certainly for our long-term shareholders. So I can't really tell you when we will continue the buyback but again, opportunistically when we see a share price diving, you can expect us to react in one way or another.

Operator

The next question is from Amit Mehrota from Deutsche Bank. Please go ahead.

Amit Mehrota -- Deutsche Bank -- Analyst

Thanks operator. Hugo, I just wanted to ask around the logistics of using the low sulfur fuel that you're currently storing in one of the two ULCCs. So there were some reports that you're repositioning one of them. I think moving to Spain and then parking it in Malesia. Can you just give a little bit more color around that and then what the strategy is for the fuel with respect to IMO 2020? Your ability to kind of easily utilize those stockpiles so to speak.

Hugo de Stoop -- Chief Executive Officer and interim Chief Financial Officer

Yeah, hi Amit, thanks for the question. I know that my answer will be a little bit frustrating for you and for other guys on the call. If you read a press release, we have decided to comment separately on what we do as far as compliance fuel is concerned or any fuel we have stored on that vessel, where it will be positioned, how we intend to utilize it and for how long and what w will do in the future. So if you will allow me, I would prefer to defer those questions to September 5th, which is not too far away. And by then, we will have more detail call and webinar talking about all those issues and our strategy when it comes to compliant fuel in 2020.

Amit Mehrota -- Deutsche Bank -- Analyst

Okay. That's fair. And then let me just ask about the relationship with the international pool. I'm just trying to understand it. I know I asked a couple quarters ago and that was something that the team was working on in terms of figuring out how the economics of that would work. Can you just talk about that given some vessels in that pool might have scrubbers some might not? And the economics in terms of TCU rates might be different. But just help us think about kind of what look like going forward.

Hugo de Stoop -- Chief Executive Officer and interim Chief Financial Officer

Yeah, absolutely. So we are redrafting the pool rules as we speak. Basically the pool will continue to form one pool. But we will have two separate sets of accounts, one for the ships equipped with scrubbers and one for the ones that are not using or being equipped with scrubbers. And so that's the simplest way to be fair to both parties. Because it's almost impossible to predict the price of each fuel, and therefore it's impossible to assign pool points to each different type of vessel. So the easiest is to go with two separate accounting ways. But as far as marketability of the vessels are concerned, that will still be done by the pool as a uniform desk that will assign each ship on its rate.

Operator

The next question is from Chris Wetherbee from Citi Group. Please go ahead.

Chris Wetherbee -- Citi Group -- Analyst

Hi, guys. James on for Chris. I wanted to ask about basically Slide 7. I wanted to get a sense of what your current expectations of the U.S. Gulf Coast exports for the rest of the year were. And try to get a sense of how much growth from those exports is driving your expectations for a rate rebound over the last half of the year.

Brian Gallagher -- Head of Investor Relations

Yeah, it's a very difficult number to sort of get some accuracy on. Because obviously, there's quite a range of facilitates which are coming on to the pipelines which are feeding them. But we've been sort of making a working assumption and you can go back through our presentations, there's going to be at least another 1 to 1.5 million barrels a day of additional export capacity come on steam during the second half of this year.

And of course, that has the effect of structuring the world fleet, because there's obviously only one way to go out from that U.S. Gulf Coast exit, and that's to go long haul either to Europe or to the Far East, you can't go through the Panama Canal. And so that's the key driver. And again, I'd refer you back to our presentation where we give a sort of ready reckoner in terms of where that demand will feed. And that million barrels a day is roughly equivalent to 30 VLCCs. But that would obviously be a slightly higher number and multiplier effect coming through from the longer-term miles that U.S. crude exports would follow. But this is a difficult number to accurately estimate simply on the basis of there's so many different moving parts and different owners of those pipelines and export facilities.

But as Hugo said in the prepared remarks, we're very encouraged. Last week we had the first financing or sign off of a financing of one of these export terminals. So we don't see any reason why over the next two to three years we shouldn't see that trajectory rise to a capacity of somewhere between 7 and 8 million barrels a day.

Hugo de Stoop -- Chief Executive Officer and interim Chief Financial Officer

And I would just add to that, James, that every increase in prediction in the U.S., as long as it gets to the coast and to the gulf, gets exported. So it's not for usage or storage locally, which obviously for shipping is very important because it means that any increase that we see there will benefit shipping in general. And probably the large size vessels in particular.

Chris Wetherbee -- Citi Group -- Analyst

Thank you for the color. And then I wanted to ask about VLCC ordering. You out that it's at a low level and likely to remain low for the future, when might you reenter that and possibly when do you think it might just broadly as a market, come off the bottom?

Hugo de Stoop -- Chief Executive Officer and interim Chief Financial Officer

That's a very good question. Well, first of all, I think the VLCC, well I know the last VLCC we took delivery of was in 2012, so the last VLCC that we ordered was probably in 2009. So that seems a long time away. And since then we've continued to grow the fleet by buying second hand and from time to time second hand contract. People would order ships that they weren't in position to take delivery of or didn't want to take delivery of and were selling those contracts in the market that we picked up.

So returning to the market is a big word so I would therefore comment on what we see generally speaking in the market. And I think that with the IMO 2050 now, which is about the detokenization of shipping in general, I think that people need to be very brave to go and order a conventional VLCC today because the life of such a ship is 25 years, and if the life of such a ship is 25 years, it means that with a delivery probably in '21 or '22, you're going to have that ship in operation by 2047, very close to 2050. And by 2050, you have to reduce the carbon emission of the entire market by 50%. Which means that the ships that are still in existence at that point in time will be either carbon neutral e.g. they don't produce any CO2, or they have largely reduced their emissions.

Certainly one solution, certainly a transition solution is to shift the fuel type that you are using. And there's much talk about, in the market, about LNG. It's fair to say that the odds are extremely active marketing those VLCC duel fuel LNG conventional fuel vessels. But they come at a price at the moment. And price is much higher than if you were to order a conventional VLCC. So the owners, in general and Euronav in particular, are sort of two minds. When it comes to ordering or buying a VLCC they are obviously thinking about what's going to happen in the next 10, 15, 20 years. Unfortunately, that's the horizon we have to think about. And therefore we do not see a lot of owners or speculators entering the shipyards and ordering conventional ships. So we need the price of the dual ships to come down before we can go and place an order.

Operator

The next question is from Greg Lewis of BTIG. Please go ahead.

Gregory Lewis -- BTIG -- Analyst

Yes, thank you and good afternoon. You know, realizing a few days doesn't make a trend. Could you talk a little bit about the strength that we've been seeing in the VLCC market over the last couple days?

Hugo de Stoop -- Chief Executive Officer and interim Chief Financial Officer

Yes, absolutely. As you said, a few days doesn't make a trend, but obviously going to the right direction both in terms of the weight and in terms of time that passes. First of all, we're getting nearer and nearer to the winter, I know it feels like the summer, but that's how people behave. And then of course, we are seeing more activity, far more activity in fact. Which means that the refineries are coming back after a long maintenance as we said in the earlier remarks.

When you see more activity, I think you have to differentiate different markets. At the moment, we have seen more activity in the Atlantic and not yet in the Middle East. And I think it's fair to say that owners are maybe a little bit reluctant when it comes to Middle East. As far as we are concerned, we continue to go there on a regular basis, but obviously we are taking a lot of precautionary measures. And the market in the Middle East has not picked up yet and we hope that the market in the Middle East will go up as well.

So it's too early to see a big trend, but it's very encouraging. And then as Brian said, answering the previous questions the amount of oil that will be available for export, we're pretty convinced that all of that oil will go long distance and potentially will replace all of the oil that's coming from the Middle East which is very good for rates.

Gregory Lewis -- BTIG -- Analyst

Okay, perfect. Thank you very much.

Operator

This concludes our question and answer session. I would now like to turn the call back over to Hugo de Stoop for closing remarks.

Hugo de Stoop -- Chief Executive Officer and interim Chief Financial Officer

Thank you everyone for your availability. We look forward to speaking to you on September 5th, when we will have a special webinar about what we will do in terms of preparation IMO 2020 and the amount of fuel we have accumulated and the price at which we accumulated it. And so, yeah, that's it for us today. Thank you very much and talk to you soon.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 40 minutes

Call participants:

Brian Gallagher -- Head of Investor Relations

Hugo de Stoop -- Chief Executive Officer and interim Chief Financial Officer

Johnathan Chappell -- Evercore ISI -- Analyst

Amit Mehrota -- Deutsche Bank -- Analyst

Chris Wetherbee -- Citi Group -- Analyst

Gregory Lewis -- BTIG -- Analyst

 

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