Scorpio Tankers Inc.

Hello, and welcome to the Scorpio Tankers Inc. First Quarter 2023 Conference Call. I would now like to turn the call over to James Doyle, Head of Corporate Development and IR. Please go ahead, sir.

Thank you for joining us today. Welcome to the Scorpio Tankers Fourth Quarter 2023 Earnings Conference Call. On the call with me today are Emanuele Ouro, Chief Executive Officer, Robert Bugbee, President, Cameron Mackey, Chief Operating Officer, Chris Avella, 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 14th, 2024, 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, as well as ScorpioTankers 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 presentation. 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. If you have an additional question, please rejoin the queue. Now, I'd like to introduce our Chief Executive Officer, Emmanuel Aylero.

Thank you, James, and thank you everybody for joining us today. We appreciate your time. We're pleased to report another quarter and another year of strong financial results. In the fourth quarter of 2023, the company generated $237 million in adjusted EBITDA and more than $142 million in adjusted net income. For the full year 2023, the company generated $959 million in adjusted EBITDA and more than $570 million in adjusted net income. The fundamentals, which have created a strong rate environment over the last two years, remain intact. Those still are an increasing global demand for refined products, a dislocated refining capacity, and a constrained maritime supply curve. In addition to this, we've seen low water levels in the Panama Canal, attacks in the Red Sea, and sanctions on Russia, which have led to the rerouting of vessels. This has made the fleet more inefficient and further tightened supply against a strong demand curve. The cash flow from the elevated rate environments are significant. They have also been transformative for our company. The balance sheets and the quality of Scorpio Tankers as an investment has become stronger and continues to improve. The leveraging has been and remains our primary focus over the last two years. The company has reduced lease financing by almost $2 billion and our total debt by $1.6 billion. In the first quarter of 2024, we will repay $316 million in debt. And today, our net debt stands at just a shade below $1.1 billion. And we feel very well positioned at these levels. Over the last two years, we have returned $732 million to shareholders. This has been returned through share repurchases and through dividends. which includes $548 million or roughly $10 per share in 2023 alone. Today, we have announced another increase in our quarterly dividend, which is now 40 cents per share. This is our fourth increase since 2022. Looking forward, we expect low global inventories, robust demand, and limited feed growth to support the strong product-tanker fundamentals which we've experienced in the last two years. I'd just like to thank you for your continued support, and I would like to now turn the call to James for a brief presentation. Thank you. James, please.

Thank you, Emanuele. Slide seven, please. For the last two years, increasing demand, low inventories, refining capacity changes, and limited fleet growth has led to a robust rate environment. In the fourth quarter, this continued. LR2 rates improved through the end of December as Middle East refining runs increased after an early maintenance season, moving from $36,000 up to $50,000 per day before any disruptions in the Red Sea. MR rates were lifted by the strength in the U.S. golf market which offset slightly lower rates in Europe and Asia. Today, Asia and Europe are lifting rates for MRs as peak refinery maintenance in the US starts to wind down this month. With low global inventories, Middle East maintenance behind us, and the US working through peak maintenance now, the outlook for product tankers remains very constructive. As Emanuele mentioned, disruptions have led to new trade flows and rerouting of vessels, which has further tightened supply. However, This would not be possible without strong headline demand for refined products. Slide eight, please. Global demand for refined products has been extremely strong, and we expect this to continue. 2024 refined product demand on average is expected to surpass 2023 by 1.4 million barrels per day, and will be driven by increases in jet, fuel, naphtha, diesel, and gasoline. As global demand has increased, so have seaborne exports. January refined product exports averaged 20.6 million barrels per day, which is 1.3 million barrels per day higher than January 2019 levels. Given low global inventories, increased consumption will continue to be met through higher imports. And not only have imports increased, but barrels are traveling longer distances. Slide nine, please. While demand is above pre-COVID levels, refining capacity is more dislocated. One of the biggest challenges has been diesel. Europe, Latin America, and Africa all have a diesel deficit of 1 million barrels per day. Capacity closures in Europe, North America, and certain parts of Asia have been offset by increases in export-oriented capacity in the Middle East and India. Opening of new export-oriented refineries and closing of older, less efficient refineries has led to an increase in seaborne exports, ton miles and ton miles. We have seen this in Australia where imports have increased already above the lost production after closing two large refineries in 2020. Last week it was announced that 150,000 barrel per day refinery in Scotland is expected to close and will be converted into a fuel oil terminal. Excluding the impact of Russian exports in ton-miles, ton-mile demand has increased over 7% compared to 2019 levels. In other words, the structural changes in refining capacity have and continue to reshape flows and increase ton-mile. As ton-mile demand increases, vessel capacity is reduced and supply tightened. Slide 10, please. Disruptions have exacerbated the strong supply and demand fundamentals in our market. First, 485 product tankers have carried Russian refined product, many of which are older vessels that will have a difficult time returning to the premium trades given their age and trading history. This has and will continue to benefit the supply of vessels servicing non-sanctioned trades. Lower water levels in the Gatton Lake, which feeds the Panama Canal, has led to a reduction in the number of ships allowed to transit the canal from 36 to 24 per day. In the fourth quarter, this resulted in a reduction of 200,000 barrels a day of refined product moving through the Panama Canal and needing to travel a longer distance. Third, the attacks in the Red Sea have reduced volumes going through the Suez Canal. Slide 11, please. Before the attacks on commercial vessels in the Red Sea, 2 to 3 million barrels of refined product were transiting the Suez Canal each day, roughly 10 to 15% of the global seaborne product tanker trade. And this was about 1 million barrels a day higher than prior years because of the increase in distillate coming from the Middle East to supply Europe given sanctions on Russia. Many vessels are going around the Cape of Good Hope today, with canal volume dropping to around 200,000 barrels per day for the first week of February. Depending on the route, this can increase the voyage length by 30 to 70%. Rerouting of vessels has made the fleet more inefficient, tightening supply and leading to higher rates. Slide 12, please. New order book is 12% of the current fleet. New orders have started to slow, given expensive new building prices, long lead times for delivery, and uncertainty about propulsion systems to satisfy future environmental regulations. In addition, the majority of the order book is LR2 vessels, and with 52% of the LR2 fleet trading in clean products today, the effective order book for vessels trading in clean is going to be less than the current 12%. Also, the fleet is aging. The average age of the product tanker fleet today is 13 years, with 9% of the fleet 20 years and older. Starting this year, 8 million Deadweight tons of product tankers will turn 20 years old each year, the equivalent of 160 MRs per year. By 2026, 21% of the fleet will be 20 years and older. Slide 13, please. This year's fleet growth is expected to be the lowest fleet growth since 2000 at less than 1%. Seabourn exports and ton-mile demand are expected to increase 2.8% and 7.3% respectively, vastly outpacing supply. Using minimal scrapping assumptions relative to the age of the fleet, on average, the fleet will grow around 3% in 2025 and 2026 and close to zero in 2027. In addition, one- and three-year time charter rates remain at high levels, evidence that our customers' outlook is one of increasing export and ton-miles against a constrained supply curve. The confluence of factors in today's market are constructive individually, low inventories, increasing demand, exports in ton miles, structural dislocations in the refinery system, rerouting of global product flows, limited fleet growth, upcoming environmental regulations. Collectively, they are unprecedented. With that, I would like to turn it over to Chris to go through the financial slides.

Thank you, James, and good morning, good afternoon, everyone. Slide 15, please. As we have highlighted, cash flows from a strong rate environment have been significant and transformative for the company. Over the last two years, product anchor rates have been resilient. 2023 was a reflection of a strong market that found equilibrium after the events of 2022. As the chart in the upper left illustrates, the fourth quarter of 2023 was marked by a normalized seasonal uptick in demand heading into the winter months. The impact of the recent events in the Red Sea will largely be seen in our first quarter results. Over the last two years, we have generated over $2 billion in EBITDA and reduced our gross outstanding debt by $1.6 billion. In addition to that, since the fourth quarter of 2022, we have increased our quarterly dividend by 300%, and during 2023 alone, we've returned $548 million, or approximately $10 per share, to shareholders in the form of dividends and share repurchases. Slide 16, please. As we have stated in the past, deleveraging remains our primary focus, and we have made meaningful progress in this respect. As the chart on the left illustrates, our gross outstanding debt at December 31st, 2021 stood at $3.2 billion. As of today, this balance is $1.5 billion. The chart on the right shows this same progression, but more importantly, highlights the shift in the mix and composition of our debt, transitioning away from expensive lease financing into more traditional bank financing with lower costs and greater flexibility. Looking back, $1.7 billion of our outstanding debt at December 31st, 2022 consisted of lease financing obligations bearing margins of over 350 basis points on average. Today, our lease financing obligations stand at just $294 million, and we have committed to repurchasing 12 more leased vessels between now and the end of the second quarter. Once complete, these repurchases will bring our obligations under lease financing arrangements down to approximately $80 million. We have refinanced a considerable portion of our lease obligations into more traditional, and lower-cost secure bank debt, which carries margins of less than 200 basis points on average. We also want to highlight that the terms and conditions of this newer debt provide the company with greater flexibility, including the ability to repay these loans at any time and $500 million of revolving credit, of which $288 million is available today. In sum, we have not only reduced our leverage, but we've also simplified our balance sheet through more traditional forms of financing at lower costs and more flexible terms. Slide 17, please. Looking ahead, we still have more work to do, as we have committed to repurchasing $209 million of lease obligations between now and the end of the second quarter. This comes on the heels of $497.1 million in unscheduled debt and lease repayments in the fourth quarter of 2023 and $171.1 million of unscheduled debt and lease repayments thus far in the first quarter of 2024. Over the same period, we drew $423.6 million from our $1 billion credit facility and $50.2 million from our $94 million credit facility. each carrying margins below 200 basis points. On a pro forma basis, after considering our committed lease repurchases, our gross and net debt stand at $1.3 billion and $1.1 billion, respectively. Moreover, with no new buildings on order and the expiration of options to purchase and install scrubbers on 11 of our vessels, we have manageable capex requirements. Slide 18, please. The company has significant operating leverage. Our first quarter of 2024 coverage across the fleet, including time charters, is averaging close to $39,000 per day. At $30,000 per day, the company can generate over $750 million in free cash flow per year, and at $40,000 per day, almost $1.2 billion. Additionally, our cash break-even rate has declined, and we continue to seek ways to reduce it in a balanced and prudent manner. And with that, I'd like to turn the call over to Q&A.

Thank you. We will now begin the question and answer session. To ask a question, you may press the star 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the key. To remove your question, please press the star 2. Our first question comes from John Chappell with Evercore. Please proceed.

Thank you. Good morning. I don't know who wants to take this one, kind of open it to the group, but clearly as Chris just laid out, the targets on net debt are going to be achieved at some point in the early part of this year, if not the end of the first quarter. there's a lot more uncertainty in the world right now, obviously. So, um, you know, there's been some turbocharge and rates that's helped you kind of accelerate the debt repayment, but I think a lot of uncertainty on how the world plays out from here. So, you know, versus where we were three, six months ago, and you talked about targeting that debt levels and maybe shift in capital allocation, how do you see attaining those targets earlier versus maybe, um, continuing to do leverage further, just given a lot of the volatility in the markets today?

John, Robert, I think that's a great question. It's a question that we're obviously asking ourselves. I think that we're all in a fortunate position as management and shareholders in that right now, this market is providing extraordinary returns. The one thing we know is as cash is coming in, our balance sheet is improving. We have really no idea at all as to whether or not this will continue, whether the Red Sea will continue to be effectively closed and helping extraordinary earnings. And so I think that we haven't reached our target yet. We don't intend to comment on on what we would do with regard to capital return. When reaching the target, we're happy to say that we're not looking to do new buildings. And I think that it is a difficult situation to make a lot of decisions in the market environment that you have right now. So, but at the same time, we're confident as James has pointed out in the longterm fundamentals. So the way I'd answer at the moment is, uh, the basic operation, the basic operational position of the company at the moment is that however unrealistic that might be, we are running the company as if the red sea were to open tomorrow. and on that basis we still think that the market will be very strong it'll take a time to wind down from where we are to let's say you know put the shipping routes together and you know we're happy to share with everybody what we would call our base case of what we would think open days would be for the rest of the quarter And so we were internally on our base case under that assumption, working assumption I've given you, is we would expect product MRs to be around $35,000 a day for the M6 days and LR2s around $60,000 for the M6 days. So that's healthy. So I think the best thing to say is, yes, we're moving very fast towards a deleveraged state where the company can then have a lot of choices. But we're certainly not distracting ourselves right now on thinking what those, you know, what the best choices would be at that time, whether you, you know, whatever you do. And we just want to keep our eye on the goal right now and the mission of taking the debt down. Okay.

That makes sense. For my follow-up, this may seem like pretty small, but maybe it helps us shape your thoughts on strategy going forward as well. Letting those scrubber options expire, you know, you guys were one of the first to implement scrubbers. You were very much behind that technology implemented on 86 of your vessels. By letting those options expire, do we read that to believe that you have enough exposure to the scrubbers and maybe the returns start to diminish going forward? Do you read that to believe that you'd just rather have those 355 days in this type of spot market environment and think the returns from operating those ships are much better than any scrubber premium? Or maybe are those just older ships that you may look to monetize in the secondhand market as they don't fit the core fleet going forward?

That's a good question. Cameron, would you like to start?

Sure. Thanks, John. It's yes to all. So it's obviously a number of considerations that go into us not declaring those options. And they had an expiration date, so it's not like we could further extend that optionality. But it's yes to all. The opportunity cost of installing scrubbers here is extremely high. The spreads have come down and are rather muted and are expected to stay that way. And obviously we have a keen eye to the age of the fleet and the potential asset values here and potentially monetizing some more vessels through sale. So it really is yes to all your points.

Okay, great.

Thanks, Cam. Thanks, Robert.

Thank you. Our next question comes from Omar Nofta with Jackery. Please proceed.

Thank you. Hey, guys. Good morning and good afternoon.

Robert, just maybe just real quick, wanted to ask if you wouldn't mind just clarifying what you were just saying, I think, to John about how your operating assumption is for the rest of the perhaps quarter or for the rest of the year. You're assuming basically in your day-to-day that the Suez Canal or the Red Sea situation resolves itself tomorrow. And in that assumption, you believe that for the rest of the quarter, beyond what you've guided, but for the rest of the quarter, you think LR2s could earn $60,000. and the MRs could earn 35. Is that right? And that's above what you've earned thus far? Correct.

Okay.

We only have, you know, a third of the quarter left. Just over a third to 40%. So, you know, that's why you weighted it that way. And we know where the rates are right now. And the rates right now are above those. significantly above those numbers for LR2. So that's how we, you know, it's not the perfect science, but that's where we would come out.

Yeah. I guess I'm just looking at it from the perspective that those are above what you've guided thus far, which I guess the implication is that what you have booked thus far has seen a limited impact from the Red Sea.

Well, yes, the first three, four weeks, there was no impact at all. You know, every day we would answer questions to either analysts or shareholders, which would say, Oh, well, we're reading that the, that the closure of the red sea and Suez canal would affect the product market by X. Why isn't that happening? And we would answer because it takes a little time, you know, just because you, uh, you know, you, you put an obstacle in the way of a group going to a bar and they have to take a longer route. It doesn't mean it changes the number of people standing at the bar waiting for drinks to begin with. So it took a little time. So in the same sense, we're saying that if you stopped it, if the Red Sea was open tomorrow, again, it would take a little time. So all we're doing is saying, what did we earn in the, let's say, the trailing four weeks. So what do we think we could earn at a minimum for the next four weeks if you open the Red Sea tomorrow? That's more or less how that's calculated.

Okay. Thanks, Robert. That makes sense. And I guess then just a follow-up just off of that. you know, sticking with the Red Sea. You know, we've been seeing the diversions accelerate here in recent weeks after a bit of a slower start. You know, in terms of, say, Scorpio's fleet deployment, I know, James, you highlighted for the broader market how impactful the Red Sea is. But just in terms of, say, Scorpio, how active is that of a region for you, for Scorpio itself? And then is that an area, I guess, currently that you're avoiding given all the risks? Thank you.

Maybe we do that back to front. So maybe the last question was more operational. So maybe, Cam, if you'd like to take that one.

Sure, happy to. So we avoid having a rigid policy with regards to the Red Sea, but it goes without saying that the risks there today are unacceptable for our vessels, cargo, and particularly our personnel. So we are not fixing any vessels, nor are we transiting the southern Red Sea or the western Gulf of Aden today. And that's been true for about a month now. That being said, two observations. We don't avoid the northern or middle Red Sea because it's obviously a very active area for our vessels to trade with Saudi Arabia. And in addition, we cannot predict what conditions would change our posture of those of the market with regards to resuming transit to the Southern Red Sea. We just don't know. I don't think anybody knows. So every day we wake up, we look at the best and latest information we have. And, you know, we expect that to continue for the foreseeable future. But there is no policy per se. It's just assessing risk as we go. And as of today, the answer is no, we're not transiting Southern Red Sea.

So, Omar, then I'll go back to the first part of your question. I don't want people to get it wrong. Look, we're very bullish. These markets are super strong. The cash flow is enormous. And the other thing that you have to put in context here is that the last couple of weeks, the markets have had a negative overhang on them with regard to U.S. golf-type refinery turnarounds. and Chinese New Year. So if you were to talk to our trading desk, if the conditions remain, they would expect that rates would start to firm up, start firming next week. We have some very unusual situations going on. This is not like a light switch. The other day when there was some tweet saying that there could be peace between Palestine and Hamas and Israel, And we saw the stocks trend down to 10% down. It was like, what on earth are they doing? What on earth are these people doing out there? Because the market will not react like a light switch. It will take time. The fleet itself is all over the place. You have really big changes. We're even booking some second quarter revenue right now. We've had two MRs that we fixed and we're not going to be any different. This is not special to Scorpio tankers. I'm very sure that all of the leading product tanker companies will have the same type of profile in their fixing. And that is we fixed two product tankers from the US Gulf all the way to Japan. That is an awful long voyage. We have fixed product tankers from Singapore, to Argentina, from China to Anchorage. We have fixed product tankers just earlier this week, and this is mind-blowing, from Singapore to New York. Those vessels are buried for a long time. For all intents and purposes, for the balance of this quarter, those vessels may as well be scrapped. They're not going to be on any position lists for the rest of this quarter. that it, you know, so the position I'm taking, the assumption I'm taking is it's going to be closed tomorrow, but if it's not closed tomorrow and next week, it's, it's, I mean, open tomorrow, if, if, if the Suez and Red Sea is still, you know, shut for transiting to the product market next week and refinery turnarounds go away and Chinese new year is finished, you should expect on balance that the markets trade up even from where they are now. So this is certainly not a, we're not trying to be negative here. We're trying to show how strong this market is under almost any of the circumstances because of the fundamentals underneath. And we're trying to show that we will finish our mission to deleverage the balance sheet, and play from enormous strength from that point.

Thanks, Robert. That's a great place to be. That's it for me. Thanks, Robert. I'll turn it over. Thanks, Cam.

Next question comes from Greg Lilly with BGID. Please proceed.

Yeah, hey, thank you, and good morning and afternoon, everybody. Thanks for taking my questions. I guess you kind of started alluding to it, Robert, in terms of some of the longer voyages. Obviously, this is an exciting, interesting, disruptive time for rates where they are. What has kind of been the appetite, or is there any appetite from some customers looking to maybe go longer i.e., what's kind of the opportunities in maybe the time charter market? Maybe not six months, but maybe longer term. Any kind of depth in the two-plus-year charter market or anything like that?

I think that there's depth in the market. There are charters out there wanting to do things. They're there for yesterday's breaks, of course. and you know even at two years the the present front end you would have to discount your rates so much and that's that's simply because we haven't had this position for very long and you know they themselves don't know what's going to happen out there so you have a situation where you know the charter wants to get on yesterday's market and the owner says well i need some recognition for where the market is right now because you know, there's no point in me fixing a spot chip that, uh, you know, if you could, if you could fix it 70, $80,000 a day for an LR two for two, two and a half months, it's going to be a little bit tough to fix away at, uh, you know, 30, 30, $40,000 discount straight out of the gun for a two year charter. unless that's reflected properly in a, in a raised charter rate from where it was before. I think though there's liquidity, there's liquidity is ironically a lot. Ironically, the S and P market is different to the S and P market is, you know, prices have gone out. Prices are reflecting that and the S and P market itself is reasonably liquid.

Okay, super helpful, and I know we've been talking a lot about the Suez Canal here. You know, could you talk a little bit, you know, maybe Cam or James, or what you guys are seeing kind of in the Panama Canal? I mean, it seems like water's still low there. It seems like that could be more of maybe a longer-term issue that could be impacting rates in the Atlantic area.

Cam, would you like to take this?

Sure. Thanks, Greg. It absolutely is affecting rate structures in the Atlantic. Our analysis of the situation is it's exacerbated by El Nino. The Panamanians are trying to redirect water into the lake. The earliest we can see any improvement is later in the second quarter, but That is an educated guess and not something that we can plan on or forecast with any certainty. So we just don't know what it would take between the rainfall and the redirection of other water into the lake to allow the Panamanians to increase transits. But that's our best guess.

Great. Thank you for the time.

We proceed with Sam Island with JP Morgan.

Sam Bland The first question is on the Red Sea disruption, we've seen a very big reaction in LR2 rates but less of one in MRs. Is that what you'd expect to see given the trading patterns of each or could the MRs go up in the coming weeks? Let's maybe take that one and then I'll have a second one after that.

Thank you. I think it's happened exactly as we would expect. First of all, there are less LR2s and when it first strikes, everybody wants to go to that vessel that carries the maximum cargo. And then what What happens after that? It starts getting absorbed around and we've seen the MR market actually move up now in the last couple of weeks. And that's moved up against the U.S. Gulf refinery situation plus the preparation for Chinese New Year. So that's like a very bullish sign. And you're starting to see cargoes getting split. So in the same way as it took a little time for the LR2s to actually move, it takes a little time for the space to be filled for one to another way between the MRs and the LR2s.

Okay, understood. And the second question is on the net fleet growth graph on slide 13. I just saw in the footnote there's this assumption of 30% slippage across 2024 to 2027, which I guess we're expecting those years to be good years. I can sort of see why you might get slippage in a bad period, but why would we expect 30% slippage in what hopefully is going to be a strong market? Thank you.

Sam, well, you always get slippage at the end of the year on certain vessels, but there's a lot of vessels in the order book that don't have firm delivery dates. So there were a lot of vessels ordered, you know, maybe promising a Q4 delivery date in 25 or, you know, a Q2 or something like that in the later years. And we just don't have the specifics on it. So it's our best estimate of when these vessels will deliver.

Okay. Understood. Thank you.

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

Hey, great. Good morning. Robert or team, can you talk about kind of break even levels now, right? So you've gone down to 16,000 a day from 17,000 last quarter. I guess, where do you see that trending? You've talked before about kind of, getting that a little bit lower, maybe just talk about where you think it is now.

I think that, I think we're happy to give the 16 and, um, you know, we'll, we'll not talk about where we want to go. I think we'll just, we will, we'll say that we're focused on, uh, you know, reducing our, uh, breakeven levels. And to the extent that you are, paying down debt and reducing your amortization, debt amortization and interest costs, then you know, that should happen. The, the, the exact, I think it's better that we just say where they are rather than say where they're going to. Okay.

Um, and just a lot on this Red Sea discussion, um, maybe talk a bit about, uh, I guess, is the impact to rates now, is it still somewhat isolated on certain lanes? Is it just rates globally have adjusted? I just want to understand the process on timing and how well spread out the rate adjustment is now.

All rates are up. That's what's so strong. The depth and breadth across the product space is very strong. Okay. And then, Robert? There's many, many, many, many different routes. I mean, I've described some really crazy routes, the MRs. But inside of that, obviously, the Asian market has been stronger on the MRs and the U.S. Gulf is. let's say, being the one that's not so strong, even though it's still very strong. But that's because of the, you know, refinery turnarounds. And Asia, even though it's going through Chinese New Year, is being assisted because talent is being drawn to Europe, you know, because of Europe's situation. And, you know, frankly, I think we're getting a little help from U.S. finally being tough on the sanctioned, you know, Russian oil and Russian trading ships.

I think that's good, too.

I guess, Robert, if we thought forward and you were talking about the Red Sea reopening kind of in your base model, right, in terms of assumption on pricing, what happens in terms of if Russia and Ukraine at some point the war will end and you'll get, you know, what happens to those vessels? How quickly do they get reabsorbed into the market? I just want to understand timing. Because obviously you stay hesitant.

Yeah, of course. But I mean, if you're looking for excuses to maintain your hold because you're now worried about Russia, I doubt whether Russia, Panama and Middle East will all get solved together very shortly. And there is, you know, Russia we can be slightly more, you know, certain on because it's a phenomena that's sort of been embedded. That position, just doesn't seem to be getting any easier. You know, as I said, the U S is getting tougher related to the sanctions. Uh, you know, Putin is showing no interest in slowing down and Ukraine at the moment is showing no interest in, in giving up. So, you know, we, we, we also still have to accept that the longer we go through the curve and time here, the more that anyway, a Russian, this going back, I don't see how you go back to how it was before anyway. And even if you go back a little bit, I don't think that it starts to affect things so much because you've got this aging of the fleet coming through and then you've got, you know, the growth in, um, in other trades in the product market that have taken over. And I just cannot imagine that you're going to go back to, oh, yeah, that's great. Thanks, Russia. We'll – Europe will just take everything again.

So just to help me understand the last part of your kind of argument, right, is if you are assuming a base case or return in your rate assumption at elevated rates, tell me again why you would not want to start locking in any – charter out contracts? Is it that they just don't adjust to where the market is in any relationship?

I've only talked about elevated rates related to the Middle East. I don't think that the market is that elevated any longer and ever was related to the Russian thing. I think that was a little bit overextended. The reason is this. It's because the rates are very, very high right now. The charter is sitting there saying, so these are not the rates, but let's say before all this happened, a ship would be $20,000 a day charter, for example. And right now, that vessel could earn, let's say, $30,000, $35,000, $40,000 a day because of the elevated rates. The charter hasn't really moved. So now the calculation would be for a two year charter, you know, the owner would want to have more rather than give the ship away at the front. It's such a big discount, but the charter isn't yet ready to pay that rate because the charter does not have the certainty with all the different changes in the newsletter announcements every 10 minutes of whether those very heightened rates will continue for a long time. The same as nobody does. So therefore, it's almost like no trade in, let's say, stock market language. The bid offer is just too wide right now.

Yeah.

But that'll settle down at some point over the next, you know, three, four weeks, I would expect. Awesome.

Thanks for your thoughts, Robert. Appreciate it. No problem.

Our next question comes from Frode Morkadel with Clarkson Securities.

Thank you. Hi, guys. Congrats. Strong quarter.

And even better first quarter. I guess coming back to the Red Sea, we talked a lot about it, and I appreciate the 60,000 figure is if it opens up tomorrow. But I'm curious to hear your upside case. Should this continue, right? I guess we haven't seen all ships divert. Do you have any idea what the potential impact could be? How high rates could go? Should this last?

Well, you know, I know this guy in Norway. who's an analyst for this company called Clarkson, this Norwegian guy whose name's Frodo. And, you know, he sort of said very early in the piece at the end of last year that, you know, we could see LR2 rates at over $100,000 a day in certain fixtures. And, you know, that person has been right, Frodo. So, you know, I think we've done quite well following your guidance, right? So I don't think we're going to comment on any of the upside. Upside can take care of itself. Fair enough.

Good, good, good.

I guess you mentioned... Congratulations on your call, Frodo. Thanks. Thank you.

My final question is just on the new trade lens you mentioned. You know, we all observe the standard routes but curious to hear what type of new routes you see on the LR2s, for example, which are emerging.

You've just seen some very... The LR2s are slightly more in order, but you've just seen some weird things that are very, very cool. You've seen, for example, vessels that are discharging in Europe. We have one ship, for example, that's gone from the AG, loaded in the AG, gone around the Cape, going to Europe, and it's about to It's discharged in Hamburg. It's going to reload in Amsterdam and then come all the way back around Cape and discharge in East Africa, six days away from loading in Jeju. That is really kind of, wow, okay. And then you've seen routes that are related out in Asia, too, where you're able to bring vessels back uh towards the ag or or voyages to australia and things that are out of the indexes that are very lucrative voyages perfect that's very interesting great thank you thank you guys yeah thank you

Our next question comes from Leon Burt with B. Reilly FBR.

Yeah, thank you. Your dividend payout has been steadily increasing from quarter to quarter. How much of that is a part of your capital allocation strategy as your debt levels start coming down, and how are you going to balance that between your buybacks where you have sort of a stated target as a percent of NAV?

We're simply not going to comment to capital allocation strategy until we've achieved our goal. And the permutations of what you would do just between stock buybacks and dividends. So right now, we've always believed in regular dividends. And I think that the dividend increase is like a nod to or a recognition of the really improved underlying strengths of the company. I wouldn't see it as, you know, anything other than that. We've just been regularly increasing that dividend all through last year, and we're just adding it again to it now.

Okay, thank you. Obviously, there's been a lot of talk about the Red Sea. How much has India, as it's stepped up as both an importer of crude and exporter of product tankers, been to your advantage, and how do you see that shaking out over time?

Robert, you want me to take this?

Yeah.

Of course. William, great question. I think the answer is it's had a positive impact. We often focus just on the Middle East, and depending on the region, sometimes people will include India in that. But they have added very advanced refining capacity. Yamnagar is probably the most advanced refinery in the world, one of the most complex refiners in the world. and they export around one to one and a half million barrels a day of product. And they're planning to add a fair bit of capacity. So similar to the impact of the Middle East, which has expanded ton miles, we have seen a similar impact in India, and it's probably the next growth region.

Great. Thank you, Robert. Thank you, James.

Thanks, Sam.

Our next question comes with Chris Robertson with Deutsche Bank.

Hi, yes. Good morning. This is Ben Moore calling on for Chris Robertson here at Deutsche Bank. Thanks for taking our questions. You've outlined very strong fundamentals in the market and given the latest disruptions in the Red Sea, it's put upward pressure on tanker rates. We wanted to ask, what are your thoughts, especially on prioritizing maybe a special dividend over share purchases, capex or debt pay down?

I'm really sorry, Chris. I missed the question.

I'm really sorry. Oh, I'm sorry. We wanted to ask, you've outlined very strong fundamentals in the market. And yes, given the latest disruptions in the Red Sea that's put upward pressure on tanker rates, we wanted to ask especially how you might be thinking about prioritizing a special dividend over other things like share repurchases, capex, and debt pay down.

Yeah, we'll sort of restate this until we get to where we finish the mission of paying down debt, then we're really not going to really think about it ourselves. We have to see what the set of opportunities are. And secondly, we're never going to telegraph it. There's no possible way. So I would say to everybody, there is no way that we're going to come out and say, oh, we're going to buy back this much stock. Or we're going to pay out, you know, intend to pay out this much extraordinary dividend. Or we intend to raise the regular dividend to X. We're just going to act on whatever we've done. You know, we've already got the stock buyback in place. We're not going to, you know, we're not going to wake up one day and say, hey, you know, guys, we're happy now. This is going to be, you know, this is what we're going to do.

Thanks. And maybe as a follow-up, can you please discuss just your thoughts looking forward, whether we've reached peak disruption in terms of product tankers and how it might play out throughout the year, just at least from what you're seeing and hearing.

I think that's a wonderful, wonderful, wonderful question. You know, when we think through two years ago, two years ago or three years ago, we wake up one morning in late February and see absolutely no cars on the road and no planes in the sky. And then we are sitting in a situation now where we've got a long-term war between Ukraine and Russia, the Panama Canal transit inhibited, Red Sea transit inhibited, and know some argue that the um the the palestine israel situation that whole middle east situation is getting worse not better and you know no one talks about the risk of it spilling over into other areas so i think it's it's impossible to say that we've reached the peak of the disruption because you know we're now way beyond three standard deviations of disruption anyway right now. So it's not, you know, Wall Street's bent and all these news things is, you know, there's a complacency in the whole oil space as we look at price. And it's like, you know, Wall Street is really, you know, wishing, hoping all the time on every announcement that's that's relatively, you know, dovish, but the facts are, if we go back since October the 7th, virtually on a bi-weekly basis, the situation has got worse, not better. It's hard for me to say, yeah, we've reached the peak of dislocation.

Wonderful. Thank you for your, great. Thanks for your insights.

This concludes our question and answer session. I would now like to turn the conference back over to James Dial for any closing remarks.

Thank you all for listening. Hope you all have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.