Navigator Holdings Ltd. (NVGS) Q2 2018 Earnings Report, Transcript and Summary

Thank you for standing-by, ladies and gentlemen and welcome to the Navigator Holdings Conference Call on the Second Quarter 2018 Financial Results. We have with us Mr. David Butters, Chairman, President and Chief Executive Officer; Mr. Niall Nolan, Chief Financial Officer; and Mr. Oeyvind Lindeman, Chief Commercial Officer. At this time, all participants are in a listen-only. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you the conference is being recorded today, Tuesday, 7th of August 2018. And I'll now, pass the floor to one of your speakers, Mr. Butters. Please go ahead, sir.

Thank you, Tracey, and good morning everyone. And welcome to the second quarter earnings conference call. Our format this morning will be changed just slightly, so that Niall Nolan, our Chief Financial Officer will lead off covering the financial highlights of the quarter. And that will be followed by Oeyvind Lindeman, who will give us an overview of the markets and all things commercial. So, why don't I give the phone to Niall. And Niall, what happened this year?

Thanks, David, and good morning all. The challenging market continued into the second quarter with charter rates, particularly for LPG remaining under pressure, although some positive progress has been seen with utilization rates across our fleet. Revenue for the second quarter was $73.2 million, $1.2 million less than the $74.4 million generated during the second quarter of 2017 and $3.6 million down from the $77.8 million generated last quarter, Q1 2018. Revenue for the six-month period ended June 30th was $151 million against $151.7 million generated during the first six months of 2017. During the second quarter, we had the benefit of two new vessels in the fleet compared to a year ago, resulting in the fleet size of 38 vessels, 14 of which are ethylene and ethane capable, 17 are semi-refrigerated and seven are fully-refrigerated. We have no new newbuildings on our dock. These two additional vessels contributed to an incremental $3.1 million revenue for the quarter. Also, utilization increased to 90.3% for the second quarter against the low of 86.2% during the second quarter of 2017, contributing an extra $2.7 million to revenue compared to Q2 of last year. However, as I mentioned, charter rates continue to be a challenge with average rates obtained during the second quarter at $19,089 per day or $580,700 per calendar month compared with rates of $21,600 per day or $657,000 per calendar month for second quarter of 2017. During the second quarter, time charters accounted for an increased 67% of all of vessel operating days, while 33% of the operating days were spent undertaking voyage or spot charters. Although LPG was transported for the majority of time charter days, petrochemical gases accounted for 81% of all spot charter days with LPG only accounting for 19%. We undertook three drydockings during the first half year, taking in aggregate 51 days off-hire and costing a total of $3.2 million. We are scheduled to drydock further three vessels during the second half of 2018, estimated to cost a total of approximately $3.1 million. For next year, 2019, we expect to drydock 10 vessels at a provisional cost of approximately $14 million, which includes the installation of ballast water treatment systems on eight of those vessels as they do not currently have one fitted and which is mandatory for all vessels if drydocked or built after January the 1st, 2019. Vessel operating expenses or OpEx increased by 4.2% to $26 million for the three months ended June 30th, compared to $25 million for the comparative three months of last year, solely as a result of the increased number of vessels in our fleet. The daily rate for vessel operating expenses for the quarter were $7,530, slightly less than the $7,641 per day incurred during Q2 of last year. The average daily operating expense for the six months of both 2018 and 2017 were pretty consistent at almost $7,700 per day. General and administrative costs and corporate expenses increased to $4.8 million for the quarter from $3.9 million for the comparative period of 2017, principally as a result of foreign exchange movements on non-U.S. bank accounts and for costs associated with facilitating in-house technical management for currently 10 of our vessels. Interest costs for the quarter were $11.4 million, an increase of over 21% or $2 million compared to the second quarter of 2017, all of which was as a result of increases in U.S. LIBOR. There were also compensatory differences with increased borrowings of approximately $120 million associated with our final newbuildings offset by regular quarterly loan repayments and lower interest costs following the refinancing of both our bond and a bank loan last year. Our next lower maturity remains in June 2020. We reported a net loss for the quarter end of June 30th of $3.2 million, a loss per share of $0.06. This compares to a net income of $2.3 million for the second quarter of 2017 or $0.04 per share. Despite this loss, the company continued to generate cash and generate at $21.1 million cash from operating activities during the quarter. And had an EBITDA of $27.2 million, just $2.7 million less than the EBITDA of $29.9 million reported for the second quarter of 2017. Moving on to the balance sheet, at June 30,, 2018 cash stood at $55.1 million, not including a further $38.1 million we had for drawdown for generally corporate purpose on one of our revolving credit facilities. Since the end of the quarter and following our announcement, on May 29th, that construction of the ethylene terminal is underway. We have contributed to a further $15 million from available cash resources towards the total capital cost of approximately $155 million. This follows an initial contribution of $10 million made in January 2018. This joint venture investment will be equity accounted and is shown separately on the balance sheet under non-current assets. We are currently advancing with the negotiations for two debt facilities to finance the remaining capital requirement for the ethylene terminal. One of these being a typical bank project finance facility and the other being debt from an infrastructure fund. At June 30th, total bank debt stood at $732.4 million along with the $100 million Norwegian bonds. During the quarter of 2018, as a consequence of the prolonged downturn in the LPG markets, the recent significant increases in U.S. labor, as well the additional interest that is expected to be incurred on incremental debt associated with the marine export terminal, prior to it becoming commercially operational. We sort and have received approval from our banks to amend one of the covenants contained in each of the bank loan facilities. The covenant which required the ratio of EBITDA to be at least two and half times interest in one facility or three times interest in the other three facilities has been amended to a requirement of two times interest on each facility for a period of two and including September 30th, 2020. In addition, the definition of interest was redefined to exclude any interest due or payable relating to the debt financing expected to be obtained by the company in relation to its obligations associated with the construction of the export marine terminal. And under the terms of these amendments, the payment of dividends by the company are prohibited until on or after December 31, 2020. And with that, thank you and I would hand you over to Oeyvind.

Thank you, Niall, and good morning all. The second quarter of 2018 continues in more or less the same way as the three months. Our customer portfolio mix remained relatively confident for the quarter with above 50% of our earnings days carrying LPG, 40% of our earnings days carrying petrochemical gases and the remaining 10% for ammonia cargoes. About half of the fleet servicing voyage charters which continues to be heavily weighted towards petrochemical cargoes, as Niall mentioned was about 80% of those earning days. We managed to maintain an overall utilization rate hovering above 90%. In theory, a higher utilization rate should translate into strong resentment in any shipping segments. Both the very large gas carrying segments and the handysize segments are currently experiencing high utilization rate but have limited effect on the freight rates which is the commander. At least for the handysize segments, additional factories are at play. Complexity of other ship sizes comes into the equation. Some competition is seen for petrochemical cargoes from the smaller 8,000 to 12,000 cubic meter ship size, and same competition is seen or has been seen for LPG cargoes from the larger midsize 35,000 to 38,000 cubic ship sizes. On a positive note, the VAT overhang of newbuildings for the midsize segments, IAG segment that's immediately above us, it's coming to an end, with only five vessels yet to be delivered and rates are starting to solidify, which in turn some on the cross-segments competition in the 4 LPG cargoes. Last week, the 12-month Clarkson's time charter assessment for midsize vessels was set at $465,000 per calendar month. Comparatively, the handysize semi-refrigerated 12-month time charter assessment was set at $435,000 per calendar month, a small reduction from $450,000 per calendar month at the end of first quarter. In the near-term, we are focusing on further developing propylene flow from the U.S. to Europe and Asian destinations. We facilitated two such incremental cargoes during the second quarter. And we are exploring additional volumes subject to prevailing arbitrage. A second relatively new incremental strain of business for our [indiscernible] segment is that of Transatlantic C4 cargoes. And similar to propylene, we are so far include two Europe to U.S. cargoes and are working closely with our partners, exploring the possibility of planning more over the coming months. We are continuously outpacing Mitsubishi in optimizing the ethylene loading terminals in Houston to ensure maximum quantity of exports given the current restrictive characteristics of that dock. Both ethylene export around our handysize boat is heading to Asia, providing decent ton mile demand. Our current and future earnings came from our mixed bag across LPG petrochemical and ammonia with vastly different supplies amount dynamic. Some of the products we are undergoing fundamental change. And I will hand over to David, he will give you some color to what we believe are the macro milestones over the next two years.

Thank you, Oeyvind. Thank you. Now, as you have read and heard our second quarter was a strong growth and I suspect that the same negative market pressures will be with us for the next quarter or so before we begin to experience a recovery. Now, if you were to believe that the management of your company, the team here in New York, our team in London and the folks in Poland were discouraged having endured almost two years of a slowing market, you would be wrong, dead wrong. Yes, we understand that not much can be done in this current market to turn things around, but we recognize that the seeds we have sown over the past few years, the new specialized vessels we recently took delivery of and the partnerships that we evented into will open the next 18 months to two years, have the potential of producing near-record earnings and profitability. That is a pretty bold observation and is of course conditional upon incurring no unusual delays or incidents. So, what are the milestones we should be looking for on this road to 2020? To begin with, some of our old friends are still drivers in waiting, namely Mariner East 2, expected to open in this year's fourth quarter. ME3 or ME2X, expected to be operational approximately 12 months following the completion of ME2. Another important milestone on our 18-month journey on the road to 2020 is of course the opening of our own joint venture ethylene terminal, owned jointly with Enterprise Product Partners. Based upon updated construction estimates, we now expect first exports to begin in the fourth quarter of next year with full operation of the terminal four months to six months later. This is about three months ahead of our original estimate. And, as I stated many times in the past, this is a transformational project for Navigator. Another key driver, especially for our semi-refrigerated handy vessels is the continued expansion of propylene exports out of the U.S. Gulf. Oeyvind just covered some of that, but it is being promoted by the current plan expansion and infrastructure improvements that have produced strong interest from the international propylene buyers. And while we have carried only a handful of propylene cargoes so far this year, this trade is expected to ramp up significantly by 2019 and beyond. These petrochemical gas cargoes are ideal for our handy semi-refrigerated vessels. Lastly, but just as importantly, we are seeing serious progress in the development of LPG exports out of Western Canada. Two projects underway are in the Prince Rupert area of British Columbia. AltaGas, a Canadian infrastructure company is building a propane export terminal on Ridley Island and is expected to be operational by the first quarter of 2019. Product is expected to be railed in from Alberta and exported to Asian and Latin American markets. We expect this terminal to favor very large gas carriers. On the other hand, a second Prince Rupert project is being built by Pembina Pipeline Company, a large Calgary-based midstream company. This terminal is currently under construction and is expected to be operational by early-to-mid 2020. While smaller than the Ridley Island facility, it is expected to utilize only handysize semi-refrigerated vessels for its targeted Asian markets. Again, the propane is expected to be transported from Alberta on railcars. And on this, we expect no particular delays. While we are all aware of the problems that Canadian producers have had in moving product, LPG and natural gas across Rockies and into the international markets, the current spat between the U.S. and China over tariff may give the Canadian provincial and federal government more incentive to coordinate their rapids and not a good capture, a large share of the export market. The U.S. loss may be the Canadian gain. All these milestones are the real projects that are actually under construction now. And all are expected to be fully operational by mid-2020. If there are no serious delays, the excess tonnage currently play in the handy LPG segment should be fully absorbed and rates and utilization should normalize, and profitability exceed - could exceed that experience in our last good operating year and that was 2015. In that year, we generated approximately a $182 million of EBITDA under $1.78. And we did this on four fewer vessels, and we did that without having the ethylene terminal. And so, that finishes my prepared remarks. And I would open - ask Tracy to open up the conference call for question-and-answer please.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Thank you. We will now take our first question. Please go ahead, your line is open.

Hey, guys. This is Randy Giveans from Jefferies. Good morning.

Good morning, Randy.

Few quick questions. Do you have the quarter-to-date rates of utilization now that we're about halfway through the third quarter?

This quarter, the current third quarter?

Correct.

Just a second. We may have something.

The only thing Randy we have would be July at this point. But it's - July is looking like just slightly over 92%.

92% utilization in July. So again, in the right direction.

Sure, sure. Okay. And then for the JV, Enterprise, what is the timeline for that remaining CapEx and when do you expect the debt financing agreements to be completed?

The CapEx is in the 6-K. So, it's split over the years between now and another $45 million payable in 2018 of which Oeyvind just mentioned we've paid $15 million of that, so $30 million in the remainder of 2018 and then $80 million in 2019 estimated and $30 million in 2020. With respect to the facilities, I think we're advancing pretty well and I would certainly - before the end of this year and ideally before the end of the next quarter, we would be fully done.

Last question here. David, you mentioned kind of the U.S. paying [indiscernible] gain, what are your thoughts on Chinese tariffs on U.S. hydrocarbon exports and maybe the risks there to Navigator.

The tariff situation is quite dense at the moment. The issue will at the moment, there is obviously a political situation. We have an election coming up in mid-term and I think a lot of the tariff negotiations are focused around that particular event. Every indication it had up to this point has been that once the negotiations are settled and a resolution is made, it will be extremely beneficial to build the agricultural industry in America and of course the hydrocarbon industry. And big focus on exports of LPG oil and LPG and petrochemical gases obviously. Now, much of the stuff that is being imposed at the moment, is fungible product. Tariff on oil won't mean too much, because U.S. won't ship oil directly to China, it will be indirect. It is a problem for the LNG, because LNG's will need long-term contracts and to build the required liquefaction facilities and the regasification facilities and I think, you are not going to have a major development on LNG for exports until the tariff resolution is resolved. Same way with ethane, because ethane has got a separate market. U.S. is the only country capable of providing large scale ethane exports to China and without the proper licenses and contracts that would be flowing out of a tariff resolution. I don't believe you will see much in the way of ethane contracts. However, propane, but particularly ethane, about particularly ethylene, is such a margin there that I don't believe that that will be altered much in the short-term. I think ethylene will continue to flow there, because the margin is, it can easily absorb whatever tariff maximum they are talking about. It's not a good thing to have these negotiations blocking and stumbling around, because a lot of decisions cannot be made both in China and in the United States. But I don't think it stops a great deal of current activity, certainly in the commodity area. So, I don't like it, I think it will be resolved. I think it gets resolved sometime after the mid-term elections, but we will see. But it's a good question to ponder. It's an appropriate thing to plan for and I think out of all of these things, there will be some winners and losers, I mean, I think right now Canada is going to be a winner. And I think they will accelerate their efforts. After all, there has been a bit of spat between Canada and the United States on tariffs and trade as well. So, I think an export outlet on the Western Canada would be a terrific thing for that country and I think they recognize it and I think we're seeing co-operation now that we haven't seen before in getting these relatively small terminals up and running and they will be quite beneficial. Certainly, the permanent line will be quite beneficial for Navigator.

Sure, sure. I was expecting a robust answer there and you delivered. So, thanks for that. All right, guys. That's it for me.

Thank you.

Thank you. We will now take our next question. Please go ahead, your line is open.

Good morning. It's Jon Chappell from Evercore ISI. David, first question for you on the terminal. As we get closer to the start-up of that and as you provided a bit more information as far as total CapEx and the timing of it and hopefully bit more visibility on the financing within the next three months. Is it possible to give any commentary on the return dynamics of that? How we should think about cash flow generation or impact on revenue once it starts and let's even call it the first quarter 2020?

Thanks, Jonathan. It's a good question, I hope I can give you the answer and not - since I haven't any confidence without our partners in Houston. But look, I think you can look - one way I have always looked at it is, does it have comparable returns to our investing in an LPG vessel. And you know, our target has always been kind of a 15% cash-on-cash type of return before we even would look into what the outlook is and how we can improve on that and what kind of financings we could get. Since we entered into an agreement with Enterprise, we've had some very - some quite positive developments. Those two positive developments were number one, as we just stated this morning, we're able to get this thing up and running somewhat earlier than originally anticipated, perhaps a full quarter. And the second, which we've been going into detail, but our cost has come down. The original estimates of that terminal are now - we are quite a bit under those original estimates. So, our profitability whenever it may have been when we initially set out to construct this terminal has only gotten better than what our original timeframe was. The returns you might also look at how we're going to be developing these terminals. The first is, we talk about it being open in the fourth quarter of 2019, and that's true. But it won't be fully up and running at that point because the storage facilities take a bit longer to complete and to construct. So, we will initially be operating directly from the chiller into our vessel, which takes a bit of time to load a vessel. So, instead of one day, it may take as much as four days, five days, but it does generate cash right away. Once this storage is complete, we can put product into the storage and load a vessel directly from the storage tank, and therefore we get it in one day. So, you won't see the full impact of both earnings and cash flow until probably second quarter of 2020, but you will see cash generation in the fourth quarter of next year. We have of course as you know, a strategic value and I can't overestimate this. The strategic value of having control of that export terminal and a very valuable product such as ethylene. It gives us obviously great advantage to be able to lock in our ethylene capable vessels. And we, as you know, we have the largest tonnage of ethylene carriers in the world. And the only big four of them midsize ethylene carriers available. But it also is a window. That terminal is a window on all things petrochemical working with Enterprise and the people who approach Enterprise, the people who approach us on gaining these products, share with us all of their concerns. So, we are in such a unique position that we have an opportunity to scale out all these opportunities and rate them and work on them with those customers and potential customers. So, it is a multi-faceted and complex asset that we have that I think is going to produce far beyond what would might just seem an asset that can generate cash.

That's very helpful, David. And just to follow-up in something you alluded to you before. With the financing process underway right now and I mean, I think this becomes a bit more real. And as you think about the timing of chartering, your fleet versus a broader kind of industry tender. How much before the start-up of the terminal would you think you would need to have the transportation in place?

That's Oeyvind has been working on that on a regular basis, Jonathan and I think it's appropriate that he cover that one, if that's okay.

Yeah, sure. Hi, Jonathan.

So, on the ethylene side, we saw project related long-term contracts in discussions. I think it was last quarter or two quarters ago, we talked about one contract which is in place. But, for sure, many of the off-takers and potential off-takers are very keen to explore the freight element to logistics or the extensions of the pipeline to their destinations, primarily in Asia, but also in Europe. And it's so long-term, so the advantage we have is obviously because we had a joint venture partner and so forth. But we also have the assets on the water, so there is no chance of delay and so forth. So, the discussions are definitely ongoing, and we expect to have things more of these contracts in place before this terminal commences last quarter next year.

Okay, probably more of a 2019 event than a second half of 2018, do you think?

We shall see. We are working hard on it. So, we'll let you know.

Okay, thank you Oeyvind. Thanks, David.

Thank you. We will now take our next question. Please go ahead. Your line is open.

Thanks. Yes, this is Ben Nolan at Stifel. So, I just wanted to follow-up on a few things actually, following on Jon's question. I believe Oeyvind or David that there are two off-take agreements on the terminal itself, at least as I recall, which make up, I don't know, around or little less than half of the total capacity. Has there been any evolution, how you're thinking about the remainder of that capacity. Is it - any portion of that you and your partner would be comfortable marketing on your own or how should we think about the rest of the capacity?

I'll take this. There is a lot of interest in those surplus available tonnage, okay. In spite of not having lined up specific contracts at this point. There is a terrific interest in it and it should be, it should be because the spread, the arbitrage, the difference between U.S. ethylene and ethylene that you can source in Europe or the Far East is so wide that it is just - very, very tempting. The pressure has been from us is to get that terminal up and running early than later and that's why we are going to - we are making all these efforts to pump directly from the chiller into the ship and we are making on that preparation, so we can get product going quicker. Now, as far as, how we want to sell that excess that we haven't sold at the moment. And we are negotiating. You can argue that - I won't say argue, you can have a discussion between what Enterprise would like and what we would like. I think, right now, we are both committed to sell down a good portion of that 50% that is not committed, sell down on the long-term arrangements. We both hide that spread, I'm sure. There is a big spread and whether or not the stock market for some of that would be appealing for us. And I think we're early for most of the major midstream U.S. based companies, international markets are virgin territory and Enterprise is no different. Most of these companies are very parochial in their approach and it's understandable why they are parochial, they are parochial because they built themselves around the MLP structure and the MLP structure favors U.S. operations for maximum tax advantages. I believe that we are now making a bridge into the International markets by all the midstream companies. This is going to be a grandeur move. A move that is small steps, export terminal is one of them, there the propylene terminal and the propylene production the PDL plant and enterprise is doing is another example targeting the international markets as opposed to domestic markets but it's sustained probe it is going to be needed by the midstream companies, they must reach out. And what double mean is a different way of marketing over the traditional methods that they have used when they were so oriented towards U.S. markets exclusively. So, I think the first stage then will be the lock-up I don't think there's any disagreement between ourselves and Enterprise. The first stage will be the lock-up fairly substantial portion of the capacity of the terminals. Maybe we allow some to be available to spot market maybe. But then I think there is a whole different route to be examined and followed perhaps and that is reaching out to all international markets and do the midstream companies try to duplicate what they've been so successful doing in the United States with their infrastructure deals with their fee-based income. Would that be extended, I think that's the real question, is where are we going with the international companies? Where are we going with the U.S. midstream companies and their reach, the unavoidable reach into the international markets? That is a whole avenue of excitement I think and potential for ourselves and the midstream companies. I don't think I've answered you very precisely but…

That's okay.

I can get clearly that about what I'm saying in our own potential of being a participant in that movement.

Right. Okay. And then switching gears briefly David, you had mentioned that there had been a handful of propylene cargoes that you're expecting there to be more as the ramp up of export at the United States increases. Is it at all possible to quantify what that might mean in terms of where we are now versus where you think we might be in terms of the cargo count a year two years from now?

I think that - hi Ben, I think the suggestion at least what we're seeing with the both the suppliers, producers here and the consumers is potentially one to two cargoes a month a bit height which and one voyage to Europe is 30 days, so of course it takes the ship out. It goes to Far East which is a propylene itself, but we've seen some demand from Far East for propylene from U.S. that's a two months job so each cargo - incremental cargo has quite an impact on this segment as you recall, it's only 110 ships so if you take it - start taking off single-digit ship numbers of course it will start having an impact, so that's what we're looking,-- that's kind of the volume which is being envisioned if the arbitrage is there, but 2019 onwards that seems to be the suggestion.

Okay.

Yes.

Okay.

In the Enterprise conference call held last week, they did talk about keen interest on propylene exports and the profitability of that and their vision that there would be greater propylene exports, so much so that there was talk around the conference call of whether or not Enterprise would perhaps even build another PDH plant just for the export markets again. So, it again is this force whereby United States with the low hydrocarbon prices, with propane prices as cheap as they are is an attractive manufacturing base for petrochemicals. And the basic market would be for the United States, but surplus to the international markets and everything crossing the dock to go there, and we want to be right at that dock with all that - with the vessels to carry into those markets. It's happening, it's accelerating.

Okay. Thanks, David. And then lastly for me and I'll turn it over. Niall, I might have mentioned - I might have missed it, but I know that you are talking about making good headway on the facilities, on the crowded facilities for the export terminal. Is it - could you maybe put a number at least roughly around how much capital you might envision that being, just trying to work through sort of what that cash component of your balance sheet will need to be for the remainder of the CapEx?

Well, as I mentioned, the total expected cost at the moment, Ben is, $155 million or it is our share is $155 million or thereabout. We have paid to-date $25 million. So, we are looking at facilities to cover the balance.

Okay, all right. So, that clears that. All right. Thanks a lot.

Thank you. We will now take our next question. Please go ahead, your line is open.

Yes. Hi, this is Fotis Giannakoulis from Morgan Stanley. David, I want to follow up a little bit on the Chinese tariffs on LNG and the impact that they can have on creating an incremental demand for LPG carriers. I'm wondering whether a potential increase in price for natural gas in China can have any meaningful impact for your sector?

No. Not that I can see, Fotis. Listen, the LNG that will go there and it will be go there eventually, I don't - I can't see us at a trade war for very long, but I'm surprised that the intensity of the war right now. But on the assumption that it tails back, and we have something of a settlement here, the LNG market will go for a variety of - U.S. LNG will flow to China, principally for power generation and some petrochemicals as well. LPG to China for power generation, I just don't think make sense, I don't think that will happen. It will be LNG and LNG only. LPG would be used for a more valuable upgrade into petrochemicals as we've seen with feeding the PDH plants. The question always is why do they build PDH plants in China and import propane, why don't they just import the propylene? Well, China is unique. The reason is China is unique is they got the central government and controlled economy and they like to create their own jobs. And so, we will continue to see the raw material as we will see with ethane going into China as well. And the only source of ethane in this kind of months that they are looking for is the U.S., no other country can supply them with the ethane. But all of this is very fundamental and very determined upon a settlement with some degree of resolution quickly. If it is not resolved, any of the new ethylene crackers that are plan for China will be done on naphtha, not on ethane, which is not going to - it's neither economical, nor is it environmentally friendly. So, I think the big thing will be whether or not we can come to a resolution quickly. The demand for U.S. ethane into China is real, it is significant, and it is very determined upon a resolution, a friendly resolution with tariff situation that we have and less that happens is not going to flow. So, I think that's the issue, it's not so much how we - how LNG impacts us, I don't see quite the connection there for this.

Thank you very much David. And switching a little bit on the improvement of the LPG, or especially on the larger size is sector that real receipts, the last few weeks. You mentioned earlier that you expect one more quarter of weakness, is that correct. Is this sort of confidence that the market for LPG shipments is turning around towards the end of the quarter and is this increase in VLCs are going to make eventually its flow to the midsize carriers?

I am not sure, look. It's all about volume, for the very large gas carriers, it's totally about volume and of course ship capacity. The volumes that will make a difference in the - the incremental volumes for the very large gas carriers have to come out of the Delaware river, Marcus Hook [ph] and that's ME2, ME3 275,000 barrels on ME2. But that will create a lot of problems another 275,000 for ME3, until those volumes get cranked up, I am not sure that the VLGC market will be as strong as we've seen it in the past. We don't compete as you know with the VLGC market. But the VLGCs do compete with midsize vessels, the smaller midsize vessels. Who in fact have taken some of the cargoes away from us, to extent they take it away that's just a little LPG, and it's not a great amount, but it enough to take the edge of a trading and our rates and that's what's happened over the last couple of years. Now, if they get better and they can get better by having more volume and the volume will probably come - hopefully come by the end of this year, when we see the Marcus Hook [ph] facility open and then those very large gas rates can continue to be supportive, midsize rates, and then we won't have that little cutting edge, from the midsize taking away that extra little volume. And it does - remember, we only have 110 handysize customers. So, if there is somewhat so it's a midsize vessel taking five or six cargoes away, that hurts us. When they go away, it helps, that's why I am so confident about what I see over the end to the road of 2020, because I see these incremental things coming in our favor finally. Yes, we'll get more volume from the handysize out of Marcus Hook, it won't be an earth shattering, it won't be a game changer for us, but it will be enough to start to clear the excess tonnage in the handy, which my guess is maybe six or eight vessels too many in the handy space. We start eroding that excess capacity by two or three vessels out of Marcus Hook, propylene needing a couple - ethylene vessels going to be taken away out of the - handy ethylene carriers will be coming out of the spot market and going into long-term ethylene trade. The opening up of the Pem, particularly the Pem [ph] are in Western Canada, that's all handysize vessels, and it's all going to go the Far East and probably absorb six vessels there. You'll add them all up and you get a shortage. That's where I am so optimistic about. It's just the small incremental things all working gradually in states over the next 18 months to two years. It's nothing - no one big event, it's the small ones, it absorbs these incremental two or three vessels that will take away the excess tonnage which I expect and believe it's probably only six or eight vessels in the handy sector for this. So, I am quite optimistic. And this is all along the play. These things are happening now. We now have to wait for them to start - they are in the process. And let's hope that nothing gets stopped, but I think it's a good time. I think it's - I don't want to call anything the bottom, that's too dangerous thing, but I feel very good about the next 18 months, how it will change fundamentally and incrementally for us.

Thank you very much, David.

Good. Come see us.

Absolutely.

Thank you.

Thank you. We will now take our next question. Please go ahead. Your line is open.

Hey, guys. Mike Webber from Wells Fargo. Good morning.

Good morning. How are you?

I'm good. One call already, but I do want to dig back into both ethylene and then the change in your covenant. So maybe David, starting with you. When you're describing the ethylene facility the last few quarters basically 50% sold with the pretty strong backlog behind it which is what helped get PD over the line. Can you give us a sense of how much of that backlog is Chinese?

Well, zero.

Okay.

Zero was Chinese whether lines up there or not, I cannot tell you. All right. It may very well go to China. But the offtake is not Chinese, if that's what you are referring to?

Yeah. Maybe taking a step further. I mean realistically to what extent do you think if we assume the last to mid-terms and maybe if that points through the end of the year does it just creates some mix shifts within that backlog. Do you think you'll see anybody move out or stepped in as a result?

No.

No, on the tariffs Mike. So, also the polyethylene is being taxed or under tariffs. So, 25% or something like that, same on ethylene. And absolute relative proportion so there - if the competitions is polyethylene and ton of polyethylene to buy from the U.S. is $900 a ton or whatever. So, the 25% is more that you are making on 25% of ton of liquid which is terrific. Yeah, and one that relate to --.

Helps a relative math I guess. Yeah.

I mean that's it, the good thing. But go back to David.

I'll quote you on that, I'm kidding. That make sense. The next question I guess is more for Niall, just around the change in your covenant and the restriction on distributions through June 2020. And looking at, you've got a half turn back I guess on your interest coverage ratio and you've got the exclusion of the export terminal debt. But looking at our numbers and stress testing them, it didn't seem like and you could have gotten certainly below 2.5 but it wasn't set to plummet by any stretch. So, I'm just curious, it seems like a pretty steep price to pay. And I'm curious as to whether just how that conversation went. Did you encounter, I guess some more difficult conversation with your lenders and you expected? What did you - aside from simply just being able to exclude the export marine terminal debt from that calculation. Maybe just a little bit color on that because it strikes me it's being a little bit expensive just given where your coverage actually was?

In having a dividend prohibition, you mean?

Yeah. And for the next 12 years, right, significant period of time?

Last time we paid the dividend was.2007.

Yeah.

I wasn't planning on paying a dividend anytime soon, Mike.

No, I understand. But this next 2.5 years, right. So, if you're right in the market turning in the next quarter or two, you're looking at a two-year ramp where your hands are going to be tied around. I know obviously there are other things you can do, but typically giving up that degree of control usually is something that the management teams don't like to do. I can understand why you might not view it as a particularly large cause. I'm just curious just how that conversation went? And then maybe, maybe that's the answer, maybe you just don't view it as particularly large cause, I'm just curious because we don't often see that sort of restriction on a covenant that was maybe by tenth of two-tenths of a point you could bridge in the next couple of quarters?

No. I mean you're right in terms of the level of the covenant. We got it down to below where we would expect it to go anytime on any scenario over the next couple of years. The calculation of the interest coverage is at trailing 12-month basis, which is why it needed to go out to September 2020 because that incorporates - that would incorporate the back end of 2019. So, to get clear of that, it's really 2018, 2019 was the sensitive part with that covenant, but we needed to get to 2020 because of the trailing fees. It is quite normal that if you are looking for an amendment of a facility like that that the dividend restriction would be for the duration of that amendment period. If you're asking the banks for something, then they don't want to give you something in a covenant amendment and then for you to distribute it all away or excess cash away to shareholders.

And Mike, can I add to that?

Sure.

You're right. A dividend I don't envision in the next couple of years. Okay. So, why? I outlined what my strong view is, how optimistic I am over the next 18 months that we're going to recover and recover in a very significant way with everything that we are working on today that is in place, that's in place, the constructions are going on in all these projects that will lend this incremental business to us. And if we don't have exceptional terminal, we have no exceptional expenditures, our newbuilding vessels are done. So, you would argue in your position that maybe I'm going to be - we're going to be generating so much cash that we could pay. But what I didn't discuss which adds just another very strong bullet case is the project that we didn't discuss, the projects that are not under construction, but are under discussions and there are lot. There is potentially new construction, all kinds of projects that we are working on our plate is full with potential delicious muffles of expansion and opportunities.

Sure.

And we're clearly is in conflict to carry and do those the same time as you would be thinking about a dividend. So…

Yeah. I think the question wasn't why won't you be paying a dividend in the next year or two, but it just seems like giving up the optionality to do that. It seems - it just stuck out to me, that's all. I understand what you're saying, it just seems like - it seems something that most companies in this space seem very hesitant to do in terms of just giving up that tool, at least for a 2.5-year period, but I certainly understand what you're saying.

Change was agreed to in a couple of days and we're just - I never thought it was an issue because as I just told you, I don't envision it and we've got lots of things going on. At that point, if you're done, Mike, I'm going to thank you for joining us and the rest of the people on the phone because our time has run out. I love to see everyone. And let's watch this road and the milestones as we develop. Thank you. Tracy?

Thank you. That does conclude our conference for today. Thank you all for participating. You may all disconnect.