Scorpio Tankers Inc. (NYSE:STNG) Q3 2022 Earnings Conference Call November 1, 2022 8:30 AM ET

Company Participants

James Doyle - Head of Corporate Development and Investor Relations
Emanuele Lauro - Chief Executive Officer
Robert Bugbee - President
Cameron Mackey - Chief Operating Officer
Brian Lee - Chief Financial Officer
Lars Dencker Nielsen - Commercial Director

Conference Call Participants

Omar Nokta - Jefferies
Jon Chappell - Evercore ISI
Liam Burke - B. Riley
Greg Lewis - BTIG
Turner Holm - Clarkson

Operator

Hello, and welcome to the Scorpio Tankers Incorporated Third Quarter 2022 Conference Call.

I will now like to turn the conference over to Mr. James Doyle, Head of Corporate Development and IR. Please go ahead, sir.

James Doyle

Thank you for joining us today. Welcome to the Scorpio Tankers third quarter 2022 earnings conference call. On the call with me today are, Emanuele Lauro, Chief Executive Officer; Robert Bugbee, President; Cameron Mackey, Chief Operating Officer; Brian Lee, Chief Financial Officer; Lars Dencker Nielsen, Commercial Director.

Earlier today, we issued our third quarter earnings press release, which is available on our Web site, scorpiotankers.com. The information discussed on this call is based on information as of today, November 1, 2022, and may contain forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a 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 the webcast will be made available on the Investor Relations page of our Web site for approximately 14 days. We will begin in 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.

Emanuele Lauro

Thank you, James, and good morning or afternoon everyone. Thank you for taking the time to be with us today. This has been a great quarter for Scorpio Tankers. The company has generated its largest quarterly profit in the company's history. Significant cash flows from a strong rate environment are transforming the balance sheet and improving the quality of Scorpio Tankers as an investment. Our capital allocation prioritizes the balance sheet. As we've said before, year-to-date, we have repaid over $720 million in debt. Since June, we have given notice to exercise the purchase options on 22 leased vessels. We will reduce our debt by almost $1 billion this year, and in addition we have returned capital to shareholders primarily through our buyback program.

In fact, since July, we have repurchased $120 million of our common shares at an average price of $38.56. The company will continue to reduce its leverage, maintain a strong liquidity position, and opportunistically repurchase shares. Fourth quarter earnings have started strongly. We have booked $45,500 per day for 52% of the available days on the quarter. We continue to see global refined product inventories remain near historic lows, and supply remained very much constrained. So, the thesis of a changing refinery landscape, increasing exports, and ton-mile demand is actually playing out. Our customers expect these current market conditions to be sustained. This is evident by the increase in time charter rates and activity.

Not only the rates at which customers are willing to commit are higher, but importantly also the period to which they are willing to commit is longer. We continue to agree with our customer views, and as significant shareholders we're excited about the constructive outlook for product tankers, and remain committed to creating long-term shareholder value. I'd like to thank you for your continued support.

And I will now pass it over to James, who is going to go through a brief presentation. James?

James Doyle

Thanks, Emanuele. Slide eight, please. Since March, the refined product tanker market has been resilient. Rates have oscillated between $30,000 and $60,000 per day even during seasonally weaker periods such as refinery maintenance. While our thesis and outlook remains the same, it would be remiss of me to say that the confluence of factors and degree to which those factors are impacting our markets is unprecedented.

Slide nine, please. Refined product demand continues to increase as the global economy reopens from the COVID-19 pandemic. However, for several quarters, demand has outpaced supply, leading to a period of significant inventory draws. Since July 2020, the United States has drawn over 400 million barrels of crude oil and refined product. Globally, distillate inventories have decreased over 200 million barrels, and have not been able to build since 2020 despite lower jet fuel demand and higher refinery utilization. With demand expected to increase through 2023, refinery output will need to increase to meet incremental demand. Low inventories, growing demand, and higher refinery output are all constructive drivers for product tanker demand.

Slide 10, please. This March, seaborne CPP exports have remained above pre-pandemic levels. And more recently, have trended 500,000 to 1.2 million barrels a day above 2019 levels. With inventories near historic lows, the ability to supply incremental demand from inventory draws is limited. And thus product tankers now more than ever are being used to supply more immediate demand. The global supply demand mismatch of refined products has less to do with Russia's invasion of the Ukraine and more to do with refining capacity closures, configurations, and dislocations. New refining capacity will help to alleviate global shortages. But it won't be easy and would require increased demand for product tankers.

Slide 11, please. While seaborne product exports have increased, so has the distance most cargos need to travel. As ton mile demand increases, vessel capacity is reduced and supply tightened. And the changes in the global refining system have had large impacts on ton mile demand. Mainly in two ways; first, new export oriented refining capacity which is built closer to the wellhead and further away from the consumer.

We have seen this in the Middle East and will continue to see it over the next few years. Second, when refining capacity closes investments further away from the consumer. After a refinery closes to maintain demand, it often needs import some of the lost production. We have seen this in Australia.

Both scenarios have led to significant increases in ton mile demand and have structurally changed global trade for us. It's difficult to change refining capacity in the short-term, but new capacity coming online in Middle East is both needed and beneficial for ton mile demand. If Russian refined exports are diverted from Europe, then markets could get even tighter by [indiscernible].

As of October, European imports of Russian refined product had declined from 1.1 million barrels per day to 800,000 whilst until recently we have not gained a major shift in Russian refined products going to Europe. Starting February 5th, any vessel transporting Russian refined products sold at a price above the predetermined price cap will be prohibited from European insurance and finance.

It's unclear what the price cap will be. And there are so many details to be worked out. In the event, Russian exports to Europe are rerouted to different region, there would be a substantial increase in ton miles. Every replacement scenario requires sending each barrel a longer distance. In the event these barrels are rerouted from Europe and split evenly between regions and countries in the grab, ton mile demand could increase over 6%. This also excludes the ton mile impact from Europe to replace the mass Russian imports as well as the vessel capacity able to complete these trades. Supply constraints will remain an issue going forward.

Slide 13, please. While demand looks robust, supply is equally if not more attractive. The order book is at a record low with 5% of fleet on order. Newbuilding orders have been limited, meaningful shipyard capacity is not available until 2025, and more than half of the fleet will be 15 years and older by 2025. When assumed minimal scrapping, fleet growth will be 1% next year and 0 to negative the years after. By using higher scrapping assumptions to account for the fleet age and upcoming environmental regulation, the fleet will likely shrink over the next few years. Seaborne exports in ton mile demand are expected to increase 3.3% and 8% next year, outpacing fleet growth again.

The confluence of factors in today's market are constructed individually. Historically low inventories, increasing demand exports and ton miles, structural dislocations in the refinery system, potential changes to Russian product flows, limited to shrinking fleet growth, upcoming environmental regulations collectively they are unprecedented.

Slide 15, please. Significant cash flows are transforming the balance sheet of the company and improving the quality of Scorpio Tankers as an investment. Year-to-date the company has reduced its debt by over $720 million. Net debt has decreased by almost a $1 billion. While we have and we will continue to prioritize reducing our leverage, the company repurchased $120 million of its own shares from July through October this year. At the same time, we have been able to maintain a strong liquidity position. And with a fully delivered modern eco fleet, we have limited CapEx requirements going forward.

Slide 16, please. In addition to scheduled amortization, we are repaying lease and bank debt. Sale leasebacks are a form of financing. They are similar to bank financing, except the financial institution legally becomes the owner of the vessel during the lease period. In most sale leaseback transactions, the lessee has a purchase obligation at the end of the lease agreement. This is the same as a balloon payment at the end of a bank agreement. The early repurchase option of a vessel before the end of the lease is equal to the outstanding debt and can include an additional payment to the financial institution through the early termination of the agreement, typically up to 2% of the outstanding debt.

After repurchasing the vessel, the vessel is unencumbered and could be refinanced at a later date at a lower LTV and margin. As we do this, our daily vessel principal and interest costs will decline. As of today, we have completed the repurchase of six sale leaseback vessels; we expect to repurchase 14 vessels in the fourth quarter which will result in debt reduction of $219 million.

Slide 18, please. Putting this all together, we will reduce our debt by close to $1 billion this year. In the first nine months of the year, we've repaid $685 million in debt. In the fourth quarter, we expect to pay $296.3 million in debt.

Slide 19, please. Scorpio Tankers has tremendous operating leverage. So far in the fourth quarter, the fleet has booked an average TCE rate of $45,000 per day. The free cash flow sensitivity doesn't go out to $45,000 a day in this graph, but if the fleet were to average $40,000 per day for the year, the company would generate almost $1.2 billion in free cash flow before debt repayment or a little over $20.00 a share in free cash flow. These are certainly exciting times.

And now, I would like to turn the call over to Robert.

Robert Bugbee

Yes, hi, everybody. Thanks very much for joining, and thank you for your continued support. I'm just going to speak briefly before we turn it over to Q&A. Now, these are record earnings, as Emanuele said earlier. And normally one might think that it doesn't really get better from here. However, what is so extraordinary is the third quarter is usually our seasonal weak quarter, and the fourth quarter has already, as usual, started much better than the third. So, yes, it looks like it is going to get better from here. I would simply suggest not shorting STNG, just take a look at the cash, and certainly not paring us against being long crude oil tankers, as we can already see the crude market has moved up, shipping oil to China and India, and it's going to only be a matter of weeks or days before India and China step up their exports and product out.

So, maybe the crude has moved and recovered a little bit earlier, that would be logical, ship the crude first before refining the product, and then refining the product. But we strongly expect that that product will start to flow very shortly, and that will be very constructive for ton-miles. So, that's all. Thank you again very much. And we're super bullish. The NAV is moving nicely along to, soon, probably be around $82.00 a share or so. And thank you very much.

We would like to open up for Q&A now. Thank you.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] Your first question today is from Omar Nokta with Jefferies. Please go ahead. Excuse me, Omar Nokta, your line is now on.

Omar Nokta

Hey, sorry about that, was on mute. Yes, just want to say congrats on another strong quarter, and based on guidance, looks like things are going to be strong yet again. Obviously, a lot, I think, to hone in on and talk about, but I did want to just really quickly, Robert, ask you about the NAV comment you just made. What were you saying, you think NAV fairly soon we'll get to?

Robert Bugbee

How it's moving along nicely towards $82.00. I mean we've already got a number now that is moving up strongly. If you add this quarter, you add the next quarter, and you have a little bit of increase in values which you're having, then those NAVs add up pretty quickly.

Omar Nokta

Okay. No, that's interesting. I mean that, obviously, that's a very nice outlook.

Robert Bugbee

I was only following some of your own reports there talking about one-year targets of $70.00 or whatever, and out there from analysts. And they obviously have -- we've obviously beaten those numbers, we're beating expectations going forward. And therefore it's reasonable to think that they won't be long before you could get an NAV of $82.00 or above.

Omar Nokta

Yes. Okay, no, exciting. Wanted to ask about the LR2s, the chief guidance so far for the fourth quarter is, I would say, pretty, I guess, exceptional, right, $58,000 for over half the quarter, and I'd say that's pretty -- well above maybe the $40,000-$45,000 maybe that the market has "Averaged." It's also higher than what you did in the second and third quarter when prevailing rates or at least quotes were higher. Can you help us maybe reconcile or maybe just expand a bit on the performance and how we should think about these LR2s going forward?

Robert Bugbee

Lars, please?

Lars Dencker Nielsen

Yes. Yes, hi, Omar. I mean, this is pretty much kind of the leverage of the LR2 that people, when you look at the market reports they don't really appreciate when they primarily look at the TC1 index route as round voyage as the marker for earnings. And this is very much about how the diversity of the cargo base that we're seeing today and the ability of triangulation that we can see is now taking place. I can give an example just from today really, we had -- we've been doing a lot of LR2s from North Asia down to Australia, they do nice $80,000-$85,000 down to Australia. But we are seeing a lot of cargos now coming out of Australia as well where we can do backhaul voyages back into China, and good backhaul money as well.

And, where in the past, you previously had ballasted to the AG and had a lot more ballast around. We can see today that, on the LR2s, the way that we can triangulate out of Asia and into the AG, the AG to the West, the West back to Far East has really meant that we've been able to leverage the power of the LR2. And the earnings, obviously, are a testament to that.

Omar Nokta

Thanks, Lars. Yes, so trade patterns that continue to evolve and triangulations just on the rise here; good. And one just final follow-up, I wasn't to ask just about the 23 ships that you've exercised option on the leasebacks. What are you guys thinking about those vessels as you start to take ownership of them, do you refinance those with bank debt? Do you keep them debt-free? Are they sales candidates, what do you think?

Robert Bugbee

I think that we're -- the one thing that we can say is we're determined to continue to, let's say, buyback on more expensive lease finance. So, here, what we've got the opportunity to do now as the balance sheet is improving and you've got strong earning, well, you can possibly accelerate that event even quicker. We're getting some very good loan propositions from lenders that have very good low margins, very efficient. So, you may actually take some of those ships and get credit lines on them in order to, in combination with the cash and the ships we've already had our option to buy back, accelerate further and be able to reduce that cost quicker.

Omar Nokta

Yes, got it. Okay, thanks, Robert, appreciate it.

Robert Bugbee

No problem.

Omar Nokta

All right, cool, I'll turn it over.

Operator

And our next question will come from Jon Chappell of Evercore ISI. Please go ahead.

Jon Chappell

Thank you. Good morning. Lars, since you're here, if I can tie together something that James had referenced in the presentation. Back in June, you had mentioned that the impact from Russian sanctions or even kind of like self sanctions hadn't really [settled] [Ph] in the market yet, most of the ton-mile demand was driven by things outside of the war. As we approach the February set for the products' actual sanctions, I know there's a lot of moving parts, but can you give us any kind of sense as to what impact it's had thus far as far as preparations for potential sanctions? Is it greater impact than it was back in June, but still kind of far from the full impact, just trying to get a sense for kind of the next level of disruption?

Emanuele Lauro

Sure. Hi, Jon. I think there are two things to that. I mean we can see that the Asian refiners are ramping up the export. I mean we can see that the fifth tranche of export quarters that were released was at end of September - October, that's coming about. And we are seeing record amount of volume coming up off of Asia. And a lot of that is JETCO. I think we are looking at about $6 million tons in November, which is record high. That's going to be moving primarily I would imagine to western destinations. So, there is certainly the kind of prep work from further afield that is going to obviously impact ton miles positively.

In the prems, right now, we are still seeing the same molecules being moved from the Baltic and the Black Sea into the same places as -- they are obviously doing what they can do up to the 5th of February. But we are starting to see the early machinations of the cargos moving from Asia into Europe. And we anticipate this to ramp up considerably in November.

Jon Chappell

Okay. And it is maybe difficult to answer, but James said about 6% ton mile impact if it's evenly distributed across the areas that we would think that cargos would go. And that's pretty consistent with what others in the industry has said. Your best guess, have we seen half of that 6% already? Have we seen less than a quarter of it? Just I mean it's an estimate but just your best guess?

Emanuele Lauro

Okay, very difficult question to answer, Jon. I mean I have read that we have seen 8% increase thus far this year. And the 6% is obviously going forward. We certainly see a lot of longer distance voyages taking place. The thing that's interesting I think for everybody to understand is that as this changes, the voyages that you would have done in Europe previously would have taken 10 days on a round voyage from [indiscernible] to Rotterdam. If you want to move the same product from Middle East, you are looking at 40 day, right? So, the math is quite obvious in terms of the distance and what is required. So, it certainly will have a big impact as we move into the 5th of February.

Jon Chappell

Okay. So, it sounds like Robert might get his Thanksgiving bounce this year, just a bounce of much higher level. One more question.

Emanuele Lauro

Jon, Robert has simply sort of saying to himself that whether or not it's 8%, 6%, 3%, 2%, 4%, the market is clearly whether it's in the low 90s in terms of utilization at the moment. So, maybe percentage, it's just 1% soft to have an exponential you know, kicker on right structures at that point in shipping markets. We have seen that in dry containers and historically in tankers too.

Jon Chappell

Yes, clearly understand. It just seems like it's going from strength to strength before you can get to the seasonal impact or the full sanctions impact. Last question and I don't know who wants to take this. May be Brian, may be James, you have laid out a clear path for the fourth quarter sale leaseback repurchases as well as the debt repayment. When we shift to '23 and I am not asking for a guide or anything. But when you think about '23 and capital deployment, is there a target leverage you are aiming for? And I feel like it doesn't need to be mutually exclusive, deleveraging with capital return in the form buybacks? But just any type of ideas we can get to target leverage before maybe the capital return is kind of accelerated further?

Robert Bugbee

I can answer that one, Jon. At the moment, we are going to continue just focusing on deleveraging. And as Emanuele said, opportunistically buying back stock. You can see that we have been doing that as we move through. We recently let's say got -- we moved from zero stock to being more aggressive in the third quarter. We don't exactly what opportunities will be given. But either way, the majority of the cash flow that we will use, i.e., above 51% is going to be -- that's the cash flow in excess of breakeven which is going to be used to repay debt at the moment. I don't think that at this particular point we want to worry about working out what net debt or gross debt we want to get to. I think that can wait for certainly for two or three-four months. It is very important to see the type of curve that we have here. So, we will pass on that question if we may a moment.

Jon Chappell

Sure. Thanks, Robert. Thanks, Lars.

Operator

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

Unidentified Analyst

Hi, this is Nathan dialing in for Ken Hoexter. Just noticed that there were a quite a few vessels going out for three to five-year charter out agreements, and this is a little bit of a step up from your second quarter earnings, want to get the sense of management that you have, still very positive spot market dynamics, but attitude towards contracts spot mix, especially heading into 2023.

Emanuele Lauro

I think that we're overwhelmingly spot; I think that on a percentage basis, we're approximately 10% on charter for three years, very strong rates and 90% spot. So, going into 2023, where and we've been going along steadily, sort of adding two or three charters every couple of months or whatever, as the market has moved upwards. So, I think that we can say that going into 2023, we're going to probably be somewhere between 85% and 90% spot because we're very bullish on the actual market and the fundamentals going forward. But at the same time, there's a lot of benefit and just taking up your secure revenue, especially if we go back to the previous question Jon Chappell about where your ideal debt levels are, part of that it's a combination of what secure revenue you have.

So, if you are -- if you have very good contracts, fixed forward for two and a half, three year periods, you can afford to run with a higher debt level than if you were running spot. And so that's part of what we've been thinking here. And part of the reason why we're driving the deck is because we are running a predominantly vastly predominantly spot fleet at the moment. And the reason we're doing that is we're so constructive and bullish about the period ahead. You should look at something between 85% and 90%, 85% and 90% spot going into '23.

Unidentified Analyst

Great, thanks. Yes and just following-up on that, clearly, the market dynamics are very, very favorable on the product side, but just so we get a more comprehensive picture of all the factors, could I get a general sense on how operating costs have comped year-over-year? Obviously, fuel is a big component of that, but just maybe, against 2021 and how that's contributing to TCE?

Emanuele Lauro

Brian, Cameron, do you want to deal with that one?

Brian Lee

Hi, Nathan, so yes, obviously fuel has increased. Also just the vessel operating expenses have increased a long way. And you see that from our schedule or you put in our operating costs that have gone up, it's normal inflation costs, travel. Those have happened and fuel of course has been it's more expensive now. But it's because it's in demand. And that's good for business. So, that's been more than offset by the rise in revenues.

Unidentified Analyst

Okay, thank you.

Operator

Your next question comes from Liam Burke of B. Riley. Please go ahead.

Liam Burke

Yes, thank you. The spot rate environment for the Handys still seems to be pretty strong. Why are they inordinately strong vis-à-vis the other vessels in the fleet?

Emanuele Lauro

Yes, okay. Hi, Liam. I mean first of all, you know you've looked at the age profile on the Handy fleet. It is a lot older than you would see on any other type of vessels and it is certainly a fleet that over the last couple of years have been decreasing. So, quality units in the Handy fleet is not similar to what you've seen in the MRs and the LR2 segments. There has been a lot of product being moved into regionally and to be honest, normally the third quarter would be a very weak quarter for Handys. And we would wait until we get into the fourth quarter. And then certainly we would have very strong market for the first or the fourth quarter and the first quarter. But we have generally seen a very strong Handy market throughout the year, across all regions, it's not only in the Continental and the Mediterranean, it has also been in Asia, it's also been in the U.S. So, they certainly have been performing extremely well.

Liam Burke

Great. And on the -- we've got a lot of disruption with Russia coming up in 2023. Do you see any change in the customers reluctance to use MRs that are over 15 years old, the fact that supply is going to be pretty tight next year?

Emanuele Lauro

Robert, you want to take this?

Robert Bugbee

Sure.

Lars Dencker Nielsen

Okay, go ahead.

Robert Bugbee

Lars, you look fine. You go ahead. If you want to take it, take it.

Lars Dencker Nielsen

No, no, no, no, go ahead, Robert. It's fine.

Robert Bugbee

It depends where it's going to go to and how tight it is. But I think the main message is that in order, I don't see the European and the American mangers changing their behavior, they're not going to try and save themselves a few dollars by taking an older vessel, and going against their own environmental policies and risking an accident. But on the margin sure, if the rates go to high levels, then fine people are going to scramble around to do whatever they can do.

Liam Burke

Great, thank you.

Robert Bugbee

For the previous sorry, Liam, what were you going to ask?

Liam Burke

No, no, I'm all set. Thank you.

Robert Bugbee

Okay, I was going to go back to the Bank of America area where they're talking about costs, et cetera, is that look obviously, the actual cost structure is shipping is not immune from inflationary wage pressures, et cetera, et cetera or input pressures. But I think that we've got a very good situation and we have got a very new fleet. It's been recently drydock. So, we have advantages there that we know it's homogeneous. So, it's no less. We're less concerned about operating costs here than companies that have older fleets.

And we also in terms of interest rate costs, is we're taking down our total debt along the way. And out of that 500 or so 700 including converters and our fixed interest rate costs. And as Brian said, we're an unusual industry, in that our revenues are so strong right now that they are overwhelming any increase in operating costs and any increases in interest rates at the moment. The next question please.

Operator

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

Greg Lewis

Yes, hi. Thank you. And good morning and good afternoon, and thanks for taking my questions. Robert, I did want to ask, I guess Jonathan's question a little bit different of a way. I know the leverage is coming down. As we think about breakevens and clearly, you've been through good times and bad times. And anyhow, I guess what I would say is even during the bad times, you were able to maintain the dividend. As we think about potential for dividend increases as the cycle continues to evolve, is the more around total leverage or should we be thinking about brake vessel all in breakevens driving that dividend, and any potential dividend increases?

Emanuele Lauro

Well, we could I mean it's partly to do with that, Greg but it's also right now right now, we clearly have the surplus cash with beyond what we consider is on needs to pay down debt because in three and a half months we've used $120 odd million to buy back stock. It's very simple that with the company trading consistently at a steep discount to NAV and it's doing so. Again now, it's a better use of funds to buy back stock than it is to pay dividends. And if we're a little all a little bit patient here, we'll have less shares that divide the free cash over here and we'll be in a much stronger position to pay dividend, if that's the course that we take here in a secure way. Not just okay, one soft dividends and Oh, my God, the market falls and we have to cut that dividend.

Greg Lewis

Okay, great. And then James, I did thank you for the slide 12. Clearly, it looks like new volumes are going to be coming out of I guess the Middle East here is that and realizing, global refinery utilization has picked up. Is there any way to kind of quantify realizing that that numbers are always moving? Do we have any sense for how much capacity, refining capacity is in the Middle East in terms of like, as we look out in the next year, when the Embargo comes in, like how much more ability is there for increased the refined volumes out of the Middle East? Have you guys done any work on that?

James Doyle

Yes, so I would say with [Jazan] [Ph], which is about half of its capacity, it should get to full capacity by the end of this year, early next year, 400,000 barrels, and outsource 600,000 barrels, and then might come on a little bit earlier, you've got probably about 1.4 million barrels that could come online, definitely one well, that's about 600,000 barrels of ultra-low sulfur diesel that the market really needs. Given where cracks are, I think you will see, these refineries tried to get the full capacity as quickly as possible. But outside of that, there's not much. And I think the only other real region that has spare capacity right now is China. And we have Lars mentioned seeing an uptick in volumes coming from China, and they will be necessary to kind of balance this global market.

Greg Lewis

Yes, and I know a question that I've been getting from at least a few, some investors or a few investors is around. I think clearly part of the expectation in '23 assuming that Russian crude continues to be discriminated against is that, maybe they send Russian crude into China, and then China turns around and exports it. There's I mean that realizing that I guess the developed world is buying Russian crude. That is not buying Russian crude. I guess once it's refined in China, that kind of I don't have a good word for it, but maybe that kind of washes it is that is that kind of a fair assessment of what happened?

James Doyle

Cam, would you like to answer that?

Cameron Mackey

Sure, Greg. At the moment that does sort of relieve further purchasers from sanctions, but we just don't know at the moment how things will evolve.

Greg Lewis

Okay. All right, guys. Thanks for the time.

Operator

Next question is coming from Ben [technical difficulty]. Please go ahead.

Unidentified Analyst

Hey, thanks. Can you guys hear me okay?

Emanuele Lauro

Yes, Ben.

Unidentified Analyst

Okay, great. So, I think first real simple for Brian; given all the sale leasebacks that you guys have been or the options that you've been acquiring and the interest rate or debt coming down, how should we -- is there any guidance you can give us on how we should think about depreciation and interest on a run rate basis from here obviously, interest rate neutral?

Brian Lee

Depreciation is not going to change, it may switch from one line item to another, but it's going to be in line because the new accounting standard that's how it works, right, if you own a vessel or lease a vessel, stay in the line. Now [indiscernible] is a little bit harder because LIBOR and all interest rates have been increasing here. So, I don't have a number for you right now. But we will work something and put something up. But debt is obviously coming down. But interest charges and interest rates are going up.

Unidentified Analyst

Okay.

Brian Lee

And we got to see more.

Unidentified Analyst

Okay, fair. And of your debt, or of your interest, any color as to how much of that is hedged premature?

Brian Lee

The majority of it it's floating. We stopped some fixed rate debt out there and not just notes that we have. We also have some sales leasebacks that are fixed. So, it's probably exclusive of the notes you pick them out. It's probably around 10% is fixed.

Unidentified Analyst

Okay, all right. And then little bit more strategically, Robert and Emanuele, clearly the company is in a dramatically different position than it was even six months ago, certainly a year ago. And it sort of opens options that really even worth contemplating in the past. Given that as you sort of look out into the future, I am curious now if you have given any thoughts to sort of how you *envision what Scorpio will evolve into? Is it something where you are sort of see it being the same as it is sort of a spot arena product tanker pure play? Could you envision it being more than just product tankers? Do you see the company as a consolidator * or just sort of playing in its name? Any change or lack of change that you can sort of foresee developing now that you are sort on firm financial footing?

Emanuele Lauro

Look, I think what we see is product market that at the beginning of very constructive period for it. And right now, we are at this particular moment the conversation seems to be overwhelmingly about Russia for a good reason. And what the winter could provide or not in terms of potential energy crisis et cetera, but on a niche, the fundamentals are very strong. And up until now most of this year it's been about fundamental. We have got a fleet that's aging. We have a very, very few vessels on order. We have a long lead time to new buildings. We don't even really know as an industry what type of engines we need or what design make new builds are going to be. And we have demand rising and potentially rising over the years in terms of ton miles because of refinery changes. We have refineries continuing to close in areas where the consumers are due to efficiencies like Europe or environmental reasons like Australia and New Zealand.

And we have new refineries opening up in places of export such as the Middle East. So, the longer term future for products for the foreseeable future is extremely strong. When it comes to consolidation, we have no -- we have said consistently this year, we no reasons to buy ships. We have no reasons to order ships. We are even willing to -- you may see us in the weeks ahead even sell a couple of the older vessels we have simply because the price in the market is so high. And we have such duplication to NAV, and also, we would be let say trimming a little bit the older fleet keeping our fleet age to be young. So, as far as we can see at this point, the product market itself has a great future. And probably, health is the future amongst all the bulk shipping markets, all the major shipping market there is the next few years.

Unidentified Analyst

Got you. So, sort of no change in course then is sort of what I am hearing?

Emanuele Lauro

Of course, yes.

Unidentified Analyst

Okay, perfect. And if I could split one and just bars it on, we heard a lot about diesel shortages and angst about that sort of thing. And also heard that the potential for temporary waivers of the U.S. Jones Act. I'm curious if -- how you as an international tanker company and somebody who is trading the markets and everything else, is that something that you think matters or does temporary waiver of the Jones Act, does it fix anything or does it have any meaningful impact on your market at all?

Emanuele Lauro

Hey, Ben. I think, first of all, I think it's an interesting political narrative that takes place always before midterms in terms of what they want to do with product exports, et cetera, and capping of prices at the pump. I think the likelihood is very minimal. Putting a Jones Act waiver into place would have a tangible impact -- positive tangible impact for product tankers in the international trade as there'll be more ships that can be doing that. I think the complexity that's around it, politically, is so great that over the last many, many years I have seen it maybe once, and for a very brief moment in time. And I don't think it has -- would help very much the American ultimately.

The international markets tend to be able to be much more efficient. And I think that the diesel shortage that we've been seeing exacerbated by the Russian situation but also by refineries closing down, and so on, and post-COVID with the stock draws have just been a perfect storm. And what we will be seeing is there is going to be a lot more product that's going to be moving further afield, as we've been talking about earlier, from the Middle East, from India, and also from Asia that's going to be helping out that dislocation.

Unidentified Analyst

All right, I appreciate it. Thank you.

Operator

Our next question comes from Turner Holm with Clarkson. Please go ahead.

Turner Holm

Hey, good morning, gentlemen. Thanks for taking the call. I just wanted to step back a little bit and think about what the risks in the market could be here. We talked about the 6% increase in ton-miles from Russia or those are the estimates out there. Have you ever seen a macro event or unforeseen circumstance where the market has managed to weaken or ton-miles have managed to go down despite such a strong driver, like what we see out of Russia next year, because I'm looking at the parts for 30 years and I don't see it?

Robert Bugbee

Sure. Ben, there hasn't been in the past, no, but we've never ever -- no one has ever predicted the thing that takes you down. I'm sure there's something out there, the potential it could happen that would create a demand destruction. And usually those, whether it's the Saddam Hussein going into Kuwait, whether it was the '97 Asian currency crisis, whether it was 2001 or Lehman Brothers, they're pretty unpredictable things that don't tend to get discussed until they actually happen. So, you are correct that there is no historical precedent, but that's about as far as I would leave it. We always have to stay a little bit humble in front of the gods and at least anticipate that something crazy, to the negative, could happen that we can't think of -- we can't foresee.

Turner Holm

Sure. I mean, to that end, I mean, Emanuele opened the call and he was talking about the growing confidence from your customers as well, and that's evidenced by the increase, and one-year time charter rates, I think they're up 70% or 80% in the last six months despite the OPEC cuts in macro environment. I mean is that the best way for us to begin thinking about rates for 2023, because it certainly doesn't seem to be what's [indiscernible]?

Robert Bugbee

It's one way to think about rates because, there, you've got what you would call a knowledgeable third party putting their money down. So, to the degree there, ExxonMobil is willing to pay X, Y, and Z for certain vessels for certain years, and that's an open market bid. So, you'll probably see more than just Exxon doing that rate, you'll see BP or Shell, and you'll see the traders too. And we use that as a base because why shouldn't we, that those people have knowledge, it's the free market, and that's, let's say, what a market is. Now, you can then have your own position to model as to whether or not you are on the charter's side. So, the customers, actually, when they're taking shipping at 35 they obviously think the market's going to be higher than 35, otherwise they wouldn't be bothering to pay the shipping. Or you could take a more pessimistic view around that number, but it's a sold -- it's a good base to take in terms of a -- some kind of indication and to model.

Turner Holm

Okay, thanks. I'm going to turn it back.

Operator

This concludes our question-and-answer session. At this time, I'll now turn the conference back over to Mr. Emanuele Lauro, Chief Executive Officer. Please go ahead.

Emanuele Lauro

Thanks very much for everybody's time. We do not have any further comments. The call concludes here. Thank you for your time, and look forward to speaking to you all in the next days and weeks. Thank you.