EURN CEO Paddy Rodgers on Q2 2016 Results

Welcome to the Q2 2016 Euronav Earnings Call. [Operator Instructions]. I would now like to turn the conference over to Paddy Rodgers, CEO of Euronav. Please go ahead, sir.

Thank you. Good morning and afternoon to everyone and thanks for joining Euronav’s Q2 2016 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, July the 28th, 2016 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, strategies, future events, performance, underlying assumptions and other statements which are not statements of historical facts.

You should not place undue reliance on forward looking statements. Each forward looking statement speaks only as of the date of the particular statement and the Company undertakes no obligation to publicly update or revise any forward looking statements. 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.

I will now pass you over to Euronav’s CFO, Hugo De Stoop, to run through the first part of the presentation. Hugo?

Thank you, Paddy and good morning or afternoon wherever you are and thanks for joining our second quarter 2016 earnings call. Turning to the agenda slide, I would like to take you through the highlights of our second quarter earnings, followed by a full review of our key financial figures, before handing over to Paddy to take you through the latest market developments and themes as we see them at Euronav. We will then turn over to the Operator for a Q session.

Moving on to slide 4, Q2 was largely a solid quarter especially for the VLCC sector until the last few weeks of June when the anticipated seasonality has also coincided with a number of factors impacting on freight rates. We also took delivery of the last of the four VLCC purchased en bloc last summer in early May. We now have no outstanding CapEx commitment as a result of that. Euronav continued to be active in adopting a leadership role within the sector, this time by launching a marketing alliance with Frontline and Diamond S Shipping in the Suezmax sector. The alliance will be responsible for over 40 vessel and Nike Air Max 2017 851623-500 Women Purple Black Malaysia Sale has started very well.

The outlook for the third quarter 2016 is mixed. The largely oil supply base factors currently impacting freight rates in the larger tanker market look set to persist through much of Q3. Suezmax’s market looks to be more impacted given the importance of the Nigerian market in this sector. So far, VLCC average rate remained profitable but at low levels and we do not expect the market to materially improve over the summer.

So far in the third quarter, we have booked 50% of the available VLCC spot days at average rates of $31,000 per day and 39% of the available Suezmax spot days at an average of $20,000 per day. I would now like to move on to the income statement on slide 6. All figures have been prepared under IFRS as adopted by the EU and have not yet been fully audited.

Our proportionate EBITDA which also take into account the EBITDA generated at the level of our joint ventures, during the first semester came in at a respectable $298.6 million, reflecting good rate performance for the first six months of the calendar year. The second quarter result is negatively affected by a non recurring charge which is non cash, related to the termination of the joint ventures with Bretta Tanker Holdings covering four Suezmax vessels as announced on 20 May, 2016.

Since early June, we assumed full ownership of the two youngest Suezmax, the Captain Michael and the Maria. All those vessels were held in SPVs and in order to keep the attractive financing, we have taken over the companies and not the ships only. In accordance with IFRS 3 which is business combinations, we’re accounting this transaction as a step acquisition and Nike Air Force 1 Unltra Jade 919521-100 Unisex White Green Malaysia Online therefore, we had to re measure to fair value our non controlling equity interest in the two joint ventures we acquired as well as to measure at fair value the consideration we transferred, including our interest in the two other joint ventures namely the two companies holding the two older Suezmax that our ex partner took over.

On that basis, we have recognized a loss of $13.5 million for the consideration we transferred and a revaluation of the assets and liabilities we took over, leading to a loss of $10.7 million for a total combined loss for the quarter related to this transaction of $24.2 million. The impact is that the current book values of the vessels we took over reflect the market values. Furthermore and going forward, the two Suezmaxs we now own in full will be accounted for directly in our consolidation and no longer using the equity method which did not provide the same level of transparency.

Other points worth highlighting are the following; the depreciation charges increased partly due to the new VLCC vessels we incorporated, but also with the two Suezmax from the joint ventures being now fully consolidated and thus being included in the main depreciation charge. As covered in the last quarterly call, the tax charge has reduced to a more normalized level now that the vast majority of our ships are under the tonnage tax regime and this will now also be the case going forward.

Now, the balance sheet on slide 7. Balance sheet strength is a cornerstone of the Euronav strategy and sustained flexible access to capital market is critical. The financial landscape has continued to develop since January, particularly during Q2 where access to capital market has become ever more restricted. Increased regulation, balance sheet pressure and contagion from other industrial segments are putting pressure on traditional sources of debt capital. Euronav believe this pressure will only intensify and drive a two tier market for access to capital for shipping companies.

Capital gains on Nike Air Max 2017 851623-500 Women Purple Black Malaysia Sale of tonnage is used mostly for fleet renewal at Euronav, so not available for distribution to shareholders under normal circumstances. The cash capital gains are used to de lever the Company until an investment to renew tonnage is made. The way we do this is by paying down our revolving facilities which remains fully committed and available to us. I would now like to spend a little bit of time talking about leverage and liquidity in greater detail, so let’s move to slide 8. Our leverage position on mark to market values at 30 June is 45%. As mentioned before, the excess cash generated by our business is parked into revolving secured credit facilities. These are long term committed and can be drawn upon short notice.

Taking our cash position and all the credit lines available to us, our liquidity position at 30 June was $535 million. If all of those lines were drawn upon, our leverage on mark to market asset values today would still be conservative at approximately 60% and this should demonstrate how robust our balance sheet is at this point in time.

That concludes the financial section of the presentation and I will now hand over to our CEO Paddy Rodgers to give you an update on the tanker market and current market themes as we see them. Paddy, over to you.

Thank you, Hugo. Usually, in our quarterly presentations, we focus on vessel supply. On slide 10, I would like to do the same, but with a different flavor today. This shows both the VLCC and Suezmax global fleets in one snapshot. This slide shows that the far right of both graphs, the order book in blue is around 17% of the current fleet size. When looking at those vessels, both in or before 2000 or 16 years or older in both segments, there is an almost identical number of vessels and therefore, around 17% of both fleets.

In summary then, it looks like both VLCC and Suezmax fleets are largely in balance, ensuring in the course of the newbuilding deliveries of the next three years the ships built up to 2000 are retired. This would assume zero growth in demand for crude and its delivery by sea, when in fact there is considerable predicted demand by all credible agencies. This provides a positive outlook for the sector and given the limited ordering we have seen this year to date and restricted finance environment Hugo spoke of earlier, this is important for two further reasons.

First, a common issue for investors is the quantity of vessels due for delivery over the next 12 to 18 months. As slide 10 makes clear, this delivery schedule does not reflect older tonnage new deliveries will be replacing which whilst not a perfect match, is more than compensated for by forecast demand increase. Too often, analysts on the order book look only at the supply side coming from the taps, so to speak, but there is a plughole at the other end of the bar that needs analysis too whilst the bar of course gets bigger as demand grows.

Second, tankers are a wasting asset and cannot continue in perpetuity. Once beyond third special survey at 15 years, the trading opportunities for a tanker start to substantially reduce for all the players in the market. This is something we cover in slide 11. We’ve included a slide with our main deck to illustrate a point on vessel age, it really does matter. Just because a vessel is not immediately scrapped, doesn’t mean it retains the same market characteristics as vessels under 15 years of age. This is an industry that becomes more and more regulated year by year.

Slide 11 shows every five years there is a special survey to be performed in dry dock. These become progressively more expensive during a vessel’s life. Post 15 years, the intermediate surveys have to be performed in dry dock as well, so the surveys become more frequent at every two and a half years. At the same time, at 15 years, the number of oil majors, traders or refiners willing to take such a vessel reduces substantially.

So as the chart shows, a vessel’s acceptability and utilization is likely to tail off quickly. Therefore, the vessel will earn less and the owners have a difficult decision in a lower rate environment whether to prolong the vessel’s life given the cost of the next survey. This is a point we and a number of our peers have made in recent months, so much so that vessels approaching 20 years of age or older are virtually impossible to operate and certainly not with the same economics.

These vessels may carry on acting as a drag on pricing as owners believe their vessel will somehow be taken by a major customer. But this quickly erodes in a downturn once older vessels go months without trading and so lose their oil major approvals. The major customers are insisting on ever more stringent regulations and a younger fleet as the risk of spillage is their greatest concern.

Moving on to slide 12 and time charter rates. Further downward pressure on time charter rates can be seen from these graphs, but in very liquid markets as the oil major primarily readjust their business model to a lower oil price. They are not so concerned to hedge their freight risk long term or at higher rates the owners need for those longer periods.

Slide 13, this shows asset prices and the background which has developed further during Q2. As Hugo spoke to during his section earlier, we have seen increased pressure in the financing background for the tanker sector. This has driven vessel prices further down largely at the newbuild to five year old range in both VLCCs and Suezmaxs.

We continue to monitor asset prices as the ship’s price is the most significant variable cost for our business. Lower prices mean lower capital costs and for a company like Euronav that is fully funded at lower leverage, current vessel prices are an opportunity, not a threat. What about current themes? Let’s turn to slide 14. Seasonality; we want to remind investors that seasonality is something to be expected. In the second quarter of 2015, it was rather more the exception than the rule as due to it was a very robust quarter notable for very sustained steady rates. As the chart also makes clear, Q2 of 2016 followed a similar pattern until the latter part of the quarter and it is now looking more typical for Adidas Equipment Support ADV Malaysia this time of year.

What has given the seasonal pattern a different flavor this year are a number of largely supply led factors providing some short term disruptions. These factors have impacted since the early part of June and exacerbated the seasonal pattern that comes from refinery maintenance, with fewer cargoes but the same number of vessels trading during the summer months.

These factors in no specific order; oil supply disruption from Nigeria and Venezuela covering about 750,000 barrels per day of lost production and this has had a knock on effect of reducing ton miles from nations like India sourcing its oil short haul from the Middle East Gulf rather than the long haul in the Atlantic and the increased tonnage simultaneously coming on stream from new deliveries in a busy quarter for dry docks as owners try to align their downtime with refinery maintenance. Both new ships and ex dry dock vessels are commercially less preferred by charters, so owners try to attract business by underbidding the market. And congestion reduced in key ports like Basra and Qingdao releasing more vessels into the market. It should be stressed that these are not huge changes in view of the strong cargo base, but small changes have a significant impact due to the behavior of owners.