Scorpio Tankers Inc.

Hello, and welcome to the Scorpio Tankers, Inc. Fourth Quarter 2021 Conference Call. I would now like to turn the call over to James Doyle, Head of Corporate Development and Investor Relations. Please go ahead.

Thank you for joining us today. Welcome to the Scorpio Tankers Fourth Quarter 2021 Earnings Conference Call. On the call with me today are Emanuele Loro, Chief Executive Officer, Robert Bugbee, President, Cameron Mackey, Chief Operating Officer, Brian Lee, Chief Financial Officer. Earlier today, we issued our fourth quarter earnings press release, which is available on our website, ScorpioTankers.com. The information discussed on this call is based on information as of today, February 14, 2022, and may contain forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For discussion of these risks and uncertainties, you should review the forward-looking statement disclosure in the earnings press release issued today, as well as Scorpio's tankers SEC filings, which are available at scorpiotankers.com and sec.gov. Call participants are advised that the audio of this conference call is being broadcasted live on the Internet and is also being recorded for playback purposes. An archive of the webcast will be made available on the investor relations page of our website for approximately 14 days. We will be giving a short presentation today. The presentation is available at scorpiotankers.com on the investor relations page under reports and presentations. The slides will also be available on the webcast. After the presentation, we will go to Q&A. For those asking questions, please limit the number of questions to two. We want all our analysts to have a chance to ask a question. If you have an additional question, we are more than happy to answer it, but please rejoin the queue. Now, I'd like to introduce our Chief Executive Officer, Emanuele Oro.

Thank you, James, and good morning and good afternoon to everyone. Thank you for your time today. For the last six quarters, product anchor rates have remained below our all-in cash break-even levels. There is no sugarcoating it. The weakness in the product anchor market and prolonged recovery has been frustrating. I'd like to thank our shareholders for their support and patience during the past year, which unfortunately has been another COVID year. Scorpio tankers finished 2021 with more cash on the balance sheet than in 2020. We continue to focus on what we can control. In January 2022, we agreed to sell 14 vessels. These sales increase liquidity. They reduce overall debt and highlight both a significant increase in asset values as well as the discount our shares trade to these higher asset values themselves. The decision to sell assets is consistent with our efforts to maintain a strong liquidity position and significant operating leverage in a challenging market. Our top priority remains the same, position the company to create shareholder value in an improving market and for the next anchor cycle. We feel the recovery is close and the next tanker cycle not far behind. As far as demand is concerned, oil demand increased by 19 million barrels a day since May 2020, and is expected to surpass pre-COVID levels this year. At the same time, refined product inventories are at historically low levels and drew 180 million barrels from January through November 2021. So the catalyst is simple. Supplying incremental oil demand within inventory draws is just not sustainable in the long term. The timing is less simple to read, but the inflection point is near. In December, product anchor rates reached their highest level since the start of COVID. While the spread of the Omicron variant slowed the momentum, there is several reasons to suggest it will return this year. I would like to now turn the call to James Doyle, who has been recently promoted to the position of Head of Corporate Development and Investor Relations. He will now walk you through a brief presentation as he discussed in his opening remarks. James, congratulations. Please go ahead.

Thank you, Emanuele. Good morning and afternoon, everyone. At the end of the fourth quarter, we started to see a material improvement in rates, specifically in December, and it seemed as if the inflection point was finally here. Even with significant inventory draws, rates pushed higher. However, by early January, the rapid spread of Omicron variant had impacted our markets and rates began to slow. Recently, our smaller vessels, the HandyMax and MRs, have shown more of an improvement because of the demand strength we're seeing in the U.S., Latin America, Africa, and Europe. On the other hand, the LR2s have been slower to recover, and this is largely due to lower demand in Asia and a reduction in arbitrage opportunities. Since Q3, we have seen 19 LR2s switch from trading clean to dirty, which is the equivalent of about 8% fleet reduction and creates a favorable supply-demand setup as Asian demand returns. If there is any evidence of a demand recovery in refined products in 2021, it's the draws we saw in gasoline and distillate inventories. From January through November, we drew 181 million barrels of gasoline and distillate. Inventories are now at historically low levels, and we feel the headwind is behind us. While Omicron delayed the first quarter recovery, we are optimistic for 2022. So the question is, how close are we? Well, in 2021, ton mile demand exceeded pre-COVID levels, which may seem surprising when you look at rates. The driver behind the ton mile demand growth has been refinery closures. Over the last two years, we've seen a significant number of closures. These are often older, less efficient, or poorly located refineries. The weak operating margins and maintenance capex to keep these refineries operating doesn't make sense. For the first time in 30 years, refinery closures outweighed new capacity in 2021. After a refinery closes, in most cases, the lost output needs to be replaced. The most favorable example is Australia, which closed two of its four refineries last year and has since increased its product exports by 200,000 barrels a day in November to make up for this lost production. On the volume side, refined product exports were around 1 million barrels per day lower than pre-COVID levels. However, from a demand perspective, when you account for the inventory draws that occurred last year, it's about half that. In other words, without inventory drugs, we're only about 500,000 barrels a day below 2019 levels. So will 2022 be the year refined product exports exceed pre-COVID levels? We think so. While jet fuel may take until 2023, 2024 to fully recover, the increase in gasoline, diesel, and nap that have offset lower jet fuel demand. Crude oil and refined product demand is expected to increase by 4 million barrels a day this year. If 25 percent of this increased demand is exported, seaborne exports of refined products will increase by one million barrels per day. Also, this excludes the additional demand of around half a million barrels that was supplied with inventory draws last year. Timing is always challenging, but we expect a sequential improvement in demand each quarter throughout the year. Inventories are at historically low levels and have declined as refinery utilization has increased, so the ability to draw from inventories has reduced substantially. Thus, given the low inventory levels to meet the increased demand this year, we expect higher refinery runs and consequently product exports. Refined product exports and ton mile demand are expected to increase 6% and 7% this year. One could argue by the end of the year it will be higher. Supply. The product anchor order book is at a record low with 5.3% of the existing fleet on order today. By looking at the low order book, one might think that shipyards are desperate for orders, but it's quite the opposite. Other shipping segments have done so well, such as containers, that the yards are fully booked. We do expect more product tankers to be ordered, but if ordered today, these vessels would not be delivered until 2025. While the order book is at an all-time low, scrapping is at an all-time high. This is due to higher steel and scrap prices, but also the age distribution of the fleet. Unlike other sectors, product tankers were not built in mass until the early 2000s, so scrapping has been minimal, and basically everything that's been delivered hasn't left the fleet. However, this will start to change, and we saw the start of this last year with 48 product tankers scrapped. Today, there are 267 product tankers 20 years and older. By 2025, excluding scrapping, there will be 687 product tankers 20 years and older. And this is not including the roughly 1,000 product tankers that will be 15 to 19 years old. Without additional new building orders, more than half the fleet will be 15 years and older by 2025. Using modest scrapping assumptions, product tanker net fleet growth is around 1.3 percent the next two years before going negative. However, if we use a scrap rate that reflects the age profile of the fleet, supply growth is essentially zero for the next two years before going negative in 2025. Financial highlights. While everyone is focused on rates and liquidity, there's been a substantial increase in asset values, rising steel and labor costs, as well as new building orders from other segments that still have available yard capacity, driving prices higher and delivery dates later. Since January 2021, five-year-old LR2s have increased $12.5 million per vessel. If we apply this increase to Scorpio Tanker's 42 LR2 vessels, it would increase gross asset value alone of the LR2 fleet by $525 million. It also means your LTV is decreasing. In January, we announced the sale of 14 vessels. These sales increase our liquidity, reduce our debt, and crystallize the steep discount our shares trade relative to our net asset value. After the completion of the sales, the company will have over $460 million in proforma liquidity. As Emanuele mentioned, to maintain liquidity with rates below all in cash break-even levels, we have refinanced vessels as opposed to raising equity and also sold some. If we look at the debt repayment schedule, which excludes amortization for the 14 vessels that will be sold, the company has two maturities in the next eight quarters. The convertible bond, which will be repaid in Q2, and a credit facility that matures in Q4 2022. In the past, we've seen different comments and figures around the debt that's due in a given period for the company. So for clarity, if we use the credit facility that's due in Q4 as an example, which is the blue box in the repayment graph, before this facility matures, we arrange to refinance the vessel in the facility with the new lender. Thus, when the facility matures in Q4, we repay the $16.9 million debt balance and then draw down on a new loan facility. Alternatively, we could sell the vessel, repay the debt, and collect the proceeds. This happens to be an LR2, so our current prices would generate significant liquidity. If you look at the company's balance sheet over the last six quarters, you will see a significant change. However, our view of the balance sheet is that after several challenging quarters, LTVs have decreased. We have $600 million in pro forma liquidity, which creates flexibility in the event of a longer market recovery. we have refinanced essentially all of our upcoming maturities and have minimal capex. We will repay $485 million of debt in the first half of this year from scheduled amortization, debt associated with vessel sales, and the convertible bond maturity. Given these points and our positive outlook for the market, we feel well-positioned. To wrap it up, The company has the largest product anchor fleet in the world, comprised entirely of ecovessels. We have significant operating leverage, $1,000 a day change in product anchor rates equates to $42.7 million in annual cash flow. We know rates don't usually move by $1,000 a day. We have positioned the balance sheet to provide flexibility with increased liquidity and a plan to de-lever. Our shares trade at a steep discount to our net asset value. The market inflection point is close, and the long-term supply-demand fundamentals suggest we could have an extended tanker cycle not far after. With that, I will turn it over to Q&A.

If you'd like to ask a question at this time, please press the star, then the number one key on your touchtone telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Omar Nakda with Clarkson Securities.

Thank you. Hey, guys. Good morning. Good afternoon. James, thanks for that. I think a pretty good run-through of things. You know, clearly liquidity has been a focus, you know, for the past year and a half or so, and you've managed really to continuously enhance your cash position with debt refinancing. You know, aside from sale leasebacks, actual sales have not been something you've done in the past or recent past. So just regarding the LR1 deal, you know, we've gotten used to seeing when an owner self-ships in a tough earnings environment, especially an on-block fleet and an all-cash deal, they usually come out at discounted sale price. But your LR1's got a pretty hefty premium, I'd say. Can you talk a little bit about how that transaction came about and what really compelled you to move forward with it?

Sure. Okay, I think the easiest thing to first understand is that, as James pointed out, prices have been moving up and moving up quite strongly. So, you know, you've got quite a strong sale and purchase market to start with. So you may have had the vessel sold at a surprisingly high price to the market, as James is inferring, that you know, we strongly believe even now that net asset values haven't been adjusted up high enough. And that doesn't just apply to us, that applies to other product banking companies with modern fleets. Now, those less than 10 years, seven, eight years old. So the first thing is you had a market that was very strong. It came about through a very competitive basis. I mean, we'd indicated in a couple of quite large conference calls and in the press that we would be willing to sell vessels as part of the liquidity position that it's a win-win for us because first of all it increases liquidity but second I mean it's a very rational thing for a management to do when you think your NAV is trading above 30 and your stock is trading you know below 50% of net asset value, and you believe that the fundamentals are very strong, but you have an uncertain point to recovery, you first get the sort of knockout of you don't have to worry about liquidity anymore. The second thing you get is an offensive position where, you know, we've always said to the degree that, you know, that we're earning, you know, above our all in break even 17 a day, then we're going to start looking to, buying stock back as an alternative. So in an offensive position, the strengthening and putting cash on that balance sheet and getting the situation where when that market turns, the next question that analysts and I'm sure you yourself will ask if you've now probably got too much liquidity, what are you going to do with it, comes at a much earlier point in the cycle. And we've had previous experience of the benefits of that. So that's really how it came about.

Thanks, Robert. Good color there. And I guess, yeah, just on the context of being offensive and having too much liquidity, clearly now you perform a cash position as well over $400 million, which I think is the highest in many years. The question obviously now is how do you feel now with that position ahead of a recovery, and do you foresee future sales to maybe take advantage of that NAV arbitrage?

Sure. I mean, at the moment, what we see, especially, you know, as Omicron seems to be, you know, going away, you know, even faster than some people hope. And we're getting some analysis that actual headline demand for products and crude is much higher than people thought. So we look at this in the glass half full way. It's actually pretty incredible that you've had, you know, apart from the United States, really not much flying going on in the world. You've had some form of restrictions going on in the last four or five weeks, even in the freest COVID countries. And yet the demand for oil and its derivatives have been so very strong. And you've got, as James pointed out, multi-year levels of inventory turndown. So that really sets up. a situation where you've got this very long-term great market, and it's just a question of when that's going to happen. I think to your second part, that we're really comfortable in the actual liquidity part. We would not sell further vessels because we have to for liquidity, but I think it still holds true that maybe we would sell some more vessels just simply again because once you have an NAV over 30 into a rising market that you're able to establish over and over again with sales, there's nothing wrong in actually let's say piling on the cash and the optionality especially when with a company with the amount of vessels that we have doesn't it just doesn't affect our operating level at all. I mean, we're not married to, you know, any particular ship.

Understood. Thanks, Robert. Good color, and those are my two questions. I'll turn it over.

Our next question comes from Randy Givens with Jefferies.

Howdy, gentlemen. How's it going? Hi, Randy. Good. Thank you, Randy. Hey, so first on your quarter-to-date rates, much stronger than the negative rates that the headline markets are showing. So with that, should we expect the rest of the quarter to be below these levels, as most of that strength was from maybe December, let's call it? Or are the actual current rates much stronger than the headline rates that we're seeing?

That's a great question. The question we ask ourselves, you see, because it's all over the place. I mean, you've got extreme volatility now. You have, you know, you actually had a lot of headway last week in MRs, for example, which were starting to trade quite firmly out of the U.S. side and west of Suez and was actually starting to pick up a bunch of... you know, speed in the east. You know, we're actually even starting to pick up a couple of jet fuel cargoes. We even load a big jet fuel cargo for the first time in many, many weeks out of the AG on one of the big ships. And it's literally, you know, you've got this inventory situation. You've got, you know, a very turbulent market. So you... You really don't know, to be honest, is the answer. As to when the exact time this market is going to spin upwards, it's very tight. So to work out whether or not the next 50% is going to be the same, worse, materially better than the last 50% is quite difficult. I think that we can be confident that, you know, overall, you know, it's going to be, our overall rates are going to be above, you know, let's say 10. You know, that's going to, and that adds to our, let's say, NAV value anyway to the degree that the prices of vessels are not going to go down. But we don't know is the absolute answer in this. But it's, you know, it's just... We see it as just time now. These markets are tight as the winter has shown, and those rates that we're showing are tight. So by saying we don't know, I wouldn't take that as a negative position to the future.

Yep. No, that's fair. Hard to prognosticate from here. Second question, following the vessel sales, which would certainly be accretive if you use those for share buybacks, but your fleet still massive. Obviously, a little bit of your operating exposure has been reduced. So with that, will you look to charter in vessels to maybe increase that spot exposure? Or, on the other hand, are time charter rates too high, and you're actually maybe looking to charter out some tonnage to secure some cash flow?

We're not looking to charter out 100%. We are, and I'll say it for the first time on this call today, even at the risk of being criticized, we are very bullish, extremely bullish, you know, supremely bullish, whichever bullish, you know, you want to want to put, we're there. Right. I could say bullish eight 82 times over. Okay. And, um, right. So no chartering out. We are, uh, you know, always looking for chartering opportunities so far. We're kind of being disappointed in that sense because rates as sale and purchase rates for good quality ships are actually quite firm. It's clearly not only us that is bullish. You have a very strong S&P market. And despite what you've had, even through all of Omicron, you've had a pretty strong forward market, certainly in contango to the spot market.

Got it? All right. Bowled up. Noted. James, congrats on the promotion. Great role. Well deserved. Thanks again. Thank you, Randy.

Our next question comes from John Chappell with Evercore.

Thank you. Good morning. Hey, James, so you laid out a good – you know, profile of what's going on with the inventories. I think Robert said something important, which was that the U.S. is basically the only country we're seeing kind of normalized flying. Asia's been the big growth area for a long time now. What are you seeing there as it relates to, you know, inventories versus OECD, you know, flying activity, other modes of transportation? Is it possible that we're so focused on the Western world coming out of the virus that Asia could continue to be a drag, and that's one of the reasons that the recovery continues to get pushed to the right?

No. You know, I think what's happened with Asia is obviously over the summer, the Delta variant, the Omicron variant this winter, They impose a lot stricter travel restrictions, and really everything's tied to personal mobility, right, on the consumption side here. When you restrict that, you know, obviously demand goes down. And Asia, though, prior to Omicron was actually starting to be quite strong again. So I think for the current time, you've got obviously the impact of Omicron. You had Lunar New Year. You've got the Olympics. So I do think Asian demand is going to come back here. I also think there's probably a difficult component to factor in with rising natural gas prices that have affected refineries differently, which is leading to a lot of volatility. But I think looking at the demand side on jet, we're probably a million and a half barrels away from where we were pre-COVID. But on the water, it's probably only, say, 200,000 barrels. So I think we will see the return here. The timing is hard.

I would add, John, that you yourself, I think, had a really interesting graph the other day talking about where it showed these real drawdowns that are going on, the inventories. I think that's something... while running, I'm highlighting you because you really did encapsulate it very well on this table, that there really has been a lot of missing barrels in the demand for tankers, whether it's products or crude, as a result of these inventory draws. And that just can't go on forever. If you simply went to stopping inventory draws, forget about rebuilding multi-decade logs, you would you know, you would expand even the Asian demand very, very quickly straight away.

Yeah, thanks for highlighting that. I think the inventory is the most important thing to watch right now, and you can see it in your presentation. James, for my follow-up, you get the promotion, you get the hard questions. I think there's this view that, you know, an Iranian sanctions lifting, positive for crude, maybe not a clear cut answer if it means anything to the product. Also, I think there's been some, you know, a little bit of publicity that if there were a geopolitical event with Russia and Ukraine, you know, possibly good for tanker con miles, but of course that doesn't take into account what a rising oil price might do. Any work that you've done or thoughts on those two geopolitical events and what that could do to the timing of the recovery or the magnitude?

Sure. When it comes to Iran, the benefit would be increased condensate exports. which would benefit the LRs. You know, it depends where sanctions would be, but certain LR2 vessels will carry that cargo, and actually there are South Korean petrochemical plants designed to run that condensate as feedstock, so I think it's somewhere around 300,000 to 400,000 barrels a day of exports for the LR2 fleet, which would be beneficial. When it comes to Russia and the Ukraine itself, It's hard to say what will happen, but what I can say is obviously Russia is a large exporter of crude oil at 4.2 million barrels a day, and refined product exports probably around 1.5 million barrels a day. Most of this is trading, you know, or going to Europe and Asia, but obviously if there were a conflict, you know, we'd have to factor those numbers into our analysis.

Got it. Thank you, James. Thanks, Robert.

Our next question comes from Greg Lewis with BTAG.

Hey, thank you, and good day, everybody. Yeah, I guess my first question is around, you know, there was a lot of news and reports about refinery closures, you know, really ongoing throughout the pandemic, whether it was in Australia, parts of Europe, A lot of refinery closures happened, and that was expected to create dislocations, ton miles. Is it possible, or how should we think about, just given the slow recovery in some of these parts of the world, I guess what I'm wondering is, has the full benefit of these refinery closures been realized, do we think, across global product, tanker, seaborne ton mile demand?

Not yet. Part of it, yes. But when you draw 181 million barrels of global gasoline and distillate inventories, everything's a little bit muted. And then you factor in that just overall demand is slightly below pre-COVID levels. So I think we've certainly seen it when we look at how much volume has gone to Australia. When you start, and we've probably seen some of it with U.S. East Coast imports after the closure of the Canadian refinery, but I think we'll really start to see the impact as demand kind of gets back to pre-COVID levels, and it'll be essentially a multiplier to that.

Okay, great. And then just one more for me around the, you know, congrats on the vessel sales, you know, previously announced. You know, one of the questions we always get is around the depth of the S&P market. And really, I think I'd be curious to hear, you know, beyond the actual buyers, you know, how competitive was that process? And, you know, any way to quantify how much interest there were from the broader industry for the vessels that were eventually sold?

I'll take that, Greg. The competitive process was pretty vast in the sense that, as Robert alluded to just a few minutes ago on this call, we were vocal about the fact that we were selling, we were going to sell ships. And this has created by itself a competitive process with all the interested parties coming in. There were pockets of buyers interested in MRs, LR2s, one or two on the handies, and more than we expected on the LR1s. The reason we chose to do the transaction we did, it's because it was a clean transaction with a natural buyer that had appetite for that specific fleet. being a market leader in the LR1 segment, which appreciated the design features of our LR1 fleet being modern, eco, wide beam, and all of the features that they didn't have in their fleet themselves. So when we started negotiating with AFMIA, it became apparent that It was a good fit for both companies, and we enjoy a good relationship and a good working relationship with them and decided that that was going to be our main transaction fairly early in the process once we saw that we could have executed on that.

Okay. Thank you, Emmanuel. Have a great day, everybody. Thank you.

Our next question comes from Ken Hexter with Bank of America.

Hey, good morning and good afternoon. So it looks like on the selling of vessels, you mentioned you get a few months' runway of cash. You get through some of the repayments. Rates here are starting off a bit weaker than I guess you would have expected. Emmanuel, you were more sanguine to start the call. I know, Robert, you're super uber-bullish. I've been on these calls for years. I don't think you've never not been uber bullish. So what is getting you that bullish here? Is it the setup of lower inventories? It doesn't seem to have monetized for years, right? We've been talking about, James has been talking about the drawdown of inventories, the setup of low fleet, low order book. So what needs to happen here in order to start seeing this to come to reality in terms of the rates and moving above cash cost and starting to not worry about the refinancing and debt pay down.

I'll start then. Go on, Mario. I was just saying that I think James mentioned this a few minutes ago on this call. I think that mobility is affecting demand, product anchor demand, And that is the main catalyst on which we will be seeing a recovery. I agree with what James said a few minutes ago. Mobility is the one that we are, the main catalyst we're waiting for. Having said that, all the fundamentals, and I think you would agree with us, are pointing in the right direction. So on the demand front, things are looking okay. On the supply front, things are looking okay. On the inventory side, things are looking okay. So all the fundamentals are there. Mobility needs to kick in for the market to rip.

I think also, Ken, I think we should remember that, you know, why let's say I'm uber bullish is in your words, I think that's a great word or a great phrase, is that, you know, two years ago, the beginning of 2021, The stock was over $40. Rates were really moving strongly across every sector of the product market. And what James is indicating is we're going to get a return to that demand level and in fact higher in terms of ton miles because we expect demand headline to be higher and we expect these refinery changes to increase the ton mile position. But supply itself, partly because of regulation, partly because of a lack of order book, and partly because of aging and scrapping, it's more or less going to be the same, not much different. So therefore, we kind of know where that market is going to, what's going to happen at that point. We know that in this dull market that we have, with all the inventory draws against us, all the demand headwinds, that the rates are what they are that we put out today. And we have seen what that market is likely to be. And on top of that, inflation and yard tightness at the moment and the lack of ability to order ships and the fact that yard prices have gone up since that period two years ago, your actual asset values are higher than where they were two years ago, too. So that, I think, is a very strong reason to be uber-bullish, as you put it.

Yeah. It's just the setup, right? It always seems to be there. We just need, I guess, your ability.

Yeah, but I don't think anybody predicted the COVID in January 2021, right?

So just a minor... Thanks, Robert and Emmanuel. A minor, I guess... balance sheet question if I can, Brian. Accounts payable seem to be going up significantly. Accounts receivable, I think it only minorly changed. Is there any change in, is that seasonal? Is there something to be highlighted on the balance sheet?

Just timing differences, Ken. Nothing there. You said our liquidity goes for a few months. It goes up for more than a few months if we look at it. At the lowest rates as a company we ever had, of 10,100 in Q3 of 2020, we look at those rates compared to our break-evens, we get eight months of time. If we look at it, what we're currently doing, we get almost 17 and a half months. So it's a little bit more than a few months. I know that's just a phrase you threw out, but I just want to make it clear to everybody on that.

Okay. Yeah, no, I was... Commenting from what I thought you guys had said when you did the vessel sales, it put us out a couple months on cash flows.

I get your math, though. Right. It's the additional liquidity. On top of what we have now, it goes out for quite a bit.

Great. Thanks for your time, guys. Thanks, Ken.

Our next question comes from Ben Noland with Stiefel.

Hey, guys. First, congrats, James. It's quite a step up, so nicely done. Also nicely done on all of your presentation today. My first question goes back to you discussed the LR1 sale a little bit, and it seemed opportunistic. Just confirming – There was nothing structural about LR1s that you think, okay, well, you know, we prefer LR2s or MRs or something like that. It was just that's where the best buy interest is. Is that fair?

No, no, no, no. I think that there was, in terms of valuation, first of all, there was buy-in across the board, across all the sites. This is universally across modern tankers, modern product tankers. the prices have moved upward. I think what's so rational for us in the LR1s was that here we could do the job on the balance sheet and giving us the strategic freedom later, hopefully, to create some real value. But at the same time, the LR1s is the one grouping, the one size range that we ourselves don't have, let's say, the leadership position in. You know, we have a leadership position in the Handys, the MRs, and the LR2s. In the LR1s, we had a good position, but not a leadership position. And the best dynamic for us overall, not only was, as Emmanuel pointed out, was Hafnir the best, you know, who was a solid buyer, but it also became, as he didn't explain, the best alternative. It becomes the best alternative at even prices across other vessels, because here... you were able to, we believe very much in consolidation, we've spoken about this before, and we were able to place those vessels into the hands of the number one owner and operator of LR1s, thereby consolidating as opposed to fragmenting that market. And that market sits between, even though it's a smaller market than MRs and LR2s, it is important that it sits in between MRs and LR2s. So anything that we can do to help strengthen that dynamic in the LR1 market will be beneficial to us in our MR and LR2 market.

Okay, that's very clear. Thanks, Robert. And then for my second question, notice that you guys are continuing to add scrubbers, especially on the MRs. Obviously, the fuel spreads have increased. widened back out i i guess my question is uh you talked about shipyard tightness on the new builds obviously there's supply chain issues um is there are are you running into well with wider margins i would imagine there's other people also out there looking to install scrubbers um at this point is there how hard is that to do is it is it challenging to get shipyard space for for repairs and scrubber installation? Is it hard to get the equipment itself? Any chance of delays or inflation in that respect?

I can take that if you like, Robert. As you know, Ben, the yards that are in new construction and those that are in repair and retrofitting are fundamentally very different yards. and so there's not a lot of overlap in that capacity. With the tightness that we've seen in containers and dry bulk, there isn't a raft of inquiry coming from those sectors around retrofitting right now, so there is capacity available. And then when it comes to supply chain concerns or inflationary pressures, again, They are modest at best. There are always risks, of course, but right now, given that the manufacturing of scrubbers is largely located in Asia and China specifically, the same place where the shipyards reside, we don't ourselves see great risks in either the logistics or the inflationary pressure just now. All right. Thanks, Tim.

Our next question comes from Magnus Fear with HC Wainwright.

Yeah, good morning. Just a question, you know, on the overall market. You know, I agree with your bullish views, but is there something we're missing here? What, besides, you know, another Omicron variant, is there anything else that concerns you? I mean, oil prices have crept up here as of late, that seven-year high. So, I mean, could that eventually eat into refinery margins and user demand? Or is there something else we're missing?

It could be. There are lots of coulds in this one. There's even the Ukraine-Russia situation. Traditionally, war has always been good for the tanker market in the short term. But if that led to something wider and something extremely disruptive to tanker demand, then that would be a negative. We don't know, Magnus, is the answer to that thing that could knock this demand scenario away. Because what we're basing it on, as Emmanuel and James said, is what we see all around us, which is that when Omicron passes, people become more mobile and they want to get out there and and spend their money and do things and travel to friends and spend time doing things again.

All right. Thanks for that, Collar. And just on the near-term outlook, based on the graphs that you showed, I mean, the IAEA has demand picking up pretty nicely each quarter going forward. Is there any seasonal demand or the seasonality playing out different this year than other years? Well, it could do.

It could do to the extent that you're going into, it would appear at the moment, unless something dramatic starts to happen very quickly, and I mean very quickly, you're going to go into increased jet fuel demand and increased gasoline demand off a low inventory base. So you may not have In a weird way, there's normally some form of weakening period as we go into the spring, but that is likely to... We would anticipate that's likely to be, you know, muted in an environment where there's low inventories already into an increasing... seasonal demand aspect plus an Omicron coming out aspect for jet fuel.

Again, one area we haven't mentioned, I mean, the IEA took their numbers up. I mean, they adjusted 15 years of demand numbers. They partly said that petrochemical demand, especially NAFTA demand, is very strong. Is there anything you've seen there that, you know, could surprise any upsides?

Yeah, I mean, look, it's always good to have. That's great. That's encouraging that petrochemical demand is strong because, you know, on the margin in the weak market, you don't want to have those chemical tankers coming into, you know, into the product trade. So it's great if the petrochemical demand is going up and getting stronger. Thank you, Robert.

Thanks.

Our next question comes from Liam Burke with B. Riley.

Thank you. The operating cash flow for the fourth quarter, Brian, was very strong in conjunction with the improving of sequential step-up in rates. When you're looking to buy back shares, are you anticipating being able to generate internal cash through the course of 2022, or do you look to borrow to buy back the shares opportunistically?

I think the only statement that we've made on shares is that that would be strongly considered once we see the visibility of rates at $17,000 or above.

Okay.

And we would give very little information to the market on that. buybacks or strategy etc etc in the same sense is we're going to give very little detailed information on you know navs because you know we've been here the management's been in on in another company another cycle going through that company had a huge buyback and we then it was very successful because the priority was to buy the shares as low as we could It was not to telegraph certain points at which we would buy or place restrictions on that buying or expectations on that buying.

Sure, fair enough. And James, you were mentioning an aging fleet, your obvious competitive advantage with your vessels. How does... The percent of vessels over 15 years old that are not scrapped benefit you guys as well, or is that just a neutral?

Well, you know, certain customers of ours will have rules around 15 years, right? They won't take a ship older than that, and it's not everybody. And structurally, the ships are fine. I think the older ships find themselves in tertiary markets. It could be cabotage trade, you know, in other places, or one of the easiest things they can do is carry, you know, fuel oil and crude oil because there's no risk of contamination. I think, obviously, the distribution of the fleet is massive, right, because nothing was really scrapped, you know, in the and what was delivered. And so I think with a super low order book here as we kind of go forward, this increase in scrapping will happen. These vessels moving over to dirty will increase. And with the yards being backed up, it's hard to materially change the supply at least to 2025. Great.

Thanks, James.

That concludes today's question and answer session. I'd like to turn the call back to Robert Bugbee for closing remarks.

Thank you very much. I think we've covered everything that we've covered and we needed to cover. And as Emmanuel says, we appreciate everybody's support and patience as well. And just trust that management looks forward as much as all of our shareholders out there to you know, as early a recovery in these rates as possible because that's really all that is required to set this company and the valuation on this stock and the ability for us to really create some value here and a much significantly stronger share price by the end of the year away is just simply that opening up of mobility and the opening up of demand and thereby rate. So thank you very much again,

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