Cmb.Tech N.V. (CMBT) Q3 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the Q3 2015 Euronav Earnings Call. All participants will be in listen-only mode. [Operator 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 of Euronav. Please go ahead.

Thank you. Good morning and afternoon to everyone, and thanks for joining Euronav's Q3 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, 29th of October, 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. I will now pass you over to Euronav's CFO, Hugo De Stoop to run through the first part of the presentation.

Thank you, Paddy, and good morning or afternoon wherever you are and thanks for joining our third-quarter 2015 earnings call. Turning to the agenda slide on slide 2, I would like to take you through the highlights of our third 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 turn over to the operator for a Q&A session. Moving on to slide 4, the spot rates above $52,000 a day for VLCC and $40,000 a day for Suezmax delivered over Q3 were in line with those delivered year-to-date, which reflect the strength of the underlying tanker market. Two key themes tell the story for the third quarter. Firstly and most importantly has been the strong freight rate performance we saw throughout July and from early September. The strong rate environment during a typically seasonally weak quarter has been the key story of Q3. Indeed to underline this, this is the first positive net income Q3 Euronav has delivered since 2008. The second theme was the short but sharp reduction in freight rates, primarily VLCC rates, which we saw during a four to five-week period over August. This was caused by a number of unique factors, all impacting the freight market simultaneously. These were crude cargo imports to China and exports from Iraq being slow than the preceding or the following month. Owner behavior on pricing which had been consistently resolute during 2015 gave way temporarily to lower rate setting, low season for cargos and high season for refinery maintenance and finally increased number of vessels available due to re-letting or speeding up. The encouraging element of this development was how quickly and effectively owners regained the strong resolute behavior they had adopted since January. So the summer low or seasonal weakness therefore lasted four to five weeks during 2015 instead of a usual period of four to five months. Both these developments are encouraging for the evolution of the tanker sector. The outlook for the fourth quarter is strong and we have booked so far over 46% of the available VLCC spot days at rates of about $65,000 a day and nearly 61% of the available Suezmax spot days at an average of about $34,600 per day. It is important to remember that the very positive headline rates reported in the press relate to specific voyages and with a large fee Euronav will always benefit from the average rate. Moving on to the decision to write-off the value of the options to buy four further resale VLCCs. The Company has decided to write-off the value of these options to acquire further four resale VLCC newbuilding contracts taken simultaneously with the acquisition of the four resale of newbuilding contract announced on 16th June, 2015. When agreeing to the options, management were aware of the timeline to delivery, which was late 2016 and early 2017, and hence the decision to sign an option to buy rather than an outright purchase at that time. Since the June announcement, there has been an increase in concentration of the VLCC order book into Q4 2016 and into 2017. The market also saw further weakness in steel prices and shipbuilder currencies as well as additional shipyard capacity from late 2017 and beyond, all putting downward pressure on newbuilding prices. After careful consideration, the Board has decided not to exercise the option to purchase four VLCCs at $98 million each. As a consequence, the values of these options have been written up to zero and an $8 million exceptional charge, which is non-cash had been taken in Q3. Including the delivery of three outstanding VLCCs in early 2016, Euronav is fully funded in its current structure and retains a strong conviction that tanker markets are undergoing a sustained and structural recovery in freight rates. With a vast majority of our fleet currently under water, Euronav is ideally positioned to benefit from this positive freight market background, but will also remain disciplined as stewards of shareholder capital. The Board believes this course of action is in the best interest of all stakeholders. Looking forward to the next six months as at 30 September, 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. 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 VLCCs and two FSOs in 50-50 joint ownership with partners. These will be accounted for using the equity method for joint arrangements. Our EBITDA during Q3 came in at $135.5 million on an underlying basis before the $8 million exceptional charge discussed earlier. This is broadly in line with the performance we delivered in Q1 and Q2. This is the consequence of a better spot market than seasonally expected, which is unusual as we would normally expect the third quarter to be materially weaker than the first and the fourth quarter as it has traditionally been. One important line to highlight is the tax line, which has moved from a benefit to an expense during Q3. This is primarily related to the recognition and usage of deferred tax assets. In 2014, we estimated we would be using a deferred tax asset of $6.5 million, which we activated. During 2015, we have used and will continue to use those tax assets as necessary. The G&A was slightly lower than normal, but this is due to an exceptional reversal of a provision taken on an office property. The rest of the P&L is self explanatory and in line with estimates. To be clear, and as we said on the last earnings call in July, Euronav only pay dividends twice a year due to Belgium corporate law. Euronav has already paid $0.87 in dividends over 2015, therefore there is no Q3 dividend. The next dividend will be decided on the basis of the full second half of the year and payable in May 2016. Slide 6 shows in more detail the key highlights for Q3. This leads us to slide 7 and our balance sheet. Our leverage position on book values at 30 September was 42%. Euronav is conservatively leveraged and has no need in its current structure for any additional either through debt or equity. Euronav's credibility in the banking markets was reaffirmed with the $750 million credit facility signed in early September. This facility gives the Group flexibility and reduces our average interest cost by around 100 basis points on that facility. The pro forma balance sheet on 30 September taking into account the full consideration for the purchase of the four VLCCs we announced in June would have showed a leverage of just over 46%. Post this deal, we will have over $3 billion in high quality assets funded by supportive consortium of banks at attractive margins. We now turn to the fleet operating days at Euronav, slide 8. The split between tanker spot days and days under time charter contract including FSO for Q3 was 20% fixed and 80% spot as slide 8 shows. On a full year basis, we expect to have similar split between our fixed and spot days. Talking about dry docks, we had two Suezmax this quarter and we will have six vessels going to dry dock in Q4, three VLCCs and three Suezmax. That concludes the financial section of the presentation. 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.

Thank you, Hugo. The vessel order book growth has continued during quarter three. We have seen 13 VLCCs ordered and 12 Suezmaxs during the quarter. As this slide on world fleet development for VLCCs and Suezmaxs shows, since our last call, there has been little change in 2015 order flow from the end of Q2 apart from less scrapping on the Suezmax fleet. The big change is in the 2016 order book where Clarksons now expect to see more ships being delivered in 2016, 45 now up from 40, but crucially less scrapping. Now six VLCCs to be scrapped instead of 12, taking net impact to 2016 in VLCCs from net 28 vessels to net 39. On Suezmax, the net effect is to see three more deliveries in 2016, all due to less scrapping. This is to be expected given the strength of freight rates as we have seen year-to-date. Whilst every new order in the shipyard is negative to the market, we still retain the view that the current order book is moderate and manageable given the outlook for industry fundamentals. We see a number of reasons supporting this view. We believe there has been some acceleration in ordering to avoid compliance with Tier III legislation that kicks in on the 1st of January 2016. We do not expect many if any orders during Q4 given this brought forward demand. Comments I just need to remember over the wasting asset class with an average scrapping age of 20 years, there should always be some attrition in each year of between 4% to 5%. So a 15% order book over a three year lengths is not at all unusual. Closer inspection of the order book in Clarksons also shows that private equity oriented orders have fallen off. We have not seen an order from this segment for over 15 months now. This reflects one part of our wider thesis, the financing of the tanker sector going forward will continue to be challenging and act as a barrier to entry. Moving onto the next slide on time charter rates. This slide shows indicative rates for one year, three year and five year time charters for both VLCCs and Suezmax. This chart provides supporting evidence that both owners and charterers see the market is both strong and has longevity. Taking this chart 12 months ago, only the one year time charter market had any adequate liquidity and it rates not far above breakeven as the chart shows. Today we see good liquidity in both one year and three year charter markets at very healthy rates. This is corroboration of our positive use from the oil majors that they believe freight rates will remain elevated for a sustained period as they are looking to guarantee and locking shipping capacity. It is important to remember that the time charter market is driven by the oil majors and not by the tanker companies. Previously, we have set those little debts of time charter market in both categories. Euronav has been deliberately not active in this period during Q3 as we believe that the winter will see freight rates at a higher level. Our strategy remains unchanged. By locking in more of our fleet on time charter, Euronav is not calling the market. It is simply as a large ship owner, active management of our portfolio. If it looks like sensible business we do it. We now move onto vessel values. Slide 12 illustrates three key features on the asset value elements of the tanker sector. Firstly, increased available capacity in the shipyards, falling values of steel and in the currencies at key shipbuilding nations Japan, South Korea and China has continued to put downward pressure on newbuild prices for both VLCCs and Suezmax. Secondly, and we make no apology to stressing this once more the importance of a new era of financing post the financial crisis and reduced advance rates cannot be stressed enough and is severely restricting the number of active buyers in the market. Thirdly, scrap prices have continued to fall reflecting the fall in commodity prices generally. Fourth, assets on the water today have a more valuable currency, as they can generate earnings immediately in the strong freight market, therefore their asset values as slide 12 illustrates have been rising. China, given the events over Q3 including a devaluation and constant scrutiny on its economic performance, China is a key theme. So far as Euronav's exposure to China is concerned, a positive outlook is supported by several factors. Firstly, the base effect. China imports around 7 million barrels per day of crude oil. Growth this year will be around 7%. Chinese crude oil demand growth therefore has a larger foundation than in previous years. Whilst Chinese growth is important, it is still only around a fifth of global demand growth predicted for 2015 and 2016. Secondly, the economic reforms the Chinese are pushing through such as allowing the smaller teapot refineries to purchase foreign crude are better fitting tanker companies as more crude is being imported. This is not new demand, but demand substituted from internal resources. Thirdly, some perspective is required. Chinese demand for crude oil did not experience the boom or bust cycle of other commodities, but is growing steadily as it is related more to daily activity than infrastructure development, particularly when compared to other commodities such as iron ore, nickel and copper. In addition, the lower oil price has stimulated procurements of crude for the strategic petroleum reserve, which is supported and given the Chinese authority's plans is likely to continue to support in the medium term. Congestion, a continuing theme is port congestion. This is taking capacity out of the market and is being driven by excess supply of crude unable to find storage ashore. As we suggested on our last earnings call, this may change the structure of freight rate costings. Voyage contracts are now regularly including improved demurrage terms to reflect the increased frequency of delays due to congestion or a form of artificial storage. This trend is something is Q3 that we were not experiencing in Q2. The bigger effect has been to stretch the global tanker market and so reduce capacity. This has been another factor significantly driving freight rates. Tier III legislation, Euronav believes over the summer there has been some crude tanker ordering which has been accelerated in order to avoid complying with incoming environmental legislation which is applicable from January 2016. Any vessel therefore that has its keel laid after the 1st of January 2016 must comply with Tier III legislation on nitrogen oxide emissions. This has had the effect of accelerating newbuilding orders so as to avoid the legislation. Whilst any new ship order we believe is destructive of value, further development of the order book will be interesting in 2016 to see how much demand has in fact been brought forward. I move now to the outlook summary on slide 15. In terms of the outlook for Euronav, we are pleased with the on schedule delivery of the VLCC Antigone. It was immediately put on spot contracts with a very small discount to the underlying rights at that time. We have been pleased in sea trials and look forward to delivery of the three other sister VLCCs early next year. Euronav is fully engaged in the tanker cycle today. We strongly believe there is sufficient visibility in the sector over the next 12 months and beyond where in the absence of any supply shock, we expect to see robust demand for tonnage. Our confidence is underpinned by the sharp recovery we have seen in freight rates from the confluence of a number of specific factors impacting simultaneously during August. The speed of this recovery reflects how tight the market is and should encourage owners to set the correct price for their tonnage. In addition, the liquidity in the three and five-year market, time charter market is another confirmation to us that the current market sector has structural longevity. Finally, the trading volumes in Euronav share remains very positive. Investors need to remember the shares trading on Euronext were exactly the same as those trading on the NYSE. Adding these volumes together shows a share pricing just around $20 million a day during Q3 with a free float of around 80%. Turning to the market outlook, we look at the next slide. Q4 has started very encouragingly, although some caution is required, that the headline rates often being quoted after specific cargos, not the average rates delivered or likely to be delivered during the quarter by a fleet. The lower oil price and China impact on tanker demand volumes remains positive, reflecting in the upgrades we have seen for most of this year for crude oil demand. Some agencies have recently revised down their growth expectations, but even at 1.2 million barrels per day of additional growth coming over the next 12 months, this equates to a requirement for 45 to 50 VLCCs. Whilst vessel supply has steadily increased during 2015, overall the effect has been moderate and any meaningful increase in vessel supply does not bite until 12 months from now in the fourth quarter of 2016. We believe some of this ordering has been demand brought forward due to environmental legislation. The financing on newbuilding tankers remain very difficult, and reflect the potential barrier to entry. But we do believe that by the time that additional capacity is brought on, it will be well met by a requirement for the capacity. The price of ships under construction and newbuilding remains under downward pressure, a feature we expect to continue whilst the odd capacity and commodity prices remain on their current trends. Given this background, Euronav will remain disciplined and focused on any potential additions to our fleet. Euronav's balance sheet is conservatively positioned with leverage below 50%, has fully funded the three outstanding VLCCs yet to be delivered, and there is no requirement for equity or debt funding. With that, I will now hand you back to the operator for questions and answers. Thank you for your time and attention.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Chris Wetherbee of Citi. Please go ahead.

Hey thanks. Good afternoon, guys. I wanted to touch briefly, you know, just revisit your comments about chartering strategy in the market. I just want to make sure I understand how you are thinking about maybe the next couple of quarters, we are obviously seeing a level of strength and liquidity in some of the term markets. How do we think about it, any more color you can provide would be helpful?

Yes. Our approach has been very consistent which is essentially that we stay in the market looking and listening and hearing what people are looking for, what the charter is looking for. Recognizing that any time charter is liable to be at a discount to the spot market, we would want to make sure there was sufficient lengths on the time charter to compensate for any discount that we took. And in particular we would like to work with people that would accept the concept of a floor with profit shares. So, what we are looking for is when we see rates that look satisfactory to us, but very importantly with a term lengths on them, that means that they offer real long term visibility on rates and there I am thinking more of three to five years rather than one to two years. Then I think that's the point at which we start to take interest and then would evaluate on a case by case basis.

Thank you. That's helpful. And you guys have been fairly accurate in terms of calling the cycle here I guess. When you think about 2016 preliminarily and start to think about some of those timing dynamics and looking at your book, which is back half weighted for next year and then ultimately a little bit into 2017. Is it the kind of thing that you would expect that market to be coming to you at some point potentially in the spring of next year, I guess. I am just trying to get some color in terms of the timing of how you might think about the market development?

Well, I think we -- as we mentioned in the record, the market is driven by inquiry from the charterers. And if you looked back, this is the fourth consecutive quarter of good earnings and we could see that in the end of -- the start of Q1, there was a rush to obtain time charter cover. And I said, the fourth quarter because of course the fourth quarter of 2014 was a very good quarter for time charter equivalent earnings. And as we went into Q1 of 2015, we saw this rush to get time charter cover, but because it was very weighted towards the short term view and a potential for Contango, the days that were being offered or the years that were being offered was anything from six to 15 months and what did we see then, we thought that Q1 would be good and Q2 would be good. In Q2, by the end of Q1, Q2 we were actually able to fix a few deals ourselves of three years and we saw that there was a market developing where more and more charterers are looking at three year rates. I think now at the end of Q3, it will probably filter into the market that a few charterers have done five-year deals. And I think that reflects that there is a balance expected from the operator, from the end user that they have a concern about the structure of the market, and are now beginning to see that it could be a long term change and therefore they want to hedge and cover their positions. I wouldn't say that was a massive rush. There were a few contracts we know that have been done, but as those develop, then you will see the possibilities really firm up for doing some business that could be interesting.

Okay, that's really helpful, I appreciate it. And then final question would just be, you know, an understandable strategy in terms of the options and the write-down that you took in the quarter. When you think about fleet development over the course of the next several quarters, are there areas that you view as attractive right now in terms of putting capital at work, I just want to get a sense of sort of how you are viewing, you know, the landscape that's out there. Can you give some comments on how you think about the newbuild market and maybe some of the stuff that's a little bit more available on a resale business or second-hand basis?

Yes, so I think that how you put the capital to work is the critical expression that you used in the question and the thing I just want to affirm is that Euronav, we are very strong believers in putting the capital to work. So, if we looked at the Metrostar ships, there were eight of them; four fell into a window which is essentially delivering around now and four of them fell into a window that's a year out from now. We took the second four as options because essentially we saw it as a hedge against dramatic movement in newbuilding and second-hand prices. Had they moved up dramatically, we would have had a hedge against that move and that would have been satisfactory. As it is, we think that if anything there is a slight trend downwards, so we think that the hedge has improved. It was useful, but it has improved with the exercising. And what was our view beyond general value, well on general value, we don't really want to be placing your capital to work in shipyard where it will not turn anything for a significant period of time and indeed where we don't think there is going to be a significant replacement cost premium in the price to mean that there is a kind of reverse yield on the decision to exercise the options. So what I mean by that is, you could say that it was a good use of capital to book those ships, if we thought in a year's time an equivalent position would be worth in excess of $110 million because we will be back writing the yield on the investment and I think that would be sensible. But if it didn't happen, it does not materialize, the sensible thing is not to lift the option, but we are looking all the time at the possibilities for where we can deploy capital into what we see as a currently well structured market.

Okay, all right. That's helpful. Thanks so much for the time guys, appreciate it.

The next question comes from Noah Parquette of JPMorgan. Please go ahead.

Thanks. I just have a question on the market. We saw kind of oddity, we saw a few Suezmaxs get fixed, West Africa a weeks ago that the U.S. line of coast that we haven't seen in a while. What do you make of that? Do you see that as kind of a beginning of a trend or just kind of one-time thing?

I honestly don't -- on the specific cargos traded I don't know who the buyer was. But I think that the view I would take is that I wouldn't say it's necessarily a trend at the moment. But I do think that it opens up the question which you are kind of begging, which is what's going to happen on U.S. exports because the noise behind that has changed dramatically and think we were quite sort of the uncertain about whether it's possible politically, but it seems to be gathering very significant momentum. And if that does happen, then we could see exactly what I think you're intimating, which is that a reawakening of US imports by sea, at the same time as the US exporting by sea and of course that would be only positive for a ship owner or tanker owner.

Okay. And then just going to the Chinese port congestion, what do you think is the underlying driver of that? Is there any chance that that clears up soon? Is there investments in infrastructure that you're seeing or you think that's something that will be with us for a little bit?

Our feeling is that it will be there for a little bit, but it's not that the ships wait there and wait indefinitely. It's a lag that's on arrival, it's a bit like eating a big meal and having to digest it, you know, it's just allergies on the tanks and so ships are waiting a bit longer in the ports. And we are seeing that both in China and also in Basra on loading in the Middle East Gulf and also even in some Saudi ports. And so as we mentioned in at the end of Q2, it is an absorbing factor, I mean we'd call it artificial employment. And as storage is beneficial generally; people seem to be happy to carry the few days wait, just reflective of inventory management I think.

Okay. That's all I have. Thanks.

The next question comes from Jon Chappell of Evercore ISI. Please go ahead.

Thank you. Good afternoon, guys. Paddy, completely understand the decision with the options and the time when used to getting vessels on the water right now, and when you look at your presentation and if you're going to overlap slides 11 with slide 12, the time charter rates versus the second-hand values, it seems to be a massive disconnect in the last 6 months to 12 months or so. So basically, the question is how long does that window going to stay open? Do you think at some point whether it's during the winter or you get closer to I guess mid 2016 when there is hopefully kind of little slump in newbuilds given the Tier III that you talked about, that gap between time charters and asset value starts to close?

Well, of course Jonathan our view is that the time charter market is tied tightly to the spot market, to the freight market and as long as those two stay correlated where we see good earnings on spot and good time charter rates for people to cover their potential exposure. I think that the thing that breaks that relationship from the newbuilding price will be the trend in the commodity pricing plus the availability of finance. Now there is one wrinkle to that of course that if the charter gets anxious enough about the outlook, they start to rise much longer charters and those charters might become so long seven years plus, that they actually support newbuilding construction and that in turn pulls the price up. But newbuilding prices, don't forget they come under pressure not just because of the tanker market. That is, shipyard issue around all forms of construction of ship and offshore. So I don't know when that gets resolved, don't have a crystal ball on it. But all I would say is that to us asset values is about replacement cost, it's an expense to the business. As long as earnings stay strong then actually low asset values are positive for our outlook.

I understand the newbuilding commentary. To a large extent obviously the currency has been working in the favor of the shipyards, obviously there is no offshore assets for them to be building right now, steel prices have been down, but it seems the second-hand vessels whether it's five-year resale, 10-year and I know 10 years moved a little bit, they've all moved a little bit, but just given the magnitude of the time charter rate increase. The fact you can get one of those ships on the water today and generate a ton of cash, I would have thought the second-hand assets would have moved little bit more aggressively maybe disconnected from the newbuild and been more tightly correlated with the actual time charter environment.

Yes, I fully agree with you. I don't think that -- I think that what you are proposing is something that we could have expected. But I think there has been -- they have crept up strongly and been a bit better supported at the 15-year to 10-year age group. So certainly, where people want to play the market with the view to two to three years, then of course the lowest cost point of entry would be that 15-year to 10-year vessel and I think those prices look relatively speaking quite strong. But there is no question that lot of people in the past who might have jumped in and been very active in that market have held back a bit, and we've always maintained the view and it's little bit like I have to apologize for that, but it's a little bit anecdotal is just that our feeling is that lot of those people would have come in the past and mixed ship owners and was they like the tanker market, they got problems elsewhere.

Yes, understood. Just one last one from me. I hate to ask kind of broad-based market questions, I think you guys do the job with the market in general. But the volatility over the last four months or so has been absolutely extreme. Meteoric highs of July, big drops in August, huge rises in late September and October, now we are seeing a pretty precipitous drop again at the time when it should be going the other way around. Obviously, congestion, ton miles things like that are driving it, but are there any other anomalous impacts right now. I mean it seems like the fixtures for November are so low, just been waiting for the spike of second decade cargos first decade was exceptionally low, was it just Iraq came back for one big month and now they are kind of tempering or what you kind of see in this kind of recent market that's driving the volatility down?

Well, so as an overall view, it's I think what you said is very accurate description and it's very typical of our tanker oil, isn't it, that on the one hand you question the volatility and on the other hand we gave the third quarter with almost exactly the same time charter equivalent earnings. And so, if you just looked -- if you looked with an accountant's eye at the financial reports of the Company, it say, they are in a very steady market. But on the daily basis, the shifting around of what people would pay for cargo is enormous. So, you are right; it's been a great volatility there. I say great because volatility is always good for us. The market always looks considerably worse when it's not volatile. What's functioning, what's causing it? Well, I think they were just a huge number of moving parts and huge amounts of uncertainty. And so much of that uncertainty is around exactly where the NOCs and the IOCs think they are, where the [refiners] think they are and where they want to be. There is an awful lot of oil being produced. It means that there is big inventory in most places, but there is very attractive pricing. And you have some new players in the market, who may come in you know, a little bit out of trend. So there are people in the market who definitely would like to see the freight rates lower, all the usual traditional long term players in the industry have been around a long time on the chartering side, on the oil side would like to see lower trends, lower rates. So they try to hold out the market when they can. On the other hand, you have newcomers and new players whether they are in the Asia-Pacific region or whether specifically you think about smaller Chinese refiners who feel driven to come in almost regardless of the market when they want to. And I think all of these together with the port delays we talked about by the increasing volumes of Iraq by lots of little disturbing factors mean that market is much more, as you say much more volatile and that's micro markets that we talk about that sort of pixilation of the market on geography and time has a much bigger play. So it's striking that we've had a hold in the early parts of November and it looks very similar in many ways to what we were talking about in August. But I think equally it will be just short lived. I don't think that we need to anybody if owners are resolute and understand that it is the fourth quarter that there will be draw down on inventory and that inventory will get replaced and the oil price is cheap then the quarter will play out as expected. But only if they just give a heads around that and focus on value.

Okay, I appreciate the time. Thanks Paddy.

The next question comes from Amit Mehrotra of Deutsche Bank. Please go ahead.

Yes, thanks. Good afternoon, everybody. Paddy, Hugo, one of you Euronav's unique selling points I'd say has been your focus on the shareholder, which is generally the exception in the shipping industry. So in that context, I just like to ask a question on how you think about using the Company's currently strong share capital to pursue growth opportunities? On one side it's easy to see why issuing equity to make acquisitions is accretive under the current circumstances and the Company is near their target leverage levels. But in the past, you've also said that the Company will not issue shares until it's trading at a significant premium to net asset value. So can you just give us some insight on this topic and how you view the current share capital as a currency to maybe pursue additional acquisitions? Thanks.

Well, I think it will be very difficult for us to give them. You know, you can understand the framework of our thinking, I'm sure. But I'd be loathe to try and give you some model which would indicate where we thought good value was. I think we -- you're always going to look at the market that you're moving into. You're always going to look at the cost structure of the assets once they're bought. You're always going to look if you're going to issue shares, the relative value for the existing shareholder compared to the target acquisition value. And our ideas of growth, I mean, we believe there is some value in increasing the size of Euronav, but only if we grow at a reasonable price. So it's always going to be trying to have that balanced framework where we say, whenever we issue stock it should be to raise money that will be employed immediately in assets to generate earnings. And that's not difficult to understand, it's a fairly straightforward approach. In terms of the relative value, the target acquisition value should be appropriate for the price at which we're able to issue stock. And always, we bear in mind the absolute value of the target against what we think always the market outlook. So all of those things come into play and it's pretty -- I think it's a pretty straightforward approach.

Okay. Maybe just one second and then last question related to the speeding up comment that you made in the press release. I remember the white paper that you guys put out earlier this year with respect to the map behind speeding up and really related to the relationship between fuel economy -- fuel consumption and the opportunity costs in a high rate environment. So can you just -- it seems like the map drove the speeding up in the third quarter. Just wondering if you could just talk about how much was that a factor in the slowdown and rates that we saw in August. And maybe in your view, does that speeding up arithmetic maybe put a cap on rates after a certain level in the current low oil price environment?

I don't think -- I think it's more of -- first of all, I think it's quite natural obviously that there has been obviously pretty much on balanced condition when we're not loaded with cargo. That most owners have been enjoying this year to the extent that speeds have crept up, so almost to full valid speeds. And I think that the -- it's not an essential driver of huge amounts of additional volume. On the cargo side, people haven't been so eager to speed up simply because they're much more interested in reliability and inventory management. So I think it's been a story of two hearts of the laden and the unladen pastures. I think in August we were specifically looking at a couple of owners, who seem to have gone full speed in order to take the market at the rate almost regardless of what the rate was. And it was almost as if they thought that cheap bunkers may be sensible to arrive early and fix whatever the rate. So I mean. I think we were little bit tied up in our own world focusing on that because the things that we do tend to see when the market goes down sharply is charterers re-letting their ships into the market. So acting like owners, but in the manner that's rates insensitive. And seeing small not very well informed private ship owners piling into the market and fixing whatever the rate. What they could've done of course was the slowdown, judge the timing, arrive at the market little bit later and smooth out on the supply side. But that should be a good business judgment and they should follow it. So I would say, the speeding up we're referring to there is much more connected to that lack of smartness around the operation of their assets than it is about a general threat to the market thesis.

Got it. Okay very good thanks very much. Congrats on a good quarter.

The next question comes from Spiro Dounis of UBS. Please go ahead.

Hey Paddy and Hugo, thanks for taking the question. Just one follow-up on something you said earlier Paddy and maybe play devil's advocate here. So I think I heard you say that asset prices are lower, asset prices here might actually be a good thing for you. And if I take that and kind of look at in terms of you being a public company with cost of capital advantage maybe relative to other ship owners, seems like maybe you should actually be even more aggressive right here in going out and buying assets just to exploit that arbitrage all day long. And so, that on top of the fact that it seems like you've got investors now moving into your name more in a yield basis and less so on what your NAV is. So I'm just wondering you know, obviously you're taking very deliberate steady approach to buy new assets, but arguably could you be more aggressive here?

Well, I think first of all, you've completely understood the business model. So obviously, we're getting the message out correctly. I think that as far as we're concerned, we've bought 23 VLCCs, and I know that sometimes the market is a bit frustrated that we don't do more and more quickly. But we just have to emphasize that often it takes us half a year to go from negotiating an acquisition to actually getting the ship operating in our fleet. So there is an element of timing everything. I trust -- I'm sure you'll understand what you've seen us do is a fraction of what we looked at. And the management team are absolutely restless in terms of seeking value. So if we see the right thing, and we feel it's the right time, we will definitely be pursuing that business model that you so adroitly described.

Great, that make sense. And just as a follow-up there, so I'm just curious obviously we've been debating discount between asset values and rates for a while now. I guess I'm just wondering is should we just give up on waiting for newer asset values to increase here and it seems like ship owners are demanding higher rate of return and I realized a lot of that has to do with availability of financing. But the other side is what happens to asset values from here just given your position as one of the largest consolidators in the last two years saying that maybe you're going to take a little breather here, is that just what you've just done. It seems like a self appealing prophecy if you're one of the only buyers in town and maybe you're taking a cautious approach to wait out asset values declining.

Well, I don't think that we necessarily, I would hate to give the impression that we've somehow switched off because we haven't exercised the options. The options were very focused on their timing into the market. Our view is that we're looking at a couple of files right now. If we could line our docks up in a row in the right way, we'd probably act straight away. So I would hate you to think that we're taking a breather in the sense that we were off acting because we will act. We just need to make sure that all the parameters that we set are in place. And as far as the asset values are concerned, I think that it's been an unusual process, but we felt it coming about a year ago when we were surprised and obviously we went very early into the market with the big acquisition on the first [most] transaction. And we thought we've seen huge appreciation of asset values. We haven't done; of course we have had great earnings in the meantime, and I'm watching it develop. This could be really, really powerful for all of us if only everybody who looks at this market can stop to look at yield. Just look at the earnings, look at the delivery of dividend, and the dividend potential of the Company and then price the stock accordingly. And then we can look after the rest in terms of what we do on acquisition and whether or not you know what we want to buy. I think the trouble is this is a market where everybody has got a bit of a -- kind of a calculation take with from the last 20 years which is they always keep looking at shipping companies and saying they got to be at certain percentage to NAV or the stock price gets held back because of shipping transactions on the asset. We're not trading in ships. we're not a private ship owner or a strategy play looking to buy or sell the whole fleet, make a super profit. What we're looking at is trying to generate consistent and effective yield to our shareholders throughout the cycle. And if you'll focus on the earnings and the dividends, we will get there.

Yes, that's big color. Fair enough. I was hoping to just see if I can get you to use the word phlegmatic again in this earnings call, but maybe we'll have to wait on that. Thanks guys. That's it from me.

Okay.

The next question comes from Fotis Giannakoulis of Morgan Stanley. Please go ahead. Sir are you there?

Yes, can you hear me?

Yes, now I can.

Yes thank you and thank you for the opportunity. Paddy, I want to insist a little bit on the exercising and or your decision not to exercise your options and try to understand what kind of returns are you expecting when you are acquiring assets. Is the 8% return necessary? What made you think -- obviously ordering a newbuilding price is little bit lower than the price of the option that you have, but is going to take at least two years to take delivery of a new order right now. What made you decide and what kind of calculation did you make, and made you decide not to exercise this option?

Well, Fotis, I think that, you know, I think a lot of people might get -- might fall into the trap of thinking that somehow we were looking at a ship with a price of $98 million, and if it had been priced at $96 million, we would have exercised the option. And somehow that $2 million represented a monetary value that could be expressed as a yield and say that that's the investment that they are looking for. That is not the case at all. Essentially, the option was defensive. If you had told me that by this time, because the market was $100,000 a day, various owners had piled in and a newbuilding price was now $110 million, then of course it would have been a good idea to exercise the option and say that sufficient headroom there, it's such a big gap that it represents a good idea to exercise the option. That didn't happen. Our view is that we're not fixated on newbuildings. As you know, we have a very strong feeling about them because we think they essentially devalue the assets that are on the water. We are always looking at on-the-water assets. That's the alternative for us and the focus and that of course means that when we do deploy your capital, it will be on something that earns immediately, not something that sits in a shipyard for another 15 months.

Thank you, Paddy. From your answer, can I assume that this is an opportunity cost that you decide that the driver of your decision and is there anything in the pipeline that you are looking at right now? In other words, are there vessels available for sale with immediate delivery that might be more attractive expansion propositions for you?

No, I think it will be -- it's not that we've lined up another deal and that we're, you know, I really think that everybody should understand that there's nothing firm. But we are restless in terms of always looking at it, and always looking at it against share price and value. So there's no -- you're not going to get a sudden -- I don't really want to talk about deals that might be being done and certainly deals that aren't being done. But there is nothing in the pipeline at the moment for you to be excited or think that we're looking at an alternative. I think the decision was made only in terms of whether we thought that our head should work, and our view was well, actually it has worked in a way because we were protected for a couple of months, and now there is no need for that protection. We see the trend is downward, let's wait and see.

Thank you, Paddy. And one more question, I'm trying to understand how -- what are the key drivers for the crude tanker market. And I understand that there is a lot of demand and demand is accelerating even in the low oil price environment. I'm just wondering whether you think that the demand is the key driver or the supply of crude and if you view that the supply that is coming next year is sufficient to absorb the 40 vessels of deliveries that we are expecting. And what are the risks of a potential period of destocking that can create some volatility and or even some weakness in the market, at least in the near term?

Yes, I think first of all, fundamentally the answer is yes. As we said in the presentation, we believe that the anticipated demand growth from pretty much every agency and every analyst for next year will be sufficient to absorb the currently stated, expected deliveries of ships. That's our view. And secondly, studying the drivers of your market. I mean, I think we all study them, and can any of us be sure of them is a very different thing. But I think there is a long-held axiom in the oil market was always that demand was essentially always driven by production or supply and the mechanism was price and that's really what we are seeing at the moment. So yes, there can be some volatilities around inventory, but as we've seen that's already happened a couple of times this year. Do you get inventory drawdown and continued buying demand or do you slip into contango and end up with storage? I think there will always be a knife edge balance for the next few years like that. But a lot of supply, I think certainly in the medium term, we don't have to be too concerned, because I think that the main area that will come under pressure will be the easy startup and the easy shutdown oil around shale. So I think that we're not going to see a huge loss of production that can't be quickly resumed in the event that the price is right. So I think of course it's volatile, of course it's uncertain, of course it's difficult to read. If it wasn't, we wouldn't all be talking about it, but I think fundamentally you have a feeling that things looks well set.

Thank you, Paddy. One more from me, obviously we have seen the market a few weeks ago being at $100,000. Right now, it has come off, but it's still at very attractive levels. Some of the brokers attribute that to the completion of the October program and charterers waiting for the November program. Can you give us your view, the near term view, how does this November loading program in the Middle East look like and what is your expectation for the next month?

Yes, I don't think that I mean it would be really -- that's one of those crazy things of the way that the market moves and the way it's organized is that there aren't huge swings month-to-month. So we are relatively speaking about quite small numbers causing quite big shifts. And it really is up to the owners to make sure that they price their market correctly. And there have been a few drivers in the early part. I think a few -- really a few less cargos, we are not talking anything significant, a little bit of lack of discovery on those as a result of charterers having a few more ships under their control and some of them re-let into the market again. But I think that we are probably already running -- that story is beginning to run a bit out of steam, and the markets beginning to look like it might pick up again. Even today, a few fixtures were priced up. So we'll see, can't really make very strong predictions on it, because of course it's the future. But I don't think there is anything for us to be too alarmed about.

Thank you very much Paddy and congratulations for a good quarter.

The next question comes from Michael Webber of Wells Fargo. Please go ahead. Sir are you there?

Hey. Good morning, guys. How are you?

Good.

Just a couple of questions. I don't want to beat a dead horse here on asset values, but it seemed a bit like Stockholm syndrome in terms of people expecting a huge ramp every time there is a move in rates. Do you think it's fair to day, I mean, if you look at the historical ramp in asset value, they generally coincided with the new source of capital entering the market, kind of putting that probably a bit on to the asset. These with VLCC even on prompt basis pricing in kind of 40,000 to 45,000 or life of the asset on a DCF basis. Do you think it is fair to say the market is being a bit more rational here in terms of where asset values are or just we are not going to see a PE funded knee jerk reaction over a one to two or three year move in rates?

I hope that people would be a little bit more rationalist, because the darn thing about -- you know if I can just take an analogy because it is just a little bit easier to think about it, because it was relatively recently. If you look at what happened in dry cargo in the start of 2014, they had a couple of weeks of good earnings, good earnings which if you stretch them over 25 years would give a good DCF return on the assets. People not only bought that story, but they bought that story for a two-year forward start because they ordered a newbuilding, right, if somebody could ever explain to me what the risk appreciation is in understanding what you've just done when you do that because you might say I'm being countercyclical, but you can't be countercyclical in a two-year forward start because by the time your forward start arrives, everybody in the world might have followed you and of broadly speaking, the same delivery timing. So it just seems to me to be -- maybe that's been a shocking lesson to a lot of people and they thought you know, this time around I would like to see things a bit more proven out or I would like to be a bit more cautious.

Right, right. It makes sense and you can make the case yet. In fact we are doing the same now, since we are not over expending themselves into a year or two out into a firm market in such cyclical space. One more an asset value then I will hop in.

Sorry Mike, I just cut in because the one think I should say about the equities guys is that they make some crazy bets in other industries, and people call us cyclical. But when you see the way that other industries can completely fold, complete loss of value and the multiples that they can achieve so that you can end up with the Shanghai Composite Exchange in summer being 50 times earnings. I sometimes wonder what it is about shipping that looks volatile.

Well, there is problems everywhere, I guess. The…

Something is fine all of us.

Right, right. Well, yes. I know, I mean -- I think you get it like you get a degree of stability and you don't have asset values flying around $50 million every five years and there is enough stability for definable margins over the course of a cycle, I think you can justify higher multiples, we need to see more rationalities when that happen. So therefore will just persist and we actually get some stable asset values and people can actually then margins will matter again and performance. It won't just be a top line game. Anyway, last question for me. It's just kind of around that idea and we are obviously seeing a battle between cheaper steel and the light backlog at the shipyards versus some stronger near term cash flows. Do you think -- if we were to back analyze a year and maybe it's a year and a half and we think about some of the -- would we take that $105 million per pump be at one point. Do you think we've already seen peak asset values for the cycle?

Very, very difficult to say just because it's partly -- what is the outlook ultimately going to look -- what the outlook on earnings is going to look like. But the bit there is always a little bit more opaque is what the funds flow is. I think if the $105 million was a pointer which I think that pricing was paid over a number of times by private equity. So they were definitely the funds flow that held that number for a while. If they are not there, and it's back to ship owners and it's down to $95 million, we'll see what the pressure is. But I think it's very difficult to see the shipyards really wanting to market much below that, but who knows? It's that certainly beyond our realm, beyond our scope.

Okay, fair enough. I appreciate the time, guys. Thank you.

The next question comes from Junior Cuigniez of Degroof Petercam. Please go ahead. Sir are you there?

Thank you for taking my question. Most of them have been asked, but some small ones. I got a feeling that in a press release or a press article in Belgium you left the door open for M&A. How do you essentially reconcile your future financing of this potential M&A with your dividend policy. Would you -- would large M&A be a trigger to do temporary see dividend payments?

Well, that's a number of extrapolations of the basic principle. I think the -- look, any deal that your update is -- and it's really crucial to understanding our pieces. And I hope that everyone is still on the line, because it is very important to get this point over. We want to make sure that we support and reward the shareholders who have brought us to where we are. And that means that any deal we look at is going to be predicated on the ability to return at least the same, if not more value to all the shareholders post merger as pre-merger. So it doesn't really matter whether we buy single share or whether we went out and bought another company or another fleet. All the maximum work will be down on the basis that we can meet the commitments that we've made in terms of yield and that ultimately we feel there is structural longevity in whatever we're doing and that is going to be sustainable and effective. So those will be the rules and there is no -- I don't see that there is any point in doing M&A, unless it's to return value to the shareholders.

I do understand your comments completely, but short -- on short, I mean yield is something which you can see over different period of times. If you would look at for example, dividend yield at over one year time, would M&A impact dividend yield in short term?

I'm not -- no, I think just I am sorry, I am just misunderstanding it. But Hugo, why don't you make the point? I wasn't sure if I understood the question. Hugo?

No, I think we can be categoric about it. We're not going to cut the dividend to make a deal. This is as simple as that. There we don't make the deal.

Absolutely.

Okay, very clear. Thanks. All right. The second question related to your press release of this morning and your explanation of the August weakness, you stated that the correction came from lower imports from China, from slower exports from Iraq. Can you give some granularity or bring some granularity, why do you -- why you see these events as temporary of nature?

Because they're finished.

Okay. That's pretty clear. All right. Thanks. That's from my side.

The next question comes from Wouter Vanderhaeghen of KBC Securities. Please go ahead. Sir are you there?

Hi gentlemen, good afternoon. Congrats on a great quarter. Couple of questions left. First, recent ship broker report suggested that Hakata has been fixed on a three-year contract. Can you confirm that one? And is that one, if confirmed of course, is it one fixed with best profit splits?

No. That's not correct. It was actually a synthetic deal, but the ship is still earning the crude under the spot market earning.

Okay. Thank you.

It's little bit complicated to explain on the phone, just because as you know we have this French flag business and from time to time we do synthetic deals. But they are always spot market related. So you shouldn't consider that as a fixed income ship.

Okay. Perfect. Thank you. On the remaining newbuild commitments, which I estimate that's about 195, would it be possible there to give a breakdown for the next quarters?

It's two in Q1 and one in the very early part of Q2. And it's one-third, one-third, one-third.

Okay. So there is nothing left for the fourth quarter then?

No. In the fourth quarter, no, nothing. Now the three ships will be delivered to us in January, March and May.

Okay. And then looking to the let's say, aging part of your fleet. So the vessels built in 1998 to 2001, we are talking about seven vessels. You are still four open. Do you have there any preference on time chartering these vessels out, let's say, until the age of scrapping or would you prefer let's say selling them in current market?

There is no decision making on that until we look at a specific possibility. So again, Wouter, it's a balanced decision that we make from time to time. You know, it's neither a call on the market nor is it a decision to prefer time charter nor yet sale, it's just -- we're looking at all the different possibilities and evaluate what we think would be satisfactory value.

Okay. Thank you.

The next question comes from Mark Suarez of Euro Pacific Capital.. Please go ahead. Sir are you there?

Thanks and good morning guys. Thanks for taking my questions here. Just you know if I can go back and look at the relationship between second-hand values and newbuilds, I think you talked about financing has been very challenging. As we all know, commodity price continue to go down, scrapping has gone down. Maybe we can talk about shipyard capacity in the Far East primarily, South Korea. How do you see that capacity coming over the next six to 12 months as deliveries accelerate in the second half of 2016? How will you describe that dynamic?

Well, let's -- I think that as you correctly identified, we're going to talk about big ships, Suezmaxs, VLCCs, essentially we're talking about the big South Korean yards. And they are obviously essentially they are unavailable to produce whatever they can produce. They have an order book, which we can see now and it is getting delivered over the course of 2016 and 2017. And behind that, there is some orders in 2018 and an empty yard space behind that. So whether those yard spaces are used, the tankers, the containers, the dry cargo, the gas ships or drilling equipment or offshore supplies or even for some industrial domestic requirements, that's really a question of their business rather than ours. So we can't really take a view on it.

And if you look at that capacity now, how will you -- what is your sense of newbuild conversions in the tankers from let's say, some or the other segments. You think that has been overstated? I know there has been talk at the beginning of the year and obviously that has come down. What is your sense on that trend?

Well, I think we did a count on it and then we got up to a four that that was it. It really required, it had to be the right yard that could build both a dry cargo ship and/or a tanker and if it were to be early enough in the process to make switch. So I suspect that the ones that could be done have been done and as I said the number we got to is four.

Got it. And then maybe we can go back to the storage trend. I know that given the very strong VLCC passing environment, you've seen the planning of the contango brent or forward curve since the start of the year. How will you describe storage pent up demand at this point of the cycle. I'm assuming you decelerate it. Have you seen any impacts on some of the pricing over the past two quarters?

No. It's really -- as you correctly said, it's really about seeing the contango structure on whether it delivers enough dollar value to warrant the carry cost of -- the financial cost of earning the oil and the storage facility of the ship. I would say, generally, there is a bit of storage going on the fleet simply because there is some logistical management around the use of a tanker where you can of course slow it down or speed it up or you can even wait it if you have problems with the storage capacity ashore. But that's not what we are talking about when we talk about contango and financial commercial storage where somebody actually has a paper play put on. As we've said repeatedly I think when the freight market is weak, it could be a little bit under a dollar or when the freight market is strong, it's a little bit over a dollar. But a dollar a barrel a month seems to be around the number to be looking for between the prompt price and whatever future position you're looking at.

Great. That was very helpful. Thanks. Thanks for your time as always.

The next question comes from Robert Perry of AXA Capital Markets. Please go ahead. Sir are you there?

Hey guys. Thanks for taking my question and congratulations on the stamina, it's pretty long call. Basically I wanted to switch gears a little bit and talk about financing. You guys just did huge refinancing $750 million priced 100 basis points below what it previously was. It couldn't [tenure] with pretty much every non-German or Greek bank. Is it definitely coming down to a two-tiered market now with the bigger guys are getting all the financing and there is nothing else going on for the small guys?

We would certainly hope so being in the right category at the moment. But no, I mean it seems that -- at least that's what we hear from the bank. You rightly pointed out that there is a number of banks who are very active in shipping markets up until the end of the last cycle, 2008. Those are the German and the Greek banks. They have almost completely disappeared from the market or are continuing to downsize their current portfolio. And so, you have a shrinking number of banks and those banks have set the focus on existing strong relationship with the preference for larger company and if they can be stock lease, that's even better. It seems that it provide them additional protection. So we hope that the trend is going to continue, because it is an additional barrier to entry to our market.

Thanks for that. And just quickly, it looks like you guys were able to free up additional, maybe $32 million in liquidity from the new facility. I mean is there a cash balance, when you guys look at acquisitions that you want to keep or is it just a matter of -- obviously, you have more input, more ability to lever up if you wanted to. But it looks like you guys are pretty much where you want to be. So I'm just trying to figure out sort of on numbers basis what you guys would have you're looking?

Look, I think that we have already said in the past that the current leverage is the one we want to have. We believe it's conservative enough to navigate through cycles. We have a good visibility on the next sort of 18, 24 months. But beyond that, it's difficult to say where we're going to end. We noted the market is cyclical so what we try to do is accumulate as much available liquidity as possible. And when we do this financing, which as you pointed out, are six or seven years when the current last one being seven years. We do like to have a little bit more under the cushion for when times comes and we need it. That could be a need because the market is a little bit softer or that could be a need because we see an opportunity that we can seize immediately. But there the condition would be that we don't change permanently the leverage.

Understood, thanks a lot guys. That's all I have for now.

Thank you.

The next question comes from Charles Rupinski of Seaport Global. Please go ahead. Sir are you there?

Thank you very much for all the color on the call. Just a very brief couple questions. You mentioned that you are looking at many, many different possibilities in terms of vessel acquisitions or moving ahead on that. Is there a way to think about second-hand vessels in terms of what a hard stop would be on age? Is there an age limit to what you'll be looking at? Obviously, I'm sure you look on a case by case basis, but -- and how do you think about going forward in terms of developing the fleet?

Well, obviously I think that it's -- we always said the most important characteristic of a ship is its price. But we've got recent amount of exposure and I think that it would be very strange to see us buying anything that was 15 years plus, because I think that that's probably not the end of the market that we see ourselves focused in and it would be a very short term view. So probably not 15 years plus. Apart from that, I think it'd just be question of all the different characteristics.

Okay. Great. Well, I appreciate the color and thanks again.