Scorpio Tankers Inc. (NYSE:STNG) Q4 2024 Earnings Conference Call February 13, 2025 9:00 AM ET

Company Participants

James Doyle - Head, Corporate Development & Investor Relations
Emanuele Lauro - Chief Executive Officer
Robert Bugbee - President
Chris Avella - Chief Financial Officer
Cameron Mackey - Chief Operating Officer
Lars Dencker Nielsen - Chief Commercial Officer

Conference Call Participants

Omar Nokta - Jefferies
Jon Chappell - Evercore ISI
Ken Hoexter - Bank of America
Greg Lewis - BTIG
Ben Nolan - Stifle
Chris Robertson - Deutsche Bank
Frode Mørkedal - Clarkson Securities
Liam Burke - B. Riley

Operator

Good day, and welcome to the Scorpio Tankers Fourth Quarter 2024 Conference Call. All participants will be in a listen-only mode. Should you need assistance, there will be an opportunity to ask questions.

To ask a question, you may press star then one on your touch-tone phone. Please note this event is being recorded. I would now like to turn the conference over to James Doyle, Head of Corporate Development and IR.

Thank you for joining us today.

James Doyle

Welcome to the Scorpio Tankers Fourth Quarter 2024 earnings conference call. On the call with me today are Emanuele Lauro, Chief Executive Officer; Robert Bugbee; Cameron Mackey, Chief Operating Officer; Chris Avella, Chief Financial Officer; Lars Dencker Nielsen, Chief Commercial Officer. Earlier today, we issued our fourth quarter earnings press release, which is available on our website, scorpio tankers.

com. The information discussed on this call is based on information as of today, February 13, 2025, 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 available at scorpio tankers. com and sec. gov.

All participants are advised that the audio of this conference call is being broadcast 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 website for approximately fourteen days. We will be giving a short presentation today.

The presentation is available at scorpio tankers. 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. Good morning or good afternoon, everyone. And thank you for being with us today.

We are pleased to report a strong quarter and a strong year of financial results. In the fourth quarter, the company generated $105 million in adjusted EBITDA and $30 million in adjusted net income. For the full year 2024, we've generated $842 million in adjusted EBITDA and $513 million in adjusted net income.

2024 was another confirmational year for Scorpio Tankers financially, operationally, and strategically. We have significantly strengthened our balance sheet by reducing indebtedness by $740 million, expanding our revolving debt capacity, and lowering our daily cash breakevens to $12,500 per day. Our liquidity now stands at $1.3% billion, comprising $531 million in cash and $788 million in undrawn revolving capacity.

For clarity, this excludes our investments in DHT. Operationally, we completed the special surveys and dry docking of fifty-four vessels during 2024. This is more than half of our fleet.

Following the dry docks, these vessels will operate more efficiently and no longer need repositioning voyages solely for their drydock, which adversely impacts earnings. In addition, we sold twelve vessels at attractive prices, many of which were older vessels, thereby improving the age profile of the fleet. We balance our constructive market outlook with the understanding that cyclical downturns in our industry are often triggered by unexpected black swan events, COVID-19 being a prime example.

As a result, we want to maintain financial flexibility and position the company to thrive under any rate environment. That said, with a strong balance sheet, we can also act opportunistically. During the year, we returned $419 million to shareholders through $336 million of share repurchases and $84 million in dividends.

Recently, we increased our stake in the crude tanker company DHT, capitalizing on its share price lag relative to improving market fundamentals and rates. We continue to view this as an attractive investment opportunity. Our outlook for both crude oil and refined products remains positive.

With low leverage, strong liquidity, and a young fleet, we believe we are exceptionally well-positioned. With these, my remarks are concluded, and I would like to turn the call to Robert Bugbee.

Robert Bugbee

Thanks, Emanuele. Good morning, everybody. Or good afternoon.

I think this morning, what we're going to do is try and separate what we know about, what we believe or believe that we have strong conviction about from, let's say, the things that we really don't know, that are speculative or even hypothetical. What we know about our company is that on the Q1 book guidance, we can see that we are operating cash positive and profitable. The operating cash, remember, is what's actually given to us as shareholders. The operating cash for us is the most important metric as opposed to EPS.

We have very strong current liquidity. We have even stronger undrawn liquidity. We are fully financed for years to come and have no new building CapEx requirements.

We are completing an extensive period of dry dock in this quarter, which will result in lower dry dock costs, more on-hire days, and more efficient vessels over the next few years. So when you think of that in comparison to the last, you know, fifteen months, this is an asset going forward. We have very low cash breakeven operating cash breakeven, so we will work even to take those lower.

This is what we know and are sure about the company. We also know that we have created optionality to make the best of the opportunity ahead. We are very constructive on the product market itself.

However, we are also cognizant of our inability to either control, predict, or even understand right now geopolitical events or various announcements, changes in emotion, etcetera, or different tweets or policies. And it's not that we do not know the answers. Because in many cases, I do not think right now we even know the questions.

So we see no urgency nor necessity to have nor to give clarity on capital allocation other than to say our present thinking is as follows. We will not change our dividend policy. We will not pay out an extraordinary dividend.

We are not thinking of ordering or acquiring ships. We are ready, however, to buy our own shares if we think we should. We are willing to invest in a small amount of cash capital in adjacent market companies.

This is not an either-or choice. We can see from our balance sheet that, you know, we could have if we wanted to, bought our own shares in addition to acquiring DHT. They are different, however.

The former acquisition of DHT remained on the balance sheet as an asset. It's an asset. It is so for us, it's okay to go ahead and do this.

Because it remains as an asset. We had prioritized very clearly creating an extremely strong balance sheet with great liquidity and the ability to take advantage of any opportunities. We will continue to monitor changing policy events and focus on the safe operation of our vessels.

We simply cannot trade the change in short-term sentiment and emotion. But we do expect to be a beneficiary as the risk premiums in the future come down. Thank you very much, and I pass this over back to James and Chris.

James Doyle

Thank you, Robert. If we could please go to slide seven. As Emanuele and Robert highlighted, the market outlook is constructive.

And at today's rates, product tankers are generating strong free cash flow. Recent shifts in political leadership coupled with tariffs, sanctions, and other geopolitical developments have increased uncertainty, not only in our markets but across global markets. This has created a volatile start to the year, but the underlying market fundamentals remain positive.

Demand for refined products remains strong, Global inventories are below their five-year average. Refinery closures are accelerating, and the fleet continues to age. All of this contributes to a constructive outlook for the product tanker market.

Slide eight, please. Demand continues to grow. This year, we expect demand for refined products to increase by close to a million barrels per day. We are seeing this demand strength in seaborne exports which averaged over twenty million barrels per day in January, near record levels.

Furthermore, it's not just the volume of exports that has grown, but the distance these barrels are traveling has also increased. Slide nine, please. Compared to 2019 levels, last year, ton-mile demand increased fifteen percent excluding Russia, and eighteen percent when including Russia.

Much of this is due to changes in refining capacity, which have been reshaping global trade flows over the last decade. This year, two million barrels of refining capacity are expected to close. And many of these older refineries require significant capital investment to remain operational.

And this makes it harder for them to compete with newer refineries in regions like the Middle East and Asia that have lower operating costs. As a result, we expect more refining capacity to close which will add incremental ton miles as lost production is replaced with imports. Slide ten, please.

On January fifteenth, Israel and Hamas agreed to a six-week temporary ceasefire. In response, the Houthis announced a pause in attacks on non-Israeli vessels transiting the Red Sea. This situation remains fragile.

And it's unclear how the temporary ceasefire will evolve and how the Houthis will respond. As of now, product tankers continue to bypass the Suez Canal in transit around the Cape of Good Hope. Slide eleven, please.

Last week, the US announced ten percent tariffs on Canadian and twenty-five percent tariffs on Mexican energy imports. Which were then postponed for thirty days. Although the US is the world's largest producer of crude oil, most of its output is light sweet crude, while the domestic refineries are optimized for heavier crude blends.

The US currently imports four million barrels per day of heavy crude from Canada and five hundred thousand barrels per day from Mexico. Of this, one million barrels per day arrives via ship and the other three point five million via pipeline. Seaborne crude imports could be replaced from further away but it would be difficult to replace Canadian pipeline imports into PAD two. From a product standpoint, increasing the crude cost for pad two refiners could reduce refinery runs and require additional seaborne product imports to the Northeast US.

The US also imports two hundred sixty thousand barrels of refined products from Canada each day. If disrupted, imports would likely need to be replaced and come from Europe. In addition, the US exports five hundred seventy thousand barrels of refined product to Mexico each day, which if diverted elsewhere would increase ton miles.

Mexico, in turn, would also then need to replace from more distant suppliers. While the final status of these tariffs remains uncertain, they could significantly reshape crude and product flows by elevating shipping distances and shifting trade patterns. Slide twelve, please.

Chris Avella

In early January, OFAC announced sanctions on an additional one hundred fifty-seven tankers, which were predominantly 2024, China and India imported three million barrels a day of crude oil from Russia. Sixty percent of Russian crude exports. And last week, Trump announced sanctions targeting individuals, companies, and tankers involved in shipping Iranian oil to China.

These actions are consistent with Trump's strategy to put pressure on Iran and reduce its oil exports. Under Trump's last term, Iranian crude exports fell to three hundred thousand barrels per day while rising to one point seven million barrels per day under Biden. Today, the total OFAC sanctioned tanker fleet is almost eleven percent of the crude tanker fleet and five percent of the product tanker fleet.

Any reduction in sanctioned vessels transporting crude and refined products is constructive for non-sanctioned vessels and can also accelerate the scrapping of older tonnage. Slide thirteen. Since the EU February 2023 price cap on Russian refined products, European imports have declined from one point one million barrels a day to four hundred thousand barrels per day.

Nevertheless, Russian exports have remained steady with Africa, Latin America, and the Middle East absorbing more barrels. Four hundred and eighty-nine product tankers have carried Russian products since 2024. Many of which are older vessels and predominantly loading Russian product.

If there is a peace agreement, it's unclear whether Europe would increase Russian product imports. And if they do, many of the vessels which have been predominantly serving Russia will have a difficult time serving western markets given their age, trading history, maintenance, and insurance limitations. The one point four million barrels of Russian product that exports per day could benefit non-sanctioned vessels, which have not been trading in Russia.

Slide fourteen. And relevant to this, the total addressable market diminishes as vessels age. The trading pattern of MR vessels built in 2004 clearly demonstrates a decline.

At twelve years old, these vessels carried three point two million barrels of refined product per year. By the time they reach twenty years old, they carried one point nine barrels per year, a decline of forty percent. And one could argue that without the Russian volumes, this number would probably be closer to one point two million barrels.

A decline of sixty percent compared to twelve years old. By 2027, more than a thousand ships will be older than twenty years. Thus, even without scrapping, effective fleet growth could be lower than anticipated as older vessels transport less refined product.

Slide fifteen. Well, the order book now accounts for twenty percent of the fleet. Half the order book is LR2 vessels.

Today, forty-five percent of LR2s operate in the crude oil market, and we expect this to continue given the larger crude oil trade. By 2027, including all the new builds, twenty-five percent of the fleet will be older than twenty years. Many are underestimating the impacts of an aging fleet and overestimating the capacity of the order book.

Slide sixteen, please. Last year, ton-mile demand increased eight percent. And over the last thirty years has increased at a compound annual growth rate of over three percent.

If all newbuild LR2 vessels were to operate in the clean market, fleet growth would average around four percent annually over the next three years. However, effective fleet growth could be closer to two point eight percent per year when factoring in LR2s servicing the crude oil trade and mild scrapping as a proxy for reduction. Several catalysts such as tariffs, sanctions, and broader geopolitical development could further tighten supply and increase ton miles.

Nevertheless, even without these factors, this supply-demand balance is favorable and supportive of our constructive market outlook. And with that, I'll turn it over to Chris.

Chris Avella

Thank you, James. Good morning or good afternoon, everyone. Slide eighteen, please.

Dispatch year, we have generated $842 million in adjusted EBITDA. And $669 million in net income on an IFRS basis. Our net income for the year includes a $177 million gain from the sale of twelve vessels.

Most of these vessels were older vintage. With eleven of the twelve vessels being almost ten years of age or greater. These vessels were sold at cyclically high prices.

These results have enabled us to continue to strengthen our balance sheet by reducing our debt levels by $740 million. In addition to this, during 2024, we have paid $84 million in dividends and purchased $336 million of the company's common stock in the open market. Next slide, please.

During the fourth quarter, and thus far in the first quarter of 2025, we've continued to take steps to strengthen our balance sheet. The chart on the left shows our liquidity profile. We have access to over $1.3% billion in liquidity as of the date of this press release. This is over $1.4% billion if you include our investment in DHT.

This level of liquidity was made partially by the recent execution of a new $500 million revolving credit facility, which is secured by twenty-six of our previously unencumbered vessels. While it is currently undrawn, this facility bears a low cost of debt with a margin of one hundred and eighty-five basis points when drawn. And a seven-year tenure with no amortization for the first two years.

Through the execution of this facility, we have locked in access to low-cost secured financing through February of 2032. The chart on the right shows the progression of our net debt since December 30, 2021. Which has declined almost $2.4% billion to a net debt balance of just $537 million as of the date of this press release.

While having low leverage is a demonstration of financial strength, this capital structure also affords us the flexibility to move quickly when windows of opportunity present themselves to further optimize our cost of capital. Our entrance into the Nordic bond market in January of this year demonstrates our willingness to seize such an opportunity. Next slide, please.

The chart on the left of this slide shows our outstanding debt by type. As we previously emphasized, our strategy has been to shift away from expensive, low-flexibility lease financing into more flexible, lower-cost bank lending. Moreover, we have sought a diverse capital structure.

As we previously announced, we recently issued $200 million of five-year senior unsecured notes at a 7.5% coupon in the Nordic bond market. A portion of the proceeds from this bond offering will be used to redeem our existing $71 million senior unsecured notes, which are due to mature in June of this year. While these bonds could have easily been retired using our existing liquidity, the refinancing of these bonds with the bond issuance in the Nordic markets was a compelling opportunity for us to diversify our capital structure into the Nordic fixed income market.

Over the past year, corporate credit spreads have tightened given developments in the interest rate environment and the strengthening of corporate balance sheets. This is all set against the backdrop of robust economic conditions around the world. The combination of these favorable macro conditions coupled with a knowledgeable investor base in the Nordic markets, opened a rare opportunity for us to lock in unsecured financing at a favorable cost and with favorable terms and conditions.

This bond issuance was a testament to our efforts on strengthening our balance sheet and credit profile over the past three years as it was well oversubscribed and set the record for the lowest credit spread for any shipping company issuing US dollar-denominated bonds in the Nordic bond market. The chart on the right shows a bridge of our outstanding debt. Through the end of March of 2025.

This bridge shows the deployment of a portion of the net proceeds of the Nordic bond to redeem our existing senior unsecured notes. With the resulting gross debt balance of $989 million, $353.7% million of this debt is once it's drawn revolver debt under our $1 billion credit facility and $225 million credit facility. The enhancement of our liquidity position through the issuance of this Nordic bond has given us the ability to pay into these revolving credit facilities at our discretion.

Which would potentially have the combined effect of keeping liquidity readily available to redraw as needed and reducing debt service costs of both principal and interest to keep our cash breakeven rate low. Next slide, please. Our debt repayment obligations through the end of 2025 are highly manageable.

At less than $15 million per quarter. This does not take into account any unscheduled repayments into revolving credit facilities that have not been committed as of today. Additionally, the company has recently completed the periodic special surveys on over fifty percent of the fleet throughout 2024.

Not only does this set the company up for a lighter dry dock schedule for 2025, with far fewer off-hire days, but the work performed during these dry docks is expected to enhance the operating efficiency of each vessel going forward. Next slide, please. The strength of our balance sheet enables us to continue to generate excess cash flow even in challenging rate environments given our low cash breakeven levels.

Further to this, our operating leverage positions us to benefit from spikes in spot rates that have been commonplace over the past three years. To illustrate our past 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.

This concludes our presentation for today. Thank you, everyone, for your time. And with that, I'd like to turn the call over to Q&A.

Operator

We will now begin the question and answer session. Pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, The first question comes from Omar Nokta from Jefferies.

Please go ahead.

Omar Nokta

Thank you. Hey, guys. Good morning. Good afternoon.

A lot of things are happening on the geo macro front, and, Robert, appreciate your comments about basically, you know, sticking to the Scorpio strategy. That's been ongoing, you know, given all the unknowns. I guess, maybe just sort of in terms of, you know, the sanctions that we've seen, you know, James was talking about this in the presentation, you know, clearly a few weeks ago.

A big chunk of sanctions were put in place, especially on that midsize Aframax LR2 segment which if we count them basically negate all the new buildings that deliver this year. I guess the kind of question is, have you noticed any change in trade flows as a result of this whether from Russia or Iran, or anything that suggests that there's been an impact thus far.

Robert Bugbee

I'll let Lars answer that. But the only comment I would make is that all these sanctions are, you know, there's the headline that the actual implementation and effect on the shipping rates is delayed. And Lars is okay.

Add whatever.

Lars Dencker Nielsen

Hi, Omar. First of all, this is the second round of sanctions. Right.

If we look at the first one, we only had, you know, thirty-four, thirty-five ships that were of interest under the first sanctions round, and that had a, obviously, a massive impact on the market. And as Robert said, it takes a little bit of time as that filters through. The second round of sanctions is hitting a lot more ships, in particular, the ships that are in the midsize.

This region. And there's no doubt that we have seen, you know, ships turning around, finding other places. There is an increase in storage, other ships are rerouting.

Doing, you know, floating off the Mediterranean waiting for STS of Turkey or Brazil, etcetera. I think also it's gonna be interesting to see, you know, the wind-down period in particular for India, which has been a kind of a massive buyer of the Russian crude, how that is gonna start to pan out as we move into March. There is no doubt that it's a lot of ships that are being sanctioned. There's a lot of ships, you know, I think it's, you know, seven percent of the entire fleet and of Aframaxes, I think, is probably overall thirteen point four percent of the sanctioned fleet.

And we can see for sure that this as we move into kind of the next phase where suddenly this is being implemented in full that you will start seeing that there is gonna be a constraint in supply in that segment. So, you know, it is one to follow. We're not really seeing the actual hits on the rates yet, which did not anticipate that either.

Because this follows kind of more or less the same kind of way that the first sanctions were hit as well. So you know, you put the OPEC sanctions on Russia and you see you've got the Iranian angle or you've got all the different angles, there's no doubt that you know, there's certainly a lot of interest in where this market might be heading.

Omar Nokta

Thanks, Lars. Yes. It makes sense.

So it's still early in the process and something, you know, to, you know, stay tuned on. And just, you know, a follow-up separately, you underwent the dry dockings last year, I think, fifty-four ships if I recall correctly. That's more than, I think, the twenty-seven that you were planning at least at the start of the year.

So it sounds like you clearly brought a bunch forward. Can you give a sense of what drove you to do that last year.

Lars Dencker Nielsen

Yeah. I can take that. Omar, obviously, there's a fair bit of planning that goes into drydocking, and one of the primary issues is positioning an asset in the right place at the right time given that you have the Red Sea unavailable to us and a rather binary position about whether we're gonna try and dry dock in parts of Europe, our most favored position.

So given all that planning and the collaboration with chartering about the commercial opportunities that exist at the time, we on average, will try to move them up if the situations allow. And it also depends on our view of the market at the time. Like, sixty to ninety-day forward view.

Omar Nokta

Okay.

Lars Dencker Nielsen

I'd like to add on that. I mean, you know, this probably, you know, from where I sit, in terms of when we look at this forward planning on dry dock which, of course, every shipping company has to undertake. It's obviously a big undertaking.

And, you know, this is probably one of the largest extensive dry dock cycles that we've ever undertaken. Know, doing fifty-four ships in 2024 is a massive task. And, you know, clearly, once you get over that hump, you know, you're positioned yourself quite well for the future.

We still have some additional buybacks in the first half of 2025, but there's no doubt that, you know, we're steadily moving ahead where we're coming to a point where, you know, the majority of our fleet is especially dry docked and obviously optimized for the future.

Omar Nokta

Thank you. Appreciate the comments. I'll turn it over.

Operator

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

Jon Chappell

Thank you. Good morning. Chris, Robert said in his comments that you're gonna continue to drive your cash breakevens lower.

You've already done a ton of heavy lifting on the expense of lease financing. You've taken the new bond in Norway. There's cost inflation in the business.

Can you help me understand how you're getting lower from the current levels from here. Is there anything you have to do with the capital structure, or is it more along the lines of maybe efficiency of the fleet, etcetera.

Chris Avella

Hi, Jon. Yeah. Well, efficiency of the fleet is one thing.

I mean, I think you have to take into consideration that vessels coming out of dry dock are gonna operate more efficiently. But the main thing is really in the financing, and I mentioned this that we have over $350 million of drawn revolving credit. And some of that is amortizing.

So if we could drive down our breakevens, we take our liquidity position and pay into that, we could even further. And I think that's really sort of the area we would target going forward. Just on those two credit facilities.

Jon Chappell

Okay. And then, James, for you, listen, I understand that there's a lot going on right now. Get your point on the supply side, maybe being overestimated.

But rates are lower today than they were last year at this time, and, basically, that's been the same thing for the last six months. So on slide nine, you have a nice ton-mile demand chart. You know, that goes back to the beginning of nineteen.

It's clearly off from the peak. So I guess the question is, is that cyclical in the sense that if it continues to grind lower, especially if there is a change in the geopolitical landscape, including Russia. Or do you think it's on kind of a higher floor here or maybe we don't revisit the 2019 levels from a ton-mile demand standpoint.

Robert Bugbee

James, maybe if I do that one. So first of all, Jon, I think that you know, we don't even know the outcome, for example, of Russia. And at this thing.

We have no idea if they'll replace what form it'll take, whether that piece will hold, and indeed whether or not it'll affect ton miles. It's just a, you know, there's like a Russian piece trade is like, well, we'll make an assumption that goes back to where it was before. And that's negative.

And we don't necessarily, you know, buy into that. And as I said before, we cannot speculate on that part. I think that there are, you know, you're right. I don't think that you are going to, I wouldn't use a base case.

That you're going to get a rate explosion and some super high rates that we've had for two, three years. That's not a thing that we would have in terms of our forecast. And that's also why we've been so focused on operating cash breakevens.

But we don't need when we when we taking down our operating cash breakevens, even so much. And doing the things we need to do and deleverage the company. We don't need those rates that we had before to make good money.

So that's thirty thousand dollar rate today or a twenty-five thousand dollar rate today gives us much more bang for our buck in terms of operating cash than we've done before. So, you know, people can choose their own assumptions, but I think a wise assumption is that, you know, you may get periods because, you know, there's no guarantee we'll have any peace anywhere, for example. Or even the let's say the peace in one place will be good somewhere else, they have periods that you get very superior rates.

But that's not a working position. You can see that in the time charter market going forward, which is still very healthy. People aren't paying time charters up in the, you know, sixties, seventies on LR2.

And that's the way I'd look at it. But at the same time, the stock is in the eighties. And neither other product tanker eighties.

They're much more secure than where they were two years ago in terms of leverage. And, you know, yep. Their prices come off behind.

That doesn't mean you can't get great returns. At lower rates.

Jon Chappell

Okay. Understood. Thanks, Robert. Thanks, Chris.

Operator

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

Ken Hoexter

Hey, Greg. Good morning and good afternoon. Maybe, Robert, can you or Emanuele, can you talk about your investment in DHT, your thoughts on moving into the crude market, why them on management.

Is it a view on net asset value on that part of the fleet. Maybe just some thoughts there.

Robert Bugbee

Sure. We've seen a period of two, three years where, you know, VLCC earnings have just been, you know, disappointing. There's been a lot of hope from analysts, the actual VLCC owners, done.

We've always stated, you know, we've stated consistent are expected even some of our MR, small MR to outperform VLCCs, and that was the case. And, however, historically, the VLCC rates and product tanker rates, especially the big product tankers, have not surprisingly worked together in tandem. And what we're seeing is the dynamics where the crude market can actually break out.

The sanctions are that Iran isn't going to be producing the same amount as it did before. And for other reasons, you will get an expansion of the, you know, back again in the crude oil ton miles. And that won't be at an expense to the product market.

So we're expecting VLCC rates to lift and get better. And then we say, so that's a good investment. And then we look at DHT and DHT is, you know, for in our opinion, you know, like a best in class, it had a very predictable way of managing things.

They performed very well commercially. And, you know, that's that we think is a good investment in that place, and that's what it is. It's an investment.

Ken Hoexter

Alright. And I forgot to say, I guess, upfront, Chris and team, great job on reducing debt. Obviously, we've watched this for years, so what a different position.

Robert, I wanna follow-up on maybe John's question. Actually maybe Omar's on kind of Russia. And I get you're not commenting on the news, but yesterday, we obviously saw Trump post calls with Zelensky and Putin.

So I just wanna understand if we step back, you know, maybe can you give us a view on what does change if peace hits Russia, Europe, Ukraine, does that mean the fifteen, seventeen percent of vessels that are now in the MR world and eight percent of LR2, do they come back to the market. Is it unknown what happens to half of them come back and half of them go to that. Like, is there just a concept of what anything like this ever happened in the past or history that you can point to.

Robert Bugbee

No. There's nothing you can point to, but it's highly doubtful that you get a return to, you know, it's a complete past. And, you know, in any form, that's not a, you know, it's a nice thought to, for shorts, to get everybody whipped up to help positions or whatever, but it's not the realistic thing that we're gonna wake up and next week everything is going to be back into its place just on the actual, you know, demand part, there is, you know, for a whole host of reasons, there is a likelihood that even if there is a peace treaty that, you know, can't really imagine that Europe goes straight back to where it was before in the dependence of Russia.

I mean, that's a little bit hard to imagine. And definitely, you're not going to have those the dark fleet serving. So either way, you're going to have a much more muted response to any trade group change between those two factors.

But it really is a wait and see. It's a long way. I mean, you can make the statement, I want this.

You can make the statement that you wanna build holiday resorts in Gaza, but they did a long chain of events between the actual statement and deliverability. Yeah. If I can just get one quick follow-up.

Sorry. But did you push out on the dry dock question. Did you push out dry docks or they go faster than expected at the end there.

It seemed like there were the expectation for perhaps even more delay days than you had or off-hire days. Sorry.

Lars Dencker Nielsen

No. I think it was a Sorry. Please go ahead.

If I meant that the timing of dry docks is driven by classification society. Essentially, they're regulated. So you cannot extend special service beyond a window.

You could move them around within plus minus thirty, maybe sixty days, but not beyond that.

Ken Hoexter

Okay. Thanks for the time, guys.

Operator

The next question comes from Greg Lewis from BTIG. Please go ahead.

Greg Lewis

Hey. Thanks. Good morning, and good afternoon, everybody.

You know, I kinda had a more of a, like, a market question. You know, obviously, you know, what's been going on in the Red Sea has been kind of an issue. And you know, it's great for us to speculate, but I imagine that, you know, the Houthis and the drones are, you know, potentially there to stay longer.

What as you have conversations, like, with insurance companies that have to insure these cargoes, like, you know, realizing that it's fluid what's kind of the general view from some of these insurers. Or are they, like, chomping at the bit to get back there and start insuring cargoes through here. Or is this something that I think, to some of your guys' comments earlier, could have a long-lasting impact on that trade.

Chris Avella

I can give that question a shot. The insurance market does care. The market is the market.

And it's been very, you know, it's been very efficient in so far its responsiveness to different changes in the environment. So the, you know, the insurance market, like any market, is agnostic. Are buyers and sellers of any at any price.

That being said, you know, a cynical point of view is insurers that to handle claims. So there is an idea that yes, there's been less volume, and they'd like to increase their volume or market share through competitive pricing, but in general, you can count on the insurance market as agnostic to risk.

Greg Lewis

Okay.

Lars Dencker Nielsen

I think it's also important sorry, Greg. I'm just gonna add here if I may. You know, what the insurance companies also do, they obviously price their risk.

And if you say what the price of risk is equivalent to risk, to some extent and the price goes up or down, you know, all I can say is that, generally, the price has not come down. So that reflects that the risk is still reasonably high. Irrespective of what your moral conundrum might be.

Greg Lewis

Okay. Understood. And then as I think about, you know, you kind of alluded to and I was yeah.

Yeah. I guess one of the questions that people are having is, you know, if I'm gonna order an Aframax tanker, why not just coat it. You know, it cost me an extra couple million dollars.

Is and we all see the LR2 order book. Is there any kind of way or have you guys done any work on, you know, in realizing that even a company like Scorpio can trade back and forth between product and crude over a period of time with their vessels. Is there any kind of way to parcel out, you know, how much of that LR2 market from new builds has been ordered historically by crude tanker operators versus product.

Any kind of thoughts or views around that.

James Doyle

That would be a difficult one, Greg. No. We don't really have an idea.

I think the best thing to look at is just recently over the last seven, eight years, you know, seventy, maybe eighty percent of LR2 Aframax orders have been. ORQs. So higher cost, you know, of the coating is not really that big of an issue in terms of the optionality that it gives you.

And I think, today, forty percent of the LR2 Aframax fleet is LR2s. Yet the market crude in the Aframax market is four times the size. It's fourteen million barrels a day.

First three and a half million of products. So it's impossible to not have, you know, some of these vessels servicing that crude oil trade.

Greg Lewis

Okay. Great. Thanks, guys.

Operator

The next question comes from Ben Nolan from Stifel. Please go ahead.

Ben Nolan

Yeah. I appreciate it. So, actually, I've got a couple things.

Maybe following on both of Greg's questions. So first of all, on the crude versus product, I know in the past, there has been so well, actually, in the recent past, VLCCs and Suezmaxes have traded product. Any update on that.

And then as you think about the Red Sea, is there you know, I know some other classes or ships are starting to dip their toe into going through there. I don't think that you guys are yet, but any thoughts on sort of how you're approaching that.

Chris Avella

Ben, I could take the second part of your question first. Is, you know, you've probably seen yourself that a lot of eyes on the Red Sea are waiting to see how phase two of the ceasefire evolves. We don't have a window into the negotiation, but I think any casual observer of the headlines would say it's highly, highly fraught.

So, you know, again, we're not as big as some of the global container players, but I think the industry as a whole, the western industry is taking a very, very cautious approach about resuming transits of the Southern Red Sea.

James Doyle

Yeah, sorry. Go ahead, James. You know, Lars, you take it.

So when the LR2 market was extremely strong in the beginning and throughout the second quarter, the differential between kind of LR2 the Middle East going west to a VLCC for a similar type of voyage was so substantial that probably the spread between using one to the other ship and putting on three LR2's and one cargo probably had a margin of twenty million dollars. So the incentive to clean up and take the cargo risk of moving distillate on a VLCC was pretty apparent. Now as the VLCC market has moved up, Suezmaxes as well to a larger extent, and also the LR2 market has kind of drifted down.

That margin is no longer there. So in terms of the clean, dirty kind of cannibalization that we have talked about in the past, there are certainly data to suggest that is not happening at this point right now. There is the casual change between Aframax to LR2 from different pockets to different areas where you could look condensate, but that's at the margin.

And then the second part, which is also interesting, is what happens then with the new buildings that are coming out of the shipyards at the beginning of the year, which tends to be the case where we, in the past, have seen a lot of new buildings moving into the virgin tanks into cars moving out of the North Asian markets west or out of the Middle East going west, and that has also kind of come at a discount relative to the LR2 market general. Point one here is that for all of 2025, there's only four VLCCs being delivered. So that really is not at the market.

And then you've got the Suezmax market. The Suezmax market is potentially kind of a contender on this cannibalization. But to be honest, this is something that we tend with every single year and it's not something that changes anything in terms of our outlook.

I think the thing that's interesting is that there's only four newbuilding VLCCs and what that actually kind of means in terms of supply-demand balances going forward.

Ben Nolan

Got it. Appreciate it, Lars. And then my let's call it second question.

Well, first of all, let me say, Robert, I think in your prepared remarks, that was absolutely the most scripted that I think I've ever heard you be in any environment, but and very helpful, by the way. My second question, though, relates and maybe this is again for Lars. But the handy size rates that you guys are getting tend to be below what we would see in broker reports.

And I suspect that's because historically, especially for the ice class vessels, they tended to do a lot of Russian trade. And so if you blend that in something that you guys aren't doing, then it creates a little bit of a differential. But can you maybe just talk to how you think about sort of and again, appreciating that you don't really know what's gonna go on with Russia, but is that the category that might benefit the most, if there was a normalization.

Lars Dencker Nielsen

I think it's important to say that, you know, we staying controlled for handy size vessels. All fourteen of those vessels were dry docked in 2024. There's no doubt that that has an impact on the tradability and the kind of the earning potential for the ships with all the dry dock time that's taken out, plus the positioning that was mentioned by Ken earlier on, etcetera, etcetera.

So you know, as we're moving into the second week of February, you know, all fourteen ships have now been completed. So in terms of where you think the market was or and so on, then I would counter to say that considering the size of dry dock that had to be done for all of these ships, it's pretty good going. The second part of your question is it's quite clear that in terms of ice and then, you know, in the past, this is before the Ukraine, we did a lot of business out of the Baltic in Russian ports.

Finnish ports as well. So today, we are kind of constrained with only loading maybe stuff out of Finland, etcetera. So it's more of a non-ice market.

For sure so that, you know, there's obviously less earnings potential. But at the same time, I will also say that there are a lot of ships in the handy market that have ice classification. I think the interesting most interesting point on the handy market is if you look at the average age on the fleet is a very aging fleet with very few ships being kind of introduced to the fleet for this segment.

Ben Nolan

Alright. Well, I appreciate it. Thank you.

I also think that that's a, you know, quite a large if you'd agree, you know, that's sort of exactly the sort of place that has the highest restrictions for many reasons related to agent operation. So beyond those charters, like, you know, the shells, the BP, the hotels, that's what we're talking about. And that's the difficulty about this, you know, assumption return to the past.

Because they at least operators that we're talking about that where the markets are going at the moment are so they have very, very little hurdles for people to get it. Whereas the conditional past European receivers have, you know, the highest hurdles there are in the world to get into trade.

Ben Nolan

Well, very helpful. Appreciate it. Thank you, guys.

Operator

The next question comes from Chris Robertson from Deutsche Bank. Please go ahead.

Chris Robertson

Hey, good morning, everybody. Thanks for taking my question. I know we're getting towards the end of the call, so I'll just ask one and try to make it quick here.

Just looking at the European market for a minute, not with regards to the sanctions of the vessels trading in Russian volumes, but just curious on how the FuelEU and EU ETS emissions regulations are having any observable impact on the product trade at the moment. And I guess given this regulatory dynamic though, you know, what percentage of the dark fleet or gray fleet would even qualify to trade into Europe regardless of, you know, the greater geopolitical issues.

Robert Bugbee

Dan, do you have any idea. Do you have any idea.

James Doyle

Yeah. I can take a shot at it, if you like, which is number one is, you know, I think what you were asking about in the second part of your question was to what extent do we anticipate should sanctions ease the dark fleet somehow come and start to compete in the western market. And I'd harken back to comments we've made on previous calls, which is regulations are certainly a bar that we have to pass, and we're happy to pass, you know, clear that bar.

But really in our industry, customer expectations are far and away the most stringent hurdle we have to clear. And when you really look in detail at some of the ships in the dark fleet, they are operating beyond the realm of any western standards, whether that is insurance, classification society, general maintenance, or repair, seafarer compensation and welfare. So you're looking at assets that have a very, very long distance to go.

And a lot of CapEx required for them to ever be even considered to trade in the west again. Not because of regulations, but because of customers and their demands and their risk tolerances. So we're skeptical that you'll see many of those vessels come back, and that's before you get to the age and the relative merits of the type of investment you're talking about.

Chris Robertson

Sorry. And then your first question, can you repeat it.

James Doyle

Just what the observable impact today is on the product trade with the existing regulations and kind of the step up into 2025.

Chris Robertson

It Lars may be better placed to answer that. But what I will say is, of course, it's been a big adjustment for the market in general. And what you're seeing not just in, you know, EU ETS or FuelEU, is added degrees of complexity around competition.

Several years, so this, along with other things that have happened in the regulatory environment over the last just makes it harder and harder for smaller ship owners to compete. So I would above anything say, look. The market's adjusting.

But it does have a consolidating impact. And so you'd expect that the bigger owners and operators get bigger and the smaller's are really struggling with the scale and the cost and the complexity of these regulations.

Chris Robertson

Got it. That's really helpful. Coming on give you a number here, Chris, which is quite interesting.

If you have an LR2 and you're gonna trade it from the Middle East and you're gonna trade it to Europe, including the UK, the difference between an EU and non-EU port in terms of what you're gonna have to pay from the EU ETS perspective is a hundred and fifty thousand dollars.

Chris Robertson

Got it. Okay. Appreciate that.

Alright. I'll turn it over.

Operator

The next question comes from Frode Mørkedal from Clarkson Securities. Please go ahead.

Frode Mørkedal

Hi, guys. Just a quick question on the order book, we discussed it, but it's an important topic. So the slide on page sixteen is great.

At least when I talk to a lot of investors, they seem to assume that all these are LR2s head all into the clean market, but you I think you laid out the for Caroline in case that is going to be let's call it, switching. Right. So my understanding is there's and then it crude Aframax order book is just five point nine percent.

Right. So clearly, there's been very few orders in that segment and maybe by owners at should have ordered a crude Aframax, but the opt in front LR2s. Right.

So the question is really, how do you think this plays out. It's transition. Right.

Is this Hardee's LR2 new builds directly going into crude, or do you think there will be some type of routing out of all the ships that then switch into great.

James Doyle

So there's you wanna start.

Lars Dencker Nielsen

Yeah. Yeah. I'll just start with some it's kind of some interesting kind of data on this.

So the time charter market that we have seen, you know, obviously, quite busy at parts of the year last year, and there's been a bit of a resurgence kind of as we move into into February. And there is no real difference in terms of the charter when he's looking for an Aframax, if he wants to have an Aframax on LR2. And from an owner's perspective, they are not concerned about taking the LR2's and fixing it as an Aframax.

The fungibility between those two markets is very clear. And it's clear in the spot market when there is spread differentials over seven hundred and fifty thousand dollars that they will start moving from one to the other. Is great for both markets.

It creates, you know, the fluidity that you want the volatility is then impacted on both. So, you know, it is very important that if you wanna look at LR2 stroke Aframaxes, you have to look at those in unison. So, you know, when you look purely as LR2s and you'd say, well, the LR2 book is huge for whatever the percentage is, twenty or whatever it is.

I think you're making a great mistake if you do not look at this in conjunction with in particular with the, kind of, the aging fleet of Aframaxes to look at these.

James Doyle

Yeah. And I would just add Lars is making a great point. So even today, you know, there's, I think, twenty-three percent of the Aframax fleets older than twenty years.

And, you know, the Aframax fleet is a lot larger than the LR2 fleet. Especially as you look at that older tonnage. So I think what you see is maybe some of the new builds trade in the clean market and then have some of the older vessels move into the dirty market.

But Lars is absolutely right. You have to look at them together as you have as well, Frode. And when you do, it certainly tells a story that there's definitely demand for both assets.

In a way where this supply growth looks substantially less than they, you know, twenty percent it may appear.

Frode Mørkedal

Yes. Indeed. Thank you.

That's a great update. My final question is on the, you know, the Red Sea potential reopening. Guess you think this must be having a positive impact on this east to west arbitrage flows, which I think a person of diminished somewhat in the past few months.

So maybe that could be a positive thing.

Lars Dencker Nielsen

I'll start with just making a few points here. Number one is that you look over the last few months, you have been through absolute a huge turnaround in the refineries in the Middle East. That's then completed.

And then some of you had a more or less shut diesel up over kind of December and the first part of January. So there was no real incentive to move covers, you know, moving cars west. That suddenly had split with suddenly the diesel has opened again.

And then on top of that, if you then add on the Jisan refinery that is completing turnaround. But end of February, I would say that you've got, you know, a lot of outlets in terms of carbon being produced both in Red Sea and also in the AG where carbon will start flowing and supply distillate to Europe.

Frode Mørkedal

Great. Sounds good. Thank you.

Operator

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

Liam Burke

Yes. Thank you. Robert, in light of your cash flow and strong liquidity position, I guess your most recent sale of a vessel was a relatively new LR2.

Are you still looking at opportunistic divestitures or are you pretty much happy with the size and the positioning of the fleet.

Robert Bugbee

Both. I mean, we're very happy with the size and the positioning of the fleet. And, you know, I think we're anyone on this call's entire careers, they've been willing to offer me mystically sell vessels if they think they're getting good value.

Liam Burke

Okay. Thank you. James, you talked about refinery realignments globally and the shutting of older less efficient ones.

This has been a multiyear event. How do you see this thing continuing to play out and till it reaches sort of a normal steady state of heavily waiting refinery capacity in China and in the Middle East.

James Doyle

Oh, look. I think it's gonna continue. So what the best part about the refining story is the lack of new capacity coming online in emerging markets.

So everybody has focused a lot on Dangote, but, you know, that was starting construction or supposed to in 2013. And it's 2025, and it's still not at full capacity. So I think that in terms of the longer medium-term product trade is really powerful.

Then the other side of it is this older refining capacity that probably should have shut before COVID, and then you had this strong crack environment, you know, as world demand came back and you're starting to see those closures again. So during our last earnings call, I think we said that we expect one million barrels of capacity to close this year, now it's two. And so going forward, I think there's still more capacity in the US. There's more in Europe. There's certainly more in China that can be closed.

And you're gonna have to make up that lost production. And most of the time, it's gonna be carried on a ship. So I think it's very constructive going forward.

We haven't had any necessarily new announcements fill up sixty-six in December, but something we monitor closely and something we think is gonna be impactful for our industry going forward.

Liam Burke

Great. Thank you, James.

James Doyle

Thank you.

Operator

This concludes our question and answer session, and the conference is now concluded. Thank you for attending today's presentation. You may now disconnect.