ADNOC Logistics & Services plc (ADNOCLS) Earnings Call Transcript

Hello, and welcome to the ADNOC Logistics 9 Months 2026 Earnings Conference Call. [Operator Instructions]. I'll now hand over to Ali Afifi from Arqaam to begin. Please go ahead.

Thank you. Good morning and good afternoon, everyone. This is Ali Afifi. And on behalf of Arqaam Capital, I'd like to welcome you to ADNOC LS Third Quarter and 9 Months 2026 Results Call. We're pleased to welcome Captain Abdulkareem Almessabi, CEO; Mr. Hugh Baker, CFO; and Mr. Peter Budd, Acting VP of Investor Relations. Thank you, management, for joining us today. And with that, I'll hand over to ADNOC LS team. Please go ahead.

Thank you, Ali. Hello, and good afternoon, everybody, and welcome to ADNOC L&S Third Quarter 2026 Financial Results Earnings Call. My name is Peter Bud. I'm Acting Vice President of Investor Relations at ADNOC L&S. On behalf of the entire team, I would like to warmly welcome everyone, and thank you for your interest in ADNOC L&S. By now, you should have received the earnings presentation pack. And if you haven't, you can download it from the ADNOC L&S website in the Investor Relations section. Please turn to Slide 2. I would like to direct your attention to our disclaimer on Slide #2 before we begin. It contains important information, and we advise caution on the interpretation and limitations of historical data and the forward-looking statements. Turn to Slide 3. Our presenters today include Captain Abdulkareem Almessabi, ADNOC L&S CEO; and Mr. Hugh Baker, ADNOC L&S CFO. I will now hand over to our CEO for his opening remarks.

Thank you, Peter, and good afternoon, everyone, and thank you for joining us today. Our third quarter marks another landmark quarter for ADNOC Logistics and Service and importantly, demonstrates that the strong momentum from the second quarter has extended into our third and fourth quarters. We have delivered record revenue of $3.3 billion and strong EBITDA of $1.1 billion and solid net profit of $887 million, taking 9 months 2026 net profits to $2.1 billion. And our results predominantly driven by historically high TCE rates and the benefits of investments in vessels which are purchased and immediately delivered to support ADNOC. Today marks our fourth guidance upgrade this year. And with a strong earnings visibility across the business, we are confident in delivering in the region of $4 billion of net profit for full year 2026. This is the result of more than favorable markets that reflects the strength of our platform, disciplined investments and our ability to consistently convert opportunity into profitable growth. And looking ahead to 2027, we remain highly confident in the outlook supported by ongoing geopolitical instability and an increasing global focus on energy security. Security inventory drawdown is likely also to provide further support rates with the next phase of restocking supporting demand for energy transportation. So as we look ahead, we believe ADNOC Logistics & Services enters the 2027 with strong earnings momentum, powerful market tailwinds and platform positioned to capture these opportunities. If you turn to Slide #5. We set a very high standard for health and safety and environmental performance and have achieved outstanding HSE results in the third quarter of this year due to our strong safety culture and commitment to protecting people, assets and the environment despite the very challenging situation that we are operating at. The company reported a record lost time incident frequency and a total recordable incident rate of just 0.12 for the third quarter. Our ability to respond quickly, operate safely and provide resilience under pressure is a strategic differentiator and one that directly underpins the trust placed in us by ADNOC, our partners and our shareholders. I'm also glad to share we delivered a 54% reduction year-on-year in energy intensity, demonstrating sharper operational efficiency as we continue to scale with additional modern vessels. Fleet modernization will remain and will continue to remain at the heart of our decarbonization efforts, supported by dual fuel technology, energy-saving devices and digital tools that optimize vessel performance. We turn to Slide #6. I would like to highlight why we believe ADNOC LS remains well positioned for long-term growth as ADNOC strategic logistics partner. ADNOC growth creates a very powerful and visible runway for ADNOC Logistics and Services. And as logistics is not simply an enabler of ADNOC growth, it is fundamental to delivering it. I want to echo our Group CEO, Victor Soldan Algader, remarks from last week ADPC on the critical importance of routes to make routes to market and advanced logistics. Energy security is not only about having the supply. It is about ensuring that supply reaches customers reliably and efficiently. And this is precisely where ADNOC Logistics and Services plays a critical role. ADNOC strategic logistics partner, we provide the infrastructure, fleet and integrated logistics capabilities that connect ADNOC's production to markets around the world. And as ADNOC expands across oil, gas, LNG, chemicals and rival, the importance of maintaining resilience only grows. Our role is not just to support ADNOC's growth, but to future-proof it and make it resilient. The numbers back this up, $21 billion of contracted revenue with ADNOC and $7 billion of committed CapEx through 2030 across 61 vessels and other investments. So do not view ADNOC Logistics & Services by the current rate cycle alone. Look at the structural growth we are building beyond it. We are deliberately building capacity today for ADNOC Group's growth tomorrow, deepening our integration with the group and securing the fleet its long-term targets demand. Each vessel we acquire is further routing of this transformation. A larger owned fleet and greater earnings visibility from long-term contracts have the potential to drive a structural re-rating of ADNOC Logistics & Services over time. I will now hand over to Hugh to provide a detailed update on the results.

Thank you very much, Captain AbdulKareem, and thank you to all the analysts and investors joining us today. Please turn to Slide 7. This slide captures the highlights of what has been another exceptional quarter for ADNOC Logistics & Services with strong earnings and a continuation of our disciplined approach to investments. ADNOC ONS delivered net profits of $887 million alongside record revenues of $3.29 billion and EBITDA of $1.088 billion. Shipping across all vessel types continues to be the driver of this performance as we experienced another quarter of historically high rates and continued service to ADNOC. Our efforts and our capacity to support ADNOC also grew over the quarter with important contributions to earnings from 5 newly delivered LNG carriers now contributing a full quarter of earnings and 6 VLCCs, 3 very large gas carriers and 4 dry bulk vessels during the quarter. Building on the exceptional shipping performance, this brings me to our fourth guidance upgrade for 2026. With shipping rates at historically high levels, a growing owned fleet and strong earnings visibility from back-to-back ADNOC contracts, these are all factors driving a further acceleration in earnings. As a result, we have upgraded our full year 2026 guidance to reflect net profits in the region of $4 billion. From this guidance of net profit for the year of $4 billion, you can determine that we expect the fourth quarter to be our strongest quarter of the year with final quarter profits in the region of $2 billion. As we have already seen in our October results and have strong visibility over the remaining 7 weeks left in the year, we have strong confidence in the numbers we are guiding to. So we ask -- we ask all of you analysts that your modeling reflects our high level of confidence and visibility on earnings. You know what number you need to guide to. Moving on from guidance, I can say that year-to-date, we have remained disciplined on our deployment of $1.9 billion of capital expenditure to support ADNOC Group's near-term demand through the purchase of 7 VLCCs, 6 VLCCs, 2 Suezmaxes and 8 dry bulk vessels. These vessels are deploy on back-to-back contracts with ADNOC, which will significantly derisk the purchase price of these vessels. Each contract reflects current market rates adjusted for contract duration and market circumstances. This is part of a total commitment of $6.2 billion of CapEx across 55 vessels committed ahead of expected ADNOC capacity expansion. This earnings call, I will spend time discussing our CapEx because we want investors to understand our capital allocation policy and begin to see how this CapEx will increase our long-term sustainable earnings. We want you to look forward from where the company is now into what we will become. We have redeployed our 2 VLCCs, Azana and Habshan onto the spot market. These 2 vessels were previously on medium-term charters until April and May 2027, respectively. The redeployment resulted in a one-off $105 million early charter termination cost, which has impacted our third quarter results. In addition, we have redeployed an L2 product tanker, Navigate Passion in October onto the spot market. This vessel was previously on a medium-term charter until June 2027. This has resulted in a one-off $25 million early termination cost. These vessels will be deployed to support ADNOC, and we support -- and we expect these spot rates to remain elevated and provide significant returns on these investment decisions. We currently have 2 LR1s, 2 VLCCs and 1 LR2 remaining on medium-term contracts. An LR2 product tanker, Navigate Prestige was returned to us in early November following the end of its 12-month contract and has since been redeployed to support ADNOC spot rates. Moving to our Integrated Logistics segment. ILSP material handling volumes were up 20% quarter-on-quarter and 7% year-on-year, and they are now at record levels. So as ADNOC offshore operations have returned to pre-conflict levels, adding further momentum across the business. However, increased costs due to offshore support vessel chartering and high bunker costs have impacted profitability in this area. Underlying performance of our jack-up barge business continues to reflect near-term softness from selective pricing discounts and softer blended jack-up barge rates. Our balance sheet remains very strong. We have upsized our revolving credit facility from $2 billion to $2.6 billion, and the credit facility maintains the rate of SOFR plus 80 basis points, providing increased flexibility at a highly competitive rate. Our net debt-to-EBITDA stands at just 0.03x, providing ample liquidity for future investments and highlights that despite the significant increase in CapEx spend, our cash generation provides the ability for further disciplined CapEx deployment. Slide 12. This slide highlights our solid financial position that supports our very substantial capacity for growth. Over the first 9 months of this year, we generated more than $3 billion of operating free cash flow and more than $1 billion of free cash flow. Net debt stands at $131 million, and we have $1.9 billion of undrawn credit facilities to fund growth beyond what we have already committed. Please note that as part of the wider projection of net income for the full year, we also project that net debt will be positive at year-end. We have a significant runway of investments to deploy across our Integrated Logistics, Shipping and Services segments, and we will commit only where they meet our disciplined hurdle of low double-digit unlevered IRR. Investing for the future is our #1 priority. As mentioned before, our focus is on what our business is going to become in a normalized business environment. Slide 14. Our investment story continues to accelerate. In August, we stood at $2.3 billion of incremental investment. By November, that has increased to $3.7 billion. This momentum takes our total CapEx commitments through 2030 to approximately $7 billion, including Tas and the remaining 20% of Navigator. If you want to understand that, there is a detailed table detailing all of this in our appendix. And this builds on the strategic initiatives already underway while creating capacity for the next wave of growth. Slide 15. Our vessel investment CapEx program is bifurcated, where immediate group support to ADNOC complements our long-term growth CapEx, which is highly contracted. The first type of CapEx, group support CapEx covers 23 vessels bought and deployed to ADNOC in the near term on back-to-back contracts, which significantly derisks their initial purchase price. Each contract is priced at market rates at the time of purchase, adjusted for contract duration and market circumstances. Our ability to deploy these assets quickly provides much needed support to ADNOC while benefiting from historically high rates in the region. Many of these vessels are now up for renewal of their original ADNOC employment. And in many cases, this deployment is adjusting for the higher rates now attributable to vessels trading within and around the straight routes. The second type of CapEx is long-term growth CapEx, and this accounts for 70% of overall CapEx amounting to $4.2 billion across 32 vessels. These are vessels that are on or are expected to deliver on long-term contracts, giving us significant high-quality income and long-term earnings visibility. In total, we have currently committed to deploy approximately $6.2 billion across 55 vessels. Turning to Slide 17. This is our guidance upgrade. As we have outlined throughout the presentation, this upgrade is once again driven by the strength of our Shipping segment and the resilience of our integrated logistics business as operations recovered and subsequently normalized. Comparing compared to 2025 actuals, we are guiding consolidated revenue up low 100% year-on-year growth. EBITDA is guided up 210% year-on-year growth and net profit up low 360% year-on-year growth. This is our fourth significant step-up in profitability this year. Taking our consolidated net profit guide, you should be expecting a full year result in the region of $4 billion, up from our previous guidance of approximately $1.9 billion. I reiterate that we are highly confident in our ability to guide you based on our visibility on earnings to the end of the year. Our guidance for all segments reflects actual performance year-to-date through October, latest assumptions for November and December, and these assumptions have been informed by current trading conditions and greater visibility over the remainder of the year. As we look through the remainder of '26 and into 2027, we continue to see a supportive market backdrop across our core shipping activities. Longer trading distances, evolving global energy flows and continued supply chain disruption are supporting tonne-mile demand and vessel utilization. At the same time, geopolitical uncertainty and the increasing focus on energy security continue to reinforce the strategic importance of reliable, flexible and efficient marine transportation. On the supply side, fleet fundamentals also remain constructive. Vessel availability across key markets remains relatively disciplined, while constraints on near-term fleet growth continue to support the overall supply-demand balance. Together, these dynamics are helping to sustain healthy freight rates despite continued volatility across global commodity and energy markets. Taken together, we believe these fundamentals provide a strong operating backdrop for the remainder of 2026 and as we move into 2027. While we remain mindful of ongoing geopolitical and macroeconomic uncertainty, we are confident in the resilience of our diversified business model, the quality of our asset base and our ability to capture opportunities as market conditions evolve. We're building ADNOC L&S for the future, not for the next quarter. While historically high shipping rates can influence near-term earnings, our strategy is focused on the long term, deepening our partnership with ADNOC Group and systematically expanding our own fleet to support its growing energy ambitions. The continued addition of vessels is a tangible proof of that strategy in action. By moving early to secure and own strategic capacity rather than relying predominantly on charter tonnage, we are creating a more resilient, sustainable and scalable earnings platform. As this transformation becomes increasingly visible, we believe the market will look beyond rate-driven quarterly volatility and increasingly value ADNOC L&S for the quality, visibility and strategic importance of its future earnings. Given the strength of 2026 performance and our latest expansion announcements, we are reviewing our midterm guidance as we expect these investments to provide meaningful long-term benefits, and we'll update the market when that review is complete. Our near-term capital allocation strategy remains to invest with discipline following the same bifurcated investment strategy I outlined previously. Investors should be highly supportive of this strategy and the benefits they are seeing flowing through into our current results in future periods. As many of you will ask, we will continue to actively look for organic and inorganic growth across both shipping and integrated logistics following our same disciplined approach. While dividends haven't increased this quarter, you are right to expect in the future that there may be a revision of our dividends, which reflects our expectation on the long-term structural increase and visibility we are building into our future earnings. I'd like to finish by just saying that these results have been really related to the magnificent efforts that our commercial and ship management departments and teams have been created for us. And everything is really down to the amazing hard work and the hard work of all our seafarers. Thank you very much for listening. And with that, I'll pass back to Captain. Thank you.

What you are witnessing is a company which is delivering significant earnings and redeploying those earnings into assets, which are delivering immediate returns and increasing future structural growth. Our earnings grew Q-on-Q removing one-off costs related to the redeployment of vessels and will significantly basically accelerate into the fourth quarter. And we are seeing our earnings momentum and contracts extending into the 2027, which should make many of you on the call today more confident in the durability of our earnings, which most of the analyst community seems to miss in their forecast. I will reiterate you all that you should look beyond cyclical rates. Our investment case is increasingly underpinned by structural growth, greater earnings visibility and the long-term expansion of our platform. And we will continue supporting ADNOC's growth, investing with discipline and building on the momentum we have created to deliver long-term shareholder value. Thank you, and we can now move to the Q&A session. Back to you.

[Operator Instructions]. We do have a question from the telephone lines comes from Ram Kamath of Barclays.

First of all, congratulations on a strong set of results and on continuing to operate with a high safety standard. I have a couple of questions, please. First of all, on gas carrier, the EBITDA has substantially increased in Q3, but a part of this earning is slipped from Q2. That's what I see in presentation. Could you quantify that timing benefit and indicate clean quarterly EBITDA run rate entering into 4Q as well? And on broadly oil market, oil freight rates have fallen sharply over the last few days, if I get it right, including Gulf of Oman to Northeast Asia route. Although rates are from OH originated inside Barsian Gulf appears more resilient. Does this indicate that the crisis-related rate premium is unwinding? And how are current rates comparing with those assumed your upgraded full year guidance? And any comment or color on the preliminary expectation from you into 2027, please?

Thanks, Graham. I'll answer the first question on gas, and then I'll pass the second question on Middle East rates to Captain AbdulKareem. On the gas segment, there has been some slippage, obviously, between Q2 and Q3, which has made that sort of somewhat distorted that result. I'm not able to quantify that for you, but that is a significant reason for the sort of uptick between the 2 quarters. I would also add that another reason for the uptake is the addition of some additional gas carriers during that period. Captain, I think...

I think commenting on the market and the rates and especially how do we view the market, it's important to distinguish between the T4 and the rest of the market. And if you look at the majority of our fleet, where is it concentrated, it is concentrated around the TD3 basically index area. Of course, I think over the last week or so, we've seen some pressure on rates on the TG 34 and the rest of the market. And when we say pressure, it's actually just calming it down from the historical highs. So it's still extremely, extremely high comparing to the norms, but it did come down. We expected this to come down, I think, outside. TG3, if you look at it, it's a much, I would say, softer landing because of the recent attacks and within the SO -- but looking at the market in general, it's still at historical highs. Still there is so much inefficiency in the logistical networks across the globe. Still inventories, if you look at them from just looking at the inventories, historical lows across U.S. So while we may see some ease of earnings or rates, still they are still at historical highs. They did not even come to the highest elevated cycle, which we have witnessed in the years before, still well above these historical cycles. And we think that these rates will continue for the next quarter if there is a solution to this total disruption in the supply chain. hope that just gives you some color.

We have some questions from Zoom. Our first one is from Mohammed Ali.

I just had 2 questions, please. The first question is concerning the gross margin. I just wanted to know why it declined sequentially from 41.3% to 33.2%. The other question I have is concerning the guidance after 2026. Management did guide previously low single-digit growth rate and mid-single digit for bottom line and EBITDA. Does that guidance still hold given now that 2026 is a high base year? Or is that something the management would change?

So I think any reduction in gross margin during the quarter is really a product of the changing nature of our earnings. We are earning a lot more from direct vessel employment and less from the very high-margin employment, should we say, employment activities related to ADNOC and services related to ADNOC, which were a big feature of the second quarter results. So as we are sort of normalizing our response to the current, should we say, extreme market circumstances, we're seeing that the way that we are making our profits is changing, and that has reflected our gross margins. In terms of future projections, I have to say that, no, I don't think we can really sustain any of the previous projections into next year. We are starting 2027 and with a very challenging guidance outlook. The ability to guide for 2027 is challenging because we -- obviously, there's uncertainty about the events. We can guide for the next 6, 7 weeks and guide to the end of the year, and we have a very high degree of confidence on that. We are not able to really guide much further beyond that. However, I think we can say that we are beginning to see some of the earnings that we're making now, some of the employment that we have with ADNOC and other counterparties that is beginning to carry over into the first quarter. And clearly, we are not going to see a really dramatic decrease in earnings in the first quarter simply because of the carryover effects of the current high level of rates. And also on a high level, and as Captain, I think, will explain, we don't have -- the inefficiencies in the market mean that we don't have expectations that there will be a big fall in the overall tanker markets anytime soon.

Just to follow up on the first question. When you say more business from non-ANOC business, does that mean from nonshipping business generally...

I can't really go into too much detail about the sort of specifics as to how we're working with ADNOC. But it's fair to say that one of the differences is related to the amount of vessels that we own that we're employing with ADNOC as opposed to vessels that are contracted in the market.

Our next question is from Ricardo Rezende.

I have one question for you, Captain, another one for you. So first one, when you look at that slide, we all the growth plans for the ADNOC Group. And when I try to overlap that with your current fleet and your order book, what's missing? Where do you see the highest growth potential in the coming years and which is not captured on your fleet right now? And the second one is a very specific question. When you look at the redeployment of those 2 vessels during the third quarter, when were the contracts terminated? And did those -- and when did the new contract start? I just wanted to capture on how much were you penalized on the third quarter by the fees that you had to pay and how much you captured on the new rates?

Thank you, Ricardo. Of course, I mean, we continue basically growth in all segments of shipping. I mean, whether it be in the dry bulk, whether it be in the LNG, LPG and crude and product tankers. And the majority, of course, of the growth would continue to be focused actually in all, I would say, tankers in particular, yes, we might increase our position in tankers owning. But also, if you look at the other sectors, I think it becomes increasingly important. One thing if I would highlight here to all investors here that are here in this room is that the importance of logistics and shipping these days are becoming extremely important and central, I would say, to ADNOC, and I'm sure it's becoming central to many other companies where if you don't own your logistics, you don't own your destiny. And as I said, our Chairman during his opening of APC when he said, while it is important to produce as much as you can, but it's similarly or equally important to deliver these molecules to your customers. Hence, there will be a big focus in long-term contracting with ADNOC Logistics and services across all sectors. And of course, increasing in capacity is a must for us going forward. I hope that answers your question.

And Ricardo, on the 2 VLCCs and LR1 tanker that LR2 tanker that were redelivered the 2 VLCCs were redelivered in September and the LR2 tanker Navigate Fashion was redelivered in October.

Our next question comes from [indiscernible] is Moab.

I have 2 questions. One is in terms of your -- considering that you have made a significant amount of profits this year. So I just want to know the priority because I know that you have this CapEx plan that you have. But I just want to understand like how do you manage the additional cash that you have generated right now? What is the priority? Is it semi CapEx or pay down some labs, how do you balance this with the dividend as well? Is my first question.

We don't really have any debt to pass on.

Do you want to continue on questions.

Yes. Yes.

So I think with all this money that you've seen, of course, I mean we do -- we did have before RCF and that was paid as well and we continue to grow from our RCF. But at the same time, -- you might have seen on had, of course, it was public that we have coned basically our acquisitions of -- to grow our fleet. At the same time, I think it was visible over the last 4 or 5 years. that we have been extremely active in terms of new investments, growth vehicles that we have always hired -- and I think this will be used in that front as well. We have always said that our strategy since 2020 and 2022, that will continue our smart growth strategy. And I think -- over the years, we have been delivering these strategies and continuing to grow. If you look at our CAGR on double digits across all the 5 years. So definitely, there's money will be used to continue our growth strategy, continue to diversify our platforms and the successful at. And you will see this hopefully -- okay.

Okay. And second is just now you mentioned that there is a potential carryover of the extraordinary profits in the first quarter. Can I know like can you give some color on some kind of fonts whether you're going to be as strong as Q2 and Q3 or atezo.

I don't think we're able to do that at this time is as on.

It's typical debt actually. I mean definitely would be many volatile market, I think geopolitical is difficult.

What we're seeing though in the market is a continuation in terms of strength. The rates within the TD3 that CEO talked about earlier on the call, continues to sit given the contracts that we're rolling as well into the first quarter of next year as well, we continue to see strength in seeing a market that is under pressure in terms of rates within the region. So we are highly confident in terms of coming into 2027 as well.

And 1 thing to bear in mind, every time we see a historical high, that cannot be used as the the standard markets come down and definitely, it will correct how products will correct itself. This is something to be seen. And maybe it's just something we see in TGTFT4,how connected slightly in the last 10 days or 2 weeks, people go over, there's a crush in the market. But still, those rates are above and beyond the highest historical cycle that shipping as -- that correction is still extremely high. Never is even at $400,000, $500,000 TD 500, 600. That is something unseen.

Our next question comes from Byzol Alazma.

Yes. Congratulations on the strong set of numbers. Maybe if we can just get a bit more color how to think about numbers on their different scenarios. So I guess, obviously, you've mentioned the changes in terms of how the contracts have shifted and the number of vessels that you have now in Q4 which is almost resulting in $650 million per month in terms of guidance. So how should we think about this particular figure in an environment where day rates come off from the $1 million per day to around $500,000, for example. Should we expect that to have? Or how should we think about that sensitivity? And maybe if you can then also talk a bit about kind of like the medium term, given the level of cash position that you're likely to be at somewhat next year, -- does that change how you're thinking about growing the business? Because it seems like shipping is now quite a large contributor to the mix. Do you feel that there is more room to do more bolt-ons or higher growth CapEx on the logistics side?