Ardmore Shipping - Q1 2019

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to Ardmore Shipping's First Quarter 2019 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 will be accessible to anyone at any time during the next two weeks by dialing 1-877-344-7529 or 412-317-0088, and entering the passcode 10131187. At this time, I will turn the call over to Anthony Gurnee, Chief Executive Officer of Ardmore Shipping.

Anthony Gurnee (CEO)

Thank you, and 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 2019 earnings release and presentation. Tony and I will take about 15 minutes to go through the presentation and then open up the call to questions. Turning to slide two, 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 of 2019 earnings release, which is available on our website. Now I'll turn the call back over to Tony.

Anthony Gurnee (CEO)

Thanks, Paul. So, first, let me outline the format of today's call. To begin with, I will discuss our first quarter results and then key market developments. After which, Paul will provide a summary of our performance, an update on recent market activity, supply-demand fundamentals, and a detailed financial update. Then I'll conclude the presentation and open up the call for questions. Turning first to slide four on highlights for the quarter.

We're reporting a net loss from continuing operations of $2.6 million or $0.08 per share, as compared to a net loss of $8.75 million or $0.26 per share for the fourth quarter of 2018, reflecting improving charter market conditions.Our MR TCE performance was stronger than expected, averaging $15,900 per day, as compared to $12,500 per day in the fourth quarter of 2018. Rates on chemical tankers improved as well,

but lagged MRs, resulting in an overall Ardmore fleet TCE of $15,000 a day. MR voyages for the second quarter to date are now at around $16,000, representing 45% of revenue days, signifying continued strength in the MR market in what we thought would be a slower period. We're on track to complete 6 out of 8 2019 scheduled dry dockings in the first half of the year, enabling us to take full advantage of IMO 2020 in the second half, but also resulting in somewhat reduced earnings in the first half of this year.

Meanwhile, we're maintaining a strong liquidity position and balance sheet, with quarter-end cash of $52 million and corporate leverage on a net debt basis of 53%. Consistent with our modern fleet strategy, we delivered the 2002-built Ardmore Seatrader and the 2004-built Ardmore Seamaster to new owners in the first quarter, and we intend to find more modern replacement units at an appropriate future date.

Regarding dividends, we're maintaining our policy of 60% of earnings from continuing operations, and consistent with that policy, the company is declaring no dividend for the first quarter. As a final point, a reminder of our earnings upside in a rising market. Every $1,000 per day increase in charter rates translates into $0.28 in earnings per share. Turning now to slide five on key market developments.

MR rates have remained stronger than expected, despite extended refinery turnarounds. We believe this is because of solid underlying supply-demand fundamentals, coupled with prolonged winter market conditions and lower global refined product inventories, which together have resulted in heightened geographical product imbalances and arbitrage-driven trading. We believe that for these reasons, MR rates have remained relatively firm as compared to the larger tanker sectors.

It's also worth highlighting that chemical tanker rates have also strengthened, or are also strengthening, largely, we believe, on the back of improving product tanker market fundamentals. Meanwhile, IMO 2020 is playing out as expected, with strong evidence of extended refinery turnarounds in the first half of this year, and also evidence of fuel oil output declining as refiners reduce yields and run down their inventories.

Our assessment is that the impact of IMO 2020 on product tanker demand will commence sometime in the third quarter, with the first signs as early as July and August, and expected to come into full swing by the end of September, with pre-positioning and even in some cases, actual bunkering of the new compliant fuels at that point. But beyond the impact of IMO 2020, we believe that solid supply-demand fundamentals should support a sustained upturn, with ongoing MR demand growth of 4% and the MR order book at very low levels and net fleet growth well below 2%. Consequently, we believe the elements are in place for a sustained upturn that could last multiple years, with IMO 2020 as the initial catalyst. And on that note, I'll hand the call back over to Paul.

Paul Tivnan (CFO)

Thanks, Tony. Moving to slide 11 for a summary of our quarterly performance. We reported adjusted EBITDA of $13.5 million for the first quarter. Loss from continuing operations was $2.6 million, or $0.08 per share, while the GAAP net loss for the quarter was $9.2 million, or $0.28 per share. The GAAP loss includes $6.6 million related to the sale of the Seamaster, which delivered to the new owners in the quarter. As Tony mentioned, our earnings in the first quarter were impacted by reduced revenue days as a result of scheduled dry dockings.

At the end of the first quarter, we will have completed 50% of dry dockings for the full year of 2019.

Ardmore's fleet average TC in the first quarter was 15,005 per day, made up of 15,856 on the MRs and 12,142 per day on the chemicals. Average rates for the chemical tankers were slightly lower than expected as a consequence of backhaul voyages, but overall rates for chemical vessels rebounded well in recent weeks, tracking the larger MRs. As mentioned in previous calls, as a rule of thumb, to compare the chemical vessels to the MRs, as they have lower invested capital, you need to add about $1,000 a day to the chemical rates. The fleet continues to perform very well operationally, and despite some weather-related delays on some of our dockings in Asia, all dry dockings came in under budget in the quarter.

Turning to slide eight for an update on the tanker market activity. Looking at the first quarter, we experienced strong winter market activity with increased volumes of gas oil into Europe from the US, China and India, while volumes of gasoline from Europe to US were also strong on the back of outages in the US. As you can see from the chart on the upper right, there was a continued drop in OECD product inventories year-on-year, resulting in more trading flows and price volatility. Overall, product stocks remain well below five year average levels. China has announced the first round of product export quotas for 2019, and it's increasing its levels for the same period from last year.

Total product export quotas are up 13% to 147.2 million barrels, while diesel export quotas alone are up 25% to 69.6 million barrels. Meanwhile, according to oil analysts, production of heavy sulfur fuel oil is declining in advance of IMO 2020. Looking ahead, the outlook remains very positive. As Tony mentioned, refineries are front-loading maintenance in advance of IMO 2020 in preparation for the expected increase in demand for low sulfur fuels. Global refinery throughput is expected to ramp up this summer, climbing towards a seasonal peak in August, representing an increase of 4.6 million barrels a day from March levels. Meanwhile, continued inventory drawdowns and regional imbalances should support product tanker activity. Notably, there is a gasoline glut in Asia and an ongoing stock build of gas oil in Europe.

And finally, chemical tanker rates are strengthening, supported by an improving product tanker market. On slide nine, we take a look at the underlying supply-demand fundamentals for MRs. MR tanker fundamentals continue to be positive. As you can see from the graph on the upper right, ongoing demand growth remains very strong, driven by oil consumption growth and refinery capacity additions in trading-oriented locations. Global refinery capacity is expected to increase by 2.4 million barrels a day in 2019, with a total of 9.1 million barrels a day of additional refinery capacity from the end of 2018 to 2024. In addition to the underlying demand growth, IMO 2020 is expected to result in an additional layer of MR demand commencing in the second half of 2019. Looking at the supply slide, MR fleet growth remains exceptionally low.

The order book today stands at 134 ships, or 6.2% of the fleet delivering over the next three years. We are forecasting 76 MRs to deliver for the full year of 2019, in line with last year, and in contrast to the five year historical average of 96 ships per year. We expect scrapping to be in the range of 40-50 MRs per year, following 49 MRs scrapped last year. Taken together, fleet growth, net of scrapping for the MRs, is expected to be close to 1.5% in 2019 and 1% or less in 2020. As mentioned, the chemical tanker market outlook is also very positive.

On the demand side, petrochemical plant capacity alone is expected to increase by 1.2% this year, while seaborne trade in commodity chemicals is expected to increase by 5.4% per annum to 2023. On the supply side, fleet growth, net of scrapping for the chemicals, is expected to be 1.7% in 2019 and less than 1% in 2020. Overall, we believe the strong fundamentals for products and chemicals will provide a solid foundation for a sustained upturn in the charter market. Moving to slide 11, we can take a look at the fleet days. Revenue days are estimated 9,300 in 2019.

We completed four dry dockings in the first quarter, and we expect to have 45 dry docking days in the second quarter in respect of two vessel docking for surveys and ballast water treatment installations. Over 75% of our scheduled dry dockings will be completed by the end of the first half of the year, so we're well positioned to benefit from increased IMO 2020-related trading volumes expected in the second half of this year. Turning to slide 12, we will take a look at our financials. As you will see on the second line, we're reporting a net loss from continuing operations of $2.6 million, or $0.08 per share for the quarter.

Total overhead costs were in line with expectations at $4.6 million, comprising corporate expenses of $3.6 million and commercial and chartering expenses of $1 million. As mentioned before, in many companies, the commercial and chartering costs are incorporated in the voyage expenses, which means that our corporate cost is the comparable overhead. Our full year corporate cash costs are expected to be $12.5 million, which works out at $470,000 per ship annually. For the second quarter, we expect total overhead incorporating corporate and commercial to be $4.5 million, including non-cash items. Depreciation amortization was $9.4 million for the first quarter, and we expect depreciation amortization for the second quarter to be in line at $9.4 million.

Interest and finance costs were $6.7 million for the first quarter, comprising cash interest of $6.2 million and amortized deferred finance fees of $500,000. We expect interest and finance costs for the second quarter to be in line at $6.6 million, including amortized deferred finance fees of $500,000. Moving to the bottom of the slide, operating costs for the quarter came in at $16.8 million. Looking at the various ship types, standard OpEx for the Eco design MRs was $6,883 per day. The Eco mod MRs came in at $7,060 per day, while the chemical tankers came in at $6,734 per day. Looking ahead to the second quarter, we expect operating expenses to be approximately $16 million.

Turning to slide 13, we can run through charter rates. Spot MRs reported TC of $15,856 per day, basis discharge to discharge for the first quarter, while the fleet average came in at $15,005. Looking at the various ship types, we had 15 eco design MRs in operation, earning an average of $16,252 per day for the quarter, while the five eco mod MRs earned $14,860 per day. Our six chemical tankers had average rates of $12,142 for the quarter. As mentioned previously, as a rule of thumb, you need to add $1,000 a day to make the chems comparable to the MRs. Looking ahead to the second quarter, we have 45% of the days booked to date.

Our MRs are earning $16,000 a day, while the chemical vessels are earning $14,000 a day. On the right-hand side, you can see the strong rebound in MR rates for the past few quarters. You will notice that rates improved nicely in the first quarter, and we expect rates to increase further through the second half and into 2020, given the outlook and increased demand as a result of IMO 2020. On slide 14, we have our summary balance sheet, which shows at the end of March, total debt and leases was $445 million, while our leverage on a net debt basis was 52%. Now turning to slide 15, we remain focused on maintaining a strong liquidity position and are continuing to pay down debt.

We completed the sale of the Seatrader and the Seamaster in the first quarter, and on a combined basis, the sales resulted in debt repayment of $12.2 million. Our cash balance at the end of March was $52.3 million, and we have $21.5 million in net working capital. And finally, we note that all of our debt, including the capital leases, is amortizing, and we're repaying $41 million per year. With that, I would like to turn the call back over to Tony.

Anthony Gurnee (CEO)

Thank you, Paul. To sum up then, MR charter rates continue at relatively strong levels at a time when we expected more weakness from refinery turnarounds. We believe this is a function of solid supply-demand fundamentals and not yet the impact of IMO 2020, with MR demand growth of 4%, driven by strong oil consumption compared with refinery capacity additions and trading-oriented locations, and the MR order book at very modest levels, resulting in net fleet growth of 1.5% or less in 2019 and lower still in 2020. On top of these healthy fundamentals, a further boost in product tanker demand is expected in the second half of 2019, when the impact of IMO 2020 begins to be felt.

This additional layer of demand is expected, we believe, to last for up to two years until the marine fuel market reaches equilibrium, and we estimate that the incremental demand for MRs will be in the region of 5% on top of underlying demand growth. We believe the impact on MR demand should begin to be felt as early as July and August and kick into full gear by the end of September. To conclude then, with our modern fuel efficient fleet and spot market exposure, we believe Ardmore is well positioned to take advantage of a market recovery and to generate strong returns for our shareholders, with each $1,000 per day increase in TCE translating into $0.28 per share of earnings. With that, we're happy to open up the call for questions.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Randy Giveans with Jefferies. Please go ahead.

Randy Giveans (SVP of Equity Research)

Howdy, gentlemen. Good morning. How are you?

Anthony Gurnee (CEO)

Hey, Randy.

Randy Giveans (SVP of Equity Research)

Hey, so first question, you mentioned you're completing most of your dry dockings in the first half of 2019. You plan on keeping your vessels in the spot market throughout the year. So clearly, that means you're pretty bullish on spot rates and that time charter rates are not high enough for you to charter out ships at these levels. So now with that said, what are your thoughts around chartering in ships to increase your operating leverage to what should be pretty high spot rates here later this year?

Anthony Gurnee (CEO)

... it's always a possibility, and it's something we've done in the past. You know, beyond that, we wouldn't want to comment on our commercial intentions.

Randy Giveans (SVP of Equity Research)

All right. And then you recently sold, you know, your two oldest MRs, mentioned replacing those with younger vessels. I guess a few questions on that: Should we assume your one remaining 15-year-old vessel gets sold this year? And then does fleet replacement, I guess, take priority over share repurchases, obviously, dividends? And then with that, would it be new buildings or kind of younger, modern second-hands? So I know multiple parts to that question there.

Anthony Gurnee (CEO)

Yeah, no, that's great. So good question. I think, I think for planning purposes, you can assume that we would be selling off the final ship. We, you know, again, to explain the rationale, just as a policy, we don't like to operate ships beyond 15 years of age. They become more difficult to trade, and there are some other restrictions placed on them. In addition, Third Special Survey, combined with ballast water treatment, is a very significant investment, and we're not sure that it's the best allocation of capital, to be honest. So that's the reason why we're selling. And, you know, as we've mentioned in the past, we do intend to replace these over time.

We do still like that kind of middle-age profile of ships that are sort of maybe six to seven years to maybe eight to nine years old. We wouldn't, at this point, be contemplating replacing them with new builds.

Randy Giveans (SVP of Equity Research)

Got it. And then just, priorities in terms of use of cash, is that your top priority for now?

Anthony Gurnee (CEO)

Yeah. So again, you know, we, you know, we're not really in a position to even tell you straight, because it really depends on the circumstances at the time that we have to make that decision. But in any case, you look, you know, the options are pay down debt, build the fleet, buy back shares, pay special dividends, and it really depends on what we think is the best use of capital at that point in time.

Randy Giveans (SVP of Equity Research)

Got it. All right, makes sense. I'll turn it over. Thanks so much.

Anthony Gurnee (CEO)

Thanks, Randy.

Operator (participant)

The next question comes from Noah Parquette with J.P. Morgan. Please go ahead.

Noah Parquette (VP and Senior Analyst)

Thanks. I wanted to ask kind of capital allocation. I mean, in the last, you know, year, year and a half, market's been okay, not great, and understandably, you know, the leverage has gone up a little bit from the sale-leasebacks. I assume at some point you want to reverse that. I mean, as we go into hopefully a much stronger period, are you guys still comfortable with, like, that 60/40 split as being, you know, the proper way to both return, you know, shares or cash to shareholders and, and to deleverage appropriately?

Anthony Gurnee (CEO)

Yeah. So, you know, that, that's our policy. And, we, you know, I think just maybe going back to the point you're making about the leases, you know, we, you know, we were pleased to be able to execute the number we did last year for a, a few reasons, but an important one was that they're actually very attractively priced. And so we, we, we look at that as an attractive, alternative source of capital, alongside our, our, our commercial banks. And if you actually look at the weighted average of the, the leasing deals that we've done and the bank debt, it's, it's actually well under 3%, spread over LIBOR still, it's about 2.9%. And we think that's actually pretty good. So I think we're pleased with what we've done.

We don't plan to do more of that, nor do we plan to increase our leverage above current levels, but we think it's appropriate and comfortable given our liquidity and also given where we are in the cycle. So.

Noah Parquette (VP and Senior Analyst)

Okay. And then I just wanted to ask kind of the news that hit yesterday about proposal for, like, a speed limit to the IMO. Remind me, were you guys signatories to that, or what are your thoughts on that and kind of how that would potentially play out for MRs?

Anthony Gurnee (CEO)

We're not signatories. However, we are, you know, we're very engaged in, you know, in industry forums in terms of discussing ways to meet the targets, and we think it's a very realistic one. I think that the various, technology-driven solutions are gonna come much later. So I think people are realizing that operational methods are really the way to go, you know, early on. And it seems like a really interesting idea. Obviously, when you slow ships down, you're essentially reducing effective supply, and that's got consequences for the market. I doubt regulators would intend to put constraints on ships that result in the charter markets going haywire.

I don't think we would complain if that happened, but that's probably not really in the cards. But overall, we think it's a pretty sensible, you know, component of an overall longer-term solution.

Noah Parquette (VP and Senior Analyst)

Okay. Well, thanks.

Operator (participant)

The next question comes from John Chappell with Evercore. Please go ahead.

Jonathan Chappell (Managing Director)

Thank you. Afternoon, guys. Tony, just a couple big picture questions for you. First, industry-wide, everything seems set up really well. I mean, we've been waiting for this for so long, and, and it's finally there. To kind of think about, tail risks, is there anything that kind of concerns you in the setup for second half of 2019 or 2020? Maybe not even likely, but just probable or, or possible, that can kind of throw a wrench in, in the outlook that we have?

Anthony Gurnee (CEO)

Good. Yeah, no, I think there are really two things that we think about. One is a global recession, and I think we, you know, we all have our opinions on that, but. You know, I think we're probably more likely to continue experiencing a slight global slowdown as opposed to a recession. And, you know, hopefully, the other headwinds on the global economy, things like, you know, the tariff discussions, et cetera, that'll clear up as well. But the other one is, if we had a remarkably smooth and effortless transition to the new fuels, that could result in less incremental demand than we thought. But we're not really talking about downside, we're talking about degrees of upside on that.

So overall, look, the reality is the order book is what it is. The net fleet growth isn't really gonna change for the next couple of years. Oil consumption looks reasonably solid, and the way our ships trade looks like it's, you know, relatively stable as well. So, you know, there's not a lot to be negative about at the moment.

Jonathan Chappell (Managing Director)

Okay. And then the second one then, as it relates to Ardmore, you know, how do you-- or what are you aspiring to be, I guess, over the next couple of years? I mean, is it a mid-20 vessel count fleet, kind of where you wanna end up through this cycle? Do you think there's opportunities to be significantly bigger, or is it just, let's reap cash while, while the times are good and, and meet the 60% payout ratio and just kind of be a, a return of capital to, to shareholders type play through a, through a, hopefully, a pretty massive upturn?

Anthony Gurnee (CEO)

Tough question, John. Thanks a lot. But let me attempt to answer it succinctly. I think we wanna balance out different priorities. We have no incentive other than maximizing shareholder value and increasing intrinsic value on a per-share basis. That's what we're incentivized to do. And that's really the compass that we hold in our hands. You know, if we can achieve that through further growth, we will. If the best way to achieve that is through debt reduction and ongoing dividend payments, we'll, you know, do that. So it's really, you know, that's really our, you know, our overriding priority, and we just look at ways to achieve that.

You know, we do recognize that the industry is consolidating around us, and, you know, we need to be aware of that. But you know, we do believe, and we've said this for a long time, that we think with the right kind of growth, we can improve our performance. With the right kind of steps toward growth, we can do that accretively on an NAV per share basis.

Jonathan Chappell (Managing Director)

Mm-hmm. All right. That's a great answer. Thanks a lot, Tony.

Operator (participant)

The next question comes from Michael Webber with Wells Fargo. Please go ahead.

Mike Webber (Managing Director)

Hey, good morning, guys. How are you?

Anthony Gurnee (CEO)

Good, thanks.

Mike Webber (Managing Director)

Great. So, Tony, just wanted to start off with, with IMO. It's pretty, pretty well-worn ground at this point, but just, just to go back to your comment around starting to see, some, some demonstrable impacts from IMO, on the market is, is, I think you said July or potentially earlier. You know, given that it's, it's May 1st, you know, is there anything that you still need to do to your fleet in terms of, in terms of positioning, to be, to be ready for that? Or, or maybe, I guess, from the angle of, is there anything that you think trade flows will do to your fleet in terms of positioning, to kind of get ready for, for that, for that regulation hitting the market?

Anthony Gurnee (CEO)

Mm-hmm. Yep, thanks, Mike. So from an operational standpoint, we've got a very good plan in place that Mark Cameron and his team are executing on in terms of being, you know, prepared for the switchover. That probably means starting to load, you know, bunker the new fuels in, you know, as early as early October, right? So I don't think we're unique in that regard. So there is gonna be meaningful demand for the new fuels starting quite early. And it's been pointed out by others that, you know, in particular, for the really big ships that engage on very long voyages, they're gonna have to load early.

So, in terms of cargo movements, I think that if the one sort of theme you could probably pull out is that on balance, you'll probably see gas oil and blended components moving from the east to the west.

Mike Webber (Managing Director)

Mm.

Anthony Gurnee (CEO)

So that, you know, that could. You know, we think that's gonna generate quite a bit of ton-mile demand. But it's still kind of early days. I mean, we do, you know, most analysts are, and I believe you as well, are saying that, you know, this should result in incremental refinery throughput, so that's certainly a demand that's additive to demand. In addition, you've got areas, for example, Northern Europe or Europe generally, which is structurally short middle distillates already. And that's gonna be only more so once the switchover takes place.

Then you've got, I think, another aspect to this is that you've got, you know, a huge number of what you could call outports that are very small ports that have to provide bunkering services that also have to switch over time, and maybe they're gonna deal with that predominantly with gas oil in the beginning.

Mike Webber (Managing Director)

Right.

Anthony Gurnee (CEO)

And then the final thing is that we believe this is gonna result in quite a bit of oil price volatility, and that's gonna be great for oil traders, but it's also gonna be great for us.

Mike Webber (Managing Director)

Right. I guess, and then, and the idea is that, that you, that trade—you let that trade kind of pull your fleet where it needs to go, as opposed to some sort of strategic repositioning or kind of tweaking your balance in terms of your, kind of, your, your global geographical balance, I guess.

Anthony Gurnee (CEO)

Yeah, we do, we do think about that, and anybody wants to look at our fleet on AIS will get the answer.

Mike Webber (Managing Director)

Okay, fair enough. And then one more for probably Paul, but you know, you guys have referenced about $0.28, you know, an EPS bump per $1,000 of rate upside. I know that's a blended number, but you know, you got $3,000 of rate upside, it looks like on the MRs this quarter. You know, I know like, I'm not trying to play gotcha, 'cause I know that's that curve is not linear, and I guess that's kind of the point. I guess if we've seen rates move to you know, the low $15, you're talking to $16 now, should the pace of that EPS accretion pick up from what we saw from Q4 to Q1?

Paul Tivnan (CFO)

Great, great question, Mike. I think you know, that's. I think in terms of our EPS, EPS accretion, every, as you said, every $1,000 a day equals, you know, $0.28 in EPS. You know, the bulk of the fleet is MRs. You know, the chemicals might trail that a little bit, but overall, you'd expect, you know, them to increase in tandem. So I guess the question is how quickly can rates jump, and how far can they go? You know, I think in 3Q 2015, which was a really good market for us, and, you know, the fundamentals probably aren't as good as they are today, but we made, you know, we made mid-20s. That could happen over the course of a quarter or two.

I think, I think the pace is, is really a function of the market. You could see it—you could see it jump, maybe no movement at all for a quarter, and then it could, it could skyrocket, which what you saw in 2015. But, no, your math is right.

Mike Webber (Managing Director)

Yeah.

Paul Tivnan (CFO)

$0.28 per share. If we can go another $8,000-$9,000 a day from here across the fleet, you know, you're talking of $2.25 a share in EPS.

Mike Webber (Managing Director)

Yeah, I guess I'm looking at it like you get a $2,000-$3,000 bump in Q1, and that corresponded to a $0.22 bump on EPS. So you didn't quite get that $0.28, but I guess the inflection point would probably be around breakeven. And I guess the, the implication would be that the second derivative then should start to accelerate, and that, I guess, that the accretion per $1,000 should actually pick up as we, as we move past that point, I guess.

Paul Tivnan (CFO)

Yeah, I think that's right. I mean, there's obviously a little bit of movement quarter to quarter in OpEx that might not quite be flat quarter to quarter.

Mike Webber (Managing Director)

Yeah.

Paul Tivnan (CFO)

But generally, you'd expect it to move up, as you said.

Mike Webber (Managing Director)

Okay

Paul Tivnan (CFO)

... in a relatively linear basis.

Mike Webber (Managing Director)

Gotcha. All right. Appreciate the time, guys. Thank you.

Operator (participant)

The next call comes from Chris Snyder with Deutsche Bank. Please go ahead.

Chris Snyder (Equity Research Analyst)

Hey, guys. So you said in the prepared remarks that you plan to buy more modern units at a future date. I was hoping to hone in on timing a little bit. I mean, it feels like sooner rather than later is probably best if you want to have these vessels, you know, for to kind of benefit from the IMO tailwinds. However, I also imagine there's probably not too many willing sellers at the moment, with sentiment pretty bullish. I mean, in this context, should we expect that you guys to kind of add to the fleet, you know, prior to 2020 or in or the early part of 2020? Or is that kind of comment maybe more towards, "Hey, maybe the next down cycle, we kind of look to, you know, kind of grow the fleet?

Anthony Gurnee (CEO)

Everything else being equal, it would be a good time to add ships. You're right. But, but there, you know, then the devil's in the details. And, and again, I, I, I have to keep on saying this, don't like to, but, but we just, just can't comment on our commercial intentions. But you're right, everything, everything else being equal, it'd be good to get more ships in today rather than later.

Chris Snyder (Equity Research Analyst)

I guess kind of obviously, you know, asset values have firmed a bit. Like, even with kind of where asset values stand today, you guys see kind of pretty strong returns, you know, with your kind of forward rate forecasts?

Anthony Gurnee (CEO)

Yeah, I think, well, if I understand the question, values have come up, you know, for that kind of range that we're interested in, kind of $1 million-$2 million, over the last kind of four or five months. And generally speaking, you know, in this business, as you well know, the spot market moves, then the time charter rates move, and then the vessel values move. So we think that as we see continued strengthening in spot and time charter, you're gonna see increasing vessel values.

Chris Snyder (Equity Research Analyst)

Okay, fair enough. And then, just a next question. You know, we all spend a lot of time thinking about how the product tanker fleet will benefit from IMO. I think the impact of the chemical fleet is a bit more opaque, you know, other than just healthy MR market is good for chemical tankers. Could you maybe provide some specific color or any potential IMO tailwinds for the chemical fleet?

Anthony Gurnee (CEO)

I don't think there really are any, and maybe somebody running a chemical, you know, full chemical tanker company would be able to articulate this a bit better. But I think that simply the improvement in the product tanker sector is more than enough to really push up the chemical market as well.

Chris Snyder (Equity Research Analyst)

Okay. That does it for me. Thanks for the time, guys.

Anthony Gurnee (CEO)

Thanks, Chris.

Operator (participant)

The next question comes from Ben Nolan with Stifel. Please go ahead.

Ben Nolan (Managing Director)

Hey, guys. So I have a couple, and while I appreciate that you don't wanna comment on commercial aspects of the business and that's sensitive, just thinking about a few things with respect to how you're deploying your ships. Obviously, in the past, you've done some time charters, haven't done that lately with the market being weaker where, you know, at $16,000 a day. Is there a point at which you kind of approach a threshold and say, "Let's put some of this in the bank," rather than kind of ride the $0.28 of EPS on every $1,000 of spot movement?

Anthony Gurnee (CEO)

Yeah, we do, we do talk about it quite a bit, and I think we feel like we're way, way, way from a level that we'd be happy to charter out. And you have to then, you know, also just think differently about, like, a one year TC versus a multiple year time charter. And clearly, if you're in a strong market, charters have very legitimate reasons for wanting to lock in, even at relatively high levels. They've got their own cargo programs and concerns about risk to them in terms of higher spot rates. And that's, you know, very often a good time to lock something in, but we're not-- we're nowhere near that today. But that would be on a multiple year basis.

When it comes to one year time charter, our view on that is simply, you know, how does that one year rate compare to what, you know, our estimate of the subsequent 12 months in the spot market? And obviously, at the moment, we think there's far more upside.

Ben Nolan (Managing Director)

Okay. I'll ask again when rates are above 20, how's that? My next question goes to sort of thinking through how to go about growing or replacing the fleet or what have you. But as the share price is now, at least by my calculation, approaching NAV, did that sort of open the door for potential capital access to capital a little bit wider? Or is that, do you know, you're would you say incremental equity capital isn't really something you're very interested in doing?

Anthony Gurnee (CEO)

We're not thinking along those lines at the moment. You know, I guess in this day and age, 26, 27 ships seem small, but we're happy with it. I think what's much more important is your earnings power, preserving, you know, shareholder value, by doing things that are, you know, accretive, et cetera. So I think we're pretty comfortable with where we are. And as I said, I think if we saw opportunities of any stripe to, you know, to meaningful increase shareholder value, whether, you know, through growth by one means or another, we would certainly consider it. But that's really the, you know, the... That's what we think about.

Ben Nolan (Managing Director)

All right. And then lastly, kind of from a macro level, just appreciating that I'm sure you've kind of thought through this a little bit more than me, at least. There's obviously been a widening of the price of hydrocarbons in the United States. Well, lower prices of hydrocarbons, specifically natural gas and NGLs, relative to the price of oil. And you're seeing an increase of the things like propane exports, or natural gas, LNG exports, which in theory, would eat into things like naphtha demand or diesel demand. It hasn't seemed to have impacted the product tanker market at all yet, but is that something that you think, potentially longer term is a risk or potential headwind?

Or, is it just not big enough on margin to really matter relative to oil consumption?

Anthony Gurnee (CEO)

I don't think it's really big enough to be, you know, to really move the market. But having said that, I think it's a good thing to look into a little bit more. But one thing we thought about is the fact that, you know, if you have a world where, you know, diesel, gas oil is in higher demand because of the fuel switch, that also results in incremental, you know, and so therefore, incremental throughputs required, that's also gonna produce more gasoline and more naphtha. And, you know, so that could actually create quite a competitive alternative, especially for, you know, for Asian petrochemical plants, to basically go after naphtha instead of LPG. So I think it could... Honestly, it could go either way.

Ben Nolan (Managing Director)

Okay. All right, very helpful. I appreciate it. Thanks, guys.

Anthony Gurnee (CEO)

Thank you.

Operator (participant)

Again, if you have a question, please press star, then one. The next question comes from Fotis Giannakoulis with Morgan Stanley. Please go ahead.

Fotis Giannakoulis (Equity Research Analyst)

Yes, hi, Tony, and thank you. Tony, I understand that the sale of the two older vessels has nothing to do with your view about the market. It's more of an operational decision. But I wonder, right now, this quarter, the difference between Eco mod and Eco ships was around $1,400. Do you view that vessels that are relatively older will be in a trading disadvantage compared to the younger vessels that you have in your fleet? And how much do you expect this differential to be, both between Eco ships and non-Eco ships, relatively modern non-Eco ships, but also on quite older vessels, something that can trigger additional scrapping?

Anthony Gurnee (CEO)

Well, okay. So, if to kind of lay out the fuel differentials, I think it's important. So if you take a kind of a standard Korean ship, built, you know, kind of 10, 10, 11, 10-15 years ago, they're probably consuming about 24 tons per day main engine. And the reason why we call these ships that we have Eco Mod, is because they're Japanese, they're more fuel efficient to begin with, and then we improve them, and they're burning a couple, two to three tons a day less than that. And then you have the first generation of eco designs, which are maybe one to two tons a day better.

And then you've got the second generation Eco designs that are better, you know, maybe, maybe, another one or two tons a day better, you know, maybe down to 18 tons a day. So that, that's kind of the spread you're talking about here. And there, you know, that, that does, you know, you can do the quick calculation, on the difference. But there's another factor, which is that the Eco mods are pump room design, which actually have less cargo flexibility, and so they, you know, over time, will perhaps earn a little bit less on that basis as well. And when you get over 15 years of age, a lot of oil companies, not a lot, but enough oil companies will say, "No, thank you," which limits your trading alternatives.

You know, just by our experience, we know that that does, you know, over time, diminish the TCEs you can achieve. So it's a little bit of fuel consumption, a little bit age discrimination, a little bit cargo restriction that results in that differential, which we think is a fairly reasonable number that you can see there. So, you know, and we think that that's probably gonna remain the case going into stronger market conditions as well. And again, you know, we just didn't really feel it was a really good use of capital to sink $2 million in for dry docking and ballast water into these ships at their Third Special Survey, given those circumstances.

Fotis Giannakoulis (Equity Research Analyst)

Do you foresee that this disadvantage or this discount of the older vessels will increase proportionally to the fuel prices as we move to the IMO 2020, or there is a possibility that the disadvantage of the older vessels will become even greater beyond of what the fuel consumption differential is with the new ships?

Anthony Gurnee (CEO)

No, I think it'll be—I think the age discrimination and the cargo, you know, the less cargo flexibility, that'll remain the same. And then, obviously, if you double the price of fuel, you're gonna double the TC differential, given the same voyage.

Fotis Giannakoulis (Equity Research Analyst)

Thank you, Tony. One more. Earlier, when you mentioned what are your concern, I noticed that you didn't say anything about the potential supply. In the past, the excess ordering was what was destroying the tanker market. Is this different this time? And we've been hearing some deals of trading houses triggering new building orders for vessels with scrubbers, offering a couple of years of charters. Is this something that might be a concern for you, or it's different this time?

Anthony Gurnee (CEO)

I think it would be unwise to say definitively it's gonna be different this time. But I think a lot of the money that came in to support ordering activity three or four years ago has, at least for the time being, learned a lesson about the fact that it's a fairly delicate supply-demand balance in this business, and just, you know, indiscriminate ordering of new ships isn't necessarily a great investment. So, you know, in terms of shipyard capacity, that's changed a lot, even over the last few years. So you kind of went through three phases.

If you, if you go back to, you know, the, the last boom market and then a couple years after that, you had a lot of capacity, and they were trying to stay in business, and they were really prepared to do, you know, very, very low pricing. And then a lot of those fell out. You still had a fairly large, but you could call it core group of builders, at least in the MR size. And they then really, really went at each other competitively and went way below their break-even costs. You know, even the best yards, like Hyundai Mipo, played into that, and that was sort of the ships that delivered in the last three, four years.

And they learned their lesson, went bankrupt, lost their bank support, and so a lot of those yards are still shut down, they'll probably never open up again. And even the yards that are still open are, you know, in a very, very tight, very short leash, from their banks, as well as their parent entities. And so the capacity for building, even at, you know, you know, is very limited, at the moment. I mean, the one yard that could build on and scale would be Hyundai Mipo. But that's not really enough to get us back up to the kind of numbers that we saw even just a few years ago.

Fotis Giannakoulis (Equity Research Analyst)

Thank you very much-

Anthony Gurnee (CEO)

You know, the order book was 20% of the existing fleet in 2014. Today, it's 6%. And if I could just add one more thing, you know, if you look at the recent pre-order books for the bigger sizes, they're also quite low right now. So, you know, looking at, for example, LR1s, that's 4.2% of the existing fleet. LR2s and Aframaxes, it's 5.4%. So these are all, you know, pretty attractive numbers now.

Fotis Giannakoulis (Equity Research Analyst)

Thank you very much, Tony. I appreciate.

Operator (participant)

The next question comes from Brian Lee with Private Management Group. Please go ahead.

Speaker 10

Thanks for taking my question. We've heard some chatter that the regulators may restrict the use of the open-loop scrubbers, which actually put the sulfur back into the ocean, and from my knowledge, that's the most economic scrubber out there. So my question is: Have you heard any of that, anything like that? And maybe give me your opinion on that. And then, if that would be the case, would that accelerate scrapping, all else being equal?

Anthony Gurnee (CEO)

Well, so, Brian, we don't, we're not intending to install scrubbers, and so it's something that we track, but we don't really get too focused on. There are two different types of scrubber systems, open-loop and closed-loop. You're absolutely right, the closed loop are more expensive. And then you also have a sludge disposal problem, which you don't have with open loop, because it just goes over the side. And there, you know, are. I mean, so for example, Japan has said they're happy enough with open-loop scrubbers in their waters. Singapore has said, "No, thank you." You know, so it's kind of a mixed response from people... and, it doesn't appear that there's gonna be a significant move against open loop scrubbers anytime soon.

So, I don't think that should be a major concern, but we'll see what happens over time. And I think you had a second part to your question.

Speaker 10

Yeah, just kind of stepping back and actually for your forecast this year of somewhat relatively flat scrapping year-over-year. Is that conservative or have people gotten ahead of this? And where do you see—like, is there a potential upside to that guidance on the scrapping outlook?

Anthony Gurnee (CEO)

Well, the scrapping for MRs is a little bit different. It seems to be much more of a routine thing and, to a degree, independent of charter rates, whereas with other sizes, bigger ships, it's very much a function of the health of the market. MR is the average scrapping age is about 25 years, and that it's kind of ongoing. So in a very strong market with no other compelling reasons to scrap, you might see 20-25 ships scrapped, and in a weak market, you know, 50+. So I think that's kind of the range that you can expect.

We think, and this is a wild card, certainly with container ships and bulk carriers, there's, I think, very, very logical, you know, very good analysis indicating that IMO 2020 should result in heightened scrapping of those sectors. We're not sure that's gonna happen with MRs, but it's a possibility as well. So it's hard to tell just yet.

Speaker 10

Should we see that acceleration in August, or at what point would you know that scrapping had accelerated or that thesis played out?

Anthony Gurnee (CEO)

I think it wouldn't necessarily be linked to the kind of timeline we talked about, but scrapping typically happens when you're coming up against a survey, a dry docking. Because you, at that point, you're making a marginal investment decision. Do I take the ship through and make the investment, and what do I think I can earn for the next two or three years, or do I just scrap? And so I think it's more a function of the timing of the docking for that particular ship. And probably at this point, people are beginning to make that decision.

So, you know, say, for example, if you have a very high-consuming container ship that's rather old and maybe a Panamax, not an attractive size, and you're, you know, coming up against a dry dock, you know, this autumn, might be a good time to scrap.

Speaker 10

Appreciate it. Look forward to the future quarters.

Anthony Gurnee (CEO)

Thank you.

Operator (participant)

The next call comes from Nick Lannine with Sefton. Please go ahead.

Speaker 11

Thanks for taking my questions. Can you give us some sense of what your expected mix of usage is between LSFO and MGO next year? And can you give us any color on kind of your testing of LSFO products has gone so far, if you've been doing that, and whether you can get any certainty on the price at which it'll be available, either relative to HSFO or relative to MGO, or if it's not possible to sort of get any contracts for supply with price certainty?

Anthony Gurnee (CEO)

Mm-hmm. Yeah, so we don't know yet. Obviously, we'll basically be faced with one of two choices, either gas oil or compliant fuel. And you know, we through the relationships we have and what we're doing, you know, we have you know, sort of indirectly been involved in testing some of the new compliant fuels. And so, you know, certainly, that will be available to a degree. But it very much depends on how our ships trade and how confident we are with the quality of the compliant fuel that's available. And in particular, in our business, where trading patterns are so unpredictable, you know, we very often give just you know, dozens of port discharge options to our customers. We don't know what's going to be available in that port.

Very often, the amount that you bunker in the load port, or, you know, at a major hub, has an impact on how much cargo you can carry. It ends up being a very complex analysis that can only be made at that time and in the framework of what the market looks like at that time vis-a-vis one alternative versus the other. And so, for example, if there's only gas oil available one way, whereas you can do compliant fuel the other way, the returns will probably normalize, you know, to take account for the difference, because it is a competitive market.

So kind of rambling on about this a little bit, but I think it's, short answer is that we're gonna almost certainly be burning both. I think that most owners are gonna be erring on the side of caution by really just sticking with, you know, kind of known qualities of the 0.5% compliant fuel, otherwise you burn gas oil, at least in the beginning.

Speaker 11

If I can ask one other, do you see any potential for actually demand destruction in some areas as a result of IMO, because diesel that previously got exported from Asia actually stayed in Asia to be used as bunker fuel?

Anthony Gurnee (CEO)

... Yeah, you know, that's possible in North Asia, where you've seen these kind of long-haul, you know, kind of maiden voyage, VLCC, and Suezmax and even Aframax cargoes. That may go away because North Asia might just be needing to keep their, what is currently a, a, a gas oil surplus, you know, for their own, for their own regional needs.

Speaker 11

And Singapore?

Anthony Gurnee (CEO)

Singapore, you know, it's a very complex, you know, Singapore is a major bunkering hub. I can't give you a straight answer, but I would suspect that they're actually probably gonna be short gas oil, and they'll be needing to get it either from Arabian Gulf or from North Asia.

Speaker 11

Okay. Thank you very much.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Anthony Gurnee for any closing remarks.

Anthony Gurnee (CEO)

Thank you. So just one final note before wrapping up the call. We'll be hosting an analyst and investor event in New York on May thirtieth, where in addition to our usual MR market overview and Ardmore update, we'll be having an in-depth discussion with on IMO 2020 with Andy Lipow of Lipow Associates. That should be really interesting, and we're looking forward to it. You can reach out to us or to the IGB Group for more detail or to register. We look forward to seeing you there, and we hope the rest of you will be able to join on the webcast.

The other thing I want to mention is just to congratulate our CFO, Paul Tivnan, and his wife, Louise, on the birth of their daughter, Fia, last Wednesday. You know, as you know, we're generally not in favor of new buildings in this environment, but we are happy if they're human. So congrats, Paul and Louise. With that, I'll conclude the call today, and thanks for joining us.

Operator (participant)

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