Ardmore Shipping Corporation (ASC) Q3 2017 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen and welcome to Ardmore Shipping's Third Quarter 2017 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 website 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 anytime during the next two week by dialing 1-877-344-7529 or 1-412-317-0088 and entering the passcode 10111083. At this time, I will turn the call over to Anthony Gurnee, Chief Executive Officer of Ardmore Shipping. Please go ahead.

Thank you, and good morning everyone. Welcome to Ardmore Shipping's third quarter 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 this morning’s third quarter 2017 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 third quarter 2017 earnings release, which is available on our website. And now, I will turn the call back over to Tony.

Thanks, Paul. On the call today, we will follow our usual format, first we’ll discuss our performance in recent activity, followed by an update on the product and chemical tanker markets, then we will highlight some of our recent value creating activities after which Paul will provide a fleet update and review our financial results, and then I’ll conclude the presentation and open up the call for questions. So, first turning to Slide 5 on our performance and recent activity. We are reporting EBITDA of $10.1 million and a net loss of $4.6 million equating to a loss of $0.14 per share for the third quarter. This compares to a net loss of $0.06 per share for the prior quarter. We delivered satisfactory chartering results in the third quarter despite the difficult operating environment. Spot and pull MR rates averaged 12,970 per day, a decrease from 13,765 in the second quarter. MR spot rates during the quarter were impacted by reduced cargo volumes resulting from refinery additives which was caused by Hurricane Irma and Harvey, as well as scheduled maintenance. We believe the near term outlook is positive with recovering U.S. Gulf refinery output, rapidly rebalancing global inventories, and the on-check on the typically stronger winter period. We continue to execute on our long term strategy focusing on operating performance, cost efficiency and other steps to improve ROI fee. On that note, we are pleased to announce that we have agreed to acquire high quality 2008 build Japanese MR product tanker and identical sister to our Sealeader and Sealifter and attractive price which equates to the 30% discount to current new building prices on an Asia trusted basis. We’ll talk more about that a little later. We also recently completed an attractively priced $15 million revolving credit facility further enhancing our financial flexibility and we're maintaining our dividend policy of paying out 60% of earnings from continuing operations. Consistent with that policy, the company is declaring no dividend for the third quarter. Turning to Slide 6 for a quick look at our fleet profile. There has been no change to the fleets since our last earnings call but as a reminder this a high quality modern and fuel efficient fleet all build in top tiers yards with significant earnings power and arising market. Now to Slide 8 on the product tanker market, as noted earlier, MR product tanker rates were softer in the third quarter. Nevertheless we believe the outlook for the year end and into 2018 is positive for number of reasons. U.S. Gulf refinery throughput is increasing meaningfully following a heavy period of maintenance and outages associated with Hurricane Harvey which should contribute to recovery in Atlantic Basin MR ton mile demand. Additionally, refinery margins in the Atlantic Basin are now at their widest levels since 2013 which should further incentivize elevated refinery runs. Global destocking of refined products was higher than expected during the quarter. According to PIRA, bringing commercial stock 70% of the way down from their peak levels in 2016 back to 2014 levels and with the market now closer to being in balance, we believe more normal oil trading activity could resume soon giving further boost to MR ton mile demand. And as a final point on short term factors, regional inventory and balances particularly from middle distillates, should result in increased trading activity as product shipped longer distances to points of consumption. Looking at the longer term factors, underlying MR ton mile demand growth remain strong. Oil demand growth has been revised upwards for 2017 to 1.6 million barrels a day and is expected to rise another 1.4 million barrels a day in 2018. The resulting growth in cargo volumes, regional products slate and balances, emissions circulations and increased trading complexity all continue to drive healthy demand growth what we believe is around 5% per annum. Turning now to supply, the order book is at historical low 4.1% and most notably supply growth is continuing to accelerate. So far this year, 15 MR to deliver and 14 have been scrapped and we expect eight vessels delivered for the remainder of 2017 after taking into account slippage. As a consequence we anticipate net fleet growth for 2017 of 1.8% and 1.1% or less in 2018 which we believe will be in unprecedentedly low level. Meanwhile shipyard capacity remains very constrained with only nine active MR yards down from 20 or more in 2008 and the ability of these remaining yards is further constrained by limited access to capital and refund guarantees. So putting this all together, the fundamentals of supply and demand are very compelling, anticipated demand growth of 5% combined with supply growth of 1.1% or less in 2018 should significantly tighten the market and go to fully recovery. Turning now to Slide 9 on chemical tanker market, charter rates remain flat in the third quarter for chemical tankers with ours averaging 10,000 per day. The cargo split on our vessels has changed, its weighted now heavily towards chemicals and veg oil reflecting the broader weakness in the CPP market, in total chemical cargos generated 12% of the revenues in the quarter which is higher than normal. Overall the chemical tanker market remains soft most notably volumes in ethanol which is an important commodity chemical shipped by chemical tankers fell in the third quarter from the combined impact of U.S. production disruptions from Hurricane Harvey as well as other Asia-Pacific outages. Turning to veg oil trades, Asian Palm oil cargoes as well as South American soybean exports remain weaker in the third quarter limiting triangulation opportunities. Looking ahead to demand growth is nevertheless positive, the outlook is positive, we expect continued growth driven by improving global GDP as well as to build out of large scale export facilities in the U.S., Gulf and Middle East. Additionally, improvement product tanker market conditions will boost demand for chemical tankers trading in CPP taking up more than capacity then at the moment. Underlying fundamentals remain strong with seaborne chemical trade growth expected to be around 5% per annum which is comparable to MRs as we discussed. Now looking at supply for chemical tankers the order book overall is currently at moderate levels but on top of that, there continues to be a difference doing stainless and prototype tankers. The total order book is 9% of the existing fleet but within that percentage on order for stainless announced at 13.5% whereas for coated tankers the amount is only around 5.5%. Net of scrapping, we expect fleet growth of about 4.5% in 2017 and around 5% in 2018 broadly in line with the demand growth but again the outlook is more favorable for coated tankers where the dynamics are more similar to MRs and we expect TCE performance for our six coated chemical tankers to follow the MR market. Turning now to Slide 11, we would like to highlight some aspects of our financial policy as well as recently value creating activity, the first point to make is that we had a clear policy of putting financial strength and efficiency first, we’re maintaining low leverage currently at 53% along with strong cash balances in order to weather the challenging market, to this end we recently completed an attractively priced $15 million revolving credit facility further enhancing financial flexibility and we’re maintaining low earnings and cash flow breakeven levels in part to transactions such as Japanese tax leases to sustain our low cost of capital. The second point that we remain very focused on operating performance, cost efficiency and further improvements to ROIC, we’re always working on operational enhancements in our chartering and post-fixture activities and ways to further reduce our overhead cost of vessel which we believe are already lowest in our peer group. It’s also worth remembering that in June 2016 we acquired six MRs, Eco-Design MRs setting the market low which we believe is still unmatched and had significantly strengthened our earnings power. In that same vein, we've recently agreed to acquire a 2008 bill Japanese MR at a compelling price equating to 30% below in new building equivalent level, this is how we believe the same level as used by analysts for NAV estimates, so does not represent a new low but rather continuation current levels and as a reminder how cyclically low are the current valuation estimates for Ardmore Stock. The acquisition was subject to completion of financing for the vessel under Japanese tax lease which we’ve done in order to preserve cash but also to maintain our low breakevens and afford very high project specific equity returns. We’re just a one ship transaction arguably not a needle mover but we believe it does have the potential to create meaningful value for example in an $18,000 a day market environment the EPS accretion from its own vessel alone over the entire fleet would be 5%. We believe this acquisition reflects our disciplined approach to capital allocation and we will continue to seek opportunities such as this whether large or small. And with that, I will hand the call back to Paul to provide an update on our fleet and our financial performance.

Thanks Tony. Moving to Slide 13, we will run through the fleet base starting with the chart on the right hand side, you will see that a revenue days would increase by 13% for the full year 2017 to 9,761 days. We had one drydock in the third quarter for the Ardmore Seamaster and we expect that 20 drydock days in the fourth quarter. Turning to Slide 15, we will take a look at our financials as you will see on the second line we reported net loss of $4.6 million or $0.14 per share for the third quarter. Total overhead cost to approximately $3.9 million in the third quarter comprising corporate expenses of $3.2 million and commercial and chartering expenses of $700,000. As mentioned before in many companies the commercial and chartering cost are incorporated into expenses which means that our corporate cost is comparable overhead. Our full year corporate costs are expected to be $12.9 million which works at a $1300 per share per day across the 27 ship fleets. Overall we expect total overheads of corporate and commercial to be approximately $3.8 million for the fourth quarter of 2017. Depreciation and amortization for the third quarter was $9.4 million and we expect depreciation and amortization in the fourth quarter to be approximately $9.7 million. Our interest in finance cost were $5.4 million for the quarter comprise of cash interest expense of $4.8 million and 650,000 of amortized deferred financings. We expect interest in finance cost in the fourth quarter to be approximately $5.6 million which include amortization deferred finance fees of 650,000. Moving to the bottom of the slide our operating cost for the quarter came in at $16.3 million or 6,538 per day across the fees including technical management fees, OpEx Eco-Mod MRs was 6,341 per day for the quarter and 6,190 for the year today’s. Eco-Mod MRs came in at 7,175 per day for the quarter and 6,583 for the year to date. While Eco-Design chemical tankers came in at 6,392 for the quarter, 6,330 for the year-to-date. The difference between the quarter and year-to-date numbers are timing related. Looking ahead we expect total OpEx for the fourth quarter to be approximately $16.6 million. Turning to Slide 16 we will take another Charter rates for the quarter. Starting on the left overall across the fleets we saw decline in charter rates with the feet earning an average of 12,376 for the quarter compared to 12,996 in the second quarter. Looking at the various ships types we had 15 Eco design MRs in operation which under an average of 12,938 per day for the quarter. While the six Eco-Mod MRs and 12,534 per day. The six Eco design chemical tankers and a average of 10,768 per day for the quarter. Looking ahead to fourth quarter as of today our spot MRs earning approximately 12,500 per day for voyages in progress with 35% of the days booked with upside potential for the remainder of quarter. We buy the chemical tankers are currently earnings approximately 12,000 per day with 35% in the days booked for the quarter. Overall we are satisfied with our chartering performance and our fleet continues to perform well in spite of a softer charter markets. On Slide 17 we have a summary balance sheet which showed up the end of September our growth that was $452 million – moving our growth leverage at 52.8% at the end of the quarter. It’s also worth pointing out our leverage on a net debt basis and shift over 50%. Turning to Slide 18 as I mentioned our balance sheet remain strong and we have cash in networking capital of $73.5 million at the end of the quarter and as Tony we completed a $50 million revolving credit facility in October further enhancing our financial flexibility. Finally as you all know all of our debt is amortizing with principle payments of $44 million annually so we’re continuing to de-lever by approximately 3% a year and strengthen our balance sheets. And with that, I would like to turn the call back over to Tony.

Thanks Paul. So on the outlook is positive for year end and its 2018 is normal trading activity resume on the back of increased refinery throughout. As always global product inventory setting back to normal levels. Underline fundamentals remain strong, MR ton mile demand growth is estimated to be around 5% underpinned by strong oil consumption growth, export oriented refinery capacity expansion and increase in trade complexity. At the same time supply growth continues to decelerate. The order book remains at a historical lows resulting in net fleet approximately 1.8% in 2017 and anticipated to be 1.1% or less in 2018 setting with state for a significant rebound in chatter rates. We’re completing vessel acquisition at a compelling price which we estimate at 30% below the age adjusted new building equivalent and which we also believe in line with currently depressed NAV estimates signaling value not just in the acquisition but also in the current company share price. We’re continuing with policy during to maintaining financial strength through low average and healthy cash balance to this end we completed a $15 million revolving credit facility in October further enhancing our financial flexibility. Overall with our modern fleet our industry leading cost structure. Our board is well positioned to take advantage of a charter market recovery and generate strong returns in meaningful value creation to our shareholders. And with that we’re now please to open up the call for questions.

[Operator Instructions] And our first question comes from Doug Mavrinac with Jefferies. Please go ahead.

I just had a few follow up questions for you all this afternoon. With the first on being on the market, so Tony in your comments your prepared remarks then also your summary your overall view of everyone kind of waiting and the looking for an inflation point and clearly the right environment and the CPP market hasn’t change much between 3Q and 4Q but when we talk about declining global inventories and we talk about U.S. refining capacity returning or even positive impact at the widening spread is having an refining margins. Are those still things on the near term horizon or have you seen any sort of indication in terms of activity levels changing like retail chattering activity here or things like that that would suggest that some of these things are actually starting to happen or they still kind of on come so to speak.

Yes, Doug to answer that first question we are looking very, very closely what’s happening in the U.S. Gulf and what we’re seeing is an increased part of weak on weak. We’ve also estimated that we think that we export volumes out of the U.S. arguably half a way back to where they were in July. So, we do think that there is something underway in with U.S. Gulf loadings, which is critically important to the MR market. In addition, the tonnage list is shrinking as well. So that’s probably the most important item at the moment. The reality is that ease us to as rates are actually quite strong. There is sort of 14.500- 15,000 a day. That’s in part because their shipments into the Atlantic basin at the moment. But as the U.S. Gulf comes back fully, not just with refinery throughput, but also export volumes. We think that the Atlantic basin will recover rapidly.

And then I would imagine just as a follow-up. That any sort of arbitrated or arbitrading would be kind of additive to the base business kind of getting back to a normalize levels?

I think that the reality is at the moment, there is just a lack of availability of cargos for export. And what the refining ready markets when they’re available.

And then transitioning slightly, over to the chemist market. So, in your commentary and as we saw in rates, how much of in between 2Q and 3Q. But when we look at, they secure thus far in 4Q. I think you have 35% of 12 grand a day versus less than 11,000 in 3Q. So, when we talk about improving global GDP and expansion of Petchem plant in Northern U.S. and the Middle East. Are we starting to see that happen? Is that what’s behind the improvement in earnings there?

Well, I think in reality there is some timing difference on fairly long voyages in terms of back haul versus front haul. Which would actually suggest that on a more unlike on a load-to-load basis, the results in the third quarter might have actually look better for chemical tankers. So, in reality, the chemical tanker market is holding up relatively well. We think that the MR markets got lot of new term upside, perhaps more than chemical sector. But we think that the biggest factor that’s going to have an impact on the chemical market at least for our type of ship over the next sort of 3 to 6 months is going to be greater activity in the CPP trades.

And then obviously, you guys announced some an acquisition during the quarter. And it's kind of leads me to thinking about those kind of, how you think about growing strategically? I mean we know that you guys did transaction I guess the previous summer that was sizable. And when we look at your lack of CapEx commitments, when we look at what jumps charters as to do to your earnings and cash flow going forward. In our models we have deleveraging fairly quickly. So how do you balance improving financial strength with what could be some very attractive opportunities in the near term given the outlook?

So that’s just that. I mean I think we have to reconcile the two. And that’s what we focused on. But we're constantly have to look out for good deals. And when we see exceptional deals, we feel like we have to move on them. So there are further opportunities, that are comparable to we think to the one we just did. There might be other largest scale opportunities that we have to balance out against maintaining our financial strength and getting the timing we're in.

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

Tony, following up that last question. And let’s talk about when as oppose to that. So let’s say you said you're focusing on your overhead pretty closely, that you've opened the budget chattering offices I think in Singapore and Houston. So, as we think about what Ardmore could become the overhead that you have today scales over 28 ships, 28 once you compete this at next acquisition. How big could you get fleet wise about adding significant overhead?

Well, I mean for example, we could probably add another 10 ships with fairly nominal incremental overhead, maybe a million or something. So, we do, we really watch our overhead per ship per year or per day, if you want, very carefully. And we're trying to maintain it at a low level, but the real opportunity is to drive the down through growth. Because the incremental cost is very nominal. On the chattering side, we measure our performance there on a cost basis, as a percentage of full fees. So at the moment we’re at about 60%. So we have all our ships at the pools, we would be spending that much more. At the moment we are at 60% of that number. Again would scale we could drive that number way down.

And then also on the chartering side. One thing that kind of stood out to me both in the presentation and press releases is that the Eco-Mod spread the Eco-Design has narrowed significantly over the last couple of quarters. Is that a function of fuel not being as expensive as it was maybe a couple of years ago? Was that just a timing thing or is there some reason we should be thinking that those two should be trading in a much tighter range than they had been historically?

No, I think we’re dealing with the fairly small sampling size. And so the reality is there’s no reason to just believe the theoretical differential which should be kind of 500 to a 1000 a day. Anything else is really just timing difference. And the differential is of course fuel efficiency, but also a bit more commercial flexibility of the newer ships.

And then finally Paul, to the extent that you can talk about. And I guess it's still probably under negotiations. But can you kind a help us through some of the math involving the Japanese leasing? Should we think about prior transactions as a base or what kind of guidance can you give to that?

I think it’s as we mentioned at the outside is there’s still a lot of negotiation in subject to completion of financing. But in terms of indicative pricing as in terms of the acquisition price of the ship, it’s comparable to previous ship acquisitions. And as we highlighted in the press release, about 20% discount on current new building prices as adjusted. And then in terms of financing, it will be the previous transactions that we’ve done capital leases on the Sealeader, Sealifter that will be very similar in terms of the clients' rates and pricing etcetera.

And I imagine you wouldn't have disclosed as even though it’s still subject to the finalization if you weren’t highly confident that pretty close in the finish line?

That's correct. We can’t say a 100%. But it’s we’ve done these before in Japan and we’ve gotten a reason to believe it will go through.

Our next question comes from Ben Nolan with Stifel. Please go ahead.

Just following up on the acquisition. I think we’ve seen a clear preference among particularly the public owners for owning or buying or acquiring much more modern assets. Obviously, this most recent one is the older and I appreciate that this sister ship and several ones you already have. Could you maybe walk through how you think of the things that you’re looking at and your opportunities there and how you wait? The age of the asset in terms of preference or if it matters and all?

Ben, it's a good question. I think it’s worth highlighting that we do screen virtually every second hand Japanese ship that comes out for sale. We’ve got some particular preferences regarding design etcetera. But also the condition of the ship is critical. That has a big impact on OpEx. This one not only as identical to the other two that we owned but it's also in the same condition. Those are the two ships no arguably the best of performers in our fleet. Now, she is on the older side but she’s got a long life ahead of her. And we believe that the ship will perform like the others that we have already. That’s why we moved down this one in particular. So it’s the only one in the last two years that we could have bought. But we just that starts aligned in terms of price, the lease opportunity and the condition of the ship. The reality is if you look at the, now granted of the newer ships generate greater cash flow. Because they play a little bit more in the market, the OpEx is a little lower. Arguably that’s not the case with this one, but generally speaking that’s the case. However the invested capital is much higher. So in the end and sort of reasonably normal kind of market the returns on invested capital are about the same. However the older ships, because essentially the same dollars per day increase in the rising market for both. The fact that this has a lower invested capital level, means that the upside is much more significant. So that’s why we’ve in the end balanced the two. And we’re very happy to pick up the frontline ships year ago. And we’re equally happy to pick this one up.

Although I guess the counter to that argument would be, that you have a shorter period of time and once you need that inflection point in terms of the market, improvement in order to capitalize on that increase leverage with respect to rate of returns. So is this at all and obviously you're a positive on market. But is it indicative of sort of the timing that you expect things to improvement? And if this a time when holding older assets is in your view kind of the optimal scenario?

Well, I'll make a slight joke about this and maybe I shouldn't. But when you go to the sushi restaurants with the conveyer belt, that's a little bit what it's like investing in our business. Things come along. When you look at it, and you deciding it to take it off the belt or not. This one with the least at the mid-cycle rates. And I'm not talking about 18,000 a day quite a bit lower. Mid-cycle rates generates a 30% return on equity. So we took this one off the conveyer belt.

And then maybe just lastly. And you'd mentioned that refinery utilization at the Gulf Coast is for the higher expense since 2013. Obviously, 2013 and the first part of 2014 was relatively like last year and then we went to really healthy market over a period of time in the back half of '14 and '15. Is this current market environment in your view, something similar to that? I mean, are we, is the opportunities that at the moment, similar to what we saw in that environment in your view?

Yes, so when 2014 rates breaks below, we remember it well. It was a difficult time. And nobody knew that the price of oil was going to collapse in October. But I remember at the time it was characterized by a relatively short distance of ages. You didn't have a lot of long haul are trading happening. And everything had become fairly compressed and stable in our business. And that's a little bit the way itself now. I think that's been exacerbated by the what we all thought, was going to be the positive impact of Hurricane Harvey turning into a very negative. The real issue there is that for an extended period of time and just kind if we think ending now. A lot of the barrels being produced in the gulf were being held back for domestic needs. And therefore not available for export. So I think a relatively subdued oil trading environment combined with that full back of cargos out of U.S. gulf refineries has really created all the short term pain that we've been experiencing.

But in terms of sort of your -- and looking into the future, the opportunities that is similar or at least, not too different than what we saw moving into 2015. Is that fair?

Again, we don't know today what the price of oil is going to do in the few months. And that was a situation in the 2014. But I will say that we've had a lot of time on the call, kind a laying out all the factors that we see coming into play now. Refinery utilization back up and heading probably back up to the 90%-95% level. A ramp up in export volumes very, very low to middle digit stocks in the Atlantic basin. Very interesting reports this morning from PIRA. They're even more bullish than they were in their prior report. Suggesting that they think that the oil market is going to be back in the balance with regard to inventories at the end of this year. They have a fundamentally different view on what represents normal levels than the IDA does, but it makes very interesting reading. And our view is always been that when inventories get down to more normal levels than regional and balances and shortages, a product emerge and drive oil trading activity, which has a big impact on lot of demand. So all of those factors are adding up. And then underneath that you've got very, very strong fundamentals. So I think first, we see, we believe, we hope we'll see a good seasonal run this winter. And then let's see whether the fundamentals take us after that.

And I don't want to deliberate too much further. But I guess what I'm asking, as you don't see anything that could potentially related to storage that you can see stand in the way of rates possibly a points getting back into the high-teens or 20s. And I guess there is nothing that's off the carts, right?

No.

Okay.

And let me add one thing. To just add one point on this I think is worth mentioning. I think a lot of analysts where the industry or otherwise make the point that they don't believe that you can have a strong MR market without a broad tanker market recovery. I take a point to a degree, however, I think the correlation analysis what they do indicates, there’s a fairly tight correlation at least on the longer term basis. But the reason for the correlation is that, that tankers are driven by primarily the same factors most of the time. However, this time we think that the supply outlook for MRs in particular, is so different from the bigger ships. But you couldn't really see the detachment. And we’re not saying that we’re going to see 30,000 a day, with MRs when these are trading at 20. But you could see substantially better performance, on a kind of capital return basis, with MRs while the bigger ships are still in recovery mode.

Our next question comes from Magnus Fyhr with Seaport Global. Please go ahead.

Just a follow-up question on this acquisition. You mentioned that was 30% ROE at mid-cycle rates and 5% accretion at 18,000 a day. I share your positive outlook for the MR market, but, 18,000 seems a little higher. I think, we we've only been over that one time in the last 8 years. So, would you get some rationale using 18,000 for the accretion?

Well, I think, we were at or above 18,000 for about year and half, right? From late ’14 up into early ’16. So, that was a market that nobody believed in, but the rates were very strong. I think we, one quarter, we tracked 25,000 a day, on the Eco-Design MR. So, it’s not like that’s a bluff that we’ve seen and went away for a long-time. And of course, we’re have to remember back that this is a long cycle business. And rates were above 18,000 a day for the better part of 3-4 years, in the mid-2000s. So, I’m not, we think that’s a perfectly legitimate benchmark to point out. And the mid-cycle rate, if we’re thinking of it is probably 15,500 a day. And it’s just, it’s simple math. On the acquisition price the resulting depreciation cost, OpEx drive our cost incremental overhead. That’s the number that you're arrive at.

So, I mean, the time charter rates are definitely lower for over the next 12 months. So, you wouldn’t surprise to see this rates developing in 2018?

Well, you were sitting at an interesting point, where we think that we’re coming out of a really bad period driven by very specific factors. Oil market dynamics needing the global inventory destocking. And then the lack of export, or into cargos, lack of export cargos had out of the U.S. gulf refinery complex. And into a period which is typically stronger during the winter months, backed up by whole bunch of other factors that we’ve described earlier. So, on the short-term seasonal basis, we’re feeling pretty good about the outlook. I know, we’ve been singing the same tune for a while. But, in shipping, there’s something mathematical about demand growth in around 5%, versus supply growth well under 2%.

Our next question comes from Noah Parquette with JPMorgan. Please go ahead.

One of the market questions, kind of dealt with. And I was just curious, do you guys have plans to do Eco-Mod modification of the new vessel? And just remind me, how much that costs?

Well, the cost is not significant. But we don’t typically disclose it. But, it will involve modifications to the propeller, to onboard monitoring. And when we’re going for the first docking, we’ll do some other to it as well. But yes, as always we tanker with the ships to maximize their fuel efficiency and the cargo flexibility.

But that doesn’t include about [indiscernible] shipment system right?

No, that’s a one thing that we’re happy to delay, as long as possible, along with everyone else. We believe very strongly that we want to be in the forefront of implementing new regulations. So that’s one, that in fact, that technology in terms of the systems, has and even really been, very well adapt yet so, that still didn't flux.

Our next question comes from Fotis Giannakoulis with Morgan Stanley. Please go ahead.

We have seen the chartering activity as you mentioned, increasing in the U.S. Gulf for the last 2-3 quarters. Still we haven’t seen the charter rates responding. I assume that this is because of the accumulation of vessels from the previous time. Can you give us your picture of how many vessels that you are shipping right now available? Or in the U.S. Gulf, what is over supply and how quickly do you expect that this will go away?

So I think what you are asking is basically cargo volumes over the last two to three quarters. As I mentioned volumes were pretty high in July, I don’t have the numbers right in front of me here. But they came down significantly maybe 50%. So as a consequence of Hurricane Harvey and we think that recovery not the refinery throughput, which is very back up again, but the cargos being loaded is probably half way to full recovery as a consequence of that lower volume. And also with ships coming in from the East into the Atlantic basin, that has greater an over capacity. So, in terms of how many ships are waiting or kind of one week have ready to load, the number right now is maybe 15 that’s down quite significantly. We think that the volume of like week-on-week, the volume of export cargos, last week was up 35% from the prior week. So these are all variable signals. Rates are moving up a little bit for TC14, but there hasn’t been a really big move yet.

And I assume that when these 15 vessels disappear from the market as refinery utilization picks up then we can see some meaningful changes in rates. I was wondering if there are any other catalyst for example if you see the trading activity to pick up. Now that oil is at slightly higher levels or if you see Voyages that they were in the upper end three months ago?

Again I think we are waiting for lift of basically when it comes oil trading activity. But again, given the decline in global inventories and the greater activity with refineries etcetera. We think that’s going to really kick up this winter.

[Operator Instructions] Our next question comes from Chris Snyder with Deutsche Bank. Please go ahead.

Its Amit here,. So maybe this is an overly I guess elementary question. But Tony, for the last two years when we're talking about the relationship between supply demand, order book and historical lows down job tightening in the market. But unfortunately the market has still been relatively lack cluster. And like you said I think there is obviously some specific things, that weren't that or explain that. But kind of that in context for the people on this call that maybe aren’t familiar with the day-to-day aspects of the MR trade. I was wondering if you could talk about the top two or three things that need to happen for this market to inflect or maybe even reflect the perspective supply outlook? And whether that’s oil prices specific projects as it relates to new refining capacity. Anything that helps us get a bit more I guess tangible about the cadence of the market recovery? Thanks.

So I would say the two big things are in each of the U.S. Gulf market is so important for overall global MR ton mile demand that seeing an increase in liftings and a shortening of the tonnage list is key. But the other part is where those cargos going? So once we get back into a more volatile world on a physical regional basis. And you start seeing MRs loading cargos would end up going halfway around the world. That will be symptomatic of the reason why rates have gone through the roof. So, that’s why for example voyages down to, you need to watch voyages to Brazil, Argentina, Chile, they are very important. Because they are fairly long haul and although we are like to trying to find triangulations. The reality is most of that business has come back empty to the U.S. Gulf so as a consequence it uses up an awful lot of ton miles or ship days to do that business. So I’d say its longer haul arbitrage combined with higher volumes.

And then in terms of diesel penetration of like we closed in Europe I mean I guess one of those key route is kind of I guess gasoline to U.S. and then bouncing over Houston and picking up diesel and going to Europe. I mean is there any secular thing that we should think about related to may be diesel penetration of light vehicles in Europe?

I think in the short-term not really, - we over here and we all tried diesel cars and that’s fine and that’s not going to change in the short-term. Longer term that could be an issue and that could change the car a little bit but that’s nothing that’s on our way to radar screen at the moment. So you have a European a middle requirements being met by accommodation of the U.S. Gulf Russia by pipeline and by sea transport and the Middle East and even from South Asia sometimes. So, and it really depends on the relative pricing to determine where those cargoes are coming from.

And then one last from me is obviously I have said this before in terms of the way you guys managed your debt repayments and your balance sheet is obviously I think great but we’re kind of now two years into maybe - I think last year when you had your Analyst Day you would expect the market to be kind of 17,000 to 18,000 today and so now we’re further along to the down cycle which implies that we’re closer to an up cycle hopefully. And so the question is as you guys think about managing your balance sheet and I guess you want to be prudent and cautious but it also at the same time kind of is beneficial if you turn a little bit more aggressive as well as it relates to where you want to take balance sheet relative to where the asset values are in the cycle. And so maybe this question has been asked I hopped a little bit late but would you lead all maybe are you turning a little bit more willing to be a little bit more aggressive on taking that LTV a little bit up at this point of the cycle because of the outlook so the market on a two to three year basis?

To be honest with you, we don’t feel that - I think we can achieve our objectives in terms of earnings power without leveraging up. The other problem is that normally the way you have to do that in shipping in this kind of business where you basically got first mortgages on all the vessels is to leverage up beyond the level we are now. We could arguably get up another few percent with senior debt but beyond that you’re relying on very expensive mezzanine and that tends to not work out well not even in the long-term but the medium term. So, it’s really a function of us being as cautious and careful as we can be regarding cost of capital as it is about outright and financial risk. The incremental return that you can get by levering up and kind of leaning forward is offset by not just the risk by incremental cost of the capital erasing and the difficulties and the complexities so that creates longer term.