Ardmore Shipping - Q2 2017

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to Ardmore Shipping's second quarter 2017 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 this conference call will be accessible anytime during the next week by dialing 877-344-7529 or area code 412-317-0088 and entering passcode 10111083. At this time, I will turn the conference call over to Mr. Anthony Gurnee, Chief Executive Officer of Ardmore Shipping. Mr. Gurnee, the floor is yours, sir.

Anthony Gurnee (CEO)

Thank you, and good morning, and welcome everyone to our second quarter earnings call. First, I'll ask Paul, our CFO, 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 will find a link to this morning's second quarter 2017 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 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 second quarter 2017 earnings release, which is available on our website. And now I will turn the call back over to Tony.

Anthony Gurnee (CEO)

Thank you, Paul. On the call today, we'll follow our usual format, first discussing our performance and recent activity, then an update on the product and chemical tanker markets. After which, Paul will provide an update on the fleet and review our financial results, and then we'll conclude with some remarks and open up the call for questions. First, turning to slide 5 on our performance and recent activity. We're reporting EBITDA of $12.9 million and a net loss of $1.9 million for the quarter. That equates to $0.06 per share, and that's the same as, actually, for the first quarter this year, also $0.06 loss.

Our six Eco-Design MRs acquired last year continue to contribute positively to earnings, increasing operating income by 17% in the quarter over the pre-acquisition fleet and will be significantly accretive to EPS in a rising market. During the second quarter, we delivered satisfactory charter results. Spot rates were firmer, with overall MR performance of $13,800, representing an increase of $600 over the first quarter of the year. The underlying fundamentals of the MR sector remain firmly intact and highly compelling, which we will discuss in a minute. Against this backdrop, we continue to execute effectively on our long-term strategy. During the quarter, we continued to take steps to strengthen our balance sheet, completing the refinancing of the Ardmore Sealeader and Sealifter under a sale-leaseback arrangement, resulting in net proceeds of $12.3 million.

Throughout the quarter, we continued to focus on maintaining tight control of costs, with our operating and overhead expenses running under budget year to date. As a final point, we are maintaining our dividend policy of paying out 60% of earnings from continuing operations. Consistent with that policy, the company is declaring no dividend for the second quarter. Turning to slide 6 for a quick look at our fleet profile. There's been no change to the fleet since the last earnings call, but as a reminder, this is a modern, high-quality, fuel-efficient fleet, all built in top-tier yards, with significant earnings power in a rising market. Turning now to slide 8 on the product tanker market.

MR rates firmed in the Atlantic Basin in the second quarter, driven by record US refinery output, and continued strong demand from Latin America for US exports, coupled with steady demand from West Africa for both US and European exports. Global refined product inventories drew down in April and May, but healthy refining margins, specifically in the US and Europe, resulted in high utilization and throughput in June and July, keeping refined product inventories high on a historical basis. However, OPEC and its non-member partners remain committed to maintaining or even raising production cuts as needed in order to rebalance the oil market within the first quarter of 2018. The ensuing decline in inventories should naturally result in increased oil trading activity and cargo flows. Looking ahead, the outlook remains positive.

In the short term, refinery throughput is expected to increase by 800,000 barrels a day in the third quarter, supporting cargo volumes in a more robust charter market in the coming autumn and winter. Longer term, the underlying positive fundamentals remain unchanged. Oil consumption is growing at 1.4 million barrels a day a year, matched by refinery capacity additions away from points of consumption. This, combined with ever-increasing trade complexity, continues to drive demand growth in the 4%-5% range. Meanwhile, turning to supply, the order book is now at a historical low of 4.4%. So far this year, 40 MRs have delivered and nine have been scrapped. We expect 24 vessels to deliver for the remainder of the year when taking into account slippage.

As a consequence, we anticipate net fleet growth for the remainder of 2017 should now be well below 2% and then 1% or lower in 2018 and beyond, until ordering activity resumes on a large scale, which we don't believe will happen until charter rates rise significantly. And then, of course, there'll be a minimum two-year delay before these orders begin to really impact supply growth. So the fundamentals of supply and demand are very compelling, which we believe will set the stage for a return to stronger charter market conditions, the exact timing of which is more a function of oil market dynamics, most importantly, inventory levels. Turning to slide 9, on the chemical tanker market.

During the quarter, our chemical fleet was employed, carrying 36% CPP, 24% chemicals and 40% Veg iil cargoes. Overall, chemical cargoes accounted for only 7% of our total revenue. Global demand for chemical transportation was particularly weak in the quarter, impacted by a softer US Gulf market, as unexpected production outages and maintenance reduced exports. Southeast Asian palm oil cargoes were also weak, limiting triangulation opportunities. Looking ahead, we expect continued solid demand growth in the chemical trades, driven by improving global GDP and industrial production. This, coupled with more general ongoing petrochemical plant expansion in the US Gulf and Middle East, should result in overall chemical tanker demand growth of around 5% for the foreseeable future. We also expect the palm oil trade to strengthen through the remainder of the year, driven by seasonal increases in demand.

And in addition, an improving product tanker market will increase demand for chemical tankers in CPP trade. Looking at supply, the chemical tanker order book currently stands at moderate levels, but there continues to be a difference between stainless and coated type ships. The total order book is 10% of the existing fleet, but within that percentage, the percentage order for stainless steel amounts to 16%, whereas the coated tankers on order amount to only 6%. So the situation for coated tankers, such as those we own, is more favorable than the headline figure suggests. Overall, net of scrapping, we expect chemical tanker fleet growth of around 4%-5% in 2017, broadly in line with tanker growth with demand growth, but as pointed out, more favorable for coated tankers, where the dynamics are more similar to MRs.

With that, I'll hand the call to Paul to provide an update on our fleet and financial performance.

Paul Tivnan (CFO)

Thanks, Tony. I'm moving to slide 11. We'll run through the fleet days. Starting with the chart on the right, you'll see the revenue days have increased by 13% for the full year to 9,747 days. We had two dry dockings in the second quarter with the Ardmore Defender and Ardmore Seafarer, both completing intermediate surveys, and we expect there are 45 dry dock days in the third quarter. Then turning to slide 13, we will take a look at the financials. As you will see on the second and third line, we reported net loss of $1.9 million, or $0.06 per share for the second quarter.

Total overhead costs were approximately $3.8 million in the quarter, comprising of corporate expenses of $3.2 million and commercial and chartering costs of just six hundred and fifty thousand. 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 $12.3 million, which works out at $1,250 per ship per day across the 27-ship fleet. Overall, we expect total overhead, that's corporate and commercial, to be approximately $3.8 million for the quarter for the remainder of 2017. Depreciation and amortization for the second quarter was $9.1 million, and we expect depreciation and amortization in the third quarter to be approximately $9.3 million.

Our interest in finance costs were $5.2 million, comprised of cash interest costs of $4.5 million and amortized deferred finance fees of $650,000. This does not include one-time deferred finance fees write-off related to the refinance of the Sealeader and Sealifter of $500,000. We expect interest in finance costs in the third quarter to be approximately $5.5 million, which includes amortized deferred finance fees of $650,000. Now, moving to the bottom of the slide, our operating costs for the quarter came in at $15 million, or 6,071 per day across the fleet, including technical management. OPEX for Eco-Design MRs was 6,006 per day.

Eco-Mod MRs came in at $6,107 per day, while Eco-Design chemical tankers came in at $6,212. Looking ahead, we expect total OPEX for the third quarter to be approximately $16.4 million. Finally, based on the company's policy of paying our dividends equal to 60% of earnings from continuing operations, we have not declared a dividend for the quarter following a net loss of $1.9 million. Now, turning to slide 14, we'll take a look at charter rates for the quarter. And starting on the left, overall, across the fleet, we saw a slight improvement in charter rates, with the fleet earning an average of $12,996 for the second quarter, compared to $12,919 for the first quarter.

Moving on to the various ship types, we had 15 Eco-Design MRs in operation, which earned an average of $13,452 per day for the quarter, while the 6 Eco-Mod MRs earned $13,960 per day. The 6 Eco-Design chemical tankers earned an average of $10,736 per day. Looking ahead to the third quarter, as of today, with 40% of the days booked, our spot MRs are earning approximately $13,250 per day for voyages in progress, and our chemical tankers are earning approximately $10,500 per day. Overall, we are satisfied with our chartering performance in the second quarter. Our fleet continues to perform well in spite of a softer charter market.

On to slide 15, we have our summary balance sheet, which shows at the end of June, our gross debt was $464 million, which net of deferred finance fees, was $454 million. We have total capital of $873 million and cash on hand of $55 million, giving a gross leverage of 54% at the end of the quarter. Turning to slide 16, as mentioned earlier, we completed the refinancing of the Ardmore Sealeader and Ardmore Sealifter under a sale and leaseback arrangement, which released net proceeds of $12.3 million for general and corporate purposes. Our balance sheet remains strong, and we've got gross leverage of 53.8%, and with total cash and net working capital of approximately $81 million at the end of the quarter.

And finally, as you all know, all of our debt is amortizing, with principal repayments of $45 million annually, so we're continuing to delever and strengthen the balance sheet. With that, I would like to turn the call back over to Tony.

Anthony Gurnee (CEO)

Thanks, Paul. So to sum up then, we're reporting a net loss of $0.06 per share in the second quarter, in line with our first quarter results. Our six Eco-Design MRs acquired last year are contributing positively to earnings, increasing operating income by 17% in the quarter, and they'll be significantly accretive to EPS in a rising market. Our spot MR rates improved in the second quarter as strong demand from Latin America and West Africa refined product imports provided support to Atlantic Basin rates. In the short term, high levels of refined inventories continue to negatively impact demand. However, OPEC and Russia appear to be very committed to rebalancing the oil market within the first quarter of 2018, which would increase oil trading activity and cargo flows.

Fundamentals remain strong, with demand growth estimated to be in the 4%-5% range, underpinned by 1.4 million barrels a day per year oil consumption growth, ongoing refinery development away from points of consumption and increasing trade complexity. Meanwhile, supply growth continues to decelerate, resulting in anticipated net fleet growth of well under 2% for the remainder of 2017, and 1% or lower in 2018 and beyond. As a final point, through a combination of our fully delivered and high-quality fleet, our ongoing focus on spot chartering performance and cost efficiency, Ardmore has significant earnings power, where every $1,000 a day increase in rates equates to $0.29 in EPS and $0.17 in dividends. With that, we're now pleased to open up the call for questions.

Operator (participant)

Okay, thank you, sir. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up the handset before pressing the keys. If at any time your question has been addressed and you'd like to withdraw your question, please press star then two. Again, it is star then one to ask a question. At this time, we'll just pause momentarily to assemble our roster. The first question we have will come from Doug Mavrinac of Jefferies. Please go ahead.

Doug Mavrinac (Managing Director in Investment Banking)

Thank you, operator. Good afternoon, guys. I just had a few follow-ups for you all this morning, with the first being a two-part question on the sale-leaseback of the Sealeader and the Sealifter. So for that particular transaction, are you guys able to provide us some of the terms of the transaction, particularly on the leaseback side, such as, you know, the leaseback rate, the duration, and whether or not there's a repurchase option? And then the second part to that question is, this is the second and third, I think, refinancing that you all have done year to date. And are there any additional opportunities for further refinancing, such as these last two?

Anthony Gurnee (CEO)

Well, yeah. So the terms are fairly typical of Japanese tax leases. This one happens to be a six-year lease. The embedded cost of capital is very attractive. Paul, if you want to add anything to that?

Paul Tivnan (CFO)

No, I mean, it's attractive. It's attractive financing for us, both in terms of the overall cost of funds, but also the implied mezzanine component. And there are purchase options starting from year three and a purchase obligation at the end. And it was an attractive transaction for us to access the Japanese market. And I think once rated, opportunities should be there for us to grow, if we have ships to finance.

Doug Mavrinac (Managing Director in Investment Banking)

Okay. And then, Paul, you know, I think this is the second and third transaction of this type year to date. Is that right? And then, you know, would there be any additional opportunities for additional refinancing such as these?

Paul Tivnan (CFO)

Yeah, this is the third, including the one that we completed in December on the Ardmore Seatrader. But in terms of opportunities, Tony, do you want to?

Anthony Gurnee (CEO)

Yeah, I think, look, it, it's something that I don't think we're going to go crazy doing Japanese sale-leasebacks now, but it, it is an ongoing, you know, new, new tool in our toolkit. They tend to be very relationship-driven. So, you know, I think you'd expect us to gradually expand our, our presence in that market over time.

Doug Mavrinac (Managing Director in Investment Banking)

Okay, got you. Very helpful. Thank you. And then, second question. You know, when you look at the performance of your fleet during the quarter, you know, the MRs continue to perform very well. The IMO 2 vessels, you know, continue to do, you know, pretty good as well. When you look at kind of your employment distribution between, for the IMO 2 vessels, between the CPP trade, the chemicals trade, and the veg oils trade, is that mix something that you expect to maintain as we head into the second half of the year? Because, you know, the CPP trade looks, you know, pretty good as we're heading into the second half.

So, would you want to maybe shift more into that, or are you good with kind of how you have those vessels deployed in anticipation of maybe something happening on the chemical side going forward?

Anthony Gurnee (CEO)

You know, in reality, Doug, those ships just they, you know, jokingly, they, you know, in chartering you, they, you follow the money. So, these, these ships will do, you know, rotations in and out of CPP, veg, and chemicals, depending on what's the most attractive cargo at the time. And very often that's, you know, part of an overall pattern of, of consecutive voyages or, or, or voyages and, you know, triangulation, if you wish. So, so the, you know, the actual percentages that fall out of there are really just the result of, you know, just finding what's going to pay the best at the time. But, but it, but it is, it is notable that when the CPP market was strong a year ago, those ships were spending more than half their time in CPP.

Doug Mavrinac (Managing Director in Investment Banking)

Okay.

Anthony Gurnee (CEO)

And of course, if that happens across that, at least that piece of the chemical fleet, that's a tremendous boost to overall demand for that ship type. And you know, we would expect under those conditions to see rates dramatically higher.

Doug Mavrinac (Managing Director in Investment Banking)

All right. Got you. Very helpful. Then final question, more modeling related. One thing I noticed was vessel OpEx was down sequentially from Q1 down year-on-year. You're down to about $6,000 a day, which is obviously very good. Should we think about that as a go-forward run rate from a modeling perspective? And two, you mentioned that you'll have 45 days worth of dry docking in the third quarter. How should we think about the distribution between the MR vessels and the IMO 2 vessels for that?

Paul Tivnan (CFO)

Hey, Doug. On specifically on the OpEx, I think we're running well below budget. It was a pretty good quarter in terms of OpEx. I think we would expect it to normalize, so some slight increases in the third quarter. We're guiding $16.4 million for the third quarter, and probably something similar for the fourth quarter. And then in terms of dry docks, they're all MRs for the third quarter.

Anthony Gurnee (CEO)

Okay. That is outstanding. Thanks again for the time, guys.

Paul Tivnan (CFO)

Thanks, Doug.

Operator (participant)

Next, we have John Chappell of Evercore.

John Chappell (Senior Managing Director in the Transportation Team)

Thanks. Good afternoon, guys. Actually, my first two questions are follow-ups to the answers you just gave. A little bit more detail on that last question, Paul. $16.4 million is a pretty large jump up from the $15 million in the second quarter. So how much of that is expensing of the dry dockings? How much of that is maybe the higher costs associated, I'm assuming the costs are running through there, of the sale and lease back? And how much of it is just kind of, you know, budget expenses moving up?

Paul Tivnan (CFO)

I mean, I think our fleet average in the first quarter was about $6,300 per day on OpEx. Second quarter was around just under, just over $6,000. I think overall, we expect the year, budget for the year, for across the fleet of $6,450. So I think what you'd expect in the third and fourth quarter is that it would normalize, come back in towards budget. It's mostly down to timing of operating expenses, quite frankly. So, it wouldn't relate to dry dockings. Dry dockings are we capitalize our dry docking costs, so it's purely run-of-the-mill operating costs.

It happened that the 2Q was good in terms of cost management, but also in terms of timing of crew changes and picking up loads, et cetera. So, I think $16.4 million is not necessarily a jump. I think it's reverting back to more normal, and we'd expect the full year to be around $64.50 across the fleet for OpEx per ship.

John Chappell (Senior Managing Director in the Transportation Team)

Okay. And then Tony, to one of your recent answers as well, the, the substitutability, if you will, of the, of the chemical tankers in the MR fleet. In the chemical tanker slide, you kind of put that out there as a positive, improving product tanker market. We'll take some of those out of the chemical trade. But from an MR perspective, which is still the majority of the fleet, everything looks so good right now with the demand versus the supply, it just hasn't translated into rates yet. How much do we have to fear, chemical tankers, or other types of ships going in and kind of cannibalizing some of that demand that looks to far exceed the, the supply growth over the next 18 months or so?

Anthony Gurnee (CEO)

Yeah. Well, I think on the chemical fleet, you know, it's actually just a very small fraction of the MR fleet. So, you know, I think it's like one sixth of the MR fleet. So if a marginal amount of that comes in, you know, and takes away CPP cargoes, you know, it, I think it would be very much on the margin. Wouldn't be overly concerned about it. You know, in terms of bigger ships stepping in and let's say, doing CPP on their maiden voyage, you know, the crude carriers, and that kind of thing, that is happening, but it's really de minimis at this stage. You know, there is some cannibalization going on with LR1s and LR2s in the MR market, but again, that seems to have its limits.

John Chappell (Senior Managing Director in the Transportation Team)

Mm-hmm.

Anthony Gurnee (CEO)

You know, it's specific to, you know, certain trades. So, you know, overall, we feel that, you know, look, it's not an impregnable moat, but, you know, the MR ships have a very, very specific function in life, and they, you know, they seem to be very much in demand.

John Chappell (Senior Managing Director in the Transportation Team)

Right. Okay. And then finally, you know, it seems like up until the last couple of days or week or two, things have been trending in a favorable direction with the MR rates. Once again, when you lay out that supply/demand outlook, that seems to be expected. And now, of course, here we are in a pretty weak environment as we stand today. Has anything meaningfully changed in the last couple of weeks or so? Is this a seasonal blip? Is it an impact of, you know, maybe the Shell refinery fire or anything like that? Why can't we seem to kind of keep the momentum in a higher high environment?

Anthony Gurnee (CEO)

It seems that, you know, I was talking to Gernot about this earlier today, and it seems that a lot of cargoes are being held back in the Gulf, for example, right now, but at some point, they have to move. So we think that, you know, we might see a more robust market, you know, in the fairly near term.

John Chappell (Senior Managing Director in the Transportation Team)

Okay. I appreciate it. Thanks, Tony. Thanks, Paul.

Operator (participant)

Thanks, John. Again, as a reminder, if you'd like to participate in today's Q&A, please press star then one on a touchtone phone. Again, that is star then one to ask a question. Next, we have Fotis Giannakoulis of Morgan Stanley. Please go ahead.

Fotis Giannakoulis (Analyst)

Yes. Hi, gentlemen, and thank you. Tony, you mentioned that your view overall demand is growing by 4-5%. Can you give us an overview of how the market, how demand has expanded the last quarter on a year-over-year basis? And if you have seen any diversion from this 4-5% that can create potential opportunities in terms of certain owners that they will be willing to sell vessels?

If you have seen this demand the last quarter being lower for any reason, and if this lower demand of the last quarter is related to arbitrage opportunities, lack of arbitrage opportunities, or ton mile diversions?

Anthony Gurnee (CEO)

Okay, so, I think the way I think about it anyway is that if you look at 1.4 million barrels a day of oil consumption growth, if you compare that to the amount of seaborne transported products, which is about 21 million barrels a day, if you look where that ongoing, you know, incremental refinery capacity is being built, you very quickly build up to a number of 4%-5%, you know, in terms of ton miles. And that's without even thinking too much about increasing trade complexity, which is hard to quantify.

If you then look at, you know, the AIS analysis that people are doing now on a long-term basis, the demand growth has actually been according to that in the 5%-6% range, up until the spring of 2016. And since then, it's been pretty flat, and we think it's been pretty flat, not because the underlying fundamentals aren't good, but because the oil market dynamics have just taken that out, that, you know, that component of demand growth, out of the market. And we think that at some point when those oil market dynamics change, you are gonna see a resumption of oil trading activity, and then you're gonna see the full force of that kind of cumulative fundamental supply-demand growth.

So, you know, it's interesting, I'm I have in front of me the Trafigura first half of the year statement. And just on page two, their CEO says that the oil market was characterized by chronic oversupply and low levels of realized volatility, with prices largely range bound from December. This reduced profitable opportunities for trading and accordingly, gross profit from oil and petroleum products trading fell. So, you know, clearly this is what's happening to our oil trader customers, and that means there's less demand for the ships. So, you know, we think that there's almost a pent up element of demand that could, you know, come back to the market fairly quickly when oil trader activity resumes to normal levels.

Fotis Giannakoulis (Analyst)

Thank you, Tony. That's very helpful. Do you think that part of this weaker trading activity is because of the lack of trade financing, if the financing market has put any pressure, consequently to the product tanker trade? And also, if you see any signs that traders are increasing or decreasing their books in terms of chartering more or less ships or even buying more ships right now that asset values they are at quite attractive levels?

Anthony Gurnee (CEO)

Okay. Well, so to your first question about trade financing, I mean, we do believe we've talked about this in prior quarters, we do believe that non-OECD inventories are continuing to decline, and we think part of that might be trade finance related. But that, you know, that again, that could change. I think overall, the oil market seems to be fairly immune to, you know, trade finance impact, but that's just a fairly loose opinion I have. So I don't know, but something worth looking into. But in terms of, I guess, the second question was oil trader activity and chartering in. It does seem that there are very, very low levels of, you know, kind of chartered and controlled fleets. In a way, that's good for us.

That means that, you know, when cargoes have to move, they don't have as many of their own ships to carry them, and so, we could see that benefit a lot quicker than otherwise we might normally see it. You know, in terms of traders buying ships, I mean, obviously Trafigura did a deal a few months ago now, which is kind of across the spectrum. It's fairly opportunistic, but, you know, we also just, you know, read that Vitol order in VLGCs. So clearly, that's something that they're prepared to do if they see the right conditions. But, at this point, other than the Trafigura order, which is a spectrum of sizes, there hasn't really been a significant step by oil traders.

Fotis Giannakoulis (Analyst)

Thank you, Tony. One last question about a number of private equity control fleets. They have been discussed widely about potential mergers or combinations of fleets. Do you see this discussion continuing right now? Is this something that your company would be interested in expanding in such a way?

Anthony Gurnee (CEO)

You know, we only hear the rumors that you hear. So, I like to say we tend to just chip away at our own piece of the coal face, and we're focused mostly on operating performance and just you know, trying to maximize earnings here. If we did find opportunities of any sort that we felt would meaningfully improve our EPS, our earnings power in a rising market and a deeper share, or quite frankly, trading liquidity in our shares, we would of course look at that seriously.

Fotis Giannakoulis (Analyst)

In terms of expansion, buying vessels organically from the market, do you think that this is the right time? Are you considering of putting more capital to work at this point of the cycle?

Anthony Gurnee (CEO)

Yeah, no, it's a possibility. I think the challenge always for us is to find good ships at the right price.

Fotis Giannakoulis (Analyst)

Okay. Thank you very much, Tony.

Anthony Gurnee (CEO)

Thanks, Fotis.

Operator (participant)

Next, we have Amit Mehrotra of Deutsche Bank.

Amit Mehrotra (Analyst)

Hey, thanks, Tony. Thanks, Paul. Hope you guys are doing well. I joined the call a little bit late, so excuse me if, I guess, this has already been asked. It's just as a little bit of a follow-up to, I guess, Fotis's question. I mean, you guys run a pretty tight ship from a risk management standpoint, at least, and it looks like, hopefully we're kind of in the sunset period of a weak market that we've been in for some while. So in that context, you know, is there potential for you guys to maybe move out a little bit further out on the risk curve, whether that means increasing the size of the balance sheet?

And related to that, are there opportunities out there for sizable transactions, given I'm sure relatively wide bid-ask spreads, especially at this point in the cycle? So not really a question about acquisitions, but really a question about potential size of deals and your willingness to maybe go out a little bit on the risk curve in expanding the size of the balance sheet. Thanks a lot.

Anthony Gurnee (CEO)

Yeah, thanks, Amit. Well, I just don't think that we feel that there's a lot of merit or value in doing something significant with leverage right now. Whatever we would do would be fairly incremental and wouldn't be particularly needle moving. It would be building on what we already have, but it wouldn't be in any way transformative. Unless it was some kind of an M&A project, but that, you know, that would have a different flavor to it. So the answer is, I think our bias is to play it relatively safe and, you know, focus on quality ships and things that are, you know, well within our wheelhouse and, you know, synergistic and additive to what we're already doing.

Amit Mehrotra (Analyst)

Okay.

Anthony Gurnee (CEO)

That spells MRs, you know?

Amit Mehrotra (Analyst)

Yeah, that's very clear. Let me just ask you a follow-up on... I mean, yesterday, we had a lot of U.S. E&P companies that reported earnings, and it seems like at these oil price levels, at least the, with the strip hovering around, you know, high 40s-low 50s $ levels, the U.S. oil production or supply is probably gonna continue unabatedly, certainly for the rest of this year and prospectively, potentially in 2018. Can you just talk about how that impacts your view on demand? I mean, if we do get this supply-led decline in oil prices, I guess maybe it could create, you know, 2015-like conditions. Maybe I'm wrong. I'm just wondering if you could just talk about some of the moving parts as it relates to the product trade under those conditions.

And then, maybe are you, Tony, more optimistic than maybe you would've been just a few months ago, given the evolution of what's happening on the supply side in the U.S.? Thanks.

Anthony Gurnee (CEO)

Sure. No, it's a really good question, Amit, and you know, anything that—I mean, really, the, you know, the short answer is anything that turns out to be good for oil traders is good for us. And oil traders like volatility and complexity, and that, that's good for our market. So, you know, all other things being equal, that, that's what's gonna really move things for us. So the reality is that, either a reduction of inventory through success by OPEC and Russia, you know, resulting in more, you know, more kind of vibrant oil trading activity is good.

On the other hand, a price collapse and extra production resulting in a steeper forward curve in the oil market, you know, better refinery margins inevitably resulting in more throughput, port congestion, you know, regional volatility, that obviously is another scenario that would be very good for oil traders, and it would be great for us as well. So you're absolutely right there. I think you know the medium case where there's low volatility and we're just kind of motoring along is the least attractive case. But the point I was trying to make earlier is that eventually just the fundamentals of supply and demand in our sector will address that, right? So it's really a matter of timing.

Amit Mehrotra (Analyst)

Right. Okay, guys. Thanks so much for taking my questions. Have a great summer.

Anthony Gurnee (CEO)

Great. Thanks. Thanks, Amit.

Operator (participant)

Well, at this time, we're showing no further questions. We'll go ahead and conclude our question and answer session and today's conference call. I would like to thank the management team for their time today, and thank you all for attending today's presentation. At this time, you may disconnect your lines. Take care and have a great day, everyone.