Ardmore Shipping - Q2 2018
July 31, 2018
Transcript
Operator (participant)
Good morning, ladies and gentlemen, and welcome to Ardmore Shipping's Second 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 two weeks by dialing 1-877-344-7529 or 1-412-317-0088, and entering passcode 10122598. At this time, I will turn the call over to Anthony Gurnee, Chief Executive Officer of Ardmore Shipping. Please go ahead.
Anthony Gurnee (CEO)
Good morning, and welcome everyone to Ardmore Shipping's Second Quarter Earnings Call. First, let me ask our CFO, Paul Tivnan, to describe the format of 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 second quarter 2018 earnings release and presentation. Tony and I will take about 15 minutes to go through the presentation, then open up the call for questions. Turning to slide 2, please allow me to remind you that our discussions 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 2018 earnings release, which is available on our website. Now I'll 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 of our financial results, and then I'll conclude the presentation and open up the call for questions. So turning first to slide 5 on our performance and recent activity. We're reporting EBITDA of $7.6 million and an adjusted net loss of $8.2 million, or $0.25 per share for the second quarter, reflecting ongoing significant weakness in the product tanker market. The company continues to perform very well in terms of costs, with operating expenses and corporate overhead under budget. But of course, the real issue is charter rates.
Our MRs earned $11,500 per day in the second quarter and $12,100 year to date. Rates in the second quarter were particularly impacted by lower cargo volumes, resulting from what we consider to be unrelated one-off events in key consumer regions in the Atlantic Basin, which we will go through in more detail later on. Exceptional weakness in the crude tanker spot market, resulting in some crude tanker voyages... Sorry, some crude tanker newbuildings carrying refined products on maiden voyages.
The charter market continues to be weak, particularly in the Atlantic Basin, but is now coming off the very low levels we saw in June and July, and we believe rates have bottomed out and should be now on an upward trajectory, supported by global refinery throughput rising to record levels in the third quarter, normalizing cargo trading patterns in the Atlantic Basin, and crude tankers trading in CPP on maiden voyages declining in the second half as the newbuilding delivery pace tails off. Looking ahead, the IMO 2020 sulfur cap is coming more into focus, with an anticipated significant increase in seaborne cargo volumes, as well as heightened cost advantage for more fuel-efficient vessels, such as those in the Ardmore fleet. Turning next to slide 6, for a look at our fleet profile.
This is unchanged since the last call, but for those not familiar with Ardmore, this is a modern, fuel-efficient fleet, all built in top-tier yards in Korea and Japan, and with significant earnings power in a rising market. Now to slide 8 for more detail on the product tanker market. The MR charter market took an unanticipated hit in the second quarter of 2018 from a number of what we consider to be unrelated one-time events, which we highlight here, along with some ongoing headwinds that have been discussed in prior calls. First, lower demand in the Atlantic Basin is a result of localized factors in the key consumer markets of Brazil, Mexico, and West Africa. These are largely political issues, not fundamental economic issues.
Second, the continuation of high oil prices and futures backwardation impacting oil trading activity, and also higher bunker prices impacting voyage profitability by $2,500 a day as compared to one year ago, and $1,000 per day versus the first quarter of this year. And third, crude tanker market weakness, resulting in some encroachment on product tanker trades, particularly Aframax newbuildings competing with LR2s. Having said that, we feel that the impact of crude tankers on MR trade is limited, probably well under 1% of overall supply. Clearly, the second quarter has turned out to be unexpectedly tough, and it's easy to focus on these short-term negatives, but there are many positives to remember. The first is that MR supply growth remains at all-time lows.
We're forecasting 23 MRs to deliver over the remainder of 2018, with 29 delivered year to date, and this is compared to the 5-year historical average of 112 per year. Scrapping has increased, with 31 MRs scrapped year to date, indicating a run rate of approximately 50-60 per year. As a consequence, MR fleet growth, net of scrapping, is expected to be well below 1% in 2018 and into 2019. The second is that the underlying demand fundamentals are still solid in terms of oil consumption growth and export-oriented refinery capacity development. As a result, we believe the outlook for the MR sector remains positive. Atlantic Basin cargo volumes should return to normal levels in the second half as the short-term factors play themselves out.
Refined product inventories are well below five-year averages, and with refinery throughput set to increase by a further 2 million barrels a day in the third quarter to all-time highs, CPP trading activity. In addition, IMO 2020 sulfur regulations are expected to have an impact from mid-2019. The initial estimate suggests that approximately 2 million barrels a day of refined products will displace high sulfur fuel oil, with the majority of this moving at sea and over longer distances, with some analysts calling for a 10%+ increase in product tanker demand. Turning now to slide 9 on the chemical tanker market. Our chemical tankers averaged $12,550 per day in the second quarter, down from $13,500 in the first quarter, which while lower, is still a very good result relative to the MRs.
Looking to recent chemical tanker trading activity, given the overlap of cargoes, the most important factor has been softness in the product tanker sector, resulting in downward pressure on chemical tanker freight rates late in the second quarter. We believe that the only thing really holding back the chemical tanker sector now is, in fact, the product tanker sector. In terms of overall demand, chemical tankers are highly correlated to the global economy, and with GDP forecast to grow by 3.9% in 2018, chemical demand is expected to be robust. Another point is that we've been waiting for petrochemical plant expansion in the U.S. on the back of the shale gas boom to come online, and this is now finally happening in the second half of 2018 and into 2019.
As a consequence, forecasted demand growth for seaborne commodity chemical trade out to 2020 is very strong at 6% per annum. Meanwhile, looking at supply, the chemical tanker order book continues to decline and is now at 5.9% of the existing fleet. But within that number, stainless steel tankers, currently about half of the order book, comprise 6.8% of the current stainless steel tanker fleet, whereas coated IMO 2 tankers, such as ours, account for the other half of the order book, but are only 5.2% of the existing fleet. Overall, we expect net chemical tanker fleet growth in 2018 of 3% or less, which should be well below demand growth. In summary then, the outlook for the chemical tanker market is positive, the main issue now being weakness in the product tanker sector.
With that, I'll hand the call back to Paul to provide an update on our fleet and financial performance.
Paul Tivnan (CFO)
Thanks, Tony. Moving to slide 11, we will run through the fleet days. Revenue days this year will increase by 3% to 9,966 days. We had 35 dry dock days in the second quarter, comprising 3 dry docks and 2 in-water surveys, and we expect 55 dry dock days in the third quarter, 4 dry docks and 3 in-water surveys. Turning to slide 13, we will take a look at our financials. As you will see on the second line, we are reporting an adjusted net loss for the second quarter of $8.2 million or $0.25 per share. Total overhead costs were $4.6 million for the quarter, comprising corporate expenses of $3.8 million and commercial and chartering expenses of $800,000. The movement from the first quarter primarily relates to non-cash items.
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 cash costs are expected to be $12.5 million, which works out at $1,250 per ship per day. For the third quarter, we expect corporate and commercial overhead to be $4.6 million, including both cash and non-cash items. Depreciation and amortization for the second quarter was $9.6 million. We expect depreciation and amortization in the third quarter to be approximately $9.9 million. Our interest and finance costs were $6.1 million for the second quarter, comprising cash interest of $5.5 million and amortized deferred finance fees of $600,000.
We also had a write-off of deferred finance fees of $400,000 related to the refinancing of two vessels. We expect interest and finance costs in the third quarter to be approximately $6.5 million, which includes amortized deferred finance fees of $600,000. Moving to the bottom of the slide, our operating costs for the quarter came in at $16.1 million, or $6,328 per day across the fleet, including technical management. OPEX for the Eco-design MRs was $6,360 per day for the quarter. Eco-mod MRs came in at $6,615 per day, while the chemical tankers came in at $5,923 per day.
As outlined on the last call, our OpEx for the first quarter was slightly higher due to timing of certain items and some upgrades, but overall, the cost is back in line in the second quarter. Looking ahead, we expect total operating expenses for the third quarter to be approximately $16.4 million, which is a more normalized run rate for the rest of the year. Turning to slide 14, we take a look at charter rates for the quarter. In spite of soft charter market conditions, the pool and spot MRs reported TCE of $11,500 per day, while the fleet average came in at $11,503 per day.
Looking at the various ship types, we had 15 Eco-design MRs in operation, which earned an average of $10,600 per day for the quarter, while the seven Eco-mod MRs earned $12,579 per day. Slightly higher performance in Eco-mods is purely down to vessel positioning and timing of fixtures in the quarter. Our six chemical tankers performed well overall, with average rates of $12,527 for the quarter. These chemical tankers started out very well, but the rates came under pressure from a softer product tanker market in the second half of the quarter. Looking ahead to the third quarter, with 40% of the days booked to date, spot MRs are earning approximately $10,000 per day for voyages in progress, and the chemical tankers are also earning approximately $10,000 per day.
Overall, we remain focused on managing performance and voyage efficiency in order to maximize TCE. Slide 15, we have our summary balance sheet, which shows at the end of June, our total book debt, and leases was $454 million. Our leverage is 54.8%, and our cash on hand at the end of the quarter was $47.9 million.... Turning to slide 16, we remain focused on maintaining a strong liquidity position, and we're continuing to pay down debt. As mentioned, our cash balance at the end of June was $47.9 million, and we had an additional $28.8 million or $21.8 million in net working capital. We had $2.5 million undrawn under the revolving credit facility.
We completed sale and leasebacks on two 2013 MRs in June, with the top-tier Asian financier releasing cash of $10.3 million and maintaining corporate leverage levels. We issued $5.2 million through an ATM at $8.15 per share for general corporate purposes. And finally, all of our debt, including capital leases, is amortizing at $44 million a year, so we're continuing to delever and strengthen the balance sheet. And with that, I will turn the call back over to Tony.
Anthony Gurnee (CEO)
Thanks, Paul. So to sum up, then, we're reporting an adjusted net loss of $8.2 million, or $0.25 per share for the second quarter, reflecting ongoing weakness in the product tanker market. The decline in MR spot rates in the second quarter was largely the result of unrelated, politically driven, short-term events, most notably in Brazil, Mexico, and West Africa, which we hope to discuss in more detail in Q&A, as well as higher bunker prices and some incursion of crude tankers into product rates. Meanwhile, supply-demand fundamentals are sound, with the order book continuing at record lows and supply growth expected to be below 1% this year and next, and ton mile demand growth underpinned by 1.4 million barrels a day, oil consumption growth and export-oriented refineries coming online to meet this demand.
IMO 2020 is now coming into focus as a major event for the product tanker sector, which may prove to be a game changer in terms of demand starting in mid-2019. When we look at very recent trading activity and charter rates, we believe MR rates have bottomed out from very low levels, particularly in the Atlantic basin, and that we should see improvement through the second half of 2018. Against this backdrop, Ardmore remains on solid financial footing with conservative leverage, good balance sheet liquidity, and an efficient cost structure, and is well positioned to benefit from a recovery in product tanker charter rates with significant earnings power, where $1,000 per day translates into $0.32 per share in earnings. And with that, we're now pleased 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're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question today will come from Randy Giveans with Jefferies. Please go ahead.
Randy Giveans (Analyst)
Hey, guys, thanks. A few quick questions for me. So looking at ballast water treatment systems, what is your fleet status for that? And, do you have a total cost and timeline for installations?
Anthony Gurnee (CEO)
We don't have something at our fingertips, but it is, it is part of our longer-term plan. Like, like everyone else, we've availed ourselves with deferrals, and we're installing the ballast water systems into our ships, you know, you know, in, in connection with, you know, with their scheduled dockings at later dates. We don't believe any are going to be installed until late 2020 or 2021.
Randy Giveans (Analyst)
Yeah.
Anthony Gurnee (CEO)
And about a third of our fleet have them already installed.
Randy Giveans (Analyst)
Okay, so not much dry docking next year or installations of ballast water treatment systems, 2019?
Anthony Gurnee (CEO)
No, no installations next year.
Randy Giveans (Analyst)
Okay. And then for the sale and leasebacks, can you give a little more color around that, specifically, maybe duration or the leaseback rate?
Anthony Gurnee (CEO)
I'll let Paul answer that.
Paul Tivnan (CFO)
Yeah, we, and in terms, it's, some of this is quite confidential, so we haven't disclosed all the details. In terms of tenor, the lease facilities are 7-year facilities with purchase options, from early on, and the rate is comparable to existing financings that we've done. And otherwise, I'm not sure we can go into too much detail. It is quite confidential from a financial standpoint.
Randy Giveans (Analyst)
Okay. Is there a purchase obligation? You said an option starting in the year.
Paul Tivnan (CFO)
There is, there is a purchase obligation at the end of year seven. Exactly.
Randy Giveans (Analyst)
All right. Cool, just clarifying that. And then last question for me, ATM, about $5 million in proceeds this quarter. What is the remaining authorization on that?
Anthony Gurnee (CEO)
In total, it's a $25 million plan.
Randy Giveans (Analyst)
$25 million remaining?
Anthony Gurnee (CEO)
No, it would be 25 minus 5, so it's $20 million remaining.
Randy Giveans (Analyst)
Yeah. Got it. Okay. Just clarifying. All right. That's it for me. Thanks again.
Anthony Gurnee (CEO)
Thanks, Randy.
Operator (participant)
Our next question comes from Michael Webber with Wells Fargo. Please go ahead.
Michael Webber (Analyst)
Hey, good morning, guys. How are you?
Anthony Gurnee (CEO)
Good, thanks.
Michael Webber (Analyst)
Tony, just wanted to start off with some of the shorter term kind of non-continuing events you referenced in your prepared remarks, Brazil, Mexico, as well as West Africa. Can you get into a bit more detail there? And then particularly around any kind of bleed-through into Q3? You know, it looks like the guidance sequentially looked a bit softer in Q3, a lot of it's seasonal. Just, I'm just curious as to how contained those items are within Q2 and how it impacts the back half of the year.
Anthony Gurnee (CEO)
Sure. So I'll try to provide a bit of framework for each of the points, and then we can go into more detail on it, if you'd like. But so in terms of Mexico, the volumes into Mexico are normalizing, you know, as we speak. They certainly did impact July, but we think that they're coming back to more normal levels. More or less the same thing for West Africa. West Africa, there was a very large buildup in offshore, you know, floating storage largely for Nigeria in the first quarter, and there was a subsequent runoff that continued- up until just very recently. We're now beginning to see an increase in MR fixtures going down to West Africa, so we think that's normalizing. You know, both of those are, of course, you know, the backdrop there is more political than anything else. In West Africa, they've got elections in February 2019, and wanted to make sure that they didn't face any shortages of either jet fuel or gasoline-
in the run-up to that. And so we think that they're gonna continue with relatively elevated levels, which means that the flow of imports down to that region will, you know, will be back to normal levels. Now, it may drop, you know, snap down again next spring, once the election is over, but that's, that's a while away. The, the biggest issue is Brazil. Brazil is very-- is, is was, the largest individual contributor to MR ton-mile demand, using a total of around 60 MRs, which is a very-
large number if you factor that in, so for example, against the Atlantic Basin demand. So, you know, as we all know, in late May, the truck drivers went on strike in Brazil, created a political crisis.
Michael Webber (Analyst)
Yep.
Anthony Gurnee (CEO)
The resolution was the reintroduction of subsidies, which is being borne largely by Petrobras. And so that has resulted in a complete change in the dynamics regarding the refined product market down there, particularly the importing of diesel. So up until that point, Brazil was importing in excess of 500,000 barrels a day of diesel, which, you know, like I said, was probably employing around 60 MRs on a full-time basis equivalent.
That number basically almost evaporated. It's come back a little bit so that in July, the number appears to be about, maybe, we think maybe 200,000 barrels a day or less, representing around, full-time demand equivalent to around 20 MRs. So that event has taken, we believe, on a relatively temporary basis, about 40 MRs worth of demand out of the market. We think that'll gradually come back. They have elections in October. The first repricing of the subsidy level happens on August twenty-second. Meanwhile, the government is handing out reimbursements for the subsidies to more than Petrobras, so we believe that a process is beginning. Meanwhile, they're probably working down inventories.
And also relying on elevated levels of throughput in Petrobras refineries in Brazil, which we don't-
Michael Webber (Analyst)
Right
Anthony Gurnee (CEO)
... believe is quite sustainable. So we think that it will recover. It'll probably take a few more months. It may not get back to the levels that we saw a year ago, which in hindsight, looked like they were pretty artificial.
Michael Webber (Analyst)
Okay. Yeah, that was gonna be my follow-up. The unwinding of that Brazilian trade, you think that's kind of a gradual process throughout the back half of the year?
Anthony Gurnee (CEO)
Yeah, and it might, our guess would be that maybe we get back to the equivalent of 40 MRs employed, where it peaked at kind of 50.
Michael Webber (Analyst)
Okay. Okay, that's helpful. Just kind of on a high level, you know, it's been a tough run from a rate perspective in the space for a while. Asset values have actually held up exceedingly well, all things considered. And when we look at cash-on-cash returns or unlevered IRRs or whatever, you know, kind of pick your metric in the space, it seems like they've been unsustainably low for quite a while now. And when you just look at, like a, you know, $35 million-$36 million print on a prompt MR versus where term charter rates are, it seems as though something should give.
Given the catalyst that you kind of laid out in your deck, kind of heading into 2019 and 2020, it seems like there, you know, the speculative bid in the space makes it unlikely we see asset value downside from here, but the more we kind of, you know, print red ink, I guess the more likely that becomes. I guess, when you think about managing the business and think about, you know, you think about opportunities laid out in front of you, how do you... how do you think about that? How do you justify kind of the returns that you're seeing in the market right now with where asset values are? Is it simply just something that you would kind of stay away from for now?
I just, you know, maybe, you know, something you would probably stare at all day, or at least when you're looking at opportunities in the space, how do you think that ultimately resolves itself?
Anthony Gurnee (CEO)
It's a good question, and you know, our view is that the current rate levels are not really sustainable or will be sustained, that they will improve. And when we think about you know, investment returns, we think about rate you know, rate forecasts going into the future, obviously. So, I think the only factor that today's market environment might have on a purchasing decision would be on sustainability. Can you generate enough cash flow to service debt at a certain level, et cetera? So we actually think it would be an excellent time to be buying ships.
There's not a lot available in the more modern eco-design kind of frame, but in terms of the slightly older, you know, Japanese or even conventional Korean ships, they're actually down to fairly attractive levels. And there's a bit more activity there, so those would be very good investments. You know, obviously, against current levels, you know, clearly not, but I don't think, I think any of us are in this business to kind of rely on these kind of levels going forward.
Michael Webber (Analyst)
Right.
Anthony Gurnee (CEO)
So, you know, I think another interesting point to make is that it's very unlikely we're gonna see any new building activity at these levels, for all the reasons you mentioned, and that the prices that yards are asking, which are effectively their breakeven, are up. They're high. They're kind of $35 million-$36 million, meaning that the fully delivered cost on a ship is more like $37 million. That's way beyond anybody's, you know, desired cost structure, you know, in the industry at the moment, so.
Michael Webber (Analyst)
Right. Right. It's an interesting framework. We probably would have and probably did call it unsustainable, you know, 18 months or 2 years ago, and it's kind of persisted longer than I think anyone expected. When you mention the slightly interesting, you know, interesting value props, slightly older, I assume you're talking 3-7 years on the Korean and Japanese build MRs?
Anthony Gurnee (CEO)
Or even, you know, we bought one last year that was, at the time, nine years old, and, you know-
Michael Webber (Analyst)
Okay.
Anthony Gurnee (CEO)
Excellent price, and it's probably the best performer in our fleet right now, you know, in terms of returns on capital, for that very reason. So, but you have to be picky. A lot of these ships have been, not well maintained through their lives.
Michael Webber (Analyst)
Sure.
Anthony Gurnee (CEO)
If you get a well-maintained ship at a good price, it'll prove to be a very good investment.
Michael Webber (Analyst)
Great.
Anthony Gurnee (CEO)
So, yeah, we think it's just a lack of trading liquidity in the market, and a lack of sustainability at current charter rates that's, you know, holding that back. But we also don't sense that there's an impending drop in the newer valuations, so.
Michael Webber (Analyst)
Right. Okay. Great. I'll stop there and turn it over. Thanks for your time, guys.
Anthony Gurnee (CEO)
Thanks, Mike.
Operator (participant)
Our next question comes from John Chappell with Evercore. Please go ahead.
John Chappell (Senior Managing Director)
Thank you. Good afternoon, Paul and Tony.
Anthony Gurnee (CEO)
John.
Paul Tivnan (CFO)
Hi, John.
John Chappell (Senior Managing Director)
If I can tie together some of the thoughts from the prepared comments and also your answer to Mike's question. I mean, obviously, the outlook looks incredibly favorable, but we've been disappointed, and a lot of us have been really early. So how do you think about offense versus defense? I mean, you've done the sale and lease backs, which seems to be somewhat of a defensive measure and obviously kind of shores up your balance sheet and adds another arrow to your quiver as far as liquidity is concerned. But you talked about the potential to add tonnage at attractive prices. So those, I guess, aren't necessarily mutually exclusive, but given the limited EBITDA and maybe continuation of that in the third quarter, there's not a ton of liquidity to be aggressive.
Are there other sale and leasebacks opportunities you're thinking about just in case this gets worse, or do you think now is the time to strike?
Anthony Gurnee (CEO)
Well, I think it is. I think that's a good description, John, of offense versus defense. And clearly, we're, you know, along with virtually everyone else, playing defense, and we're trying to play as well as we can by being very kind of measured in the way we assess and manage our liquidity and in particular, our debt cost. When we feel that we've got the resources and either available or in hand and we see opportunities, you know, that are meaningfully accretive to value, then, you know, we're interested. But it's a tough environment to play offense at the moment.
John Chappell (Senior Managing Director)
How would you gauge your current liquidity and ability to buy ships? I mean, is it still kind of a, in this stock price environment, in this kind of sentiment, macro headwind environment, is it basically ones and twos is all you can do at this point?
Anthony Gurnee (CEO)
I think so. Again, without, you know, without tapping a lot of capital, that's the case. Obviously, there, you know, there's the whole arena of M&A as well, but, you know, again, we've thus far never been presented with or developed an opportunity that was going to be meaningfully accretive to our shareholders. So, but, you know, we're, you know, we're always surveying those opportunities as well. You know, having said that, we did the Frontline acquisition a couple of years ago now. Arguably, that was too early, but if you look at what that did for the company incrementally, it was absolutely the right thing to do at the time. And in fact, if you age adjust what we bought those ships for, that still hasn't been matched in the market, so we're still happy with the transaction.
John Chappell (Senior Managing Director)
Right. I think also, just to be clear, even though the offensive initiatives may be somewhat limited, defensively, there really isn't any near-term liquidity issues, and you've already done a pretty decent job being proactive. But do you, do you think you would pursue other defensive actions, you know, just in case?
Anthony Gurnee (CEO)
Well, I mean, we're always monitoring and seeking. Quite frankly, we're looking to be opportunistically defensive in the sense that, you know, if we—you know, for example, we have a lot of dialogue going on in Japan on sale-leasebacks, and, you know, the three that we've done in that part of the world already were very attractively priced. They're 90%-95% advance, swapped into LIBOR. Today's levels will probably be around 3%, no covenant. So, you know, we are always looking for, you know, opportunities to tap into new attractive sources of capital, whether that's, you know, for defense or maintenance or, you know, perhaps building up a war chest is, you know, depends on the situation.
John Chappell (Senior Managing Director)
Okay. And then just a final one. It's not surprising to see the third quarter-to-date bookings on the MR, just given where that market's been, but the chemical market's a bit more opaque. And, you know, given what you've done in the first half of the year, 12, 13+, have 10.5. Is that a seasonal issue associated with the chemical quarter-to-date bookings, or is that, as you kind of alluded to before, just the MR market is really starting to pressure that segment as well?
Anthony Gurnee (CEO)
My guess is that it's really both. It's, I wouldn't call it seasonal, but, you know, I think that the coated chemical sector has definitely been impacted by product tanker rates. But at the same time, some of those ships, small as they are, they go on very long voyages, and so there's a front haul, back haul pattern to what they do. Not exactly seasonal, but so far, you know, we think it's got really to do with a combination of product tanker market impact and back haul versus front haul.
John Chappell (Senior Managing Director)
Okay. Thanks for the help, Tony.
Anthony Gurnee (CEO)
Thanks, John.
Operator (participant)
The next question comes from Ben Nolan of Stifel.
Ben Nolan (Managing Director)
Yeah, thanks. So you've, you've Tony, hit pretty well on some of the macro drivers that are moving things. One of the things that I thought was interesting in the quarter was that the Eco-mod vessels, in particular, outperformed the actually Eco-design ships. And I understand that a lot of that has to do with location and timing and everything else. But one of the things I had expected to see in a higher oil price environment is a real differentiation or a widening gap for those more fuel-efficient vessels like we talked about a number of years ago. Yeah, I don't know, are you seeing that happening? I mean, is the you know the higher price of fuel starting to again create potentially a two-tiered market?
Anthony Gurnee (CEO)
Let me try to answer that then in, in, you know, two parts. First of all, with regard to our Eco-mods versus Eco-designs, it is luck of the draw. The Eco-mods, you know, just did relatively well. But I think it's important to, you know, to point out that, you know, we call them Eco-mods for a reason, which is that they were already very fuel-efficient ships when we bought them, and we further improved them. And so they're actually not that much more. You know, they don't consume much more than the Eco-designs that we have, maybe one or two tons a day. So they, you know, I think that's a point worthwhile making.
The second thing generally is, yeah, I would imagine that there is probably more of a differential between some of the very high-consuming, kind of ten-year-old Korean, Chinese-built ships, compared to the more modern, fuel-efficient vessels. And you may not exactly see that in the results because it very much depends on the voyages and, you know, positioning east versus west, et cetera. But you know what, you know, the consumption differentials are, that could be upwards of, 6-8 tons a day, and the math on that's pretty simple.
Ben Nolan (Managing Director)
Okay. All right, that's helpful. And then for Paul, unless I'm mistaken, there wasn't any sort of explicit cost guidance for the third quarter in the presentation. Could you maybe give me any sense of where you might expect, you know, whatever G&A or OpEx to look like in the coming quarter?
Paul Tivnan (CFO)
Yeah, no, I can, I can run through the model. It was, it was actually in my script. So the depreciation and amortization in the third quarter would be $9.9 million. The interest in finance costs will be $6.5 million, and the OpEx is expected to be $16.4 million for the third quarter.
Ben Nolan (Managing Director)
Okay, great. Sorry, I must have missed it. All right, no, that's, that's helpful. Well, I... That, that pretty much does it. I think, again, I think kind of Tony kind of hit on the, the market-related things that I was curious about, so appreciate it.
Paul Tivnan (CFO)
Thanks, Ben.
Operator (participant)
The next question will be from Magnus Fyhr with Seaport Global. Please go ahead.
Magnus Fyhr (Managing Director and former Head of Maritime Research)
Yeah, good morning. Just one question on the capacity on the balance sheet to take on more of these sale-leasebacks. How much more do you think you have, and what level would you be comfortable with? You know, based on our numbers, it looks like the, you know, it's a, it's a pretty high level, right, in debt versus fleet value. So it'd be interesting to hear your thoughts.
Anthony Gurnee (CEO)
Well, I think the, you know, the important thing, Magnus, to point out there is that, without doing anything, we delever by about 4% a year. So effectively, by entering to sale-leasebacks, whether earlier the Japanese or more, more lately, the one that Paul described, we're effectively keeping our leverage at around 55%. So on that basis, given that we're being pretty disciplined on cost, we can keep doing these for a long, long time, if we choose to.
Magnus Fyhr (Managing Director and former Head of Maritime Research)
Okay. And just a question on the supply. I mean, do you—I mean, I think on the last conference call, we were talking about an inflection point here in 3Q, 4Q. Do you think, I mean, is there more structural oversupply, or do you think with the Brazilian, you know, market coming back, and that we see scrapping of about, you know, maybe 50 ships this year, that we should be in a balanced market? Or are you still confident that we'll get a recovery, or you think there's still more scrapping needed to get the market back in balance?
Anthony Gurnee (CEO)
Well, you know, we sound like a broken record, I'm afraid, but, you know, the fundamentals are compelling. You know, the global macro environment seems fine. I think that the pressure and the incursion from LR2s has been somewhat problematic, you know, for MRs. But in addition, you know, we're dealing with a really very large number of kind of one-time events, which, you know, in shipping, they come and go, and right now they're all here. So we're talking about Mexico, West Africa, Brazil, you know, a few other things that we didn't mention, but it's a lesser impact. But emerging economy, local currencies, combined with slightly higher oil prices, we think has held people off from, you know, purchasing for a while.
We also think that exports from your part of the world have been a little bit less, in part due to higher consumption domestically of gasoline. So there's a lot of these kind of factors at play right now, which seem to be all conspiring against us, but they don't feel like any of them are particularly long term, and that they will turn around, and at the same time, other similar type of activity or events will occur that'll swing the other way. So, you know, if you strip away the malaise and the kind of, you know, the pressure from the bigger ships, with the kind of oil market dynamics we've been talking about for a while,...
Combined with all these kind of accumulation of one-time events that we're facing just right now, or have, you know, that are kind of going away as we speak, you know, we think we're in very good shape. So you take those out, we've been in a very, in a very good market.
Magnus Fyhr (Managing Director and former Head of Maritime Research)
All right. Thank you. One last question. The IMO 2020 should be a big shot in the arm for the product tanker market. What are your clients saying as far as the refineries being ready to supply the fuel come, you know, 2020?
Anthony Gurnee (CEO)
We're not hearing much other than what we all read and kind of get from reports, to be honest with you. But it seems like there's a relatively passive approach still across the, you know, the refining and the oil industry in terms of responding to it. It's a bit wait and see. Clearly, there's gonna be a big run on gas oil initially. And that over time, when people figure things out, what's what, that'll transition to 0.5% ultra-low sulfur fuel oil blend, which will be... We think a lot of that is gonna be gas oil as well. So it'll go through a disruptive period, but it's the kind of disruption that almost everybody is gonna benefit from, so why would they do anything about it now?
Magnus Fyhr (Managing Director and former Head of Maritime Research)
Okay, thank you.
Operator (participant)
Once again, if you would like to ask a question, please press star then one. The next question comes from Fotis Giannakoulis with Morgan Stanley. Please go ahead.
Fotis Giannakoulis (Analyst)
Yes, hi, Tony. The rates, the spot rates are very low, and I'm trying to understand if this is an opportunity for traders to take some cheap tonnage and charter in some vessels. The Clarksons data do not show any time charter fixtures for quite a while, and I'm wondering if there is any activity and if this rates of around $13,000 that the brokers are quoting are real.
Anthony Gurnee (CEO)
There is a wide spread between what owners are prepared to accept as a rate and what charters are prepared to take. And that's resulting in a standoff. You would think that analytically it would be a very good time to charter in a lot of ships, but at the same time, nobody likes to lock in trades where they're basically losing money on day one.
I mean, you know, the more normal course of action is you wait until you've got specified trades or you know the market's at a level that you can make money on a TCE, for at least the first portion of the charter, and then the back half of it or the back part of it, is, has got a lower break even, and obviously, that would be reversed at the moment. So I, you know, I can understand why they're a little bit, reticent. But the other thing is that there are plenty of ships for them to charter. They're just doing it on a spot basis.
Fotis Giannakoulis (Analyst)
Okay, thank you. Is this something that you would consider it? You were talking earlier about being offensive versus defensive, and I was wondering if time chartering in tonnage would be a way to go, a midway between these two options?
Anthony Gurnee (CEO)
You know, it's a possibility, but I think our mindset right now is more in tune with the oil traders, that let's kind of wait and see.
Fotis Giannakoulis (Analyst)
And you mentioned earlier about the difficulties in the U.S., Brazilian trade and West Africa, and Mexico, of course. I was wondering how is the situation in other regions, like in the Mediterranean and in the Far East? Do you see any difference in activity there? And is this weakness that we see in the Atlantic Basin because of this, just because of Brazil and the rest of the world is doing better, or it's more the inventory stocking that is keeping the market so low?
Anthony Gurnee (CEO)
Fotis, that's a good question. You know, one thing that we haven't highlighted on this call yet, which I'm glad we now have a chance to do it, is the fact that the market east of Suez is actually quite healthy at the moment. The rates are up in the kind of low to mid-teens. And so, you know, on a world basis, we may be 10 or 11, but east is quite strong, so there's good activity there. And so it's really a matter of waiting to see these one-time events and that have impacted the Atlantic Basin, play themselves out. At the same time, a lot of tonnage is trying to find a way to go east.
And, you know, there's a fairly long line of ships heading east. So, you know, even on a global basis, markets tend to normalize over a several-month period. So that should actually help to even out the, you know, the global market.
Fotis Giannakoulis (Analyst)
And, given the fact that we already have a very heavy, heavy delivery from the crude tanker side, which it seems that they are putting some pressure on LR1s, and then there is a cascade to MRs. Is there a way that you can quantify the pressure that you get from the LR vessels and, or even the indirect pressure that the LR vessels get from the new buildings? How many cargos, how much of demand are we missing right now for the MRs because of the weakness on the crude side?
Anthony Gurnee (CEO)
Well, as I mentioned in the presentation, we think it's less than 1% for MRs. The reality is that because these ships are really just engaging in initial voyages or maiden voyages, you know, the overall impact is actually quite limited. So for example, so far this year, the first half of the year, I think it's Gibsons reported that three VLCCs carried diesel or gas oil on their initial voyages, but not with full cargoes, and it was only three out of 25 deliveries. So it's not like you have every V going into that business. Suezmaxes were carrying quite a bit, but the pace of Suezmax deliveries is way down.
More problematic for LR2s or Aframaxes, they're basically the same, where about 85% of all the LR2 Aframaxes delivering have done maiden voyages in CPP. However, if you assume that those are operating on a 40-45-day initial voyage, that actually works out to a little bit above 1% of the LR2s that are trading clean. So it's not a very big number. It certainly doesn't help, but it's not particularly devastating, we don't think. In terms of how much LR2 activity is taking business away from MRs, it's hard to quantify it, but it just doesn't seem like it's gotten any worse than it was in the first quarter.
Fotis Giannakoulis (Analyst)
Thank you very much, Tony.
Anthony Gurnee (CEO)
Okay.
Operator (participant)
Ladies and gentlemen, this concludes our question and answer session, and thus concludes today's call. We thank you very much for joining today's presentation. You may now disconnect your lines at this time. Take care.