Aristidis Alafouzos
CEO at Okeanis Eco Tankers
Thank you, Iraklis. Q2 2024 was the second quarter of our fleet having 100% spot exposure. The main objective of this quarter, as we had alluded to in Q1, was to favorably position our VLCCs that required special surveys, and complete the company's dry dock requirements during the weaker summer months. This was planned and organized well in advance, which required close coordination between the commercial department and the technical manager to time the vessels to have staggered deliveries at the shipyard and avoid delays. We also brought some dry docks forward to have off-hire during the weaker summer months instead of during the winter. Given OET's preference to trade our VLCCs in the West, which outperforms East market, we were able to fix many long, high-earning front haul voyages for our dry dock positionings. We also took advantage of the strong spring market to fix front-haul business on our VLCCs that did not require a dry dock to cover for the weaker expected summer as well. The West-East fixtures we concluded loaded from the North Sea, the Mediterranean and South America. A number of these fixtures only occurred because of the Red Sea avoidance and voyage economics, which made more sense to parcel the cargo up on a VLCC and sail via the Cape around Africa, in comparison to fixing two Suezmaxes, also via the Cape and around Africa. The disruptions due to the Ukrainian war and Houthis in the Red Sea created many triangulation opportunities that allows you to tramp trade the ship of VLCC, much more like a Suezmax, Suezmax. Seeking these opportunities and being comfortable to trade the VLCCs outside the usual TD3 or West-East round voyages produced a significant outperformance for us, and we're happy we took these risks. An unexpected highlight of the quarter was progressively turning our dirty trading VLCCs into LR4s. I will go into more depth about the idea and process later in the call. There was a huge spread between crude oil and product freight rates, though, which made the cleanup trade profitable for the trader when he was incorporated the cost and time of cleaning up a crude ship and the cost and time of the inefficiencies of lightering to load and discharge a vessel. Clean terminals at the load and discharge ports were not all designed to fully load VLCCs with diesel. We successfully cleaned up three VLCCs on a spot basis. Why did we do this? It generated premium time charter equivalent rates relative to the crude trade. It extended voyage duration during the seasonal weaker summer months, covering us for a longer period of the summer than a crude voyage would have done, and simultaneously positioned our vessels in the West. We have the added bonus of a future clean trading optionality, but this is not our base case scenario. To date, we have cleaned up four ships, of which one has reentered the dirty trade already. We are now experienced in the process and trusted by our counterparties. We spend a lot of time and effort commercially and technically to get these deals concluded. Two out of the six VLCCs planned for this year to dry dock, completed their dry docks during the second quarter, being the Despotiko and Keros, with the latter sailing in early July. The remaining three are planned for Q3 and one in early Q4, aiming to have the ships ready for a strong Q4. Given we do not transit the Red Sea and the decrease in Suezmax stems from the AG that are sold to the West, we have found it more challenging to trade our Suezmaxes east of Suez. Before the Red Sea situation developed, it was very easy to find backhaul cargos, repositioning the vessels from the AG to Europe. Now, this is more challenging and there are fewer cargos. We could not risk having multiple Suezmaxes open in the East and compete against each other and the market for backhauls. Therefore, we had to calculate earnings on the Suezmax front haul voyages from West to East with a long ballast reposition back to a location where we were comfortable finding cargos, like West Africa. This deteriorated the time charter equivalent earnings significantly, and in most cases, will not outperform trading the ships locally in the West. For this reason, we strongly focused on keeping them in the West, with only one vessel being fixed east, where we found a lucrative opportunity in comparison to the Western market earnings. Despite the seasonal weakness prevailing in both segments towards the end of the quarter, we achieved a fleet-wide TC rate of $64,900 per day. Our VLCCs generated $73,200 per day in the spot market, a 39% outperformance relative to our tanker peers that had reported Q2 earnings. Our Suezmaxes generated $54,600 per spot day, a 17.5% outperformance relative to our tanker peers who have recorded Q2 earnings. These numbers reflect our actual booked TCE revenue within the quarter as per our accounting standards. Moving on to slide 11 for guidance on Q3. Q2 was a relatively strong quarter, which mitigated some of the Q3 seasonal weakness, by which we had done by fixing long haul, front haul voyages to dry dock and cleaning up the 3 VLCCs. This positive trend continued into Q3, where we cleaned up an additional VLCC for product trading with one more ship in the works. As mentioned previously, this move generated a premium time charter equivalent and extended the trading duration compared to a crude backhaul trade. Additionally, as again mentioned previously, we positioned ourselves back in our beloved West market for Q4. We hope to find market outperforming opportunities to continue trading clean following discharge of the first clean cargo, but this is not a given. In Q3, we continue our focus on positioning the remaining four VLCCs that are due for dry dock, with long-haul voyages east and discharging in proximity to the yard. For our Suezmaxes, we focused again in the West and on voyage optimization by limiting waiting times and ballasts. Given the seasonally weaker summer in both segments, our focus and strategy now is to conclude the remaining dry docks. Already one vessel, the Nisos Rhenia, has completed dry dock, while the remaining two are scheduled for the latter part of the quarter and one will enter in the beginning of Q4. Meanwhile, we maintain a wet positioning on the trading fleet to capitalize on seasonality changes. Once we complete the dry docks on the VLCCs, we will likely return to minimizing ballast and focus on trading our VLCCs in the West. Current Q3 rates have weakened significantly, with VLCC round voyages trading around $25,000 per day for AG East and $30,000 for US Gulf to Asia, while Suezmaxes are earning in the low $20,000s on a round voyage basis. So far in Q3, we have 56% of our fleet-wide spot days at $51,300 per day, 58% of our VLCC spot days at $46,100 per day, a 24% outperformance. 53% of our Suezmax spot days at $58,000 a day, a 39% outperformance relative to our tanker peers that have reported Q3 earnings. On slide 13, we demonstrate how our ability to adapt and capitalize on the market opportunity is proven with consistent outperformance relative to our tanker peers in almost every turn of the market. We are very focused on maintaining this consistency going forward. I would like to note that the outlook for the next years is great, and our outperformance grows in firm market environments. Significant softening has been seen going into the summer, mainly driven by weaker Chinese crude exports, weak refining margins in Asia, and ongoing OPEC+ cuts. The outlook and conditions remain firm in the crude tanker market for the winter, and seasonality provides for meaningful upside. Rates in both segments are at quite healthy levels and way above the 2019 to 2023 average, while expectations for seasonality boost should start appearing on the horizon soon. Global oil demand is expected to continue its upward trend, with the IEA forecasting an increase of 1.1 million barrels per day in 2024. This growth is bolstered by increased production in the Americas, particularly U.S.A., Canada, Brazil, and Guyana. However, OPEC's production is expected to remain relatively stable, which may limit some of the supply increases from this group. In addition to the above, ongoing geopolitical instability is forcing tankers to take longer routes to avoid high-risk areas. This rerouting is expected to continue, increasing ton-mile demand significantly, contributing to higher shipping volumes and sustaining higher freight rates. In recent years, we have seen the winter market arrive later in Q4, but also extend deeper into Q1. We are confident in seeing a strong winter market and are perfectly positioned to capture this with our 100% spot fleet and no planned dry docks. Moving on to the following slide, I want to explain in greater detail about our decision to put so much focus into our cleaning up of the VLCCs into LR4s in Q2 and Q3. The summer is always the most challenging period of the year in terms of freight, and we look for ways to protect ourselves from this. Other than the vessels requiring dry dock, we also fixed two VLCCs from our East. We had a large eastern presence with a strategy to reposition them in the West for the winter. In addition to this, a vessel sailing from dry dock will always have to fix at a discount to a vessel that's not in dry dock for the first voyage. We saw in the market that traders like Mercuria and Trafigura were fixing dirty trading Suezmaxes on time charter and proceeding to clean them up and trade them in the clean market. A similar voyage for crude cargo on a large, dirty ship was cheaper freight than a clean cargo on a smaller, clean ship. A VLCC for the same freight could carry 3-3.5 times the cargo of a product carrier. As our Suezmaxes were trading in the West and these opportunities developed in the East, it was not an option for our Suezmax fleet. Also, at the time, the spread between the clean and dirty Suezmax market was not large enough to make sense for us. The VLCC dirty market, though, was comparatively weaker, and the freight we believed we could earn if we cleaned up the vessels was significantly higher. This is where we had to start taking some commercial risks. We did not market the VLCCs we had for crude business. Instead, working with a specialist, we started cleaning up the VLCCs on spec while trying to develop cargoes. A vessel that is trading dirty will have her cargo tanks covered in crude oil, a thick, waxy substance. Each tank on a VLCC is about 28 meters tall, and there are 17 of them. Every surface needs to be cleaned until it was pure, bare metal. This involves hot water washing, sludge removals, chemical washing, and at times, having over 120 people on board, scraping, cleaning, and removing all the crude residue. On each ship, we removed an average of around 150 tons of sludges in sludge disposal and also in garbage-sized bags. This was a huge feat. The total cleaning process took about 20 days, which is factored into our TC, and the total cost is amortized in the single spot voyage. We assured our charters of the quality of the work we've done and secured the business. Instead of fixing the traders, we aim to work with the refiners who own the cargoes and do not have to develop the trade as extensively, thereby reducing our risk of the voyage not materializing. There is not an independent owner that was able to clean up over 50% of their VLCC fleet on a spot basis. And Chris and the team did an excellent job executing this plan. If we had fixed on a time charter basis instead of a spot basis, we would have given up optionality and extended duration to the charter. Now, let's discuss why we did it, which we mentioned earlier as well. The market was weak, and the dry dock ships would need to be discounted. So the CPP opportunities allowed us to outperform in earnings all the different crude voyages, whether a backhaul or a round voyage. Incorporating the time to clean and the slower discharge and loading due to multiple STS lengthened the voyage to take a season into the seasonally firmer Q4. The demurrage rate was much higher than the crude, so inefficiencies in discharge would only improve the voyage economics. The voyages were all for discharge in the West, which is exactly what we wanted to do to reposition our ships for Q4.We have the future clean trading optionality without any cleaning cost or time. As already discussed, we've cleaned up four vessels so far, and hopefully one more soon, showcasing our operational flexibility and adaptability to market conditions for the benefit of our shareholders. Lastly, on slide 16, we look at the setup that, as we discussed in the previous quarter, seems still too good to be true. An aging fleet with minimal order book, especially for the VLCCs, and no yard capacity in Tier One yards until at least before 2028, creates the perfect supply scenario, especially for Okeanis' super eco-modern fleet. For 2025 onwards, we observe a significant increase in scrap candidates, especially for vessels over 20 years old in both segments, which can easily absorb the incoming deliveries. Handing you back to the operator. Thank you.
