Euronav NV (NYSE:EURN)
Q2 2016 Earnings Conference Call
July 28, 2016, 09:30 ET
Paddy Rodgers - CEO
Hugo De Stoop - CFO
Chris Wetherbee - Citi
Wouter Vanderhaeghen - KBC Securities
John Chappell - Evercore ISI
Ben Nolan - Stifel
Noah Parquette - JPMorgan
Amit Mehrotra - Deutsche Bank
Gregory Lewis - Credit Suisse
Donald McLee - Wells Fargo
George Berman - IFS Securities, Raymond James
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.
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 the 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 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?
Hugo De Stoop
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&A 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 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 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 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 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.
As chart 14 shows, the freight rates in VLCC terms have hit the rate lows last seen in Q3 of last year. Will these factors persist? The number of cargoes remains consistent as do signals from core markets such as India and China. Indeed, a similar dip in rates was seen last year and lasted all of five weeks. The key to the timing of a recovery will depend significantly on the attitude of owners. Currently, we feel they are collectively on holiday. Whilst the disruptive factors in recent weeks have had an impact, the underlying tanker market fundamentals remain solid. Owners have a responsibility to get the best return for their valuable assets and to correctly price the market. No one will do this for them. They must do it for themselves. After all, they are the ones that sold the market down.
I will now move to sum up on slide 16 and the outlook for Euronav, followed by the wider tanker market outlook. Slide 16, Euronav outlook, we see three areas that we need to discuss. First, the access to and the cost of capital has moved forward greatly in the past six months. This is very important for Euronav and the wider tanker sector as we continue to believe that financing will become more restricted for marginal players and therefore, those like Euronav with good access to capital markets should enjoy a competitive advantage in the cost of and access to financing going forward. This position would be for the first time.
Second revolves around sentiment; difficult to measure, but it's important in tanker shipping markets, owners have a responsibility to drive the best return they can for their valuable assets. Over the last 18 months, we have seen sustained periods of good freight rates and responsible owner behavior as a key part of this development. Recent factors we covered earlier have helped put seasonally lower rates under more pressure, but owners have their part to play. The underlying fundamentals provide solid support, owners need to use this.
Third, asset values continue to remain under pressure across the whole spectrum. Recent analysis suggest tankers are approaching multi-year lows in terms of values which to an industrial player provides an interesting potential. Certainly, the rate of asset price reduction looks to have moderated and buying interest is coming from longer term industrial players.
Lastly, on to the wider market outlook on slide 18. Demand for crude continues to provide a positive backdrop. The IEA again recently upgraded their 2016 and 2017 forecast for demand. Oil, with what looks like to be lower for longer price, has regained its place in the energy mix. And yet despite substantial outages during Q2 from Canada to Nigeria, the underlying price continues to remain below $50 and substantial supply continues to continue to come on-stream. As one of the slides in our investor deck makes clear, an oil price between $30 and $60 we believe is constructive for the tanker market and looks set to continue as it will stimulate demand.
Other structural drivers provide support. Recent analyst discussion on the Chinese SPR suggests limited short term potential. But with 95 million barrels still to fill, there is plenty left to do. In addition to this, the June announcement from the Chinese authorities pointed to commercial operators being obliged to build reserves to match those of the SPR, providing potentially a further 160 million barrels of required capacity. The diversification of demand from China, SPR depots, falling domestic oil production and the base effect of a large oil consuming economy importing 8 million barrels per day all appear intact.
Finally, despite a mild winter during 2016, 24 VLCCs and 11 Suezmax have been absorbed into the global fleet so far this year. We retain the view that the global fleet is largely in balance given its age profile and current and anticipated cargo volumes.
Owners and tanker management team have an opportunity given supportive fundamentals providing a sustainable framework for the tanker market and it is theirs to fight for, not just to give away.
That concludes the formal part of the presentation. Thank you for listening. I will now pass you back to the Operator.
[Operator Instructions]. And today our first question comes from Chris Wetherbee of Citi. Please go ahead.
Wanted to just kick off on the S&P market. Obviously, a lot of discussion about potential transactions. Just want to get a sense of how you guys are thinking about the attractiveness of assets in this current market. And then I think, Hugo, you mentioned about a two-tier financing market. Do we think we're at that point now? Aren't we at a bit of a two-tier financing market right now? I just want to get a sense of maybe how that kind of helps you guys going forward?
Hugo De Stoop
Yes, why don't I take the first one and then Paddy can make some comments about the values in general. I think that's right, we're certainly feeling that we're at the two tier market. We think that it can deteriorate for some players even more simply because some banks will feel a little bit obliged to continue lending to some players, but at some point the regulator -- certainly, the audits that are being conducted by the ECB, for instance, will force them to apply the rule and to mark-to-market their books.
And that in turn will exacerbate the two-tier market that we're seeing. And I'm saying that not because we're suffering from it -- quite far from it -- but simply because we're in permanent contacts with a lot of banks and they are telling us what they are doing. So every time we had that discussion, it seems that it's becoming an ever greater topic and you can also read a lot of articles in the press about it. Paddy, you want to comment on the values?
Yes, I was just going to say that specifically on the values, I think it's a very, very interesting time and I know that it has been a subject to much discussion because we would say the last couple of years have been pretty good for the tanker owners and yet we've seen on an annualized basis the values of VLCC ex-yard re-sell dropping with $10 million a year. So it's a very surprising function. I suppose a lot of people now would be saying and will they drop another $10 million the next year.
And I think just to try to put it in context, we can open the history books and look back to the 1980s or we can look back to the 1990s, but we have to always remember that the environment is very different. So it's very difficult to make relevant extrapolations over those long periods of time. But we bought four VLCCs in 1998 for $80 million. The cheapest I've seen done was in 2002 at about $65 million, but those were exceptional distressed sale. And let's remember that the oil price was probably around -- on a steady basis around the late teens early 20s at that time and all other energy prices and steel prices in the metrics somewhere at those levels.
So to be now at the prices which we've seen done recently ex-yard re-sells by Metrostar to Frontline, they look very competitive. And are we at a floor? Well, I think the important thing to remember about a ship being built for the shipyard is that it's not a commodity for the shipyard; it's not something the shipyard has produced and therefore has to sell. It's something that when they receive the order, they start to work out whether or not they can afford to build it.
And I would be very surprised if shipyards, where they -- certainly, in Korea to build anything significantly below today's ex-yard re-sell numbers. So it looks like we might be bottoming out on values and I think that's the point at which you start to get a little bit more excited.
And in terms of that potential attractiveness of the market, you mentioned liquidity during the prepared remarks. Is it fair to say that this is a point in the cycle where you might be a little bit more comfortable moving that number up in pursuit of potentially attractive acquisitions?
I just missed the reference to liquidity. I mean I think -- look, there's no question, we made no bones about it that we want to build Euronav and to grow it. So we've been looking at virtually everything that has been put into the market for the last couple of years. We still continue to do. And of course we evaluate every opportunity and always looking towards long term shareholder value.
Yes. And in terms of bringing up leverage, I think that you answered the question. It makes sense.
And then I guess my last question, just when you think about the sort of the market in general, you mentioned the order book relative to the older vessels. I think the older vessels are probably a little weighted towards the 15, 16, 17 year old range. So in that context, do you think that you really can expect to kind of work through that in the next three years as you take delivery of the order book or is it the kind of thing that maybe it sort of lingers as a bit of an overhang and in the fourth quarter specifically given what we have, the mix of seasonality potentially getting stronger from a chartering perspective and the order book delivering at a sort of decent pace, do you think it's digestible -- I guess sort of fourth quarter and then thinking about the next couple of years? Thank you.
Yes, so this is a subject that we've always said -- there has been an awful lot of talk about the order book and we've reached the point that everybody has been looking and talking about for a couple of years, the second half of 2016. And our view -- and it has always been pretty consistent -- that on nominal terms it always looked much bigger than we believe that it actually will develop in terms of delivered ships. And we believe that the ships that will come on can be manageable and that we can get through it with the structure intact in view of the demand expectations.
But it is very dynamic and it depends a lot on these minor things that have made such a difference in Q2; a little bit less ton mile, a little bit less port congestion and a considerably lot less conviction on the part of the owners and of course you struggle a little bit. But I think that if we get the demand that's predicted and people stiffen their resolve and we have the usually expected upturn in demand over Q4, this is perfectly well manageable, but it will depend a lot on exactly how the owners approach it.
And our next question comes from Wouter Vanderhaeghen of KBC Securities. Please go ahead.
A couple of questions from my side on the FSOs. We recently saw that Total acquired a 30% stake in the Al-Shaheen field. Can you update us when we should expect the tender for the FSO contract coming out? That's the first question. Secondly, at the end of this contract is there going to be any significant CapEx required on the two units?
And then finally, leverage; if I'm correct at least, on the units it's quite limited, $45 million per unit for the 100% basis. Would you consider re-leveraging if and when a new contract will be signed for these two units? Thank you.
Hugo De Stoop
Okay, so I can answer first--
Yes, you jump on the leverage first then, Hugo.
Hugo De Stoop
Yes, I was going to take the easy part. Today it's still $90 million, so $45 million per unit -- also, $45 million per partner, sorry. And so at the end of the contract which is, well, almost exactly a year from now, it's going to be $22.5 per partner left on the two units. So indeed, relatively low leverage. As far as re-levering the project, I would just wait until we cross the bridge. I mean let's first sign a contract and then we will see what we do, what will be the tenure of the contract, what will be the level of the contract and a number of elements that will enable us to take the right decision at the right time. Paddy?
Yes. No, I just wanted to -- I think in terms of renewal, you referenced tender -- I mean as far as we're aware, there is not a proposal to tender. The FSO it will be, I would hope, a normal contract extension discussion. But obviously, the whole thing has been a bit delayed. You must be tired of asking the question and we're tired of trying to answer it. But it has been delayed as a result of the postponement of the whole field negotiation. So I think that all we can say is it's pretty much as we have said in the past. Honestly, as soon as it's done, we will make sure you're the first to know.
And in terms of significant CapEx, the only reference there would be, look, at the moment it's business as usual. There are critical parts of the infrastructure on this field, so we feel reasonably confident. At various times during this process, we've had approaches from the QP or from MOQ to discuss potential changes to the FSOs around mooring arrangements. If those were ever brought up, then there might be CapEx. But there's no required CapEx for the continued performance of the business.
Okay. Now, maybe one other question if I may. We're of course all advocates of disciplined contracting and -- but given where newbuild prices are today, how are you looking towards ordering? I mean if you compare current re-sale values of 86.5 for prompt delivery versus, yes, the same kind of prices for delivery early 2018 ordering newbuild starts to become quite attractive.
Well, I think we probably bored everybody to death on this subject over the years. But any ordering of tankers on a speculative basis is a form of deconsolidation, weakens the market and strengthens the position of your counterparties. I think that ordering on a speculative basis in the current phase of the market would be wrong. And the reason I want to emphasize that, Walter, is that don't forget that we went through the single hull to double hull transition in the first decade of this millennia and the impact of that is that relatively speaking we have a young fleet. Now, if we had a much older world fleet, then of course we would be saying by all means go and order because when you take delivery you should be scrapping the ship.
But as the world fleet is, relatively speaking, quite young and we're talking about vessels 16 years or between 16 and 20 years as ones that we would target for removal, we're not talking about ships that are 20 to 25. So our view is that speculative ordering makes no sense. It would only weaken the market. Obviously, we would accept from that ordering per specific customer usage on a project basis. And last but by no means least, there are plenty of ships I think that are available for acquisition that are under -- they are either on the water or under construction already. So there's no shortage of opportunity.
And then in mid-July there has been quite some activity in the newbuild markets. I'm making reference to the orders placed at Jinhai, for instance. How you're looking to that?
Well, we really couldn't comment too much. But let's face it, Jinhai may have taken some orders, but they haven't built any ships. They have a record of trying to sell ships to people and eventually they have had to order them from their own group. So I mean I don't think that represents any significant development.
Hugo De Stoop
And, Paddy, maybe it's worth highlighting maybe a little bit how our industry works. You can place an order, Walter. But before you make the first deposits as little as that deposit is, it could be as little as 5%, you're very lucky. You're not going to make that deposit before you get a refund guarantee and the refund guarantee is there for you to get your money back in case the shipyard goes bankrupt.
A number of those shipyards went bankrupt and people were very happy to have a refund guarantee. Absent a refund guarantee, I guarantee you that nobody is going to put the first deposit in place and if there's no first deposit, they will not start building the newbuilding. So it's very important when you see a piece of news like that, that you first wonder are they going to get the refund guarantee. And if you are putting yourself in the shoes of the bank that has to issue that refund guarantee, then you better check your counterparty before you do, otherwise you may well end up paying the bill.
And our next question comes from John Chappell of Evercore ISI. Please go ahead.
Paddy, interesting way to break down the supply side on pages 10 or 11. As it relates to Euronav, you go to the fleet list. You too have some vessels that are over 15 years old and a couple that are approaching that age as well. So as you think of modernization and then balance that also though with values at historical levels, how do you think about modernizing the fleet and sell some of your older ships as opposed to, given your financial strength, holding on a little bit longer to potentially get more of an uptick in the market in 18 months or so?
Well, our record on older ship sales has been reasonably good. I think -- when I say reasonably good, I'm being a bit modest. It has been excellent. Because we have a very high quality in-house management and the ships tend to be in exceptionally good condition for their age. And we've been able, as a result of that, to make innumerable sales into offshore so that even though -- we've been able opportunistically to sell vessels before they reach 20 years of age and after they have been -- or even earlier than 15 and we've even had very new ships.
But they have all been able to go into offshore so that we're able to sell. And it's a great double win because we can sell and get a premium from the offshore contractor for having a high quality vessel on which we assist them on presentation of their project. And at the same time, it also takes it to the tanker market, so for us it's a double kind of win.
And I think that we'll continue to work along those lines, looking opportunistically for good opportunities or points of sale as we always do. But again, it's not something that you can force. We have a couple of older Suezmaxs all of which are on term charter to Valero and obviously at 20 years of age we'll definitely be looking end of life projects.
And then a little bit more maybe color on the two tiered market. Just -- you've been rumored to be buying some ships in the secondhand market. I'm not going to ask about that transaction specifically; otherwise I'm sure you would have disclosed it. But when you're looking at or inspecting ships or bidding for ships, is it a much smaller group of owners that are potentially looking at these acquisitions relative to two years ago, five years ago which really kind of shows the differentiation in the ability to access finance?
Undoubtedly. I mean absolutely undoubtedly. So I don't think that anybody who has been in the market selling asset has really been able to get a crowd around. I think we saw -- one ship went to auction with very limited bidding and then immediately afterwards we saw a similar ship going in a small competitive auction with three or four bidders. But these were single ship opportunities. And when we look around, I don't see a host of people. I don't think the ship brokers are relaxing and feeling that at any moment they could place a ship and get around a crowd of people to bid up the price. So we can really feel that -- you can count on one hand the number of companies that are active to acquire.
And then final thing, I think there has been a little fear mongering in the market, if you will, about commitment to dividend policies given the recent falls in asset values. As Hugo laid out, 45% leverage to current market value obviously puts you in a really strong spot. And I think there's one sentence in the press release.
But just so we can get it on the record, I assume there's no change to the current dividend policy and as we think about the August 25th announcement and just kind of do the math, excluding gains, including charges, an $0.88 per share pot with an 80% payout ratio should get us around $0.70 for the first half. Is that the right way to think about it?
Well, you have to follow me on this that we're going to leave the -- we'll leave the math and the exact numbers to the Board to make their decision on August 25th. I don't want to sort of preempt or jump them on their prerogative. And no doubt you will understand that the Chairman and his fellow Board Members will be disappointed if I overstep the mark and started confirming numbers to you here.
I mean our return to shareholders policy, you know it has been very important to the way that we approach the transparency of the business. So we've had a policy in place for some time now and you can see that on our website and our 20-F.
And the reason for having a policy that's really quite specifically written is because it provides a framework not just for Board and Management to think about how they run the Company, but also for investors to have some sense of how value in the market translates to value for them. Our primary responsibility always is to create and of course then to preserve long term shareholder value.
So our policy is of course relatively simple. As you've said, it's 80% return to shareholders of the P&L, excluding gains reserved for fleet renewal. But remember that's on a full year basis. And as I'm sure we're going to get asked about and as you've heard me speak about, it's very important to look at this on a longer term full year basis simply because of the volatility within a year that different quarters can produce. So that's the position, 80% on a full year basis.
So on the interim which is not a half year dividend or distribution, it's an interim and so it tends to be more conservative just because you can never be really sure that the second half -- no matter what your expectations are, the second half will not always play out the way that you anticipate. Of course that policy is working in a dynamic market and we need to balance the returns that we have today in the business against the returns that we want to achieve tomorrow. So I think we have to think about the balancing between those two positions and we have to think about the balancing between share buyback or dividend.
But that policy is well rounded. And as I've explained to you, the Board decides on the dividends but always against the background of Company leveraging liquidity which as you point out is strong, always against the backdrop of the share price, strategic objectives and of course opportunities, as you've also highlighted, on alternative potential uses. I mean there can always be the possibility that the opportunities for growth are too exciting to miss.
So I think without wishing -- I mean I think probably I've given you a full summation of where the policy is, but do feel free to go and read it and always to ask questions of management about it.
And our next question comes from Ben Nolan of Stifel. Please go ahead.
So I have a question. Obviously, you guys have been very plain about saying that you still would be in the market to acquire assets to the extent they are available. Along those same lines you're seeing sort of the wind down of some of your charter and assets and will be I suppose done with those pretty soon. Have you given any thought to chartering in assets or going along the market from an asset life perspective, because I would imagine that that's pretty thin and there might be opportunities where distressed owners or owners who really need to lock in revenue might be flexible in what they would need?
Yes and I think that obviously we look at what's going on in the time charter market. It's a funny old business. Unlike dry cargo and tankers, people tend to be more reluctant to put a vessel on charter to somebody who is not an end-user. So there's a little bit less capacity for being able to opportunistically play the operating market.
But the other thing that's very important, Ben and I'm sure you're aware of that is that we really can't be acting as a fairy godmother to a distressed owner simply because -- not because -- not only because some circumstances it wouldn't be good for shareholder value, but also because a distressed owner may well not deliver what he is meant to deliver in terms of operational performance and quality as our customers might require. And that's -- so there's always a little bit of a -- the liquidity in that market is always a lot less -- a lot less depth to it than you might imagine just because of those issues.
Okay. All right. And then again on a sort of an operational basis, I know you mentioned in the prepared remarks that you now have this venture with Diamond S and Frontline on the Suezmaxs. Is the intention here to be something similar to what maybe Tankers International is and maybe even with like the app that you guys have to create better visibility in the market and maybe help out some of the weaker hands from rolling over and taking lower prices that sort of set the market for everyone else?
Yes, I think that's absolutely right. I mean I'm afraid it will be a little bit of time anyway before we get there simply because we have to go to the process and TI certainly have to have 16 years of data logging and fleet observation to be able to make sure that their systems really delivery quality data. And we certainly would want to go along that line as soon as we can be sure that we're capturing the market effectively and accurately, because whether the market goes up or the market goes down, those systems only work if they are accurate and reliable.
Okay, all right. And then lastly, you mentioned this a little bit with respect to the refund guarantees, but obviously there has been a handful of vessel cancellations in the market as of late. Just curious if you guys are hearing if there is much more of that? As we look at the 17% order books, how would you best suggest thinking about what percentage of that may not actually materialize?
Yes, I don't think we could put a number on it. I know that some of the brokers -- I think particularly Clarkson said something like an average historical 30% drift on the order book. And all I would say is this, that the current rate environment -- and by that, I think it's very, very important that we -- maybe I should just touch on that a little bit more depth about where we're in seasonality and earnings, but this is only going to put more pressure on people that are scrabbling for finance.
It's a lot easier to find that additional couple of million dollars that you need to take delivery if the market's ripping and everybody is very confident about the future, because whatever else we say -- and I can only but repeat that I'm of the belief and Euronav is of the belief that the supply side is manageable with the demand outlook. But that doesn't mean that the rates will reflect that because it's entirely market dependent and the other participators in the market have to believe it as well.
And I believe, we've had a few little changes here in terms of supply coming off, in terms of loss of the congestion around certain ports, around a reduction of ton miles. These are all relatively small changes that had a big impact on the rates. And this isn't like last summer. We can use the analogy of talking about the five week gap last year, but the reality is we've had good cargo volumes all through the last month and these numbers are being transacted on a daily basis.
So there is much more the loss of support for the market this time than there was last year and I think that's very important to see. And that environment you could imagine some people finding it difficult to scrapple around and find cash and it having an impact on the supply side going into Q4. That's one of the few bright spots I could offer on that. One of the things that I do want to say about it additionally and I think it's really important, is that it is very small changes having a very big impact on value. That's why the owners have to get a grip and come back from being on holiday mentally.
We've had a lot of negative adverse comment about the market because commentators speak of the market, but the fact is they are also speaking inevitably to the market. And so it puts a lot of weight on owner's minds and they get very, very black vision of the future just because of the number of negative expressions used around what's coming. And I think that it -- that's what's really made a big difference to us over this summer and the issue now will be will we see a big enough event in terms of either a spike in demand or a restriction in supply or some additional congestion or storage for contango that will suddenly reverse that trend and give people some confidence.
And I think that that's really what you have to look for, a catalyst like that. And so it is a very, very interesting time and if that catalyst doesn't come and just walks into Q4, then inevitably we might well have a knock-on effect that people find it harder to take delivery of some of that order book and that itself creates the catalyst which brings the market back up.
And our next question comes from Noah Parquette of JPMorgan. Please go ahead.
I wanted to ask just about the market. I mean we had about six months of the U.S. changed its export ban policy. Can you talk a little bit about what trade flow changes you've seen, what has been kind of ton mile disruptive, what has been ton mile creative and what's your expectations in the future?
Well, it's been a bit of a damp squib, hasn't it? I mean it was talked about it was going to be some huge event and in fact I don't think that anybody really seems to have benefited much from it. Perhaps the U.S. refiners have suffered from it. But the lifting of the export ban has not had a huge impact. And I think there has been a little bit of trade flow. Probably surprisingly the most significant developing trade flow has been a bit more re-activation of the trade route, West Africa into the U.S. Atlantic Coast. And we've seen a little bit more of a comeback into Middle East Gulf barrels going into the U.S. Gulf as well. So funnily enough instead of -- the export ban gets lifted and the net effect is imports into America go up. I mean it's difficult to work out, isn't it?
Yes. Okay, that's consistent with what we've seen too. I also just wanted get your thoughts on just the idea of oil demand growth going forward, the IEA is forecasting pretty strong oil demand growth. That's mostly refined product consumption and it's a couple of steps removed from crude oil volume shift. Can you talk a little bit about what metrics do you look at to be comfortable with the demand for your assets beyond just oil demand growth?
Well, I mean I think primarily it's oil demand growth. And I think that the only reason that I would say that we can get comfortable with it and look beyond it is simply to say the IEA figure whilst it started off at 1.2, it's gone to 1.3 and 1.4 for the next two years -- I think 1.4 and 1.3 for the next two years. Let's put it in context, oil demand grows year on year. There has only been two years in the last 20 when it didn't grow. The average growth is about these numbers. So what's being predicted going forward looks pretty typical. It's not -- nobody is predicting anything exciting or particularly dramatic.
And our next question comes from Amit Mehrotra of Deutsche Bank. Please go ahead.
Just a quick question on the dividend in response to Jonathan's question. I'm sorry, Paddy, I didn't actually catch the crux of what you were saying. I just wanted to confirm that there is a steadfast commitment to 80%. Or are you trying to imply that maybe there's some wiggle room there depending on opportunities that come by?
Well, I think we gave a pretty comprehensive statement. I'll just refer you to the website for the full statement. But, Amit, I wouldn't call it -- you called it wiggle room and I'm not quite sure what you mean by wiggle room.
Well, I mean I didn't understand that statement or--
No. And again, let's not get into semantics. But the point that we've been making is that we have a clear policy to return 80% of the P&L to shareholders and that's against the judgments that the Board have to make against liquidity and leverage, both of which we've established are in reasonably good shape. But also let's not forget, strategic objectives and of course our outlook in the market are going to be important parts in determining what are the requirements of the Company, what are the growth opportunities of the Company and what we think is the right amount to be returning to the shareholders. So it's going to be a balanced decision that the Board makes in August.
No, I agree. I mean the NPV of an asset purchase could actually be more than the dividend, so I just wanted that clarification. Okay. Let me ask you a couple of more if I could. On the FSO, I think those assets are field specific and they generate obviously a pretty significant amount of cash flow to the Company. So if you could just elaborate or let us know what you think the switching cost could be so that people can just get a little bit more comfortable around understanding the risk there or the lack of or the opportunity even, if you could just sort of talk about that?
Well, so the switching cost, I'm not quite sure -- I mean these are not -- these aren't -- these are field specific assets. It's both the virtue and the vice in the sense that -- well, they are not market assets. So I mean you might see it as a weakness or something that people should get concerned about. All I would say is they are an essential and integral part of the infrastructure of the field.
The angle that I'm coming at it from is I don't think people should be worried about it because of the switching cost. And so my question was is the switching cost just so extraordinary that--
I'm afraid that I misunderstood you. I misunderstood you, Amit. Yes, I think that -- look, the idea that you move to something else -- when we went on to this field two things happened. First of all, the days when the export method from the field got disrupted which used to go on regularly and ended up causing them to have to shut down production, that ended with our arrival. Our ships have never caused a shutdown in production from the field. That's hugely valuable to the field infrastructure.
Secondly, the water cut as a result of it being a really effective system for reducing the water in the oil was a phenomenal change. So they went from giving a discount on their oil sales of close to 20% because of the amount of water that would settle out in the sold product between delivery on to a ship and arrival at a port -- so they were giving discounts of 20%. They now give no discount. It's sold as export grade crude without a discount.
So these are very, very important and I think that to leap into -- for the operator to say that they wanted to go with a different system -- and don't forget, the design and the build of the system was done under their supervision and to their specification -- for them to suddenly say, oh, let's go to a different system, would be quite a big leap in the dark.
Can I just ask a couple quick more -- a couple more maybe for Hugo? Obviously, there were reports that you've entered into a contract to acquire assets that are worth $168 million. And so I'm not going to ask you specifically on that, but my question is really about financing because you have, as Hugo said, a lot of incremental debt capacity. And so could we contemplate that if you were hypothetically going to make an asset acquisition of that size, would it be an all debt acquisition or would there be some equity component?
And then, Hugo, just related to that, you've said in the past your net leverage max was 50% or target rather was 50%. In the slide deck it's now 60% or you said -- the hypothetical example was 60%. So is there anything to read into that in terms of your willingness or the Company's willingness to go above 50% in the short term?
Hugo De Stoop
The second question is easier because it's a clean no. At the start of the cycle I think that 50% is the max, not the target. The target is between 30% and 50%. So absolutely no willingness to go above that. What we mentioned in the deck was that if we were to draw all the liquidity that is available to us -- and most of that is parked into revolving credit lines that we can go within three days' notice and that cash was being -- I was going to say wasted, our leverage would only be 60%.
And we said that just to illustrate how strong the balance sheet is at the moment, that leads me into the answer of your first question. Because all the excess cash is parked into those lines, you can see it as equity or debt because it's the retained earnings that we're parking there and then if we were to make an acquisition, we would obviously draw down on those lines. So you can qualify it as is it debt or is it equity? I'm not quite sure. It would obviously increase the amount of debt, but at the same time we would be buying something and the balance sheet would overall be increased.
Yes, but if you finance it with 100% debt, then your net LTV does go up.
Hugo De Stoop
Absolutely, yes. I'm not going to counter argue with you. Absolutely.
Right. So the question is if you were to make a $170 million acquisition with 100% debt, wouldn't your LTV go past 50%?
Hugo De Stoop
No, it wouldn't.
It wouldn't? Okay. Maybe my math is wrong then. Okay, I'll follow-up with you offline. One last one from me is, wondering -- with respect to the weak time charter market, I was wondering if you guys have looked at it from another side in terms of some of the older vessels if you would engage in one-off, say, leaseback opportunities not with really like financial institutions or institutional investors where you could basically keep control of the assets, actually lower the breakeven given where the time charter market is on a maybe four, five year basis and get a pretty good rate and then also free up more debt capacity to have some more ambitious fleet renewals, is that an option for you guys?
Hugo De Stoop
Well, I think that we have demonstrated the balance. We're looking -- we have the capabilities of looking at every single form of financing the Company and it's always the same. The first question is, is it good for the Company and for its shareholders? And the second question is, is it available?
Now, when you're talking about time charter equivalent being where they are today, I think that's right. But at the same time if you want to sell a piece of asset and take it back on bareboat or on TC, but it's likely to be a bareboat, then it will very much depend on what the conditions are around that. So you're selling for 400, you sign a contract it's for 3 years, 5 years or 6 or 7 years, it may depend, all those elements will have a much more important role into your bareboat rate then where the TC market is at the moment.
So everything is linked into a sale and leaseback. But I do agree with you that this is something that we could potentially look at, especially at the time -- I mean if we had an opportunity, but especially at the time when we're not entirely happy with where the share price is trading.
One last quick one before -- Paddy, even you said you never issue equity below NAV, but with the decline in asset values the NAV bar is also coming down. So given sort of where asset values are -- and you guys have done pretty ambitious, successfully -- so acquisitions on a large scale vis-a-vis the Maersk transaction. And so would you be willing to have a larger equity component to take advantage of some of the specific market characteristics here or no?
Well, I think our metric is normally -- and I think that we have expressed that in the past, is that the metric we look at is where is the share getting issued in terms of net asset value on the target. So you can issue the share -- and of course it might translate to net asset value against your own asset simply because of the way that we mark-to-market or the way that we look at the asset value. But the important thing is when you buy the target, are you buying more shipping with the share than you already have in your portfolio and if you are, then it's accretive to the shareholder.
And our next question comes from Gregory Lewis of Credit Suisse. Please go ahead.
And I guess the call has already run over an hour, so I was thinking maybe next call you kind of implement something so maybe people only ask one question and one follow-up as opposed to rambling on. But anyway, just one from me I guess. Oil has moved back in the contango, right and as we have seen that, has there been any impact into the tanker market in terms of have we seen vessels slowing down, have we seen any sort of change in how operators or customers are viewing delivery schedules given the fact that we have moved in the contango?
I would say no. So a lot of the storage that people talked about in the first six months was essentially what we called forced storage or commercial -- sort of a kind of operational storage. And that's unwound a little bit and our feeling about it at the moment is that you couldn't honestly say if there's any significant storage in the market at all, outside of course of those ships that are permanently on storage or which are part of the Iranian fleet.
But undoubtedly there are a few charters who are beginning to ask again for short term time charter opportunities with multiple options and maybe they are beginning to sniff the opportunity potentially for accretive value on cargo held for a long period of time.
And our next question comes from Mike Webber of Wells Fargo. Please go ahead.
Most of my questions have been answered, but I just wanted to circle back to liquidity within S&P markets. I think most of you would agree assets are pretty attractively priced right now as they approach 2013 lows. And you covered the bid side of the equation earlier noting that there are still not a lot buyers. But what are you seeing on the ask side of that? I mean with asset values at near tri-levels are sellers more reluctant, say, relative to three and six months ago or they are relatively the same amount of assets for sale in the market?
I think that's an interesting question, because I think that -- I don't think there is much being marketed by the shipping broking community as there was six months ago. But on the other hand, we've seen -- I mean I think people are still absorbing a bit of shock over the fact that people have coughed up ships at relatively good values simply because of the pressure to fund when the time comes around.
That's why I think the market has been a bit more focused on market ex-yard resale because all of a sudden somebody is thinking, cranky, I was only meant to put 10% in and then I was meant to flip this. And now all of a sudden they are coming up to the delivery installment and thinking, blimey, I was never meant to be asked what color to paint it.
And our next question comes from George Berman of IFS Securities, Raymond James. Please go ahead.
A couple of quick ones for me. It is generally accepted that there's about 96-97 million per day used in crude oil worldwide. What percentage of that is shipped via the oceans versus pipelines? Second question would be the reduction of the on land production in the U.S. of 1 million per day currently over a year ago, how does that affect the imports into United States and are they also primarily done by ship? And lastly, have you seen any openings for transportation of oil from Iran since their ships I guess are very, very old?
Starting at the beginning, there's loads of data point that you can get from major agencies on how much oil is shipped per ton. I would guess it's slightly over half of daily consumption.
Hugo De Stoop
The last number I had, Paddy, was 45.5.
Yes. So I think as far as the U.S. is concerned, we're seeing more import of oil, as I mentioned earlier on, the U.S. Atlantic Coast and U.S. Gulf Coast. And last but by no means least was--
Iran, yes. Iran, yes, plenty of cargo being sold, not usually -- not much of it going -- I mean, look, plenty of cargo being sold and plenty of people taking it, largely of course into Europe. The incremental barrels are going to Europe, certainly the ones that we see.
And, ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the call back over to management for any closing remarks.
Okay. I don't think there was anything left that we wanted to highlight. I think we've given it a thorough going. So thank you all for phoning in and I look forward to speaking to you again in the quarter. Cheers.
Hugo De Stoop
And, ladies and gentlemen, the conference is now concluded. Thank you for attending. You may now disconnect.
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