Hafnia Limited Common Shares

welcome to hafnir's second quarter 2024 financial results presentation we will begin shortly you will be brought through the presentation by hafnir ceo michael skov cfo perry van egtelt evp commercial jens christopherson 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. During this conference call, some statements may be considered forward-looking, reflecting management's current expectations. These statements involve risks, uncertainties, and other factors, many of which are beyond Hafnia's control that could cause actual results, performance, or plans to differ significantly from those expressed or implied. Additionally, this conference call does not constitute an offer or solicitation to buy or sell any securities. With that, I'm pleased to turn the call over to Hafnir's CEO, Michael Skov.

Thank you. Hello, everyone. I'm Michael Skov, CEO of Hafnir. Thank you for joining Hafnir's second quarter 2024 earnings conference call. With me here today are our CFO, Perifran Echtelt, EVP Commercial, Jens Christoffersen, and EVP and Head of Investor Relations, Thomas Anderson. Together, we will present Hafnir's performance for the second quarter of 2024. Today's presentation agenda will cover four key topics. First, I will begin with a summary of our key achievements and events from the second quarter. Following that, I will provide an overview of Hafnir's key investment highlights. Next, We will discuss commercial updates and provide an outlook on the product market. After that, we will delve into our financial performance for the quarter. And finally, we will conclude with an overview of our ESG projects. Let's move to the next slide. Slide number two. Before proceeding, you should all be aware and take note of the mandatory disclaimer. Some statements in this call may be forward-looking and carry inherent risks. This call does not constitute an offer to buy or sell securities. Thank you for your attention, and let's start the presentation. Let me begin by outlining some of the key highlights from the quarter. We're on slide number four. I'm pleased to announce another strong quarter of financial results for Hafnir. In the second quarter, we achieved a net profit of $259.2 million, bringing our total net profit for the first half of 2024 to $478.8 million. This quarter marks our best performance since the start of 2023 and represents the strongest first half result in our company's history. In line with these robust results and our recent increase in the dividend payout ratio, I'm pleased to announce a dividend payout of 80% of net income for the quarter. This translates to a total distribution of $207.4 million, or $0.4049 per share, approximately 4.4 Norwegian kroner. For the second consecutive quarter, this marks the highest dividend payout ratio in Hafnir's history, underscoring our commitment to delivering strong shareholder returns. We anticipate further upside potential as we continue to reduce our leverage in these strong markets. Slide number five. Moving on, I would like to provide an overview of Hafnir, which today offers unparalleled investment opportunities. As an introduction, Hafnir is one of the world's leading tanker owners and operators within the product and chemical tanker market. As owners and operators of around 200 modern vessels across eight pools, we offer a fully integrated shipping platform, including technical management, commercial and chartering services, pool management, and an extensive bunker procurement desk, which has serviced over 1,400 vessels within our pool platform and for external ship owners. At the end of the quarter, we owned and chartered a diversified portfolio of 133 vessels. Our owned and joint venture vessels have an average broker valuation of approximately $5 billion, resulting in an approximate net asset value of $4.5 billion. This translates to an NAV per share of around $8.77 or 93.3 Norwegian kroner. Through the implementation of our fleet renewal strategy, we aim to maintain a low average age for Hafnir's fleet. At the end of the quarter, our old vessels had an average age of 8.8 years. This strategy enhances fleet utilization, boosts earnings potential, and reduces our environmental footprint. Let's move on to the next slide, which is slide number six. Our key value proposition today runs deeper than ever. This has been achieved through our active management and deep understanding of market dynamics. Since our merger with BW Tangers in 2019, our growth trajectory has been significant, establishing us as one of the world's leading product and chemical tanker companies. Our approach to market assessment is to continually seek advantageous opportunities as part of our active management strategy. Throughout our journey, we have executed several strategic acquisitions and joint ventures that align seamlessly with our overall goals. Most recently, in 2023, we formed a joint venture with Socatra, securing orders for four dual-fuel methanol MR new builds with expected delivery between 2025 and 2026. Upon delivery, these vessels will be charted out on long-term time charter arrangements to our long-standing partners, Total Energies. We remain committed to pursuing further strategic acquisitions and joint ventures that will drive sustainable growth and position us for long-term success. Additionally, we are dedicated to delivering strong and sustainable shareholder value. As you can see, we've consistently paid high dividends over the past year. We have actively worked to strengthen our balance sheet and reduce our leverage ratio. With the current strong markets, we anticipate further upside potential in our shareholder returns. Jens will now be sharing an industry review and market outlook. Over to you, Jens. Thank you, Michael.

Hafnia primarily operates within the cyclical and volatile product tanker segment, where charter rates and tanker capacities are influenced by multiple factors. Over the next few slides, we will provide an update on the current market conditions and share our expectations about the forward outlook. Since the beginning of 2024, an already strong product tanker market has experienced further positive momentum. Ongoing safety concerns in the Red Sea have led to shifts in trade routes, with vessels rerouting from the Suez Canal to the Cape of Good Hope. Additionally, droughts in the Panama Canal and low diesel inventories in Europe have further contributed to a robust second quarter. Volumes of CPP and chemicals on water continue to steadily increase, largely driven by geopolitical unrest. Currently, approximately 20% of these volumes are routed via the Cape of Good Hope, with Russian CPPs making up about 13%, double the pre-sanctions average. We are experiencing historically high levels of CPPs on water, and we anticipate these elevated volumes will persist through the end of the year. The graph on the right-hand side shows transportation demand development expressed in CPP ton days and how this has impacted MR and LR1 earnings. Next slide. Similarly, when we examine the ton-mile effect, we observe a significant impact. Since 2018, we have witnessed a steady rise in daily CPP and chemicals loadings. This disproportionate rise in ton-miles can be largely attributed to the geopolitical unrest and the dislocation of refineries, with eastern refineries increasingly supplying Atlantic consumers via the Cape Good Hope. On the other hand, crude and DPP daily loadings and ton miles have seen a slight decline as they continue to struggle under the weight of OPEC Plus production cuts. Looking ahead, we anticipate that the high ton mile levels for CPPs will persist, driven by the ongoing dislocation between refining capacity and end users. Next slide. In addition to the impact of geopolitical unrest, global inventory levels and the evolving refinery landscape are having a significant impact on the product tanker market. In 2023, export-driven volume gains were largely fueled by refinery startups in the Middle East, including Alzawa in Kuwait and Dukem in Oman. The commencement of production at Nigeria's Dangota Refinery and the expected ramp-up in Chinese refineries by late 2024 is anticipated to further boost global refinery operations. According to the IEA, global refinery throughputs are forecasted to increase by 0.8 million barrels per day, reaching 83.3 million barrels per day in 2024. This reflects approximately 100 mi equivalent of additional transportation demand. Conversely, continued refinery closures in regions such as the US and Europe will likely necessitate that these oil-consuming regions seek imports from refinery sources further away, and this shift in global oil trade flows will contribute to increased transportation demand. Whilst we are currently experiencing record high volumes of CPP on water, it's noteworthy that global product inventories remain below average, even when combined land-based inventories with CPP on water. Given that elevated oil and water levels so far have had marginal impact on land-based inventories, we assess that we are continuing to transport to fulfill demand rather than to strategic inventory bills. And this suggests a long runway for the current high earnings environment, as there will be a need to replenish inventory levels in the near future, supporting tanker demand. Next slide. In recent months, we have observed an increase in cannibalization from the crude sector, primarily driven by the spread in earnings between LR2s and Suez Maxes. This shift has led to more crude tankers converting their tanks to carry clean cargo and thereby introducing greater competition in the product market, especially within the LR2 segment, where these VLCCs and Suez Maxes are now competing. However, we believe this impact will be short-lived. Historically, earnings for large tankers tend to rise from the latter part of Q3 and onwards. With higher OPEC exports anticipated, crude rates are expected to increase, which should reduce the cannibalization effect starting from Q4 2024. Next slide. Looking at the product tanker supply, the average age of the global product tanker fleet is steadily increasing. The vessel is over 20 years old, now comprising a larger share of the global fleet. This trend has significant implications for fleet dynamics and market supply, as older vessels are underutilized compared to vessels under 15 years of age. The trend is generally that vessels above 15 years of age tend to become less efficient over time, as customers tend to prefer younger tonnage. However, the recent market strength in 2024 has provided some tailwind also for the older vessels. As the worldwide fleet age increases in the coming years, we can expect the fleet to generally become less efficient. Next slide. On the flip side, despite the increasing average age of the global product tanker fleet, contracting activities in the sector continue to rise. As of August 2024, the order book to fleet ratio for deliveries going out to 2028 stands at approximately 20%. However, it's worth noting that the LR2s account for over 50% of the tonnage to be delivered in the next few years. Historically, around 70% of LR2 capacity deliveries has been absorbed into the dirty and crude petroleum products trades. Additionally, the crude sector is getting increasingly old, and the order book on the crude side remains at a relatively low, only 19% ratio. We anticipate grabbing levels to exceed deliveries over the next four years, effectively removing tonnage supply and pushing more LR2 capacity into the crude and DPP trades. So, looking ahead, the outlook for product tankers remain highly positive. Despite global oil demand showing signs of slowing in 2024, with the IEA reporting a year-on-year increase of only 0.9 million barrels per day in the second quarter, primarily due to reduced consumption in China, The underlying market fundamentals remain strong. And Perry will now bring you through the key financials of the second quarter.

Thanks, Jens. As highlighted by Michael and Jens earlier, we've seen a continued strong market in the second quarter of the year. As a result, we experienced sustained high earnings across all segments. generating a TCE income of $417.4 million and bringing our half-year TCE income to $796.2 million. This is against the $726.5 million for the first six months last year, the highest in half-year history for both periods. Our fee-focused business has also benefited from this strong rate environment, generating $10.7 million from our commercial managed pool and bunker procurement business. These adjacent business streams have continuously performed well. Our balance sheet has further strengthened with a cash balance of $167 million at the end of the quarter and a total liquidity of around $591 million. This includes $424 million in undrawn credit facilities. At the end of the second quarter, approximately 88.6% of our loans were hedged at the weighted average of 1.77% base rate or on a SOFR basis. This hedging strategy has largely protected us against the high and volatile interest rate environment and thereby controlling the finance costs. During the quarter, we further optimize our balance sheet by reducing our leverage ratio. Our net LTV ratio has further decreased to 21.3% at the end of June, driven by higher vessel valuations, strong cash flow generation and the subsequent debt repayments. Our net LTV has been on a steady downward trajectory, reducing by more than 8% compared to the second quarter last year. This deleveraging has gone in parallel with increased shareholder distributions in the form of cash dividends. Of course, depending on markets and valuations, we do anticipate reaching our next milestone in our dividend payout policy of a net LTV below 20% before the end of the year. This would trigger a further increase of our payout ratio to 90% of net profits for such quarter. We move to the next page. On to the operating summary. So in the second quarter, our TCE was based on 10,635 earning days and we generated an average TCE per day of $39,244. But focusing solely on spot earnings for the quarter, we generated an average spot TCE per day of $40,995, reflecting our ability to capitalize on the strong market backdrop and a strategic positioning. Then looking forward to our coverage for the third quarter, we're well positioned for another strong quarter when compared to a year ago. As of the 9th of August 2024, we had 72% of the total earning days in the third quarter of the year being covered at an average of $34,934 per day. And for Q3 and Q4 of this year, 45% of the earning days are covered at an average of $33,534 per day. Despite the recent market softness, we still expect a strong quarter ahead. We move to the next page. As we conclude the second quarter and look forward to the remainder of the year, Hafnia is well positioned to continue to capitalize on the favorable market dynamics and we're set to deliver another strong year of results. Benefiting from strong market fundamentals, including rising global oil demand, limited fleet growth, and a significant exposure to the spot market, provides us with a solid foundation to maximize earnings in this environment. This slide presents a comparative analysis of three scenarios outlining our potential full year earnings. These scenarios include firstly, the consensus forecast from the equity analysts. Second, an extrapolation of the Q3 covered rates applied to the available earning days in the rest of the year or in 24. And finally, a scenario based on Q3 to Q4 covered rates similarly applied to available earning days in 2024. In each scenario, Hafnir is projected to deliver exceptionally strong financial performance, with net profits estimated to range between 800 and 900 million dollars. Michael, over to you for the remainder of the pages.

Thank you so much. We're now on slide 19. Moving on, I would like to provide insight into Hafnir's ESG strategy and targets. As we navigate the evolving maritime landscape, we acknowledge the inherent responsibility across our operations and are committed to minimizing our environmental footprint. Additionally, we have focused on fostering diversity, inclusion, belonging and equity, as well as maintaining high standards of corporate governance within our organization. We recognize that collaboration is key to overcoming the challenges within our sector. That is why we actively engage with industry peers, international organizations, and other stakeholders to address these challenges collectively and effectively. Slide number 20. Next, I would like to highlight some of the key ESG projects Hafnir is actively engaged in as we lead the way towards a more sustainable maritime industry. To realize our vision of greener maritime sector and in preparation of an increasingly technologically advanced world, we are involved in several forward-looking projects that align with our long-term ESG goals and the broader global energy transition. We are exploring a joint venture with Big Hill on the development of a hydrocarbon fuels plant that will produce low carbon intensity blue methanol and, in the future, sustainable aviation fuel. Still subject to FID, this project will develop new sustainable shipping opportunities within the CO2, methanol, and sustainable fuel sectors. We are also co-founders of Complexio, a foundational AI company that is trained on big data, which will ultimately streamline tasks and enhance value extraction within our organizations. Our ESG focus extends beyond these projects and is deeply embedded in every employee. We continuously seek innovation and collaboration across this space and remain firmly committed to making significant strides towards advancing sustainability across the maritime sector. Slide 21. To conclude, I hold a positive outlook on Hafnir's ongoing commitment to fostering a greener maritime sector and leveraging our strategically positioned modern fleet. We will continue to build on this strong momentum to produce even greater results. This will allow us to pursue our objectives, invest in a greener future, and provide greater returns for our shareholders. This concludes our presentation. With that, I would now like to open 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 questions verbally. Okay, so for the sake of good order, we'll take the questions with the raise hand function first. So, Omar, may I ask you to unmute yourself?

Yes, thank you. Hi, guys. Thanks for the presentation. A couple questions on my end. Maybe just on the first one, it looks like you realized averages across all four segments were higher sequentially, which we really haven't seen this earnings season from your peers. The LR2s were notably quite strong at $60,000. I know it's not a big part of your fleet, but just, you know, can you maybe discuss what drove that outperform in the second quarter? And how do you think that this market's developing as we look into 3Q and beyond, given all the talk of SUISMAXs and VLCCs looking to catapult onto that strength?

Hi, Omar. This is Jens. Good question there. On the LR2 segment, As you know, we have relatively few ships compared to some of our peers, but the good result is really down to good positioning of the ships and a quarter that spans 90 days. So there's an element of accounting principle in it. Today, our LR2 fleet is equally balanced between East and West, where the markets are also more or less at the same earnings levels. You also asked a little bit about the VLCCs and 2S Maxes that have been cleaning up and taking out clean cargoes, and yes, we felt that in the LR2 and LR1 segments in particular as well, but I think it's noteworthy to see that we are in the lowest seasonally quarter of the year, And yet we're still producing good earnings despite all that volume having been taken out of our markets. So we are constructive for the end of Q3 and start of Q4 where we expect the crude chips to pick up in freight rates again. Already now we see less of that cannibalization than we saw just a month ago, simply because freights have sort of aligned themselves a bit. I hope that answers your question.

It does, yeah. And maybe just a quick follow-up just on that point. You know, we've seen the LR market's definitely been a strong performer since 2022, and VLCCs have generally lagged. So just maybe, what do you think, why do you think there's been that surge this year? Is it really the rate differential between the large crude ships and the LRs? Is it just the rate, or is it really the There is a rerouting and going around the long haul from Middle East to Europe. Is that what's driving that trade? I know it's a tough question, but is it the long haul?

It's a good question. So it's the rates. That is the answer. And what we saw in Q2 was that LR2 freight from the Middle East to Europe ran all the way up to $8 million a ship. And with that type of freight, it became more beneficial for some of our customers to take the risk, clean up Suez Maxis and VLCCs and simply get the benefit of scale on these bigger ships on the diesel that they've been transporting. So that's what we saw. You know, the concept of Suez Maxis and VLCCs transporting clean products is an old one. The trade has always been there, but it's been predominantly done on on new buildings in the past. So the development we saw here, we see that as a one-off because the clean market went up as much as it did.

Got it. Okay, thank you. And final one, and I'll... I'll turn it over after this one. Just wanted to ask, you mentioned in the financials, you know, getting down to the sub 20% is happening before year end, which would then trigger the payout to 90%. Is that something you see happening sooner? Could that happen by the end of 3Q? Are we on pace for that? Or do you think this is more of a 4Q event?

Sorry, that took long to find the unmute button. Hi, Omar, good question. Yeah, we've indicated a second half of the year. I mean, it really depends on where values are going, but obviously the trajectory is to go below 20%.

Okay, I appreciate that, Perry. Thank you. That's it for me.

Thank you, Omar. Frode Morgdal, may I ask you to unmute yourself?

Hi guys, thank you. Just a quick question on the markets. Regarding the Panama Canal, I guess it's been in focus recently. I just wondered if you have any views on the impact on the product anchor market. I think it was a positive event initially and then we've seen some. normalization, so to speak. Do you think it has already happened, negatively speaking, in terms of the impact, or is this more to go, do you think?

Yeah, hi, Ford. This is Jens. Our observation is that the delays in the Panama Canal has abated, and we are back to daily number of transits that we saw before the draw kicked in at the back end of 2023 so we feel that you know all all that let's say improved efficiency on the Panama Canal has already been factored into the market okay that's good to hear uh I was well I also get some incoming question on the you know Russia Ukraine and the

impact of product tankers. Do you have any updated view on what the impact has been so far in terms of ton mile improvements?

I think we do our numbers and everybody do their numbers. There's probably a level of uncertainty to it. We've been measuring CPP on water. And what we see is that the Russian volumes themselves, they have doubled their presence on water compared to pre-sanctions level. So that's probably an increase of maybe 5-6% in demand.

Okay. What if at some point that ends? Is there any... the shadow fleet, what's your view on there? Could there be some type of mitigating factor by the shadow fleet being removed, so to speak?

I think that's a very big question. It's too difficult to put any precise numbers on that. Without a doubt, it would have an impact on demand if the sanctions on Russia were lifted. But what would happen after that is hard to speculate on at this point in time.

Yeah, I understand. Yes, that's the question we're receiving, right? So tough question, obviously, but I guess it might be some type of supply mitigation, so to speak, as well, of fleet being scrapped or removed. Anyway, maybe another time then. Thank you. Thank you.

Thank you, Frode. Sherif Maghrabi, may I ask you to unmute yourself?

Hey, good afternoon. Thanks for taking my questions. So you mentioned the startup of Dangodi. Can you give us some color on how that's changed trade flow since coming online? And also, how do you see that impact going forward as the refinery produces, A, more diesel, but then B, starting next month, gasoline as well?

Yeah, good question. The expectation of the industry has been for many years that this would be a negative for product tanker demand. Our expectation so far from having observed the trade floats around the Dengoda refinery here in the first four to six months has been that it's created more cargo activity and more trading in and out of Nigeria. So we feel it's been positive so far. It'll be interesting to follow the development as the quality of the Dangoda production picks up. It is a refinery that's designed to produce higher specifications than what's required in Nigeria. So from that perspective, we believe that there's definitely potential that gasoline could be moving out of Dangoda towards the US or other markets where they have higher requirements to quality. So overall, we think it's a positive thing for the product anger market. Thank you.

And then on the four methanol-capable new builds, do you expect them to run on methanol when they hit the water? And given last week's cancellation of the Swedish project for marine e-methanol, can you speak to the availability of methanol bunkering over the next few years?

In terms of our four MRs, We really don't know if they will be running on methanol or standard fuels. It's up to our customers to make those choices. And in terms of the availability of methanol bunker fuels, it's too early for us to make any comments on the availability of it.

Okay. Thanks for taking my questions. You're welcome.

Thank you, Sharif. Clement, may I ask you to unmute yourself?

Hi, thank you for taking my questions. You've been historically mostly exposed to the spot market while also having some time-chartered cover, especially on the LR2 side. But you've shifted towards higher spot exposure over the past few years, which so far has been the right decision. How are you thinking about potentially adding some cover at prevailing period rates?

Yeah, hi. As you say, it's been a good decision for us to have a higher exposure towards the spot market for the past couple of years. And with time charter rates having increased as much as they have, we are also looking at increasing our coverage potentially. But this is something we evaluate as and when we go by during the upcoming quarter.

That's helpful. Thank you. Also wanted to ask about this. I also wanted to ask about the synthetic hydrocarbon fuel plant JB with Big Hill. What kind of timeline is the project targeting? And secondly, should FID be reached? What kind of equity outlay should we expect net to have here?

Yeah, production will be. In 2029 only, equity-wise, we are in it for the shipping. So that would be to invest in ships on those ultra long-term contracts.

All right, makes sense. Thank you for taking my questions. Yeah, thank you.

I'm not actually seeing any more raised hands. I'll give it a few more seconds in case anyone has any last-minute questions. Otherwise, moving on to the Q&A box, I also don't see anything there. OK, so then we've come to the end of today's presentation. Thank you all for coming to the second quarter 2024 Financial Results Conference. We will upload the recording of this presentation to our website shortly after this. Thank you, everyone. Goodbye.