Scorpio Tankers Inc. (NYSE:STNG) Q1 2024 Earnings Call Transcript

Scorpio Tankers Inc. (NYSE:STNG) Q1 2024 Earnings Call Transcript May 9, 2024

Scorpio Tankers Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello and welcome to the Scorpio Tankers Inc. First Quarter 2024 Earnings Conference Call. [Operator Instructions] 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. Please go ahead, sir.

James Doyle: 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 Dencker Nielsen, Chief Commercial Officer. Earlier today, we issued our first quarter 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 09, 2024 and may contain forward-looking statements that involve risk and uncertainty. 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.com and sec.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. The presentation is available at scorpiotankers.com on the Investor Relations page under Reports and Presentation. These slides will also be available on the webcast. After the presentation, we will go to Q&A. For those asking questions, please limit the number of questions to two. If you have an additional question, please rejoin the queue. Now, I’d like to introduce our Chief Executive Officer, Emanuele Lauro.

Emanuele Lauro: 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 first quarter, the company generated $293 million in adjusted EBITDA, and $207 million in adjusted net income. The market dynamics that have been driving this favorable rate environment continue. Global demand for refined products is robust. 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 [indiscernible] environment have been significant as well as transformational for Scorpio Tankers over the past few quarters.

In Q1, we continue to focus on using our leverage. We made $262 million in unscheduled repayments on our debt, and are set to repay an additional $118 million during the second quarter. As previously mentioned, the balance sheet and quality of Scorpio as an investment improves each day. Today, our net debt stands at $811 million, which represents the lower end of our target debt level. We anticipate significant reduction in our cash breakeven, starting in the third quarter of this year. In fact, we are working with our lenders to prepay existing debts, which will decrease our daily fleet operating breakevens to $12,500 per day, a figure near the lowest TCE rates 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. If things were to remain the same, even the share price discount to NAV, we would be buyback — we would favor buybacks as we see them more accreted to shareholders than further increases in regular dividends. As we look forward, we remain optimistic with low global inventories, robust demand and limited growth [indiscernible] 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?

James Doyle: Thank you, Emanuele. Slide 7, please. Never have there been so many factors driving our business. Individually, these factors are positive. Collectively, they’re unprecedented. Increasing global demand, low inventories and shifts and 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 headlines because of their higher volatility and impact from disruptions in the Red Sea, MR rates have shown remarkable consistency and served as a clear indicator 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 1.5 million barrels per day through year end driven by increases in diesel gasoline, jet fuel and Naphtha. And yes, as global demand has increased, so have sea borne exports right now in place. The increase in demand has led to record levels of seaborne exports. In March, exports reached 21.1 million barrels a day, an increase of 1.1 million 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. Moreover, not only have export grow — exports grown, but the distance these barrels are travelling has also significantly increased.

Slide 10, please. As refineries have moved further away from the consumer, the distance to cargo needs to travel has increased. Refinery closers in Europe, U.S. and Australia, Asia 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 been continuous to reshape for us. As ton mile demand increases, vessel capacity has reduced and supply tightened. Slide 11 please. End 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. For instance, attacks in the Red Sea [indiscernible] 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 supply and demand fundamentals in our market. Slide 12, please. Strong spot and time charter rates coupled with an ageing fleet has led to an increase in new building 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 new build?

Well, by then 50% of the fleet will be older than 15 years and 21% [indiscernible] 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 mile is expected to increase 2.6% and 7% this year, it’s vastly outpacing supply. Looking for we’re very constructive on the supply demand balance. The confluence of factors in today’s market are constructed individually, historically low inventories, increasing demand exports and ton miles, structural dislocations in the refinery system, rerouting of global product flows and limited fleet growth.

Collectively, they’re unprecedented. With that I would like to turn it over to Chris.

Chris Abella: Thank you, James. Good morning. Good afternoon, everyone. Slide 15 Please. The first quarter 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 five quarters, we have generated $1.3 billion in adjusted EBITDA and $777 million in adjusted net income. These results have enabled us to reduce our debt by $557 million, pay $79 million in dividends and purchase, $490 million 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’ve also simplified our balance sheet through more traditional forms of financing at lower costs and more flexible terms.

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 $1.4 billion and $811 million, respectively. Slide 17, please. We are currently in discussions with the lenders on our $1 billion credit facility to make a prepayment of up to $223 million 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 third quarter of 2024 through and including the second quarter of 2026. This prepayment remains subject to lender credit committee approval and the execution of definitive documentation.

If approved, repayments would not be scheduled to resume again until September 2026. We are taking this step in an effort to effect a significant and immediate reduction in our cash breakeven costs. Accordingly, we projected the company’s daily cash breakeven costs, which include vessel operating expenses, cash G&A, interest payments and regularly scheduled loan amortization will come down to about $12,500 per day on a pro forma basis after giving effect to this prepayment. We expect to continue to pursue ways to reduce our daily cash breakeven rates through additional debt and lease repayments. By pursuing a long-term reduction in our cash breakeven rates, we have positioned the company to opportunity opportunistically increase shareholder returns.

Slide 18, please. Our second quarter 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 million in cash flow per year and at $40,000 per day the company can generate $937 million per year. It is important to note that these estimates do not include any potential impact of the prepayment on our $1 billion credit facility. And with that, I’d like to turn the call over to Robert.

Emanuele Lauro: If Robert is not available, I don’t know, Robert, if you’re on mute or something, but …

Robert Bugbee: I am sorry. Hi. Hi, Rob, that’s — thank you very much, Chris. That’s — it’s fantastic. I just want to say just how enthusiastic all of us here in the Scorpio Group is. We know we’ve been climbing this mountain for a long time many years. And we finally got to this incredible stage where we’ve genuinely got a lot of things going for us. We are the largest market cap company. In — a pure product tanker company. They’re the highest liquidity in dollars per day trading volume. We have the newest fleet, the least need for fleet renewal, a sustainable dividend policy. 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 on that date range that set out.

Emanuele stated right from the beginning, that with our stock trading well below NAV, up priority for return of capital will be shared 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, we understand that, that can be frustrating, but it’s been worth it because these operating cash breakeven are really low right now, a $12,500 [ph] a day that’s like trust, earnings. It’s even lower if we actually looked at the breakeven related to the spot part of the fleet, but a 12.5 that almost withstand anything, that withstand the COVID — that terrible COVID year, the terrible 6 months or the worst period of the COVID year. 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. 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. Whenever there’s a mention of a ceasefire in Israel, Gaza, because I guess it’s because of the fear of opening up the Red Sea. But first of all, a ceasefire in Gaza does not necessarily mean you open the Red Sea straightaway. 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 first quarter, this first 5 months as 2023. The LR2 market, depending on what quarter is maybe $5,000 to $10,000 stronger than 2023.

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 cases, Emanuele said straightaway, is the company is in great shape. You 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: [Operator Instructions] Our first question comes from Omar Nokta of Clarksons Platou Securities. Go ahead, please.

Omar Nokta: Thank you, operator. I’ve since moved to Jeffrey. Hey guys. Good morning and good afternoon. First off, congrats on reaching your debt target. And, Robert, as you mentioned, we’ve been climbing this mountain. 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 the pause that we’ve seen for the past maybe 6 to 9 months as you focused on debt reductions have been well worth it. But in general, are there any kind of changes now that you’ve reached this target regarding the business are coming?

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Q&A Session

Robert Bugbee: 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, or willing to continue while as this spread to sell some of our older ships, sure. But as you see it’s not like a drastic situation, we are just doing it one-at a time or whatever it is taking. Great advantage of strong prices. I think that there was — I think one thing that may not really a change, because it’s just an expansion of where we before is that you are saying the 3-year rates move up quite strongly, the 2-year rate quite strongly and one of the things that I will — a 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.

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 the lowering of our cost structure has changed. If you think of it this way, if you know, basically the third quarter last year, those numbers that we’re talking about 12,500 were pretty close to the 20 and effective terms. That delta is huge. That means that if you are fixing a ship out to $40,000 today, that cost you 18, you’ve changed your 19, you’ve changed your free cash flow from 21 to 29, that’s enormous. That’s another real benefit of lowering these costs. And that would be the only change. But there’s no rusty look, we’re very confident that spot market too. So there’s no rush to go out there and pile on the time charter.

Omar Nokta: Thanks, Robert. Yes, no, it’s nice raising interest rates and lower breakeven, very, very different times. And I have a follow-up and just a bit more market related. Obviously, LR2s have been strong, and they’ve really established a higher floor or higher ceiling this year, at least, definitely relative to other segments in this, whether it’s crude or product. Rerouting is obviously played a role, but I guess on that front any color you can give on how much the LR2 capacity that had previously been trading dirty has come back into the [indiscernible] 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 the dirty LR2s and then perhaps, do [indiscernible] LR2s want to migrate into the dirty trade, take advantage of that TMX opportunity. Any color you can give on that?

Robert Bugbee: Lars?

Lars Dencker Nielsen: Yes, I will take it. I mean, LR2 clean dirty trading has obviously taken place for years, right? I mean, it oscillates and I looked at this the other day. Can you hear me?

Emanuele Lauro: Yes, we can.

Lars Dencker Nielsen: Yes, sorry. And it has oscillated, up and down between 220 units to 250 units trading clean over the last 3 or 4 years. So there has been a number of ships that gone into clean from the dirty trade as they clean up. And you might recall them that it takes a little bit of time to do that. So it’s obviously a big decision. If you look at a 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 Bab el-Mandeb and — does not going through Suez, 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 the big turnaround season that has taken place in the first quarter. And here we’ve still had a very strong first quarter. And now we’re going into the second quarter, we can start seeing that there’s more runs being built up, which is great. So you look at Asia, MRs there have been trading. And I think as James was saying early on around $40,000 per day, those rates have been increasing. [Indiscernible] 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 50 points today trading 225, 230. Probably gainfully around $60,000 a day for offer long-haul business. 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., Gulf couple $100,000 for cross curves, 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.

And also the disparity of the cargo selection that we can do the triangulation availability not only on air mass, 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 [ph], which is a big thing, it does focus in Mexico, which is coming up end of the year and then CMX. Now CMX 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 listings per month out of Vancouver. And that’s a lot of Aframaxes. I mean we’ve seen a couple of [indiscernible] now they’ve gone to Asia. If it goes long-haul, it could be more than that, if it goes to California be less than that.

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 for what LR2 supply, you need to look at the overall context and you have to include the Aframaxes. So 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 the LR2 and Aframaxes will reach 20 years of age, it doesn’t equate to that. So I see this as a really strong kind of input or the one of the new dynamics that really is going to improve the overall demand for Aframax stroke, LR2s as we move into ’24 and beyond.