Ardmore Shipping Corporation (ASC) Q3 2019 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Ardmore Shipping’s Third Quarter 2019 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 the question-and-answer session after the opening remarks and instructions will follow at that time. A replay of the conference call will be accessible anytime during the next 2 weeks, by dialing 1-877-344-7529 or 1-412-317-0088 and entering passcode number 10136638.At this time, I will turn the call over to Anthony Gurnee, Chief Executive Officer of Ardmore Shipping. Please go ahead.

Good morning and welcome to Ardmore Shipping’s third quarter 2019 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’ll find a link to this morning’s third quarter 2019 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 2019 earnings release, which is available on our website.And now, I will turn the call back over Tony.

Thank you, Paul. Let me first outline the format of today’s call. To begin with, I’ll discuss the quarterly highlights and then key market developments, after which, Paul will provide a summary of our performance and update on tanker market activity and the detailed financial update. And then, I will conclude the presentation and open up the call for questions.Turning first to Slide 4. After 3 difficult years, we believe the tanker market is in the early stages of a sustained upcycle, characterized by repetitive spikes with settling periods in between, but at levels well above the recent past. Sentiment has fundamentally changed over the past month, with rates now pushing up against what we would describe as a demand ceiling rather than bouncing along the supply floor.Rates for our MRs fixed since October 5, have been a bit over $20,000 a day compared to an average for the third quarter of $13,800. The immediate driver is IMO 2020. Preparations are well underway and adding an additional layer of demand for product tankers with more to come. On the back of these positive developments and with a fleet of 25 modern fuel-efficient ships, which are 100% employed in the spot market, Ardmore is well positioned to deliver strong results, where every $1,000 a day increase in rates translates into $0.27 in EPS.Based on these new rate levels, we expect to be profitable in the fourth quarter. And as a consequence, we will recommence our dividend payout as per our policy of 60% of net income from continuing operations. One non-market item to highlight is that we’ve agreed refinancing terms with our existing banks on 2 credit facilities totaling $202 million, on substantially improved terms, which Paul will describe later.Turning next to Slide 5, on key market developments. Many factors which we’ve been discussing and anticipating are now coming fully into play. Most notably, tightening product tanker fundamentals, supply and demand, as well as the impact of IMO 2020. Other positive factors are now emerging, which we will also address.Regarding IMO 2020, preparations are accelerating. While the third quarter stockpiling was lower than we anticipated, as a consequence we expect there will be particularly heightened disruption and trading activity to cover demand in the fourth quarter and into 2020. The demand for gasoil is likely to be higher than it’s been forecast, as a consequence of far fewer scrubber installations; the strong tanker market resulting in higher voyage speeds and less consumption, and anecdotal evidence of company’s risk aversion about VLSFO, at least initially.Also keep in mind that the new VLSFO blends will be heavily middle distillate in the beginning. Overall, this means more gasoil demand, more refinery throughput, more oil transport and more trading activity.Meanwhile, Middle East tensions persist. Recently sanctioned tanker fleets are not expected to return to worldwide trading anytime soon. And, of course, other disruptions are possible. The winter market is coming, but as of yet, has had no impact, which usually starts in late November.Oil consumption growth rate for 2020 is predicted to rise substantially from 2019 levels according to IEA. Recession fears seem to be dissipating. Global GDP growth for 2020 may in fact be better than the consensus view, which would logically result in further demand lift for product tankers.And an important final point, which is worth dwelling on, on a longer-term basis, we see constraints in tanker supply arising from regulatory uncertainty around the shipping industry’s targets for greenhouse gas emissions, as well as an emerging preference among charters for green transport. While we don’t believe ordering activity will exactly grind to a halt, we do think it will put a meaningful damper on activity until this next set of IMO legislation becomes clear and new ship designs emerge to meet these rules.And on that note, I’ll hand the call back over to Paul.

Thanks, Tony. Moving to Slide 7 for a summary of our quarterly performance, both the GAAP net loss and the net loss from continuing operations was $5.7 million or $0.17 per share for the third quarter compared to a net loss from continuing operations of $3.4 million or $0.10 per share for the second quarter.Ardmore’s fleet average TCE in the third quarter was $13,029 per day, made up of $13,784 per day on the MRs and $11,013 per day on the chemicals. As Tony mentioned, charter rates have rebounded significantly in October. And as we look ahead, the fourth quarter will be a tale of two markets, with fixtures at lower levels coming through from the third quarter and fixings since the market rise in early October at above $20,000 a day.As of today, for the fourth quarter, we have 45% of our days booked on the MRs at $17,000 per day and expect rates for the remaining 55% of the quarter to be approximately $20,000 a day, in line with current market levels. The fleet continues to perform very well operationally and dockings are coming in under budget for the year, with one remaining drydock scheduled for the fourth quarter.Turning to Slide 8 for an update on the tanker market activity, in terms of activity in the third quarter, the charter market was more subdued particularly in the Atlantic due to increased refinery maintenance and downtime in U.S. and Europe. The market east of Suez was firmer, in particular, strong Chinese exports with Chinese refinery throughput up 730,000 barrels a day year-on-year.There were surprisingly low stockpiling in preparation for IMO 2020 with many bunker suppliers delaying full preparations of – until VLSFO letting commenced earnest. Industry estimates that 10% to 15% of the barge infrastructure was prepared for VLSFO as of the end of September.Most recently, Middle East tensions exposed tightness in the tanker market. And as you can see from the chart on the upper right, rates increased across all tanker sectors at the same time as IMO 2020 preparations started to intensify.In terms of market outlook, the product tanker market looks set for a sustained market upturn. IMO 2020 is now delivering as expected. As can be seen on the chart on the bottom right of the slide, marine gasoil demand is expected to jump over the next few quarters, both for blending and consumption as the industry transitions to VLSFO.Many shipping companies, including Ardmore, are expected to significantly increase liftings of VLSFO in early November in advance of the yearend, causing expected delays and potential increased wait times. Meanwhile, continued strong crude tanker market, driven by the Middle East tensions, HSFO movement and storage, U.S. crude exports and no fire for scrubber installations is expected to further support product tanker demand with approximately 10 LR2s switching from clean to dirty over the last few weeks. Finally, the winter market is expected to provide a typical seasonal uptick with increased cargo volumes of refined products and weather-related delays.On Slide 9, we take a closer look at the underlying product tanker supply demand fundamentals. The product tanker demand fundamentals continue to be positive. Oil consumption growth is increasing with estimated growth in 2020 of 1.2 million barrels up from 1 million in 2019. As you can see on the chart on the upper right, refinery capacity growth is to average 2.2 million barrels a day annually between 2020 and 2023, with additions centered within export-oriented locations. IMO 2020 should result in a new layer of demand for product tankers. The impact on refined products demand, in particular, gasoil, is expected to be significant.Looking at the supply side, overall product tanker fleet growth comprising LRs and MR tankers remains exceptionally low. The order book today stands at 170 product tankers or 5.8% of the fleet, delivering between the fourth quarter of 2019 and the first quarter of 2023. We are forecasting 120 product tankers to deliver for the full year of 2019, of which 114 have delivered to date. We expect scrapping to be in the range of 35 to 40 product tankers per year, 61 tankers were scrapped last year.Taken together, product tanker fleet growth, net of scrapping, is expected to be approximately 3.2% in 2019 and falling to 2% in 2020. And the MR fleet alone is expected to grow by 2.8% in 2019. The chemical tanker market outlook is also positive with an historically low order book of 4.6% and fleet growth net of scrapping, expected to be between 2% and 2.7% in 2019. As Tony mentioned, we think the market is changing.Regulatory uncertainty around IMO targets for greenhouse gas emission reductions and charter preference for green transport should put a damper on new billing activity until the regulations become clear and the new ship designs emerge. Overall, we believe the strong fundamentals will provide a solid foundation for a sustained upturn in product and chemical tanker rates.Moving to Slide 7, we take a quick look at fleet days. Revenue days are estimated at 9,103 in 2019. We completed 1 drydocking with ballast water system installed at the end of July, which accounted for 23 drydocking days in the third quarter, and we will complete our 7th and final drydock of the year in the fourth quarter with 15 drydock days budgeted, including repositioning.Turning to Slide 12. We will take a look at our financials. As you will see on the second line, we’re reporting a net loss from continuing operations of $5.7 million or $0.17 per share for the quarter. Total overhead costs were in line with expectations at $4.7 million for the quarter, comprising corporate expenses of $3.9 million and commercial and chartering expenses of $800,000. As mentioned before in many companies, the commercial and chartering costs are incorporated into voyage expenses, which means that the corporate cost is a comparable overhead. For the fourth quarter of 2019, we expect total overhead, including corporate and commercial, to be $4.4 million, including cash and non-cash items.Depreciation and amortization was $9.2 million for the third quarter, and we expect depreciation and amortization for the fourth quarter to come in at $9.3 million. Interest and finance costs were $6.1 million for the third quarter, comprising cash interest of $5.6 million and amortized deferred finance fees of $500,000. We expect interest and finance costs for the fourth quarter to be approximately $6 million, including amortized deferred finance fees of $500,000. In addition, we expect to write off deferred finance fees as a consequence of the new refinancing of approximately $2 million in the fourth quarter.Moving to the bottom of the slide, operating costs are well under budget at $14.9 million for the quarter. Standard OpEx for Eco-Design MRs was $6,262 per day. The Eco-Mod MRs came in at $5,982 per day, the chemical tankers came in at $6,264 per day. Looking ahead, we expect operating expenses for the fourth quarter to be approximately $16.2 million.Turning to Slide 13. We take a look at charter rates. On the left hand side, you can see a dramatic rebound in MR rates. The market rallied in early October, and our MR fixing since October 5 are averaging $20,085 per day. Spot MRs reported TCE of $13,784 per day for the quarter, while the fleet average came in at $13,029 per day for the third quarter basis discharge-to-discharge. Looking ahead, as I mentioned, the fourth quarter will be a tale of 2 markets, with fixtures at lower levels coming through from the third quarter and fixtures since the market rise in early October at above $20,000 a day. As of today, for the fourth quarter, we have 45% of our days booked on the MRs at $17,000 a day and expect the remaining days, 55% to be approximately $20,000, in line with current market levels.On Slide 14, we have our summary balance sheet, which shows at the end of September, our total debt and leases was $420.5 million, while leverage on a net debt basis was 52.3%.Turning to Slide 15. We remain focused on maintaining a strong liquidity position and continuing to pay down debt. Our cash balance at the end of September was $46.2 million, and we were $19.8 million in net working capital. As Tony mentioned, we recently agreed terms on 2 new credit facilities for $201.5 million in the aggregate to refinance 12 ships on attractive terms. First facility is for $140 million to refinance 8 ships and includes a $40 million revolver component.The second facility is a $61.5 million term loan to refinance 4 ships. Both facilities reduced the margin by 10 basis points to LIBOR plus 2.4% and extend the maturity to 2024. It also provides a cash release after fees of close to $16 million and is expected to contribute an additional $1.7 million in cash flow annually. We’re continuing to maintain low leverage and pay down debt. All our debt and leases are amortizing at approximately $40 million per year.And finally, LIBOR has been reducing. With 90% of our debt and leases being LIBOR based, every 25 basis points reduction in interest is expected to contribute to an additional $1 million in earnings or $0.03 in EPS annually.And with that, I’d like to turn the call back over to Tony.

Thanks, Paul. So to sum up then, after 3 difficult years, we believe the tanker market is now in the early stages of a sustained up cycle. IMO 2020 is playing out as expected. Gasoil demand arising from IMO 2020 is anticipated to be higher than forecast. Geopolitical tensions in the Middle East are resulting in tanker tonnage out of service for extended periods with more disruption as possible. The winter market is coming, but it’s not yet here. Global recession fears seem to be dissipating. This could result in an unexpected layer of product tanker demand next year.Oil consumption growth is projected to recover to 1.2 million barrels a day in 2020 and could rise higher if the global economy is stronger than expected. The order book for product tankers remains at historical lows. And the new consideration is that regulatory uncertainty should put a damper on new building activity until regulations become clear and new ship designs emerge. In the midst of these positive market developments, we remain focused on operating performance and effective capital allocation to maximize returns.The modern fuel-efficient fleet trading at 100% spot, we believe we’re well positioned to take full advantage of improved conditions and to generate strong returns for our shareholders, where $1,000 per day – each $1,000 per day increasing rates translates into $0.27 in EPS. And in addition, as we expect to be profitable in the fourth quarter, we believe our dividend will recommence as per our policy of paying out 60% of net income from continuing operations.And with that, we are happy to open up the call for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Jon Chappell with Evercore. Please go ahead.

Thank you. Good afternoon, everyone. Tony, maybe, Paul, I think for the first time ever you’ve given a little bit of forward guidance on the rest of the quarter by saying that the last 55% of the MRs would be at about $20,000 a day. So I’m just trying to match that up with – you’ve done a little over $20,000 a day since October 5th, but then you lay out all the positives that are still coming up like winter, the full impact of IMO 2020, disruptions to the trade, which is somewhat seasonal as well.So are you just being conservative with using that similar number to what you’ve done in October or do you have a little bit more visibility on what’s kind of already lined up, and you think that some of those forward looking catalysts will be more of a first quarter impact as opposed to 4Q?

Hey, Jon. The 45% that we quoted is it captures everything that we’ve done up until last Friday. Maybe, we’re being conservative. But it feels like rates have settled in at that level and maybe we should have been more complete in our statement. We can talk about risk to the upside being much more than downside at the moment.

Okay. I wanted to ask a couple of questions on the chemicals. You guys call them product/chemical tankers. They don’t seem to have as much upside as the pure MRs. But are you seeing any kind of filter down into those ships from what’s been happening in the core MR or even just the broader product tanker business?

Yeah. That’s a good question, Jon. When we think of our chemical tankers, we’ve got the 4 25s and the 2 37s. The 37s are performing at around the same level currently as the MRs. The 25s are more kind of core chemical tanker units and they are lagging a little bit. But we only have to go back to last year to go through a period when those ships were actually outperforming the MRs. So they do have their moments. They are, I wouldn’t call them core to our strategy, but they strategically give us insights and capability into trading the MRs into some chemical type business. And we think that’s one of the things that underlies our performance in the MR sector.

I mean, we can certainly recall periods where they’ve done just as good, if not, better when the lag makes sense. Just one last thing on that, there’s been a lot of kind of media coverage in the last couple of days on this EU ban on palm-based biodiesel and how that’s going to hurt the chemical tanker business. Are your 25s exposed to that?And are you worried that, that could cause maybe a bigger disconnect between the historical relationship on the MRs and the 25s?

No, because actually that’s more of an MR trade and a handy-sized trade. So in fact, the 25s typically don’t do that kind of trade all the way into Northern Europe.

Okay. Final thing on the chems, and then I’ll leave it alone and move on. You’ve given kind of an outlook on what the rest of the quarter can be for the MRs. Obviously, when you booked quarter to date and the chems has been a little bit lighter. Should we expect a kind of similar gap up to what you’ve done since October, or kind of in line with what you’ve done to date so far in the chems?

Yeah, I think unfortunately with the chemical tankers, we’re dealing with a fairly small dataset. And so, voyage specifics can have a big impact on the performance. But, like I said, the 37s are trading very well at the moment. And the 25s, we do expect will improve through the quarter.

Okay. Thanks a lot, Tony.

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

Hey, good morning, guys. So I have – I was going to ask Jon’s question on the chems there, yeah, he beat me to it. But the – just curious, sort of strategically, obviously, the market is better, you’re earning more than $20,000, time charter rates have come up. Any thinking about locking in some of these higher rates here or hold out for a better market?

We think the market has a long run ahead of it, and so we wouldn’t be interested in locking in. Time charter rates have gone up a lot. They’re probably, for an Eco-Design, they’re probably $18,000 a day for a year. That’s nice, but we think it needs to be a lot higher before we’d consider locking in.

Okay. And to that point, and as time charter rates have moved up, so has secondhand asset values, as you look forward and kind of strategically how you would expect to develop the fleet and that sort of thing. First of all, is there an appetite to buy secondhand equipment? And sort of with that, newbuilding parts haven’t gone up as much.Is there any interest at all if you were to expand in placing newbuilding orders or is that completely off the table?

I think the answer of the first part of the question, it’s definitely – we always look at it as just part of a larger capital allocation decision. And so, it’s a question, do we pay dividends? Do we pay down debt? Do we invest in additional assets? And we always approach it that way and try to figure out what’s the best step to create most value for our shareholders. I think it’s interesting when you – it’s a little bit different when you talk about newbuildings. Because as I alluded to in the comments about the IMO regulations that are coming up, there’s just – for all the reasons we’ve been talking about, there’s another one that’s really emerging now in terms of really nobody wanting to order the last model or the last unit of an old model.The amount of uncertainty around the future for propulsion technology, greenfields, et cetera, is so significant at the moment that I think most senior executives in the industry would probably join me in saying that newbuilds just doesn’t feel like the right thing to do right now. We just don’t know what to build. And I want to add also that even if you were to order today’s model, it’s actually not as good as yesterday’s model because the Tier 3 engine is less fuel-efficient and you incur more OpEx, and that’s what you’d have to order today. So there’s a whole bunch of reasons, including the new regulatory issues and some technical issues why it just doesn’t feel like the right to do.

Got you. No, that’s very clear. I appreciate it. And then lastly, just sort of more from a macro level or trying to understand the business. I think Paul mentioned that something like 10 LR2s had switched from clean to trading crude. From an MR perspective, how long does it take that to sort of trickle through? You probably don’t see as many MR switching, but as the LR market tightens, what’s the time period before that can sort of drag up the MR market ordinarily?

It – I wouldn’t say it’s immediate, but it happens reasonably quickly. Because once those ships leave the clean market, there’s less competition, means that LR2 rates improve. And then charters on the margin are more interested than in chartering MRs instead. I mean, the real damage to the MR sector is when LR2 rates got so low that charters and traders, they can double up cargoes and incur the higher cost, but enjoy the lower freight. So I think we’re certainly back in an environment where that’s not happening very much. And as those ships leave, it’s a very easy switch to go to dirty, it’s very hard to get back. But I would say it probably is having an impact already.And the number of 10 is maybe somewhat different from what you might hear from others. And the number we’re using is validated by an analytical source as having made the switch. Others have probably switched over already but aren’t being recorded as such and others are intending to do so. So the actual number of ships that have switched over and process switching over might be more like 20.And then, you’re starting – and then similar on the LR1 size. And if you add it all up, it’s probably a couple percent less addressable supply for cargoes in our business, and that’s not the game changer, but it’s quite meaningful.

Yeah. Absolutely. All right. Well, I appreciate those very detail and helpful color. I appreciate it. Thanks, Tony.

The next question comes from Randy Giveans with Jefferies. Please go ahead.

Howdy, gentlemen. How is it going?

Yeah. Thanks, Randy.

Yeah, I’ll be sure to ask 2 questions. So don’t worry. Speaking of switching kind of although Ben’s question was regarding cargo switching, what’s your strategy and likely timing for bunker fuel switching from HSFO to VLSFO or MGO? Is that happening across your fleet this month? Next month?

Good question. So to make the point, our ships are spot trading generally on relatively short voyages. So we’ll be switching over later than others that have bigger ships or kind of minor type vessels. We think the switching is now underway. We expect to be switching later this month. I think we were considering doing 1 stand as early as right around now. I’m not sure that’s happened. But it’s – from what we’re hearing the bulk of the switchover is going to happen very end of November, early December, so that by probably December 10, the switchover is more or less complete. And on that basis, it’s going to be extremely abrupt and quite impactful, we think, on the oil trading market.

Sure. All right. That’s helpful. And to my second and final question spot rates certainly been volatile in recent weeks. Time charter rates, as you said, ticked up a little bit, but relatively stable over the past month. I know you mentioned a few minutes ago, you’re not interested in time chartering out your vessels based on your current kind of bullish outlook. What are your thoughts around time chartering in ships to give a little more operational exposure without having to acquire vessels over the next year?

Yeah. It’s always a possibility and it’s something honestly that we’ve done in the past, not recently, but we’ve done in the past and we would consider at an appropriate moment, but it’s certainly something that’s – it’s in the toolkit. And for a variety of reasons, we haven’t acted on it yet, so.

All right, it’s fair. Well, that’s it for me. Thank you.

Thanks, Randy.

The next question comes from Omar Nokta with Clarksons Platou Securities. Please go ahead.

Thank you. Hi, Tony and Paul. Just nice to see the carbon emissions table. And as a public company, there’s a lot of metrics that we focus on. You’ve got TCE and OpEx utilization. Now you’ve got carbon emissions, which is clearly a good thing. Just before I ask like the actual question, I’m looking at the 9 months so far for the year. CO2 emissions are 324,000 tonnes. Is that – am I doing the math correct, and that basically means 47 to 48 tonnes a day per ship?

Sorry. What the math leads to what, again?

About 47 tonnes or 48 tonnes per day.

Yeah, that would be about right, because if the ratio between fuel oil and tonnes per CO2 is about 3.1. Multiply, yeah – or divide that by 3.1, and you’re probably getting what our consumption would be on a calendar day basis, remembering that the ships are idle in port, about 40% of the time.

Right. Okay. And those CO2 emissions, is that basically – is that primarily coming from just the bunker fuel?

Yeah. So it would be – it’s all the total fuel consumed. We don’t emit methane, and we don’t – nothing else that I’m aware of going out from the ships into the atmosphere. So it’s largely fuel oil but some gas oil.

Yeah. Okay. And then, so I guess, just kind of thinking about that, say, that 47 to 48 tonnes a day. I know, it’s early, and this is your first time publishing it, how should we be reading that figure going forward? Obviously, we want that or you want that to be lower. How does that happen? Is that something that doesn’t require different vessels as part of the fleet going forward? Or are there things you can do with the existing fleet to reduce it?

Well, I think the number that we’re probably more going to target is the 2 numbers further down the AER and the EOI, because that’s more of a specific work-based calculation. We’re learning. We’re staring at this for the first time along with everyone else. We do know that we have a fairly modern fuel-efficient fleet, so our numbers are probably pretty good to begin with. We do know that every time we burn less fuel and improve our TCE, we’re also emitting less carbon. So there’s a full alignment of interest in terms of focusing on that. And we do focus on various technical and operational measures to improve performance and thereby also reduce CO2 emissions.Beyond that, I think, we’re really waiting for the IMO to take a leadership role in laying out legislation that tells us what the future holds. And over what period, so that we can begin to comply with that through operational measures such as speed limits, finding ways to increase efficiency in port as well as new designs and new fuel technologies that will enable us to dramatically reduce that.

Yeah. That makes sense. Thanks, Tony. Maybe just to that, regarding the IMO, is there any – from – you’re obviously part of the different boards that are involved in a cleaner environment within shipping. Any sense on timing of when we’ll get some information from IMO regarding mandates, and how things need to look to get to those targets in 2030 and 2050?

Yeah, I can – if you like maybe for the next call, I’ll get a bit more specifics from Mark Cameron, who’s very closely engaged. And we also have a new board member, Kirsi Tikka, who’s closely involved in the process as well. Last week, I was in Singapore, and I spent time at the Global Maritime Forum, which is kind of a CEO level of forum that focuses on key issues and looking ahead. The big theme, obviously, was de-carbonization for shipping. And what was emerging from those discussions was really 2 things. One is that nobody has any sense of how those targets are going to be met. The technology is theoretically there, but it’s not really being developed yet because there’s no incentive.The process within the IMO is going to focus on initially very heavily on operational improvements like speed limits or engine load limits and secondly, on technology improvements. And the – just the deliberation within the IMO, we think, could take a couple of years. The legislation coming out of that could take longer. And then the phase-in could take many, many years. So we’re talking about a fairly long-term process, but one which has to start very soon, and where the decisions that shipping companies are going to make will be heavily impacted by in terms of what to build and when. So we think it’s real. The public pressure and investor pressure is only increasing. Certainly, the big companies in the industry are facing that full force as are their large clients.And we think that it’s really incumbent now on the IMO to kind of step up and listen to the industry in terms of what we think is workable, but to arrive at legislation that’s going to make all this happen. But it’s definitely multiyear. It’s definitely going to be phased in, and it’s going to have a profound impact.

Yeah, Tony. Thank you so much for that discussion. I appreciate it.

Yeah.

[Operator Instructions] Our next question comes from Mike Webber with Webber Research. Please go ahead.

Hey, good morning, guys. How are you?

Hey, Mike.

Hey, yeah, thanks for squeezing me in. I wanted to loop back, Tony, to where you’re just talking to Omar about and then actually your comments in your prepared remarks around the impact that those deliberations are having on the order book and newbuild pricing, and some time they kind of screw around with this.But you’ve seen the same thing in crude right now, but you’re seeing a product where you’ve actually got newbuild prices and prompt prices moving in opposite directions, which has only happened 4 times since – 4 months, I guess, since 2007. So about 2% of the time this ever happens or you actually get newbuild prices inching down, because no one wants to put in a bid or the cash flows dictate that prompt prices are ramping.So, I guess, considering how rare that is and then what you just went through with Omar in terms of the idea that the solution to enticing owners to come in and order new ships is a legislative issue effectively, which you framed in terms of a timeframe measured in years. Where do you think that, the spread right now between prompt and newbuild tonnage is $4 million. Do you think that the time, the lag associated with the IMO getting something clear out the ship-owners is long enough that we see newbuild prices get discounted down to the mid-30s again to entice a bid and that spread widens out the 15%, 20%, kind of the peak levels?I’m just curious, how you see the dynamics between prompts and newbuild tonnage working in the scenario you just laid out for clarity around technology and obsolescence risk?

That’s a good question, Mike. Let me think how to answer it. I think up until now, there have been a whole bunch of reasons not to want to order ships, lack of access to capital, uncertainty around the market outlook, et cetera. Now, in addition this has been there for a while, but now that the other excuses may be going away a little bit. We do think there’s going to be ordering activity. But we think that more than just on the margin, we think there’s going to be a real dampening effect from what we just talked about.But I think there’s another factor that I want to introduce to that discussion, because I think more than anything, just at the moment, I think it’s recency bias, which is limiting ordering activity and driving up that prompt delivery price. I mean, based on what we’ve been through in the last literally 10 years, who wants to order a ship delivering in 2.5 years, right? Where will the market be? And on top of that, people are thinking, okay, well, in 2.5 years, the future probably will be clear, and there’s a very high probability that I’ve just taken delivery of an obsolete ship. Not obsolete immediately, but with a shorter life.And this actually, there is an interesting precedent to this. If you go back to the early mid-1990s, after the Double-Hull legislation came in, there were some shipping companies that were still building single hauls, because they were safer and more efficient. And the new designs were really unclear, and they were quite conservative.And those ships, in particular, were the ones that got hurt. They were heavily discounted at an earlier point in their life, and they otherwise, than the others were. So I think that’s the fear. It’s not that something is going to be immediately obsolete, but that the life expectancy of it will be much shorter, so.

Got it. So, I guess, you think you need to see that newbuild value get teased down significantly more to entice people to come in and take that kind of risk that they’re the last owner to buy obsolescent deck?

Maybe, but I think the differential right now is more wanting to grab the upside now rather than taking of that. And on top of that there is the regulatory uncertainty.

Got you. Okay, that’s helpful. And then, one more for Paul actually along those lines, if you think about the cash flows, the windfall, it looks like you guys are going to step into the next couple of years from a rate perspective. Forgive me, Paul, if you mentioned this before, but your target leverage level, I know you’re kind of down in the low-50s now at a pretty healthy spot. And even with a relatively flexible dividend policy, you’re going to have an opportunity to delever.Where are you going to be comfortable kind of taking your leverage over the next couple of years? And do you have a kind of a bull case target level, if you will?

Thanks, Mike. We don’t have a specific leverage target levels. All our debt is amortizing, so we continue to pay it off. I mean, this business largely is about being countercyclical and having the capacity to buy and take advantage of ships when the market is low. So for the foreseeable future, if we do generate superior earnings, I think we would look to continue debt reduction and pay it down and take it down well below 50% and then give it – give good strong muscle to take advantage of opportunities at that – potentially the next downturn.So there’s nothing, no targets in mind, but over the next while we’ll certainly continue to pay down debt and potentially and aggressively pay down debt as the market – as we get to enjoy a stronger market.

That’s it. Okay. Thanks for the time, guys. I appreciate it.

Thanks, Mike.

Thanks, Mike.

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