Q2 2015 Euronav NV Earnings Call
Jul 30, 2015 AM CEST
EURN.BR - Euronav NV
Q2 2015 Euronav NV Earnings Call
Jul 30, 2015 / 01:30PM GMT
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Corporate Participants
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* Paddy Rodgers
Euronav NV - CEO
* Hugo De Stoop
Euronav NV - CFO
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Conference Call Participants
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* Jonathan Chappell
Evercore ISI - Analyst
* Amit Mehrotra
Deutsche Bank - Analyst
* Noah Parquette
JP Morgan Securities - Analyst
* Wouter Vanderhagen
KBC Securities - Analyst
* Fotis Giannakoulis
Morgan Stanley - Analyst
* Charles Rupinski
Seaport Global - Analyst
* Erik Stavseth
Arctic Securities - Analyst
* Junior Cuigniez
Petercam - Analyst
* Erik Havelson
Tetra Securities - Analyst
* Samuel Sekine
ALJ Capital - Analyst
* Gregory Lewis
Credit Suisse - Analyst
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Presentation
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Operator [1]
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Welcome to the Euronav Q2 2015 results conference call. All participants will be in listen-only mode. (Operators Instructions) After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.
I would now like to turn the conference over to Paddy Rodgers, CEO. Please go ahead.
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Paddy Rodgers, Euronav NV - CEO [2]
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Thank you. Good morning and afternoon to everyone and thanks for joining Euronav's Q2 2015 earnings call. Before I start, I would like to say a few words. The information discussed on this call is based on information as of today, 30th of July, 2015, and may contain forward-looking statements that involve risks and uncertainties.
Forward-looking statements reflect current views with respect to future events and financial performance and may include statements concerning plans, objectives, goals, strategies, future events, performance, underlying assumptions and other statements which are not statements of historical facts.
All forward-looking statements attributable to the Company or to persons acting on its behalf are expressly qualified in their entirety by reference to the risks, uncertainties and other factors discussed in the Company's filings with the SEC, which are available free of charge on the SEC's website at www.sec.gov and on our own Company's website at www.euronav.com.
You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement and the Company undertakes no obligation to publicly update or revise any forward-looking statements. Actual results may differ materially from these forward-looking statements. Please take a moment to read our Safe Harbor statement on page 2 of the slide presentation.
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Hugo De Stoop, Euronav NV - CFO [3]
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Thank you, Paddy, and good afternoon or good morning wherever you are and thanks for joining our second-quarter 2015 earnings call.
Turning to the agenda slide on slide 2, I would like to take you through the highlights of our second quarter earnings, followed by a full review of our key financial figures, before handing over to Paddy to take you through the latest market developments and themes as we see them at Euronav. We will then turnover to the operator for a Q&A session.
Moving on to slide 4, the key theme for the second quarter has been the stability of the rates with far less volatility than we normally see. We at Euronav have also fixed two VLCCs to two different oil majors for a period of two years and three years respectively. The third quarter is looking good and we have booked so far almost 53% of the available VLCC spot days at rates above $60,000 a day and nearly 50% of the available Suezmax spot days at an average of more than $42,000 a day.
Looking forward for the next six months as at 30th June, 2015, our employment mix is currently standing at approximately 80% spot and 20% under time-charter contract. This is something we will look into more detail later on. But before that, I would like to move on to the income statement on slide 6.
All figures have been prepared under IFRS as adopted by the EU and have not yet been fully reviewed by our auditors. Currently, we have four Suezmax, one VLCC and two FSO in 50%/50% joint ownership with partners. These will be accounted for using the equity method for joint arrangements.
As a side note, these joint ventures generated for the first six months ending on 30 June, 2015 a combined EBITDA of $101 million for Euronav's portion. Our EBITDA during the second quarter came in at $142.3 million. This is 8% higher than the first quarter EBITDA and is the direct consequence of a better spot market, which is unusual as we would normally expect the second and the third quarter to be weaker than the first and the fourth quarter.
G&A was $11.1 million. This increase year on year is the direct result of the growth we had in 2014. In terms of depreciation charge on an equity method basis, we depreciated $52.6 million for the second quarter. Full-year depreciation on the equity method is likely to be around $210 million.
As we announced on April 1st, just after the end of the quarter, we have a clear and transparent dividend policy, whereby we will be distributing at least 80% of net income on an annual P&L basis in May and September. We will declare our dividend for the first half of 2015 on August 20 after completion of the audit.
To be clear, the 2015 dividend will unusually come in three tranches. We paid $0.25 in May of this year as an advance on what we will be paying in September for the first half of 2015. The balance of the full-year 2015 dividend will be paid in May 2016 after being approved by the Assembly of Shareholders.
For 2016 and beyond, dividends will come in two tranches; September, after the declaration of each half year's result, and May, after approval of shareholders based on previous year financial figures. The reason for the accelerated payment in May 2015 was a clear reflection of the Board's and Management's confidence in the structural improvement we are experiencing in the crude tanker freight market.
Slide 7 shows in more detail the key highlights for Q2. During this quarter, we had the delivery of the Hakata. That is the last of the four VLCCs acquired last July 2014; the Flandre, for which we signed a 3 year time-charter contract with an oil major; the Sara, which has been extended for two years under our current contract starting in July also with an oil major; and the Hakata, which has been fixed under time-charter contract with an another major for two years starting in the fourth quarter.
In terms of sales and purchase, we announced the purchase of four VLCC in June. Indeed, on June 16, we announced the acquisition of four VLCC for a total consideration of $384 million and we also paid a total of $8 million towards the options to purchase four further sister VLCC from the same seller.
This leads us to slide 8 and our balance sheet. Our leverage position on book value at 30 June was 42%. We paid a deposit of $122.8 million for the four VLCCs that I just mentioned and that was booked on the balance sheet at 30 June. We will finance the acquisition with existing liquidity and a classic bank financing.
The proforma balance sheet on 30 June, taking into account the full consideration for this purchase, would have showed a leverage of just over 46%. Post this deal, we will have over $3 billion in high quality assets funded by a supportive consortium of banks at attractive margins.
We now turn to the fleet operating days at Euronav. The split between tanker spot days and days in the time-charter including FSO was 90% fixed and 81% spot. On a full-year basis, we expect to have a similar proportion between our fixed and spot days.
Talking about dry docks now, we docked the TI Hellas, a VLCC, for her second survey and the Hakata, also a VLCC, for her first survey. In the second half of this year, we will take a further five Suezmax, of which one is a joint venture, and three VLCC to dry docks.
That concludes the financial section of the presentation and I will now hand over to our CEO, Paddy Rodgers, to give you an update on the tanker market and current market themes. Paddy, over to you.
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Paddy Rodgers, Euronav NV - CEO [4]
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Thank you, Hugo. Vessel supply growth has been modest since Q1 2015, as this slide on world fleet development for VLCC and Suezmax shows. Since our last call, the VLCC fleet according to Clarksons is now forecast to grow on a net basis by 17 new VLCCs for 2015, up 2 from 15 at the end of April. The situation for 2016 is unchanged with net 28 VLCCs of expected growth.
We have seen new orders of VLCCs during Q2, but they will not be delivered until 2017 at the earliest.
For Suezmax, again, on a net basis, five vessels are due for 2015 delivery compared with a Clarksons estimate of only two at the end of Q1. With 2016 now forecast, we see Suezmax added to the fleet compared to 15 forecast three months ago.
We had expected to see increased ordering activity given the strength of the freight market that Hugo outlined earlier. However, this activity has been modest and remains manageable.
Closer inspection of the order book from Clarksons reveals that most of the VLCC orders in particular are due for the second half of 2016. Also, as the chart shows on this slide, net fleet growth is between 2% and 4% for the next two years in VLCCs, which we believe is manageable given the outlook for oil demand, production of oil and further ton mile expansion. We believe this increase in vessel supply is manageable, particularly as demand will have moved up by the time these vessels arrive in the marketplace.
Moving on to the next slide, time-chart rates. This slide shows indicative rates for one, three, and five years for time-charters for both VLCCs and Suezmax. Previously, we had said there was little depth to the time-charter market in both categories. This has begun to change during Q2, a fact reflected by the several time-charters Euronav has fixed during the quarter. We have done this business not only because rates are attractive, but also the length has increased.
In addition, these deals have strengthened the existing relationships. It is important to stress by locking in more of our fleet on time-charter, Euronav is not calling the market. This is simply as a large ship owner active management of our portfolio. If we think it looks like sensible business, we do it.
We now move on to vessel values. The changes in the slide since our previous quarterly calls reflected two important features; the lack of availability of capital and strong spot freight market. The strong spot freight market is reflected in the recent increase in 15-year-old VLCCs and Suezmax values. Their value increases as they are on the water now, in what is becoming a sustainable and strong freight market.
Added to this, relatively little capital has to be allocated to acquire them, bearing in mind that they have the same earnings capacity as a modern ship. The value of a five-year-old vessel is flat lining, newbuildings either re-sells ex-yard or new orders are flat to falling in value. More capital is required to buy a newer ship, which is more difficult to attract given bank financing is more restricted than in previous cycles.
For instance, advance rates we believe are around 60% today versus 85% plus in the last cycle. Added to this is the availability of capacity at the shipyards, which is adding downward pressure on newbuilding prices. Euronav has taken advantage of this phenomenon during Q2, as highlighted on the next slide, with our Metrostar acquisition, which we announced last month.
We now look at this transaction in more detail. I don't propose to read through each line on slide 14, so let me summarize. This is a very good transaction for Euronav as it reduces the average age of our fleet with modern efficient vessels and is fully funded from internal resources. Euronav is a large fleet owner with over 50 ships, so we constantly need to look to rejuvenate our fleet at the right price. This transaction achieves that objective.
The delivery schedule ensures these vessels will be very similar to that of an on-the-water acquisition. Euronav has no objection to modern tonnage and improvements in ship specification is more evolution than revolution. But the two critical features for a ship are its price and the market it operates in. So buying ships for delivery promptly into a good market is important as is the price we pay, which we feel is very competitive.
Lastly, it will enhance our capacity to pay dividends in the future. With regard to the interim dividend, we look forward to updating our investors by announcing our interim dividend on August the 20th.
I would like to turn to the current themes as Euronav sees them. Iran; firstly regarding market themes, Iran and the impact of the recent nuclear agreement and potential end of sanctions. Given commentators' estimates, implementation day could be anytime from December 2015 up until the second quarter of 2016. We believe the impact on the crude tanker market will be more of a 2016 event and will be largely neutral or ring fenced.
Iran has approximately 40 million barrels of crude oil and condensate in storage, which can be released into the wider market and should act as a positive trigger for the tanker market as it should drive the spot price of oil lower, which should encourage further demand.
Iran has been trading with around 20 VLCCs since 2012 with countries outside the sanctions program and so has around another 15 to 20 VLCCs to be readmitted from storage to the global commercial fleet. This will be more than compensated by the half to a million barrels most commentators are estimating Iran will be able to increase its exports with during 2016.
This fleet will need dry docking, wetting and maintenance inspections after a prolonged period of absence from trading. It will also need to be properly insured, and consequently, we believe most charters will take their time before using these vessels. This timing lag on reentry of the fleet will match the time it takes for Iranian exports to come on stream.
Congestion; congestion is an important and growing theme. Clarksons Platou recently estimated that 53 VLCCs were in temporary storage awaiting discharge of their cargos during July 2015 and this is up from something around 29 in storage in January. This is taking out capacity from the market and is being driven by excess supply of crude oil unable to find storage ashore. This will only be resolved in three ways; reduced production, which we see as unlikely given OPEC production plans and the potential return of Iranian output.
Two, increased demand utilizing this supply; this will be positive for tankers as this would increase the demand for shipping. Or three, potential contango, as the only viable alternative to store would be offshore in tankers. The spot price for oil will fall further increasing the contango, which in most weeks has been around $0.50 per barrel per month, if production increases without a commensurate increase in demand.
The congestion seen currently is being treated as normal commercial delay and has a tendency to deliver lower daily earnings for voyages than the rates fixed because the demurrage or delay compensation is slightly lower than the time-charter equivalent earnings on a normal voyage. However, the cancellations caused by delays as vessels are not released from their current voyages to meet the loading dates of their next voyages causes volatility and tends to drive up the fixing rates.
This accounts in some part for the improved headline rates of Q3. This de facto storage may soon become recognized as true storage under normal storage terms, but time will tell. Whilst this is not a pressing issue for Euronav at the moment, it is nevertheless one that we believe will gain in profile during the second half of the year.
Disconnect between earnings and asset prices; a question we are frequently asked is why there is a disconnect between asset values and tanker earnings. We would point to four reasons to explain this. There are currently a lot of sellers. Most tanker owners, unlike Euronav, have other shipping interests which currently require capital expenditure, specifically in areas such as dry bulk. One area from which this funding can be raised is selling tankers.
The price at which sales can take place is then underpinned by the seller's cash requirement, which explains why five-year-old vessels are for sale but the prices are flat and not down as buyers are discouraged from bidding when they know that they cannot negotiate a lower price.
Secondly, there is a limited pool of buyers, as financing is proving difficult to secure as the banks are unwilling to provide financing or advanced rates as they did in previous cycles. Thirdly, a key buyer of assets in recent years has been private equity. Most are yet to recycle out of their current investments and are currently not looking to add to their tanker portfolios.
And lastly, shipyard capacity is still widely available for 2017, which is acting as a cap on newbuilding prices. These four factors are driving the current market and we took advantage of this with our recent acquisition from Metrostar.
Greece; lastly, let me return to Greece as a current theme. Euronav is not a Greek ship owner, but does have significant ship operations in Greece. The recent events in Greece have clearly been unsettling for our employees, but I'm pleased to report their professionalism and dedication has ensured that we have not been impacted at all in our business.
In terms of the outlook for Euronav, firstly, a key aim of our additional listing on the NYSE was to increase liquidity in our shares and this has continued during the second quarter. April the 28th was an important date in this process with shares becoming fully fungible and transferable between Euronext in Belgium and the NYSE in the USA. Since this date, we have seen further improvements in liquidity to around $20 million per day of value.
The Metrostar acquisition was opportunistic and will further enhance our ability to pay dividends. We will provide an update on our interim dividend on August the 20th. Euronav is fully engaged in its tanker cycle today. The Metrostar vessels will be delivered shortly as if it were an on-the-water fleet and our spot exposure remains high. The cycling crude tanker market is evolving positively. Q3 has got off to a strong start with owners resolute in their pricing and discipline.
Market outlook; we have seen tangible increase in demand for oil during the second quarter, a fact recognized by all of the agencies upgrading their demand forecasts for 2015 and 2016. The market is well underpinned with consensus demand growth of 1.3 million barrels per day for both 2015 and 2016.
The outlook for vessels supply has increased for both VLCC and Suezmax, but remains at low and manageable levels. Further analysis of the order book shows key capacity increases will not come until the second half of 2016. By this time additional demand growth should be sufficient to absorb any additional capacity.
Finally, rates have remained robust. The key feature of the second quarter was how stable the rate environment was through the three months to the end of June. Ton mile expansion continues and Q3 has got off to a strong start.
With that, I will now hand you back to the operator for question-and-answers. Thank you for your time and attention.
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Questions and Answers
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Operator [1]
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(Operator Instructions) Jonathan Chappell, Evercore ISI.
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Jonathan Chappell, Evercore ISI - Analyst [2]
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The first question, Paddy or Hugo, on the options on the Metrostar ship, just two tiny questions. First of all, when do those need to be exercised by, and second of all, as it relates to your desire to have ships close to being on the water? When will those deliver vis-a-vis the exercise date?
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Paddy Rodgers, Euronav NV - CEO [3]
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Hugo, I will take that one. Hi, Jon. We have the first exercise date in October and they go through on optionality on our choice for when to exercise the option through to the end of February of 2016. The vessels would come February, March and May of next year.
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Jonathan Chappell, Evercore ISI - Analyst [4]
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Okay, certainly. And then as far as the financing of those are concerned, you mentioned in the presentation even post the original four you're going to be sub 50% leverage. What's the kind of comfort zone of leverage that you would be willing to go to either for these options or for other potential [amount] of vessels?
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Hugo De Stoop, Euronav NV - CFO [5]
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Well, Jonathan, this is Hugo speaking. Hi. As we said, I think that around 50% is a level of comfort. But obviously we're not going to raise additional debt if we don't need to. We did this purchase and that has moved the needle a little bit towards the 50%, which was the target. And we will see in time whether we find other opportunities or whether we can increase the dividend policy to arrive to such level. But at the moment, nothing is pressing and we are happy with the levels.
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Jonathan Chappell, Evercore ISI - Analyst [6]
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Okay. And then, Hugo, did you say you put down $122 million for the four newbuilds in the second quarter?
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Hugo De Stoop, Euronav NV - CFO [7]
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That's correct.
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Jonathan Chappell, Evercore ISI - Analyst [8]
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Okay, thanks. And then --
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Hugo De Stoop, Euronav NV - CFO [9]
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So the remaining CapEx is EUR262 million.
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Jonathan Chappell, Evercore ISI - Analyst [10]
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Great. Just shifting gears to one last question, is it possible first of all to provide the rates at which you've done these three time-charters for the Flandre, the Sara and the Hakata?
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Hugo De Stoop, Euronav NV - CFO [11]
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Well, Jonathan, already --
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Paddy Rodgers, Euronav NV - CEO [12]
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Yes.
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Hugo De Stoop, Euronav NV - CFO [13]
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Go ahead, Paddy.
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Paddy Rodgers, Euronav NV - CEO [14]
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Carry on. I was just going to say no -- I think that you will -- just at the moment they are relatively -- it's still subject to a degree of confidentiality. So I think just at the moment not, but in due course you will see them coming through in the reported numbers.
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Jonathan Chappell, Evercore ISI - Analyst [15]
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Okay. And then as it relates to the time-charter strategy, I know you've been pretty clear, Paddy, that you don't want your time-chartering activity to be viewed as your kind of commentary on the market. It does seem like the -- not just the depth of the market is moving up, but the rates in the time-charter market is moving up as well. And maybe the spot market is flat lining a little bit, even coming down from unforeseen highs.
When you think about the next 6 months of this year, do you foresee kind of more time-charter activity if the levels stay where they are today? And once again, is there a kind of a target where you would like to be given where you view this part of the cycle?
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Paddy Rodgers, Euronav NV - CEO [16]
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Well, I think Jonathan it's -- as you all know, it's -- we are looking at the same numbers from the charters and the charters desire to have ships in on charter is dependent on their feeling or their exposure to the market. And as soon as they are considered -- as long as they are considering it a source of anxiety or risk management to take ships on time-charter, then we will be just looking at the numbers and the terms and then seeing whether we think it meets our requirements for the kind of numbers that make sense for us.
So I think it is very difficult if you start trying to sort of tactically guess the market on what you are seeing because we are all seeing the same information and you are liable to see that as you start to pursue it aggressively, you might see the charters begin to back off, which is why we have a rather more phlegmatic view of it that let's see them be available for charter, see what the rates and the terms are and then we will take what is available if the rates are good.
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Jonathan Chappell, Evercore ISI - Analyst [17]
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Okay, understood. Thank you, Paddy. Thanks, Hugo.
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Operator [18]
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Amit Mehrotra, Deutsche Bank.
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Amit Mehrotra, Deutsche Bank - Analyst [19]
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Yes, thank you very much. Guys, congrats on a very strong quarter. The prepared remarks were really so good I have hard time coming up with questions. But I have come up with a couple. The first one, Paddy, the discussion in the press release around the tanker market I guess seemed somewhat ominous to me if I compare it to the comments in release three months ago with respect to the ordering activity and how up-cycles can end or usually end. So just a question on have you gotten a little bit more cautious or, as usual, am I just reading too much into it?
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Paddy Rodgers, Euronav NV - CEO [20]
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I think reading too much into it really. I think we just -- I think that we are very experienced and I think our view is never to get too hubristic or too carried away. Some people are obsessive watchers of the order book and I think that can be a mistake, because often people get very anxious about another 15 or 20 ships added to the order book without looking to see what times those ships would arrive. And they forget that demand is going up all the time and that this year has been a year of surprise demand.
All the features that made demand good in terms of low oil price and the pull-through that that gave not only to immediate consumption but also to building a strategic reserve, means that everything is in place for things to carry on as it is. But you have to have a very -- in tanker shipping you have to have a very phlegmatic approach to it and I just think it's trying to stay balanced rather than having a differing view. We still think that all the factors are in place for this to be a continued multi-year uptick.
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Amit Mehrotra, Deutsche Bank - Analyst [21]
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Okay. Yes, I guess if demand sort of does stay on this trajectory as long as you don't see any disruption in demand, it has the ability to sort of absorb incremental supply. And so -- then really it's less of a question about supply and really more of a question about demand. And so just from that perspective, I know you sort of talked about Iran and if you could just sort of flush out other things that have driven sort of the demand story over the last six to nine months and the sustainability of things like China sort of importing oil hand over fist and where they are importing oil from whereas where they were before? I mean can you sort of talk about those trends from the sustainability of demand standpoint?
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Paddy Rodgers, Euronav NV - CEO [22]
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Well, I think the -- I know I always turn the clock back a bit when we talk about this because I just want to get over to people that we had real demand destruction when oil was priced at $100, and I don't see us going back to that oil price anytime soon. I think that we definitely have the same fundamentals in place.
The Saudis have abandoned being the swing producer and want to find market share. I think that they understand very well that high priced oil, which they supported for three or four years, actually cost them market share and potentially market share forever if people were weaned off oil and onto renewables or onto other energy sources.
So for them it just makes good economic sense to make sure that they get that oil out of the ground and sold. And I think that's a fundamental shift, but it has always been there in their mentality and they have always understood the nature of the commodity that they were selling.
I think the Russians haven't changed. They still have to produce it. It's the major source of foreign currency. The country needs it. And I think in the US, nobody wants to give up shale play easily. So we have all those factors there and then additionally we have the Iranian barrels coming on -- and at least on the south side of Iraq, Basra remaining a strong provider.
So all-in-all, it looks like we are going to be in a kind of maybe slightly big swings, but still relatively speaking a low oil price environment for some time. And as long as that's the case -- and I think it will stimulate demand, as it already has done. I think there's the capacity according to the various agencies for this to be a multi-year at an excess of a million - 1 million, 2 million barrels a day of increased demand growth year on year.
And against that environment, then I think we could be in the situation which I would call a kind of happy medium or Goldilocks situation where you have supply coming on but demand is always just running that little bit ahead, so there's a tightness in the market and it remains that way on a multi-year basis.
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Amit Mehrotra, Deutsche Bank - Analyst [23]
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Okay, that's helpful. Just one last specific question just on the dividend. I'm guessing I'm going to have to wait till August 20th. But I just want to understand that that at least 80% number, I think that's an annual number and the percentage can vary quite dramatically between sort of the mid-year and then the following year payout. Hugo, can you just sort of give us some color on how that percentage trends and what we can expect on August relative to that sort of 80%?
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Hugo De Stoop, Euronav NV - CFO [24]
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Yes, Amit. I mean we have on purpose not said it accurately for the interim dividend because we wanted to give ourselves a little bit of flexibility, and obviously that very much depends on the outlook you have for the remainder of the year. So on the 20th of August when the Board will sit down and think about the dividend, I think that they will take a number of things into consideration, the outlook being one of them. And then if the outlook is very positive and we are very bullish about it, then we are going to get closer to that 80% even for the interim dividend. But you will indeed have to wait until the 20th of August.
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Amit Mehrotra, Deutsche Bank - Analyst [25]
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Okay, sounds good. Thanks very much for answering my questions. I appreciate it.
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Hugo De Stoop, Euronav NV - CFO [26]
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You're welcome.
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Operator [27]
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Noah Parquette, JP Morgan Securities.
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Noah Parquette, JP Morgan Securities - Analyst [28]
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Just a follow-up to Jonathan's question on the period charter market. Are you experiencing more anxiety from charters looking to extend periods beyond 1 year or maybe you can give a little more color what you are seeing there?
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Paddy Rodgers, Euronav NV - CEO [29]
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Well, I think now that -- if I could be very -- if I could just be almost exaggerated a little bit, what we saw at the start of the year was the charters' view, was that they were looking for ships for 12 up to 24 months. Our feeling at the moment is that charters are now firmly in the market for three years and we are hearing rumors that some of them are beginning to look to five years.
So it's very supportive of our general outlook as well that people are beginning to think this is going to be a multi-year event and they are beginning to get more and more concerned about that on the chartering side and therefore looking to cover for their exposure.
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Noah Parquette, JP Morgan Securities - Analyst [30]
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The rates -- are they are talking -- are we talking in excess of 40,000 for those types of periods or --
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Paddy Rodgers, Euronav NV - CEO [31]
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Yes.
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Noah Parquette, JP Morgan Securities - Analyst [32]
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Okay. And just on the broader market, the Nigerian ban on tankers it seems a little strange. But I mean can you talk a little bit if you are seeing any changing trade patterns based on that or what do you feel like the effects would be on the VLCC market from that ban?
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Paddy Rodgers, Euronav NV - CEO [33]
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Well, right now it's difficult to tell. It's a relatively recent event. For Euronav, we've had -- we have seven ships on the list I think. We've made two calls at Nigeria this year. So Nigeria has not been a major port -- a major country or destination for us for loading and we have a number of ships on that list that have never in their lives called at Nigeria. So there clearly is no -- there is no system there in terms of what's being done.
What happens now in terms of enforcement, I think owners will have to make their minds up whether they are prepared to call there or to check whether or not they would be released if they did call there and find out exactly what the nature of the ban is. But (inaudible) is working on that at the moment and I think that anything like this that's disruptive of normal positional patterns will result in what we might call artificial employment as vessels have to be sailed around to meet those lifting obligations or the lifting requirements.
So if you had ships that were actually in the Atlantic but couldn't call at Nigeria, then they would have to return to the AG or load in other areas in the Atlantic and you will have to drag in more ships without cargo bringing them naturally into the Atlantic in order to lift barrels in the Atlantic to go to Asia-Pacific.
So the impact of a ban like this would be disruptive, first of all, and more than likely that disruption would weigh on sea mile demand -- because although it wouldn't make much difference to the movement of cargo, it could make a very significant difference to the movement of ships and the absorption of shipping capacity.
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Noah Parquette, JP Morgan Securities - Analyst [34]
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Okay, that's helpful. That's kind of what we were thinking too. And then just finally, some of your Suezmax ships are getting a little older. Can you talk a little bit about what your plans are to renew that segment of the fleet?
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Paddy Rodgers, Euronav NV - CEO [35]
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Absolutely an interesting area of shipping. I know that we've been headline grabbing on VLCC acquisitions. It's not because we don't care for the sector. We just haven't seen the right transaction at the right pricing. We are definitely looking at a lot of different projects. The fleet is in great condition even though it's ageing and in fact one of the highlights at the end of the first quarter was putting three of our '98 built ships on three-year charters. And so we are able to employ them fully. So we are not concerned about our earning capacity. But it's definitely an area where we would be looking to do some expansion.
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Noah Parquette, JP Morgan Securities - Analyst [36]
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Okay, that's all I have. Thank you.
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Operator [37]
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Chris Wetherbee, Citi.
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Unidentified Participant [38]
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This is Prashant in for Chris. Just a quick first question, could you remind us where the four option vessels are pricing, if you've disclosed that?
------------------------------
Hugo De Stoop, Euronav NV - CFO [39]
------------------------------
Yes, we did it at $98 million per ship.
------------------------------
Unidentified Participant [40]
------------------------------
Ninety-eight per ship, thanks. And I guess a follow-up on the Suezmax, rates have held up I think better than what we would have expected coming into 2015. Obviously, there were some excess demand on some shorter routes compared to VLCCs' West Africa AG or AG to India. Do you see these trends continuing through 2015? Could this become a more secular trend? How should we be thinking about rates or do we see a normalization in your view coming as we exit 2015?
------------------------------
Paddy Rodgers, Euronav NV - CEO [41]
------------------------------
Well, I'm not -- we are not anticipating there being any significant separation between the VLCC and the Suezmax market. We believe that essentially they move at least to some extent in tandem and we are expecting this to be a multi-year event.
------------------------------
Unidentified Participant [42]
------------------------------
Okay, great. And just final question, in terms of additional fleet acquisition opportunities given that newbuild prices have remained relatively flat and so have five years, there was a little bit of an uptick in some of the older vessels. What's the potential for further fleet expansion beyond what you announced like before? Into 2016, are you seeing incremental opportunities in a sustained sort of flat acquisition price environment? Has it changed significantly since your last call?
------------------------------
Paddy Rodgers, Euronav NV - CEO [43]
------------------------------
No. But I think you are raising a very good point and I think that that's -- it's obviously as we've said in the past. In a normal cycle where values are extremely reactive to earnings, as the earnings go up, the values go up. Therefore, if you start to buy at the higher values, you are essentially chasing yield and it's a tricky thing to manage.
I think that if we see a re-rating on the relationship between values and earnings for cash liquidity reasons, then it could mean that there is a sustained basis upon which acquisitions would make sense, because you will be not chasing up the values at the same time as buying in robust earnings.
So I think that that's some -- it's an interesting thing to observe and we are watching it very closely -- and obviously not just watching, we have acted on it.
------------------------------
Unidentified Participant [44]
------------------------------
Okay, thanks guys. I appreciate the time.
------------------------------
Operator [45]
------------------------------
Wouter Vanderhagen, KBC Securities.
------------------------------
Wouter Vanderhagen, KBC Securities - Analyst [46]
------------------------------
The first question on the FSOs, with current contracts expiring July-September 2016, when would you start negotiating contract extension? Would such negotiations be initially for a two-year period or beyond the two years? And beyond 2017, do you expect MOQ to require one or two units?
And then finally of course given there's a little bit of history with regards to Africa negotiations, thereby fares which were quite hard. Do you expect negotiations to be similar or as hard as at that time?
------------------------------
Paddy Rodgers, Euronav NV - CEO [47]
------------------------------
Well, I'll take that one and then, Hugo, can feel free to jump in if he thinks that -- because there's a certain amount of interpretation in it. I think that the first and foremost thing is that we don't start negotiations I'm afraid. We are in a very reactive situation just because our counterparty is Maersk Oil Qatar and that's a joint venture which is -- and that Qatar is currently re-tendering the field license.
So until they have resolved how they are going to -- or who is going to operate the field, there won't be -- nobody will be able to come to us with a contract extension negotiation. So we are a little bit left waiting. We are not too anxious about the wait because we believe that when they come back -- and I would make an assumption that a field operator would insist on a decent length of time on that field license extension.
So the last one was I think -- and Hugo will correct me if I'm wrong -- 25 years or 20 years. So again if it's a very long license period, some parts of the machinery and equipment they will probably want to re-license or re-lease for a long period of time and that is the point at which we can see what the term will be on the negotiation.
I would think it's highly unlikely that they would come back for a short period unless there is -- let's say, very unlikely they come back for a short period given my assumption that the license is a long-term extension.
Will the negotiation be tough? It will be if they don't agree our rate. I will go for the long term. We have fairly firm ideas about what we want. And no doubt these things tend to be very detailed and intense discussions. And would they buy them? Again, I'm not really in the position. I don't know, Hugo, whether you had any feelings about that.
------------------------------
Hugo De Stoop, Euronav NV - CFO [48]
------------------------------
No, I don't think so. I mean that's -- again, that's their decision to make as an offer and then if the offer is good enough, we may accept it. I mean we are always there to protect shareholder value.
The only thing I would mention, Paddy -- and you are right to say that the last license was 25 years in fact. The next one is likely to be as long as that. And so we hope to get multi-year contract. I mean the last time was I would say only an eight-year contract simply because the MOQ license was maturing or ending in 2017, so they couldn't offer something longer than that.
------------------------------
Wouter Vanderhagen, KBC Securities - Analyst [49]
------------------------------
Okay. And then a couple of shorter questions. First, what is your share in the debt of joint ventures at the end of June?
------------------------------
Hugo De Stoop, Euronav NV - CFO [50]
------------------------------
On the FSO, you mean?
------------------------------
Wouter Vanderhagen, KBC Securities - Analyst [51]
------------------------------
No, the share in debt of your all joint ventures together -- so indeed FSOs, Suezmaxs. The number -- if I'm correct, the number at the end of December was something like $170 million.
------------------------------
Hugo De Stoop, Euronav NV - CFO [52]
------------------------------
Yes, let me come back to you in two seconds. Let me look into my system and I will give you that answer in one minute. But let's jump on another question in the meantime.
------------------------------
Wouter Vanderhagen, KBC Securities - Analyst [53]
------------------------------
Okay, perfect. On the -- yes, the vessels that have been fixed on time-charter contracts, is there any profit split on these vessels?
------------------------------
Hugo De Stoop, Euronav NV - CFO [54]
------------------------------
Yes, except for one. So the one on the three-year does not have a profit split and that is actually the only vessel that we currently have on time-charter out without profit splits. So all the others have profit splits.
And just to answer your question, it's $141 million the total joint venture debt. So for the FSO, VLCC and for -- the two FSO, the one VLCC and the four Suezmax.
------------------------------
Wouter Vanderhagen, KBC Securities - Analyst [55]
------------------------------
Okay. And then as a final question, could you split the newbuild commitments or your commitments between second-half 2015 and first-half 2016?
------------------------------
Hugo De Stoop, Euronav NV - CFO [56]
------------------------------
Yes, absolutely. So $65.3 million for the second-half 2015 and then $195 million for the second-half 2016 -- $196 million in fact -- $195.9 million.
------------------------------
Wouter Vanderhagen, KBC Securities - Analyst [57]
------------------------------
Okay, very clear. Thank you.
------------------------------
Hugo De Stoop, Euronav NV - CFO [58]
------------------------------
You're welcome.
------------------------------
Operator [59]
------------------------------
Fotis Giannakoulis, Morgan Stanley.
------------------------------
Fotis Giannakoulis, Morgan Stanley - Analyst [60]
------------------------------
Paddy, obviously we have a very, very strong market and you expressed your strong confidence about the longevity of this tight market. What I want to ask you is what makes you worry, what are your concerns that they might threaten your highly optimistic best case scenario?
And also given the vessel that are coming next year, they are scheduled -- if I'm not mistaken, something like 55-56 vessels, which of course most of them or many of them are towards the end of the year. How much do you think that demand or oil supply should grow next year in order to absorb these vessels?
------------------------------
Paddy Rodgers, Euronav NV - CEO [61]
------------------------------
Yes. Hi, Fotis. I think the -- we haven't -- I mean like I don't want to run through a shopping list of things that could affect the market. I think we all have a fairly good idea of the things. I think that really it's invariably the economy and demand. But at the moment things look extremely good. I think that the agencies have kind of caught up with the way that prices affected oil demand, so they are beginning to make projections which look a bit more accurate having had to play catch-up in the first half of this year having underestimated 2015.
But if they were to deliver the currently estimated oil demand expectations and if we can accept as a principle, which I think is true, that that is all basically shipped because the incremental barrels will be shipped barrels and if the effect of that follows through, then we believe that a million barrels a day which is based around Atlantic to Asia-Pacific region as the main shift of oil will absorb 40 VLCCs and the projections are currently about a third higher than that, so looking more like 55.
And I think that whilst the nameplate deliveries next year might be 55 for these, the reality is somewhat less than that. And as we showed in our slide, I think Clarksons view was that it was going to be about 40 after slippage during the year.
So that's the way we feel about it and I think that all the usual risks are there. I feel bullish about it and focused because I think that there's a feeling about the market for those that are in it, which is that everybody is beginning to have the same thoughts and beginning to get the same vibe from the marketplace. We always have to be cautious and we always have to know that things could be changed very quickly. But that's just the reality of the business we are in.
------------------------------
Fotis Giannakoulis, Morgan Stanley - Analyst [62]
------------------------------
Thank you, Paddy. In this one million barrel that you mentioned, I assume you include also the Iranian barrels. I mean most of the analysts -- the oil analysts, they are talking about 500,000 to 700,000 barrels that can come alone from Iran. How many vessels do you think that Iran will require from the open market outside of the vessels that they already have, because we all know that they use a number of vessels for their floating storage, as you mentioned?
I wonder, are these vessels going to stay in floating storage or a big portion of these vessels going to stay in floating storage after Iran starts exporting oil and will Iran going to need any vessels outside of their own in order to complete the shipments?
------------------------------
Paddy Rodgers, Euronav NV - CEO [63]
------------------------------
Yes. I mean I think there are a number of points that have to be quite -- let's be quite -- try and be quite precise about them, because -- I'll try and be quite precise about them because I think it's important. When we talk about projection of demand, we're talking about projection of consumption. So where it's filled from is not what is focused on by the agencies. So whether that 1.3 million barrels of expectation of demand growth for the next 12 months, where it's coming from is not addressed.
Some of it may come from Iran -- that's certainly true. Don't forget some of it is already coming from -- some of the current oil demand is already coming from Iran for those countries that were outside sanctions. So they can increase their supply. It doesn't mean that people will want to buy it. It's going to be in the market competing with other grades of crude. The issue will be whether or not people will buy it and whether or not exactly what the pricing of it would look like.
And I think as far as shipping is concerned, I would see no reason why the Iranians wouldn't want to take a third-party tanker in order to carry the oil. I think that they will find it difficult to employ their tankers other than on their own cargo. And as a result of that, they are more likely to use their own ships. But they would have no objection to taking a third-party tanker. Of course, issues may arise if owners themselves are nervous about the carriage.
I think that the carriage itself isn't too much of a problem. It's a relatively short period. I think the area where the Iranians may struggle is in getting insurance, because of course insurance claims can have a very long tail and many insurers may be reluctant to want to expose themselves to a contractual obligation that may be a multi-year obligation with a country that may or may not perform in accordance with its commitments under the current deal. So you could see sanctions re-imposed.
But I think that what we are hearing is that people think that they will -- they can crank up certainly their production of oil and get themselves back up another 700,000 barrels by the middle, towards the end of next year. Whether it's bought and who buys it, we'll just have to wait and see.
------------------------------
Fotis Giannakoulis, Morgan Stanley - Analyst [64]
------------------------------
And if they do increase the production as much as you mentioned, how is the storage situation in Iran? Are they going to need a big portion of these vessels to remain in storage in order to meet these requirements?
------------------------------
Paddy Rodgers, Euronav NV - CEO [65]
------------------------------
Yes, I think that's right, Fotis. I think that's true. And I think that the reality is that many of their ships have always been used for storage in and around their ports and some of the ships are quite old. And I would imagine that -- we are not talking about releasing a fleet.
Even if they have a nameplate fleet of 38, 40 ships, you are not going to see that fleet suddenly released into the world, because a lot of it is very old, a lot of it has been used in storage for a long period of time, a lot of it is in effect permanent floating storage.
------------------------------
Fotis Giannakoulis, Morgan Stanley - Analyst [66]
------------------------------
And from all that, if you mention that we need one million barrels to absorb next year's deliveries and it seems that projections are talking about more than 1.3 million barrels, can we draw the conclusion that the options will be exercised?
------------------------------
Paddy Rodgers, Euronav NV - CEO [67]
------------------------------
No. When you say options, we've shifted I think. We're not talking about Iranian options now. You are --
------------------------------
Fotis Giannakoulis, Morgan Stanley - Analyst [68]
------------------------------
I'm talking about the newbuilding options.
------------------------------
Paddy Rodgers, Euronav NV - CEO [69]
------------------------------
Newbuilding?
------------------------------
Fotis Giannakoulis, Morgan Stanley - Analyst [70]
------------------------------
Yes.
------------------------------
Paddy Rodgers, Euronav NV - CEO [71]
------------------------------
Well, I mean that will be a matter of close careful discussion and potentially negotiation. Because obviously the interest of an option is it holds the price back against the moving market, and we will see where we are at the time that we get there.
------------------------------
Fotis Giannakoulis, Morgan Stanley - Analyst [72]
------------------------------
So what will be the decision considerations for such a --?
------------------------------
Paddy Rodgers, Euronav NV - CEO [73]
------------------------------
What will be the -- I mean all the usual. Whenever you have an option, what you have is a financed price in the sense that somebody else is caring the risk of the price and you are looking at what the alternatives are. So of course we go through in the next few months. We will be looking at all the different alternatives as to whether or not it makes sense to do this or to do that or whether it's one, whether it's four, whether it's two, whether it's three.
And so we will go through the whole thing, how we are going to finance them. It's all part of a careful management deliberation that you can trust we will take with every due consideration for the value to the shareholder.
------------------------------
Fotis Giannakoulis, Morgan Stanley - Analyst [74]
------------------------------
Okay. Thank you very much, Paddy. Thank you, Hugo.
------------------------------
Hugo De Stoop, Euronav NV - CFO [75]
------------------------------
Thank you.
------------------------------
Operator [76]
------------------------------
Charles Rupinski, Seaport Global.
------------------------------
Charles Rupinski, Seaport Global - Analyst [77]
------------------------------
Thank you and congratulations on the quarter. Thanks for taking my call, Paddy, Hugo. I just had a -- you basically did answer all my questions mainly on the industry, very good color there. The question I had just because I didn't hear this very well, but could you just repeatedly go over the spot versus fixed coverage currently in for this year again?
------------------------------
Hugo De Stoop, Euronav NV - CFO [78]
------------------------------
Yes, I mean that's in the presentation. So for the remainder of the year, it's going to be 20%, 80% and the 20% includes the contract that we have on the FSO.
------------------------------
Charles Rupinski, Seaport Global - Analyst [79]
------------------------------
Okay, great. And as far as just the non-FSO, so just to be quick, you mentioned that all your time-charters have profit sharing except one. Is that correct, other --?
------------------------------
Hugo De Stoop, Euronav NV - CFO [80]
------------------------------
That's right, that's correct. Only one, she does not enjoy the profits split.
------------------------------
Charles Rupinski, Seaport Global - Analyst [81]
------------------------------
Okay, all right.
------------------------------
Hugo De Stoop, Euronav NV - CFO [82]
------------------------------
Obviously, the floor is higher in that case.
------------------------------
Charles Rupinski, Seaport Global - Analyst [83]
------------------------------
Yes, floor is higher. Okay, great on that one. Yes, that really -- great job on the industry. I appreciate it and thanks for your time.
------------------------------
Hugo De Stoop, Euronav NV - CFO [84]
------------------------------
Thank you.
------------------------------
Paddy Rodgers, Euronav NV - CEO [85]
------------------------------
Thank you.
------------------------------
Operator [86]
------------------------------
Erik Stavseth, Arctic Securities.
------------------------------
Erik Stavseth, Arctic Securities - Analyst [87]
------------------------------
So -- I mean you've been talking a lot about demand and I have a few questions there as a follow-up. I mean first of all back when -- before you acquired the Maersk fleet, oil was over $100 and we were talking about longer distances leaving from the Atlantic into the Pacific and you are mentioning those new trades routes in your presentation today.
However, with oil now down in the sort of 50s range, are you seeing any change to the story where you are effectively seeing more volumes and less miles as opposed to before when you probably had lower volumes but longer miles?
------------------------------
Paddy Rodgers, Euronav NV - CEO [88]
------------------------------
No, I think, Erik -- yes, I think that the -- again, during the quarter this year, I think that we were excited when we started to see that it made more sense for us to ballast ships out of the Red Sea and take them through Suez Canal into the Caribbean to load off China. And we thought that was a sort of turning point again of the market really continuing to stay very robust. And we saw that towards the end of Q1. But in Q2 and into the start of Q3, we've seen ships and ships of ours have discharged China and gone directly in ballast to the Caribbean.
So as the market tightens, what you are beginning to see is not necessarily just the expansion of distances over which the cargo moves, but also the dislocation effect as the ships are moved over huge ballast distances, effectively the world fleet becoming less efficient and therefore increased supply of ships needed in order to move the same amounts of oil. So those features are all coming into play to create quite an effective mix.
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Erik Stavseth, Arctic Securities - Analyst [89]
------------------------------
Have you -- do you have any sort of data points or data as opposed to -- as to how much time of your -- how much time your vessel or your fleet has been laden versus ballast? I mean it will be interesting to see how that has developed over the past six to eight quarters, just to sort of portray that situation.
------------------------------
Hugo De Stoop, Euronav NV - CFO [90]
------------------------------
Yes, I mean this is Hugo speaking. Let me take that question. I don't have the data point in front of me. I believe that it has been very, very stable. I mean we used to do a lot more triangulation in previous cycle, but that was because the trade patterns were very, very different than what we see today.
I mean today we see the refinery development having a huge impact on our market -- and as a matter fact a positive impact. We have -- in pretty much all of our presentation we are highlighting the fact that in the Middle East you have a strong development of refineries as well as in the Far East, specifically in China.
And in China, it's very natural that it has a positive impact. In the Middle East, it's a little bit counterintuitive. But the fact is that whenever they use their own oil in that region, it is less oil coming out of that region going to China and therefore that oil that is in demand in China has to come from somewhere else and that somewhere else is the Atlantic. And that has not changed for the moment.
It is true that in the future we need to see which country and certainly from the OPEC which sort of increase we are going to see out of that region and see where that oil is going to.
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Erik Stavseth, Arctic Securities - Analyst [91]
------------------------------
Okay. So basically if we have the demand of 1.3 million barrels all coming to seaborne, your distance hypothesis or (inaudible) still remains intact. That sounds extremely bullish.
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Hugo De Stoop, Euronav NV - CFO [92]
------------------------------
Well, I don't know what you mean by extremely bullish. I mean a fact is a fact. Today when you look at the trade patterns, as I said, I mean they haven't changed. I mean we are doing as many voyage from the Caribbean to China that we used to do in the past. There is an increase of consumption by the Chinese, a portion of that is coming from the Atlantic, a portion of that is coming from the Middle East.
But as I said, at the same time you have the development of refineries in the Middle East. Some of them are already up and running. Some of them are still in building, will be up and running in 2016 and 2017 and will absorb some of the increased production that is being forecast for the region.
So I don't -- I'm not sure I understand why you say it's bullish. I mean it is what it is. And as I said, in the future it may change, but it's very difficult to forecast where the oil is going to go.
The very big difference from today and probably in the future and in the past is that in the past you had pretty much the states taking a lot of oil -- and a little bit in Europe -- a lot of oil coming from the Middle East. And now the growth is coming from China and China is looking to diversify their sourcing of oil. And that's very, very different.
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Erik Stavseth, Arctic Securities - Analyst [93]
------------------------------
Thanks. Much appreciated.
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Hugo De Stoop, Euronav NV - CFO [94]
------------------------------
Thank you, Erik.
------------------------------
Operator [95]
------------------------------
Junior Cuigniez, Petercam.
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Junior Cuigniez, Petercam - Analyst [96]
------------------------------
Only one question left from my side. I understand that the fact that you fixed two vessels is not a message that you called a cycle. Yet could you help us to understand how or who decides to go for fixing of spots as you are a member of the TI pool? I mean in other words, is the decision to go for spot or fixing influenced by your partners? Thanks.
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Hugo De Stoop, Euronav NV - CFO [97]
------------------------------
Thank you, Junior. That's a good question. Not at all. So it's almost two different business and we are entirely in charge of the fixed business, i.e., we decide whether we want to pull out of the pool any vessel that is currently on the spot market and place it under a time-charter contract, the minimum period being obviously at least 1 year. Otherwise you -- I mean on shorter period you could start competing with yourself and with your partners in the pool. But beyond 1 year period then it's your own business and your own decision.
And again, as Paddy mentioned earlier in this call, this is not really us calling the market. I think that there is a level and has length at which we are happy to sign those contract, especially when they have a profit split element to it which continues to expose us to the volatility of the spot market.
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Paddy Rodgers, Euronav NV - CEO [98]
------------------------------
Hi. Just to interrupt to say that I didn't just drop off because I didn't want a question. I'm back on now.
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Junior Cuigniez, Petercam - Analyst [99]
------------------------------
Okay. Then as a follow-up, the main advantage of the TI pool is really to have eyes on the cargo. Is that correct?
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Paddy Rodgers, Euronav NV - CEO [100]
------------------------------
Yes.
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Junior Cuigniez, Petercam - Analyst [101]
------------------------------
All right, thanks.
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Operator [102]
------------------------------
[Erik Havelson, Tetra Securities].
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Erik Havelson, Tetra Securities - Analyst [103]
------------------------------
Just on a more high level basis if you look at spot rates over the past week or so, they have been dropping and that actually coincides with a rather sharp drop in Asian refinery margins if you look outside of China.
So is that something you are worried about and -- I mean it's a bit natural now that oil prices are falling and yet these Asian refinery margins are falling to kind of 5 year low levels. Is this part of that refining story that we have been talking about that Middle Eastern refineries would gain market share and could that be a major threat to this tanker story or is it nothing to worry about?
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Paddy Rodgers, Euronav NV - CEO [104]
------------------------------
I would never -- I mean look now, I never would say -- rates going down is never something not to worry about. I think that would be just too glib to say I wouldn't worry about it. But I think that the characteristic of the market is huge volatility and it's moving into a different phase and I think that -- so we have seen within day movements which are huge and I wouldn't be frightened of volatility. I think that normally when market is overly static is normally when we have lost any pricing power.
So I think -- let's not forget where we are. We are just into August or in the middle of Q3. We have had a booming period all the way through Q2 and into Q3. So a little bit of volatility or some changes now I don't think is anything to be terrified of or frightened of. But I think it's something you obviously have to watch and keep an eye on.
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Erik Havelson, Tetra Securities - Analyst [105]
------------------------------
But you don't know if this --
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Paddy Rodgers, Euronav NV - CEO [106]
------------------------------
I don't see the Far East losing market share on crude oil transport as a result of Middle East refineries.
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Erik Havelson, Tetra Securities - Analyst [107]
------------------------------
Okay, so you are not noticing any kind of hesitance from the Far Eastern refineries due to all the volumes that are now coming out of the revised and younger refineries that are kind of increasing production and exports every day?
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Paddy Rodgers, Euronav NV - CEO [108]
------------------------------
Yes -- no, that's right, we are not seeing a concern because largely it's the domestic consumption and the Chinese are importing crude. They are not importing products.
------------------------------
Erik Havelson, Tetra Securities - Analyst [109]
------------------------------
Agree. Okay, thanks.
------------------------------
Operator [110]
------------------------------
Samuel Sekine, ALJ Capital.
------------------------------
Samuel Sekine, ALJ Capital - Analyst [111]
------------------------------
I had a question. If you guys maybe can break out the cash breakeven rate for VLCCs (inaudible)?
------------------------------
Hugo De Stoop, Euronav NV - CFO [112]
------------------------------
Yes. Hi, Samuel. This is Hugo speaking. We are 27,000 give or take on VLCC and 22,000 give or take on Suezmax.
------------------------------
Samuel Sekine, ALJ Capital - Analyst [113]
------------------------------
And with the new vessels coming in, does that move much slower, I mean just kind of spreading the overhead?
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Hugo De Stoop, Euronav NV - CFO [114]
------------------------------
No, because the overhead represents about $1,600 per day and that would -- I mean it's only four vessels out of a fleet of 56, so the movement is marginal to be quite open.
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Samuel Sekine, ALJ Capital - Analyst [115]
------------------------------
Okay. And maybe if you can just help me understand the seasonality of it. I mean my understanding is that we are kind of in the lows of the year right now with rates being pretty high. I mean is it safe to say that we shouldn't really see rates drop much lower than this for the rest of the year?
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Paddy Rodgers, Euronav NV - CEO [116]
------------------------------
Look, I'm -- that's certainly what would -- if you just did the statistical analysis of every quarter over the last 15 years, you would have expected Q4 to price higher than Q3. There have been anomalous years and most notably of course was 2008 when we had three ripping quarters and then a very poor fourth quarter.
So I would say that if you want to play statistical numbers in order to get some sort of predictability, then you would say this should be the lowest that it gets for the rest of the year. But unfortunately we are not in a world of statistics. We are in a world of demand and consumption. So all we could say is that where we are is good. Normally we would expect it to be better. But that can't be -- you can't bank on that yet.
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Samuel Sekine, ALJ Capital - Analyst [117]
------------------------------
Sure. But I guess I have to say --
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Hugo De Stoop, Euronav NV - CFO [118]
------------------------------
And I just like to say that in 2008, just for sake of completeness, we had a certain event on 12th September 2008 which was (inaudible).
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Paddy Rodgers, Euronav NV - CEO [119]
------------------------------
Absolutely. I took that piece of knowledge for granted.
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Samuel Sekine, ALJ Capital - Analyst [120]
------------------------------
Well, so I guess just with that seasonality, I know there are a bunch of contracts of floating storage earlier in the year. So I expect that to kind of roll off in 6 to 12 months, kind of Q3 and Q4. Do you see that impacting kind of the supply and pushing rates a little lower?
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Paddy Rodgers, Euronav NV - CEO [121]
------------------------------
No, no, because they didn't really go into storage. Most of those ended up getting used commercially anyway. And we know that because one of the biggest takers was Trafigura and they ended up negotiating to put those ships into our tanker pool because they didn't -- apart from one or two -- I think one or two contracts they managed to put on in time to actually play the contango trade.
But effectively very few people were able to execute on the time-charter position quickly enough to get their paper trade on, and as a result of that not many ships actually went into storage. Most of them have been in full commercial usage.
------------------------------
Samuel Sekine, ALJ Capital - Analyst [122]
------------------------------
And just one last one from me. The Q3 rates that you guys have seen so far, I mean the very encouraging also a strong rate. And I have seen some of the big competitors also put out a number out there that seemed a little bit high. But can you maybe just talk about where that difference can come from, maybe what they are doing or what --?
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Paddy Rodgers, Euronav NV - CEO [123]
------------------------------
Yes, I know. Well, I fully agree with you. I thought it was a very high number as well that we saw out from DHT yesterday. And all I would say is that we've got a fairly -- I mean we've given a number that's based obviously on a bigger fleet. We also are in joint venture with -- in VLCC chartering, so we have a good knowledge of our partners' fleet and we have quite a lot of other commercial information.
I would say that the DHT number looks a bit anomalous. Where could it come from? Well, I mean it may well come -- they just had a very fair hand and fixed some very good business. But also, as I mentioned and as it was pointed out in the presentation, we are going through a period when you can get caught up in the discharge ports for a long period of time. And if you are, then it will worsen your projected voyage result simply because you may well have fixed it on the basis that the voyage would take 50 days and that would give you a result at a big number.
But then it takes another 10 to 15 days to complete the voyage because you are waiting at port and the rate of compensation that you are paid for waiting is much lower than the daily rate that you would have got on the time-charter equivalent earnings from the freight -- then of course you pull down the earnings.
So it could well be that we will see a number of different factors. Maybe it will be a very good quarter. Maybe it won't be as high as is currently being forecast. We just have to wait and see. And I think what's critical for all of you guys to remember is that free cash flow and earnings per share and dividends paid comes off the actual results, not the forecasted result.
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Samuel Sekine, ALJ Capital - Analyst [124]
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Okay, thank you. That's it for me.
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Operator [125]
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Gregory Lewis, Credit Suisse.
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Gregory Lewis, Credit Suisse - Analyst [126]
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I apologize if this has already been talked about, but I had to hop on late on the call. So I guess yesterday there was news about Saudi Arabia potentially lowering production in September. I guess the two things I would be curious on your thoughts about, is that something that is normal seasonal, is it something that happens normally every year and just seems like it's potentially happening later this year?
And I guess if the expectation is September, we should already start being seeing that in activity and are you seeing any impact from that at this point? And what I would say -- that was I think in the Financial Times yesterday afternoon.
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Paddy Rodgers, Euronav NV - CEO [127]
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Well, that's not -- the Financial Times commentary on Saudi Arabia's intention on production is a very, very long way away from fact. Well, it's a print journalist talking about a conversation he has or hasn't had around Saudi government behavior when for virtually every month people have been surprised that Saudi's have continued to produce more and more and more. And the comment from Saudis most recently has been that they thought in the second half of this year they could break 11 million barrels a day.
Their purpose of putting out -- of putting the oil out there is to sell it, to reduce the price of oil and push out some of the competitors who have been taking market share off them, whether it's the Americans, the Russians or indeed the Iranians.
So I don't see them backing off that any time soon simply because they have committed themselves for over a year -- now we are coming up to a year -- to that policy. And nothing has happened that should make them back off it. So I think that I would be very, very surprised if they were to cut production. If you told me that there was -- that the news had come from Wood Mackenzie and that they knew that there was a field problem out in Saudi Arabia and there was going to be a cut in production, that would cause me a lot more anxiety.
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Gregory Lewis, Credit Suisse - Analyst [128]
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Okay, so -- okay, great now --
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Hugo De Stoop, Euronav NV - CFO [129]
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Greg, I mean, just for sake of completeness, some of the related articles after that, the one that you mentioned, were actually talking about cutting production that is actually being used internally and not for export, and that was due to potentially a refinery turnaround maintenance, which is not unusual especially when you have a new refinery and you have some teething problems.
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Gregory Lewis, Credit Suisse - Analyst [130]
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Okay, perfect. Yes, -- I mean, yes. I think the chances of them doing -- deciding to do that at this point don't seem plausible either and it almost sounds like you are not seeing any change in activity related to that, which sort of gives you that confidence.
Okay, guys, thank you very much. Yes, have a great day.
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Paddy Rodgers, Euronav NV - CEO [131]
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Thanks.
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Hugo De Stoop, Euronav NV - CFO [132]
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Thank you, Greg.
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Operator [133]
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There are no further questions at this time. This concludes the question-and-answer session and today's conference. Thank you for attending today's presentation. You may now disconnect.
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Paddy Rodgers, Euronav NV - CEO [134]
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Thank you all very much.
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