Ardmore Shipping Corporation (ASC) Q2 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the Ardmore Shipping's second quarter 2015 earnings conference call. All participants will be in listen-only mode. [indiscernible]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Anthony Gurnee, Chief Executive Officer of Ardmore Shipping.

Good morning and welcome to our second quarter 2015 earnings call. First, let me ask our CFO, Paul Tivnan, to describe the format for the call and discuss forward-looking statements.

Thanks, Tony and welcome, everyone. Before we begin our conference call, I would like to direct all participants to our website at ardmoreshipping.com, where you will find a link to this morning's second quarter 2015 earnings release and presentation. Tony and I will take about 15 minutes to go through the presentation and then open up the call for questions. Turning to slide two. Please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from the results projected from those forward-looking statements. Additional information concerning factors that could cause the actual results to differ materially from those in the forward-looking statements is contained in the second quarter 2015 earnings release, which is available on our website. And now I will turn the call back over to Tony.

Thanks, Paul. So today we will follow our usual format discussing our recent performance and update on the products and chemicals tanker fleets, current markets, a review of the Ardmore fleet after which Paul will discuss our financial results and then we will finish with a summary before we open up the call for questions. So turning first to slide five. We are reporting another set of strong results today with net income of $7.9 million or $0.30 a share and EBITDA of $6.8 million. This was with only 76% our fleet in the water in terms of revenue days for the quarter. And in fact, if our newbuildings were fully delivered, we estimate our EPS would have been $0.43 a share. During the second quarter, we continued to build momentum in our chartering results with spot MR's earning $22,400, up from $21,600 in the first quarter. Our voyages in progress are running at around $23,500, signaling continued market strength and momentum. Meanwhile, we are maintaining close control over our costs, which are below budget for the first half of the year and through which we have a meaningful relative to our peers. We declared a quarterly dividend of $0.10 per share on July 16. Our dividend reinvestment plan has been in place for two quarters now and gives shareholders the opportunity to reinvest efficiently. Our largest shareholder Greenbriar continues to participate in the plan, signaling we have support for the company as well as their view that the current stock price is very attractive. And something which we will discuss later in the presentation, we are planning a dividend increase in light of the strengthening charter market and soon to be fully delivered fleet which would commence with the third quarter. Turning now to slide seven. On the product tanker market, MR triangulations for the East and West continued their strength and they increased significantly compared to the same period last year. For the first half, the Atlantic Basin was up 116% to around $25,800 and the Pacific Basin up 66% to $21,900. Time charter rates are also increasing with the one year for an Eco MR now about $20,000, up substantially from even just three months ago. With the new oil market dynamics continuing in full force, crude oil production and refinery runs remain very high, creating surpluses and price volatility of both crude and refined products, which is leading to greater cargo volumes and heightened trading activity over longer distances. U.S. refineries are currently operating at around 95% with the EIA reporting U.S. product exports up significantly, a big destination being long haul voyages to South America. Middle East and South Asia refinery expansions are set to add more than one million barrels per day through this year, providing a big boost to ton-mile demand, which is fundamental and not wait to oil market action, which highlights the underlying strength of the product tanker sector in particular. To put this in perspective, considering that seaborne refined product transport is about 20 million barrels a day, a one million barrel a day increase is a big number and it's having a significant impact on ton-mile demand growth year-after-year. On a final point, the MR order book is now in steep decline as deliveries far exceed new orders. We estimate that by the end of the year the order book maybe at or below 10%. Meanwhile, we are looking around 5% net fleet growth for this year, which is being fully absorbed by strong demand growth. Turning to slide eight, the chemical tanker market. Chemical tanker charters have rebound in the first half of the year as well, up 28% compared to one year ago. So far in 2015, we have taken delivery of five Eco design product and chemical tankers with one more to deliver in the fourth quarter. Our vessels continue to exploit the overlap between products and chemicals, as evidenced by the fact that in the first half of the year, 44% of the cargo volumes were CPP or clean products, 33% veg oils and 23% chemicals. The chemical market is still at an earlier stage of recovery than product tankers. But we believe this sector has significant near-term upside. Low oil prices should continue lift in chemical demand, Arabian Gulf petrochemical expansion continues at a rapid pace and U.S. Gulf exports are expected to ramp up as well, as the U.S. continues to enjoy a significant feedstock price advantage over other regions. Meanwhile, net fleet growth is continuing at a pace of around 5% as well. So while all eyes are on the bigger tanker sectors, we think chemicals will follow suit and Ardmore is well positioned to extract maximum value with our fleet of modern, high-quality chemical tankers able to play both markets. Moving on slide 10. We are continuing to position our vessels to take full advantage of the strong spot market. About 73% of our revenue days will be spot through the third quarter, up from 64% in the second quarter. Going forward, we will continue with our value maximizing strategy which enables us to adjust the mix of spot and TC business depending on how we see markets developing. And then turning to slide 11. The average number of ships in operation for the second quarter was 18 and will rise to 24 by year-end,. We have no drydockings in the second quarter and none scheduled for the third quarter which enhances our ability to capitalize on the strong market. Our newbuilding program remains on track and we expect to take delivery of the remaining three vessels by year-end, one more in the third quarter and two early in the fourth quarter. With newbuilding deliveries, our revenue days will increase by 16% in the third quarter as compared to the second quarter and 70% for the full year, which will substantially boost earnings and cash flow over those periods. Of the three remaining vessels, two will join a proprietary spot trading arrangement with a leading oil trader and we expect the final tanker at $25,000 deadweight ton chemical tanker will be employed either on time charter and on spot trading, yet to be decided. And with that, I will hand the call back to Paul to discuss our financial performance.

Thanks Tony. Starting with slide 13. To reiterate Tony's comments, we are pleased to report a very strong financial performance with a net profit of $7.9 million and $0.30 per share for the quarter. This was achieved through an average of 18.4 ships in operation, which is very significant in light of our building growth this year. This is also our fifth successive profitable quarter and we expect a fleet expansion, operational efficiency and a much improved charter market. The company reported EBITDA of $16.8 million which represents an increase of $11.8 million from the second quarter of 2014. Revenue was $39.3 million, an increase of $25.5 million from the same period last year. Our vessels are running under budget for the second quarter. Net operating cost for Eco design MRs were $6,461,while the Eco design product and chemical tankers came in at $5,792. Our Eco mod vessels were on average for both product and chemical $6,750 per day for the quarter. Depreciation and amortization for the second quarter was $6.3 million and we expect the third quarter to be approximately $7.4 million. Corporate overhead costs were $2.7 million in the second quarter, which on a fully delivered basis works out at just over $1,100 per ship per day and is among the lowest of our peers. To point out, this is above our run rates due to timing and one-time expenses. We are on run budget for the year-to-date. Our interest and finance costs were $2.5 million, which is net of capitalized interest related to the newbuilds in the quarter of $900,000. We expect interest and finance cost in the third quarter to be approximately $3.9 million net of capitalized interest of $400,000. The above results and net profits for the second quarter of $7.9 million at $0.30 per share. As Tony mentioned earlier, if our full fleet of 24 ships was in operation, Ardmore's EPS would have been $0.43 per share for the quarter. As you can see on slide 14, we are again reporting very strong charter rates. We had eight MRs operating in the spot market at the end of the quarter earning $22,402 per day. Setting out for the various ship types, we had seven Eco design MRs in operation, which earned an average of $22,732 per day for the quarter. Our six Eco mod MRs earned $20,212 per day on average which represents an increase of over $5,000 per day from 2014. As of today, we have eight ships trading spot and aligned with the stronger charter markets, the vessels are earning an average of $23,500 per day for voyages in progress with approximately 43% of the days booked for the third quarter. Our Eco design product and chemical tankers earned an average of $16,769 per day in the second quarter, while the Eco mod product and chemical ships earned $14,310 per day which is a significant increase from one year ago. Again, to reiterate, Ardmore had substantial upside potential in every $1,000 a day increase in rates across the fully delivered fleet equates to $0.34 per share in EPS. At current MR spot rates of $23,512 and based on 12 MRs in the spot market or pool, we estimate that earnings will be around $1.85 per share annually. We believe this upside is on a per share basis the highest of our peers. On slide 15, we have our summary balance sheet and at the end of June our total debt $355 million compared to total capital of $706 million leaving our leverage at 51%. Our cash on hand was $42 million which including working capital leaves our net debt at $310 million. In terms of net asset value, as vessels values improve every $1 million increase in vessel values equates to $0.92 in additional NAV per share for our shareholders. Turning to slide 16. As you all know, we are fully funded with committed bank financing in place for all of our newbuildings. At the end of June we have $79 million remaining in yard installment and $83.5 million remaining in committed debt. At current MR rates, we would be generating over $20 million in surplus cash per quarter over the full fleet which is significant. Our leverage stands at 51% and we expect our leverage to peak at around 56% with significant cash on hand. And with that, I would like to turn the call back over to Tony who will discuss our thinking on capital allocation as well as some closing comments.

Thanks, Paul. So turning to slide 18. As Paul said, we would like to take moment to discuss our thoughts on capital allocation and more specifically what to do with the earnings that we are now generating. To put things in perspective, as we have discussed, the tanker market is experiencing a broad recovery and the product tanker rate outlook is particularly very positive with the new oil market as well as strong ongoing secular trends driving our financial performance. So after five years of effort building the business, we are now in a very good place. We have developed best-in-class operating platform. We are a mature public company with a valuable currency. We have excellent EPS metrics. Our growth strategy is played out well with our fleet tripling in just two years and our new ships now almost fully delivered and a rising market. And yet vessel values continue to like in charter market, thereby possibly offering opportunities for further accretive growth. So in light of where we are today and given the very positive outlook, we are continuing to work on plans to return more cash to shareholders while also seeking ways to build on our competitive strength through well-timed growth. As a consequence, we are working on the specifics of a dividend increase, which we will finally announce in the coming weeks, probably right after Labor Day and which would commence with the third quarter. We are also continuing to search for accretive growth opportunities involving high-quality, modern ships that are consistent with our strategy and current profile. However, nothing specific is in the works. So to recap then on slide 19. We are reporting a strong second quarter with results of $0.30 per share. The new oil market is continuing to provide robust demand for our ships and meanwhile long-term fundamentals continue to play out very positively. We are continuing our emphasis on spot trading and we are anticipating a strong second half to the year and beyond. Our operating cost and overhead remain low and a sustaining and meaningful advantage. We are fully funded and focused on maximizing earnings through our operating platform where every $1,000 per day across the fleet results in $0.34 in EPS. And we paid a regular dividend of $0.10 per share for the second quarter and are planning a dividend increase for the third quarter in light of strong earnings and our soon to be fully delivered fleet. And with that, we are now pleased to open up the call for questions.

[Operator Instructions]. Our first question will come from Doug Mavrinac of Jefferies.

Thank you, operator. Good afternoon, guys and congrats on a great quarter. Tony, you just highlighted all the good things going on in the products market and for Ardmore. So my questions are going to be within that light. The first has to do with the fact that spot rates are surging, time charter rates are now increasing and the outlook is getting even better. My question is, obviously you guys are focused on the spot market right now, but what would it take for you to entertain, putting more of your vessels in the time charter contract? Would it be, is there a certain number that you have in mind, that you say, all right, well, these rates are really good to lock in here or is it more outlook dependent?

Thanks, Doug. Well, I think you are absolutely right. It is outlook dependent. We, at this stage, I think our view is still that there is lot more action and upside in the spot market. But I would want to differentiate between one year TC and longer-term TC. We really view one year TC as a substitute for spot. It doesn't really give us any particular cash flow visibility or long-term cover. And so it's really a matter of something opportunistic pops along at the right time and we feel it's a good rate relative to the market. We think that's a good trade. In terms of longer-term, I think rates will have to go higher from here. How much? We don't know. Because again it depends on how we see things at the time. But that would be an ability to kind of start translating our cash flow to something with much greater visibility and certainty and quality and that's not really something we are thinking about right now. But we will see how the marketplace plays out.

Yes. I think that is a ways out, just given how attractive the outlook was. I was just curious. So then on the topic of capital allocation, your cash flow is going to be multiplying here and you highlighted a couple of things that I was interested in pursuing a little bit further. And the first is, in terms of dividend, you probably can't answer this yet, but at least could you maybe share with us whether you are thinking fixed or floating, percent of cash flow? What are some of your preliminary thoughts as it pertains to what the thing is going to look like on maybe Labor Day?

Yes. You are right. We are working on finalizing the specifics of the plan. We don't want to comment extensively on it now. But we wanted to discuss it now because we understand it's very topical and so rather than wait really until September and just come out with a surprise announcement, we wanted to explain now that it is in the works and it will involve a substantial increase.

Yes. Perfect. Makes a bit of sense. And then just a final question on the acquisition opportunity front. You guys pulled the trigger on some very timely acquisitions not too long ago. And so my question is on that topic, are there assets still out there to acquire? Are you going to focus mostly on MRs? Or does the LRs become something of interest? So maybe digging a little bit deeper in terms of where your head is on maybe the expansion front. And that's all I have.

Sure. Thanks, Doug. Okay, so with regards to expansion, I think the main point we re making is that we intend to balance the return of capital with continued growth and we have an efficient platform which enables us to do that when others may not have that ability. So we anticipate generating a lot of cash flow. In fact, that should enable us to buy just with surplus cash flow two or three ships a year. So I think that's an ongoing consideration. We are looking all the time, but we are very selective. In terms of sector, we really like the MR sector and that's our preference at the moment. I think at some point we might look at different sizes, but that's our inclination at the moment.

Okay. Perfect. Thanks, Tony.

And the next question will come from Noah Parquette of JPMorgan.

Thanks. Just going back to dividend. You have been very comfortable with the fix payout recently. Is that something we expect to stay in place? When you talk about substantial dividend increases, is it an increase in the fixed payout? Through a cycle ratio? Or are you looking more of formula? Some comments there would be helpful.

Noah, that's a fair question. But again, we really just wanted to discuss the fact that we are planning a dividend increase and it would be substantial and its going to kick in with the third quarter and will be out probably right after Labor Day with a full release and a full explanation.

Okay. Fair enough. Just had to ask. And then talking about picking up ships here and there. Your competitors are placing orders for 2017 deliveries. Just to clarify, are you more comfortable of secondhand vessels or are newbuilds also on the table?

Sure. Well, look, there are a lot of different strategies and approaches to the business and ours is very much focused on ships in the water generating cash flow. We are fairly comfortable with secondhand acquisitions, if they meet our quality standards and fit into fleet strategy. So that's our focus now. It would be either eminent deliveries or ships in the water.

Okay. And then just maybe some color on some of the strength that you are seeing on the market. What kind of port congestion are you experiencing? You talked about in the past, some of your ships effectively sitting idle looking forward to sell their cargoes. Can you just maybe give some more anecdotes there about what you are seeing in the market right now?

It's amazing that the conditions that we are experiencing today has been going on now really since last October, November and not a lot of has really changed, But I think what's changing is the recognition that this is a new phase of the market. And so in terms of congestion, we are seeing ships just waiting a long time to discharge and to load. And when they queue up to discharge, that creates all sorts of problems logistically for the industry and for the sector, because all of a sudden that ship that was already committed to the next voyage misses and then the charterer basically has to scramble to find a replacement. So I think it's really creating a lot of uncertainty and volatility in the spot market and that's certainly helping. But just from a very physical reality, we just see ships waiting for long, long time to load as well to discharge.

Are there any period or any places in the world that are worse than others? Can you talk about that?

Well, I think West Africa usually gets all the high marks for congestion, but we are seeing it pretty much on a global basis now.

Okay. That's all I had. Thanks.

And our next question will come from Ben Nolan of Stifel.

Hi guys. I have just a couple of questions. The first is, it's nice to have some guidance towards a higher dividend. I was just curious how you thought about that particular allocation of capital as opposed to potentially buying back the shares, if you feel the shares are undervalued or just keeping it where it is and buying more assets, if you feel like there is exceptional returns available on the market?

Well, look, I mean we do -- I think one thing we can say about the dividend policy is that we like to provide people with a degree of visibility, right and thinking. So we will do that after Labor Day. In terms of the share repurchase plan, it's still in place. We can act on it any time we want. And it's just another tool in the kit to enhance shareholder value, if the conditions are right as well as acquiring vessels.

Okay. So all three, I guess is the way to think of that. The other thing is, I was curious, you guys do a fair bit on the veg oil trade, specifically on the palm oil and I have heard some noise that things have improved and they are tightening quite a bit there. I was curious if you could give a little bit of color as to what you are seeing from that part of your business?

Yes. I mean it is something that we continue to be engaged in and we like it because it provides interesting triangulations and positioning. So our main interest is in utilizing that flexibility to really maximize the TCE of a combination of voyages. In terms of the actual market, it comes and goes. It's a great way to position newbuildings into the Atlantic from Asia and along with the rest of the broader MR market, it seems to have real strength.

Okay. That's helpful. And then a last thing, just sort of getting back to on of your comments with respect to Doug and he said that you are still holding off on putting vessels on long-return time charter contracts because those rates are not quite where you would want them to be. I was just curious, if there a high level of inquiry there? Are you seeing it move in that direction? As there are a lot of people that would like vessels, the rates just aren't quite there yet? Or is there still another bridge to be crossed, you think?

It feels like the one-year rate right now is hovering around $20,000, but that's got signaling significant. So we are right on that cusp right now and I think that nobody wants to be the first or really wants to be the first charters, owner to take it, but nobody wants to be the first charterer. So there seems to be a bit of a standoff with upward pressure. So we expect to go through that and there is a real need among charters and oil traders for tonnage. So we think it's heading north of that direction.

Okay. That's it for me. Nice quarter, guys.

And next, we have a question from Jon Chappell of Evercore ISI.

Thank you. Good afternoon. Just two quick follow-ups for Paul. First on the capital structure. You mentioned post delivery of all the ships, we should be looking at 56% debt to cap. As you start to transition a little bit to more of a return of capital type philosophy, what's the target leverage and how do you think about that vis-à-vis expansion as well?

That's a good question, Jon. So about 56% at the end of this year kind of the peak and all of our debt is amortizing debt. So it starts coming down from there. In terms of capital structure, I think look, as we head into a really strong charter market, I think we look to, as all of the things Tony mentioned in terms of returning cash to shareholders and acquiring ships that we think are at the right price, but I think we also look to reduce our debt and pay down some debt. So I can't exactly put a percentage on where we think it should be, but I think certainly heading into a strong market, you want to certainly get below a 50% and for us to get there quite quickly, because we are paying off about $30 million dollars a year down in our debt. So most of that answers your question, but I think the time would be for the debt to reduce from this point.

Okay. And when Tony mentioned, in terms of being able to buy one or two ships a year, just based on cash flow, would that under similar type leverage parameters, 60%? You think you would be able to garner 60% financing for that and leverage any additional cash flow?

I think that's about right. Yes, 60% is typically what you would expect to get on a senior financing on a ship and then on that again you would actually have some working capital for the actual leverage on the vessel as a package before it goes on employment. So a direct answer to your question, 60% feels about right for additional acquisition.

Okay. And then the final thing is just, I think you have mentioned now for several quarters in a row that the operating cost keep coming in below budget. We know that cost can ebb and flow with timing issues or whatever, but it seems to be a little bit of a trend now. Are you thinking about, as you are going forward, taking this down? Or is it maybe just a function of the Eco ships are providing a little bit more non fuel efficiency, OpEx efficiencies than you had originally budgeted for?

Yes. I think there is that. I think the main reason that our fleet OpEx is coming down is really down to the newbuildings ships. For the first years that the ships deliver, they will all be under warranty with the shipyard. So there the maintenance costs are lot lower but the newer ships obviously have lower OpEx, but only a little bit. So I think the second year ship is having increases a little bit, but the biggest component of operating expenses is actually a crew. And I think we have very tight rein on all of the cost. So overall, it's coming in low, but your ability to strip out more isn't really there and I think we pride ourselves at running a quality operation and maintaining cost control as well. So I think it's pleasing to see it come down and we will keep a tight control on it, but the big reductions are really on the back of the newbuildings delivery.

Okay. Very helpful. Thanks, Paul. [AUDIO GAP]

The $23,500 you booked for the quarter, can we see that as a pretty good rate for the quarter?

I missed the beginning of what you said. Could you just repeat that?

Yes. Just on the bookings for the quarter, on the MRs you booked 43% at $23,500. Is there any reason why we should seasonality this year as the rates continue to remain firm through the summer?

Yes. I think it's really notable that rates if they remained as strong as they are through July and August. And so I think people experience with this business, it's exactly what they say, wow, that's a really, really great set up for the winter. So it could get very, very exciting.

All right. Fair enough. Thank you.

The next question will come from Michael Webber of Wells Fargo.

Hi. Good morning, guys. How are you?

Great.

Tony, I wanted to touch on the dividend guidance again and just maybe without getting into specifics, you did talk to Jon earlier around having enough capital that you wanted two vessels per year on a levered basis. And I am just trying to think about how we should think, parcel out your cash flow for the next couple of quarters, couple of years in light of moving dividend. So how do you think about comfort zone there? Would it be as simple as saying, preserving of capital to continue growing at a couple of vessels per year? Are there other inputs, I guess, as we try to figure out where that number could end up landing over the next couple of quarters? What sort of things will you guys be discussing? And I guess how should we prioritize those?

Again, we are looking for the right balance between returning a meaningful amount of capital to shareholders through the dividend and giving us resources for well-timed growth. So you can infer some numbers if you like from the comments about the number of ships we think we could buy per year with what we retain but again, we will be very, very explicit and lay everything out a lot of the detail in early September.

Okay. No, that's helpful. Around those acquisitions, you are not going to stepping up the fleet one or two vessels per year. You talked a bit about some of markets you like. But if you think specifically, if I just think about a prompt MR here at $36 million, $37 million, is that something you guys finds attractive, given your outlook for forward cash flows and having around about $37 million for prompt? Is that something you guys find attractive?

I think that's not far off. Everybody wants to shave a nickel here and there to say they have done well, but fundamentally, the Eco design ships do have a real edge in terms of cash flow generation. And so they do deserve a fundamentally different valuation than the older standard ships, even if we were able to improve them. So we think those are attractive.

Okay. That's helpful. It seems like, I guess one or two more from me. It seems like everything in the last couple months, I think the last quarter, there has been more deal speculation flying around, I guess more M&A activity, haven't seen a lot of it come to light, I guess in the space. But I am just curious as to whether you think the door has may be cracked open a bit wider now than it was, say, last quarter for M&A within the States? And then how you all think about that especially within the context of the dividend bumped around and what that says about your intentions for the currency and everything else? So just your thoughts around that in general.

It's a good questions. We really think back to what we have done so far and what have we built and how do we grow from here and when we look at our performance objectively compared to other companies, we are quite pleased with what we have done and we then think of ways we can build on that capability. Is there anything missing in terms of our capability? We don't think so. With scale, in and of itself, creating an advantage, we don't think so. So when we think about things like M&A, we become very cautious because we recognize that, historically, that's been a way for companies to really lose track of their core strategy and their real strength. So we have got a very focused strategy. We have got a very, very tight culture in terms of cost control and discipline and quality and performance. And anything we do is going to put that at the top of the heap in terms of priorities.

Well, I am actually coming at it from the other angle in terms of more of you being an acquiree as opposed to the acquirer in that scenario, but it would just makes sense given the relative valuation. But does it seem like there has been more activity in the last quarter or so? Maybe not meaningful, but is it the same on your end? Are you guys getting more inquiry or other more high-level conversation?

Not particularly.

Okay. Fair enough.

I think there are a number of fleets and companies that I think would like to go public and obviously they are crashing around looking for ways to provide liquidity to investors, but that's not necessarily something for us right now.

Fair enough. One more for me, just around the cargo mix and I guess per an earlier question. It looks like, if anything, that you are a little bit down quarter-on-quarter. It looks like a bit more of an even mix in terms of your cargoes. I am just curious, was that purely a function of just catching those cargoes? Is it the newbuilds entering the market or the shipyard or is it more of a -- was there any sort of the dramatic trade throughout the quarter that would have led to get some more balanced cargo mix between products, oils and chems? Is it really a bit more about quarter [indiscernible]?

If I gave you a full explanation, you would probably be disappointed but the reality is, when these ships are being spot traded, you follow the money, right. So if you are looking at a range of alternative, when the ship is up for its next bit of business, you basically are going to go with what everyone pays the most. And obviously there is strength in the product market that afforded opportunities in particular for the simper coded chemical tankers to trade into that business and make good money. That's something that stainless steel ships don't really have liberty to do because their breakeven is just so much higher.

Right. Okay. Thanks. I appreciate the time.

The next question will come from Fotis Giannakoulis of Morgan Stanley.

Yes. How are you, Tony? And congratulations for a good quarter. I wanted to ask also about this acquisitions of two or three vessels that you talked about. Is the strategy to stay on the mass sector or you might consider going even higher? And how much are you going to need for each of these vessels? Is it safe to assume $10 million to $15 million per vessel?

So, as you know from what Paul was saying, so obviously we talked about values and you know what the values are, so roughly 55% can be after accounting for working capital and liquidity, probably 55% of the package could be debt and the rest would be equity. So, that's the simple metric. We inspect a lot of ships. We review a ton of ships all the time. And we keep an open mind to different sectors, but we really like the relatively modern in the water MRs. So that's where our focus would be.

Okay. Thank you. And regarding the trade you mentioned about the big expansion, over a million barrels of new refinery capacity that is coming online in 2015 and 2016 and most of it is in Asia. Have you seen where this volume is heading to? And given the fact that refinery capacity is expected to grow even further in 2017, what kind of impact it might have on refinery margins? And how lower refinery margins and where they are today, they can affect the product tanker trade?

Fotis, I love your compound questions. So let me do my very best here. So I think these million barrels a day is really significant and if you think about it very, very simplistically, roughly the annual growth in oil consumption is about 1.2 million barrels right now and that's roughly the ongoing refinery expansion rate. That's where the growth based not on 90 million barrels a day, it's 20 million barrels a day. So even if, okay not all of it is being shipped at sea, but a good amount of it is. By the way, it's not so much Asia, it's Middle East. And that's basically export business, right. So it's going on all different product tanker sizes and types to all parts of the world. Petrobras is, my understanding is they are putting barrels on LR2s to go all the way to Brazil. There is a lot trading to the West. A lot to the East. So it's very long-haul. When the LR market gets really strong, then you start splitting cargoes up, so they stem two MRs instead and those go long-haul as well. So it's a very dynamic, very, very powerful long-term trend in terms of demand growth.

And can you balance also how the trade is expected to develop and balance between the potential declining refinery margins and the expansion of refining capacity over the next couple of years?

Refinery expansion for the Mid-East Gulf states is a strategic priority. They want to move up the food chain, just like they are with petrochemicals. And I think Saudi Arabia would rather just export 100% products and no crude. That's the direction they are heading. Kuwait, UAE, they are all doing this. So it's part of this ongoing very, very long-term shift away from moving crude in tankers to moving refined products. And that's something that we have been tracking for a long time. We have been talking about it for a long time and it's playing out as we expected. So there are announcements on new refinery plans all the time and we think this trend is going to continue. We believe that fundamentally it has to because as demand for oil grows, so does the demand for refining capacity and on top of that, this is really a strategic priority for these countries. And so we are going to see those marginal demand barrels being produced and shipped out as refine products.

Thank you, Tony. One last question also about supply and demand. If you can quantify the growth of demand that you see in the next couple of years. We see that the supply is shrinking but how disciplined the market is, especially about 2017? And if you can give us both your supply and demand growth forecast and how much of the demand will be driven by the chemical market for these type of vessels?

So the underlying fundamental demand growth in the product sector, we believe is continuing at around 5%. And every bit of information we have going back years and years and going ahead would suggest that. And again that's shift in refinery capacity and expansion primarily, but it's also an increasing complexity of trade using ship time and growth in U.S. exports. So those are the primary fundamental long-term drivers. On top of that, referring to the new oil market, which we believe is here to stay for quite a while. Who knows? But it just seems to, no end in sight in terms of the fundamental overproduction, very high refinery runs, port congestion and heightened oil trading activity on the back of a volatility. So how much more demand that's adding, it's hard to say. We don't know yet, but it appears to be meaningful and that's really what's driven rates for the levels that we are seeing right now. But just want to underscore that underneath that, we think there is very, very strong fundamental demand growth, which you perhaps don't really see on the crude side. So in terms of how much chemicals will add, there are a number of ships out there, like ours which can go both ways. And so its a very simple commodity chemicals as you know volumes continue to grow out of the Mid-East Gulf and out of the U.S. gulf, that's obviously going to add to demand. But that's a relatively small sector compared to product. So we think the dominant growth is coming from within the product sector itself. So I hope that answers that question.

And on the supply side, if you can give your forecast?

Supply, its' really interesting. So far we believe fundamentally the yard that are your typical core builders of MRs are really holding back. I think there is a lot of other ship types they are building right now, but fundamentally I think they made mistakes two years ago in taking in orders as at a certain level of pricing, which has fundamentally bankrupted most of yards and ones that aren't bankrupted and taken over by the parents, right. So all the guys that made those decisions are all out on the beach now, right, or sitting in a darkroom somewhere. So there has been a fundamental shift in thinking, new discipline driven by the banks, which now control those yards or the parent companies that control them. On top of that, there is a set of new rules that kick in with heels that are laid after January 1, 2016, which fundamentally means now. It is very difficult to squeeze any more ships unless it's an absolute copycat design which wouldn't necessarily be ideal either. And so that has to do with the type of engine, the structural regulations and all those statements. And we think that's going to increase the cost of an MR by $1.5 million to $2 million per ship. So that's going to probably put the brakes on orders. Fundamentally the crane yards are being told by their banks, unless you can definitively prove you can make money on an order, we are not going to let you do it. And they are looking at other factors now as well that they haven't before. So we are feeling pretty good. We think that there will be ongoing ordering, but I think the other mistake people make about the MR sector is forgetting how big it is. So there is close to 2,000 ships in the MR sector now, if you look at full scope of the competitive range. And so you have to think of it in percent terms. The ordering activity so far this year has been very light relative to the deliveries. So the order book is coming way down and there could be an inflection point where all of a sudden this kicks in to the, kind of adds to the sentiment the psychology with charterers when they realize that the outlook for the supply is going to be quite muted against ongoing demand growth, very strong demand growth. And that's when you might see longer time charter rates really go up high.

Thank you very much, Tony. Congratulations again.

The next question comes from Charles Rupinski of Seaport Global.

Congratulations on the quarter and thank you for taking my questions. Most of my question have been answered with a very good color on the industry. I just wanted to maybe get an update or if there is any new updated thinking on this whole ballast water regulations and how that might affect things going into the second half and into next year? I know that you had made that point about potentially taking out or particularly taking out some capacity? And also may be discuss the 15-year-old type vessels and how that might differ from the crude market, if it's something that's more better for the product side?

Sure. Ballast water treatment is going to be a significant factor, starting again on January 1. Any ships that are going to drydock, after that date, fundamentally if they wanted to trade to the U.S. and once the international rights are ratified on a global basis. So, initially we thought that was going to result in a lot of ships coming out in the second half for drydock to avoid having to do that. We think on the margin that's going to happen, but rates are very, very strong right now. So we are not sure how much of that has happened yet. We think it's going to kick in, in the fourth quarter, which could further turbo charge or add to a very real tightness in the market of demand versus supply. And then going forward, especially for meaningfully older ships, if you are looking at spending upwards of $700,000 plus to retrofit the ship, that's a big number. And I think on the margin, that's going to push a lot of ships towards the scrap yard. I am not saying that's going to be dramatic and it's not necessarily going to happen in the really hot market, but these retrofits do take longer and they do take quite a bit of money. And there are also improvements so far. So it's one of these situations where I think there is a lot of uncertainty as well, which is going to cause people to try to make easier decisions like sending the ship to the scrap yard. So we think on balance, that's obviously going to be, from a supply standpoint. In terms of 15-year age, that is a meaningful cutoff for a lot of oil majors. They tend to turn a blind eye to it in the strong market and they tend to use it as a discrimination in a weak market. So you can always have a 16-year old ship that's in better condition than a 12-year old ship, but they need to be cut off. It doesn't mean those ships are going to go away because the reality is that ships in our class, typically get scrapped at around 25 years of age. So obviously they go somewhere and they can very often earn good money. At the same time, their invested capital goes way down. So I think a lot of particular private ship owners do very well by focusing on that age bracket. We think it is one of the contributors to underpinning the value of the modern, high-quality fleet, which is what we have.

Okay. That's a very good color and I appreciate it. Thank you.

[Operator Instructions]. The next question will come from Amit Malhotra of Deutsche Bank.

Yes. Thank you very much. Just wanted to follow up on some previous questions on capital allocation, I guess at the risk of beating a dead horse. I guess there is four avenues that you can go down, dividend, share repurchase, deleveraging and/or acquisition. And it certainly seems like you are thinking about going down all of those avenues. That sort of begs a question, I guess is how you think about divvying up the company's resources across those options? And I ask that in the context of typically I think managements and boards have certain philosophies in terms of how they think about value creation, vis-à-vis cash deployment. So if you can help us out with that, in terms of maybe ranking the options you have and compare and contrast those options? And I just want to focus a little bit more on deleveraging, because that option seems to maybe give you the most flexibility in terms of value accruing to the equity almost directly or right away, which can then also result in offering you more opportunities on the acquisition front as well.

Hi Amit. So to be clear, we didn't say we were going to do all four, but they are our four options for allocating capital. And in terms of our philosophy, we simply want to try to figure out how to maximize value and that changes over time. So at this point in time we think that one of the very good use of our capital and the retained earnings now is to increase the dividend. And we have also discussed the fact that we are very disciplined and very focused on quality and ship type and we are continuing to look for acquisitions. Share repurchase is in the cards and the debt will come down naturally. I think we are not yet at a point where we think it makes sense to voluntarily prepay a lot of debt but we will see how things play out.

Okay. All right. I will just wait a few months, I guess until you guys offer more details on that. Just one last question, if I may, on the business and the demand side. Just wondering if you have seen any delay or may be deferments of refinery turnarounds so far this year relative to maybe what you have seen over the last couple of years? I am just trying to see if there is may be some pent-up maintenance requirements in the system or is in your views just the demand side in terms of the refinery maintenances follow the typical seasonal patterns?

What we are hearing and by the way, its not a few months, it will another month or so and we will be out with the new dividend information. So anyway, in terms of refinery turnarounds, what we are reading and hearing is that a lot of refineries in U.S. Gulf are, they are spending so much money that they are just going to defer their turnarounds at least until 2016. So that's not how things are going to happen in the U.S. Gulf, but typically when that happens in other parts of the world, you start having a lot of unscheduled outages which then creates even more uncertainty and volatility and trading opportunities.

Got it. Okay. That's very helpful. Thanks so much for answering my question. I appreciate it.

Next, we have a question from Donald Bogden of Wells Fargo.

A strong quarter. I just had a quick question on your commercial agreement with the oil trader. Following the delivery of your last two MR product tankers into that agreement, what would the total number of vessels within that agreement be? And also, are there any cost efficiencies or decrease in management fees that come with having a larger stake in that pool?

So, it's not exactly a pool. It's a commercial management or a revenue sharing agreement and we will have a total of four ships trading spot and then we have got two on TC. So it's a total of six, four on spot and two on TC. Generally speaking, oil traders tend to have a huge amount of information and an advantage and so they tend to trade very well. So we are excited about that. That, by the way, will bring the numbers of ships that are trading spot in the MR sector up to 12 with the eight that we are trading ourselves. So in terms of cost, the terms are somewhat similar to other pools. So there is not necessarily a cost advantage for us to put more ships in there, but we do think that the performance advantage will be there.

All right. Well thank you for that color. That's it for me, guys.

And the next question comes from [indiscernible] of Sentry Management.

Hi guys. Just wanted to say congratulations on a great quarter. And I was curious more about share repurchase authorization. I know that you guys announced it at the end of last year and didn't get the opportunity to buy very much when you saw it attractive, but correct me if I am wrong, I think you got about $18 million still available on that authorization and it looks to me like you have had multiple opportunities to buy it at below book value and a dividend obviously is tax inefficient for your shareholders, whereas the opportunity to return some of that capital, it would seem like that would make more sense from a capital allocation standpoint, especially from your shareholders. So could you provide a little bit of color as to what the, I guess, whole back is on that repurchase authorization?

Yes. So we did put in place a $20 million plan. We, in hindsight, recognize that we should have had it in place from the start because there was a tremendous opportunity early and then we weren't really in a position to take advantage of it. Since then we have been monitoring but you are right. We decided not to do any more for the time being. In terms of whether it's better or worse for shareholders to receive dividends versus capital accretion through repurchase, I think there is more than one point of view on that. But we do take your point onboard.

And just to add to that, Casey, it's actually, in terms of parameters for buying back stock, it's quite difficult to buyback anything meaningful in terms of putting the money to work in terms of actually increasing dividend, we can certainly return more cash to shareholders and a greater volume over a shorter period of time. So buying back stock, as Tony mentioned, it's a three year program. It remains in place and it's a tool in a toolkit in terms of the company's ability to really go affect on a share buyback, it's can be quite complex.

Do you guys still have about $18 million remaining on that program?

Yes. That's about right, yes.

Okay. All right. Well, thanks again guys. I will turn it back.

And this concludes our question-and-answer session. I would like to turn the conference back over to Anthony Gurnee for any closing remarks.

Yes. Thanks very much, everybody for joining us on the call. Hope you have a good August and we will be back after Labor Day with some news on the dividend.

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