CMB.TECH NV Ordinary Shares

Good day and welcome to the URNAV fourth quarter 2021 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Brian Gallagher, Head of Investor Relations. Please go ahead.

Thank you. Good morning and afternoon to everyone, and thanks for joining Euronav's Q4 2021 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 3rd of February, 2022, 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 historical statements of fact. 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 SCC, which are available free of charge on the SCC website at www.scc.gov.uk. scc.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 harbour statement on page two of the slide presentation i will now pass over to chief executive huger stoop to start with the agenda slide on slide three. Over to you, Hugo. Thank you.

Thank you, Brian. Welcome to our call today, wherever you are. In terms of the agenda, I will firstly run through the Q4 highlights and some comments on what was, in the end, another challenging quarter after an encouraging start. I will then turn over to Brian Gallagher, our head of IR, to run through some market slides before Liv Logger, our CFO, highlights some important accounting changes we are announcing today. I will then return to outline how the Euronav platform is positioned for the coming cycle, not only on a standalone basis, but how we compare with our peers before finishing off with our traffic lights and a Q&A session. So turning on to the next slides, the highlight slides. We stress in our Q3 call that we felt we had reached the trough in this cycle during the late summer month of 2021. We stand by that view. The recovery we saw from late August into when we reported in early November was tangible and reflected in better freight rates. However, with a rapid spread of the Omicron variant from late November, the associated rapid restrictions in economic activity and the lack of confidence in the business cycle, we saw this recovery of storm in what seasonally is the most important period of the year. This was very frustrating, and overall tanker activity has yet to really recover. However, freight rates, whilst under pressure, have not revisited the low levels of late summer, and we remain with the conviction that a recovery has only been deferred. Unlike the situation 12 months ago, we face the coming year with strong oil supply growth forecasted by the leading agencies, a further rebound in demand, and a pressing requirement to address low crude inventories level at some point in the future. Our low cash break-evens, coupled with our strong balance sheet, enable us to manage through the current market, and we are positioning for the next structural phase of the cycle, as we recently took delivery of two new super eco-sewers max, the Cedar and the Cypress, at the same time as re-delivering four non-eco older VLCCs. Don't get me wrong. We, along with all of our stakeholders, remain extremely frustrated with this pause the tanker market has taken on our recovery journey. But we continue to expect the freight market to improve to healthy levels, even though this is no more likely focused on the second half of 2022. I will return to this later and now pass it on to Brian. Thank you.

Thank you, Hugo. The demand background remains very important for our markets. And the setup for 2022 looks far more encouraging than it did last year, with different and more numerous factors at play and largely in our favor. Firstly, it does appear that demand is finally expected to revisit or even exceed 2019 levels this year. The IEA, for instance, is forecasting a further demand snapback of 3.3 million barrels per day in 2022, implying over 100 million barrels per day of consumption for the first time since 2019, as the top left on slide seven shows. Top right, we show the growth, which is leverage for all tanker companies and ourselves in particular, as every 1 million barrels per day of annualized expansion of demand historically is required between 30 and 40 VLCCs. And we believe this correlation will hold going forward. The bottom left chart looks at demand, which may also be further increased with a requirement to restock. If we remember that the story of 2021, which is shown bottom right, was that demand rebounded very, very strongly. But most of this demand was satisfied with inventory and drawdown from local supplies. So therefore, there was no need for shipping. The picture for 2022 looks very different. Inventories are currently at levels globally that we have not seen since 2011. So at some point, and commentators such as the EIA advocate strongly that we'll see a big snapback in inventory rebuilds. We'll move from the stocking phase to a restocking phase sometime this year. This should be a further boost to tankers over and above the underlying demand snapback that we anticipate. We now turn to slide eight. We look at vessel supply. Vessel supply remains an issue and will clearly provide some headwinds, especially in the first half of this year. The top right slide illustrates how supply has largely stayed one step ahead of the recovering demand ever since we went into COVID-related restrictions early in 2020. The fleet has grown by around 50 VLCCs in that time, and there are another 40 expected to hit the waters this year. Most of this will happen before September. Recovering demand will absorb some of this tonnage increase, but clearly not all. However, there are two factors that could redress this balance during the rest of this year. Slide 9 top left shows that 2022 is a big year for special surveys. Nearly 10% of the sector will go into the yard this year, aged between 17 and a half years and 22 and a half years of age. Now, clearly, not all of these ships will exit the market, but it illustrates the soft underbelly of the tanking market, with 25% of the fleet already aged over 15 years of age and an average fleet age at 20-year highs. The catalyst for taking the decision whether to exit or not is twofold. the steel price, which is the driver of scrap metals, and the cost of the survey, which at that age is considerable and somewhere between $3 and $4 million for each survey. In other words, owners are faced with a choice of either spending a lot of dollars to remain in the market today to keep an old ship which will only survey and have low utilization for the following 30 months or receive a hefty capital injection in terms of an exchange for recycling that ship. This decision was skewed last year because a lot of these older ships could be sold to perform the so-called illicit trade, a murky business allowing those involved in it to pay a premium over recycling values. We don't believe this will play a very big role going forward as this illicit trade has stabilized in size, as shown by the slide on the bottom left, which will make it difficult for new entrants to enter this illegal trade. This illicit trade, it must be stated, remains a wild card for the tanker markets, but there is a pressing need for the IMO and others to apply the sanctions that are in place as this trade represents a huge risk for human life and also the environment because of the way this trade is operated and the age of the vessels that are engaged in this trade. The bottom right chart illustrates how dynamic tanker markets can be. If one assumes that the 20 and 22 and a half year old vessels up the server this year were to exit the trading fleet, then the fleet would actually shrink in terms of overall size. Whilst very unlikely, it does illustrate the age profile of the VLCC at the current state and how dynamic this would be if recycling were to maintain the trend that was started in Q3 2021. With that, I'll now pass over to our CFO, Liva Logger, for some important changes in our accounting approach. Liva, over to you.

Thank you, Brian. Today we are announcing a number of important changes in our accounting policies and the way we report our figures in our P&L. We are reviewing on a regular basis our judgments and assessments made with the objective to continue to present a fair, exhaustive and thorough view next to the fact that it's equally important for Euronav to be directly comparable to its peers. The key change is the adjustment we are making to our residual value accounting. After a thorough internal review and with our auditors, we believe now is an appropriate time to update our assessments and to transparently share this with our stakeholders. Historically, our approach has been very simple. 20 years straight line depreciation to zero. However, there have been significant changes in shipping and steel markets in the past five years, which we believe necessitate a change in policy. Steel is one of the most recoverable commodities in recycling, and in a sustainable circular economy, hence the recycling of ships will become more important. With this in mind, we have decided to move to the following approach. we keep our depreciation policy over 20 years, but to a residual value basis, as opposed to what we had until now, which was a zero residual value. The residual value we will adopt will be an average of the key recycling market prices, which presently is around $500 per ton. So going forward, as slide 12 shows, This will reduce our depreciation charge annually by around $100 million from the current run rate of around $380 million and places ourselves more in line with our quoted peer group. On this slide, you can also look at how recycled steel prices have performed in the past decade and the reasoning behind choosing $390 per ton which is equivalent to the four years moving average. Other important changes in our P&L are some reclassifications we are making between revenues and cost lines in order to make us more market conform. CI pool administration fee has been reclassified out of G&A to revenues, whereas FLAC compensation is now directly integrated in our cost as an offset. Ship management overhead is now part of OPEX, as we recognize that the majority of market takes the ship management fees, especially when this is outsourced, directly into the OPEX. While those changes have no impact on EBITDA or the bottom line, it clearly shows that our system platform enables us to deliver top quality service at very reasonable costs, which can only be achieved with scale. We illustrate this point by showing how we compare to one of the most reputable benchmarks produced by BCG in the tanker shipping industry. Another important feature worldwide mentioning is that Euronav's portion of debt hedged against interest rate hikes is now 60% In an inflationary environment, we cannot just do nothing about it. I will now pass back to Hugo for the rest of the presentation and its conclusions.

Thank you, Lieve. I would like to finish up on a few slides outlining exactly where Euronav is positioned. Slide 15 illustrates a comprehensive platform we offer investors. Firstly, our operational performance is at the leading edge in our market. Our OPEX performance compares with the best in class and is backed by a strong balance sheet where we have the highest liquidity, both in absolute and relative terms, accompanied by one of the lower leverage ratios amongst the peer group. Finally, in terms of capital markets, investors looking to gain exposure to the tanker market at this stage should focus on two elements. The robustness of the company they invest in, as well as the operational leverage they acquire for when the cycle will turn. It should be clear to investors that Euronav offers the lowest entry point and therefore the highest upside. In summary, on slide 14, we have a clear focus and strong platform at Euronav. Our operational structure is extremely competitive in cost terms and is fully integrated. Our large fleet is appropriately aged and we have a balance sheet that retains two years liquidity runaway. All of this supported by increasing sustainability credentials and proven record in terms of return to shareholder. Do we wish the freight market was more encouraging and in better health? Yes, of course. But as no one can accurately predict the markets, we are always prepared for challenging markets, even when we expect the cycle to improve, which is clearly the case for 2022. Let's move on to our traffic lights and another upgrade. we have upgraded our all-supply outlook driven by three factors. OPEC continues to deliver on its monthly production increase as confirmed yesterday. Non-OPEC is beginning to show signs of life with pockets of exports increasing from areas like Guinea, Brazil, or even the U.S., which are long-term miles. And finally, inventory at our level, where people will look more into replenishment than further drawdown. Elsewhere, the key traffic lights remain the same. So, in conclusion, Euronav remains constructive on the prospects for our market and its recovery. The setback that we saw in the second half of Q4 is just that, a setback. It will take time, but we remain confident for the recovery. That concludes our remark. Thank you for your attention, and I now pass it back to the operator and look forward to your questions.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star, then 2. The first question is from Randy Gibbons of Jefferies. Please go ahead.

Howdy, Team URNF. How's it going? Hi, Randy. How are you? Doing well, doing well. I guess first on the accounting changes, knowing you're going now to a scrap value, residual value depreciation, makes sense. Any impact to the potential payout ratio, if and when we get back to some pretty meaningful profitability here?

At the moment, we keep our policy. It's very clearly set out on the website, very similar to what we had in the past. You know that we are very shareholder-focused, and we tend to be very generous towards them, be it in dividend or in buyback. We continue to be frustrated with the share price. It continues to trade below NAV, and so clearly we will need to make a choice between dividend and buyback when we get to positive territory and we have something to return to shareholders.

Got it, okay. And then in terms of your comments on inventories, I think, Brian, going back to 2011 levels, clearly with Brent at, I don't know, $88 today, there could continue to be some downward pressure on inventories. Do you see any kind of inflection point in the near term for that restocking that you mentioned, or is it all just kind of supply-driven?

It's a good question, though, Randy. I think that how we would see it is would be the business cycle getting confidence. We were beginning to see that confidence return before Omicron began to bite in November. And we're just not getting sort of any longevity in these recovery periods over the last two years. So I think it's a question of, one, the business cycle getting back to some form of normalization and therefore having the confidence to order, but also the price structure of oil itself. Clearly, it's been very deep liquidation at the moment, which moves against that infantry rebuild. But, look, I think it's just a question of time getting through, and then as we get through, better improved confidence, then we would expect that rebuild to start. But we are talking about very low levels, and that's the reason we wanted to highlight. We take the EIA, their forecasting, the rebuild will start as soon as this quarter. So let's wait and see, but I think it's more a question of the businesses confidence and cycle returning to some form of normalization and then we will expect restocking to happen then.

I just would like to add maybe one color on this which is world stability. We all know why those inventories exist and it's because there is always a risk that the supply of oil is being disrupted by an event or another which is clearly the case at the moment. It's very good to be able to draw on your inventories, but there is a limit to what you can do, and that limit is reached when you're confident that your supply chain is going to be interrupted.

Yes, that's fair. And then if you don't mind, I'm going to sneak in one last question here. Obviously, you're frustrated with spot rates. I think those sentiments are shared pretty widely. In terms of time charter rates, those have held in decently relative. So any appetite for just locking in some cash flows there while we continue to wait for the uplift in spot rates?

As we're concerned, we haven't seen anything short term that was really attractive. I mean, yes, you can lock in sort of the low 20s for a year. whenever you are crossing sort of the 30s, then you're talking about three years and usually one or two years option on the back of that at maybe $1,000 more. So we've seen structure like 33,000 for three years and 34 for the fourth one as an option, 35 for the fifth one. And when you read our thesis, which is obviously shared by a lot of people, We believe that when the market returns to positive territory, it's going to be probably a longer cycle than what we have seen recently. It's probably going to be like a 2004 to 2008 type of cycle, relatively high rates and relatively prolonged. So I think that we should be prudent when we are looking at those rates, which today looks attractive. But quite frankly, at the back end of those five years, you may be a little bit regretful to have done it.

Yeah, that makes sense. And with your balance sheet liquidity, you have the ability to wait. So all good. Thank you again. Thank you.

The next question is from John Chapao of Evercore. Please go ahead.

Thank you. Good afternoon, everybody. Brian, if I could start with you. I've found that there's been a pretty strong consensus from the public companies and most of the analysts looking for a recovery just any day now. But some of the brokers maybe don't have any skin in the public game or are quite more bearish. It feels like a lot of their negativity is focused on the supply side. So if I can go to page 8 and look at that upper right-hand graph where you say it implies 60 to 80 excess VLCCs based on 19 demand, what gives us confidence that that 60 to 80 spread closes? I know there's some hope for scrapping, but scrapping is always a bit of a wild card. Is that a demand-driven reversion? Anything you can point to that would maybe debunk that bearish thesis?

It's a very fair point, John, and I think what we tried to do maybe with the first slide before that was to try and just show that there are multiple elements to this. I think if I maybe give three sort of pushbacks on that, one would be on the supply side. Yes, supply has been patchy. We have to recognize that, and we haven't seen the supply growth that we would have anticipated. But if we take, again, the forecast, which independent commentators are giving, Platts, for instance, are talking about $1.5 million barrels per day increase from the US, although that is second half weighted. We're also looking at 0.7 million barrels per day from Brazil, Canada, and the North Sea. Again, second half weighted. But also, I think we have things like the Stancil agreement that will come into place with the OPEC Plus nations, which could see, well, potentially we'll see Russia, Saudi, the UAE, and Kuwait have 1.5 million barrels per day between them that they can increase their production. Now, that's important because obviously those nations have been the key drivers of the production growth that we've seen. We've seen other, in particular, West African nations struggle to even grow their production. So I think there's some really good grounds, albeit second half waiting for the supply side. The second answer would be, as Hugo said in his perpetual remarks, the demand, we do believe, is going to continue to gain traction. There's some seasonality to that. So we shouldn't be surprised that, again, that's going to be more second quarter onwards based. And then lastly would just be the fact that we have started to see some of that recycling. I think it was 11 VLCCs in the second half of last year, and I think a similar number of Suezmats. And we've got a very big survey cycle here. I'd love to give you a magic bullet, John, and everyone else, again, as Hugo said in his call, that we're not happy with where we are. But we do believe we've seen the worst in the rearview mirror. But all we can point to is some of these factors that we see in front of us. We wish they were gaining traction more quickly than they are. We're going to have to be patient, and I think that's the message we try to give in the commentary and the press release. But we do see, you know, it's not just one factor that we're sort of hoping that will come through. We see multiple factors which will be supported, and we believe those will combine to give traction as this year progresses. But it's certainly probably going to be more in the Q2, Q3 when we start to see that getting traction. moving into the key winter period. But look, we're comfortable and confident that that will come through, but I can't give you, I can't sugarcoat it to any degree that we've got some sort of hidden numbers that we're seeing. The pushback on that would be, well, the worse it gets or the more it continues to be very, very challenging, then you want to be exposed with those stocks that have got the best balance sheet and the best cash flows that can withstand that marketplace And the tougher it gets, then we think the more we'll start to see recycling come into play. So we do believe we're getting into the end of this particular sort of phase. But I don't know if Hugo's got anything to add to that.

No, I think you sum it up. I mean, there are so many moving parts and... Obviously, John, I know that on the recycling side, it's very difficult to predict, but I think what we've tried to put in the presentation is the opportunity that is there. I mean, if no one had to do a special survey, especially at 17 and a half or 20 or 22 and a half years, then I think that the hope to see a lot of scrapping would be gone. But this year is particularly interesting from that point of view. And if you're faced with three or four million dollar bills, And when you return to the market, it doesn't give you anything because for this age profile, the return is literally zero at the moment. Then I wonder what people are going to do. And last year, they were selling their vessels to the illicit trade. But that part of the market seems to be well covered. And we haven't seen any ships going into this horrible business recently. So we don't see any reason why it will continue. I think there is an existing fleet. Um, and, and it's service, uh, this, uh, this part of the market.

I think Brian's point about just making sure you're aligned, uh, with the best balance sheets and liquidity is, uh, is a very important one. If we can look at just a bit past the short term ism. I know we have a tendency to focus on the here and now, um, you know, if we get past 22, the order book drops precipitously. And I know that ship owners have a long history of saying, oh, you can't get a ship for three years and then magically we find 30 slots in 18 months. But it does seem that given the strength of the container ship ordering, the LNG ordering, even the LPG, that there is less availability in kind of the 23-24 timeline. Can you just speak to, in a very realistic manner, at a commercial scale, When would you realistically get like a 10 plus 4 order of VLCCs or Suez Maxis? Do you have a great relationship with the Korean Yard where you can sneak one in first half of 24? Or even the best place ship owners, you're looking at late 24, maybe into 25 and beyond?

If you're talking about one slot or two, I think that you can reasonably expect to squeeze maybe one or two slots, as I said, at the back end of 24. But it's certainly not six, eight, or 10 sort of ship slots, and that's in Korea. In China, it's a little bit more opaque and so one never know. But quite frankly, if you look at what has been ordered in the past, it's very much for Chinese owners. And then Japan seems to be completely out of picture for VLCCs at the moment. And quite frankly, if and when they return, it's also probably going to be for Japanese owners who are not typically spot operators. And that's probably what we are looking at when we see new orders. So quite frankly, I think that a lot of the characteristics of the market that we're seeing now are very much the same as what we were seeing 2003 2004 and it's simply because every bit of shipping and and well this time around not us but every bit of shipping is doing very very well and has placed an enormous amount of uh of orders and i think people don't realize that Those ships are being built in the same docks. I mean literally in the same dock So if the dock is busy building a container ship or a gas carrier Or any other time that has been ordered The slot is busy. And yes, you can gain some efficiencies But you know the Koreans they are they are pretty efficient people. So Already or already efficient what you can gain is a maybe 5% maybe maybe 10% and then of course In the other segments, certainly in the container, we don't expect reading the analyst comment that this sector will abate and the cycle will turn anytime soon. So you continue to see orders, which means that even if there was a willingness of some tanker owners to place orders in those yards, they would be competing with those ships. And given that those yards are earning well, better margin on container and certainly on the gas carrier. We don't believe that the price they would be offering us would be attractive for owners to place a large quantity of water. Today, you can probably get a VLCC for 106, and that would be a very basic one, so not even one that could potentially be retrofitted later into one of the two or three technologies or fuel that we'll use in the future. So I'm I'm very positive, in fact, on that part of the market. And quite frankly, it's the most important part of the market because the only reason why our markets are cyclical is simply because of the supply side.

Okay. I appreciate the thoughts. Thanks, Brian.

The next question is from Greg Lewis of BTIG. Please go ahead.

Yeah, hi, thank you, and good afternoon, everybody. Hi, Greg. You know, you, though, or Brian, I was hoping to get a little bit more color. You know, a typical question that we get a lot, you know, as people look at kind of headline rates, are those negative, you know, are those like a negative TD3? Now, clearly, clearly your company has been able to, you know, generate profits over, you know, generate positive cash, generate a return over positive, operating cash costs. Really what I think people are trying to understand is, you know, there's been a lot of vessels that have had scrubbers installed. And so we have a scrubber fleet and a non-scrubber fleet. You know, as you look at the market and track what you're seeing, do you get a sense that the utilization, it's almost a two-tiered market where the utilization of the scrubber fleet is significantly higher than the non-scrubber fleet. And this is obviously beyond TI, but maybe broadly speaking. And if that's the case, how much utilization bump do we need in the non-scrubber fleet to kind of get utilization to a point where maybe those are the vessels that are setting the prices and we can actually see upward momentum in rates?

Well, it's a very good question. It's certainly one that we are asking ourselves all the time. We do have a little bit of visibility because TI operates both scrubber ships, non-scrubber ship, old non-scrubber ship, old scrubber ship, echo scrubber. So you have four categories, not two, in fact. What tends to happen in the market is that you would put the most economical vessel on the longest trade. because you want the ships that are non-eco, non-scrubber to do short voyages and then spend a lot of time in the terminals, because there they are not consuming a lot of energy, a lot of fuel, for obvious reasons. So that's a little bit how the market is developing at the moment. Very clearly, when you have an old vessel which is non-scrubber, I'm talking here about something which is 11, 12 years old and older, even with a scrubber, the economics looks horrible because you will consume 77, 78, 79 tons per day compared to 40, 42, 45 for ecovessels. So that's already one element. So the scrubber will help but will not compensate in full for the excess consumption. And then, of course, I just touched on that, but I'm going to repeat what I said. There's a completely different utilization for the guys who are doing the illicit trade. And we're talking about 55, potentially 60 vessels. So it's quite a lot of vessels where nobody talks about utilization because what they need to do is constantly change registration, flag. They do transshipment two or three times before they deliver the oil. I mean, it's a game of hide and seek. which seems to work for them, obviously, but which means that digitalization is not really the element that you're looking at. And 55 to 60 vessels on a market that is 830 vessels in operation, i.e. trading, it's not insignificant. So it's very difficult to give you a straight answer to that. I think the market always tries to adapt to what it's given. Every operator looks at its ship, its capabilities, efficiency, and then decide to do one trade or the other. When Brian is talking, well, when we all, but Brian specifically in this slide, is talking about the excess number of ships, I think we are very much talking about the older part of the fleet. And if we would see that, disappearing one way or another, being scrapped or being used, converted in FPSO or what have you, I think the market would quickly rebalance. And that's the issue also that we have today is because the market is so patchy, i.e. with four subsegments, as I said, the list of ships that can potentially do the cargo is very long. Whereas we, along with other big operators, can really make the difference of, okay, but is that ship really the right one to do this cargo or not? A lot of the owners who have very small exposure because they only operate two, three, four, five vessels, they don't have that kind of information and they are completely being blurred buy that lease and say, oh, my God, I'm facing six, seven, eight ships that will compete with me, so I need to drop my pant and I need to set a rate that is very low. And then they have set the rate very low. They don't get the business. But guess what? The guys who was probably the only one or amongst the two ships who could do the business has to match that rate. So that's really what's happening in the market on top of a lot of private cargoes. not being shown to the market and only being revealed once they've been done, to the regret of many people saying, oh, I thought there was far fewer cargoes, but in fact, on the cargo side, we're not very far from 2019. So there's a lot of things that need to be correct, but it's no different than other cycles. Sorry for the long explanation, but the question was complicated, complex.

Yeah, no, absolutely. Thank you for that. That was super helpful. And then just as we think about Iran, you know, clearly, you know, in the U.S., we hear, you know, what's in the newspapers. It seems like the U.S. is really going to drive the decision, you know, maybe not the decision, but the event path of how Iran plays out. You know, in the event that the shadow trade kind of, you know, drifts away over time. How should we think about that kind of impacting the market? And is this something that, you know, just could be a 2022 event and it's part of the reason that you're as optimistic or is it something that is, you know, probably the way it plays out, it's more of a nice bump in the 2023, which is why, you know, I think you mentioned earlier that you're pretty bullish Maybe not on today's rate, but in the next few years.

We don't have a crystal ball, and we've been there near an agreement, and then it disappeared. I think the last time was just before the withdrawal of Afghanistan, and I guess the U.S. administration could not afford that kind of news right after that. So no clue when it's going to happen. We are reading the same sort of headlines. So it's a wild card, and that's not part of the thesis. But when we are looking at it, if it happens, we believe that the story is then very, very simple. You have 1.3 million barrels that are being traded today in those illicit trade. The capacity of Iran is probably around 2 million barrels, so even more than what is being traded today on illicit. And all of that would return to the regulated legal market. And the ships that are currently doing it would immediately become commercially obsolete because nobody would touch them. So you would have a double impact, which is more cargoes available for us to transport, for us and the rest of the regulated market. And at the same time, all those ships, which by then would be very war-in-turn because they are, you know, 20, 21, 22 years, they are not being properly maintained, they don't have certificates, and the scrap price are pretty high, so they would hit the scrapyards in no time, in our opinion. So it's a double whammy, but again, it's a wild card and certainly not part of the thesis that we have shown to you today.

Okay, super helpful. Thank you, everybody. Have a great day.

Thank you, you too.

The next question is from Chris Weatherby of Citi Group. Please go ahead.

Hey, thanks for taking the question. Hugo, I just wanted to follow up going back a couple of callers ago to your comment about a cycle like 04 to 08 in tankers. I just wanted to get a sense of, you know, what do you think sort of the key of driving that degree and duration of strength? Is it really the sort of supply side that you talked about earlier? I just want to make sure I understand. It feels like demand has the potential to be a significant wildcard relative to what, you know, 04 or 08 was. So I guess I just want to make sure I understand, you know, how you guys are thinking about that.

Primarily because of the supply side, very low order book, very low space in the slots in the yards, but also age profile of the fleet, 25% being already in the sort of age profile where potentially people are thinking about scrapping. high very high scrap price and yeah that's that's I would say 70 or 75 percent of the reason why we believe it could be a prolonged cycle like or four or eight now don't get me wrong or four or eight was not only long but it was you know always between seventy and a hundred thousand dollars a day and That's not really what we're saying. What we're saying is that it's going to be very good rates, and it should be very good rates for three or four, potentially five years. But let's not be too excited, too carried away. I mean, when you get $100,000 a day, you indeed need both elements, which is super strong demand growth and very limited capacity on the supply side.

Okay. Okay, that's helpful. I appreciate that clarification. I just wanted to ask a sort of detailed question about the accounting changes, if I could. I know we're going now to a residual value versus a zero residual value. I guess maybe two questions here. Are you moving from 20 years to 24 years to match peers? number one, and then number two, when you're thinking about the residual value, are you taking the four-year average? Is that what you're suggesting to us, or are you just taking a mix of multiple destination residual values at the current point? I guess I just want to make sure I understand the couple of moving parts there.

Yes, Chris, thank you for raising or asking the question. So, indeed, to answer your first question, So we keep our 20 years depreciation rate, or 20 years. So we are not moving there to 25 years. So we keep the duration. And indeed we change from nil to a residual value of $390 per tonne. And how did we define this $390 per tonne? So we use there what we call the four-year moving average. So each year we will update with the new rates. And there we are using a basket of scrap countries, I think Bangladesh. There are three countries in there, India and Pakistan. So there are three countries in there which we take as the reference. And so based on this, this is how we will update on a yearly basis our assessment.

Okay. That's very helpful. Thanks for the clarification there. And I guess last question, just when we're thinking about the debt profile, you've got 60% fixed at this point. Is there an ability to move that higher? I mean, obviously, that's a nice step up from where we were earlier in the year. Is there an ability to move that higher, or what are your expectations there?

So for the moment, indeed, we have fixed what we could fix. And indeed, we continue to look at what needs to be concluded in terms of new loans and use our liquidity. So from that perspective, we will follow closely what needs to be fixed. But the 60% is currently the best we can do based on the loan portfolio and the loan diversification we are currently having. Okay.

That's helpful. Thank you very much for your time today. I appreciate it.

Yeah, thank you.

The next question is from Chris Sung of Weber Research and Advisory. Please go ahead.

Hi, good afternoon. How are you? I wanted to ask about depreciation as well. Just looking at the chart that you guys have on slide 10, I understand it's a four-year moving average. But I guess, is there a floor or ceiling at what you guys would determine the scrap values to be at? Because I could just see looking at this chart in 2016, for instance, the four-year moving average is around 400 versus the current scrap, which is like 250 or so. And I guess just in that scenario, you would be depreciating at a higher value than current market. So I just want to understand what goes into that process.

So indeed, it's a good question, Chris. It's also a question that we discussed thoroughly with our auditors. And indeed, when we look over how the 20-year cycle, this $400 average is there. So we had somehow to define an average which made sense. And looking indeed to the last years of high prices of scrap steel, you see there indeed the $600 per ton. We know that this is a bit too high and will not keep probably over the 20 years lifetime of a vessel. So, hence, we have to monitor and see, compared to this 20-year average moving, compared to the four-year cycle, and then, indeed, to see how we can cap this. Because, indeed, I agree with you that we have to look to the tendency, and this tendency is based on the last 20 years, and we have to keep this as a cap moving forward. This is how we think about it. But indeed, we have there to test and to see how it works in reality. We did know our first step and we think we are still conservative. So hence, something which we have to explore and see how it further works. But indeed, we are tending to keep the cap over the 20 years lifetime of the vessel as a moving average based on that principle.

And by the way, this is very much the same for the other tank companies, right? So in the past, zero was zero. You only need to look at it on a yearly basis because that's your policy. But once you go to a scrap value, then obviously you need to look at the market. And as Liv explained, we didn't want to bring more volatility into the P&L, far from it, or into the balance sheet. So you need to look at it with a certain number of years of average. That's what we're doing. But also taking into account the last 20 years, simply because 20 years is the lifetime of a vessel. But everybody is facing a little bit the same issue. And I don't think that the market sees the little volatility when there is a small correction in the depreciation rate.

And it's because of the last years that the scrap price is so high that this topic came up and why we changed. Because of this high pricing of $600, this is why we had to change and move towards our peers in that direction. So hence this change now at this moment.

Okay, thank you for the color on that. And I just want to move on to another point that you guys had in the press release. You guys were able to successfully try the B50 biofuel. And I wanted to just understand, would you think B50 allow UNF to generally meet EEXI compliance, or will you guys be looking to try a higher biofuel blend?

I think the idea behind it is really to be helpful in the energy transition. And quite frankly, we don't believe that it's a long-term solution, biofuel. certainly not given the quantity that will be produced and the competition that we will face with other industries. But nevertheless, it is helpful to see how it reacts in the engine. We didn't pay a premium to get that fuel, so that's also very important. There is an incentivization scheme that is present in Rotterdam, which meant that the Dutch state is indeed giving subsidies to the guys who are producing it, So the only thing that we did there is try something else. And then obviously, you need to pay attention to the chief engineer on board, making sure that everything is running smoothly. And then you deliver the data and whatever you have discovered to the people who are making that fuel. I think that whilst it's not a long-term solution, every little helps in the short term. So to answer your question, first of all, happy to lower carbon emissions whenever we can, especially when we don't increase the cost. Secondly, as far as the regulators are concerned, this fuel is produced in Europe, in the Netherlands, and it remains to be seen whether it's going to be acceptable or not under Well, there are three regulations that are coming in place from the EU perspective. So it's a little bit too early to tell you whether it can play a role or not. But the fact that we have tried it means that if it would be accepted, then obviously we would know how to handle it. And if there is an issue, we would know how to mitigate them.

Perfect. Thank you. Thank you, Hugo. And just one last one. I'm just going to squeeze in just On the cadence of dry dockings in 22, I know there's 16, is this going to be kind of front-loaded? Or maybe tell me how to model this.

Yes, we are trying to front-load as much as we can because we are very optimistic about the second half of the year. So obviously you're always trying to see or to take advantage of the low rate, if I may use that expression. It very much depends on the voyages, but the ambition is to try to front-load it as much as possible.

Great. That's it for me. Thank you, guys.

Yeah, we will update our quarterly basis where we are on that program.

Great. Thank you, Hugo.

The next question is from Magnus Furr of H.C. Wainwright. Please go ahead.

Yeah, good afternoon. Just one question related to the supply of oil. You upgraded your outlook there. And I'm just curious, you know, with $90 oil, OPEC has all the incentive to increase production, but January production was only 50,000 barrels compared to the 400,000 barrels announced. And I would be somewhat concerned that OPEC is struggling to increase production in And, you know, the IAEA is looking at 3 million barrels plus in 2022. But what gives you confidence now on your upgrade there that the supply of oil is going to increase?

Maybe if I can jump in there. Yeah, go ahead. I was going to say there's a similar sort of answer to before. You're absolutely right. We're obviously disappointed as well that it's been a very patchy level of production growth, as you say. And in particular, the numbers for January look to be, in December, seem to be a little bit lower than we would have expected, in particular in areas like West Africa. But again, as I mentioned before, there are areas where we have seen sort of decent growth in Saudi and Kuwait and UAE. And that agreement changes under the OPEC Plus terms in May. That's a potential 1.5 million barrels per day with Russia as well. We'd love to see a situation where not only is the production growth coming through, but also it's coming through spread around the world so that oil has to move even further. But the reason we upgraded is because we see this pressure, in particular in the second half, rising, as you say, because of the rise of the higher oil price. And then secondly, obviously, we've got the return of, we believe, along with people like the EIA and PLATS, suggesting that we'll see more growth coming through from the U.S. So PLATS, for instance, are talking about 1.5 million barrels per day coming through from the U.S., again, second half weighted. So I think it's more a question of what we see in terms of some of the particular production growth areas, albeit a little bit specific, that we see that growth continuing. You're absolutely right to highlight that, again, it's been, if you like, the stop-start nature of this recovery has been reflected in the fact that the production growth has been so sporadic and so stop-start. But we certainly get a sense, not only from the official commentary, but also from some of the conversations we're having with the client base, that that supply growth will begin to transit into more sustainable levels of increase going forward.

All right, thank you. I mean, we've been talking about Omicron virus having an impact on the market here, but don't you think it's more related to that OPEC has been unsuccessful in increasing production? I mean, if we could see another 500,000 barrels to a million barrels, I mean, I think the tanker market would look a little different.

I think personally, yeah, that's a very fair comment. But at the same time, I think the two go hand in hand a little bit in that we're not really seeing the refinery participation in terms of order flows of cargoes that we would anticipate. And that goes back because of that stop-start nature and Omicron reducing that demand and that business cycle, if you like, duration and confidence. So I think you're right. I think it's a combination of the two. As you said right at the start, as Hugo said on the preparatory remarks, you know, the refinery don't get us wrong, we're not happy with where we are, and it's frustrating that all of these different factors and the moving parts that we always see in our market, that we're not getting maybe the full value from all of them. But, you know, we do anticipate that that will come through, and we're certainly hopeful, as we now seem to be in a better phase with regard to COVID, in particular in Europe, as we come out of restrictions, that that should start to get some traction. So the oil price is clearly going up because of, if you like, a the lack of equalization between the supply and the demand. But we do anticipate that we're going to start to see some proper benefits coming through from that. But we have to be patient.

All right. Thank you, Brian. Just one more question on the depreciation policy. Will that be effective as of second quarter or when we start seeing those changes?

It will be effective as of first quarter. Yeah, it's first quarter. First quarter, yeah.

All right, very good. Thank you. Thanks, Mike. Thank you.

You're welcome. This concludes our question and answer session and today's conference. Thank you for attending today's presentation. You may now disconnect.