Ardmore Shipping Corporation (ASC) Q1 2020 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to Ardmore Shipping’s First Quarter 2020 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 weeks by dialing 1 (877) 344-7529 or 1 (412) 317-0088 and entering passcode 10143555. At this time, I will turn the call over to Anthony Gurnee, Chief Executive Officer of Ardmore Shipping.

Good morning, and welcome to Ardmore Shipping’s first quarter 2020 earnings call. First, let me ask our CFO, Paul Tivnan, to describe the format for the call and discuss forward-looking statements.

Thanks, Tony, and welcome, everyone. Before we begin our conference call, I would like to direct all participants to our website at ardmoreshipping.com, where you will find a link to this morning’s first quarter 2020 earnings release and presentation. Tony and I will take about 15 minutes to go through the presentation and then we’ll 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. Additional information concerning factors that would cause the actual results to differ materially from those in the forward-looking statements is contained in the first quarter 2020 earnings release, which is available on our website. And now I will turn the call back over to Tony.

Thank you, Paul. Let me first outline the format of today’s call. To begin with, I’ll discuss quarterly highlights and then key industry developments. After which Paul will provide an update on tanker market activity, a summary of our performance and a detailed financial update. And then I’ll conclude the presentation and open up the call for questions. Turning first to Slide 4. We’re reporting adjusted net profit of $6.5 million or $0.20 per share for the first quarter 2020 as compared to an adjusted net profit of $2.5 million or $0.08 per share for the fourth quarter of 2019, reflecting substantially improved tanker market conditions. The MR charter market was performing very well even before the full impact of the oil price war and pandemic, which is reflected in our first quarter performance. Our MRs earned $19,300 per day compared to $17,700 in the prior quarter, and our chemical tankers earned $19,700 per day compared to $14,300 in the prior quarter. Throughout April, the pandemic and the price war increasingly impacted the oil market, resulting in overproduction, physical supply demand dislocation, record volatility in steep futures contango and rapidly depleting oil storage capacity. Tanker demand jumped as a consequence and pushed rates to record highs, initially for crude and more recently for product tankers, as evidenced by our recent activity. Our MR voyages booked in the second quarter-to-date stand at 24,000 per day, with 55% of fixed for the quarter. Our MR voyages in progress, representing roughly the last three weeks of activity, now stand at $28,200. And most recently, we’ve booked voyages as high as $72,000 a day. So clearly, the market has been building over time. Any increase in TCE performance goes straight to the bottom line with every $10,000 a day increase in TCE performance adding $90 million to earnings and cash flow annually. In this volatile but strong tanker charter rate environment, we intend to remain on the front foot commercially while remaining financially conservative, adhering to our capital allocation priorities which we announced in March. Turning next to Slide 5 on key industry developments. Every quarterly earnings release, we have to call it the way we see it regarding the product tanker market even under circumstances such as this. What we’ve seen is an unprecedented collapse in oil demand and massive overproduction exacerbated by the OPEC-Russia price war and the filling up of a substantial portion of global oil shore storage. In spite of the OPEC+ cuts, some production declines and a modest recovery in consumption, the over production may be lower, but we believe not enough to avoid shore storage reaching max capacity in the near-term. A demand rebound is expected some time in the third quarter of 2020 if the virus cooperates, but it’s unlikely to occur before shore tanks are functionally full. Already, about 10% of the world’s large tanker fleet is engaged in floating storage or carrying elevated levels of oil on the water, and we expect this to continue rising. Under these conditions, our view is that the value of oil storage, including floating storage, could go extraordinarily high resulting in a second round of strong tanker rates. When an economic recovery does occur, oil demand would rise with it, with oil products available but in the wrong locations and a significant portion of the world tanker fleet still tied up in storage. This, we believe, could result in potentially a third round of strong rates. As a consequence, we expect the product tanker market to remain volatile with spikes and lulls but at overall elevated rates for the near-term, possibly into next winter. This is not the only potential scenario out there, but at the moment, our view is that this one has the most logic. And with that, I’ll hand the call over to Paul.

Thanks, Tony. Turning to Slide 7 for an update on current tanker market activity. Product tanker market enjoyed significant strength from November to February as a result of IMO 2020 demand overlay and winter market conditions. COVID-19 and the associated disruption has effectively turbocharged demand for tankers to-date. As you can see on the chart on the upper right, the oil price war, coupled with the demand impact from COVID-19 saw a dramatic collapse in oil price and heightened volatility. The oil market went into steep contango, opening up trading and storage opportunities, and broker cost declined, reducing voyage expenses and boosting charter rates. Product tanker charter rates are now at unprecedented levels, driven by a number of factors. As you can see on the chart on the lower right, oil price volatility, a key indicator of trading activity, has reached record highs. The OBX in March was nine times average levels for the past five years. At the same time, there are significant regional imbalances of refined products driving demand for cargo movement. Global oil oversupply is resulting in a surge in demand for floating storage due to unprecedented imbalance between oil supply and consumption. Diesel, jet fuel and gasoline markets have moved into sharp contango in the Europe, U.S. and Asia-Pacific. And the collapse in oil price has boosted demand for substitute products. Oil and gas products are displacing coal for power generation, while demand for NAFTA has surged given the low price relative to propane. Finally, COVID-19 restrictions are causing significant disruption and increasing demand for ship time and supporting stronger rates, notably, logistical bottlenecks, port delays and congestion. Moving to Slide 8 for our near-term market outlook. Onshore oil storage is forecasted to reach capacity as early as mid-May. The OPEC+ cuts are unlikely to be enough to offset near-term oil demand losses. Estimated oversupply for May and June is expected to be significant. And based on the IEA’s estimates for 2Q 2020, oversupply of crude is estimated at 11.9 million barrels a day, with refined products estimated at 5.5 million barrels a day. As can be seen from the graph on the upper right, the IEA estimates that there are approximately 100 million barrels of available operational capacity in storage as of the end of April. Based on these levels of oversupply, approximately 20% of the world tanker fleet could be committed to floating storage by the end of June, which is unprecedented. Floating storage is expected to rise rapidly as a practical and viable option. Oil traders need to manage existing contracts and hedges while oil producers need to weigh the cost of reducing or shutting production. As a consequence, near-term demand for product tankers could remain very strong potentially through next winter. The oil market is expected to remain very choppy and volatile, while the global economic recovery could fluctuate, resulting in continued uncertainty. We expect more disruption to oil trading flows as the economy reopens in various stages and a large portion of the world tanker fleets tied up in storage would limit ship supply as oil and storage would also need to be redirected to a made point of immediate consumption. Moving to Slide 9 for a view of the medium-term market outlook. Oil consumption demand is likely to take some time before returning to pre-COVID-19 levels. However, disruption to existing trade patterns could benefit product tanker tonne-mile demand. There’s potential for restructuring of the refinery industry with less efficient and smaller refineries expected to lose out to mega-scale refineries located closer to points of production. This would be an acceleration of the secular trend evident over the past 10 years. For example, European refineries have been under pressure for some time and the post-COVID-19 market could add further pressure and accelerate their decline. A continued or accelerated dislocation of trading patterns and regional imbalances is likely to result in less crude and more refined products moving over longer distances, with the Middle East and Asian refineries increasing exports of refined products. This could result in increasing volumes of gasoline from Asia to the U.S. instead of Europe to the U.S. and increasing volumes of gas oil from the U.S. and Asia into Europe. Meanwhile, product tanker net fleet growth remains exceptionally low. Total order book stands at 173 product tankers or 5.8% of the existing fleet, delivering from the second quarter 2020 to the first quarter of 2023. We are forecasting 76 MRs to deliver for full year 2020, assuming no delays, while scrapping run rate is approximately 30 to 40 ships per year. Looking at scrapping, there are currently 79 MRs over 23 years old, and across all product tankers, there are 220 ships, representing 7.4% of the fleet over 20 years old, which would be expected to be scrapped in a weak market. We expect total product tanker fleet growth, net of scrapping, to be approximately 1.6% in 2020, 1.8% in 2021, and the MR fleet alone expected to grow by 1.7% in 2020. Moving to Slide 11 for a summary of our quarterly performance. As Tony highlighted upfront, we’re reporting net profit of $6.5 million for the quarter, up substantially quarter-on-quarter and on the prior year. We will go through the rates in more detail on a later slide. So moving to the fourth bullet, we completed dry dockings on three ships in the first quarter. We do not have any dry dockings in the second quarter as the schedule has been pushed out due to COVID-19 restrictions. Operational challenges are evident and being carefully managed. Areas impacted include, availability of supplies, labor, dry docking space for both routine maintenance and special surveys, crew changeovers and crew health and safety. Overall, the fleet continued to perform very well operationally in the first quarter with operating expenses coming in below budget. Moving to Slide 12, we take a quick look at fleet days. We are expecting 8,890 revenue days in 2020. The three drydockings completed in the first quarter accounted for 91 dry docking days. And as mentioned, three originally planned drydocking dates for 2Q have been pushed to 3Q and 4Q. And in the second half of the year, we expect to complete seven dry dockings and install one ballast water treatment system. Turning to Slide 13. We take a look at charter rates. And on the left-hand side, you’ll see a strong recovery in rates starting in the fourth quarter of 2019. Spot MRs reported TCE of $19,307 per day in the first quarter, while the fleet average came in at $19,390 per day basis discharge to discharge. The chemical tankers also rebounded strongly. Charter rates for the chems were $19,707 per day for the quarter, up from $14,284 per day in the fourth quarter. Looking ahead as of today and already mentioned, for the second quarter, we have 55% of days booked on the MRs at $24,000 per day and $16,000 a day on the chemicals with 45% of the days booked. Turning to Slide 14, we will take a look at our financials. As you will see on the second line, we’re reporting EBITDA of $21 million and a net profit of $6.5 million or $0.20 per share. Moving to the fifth line, we’ll take a closer look at overhead. Corporate overhead costs were $4 million for the quarter, commercial and chartering expenses came in at $900,000. As mentioned before, in many companies, the commercial and chartering costs are incorporated into voyage expenses, which means that our corporate cost is the comparable overhead. For the second quarter of 2020, we expect total overhead incorporating – corporate and commercial to be $4.9 million, including both cash and noncash items. Depreciation and amortization totaled $9.1 million in the first quarter and we expect depreciation and amortization for the second quarter to come in at $9.5 million. Interest and finance costs were $5.3 million for the first quarter, comprising cash interest of $4.9 million and amortized deferred finance fees of $400,000. We expect interest and finance costs for the second quarter to be approximately $5 million, including amortized deferred finance fees of $400,000. And moving to the bottom of the slide, operating costs came in under budget at $15.7 million for the quarter. Standard OpEx of Eco-Design MRs was $6,361 per day. Eco-Mod MRs came in at $6,559 per day while the chemical tankers came in at $6,743 per day. Looking ahead, we expect OpEx for the second quarter to be approximately $15.4 million. Turning to Slide 15. We will go through the progress on our capital allocation policy. As you all know, we initiated our capital allocation policy on March 9 of this year. Our objective is building long-term shareholder value in a highly cyclical industry through operating performance, capital allocation and effective risk management. The policy is designed to ensure that Ardmore is well positioned to capitalize on opportunity through the cycle and developments in the industry. Looking at our progress in the first quarter, we had CapEx of $2.8 million which included three drydockings and an additional investment of $500,000 in performance-enhancing upgrades. We repaid $7.8 million in scheduled debt amortization while we’re maintaining our revolving credit facilities for liquidity and additional financial flexibility. Our priorities under the policy are unchanged. Top priorities are fleet maintenance and debt reduction. In terms of fleet maintenance, we expect to complete 10 drydockings and won’t install one ballast water treatment this year. And for debt reduction, we have scheduled debt and lease amortization of $9.3 million in the second quarter and $36 million for the full year. On Slide 16, we are maintaining a strong balance sheet and liquidity position. At the end of March, our total debt and leases was $423.6 million, while our leverage was 51% on a net debt basis. Our cash at the end of March was $64.5 million and we have $25.6 million in net working capital. We are continuing to pay down debt, all debt and leases are amortizing at a run rate of approximately $38 million per year in the aggregate. And finally, as you all know, LIBOR has been declining, which is reducing our interest expense. With over 90% of our debt and leases being LIBOR-based, every 25 bps reduction in interest rates is expected to contribute an additional $1 million in earnings and cash flow. And with that, I would like to turn the call back over to Tony.

Thanks, Paul. To sum up then, much attention has been placed on the extraordinarily high charter rates achieved by crude tankers. More recently, those conditions that arrived for the product tanker market, too, which we believe may be more persistent, potentially for many months as the physical oil market continues its extreme gyrations around supply and demand. To better explain, we have to describe our recent chartering activity. Last week, we fixed a 55-day voyage at $72,000 per day, equivalent to a VLCC at 200,000-plus. MR Voyages in progress, representing roughly the last three weeks’ fixtures, now stands at an average of $28,200 per day, equivalent to the VLCCs at around $84,000 per day. While this is lower than rate estimates from some brokers and analysts, let’s face it, this is higher than any of us have seen since the super-cycle and the financial impact is significant. If for example, rates for our fleet averaged $28,200 per day for the full year, taking the first quarter of costs and ship days as a base, we estimate that our annual earnings would be approximately $110 million or $3.30 per share. To be clear, we’re not estimating or forecasting any future results, but rather just contextualizing what’s happening in the market. In terms of near-term outlook, if and when the oil market reaches max capacity for shore storage, we may enter a new and potentially more volatile phase of the product tanker market. And if and when oil demand rebounds with an economic recovery some time in the third quarter, we would expect more volatility, this time, consumer-demand driven. In terms of the medium-term outlook beyond 2020, there may indeed be a reckoning from high oil inventories and oil demand may recover slowly. However, we also expect the global refinery landscape to shift with older, inefficient refineries shutting down, resulting in more products shipped over longer distances from modern and efficient refineries geographically closer to points of oil production. That the tanker market is soaring when virtually every other industry is suffering is not illogical. Shipping rates strengthen with volatility and disruption. Of course, we’re saddened by the widespread suffering from the pandemic, but it should be understood that as an industry, we respond to demand through a market mechanism whose function is to optimally allocate transport and storage resources often in surplus, sometimes in scarcity. And with that, we’d like to open up the call for questions.

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

Thank you. Good afternoon, Tony and Paul.

Hi, Jon.

First question for you. You mentioned on your first slide, you intend to stay on the front commercially. So floating storage in MRs is obviously very rare and a lot of them LS2 or LS1, how are you trying to balance the positioning or availability of the fleet to take advantage of float adoptions versus keeping them in the right regional position if there’s any follow-through from what would traditionally be LS2 or LS1 cargoes that don’t have the capacity available?

To adopt an old adage, we simply follow the money. Storage contracts are really just time charters if the ship happens to sit. There are some consequences afterwards. You might have hull fouling, et cetera. And of course, if you’re sitting there, you don’t move around, and potentially, you do miss out on the opportunity to reposition. So that’s what we leave to the chartering team. I think they’re doing a terrific job so far. We expect they’ll continue to do so. But it’s all just part of the mix of opportunities within which we try to maximize our performance.

Okay. And then just a follow-up. The MRs and the chemical tankers put up very similar numbers. And they had quarter-to-date when you got boarded in February and they basically finished the first quarter in the same ballpark. In 2Q, there’s been a pretty big disconnect, which is really being driven by the upside from the MRs, although it looks like the chemicals have also come off a little bit from the 1Q average. Is there any visibility of the chemicals into the MR space where you can see similar performance like 1Q, when the market gets as tight as it has or are they just truly, really specialized and have completely different supply and demand dynamics altogether?

I think the truth, Jon, is somewhere in between. So first of all, our chemical tanker fleet is relatively small, and therefore, the portfolio of their voyages can change over time. What we also notice is that those ships tend to do extremely long-haul voyages. And so that does create a pattern of kind of front haul backhaul that can extend over even as much as a quarter. The other point is that within those six chemical tankers, we’ve got two 37s, and their earnings pattern is much more similar to the MRs. The 25s operate not fundamentally differently, but they do seem to have a different pattern of earnings. Overall, we think they do very well. I think the return on capital is good, but they tend not to catch the spikes the way the bigger ships do. So I think that’s probably what we’re seeing, it’s a combination of backhaul versus fronthaul and long voyages, combined with the MRs and the 37s catching the wave quicker than the smaller ships.

If I could do just a quick follow-up on that. If the MRs have averaged $24,000 we’d be today, but the current market you’re saying is $28,000 and of course, you do that – out there voyage. We’ll just ignore that for now. If the – $16,000 quarter-to-date, is there a representation of where the market is today to think about how the remainder of the quarter may act? Or is it still right around that same level that it’s been quarter to date?

No, I think I can mention things that are happening in the market that because this is full disclosure, but we fixed a 25 earlier today at $23,000 a day. Maybe that’s still a little bit short of what the potential market is, but that is probably a better estimate of where the market is today. And like I said, those ships tend not to get these spikes quite the same way. But then their voyages are longer and they actually tend to do about the same over time on a return on capital basis. So I think there’s some confusion about the rates that we’re mentioning. And I might just take this as an opportunity to clarify that. Because the numbers that we’re providing are not really guidance. They’re – what we’ve actually booked in the portfolio for the quarter to date, okay. And typically, voyages in progress get improved over time. So as an example, we just for a voyage that we actually commenced on March 3, just completed now, it was a fairly long voyage and incorporated backhaul. That started off at $19,000 a day, and we just concluded it at $26,000 a day. So one key point to make here is that these are portfolios of historical voyages. And for voyages in progress, they do improve over time. The second thing is that whatever the market, whatever level the market delivers, we’re going to earn it, right. So for the rest of the quarter, the MR market is at $30,000 a day, we’re going to earn that, maybe a little bit more. The fact that quarter-to-date, we’ve earned $24,000 reflects voyages that we’ve booked as early as late February, early March, right, in part, okay. So it’s not forward-looking, it’s historical. And I think based on some of the notes that we’ve seen this morning, I think people are misconstruing a little bit. The final point I want to make is that it just seems like when you get into these extreme periods of volatility, the indices the people are quoting, the rates, the broker the ship brokers, they’re going around, tend to be somewhat detached from reality. And as our chartering team likes to refer to that, it’s basically fairy dust until you actually fully fix it, right. So I’m not saying the market is not at $35,000, $40,000 a day. I don’t think MRs are at $50,000 a day as a lot of the broker reports are suggesting, right? But let’s face it. That’s a pretty good level, right? And the financial implications are pretty extreme. So I think if we’ve sort of somehow disappointed, based on our "guidance", we’re providing estimates based on what we booked so far going back to as early as late February, early March, and maybe the numbers that people have been hanging on to that have been quoted by brokers and indexes, et cetera, aren’t quite there.

That’s completely fair. I appreciate being financial. Thanks.

The next question is from Randy Giveans of Jefferies. Please go ahead.

How are you, gentlemen? How is it going?

Very good Randy. How are you?

Good. All right. So as you mentioned there, talking about the headline rates we’re seeing $50,000, $50,000, even $45,000. How robust is that market? Is that one charter? Is it a handful of charters every day? How often are those? You’ve had a benchmark out there that you had at least one in the 70s, right, although most have been in the 20s. How robust are those kind of charters?

They’re robust. I mean, we – at the moment, we would assess the global market at MRs at $35,000 to $40,000 a day. We’ve got voyages that we booked at substantially higher rates than $28,000 a day. And we’ve got some that are largely historical, that were lower, right. So this is it kind of builds and then plateaus, et cetera. The strongest market at the moment is the Arabian Gulf. We think that, that kind of rate level, $70,000 a day is close to achievable in that market today, meaning that their ships’ fixing at those kind of levels, right. Elsewhere, the rates are lower. So for example, the Atlantic, especially, think in Northern Europe, it’s come off quite a bit. But overall, we would assess the global market at $35,000 to $40,000, not at $50,000. But I think, again, I mean, we have to put this in context because these rates are quite extraordinary in and of themselves. And I think anybody that finds those kind of rate levels to be disappointing, I think, is, it’s – they might have been looking at numbers that were more broker talk than reality.

Sure. That’s fair. And then how…

And maybe if I could just maybe add – yes sorry. We’ve got a time-lapse. So I’ll let you go ahead. Sorry.

I was just saying in terms of the strength in the market that we’re seeing in spot rate, has that translated to time charter rates? And then what about asset values? Has that kind of cascaded down from the strong spot rates we’re seeing that moved time charter rates much? Has been moved to asset values much? And then with that, do you still believe your NAV is in that $10, $11 range?

Yes. Just to finish up maybe a point on the last question. We don’t know how persistent this market is going to be. We think it’s going to be volatile. And overall, at very elevated levels for the reasons we mentioned. It doesn’t feel like the MR market right now is in any kind of free fall. There seems to be real support at the levels that we’ve mentioned. In terms of the time charter market, let’s face it, the spot markets move very, very rapidly, literally over the last kind of two weeks in the MR space. And while time charter rates have moved up, probably not as much as you would think. And as a consequence, not much is getting done at the moment because we think that the differential between bid and offer is probably pretty wide at the moment. As these conditions persist, you’ll see the time charter rates come up. You can imagine that the asset market is even further behind that, right.? Because let’s face it, the overall macro picture is quite scary looking, right? So if you’re talking about new buildings or buying relatively modern ships, these are fairly long-term investments. And I think there would be understandably a degree of risk aversion. A 2010 built ship recently sold for $19 million not very recently, like in last week. We think that’s a good support level given what’s happening in the bigger macro picture. Can these go higher? Yes. But we’ll just I think it really would require two things. One is for the spot market to play out over a longer period. And I think for some of the concerns about 2021 to begin to dissipate. In terms of our NAV, we don’t talk about what our NAV is. The number that you’ve quoted sounds to be sounds to me like a price level that we’d build in future earnings expectations. But in principle, obviously, is vessel values go up, so does the NAV by roughly $0.80 a share for every $1 million in asset value.

All right. Well, that’s it from me. Thanks for the time thanks.

Thanks, Randy.

The next question is from Ben Nolan of Stifel. Please go ahead,

Hi, guys. I first wanted to ask just on the asset allocation side of it, obviously, you guys have sort of changed the way you’re doing things with respect to the dividend. And I think given the uncertain times that we live in, that makes perfect sense. But maybe from a longer strategic standpoint, can you maybe kind of talk through what you want the balance sheet to ultimately look like? You go through a period of excess earnings here that certainly builds the balance sheet. But where’s the target, would you say?

Well, we have I mean, we stated our target at 40% based on mid-cycle asset values. We think the reasoning behind that is we think that begins to put us in a position where we can be truly kind of countercyclical. Everybody sees opportunities in a weak market, but very few people can act on it. That’s the principal reason. We think that it’s a better approach to building value over the long-term.

So I don’t know. Let’s say that this elevated market were to last for six more months and you get to that or get below that kind of threshold. At that point, do you revisit, sort of capital allocation? Or I don’t know, is that a real threshold, would you say?

Real.

Or just kind of? Okay. All right. That’s helpful. And then as it relates to…

No, no, no. That’s exactly what we said and yes.

Okay. As it relates to just the market, and we’ve discussed a little bit here in freight being elevated and floating storage and everything else. But clearly what’s going on is refineries have not turned down to the same extent that or at least their production remains higher than consumption, and that’s relatively obvious. But, I’m curious what you’re hearing from your customers with respect to what they’re thinking about going forward. What would you expect there to be some more refinery pullback or do you think that maybe some of the coastal refineries will maintain their high production levels relative to maybe inland refineries and just sort of how you, obviously, none of us know for sure, but how do you envision this playing out with respect to the demand from product anchored, both for floating storage and transportation?

Good question. It seems like there’s a lot of talk in the market about refineries curtailing production, reducing utilization levels, et cetera. And I’m sure that’s happening. But more than that, it seems like whether you’re an oil producer or refiner, to a degree, just trying to make it to the rebound. And I think that’s prompting a lot of continued production. And of course, refineries will, if they have a buyer and they can buy the crude cheap enough and make money, that’s the business they’re in, right. So I think there’s that dynamic that’s going to result in maybe more production and more throughput and more shipping than you’d otherwise think. The second point is that with all the extreme volatility going on, or I mean, which is really a reflection of price dislocation, we’re just seeing voyages over much longer distances. And that just has a dramatic impact on tonne-mile demand. And as we’ve seen before, you arrive at a discharge port and you’ve got to wait. And so of course, that may not be contractual floating storage, but it is floating storage. The other thing we’re hearing more and more of is requests from charterers to slow ships down because they know that when they arrive, it’s going to be a long time, right. And there’s a mechanism in the charter party that allows you to benefit from that as the owner. But that basically results in elevated levels of oil on the water. So all of this contributes to either tonne-mile demand or it takes supply out of the market.

Okay. So and is that what you might attribute the fact that MRs, although they have pulled back in product tankers in general, have not nearly seen the pullback that we’ve seen in the crude market? Is that sort of a differentiation between the activities of the refineries that what’s going on here?

Yes. I wouldn’t really even characterize what’s happened with MRs as a pullback. I mean rates have come off. But like I said, rates are still up at those close to those record levels out of the AG, which has been exporting a hugely increased amount of CPP. And yes, this activity is supporting it’s that market dynamic that we just painted is supporting those kind of price levels. Now, will it dissipate a little bit, possibly? Will it tighten again? We actually think it will because we just see more and more product getting stuck on ships.

Okay. And lastly, if I can squeeze one more in. Given all the volatility and everything else, just I’m curious from a broader macro perspective, if you think there’s been any change in either the banking side of it, whether clearly, you’re making good money now, but whether you think that there’s been any pullback in terms of capital availability from the banks, and/or any change in how owners are thinking about it, maybe being more or less aggressive with respect to consolidation or M&A or asset-specific buying and so on.

Well, I think if capital was relatively scarce before, it’s even scarcer now. I think banks that we talk to are there to support their customers, but we’re very, very lucky being in the tanker sector just at the moment. Others aren’t faring so well. So I think there’s probably overall pressure in every aspect of the bank’s portfolio, not just shipping but then in shipping, too. And there will probably be consequences in terms of overall access to capital. In the long run, we think that’s a good thing. It will keep capital away from newbuildings. Will it spur any more consolidation in the industry? We don’t know.

Okay, perfect. I appreciate the time. Thanks.

The next question is from Mike Webber of Webber Research. Please go ahead.

Hey, good morning guys. How are you?

Good, Mike. How are you?

Good. It’s only a lot of this has kind of been picked over, but I do wanted to touch on storage again. And I guess, first and foremost, around and a lot of this is oriented toward some of the larger tonnage things, some of it in MRS, but just curious in terms of the length of inquiry and at least maybe, I guess, is not directly related or as robustly related to MRs as what you’re seeing in the broader market in terms of people, maybe looking to extend beyond six month storage contracts and take a bit more length. It seems like it’s been pretty clustered around six months. But I’m just curious whether you’ve seen people starting to going to extend their days and maybe get a bit worried about what to do with the cargo after a six month period?

Yes. It’s a good question, Mike. I’m afraid we’re not quite in the right sectors to speak on it knowledgeably. We have had some discussions, even on MRs, about six month storage at good rates, but that’s really more for the bigger ships, even for LR2s, et cetera. But it does seem like the real interest is around six months. But if you’re an oil trader and you’re doing your job, you’re probably getting options to extend.

If I look at slide eight, and you guys kind of put some illustrative examples of where floating storage could go. And you’ve been in the market for a long time and a lot of the storage decisions or kind of the mechanisms are largely going to be driven by that refining behavior, which you guys certainly get a ringside seat for. So I’m curious, as you’re looking at the market now, where would your best guess be in terms of how much tonnage actually gets soaked up by storage? I mean, we can all kind of put the parameters out there of what could happen. But then you’ve got a pretty interesting vantage point and certainly more institution memory than just about anybody. So I’m just curious, as you look at it now, knowing it could certainly change tomorrow, where would you put that number?

So unfortunately, experience doesn’t count for much right now because these are unprecedented conditions. But we spent a lot of time looking at this analytically as everybody has. And you guys more than anyone probably. If we were overproducing by 30 million barrels a day of demand in April and let’s say, the effective OPEC cuts are eight million barrels a day, that the shut-ins and curtailment is another three million, four million, five million barrels a day globally; and you’ve got a rebound a gradual, sort of slight increase in demand of maybe three million, four million, five million barrels a day. You’re still probably 12 million or 13 million barrels per day overproducing globally. And so that’s over the course of May. And so that’s another 400 million barrels. Of course, there’s you get a double effect because that is essentially production, some of that goes through refinery and then can end up on the other side of the refinery, on our side of the world as additional excess production. So those numbers are pretty significant. Right now, I think the estimate is that as of the end of April, 370 million barrels of oil were in officially floating storage or elevated levels of oil on the water. How much of that 400 million ends up actually out on ships is just pure conjecture. But if it’s, let’s say, half, that’s a significant number. That could result in the utilization of the world tanker fleet going from and when we say large tankers, we mean, Aframax and up and kind of MR and up, so we’re not talking about 10,000 deadweight tonne ships. But on that basis, 10% could go to 20%. And then if you factor in other longer voyages, other disruptions, then that’s where the support for the market is coming from right now.

All right, that’s helpful. And just maybe one more on asset values. I think you kind of mentioned the upside to NAV with every $1 million of value and think you look at I know there’s a debate around whether the market is $72,000 or $40,000 but we’re kind of talking about stupid numbers at that point anyway, right. So at the $35,000, $40,000 for an MR, you’re talking about justified values that are probably $41 million, $42 million, a little bit north of where we’re at today. I’m just curious, based on, again, the conversations you’re having within the industry, should we keep marching up a little bit from here? And we index these equities off of now. Do you think the market ends up clearing at some of these prices? Do you think there’s enough liquidity or really a lack the friction’s minor enough for deals to people to transact that we actually see some asset value, some assets trade on that kind of the proper newer side in the high 30s in the low 40s or beyond?

I think it’s a really good point and interesting question. Look, obviously, when you really see values moving up, it’s because people have a belief that something is going to continue for a long time. I don’t think anybody believes this is going to continue for a long time. In nine months would be fantastic, right? After that, if we get back to decent market levels, I think we’re all happy. But the reality is, if you go back to what happened in the super cycle, it was just a whole different mindset. But what’s happening now is that rates are so high on the front end that you could see I’ve never been a big believer in this idea of adding future earnings to NAV, for NAV type of thing. But I think it makes some sense now because the near-term cash flow is potentially really, really significant. And it just has to be added in, right? So for example, for us, if we make $90 million of cash over a certain period of time, that’s $3 a share. But that’s NAV, right? Because it’s in the balance sheet, right? So I think on a forward NAV basis, yes, you can start kind of projecting significantly higher numbers.

And just to follow-up on your answer there a bit. You mentioned this lasting nine months. To what degree is that you predicated on a relatively orderly and linear recovery? If we’re looking at a scenario where we have fits and starts of economic recovery and kind of the general kind of linear storage trade kind of gets turned on its head? Do you think that scenario is still reflective of kind of a nine month time frame? Or do you think it could extend beyond this? Sorry, that’s a very high level question, but just curious.

No, I think, no, we’ve been spending a lot of time thinking about this. And we went from having no sense of visibility a month ago to all of a sudden, beginning to see what could be happening here. And the first piece is this short storage situation, right. And we think, look, it’s not guaranteed to happen. We think it’s likely to happen. And I think there’s a difference between theoretical and functional storage capacity. For example, 50% of all the remaining oil storage in the world is in the U.S. and China, right? That doesn’t help you if you’re in the mediterranean or something, right? So I think there’s potentially a very disruptive event coming up in the near-term, like in the next few weeks. I don’t think it has to do much to have to provide real support to the current market and maybe even drive it higher. That’s our personal view. We might be completely wrong on it. And I think what’s happening is everybody is just trying to survive to the rebound. But what does that rebound look like? Well, it’s probably I mean, when you’re coming back from 25% down, 15% is one hell of a rebound, but you’re still 10% short, right? So in terms of this kind of snapback and whiplash of, all of a sudden, demand coming back to life after this traumatic phase that we’ve been through, and perhaps can go through even more, that could be that could really generate a lot of volatility and chaos in the oil market, right? The oil be will be out there, but almost certainly not in the right places, right? So then you get into these incredibly long-haul trades. And the old our famous example is, if you go from Houston to East Coast, Mexico, that’s very different from Houston to China. Right, in terms of tonne-mile demand. And you could, theoretically, if you have setbacks and recurrence of coronavirus in certain parts of the world, you could have more volatility, more physical dislocation of supply and demand in the oil market. And so that’s why, overall, we think that this just could carry on for a while. Could it carry into 2021? I don’t know. I mean, it just we’ll take what we’re getting right now, if it’ll continue for nine months. But going into 2021, we would expect things to stabilize. We are really interested in learning more about what’s happening to the refinery, the global refinery landscape, because we think that could really accelerate trends that have been going on a long time. And the world could look quite different in terms of trade patterns and tonne-mile demand for product tankers in that situation.

Got you. Okay, that’s enough for me. Appreciate the time guys. Thank you.

Yes. Thanks, Mike.

The next question is from Omar Nokta of Clarksons. Please go ahead.

Hi, thank you. Hi, Tony. And Paul I am I know I’m jumping in a bit late, but I just wanted to follow-up on maybe the voyage dynamics you were discussing. I think it was a bend, you mentioned charterers asking to slow speed down because there’s obviously a logjam at different ports worldwide. Are you are there any issues that are arising where a charterer may want to declare something along the lines of a force majeure when it comes to having to pay the added demurrage cost?

So far, no. I think there’s a lot of worry about what could be coming down the road. But the reality is that the Merge bill is the obligation of the charterer. And these are typically big oil traders and oil companies and oil majors and national oil companies. So that’s not that’s really, at this point, not a direct and immediate concern.

Yes. Okay. So the counterparty risk, obviously, you’re not chasing you’re not chasing builds here. Maybe just a bit more color. Let’s say when you are fixing a ship, when you’re agreeing on a spot rate, how different is it, especially in today’s market where spot rates are just through the roof, what’s the difference between the spot and the demurrage? And because if delays persist globally here for an extended period, should we be thinking that maybe there is some risk to the rate that we think you’re going to be reporting relative to the indexes?

Yes. I think that’s a good question. I demurrage is always heavily negotiated. And very often, it’s you kind of consider it’s pretty far out on the futures curve, if you will, or the forward curve of where the market ought to be. And so let’s say, if you’re in a hot market and you’re able to get a good rate now, that doesn’t necessarily mean you entirely believe on what the market might be in a month, right, when you’re sitting on demurrage, right? So you’re right, typically very often, the demurrage rates are lower, but they’re still at very, very high levels. Like nobody is fixing at $40,000 a day and agreeing demurrage at $17,000. You fix at $40,000 a day, you agree demurrage at $35,000 to $30,000, all right?

Okay. All right, that’s helpful.

So and there are sometimes you deliberately enter into trades that you call demurrage plays where you’re going for the demurrage and then it becomes the main point of your negotiation. So, but I wouldn’t I don’t think, typically in our business, people sell themselves too short on demurrage. Very often, it’s kind of a forward-looking indicator of where people think rates might be coming out of a certain market. But there’s usually not a huge disconnect between the spot voyage and the demurrage rate.

Got it. Thanks, Tony. That’s all I had.

Okay. Next one.

The next question is from J. Mintzmyer of Value Investor’s Edge. Please go ahead.

Good morning, Tony. Good morning, Paul. Thanks for taking my question.

Good day.

I think we’ve covered most of the fixture nuances pretty well on the call thus far. But looking at the numbers you reported for the Q2 guide, it seems like a lot of fixtures came a little early, which is understandable. For the rest of the fixtures in Q2, is that pretty evenly spaced out? Or are we going to have several coming up the next week or two?

We do – I think it’s a relatively smooth flow. So we’re probably fixing on average a ship every one or two days in a fleet of our size. So yes, so I think we’re in position to grab any near-term upside. And over time, whatever the market delivers, we’re going to get, all right, so…

Excellent. Makes sense, Tony. You mentioned one fixture you just did at $72,000. Was there anything else you did recently, like over the $50,000 range? Or is that the only one that’s kind of eye-popping at this point?

I think we’ve done two over $50,000.

Okay. And then a final question on your capital allocation letter. You mentioned wanting to get down to 40% debt to assets that I think that’s pretty reasonable. But at the same time, we kind of had a discussion earlier with Randy about your NAV. And we have different numbers, but we show you guys about $750 million right now as of Q1 financials and probably a little bit $859 million range by Q2, which we’re almost halfway through that quarter. And your stock right now, it’s been trading down pretty poorly. It’s about $6 flat earlier, now it’s rebounding slightly. At what point do you say we’re going to take advantage of some of that huge dislocation and perhaps do a repurchase? Is there an opening to do that perhaps this summer? Or is that something you want to wait until you get to the 40% leverage first?

I think there’s a really interesting philosophical discussion to have around short-term value versus long-term value orientation on that question, and probably now is not the time. But bottom line is that we’re just very, very focused on building value over time, building long-term value. And we’ve come out with our new capital allocation policy, and we’ve kind of stated our priorities very clearly. And they can shift over time. So for example, I can almost guarantee you, if our stock went to $0.50 and we were earning this kind of money, we’d probably buy a lot of stock, right? But the other thing maybe I’ll mention is that the share buybacks are not particularly in vogue right now. But in any case, the SEC rules around share buybacks actually really limit the amount that you can do in a quarter. Very often, you get stuck against blackouts, et cetera. So I think in terms of buying shares back cheap, it’s a little bit elusive anyway. Something good to talk about and maybe a signal to the market. But again, we’re just trying to figure out what’s the right thing to do to build value on a long-term basis. And obviously, maximizing earnings is a really good way to do it.

Yes. Absolutely, Tony. Well, you can never go wrong with deleveraging and making sure that balance sheet is solid. So really looking forward to your Q2 results, and hopefully, these MR rates will stick around. Thanks for your time.

Yes, thanks.

The next question is from George Berman of Cabot Lodge Securities. Please go ahead.

Good morning. Thank you for taking my call. And I want to congratulate you to a very good quarter, even though the stock doesn’t reflect it yet. I got a couple of questions for you. We often see that various tankers are booked on a subject, and then a few days later, the subject calls in as failed. What happens to your tank? Or what kind of way do you negotiate then?

That’s a really great question, George. It’s especially when you get in these volatile markets, it’s a very prevailing feature. It’s called fixing and failing, as you say. And it really has to do with the oil trader, whether he’s in an oil company or at an oil trader firm, whatever, they will basically secure the ship, and then they will give it to the oil traders who will then try to complete the trade the oil trade. And very often, with the markets moving around as much as it’s been recently, you can grab something and then at the peak of the market to then lose it because conditions change or they don’t lift the physical side of the oil trade. So what happens then? You just keep on working the market. Companies that develop a reputation for fixing and falling, find it hard to get ships. So I think it’s there is a bit of good behavior monitoring that goes on in the market on that basis. But look, it’s a very typical feature of our business. It creates a bit of an emotional roller coaster for our own trading team, but they’re great at it and they just keep at it until they get a good fixture done.

Okay. Fair enough. Then next question would be on storage. Are there any time limits due to, say, degradation of the cargo as to how long you can store your clean products, that being gasoline, diesel and jet fuel, I guess? Is there any like effluent? Or does it evaporate? Or what’s happening on the time that you store a load?

The only cargo I’m aware of that can actually go out of date, is jet fuel. The rest of it, I think, is fairly stable. What you might find is that, that grade of gasoline, for example, may not be suitable for the season that you’re in. So there might be some impact of that. I think the other factor is that if you let a ship sit too long on a storage contract, it can develop significant hull fouling and might need to go into dry dock, et cetera. So I think there are operational considerations. But as far as I’m aware, there’s not other than jet, there’s no real kind of cutoff dates in terms of the cargo going off in any way.

Okay, great. And your fleet predominantly is not on storage, it’s a voyage fleet, correct?

Yes. But very often, we find ourselves arriving at a discharge port. And lo and behold, the shore tanks are full and they we can’t discharge the ship, then it goes on demurrage and it’s effectively in floating storage at that point.

Okay. And then last one maybe. Have you seen any of your competitors in your size range, switch from clean to dirty crude oil storage or transportation? Or is that not a factor in your class?

In our size, there is a limited amount of dirty trading MR activity. It’s quite small. It’s more prevalent with LR2s and LR1s, mostly LR2s. We up for the last probably since November, we were tracking more and more LR2s that were treating clean going into the dirty trades more recently because the LR2 rates have gone sky high; and Aframax rates, which is the uncoated description of that ship size, they’re not earning as much. And so we hear and we haven’t seen anything yet, but we hear of some ships trying to find ways to clean up and go back into clean trades. So far, we don’t see it as a major factor in the market.

Thanks very much for your time and look forward to another great quarter.

Thank you, George.

The next question is from Greg Wise with Boston Partners. Please go ahead.

Hey guys. I just want a little more some comments on two quick things. You mentioned a couple of times now, the delays when some of your ships are reaching port. And obviously, MR voids are oftentimes not that long, 20, 30, 40 days, so if you add a couple of days to that, it’s effectively a big percentage of capacity coming out of the market. So is this trend increasing, decreasing? What effective how long a delay is? In other words, how much supply is being taken out of the market potentially from this, which obviously, people have been talking about floating storage more than just delays. And then secondly, on the order book, it’s extremely low. And back in the fall, the one thing everybody was worried about was new orders, it could disrupt the supply demand balance. Now we’re in this environment where rates are high but no one’s ordering. Just give us a bit of the ship owner’s mindset if you think we’re going to see ordering here because obviously, we don’t it extends domains we could be in a constructive supply/demand environment post whatever hangover we have. Thanks.

Yes. Good questions, Greg. I guess to answer the first one, maybe to use an example, we just completed a voyage where the ships sat at a discharge port for 40 days. That’s unusual. It was probably going to sit there anyway, but this was much longer than was expected. And so if that’s and we’re not we have other ships doing similar things right now. So I think the effective floating storage component of the market right now is significant and it’s growing. The slow steaming is the effectively the oil on the water calculation. So we think these are very real, and we don’t see them going away anytime soon. In fact, we think that, that’s going to increase, right? So analytically, I think other people are much better positioned to try to figure out what percentage of total supply or demand or whatever that represents. In terms of newbuildings, we talked earlier about the fact that capital, if anything, is more scarce than it was a few months ago. That’s certainly going to I wouldn’t want to go into a bank right now and say, by the way, we want to order some ships, what do you think? I think they might tell you just to kind of stick with what you have and be happy. But there are a lot of very cash-rich owners in the world, and they’ve succeeded by being countercyclical and speculative, and we’ll always see a trickle of that kind of activity. But it just doesn’t feel like a great time to access capital and go order a bunch of ships.

Have you – in your history, in your career in this industry, have you seen a period where we have very strong rates and a low order book and the rates not stimulating orders? Or is this kind of, given the backdrop, a unique situation?

This – look, I think you can look to two prior periods, like this one is 2014, 2015, and maybe 2008, 2009. Both resulted in strong markets at a time when it was acknowledged that they were going to be short-term. I think what’s different this time is this whole issue of shore storage filling up. And it’s just taking it into a new dimension, we think. We’ve just never seen this kind of volatility in oil price or oil demand. So like I said earlier, I can’t say there’s anything in what we’re talking about that feels like it’s a multiyear trend. So we have to think of it in the short-term. But if you earn five times as much in one-fifth a time, that’s the same thing as earning that over a longer period.

Got it. Thank you, Tony.

Yes.

This concludes our question-and-answer session and today’s conference. Thank you for attending the presentation. You may now disconnect.