Okeanis Eco Tankers Corp. (OTCPK:OKENF) Q2 2022 Earnings Conference Call August 12, 2022 7:30 AM ET
Company Participants
Konstantinos Oikonomopoulos – Chief Financial Officer
Aristidis Alafouzos – Chief Operating Officer
Ioannis Alafouzos – Chief Executive Officer & Chairman
Conference Call Participants
Petter Haugen – ABG
Operator
Welcome to OET’s Second Quarter and First Half 2022 Financial Results Presentation. We will begin shortly. Ioannis Alafouzos, CEO and Chairman; Aristidis Alafouzos, COO; and Konstantinos Oikonomopoulos, CFO of Okeanis Eco Tankers, will take you through the presentation. They will be pleased to address any questions raised at the end of the call. I would like to advise you that this session is being recorded.
Konstantinos will begin the presentation now. Thank you.
Konstantinos Oikonomopoulos
Thank you, operator. Welcome to the presentation of OET’s results for the second quarter of 2022. We will discuss matters that are forward-looking in nature. These forward-looking statements are based on our current expectations about future events, including the company’s commercial performance, dividend policy, projected capital expenditure and anticipated debt capital commitments. Actual results may differ materially from the expectations reflected in these forward-looking statements.
Starting on slide 5 in the executive summary we’ll review the highlights of the quarter. OET returned to free cash flow generation on the back of improving markets. In particular, we generated net revenue of $36 million that is 36%, up quarter-on-quarter. Adjusted EBITDA of $25 million that is 52% up quarter-on-quarter, and an adjusted profit of $8.5 million or $0.26 per share.
Our fleet-wide TCE for the quarter came in at 29,900, which is 21% up versus the first quarter of this year. At the end of the second quarter, OSP reported total liquidity of $72.4 million, 121% higher year-over-year and 65% leverage. During the quarter, we have drawn our sustainability linked-loan with usage towards refinancing debt on two of our VLCCs and also for general corporate purposes. The company is now operating on a fully delivered fleet, following the delivery of the last VLCC under construction during the second quarter. Our Board of Directors agreed and we announced a cash dividend of $0.30 per share or $10 million in total.
We are now moving to slide 6. On slide 6, we provide a summary of trading data for our share and also present OETs total return since IPO in 2018. Since listing and adjusted for distributions, assuming reinvested into our stock, total return comes in above 100% to 119% based on yesterday’s close, up $130. Notably, our weighted average buyback price stands at NOK62.9 and is lower than half of the current trade.
We are now moving to slide 5 — slide 7, sorry. We summarize our corporate debt and chartering structure on slide 7. 47% of the company is owned by public investors other than the sponsor. The company owns a fleet of six suezmaxes and eight VLCC and is now running on a fully delivered basis, while the average age span was up three years. As you can also see on the slide, our financing mix includes a variety of finance providers and the group’s financial flexibility is also shown due to a variety of sourcing its capital.
Lastly, three of our vessels are currently on long-term charters and in the second and third quarter of 2023, while the rest of the fleet is trading either spot or under short term TC.
I will now hand over to Aristidis for our commercial market update.
Aristidis Alafouzos
Thank you, Konstantinos. During Q2, we achieved a fleet-wide TCE rate of $29,900 per operating day. Our VLCC generated $18,600 per day in the spot market, a 2% outperformance relative to our tanker peers who have reported Q2 earnings. OET had a weaker result in Q2 due to IFRS accounting principles and our decision to reposition most of our VLCC fleet in the West, following the disruption in trading patterns after the Russian invasion in Ukraine.
The Nissos Anafi and Nissos Donoussa, Nissos Keros and Nissos Kythnos were all fixed for backhaul voyages loading in West Africa to discharge into Europe coming open from China. The TC for these voyages was below the round voyage equivalent of a Middle East Gulf to China or West Africa to China or US Gulf to China, but dramatically improved our position. Since the web has begun to sell sanction from Russian oil, new trade routes have emerged for VLCCs.
The two most important being West Africa to Europe and US Gulf to Europe. These voyages freight very well on a round voyage basis and being short in duration, allows us to keep our position in the web, where we’re able to choose the opportune moment to fix longer fronthaul voyages back to the east and when the market firms taking advantage of a minimal bottle flag.
In Q2 and Q3, our eco scrubber fleet benefited greatly from the increased bucker prices and spread between VLSFO and HFO, which reached $550 at one point and is currently trading closer to $280 per metric ton. Our suezmaxes generated $41,500 per spot day and 80% outperformance relative to our tanker peers that have reported Q2 earnings so far. We are very happy with our Suezmax performance in Q2. We had 75% of our fleet available — Suezmax fleet available for spot voyages, when rates spiked in mid-Q2, and we took advantage of this by fixing a few short time charters as well as front haul voyages. Similar — similarly to the VLCCs, our Suezmaxes took advantage of extremely well-priced bunkers in the west that gave a further boost to the east time charter growth.
Moving on to slide 10. We provide our guidance for Q3. So far in Q3, we have fixed 60% of our VLCC spot days at $31,900 per day, a 72% outperformance relative to our tanker period that have reported Q2 earnings and 70% of our Suezmax spot days at $60,400, a 109% outperformance relative to our tanker peers who have reported their Q2 earnings.
On the beat, we fixed Nissos Sikinos, Nissos Anafi and Nissos Donoussa, which were all open in the west, as I mentioned on the Q2 update. For lucrative West Africa and US Gulf voyages discharging into Europe, the shorter round trip voyage as I mentioned again. We like these voyages again because they treat very well, while they’re short and the vessels remain in the West. This gives us optionality to capture spikes in the market more effectively with our smaller fleet when compared to our larger competitors.
In addition, Nissos Kea and Nissos Nikouria will redeliver from their short launch time charters after their delivery this year in the end of Q3. This will bring our spot exposure out of these to seven of eight vessels right before the historically firm winter market in Q4.
Our only vessel that’s on time charter as Konstantinos mentioned will be Nissos Despotiko, which had 10 months left at around $48,000 per day. We’re very happy with our performance on the suezmaxes as well. We’ve managed excellent triangulation on the fleet as well as taking short-term time charters that will redeliver the vessels end Q3 in time for the winter market.
On all segments, but suezmax in particular, have benefited from Europe’s need to replace Russian crude. Cargoes from the US Gulf, West Africa, and the AG have become much more frequent. We do not anticipate this to end and believe that the crude segment will be able to triangulate and reduce ballast days while optimizing TCE for the short to medium term. The evidence of having the most efficient well approved fleet has never been more clear again.
On slide 11, a we look at the change in trade patterns and the effect on the crude market tonne-miles. Starting from the left-hand side, Russian crude exports, that would be sold into Europe before the invasion in Ukraine, have now shifted to the East, mainly China and India, which are much farther away.
Europe, on the other hand, is outsourcing its crude supplies from other crude buying region, which are farther away than the replaced Russian crude. We have looked at the change in European crude imports from various trading regions year-on-year and it is evident that Europe is gradually shipping supply from neighboring Russia to further origins.
While US Gulf exports can shift on aframax, suezmax or VLCC, West Africa and Middle East Gulf cargoes will move and benefit much more on larger vessels like suezmax and VLCC.
The collective impact is mirrored on the right-hand side in the higher average crude tanker sailing business, a result that is very positive for our tankers trade and benefiting tonne-miles.
Moving to slide 12, we focus on the second part of the tanker demand equation and in particular, trade volumes. Consensus energy agencies suggest growing seaborne crude tanker volumes from 2021 lows following easing mobility restrictions associated with pandemic and the end of this like [indiscernible].
Drivers in such volume growth over the next couple of years is the Middle East, Gulf, in the United States that are expected to contribute 2.5 million and 1.6 additional million barrels per day.
On the bottom part of the slide, we provide an overview of the incremental volume potential in the event of the easing sanctioned scenario for Venezuelan crude.
In this summary, we would expect in excess of 1 million barrels per day in such a case, that could translate to equivalent of more than 20 additional VLCCs and 10 additional suezmaxes.
Moving on to slide 13, we take a closer look at key indicators from China that play an important role in our markets, especially in longer haul trades associated with VLCC. The Chinese government is supporting weak domestic production through elevating infrastructure spending to help the country recover quickly from the pandemic.
Mobile restrictions are scarcer and seem China is moving away slowly from the pandemic, and this is reflecting port congestion now standing at pre-pandemic levels. Chinese liquid demand is also pointing towards that direction. Chinese demand will be the key driver to change tanker earnings and move in materially higher again.
Moving to Slide 14. We look at the constructive fundamentals for the tanker supply side. We believe that we’re looking at the best medium-term supply fundamentals for our sector in more than a decade. The order book is at a historically low level, which combined with declining yard capacity suggests that fleet growth will remain manageable for years to come including early deliveries being in mid-2025 for substantial manuscripts.
Regulatory pressures are expected to amplify the positive supply outlook. More than 30% of the crude tanker fleet is expected not to comply with carbon intensity rating and owners of such vessels will need to reduce speed to supply. Hence, we expect our competitive advantage to be stronger in the coming years, and continue being Charter’s first choice to perform voyages at optimum speeds.
Moving on to Slide 15 now and adding everything together, we believe that the combination of growth in absolute seaborne crude trade volumes. Longer voyage distances, constructive supply side and elevated demand for crude in SnP market is expected to improve vessel utilization, charter rates and asset values. The current pricing of secondhand vessels is translating to a meaningful discount to replacement costs, signaling upside potential and rerating on secondhand values. We expect an improvement in charter rates together with a very tight SnP prices to be reflected in asset values in the short to medium term.
To give you a short update on SnP activity, we have seen a material pickup uptick in values. In June, $95 million and $98 million was paid for 2020 and 2021 built VLCC, which is up from last done at $90 million. In the past week, a 2020 build VLCC was sold for $108 million and the deposit forties vessel has been lodged to the seller.
Now handing you back to Konstantinos to give you an overview of our financial information.
Konstantinos Oikonomopoulos
Thank you, Aristidis. Now turning to Slide 17 to have an in-depth look on our income statement and the summary. Following improvement in our time charter equivalent quarter-on-quarter at 29,900, we generated $36 million in TCE revenues and $25 million adjusted EBITDA. Our bottom line improved as well, and we report an adjusted profit of $8.5 million or $0.26 per share. Our fleet-wide OpEx, including management fees came in at $8,650 per day, and our G&A stood at $724 per day.
We are moving now to slide 18 where we provide a summary of our main balance sheet items. We report 121% higher cash year-on-year, $72.4 million. Our debt stands at $763 million higher compared to 4Q 2021, mainly following the delivery of our two VLCCs during the first half of the year. Our book leverage came in at 65% and book value of equity at NOK 115 per share.
Moving now to Slide 19 with a summary of our cash flows. Our EBITDA generation was translated to operating cash flow, and we report $21 million for the first half of the year in operating cash. Movements in investment and financing activities for the quarter relate mainly to payments for the delivery of NISSOS NIKOURIA and that drawdown to finance such.
We are now moving to Slide 20, where we will summarize our debt maturity profile and also provide a guidance for our future CapEx. Total debt weighted average maturity of our debt stands at 4.6 years. Our average spread over base rate for bank financing stands at 2.36%, while an all-in once to report an all-in cost of 3.17% spread above base rate on our entire debt stack.
Our purchase option for suez market under more expensive financings compared to what we usually achieve in the market and this comes in 2024 for two of our suez markets. Now we’re having a look at the right-hand side where we summarize our expected scheduled CapEx for our fleet. Going forward, we will perform two drydockings in 2023. We have zero drydockings – for the remaining of 2022, and we will perform five 5 drydockings in 2024.
We are moving now to Slide 22, where we summarize our ESG and emissions reporting. For the first half of the year, our ratings for EOI and AER came in below well guidance from [indiscernible].
We now conclude with some thoughts for the outlook and our investment basis from our CEO.
Ioannis Alafouzos
Hello, hi. This is Ioannis Alafouzos, we feel it is the best vehicle to capture the next — or maybe the current tanker cycle. We have the most efficient fleet in a very high bunker price environment. We have a track record of outperforming our competitors. We have shown our commitment to returning value to shareholders and selling ships at profitable prices.
Our fleet is positioned with the spot exposure to capture as much of the upside as possible in the short and medium term. While the tanker market faces phases, zero current ordering and the historically lower order book, as I said earlier, increasing ton miles and crude trade volumes going forward. Thank you. I think that the way we’re done. And we expect your questions
Question-and-Answer Session
Operator
[Operator Instructions] The first question comes from the line of Petter Haugen calling from ABG. Please go ahead.
Petter Haugen
Hello, guys. This is Petter from ABG calling in. Just, well, firstly, impressive results, in particular, on the Suezmax this year for Q3. I am asking myself, what sort of levels would you find acceptable to fix longer dated charters? And secondly, what would you think in terms of either investing more or selling ships at both sort of current levels that in the case of disposing assets, what would be your thinking around the levels at which you would think that to be a real option? Thank you.
Aristidis Alafouzos
Thank you, Petter. I’ll let answer the time charter and then I’ll hand over the S&P to Ioannis. On the TC, I think that before we consider longer-term deals, we’d like them to come in to line closer to the picture we’ve done [indiscernible] , which is in the very high 40s for VLCCs and the comparative rate for Suezmaxes. As you know, we’re very bullish on the market. So the current three- to five-year deal is in the high 30s, and we think that’s very undervalued at the moment. And the second question is regarding whether it’s an opportune moment to further invest or divest in tender as well.
Ioannis Alafouzos
It’s difficult to say, but undoubtedly, it’s more difficult to invest now in tankers because the price is very high. But as Aristidis mentioned, we expect significantly higher rates in the future. So it might make sense, but it will be a dangerous investment.
At the same time, of course, I mean, if you are a shipping company and you want to renew your fleet and you can sell all the ships for a profit and renew them at this — at these levels and then renew them with more modern vessels at these levels, then the investment makes a lot of sense. So in general, this is not an opportune time to make investment, but there are exceptions, especially if you are already in shipping, and you are selling some ships and buying some others at current prices.
Petter Haugen
Okay. Thanks. And if I can quickly follow up on the more sort of short-term market here. Personally, I’ve spent a lot of time trying to understand to what extent the US in particular is capable of increasing their exports substantially from here. So — but if that is the case, I suppose, actually would perhaps go sort of silent and not into the spot market. But if you can share some thoughts on the activity seen in the US growth and also in terms of how much is done on the VLCC and what is done on reloading or smaller ships?
A – Ioannis Alafouzos
Speaking with charters and clients, we expect that the end of Q3 and the early Q4, which is like the visibility they have currently to be extremely busy on US Gulf exports. So we’re quite bullish that there will be a lot of cargoes being sold both to Europe and the — in the very short term, today, let’s say, today, there’s a lot of outstanding US Gulf cargoes on VLCC, both going to Europe and to the East. Last ton rates were around the 7 million mark to the East, and rates had fallen even below 5 last year. We do believe that there is an opportunity that the rate for East could go up by 1, 1.5, may hopefully more $2 million if this period is sustained and the cargoes end up being firm and lifting. And the VLCC — a few VLCC are fixed away.
To give you kind of a picture of what that would make for one of our ships that’s opened in Europe, just to balance the United States and then sales to China is laden with $8 million or $8.5 million would give a TCE of around $80,000 a day for 3, 3.5 months. So currently, in the short term, we do think that the VLCCs have upside and more upside than we do on the Suezmax and Aframax segment..
Petter Haugen
That’s very helpful. Thank you. Thank you so much. That’s all for me.
Operator
The next question comes from the line of Clement Molins calling from Value Investor’s Edge [ph]. Please go ahead.
Unidentified Analyst
Good morning. Thank your taking my questions. I wanted to start by asking about the financing, the sponsor provided for the acquisition of the KEA and Nikouria. Should we expect the repayment of the sponsored financing in the near-term, or are you comfortable holding on to the facility until closer to maturity?
Ioannis Alafouzos
Hi. Thank you for your question. The sponsored debt on — these two vessels is repayable in over — in a time of two years. So we — the company solved this question. We have budgeted some repayments along the way, and we will finalize the full repayment upon the maturity of this facility.
Unidentified Analyst
All right. That’s helpful. And, kind of, following up on that question. What kind of cash balances would you be comfortable with going forward? Because you have previously operated with closer to $30 million, $35 million. So could you provide some kind of guidance on what you would be comfortable with going forward?
Ioannis Alafouzos
Well, we certainly want to increase our liquidity because of the volatility of the market, but also interest rates, which are rising. We took probably a significant profit from some positions. We have taken with low interest rates. So we made about $11 million, $12 million. So we don’t have any cover now on interest rates.
So to give you an idea, we expect our, let’s say, we can survive with 3.5% interest rates and a market like 2021, which was the worst historical market for two years. And now where we have decided that our liquidity should be at least €70 million, and thus the market continues in this way to increase it depending on our cash flow by $10 million, $15 million every quarter. So let’s say, we think we think we’re very secure because we are increasing our cash position because of the very uncertain interest environment.
Unidentified Analyst
All right. Thanks for the color. And final question for me. Given the improving market backdrop, is there any appetite to pursue a US listing in the medium term, or are you comfortable as is?
Ioannis Alafouzos
The US listing is something that we’ve begun to, let’s say, KYC and procedural process of looking into co-listing with New York and [indiscernible], and we will update the market and our investors accordingly when we have further news and the times schedule.
Unidentified Analyst
All right. Thank you very much for taking my questions. And congratulations for the quarter.
Operator
We currently have no questions coming through. [Operator Instructions] Well, there are no more questions on the phone at the moment. So we’ll pass over to your host.
Ioannis Alafouzos
Okay. There is — we can see two questions, which have been sent to us. One is what would we consider our NAV to be under the current market value. It depends maybe — yes, we thought were around 140 yesterday. Now with the sale of the BTC, 2020 we have to see at $108 million, I don’t know, maybe $50 million — $150 million. It’s going up all the time, because the prices are going up. Yes, that’s it.
And the second question is Suezmax TCE rates for Q3, is that catching does Baltic East mean that you have taken cargoes out of Russia, if so, is it something dot-dot-dot. Well, first of all, we are only trading in legal cargoes and non-sanctioned cargoes. Secondly, the most major owners, including, for example, the likes of frontline go to transport non-sanctioned Russia crude or Russian products.
So just for an example, the European Union has been importing more diesel today than what it was importing before the war. We feel that, especially as a buyer — especially with Greek ship owners that they are going to Russia. But then, I would like to tell, it’s an interesting question that you have asked, because I would like to mention that all Western oil majors transport and buy crude from Russia today. So I cannot understand why we have this hypocrisy about not going to Russia when the whole Western world needs and transports crude oil, full stop.
When the war started, we took a decision not go to Russia, because like everybody else, we were very emotional and we felt the distressed with what was going on. But that’s time progressed. We realized that, first of all, a lot of our competitors and all the majors were lifting oil from Russia. Secondly, we saw that the European Union was encouraging even this process. In fact, recently, they have made insuring ships, I mean, in Europe — European ships going to Russia a little bit a little bit easier. Yes. That’s my position. We would certainly not go anywhere where there is a sanction cargo, full stop.
Ioannis Alafouzos
Okay. Thank you, operator. And if there are no more questions, thank you all for participating and listening.
Operator
We have no question at the moment. So yes, thank you for joining today’s call. You may now disconnect. Thank you, host. Please stay connected.
Ioannis Alafouzos
Thank you.
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