CMB.TECH NV Ordinary Shares

Good day and welcome to the Euronav 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 touchtone phone. 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 Q1 2022 earnings call. Before I start, I would like to say a few words. The information disclosed and discussed on this call is based on information as of today, Thursday, 12th of May, 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 statements of historical facts. All forward-looking statements attributable to the company or to persons acting on its behalf are especially 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 and 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 going forward. Actual results may differ materially from these forward-looking statements. please take a moment to read our safe harbor statement on page two of this slide presentation. I will now pass on to Chief Executive Hugo de Stoep to start with the content slide on slide three. Hugo, over to you.

Thank you, Brian, and good morning or afternoon to wherever you are, and welcome to a first quarter earnings call. I will run through the Q1 highlights before passing on to Liv Log or CFO to give more details on the financial with a focus on our balance sheet and P&L. Brian Gallagher, our head of IR and research, will then highlight some key trends in the wider tanker market and Euronav's positioning within it, before I return to summarize our strategy and outlook. So turning to slide four and the Q1 highlights. It was a busy quarter for Euronav on many fronts, but we're particularly pleased with our fleet modernization program, which has a strategic focus with nine vessels transaction during Q1. Indeed, we sold four older VLCCs and acquired two modern ones, and we sold one Suezmax jointly owned and took delivery of two brand new SuperEco Suezmax that we had purchased last year as they were still under construction, but for a defaulted party. This, in turn, has improved further the age profile of our fleet. Freight rates were under pressure for most of the quarter, but the onset of the conflict in Ukraine in early March caused an important dislocation in the oil markets, which in turn has proved to be a positive catalyst for tanker markets. This has driven sequential improvement in freight rates across all segments, starting specifically with smaller ships benefiting from the Russian dislocation and gradually impacting larger ones. Whilst freight rates in absolute terms remain disappointing, the direction of travel is encouraging, especially in Suezmax, with rates on average at $20,000 per day for the current quarter. I will return later in the call to expand on our thoughts on some of these trends and the outlook, but I will now pass over to Lever to provide more details on the financial. Lever, over to you.

Thank you, Hugo. Before I start, you will have noticed our financing and market efforts are being recognized, which reflects on the hard work by our employees. Turning now to slide 7 and the balance sheets. Focusing firstly on our balance sheet, which remains strong and supporting in financing the expansion of our platform. Our two-year liquidity runway remains core to our strategy. And whilst lower than Q1, it is sufficient to deal with more duration to the current down cycle. Leverage has picked up towards our self-imposed limit of 50%, but our availability of financing remains good. And optionality and further fleet recycling readily available given a buoyant sales and purchasing markets. I would now like to dive into our income statement and give more detail on Q1 performance on slide 8. As Hugo highlighted earlier, whilst small, freight rates continue to sequentially improve quarter on quarter. Strong cost control has allowed us to progress on Q1 2022 even though we have had to incur some exceptional costs during the quarter related to our corporate background. As we highlighted in Q4, our depreciation approach has been updated and it was pleasing to bank a capital gain on some of our legacy sales and leaseback arrangements during Q1, which we announced in early January. I would like to spend a brief moment on our fuel hedging which continues to be a net benefit for Euronav. Euronav executes a 100% hedging program to manage volatility of the company's fuel stock. The paper position which is booked in the financial result of this quarter for a total amount of minus 16.3 million is more than compensated by the realized gains on consumption and the unrealized gains on the fuel stock for a total amount of $20 million positive. I will now pass on to Brian Gallagher to run through current thoughts on the tanker markets.

Thank you, Liva. On slide 10, we look at the tragic events of Ukraine and the impact that they've had from the Russian dislocation, which has had a major impact on our market. Effectively, this catalyst has triggered a set of reactions which have been largely positive for tanker operators. Slide 10 shows the before and after effects of Russian dislocation and also looks at how we anticipate it developing. On the left-hand slide, you can see the relatively stable 4.5 million barrels per day or so of Russian exports that were largely seaborne-driven that were made every single day before March. Most of this eastbound oil to Far East markets will continue to remain unchanged. albeit under some pressure from sanctions. The key impact, we believe, has been and will continue to be in the Western or Baltic ports, which have traditionally exported between 2.5 million and 3 million barrels per day to the EU. This trade was performed by Suezmax and Afromax vessels. These ships are now sailing around Europe and directly into Far East markets, taking this Russian oil very long distances. To replace this lost oil, the EU is already taking more oil from the Middle East and from the Atlantic, namely Brazil, North Sea, US ports, as well as West Africa. This trend, we believe, will deepen and strengthen. And then we also anticipate that Russian production will probably fall by around about 1.1 million barrels per day. This has seen the sector benefit from slightly lower and smaller volumes of crude moving. But the crude is now moving much greater distances or ton miles. This impact still has some way to run, we believe, and will take over the summer months to fully impact the scale of this dislocation. But overall, it is a very strong positive for the tanker market sector. And as you can see from slide 10, we believe the spillover effects are already starting to affect and will continue to be a positive effect of the VLCC market. It's important to remember that VLCCs cannot discharge a load in any of the Russian ports. Therefore, it's never really been a market for VLCCs. Hence, the impact has been largely seen on Afromax and Suezmax categories. Catalyst, for want of a better word, has been the key feature in our market over the last quarter or so. And if we now turn to slide 11, we can see other short-term signals which are largely positive. Four key factors we addressed in slide 7. Bottom left, US crude exports have risen on a full weekly average basis by over a million barrels per day, or 41% since mid-January, as a mix of increased production, release of strategic reserves, and attractive inter-oil pricing has boosted exports. These barrels tend to be very long haul in transportation and support building of a better outlook when considered with top left and looking at the recycling activity. Top left shows that this has begun to rise again. In April alone, we saw six Suezmax exit the global fleet, which is a very large number on a month's basis. And this follows the aftermath sector, which has been shedding tonnage historically earlier than VLCC and Suezmax in their recycling cycles. Top right underpins what we've been seeing on a day-to-day basis, volatile but rising crude volumes, and April recorded the highest global volume on a monthly basis in two years. This is another encouraging data point. Finally, if we look at bottom right, we can show the direct impact of the Russian dislocation. Russian ships made up around about 7% of the Afromax fleet, and about just under 3% of the Suezmax fleet, and this is enough to have driven a much tighter market in those categories, and hence freight rates rising quickly and to extreme levels on specific routes. VLCCs cannot load, as I mentioned before, or discharge directly into Russian crew ports, so it's not had much of a direct impact, but we're now seeing a substitution effect as VLCCs are being used to replace the barrels lost from Russia to the European ports from the Middle East and from the Atlantic. We now turn to slide seven and the medium-turn drivers, which continue to build positively for our large crew tanker market. Slide seven is a slide which looks at the mix of the immediate future on the left, highlighting the still very heavy special survey program we have for older tonnage, namely those ships going through their 20-year special survey in the VLCC and Suez Max sector. This represents around about 4% of both categories alone over the next 12 months. And again, this is a very important point for owners to decide whether they want to continue to remain in the sector or take the very attractive scrap prices that are currently available. The right-hand part of the chart looks at the absence of new orders of VLCCs. We've not seen a VLCC order since early July and the reasons behind this. Some interesting work that Fernley's scheduled this week indicates that it's not just an absolute dollar issue, although that is important. A brand new plain vanilla VLCC costs $150 million at the ports when reported today, And this also means that in order to make an economic return of 10%, the analysis that they conclude needs around about $46,000 to $47,000 per day in terms of a freight rate in order to justify that entry price. With steel prices remaining high and the yards full in terms of the shipyards constructing ships, it's difficult to see how this barrier to entry is going to be lowered anytime soon. I'm now going to switch gears and look at what was an important milestone last week for Euronav. namely the unveiling of our decarbonisation pathway that we now highlight on slide 30. In summary, there are two broad stages to our approach on decarbonisation, which will end up with us being net zero by 2050 with an ambition to beat that timeline. Between now and 2030, we're looking to reduce the energy we use as well as investing in future technologies before the second stage from 2030 onwards, where the focus will be on adopting cleaner energy and scaling up that investment in technology. Reducing our CO2 emission intensity by 2030 by 40% will be an important pathway and milestone on this journey and on our commitment to get in line with the Paris set trajectory by net zero by 2050. We believe this is very, very attainable. And in fact, we're very confident we can actually beat this time, as I mentioned earlier. Euronav's attributes in managing the energy transition and decarbonization are, we believe, amongst the best in class already in the tanker sector, if not in the wireless shipping community. We encourage all who are interested in Euronav to review our 70-page presentation from last week, which is on our website, with a transcript and a replay also available. I will now pass back to our Chief Executive, Hugo Destoux, to give some concluding remarks. Hugo, over to you.

Thank you, Brian. The Euronav platform is working well, is well-equipped to deal with the next stage of the cycle with high-quality assets, a strong balance sheet, and the right level of liquidity. We have addressed and will continue to address our fleet age profile as well as the positioning of that fleet. We have also laid out how this platform going forward will decarbonize and meet the challenges of the energy transition. And we have outlined this recently in our ESG event. We believe that our platform will deliver enhanced return for our stakeholders going forward. Let's now turn on the positioning in the past cycles on slide 16. Unanav continues to manage its business as we have always done, in a disciplined and focused manner, applying high governance standards and a methodological approach across the platform. As both Brian and Liv have highlighted, we have been busy in positioning ourselves for the next stage of the cycle. It is important to remember that we are in a cyclical industry. Consolidation opportunities are often present, but timing is always the key. The chart on slide 16 smooths out the VLCC resale price and the one-year time charter rates, which are two key variables within our markets. Historically, we have executed consolidation transactions at similar points in the cycle, eight years ago with the acquisition of the Maersk crude tanker fleet and four years ago when we merged with Generate. We now proposing to merge with Frontline and to offer a material consolidation transaction in order to deliver further shareholder value as we enter into the next stage of the tanker market. This exciting development and merger of two leading companies in the space is a strong signal of our confidence in the sector. Turning now to the summary slide and outlook on slide 17. Another upgrade is driven by the catalyst that has come in tragic circumstances from the dislocation from the Russian oil situation. This will drive, we believe, sustained change in tonnage, as Brian highlighted, in swapping out Russian barrels to Europe for those from Middle East and the Atlantic, and Russian barrels transported over much longer distance than before. Elsewhere, demand and supply of oil offer some encouraging data points with small but consistent upward trends. The cell supply looks well underpinned given the order book at 25-year lows and global fleet age profile at 20-year highs. Thank you for your time and attention. With that, I will pass it back to the operator for your question.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And our first question will come from John Chappell of Evercore. Please go ahead.

Thank you. Good afternoon. Hugo, I understand there's sensitivities about what you can say regarding the proposed frontline merger, but maybe you can just help us understand the next steps. I know the AGM is next week. What does a term sheet mean, you know, versus an actual closed deal? What steps need to be taken to get the term sheet to an actual proposed deal? Is it just clearing the AGM and getting the board on board, so to speak? And just what are the other building blocks to bring this to finality?

Yeah, thank you, John, and yeah, you appreciate that. There is a limited amount of information we can share on this call, but you're absolutely right. The first step is to go over the AGM next week and then have the board reconfirm the merger. And then after that, we will update the market with the next steps, the timing, and some other bits and pieces that we've been working on. But we can only do that after the AGM.

Got that. And then I know this is a stock-for-stock deal, and you still are sitting on a fair amount of liquidity, but are you kind of in a strategic holding pattern until there's more clarity on this plays out, or can you continue the rejuvenation of the fleet either through sales or purchases until you get to the finish line on this deal?

No, absolutely. I mean, what you've seen is that we are not resting on our laurels. It was a very busy quarter on a number of – SHIB's transaction as we have explained in the preparatory remarks and we have more in the pipeline indeed. So the two companies are being run independently until a merger happens and we will continue to work hard both on the spot market and DC front but also on the fleet rejuvenation and that's something that we believe the right time for. Values are already ahead of the market, as you've seen. I mean, very strong numbers for the vessels that we sold. And then we found some opportunities at what we believe are attractive price, especially when you bring in the element of consumption. because it's true that the four vessels that we sold were designed to go at high speed, speed that we were performing 10, 15 years ago, whereas the two VLCCs that we purchased were designed to go at the current speed and very economical with the latest eco-design. The same for the two Suez Maxx. And as you know, our VLCC fleet is relatively modern, but our SUSEMAX fleet needed some rejuvenation, and that's what we've done last year when we purchased and order a purchase contract and order three VLCCs, so a total of five. So all of that is part of the strategy, and that strategy doesn't stop. To the contrary, I think that the more the merrier, and hopefully the market appreciates it.

Okay, that's helpful. We'll call that my A and B to question one. My follow-up question for Brian, you know, this diesel shortage issue seems to be gaining a lot of momentum, and clearly, you know, your Vs and Suez's carry crude. Have you thought about the secondary and even tertiary fallout of these global diesel shortages and what that may mean to the crude markets?

Yeah, I mean, I think, as you know, John, better than anyone else on the call, you know, in our shipping markets we work in, in weeks and months, and that's the duration of our voyages, whereas obviously capital markets see something today and they want to know what the impact is tomorrow. So we did try to stress on the call we anticipate a lot of this Russian dislocation has still got some way to go. We're in the early stages of it from a shipping market perspective. In direct answer to the diesel side of things, yes, I think we're getting such an extreme element of dislocation there. You're seeing it with very high rates. that I think we would expect to see some spillover. The arbitrage, quite frankly, can't last forever. We're already seeing that arbitrage, which is beginning, doing some heavy lifting of the VLCC rates, as we're seeing Suezmax and Afromax cargoes being merged into VLCC cargoes. And I think you'll get some blurring at the margin with the product market as well. But it's a bit early yet to have actually seen that. I think there's some way to go on the arbitrage within the tanker categories. And if we have more duration, and it looks like it's likely into the summer months on this diesel side of things, then that certainly will come through. And you're hearing that from some of the players like Valero, et cetera, directly involved in that space, that there does seem to be some duration. But I think also one absolute output that we would expect to see is further continuation of the US exports of crude, because there's obviously some slated deliveries from the strategic reserves, and they are obviously going to come over, and a lot of that is being used as feedstock into the European refineries, because we know expressly the U.S. refinery slate is already full, and they don't need that crude. So absolutely, there's some absolute and secondary benefits, I think. But I think for the diesel side of things, I think we'll have to wait until next quarter before we can give a bit more clarity.

Okay. That's very helpful. Thank you, Brian. Thanks, Hugo.

Thank you.

The next question comes from Frodo Morkadal of Clerks and Securities. Please go ahead.

Thank you. Hi, guys. First question, regarding the proposed merger with Frontline, is it correct that the shareholder vote with 75% majority is needed to get it passed?

It's a little bit more technical than that. So there are many ways to approach a combination, and obviously that's what we're working on at the moment. So if you indeed think about a full-fledged merger on day one, you need 75% of the votes that are being presented at a special meeting. But as I said, there are other structures that could be contemplated. which require a lower amount of food.

Okay, like an acquisition, I guess.

Well, unfortunately, I cannot tell you much more about it, but you need a simple majority to just take control of a company, of course, and that's 50% in one share.

Yeah, understood. Second question is on the market. It seems like the Russian oil exports have been holding up fairly well so far, but according to the International Energy Agency, which had a report today, they said that on May 15th, the major oil trading houses are supposed to have to halt all transactions with Russia, I guess. So the question is, do you foresee any immediate impact on the tanker market from that winding down process?

I think it's fair to say that you have the efficient sanctions and quite frankly, people should make a difference between sanctions and an embargo. So the sanctions is what we have seen in Venezuela and Iran, which are supposed to cover everything on a worldwide basis, using the currency as a way to preempt people from trading oil, namely the dollar, whereas embargo means that you cannot export or import European into the U.S., the Russian oil. So there is a series of... so-called sanctions, but also embargo towards the end of the year that are being put in place. And then you have a lot of people who have declared that they will do this or not do that as far as the Russian oil or other Russian commodities are concerned. As Brian said, we've seen definitely the first impact of that into the smaller size, the Aframax, that has a spillover effect, as you've seen in our numbers, into the Suezmax. And quite frankly, we went out of the trough on the VLCC probably because of that as well. And as Brian said, this is because of combination. So to answer your question, yes, we should see more of that happening. And therefore, that should benefit the entire tanker market. Again, in the same order, smaller ships, because the Russian is usually transported on Aframax LR2 type of vessels. but with consequential consequences on the other market because the longer the distance you need to transport the oil over, the bigger the ship you need for obvious reasons of economies of scale. So what we anticipate to see Future is probably liftings being done on smaller ships and then lighted into VLCCs to go all around the world and probably the Far East, India and China sort of place to carry the Russian oil where those people will be able to buy it. Because as I said, this is an embargo, not strictly speaking sanctions by the Americans.

Great. Thank you for the caller. That's it for me. Thank you.

The next question comes from Tij Berkhelder of ABN AMRO ODDBHF. Please go ahead.

Yeah. Good afternoon, gentlemen and lady, of course. Three questions and coming back on the, let's say, the merger announcement. In last week's presentation, you again highlight that you expect significant synergies. Can you roughly quantify what is significant for you? Is it 10 million per annum, 30 million, or $100 million per annum? Then secondly, can you somehow give more clarity and maybe quantify on your expected cost synergies and expected revenue synergies? Thirdly, then what is still not clear to me, can you in any way explain where the merger ratio is coming from? Why 145 frontline share for one year enough share and not, for instance, something like two frontline shares for one year enough share? Those are my questions.

Yeah, thank you very much for that. Again, we will give a lot more information about the merger after we have had our AGM. It is obvious that we expect significant synergies, and indeed there are different buckets. I think on the revenue side, it is about utilization. And so when you think about traditional tram shipping, we usually carry oil from production place to the refineries. And then we come back empty. But obviously, the bigger the fleet, the more optionality you have on triangulation and these sort of things. So we will come back with a hard number, even though that hard number will be an estimate, obviously. On the other items, The logical ones are GNA. As we said, we don't expect a lot of synergies in the GNA because two companies are structured in very different ways. So Frontline is outsourcing part of the services whereas Euronav is more vertically integrated and the model that we are thinking of is a combination of both. So there will be synergies that will be quantified and we will announce it to the market with more precision and obviously how do we get there. On the OPEX, Again, this is very logical. When you're thinking about procurement, this is economies of scale. You are dealing with more volume in pretty much everything that you buy. There are some bigger elements than others when you think about the fuel that we buy, when you think about the lube oils. Obviously, this is a numbers game. As always, if you are a more important client for your service providers, then you can bargain a better price. Finally, and maybe importantly on the financing side, we believe that the platform will be very attractive to many people providing capital to companies, especially on the debt side. And here I'm thinking about the banking side, but also the bond side, which should benefit from an even better credit rating So it's too early to give you hard numbers, but we are working and crunching the numbers and we'll communicate that in due course and certainly ahead of a merger proposal that will be put before both sets of shareholders. As far as the ratio is concerned, I think we didn't want to come to market with the calculation behind it. That was the result of the negotiation. Usually, when you do that in shipping, you look at the NAV of the two companies, and the NAV is a relatively simple calculation because we have hard assets. ships, namely. And then we have a certain amount of debt, and that gives you the NAV number. And that is the starting point of any conversation, and the rest is about negotiation.

Okay. Clear. Thanks.

You're welcome.

This concludes our question and answer session. The conference has now also concluded. Thank you for attending today's presentation and you may now disconnect.