Euronav NV (NYSE:EURN) Q4 2022 Earnings Call Transcript

Euronav NV (NYSE:EURN) Q4 2022 Earnings Call Transcript February 2, 2023

Operator: Good day, and welcome to the Euronav Fourth Quarter 2022 Earnings Conference Call. Please note this event is being recorded. I’d now like to turn the conference over to Brian Gallagher, Head of Investor Relations. Please go ahead.

Brian Gallagher: Thank you. Good morning and afternoon to everyone, and thanks for joining Euronav’s Q4 2022 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, the February 2, 2023 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. All forward-looking statements attributable to the company or to persons acting on its behalf are expressly qualified in their entirety by reference to the risks, uncertainties and other factors discussed in the company’s filings with the SEC, which are available free of charge on SEC’s website at www.sec.gov and on our own company’s website at www.euronav.com.

You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of that 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. With that, I will now pass over to Chief Executive, Hugo De Stoop to start with the conference slide on Slide 3. Hugo?

Hugo De Stoop: Thank you, Brian, and good morning or afternoon to wherever you are, and welcome to our call. I will run through the Q4 highlights before passing on to Lieve Logghe, our CFO, who will then highlight key factors over the quarter and important work the finance team have done in increasing, again, our liquidity through sustainable financing. After that, Brian will run you through some current market trends before I return to summarize our strategy and where we believe we are in the current cycle and outlook. Q4 was the breakthrough quarter we’ve been pointing at in our last 2 calls. The strong demand for tankers reflected in higher freight rates was created by 3 factors: seasonal pattern into the Northern Hemisphere winter, a sustainable supply of oil from OPEC and non-OPEC.

And then finally, a repositioning of the world fleet ahead of the embargo on crude from Russia that was enacted on December 5. TCE rates actually squeezed materially higher into November. And even though they have reset since they remain at very profitable levels and well above the medium-term averages. Euronav benefited from this upswing and from the fleet rejuvenation we have done in the last 18 months in taking our new tonnage and reducing our older fleet of higher-consuming ships. Given our current corporate situation in full respect to the combination agreement with Frontline, we are unable at this stage to release dividends beyond the trees and minimum outlined in that agreement. However, to give some guidance and reassurance to our investors, we are indicating what level of returns could have been and this in line with our past commitments.

Future developments will determine if, how and when this can be returned to our shareholders. I will now pass over to Lieve to run through the financials. Lieve, over to you.

Photo by Diogo Hungria on Unsplash

Lieve Logghe: Thanks, Hugo. Q4 2022 was indeed a very busy quarter in terms of the financials. Our leverage has improved positively to 45%, boosted on one hand by incoming cash from the higher freight markets, and on the other hand, from sales proceeds of some older vessels. The operational leverage is clear in our business during such period with net profit of nearly $235 million generated in just 1 quarter. This figure was clearly boosted by $62.6 million of asset sales, reflecting our continued fleet renewal program. Such capital gains are, in our view, correctly retained within the capital structure of our business and not for distribution. It is important, this capital is recycled into new and more energy-efficient fleet, which we have done and we’ll continue to see with these 7 vessels currently under construction.

I will now turn to an exciting and growing part of our funding sustainable financing on Slide 8. We or less is on a journey and we made another significant step with some dedicated hard work from our finance team and our partners during Q4. Over half our financing now comes from sustainability-linked sources, making Euronav the leader in the sector and among shipping companies globally. The new facility we agreed, totaling $377 million comes with some challenging ESG objectives, including social targets for the first time, but also with a higher incentive of candid when hitting such targets. This change in the incentive structure, we believe, has further to run as this gives motivation to increase the scale and penetration of our sustainable funding.

With that, I will now pass it back over to Brian Gallagher to give some thoughts on the current market cycle.

Brian Gallagher: Thank you, Lieve. I start with the slide from the last sector we gave in Q3, illustrating the very real step change that we’ve seen in the oil on the water and in transit. And the positive follow-through is had on freight rates, especially over the last — second half of 2022. Historically, as one would expect, there’s been a very positive correlation between time 28 and volumes of cargoes on the water, but the Russian mid-dislocation started last March and subsequent increase in ton miles across the tanker sector has given a structural boost to our markets. This provides a strong base going forward for the sector, along with the age of the world fleet, which is at a 22-year high, and the fact that order books were a 40-year low, giving a very, very strong vessel supply signal.

The other key factor short term for investors is also to look at China, which we now look to analyze on Slide 9. The tanker market recovery we’ve seen over the last 6 to 9 months has all been delivered with very little input from China. COVID restrictions have continued to remain very severe and have restricted economic activity consequently. This does look to be starting to change though. The cargo accounts for February and March, in particular in the VLCC sector, have been very, very encouraging and positive as China opens up an activity returns. Slide 11 shows an illustrative pathway of the recovery as we see it. And as I mentioned, we are starting to see the early signs of this. This we believe will further underpin freight markets well into the second half of 2023 as China only expected the level of consumption loss prepandemic.

We turn now to the other side of the short-term factors that investors are looking at and Russia related activity on Slide 12. Much speculation centered in recent months for the positive factors that the Russian situation and dislocation brought would soon evaporate anticipate in the tanker market space. Whilst there was a lot of noise and clearly, there was a lot of dislocation itself within Russia with refinery shutdowns, production shutdowns and maintenance programs, volumes are now back to levels that we saw pre December 5 and the Unaoil. Production levels were also back to November run rate and also the nature of the crude and sport trade is changing with more evidence of more ship-to-ship transfers occurring across Europe and in the Mediterranean on to larger vessels in particular, VLCCs, with Siedmand-Apramax now are doing more shuttle-type runs between those low tensions rather than the entire journey themselves to the prior is.

So in summary, our short-term market views continue to remain very, very positive and our current trend is very supportive as we move into Q2. We do expect to see a sustained and strong winter period over the next few weeks and months. I’ll now pass over to our Chief Executive to give some more medium-term thoughts about the cycle and concluding with our current traffic right outlook. Hugo, over to you.

Hugo De Stoop: Thank you, Brian. The recent firming in freight rates have been driven by shorter-term factors, and this will now give way to very solid longer-term drivers. The global fleet is all by historical standards, and yet the order book is at 40 year lows, but no one is ordering because of the high price regulations and time to delivery as shipyards are not able to deliver tankers until 2025, 2026. New operational regulation will also bring curves on all the tonnage. So the vessel supply situation appears to be locked in. On the demand side, we see China returning to normal levels of demand, a global economy bringing back even modest levels of demand growth, and all of that oil needed to be transported further distance than in the past.

These factors should drive a sustained period of profitable freight rates. We at Euronav will continue to reward shareholders and invest in the energy transition. Indeed, Euronav delivered on its promise to be an energy transition leader in the past 5 years and accelerated that in the past 12 months, and we’ll continue to do so. Now on to the traffic lines, Slide 15. This will surprise no one. We are again upgrading one of our traffic lines to green. This time, demand is driven mainly by the prospects from China reopening. The sharp eye that Manu will notice most of the lines are now green or greenish. That is true, but there still remains some upside in investment supplies and also in demand in our view. There is more oil in the tank. With that, I would now like to pass it back to the operator, but with a final word.

You will appreciate the sensitivity of our corporate situation. We have made public that the arbitration process will provide an initial decision next Tuesday. Given the sensitivities and regulations around that process, we will not be in a position to take questions on that. Now, back to the operator to take the other questions.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. Our first question comes from Omar Nokta from Jefferies.

Omar Nokta: Good afternoon, Hugo. First off, I can commend you, you and the team for being able to continue really executing on the business here, given all the distractions. I can’t imagine it’s that easy to focus on the business while dealing with all the noise. I appreciate the comments you made, Hugo, just before we started the Q&A session, especially regarding arbitration ruling. And I just maybe will float out this question. I know the February 7 is the expected ruling. It seems a little sooner than I guess I would have assumed. But maybe just — are you able to give us maybe a sense of what the different outcomes could be when a ruling is made? Is there a certain series of parameters that’s being evaluated? Or any color you can give there? Or is it you prefer not to?

Hugo De Stoop: No, I think it’s a very good question. It’s difficult to clarify in writing. I mean, summary proceedings are dealing with aspects that require urgency in a judgment. So I may take an example, which is, unfortunately, a couple of divorce, husband has the title on the house — he doesn’t know what the judge will decide whether it’s why I can stay in the house, have the house or whatever. And if he sells the house, then there is nothing left, say, in the estate, maybe the money body can spend it. So an emergency judgment will say, you cannot sell the house until we have decided the outcome of the divorce and who gets what. And that’s what we are trying to have here. So it’s not on the merits, it’s not on whether or not — there were some damages created, whether or not there was the right terminate, et cetera, et cetera.

It’s really to see what should be sort of frozen until — or for a certain period of time and probably until there is a judgment on the fundamental state, which are called the merit. I hope this is helpful.

Omar Nokta: Thanks. I appreciate that. That lays it out nicely. And then maybe just as a follow-up. I know there’s a lot of sensitivities with what’s happening. And I just wanted to maybe check with you if there’s been any discussions that you’ve had with CMB and you’re regarding kind of the — have they tipped their hat to you about the strategy that they’re looking to take moving forward if they were to be successful with the Board?

Hugo De Stoop: I can really not comment on that. And I think that it is for them to express what they would do if the outcome is favorable to them, I can only repeat what we have said in the press release, which is that we at or continue to be constructive and try to find solutions to all the problems. And obviously, there are 3 parties around the table. And so our attitude is continues to be very constructive. We’re not the type of people who say, well, we are all enemies, and let’s go to war. I think that we always have to look forward into the future. And I think that every problem has a solution. And as long as the 3 parties have the same attitude, I’m sure that we will find a very positive outcome that will be beneficial for all the shareholders, which also means that probably nobody will have the perfect solution that they want for themselves, but it will be a compromise and we very much hope that that will be the case.

When I don’t know, how I don’t know. You first need to have that attitude.

Omar Nokta: Yes. Well, thank you. Obviously, a very complicated situation, but one that can be resolved. So I appreciate the time you go, and I’ll pass it over.

Hugo De Stoop: Thank you. And thank you for the comments earlier on. Very much appreciate it.