Scorpio Tankers Inc. (STNG) Q2 2024 Earnings Report, Transcript and Summary

Hello, and welcome to the Scorpio Tankers, Inc. Second Quarter 2024 Conference Call. All participants will be on listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to James Doyle, Head of Corporate Development and IR. Please go ahead, sir.

Thank you for joining us today. Welcome to the Scorpio Tankers' second quarter 2024 earnings conference call. On the call with me today are Emanuele Lauro, Chief Executive Officer; Robert Bugbee, President; Cameron Mackey, Chief Operating Officer; Chris Avella, Chief Financial Officer. Earlier today, we issued our second quarter earnings press release, which is available on our website, scorpiotankers.com. The information discussed on this call is based on information as of today, July 30, 2024, and may contain forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For discussion of these risks and uncertainties, you should review the forward-looking statement disclosure in the earnings press release as well as Scorpio Tankers' SEC filings, which are available at scorpiotankers.com and sec.gov. All participants are advised that the audio of this conference call is being broadcasted live on the Internet and is also being recorded for playback purposes. An archive of the webcast will be made available on the Investor Relations page of our website for approximately 14 days. We will be giving a short presentation today. The presentation is available at scorpiotankers.com on the Investor Relations page under Reports and Presentations. The slides will also be available on the webcast. After the presentation, we will go to Q&A. For those asking questions, please limit the number of questions to two. If you have an additional question, please rejoin the queue. Now I'd like to introduce our Chief Executive Officer, Emanuele Lauro.

Thank you, James, and good morning or good afternoon, everyone, and thank you for joining us today. We are pleased to announce another strong quarter of financial results. In the second quarter, we continue to see a significant year-over-year increase in rates, and the company generated $278 million in adjusted EBITDA and more than $188 million in adjusted net income. When we last spoke, I highlighted that we have positioned the company to further reduce debt, act opportunistically and increase shareholder returns, and in the second quarter, we were able to do exactly that. During the quarter, we repaid almost $400 million in debt and executed on reducing our adjusted EBITDA to a level of $12,500 per day. Our net debt has decreased from $1.4 billion in June 2023 to around $700 million today. In addition, on a pro forma basis, which assumes the closing of the four remaining vessels' sales, which we had previously announced, our net debt would be below $600 million as of today. We recently announced an agreement with the lenders on our $225 million credit facility to convert it from a term loan to a revolving credit facility, and we have also recently sent notice to prepay the outstanding debt on our facility with BNP and Sinosure for $64 million. The repayment of the net debt in these facilities could lower daily cash break-evens by over $1,000 per day to $11,500 per day break-evens. Since June 1, we have repurchased 1.4 million shares of our company for an aggregate $109 million at an average price of $78 per share. Selling older assets at prices above consensus net asset value and repurchasing stock below net asset value is accretive and crystallizes value for shareholders, including share buybacks and dividends. We have thus far returned $2.86 per share to shareholders during 2024. In addition to that, today we declared a quarterly dividend of $0.40 per share and announced the replenishment of our securities repurchase program with an increased authorization limit of $400 million. We are very optimistic for the rest of the year as we start the third quarter with a spot split average of $36,000 per day TCE. This is more than $10,000 higher than it was last year, which was $26,000 per day. So compared to last year, we are $10,000 higher in TCE for the third quarter. We remain committed to delivering value to our shareholders. We appreciate your continued support and confidence in Scorpio Tankers. With low leverage, a strong liquidity position and a young fleet, we are uniquely positioned to capture what this high-rate environment has to offer. With this, my opening remarks are done, and I would like to turn the call to James, please.

Thank you, Emanuele. Slide 7, please. The ongoing strength in the product tanker market continues to exceed expectations. Increasing global demand and shifts in refining capacity have increased seaborne exports in ton miles. At the same time, the fleet has become bifurcated and supply growth has been limited. Geopolitical events have further exacerbated the strong underlying supply and demand fundamentals. The combination of all these factors is unprecedented and has caused product tanker rates to remain at high levels for the last two and a half years. Year-to-date, average MR tanker earnings have reached their highest level since records began in 1990. The next highest earnings were recorded in 2022, followed by 2023, with 2005 ranking fourth. While the high rates are striking, the floor in rates has arguably been more notable. As Emanuele mentioned, the year-over-year increase in rates has been significant. Despite the seasonal nature of our business, we have entered the third quarter with exceptionally strong rates, with LR2s at $34,000 per day and MRs at $34,000 per day. While current spot rates are well above historical averages and at levels which generate significant cash flows, the confluence of factors driving today's market remain intact, and thus we expect seasonality to return in our favor. Slide 8, please. Global demand for refined products remains strong. As we look to the second half of the year, we expect demand to increase by almost 1 million barrels per day compared to last year. And as global demand has increased, so have seaborne exports. Slide 9, please. The increase in demand has led to a record level of seaborne exports. In June, exports reached 20.9 million barrels per day, an increase of 300,000 barrels year-over-year, and up 3.2 million barrels compared to 2020. Moreover, not only have exports grown, but the distances these barrels are traveling has also significantly increased. Slide 10, please. Excluding Russia, year-to-date ton-mile demand is 14% higher than 2019 levels. Including Russia, ton-mile demand would increase an additional 4% to 18%. Vessels continue to avoid the Red Sea and transit around the Cape of Good Hope, leading to a less efficient fleet that must cover longer distances. These disruptions have exacerbated the strong supply and demand fundamentals in our markets, and it's not only geopolitical events driving ton-miles, but also changes in refining capacity. Slide 11. Nigeria's long-awaited Dangote refinery began production earlier this year and has exported over 200,000 barrels of refined product per day since April. While the refinery is still ramping up production, the early data suggests that the refinery may increase trading activity as opposed to reduce it. Changes in refining capacity are significantly altering global flows of refined products. From 2013 to 2023, excluding China and the Middle East, global refining capacity fell by nearly 3 million barrels a day. Conversely, over the same period, the Middle East added almost 4 million barrels per day of capacity and has become the incremental supplier for lost or closed production. This structural shift in capacity continues to reshape product flows, increase ton-mile demand, and tighten supply. Slide 12, please. Canada's TMX pipeline has exceeded expectations in both throughput and Aframax LR2 loadings. In June, TMX exported 300,000 barrels of crude oil, and this is expected to increase by an additional 130,000 barrels through the year-end. This has and will continue to increase demand for Aframax and LR2 vessels. Today, 56% of the LR2 fleet is trading clean products, which is another way of saying 44% of the LR2 fleet is trading crude oil. Historically, around 50% to 60% of the LR2 fleet has traded clean. We expect this ratio to continue given the strong underlying fundamentals for Aframax and LR2 vessels. Slide 13, please. Prior to 2010, the majority of Aframax LR2 orders were on coated Aframax vessels as opposed to coated LR2 vessels. Since then, and especially recently, owners have increasingly opted for coated LR2 vessels because of the optionality to trade both crude and products. However, the increase in LR2 orders has come at the cost of Aframax vessels, and thus declining Aframax growth will require LR2s to continue to service the larger crude oil market. While recent LR2 orders may appear high given their smaller fleet size, the combined LR2 Aframax order book is only at 14%, which is modest and substantially below the 30% to 45% seen in the 2006 to 2008 period under similar earnings levels. Slide 14, please. Strong spot and time charter rates coupled with an aging fleet have led to an increase in new building orders. Currently, the order book that is set to deliver over the next four years represents 16% of the existing fleet, half of which are LR2 vessels. Meanwhile, the fleet continues to age, with the average age of the LR2 fleet now at 13.6 years. So what will the fleet look like in 2026, including new builds? Well, by then, close to 50% of the fleet will be older than 15 years, and 21% of the fleet will exceed 20 years and older, positioning them as potential candidates for scrapping. Thus, using conservative scrapping assumptions, fleet growth looks modest over the next several years. Slide 15, please. Year-to-date seaborne exports and ton miles have increased 0.50% and 7.5%, significantly higher than this year's 1.3% fleet growth. Using minimal scrapping assumptions, we expect fleet growth of 3.5% and 5% over the next two years. However, using slightly higher scrapping assumptions and assuming a portion of the LR2 new builds trade in the crude markets, effective fleet growth would be 2% and 3.5% over the next two years. Looking forward, we are very constructive on the supply-demand balance. The confluence of factors in today's market are constructive individually, increasing demand, exports in ton miles, structural dislocations in the refinery system, rerouting of global product flows, limited fleet growth. Collectively, they are unprecedented. With that, I would like to turn it over to Chris.

Thank you, James. Good morning, or good afternoon, everyone. Slide 17, please. Second quarter of 2024, average daily TCE rates were a significant improvement over the same period last year. This improvement was driven by strong underlying demand, coupled with the expansion of ton-mile demand triggered by the conditions in the Red Sea. Over the past six quarters, we have generated $1.5 billion in adjusted EBITDA and $965 million in adjusted net income. These results have enabled us to reduce our debt by $955 million, pay $101 million in dividends, and purchase $543 million of the company's stock in the open market at an average price of about $53 per share. In July, we have since repurchased an additional $55 million of the company's stock. Including dividends and share buybacks, we have returned $152 million worth $2.86 per share to shareholders thus far in 2024. Slide 18, please. We continue to deleverage with the goal of maximizing balance sheet flexibility, lowering our cost of debt, and reducing our daily cash break-even rates. We have recently submitted notice to prepay our $64 million term loan with BNP Paribas and Sinosure. This facility was the most expensive bank financing on our balance sheet, currently bearing interest at SOFR plus a margin of 291 basis points. This prepayment is expected to occur before the end of the third quarter and will release five vessels that are currently collateralized under this facility. We have also reached an agreement with the lenders on our $225 million credit facility to convert this facility into a revolving credit facility. This amendment is expected to give the company the flexibility to make unscheduled repayments that can be redrawn in the future. There is currently $174 million outstanding on this facility as of today. The outstanding amount or amount available should we repay the revolver remains subject to the same quarterly amortization profile as the term loan. A full repayment on both the BNP Paribas and $225 million credit facility could potentially reduce our daily cash break-even costs, which include vessel operating costs, cash G&A, interest payments, and regularly scheduled loan amortization, by over $1,000 per day in the first year following repayment. As shown in the chart on the right, our gross and net debt as of today stands at $992 million and $712 million, respectively. On a pro forma basis, which assumes the closing of four remaining vessel sales which have been previously announced, our net debt would be below $600 million. This compares to net debt of $1.4 billion at the same time last year. Slide 19, please. Our debt repayment and refinancing initiatives over the last two years have been transformative to our forward debt service commitments. Through the end of 2025, our ongoing quarterly scheduled principal repayment obligations on our secured debt are less than $20 million per quarter. With a daily cash break-even rate of approximately $12,500 per day, these obligations are highly manageable and position the company to continue to opportunistically increase shareholder returns. Slide 20, please. As we enter into what is typically the seasonal low point of the year, our third quarter of 2024 coverage across the fleet, including time charters, is almost $10,000 per day above the same levels in the prior year. To illustrate the company's cash generation potential, at $30,000 per day, the company can generate $652 million in cash flow per year, and at $40,000 per day, the company can generate over $1 billion per year. That concludes the presentation, and with that, I'd like to turn the call over to Q&A.

[Operator Instruction]. Our first question comes from Jon Chappell of Evercore ISI. Go ahead, please.

Thank you. Good morning. Good afternoon. So, Chris, you ended about two pages early in the presentation. If you go down a couple more pages, you have 15 time charters, which is just less than 15% of your fleet. Interestingly, you haven't commenced one in about a year and a third, so it feels like the time charter market is becoming a little deeper. The contract rates continue to push higher. We're two-plus years into this up cycle. Has there been any consideration of increasing the time charter out exposure to the fleet as we go through the rest of this year and into next?

Jon, it's Robert. I think if we look at this historically, first of all, we've been very confident in the actual market, that it would provide a better return than time charter, which it has and still continues to do so. And also, we've been deleveraging, which is allowing us to take a more spot approach. And we've been selling assets. And the math would tell you that it's better to sell the assets than to put the vessel on time charter, or has told us that. That relationship may change. We don't know. We've also been focused on, let's say, pruning the age of our fleet. So, we've now got rid of all vessels that are older than 10 years. And we will continue to look at time charters opportunities. I would expect that this would be, let's say, the next place. We're confident, let's say, in the age of the fleet, we would still look at selling ships, as Emanuele was pointing out in his talk, related to just the NAV to stock price ratio. But, again, there's no desperate need to do that. We'll just take that opportunity, like we've done before. But we're in the market, watching it and we're not anxious to fix. But on the other hand, we're happy to fix, too.

Yep. Okay. Second question, maybe for James. I was reading last night that Russia is considering putting another export ban on diesel. Can you just remind us, I know it was pretty short-lived the last time they did that, but the impact on the market during that last period and how you maybe think about the compare and contrast to what another diesel export ban from Russia could mean to the product market in the near term?

Jon, you're right. It was very short-lived. We have seen Russian exports decline by about 300,000 barrels a day, from kind of the 1.7 range to the 1.4 over the last couple months. About a million barrels of that is distillate. So to frame that, you would basically lose about 1 million barrels of distillate in the market, which has been going to MED and Africa and Middle East. So that would have to come most likely from the Middle East or the Atlantic Basin to make up for it and would certainly tighten the market, especially as you kind of get towards fall maintenance here where distillate inventories start to build.

Okay, great. Thanks, James. Thanks, Robert.

Thank you. The next question comes from Omar Nokta of Jefferies. Go ahead, please.

Thank you. Hi, guys. Good morning and good afternoon. I just wanted to touch on the debt. Obviously, you've reached your debt targets. You did that last quarter, and you're still generating a good amount of cash flow and you're on pace to be basically in a net cash position here in the next perhaps two to three quarters. So just maybe a couple questions on that. One, is that a place you want to be basically debt-free? And then, two, do you see any compelling use of free cash at this point besides buying stock?

I think that buying the best public product bank or fleet in the world at a discount is a pretty compelling use of cash and that's what you've seen from our announcements. Obviously, we've been blacked out from the market in the last two or three weeks because of earnings, but going into this earnings release before that, we were going along buying quite, I wouldn't say aggressively, but buying regularly. We anticipated that Wall Street would react to, in a way, it's done in the sense of selling off. Selling off as a result really, the rates are weaker than where they were in the very strong months of May and June, whereas we looked at it in a more holistic way that, my God, the rates at the moment are at record levels for this time of year. The market is very, very strong and we're about to turn into the strongest season in a matter of weeks now. So, it's very hard to, it wouldn't be nice to think that we're going to get into a net cash position, but it's nicer to think that we've got an opportunity right now to buy our own shares and invest in a strong market pretty cheaply now.

Thank you, Robert. Yes and then just one quick follow-up to that. Maybe, as you mentioned in talking with Jon and Emanuele's opening comments discussing the sale of the shifts, crystallizing the disconnect between the stock price and NAV, in terms of buying further stock from here, you obviously bumped the buyback to the 400 million. How do you think about buying the stock? Is that coming from asset sales, or is it coming from ongoing free cash?

No, we're not going to give the market a read at all.

Fair enough. Okay. Thanks, Robert.

Our shareholders have allowed us to get into a position that is unbelievably strong and we have the ability to act on what's on offer and it's better for our shareholders in the long term that we keep quiet.

Thank you.

Our next question comes from Ken Hoexter of Bank of America. Go ahead, please.

Hi, great. Good afternoon and good morning. So, maybe just talk a little bit about the market itself right now. It looks like your percent of days that you've locked in are maybe a little bit lower. I think it's the lowest on the handy I've seen since you guys have recorded it down to 29%. The 43% on the LR2 seems to be maybe more seasonal. That's what you do it seems like in the second and third quarter. Maybe talk about your thoughts on locking in and you're expected on seasonality here. Or is it just rates were a little weaker and you're looking to hold off to get some of that seasonality?

No, I think that they've just been weaker in that particular area in terms of people holding on. It's been a quiet summer. It's been a very volatile summer, so trade has been going from hand to mouth. But I think that when we're using – you guys have even got me using the word weaker. It's really difficult to describe a market that is plus 30 a day on MRs and plus 40 a day on LR2s. At the end of July, early August is weak. It's really strong. So, we're very pleased with this position because as it was pointed out with Chris earlier and Emanuele, these are $9,000, $10,000. I'd like to take an opportunity to say two really important things here. Your actual headline rate is $9,000, $10,000 a day above last year. It's not relevant to us where that rate is compared to June or the second quarter. It's relevant in its own season and its own time and that's plus 10. Your cash operating costs are somewhere like $8,000, $9,000 a day lower. So, you've got a very substantially strong differential between last year in terms of net cash flows and in actual market. We've never actually had a springboard that's this high. We're almost halfway through this third quarter now.

Great. I understand that. Definitely strong rates. I just wondered if you thought it was a move on seasonality or anything that you're looking at.

No, this is pure seasonality the change between May, June and now.

Robert, last week we chatted, you had talked about customers increasing the interest in three-year time charters. Are you still seeing that interest as high or are they getting nervous on the state of the market and looking to lock in longer term? What are your discussions like now?

I think the inquiry is there and the charter is still doing it. Again, I think we have to remember that this is, I think in many industries and in ours as well especially with the geopolitical thing. I think that people have been taking the holiday for the last three weeks or so and we'll probably continue to have quiet markets in terms of what you're talking strategic things. I would expect that the activity in terms of a willing charterer and a willing owner getting together will start to occur again in another three or four weeks. In the meantime, you may have a handful of fixtures or lower activity along the way.

Great. I appreciate the time, Robert. Thank you.

Thanks.

Our next question comes from Greg Lewis of BTIG. Go ahead, please.

Thank you and good morning. Good afternoon, everybody. Thanks for taking my questions. I just had a couple of market questions. One is, I guess in the last couple of days with Dangote, I guess they're now allowed to buy crude directly from NNPC. Any kind of thoughts on what that has the potential to do in terms of increasing volumes from Dangote? Is that something that market participants are thinking about or is it challenging the ramp-up of refinery and it's just going to take a while?

Greg, I think you're right. I think it takes time. I think it's sensitive to different crude types. For us, I think what we're focused on is first just looking at what's been exported. You've had jet fuel and fuel oil and NAFTA. This summer – sorry, not this summer next year, we expect the RFCC units probably to come online early next year, where they'll start making more gasoline, and then we'll see how the trading dynamics play out. But in terms of the ramp-up stage, like other refineries, it takes time, and so they're going to go through some challenges here. I know they had a fire a few weeks ago due to an effluent tank that was leaking. So, just regular kind of run-ups -- run-off. But the positive is we're starting to see exports come out on the product side, and I think that's a lot more bullish for the market than people were anticipating from a product's perspective.

Okay. Just one more for me. Realizing that the scrubbers have been a great investment and have more than paid for themselves, a lot of fuel gets moved by product tankers. Just kind of curious, maybe at a high level, if you have thoughts around the recent move lower in the spread between low-sulfur and high-sulfur fuel. Just kind of curious how you're thinking about that. And hey, maybe this $100 price is the new normal, or is there something kind of seasonal or something that you see in the market that is, I guess, keeping that spread lower than where it historically has been?

I could take that if you want, Greg.

That'd be great, Cameron. How are you?

Yes, I'm great. Thank you. So, we expect the spread to stay pretty narrow for the foreseeable future. In fact, there were regulatory reasons but more important timing issues around our investment in scrubbers where we predicted successfully a widened spread for a period of time, but our long-term forecasts have been a narrower spread for reasons I could get into. So, if we had to make that decision again today, it wouldn't be a great return on our capital.

Okay, great. Thank you.

The next question comes from Ben Nolan of Stifle. Go ahead, please.

Yes, I appreciate it. So, I guess I have a couple of market questions myself. There has been and continues to be some noise about crude tankers trading into products. We don't have great visibility into that sort of thing, and so I was hoping that maybe you could give me a little bit of an update on how that's playing out and if there's been any shifts or changes or what you're seeing in that respect?

Cam, I'll start and maybe you can add if I leave something out?

Sure.

Ben, we have seen it. So, it's predominantly Suezmaxes that have carried distillate, specifically diesel, from India to the UK. They're going to discharge later this month and next month. The challenge is where do they go after. We can tell you that it's been done predominantly by commodity traders. So, where that vessel goes after it discharges and it will need to lighter to smaller vessels remains unclear. But you would have to have a very weak crude oil market for those vessels to want to travel back to the Middle East or India to try to load another clean cargo.

The only thing I'd add, Ben, is consistent with what you said in previous quarters and years. It is a significant investment to clean up a larger vessel that's been trading dirty. And so, you're not talking about an easy process. In fact, you not only have to clean the vessel, but you have to find intermediate cargos that aren't as prone to contamination like condensate, for example, in order to get that clean history. Once they are cleaned up, historically, those same traders that James is referring to do not want to keep those vessels clean. They want to re-deliver them because they have them mostly on charter themselves. They want to re-deliver them back to the owner in a dirty condition. So, whether it's a single voyage or several voyages, it has historically been a temporary thing and not ships cleaning up for long periods of time.

Okay. That's good, Cameron. I appreciate it. And then, the next question is, and I know this is a wall of worry kind of thing, but continue to sort of see that order book to fleet ratio moving higher. And I know that the Aframax, LR2 versus Aframax, and age and everything else. Just out of curiosity, is there a point at which you'd say, oh, geez, I don't know, whatever it is, 20% order book to fleet ratio or something. That's starting to get frothy or, just some senses where you might think we are in the slope of risk with respect to supply.

We don't. We think we're fine at the moment. The outlook is very strong next two, three years still. You've got the aging counterbalance, as you're saying. You've also got a market that, yes, you've had these movements from crude oil ships carrying, cleaning up, but as I said before, this market is at a record high for this time of year. So, it's absorbing that as well. So, no, we're fine. And, it's a good try then, but there's no possible way we're going to start posting on our website and market or chart saying, at this point, the market is oversupplied for stuff.

Yes, it's always the first.

Yes.

All right. I appreciate it. Thank you, guys.

The next question comes from Chris Robertson of Deutsche Bank. Go ahead, please.

Hi, everyone. Good morning. Thanks for taking my questions. Let me first by saying congratulations on significantly lowering the cash breakeven level here. I think it highlights the strong efforts you guys have done to strengthen the balance sheet over the last several quarters. On that point, maybe, Chris, what will the cash breakeven level be, do you think, by the end of 2025 if the debt prepayments and normal quarterly amortization continues?

Hi, Chris. Thanks for the question. End of 2025 cash breakeven. So, you have to layer in a lot of assumptions there. Like we said earlier, we have this revolver, which we could potentially repay. We could potentially get down to below $12,000 per day, assuming these prepayments. By the end of 2025, you have to take into consideration things like inflation and the resumption of certain debt repayments. The big one on our billion-dollar credit facility does not resume until September of 2026, so there's still some time there. So, I would guess somewhere around 13 or so to directly answer your question. That's just an estimate right now.

Okay. Yes, that's fair. This is more of a high-level strategic question maybe for Robert, but looking out a few years ahead, are there any segments beyond the traditional refined product tanker space, whether it's in chemicals, whether it's in carbon capture and transport? Any other sectors that might interest you in the future that are a bit tangential to the core of the business that could look more attractive in the coming years?

We'll pause on that. We'll pause on that.

Okay. All right. Well, that's it for me, guys. Thank you for the time.

Thank you.

Our next question comes from Frode Mørkedal from Clarkson Securities. Please go ahead, sir. Frode Mørkedal: Thank you. Hi, guys. Interesting chart on this Page 12 where you show the LR2s trading clean, right? 56% right now. That seems to be fairly in line with long-term averages, but it's certainly above last year's level. Roughly, when I look at this chart, maybe it was 52% last year. Last year, more of the LR2s were trading dirty or crude. Now, they're trading clean. That's been a negative growth, right? Of probably 4% on the LR2s. And then, I guess this was Ben talking about the crude, but do you have any crude tankers trading clean? Do you have any data points of how much are we talking about? How many investments are we talking about here?

You're asking on the LR2s, how many have cleaned up or how many are trading clean? Frode Mørkedal: No, I'm sorry. I was talking about the crude tankers. The LPCs, the Scorpio trading clean. How many investments are we talking about?

Yes. We've seen different estimates. If you look at vessel tracking data specifically, the number is probably around 12, because they've had to already have loaded that cargo. If you look at some broker reports, it can be up to 20 ships. That was something that we're tracking. What we don't know and as Cameron highlighted, once that vessel arrives with that clean cargo to, say, Europe, if it's going to continue. It's something we're monitoring. We don't think that this is going to be sustainable long term, because we're bullish on the crude oil segment as well. But it's something we're monitoring and… Frode Mørkedal: If I take the 20 count you mentioned, that's probably like a 1%. We're talking probably like maybe 2% higher effective lease growth year-on-year. That's probably enough to explain why LR2s are 40,000 instead of 60. The rates are still good, but they could have been even higher. The question is, what happens if they turn back to crude again?

The crude oil hope trade, Frode, again, I think we're really happy with our 40 a day. We're not complaining that it's going to be higher. We hope that the VLCC market gets stronger sometime. It's been showing much promise now, so that's what we are. Frode Mørkedal: Fair enough. It seems like Aframax and LR2s are fairly stable now in the stock market. Hopefully, they will change back. Okay. Thank you very much, guys.

Our next question comes from Liam Burke of B. Riley FBR. Go ahead, please.

Thank you. I've got another macro question. On Slide 8, you're showing nice steady demand growth for refined products. The Ton Mile Demand has gotten a boost by the redistribution of global refinery capacity. This has been a multi-year event. How long do you see the redistribution of refinery rolling out past this year and keeping Ton Mile Demand up there?

Liam, it's a good question. There are a few refineries coming online outside of China. We highlighted Dangote. We've got [indiscernible]. But really, the outlook is going to be addition by subtraction. So those three refineries that are going to close next year for around 600,000 barrels between the U.S. and Europe, two in Europe, one in the U.S. I think we're going to continue to see older refineries close and then have more modern refineries export product to those regions as demand increases or stays the same in those regions, as well as grows in other places. I think this is going to be a long-term trend that's going to benefit product tankers as products are reshuffled around as refinery production closes in certain areas.

Okay. You're looking at a multi-year event. You've got an order book, which you've highlighted, 14% over a period of time. Plus, you have scrapping. It's safe to think that if you're looking on the supply side based on ton-mile demand, you'll continue to see a nice gap there on the supply-demand side.

Exactly.

Okay, great. Thank you, James.

This concludes our question-and-answer session. I would like to turn the conference back over to CEO Emanuele Lauro for any closing remarks.

Thank you very much, operator. We do not have any closing remarks apart from thanking everybody for their time and attention today and look forward to speaking with you all soon. Thanks a lot. The call is concluded.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.