HIGHLIGHTS
- Elevated cargo supply and oil price contango structure drives record quarter
- Second quarter spot market TCE reached USD 82,750 (Eco VLCC), USD 81,500 (full fleet VLCC) & USD 60,750 (Suezmax) per day
- First half spot market averaged TCE USD 76,000 (VLCC) and USD 60,000 (Suezmax)
- Return 80% of quarterly net income to shareholders: USD 100 million via share buyback from Q2 cashflow and nearly USD 96 million in cash dividends
- Q3 update: 48% of VLCC spot booked at USD 60,250 per day, 48% of Suezmax at USD 36,500 per day
- Sector now in transition phase driven by oil inventory levels
Euronav NV today reported its non-audited financial results for the first semester and second quarter ended 30 June 2020.
Hugo De Stoop, CEO of Euronav said: “Tanker markets continued to deliver strong earnings throughout Q2 and into the early part of the third quarter. Floating storage requirements dissipated sooner than expected, pivoting the tanker market to a transition phase ahead of our prior forecast. With our sector low leverage, supported by over USD 1 billion liquidity Euronav is very well positioned to navigate challenges and seize opportunities as the market transitions to a lower crude supply and demand dynamic.
Euronav today commits to an additional USD 25 million allocated to share repurchases from Q2 earnings in addition to the USD 75 million already executed recently. Therefore, shareholders will benefit from a distribution of USD 196 million from the earnings generated in Q2 alone split into accretive share repurchases and a cash dividend of USD 47c per share payable later in August.
COVID-19 continues to create huge restrictions on the mobility and movement of seafarers. Crew changes are critical for all shipping sectors and movement of goods. We reiterate our call to Governments globally to acknowledge the essential role seafarers play in maintaining crucial supply chains and global commerce during this pandemic and recognize them with “key workers” status.”
EURONAV TANKER FLEET
On 9 April 2020, the Company sold its oldest vessel in the fleet, the Suezmax Cap Diamant (2001 – 160,044 dwt) for USD 20.8 million. A capital gain on the sale of approximately USD 13 million was recorded in the second quarter.
The sale of the VLCC TI Hellas (2005 – 319,254 dwt) was concluded for USD 38.1 million. A capital gain on the sale of approximately USD 1.6 million was recorded.
Euronav considers regular fleet rejuvenation an important function of vessel management in providing quality services to our clients as well as providing long term value to our shareholders.
FUEL PROCUREMENT STATUS (UPDATE)
During 2019, Euronav purchased 420,000 metric tonnes of compliant fuel and stored it on its vessel, the Oceania (2003 – 441,561 dwt) ahead of the new IMO 2020 fuel regulation. In view of the significant drop in oil and fuel oil price owing to COVID-19, the Company has actively managed its fuel position by procuring its fuel requirement from both the open market and its stored compliant fuel. The quantity onboard the Oceania on 30th June was approximately 275,000 metric tonnes of compliant fuel and the marked-to-market value was USD -32 million, a much improved position from the last quarter. The Company continues to conclude that no write down is required at this time but will continue to assess its position each quarter in full compliance with the accounting policy.
CAPITAL ALLOCATION STRATEGY IN ACTION
Euronav remains committed to its target return to shareholders of 80% of quarterly net income. It is important to stress that this return to shareholders is from net income generated quarterly and therefore does not impact the company’s liquidity which will be augmented by the 20% of net income that is retained.
SHARE BUYBACK RELATED TO Q2 EARNINGS
As previously disclosed, the Company has so far bought back just under 8.5 million shares at an average price of USD 8.86 per share by deploying a total of USD 75 million. Furthermore the company intends to spend an additional USD 25 million on share buybacks before the end of the current quarter.
FINANCING AND LIQUIDITY AT EURONAV
Euronav has always looked to maintain a strong financial base and excellent relationships with our capital providers: commercial banks, equity and debt investors. At the end of June 2020, the Company had liquidity of USD 1.086 billion comprising USD 280 million cash and USD 806 million undrawn committed credit facilities.
KEYWORKER STATUS FOR ALL SEAFARERS – NOW!
Unfortunately, the lockdowns occurring all around the world have severely impacted the ability to perform regular crew changes. The entire maritime industry has been affected with thousands of seafarers confined onboard with an overdue contract, due to COVID-19 related travel restrictions.
This is not a crude tanker company issue but a global maritime industry issue. It is the largest ever humanitarian and logistical crisis facing the maritime sector, with the disruption now affecting the lives and livelihoods of nearly 40% of the world’s estimated 2 million crew; including those seafarers that are unemployed and unable to join their ships. This issue needs affirmative and positive action at border points in order to ease the backlog of stranded seafarers around the world. Euronav calls upon all governments around the world to recognize all seafarers as “key workers” with immediate effect, and allow them safe and secure access to their destinations.
COVID-19 UPDATE
The COVID-19 pandemic is impactful in many ways. Since the crisis arose, Euronav has focused on the safety and well-being of its people, as well as ensuring business continuity for its customers and all its other stakeholders.
The Company’s main concern and challenge remains the rotation of more than 600 Euronav seafarers with expired contracts stranded at sea. Euronav is working closely with many organizations and countries to take measures to facilitate the movement of seafarers to and from their ships.
None of our crew has been affected by the virus so far. While the cost impact related to this situation was not too significant in Q2, the third quarter may see an increase in crew related operational expenditure related to quarantine accommodation and increased travel costs. Notwithstanding this challenge, we are extremely thankful to our crew members who despite those challenging circumstances have continued to ensure the safe operation of our fleet and the delivery of essential supply chains for our customers.
Going forward and in general terms, the market may become more challenging if demand for crude oil continues to be negatively impacted by the COVID-19 pandemic. This decrease in demand combined with the gradual release of vessels that are currently used as storage may distort the supply-demand balance and thus the freight market. However, some of these negative consequences could be partially offset by continuing logistical delays of ships in ports, increased level of recycling, reduced ordering of newbuild vessels and increased crude oil production, all neutralizing the COVID-19 impact to a certain extent. In view of these different dynamics which the company does not control, the longer term global macro-economic impact on the Company’s results related to the COVID-19 outbreak remains difficult to accurately quantify. Any forward-looking statements should be regarded with caution because of the inherent uncertainties in economic trends and business risks related to the current COVID-19 outbreak.
TANKER MARKET
Tanker shipping markets continued to be volatile with gyrations in crude supply, oil prices and oil price spreads throughout the quarter. A combination of aggressive crude price cuts from Saudi and reducing demand due to COVID-19 induced restrictions drove a “super contango”* structure in the oil price from mid-March to mid-May. This reached a record high (spread between spot and 6 month forward price on Brent hit USD 13) at the start of the quarter based on forecasts suggesting that continued oil production and rapidly shut off demand would produce a large and sustained requirement for crude storage on ships. These combined features drove tanker rates to elevated levels during April.
*contango – is where the future price of oil is higher than the current spot price of oil meaning traders can profit by forward selling the futures price and then buying the oil at the spot price; storing the oil in the interim period and thus making a profit.
Ultimately, the disconnect between production and demand was not sustained as OPEC+ cuts enacted on May 1 were accompanied by further additional voluntary Saudi based reductions and production shut-ins from the US shale sector. This affirmative crude supply reduction in the face of substantial reductions in demand from COVID-19 lock down restrictions consequently reduced the peak requirement for floating crude storage to c 275m barrels compared to forecasts in early Q2 of a requirement 3 times this amount.
A specific feature of the floating storage impact on tanker markets was, in the short term, the disproportionate quantities that the Suezmax/Aframax vessels took in floating storage primarily due to the freight rate differential with VLCC vessels. Therefore, when the unwind of this floating storage occurs, it may be less pronounced on VLCC sector (only c 40-50 VLCC were taken on “market” storage for shorter duration contracts). Supply restricting disruption during Q2 (congestion, fleet arrests, sanction concerns) also benefitted specifically the VLCC sector and helps explain the freight rate differential with the Suezmax space. When and if those disruptions disappear, it may put further pressure on rates.
The OECD estimates there will be an inventory build of over 500m barrels from the dislocations of late Q1 and Q2 in oil markets to add to the 200m barrels currently in floating storage. The IEA are forecasting that oil demand will not recover to 2019 levels until 2022.
Asset prices in most age categories have softened year to date. An overhang of second hand vessels available to buy is likely to discourage asset price appreciation in the near term.
With an orderbook to fleet ratio at about 8% (23 year low) for the VLCC sector and 10% (18 year low) for Suezmax, increasingly restricted access to finance for shipping sectors and rising stringency of environmental standards to be met in less than a decade, it is very difficult to see contracting of new vessels enjoying a renaissance.
OUTLOOK
Our outlook presentation in Q1 presented a thesis around the oil production/consumption disconnect to drive a contango price structure of some duration and therefore a requirement for floating storage. Our view of the floating storage duration requirement proved to be too optimistic. High compliance with OPEC+ production cuts and rapid shut-ins primarily from US crude supply reduced any oversupply of oil to a minimum from mid-May onward. The impact of the disconnect during March and April however helped drive a strong Q2 which has impacted positively into a robust start for Q3 earnings.
As a consequence, the floating storage disruption has been relatively softer implying any flowback of vessels is likely to have a less pronounced impact on tanker markets during the second half of 2020. OPEC+ is scheduled to release increases to crude supply (and therefore tanker cargoes) from September onwards and there are potential prospects for additional shipping demand from execution of the Chinese commitment to purchase USD 20-30 billion of crude oil from the phase one trade deal between US and China, although this too may face difficulty owing to the worsening political relations between the two nations, along with the uncertainty over the outcome of the US election in November.
Therefore, the tanker market has rapidly pivoted to the transition phase that Euronav anticipated during its Q1 commentary but which has positioned itself sooner to be the key driver for the second half of 2020. This pivot toward a “back to 2019 consumption levels” post COVID-19 world with reduced supply and demand for crude is estimated by the IEA to take place in 2022. It is likely therefore that this will drive a challenging backdrop for large crude tanker markets and freight rates.
For Euronav, the likely challenging freight rate environment provides a number of opportunities. In terms of vessel supply – ordering remains at a multi-year lows. At the other end of the vessel supply spectrum is the number of VLCC and Suezmax tankers (estimated to be around 150 vessels) that have to undertake a special survey on tankers aged 15 years or more between now and the end of 2021. The supply side equation for tankers is highly promising with sustained pressure on freight rates likely to drive a global reshaping and downsizing of the crude tanker fleet.
Euronav is very well positioned to navigate these challenges from a transitioning tanker market to a lower crude supply and demand dynamic. Euronav enjoys sector low financial leverage and is supported with liquidity of over USD 1 billion so this will allow us to manage a period of pressure on freight rates. Combined with a strong, accretive track record in transiting such difficult sections of the cycle Euronav is confident of its immediate future and for the medium term outlook for the large tanker sector and market.
So far during the third quarter of 2020, the Euronav VLCC fleet operated in the Tankers International Pool earned about USD 60,250 per day whilst 48 % of the available days for the third quarter have already been fixed. Euronav’s Suezmax fleet trading on the spot market has earned about USD 36,500 per day on average with 48% of the available days for the third quarter already fixed.
Sea News, August 6
