Ardmore Shipping Corporation (ASC) Q2 2016 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to Ardmore Shipping Second Quarter 2016 Earnings Conference Call. Today's call is being recorded and an audio webcast and presentation are available in the Investor Relations section of the company's Web site ardmoreshipping.com. We will conduct a question-and-answer session after the opening remarks. Instructions will follow at that time. A replay of the conference call will be accessible any time during the next two weeks by dialing 1-877-344-7529 or 1-412-317-0088 and entering passcode 10089375. At this time, I will turn the call over to Anthony Gurnee, Chief Executive Officer of Ardmore Shipping.

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

Thanks, Tony and welcome, everyone. Before we begin our conference call, I would like to direct all participants to our Web site at ardmoreshipping.com, where you will find a link to this morning's second quarter 2016 earnings release and presentation. Tony and I will take about 15 minutes to go through the presentation and then open up the call to questions. Turning to Slide 2, 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. And 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 of 2016 earnings release, which is available on our Web site. And now, I would turn the call back over to Tony.

So, turning first to Page 3 of the agenda. We are going to start with a discussion of our performance of recent activity, then an analysis and discussion of the acquisition of the six Eco-Design MR's, followed by a discussion of the product and chemical tanker markets, a fleet update, I will hand the call back to Paul to cover our financial results in more detail. And then, we will summarize and open up the call for questions. So turning then to Slide 5, the highlights. We are reporting EBITDA of $17.3 million and net income of $5.5 million equating to $0.20 per share for the quarter. We delivered solid spot MR performance at around 16,300 per day, continued tight control of operating costs and overhead expenses. We completed the sale of the Ardmore Calypso and Capella during the quarter for a sale price of $38.5 million and repayment associated with that was $26.7 million. We agreed to acquire six MR products and chemical tankers, which will be highly accretive to earnings and cash flow. We completed a public offering of 7.5 million shares raising $64 million in net proceeds which will be used to part finance the acquisition. And we are declaring today a quarterly cash dividend of $0.11 per share representing 60% of earnings from continuing operations. Year-to-date, this totals $0.27 per share, which is 35% above the same period a year ago. Turning out to Slide 6, for a quick look at our fleet profile. The main point is to hear is that, we have a high-quality fleet of modern tankers all built at excellent Korean and Japanese yards. The recent acquisition of six tankers that you can see shaded takes our fleet to 28 vessels with an average age now of four years. We continue to emphasize operating efficiency and fuel economy as a way of meeting our customers' needs as well as maximizing earnings for Ardmore. We will turn now to Slide 8, and take you through few slides highlighting some of the key points on the acquisition. The transaction is accretive to both NAV and earnings more on this later. We acquired the ships for $172.5 million in cash for an average price of $28.75 million per vessel. These in fact are sister ships for the Ardmore Endeavor, so we know the class, we know the ship and they fit right into our fleet. They are expected to deliver in September and October of 2016, this year. And as such they will be more or less fully deployed and operating for the fourth quarter. The acquisition price is very attractive and it was originated through a close commercial relationship with the seller. We believe this is a one-off acquisition opportunity unlikely to be repeated in terms of price. As the seller was focused on opportunities and other factors, and in fact, we both felt this was a win-win. This is a high-quality fleet of MR's built in South Korea. In our view, the most fuel efficient of designs and they have an average age of 2.5 years. And they are complementary to our 15 fleet and strategy. We have a senior debt commitment of $108 million from ABN AMRO to finance these ships. And overall, we are very pleased with the impact of this acquisition is going to make on our performance as you will see on Slide 9. So, on Slide 9, we are first going to highlight the accretion to NAV. While, we don't believe that net asset value is necessarily the most important measure for Ardmore stock. It is a metric that investors look at carefully and it's therefore important to highlight the NAV impact of the transaction. We viewed the acquisition is a relative trade between the stock price and the price of the acquired vessels. We bought the ships well below the implied value by our share price at the time, so the transaction was accretive to NAV with the same economic effect as if we have bought the ships in NAV and issued stock at a corresponding premium to NAV. To illustrate the point, we present a few scenarios for NAV. For the NAV of Ardmore pre and post the transaction. On the left hand side, let's assume Ardmore's NAV is $12 a share following the acquisition, if you use the implied vessel values for the acquired fleet, the transaction is $0.22 accretive. Applying the same methodology of $8 a share on the right hand side, which by the way is well below the current analyst consensus estimate as of NAV and it's really there to just provide rocketing. It's $0.13 accretive. So, under all practical scenarios, the transaction is accretive to NAV per share. Moving now to Slide 10, we highlighted the accretion on earnings, which is much more pronounced and in our view more relevant than NAV because we believe that this is what -- that is what the company earns on its assets that should really drive value. Based on a simple pro forma analysis for the second quarter, the one that we are reporting here -- [Technical Difficulty]

Sorry, guys. We are having some technical difficulties. We will be back in just a moment. [Technical Difficulty]

Pardon me ladies and gentlemen, this is the operator. We are trying to reconnect with our speaker. But, please remain in the conference, remain connected. You will hear music. Once again, thank you for holding. We are attempting to connect with our speaker. Thank you.

Okay, good. Let me first of all apologize and explain that we had another delivery this last week, which was actually Paul Tivnan [indiscernible] so, congratulate him, but that's why I'm here on my own and blew the Slide turns here or something anyway. I'm going to go back to Slide 10 and start from there, Paul give me the thumps up, is that right? Okay. Good. All right. So we move back to Slide 10 or forward, we've highlighted the earnings accretion, the accretion on earnings which is much more pronounced, okay, sorry. So on Slide 10, we've highlighted the accretion on earnings which is much more pronounced in our view more relevant than NAV because we believe that it's what a company earns on its assets to really drive value. Based on a simple pro forma analysis for the second quarter, if the six acquired vessels were in operation for the fourth quarter, we would've earned an additional $0.05 per share over the full share account for a total of $0.25 which represents accretion of 25%. In addition the dividend would have been 27% higher at $0.14. On Slide 11, we highlight the cost efficiencies and reduced cash flow breakeven associated with the acquisition, which in large part explains the transaction accretion and highlights the importance of cost efficiency and earnings power for a company like Ardmore. Our overhead will not increase with the additional vessels and as a consequence overhead per ship decreases quite substantially. You can see that we breakout commercial cost from the remainder of overhead because these costs in other companies are often deducted from the revenue line in the income statement as pool fees and commissions but that's not the case for Ardmore. On the right side of the slide, you'll see that our cash flow breakeven per ship decreases by $620 per day, maintaining a low cash flow breakeven is important for earnings, but also for risk management, efficiency pays off in all market conditions. It's worth nothing that our cash flow breakeven numbers include full debt service of interest and principle, in fact, our net income breakeven post acquisition will be slightly lower than the cash flow breakeven. Our net income breakeven post Frontline acquisition of the six ships is $13,500 today. Turning now to Slide 13 on the product tanker market, our MR spot TCE performance softened in the second quarter to $16,300 from $19,000 in the first quarter. We believe this is largely due to temporarily reduced activity particularly on long-haul routes, for example to West Africa and South America. There is continued strong underlying demand for product transport, but inventory levels are at all time highs and as a consequence, refinery utilization and Pad-3 for example is down year-on-year and 2Q it averaged at 91.9% compared to 94.5% a year ago, but that's up actually from 90% in the second quarter 2014. The MR spot market is expected to remain softer in the third quarter, but should improve again as we move into winter market. We'll talk more about that a little later. Beyond this short-term softness, the outlook is very positive as MR supply growth is decelerating and underlying demand growth remains strong. The MR order book is currently 6.5% of the existing fleet which is the lowest we've spent in at least 20 years. So far this year 79 MR's are delivered and 12 have been scrapped resulting an annualized growth of 6% for the first half of the year. But, we estimate that 36 ships remained to deliver in 2016, which should result an annualized growth of only 3% for the second half and importantly the order book is expected to be down to around 5% of the existing fleet by the end of the year. Okay. Turning to Slide 14, we want to reiterate the trading complexity associated with MR's and the pitfalls of using spot rate indices to judge performance. As we're sure you're all aware MR trading patterns are very complex that looks straight worldwide on multiple roots and triangulation so just focusing on for example the Atlantic TC2, TC14 triangulation can be quite misleading. As a consequence to get a feel for actual trading results in the MR sector, you need to take an average of rates on wide selection of roots such as that shown here from one ship broker in order to have a more accurate view on the market. But even then indices may understate earnings that they're not calculated optimal speed or factoring actual port times and costs to merge et cetera. Our view is that companies with good chartering teams and modern fleets such as Ardmore are currently earning around $14,000 a day spot and that rate should be in the $14,000 to $15,000 range and so we start to have a winter market uplift we believe sometime in late November or early December. But, turning to Slide 15, at the risk of being repetitive we want to highlight again the demand drivers for the MR product anchor segment. We normally don't include these slides in the earnings presentation, but feel that the demand and supply outlook is so compelling and is such odds with current stock market sentiment that it's worth emphasizing on the call today. So starting in the upper left of Slide 15, Seaborne product loads are about 23 million barrels a day and you could see where the main flows are running to. On the lower left, you can see the refinery capacity is growing at about 1.4 million barrels a day which is very close to the growth in oil consumption, of course virtually all oil consumed has to first be refined so that growth in refining capacity is no surprise. So this gives you a first indication of product tanker demand growth. Divide the 1.4 by 23 and you get 6% probably higher than actual volume growth because not all of the new volumes are exported by sea, but on the upper right you can see the long-term trend volume growth 4% plus. But, this is not the full story, if you look at the lower right we make some points there that explains that this is just volume, it does not factor in voyage distance or time consumed in increasingly complex operations, so it's just blending and parceling. When these factors are routed in, you get 5% to 6% ton mile demand growth for product tankers. So we feel that the demand growth trend is very much intact. Moving then to Slide 16, the supply outlook for MR's is increasingly attractive. Here we show 5%, the top steady line is 5% demand growth and that's shown the contrast with the month-by-month net fleet growth which is scheduled deliveries plus actual projected scrapping. As you can see from August, which is now vessel deliveries dropped sharply and demand growth starts to significantly exceed supply growth. The shaded area, the gap between demand and supply keeps growing as long as ordering activity remains low. If this continues we believe it can only end one way and that's in a supply squeeze. Remember that the MR fleet now stands at around 2000 vessels, if demand growth is 5% then we need 100 ships delivering every year actually we need 100 ships more per year net of scrapping so we probably need 110 to 120 ships delivering in ordinary market conditions. By the end of 2016 the order book will be down to around 90 MR's and net fleet growth for 2017 will be less than half of that required to meet ongoing demand growth. Turning now to Slide 17, we'll have a look at the chemical tanker market, for the last couple of years we've seen our chemical tanker fleet lag our MR fleet in terms of earnings performance, but now they're coming into their own not only because of chemical tanker sector is doing relatively well, but also because the chemical tankers we built and that it delivered over the past years are excellent performers. On average for the rest of 2016, we anticipate these ships will earn $16,000 to $16,500 a day versus MR's at $14,000 to $15,000 a day as previously discussed. The market strength is attributable to increased volumes of commodity chemicals including methanol, ethanol and paraxylene. Our chemical tankers traded an increased proportion of chemical cargos in the second quarter reflecting a stronger chemical market relative to products. If you recall perhaps on the last couple of quarters we reflected on the fact that roughly half the time was spent moving CPP now they're back to moving roughly half the time moving chemicals and then here you can see 21% veg-oil and 29% CPP or clean petroleum products. So overall, the chemical market is expected to remain positive driven by underlying demand growth and increased petrochemical fluids out of the U.S. and Middle East Gulf. Chemical tanker fleet growth is expected to be relatively moderate, the order book stands at 14% of the fleet is measured by deadweight and with 2.7 million deadweight delivering throughout 2016, we expect fleet growth of around 6% net of scrapping. Thus, we expect the order book to be down to around 8% of the fleet by the end of the year not as low as MR's, but still favorable and trending in the same direction. Now turning to Slide 19, we have four vessels still on time charter and the remainder of the fleet is trading spot either directly or in pools. We've had 40 dry dockings, sorry, we've had 40 dry docking days on three ships in the second quarter and we have one dry docking scheduled in the third quarter. We completed the sale of the Ardmore Calypso and Capella during the second quarter and as we've discussed we've agreed to acquire the six Eco-Design MR's, which will result in revenue days increasing by 23% in the fourth quarter of 2016 as compared to this upcoming third quarter and by 15% in 2017 as compared to 2016. And with that, I'll hand the call back to Paul to discuss our financial performance.

Thanks Tony. Starting with Slide 21, we are pleased to report a steady financial performance with a net profit of $5.5 million and $0.20 per share for the quarter. Our strong profit reflects a good chartering performance across the fleet particularly on chemicals and our continued focus in operations efficiencies. The company reported EBITDA of $17.3 million which represents an increase of $0.5 million from the second quarter of 2015. Revenue was $39.7 million for the quarter. Our operating cost for the quarter running at 6215 per day across the fleets OpEx for the Eco-Design MR was 5704 per day, while the Eco-Design product chemical tankers came in at 6109; our Eco-Mod MR's came in at 6439 per day and we expect total OpEx for the third quarter to be approximately $14.9 million. Depreciation and amortization for the second quarter was $7.9 million and we expect the third quarter to be approximately $8.3 million. Corporate overhead costs were $3.6 million in the second quarter, which includes the one-time cost related to the offering of approximately $200,000. We expect our corporate overhead to be approximately $13.7 million for the full year 2016. Our overhead includes commercial management cost of $1.5 million annually, which in many situations where the other company is incorporated into net revenue. This sees our comparable overhead $12 million or a full year which works at approximately 1200 per ship per day across the 28 ship lease. Our interest and finance costs were $4 million for the quarter, which includes $900,000 of amortized deferred finance fees and we expect interest and finance cost in the third quarter to be approximately $4 million which includes amortization of deferred finance fees of $600,000. On the middle of the slide, you will see a reconciliation of net income to earnings from continuing operating. We booked a net gain under disposal of the Calypso and Capella of just under $500,000 and stripping this out, results in earnings from continuing operations of $5 million and $0.18 per share. Turning to Slide 22, we take a look at charter rates for the quarter, our charter rates for product tanks are not at the same levels as reports in 2015 the market is well above 2014 and continues perform driven by strong underlying fundamentals. We have 13 MR's operating in the spot market for the quarter and in an average of 16,302 per day. Overall for the fleets we earned an average of 15,645 for the quarter and 16,661 for the year-to-date. Splitting out for the very ship types across all employments time charter approvals and spot, we have 9 Eco-Design MR's in operation which earn an average of $17,254 per day for the quarter and $17,495 for the year-to-date. Our 6 Eco-Mod MR's, they are in $15,376 per day for the quarter and $16,303 for the year-to-date. As of today our spot MR's are earning approximately $14,000 per day the voyage in progress, but approximately 40% of days booked for the third quarter. Our Eco-Design chemical tankers are earning average of $17,547 per day in the second quarter and $17,350 for the year-to-date and our Eco-Mod chemical ships earn $14,468 per day. As of today, our Eco-Design chemical tankers in pools are averaging approximately $15,500 for the third quarter with 40% of the days booked for the period. Overall, we are pleased with our performance in the second quarter, which is achieved despite some softness in the charter markets. Again to point out, Ardmore has substantial upside potential and every $1,000 a day increase in rate across the 28 ship fleets equates a $0.30 per share in earnings which equate to an extra $0.18 per share in the dividend. On Slide 23, we have our summary balance sheet, which shows at the end of June our gross debt was $388 million; net of deferred finance fees was $377 million. We have total capital of $805 million and cash on hand of $103 million. On the right hand side, we have a pro forma balance sheet following delivery of the recent acquisitions. The transaction is fully funded and we estimate we will have $66 million in cash in net working capital and gross debt of $486 million following delivery of all vessels. Our gross leverage should be approximately 54% and our net leverage after cash should be 52% in October. Turning to Slide 24, as you all know we recently completed the sale of the Calypso and Capella, which reduced our debt by $26.7 million in the second quarter. We are fully funded following the acquisition with $108 million commitment from ABN AMRO, which we expect to draw in September and October. All of our debt is amortizing and following delivery of all the recently acquired vessels our debt amortization schedule will be $46 million annually so we continue to delever and strengthen the balance sheet. And with that, I would like to turn the call back over to Tony.

Thank you, Paul. So in summary then we're reporting strong financial results with net income of $5.5 million and EPS of $0.20 for the quarter. There has been a reduced activity in the product tanker market particularly on long-haul, voyages as a consequence of high product inventory and reduced refinery utilization. Meanwhile our chemical takers though it continue to perform very well. Beyond the short-term softness, the product tanker market outlook is strong driven by growing oil consumption in the ongoing secular trends of refinery dislocation and trade complexity. The supply outlook is increasingly favorable, the MR order book is now at its lowest point in over 20 years and is set to decline further by year end to around 5% without additional ordering which we believe should result in a significant supply squeeze commencing in 2017. Our recent acquisition of the six Eco-Design MR's will be highly accretive on earnings and cash flow and on top of this we're well positioned to take advantage of improving rates with every $1000 of the increase across the delivery fleet equate into $0.30 in EPS and $0.18 in dividends. And we're declaring a quarterly dividend -- cash dividend of $0.11 a share based on 60% of earnings from continuing operations and the [drill] [ph] program is open and available to all shareholders. And with that, we're now pleased to open up the call for questions.

[Operator Instructions] The first question comes from Ben Nolan with Stifel. Please go ahead.

Thanks and nice quarter guys. And actually that gets to my first question. The spot rates that you guys put up particularly on your Eco-Design MR's were pretty good and sort of better than we have seen elsewhere. Is it just one or two good voyages or what sort of would you attribute the out performance and its not the first time either I mean what -- what's the secret sauce?

I don't think we plan to have any secret sauce, Ben. But, look we've got a great chartering team they work hard. We're usually in the top tier of companies report MR earnings and that's where we intend to say. Interestingly enough the Eco-Mods are doing much better than Eco-Design for a period of time. And it's simply a matter of where the ships trade, it's purely coincidental on what they're doing. I mean in reality there should be about -- in the current market there should be about $700 a day difference between the two and beyond that its really kind of luck of the draws to where they're trading, and then, what voyages they get. So look I mean -- thanks for the recognition on the chartering performance, I think we're not alone in doing well, but that's -- it's also the value of having a modern coherent fleet.

Sure. And then, secondly something that you guys did pretty actively in the -- well, somewhat actively in the first quarter was buying back shares then obviously did the offering in June, it is subsequent to that the shares have sort of traded below the offer price. At what point do you think about stepping back into the market to buy back shares again?

Well, we do have plenty of capacity under the existing plan and its one of the many potential uses of cash. So again, we're not -- we never tip our hand with these things, but we acknowledge what you're saying.

Okay. And then, the last thing from me was Tony, you mentioned that and maybe I missed it, but you mentioned that you'd expect the third quarter to continue to be a little bit soft, but then had expectations for fourth quarter to get materially better. What is the -- or what are they, I suppose the driving factors that give you give you confidence that the market would turn up in the fourth quarter?

Well, I think part of it has to do with a lot of refinery capacity coming online. And I think we see crude oil prices trending down right now which is going to make it increasingly attractive for refineries to run at high rates and to process all that crude when they come back online. So, we do anticipate there is going to be an incremental flow. At that same time, we see kind of important markets like West Africa that have been very quite for the last couple of months are coming back to life, South America as well. And those long-haul trades are enormously important to driving overall ton mile demand. And underlying that, we are dealing with kind of 4% to 6% demand growth annualized.

Okay, great. The last thing, I was going to say is just congrats to Paul and maybe I'm sure you are well rested.

Thanks Ben.

The next question comes from Amit Malhotra with Deutsche Bank. Please go ahead.

Yes. Thanks. Well, let me just echo Ben's comments and congrats Paul on the addition to dividend household. Tony just had couple of questions here. At the Analyst Day, you said you expect normalized earnings power of the company to sort of reflect MR rates at the $70,000 to $80,000 per day level. And based on my sort of back at the envelope map kind of translates to about $1.20 per share and also in annual EPS on a fully delivered basis or $0.30 a quarter? Is that sort of where you see the earnings capacity of this company as it stands today? And also given the tightening of the market, MR's way better than I do. They are not super immortal asset class but obviously, we seem to be at the bottom of the trading range here. And so just with the tightening do you expect perspectively how much above that long-term run rate, do you think MR rates can go over the next year or so. So we can get some color in terms of what type of earnings momentum you can show from here?

Sure. I think there is a view that MR's are not particularly volatile. They don't have a lot of upsides. But people conveniently forget about the fact that the invested capital in an MR is about a third of VLCC. So, the absolute rate level may not be exciting but the cash flow to invested capital can be. So, it's a smart one thing I wanted to mention. But, I honestly think that what we are looking at perspectively is a -- it's a classic shipping upturn not what we had in the last two years. And the last time we had a classic shipping upturn was in the mid-2000s and how high that rates go then I think is really the clue as to how high they could go next time.

Okay. I will get my spreadsheet out and take a look at that. Couple of follow ups, just one on asset values as it relates to your net asset value, the discussion or slide. It seems like your own assessment of your own NAV is -- it appears to be based on values that are above where you made your most recent acquisition. So I'm just trying to understand, I know there maybe some special circumstances around that particular deal. I understand it took a while. But, I'm just trying to understand because it's not a super liquid market and it's some time hard to clean with the real values are. So, if you can just compare as to the real the deal that you just did versus how we should think about analyzing the true value on our NAV basis?

Good question. I think the answer wise and the fact that even though this wasn't a particularly large transaction, it was strategic for us and for the seller as well because they were redeploying into their core business. Actually, they were buying at a level which was also an attractive relative trade, selling the MR's at this level. So in a way we are leveraging half of a -- perhaps even more unique opportunity in the VLCC sector through the transaction. So as a strategic transaction, I think when the market is strong, you can see block suites in -- strategically oriented transactions get done at a significant premium to individual vessel sales. And I think under these circumstances and in a more challenging market and one where there is universally no liquidity. You can see the opposite happen, which I think is really the case here. But again, it kind of -- the first domino to follow was in the VLCC sector. So we are not aware of anything else, it's been negotiated or discussed at anywhere near these vessels. The whole concept of NAV is based on broker valuations which are willing buyer, willing seller. And so, I think there are -- there are -- I think on both sides, you got a market which is capital constraint. And so there would be more buyers if the capital was available. And then, in terms of selling, you've got companies that are being pressured and again because of the overall shipping market conditions not just tankers or not really tankers, but relating to other factors. And the fact that they are highly motivated to get liquidity anyway they can. So short answer is, I don't think the transactions happening today are really market clearing prices, willing buyer, willing seller. I think these are skewed downward because of the liquidity and we would like to feel that we are doing the right thing by taking advantage of that.

Right. That's helpful. Thanks. One last quick one for Paul, can you just update us on the net income breakeven pro forma for the six MR's. I think based on my math; I have about $13,500 a day from a net earning standpoint. If you could just offer color there?

You are bang on. I mean that's exactly the number we have. And the cash flow ones is slightly higher because of the mix of deprecation and we are actually paying off a little bit more debt than we are depreciating. So, I know your numbers are bang on.

Okay. Great. Thanks so much guys. Appreciate it.

Thanks Amit.

The next question comes from Doug Mavrinac with Jefferies. Please go ahead.

Thank you, operator. Good afternoon guys. Just had a few follow ups for you. First, when I looked at your 2Q numbers the thing that jumped out at me the most was the daily earnings that you got in your chemical tanker fleet. Can you provide a little bit more color Tony; I know you talked about the specific commodities and then also the geographic regions where you saw the up tick in demand. But, can you shed some light on whether you get the sense that's an increase in production capacity in those regions or simply an increase in existing capacity utilization that was the source of the up tick in demand. And then, also given kind of what's expected in terms of chemical production capacity going forward, how do you think the strengthening environment, and then, kind of think about strategically employing these particular assets whether you are going to put them in the chemical trade, the NOR trade et cetera. So, I guess first kind of this more specific source of the demand strength in 2Q and then also kind of strategic ideas in terms of employment for these assets in your end?

Good. Thanks Doug. That's a good question. So, we don't trade the ships ourselves, they are in a pool with many other ships that are similar. And I think the strength of that pool is that they are really modern and fuel efficient ships that are focused on overhaul simpler commodity chemicals. So I think that part of the chemical sector has been doing particularly well. I think that is in stainless steel. There are increased flows out of the U.S. Gulf that relate into things like methanol but also out of the Arabian Gulf. And there has been some dislocation because some of this volume came on kind of unexpectedly soon. So, the market was adjusting to it. So, I think that we did get a very nice bump sort of in the -- early middle of this year. We think overall, the strength is there and it will continue maybe not continue at those levels. But, also I think it's worth highlighting the fact the ships that we built are eco designed, they are very, very user friendly and flexible. And so they are earning substantially more than an older model, let's say a 10-year old ship of that type would have been right now.

Right. I got you. Because it's already earning 17 grand a day and we see what's happening at 2017, things could get quite interesting it appears.

Yes. And let's -- I think I guess my main message is, let's not forget about the fact that we have got six Eco Designed chemical tankers that aren't to business and that market had led the tone and it could very, very well.

All right. Got you. Thank you, Tony.

And we expect to do well.

Thank you. And then, as it pertains to your presentation this morning, you are saying but I found those interesting was, you guys actually took a stab out forecasting supply growth in the MR market for 2017. And so I'm just curious as far as some of your assumptions that went into that 2% to 3% conclusion in terms of -- you guys do a great job at identifying the specific orders at specific shipyards. What were kind of some of your slippage assumptions, what were some of the basis or the basis for your scrapping assumptions, so I'm trying to figure out kind of maybe what that 2% to 3% forecast is predicated upon or maybe where some of the rest of that number.

Well, I think the slippage is kind of rolling at around 20 ships. So we kind of absorbing that every month. And so we think that of the ones that are theoretically on books deliver this year maybe 15 or 21 that will deliver into next year. But, we are talking about an ongoing process here. And it's just simply if you are going to the collection database and start counting deliveries by month that's what you get. We also scrub it down to take out all the stuff that we know is not real. Scrapping is the interesting bit. Typically, we think on average about 25 ships are to be scrapped that will run at a higher rate when the market is weaker and it will drop down as it last year when the market is stronger. So I think that is a factor and it has to be watched as well. So obviously, as the market strengthens materially, you will see scrapping diminish, but I think we are into a phase now where that's not really the issue, the issue is the fact that there are no orders taking place because there is no money, the yards can't take the orders and two out of the three big yards in Korea, they are just not capable of taking orders right now at least the ones that build MR's. And on top of that, you do have technical issues relating to which we talked about before relating to the new engine type et cetera. So, it's actually quite astonishing to see how rapidly the order book is depleting. And simply, we are just saying out it's on the books and when it's scheduled to deliver, I don't think these yards are going to deliver any faster than they are currently showing. It could be a lot slower. So, if you just run the math and you get to around 2% to 2.5%.

That's -- like you said astonishing. And then, just my final question, this is more of a two-part modeling question. First, since you guys do consistently outperform the industry benchmarks, I just wanted to confirm that I heard correctly that quarter-to-date, your MR's are averaging about 14 grand a day, is that about right?

That's right, Doug.

Perfect. Thanks Paul. And then, finally Paul, as it pertains to the six MR's to be delivered in the September, October timeframe, I know this is going to be very detailed. But, do you have a sense of how we should expect that those deliveries to take place if it's half in September, half in October, the first part of September, towards the end of October just because it's such a sizable transaction, it does impact your earnings and therefore, your dividends. So, do you have like an idea, or can you share with us kind of how you are thinking about when those ships should deliver to you guys?

Hi, Doug. I will take that one. So they do have a delivery window, three ships in September, three in October. I think they can deliver more of them earlier in September, if they want. So we will see what happens. It really depends on how they are planning out the last voyage. And so -- but, I think you can assume that like -- you probably just use September 30 or October 1 as the start date for all six of them and that will be roughly correct.

Perfect. That hits the button. Thanks for the time Tony and Paul.

Sure.

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

Thank you. Good afternoon, guys. Tony, I wanted to ask you about chartering strategy something you never utilized and you've obviously just added to your operational leverage to the acquisition of the six ships. But, given the way that you've laid out your outlook for 2017 and beyond and given the fact that you are probably going to be integrating these six ships and sometimes, so actual acquisitions maybe somewhat limited going forward. Have you thought about chartering in especially as there maybe some disconnect from less well informed owners right now and the charter rates maybe a little bit lower than you are actually achieving in the pools?

Yes. I mean, it's a good point. And obviously, other people are doing that and they are benefiting from it. It's currently not really part of our strategy. But, that may change over time.

Okay. And then, the other thing is, obviously, you've got the 60% payout ratio. I think there has been some mongering a little bit in the market about assets value coming down and banks being a little bit more restrictive on what they are enabling companies to distribute? Clearly, you've gone out and raised another 108 million facility for the acquisition of the six ships. And the banks must have incorporated what you pay for these last six MR's into their processes. So, how do you feel about the ability to maintain the 60% payout ratio and have the banks, I guess confirmed both through words and actions that they are comfortable with this as well.

Yes. It's a -- they are comfortable with it, 60% of earnings, so they recognize that if the market is really weak then there won't be a dividend that's fine. But, they also recognized that this transaction really strengthens economically strengthens the company -- strengthens the balance sheet reduces or breakeven. Actually on a market value basis this reduces our leverage. And as we discussed in detail reduces our cash flow breakeven, which means in any given market we're generating more cash.

And then with that remaining 40% I know the buyback question has been asked, but more importantly are you targeting in bringing the total leverage back down to 150%, I guess it stands at 54% pro forma acceptable?

Yes. I think we -- I think as rule of thumb, if we're in a good market, we would want to gradually delever. And then, we do the opposite when we see opportunity. So yes, we're not changing our strategy when it comes to financial risk or leverage.

Great. That's all I had. Thanks Tony.

Yes. Thanks.

The next question is from Mike Webber with Wells Fargo. Please go ahead.

Hey, good morning guys. How are you?

Good morning, Mike.

Tony just a couple of quick follow ups specifically around demands. If I look at maybe at a high level if I look the Slide 16 and kind of here the way out expectations to do every scrapping, and then, you kind of laying out or what I'm assuming is just kind of a base line I guess for forward demand of 4% to 5% and then you're grossing that up by a 400 basis points for refinery dislocation. What -- if you look out through 2016 and 2017 where do you see the major risks to those expectations on either the upside or the downside specifically around -- in and around Europe as we start to look at either slow one unwinding of Brexit or what have you just, when you think about that 4% to 5%, the worthy odd even that ends being a bit heavy?

Well, I think the 4% or 5% is an underlying trend -- kind of medium, long-term trend. Obviously, in the second -- right now we're experiencing second and third quarters. We're dealing with the inventory build or the excess inventory levels. So, that will play out in the Europe as well as North America et cetera. But, it seems like everybody is comfortable even post Brexit with some pretty robust assumptions on oil consumption growth. And then the fact is that that's going to have to be met through as additional refinery activity, which is going to tend to happen in places that are remote from the point of consumption and therefore export oriented. So, I think that's the real story. The other real part of the story is the fact in the last two years, we've had this extra layer of demand that was created by price volatility, poor congestion, et cetera. And we think that we're kind of well along to getting out of that leaning ourselves off of that right now. And that's part of the plan. So without getting too granular and talking about orbs and inventory builds that limits in storage and that kind of thing. To us that's a big picture. The things -- right now because we're kind of working out way out of that oil market that we've enjoyed. But underneath is very, very strong, oil consumption growth and therefore ton mile demand growth.

All right. It's an important question all right because you think about the market telling us by asset value and everything else but near term cash flows are going to be a bit weaker historical context would say 4% to 5%. So I guess that granular question of how long does it take inventories to unwind and what that sequencing looks like, it's pretty key for the next kind of year to 18 months. So I guess maybe a better way of looking at it is, when you look at maybe the landscape for the next call it six or 12 months and as inventory starts to wind down as you start to see some kind of normalization on some of these trades. What is that sequencing look like and which again, which are or which way do you expect to start to recover first, which should we be looking at for us to think okay we're going to start moving back close to that historical range?

Well, let me just try to answer that in a few different ways or reply in a few ways. So, I guess the first point is that, I fully agree that I think the market is telling us something. But I think the market is not always rational especially when it comes to shipping in terms of the equity markets et cetera and the asset markets and the reality is that I think that asset values are influenced today more by the overall picture in shipping and the capital and the scarcity of capital than anything else certainly as it pertains to the MR sector. It turns out how this is going to play out. Again, we're big believers in the underlying secular trends and the fundamentals. I think the reality is that there are -- the real interesting peaks and troughs are around voyage distances. And so I think back to kind of mid-2014 when we had a real pull back in rates. When we were looking at what was happening then it was just a real lack of long-haul business, right? We're not talking about arbitrage driven stuff happening around the world, just talking about for example down to South America or Africa et cetera and so we're going through that right now. So I think if I were looking for kind of trying to read the tea leaves at any given point in time. I would be looking very carefully about where those voyages are heading. And if I see a lot of ships going down to South America or West Africa or something that has a tremendous impact on ton mile demand on very immediate basis. So to me those are the answers. I mean it's -- I think the real -- really exciting right now is the supply side. And the irony there is that the more concern there is about the outlook, the more constraints the situations going to be in terms of ordering activity. And the more difficulty that the green shipyard face, the more they're going find themselves to be just incapable of taking in orders or even delivering what they have and [indiscernible] for example. So I think that the demand growth is something that we maybe hold a default, it's kind of an article faith. There are short-term ups and down and we know that's very important to investors, if they're trying to time the market. But for us, we're looking at oncoming strong demand growth and everybody looking one way while the real action is the other way and that's what's happening with the order book.

Right. Right. Okay. Just one more from me and I'll turn it over. And I think I asked this last quarter as well. But, you mentioned in your prepared remarks Tony that the Frontline deal was more or less a one-off. And there are some different motivations and kind of a motivated seller there, relative to say six months ago, are you seeing more deals for on block transactions, just in general today, be it private or public, just given the fact that assets have re-rated a bit, and albeit partially from the lack of capital or partially from re-rating of demand and there is probably a ratio in there somewhere. But just, as a movement in asset value is that an impact on the kind of deals you guys are seeing right now specifically the larger kind of game changing once?

There are some distress related deals that are kind of out there that are kind of rolling along and they're -- they'll may eventually get done may be not. But they always have a lot of issue surrounding them. So I would be or them to be representative either. But, I would say overall the volume of -- the sort of list of potential acquisitions hasn't really moved along. So I think that with the more modern vessels, I think anybody is kind of an economic stake in them just looking at the price, which is right in front of them as we think in the next kind of a year or two, three years. So they're not really willing or ready to throw the towel. And there are some kind of middle kind of sort of 7 to 10-year old ships that that might be under a lot of pressure to go to get sold. But, they're not necessarily ships we would look at, if they're not in the condition that we expect or don't have the performance growth. So I don't know that's kind of rambling answer that I don't think things have changed all that much.

No, it answers the question. I appreciate you saying that. No, that's all I've got. I appreciate it. Tony, thanks.

Thanks Mike.

The next question is from Magnus Fyhr with Seaport Global. Please go ahead.

Yes. Guys. Just had one question. On the chemical tanker market. I mean chemical tankers rates have come a long way in the last two years. And I noticed you outperformed MR rates in the 2Q and 3Q you booked the rates higher than the MR rates. You think how this performance is sustainable or I mean, you also mentioned that there is some dislocation there on the second quarter that resulted in and stronger rate for the chemical tankers.

We think they have come off. But, they are still at a very nice levels. So we -- but we also think that winter market and the chemical sector is often very good as well. So, I think we would expect to see things pick up again in the winter, but from a higher level than we are talking about with MR's.

Right. And do you see any risk with some of the swing shift [indiscernible] two ships coming in back into the chemical trade; you mentioned your percentage had increased here in the last quarter?

Evidently, it's not having a huge impact, so, yes, I mean it's -- yes. There is a small amount of swing tonnage. So, I think that, yes, that's an interesting question. Arguably that has more of an impact on the more specialized ships because they are the ones that have the cargo taken away from them.

Right. And you see continuing opportunities with some of these bigger ships taking cargos from the Gulf to the Far East, I mean creating up tonnages for your smaller ships?

Well, the smaller ones we now have are 25, which are pretty fairly workforce global type assets in the chemical trade. So they won't -- something slightly different to the bigger ones. But, they might go the same distance.

Okay. Thanks. That's all I have.

If they take smaller parcels -- they take smaller parcels and do more discharges.

All right. Great. Thank you.

[Operator Instructions] The next question is from Fotis Giannakoulis with Morgan Stanley. Please go ahead.

Yes. Hi, gentlemen, and thank you. Tony, I want to ask to follow up on your capital allocation question earlier. And given the fact that earnings have actually been higher than most analyst and market expected, you accumulate a lot of cash, if the market develops the way that you are expecting, I think that this 40% of your earnings that you will be accumulating will be a quite substantial number. You mentioned earlier that these acquisition is a one-off acquisition and from where I understand, it's not going to be very easy to find such a good price in the future. Are there any sorts of potentially buying back shares in a meaningful way?

Hi, Fotis. Can I just make an observation or point that when we did the Frontline transaction, we did use $10 million of our balance sheet cash in that transaction. So, in fact, that was money that we basically freed up from the sale of the Calypso, Capella. So, we have redeployed that we think successfully and accretively. And so, if you are kind of looking at what our cash balances might have been before the transaction, they are going to be $10 million less a consequence. So, we are using the funds. In terms of, how we are going to use that going forward. Again, we got a many in front of us that involves share repurchase, just building up cash buying more ships paying down debt and we just have to figure out at any given point in time, what's the best use. And we don't get universal acclaim in that and kudos for share repurchasing, people say why are you doing that? You are decapitalizing the company. The problem is you're too small. You should take the opportunity to grow. So it's not a universally admired or a desired thing.

Okay. Thank you. I see that from Slide 14, the rates that you show there I believe from Clarksons, they are quite lower than what you have fixed your vessels right now. And I only see that the Korean relay the charters being at higher level. What is going on there? And how have you managed to get this premium that in the third quarter? And if you're going to also give us your estimate of what is today the time charter number that you can fix your vessel under the period market?

Okay. So, maybe one way to explain this is that. The MR business more than any other sector rather than maybe chemical is a trading business. It's really freight trading. And the result that you see there is, first of all, probably very, very standard assumptions on port times and cost et cetera. But, it's also what a computer can do. Okay? And we've got a team of six people in chartering and we pay them a lot more than a computer would cost. And we do that because they are effective at trading assets. And we are not the only company that does this. This is how the business is done. So, if weren't outperforming, I would be very, very upset. In terms of what the one-year TC rate would be today. Again, I think there is a risk-off mentality in the time charter market as well as everywhere else. And so they are not very impressive at the moment. But, we can probably get 15.5 per year on a Eco-Design MR, which isn't great but it's probably a little bit above current spot trading levels.

Thank you very much Tony.

The next question comes from Noah Parquette with Ardmore.

I guess, I work with you guys now. I just -- sorry, it's going long. I rather would be quick. You did a good job of laying out, how you think the market is going to be over the next year or so. You described it, I think the good way to put it, classic shipping upturn. It kind of reminds me a little of you season like the fall 2013, it's almost too obvious, it's like too good to be true. What gives you comfort and fact that owners are going to go out and order ships and kind of build this upturn away?

Yes, Noah. They definitely would, if they could, but they can't because they don't have the money. They -- in the public sphere, I don't think any of us are ready to run out, order a bunch of ships. In the private sphere, most private companies that own MR's also and other ships like bulk carriers, containerships, offshore et cetera, so they are -- husbanding their cash for other reasons, defensive reasons. And there is actually a lot to buy second hand, so there won't be any need particularly. On the shipyard side, we tried to stay as close we can to that even though we don't have ships under construction right now. I think that's been covered [indiscernible]. So, I will go over it, if you like. But, you just have to look at the situation with STX or even a [Hyundai Lepo] [ph] where they are just not prepared to drop their price ideas to a level which is going to encourage ordering activity. And I think perversely now I think if they were to drop the price down a lot, I think that would cost people to stand away rather than actually go and go it. So, and then there are other minor issues -- tactical issues in terms of ship design et cetera. But, the main reason is that, that is not the money and that is not the capacity or the willingness among Korean creditors or shipyards to engage in ordering activities it's full of the breakeven.

Okay. And then, again, really quickly, you talked in the past about some times your ships trading inefficiently or changing destination or port congestion. There has been some tanker on gas level features in the Europe; can you talk a little bit about what you are seeing anecdotally about given the glut of products?

It seems overall, relatively quite at the moment. So now, I ironically, I mean I heard a really interesting view of what's happening which is that basically in the crude oil business right now, the drains are clogged meaning that refineries aren't taking in any oil. And that will change and when it does, it will be [indiscernible], we will pick-up significantly and we will -- if that -- it's accompanied by [indiscernible] then we could see a lot more arbitrage activity. But, at the moment things are -- I wouldn't say are really quite, but it's really quite at the moment.

Okay. That's all I have thanks.

This concludes our question-and-answer session as well as the presentation as a whole. Thank you for attending today's conference. You may now disconnect.