Hafnia Limited

Welcome to Hafnir's first quarter 2022 financial results presentation. We will begin shortly. You will be brought through the results presentation by Hafnir's CEO, Michael Scope, CFO, Perry van Aertelt, EVP, Commercial, Jens Kristoffersen, and EVP, Head of Investor Relations, Thomas Anderson. They will be pleased to address any questions after the presentation. Should you have any questions, you can submit them via the chat function or use the raise hand function to be unmuted to ask your question verbally. Questions will be answered at the end of the presentation. 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 HFMEA is unable to predict or control that may cause HFMEA's actual results, performance or plans to differ materially from any future results, performance or plans expressed or implied by such forward looking statements. In addition, nothing in this conference call constitutes an offer to purchase or sell or a solicitation of an offer to purchase or sell any securities. With that, I am now pleased to hand the call over to Hafnir's CEO, Michael Skov.

Thank you for this. As mentioned, my name is Michael Skov and I am the CEO of Hafnir. Let me welcome you to Hafnir's first quarter 2022 conference call. With me here today, I have our CFO, Perifran Echtelt, our EVP commercial, Jens Kristoffersen, and EVP and Head of Investor Relations, Thomas Anderson. The four of us will present the first quarter 2022 financials for Hafnir. Today's presentation agenda consists of four key areas. We will begin with an overview and key highlights of Hafnir's first quarter, followed by financials for the first quarter, and then commercial updates on the product tanker market. We will then conclude our presentation with our ESG overview. Let's move to slide number two. You should all be aware and take note of the mandatory disclaimer. Thank you. Slide number three. Let me now begin by giving an overview of Hafnir and key updates of the first quarter. Slide number four. Hafni is a fully integrated shipping platform operating within the product and chemical tanker market. We are listed on Oslo Stock Exchange under the ticker code Hafni. At the end of first quarter 2022, we owned and had chartered in a diversified portfolio of 139 vessels. Our own vessels have an average broker valuation of $3 billion, giving Hafnia a net asset value of around $1.4 billion. We also have our own in-house technical management and global commercial platform with chartering teams in Asia, Europe, the Middle East, and USA. Our technical management team ensures that the high safety and environmental standards are maintained on board, while our chartering team are managing close to 100 third-party vessels in the pools. These various operational segments make Hafnir a fully integrated platform, highlighting several key value propositions. Hafnir is now the largest operator of product and chemical tankers in the world. Our fleet's low average age of 7.7 years and unparalleled scale makes Hafnir's business robust and sustainable, enabling better utilization and improved earnings capability. With improving fundamentals, the market outlook for product income in the coming months remains strong on the back of significantly increasing ton mile demand. We continue to focus on having low operating and funding cost. This is made possible with strong relationship with our stakeholders, such as banks and industry partners, giving us access to industry leading debt financing. Our business model is robust, with diversified revenue streams, such as the pool platform and bunkering service. Fee revenue from our bunker and pool business has been strong and consistent. In the first quarter, our commercially managed pool business generated an income of $5 million, while our bunker team has generated an income of $1 million, buying bunkers for more than 900 vessels for our pool platform and third-party owners. With the recent increase in activities and rates, we can expect the fee income to further increase in the coming quarters. Based on this success, we will continue to develop these adjacent businesses. Lastly, at Hafnir, we have a clear ESG profile. With growing impact from environmental regulations, Hafnir is well equipped and takes all responsibilities seriously to minimize our carbon footprint as well as ensuring the most optimal working environment for our organization. Moving to slide number five. So let me move on by giving an update of the key events that happened in the first quarter. I'm proud to reiterate that we have successfully executed two key strategic acquisitions. The first being the acquisition of CTI, with a fleet of 32 vessels, and the second being the acquisition of 12 modern LR1s from Scorpio tankers. As a result of these strategic transactions occurring at a period when Hafnir was trading at a large discount to NAV, Hafnir has seeked out alternative channels to a capital raise to finance these transactions. As a result, Hafnir's overall leverage has increased. With the subsequent improved fundamentals and outlook for the product tanker market, Hafnia's shares have been trading higher and closer to NAV. With that, we decided to execute a $100 million capital raise, which was successfully completed on May 5th. The capital raise allows us to optimize our capital structure and to strengthen the debt structure in our balance sheet. following the previously mentioned two acquisitions. Additionally, this also allows us to lower our cash flow breakeven and financing costs, increase the free float in our shares, and continue to be in a good position to take advantage of future opportunities. We have seen greater volume traded in recent weeks, which improves our share liquidity. Our share price has also increased 54% since the start of the year. I would like to take this opportunity to thank our dedicated team and industry partners for their hard work and commitment to make this happen. I'm also grateful for the continued trust from both our existing and new shareholders, further highlighting Hafnia's firm foothold in the market. Going forward, we will continue to focus on optimizing synergies and earning capabilities by utilizing our well-positioned modern fleet to take advantage of the continued expected upturn in the product-tanker market. Moving on to slide six, and I will hand it over to you, Perry.

Thanks, Michael. Global oil demand has gradually recovered at the end of 2021 and into 2022. We saw rates improve significantly. The situation in Ukraine has also impacted trade returns, increasing product-toll-mile demand, And as a result, the first quarter saw a TCE income of $163.4 million and a net income of $21.3 million. Income from the management of third-party vessels and buying bunker on behalf of third-party clients was $6 million for the quarter. So for the quarter, we saw a return on equity of 6.8% and a return on invested capital of 5.1%. The balance sheet remained strong with a cash position of $74 million at the end of the quarter. We continue to see strong access to the banking environment. With the increasing interest rates for the US dollar financing that we have, we have continued to gradually increase our interest rate hedging position to lock in the rates to match the tenor of our debt profile. And with this result, we are happy to announce a dividend of 2.1 cents per share in dollars for the first quarter, representing a payout ratio of 50%, and further demonstrating our ability to produce shareholder value, even in challenging markets. Looking forward, we can expect high product tanker rates to continue amidst the more restricted oil market and altering trading patterns. The increase in assets and gross debt is likely the result of the consolidation of the CTI acquisition from end January this year and the prior delivery of acquisition of the LR1 vessels in the first quarter. The eight S-class vessels that have been sold are now classified as assets held for sale until the assets have been all delivered later this year. As Michael already mentioned, we've also further strengthened our balance sheet and liquidity position through the capital raise, which will be reflected in the financials of the second quarter. This allows us to reduce our leverage in the near term and enable us to continue to be in a good position to take advantage of any future opportunities. Then if we move to the next page, We'll discuss a bit about TCE breakdown. For the first quarter, we saw TCE revenue of $163.4 million on the basis of 10,366 earning days. And this represents an average of $15,761 per day, which is a great increase from both year-on-year and quarter-on-quarter perspective. From the graph, you can see the rates have improved significantly from these previous quarters, and the covered rates for Q2 continue to be strong. So looking at those rates, as of the 20th of May this year, 70% of the total earning days in Q2 were covered at an average of $27,193 per day. For the remainder of the year, we've covered 29% of our 38 to 279 total days at an average rate across the fleet of $25,455 per day. Due to the supply situation in Russia, we find oil products have started to travel over longer distances to meet the shortfall of supply of oil to the Atlantic Hemisphere, which is positive for freight rates. For the week beginning the 16th of May, Hafnia's pool earnings have averaged $34,011 per day for the Handy vessels, $32,646 per day for the MR vessels, and $57,506 per day on the LR1s. And if you move to the next page, a bit more on OPEX, which includes our festival running costs and technical management fees, we spent in total $62.3 million for the quarter on the basis of 9,259 calendar days, resulting in an average of $6,723 per day. All in G&A expense per day for the quarter was $772 per day. Our operating cash flow breakeven for the full fleet in the first quarter was $14,382 per day, one of the industry lowest. We are constantly evaluating our performance by benchmarking ourselves. We're pleased with our performance relative to our peers. This comes from the quality in our daily commercial decision-making and keen understanding of the market conditions. The graph on the below part of this page further reinforce this. For the quarter, we benchmarked some key metrics against the peers, I can see that Hafnia stands out from the rest in all segments. Then on page 10, we show a few scenarios. So with the recent increase in rates in the product tanker segment, it represents a significant earnings potential for the future. Looking at the various scenarios where we apply recent realized rates into our forecast for the remainder of the year, you can see the strong earnings potential Hafnia has for 2022. From this page, you can see the impact, the open position of the fleet and the added capacity of the two acquisitions have on the P&L in different scenarios. Haffi is well positioned to take full advantage of this upturn in the product anchor market by optimizing synergies with a well-positioned fleet and capturing the strong market. And if you continue Jens, why don't you take the next few pages?

Thank you, Perry. The next few pages show the global oil outlook and our expectations for the product tanker market. Global oil demand has recovered towards the end of 2021 and into 2022, mainly due to the reopening of several countries' borders and resumption of air travel. However, recent escalating lockdowns in China, the world's second largest oil consumer, and surging commodity prices as a result of the situation in Ukraine, have led to a slower growth in global oil demand. Despite of that, the impact has been mitigated by the continued strong recovery of oil use in the West. Mobility indicators have also remained robust, where the number of international flights and driving indices are on an upward trajectory. This lends support to the demand of both motor gasoline and jet fuel, which are recovering strongly in 2022. Global oil demand is still expected to increase by 1.8 million barrels a day to 99.4 million barrels in 2022, slightly below 2019 levels. On the supply side, global oil production has fallen by 0.7 million barrels and 1 million barrels, mainly due to Russia, which saw 1 million barrels go offline. OPEC members also continue to supply below target levels. This is offset by incremental production from the US, South America, North Sea, and Middle East, and we anticipate that this increase should more than offset the lower Russian volumes in the coming years. Move to slide 13. From the beginning of the situation in the Ukraine, we've also seen an increase in latent utilization for product angles. So far in May 2022, we've seen the utilization for MR increased by 5.5%, and the average ton mile per MR unit increasing by 3.3%. We expect this utilization to further increase, resulting in increased rates for the vessels. On this slide, oil production for the last year has not kept pace with oil demand, and consequently, oil inventory levels have been declining rapidly to levels below the last five year range. However, Total OECD industry stocks saw a marginal increase by 3 million barrels in March 2022 due to the emergency stock releases of 24.7 million barrels in March in the OECD. Total inventory levels now stand at 2,626 million barrels and only cover 57.7 days in terms of forward demand. That's 8.4 days lower than the five-year average. Of the industry stocks, crude inventories rose by 22.8 million barrels in line with seasonal trends, but product stocks grew by 25.5 million barrels, mainly due to gasoline and middle distillates, which decreased by 12.1 and 10.2 million barrels respectively. Cargo volumes and ton miles for clean and chemicals are increasing steadily and have surpassed pre-pandemic levels compared to dirty counterparts. Situation in Ukraine has also impacted trade patterns around the world, having a positive impact on ton miles from longer voyages to the Atlantic hemisphere. In short, with steady growth in oil demand, this bodes well for the tanker trade volume, which is expected to grow further in 2022. Moving on, the refining sector recovered well towards the end of 2021. but severe lockdowns in China has caused the global refinery throughput to plunge in April. US refining activity also saw a counter seasonal fall in activity due to operational issues and tight available capacity. Despite that, we expect refinery throughput to increase in the latter half of the year with new refineries coming online mainly in the Middle East. Alsawa in Kuwait with a total capacity of 0.6 million barrels per day is expected to be fully operational early Q3 2022 and dedicated to exports. Saudi Aramco's GSAN refinery is running at about 50% and estimated to deliver the balanced 0.2 million barrels a day by the end of Q2 2022. These two new refineries will jointly add about 0.8 million barrels of product transport demand versus today, equivalent to a demand increase of 75 MRs. Current refinery margins are likely to speed up the completion process and drive high refinery utilization in all regions. On the supply side, outlook remains positive with a slow fleet growth. Fully booked yards until the end of 2025 gives us high visibility on the supply of tangles. Looking at the order book for tangles, They are at historical lows and we can expect this number to further drop in the coming years due to increasing new build prices and ambiguity around the future of propulsion systems, energy prices and regulatory environment. With that, this will likely fuel further secondhand vessel price increases and market activity. Looking at the age profile of oil tankers, Worldwide Clean and Dirty Fleet today is about two years older compared to what it was in 2008. During 2022 and 2023 combined, the product tanker fleet will reduce by about 75 mR equivalents due to aging. This further reinforces the importance of having a young fleet as older vessels tend to have more waiting time and shorter voyages. Additionally, the scrapping of older tonnage is increasing. We've already seen this in 2021, where a total of 3.7 million tons deadweight was scrapped up from 1 million tons in the whole of 2020. Scrapping levels for the following years are expected to remain at high levels as steel prices are likely to remain high. So with this, I hand it over to you, Michael.

Thank you. And we move to slide number 18. On top of excellent commercial performance and notable consolidation efforts, Hafnir also have a strong focus on ESG. We're always on the lookout for potential partnership opportunities to accelerate our environmental initiatives and developing our company culture through deliberate and thoughtful leadership training programs. Hafnir's ambition is to be best on water. This means recognizing the role our business plays within the wider climate narrative and taking meaningful steps towards a net zero emission future. we are in full compliance with the IMO 2020 regulations on sulfur emissions. 2021, across Hafnia's own fleet, our carbon intensity, as measured by the annual efficiency ratio, was 5.4 grams per ton mile, which is 6.4% better than the present IMO baseline. We are working hard to reduce our current fleet's carbon intensity to 4.35 grams per ton mile by 2028, meeting the IMO's 2030 target two years in advance, and we are well on track to achieve that. Moving on to slide number 19. Looking ahead, the future is expected to remain volatile on the back on geopolitical tensions and accelerating inflation, but we believe Hafnir has future-proofed itself and is well equipped to face what is to come. With the situation in Ukraine altering trading patterns, driving up exports and longer voyages, we expect strong product tanker rates to continue in the coming quarters. Hafnir, being the largest operator of product and chemical tankers, is well positioned to optimize synergies and earnings with our well-positioned fleet and expanded range of cargoes that we can transport. With the increased focus from the political environment to reduce dependency on Russian oil and products in the future, we foresee structurally longer-term mile transportation into Europe to remain a permanent positive factor. The recent capital raise has also highlighted Hafnir's strong foothold in the market. I am immensely grateful to the support and strong interest that we have received during the capital raise and Hafna will continue to take advantage of market synergies and opportunities to further demonstrate our ability to produce great shareholder value. With that, I'd like to open up the call for questions.

We will begin our Q&A session now. Should you wish to ask questions, you can submit them via the chat function or use the raise hand function to be unmuted to ask your question verbally.