Hafnia Limited

Welcome to Hapnia's Q1 2020 Financial Resource presentation. We will begin shortly. You will be brought through the presentation by Hapnia's CEO, Michael Skoll, CFO, Perivan Eshel, VP Commercial, Soren Winter, and EVP, Head of Investor Relations, Thomas Anderson. They will be pleased to address any questions after the presentation. Should you have any questions, please press star one on your telephone keypad or type your questions into the chat box on the website. You will receive further instructions as required. Certain statements in this conference call may constitute forward-looking statements based upon management's current expectations and include known and unknown risks, uncertainties, and other factors, many of which Hafnia is unable to predict or control. that may cause Hapnia's actual results, performance, or plans to differ materially from any future results, performance, or plans expressed on implied by such forward-looking statements. In addition, nothing in this conference call constitutes an offer to purchase or sell or solicitation of an offer to purchase or sell any securities. With that, I'm now pleased to turn the call over to Hafnia's CEO, Michael Skoll.

Thank you very much. As mentioned, my name is Michael Skoll, and I'm the CEO of Hafnia. I would very much like to welcome you all to our first quarter 2020 conference call. As mentioned, I have today with me our CFO, Perry Veneto, our Vice President of Commercial, Sean Venter, and the Executive Vice President and Head of Investor Relations, Thomas Anderson. Before us, we'll present the Q1 2020 financials for Hafnir. So we'll move on to slide number two, which is the disclaimer slide, which I would like everyone to be aware of the mandatory disclaimer that we have and read it very carefully. We move on to slide number three to talk a little bit about the first quarter 2020 highlights. So first of all, we addressed the first quarter financials, and the time shot equivalent earnings for Hafnia was $193.5 million, and EBITDA was $129.6 million. The commercially managed pool business generated an income of $5.9 million and the overall net profit for the company was $77.1 million. EPS or earning per share was 21 cents per share. We had a return on equity of 27.3% and the return on invested capital of 14.3% both on an annualized basis. At the end of the quarter, Hafni had a total of 102 vessels, hereof 87 owned and 15 chartered in. The average estimated broker value of the owned fleet was $2.3 billion. As of the 15th of May, 70% of the total earning days in the second quarter were covered at $28,921 per day. Hafni will pay a cash dividend of 10.62 cents per share. We move on to slide number four. So in the first quarter, the product market was very heavily influenced by the very tragic COVID-19 outbreak. Countries all over the world adopted various containment and lockdown measures to limit the spread of the virus. The virus and the consequent lockdown had a historical dampening effect on the demand for refined oil products. We saw that members of OPEC Plus failed to reach an agreement on crude production costs, which resulted in an all-out price war, as members were no longer bound by output restrictions. This created a dramatic oil supply of oil and oil products, which both benefited freight rates. The demand for jet fuel was most significantly impacted as international air travel was paralyzed by global travel bans. Reduced domestic land-based travel also saw that demand for gas oil fell correspondingly. The dramatic fall in food prices on the back of weak consumption environment created trading opportunities where spot oil prices were lower than future prices and the buildup of inventories. This led to strong demand for floating storage, benefiting the tanker market in general. Move on to slide number five. So focusing on the market activities in the second quarter of 2020. We saw economic activity started to recover in China in April, while many economies in the West and other parts of Asia went into lockdown resulted in an additional decline in demand for refined products, leading to land storage filling up, while container steepening fueled a further demand for floating storage for refined products. As tanker supply was reduced by port congestion, freight rates across most clean tanker routes rose to an all-time historical high in late April 2020. In the second half of May, freight rates experienced a downward correction, The agreed production costs of $9.7 million per day by OPEC Plus members in April started to play a part in improving supply-side fundamentals of the oil market, while the rate of recovery of oil demand in the medium term triggering a de-stocking of floating storage. Looking a little bit into the various segments and what effect that had, we've seen the following. The handy segment is benefited from the filter-down effects of the larger vessel segments on the European continent and the Mediterranean, which increased demand accordingly. The average year-to-date clean and dirty anti-earnings are in the range of $20,000 to $25,000 a day. Looking at the MR and the LR-1 vessels trading west of Suez, the flow of naphtha and gasoline from Europe to Asia on MRs soared in April, as the LRs were diverted to loadings in the Middle East and tied up in floating storage. The average year-to-date earnings are $22,000 per day for MR vessels and $30,000 per day for LR1 vessels. Looking at the same sizes, i.e., MR and LR1s, but instead sewers, we saw that low crew prices, excess crew supply from onshore storage, and demand destruction from the coronavirus created a steep contango structure leading to increased demand for clothing storage. The average year-to-day earnings for MRs in the Far East are $25,000 per day. For MRs in the Middle East, about $24,000 to $26,000 per day, and LR earnings around $35,000 per day. Looking at another important part of the business, which is the bunker site, We saw that at the end of the first quarter, the spread between high sulfur fuel oil and very low sulfur fuel oil was $80 per metric ton. The spread narrowed to $48.50 per metric ton with falling crude oil prices, but rebounded to $68 in Singapore as the overall prices made some recoveries. That was the end of the commercial view on Q1 and Q2. So, Perry, why don't we move on to the next few slides?

Yes. Thanks, Michael. And good day to everyone on the call. As Michael correctly said, the first quarter was Havnia's strongest quarter yet, where the industry benefited from a winter market in combination with the oil industry building floating storage. We feel that we got a very good result of a net profit of $77.1 million. and pay a dividend of in total $38.5 million, or 10.62 cents per share. The income from the management of third-party vessels of our pool business in the first quarter was $5.9 million. The effort resulted in an annualized return on equity of 27.3%, and a return on invested capital of 14.3%. The balance sheet is strong with an equity ratio of 41.9% and a liquidity position of $128 million. The increase of working capital is mainly a result of higher freight rates. Save for two LR1s in our Vista joint venture, there is no further CAPEX for new builds. The remainder of the investments for these two vessels will be drawn from the arranged bank financing. Then zooming in on the next page, on page 7 on the pool economics chart, Let me explain that a little bit further. Hafnir charges a commission for the management of external ships based on two elements, a fixed fee of $250 per day per vessel and 2.25% of net TCE earnings made by that vessel. So in an example where a vessel makes $20,000 per day, Hafnir will make $250 plus $450 totaling $700 per day. The $250 fixed fee basically covers the fixed costs of running the pool for external vessels. Based on a fleet of 80 external managed vessels and a TCE hire of $20,000 per day, Hafnia generates an income of $13 million before tax. And as I said, for the quarter, the pool business generated $5.9 million before tax. Michael will now present as of slide number eight.

Yes, so moving into slide number eight, talking a little bit about some of the reasons for Huffman's position today and the strong result that we think we have presented. The result is not just a consequence of one thing alone, but a combination, we feel, of six very important items. It's a very strong commercial platform, a combination of the lowest operating cost and lowest cost of funding in the sector, no fee leakage, which is full alignment really between all stakeholders including management and shareholders, very good stewards of capital, and obviously very strong market fundamentals. So we believe in general that the company has a very strong earning potential with a low cash flow breaking even of $13,625 per day expected for the year, a very balanced capital structure, with a targeted fleet loan-to-value of between 50% and 60%, and a highly attractive dividend yield, potentially combined with a transparent dividend policy. Sorry, potentially combined with a transparent dividend policy. So the target dividend payout ratio of 50% of annual net profit from operations, intended with quarterly payments. Moving on to slide number nine. So as the title on the slide says, IMO 2020 was supposed to be the hot topic in 2020, but it turned out to be anything but a hot topic. The real world has simply changed so dramatically in the last six months with the following main events happening. Part of the Costco tanker fleet being OFAC listed, the attack of the Aramco refinery, the bombing of an Iranian tanker, oil prices going up above $60 per barrel China locked down due to COVID-19. The before-mentioned Costco OFAC listing lifted. Europe, the U.S., and India went into lockdown due to COVID-19. And a barrel of WTI crude oil would cost a minus of $37. Who could have foreseen that? And definitely a good reflection of the weather we've been through over the last two quarters. We move forward into slide number 10. And basically, as discussed in the previous slide, the overall market has been influenced by many of one-offs in the last six to eight months, and we have constantly seen increased rate rates, although with plenty of volatility. However, the rational values have seen little change as an indication of an expectation of a short-lived rate spike. Move on to slide number 11. So in the last 20 years, we've basically seen five periods with five to six quarters of inventory draws. There have been various reasons for the inventory draws, where the first ones were driven by economic setbacks and production costs, while the later ones have been caused by a strong demand, outpacing production growth. Looking at tanker sizes in general, we've seen a period of weak market when the oil market is in rebalancing mode, However, the production growth is by far more important for the tanker market compared to demand growth for oil. We move into slide number 12. As I think everyone is aware, the floating storage has in 2020 been a significant driver for the overall tanker market with a massive increase in capacity used for floating storage in the second quarter. However, we have seen it peak a few weeks ago, and it seems to be trailing off slightly. As an illustration, we've shown the drop in oil demand following the financial crisis in 2008 to 2010, versus the forecasted drop in oil demand in 2020, and global oil demand declined by approximately 4 million barrels a day from December 2007 to March 2009, and it's expected to drop by 25 million barrels a day in the second quarter of 2020. Moving to slide number 13. Due to the COVID-19, the expectations for 2020 have changed somewhat, and it's now expected that growth in expected seaborne product demand will be negative in 2020, but partly compensated by increased floating storage. We still have a historically small order book. We had a lot of increased refinery outage in the early part of 2020. And the ton microbe is higher than the fleet growth for 2021. So these are the main highlights, really, of how we look at the demand and supply situation, also taking a little bit of a forward look into 2021. And we still like to focus on the fact that Before we came into 2020 and before we had the current situation with floating storage, the supply of vessels, i.e. the order book, was historically low and is still historically low. So even when leaving and trailing off the floating storage situation, we're still going to be in a very beneficial position as far as new tonnage and supply is concerned. We move into slide number 14. and speak a little bit about governance. At HapNet, we have a very strong focus on our corporate governance, and things we'd like to highlight in this presentation are as follows. It's a highly reputable board of directors. We have a strong seasoned audit committee, internal audit, extensive authorization metrics, clearly identifying the authority throughout the entire organization, remuneration committees, and fully aligned incentives between management, stakeholders, shareholders, and with no fee leakage, all safeguarding to be a best-in-class governance structure. We move to slide number 15 and look a little bit at the ESG side. We'd like to say, finally, as the world's leading product company, Hathaway should be positioned to help create the future of responsible and transparent maritime energy transportation to the world markets. Through innovation and collaboration, we commit to be a trusted partner for the business and communities we serve and to shape our world and oceans for future generations. And we're very happy to be part of the Getting to Zero Coalition, and that's an important part of our ESG strategy, as well as many other initiatives that we're currently focusing on. So this kind of forms the last slide of our presentation. And with that, I'd like to open up the call for questions from the investors and other people on the call.

We will begin our Q&A session now. Should you wish to ask questions, please press star 1 on your telephone keypad. Once again, ladies and gentlemen, if you wish to ask a question, please press star 1 on your telephone keypad. Once again, if you wish to ask a question, it's star 1 on your telephone keypad. We have our first question from the line of Mr. Ryan Flynn. Please go ahead.

Yes, thank you. You've helpfully provided information on where the vessels were covered at as of 15th of May. I'm curious if you could give us some directional information on when during the period those vessels were covered and and whether you expect that figure to fall now that rates in general have dropped back from previous peaks. And my second question would be regarding the share buyback. I note that you've been active in the market repurchasing shares, and that forms a second part of the capital allocation policy in addition to the dividends. So what are your thoughts regarding the buyback going forward, please? Thank you.

Yeah, thank you for the questions. I think maybe, Per, if you want to say a few words on the share buyback, I can start maybe by talking a little bit about the earnings side of it. So basically, maybe just to elaborate a little bit, so when you pick a date like the 15th of May, that's basically, we've been trying to highlight what the situation looks like as of that day. So basically, you know, you can go in and look at, I guess, the daily broker valuations and see, you know, what the current market was up until that day, and that's what it's going to reflect. So the balance 30% is really just going to be a combination of how we see and how markets will develop basically from, you know, the last week and a half and the balance of the period. But, you know, I think what you're going to be seeing as far as earnings are concerned is that, you know, The bigger ships, for instance, we fix on very, very long voyages, which basically means that when you have stronger markets, the period will drag out. That means you're going to have a longer benefit of that, whereas on the very smaller ships, you have a more quicker change of earnings reflecting where markets go because the voyage is very short. Basically, we're not going to really comment on whether the average number we gave is going to be higher or lower, but just more reflect the fact that we are so far into the Q2 that we have very good visibility, as we've mentioned, that the Q2 quarter will be a strong one as well.

Okay, understood on that point. Thank you. Sorry, did you mention you were going to comment on the buyback?

Yeah, maybe I can do that, Michael. So the share buyback that we announced in February after the full year results was to cover basically 2% ultimately of a share buyback. We purchased 7 million shares, spent around $12.6 million on those shares, and that basically covered the mandate for the share buyback going forward. So as of now, there is no there are no plans for further buybacks.

Understood. Thank you for taking my question. Sure.

Thank you. Once again, ladies and gentlemen, to ask a question, please press star 1 on your telephone keypad. Once again, at star one, if you wish to ask a question.

This is Thomas from . I think we received a question from Anders Carlsen from Webcast, Anders from . He's asking if you can elaborate a bit on how we see port delay situation currently. I guess that would be for maybe Sean or Michael.

I think Sean should take that.

I can do that. We have seen very strong and very long delays on in-port delays awaiting outside ports. It is coming off a little bit now as demand for products is increasing, and that's really what you're seeing on the overall floating storage numbers that is being reported around the world. We still have quite a few products sitting outside, JET and ULSD being the most stored products, and gasoline and NAFTA being the products with the most turnaround, or the quickest turnaround, if you like. you have a strong carryover of demurrage from very high markets back in early May and end April. So overall, you're looking at a mix of The merge rate is fixed back then, and if you take the LR1s in particular, you're talking very, very high, close to $100,000 in some of them. On MRs, it's obviously lower, and as we go on with new fixtures, it becomes lower. I would guess an average is about $40,000. Good.

I think we have one more question, Amanda. There was a third.

We were still getting orders for deviation. It is not as pronounced as it was. Many, many fixtures in end of April and all the way through May would have been AG fixtures directed via Cape of Good Hope. The share volume of long-distance cargoes in that sense with added ton mile has come off, but the activity has also come off. So you're not getting the same amount of questions now as we had.

Thank you, John. Then we received a question from that is asking, what is your approach to term charters in the current market?

Yeah, maybe I could just give an overall view on that. So thank you for the question. So basically, our view is, as always has been, is that we constantly value and view the current forward market for either time starters or other ways of hedging or earnings and compare that to our view on spot market. And so we have actually been doing a bit of term coverage, but... So far, it's still predominantly fleeting spot, and our view has not changed in the sense that if we feel that the forward curves and the forward times are already too high, then how we see spot noise develop, we're going to increase the amount of hedging accordingly. So that is our kind of fundamental strategy and one that we continue to follow.

Thank you. Then we received a question from Gabriel Eichmann from Tricon Energy. Gabriel? Yes, hi.

I wanted to have your view on the second half of the year and the expectation of the refinery run versus whatever is sitting on floating storage, which one will kick in first.

Thank you for that. I don't know, Søren, maybe you can just give a little bit of a view on how we see that situation develop.

Yeah. There's no doubt that a lot of the product that we are storing now outside ports is already sailed to areas where it's needed. Hence, one would have to assume that you have product readily available for a consumption increase. We actually think that the refinery runs will come back to some extent and we are already seeing for instance South African refiners trying to fire up the refineries again. They are having problems and instead of actually using their own refineries they are now looking for imports coming out of the AG because they can't produce the right product. So we are seeing slowly refiners coming back. As to how fast they will get up to a high run percentage, that still remains to be seen.

Thank you.

Does that answer the question?

Yes, thank you.

Do we have any further questions? Doesn't seem to be the case. Operator, there are no further questions from the webcast.

We have come to the end of today's presentation. Thank you for attending Hafnia's first quarter 2020 financial results presentation. More information on Hafnia is available online at www.hafmyabw.com. Goodbye.