Ardmore Shipping - Q3 2017
November 1, 2017
Transcript
Operator (participant)
Good morning, ladies and gentlemen, and welcome to Ardmore Shipping's third 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 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 the passcode 10111083. At this time, I will turn the call over to Anthony Gurnee, Chief Executive Officer of Ardmore Shipping. Please go ahead.
Anthony Gurnee (CEO)
Thank you, and good morning, everyone. Welcome to Ardmore Shipping's third 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 third 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 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 third quarter 2017 earnings release, which is available on our website. Now I will turn the call back over to Tony.
Anthony Gurnee (CEO)
Thanks, Paul. 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. Then we will highlight some of our recent value-creating activities, after which Paul will provide a fleet update and review our financial results, and then I'll conclude the presentation and open up the call for questions. So turning first to slide five, on our performance and recent activity. We're reporting EBITDA of $10.1 million and a net loss of $4.6 million, equating to a loss of $0.14 per share for the third quarter. This compares to a net loss of $0.06 per share for the prior quarter. We delivered satisfactory chartering results in the third quarter, despite the difficult operating environment.
Spot and pool MR rates averaged $12,970 per day, a decrease from $13,765 in the second quarter. MR spot rates during the quarter were impacted by reduced cargo volumes resulting from refinery outages caused by Hurricane Harvey, as well as scheduled maintenance. We believe the near-term outlook is positive, with recovering U.S. Gulf refinery output, rapidly rebalancing global inventories, and the onset of a typically stronger winter period. We continue to execute on our long-term strategy, focusing on operating performance, cost efficiency, and other steps to improve ROIC. On that note, we're pleased to announce that we've agreed to acquire a high-quality, 2008-built Japanese MR product tanker, an identical sister to our Sealeader and Sealifter, at an attractive price, which equates to a 30% discount to current new building prices on an age-adjusted basis.
We'll talk more about that a little later. We also recently completed an attractively priced $15 million revolving credit facility, further enhancing our financial flexibility, and we're 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 third quarter. Turning to slide six for a quick look at our fleet profile. There's been no change to the fleet since our last earnings call, but as a reminder, this is a high-quality, modern, fuel-efficient fleet, all built in top-tier yards with significant earnings power and a rising market. Now to slide eight on the product tanker market. As noted earlier, MR product tanker rates were softer in the third quarter. Nevertheless, we believe the outlook for the year-end and into 2018 is positive for a number of reasons.
U.S. Gulf refinery throughput is increasing meaningfully following a heavy period of maintenance and outages associated with Hurricane Harvey, which should contribute to a recovery in Atlantic Basin MR ton-mile demand. Additionally, refinery margins in the Atlantic Basin are now at their widest levels since 2013, which should further incentivize elevated refinery runs. Global destocking of refined products was higher than expected during the quarter, according to PIRA, bringing commercial stocks 70% of the way down from their peak levels in 2016 back to 2014 levels. And with the market now closer to being in balance, we believe more normal oil trading activity could resume soon, giving a further boost to MR ton-mile demand. And as a final point on short-term factors, regional inventory imbalances, particularly for middle distillates, should result in increased trading activity as product is shipped over longer distances to points of consumption.
Looking at the longer-term factors, underlying MR ton-mile demand growth remains strong. Oil demand growth has been revised upwards for 2017 to 1.6 million barrels a day and is expected to rise another 1.4 million barrels a day in 2018. The resulting growth in cargo volumes, regional product slate imbalances, emissions regulations, and increased trading complexity all continue to drive healthy demand growth at what we believe is around 5% per annum. Turning now to supply. The order book is at a historical low of 4.1%, and most notably, supply growth is continuing to accelerate. So far this year, 55 MRs have delivered and 14 have been scrapped, and we expect eight vessels to deliver for the remainder of 2017 after taking into account slippage.
As a consequence, we anticipate net fleet growth for 2017 of 1.8%, then 1.1% or less in 2018, which we believe will be an unprecedentedly low level. Meanwhile, shipyard capacity remains very constrained, with only nine active MR yards, down from 20 or more in 2008. The ability of these remaining yards is further constrained by limited access to capital and refund guarantees. Putting this all together, the fundamentals of supply and demand are very compelling. Anticipated demand growth of 5%, combined with supply growth of 1.1% or less in 2018, should significantly tighten the market and lead toward a full recovery. Turning now to slide nine on the chemical tanker market.
Charter rates remained flat in the third quarter for chemical tankers, with ours averaging 10,700 per day. The cargo split on our vessels has changed. It's weighted now heavily toward chemicals and veg oils, reflecting the broader weakness in the CPP market. In total, chemical cargoes generated 12% of revenues in the quarter, which is higher than normal. Overall, the chemical tanker market remains soft. Most notably, volumes of methanol, which is an important commodity chemical, shipped by chemical tankers, fell in the third quarter from the combined impact of the U.S. production disruptions from Hurricane Harvey, as well as other Asia Pacific outages. Turning to veg oil trades, Asian palm oil cargoes, as well as South American soybean exports, remained weak during the third quarter, limiting triangulation opportunities.
But looking ahead, the demand growth is nevertheless positive. The outlook is positive. We expect continued demand growth driven by improving global GDP, as well as the build-out of large-scale export facilities in the U.S. Gulf and Middle East. Additionally, improving product tanker market conditions will boost demand for chemical tankers trading in CPP, taking up more of their capacity than at the moment. Underlying fundamentals remain strong, with seaborne chemical trade growth expected to be around 5% per annum, which is comparable to MRs, as we discussed. Looking at supply for chemical tankers, the order book overall is currently at moderate levels, but on top of that, there continues to be a difference between stainless and coated-type tankers.
The total order book is 9% of the existing fleet, but within that, the percentage on order for stainless is announced at 13.5%, whereas for coated tankers, the amount is only around 5.5%. Net of scrapping, we expect fleet growth of about 4.5% in 2017, and around 5% in 2018, broadly in line with demand growth. But again, the outlook is more favorable for coated tankers, where the dynamics are more similar to MRs, and we expect TCE performance for our six coated chemical tankers to follow the MR market. Turning now to slide 11, we'd like to highlight some aspects of our financial policy, as well as recent value-creating activity.
The first point to make is that we have a clear policy of putting financial strength and efficiency first. We're maintaining low leverage, currently at 53%, along with strong cash balances in order to weather a challenging market. To this end, we recently completed an attractively priced $15 million revolving credit facility, further enhancing financial flexibility. We're maintaining low earnings and cash flow breakeven levels, in part through transactions such as Japanese tax leases that sustain our low cost of capital. The second point is that we remain very focused on operating performance, cost efficiency, and further improvements to ROIC. We're always working on operational enhancements in our chartering and post-fixture activities, and ways to further reduce our overhead cost per vessel, which we believe are already the lowest in our peer group.
It's also worth remembering that in June 2016, we acquired six MRs, eco-designed MRs, setting a market low, which we believe is still unmatched and has significantly strengthened our earnings power. In that same vein, we've recently agreed to acquire a 2008-built Japanese MR at a compelling price equating to 30% below a newbuilding equivalent level. This value, we believe, is the same level, as used by analysts for our NAV estimates, so it does not represent a new low, but rather a continuation of current levels, and is a reminder of how cyclically low are the current valuation estimates for Ardmore stock.
The acquisition is subject to completion of financing for the vessel under a Japanese tax lease, which we've done in order to preserve cash, but also to maintain our low breakevens and afford very high project-specific equity returns. While this is just a one-ship transaction and arguably not a needle mover, we believe it does have the potential to create meaningful value. For example, in an $18,000-a-day market environment, the EPS accretion from this one vessel alone over the entire fleet would be 5%. We believe this acquisition reflects our disciplined approach to capital allocation, and we will continue to seek opportunities such as this, whether large or small. And with that, I'll hand the call back to Paul to just provide an update on our fleet and our financial performance.
Paul Tivnan (CFO)
Thanks, Tony. Moving to slide 13, we will run through the fleet days. Starting with the chart on the right-hand side, you will see that our revenue days will increase by 13% for the full year 2017 to 9,761 days. We had one dry dock in the third quarter for the Ardmore Seamaster, and we expect to have 20 dry dock days in the fourth quarter. Turning to slide 15, we'll take a look at our financials. As you will see on the second line, we report a net loss of $4.6 million or $0.14 per share for the third quarter. Total overhead costs were approximately $3.9 million in the third quarter, comprising corporate expenses of $3.2 million, and commercial and chartering expenses of $700,000.
As mentioned before, in many companies, the commercial and chartering costs are incorporated into voyage expenses, which means that our corporate cost is the comparable overhead. Our full-year corporate costs are expected to be $12.9 million, which works out at $1,300 per ship per day across the 27-ship fleet. Overall, we expect total overheads, as corporate and commercial, to be approximately $3.8 million for the fourth quarter of 2017. Depreciation and amortization for the third quarter was $9.4 million, and we expect depreciation amortization in the fourth quarter to be approximately $9.7 million. Our interest and finance costs were $5.4 million for the quarter, comprised of cash interest expense of $4.8 million and $650,000 of amortized deferred finance fees.
We expect interest and finance costs in the fourth quarter to be approximately $5.6 million, which includes amortization of deferred finance fees of $650,000. Moving to the bottom of the slide, our operating costs for the quarter came in at $16.3 million, or 6,538 per day across the fleet, including technical management fees. OpEx for Eco-design MRs was 6,341 per day for the quarter and 6,190 for the year-to-date. Our Eco-mod MRs came in at 7,175 per day for the quarter and 6,583 for the year-to-date, while the Eco-design chemical tankers came in at 6,392 for the quarter and 6,330 for the year-to-date.
The differences between the quarter and year-to-date numbers are timing related. Looking ahead, we expect total OpEx for the fourth quarter to be approximately $16.6 million. Turning to Slide 16, we will take a look at charter rates for the quarter. Starting on the left, overall, across the fleet, we saw a decline in charter rates, with the fleet earning an average of $12,376 for the quarter, up to $12,996 in the second quarter. Looking at the various ship types, we had 15 Eco-design MRs in operation, which earned an average of $12,938 per day for the quarter, while the 6 Eco-mod MRs earned $12,534 per day.
The six Eco-design chemical tankers earned an average of $10,768 per day for the quarter. Looking ahead to the fourth quarter, as of today, our spot MRs are earning approximately $12,500 per day for voyages in progress, with 35% of the days booked, with upside potential for the remainder of the quarter. Meanwhile, the chemical tankers are currently earning approximately $12,000 per day, with 35% of the days booked for the quarter. Overall, we are satisfied with our chartering performance, and our fleet continues to perform well in spite of a softer charter market. On Slide 17, we have our summary balance sheet, which shows at the end of September, our gross debt was $452 million. Leaving our gross leverage at 52.8% at the end of the quarter.
It's also worth pointing out that our leverage on a net debt basis is just over 50%. Turning to Slide 18, as I mentioned, our balance sheet remains strong, and we have cash and net working capital of $73.5 million at the end of the quarter. And as Tony mentioned, we completed a $15 million revolving credit facility in October, further enhancing our financial flexibility. Finally, as you all know, all of our debt is amortizing, with principal repayments of $44 million annually. We are continuing to delever by approximately 3% a year and strengthen our balance sheet. With that, I would like to turn the call back over to Tony.
Anthony Gurnee (CEO)
Thanks, Paul. To sum up, then, the outlook is positive for year-end and into 2018 as normal trading activity resumes on the back of increased refinery throughput, as well as global product inventories heading back to normal levels. Underlying fundamentals remain strong. MR ton-mile demand growth is estimated to be around 5%, underpinned by strong oil consumption growth, export-oriented refinery capacity expansion, and increasing trade complexity. At the same time, supply growth continues to decelerate. The order book remains at historical lows, resulting in net fleet growth of approximately 1.8% in 2017, and anticipated to be 1.1% or less in 2018, setting the stage for a significant rebound in charter rates.
We're completing a vessel acquisition at a compelling price, which we estimate is 30% below the age-adjusted new building equivalent, and which we also believe is in line with currently depressed NAV estimates, signaling value not just in the acquisition, but also in the current company share price. We're continuing with policies oriented toward maintaining financial strength through low leverage and healthy cash balances. To this end, we completed a $15 million revolving credit facility in October, further enhancing our financial flexibility. Overall, with our modern fleet, our industry-leading cost structure, Ardmore is well positioned to take advantage of a charter market recovery and to generate strong returns and meaningful value creation for our shareholders. And with that, we're now pleased to open up the call for questions.
Operator (participant)
Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you are 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. Our first question comes from Doug Mavrinac with Jefferies. Please go ahead.
Doug Mavrinac (Managing Director and Global Head of Maritime Investment Banking)
Thanks, Jeffrey. Good afternoon, guys. I just had a few follow-up questions for you all this afternoon, with the first one being on the market. So, Tony, in your comments, your prepared remarks, and then also your summary, you know, we're all sitting here, you, us, everyone, kind of waiting and looking for inflection points. And you know, clearly the rate environment in the CPP market hasn't changed much between 3Q and 4Q. But when we talk about, you know, declining global inventories, when we talk about U.S. refining capacity returning or even, you know, the positive impact that the widening spread is having on refining margins, you know, are those still things on the near-term horizon?
or have we seen any sort of indications in terms of activity levels changing, like, you know, regional chartering activity here?...some of these things are actually starting to happen, or are they still kind of on the come, so to speak?
Anthony Gurnee (CEO)
Yeah. So, Doug, to answer that first question, we are looking very, very closely at what's happening in the U.S. Gulf. And what we're seeing is an increased cargo loading count week on week. We've also estimated that we think that the export volumes out of the US are arguably halfway back to where they were in July. So, you know, we do think that there's something underway in, you know, with the U.S. Gulf loadings, which is critically important to the MR market. In addition, the tonnage list is shrinking as well. So, you know, that's probably the most important item, you know, at the moment. The reality is that East of Suez rates are actually quite strong.
They're sort of $14,500-$15,000 a day. That's in part because there are shipments into the Atlantic Basin at the moment. But, you know, as the U.S. Gulf comes back fully, not just with refinery throughput, but also export volumes, we think that the Atlantic Basin will recover rapidly.
Doug Mavrinac (Managing Director and Global Head of Maritime Investment Banking)
Got you. Very helpful, Tony. Thank you. And then I would imagine, just as a follow-up, that any sort of arb traded or arb trading would be kind of additive to the base business, kind of getting back to the normalized levels?
Anthony Gurnee (CEO)
Yeah, I think, I think the reality is, at the moment, there's just a lack of availability of cargoes for export, and, but they're finding ready, ready markets when they're, you know, when they are available.
Doug Mavrinac (Managing Director and Global Head of Maritime Investment Banking)
Got it. Thank you. Then transitioning slightly over to the chems market. So, you know, in your commentary, and as we saw in rates, you know, not much change between 2Q and 3Q. But yet, when we look at, you know, days secured thus far in 4Q, I think you have, you know, 35% at $12,000 a day versus, you know, less than $11,000 in 3Q. So, you know, when we talk about, you know, improving global GDP and expansion of petchem plants and whatnot in the US and the Middle East, you know, are we starting to see that happen? Is that what's behind the improvement in earnings there?
Anthony Gurnee (CEO)
Well, I think, I think in reality, there's some timing difference on, on fairly long voyages in terms of backhaul versus fronthaul, which would actually suggest that, that you know, on a more, on, like, on a load-to-load basis, the results in the third quarter might have actually looked better for chemical tankers. So, so in reality, the chemical tanker market is holding up relatively well. We think that the MR market's got a lot of near-term upside, perhaps more than the chemical sector. But, you know, we, you know, we think that the biggest factor that's going to have an impact on the chemical market, at least for our type of ship, over the next sort of, you know, three to six months, is going to be greater, greater activity in the CPP trades.
Doug Mavrinac (Managing Director and Global Head of Maritime Investment Banking)
Got it. Got you. Very helpful. And then, you know, obviously, you guys announced an acquisition during the quarter. And it kind of, you know, leads me to thinking about just kind of, you know, how you think about, you know, growing strategically. I mean, we know that you guys did a transaction, I guess, the previous summer that was sizable. And when we look at, you know, your lack of CapEx commitments, when we look at what charter rates could do to your earnings and cash flow going forward, you know, in our models, we have you deleveraging fairly quickly. So how do you balance, you know, improving financial strength with what could be some very attractive opportunities in the near term, given the outlook?
Anthony Gurnee (CEO)
Well, that's just it. I mean, I think we have to reconcile the two, and that's what we focus on. But we're constantly on the lookout for good deals, and when we see exceptional deals, we feel like we have to move on them. So there are further opportunities that are, you know, comparable to, we think, to the one we just did. There might be other larger-scale opportunities, but we have to balance that against, you know, maintaining our financial strength and getting the timing right.
Doug Mavrinac (Managing Director and Global Head of Maritime Investment Banking)
Got it. Got you. Very helpful. That's all I had. Thanks for the time, guys.
Anthony Gurnee (CEO)
Thanks, Doug.
Operator (participant)
Our next question comes from Jonathan Chappell with Evercore. Please go ahead.
Jonathan Chappell (Senior Managing Director in Equities)
Thank you. Good afternoon, guys.
Anthony Gurnee (CEO)
Good afternoon.
Jonathan Chappell (Senior Managing Director in Equities)
Tony, following up on that last question, and let's talk about when, as opposed to if. So let's say... You said you're focusing on your overhead pretty closely, but you've opened a bunch of chartering offices, I think, in Singapore and in Houston. So as we think about what Ardmore could become, you know, the overhead that you have today, scaled over 28 ships, 28, once you complete this, this next acquisition, how big could you get, you know, fleet-wise, without adding significant overhead?
Anthony Gurnee (CEO)
Well, I mean, for example, we could probably add another 10 ships with fairly nominal incremental overhead, maybe $1 million or something. So our, you know, we do really watch our overhead per ship per year or per day, if you want, very carefully. And we, you know, we're trying to maintain it at a low level, but the real opportunity is to drive it down through growth because the incremental cost is very nominal. On the chartering side, we measure our performance there on a cost basis as a percentage of pool fees. So at the moment, we're at about 60%. So if we had all our ships out in pools, we would be spending that much more. At the moment, we're at 60% of that number.
Again, with scale, we can drive that number way down.
Jonathan Chappell (Senior Managing Director in Equities)
Mm-hmm. Okay. And then also on the chartering side, one thing that kind of stood out to me, both in the presentation, the press release, is that the Eco-mod spread to the Eco designs has narrowed significantly over the last couple of quarters. Is that a function of fuel not being as expensive as it was maybe a couple of years ago? Is that just a timing thing? Or is there some reason we should be thinking that those two should be trading in a much tighter range than they have been historically?
Anthony Gurnee (CEO)
No, I, I think we're dealing with a fairly small sampling size, and so, you know, the, you know, the reality is that there's no reason to disbelieve a theoretical differential, which should be kind of $500-$1,000 a day. Anything else is really just timing difference, and the, the differential is, of course, fuel efficiency, but also a bit more commercial flexibility of the newer ships.
Jonathan Chappell (Senior Managing Director in Equities)
... Okay, and then finally, Paul, to the extent that you can talk about it now, I guess it's still probably under negotiations, but can you kind of help us through some of the math involving the Japanese leasing? Should we think about prior transactions as a base, or what kind of guidance can you give to that?
Paul Tivnan (CFO)
Yeah, I mean, that's, that's a fair question. I think it's, as, as you mentioned at the outset, it is still under negotiation and subject to completion of financing. But in terms of indicative pricing in terms of the acquisition price of the ship, it's comparable to previous ship acquisitions. And as we highlighted in the press release, about 20% discount on current newbuilding prices, age adjusted. And then in terms of the financing, it will be the previous transactions that we've done. Capital leases on the Sealeader, Sealifter will be very similar in terms of advance rate and pricing, et cetera.
Jonathan Chappell (Senior Managing Director in Equities)
Okay. I imagine you wouldn't have disclosed this, even though it's still subject to the finalization, if you weren't highly confident that pretty close to the finish line?
Anthony Gurnee (CEO)
That, that's correct. I mean, you know, we can't, we can't say 100%, but it's, you know, we, we've done these before in Japan, and, and we've got no reason to believe it won't go through.
Jonathan Chappell (Senior Managing Director in Equities)
Okay. Thanks, Tony. Thanks, Paul.
Paul Tivnan (CFO)
Thanks, Jonathan.
Operator (participant)
Our next question comes from Ben Nolan with Stifel. Please go ahead.
Ben Nolan (Managing Director and Senior Equity Research Analyst)
Yeah, thanks. Just following up on the acquisition, I think we've seen a clear preference among particularly the public owners for owning or buying or acquiring much more modern assets. Obviously, this most recent one is a bit older, and I appreciate that it's a sister ship to several of the ones that you already have. But could you maybe walk through how you think of, you know, the things that you're looking at and your opportunity set and how you weigh the age of the asset in terms of preference or if it matters at all?
Anthony Gurnee (CEO)
No, that's a good question. I think it's worth highlighting that we do screen virtually every secondhand Japanese ship that comes out for sale. We've got some, you know, particular preferences regarding design, et cetera, but also the condition of the ship is critical. That has a big impact on OpEx. This one not only is identical to the other two that we own, but it's also in the same condition. Those other two ships are arguably the best performers in our fleet. Now, she is on the older side, but she's got a long life ahead of her, and we believe that this ship will perform like the others that we have already. That's why we moved on this one in particular.
So, you know, it's not that it's the only one in the last two years that we could have bought, but we just, you know, the stars aligned in terms of the price, the lease opportunity, and the condition of the ship. The reality is, if you look at the... Now, granted, the newer ships generate greater cash flow because they earn a bit more in the market. The OpEx is a little lower. Arguably, that's not the case with this one, but generally speaking, that's the case. However, the invested capital is much higher. So in the end, if you- in a sort of reasonably normal kind of market, the returns on invested capital are about the same.
However, the older ships, because you essentially get the same dollars per day increase in a rising market for both, the fact that this has a lower invested capital level means that the upside is much more, is more significant. So that's why we've, in the end, balanced the two. So we're very happy to pick up the Frontline ships a year ago, and we're equally happy to pick this one up.
Ben Nolan (Managing Director and Senior Equity Research Analyst)
Right. Although I guess the counter to that argument would be that you have a shorter period of time in which you need that inflection point in terms of a market improvement in order to capitalize on that increased leverage with respect to the rate of return. So is this at all, and obviously you're a positive on the market, but is it indicative of sort of the timing that you expect things to improve? I mean, is this a, you know, a time when only holding older assets is, in your view, kind of the optimal scenario?
Anthony Gurnee (CEO)
Well, I'll make a slight joke about this, and maybe I shouldn't, but, you know, when you go to those sushi restaurants with the conveyor belt, that's a little bit what it's like investing in our business. Things come along, and you look at it, and you decide you're going to take it off the belt or not. This one, with the lease at mid-cycle rates, we're not talking about $18,000 a day, quite a bit lower. Mid-cycle rates generates a 30% return on equity. So yes, we took this one off the conveyor belt.
Ben Nolan (Managing Director and Senior Equity Research Analyst)
Okay. And then, and then just lastly, and you, you'd mentioned that, refinery utilization in the Gulf Coast is the highest it's been since 2013. Obviously, 2013, and the first part of 2014 was relatively lackluster, and then we went to a, you know, a really healthy market or a period of time, in the back half of 2014 and 2015. Is this current market environment, in your view, something similar to that? I mean, are we... Is the opportunity set at the moment similar to what we saw in that, in that environment, in your view?
Anthony Gurnee (CEO)
Yeah. So in mid-2014, rates, rates were low. You know, we remember it well. It was a difficult time, and nobody knew that the price of oil was going to collapse in October. But, but, but I remember at the time, it was characterized by relatively short distance voyages. You didn't have a lot of long-haul arb trading happening, and everything had become fairly compressed and, and, and stable in, in our business, and that's a little bit the way it's felt now.
I think that that's been exacerbated by the, you know, what we all thought was going to be the positive impact of Hurricane Harvey, turning into a very negative where, you know, I mean, the real issue there is that, for an extended period of time and just kind of, we think, ending now, a lot of the barrels being produced in the Gulf were being held back for domestic needs and therefore not available for export. So I think a relatively subdued oil trading environment, combined with that whole backlog of cargoes out of U.S. Gulf refineries, has, you know, really created all the short-term pain that we've been experiencing.
Ben Nolan (Managing Director and Senior Equity Research Analyst)
Okay. But in terms of sort of your looking into the future, the opportunity set is, you know, similar or, you know, at least not too different than what we saw moving into 2015. Is that fair?
Anthony Gurnee (CEO)
Yeah. Again, again, we don't, you know, we don't know today what the price of oil is going to do in a few months, and that was the situation in mid-2014. But I will say that, you know, we spent a lot of time, you know, on the call, kind of laying out all the factors that we see coming into play now. Refinery utilization, you know, back up and heading probably back up to the 95% level. You know, a ramp up in export volumes. You know, very, very low middle distillate stocks in the Atlantic basin. You know, global oil, you know, very interesting report this morning from PIRA.
They're even more bullish than they were in their prior report, suggesting that they think that the oil market is going to be back into balance with regard to inventories at the end of this year. They have a fundamentally different view on what represents normal levels than the IEA does, but it makes for interesting reading. Our view has always been that when inventories get down to more normal levels, then regional imbalances and shortages of product emerge and drive oil trading activity, which has a big impact on ton-mile demand. All of those factors are adding up, and then underneath that, you've got the very, very strong fundamentals.
So I think first we see, we believe, we hope we'll see a good, good seasonal run this winter, and then, and then let's see where the fundamentals take us after that.
Ben Nolan (Managing Director and Senior Equity Research Analyst)
Right. Okay, perfect. And, and I don't want to deliberate too much further, but I guess what I'm asking is, you don't see anything that could potentially, at least as far as you can see, stand in the way of rates, possibly a point of getting back into the high teens or twenties. I mean, that's... There, there's nothing that says that's off the cards, right?
Anthony Gurnee (CEO)
No. No.
Ben Nolan (Managing Director and Senior Equity Research Analyst)
Okay, great.
Anthony Gurnee (CEO)
May, can I maybe add one thing on-
Ben Nolan (Managing Director and Senior Equity Research Analyst)
Sure.
Anthony Gurnee (CEO)
Yeah, just to add one point on this I think is worth mentioning. You know, I think a lot of analysts, whether industry or otherwise, make the point that they don't believe that you can have a strong MR market without a broad, you know, a broad tanker market recovery. And, you know, I take that point to a degree. However, I think the correlation analysis that they do indicates that there is a fairly tight correlation, at least on a longer-term basis. But the reason for the correlation is that the sectors are driven by fundamentally the same factors most of the time. However, this time, we think that the supply outlook for MRs in particular is so different from the bigger ships, that you could really see a detachment.
You know, we're not saying that we're going to see $30,000 a day with MRs when these are trading at $20,000, but you could see substantially better performance on a kind of a capital return basis with MRs, while the bigger ships are still in a recovery mode.
Ben Nolan (Managing Director and Senior Equity Research Analyst)
Okay. That's helpful. Thanks.
Operator (participant)
Our next question comes from Magnus Fyhr with Seaport Global. Please go ahead.
Magnus Fyhr (Managing Director and Senior Shipping Analyst)
Yeah, thank you. Just a follow-up question on this acquisition. You mentioned a 30% ROE at mid-cycle rates and 5% accretion at $18,000 a day. You know, I share your positive outlook for the MR market, but, you know, $18,000 seems a little high. I think we've only been over that one time in the last 8 years. So, would you give some rationale using $18,000 for the accretion?
Anthony Gurnee (CEO)
Well, I think we were at or above $18,000 for about a year and a half, right?
Magnus Fyhr (Managing Director and Senior Shipping Analyst)
Right.
Anthony Gurnee (CEO)
You know, from late 2014 up until early 2016. So, you know, that was a market that nobody believed in, but the rates were very strong. I think one quarter, we tracked $25,000 a day?
Magnus Fyhr (Managing Director and Senior Shipping Analyst)
Yeah.
Anthony Gurnee (CEO)
On the MR on the Eco-design MR. So, you know, it's not like that's a blip that we've seen and, and kind of went away, you know, for a long time. And of course, we all have to remember back that, you know, this, this is a long cycle business, and, and rates were above $18,000 a day for the better part of three or four years in the mid-2000s. So, you know, I, I'm not... You know, we, we think that's a perfectly legitimate benchmark to point out. And, you know, the, the mid-cycle rate that we're thinking of is probably $15,500 a day.
And, you know, you just, it's simple math on the acquisition price, the resulting depreciation cost, OpEx, dry dock costs, incremental overhead, that's the number that you arrive at.
Magnus Fyhr (Managing Director and Senior Shipping Analyst)
Right. So I mean, the time charter rates are definitely lower for over the next 12 months, so you wouldn't be surprised to see these rates develop in, in 2018?
Anthony Gurnee (CEO)
Well, we're sitting at an interesting point where, you know, we think that we're coming out of a really bad, you know, period, driven by very specific factors, oil market dynamics, meaning the global inventory destocking, and then the lack of export-oriented cargoes, lack of export cargoes out of the U.S. Gulf Refinery Complex, and into a period which is typically stronger in the winter months, backed up by a whole bunch of other factors that we described earlier. So, you know, on a short-term seasonal basis, we're feeling pretty good about the outlook. And I know we've been singing the same tune for a while, but, you know, in shipping, it's, you know, there's something mathematical about demand growth in around 5% versus supply growth, well, under 2%.
Magnus Fyhr (Managing Director and Senior Shipping Analyst)
All right. Thank you, Tony.
Anthony Gurnee (CEO)
Yep.
Operator (participant)
Our next question comes from Noah Parquette with JP Morgan. Please go ahead.
Noah Parquette (Senior US Equity Research Analyst)
Thanks. Yeah, a lot of the market questions kind of dealt with that. I was just curious, do you guys have plans to do an eco mod modification of the new vessel? And just remind me how much that costs.
Anthony Gurnee (CEO)
Well, yeah, we will. The cost is not significant, but we don't typically disclose it. But it will involve modifications to the propeller, to on-board monitoring, and when we go in for the first docking, we'll do some other work to it as well. But yes, we will. You know, as always, we tinker with the ships to maximize their fuel efficiency and their cargo flexibility.
Noah Parquette (Senior US Equity Research Analyst)
Okay. But that doesn't include the ballast water treatment system, right?
Anthony Gurnee (CEO)
No, that, that's the one thing that we were happy to delay as long as possible, along with everyone else. You know, we, we believe very strongly that, that we wanna be in the forefront of, of implementing new regulations. But, but that's one that, in fact, the, the technology, in terms of the systems, hasn't even really been very well worked out yet, so, that's still a bit in flux.
Noah Parquette (Senior US Equity Research Analyst)
Okay, thanks.
Operator (participant)
Our next question comes from Fotis Giannakoulis with Morgan Stanley. Please go ahead.
Fotis Giannakoulis (VP and Executive Director in Shipping Research)
Yes, hi, Tony. We have seen the chartering activity, as you mentioned, increasing in the U.S. Gulf the last 2 quarters-3 quarters. Still, we haven't seen the charter rates responding. I assume that this is because of the accumulation of vessels from the previous time. Can you give us your picture of how many vessels they are sitting right now, available or in the U.S. Gulf? What is the oversupply, and how quickly do you expect that this will go away?
Anthony Gurnee (CEO)
Okay. So I think what you were asking is basically cargo volumes over the last two or three quarters. You know, as I mentioned, volumes were actually pretty high in July. I don't have the numbers right in front of me here, but they came down significantly, maybe 50%. So as a consequence of Hurricane Harvey, and we think that recovery, not of refinery throughput, which is right back up again, but the cargoes, you know, being loaded, is probably halfway to full recovery. As a consequence of that lower volume, and also with ships coming in from the east into the Atlantic Basin, that has created an overcapacity.
So, you know, in terms of how many ships are waiting or are kind of one week out, ready to load, the number right now is maybe 15. That's down quite significantly. We think that the volume of, like, week on week, the volume of export cargoes last week was up 35% from the prior week. So, you know, these are all very, you know, very bullish signals. Rates are moving up, a little bit, in, you know, in, for TC14, but there hasn't been a really big move yet.
Fotis Giannakoulis (VP and Executive Director in Shipping Research)
Thank you, Tony. And, I assume that, when these 15 vessels disappear from the market as refinery utilization picks up, then we can see some meaningful changes in rates. I was wondering if there are any other catalysts, for example, if you see the trading activity to pick up now that oil is at slightly higher levels, or if you see voyages that weren't apparent three months ago?
Anthony Gurnee (CEO)
You know, again, I think we're waiting, waiting for liftoff, basically, when it comes to oil trading activity. But again, given, given the decline in global inventories, and, and the greater activity with, with refineries, et cetera, you know, we, we think that's, that's gonna really kick up this winter.
Fotis Giannakoulis (VP and Executive Director in Shipping Research)
Thank you very much, Tony.
Anthony Gurnee (CEO)
Okay.
Operator (participant)
Once again, if you have a question, please press star then one. Our next question comes from Chris Snyder with Deutsche Bank. Please go ahead.
Amit Mehrotra (Transportation and Shipping Analyst)
Hey, guys, it's Amit here. Hope you're doing well. So, you know, maybe this is an overly, I guess, elementary question, but Tony, you know, for the last two years, we've been talking about the relationship between supply, demand, order book and historical lows that will drive a tightening in the market. But unfortunately, the market has still been relatively lackluster. Like you said, I think there's obviously some specific things, you know, that warrant that or explain that.
But kind of in that context, you know, for the people on this call that maybe aren't familiar with the day-to-day aspects of the MR trade, I was wondering if you could talk about, you know, the top two or three things that need to happen for this market to inflect or maybe even reflect the prospective supply outlook, and whether, you know, that's oil prices, specific projects as it relates to new refining capacity, anything that helps us get a bit more, I guess, tangible about the cadence of the market recovery. Thanks.
Anthony Gurnee (CEO)
... Yep, thanks, Amit. So I would say the two big things are, and, you know, the U.S. Gulf market is so important for overall global MR ton-mile demand, that seeing an increase in liftings and a shortening of the tonnage list is key. But the other part is where those cargo is going. So, you know, once we get back into a more volatile world on a physical regional basis, and you start seeing MRs loading cargoes that end up going halfway around the world, that's, that's, you know, that will be symptomatic of the reason why rates have gone through the roof. So, you know, that, that's why, for example, voyages down to, you know, you could watch voyages to Brazil, Argentina, Chile, they're very important because they're fairly long haul.
And although we all like to try to find triangulations, the reality is most of that business has to back, you know, come back empty to the U.S. Gulf. So as a consequence, it uses up an awful lot of ton-miles, or, you know, ship days, to do that business. So I'd say it's longer haul arbitrage combined with higher volumes.
Amit Mehrotra (Transportation and Shipping Analyst)
And then, in terms of, you know, diesel penetration of light vehicles in Europe, I mean, I guess one of those key routes is kind of, you know, I guess, I guess gasoline to, to U.S. and then balancing over Houston and picking up diesel and going to Europe. I mean, is there any secular thing that we should think about, related to maybe diesel penetration of light vehicles, you know, in Europe?
Anthony Gurnee (CEO)
Yeah, I think on, in the short term, not really. You know, it's a, you know, we live over here, and we all drive diesel cars, and that's fine, and that's not going to change in the short term. Longer term, that could be an issue, and that could change you know, the cargo flows a little bit, but that's nothing that's on our radar screen at the moment.
Amit Mehrotra (Transportation and Shipping Analyst)
Right.
Anthony Gurnee (CEO)
So-
Amit Mehrotra (Transportation and Shipping Analyst)
Yeah, as much secular, I guess.
Anthony Gurnee (CEO)
Yeah. Yeah. Yeah, so you, you know, you have European middle distillate requirements being met by a combination of the U.S. Gulf, Russia, by pipeline and by sea transport and the Middle East, and even from South Asia sometimes. So, you know, there, you know, and it really depends on the relative pricing to determine, you know, where those cargoes are coming from.
Amit Mehrotra (Transportation and Shipping Analyst)
Okay. And then one last one for me is, you know, obviously, it's... I've said this before in terms of the way you guys manage your debt repayments and your balance sheet is obviously, I think, great. But we're kind of now two years into maybe, you know, I think last year, when you had your analyst day, you would have expected the market to be kind of at $17,000-$18,000 today. And so now we're further along to the down cycle, which implies that we're closer to an upcycle, hopefully.
So the question is, as you guys think about managing your balance sheet, and I guess you want to be prudent and cautious, but it also, at the same time, kind of is beneficial if you turn a little bit more aggressive as well, as it relates to where you're willing to take that balance sheet relative to where the asset values are in the cycle. Maybe this question has been asked, I hopped a little bit late, but would you be at all, maybe are you turning a little bit more willing to be a little bit more aggressive on taking that LTV a little bit up at this point in the cycle because of the outlook for the market on a two year to three year basis?
Anthony Gurnee (CEO)
Yeah, you know, it's to be honest with you, we don't feel that that's... I think we can achieve our objectives in terms of earnings power without leveraging up. The other problem is that, normally, the way you would have to do that in shipping, in this kind of business where you basically got first mortgages on all the vessels, is to leverage up, beyond the level we are now. We could arguably get up another few percent, with senior debt, but beyond that, you're relying on very expensive mezzanine, and that tends to not work out well, not even in the long term, but the medium term.
So, it's really a function of us being as conscious and careful as we can be regarding cost of capital as it is about outright financial risk.
Amit Mehrotra (Transportation and Shipping Analyst)
Right.
Anthony Gurnee (CEO)
You know, the incremental return that you can get by levering up and kind of leaning forward is offset by, not just the risk, but by the incremental cost of the capital that you're raising and the complexities of that that creates longer term.
Amit Mehrotra (Transportation and Shipping Analyst)
Yep. Yeah, that makes a lot of sense. Okay, thanks for taking my questions, Tony. Have a good one. Bye.
Anthony Gurnee (CEO)
Thanks, Tony.
Operator (participant)
This concludes our question and answer session. The conference has now has also concluded for today. As a reminder, to access the digital replay of the conference, you may dial 1-877-344-7529 or 1-412-317-0088. You will be prompted to enter a conference number, which will be 10111083. Please record your name and company when joining. Thank you for attending today's presentation, and you may now disconnect.