Ardmore Shipping - Q1 2018
May 2, 2018
Transcript
Operator (participant)
Good morning, ladies and gentlemen, and welcome to Ardmore Shipping's first quarter 2018 Earnings Conference Call. Today's call is being recorded, and an audio webcast and presentation are available in the investor relations section of the company's website, ardmoreshipping.com. We will conduct a question-and-answer session after the opening remarks. Instructions will follow at that time. A replay of the conference call will be accessible anytime during the next one week by dialing 1-877-344-7529 or 1-412-317-0088 and entering passcode 10119955. At this time, I will turn the call over to Anthony Gurnee, Chief Executive Officer of Ardmore Shipping.
Anthony Gurnee (CEO)
Good morning and welcome to Ardmore Shipping's first quarter earnings call. First, let me ask our CFO, Paul Tivnan, to describe the format for the call and discuss forward-looking statements.
Paul Tivnan (CFO)
Thanks, Tony, and welcome, everyone. Before we begin our conference call, I would like to direct all participants to our website at ardmoreshipping.com, where you'll find a link to this morning's first quarter 2018 earnings release and presentation. Tony and I will take about 15 minutes to look through the presentation and then open up the call to questions. Turning to slide 2, please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from the results projected from those forward-looking statements, and additional information concerning factors that could cause the actual results to differ materially from those in the forward-looking statements is contained in the first quarter 2018 earnings release, which is available on our website. With that, I will turn the call back over to Tony.
Anthony Gurnee (CEO)
Thanks, Paul. So on the call today, we'll follow our usual format. First, we'll discuss our performance and recent activity, followed by an update on the product and chemical tanker markets, after which Paul will provide a fleet update and review our financial results, and then I'll conclude the presentation and open up the call for questions. Turning first to slide five on our performance and recent activity. We're reporting EBITDA at $9.9 million and a loss of $5.2 million, or $0.16 per share, for the first quarter, reflecting earnings lower than we had hoped as a result of our market exposure in the Atlantic Basin, as well as timing of expenses, both of which are short-term factors. The MR spot market remained challenged through the quarter.
Strength early on was followed by reduced refinery throughput in February and March, putting downward pressure on rates, particularly in the Atlantic Basin. Overall, though, we delivered satisfactory chartering performance, with our MRs earning $12,700 per day, representing a meaningful increase on the fourth quarter of 2017, which was $12,130 per day, and with our chemical tankers performing well on a relative basis at $13,500 per day. During the first quarter, we took delivery of the Ardmore Sealeader, a highly efficient 2008-built Japanese MR with attractive financing under a JOLCO structure. We've agreed to terms for refinancing two of our 2013-built MRs under a sale and lease-back arrangement with a top-tier Asian financier on attractive pricing and terms, which Paul will discuss later. In spite of the currently weak charter market conditions, the market outlook is positive.
We don't say this lightly, but we believe that we will reach an inflection point in the MR market later this summer, given that refinery throughput is set to increase significantly over the next four months to the highest level on record. Oil demand growth is very strong, and product inventories are well below their five-year average. Looking ahead, the 2020 sulfur cap is now coming into focus. We believe this will have a positive ton-mile demand impact for MRs and will also benefit more fuel-efficient eco-vessels, such as those in our fleet. Turning to slide 6 for a quick look at our fleet profile. As you'll see, the only change to the fleet during the quarter was the addition of the Ardmore Sealeader, built in Onomichi, Japan, and an identical sister to the Sealeader and Sealifter.
This brings our total fleet to 28 MR product and chemical tankers. Turning now to slide 8 on the product tanker market fundamentals. We believe the outlook for the MR sector is increasingly positive. Refinery throughput is set to ramp up significantly, with a 3.2 million barrel per day increase from April to August to a level of 83.3 million barrels per day, the highest level on record and obviously supportive of product tanker demand. Global oil demand growth is strong at 1.5 million barrels a day and is being matched with a similar level of refinery capacity expansion in export-oriented locations. Refined product inventories are now well below their five-year averages, which should stimulate incremental trading activity. Meanwhile, MR supply growth is now close to zero. We're forecasting 37 MRs to deliver over the remainder of 2018.
Meanwhile, the scrapping run rate has increased to approximately 40 MRs per year, and as a consequence, the MR fleet growth net of scrapping is expected to be well below 1% this year and trending even lower into 2019. Other factors to be taken into consideration include an increasing focus on the 2020 sulfur Cap. This may begin to be felt in mid-2019 as refineries and downstream supply chain start to move over to MGO in order to meet the December 31st deadline. We believe this has the potential to be highly disruptive to distribution and storage and should provide a meaningful boost to MR ton-mile demand. The MR sector has experienced downward rate pressure from LRs and crude tankers over the past six months. We believe this should begin to ease in the second half of 2018, with even a slight improvement in these markets.
Oil trader sentiment is turning more bullish on tightening oil market fundamentals. Increasing geopolitical risk is further contributing to oil price volatility and trading. As noted by PIRA in a recent report, there is the makings of a potential scramble for crude supply this summer as refineries ramp up, which could aid tankers more broadly. Overall, we believe that the market is poised to reach an inflection point in rates later this summer. The demand forces as described above are significant, and MR tanker supply growth is now close to zero. Turning to Slide 9 on the chemical tanker market. Our chemical tankers averaged $13,500 in the first quarter, up from $13,370 in the fourth quarter of 2017. During the quarter, we withdrew our ships from an external pool, and all are now traded in-house and performing very well.
Looking to recent chemical tanker market activity, increased Indian palm oil import duties have displaced short-haul Southeast Asian imports into India, with long-haul edible oil volumes sourced from the Atlantic Basin. UAN volumes from the United States have been ramping up on the back of 2.7 million tons of capacity additions over the last two years. Overall, however, the broader chemical tanker market remains active but continues to be affected by weakness in the product tanker market. We expect solid demand growth for commodity chemicals, coupled with continued production expansions in the US Gulf and Middle East Gulf to boost export volumes and lengthen voyages. Chemical tanker demand is highly correlated to the global economy. Accordingly, with global GDP forecast to grow at 3.9% in 2018, chemical tanker demand growth is expected to strengthen along with it. Meanwhile, the chemical tanker order book continues to decline.
It now stands at 7% of the existing fleet. Within that number, stainless steel tankers account for 60% of the overall order book, and they comprise 10% of the existing stainless steel tanker fleet. On the other hand, coated IMO 2 tankers like ours currently account for 40% of the order book and account for only 5% of the existing coated IMO 2 fleet. Overall, we expect net fleet tanker growth in 2018 of 3.5%, which should be well below demand growth. As a final point, our chemical tankers are continuing to perform very well. We anticipate that they will achieve around 14,250 per day for the second quarter of this year. When you adjust for the lower capital invested as compared to MRs, the MR equivalent rate would be approximately 15,000 a day, which is a very respectable level.
With that, I'll hand the call back to Paul to provide an update on our fleet and our financial performance.
Paul Tivnan (CFO)
Thanks, Tony. Moving to slide 11, we'll run through the fleet days. As Tony mentioned, we took delivery of the Ardmore Sealeader at the end of January, and as you will see on the chart on the right, our revenue days increases by 3% for the full year to 9,986 days. We had 20 dry dock days in the first quarter and expect 35 dry dock days in the second quarter of 2018. Turning to slide 13, we'll take a look at our financials. As you will see on the second line, we are reporting a net loss for the first quarter of $5.2 million, or $0.16 per share. Total overhead costs were $3.75 million for the first quarter, comprising corporate expenses of $2.9 million and commercial and chartering expenses of $800,000.
As mentioned before, in many companies, the commercial and chartering costs are incorporated into voyage expenses, which means that our corporate cost is the comparable overhead. Our full-year corporate costs are expected to be $12.5 million, which works out at $1,250 per day per ship across the fleet. For the second quarter, we expect corporate and commercial cash overhead to be $3.5 million and non-cash overhead to be $750,000. Depreciation and amortization for the first quarter was $9.5 million, and we expect depreciation and amortization in the second quarter to be $9.65 million. Our interest and finance costs were $5.7 million for the first quarter, comprising cash interest of $5.1 million and amortized deferred finance fees of $600,000.
We expect interest and finance costs in the second quarter to be approximately $6.3 million, including amortized deferred finance fees of $600,000, reflecting the additional lease debt associated with the Sealeader acquisition in January. Moving to the bottom of the slide, our operating costs for the quarter came in at $17.3 million, or $6,786 per day across the fleet, including technical management. OPEX for eco-design MRs was $6,915 per day for the quarter. Our eco-mod MRs came in at $6,632 per day, while eco-design chemical tankers came in at $6,635 for the quarter. Operating expenses came in higher than expected on eco-designs, primarily due to timing of crew costs, vessel stores, and upgrading expenses in the first quarter of the year.
Looking ahead, we expect total operating expenses for the second quarter to be approximately $16.4 million, a reduction from the first quarter, and a more normalized run rate for the rest of the year. Turning to slide 14, we'll take a look at charter rates for the quarter. Overall, in spite of the soft charter market conditions, we delivered a satisfactory chartering performance during the first quarter, with pool and spot MRs earning $12,721 per day, while the fleet average came in at $12,897 per day. Looking at the various ship types, we had 15 eco-design MRs in operation, which earned an average of $13,146 per day for the quarter, and the seven eco-mod MRs earned $11,806 per day. Although the TCs for the eco-mods are lower, these vessels have much lower invested capital, and overall, the returns on the eco-designs and eco-mods are about the same.
The six eco-design chemical tankers performed very well in the first quarter, with average rates of 13,504 per day. Looking ahead to the second quarter, as of today, the MRs are earning approximately $13,000 per day per voyage in progress, with 45% of the day is booked, while our chemical tankers are currently earning 14,250 per day, which we expect will continue for the full quarter. Overall, we are satisfied with our chartering performance, and in particular, the chemical ships are performing really well commercially with their in-house team. Moving to slide 15, we have our summary balance sheet, which shows at the end of March, our total debt and leases was $451 million. Our leverage is 54%, which includes the lease debt associated with the Sealeader acquisition, which was drawn in January.
Our cash on hand at the end of the quarter was $35.3 million, with $29.6 million in net working capital. Turning to slide 16, we remain focused on maintaining a strong liquidity position, and we are continuing to pay down debt. As mentioned, our cash balance at the end of March was $35.3 million, with $4.5 million undrawn from the revolving credit facility. We recently agreed terms for the refinancing of two 2013-built eco-design MRs under a sale and leaseback arrangement on very attractive terms for a high advance with a top-tier Asian financier. The transaction is subject to documentation, which we expect to complete at the end of May, and we will provide more details on the terms at that point. The financing is expected to release cash net of repayment of existing debt of between $8.5 million and $9 million.
All of our debt, including capital leases, is amortizing at $44.5 million per year, so we'll continue to deliver and strengthen the balance sheet. And with that, I would like to turn the call back over to Tony.
Anthony Gurnee (CEO)
Thanks, Paul. So to sum up, the MR market remained challenged, with our vessels earning $12,700 per day in the quarter. The chemical tankers performed very well, earning $13,500 and thus lifting overall performance. That outstanding, we believe the market outlook is increasingly attractive on account of the following key points. Refinery throughput is set to increase sharply this summer by 3.2 million barrels a day, which is significantly higher than the five-year average summer ramp-up, in fact, by 1.3 million barrels a day. Oil demand growth overall is very strong at 1.5 million barrels a day. Refined product inventories are now well below their five-year averages, which should help stimulate incremental oil trading activity. MR supply growth is close to zero given the lower pace of deliveries and elevated scrapping levels over the past six months.
We believe the downward pressure on MR rates from LR and crude tankers should start to ease in the second half of this year, even with just a slight improvement in those markets. Meanwhile, we continue to focus on balance sheet strength and liquidity, as well as incremental earnings power through operating improvements and effective capital allocation, such as the recent MR acquisition and associated lease financing. To conclude, the MR market over the past two years has turned out to be something of an endurance test. The fundamentals have been positive for some time, and we've been waiting for an improvement in rates, but we've been held back by specific oil market dynamics and downward rate pressure from larger tankers. Given the factors described above that are now lining up in our favor, we feel that the wait may soon be over.
With that, we're now pleased to open up the call for questions.
Operator (participant)
At this time, if you would like to ask a question, please press star, then one, on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. That first question will come from Michael Webber with Wells Fargo. Please go ahead.
Michael Webber (Analyst)
Hey, good morning, guys. How are you?
Hey, Mike.
Hi.
Tony, just a couple of questions on IMO, and then Paul, a liquidity question for you. But just maybe, Tony, high level, just considering kind of the ramp in activity and chatter we're seeing kind of heading into 2020, can you talk a bit about when you start to think about strategically positioning your fleet to kind of meet any shifts in ton-mile demand that might arise from that gradual transition towards the end of next year, and maybe how you would think about doing that in terms of geographical concentrations? Yeah, so maybe kind of how and when you think about repositioning your fleet or tweaking your fleet to take advantage of that.
Anthony Gurnee (CEO)
Yeah, Mike, that's a good question. Honestly, it's too early to think about it. I think we need to identify where we feel that the flows will be coming from, and that could actually create some imbalances between the two hemispheres as well. But clearly, a point that we'll have to focus on as we get closer to it.
Michael Webber (Analyst)
So, too early to say there's going to be a growing emphasis on kind of maintaining a healthy presence in the Atlantic Basin more so than you already have? It's too early?
Anthony Gurnee (CEO)
Yeah. At the moment, we're about two-thirds in the Atlantic Basin and one-third in the East, and that didn't work out too well for us in the first quarter. But actually, at this point, the markets have rebalanced so that they're roughly at same levels, East versus West. It'll be interesting to figure out what the broad direction of flow is going to be of the MGO required for bunker fuel, and then to figure out how to position against that.
Michael Webber (Analyst)
Again, just on a higher level, just thinking about the industry in general and maybe kind of just getting your take on the product tanker space, but then maybe shipping in general. In terms of scrubber penetration, when we think about where we are now versus where we could get to by 2020, is that number in 2020 sub-10%, and is it ending sub-5% in terms of where you think we'll actually shake out? It ultimately drives kind of the mix you guys will ultimately be carrying.
Anthony Gurnee (CEO)
Yeah, that's, again, a good question. We're looking at this pretty carefully. On the other hand, we're not looking at it with a view toward participating. It seems like scrubbers work much better on the bigger ships. In theory, you want to put the scrubber on the biggest smoke stack you can. Ideally, that would be ashore, but we have to do something on ships. But that's clearly big container ships, VLCCs, Capes, etc. The other thing is that you need to be in a position you need to be trading in a pattern where you can be confident regarding your access to 3.5% high-sulfur fuel oil. So that makes it a much bigger challenge for smaller ships like ours, both in terms of the economics and the availability of the fuel because we trade very randomly around the world.
So my understanding is that the best, well, it's clear that the best time to install scrubbers is during a dry docking and requires some advanced planning. So I would say that I'm not sure there's really much time left for companies to plan ahead or to kind of decide now. So I think whatever's in the works is probably the number. Like I said, it'll be probably quite a bit larger. I'm only aware of four MRs that are being fitted with scrubbers that are new buildings. So I think it's going to be potentially a real windfall for the ships that do fit them in the bigger sectors. But then the question is, how long will that last in terms of the emergence of 0.5% fuel oil and the differential to 3.5%?
Michael Webber (Analyst)
Yeah, the payback period is certainly in question. I appreciate that. That's helpful. And then, Paul, just one more for you, and just to make sure I'm eyeballing this correctly. When I look at your liquidity profile and you kind of go through this on slide 16, when you think about $44.5 million a year of amortization, you're sitting on. I know you paid some paydown in Q1, but you're sitting on $35 million in cash and almost $450 million with undrawn revolving capacity. How should we think about your ability to kind of meet that amort profile if we do sit at this kind of a rate complex for the better part of the year?
Paul Tivnan (CFO)
I think we're at $35 million as of the end of March, plus when we complete the sale and leaseback, we'll be up to kind of mid-$40s or $45. At these rates, now, it's certainly trending upwards in the second quarter and hopefully the better. But leaving that aside, at these rates, you're kind of burning somewhere around the $3 million mark per quarter. So I think we're in a really strong position from a defensive standpoint. But obviously, if we were to do something more, we wouldn't have surplus cash to do kind of big acquisitions. But I would say in terms of our ability to I don't think we'd make any changes to the amortization profile. I think if these continued, you might do another refinancing of some of your ships. But I think we're in a really good position.
Leverage-wise and liquidity-wise, I think we're strong and certainly able to hopefully make the best out of these markets with the balance sheet we have.
Michael Webber (Analyst)
Gotcha. All right. Yeah, I can dig on that later. Thank you. Appreciate your time, guys.
Operator (participant)
Our next question comes from Ben Nolan with Stifel. Please go ahead.
Ben Nolan (Analyst)
Thanks. Hey, Paul Tivnan. So I guess my first question relates to sort of the market dynamics. In talking to a handful of MR operators in particular in the last few weeks, it sounds like at least some people are experiencing a lot lower waiting periods for cargoes, or effectively, they're beginning to see already right now the effective utilization of the fleet tightening. I was curious if you're although apparently, that hasn't translated into pricing yet. But I was curious if you're seeing the same thing and if that is what is beginning to give you confidence that we're close to an inflection point.
Anthony Gurnee (CEO)
Yeah, hi Ben. It's Tony. The tonnage lists for both US Gulf and for Europe have been shortening. They're not at bullish levels yet, but they're trending in the right direction and much improved compared to a month or six weeks ago. So that is something we're seeing as well. The US Gulf market has improved significantly in the last few weeks, and so things seem to be much more reasonable in the Atlantic Basin. At the same time, unfortunately, rates have trended down in Southeast Asia and in the Far East generally, so that now rates in both hemispheres are roughly at the same level. But there is a tightness in terms of waiting lists, and it does feel better.
Michael Webber (Analyst)
Okay. I don't know if this was just sort of my perception or not, but it seemed like in your prepared remarks there, Tony, you talked a bit more about the chemical tanker market than maybe you had in prior quarters. That might not be right, but it seemed that way, at least to me. Is that an area where you're beginning to be a little bit more constructive? And maybe, obviously, it's a small portion of your fleet now, but as we go forward looking out longer-term strategically, is that something that you would envision growing?
Anthony Gurnee (CEO)
I think we're really happy. I think we'd like the exposure we have there because it does add something to the MR trading activity as well in terms of what we do. There's a very heavy overlap between MRs and the type of chemical tankers we have regarding cargoes and customers. There is that benefit. I wouldn't imagine us doubling down or kind of increasing our exposure to chemicals just at this moment. We think that there's better opportunity in the MR space. We did want to talk a bit more about chemicals in this call because they are doing well, and I think it speaks as much to the sector as it does to our ability to operate them and the quality of the ships that we built. These are very fuel-efficient ships, and they're a nice size.
They fit a good niche, and that particular niche has a very low order book at the moment.
Michael Webber (Analyst)
Okay. That's helpful. And then lastly for me, and I'll turn it over, it sounds like you're out of the pool business. I was curious what the thinking is there. I mean, ultimately, do you expect to be able to lower your costs, or what's the advantage of doing things in-house as opposed to even partially being in the pools?
Anthony Gurnee (CEO)
We've always felt that we were quite agnostic when it came to participating in pools. We're simply looking for the best mode of employment and returns. We had just gotten to a point where we felt that we developed our own platform, and we could manage operationally better and produce better results. The other thing that's important to highlight, typically, people don't talk about overhead very much in shipping, but the reality is that our ability, cost-wise, to operate ships in terms of spot trading is at about two-thirds or less the cost that it would be if we were paying pool fees. There is a cost savings. We think that they're performing quite well. It gives us better control over the operations and, of course, more scale as well, which helps the other ships.
Michael Webber (Analyst)
Okay. Great. All right. Good to hear. I appreciate the color there, Tony. Thanks.
Anthony Gurnee (CEO)
Thanks, Ben.
Operator (participant)
Our next question comes from Magnus Fyhr with Seaport Global. Please go ahead.
Magnus Fyhr (Analyst)
Yeah. Hey, guys. Just a couple of follow-up questions. First, on the chemical market, I thought you said the average rate booked for 2Q, 14,200, and you expected that to continue for the remainder of the quarter. Can you just refresh our memories about the seasonality in this market? I mean, is Q3 typically a weaker market, or how do you see that this year?
Anthony Gurnee (CEO)
With the type of ships we have, there's such a heavy overlap with CPP that they pretty much follow the same seasonality. It's just interesting to note that going back a couple of years ago when the CPP market was strong, our ships were trading 50% or more in refined products. Now that that market's weak, they're doing roughly a quarter to two-thirds products, right? So I think there's a very, very significant overlap, and that means they more or less move together. We are benefiting at the moment from strength in the veg oil trades in particular, and we think that'll continue for a while longer.
Magnus Fyhr (Analyst)
All right. Good. And there hasn't been much new building in the MR space. I've seen a few orders, but what do you hear from the yards there? Are they getting more aggressive, or are they focusing on their larger ships?
Anthony Gurnee (CEO)
The yards that build MRs are what I would like to describe as in kind of a drip feed mode. They're just taking orders as they need to to keep everything ticking over. In reality, there's only one yard at the moment that people are ordering at, and that's Hyundai Mipo. STX is talking, but otherwise, there's really nobody very active at the moment, maybe a little bit in China and a tiny bit in Japan.
Magnus Fyhr (Analyst)
What would you say the price talks for a new MR, $35-$36, or have you seen lower pricing?
Anthony Gurnee (CEO)
No, it's probably around that, maybe $35-$35.5 million for a Tier 3 type vessel. But just to remind the audience or anybody that's listening that that's the contract price. When you add on some extras, etc., you're very quickly up another $500,000, and then you've got capitalized interest and supervision costs. So a $35-$35.5 million contract price will deliver at $36.5 million or $37 million.
Magnus Fyhr (Analyst)
Okay. Great. And just one last question for Paul. Talking about the liquidity, what's the minimum liquidity covenant now currently? I know you have a pretty good cash position, but just refresh my memory on that one.
Paul Tivnan (CFO)
Yeah. The liquidity, it's 5% of debt. It's a pretty simple calculation. It's around the $21 million mark currently. So we've got lots of headroom on it. And as we pay down debt, obviously, that number comes down as well. So we're in pretty good shape.
Michael Webber (Analyst)
All right. Great. Well, thank you, guys.
Operator (participant)
Our next question comes from Noah Parquette with J.P. Morgan. Please go ahead.
Noah Parquette (Analyst)
Hey. Great. Thanks. I just wanted to follow up on the OpEx. You mentioned that some of it was due to timing this quarter. Are we going to see all those benefits kind of or the reversal of that timing in Q2, or will it be spread out over the course of the year?
Paul Tivnan (CFO)
Hey, Noah. Yeah, I suspect you'll see it for the most part. You'll see it spread over the course of the remaining three quarters. It just happened you had a few things come all at once. In the first quarter, we had some crew changes, which was front-loaded, and also some stores, and then some kind of upgrading, selective stuff that we did, plus the Sealeader delivery as well. So just a combination of small things in the first quarter, which should certainly you'll feel the benefits of it for the remaining I wouldn't say it'll all come in the second quarter. I'd say it'll come over the remaining three quarters. So tracking for the full year, for the remaining quarters, about $16.4 million per quarter, and average for the full year should be about $6,500-$6,550 per ship per day.
You'll certainly see that come back in the second, third, and fourth quarters.
Noah Parquette (Analyst)
Okay. Great. And then to follow up, I think, Tony, you mentioned that four MRs are going to have scrubbers installed during construction. Do you see that number increasing materially from here, or you expect almost no new builds to have scrubbers?
Anthony Gurnee (CEO)
Yeah. I think, first of all, some of them are being fitted to be scrubber-ready, and very few are actually delivering with scrubbers installed. We're not actually actively tracking it, but I'm just commenting on what I've heard. And so far, I'm only aware of four ships that are coming out of the yard with scrubbers fitted, and I haven't heard anybody that's retrofitting.
Noah Parquette (Analyst)
Okay. No, that's helpful. Just lastly, I think you mentioned you're two-thirds exposed to the Atlantic. Do you see yourself having organizational flexibility to change that, or does that require more kind of moving around people or investment?
Anthony Gurnee (CEO)
It's simpler than you think, which is that it's not very easy to deliberately move ships from one hemisphere to the other. The trade will take you there or it won't. Sometimes you can force a trade if you feel very strongly, but it seems very often if you do that, you're going to be punished as often as you are going to be rewarded because it takes a long time to get there, and then things change. Bottom line is that the ability to deliberately swing significantly from one hemisphere to the other is quite difficult.
Noah Parquette (Analyst)
Okay. That's great. That's all I have. Thank you.
Anthony Gurnee (CEO)
Thanks, Tom.
Operator (participant)
Our next question is from Amit Mehrotra with Deutsche Bank. Please go ahead.
Michael Webber (Analyst)
Hi. This is Chris Snyder on for Amit.
Operator (participant)
Hey, Chris.
Speaker 8
Hey, Chris. My first question is around IMO 2020 regulations. There seems to be multiple potential demand tailwinds for the product tanker sector come 2020, whether it's just better refinery margins, the shift of bunker transportation to product tankers, or then just the need for refineries to import low-sulfur blending components. So when you kind of think about the demand impact of the regulation, what part gets you the most excited?
Anthony Gurnee (CEO)
There are really two pieces to it. One is the disruption in the lead-up to the transition and then the impact thereafter. So I'm looking at the PIRA Report from April, and one of their subheadlines is that IMO 2020 will be one of the most disruptive events ever seen for refining. So it's going to be a big, big event for the refining industry. That's inevitably going to result in a lot of cargoes or a lot of different grades moving in different directions, and that, of course, will help us.
Another interesting thing that we have no evidence of or have heard no other discussion of but we think is a possibility is that while the shore storage and the bunker barges, etc., are going through this transition of cleaning up from heavy fuel oil to gas oil, they may need extra storage, and perhaps that'll be floating storage. So I think that's another consideration. So I think it's the disruption, possible storage activity in the final months leading up to December 31st, 2019, and then the ongoing movements after that to basically get the MGO from where it's produced to where it's going to be needed, which is probably a much greater volume and a much different pattern of distribution than exists today.
Speaker 8
Yeah. It seems like the disruption could come before 2020. Is that kind of how you're seeing it? When do you think we can kind of start feeling this just from a product tanker standpoint?
Anthony Gurnee (CEO)
I think the earliest would be mid-2019, but once you get past that, the reality is that from January 1st, you have to be burning MGO or have a scrubber fitted or using LNG or something. But then the other factor is that you're allowed to have high-sulfur fuel oil on the ship, but only until March to the end of March. So you have three months to get rid of any surplus or any extra on board. Everybody will be trying to burn that down because after that, it's just going to be shutting out cargo. So I think it's unlikely very many ships are going to have heavy fuel oil on board unless they're fitted with scrubbers after the turn of the year, which means that that whole process of changing over is going to have to happen quite a bit earlier.
Speaker 8
Okay. Makes sense. And then just next questions around liquidity. Your LTV metrics suggest to us that you guys kind of have incremental capacity here, but at the same time, the liquidity's at pretty low levels. Do you think the low liquidity will have any impact on your guys' ability to explore potential acquisitions or purchases over the next year or so?
Anthony Gurnee (CEO)
In short, no. I think it'll be business as usual in terms of how we approach opportunities. Our principles are to remain financially conservative and to just look at opportunities that are accretive. We're not able to take advantage of every opportunity that goes before us, and that's fine as well.
Speaker 8
Okay. That does it for me. Thanks for the time, guys.
Anthony Gurnee (CEO)
Sure. Thanks, Chris.
Operator (participant)
Again, if you would like to ask a question, please press star, then one. Our next question is from Randy Givens with Jefferies. Please go ahead.
Randy Givens (Analyst)
Hey. Thanks, operator. So I know there's been some concerns about cash burn, but it looks like you had about $5 million or so in positive operating cash flow in the first quarter. So what are the cash break even rates for your MRs and chemical tankers?
Paul Tivnan (CFO)
Hey, Randy. So their cash break even, net income break even is about 14,500, and it's the same for cash break even before drydocking. So on a normal operating basis, you're running at kind of 14,500, so a little bit below that right now. And then CapEx this year would be about $4 million-$5 million in terms of drydockings, etc. So hopefully, that answers your question.
Randy Givens (Analyst)
Yep. That's fine.
Paul Tivnan (CFO)
The Chems and the MRs are around the same.
Randy Givens (Analyst)
Sure. And then you announced half the quarter at $13 a day on the MRs and about $14,250 for the chemical tankers. So two questions on that. Kind of why the outperformance by the chemical tankers? I think Tony was saying there's some benefit from the strength in the veg oil trades. So kind of talking to that outperformance. And then second, do you expect the rates for the rest of 2Q to be higher or lower than the first six or seven weeks?
Anthony Gurnee (CEO)
Well, the outperformance, like we said, they typically, if you look over time, if you adjust the rate for the invested capital. And for the 25s, for example, it's 15% or 16% below, and for the 37s, it's about 5% below an MR of equivalent age, etc. So when you make those adjustments, they typically track at around the same levels, which is no great surprise. At the moment, we've been benefiting, as I mentioned, from some very good veg oil trades. In reality, the rate that they've earned quarter to date is huge. It's much higher than $14,250, but we think the follow-on voyages partly will be kind of backhaul-type voyages, will be lower, and we think we're going to finish up the quarter around $14,250.
Randy Givens (Analyst)
Okay. And then for the MRs?
Anthony Gurnee (CEO)
The MRs, we think that the 13,000 a day that we've mentioned is a solid number.
Randy Givens (Analyst)
All right. I guess one more question on the modeling. So dry docking, 35 days for 2Q. I'm assuming that's for two vessels. And then how many vessels do you expect kind of the rest of the year, 3Q, 4Q?
Paul Tivnan (CFO)
So you've got two dockings, but there are also some in-water surveys. So it's not like each docking is going to be 17 days. You can probably take 14 days for the actual dockings and then a couple few days each for the in-water surveys.
Randy Givens (Analyst)
Okay. Any guidance for the rest of the year?
Paul Tivnan (CFO)
And then for the rest of the year, then you will have in the third quarter, you will have 2 more dockings, and in the fourth quarter, you'll have 2 more dockings as well. So you've got 2 more special surveys in third and 2 more special surveys in the fourth quarter. And then, as Tony said, you've got some in-water surveys.
Randy Givens (Analyst)
Okay. We have those. All right. Thanks so much. Congrats on a good quarter.
Anthony Gurnee (CEO)
Thanks, Randy.
Paul Tivnan (CFO)
Thanks, Randy.
Operator (participant)
This concludes our question-and-answer session as well as today's conference. We thank you for attending the presentation, and you may disconnect your lines at this time.