Scorpio Tankers Inc. (STNG) Q3 2024 Earnings Report, Transcript and Summary

Hello and welcome to the Scorpio Tankers Third Quarter 2024 Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the call over to James Doyle, Head of Corporate Development and IR. Please go ahead, sir.

Thank you for joining us today. Welcome to the Scorpio Tankers third quarter 2024 earnings conference call. On the call with me today are Emanuele Lauro, Chief Executive Officer, Robert Bugbee, President, Cameron Mackey, Chief Operating Officer, Chris Avella, Chief Financial Officer, Lars Dencker Nielsen, Chief Commercial Officer. Earlier today, we issued our third quarter earnings press release, which is available on our website, scorpiotankers.com. The information discussed on this call is based on information as of today, October 29, 2024, and may contain forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For discussion of these risks and uncertainties, you should review the forward-looking statement disclosure in the earnings press release, as well as Scorpio Tankers SEC filings, which are available at scorpiotankers.com and sec.gov. Call participants are advised that the audio of this conference call is being broadcasted live on the Internet and is also being recorded for playback purposes. An archive of this webcast will be made available on the Investor Relations page of our website for approximately 14 days. We will be giving a short presentation today. The presentation is available at scorpiotankers.com on the Investor Relations page under Reports and Presentations. The slides will also be available on the webcast. After the presentation, we will go to Q&A. For those asking questions, please limit the number of questions to two. If you have an additional question, please rejoin the queue. Now I'd like to introduce our Chief Executive Officer, Emanuele Lauro.

Thank you, James. Hello, everyone, and thank you for joining us today. We are pleased to report another strong quarter of financial results. In the third quarter, the company generated $166 million in adjusted EBITDA and $87.7 million in adjusted net income. While rates experienced a seasonal dip during the quarter, they remain above historical averages. Thanks to significant improvement in our balance sheet and lower daily breakeven costs, with the rates we have booked in [indiscernible] so far, our LR2s generate $18,000 in cash per day, and our MR fleet generates $8,000 per day. And rates have already started to improve, particularly on our LR2 segments. Throughout the third quarter, we continue our strategy of reducing debt. We've been acting opportunistically and returning capital to shareholders. Since July, we have reduced our debt further by $115 million and significantly decreased our share count. We have also reduced our daily cash break-evens to $12,500 per day, strategically positioning the company to generate more cash even at lower rates and improve per share earnings. During the quarter, we capitalized on opportunities to sell assets at attractive prices while also repurchasing our own shares at a discount to net asset value, thereby creating and crystallizing value. We completed the sale of six vessels and announced the sale of another three vessels, expected to close in the fourth quarter. On a pro forma basis, which assumes the closing of the three remaining vessel sales and marketable securities, the company has liquidity today of $463 million. From April 1, we have repurchased over $300 million of our own shares, representing over 7% of the company. Of these, 3.4 million shares, or around $240 million, were purchased since July 1. Including share buybacks and dividends, we have returned $7.13 per share to shareholders in 2024 so far. Additionally today, we declared a quarterly dividend of $0.40 per share. In the third quarter, we acquired a 4.9% stake in the crude tanker company DHT, a passive but liquid investment that positions us to capitalize on the upside of an improving crude tanker sector. Our outlook for both crude oil and refined products remains positive. For the first time in several months, we anticipate that improvements in the crude oil market will also positively impact refined products. With low leverage, strong liquidity, and a young fleet, we are exceptionally well positioned. We remain committed to delivering value to our shareholders, and we do appreciate your continued support and confidence in Scorpio Tankers. With this, I would like to turn the call to James for a presentation, please.

Thank you, Emanuele. Slide 7, please. Just a few years ago, many would not have believed that MR and LR2 rates could reach $20,000 and $30,000 per day, especially during the seasonally weakest part of the year. Product tanker rates remain well above historical averages and are at levels which the company generates significant cash flow. We expect this to continue. The ongoing strength in the product tanker market is the result of, one, demand consistently outpacing supply, two, increased ton miles as changes in refinery capacity have reshaped global trade flows, and three, geopolitical events exacerbating points one and two. Despite facing several challenges in the third quarter, including the end of summer driving season, elevated refinery maintenance, and competition from crew tankers, the fleet still averaged over $28,000 per day. Notably, these rates have been achieved while undergoing a significant drydocking program. By the end of this year, we will have dry docked almost 60% of the fleet, increasing the efficiency and earnings days for next year. Looking forward, our outlook remains constructive. Rates have bottomed at very high levels. The market headwinds are becoming tailwinds, and it will not require much for rates to increase further. The risk is to the upside. Slide eight, please. From August through October, we saw significant refinery maintenance. Over the next month, 3.5 million barrels of capacity will come back online, increasing refinery runs and seaborne exports to meet growing winter demand. We are entering the seasonally strongest period of the year. Q4 and Q1 tanker earnings have consistently exceeded Q3 over the last 30 years. We expect this to continue. Additionally, seasonal improvements in crude tanker rates are also expected to be a tailwind for product tankers. Slide nine, please. The crew vessels which entered the clean product trade are moving back to carrying crude oil. Of the 45 crude tanker vessels which moved into this trade, and excluding the vessels which have recently loaded clean, 32 are expected or have already moved back to carrying crude oil. We do not expect additional vessels to clean up and carry refined products, as the off-hire time, cleaning costs, and trading limitations make this unattractive at current rate levels. The improving crude oil market and exit of these vessels from the clean trade will provide a positive tailwind for LR2s. Slide 10, please. Diesel and gasoline inventories in the U.S. are well below the five-year average. Thus, future demand will rely on refinery production and seaborne exports as opposed to inventory draws. Slide 11, please. Demand continues to grow. Yes, grow. And we expect demand for refined product to increase by close to a million barrels per day next year. We are seeing this demand strength in seaborne exports, which averaged 20.5 million barrels per day in September, near record highs. Furthermore, it's not just the volume of products that has grown. The distances these barrels are traveling has also significantly increased. Slide 12, please. Ton-mile demand has increased by 17% compared to 2019 levels, excluding Russia, and 20% when including Russia. Last week, Phillips 66 announced the closure of its 139,000-barrel-per-day refinery in Los Angeles. In total, we are tracking closures that could reduce refining capacity by a million barrels per day next year. Many older refineries require significant capital investment to remain operational or meet new regulatory standards. This makes it hard to compete with newer refineries in regions like the Middle East that have lower operating costs and more complex refinery configurations. As a result, we expect more refining capacity to close, which will add incremental ton-miles as loss production is replaced with imports. Slide 13, please. LR2 vessels continue to transit around the Cape of Good Hope. This has increased voyage distances, ton-mile demand, and tightened supply. We have not seen any disruption to flows going through the Strait of Hormuz, which accounts for 16.5 million barrels of crude and refined products per day. But the biggest benefit we expect to see on the LR2s is the exit of crude tanker vessels from the clean trade. From June through September, crude tanker vessels carried 65 million barrels of refined product, the equivalent of 87 LR2 cargos. Slide 14, please. Year-to-date, the combined Aframax and LR2 fleet has carried 16.5 million barrels a day of crude oil and refined products. Of this, over 13 million barrels consist of crude oil and dirty products, while the remaining 3.3 million barrels has been clean product. However, within the Aframax LR2 fleet today, 39% of the fleet comprises LR2 vessels. But differently, 39% of the combined fleet is LR2s, but the clean product trade accounts for only 20% of the total cargo volume. Slide 15, please. This requires the use of LR2 vessels to service the crude oil trade. Currently, 44% of LR2s on the water are engaged in the crude oil and dirty products trade. We expect this ratio to hold, if not grow, over time, given the age of the Aframax fleet and new orders being predominantly LR2s. Of the 263 Aframax and LR2s that have been ordered since 2021, 203 are LR2s, roughly 77%. This has also inflated the product tanker order book. Slide 16. While the order book now accounts for 20% of the fleet, half of the order book is LR2s. As we highlighted on the previous slide, we expect a significant portion of the LR2 fleet to continue servicing the crude oil trade. Furthermore, this does not reflect the age challenges facing the fleet today. Today, the fleet is 14 years old. By 2027, including new building deliveries, 25% of the fleet will be older than 20 years. Therefore, the effect of fleet growth is likely to be less than what the order book suggests. Slide 17, please. The total addressable market diminishes as vessels age. The trading patterns of MR vessels built in 2004 observed over the last eight years clearly demonstrates this decline. At age 12, these vessels carried 3.2 million barrels of refined product per year. By the time they reached 16 to 18 years old, they carried 2.1 million barrels per year, a decline of 33%. As these vessels approach 20 years, their capacity declines even further to 1.8 million barrels, translating to a total reduction of over 40% in volume compared to age 12. One might argue this could have declined even further without the additional demand from sanctioned Russian trades. By 2027, more than 1,000 ships will be older than 20 years, and the number of MRs over 20 years will increase from 261 today to 525 by 2027. Many are underestimating the impacts of an aging fleet and overestimating the capacity of the current order book. Year-to-date seaborne refined product exports and ton-miles have grown by 0.7% and 7.8%, respectively, far exceeding this year's fleet growth of 1.5%. As highlighted earlier, we anticipate that fleet growth will be more modest than the order book implies. If all new LR2s were to operate in the clean market, fleet growth would average around 3.9% annually over the next three years. However, the effect of fleet growth could be closer to 2.5% per year during this period when factoring LR2s trading in the crude oil market and mild scrapping. Looking forward, we are very constructive on the supply-demand balance. The confluence of factors in today's market are constructive individually, increasing demand, exports, and ton miles, structural dislocations in the refinery system, rerouting of global product flows, and modest fleet growth. Collectively, they are unprecedented. With that, I will turn it over to Chris.

Thank you, James. Good morning. Good afternoon, everyone. Slide 20, please. Over the past seven quarters, we've generated $1.7 billion in adjusted EBITDA and $1.1 billion in adjusted net income. These results have enabled us to reduce our debt by $1 billion, pay $121 million in dividends, and purchased $786 million of the company's stock in the open market at an average price of about $56 per share. Our approach to shareholder returns has been to combine the accretive effect of deleveraging along with opportunistic share repurchases and a sustainable dividend. On a year-to-date basis, through September of 2024, we've reduced our debt by over $700 million and returned $365 million, or $7.13 per share, to shareholders in the form of dividends and stock repurchases. As an additional point of emphasis, the company expects to have completed the five-year special surveys on almost 60% of the fleet by the end of this year. Not only does this set the company up for a lighter dry dock schedule for the next couple of years, but the work performed during these dry docks is expected to enhance the operating efficiency of each vessel going forward. Slide 21, please. The charts on this slide demonstrate the complete transformation of the company's capital structure over the past three years. Less than three years ago, the company was highly levered and vulnerable to even mild contractions in the spot market. With the low leverage of the company's balance sheet today, not only can it withstand a contraction in the spot market, but it can thrive due to its cash generation potential driven by low break-even rates. Our debt reduction efforts continued during the third quarter, as we repaid our $64 million term loan with BNP Paribas and Sinosure. This facility was the most expensive bank financing on our balance sheet, bearing interest at SOFR plus a margin of 291 basis points. We also executed an agreement with the lenders on our $225 million credit facility to convert this facility into a revolving credit facility. This amendment gives the company the flexibility to make unscheduled repayments that can be redrawn in the future. A full repayment of this facility could potentially reduce our daily cash break-even costs, which include vessel operating costs, cash G&A, interest payments, and regularly scheduled loan amortization by almost $850 per day. As shown in the table on the right, our gross and net debt as of today stands at $896 million and $675 million, respectively. On a pro forma basis, which assumes the closing of three remaining vessel sales, which are expected to close within the fourth quarter of 2024, our net debt would be below $520 million. This compares to net debt of $1.3 billion at the same time last year. Slide 22, please. Through the end of 2025, our ongoing quarterly scheduled principal repayment obligations on our secured debt are less than $20 million per quarter. This illustrates the company's low leverage and cash generation potential. With a daily cash break-even rate of approximately $12,500 per day, these debt service obligations are highly manageable and position the company to generate cash flow and sustain shareholder returns even in the most challenging rate environments. Slide 23, please. We are currently exiting the seasonal low point of the year and are now seeing positive signs of momentum in the spot market. Our quarter-to-date coverage on our LR2s and MRs, which incorporate the effect of this seasonality, still reflect cash generation of over $18,000 per day and $8,000 per day, respectively, on these vessels. To further illustrate the company's cash generation potential, at $20,000 per day, the company can generate up to $271 million in cash flow per year. At $30,000 per day, the company can generate up to $632 million in cash flow per year. And at $40,000 per day, the company can generate up to $994 million in cash flow per year. With that, I'd like to turn the call over to Q&A.

We will now begin the question-and-answer session. [Operator Instructions]. And our first question comes from Omar Nokta with Jefferies. Please go ahead.

Thanks for the update. Obviously, a lot going on. I just wanted to ask, obviously, on DHT being the big news today, you put $89 million to work there. It stems from Emanuele's comments in the beginning of the call that you're bullish on crude. I wanted to just ask, how do you view this playing out in terms of the longevity of this trade? Is this a short-term trade to take advantage of potential winter strength, or is this more of a long-term holding given the dynamics of the limited supply in VLCCs?

Thanks, Omar. I think there are a couple of things. First of all, we can see that we can afford to do this. We have a lot of liquidity. The liquidity is $463 million. It doesn't even include the liquidity we could use. There's no way that this investment in DHT is at all restricting our ability to buy our own stock. We really wish that the rules related to buybacks had been a little bit different. We've been quite severely restricted during these last weeks. We haven't been able to buy for a number of days now. Even during the period where we could buy, because of the drop in volume, even though we were doing the maximum we could buy in many days, that was inadequate to us. We wish we could have bought more. But even if we could have bought all the time, all the way through this, we would still have enough money to do what we see with the DHT trade, which is to take advantage of something that is pretty unusual. For a few years now, the VLCC market has underperformed itself. It has been a potential negative for the product market because its weakness, along with the crude market, has drawn vessels from the crude into the product at times. Now we're seeing that this is going to change. We see for the first time that this winter is lining up to be a very strong winter for the crude side. That's going to be additive to our product tankers. We're seeing it already starting to happen in the LRTs. In that setting, we think DHT is very undervalued. That's just setting up a great investment for the company. It's proven to be a liquid stock. We don't foresee having the need to access the capital to help buy our own stock, but we could do if we had to. It's like any other investment. You watch how it goes. We think that this could be a very good long-term position. The company is returning a lot of capital during this week period. So we've already received one dividend off our purchase price. As you point out, the supply-demand balance looks very attractive for VLCC. So I don't think you use a public company as a short-term trading vehicle when you go in. So the intention here would be because you've got great fundamentals for a period in the VLCC market.

I appreciate the context. Maybe just as a follow-up, I'll turn it over. The 4.9%, I'm guessing that's by design, but is that the extent of it? Would you look to add to it? Would you want to add either VLCC or crude exposure in any other way?

I think this is an exceptional opportunity. The stock markets are going just like we've seen in products. The actual third quarter, if we look at the reality of the cash generation, has been fantastic. The rates during that period for any of us who've been in the industry for a reasonable while are absolutely fantastic. The rates as we're coming out of this third quarter right now today in the LR2s and the MRs, you could take the rate from 30 to 50 in one trading week in the LR2s as you approach this winter position. I'm sure Lars will talk about it later. That opportunity arose the same in crude, where the crude was consistently improving, despite very low exports during particularly September and October. And we were able to take this opportunity. It is by design that we stopped at 4.9%. We wanted to make it clear to the market. I think it would have been a mixed message if we had gone from 4.9% to a filer of 6%, 7%, 8%. I think that would be too aggressive. Moving could lead to the thought that we weren't a passive investor, that there was going to be Act 2 or Act 3 or something. By design, we're stopping at that position. We do not see ourselves acquiring VLCCs. There's really no thought at all to do that. We've managed to acquire, if you want to put it that way, VLCCs. If you put finance on them, we managed to buy 2, 3, 4, 5 VLCC equivalents, but we happened to have bought them at 20% below the sale price. So we're happy and content with what we got.

Our next question comes from Jon Chappell with Evercore ISI. Please go ahead.

James, as it relates to the bigger ships encroaching on the product trades, I understand that they're leaving now, which makes complete sense from a seasonal basis. We also were led to understand over the years that these are new-build VLCCs or Suezmaxes, never carried accrued cargo before, made it easy to trade in the product on their maiden voyage. But it seems like a lot of what's happened in the last couple of months are actually established ships who had moved crude before. Can you help us understand the process and how they were able to switch so quickly between crude and product? Is this going to be a risk for seasonal shoulder periods going forward, the ability to move back and forth that quickly, especially of ships of that size?

Lars, do you want me to take this, or would you like to?

I'll give it a stab. Thanks. Hi, John. First of all, the ships we're talking about right now are basically ships that are dirty and have cleaned up at great expense. The spread between the clean and the dirty market had to be that great to be able to take the risk in terms of spec and degradation of spec, the time that it would take to clean up the vessels, and also the type of cargo that you have to load has to be able to manage an uncoated vessel. We had a huge market on LR2s in the middle of the year, around June or July. The crude market at that point in time was languishing, and there was a massive spread where traders could say, we're willing to take that particular risk. We saw about 65 million barrels of product moving on. We count 32 or 35 Suezmaxes and 14 VLCCs, which is about 86 to 90 LR2 equivalents. This impacted, of course, the LR2 market and the MR market, to some extent also the LR1 market. What we can see now is that since then, and this is looking back to June and to where we are now, on the VLs of the 14, 7 have gone back to dirty. There are still three of those that are on a clean voyage. They're all trading off, as we can see, off West Africa. They could have spec issues, there could be storages because they're cheap, and so on. But in terms of Suezmaxes, we counted 35. We can see that 23 of those have gone back. There are still about 10 on those voyages. Then you think about where we are now in terms of the number of ships being fixed in that segment. We can see for October, there's only one ship, one VL, that has gone into this thing, and there's only a small handful of Suezmaxes. So there's a huge change in terms of that volume. And if you say it's given that the volume in the Middle East and West Coast of India is constant or relative constant, despite the large turnarounds that are taking place, in particular in Yanbu and also in Azores, two trains that are just about to start on some of their maintenance, you're really talking about a huge amount of volume that suddenly is going to go back into the CPP trade. And the reason for that is that the spread between the CPP and the crude has now drawn in, and it doesn't make it, at the margin, beneficial to expense yourself with cleaning up vessels. We've seen now a huge amount of VLCCs and the Suezmaxes going back into dirty. When the market was trading $8 million, $9 million for a LR2, and it was trading at $3 million or something like that for a VLCC, you could see that you could load 3 LR2 cargos in and you had a big spread. That no longer is the case, and therefore we believe that we have a lot more cargo coming in once we get through the markets as we see it right now.

Okay. I'll keep my follow-up somewhat on the same thematic. Between that kind of variability of bigger ships coming in and out, and also the order book picking up a little bit for product anchors in 2025 relative to the last few years, do you envision more volatility in the segments that you operate in, especially the LR2s as the bigger ships, than we've seen over the last couple of years, maybe a wider spread of highs and lows? If not, why?

I think we have seen immense volatility over the last couple of years, which we embrace. I think the volatility is a telling tale about how strong the markets are underlying, where suddenly you can see these big jumps that Robert also alluded to. We've seen those jumps throughout this year as well, and we've seen them in the West, in particular the U.S. Gulf, on numerous occasions as well this year on the MRs. When it comes to the first point you made, which I didn't really answer properly, Jon, the fact of having new buildings coming into the market, be it Suezmaxes or VLCCs, has been something that has been going on for years, right? When you have a completely virgin tank, people will be able to load the gas oils and the ULSDs, et cetera. We anticipate that to happen going forward as well, but that's just par for the course. That's normal. We don't consider that to be a big issue. I think there's a number of Suezmaxes coming out next year, and very few VLCCs. On balance, that is something that's just normal. When it comes to the fact of these huge, immense spreads that we saw in the middle of the year between VLCC and LR2, that could happen again. Then you would have to have a stronger view on where you think the VLCC market is going to go as we move into the fourth quarter and the first quarter. There we are a lot more constructive now than we were, let's say, a year ago.

Our next question comes from Greg Lewis with BTIG. Please go ahead.

I was hoping you could talk a little bit about what you're seeing in the sales and purchase market. Clearly, you guys have sold a couple vessels. It seems like maybe not on the MR side, on the older vessels. You don't have many of those, but we're hearing reports of those kind of assets kind of selling off. Any color what you're seeing? Has it been a lack of buyer interest, more sellers coming to market? Any kind of color there would be helpful.

I'll take this. Thanks for the question. I think the market has remained quite stable on the levels from an S&P standpoint. As you have seen, as far as we are concerned, we try to always sell the next ship at the higher level than we were selling the previous one. We've been riding that wave, looking for quality rather than quantity, not needing to sell, and wanting to always capture the best price to date. This has, as far as we are concerned, limited the quantity, but went with always an increasing price level as just described. Market-wise, on the bigger ships, there has been less appetite than on the MRs. This is why we've been selling less LR2s than MRs. MRs, by definition, are the workhorse of the product space, and it is an easier vessel to trade for a bigger spectrum of buyers or operators. We found more depth into that market. Bear in mind that, of course, we've stayed far away from any doubtful potential buyer on the grey fleet or anything like it. By definition, not even entertaining discussions on people that we didn't have a clarity of without even having to conduct the KYC. We are satisfied with what we have done, and we are also satisfied with how the market is holding up. Of course, people are trying. It's normal. There has been a dip in seasonality on the right side, and people have been trying to throw lower numbers to see the reactions. They, so far, didn't get very far. I'm not talking with us, which they would go nowhere, but more broadly from a market perspective. It remains to see how the next couple of weeks pan out and see whether the winter market, which we're expecting to come, will come. Then I expect the S&P market to stabilize as well.

Okay. Great. Super helpful. In the prepared remarks, you guys highlighted the Phillips closure out on the West Coast. Any thoughts around how that impacts the market in terms of those volume replacements, whether that's in the U.S. Gulf on pipelines? Does it impact exports? Any kind of high-level views on that closure and what that could mean for U.S. exports, imports on the product side?

Sure. Greg, it's James. And Lars, feel free to add. I think this closure is going to require imports to come from Asia. You're going to need gasoline and distillate to replace that, probably 70,000 to 80,000 barrels. But I think what's more important is it sets the tone for some of these regions that are going to have a difficult time with their older capacity. We don't think it's, for example, the only refinery that could close in California. Valero highlighted some of the challenges that they have there. It's probably something we'll see or have seen in Europe. We expect this to continue. I think you had a really high crack spread environment for two years as cracks have come in. There's a lot of costs that need to go into maintaining these refineries, and the economics don't make sense. We view this as not only constructive in the short term, but definitely in the long term for flows.

Our next question comes from Ken Hoexter with Bank of America. Please go ahead.

I guess if we look at the 35% bookings for quarter-to-date, deceleration in rates, as you mentioned, but market rates, you noted, are starting to drive. I don't know if Cameron or Lars, if you want to give maybe a little historical perspective, how do you see this shaping up seasonally? Is this an early start, a late start? I don't know if you want to put it in perspective of giving the excess new builds in terms of capacity, or if given the timing of the shutdowns, maybe just give some perspective on how we should think about the seasonality of rates as we head into the Thanksgiving that Robert always talks about as the key startup.

I was just going to say exactly that. The old school thought process is that the market always starts around Thanksgiving. Obviously, that's been a very different game over the last couple of years in terms of the seasonality and what we expect the market to come in. I think the most important thing is that when you look at the refining capacity that's offline for September and October, we're trending at 7.7 for September and 8.5 million barrels per day for October. That rapidly draws down in November to 5 million, and then suddenly for December, it's down to 3.5 million. Then for Q1, we're trending around 2.2 million barrels offline globally. There's a huge amount of oil that's going to have to come to market from that perspective. The question, of course, is that when you want to go into the macro or the micro of that, is that short-haul or long-haul? Is that [ARB-related] [ph]? What's going to happen? That's always a defining factor. The thing that's always interesting when it comes to Q4 drivers is the refining runs that we're going to see that's going to come online in Asia and the Middle East, but also for Europe and North America. I think for September and October, that's about 3 million put together. 1.4 million in North America, and Europe is 1.3 million, 1.7 million in North America, and 1.8. In October, we've got 3.5 million barrels offline in the Atlantic Basin that comes back on stream. Obviously, refining runs is a big ticket item. The thing as well is the northern hemisphere weather delays. We've talked about the years gone by. That also always plays a small role as well. But the thing as well that's important is the fungibility of these different types of vessels. We talked about before the issues around the cannibalization of the 6.5 million barrels that we saw over June to September. That's a huge amount of LR2 equivalents, but that also impacted the MRs. We have a perpetual open market in terms of arms from the U.S. Gulf going to Europe in terms of distillate. That has always been there. We've had a very weak TC2 market over the last couple of months, which probably is going to be prolonged because of the turnarounds that we're seeing in Europe at the moment. But the fact of the matter is that on balance, you've got a lot more product that's going to come to the market that needs to be shipped.

Just to put it in perspective, when you look at the barrel numbers you threw out, the 7.7 million in September, 8.5 million in October, is that seasonally? I'm just trying to understand the rate of change potential. Is that normal level? Is that higher than normal in terms of what's offline? I'm just trying to understand the potential acceleration as we move toward November.

I'm probably going to ask James. He probably has the numbers for the previous years. The only thing I do recall is over the last couple of years we've seen before, because of the very high margin environments, people were pushing refining maintenance forward and backward to fit into their profile in terms of where they want to be. It is quite normal to see these types of turnarounds when it comes to the Middle East and Asia. North America has been a little bit different over the years because of refining margins, particularly the U.S. Gulf being so high. I'll see if James has anything to add.

Yes. No. I agree with Lars, I would say. It's been above average this year. Ken, if you look historically, what happens in certain years where it looks really high is because of a hurricane that will impact specifically the U.S. Gulf. We were projecting, to give you an idea, maybe about 5 million barrels a day of capacity offline for September and October. It came in about 3, 3.5 million more. Keep in mind, refiners keep this close to their chest. A lot of the refineries have trading arms and things like that. We do find this out a little bit later, but it was above average, which means we should get a bigger boost as it comes back online.

I appreciate that. If I can get my second question on your operating costs per day. It looked like the MRs really took a jump up about 8% sequentially. The others were more in line with a normal step up. I just want to understand, was there anything going on that changes those costs per day as we start to think about running forward? Is it inflation? Was it labor costs? I don't know if there's anything particular to the MRs that you'd highlight.

Hey, Ken. It's Chris. I'll take that one. Nothing in particular. You have to look at the running costs more on a year-to-date basis. They tend to be lumpy throughout the year. We're still seeing inflationary pressures. And, yes, there's still slight upward cost movements in our running costs. But if you're looking for a forward run rate, I would look more at the year-to-date figure than just Q3 in isolation.

Okay, but I guess when you have a 1% increase in LR2 costs per day on your sheet, but an 8% MR, is there --

Right, that's a quarter over. You're comparing a quarter to another quarter. It's not as pronounced when you compare it on a year-to-date basis. And there's no -- if you look at the numbers, it's a high volume of data. There's nothing that's huge that stands out. It's just data. It's just normal operating, repairs and maintenance, spares and storage purchases, things like that.

Next question comes from Chris Robertson with Deutsche Bank. Please go ahead.

This kind of harken back to Jon's question around volatility, but it relates to the one- and three-year time charter market. So I just wanted to get a sense that if you're getting healthy levels of incoming inquiries around the one- and three-year time charter market, how would you kind of characterize the bid-ask spread in the market at the moment? And given your positive commentary around supply-and-demand dynamics, would you be looking to put away additional tonnage on time charter, or are you leaning more into the spot market at this point?

I'll just take the last part of the question. We'll just continue what our policy is on time charter, which is if we have a customer, a good strategic partner who wants to do a three- or five-year charter, then, I think we'll engage with that discussion. Otherwise, we are very constructive on the market at this point, the spot market.

Okay. Yes, thanks, Robert. And I guess any color on level of incomings, or is there a narrow or wide bid-ask spread in that market at the moment, or how would you characterize it?

I think it reflects a little bit my answer on the S&P side, where with the dip that there has been over the last month and a half in rates, of course, charters are trying to get better rates for them before the winter starts. Having said that, there hasn't been a lot of volume of deals done because, we wouldn't fix below what we've done, for example, to echo what Robert just said. And so, people are on a wait-and-see situation here for the next couple of weeks, I guess, before the winter market shows up.

Yes, makes perfect sense. I appreciate it. Thanks for answering the question.

I think, Chris, everything is like traditionally in stock prices. As soon as the winter market starts to move up, then, the bid gets firmer on the time-charter market, just in the same way as stocks get firmer. But people have to wait to see it.

That's a fair comparison. Thanks, Robert.

And our next question comes from Frode Mørkedal with Clarkson Securities. Please go ahead. Frode Mørkedal: Yes, considering the fleet growth figures you mentioned, I agree that it's clearly important to account for the LR2s trading there. But do you also think that there's a need for product tankers to slow steam or reduce speed more to comply with the carbon regulations, despite the strong markets you've seen, right? If so, how significant could this be?

Frode, absolutely. I think you probably have a better number than I do on that. But what I would say is, I still think that impact is going to be less than the MRs, for example, going from 250 today over 20 years to 550 by 2027. And that carrying capacity and the vessels that trade in those markets completely changing on a basis we've never seen before. Because if you go back from '04 to 2010, the fleet grew 11% per year, 70%, 80% fleet growth. All those vessels are now hitting each year that 20-year age mark. And we can debate maybe how many vessels a customer will take at 16 or 17 years old. But at 20 plus, we all know that's a tertiary market limiting trading patterns. So I think that's where we focus most of our analysis to say this will be the biggest impact on fleet growth. But we do definitely think that the environmental impacts will also be significant. Frode Mørkedal: That's good to hear. Next question is on the Handymax. Earnings there seem to be relatively weak compared to MRs. What's driving that market weakness?

I'll take that. Over the last two years, we have seen unbelievable handy markets. Primarily because of the issues around the supply of distillate with Russia being taken out of the market. But there's been a couple of trends that we've seen lately. One, of course, is very much down to the refineries going through their maintenance. MR market capping the handy market as well. So even though there is a handy market that is about to go, the MR weakness because of the TC2 being weak has capped that market as well. I also think that smaller things like the fire that we saw in Agio Theodoroi in Greece, the force majeure in Libya has not helped with the overall cargo count. We had anticipated that with the VLs and Suezmaxes coming up to Northwest Europe that because of the size of these vessels that there will be a lot of STS to take place. That didn't really happen. And then the third thing that I think is also important to understand the handy market is that there is a big difference between the dirty handy market, the clean handy market, the difference between the Northwest Europe handy market and the Mediterranean handy market. So there are markets right now that are trading reasonably well, $18,000, $19,000, $20,000 a day. And then you've got other markets in the short-term that have kind of sitting there and trading water. One thing is for certain that every time that we have seen a handy market going into the fourth quarter, it suddenly has a lot to be said to these ships in terms of what their earning potential is as we move into November, December and into the first quarter. Overall for the year of the Handys, I think it's been fantastic. It's only of late that we've seen this. I think it's primarily due to the reasons that I just mentioned. But at the same time, as people probably are aware that the aging fleet of the Handys is probably more prevalent than it is in any other segment. We are blessed with the younger fleet of the Handys and we can see that we are still kind of the vessel of choice.

Our next question comes from Liam Burke with B Riley FBR. Please go ahead.

On asset sales, you sold the 2019 built LR2 and you published the price on it. Emanuele earlier in his discussion said that you'd hesitate to ever sell assets unless it was at a higher level from the previous sale. Is there interest if prices on assets remain higher? Would you be interested or would you think about selling more LR2s, or do you have to balance that against the return the fleet can provide you?

No. I think we've been very consistent over this now for two or three quarters. We see it as beneficial to the extent that you have such a widespread on the price to NAV to always look at opportunistically selling an asset at a very high price. That's just common sense. It's not any more complicated than that. We certainly have enough assets. Remember, our assets are in pools, too, where we can continue to do that without affecting our operating platform.

Okay, fair enough. On the debt side, Chris highlighted some nice leverage on cash costs with the debt reduction. Is it now the objective to be at net debt zero or is there any thought about what a proven level of debt would be?

The only thing that we've made a comment on that and we want to remain that is to say that we've obviously reached our debt targets, which is to have net debt to be around the scrap value of the fleet.

Fair enough. Thank you, Robert.

Not to our advantage to give details on where we're willing to go on our leverage, exactly.

The next question comes from Ben Nolan with Stiefel. Please go ahead.

If I could go back a little bit maybe to the MR markets. I think a seasonal uplift is a function of the return of crude tankers to the crude trade. Impacting the LR2 market makes perfect sense. But with crack spreads still low, as you mentioned, James, is that, do you think, going to be a drag on some of the normal trading that would typically enhance what would otherwise be an MR and maybe Handy recovery?

The question is how do we see the MR market with crack spreads where they are and kind of the outlook?

Right. In terms of that seasonality, because I think it's more obvious on the LR2.

Maybe I can answer it. What we also had also been in the last few weeks is you've had an affecting spread. You've had a price premium put into crude oil because of the uncertainty related to the Middle East. And that's compounded by a weak season and a turnaround too and people not feeling anxious to buy stocks ahead of it. So I think a lot of this gets sorted out now that oil prices are coming down and they can't delay starting the shipments for the next season much longer. Lars, do you want to add to that or not?

I would just also add, Robert, I think there's so much negative sentiment, Ben, in kind of the outlook for next year on crude oil and that there's going to be this oversupply. But if you look at the incremental supply from non-OPEC regions, mainly the U.S. and Latin America, has underperformed this year. And if it underperforms next year, we're going to have a much tighter crude oil market. I think you're going to see a lot of that negative sentiment reverse. I think you'll also see that happen in crack spreads as well because underlying demand has actually been quite good.

Okay, that's helpful. And if I could go back to, Emanuele, you were discussing sort of the S&P market, which I appreciate. I was curious if you could maybe frame in the type of buyer for assets in the market. I mean, is there a specific geography or, you know, is it traders or, you know, who are sort of out there to buy at the moment? Is there any pattern?

Very vast. It's a good question, Ben. Very vast. We don't usually disclose our buyers, but I can tell you we've sold in the last three months, we've sold ships to a traditional Greek owner, to an oil company based in Asia, and to an operator based in South America. So as I said, geographically, only in the last three months we went through the world, and types or nature of business is completely different from traditional ship owners to end users to operators. So, the best example is, or the quick answer is extremely vast on both fronts.

Ben, I'd also add to that. I think it's quite interesting what Emanuele was talking about, the vastness. It extends also to the charters. You saw us do a charter out to Brazil earlier, a month or so ago. And you're also seeing, I think this is something that's perhaps understated in the demand situation, because it's quite fragmented to the demand side, so it will lead to greater requirements of vessels per ton mile, is the growth of those areas in Asia outside of China's demand for products as their economies have grown. And those countries are not blessed with a whole bunch of refinery capacity, so they're going to be increasing their imports, which is reflected both in what Emanuele was talking about in the S&P market, as well as what's going to become more apparent on the charter market, both spot and time charter.

Interesting. All right. Well, I appreciate you guys taking the questions.

This concludes our question-and-answer session. I would like to turn the conference back over to Emanuele Lauro for any closing remarks.

Thank you, operator. There are no closing remarks, rather than thanking everybody for their time today, and looking forward to being in touch going forward. Thank you.

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