Tsakos Energy Navigation Limited (TEN) Q1 2018 Earnings Report, Transcript and Summary

Thank you for standing by, ladies and gentlemen, and welcome to the Tsakos Energy Navigation Conference Call on the 15th of June 2018 First Quarter 2018 Financial Results. We have with us Mr. Takis Arapoglou, Chairman of the Board; Mr. Nikolas Tsakos, President and CEO; Mr. Paul Durham, Chief Financial Officer; and Mr. George Saroglou, Chief Operating Officer of the company. At this time all participants are in a listen-only mode. There will be a presentation followed by the question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, and I will now pass the floor to Mr. Nicolas Bornozis, President of Capital Link, Investor Relations Advisor of Tsakos Energy Navigation. Please go ahead, sir.

Hello, Mr. Nicolas Bornozis?

This morning, the company publicly released its financial results for the first quarter of 2018. In case you do not have a copy of today's earnings release, please call us at (212) 661-7566 or e-mail us at ten@capitallink.com, and we will e-mail a copy to you right away. Please note that parallel to today's conference call, there's also a live audio and slide webcast, which can be accessed on the company's website on the front page at www.tenn.gr. The conference call will follow the presentation slides, so please we urge you to access our presentation on the webcast on the website. Please note that the slides of the webcast will be available as an archive on the company's website after the conference call. Also, please note that the slides of the webcast presentation are user controlled, and that means that by clicking on the proper button, you can move to the next or to the previous slide on your own. At this time, I would like to read the safe harbor statement. This conference call and slide presentation of the webcast contain a certain forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties, which may affect TEN's business prospects and results of operations. Such risks are more fully disclosed in TEN's filings with the Securities and Exchange Commission. Before turning over the floor to Mr. Tsakos, I would like to mention that we just came back from a very busy, productive and successful Posidonia week, where we visited the company’s headquarters. TEN is celebrating this year, 25 years as a public company. 25 years of continuous growth, growing the fleet from four to 66 double hull vessels. We should also point out TEN’s track record of uninterrupted dividend payments inclusive of the recently declared dividend, TEN will have distributed a total of $10.71 per share in uninterrupted dividends to its common shareholders since the company’s listing on the New York Stock Exchange in March 2002 against an issue price at the time of $7.50. And now before turning over the floor to Mr. Tsakos, I would like also to point out how the company’s prudent and balanced fleet deployment strategy has resulted in outperforming the spot market in the first quarter of 2018 by over 100%. Ladies and gentlemen, at this point I would like to turn the call over to Mr. Nikolas Tsakos, President and CEO of Tsakos Energy Navigation. Mr. Tsakos, please go ahead, sir.

Thank you and good morning to everybody. Thank you from Greece and thank you for your good comments and I hope that we will continue to make a more profitable years. The first quarter of this year has not been a very positive quarter, but we looked at it as the bottom of the recent market that will be in a down cycle for, I would say, the last two years. And we hope and we have the fleeing that the Q1 was the bottom of the cycle. We are looking it starts reminiscing, if you look at the graph of 2013, and by this, the first quarter of 2013 was the weakest part, and then the market, for different reasons started turning around. However, in TEN, we have followed a very prudent and sometimes boring model of running the commercial side of our business, and with 80% of our ships on long-term time charters we always cover our financial and operational obligations with the 80% of that fleet, and it covers the whole obligations of the fleet. And that leaves us, the 20%, of course, is still a significant part, together with another 20% of profit sharing to take advantage of a higher market. So, although it has been a very difficult period, I think, operationally, we have, again, more than 96% utilization, although, we took the decision to take out of service five of our vessels and take advantage of this low-market and pass the special surveys, which incurred, of course, expenses and downtime. We're very proud also of our operational record, 97% our utilization, and also, we have moved in year-to-date, 600 million barrels of oil and products, including gas, which is six days of world production of energy. And all of this, it often would work with no operational issues, which is very important. So we're looking forward for a better quarter, the second quarter, which we are in into this quarter. We are seeing signs of betterness from a big part of this business and value segments, of this coming mainly from the VL’s and Afra’s, we are seeing a big appetite of major oil companies for long-term business, not only for new buildings, but for existing tonnage, which is always a very good sign, and you know that we are always looking at this. We are proud to announce another after finishing in the fourth quarter of 2017, our 15 vessels new building program. We are proud to be back in buildings responsible ships, with employment for major oil companies, and this is something, again, which falls within the company's strategy and repeat business. Another segment that makes us believe that our second quarter will be significantly better or better from this quarter and the remaining of the year will return back profitable has to do with the turnaround of the LNG market, and as we see today, we have the LNG market almost doubled in the recent – within the last year. So, we have renewed the Maria Energy, she went up from $33,000 to $43,000 starting in April, and we will take this positive effect within this quarter, and of course, our other vessel NEO Energy has almost doubled. Here employment will start in the third quarter from 19,000 to 38,000. So, this goes straight to our bottom line, as we speak. Also, there are things that are not completely on the day-to-day business that have to do with legislations that we are seeing. We are seeing the scrubber and the water ballast arrangements and legislation that will make a significant part of the world to either slow steaming or being out of service for our fitting and upgrading its technical capacity. So, I think we are looking at better times going forward and then with that, I will ask George to tell us a little bit of the first quarter and his process. Thank you.

Thank you, Nikolas. We announced today the operating results of the first quarter of 2018. However, since 2018, this year marks the company's 25th-year anniversary, allow me to try to summarize the 25 years in one slide. If you actually understand, it's not easy, but let me put out some key figures from the first 25 years. As you know, we started with four modern vessels back in 1993, and we find ourselves today with a pro forma fleet of 66 vessels. Most of the vessels, especially since – after 1997, have been built with newbuildings meeting clients’ requirement. The total net income generated since inception is $1.25 billion, of which, $565 million, a figure of close to 55%, had been returned to the company's shareholders in the form of cash dividends and buybacks. Turning now into the first quarter numbers. OPEC supply cuts and an oversupply of tonnage, together with seasonal refinery utilization, continue to weigh on the crude tanker rates during the first quarter. The environment has been weak, but thanks to hence proven commercial strategy of fixing most of the fleet on medium- to long-term time charters, it paid dividends again, as it helped the company to outperform the average spot market indices, by beating them over 100% in all vessel categories that we operate. We believe that tanker rates have reached the low point of the current cycle. And as we move into the second quarter, we already see signs of improvement. For those of you who are connected to the Internet and our website, there's an online slide presentation, the format we will follow during the call. Turning to Slide Number 4, to the key corporate highlights, we have announced today the company's agreement with an oil major to build two new state-of-the-art Aframax tankers against long-term contracts. We have also shown our oldest vessels of 1998 build VLCC Millennium after 20 years of profitable trade for the company. With this order, TEN has a pro forma fleet of 66 vessels, and 25 vessels in the fleet have ice-class capabilities. The average age of the fleet is 7.4 years against 10.3 years for the world tanker fleet. We have a balanced employment strategy that takes advantage of market peaks with profit sharing arrangements. Out of the 66 vessels, pro forma fleet, 53 vessels are on secured employment contracts, with an average duration of 2.5 years. The emphasis is on charters with profit sharing arrangements that enabled TEN to take advantage of spikes and stronger freight markets. We have secured minimum contracted revenue of $1.3 billion, with potential additional revenues from profit-sharing arrangements. We have a modern diversified fleet covering client transportation requirements in crude, products, shuttle and LNG, and we have become the carrier of choice for many of the top oil majors, commodity traders and refineries. We have continued to keep a very high utilization, with the latest figure being closest to 97%. In the next slide we have a breakdown of the fleet, 66 vessels pro forma fleet, with 48 vessels being engaged in crude trading, 13 in products. We have three shuttle tankers and two LNG vessels. The next slide has the main financial – the next slide has – basically they're all in blue-chip clients of the company with whom we are doing repeat business over the years. Thanks to the modern fleet, the safety record and the quality of service. These 10 names that you see represent 72% of the revenue generated for the company. Strong secured coverage with upside potential, we have so far announced during the year, new charters and charter extension of a total of 15 vessels in the fleet. The charter period for these vessels ranges from six months to three years. 51 vessels out of the 66 vessels pro forma fleet are fixed under secured contracts, combination of time charters, time charters with profit sharing and contracts of affreightment. 38 vessels are in market-related charters, including the vessels currently in trade and export, securing the company's ability to immediately capture the market's upside. The revenues expected from the vessels in the fleet with secured employment cover the company's annual operating and financial publications. We have seen in the LNG – we continue to see improvements in the LNG markets, with two of our vessels that we operate having secured extension in their rates and charter period of significantly higher levels, 30% in the case of one vessel, and doubling the rate in the second one. On the next slide, we present basically the breakeven quotes for the various vessel types that we operate and as you can see, the cost base is very low. In addition to the low shipbuilding cost we must highlight the purchasing power of technical manager, Tsakos Columbia Shipmanagement and the continued cost control effort by management in order to maintain a low OpEx average for the fleet, while keeping a very high fleet utilization rate quarter-after-quarter, that we believe qualifies as full employment. With 80% of the fleet on secured employment, the revenue this charter generates cover the company's operating and finance expenses, including the dividend. In addition, the combination of time charters with profit sharing, contracts of affreightments and spot charters guarantee for TEN a share of the market’s upside every time we have a spike or a sustained strong freight market. Based on the current number of vessels operating in the spot market and time charter with profit sharing, for every $1,000 increase in the spot market, we have a positive $0.07 impact in annual's earnings per share. The next few slides, from 10 to 12, tell us what we see in the market. Despite the weakness we have experienced in the market, we are near the bottom – or we have surpassed the bottom of the current cycle and we see positive signs that point to the markets recovery. Some of these things are first of all, the solid global economic background, which translates to strong global oil demand. And the growth for global oil demand in 2018, it marks the fourth year in a row with global demand growing by at least 1.4 million barrels per day against the long-term demand growth figure of closer to 1.1 million barrels per day. This trend appears to be holding strong as the International Energy Agency, in the latest report, forecast the same demand growth number of 1.4 million barrels per day for 2019 as well. With global oil stocks currently below the five-year average level that OPEC was targeting in order to reduce oil oversupply, the reintroduction of economic sanctions against Iran by the United States and with key OPEC producers suffering continuous production declines, OPEC and trends appeared to be ready to increase production by a figure of up to 1.5 million barrels per day following the June 22nd meeting. Increased OpEx production historically has always been positive for tanker demands and freight rates. The U.S. continued to develop as a major crude oil exporter to the world. During 2017, the average U.S. exports were in excess of 1.4 million barrels per day. The latest Department of Energy four-week average has U.S. crude oil exports exceeding 1.9 million barrels per day. The growing U.S. exports have created new long-distance trade routes, mainly through Asian destinations, adding to ton-mile growth. Highest scrap prices and the weak market resulted in a significant increase in tanker scrapping, the highest that we have seen quite some time. The average age of the scrap vessels is coming down to about 20 years. With the upcoming regulations for the water ballast in 2019, and the global sulfur cap from 2020, we believe in the company that owners of older vessels will continue to prioritize in scrapping their older tonnage rather than passing them to an extensive special survey, the effect of which will be a lower net fleet growth for the next couple of years. In view of all the above, we announced today, another dividend of $0.05 to be paid on August 8, to the shareholders of record on August 2. In total, since 2002, TEN has paid $10.71 in cash dividends, or in excess of $466 million, and this compares with a listing pricing in our IPO of $7.50. The average yield since the New York Stock Exchange listing in 2002 is 5.25% per annum. We believe that we have turned the quarter and we're going to be positive again in 2018. And with that, we're turning to the numbers. Paul?

Thank you, George. Well, as Nikolas described, the tanker market in quarter one was not conducive to generating strong results by any large tanker company, although, we probably fared better than most others. Our net loss was limited to $11.9 million, thanks to our time charter cover and our fleet enjoying full employment. As a result, our vessels are significantly better than market rates, with an average daily TCE rate of nearly $18,000. We have 16 vessels on spot, Aframaxs and Suezmaxs at least comfortably covering their running [indiscernible] $13,000. We have five vessels dry docked, as Nikolas mentioned. Four are losing their time charter revenue, including shuttle tanker in Brazil losing $53,000 daily. However, our time charter vessels still managed again to generate enough cash to cover our operating, overhead and finance costs, but leaving a smaller surface than in recent quarters. Our average daily OpEx per vessel increased, but we regard this as an temporary aberration due to the five dry docks, the heavy restocking of vessels, and a weak dollar. In quarter 2, we expect the reduced dry dock scheduled, regular supplies vessels and a stronger dollar, the average daily OpEx per vessel should return to normal levels. Our daily overhead cost per vessel remains stable as there is no management award and vessel management appears to remain stable as they have been for six years. Finance costs increased by $6 million, mainly due to the loans relating to the new vessels and increased interest rate. Unlike the prior quarter 1, there was no capitalized interest, and no gains from early termination of interest rate swaps in this quarter 1. There were no new loans in quarter 1. Repayments amounted to the $42 million, bringing our outstanding balance to $1.72 billion. Net debt-to-capital was 51%. Our average cost of debt includes a one with only 3.9%. In quarter 2, we have successfully refinanced the debt on 11 of our vessels, extending the original life of the debt on these vessels for another five years with a reduced margin. We have also refinanced the shuttle Brazil, providing an extra $16 million cash. Our old VLCC Millennium was sold, and $10 million worth debt repaid from sale proceeds. We soon expect to complete negotiations to finance the two newbuilding Aframax has just announced at very competitive terms. And this concludes my comments, and now I'll hand the call back to Nikolas.

Thank you, Paul, and thank you, George. And as we said, this has been a challenging quarter, but the prospects look positive, and we hope that 2018 will be another profitable year. It has in many ways, these are reminiscent of the end of 2013 and when the market started turning around, and we see a lot of this because of the appetite of the major oil companies for a long-term business happening almost on a daily basis and big names, all the majors are out there to dig in vessels. And I said, again, not newbuildings just the vessels out of the market. So with that positive note, I would like to open the floor for any questions.

Thank you. Ladies and gentlemen, we'll now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Donald McLee from Berenberg. Please ask your question.

Good morning, guys.

Good morning.

So just to start with the newbuildings, could you provide any details around the Aframax's in terms of the pricing, expected delivery, contract tenor, et cetera, and those things will be helpful from a modeling perspective?

We will tell you this in private, when you're going to offer to finance it. I think these are – vessels are capturing all the new Tier 3 technology, which is required, and it's in the low 50s depending on the external of the major companies going to be – to adding. Yes, it is very close to 50 or 100 depending on the specification – on the price.

Okay. And then just in terms of the tenure on the contracts that’s actually Aframax's?

It's anywhere between five years and seven years. I think five is the minimum, and there are options up to seven years.

Okay, that makes sense. And then just taking a step back, in the past, you've talked about taking time to digest the recent CapEx program, when referencing potential LNG carry orders. But with that Aframax’s order on the books. Could you provide an update on if you see LNGs in the near-term avenue of growth, and if there has been any change to the level of activity, but any negotiations around those orders?

No, no, as I said, we are digesting – it took us one quarter to digest our growth program. And of course, LNGs are in the forefront of our growth program without wanting take out of – without stopping the day-to-day business with service order has to do with.

So I guess compare to three months ago, or six months ago, however has there been any progress and negotiations there as it kind of the same.

There is – a vast appetite of the components that they’re involved the end users of gas into wanting more vessels and we’re participating in this.

All right. And then one more on the [indiscernible] turn it over. We have about $100 million that becomes redeemable in H2. How do you prioritize potentially paying those pref of against pursuing near-term growth opportunities?

I think our aim will be to repay the pref as soon as possible as early as 2019, I mean, our pref, the first one is view in July next year and the other one is in 2020 in October 2020. So they have a year in EBITDA part, I think it will be 2009 – the first one will be repaid in 2019.

Okay, and then…

This is our priority. Of course, it was our obligation.

And then just sticking that, so I think after July 2019 and October 2019, there’s an escalation in the yield. What would be the increase, it will be on that period.

I do not know the increase, because we’re not planning to get into that. It’s not October 2019, it’s October 2020, the second one.

Seriously?

Yes.

Okay. That’s it for me. I can turn it over now. Thank you.

Thank you.

Thank you. Your next question comes from the line of Jon Chappell from Evercore. Please ask your question.

Thank you, good afternoon. Two quick follow-ups on the newbuilds, when is the delivery set to those? Is that mid-to-late 2020?

Perhaps, yes. Perhaps as early as the last quarter of 2019 for the first vessel.

Okay. But that might slip, I mean, you probably don’t want to take a December 2019.

Yes. Although these – the tankers are pushing, because they need to shift, you’re right, which is what we would do.

Okay. And then, Nick, you were on the record earlier this year, saying that your constituents, I’m not sure if that’s the right term, but your fellow owners in INTERTANKO would "shoot" you if you order newbuilds. So can explain what the aftermath that you have in your fleet today on the spot market, why those ships couldn’t be used for this particular charter?

Yes, you’re right, but you have missed my quotation, which is built responsibly – like drink responsibly. So I think, I’ve always said that we cannot stop anybody ordering ships that a client will give to somebody else unless they’re allowed to do it. So we’re not looking to build opportunistic because of low prices of new builds or so, but we have never – you know this, because we just delivered 15 ships last year, we’ll never shy out of doing business. One of the reasons that we think the market will be positive is, as you know, we have moved for environmental reasons to Tier 3, and a new designs of engines and more and more environmental and a lot of might for specific rates require this type of vessels instead of existing. Our priority has been to offer them existing ships, but they need new technology.

Okay. So is the other – main other way to ask then is there a two tier market developing for time charters? I mean if you have a handful of 2007 to 2010 build Aframax’s in your fleet when the customer comes to you, they specifically want the new technology and maybe be involved in the oversight of the new build process rather than take the existing ships?

Many of the – many of the clients that are asking for new buildings, because I said, we have a lot of business for existing charters by the major oil companies. And I think this is also very encouraging, because it’s not – we see I would say, 75% of the business out there for existing ships, for 2007 to 2010 to 2012 vessels, and we’re planning to announce some of this business, I think later in – within the third quarter. But there are some specific clients that we have started earlier – later in 2017, but specific ships for specific trades.

So that leads into my last question. You have laid out a pretty optimistic view on the bottoming of the cycle and the near to medium-term outlook. And you do have a fair amount of spot ships today but bunch of contracts rolling off to – in the relatively near future. It sounds from that comment that you’re still looking to kind of recharter ships and maintain the current time charter coverage as opposed to maybe be getting a bit more spot exposure, and what you think would be a recovery market, is that accurate?

Yes, because as you know – as I said in the beginning, we are a bit of a boarding company, because we tend to have long-term charters, and because of the company’s reputation we then not to have time to have a ship open to long before the next client comes for a long-term employment. And as you know, I’m here with our chartering team, and we have this type of examples on a daily basis. And if you recall, I think we’ve made an announcement back in March that already in March, we chartered 16 vessels from the existing fleet. So there’s apatite for that. I think, you have big companies out there like [indiscernible] the actions that are looking for cover, for existing fleet.

Okay. Final thing, more of a comment rather than a question, and I’d spoken this on my peers about this as well. It’s June 15, we’re 15 days away from the end of the second quarter, and most of your peers have reported weeks, if not months ago. If possible, as far as staying relevant with the investor community if you can kind of move the timeframe up a little bit and be closer to the peers, I think that would be helpful to the company to us and the analyst into your valuation and that’s just an observation. So thanks for time Nick.

Thank you.

[Technical Difficulty] And your line is open. Please ask your question.

Thanks, operator. So few quick questions here. On Slide 5, you showed that your three LR2’s and your two LR1’s are currently operating on the crude trade. How hard or easy would it be to switch those vessels to transporting refine products and is that something you’re thinking about doing?

Yes. I think operationally it’s not – those ships have been designed built in the best yards, operationally, it’s not more than one week and perhaps depending who pays for about $0.25 of expenses to turn them from dirty to cleaner traders.

Okay. Is that something that you think about doing or you pretty committed to crude trade on this?

I think the ships are on charter employment so the owners are – charters are working now more on the crude trades. But they are turning to clean.

Sure. Okay, and now with those two buildings basically to be delivered that were recently ordered. Any other plans for fleet growth or maybe additional fleet sales and now that you already sold the millennium in the coming quarters?

I think, yes. On specific segment we are looking – as we have discussed like gas is a growth priority for us. And all of our – I would call the first generation ships as we start with the millennial helped for sale. Some of them we are negotiating closely.

Got it. Okay. And then back to the market. Can you give some guidance on quarter to date or maybe current spot rates on some of your open Suezmax’s or even open Aframax crude tankers? Obviously, the headline rates according to some of brokers are pretty low, obviously I assume, outperforming those?

Yes, I mean, we are. Just to – like I'll give you this, the comparison in the first quarter, I think our, again, this has do, because we have coverage of our ships in a market that are – well this is performed close to above 27,000 in a market of 11.5. Suezmax is 18 in a market of five. Aframax is 18 on a market of 7, and so on and so forth. So I think today some of these markets, mainly the Aframax have recovered substantially, and we're seeing a bit of coal portion of the Suezmax trade.

Okay, so 2Q rates higher than 1Q for the spot vessels?

Excuse me.

2Q rates higher than 1Q for the spot vessels?

Yes. Mainly VLs and Aframax, so they are the ones who have started reacting more positively.

Sure, sure. Okay. Last question, share price, obviously, still trading at a pretty steep discount to NAV or share repurchases part of your kind of return to capital plans this year? Or are you just focused on buying back those preferred first?

I think buying back the preferred is our priority, and maintaining our dividends is number two to the first priorities.

Great. Thanks, again. Good chatting with you.

Thank you. Next question is from the line of Ben Nolan from Stifel. Please ask your question.

Thank you, operator. So my first question relates to, I guess, just the newbuilds, and ultimately, the returns on them, kind of backing into it sounds like you're on a moderate returns, 10% or 11%, if that's correct, correct me if I'm wrong, but – which is, I think, probably in my mind to work things have been historically for longer-term contracts on newbuildings. But as you look forward, are you seeing any changes there, any evolutions in terms of what you guys in the market will in due require, in terms of kind of a minimum level of return in order to be incentivized to build new vessels?

I think our equity return is closer to the mid-teens rather than 10%, 11%. I think we're trying – we have lost a lot of business to others at 10% and 11%, and there are other people that would go for about I think – Paul?

I agree, I mean, we've always, in the past, we've been to as much as 15% for, but of course, that has been whittled down at few years, our target that is. But I think we would be – well, we are very happy to get 10% or 11%, but even at these days it can be a bit of a struggle. But what we feel at by the end of the year, we'll be up again around the 12% to kind of 11%.

Yes, well I mean, Paul’s comments has to do with the return on the fleet overall, but my comments have been on the time charted market. But we let other people get the 10% and 11% on long-term charters, we're looking at something with meet thins, I think 10% is our sweet spot, and we had examples in businesses that we let go when people on the undercut the market.

Thank you. Are you ready for the next question?

Yes.

Next question is from the light of Fotis Giannakoulis from Morgan Stanley. Please ask your question.

Yes. Hi, Nick. I also want to ask about your capital allocation, your – how comfortable do you feel with your liquidity? I know that you want to have plenty of cash in your balance sheet for opportunistic acquisitions. Given the fact that you have to, I mean, plan to repay back the two prefers, which is $100 million, and you have also some equity to contribute for the newbuildings, what are the sources of liquidity that you can have and if you would consider of raising any external capital?

Well, I mean, as I said, our intention is – we have two preferreds. The first one will be repaid, I think, within 2019; the second is during October 2020, and we're planning to, has a priority to repay those preferreds, or at least to refinance them. In the market, as you know our preferreds have performed very, very, very well, and they're performing very well, because we have a very constant dividend from that side. Also, we're looking at fixed sales and to create liquidity, and we are doing that and enhancing the company's liquidity, which has always obvious on the high side for these graduals. And we are securing businesses that the equity participation because of the signature of our name and the charters is not so demanding. So I think the existing growth of the company will come from existing cash flow for the new ships.

So, is there any minimum threshold over the cash that want to have in your balance sheet? And you mentioned earlier your first priority for the repayment of the preferred – the preferreds will be reaching new preferreds, is this the game plan here?

Well. It depends how the market conditions are going to be at the time. I mean, it's Something we do not exclude.

Okay. Thank you. And Nick, you are expect being the CEO and the Chairman of the – CEO, but then, you're also the Chairman of Intertanko, the association of tanker ship owners. I want to ask you, with both hats the implications of 2020, and then where that your fellowship owners are reacting to that we heard earlier this week. One of your peers in the dry bulk sector mentioning that they have already ordered a number of scrubbers for capsized vessels, very similar sized with the Suezmax that you owned. Is this something that you expect to have a wide adaptation, now that the first test have already been done and it seems like the cost is a little bit lower than we previously talked?

Well, I think, first of all, we will have to take – we will have to spend here after dinnertime in New York to discuss this issue. But I would try to give you a small summary of our thoughts here. I think, everyone has his own right, we believe that scrubber is one of the solution, we believe scrubber is a short-term solution. Owners are doing – are taking this stance. However, whichever way we'll go, even if the scrubber becomes much more acceptable day to day, the disruption and the dislocation that this will create in the market will be very positive edge for both and tankers, dry cargos, and I'm not sure what will happen with containers, because containers is what actually the majority of the CO2 comes out from. So I think any disruption of that sort, even by slow steaming, either by people going to the yards, working for steeping scrubbers, is going to make a big change for the market within stopping early in 2019, and that's why I say – now my opinion is that scrubbers is a short-term solution, and that my faith to fit them. So I think everybody is taking a chance on that, there are not enough scrubbers in the world to fit all the works vessels and scrubbers, then lot of all the ships will go for scrap. I think you mentioned that I sound optimistic. I'm not overhead optimistic, I'm just looking also at the supply and demand figures, which you are much more analytical about. I mean, there are, let's say more than 100, 120 VLCCs in the order book, but close to 200 of those ships are above 15 years old, and more than 10 years old ships are always busy. So really, if you imagine that some of this 20-year-old ships will not, for sure, as we do in the Millennium, will not go through the scrubber or the water ballast treatment scenario. Then the market is much, much more balanced than we think, and that was the reason that we feel optimistic. Our opinion as an association, whether in the Intertanko thought about the scrubbers, it’s a short-term cure with no real positive long-term effect from the environment I’m talking about, but every owner takes his own economical decision. The truth is, whichever way it goes, it’s going to be positive for the market, because it will create significant disruption.

Can you also give us your view about the level of compliance that you see after 2020, and also if you believe that this date is set in stone, or there might be some extensions similar to what happened with the ballast water treatment?

What I can tell you is that, as we speak today, from now until September, a lot of very important discussions will be taking place in all the legislative forums, and by September, there will be a decision if that based on supply and demand, supply of 2005 and demand for 2005, I would believe that some sort of transition time has to be given for vessels to comply. But I think in September, the final decision will be taken, and then we will know much more in the effect on the market depending on that will be significant.

And jumping to the U.S. Gulf market and the ramp up in exports, it seems to be one of the high expectations for the tanker sector. Can you give us an idea of how many vessels they are engaged in U.S. exports right now? Why there are VLCCs or Suezmax’s or Aframax’s for reverse lighter ring? And how many vessels do you expect that will be engaged in the future if we have this growth in U.S. exports people are talking about 4.5 million, 5 million barrels per day growth?

Well, I mean, as we have seen this is a market that we think is biting more and more into the demand for transportation business. The Aframax’s are basically used as you rightly said for a change for reverse; lightering and we have the first couple of VLCC cargos that have been exported and Suezmax’s. But so far, the market that has been more effective and we see this, because it is the best performing market in 2018. It’s the Aframax golf market and I mean today, it has gone close to $20,000 a day, which is very important.

Thank you very much, Nick. thank you everybody.

Thank you.

Next question comes from the line of Magnus Fyhr from Seaport Global. Please ask your question.

Yes. Hi, good afternoon. Just two follow-up questions. I guess first on the scrubbers. We’re seeing some of the oil companies taking a bigger interest and putting these on their ships. Maybe, you can tell me a little bit about of these two most recent time charters going to do Aframax’s, was there any talks about putting scrubbers on this?

Yes. I think scrubbers is one of the options that is being discussed and evaluated with the shipyard, and as you know, there are various types of scrubbers. We’re learning more about scrubbers and we have our ambitions in our life when we started out, open loop, hybrid scrubbers. So yes, these are options that are being discussed very, very seriously.

All right, thank you. And then the second question on the LNG markets. I know we’ve set out on some goals here a few years back, who were at mid-2018, we still had two LNG ships, are the returns getting closer now, we’ve seen some longer-term charters being awarded that you think you could have maybe one or two ships more by 2020?

Yeah. So, I think – I think you are right. We went through a period that I think some owners for their own reasons, more out of – because they had a significant amount of ships that idle in the spot market – as we said; the spot market has almost doubled in some segments of that. And that carries some weight on the long-term side of the business. I think some of the owners that had idle ships have now employed them. low respectable levels and the market is going through a period that we are approaching our returns that I mentioned earlier of the mid-teens in terms of the returns for our equity.

Thank you. Next question comes from the line of James Jang from Maxim Group. Please ask your question.

Hey, good afternoon guys. So, I know you’ve mentioned that LNG is a focus for the near-term, but any plans on replacing the Millennium?

I mean yes. big ships are always interesting. And there is a big appetite for big ships by the oil companies. So, it is a segment that we are looking, not as a priority, more opportunistic, and we’re looking also at ships that are retails.

Okay. Nikolas, since you are the Chairman of Intertanko, can you give us an insight into whether Intertanko is working with someone like Alfa Laval on the scrubbers?

I think Intertanko is giving information to its members for every technology available. We are – we have our annual meeting for five beautiful days in Rome next week. They know that the majority of those in this room talking about scrubbers and they get the ballast treatments – but we will have to bring a lot of graphsin Italy to stay all these technical issues. but yes, I mean we are providing a forum for suppliers to come and talk to our members. We’re not influencing them, and we’re not a commercial organization because Intertanko, but we have had in Houston in the last year, in our annual meeting, we have a lot of the water ballast treatments with the U.S. Coast Guard approval presenting. The technology will have Alfa Laval and others presenting their technology in our annual meeting now. But I mean we’ve not been making a profit out of this. We’re only telling our numbers what is out there as an option.

I mean wouldn’t it benefit, I guess the industry if you guys can come to some type of consensus on a scrubber system to help the cost, or is that not part of discussion at this point?

I mean we have strong opinions on scrubber technology, and we have a very confident technical team in Intertanko dealing with issues like this. But their aim is not to – our aim is not to influence one out of their technology.

Got it, okay. And one last one is, you mentioned that you believe that the sector is kind of exiting the trough right now. What are you seeing it’s kind of to support that outlook?

You’re talking about why we believe that the market has turned the corner?

Yes.

Perhaps, as I said before, it reminds us very much, if you look also in the graph of where we were in the same time in the same period in 2013, which was, again, a very low period of time. We had a difficult summer in 2013 for those of us who long memories to remember. And then I think October that year, the market turned the corner without specifically, we have any major wars other than the usual, the Iraq skirmishes at the time. The reason is not because we are seeing that the supply and ships are getting older, and the supply out of from the VLs where the number sounds is a bit scary. It's imbalanced, and the other segments that we're seeing is the dislocation that you guys have mentioned, if people have to go and close deal or have scrubbers that pre-fit on their ships, they will have to have a lot of timed out of service, and that will create significant market disruptions and dislocations and we expect the rate as long as demand, and as George has mentioned in his presentation stage, increase is – where we expect to increase, we're going to see a positive remaining of the year. I mean, we know how many ships are coming in. We know – and we hope, we’ve already had let's say, more than 70 ships since in the first six months, in tankers have been scrubbed [indiscernible] in Suezmax's, 20 Aframax's, and then about 22 smaller ships, so, that’s a good sign.

And one final one is on the two new contracts, I think Jon post upon this. Currently you have a Sephora in the rogue of Princess of Charter, why would these vessels not look that as candidates for the charter? Is it because of age or the technical aspects?

No, no, no, no. Actually, the ships are participating in contracts of a Friedman with major oil companies, they’re not done – just because the system, not the same charter, that’s not mean that they're not operating. Actually, they're operating in the sports market. And if you look our utilization of 97%, it's way, way above the industry average of 80% to 85%

Yes, okay.

So the ships are operating, and there is a big appetite, I mean, let's say, one of the major companies is out there as of this week, looking for this type of vessels for long-term employment. Now, if they meet the rates, we believe it’s appropriately might charter than long-term, but the ships are working with 96% utilization. So they're working with the majority of – every single day

Okay, thank you. Only one quick one, the two new Aframax has been, are they coated?

Of course, yes.

Okay, great, that’s all I have. Thank you.

Thank you.

Thank you. There are no further questions at this time.

Okay, thank you, well. We would like to thank you very much for your interest in the company and the questions. Our team will be out in Marine Money next week, so you can see and have any more clarifications with our results being out. We believe that it has been a tough start for the year, but our strategy of 80% employment and more than doubling – outperforming by double the spot market has put us in the right direction. We still had a positive cash production, a small one, but still, our strategy with 80% of the fleet obtain all our operational and financial obligations has started to operate. It’s been the first real quarter that we have a full fleet working. We took a decision to take a number of our ships out of service and passed the special surveys because of the low market. It is something we will not have, I think, in this degree at all in the second quarter. So hopefully, our news will be even much better when we talk to you after the summer. And with that, we would like to thank all of you very much. Thank you.

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