Ardmore Shipping - Q3 2018

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to Ardmore Shipping's Third 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. Please note, for those on the webcast, due to a technical issue, you may need to refresh your browser in order to see all the presentation. The presentation is also available as a download in the Materials tab of the website and on the Ardmore website. We will conduct a question-and-answer session, and after the opening remarks, instructions will follow at that time.

A replay of the conference call will be accessible anytime during the next week by dialing 877-344-7529 or area code 412-317-0088 and entering passcode 10125856. At this time, I will turn the call over to Mr. Anthony Gurnee, Chief Executive Officer of Ardmore Shipping. Mr. Gurnee, the floor is yours, sir.

Anthony Gurnee (CEO)

Thank you, Mike. Good morning, everyone, and 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 2018 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 2018 earnings release, which is available on our website. Now I will turn the call back over to Tony.

Anthony Gurnee (CEO)

Thanks, Paul. The call today will follow our usual format. First, we will discuss our performance and recent activity, followed by a market review, with a focus on IMO 2020, after which Paul will provide a fleet update and review our financial results, and then we'll conclude the presentation and open up the call for questions. Turning first to Slide 5 on our performance and recent activity. We're reporting EBITDA of $3.9 million and a net loss of $12.2 million, or $0.37 per share for the third quarter, reflecting continued weakness in product tanker rates, particularly early in the third quarter. Our MRs earned 10,300 per day in the third quarter and have earned 11,450 year to date.

During the third quarter, MR spot rates were adversely impacted by lower cargo volumes in the Atlantic Basin, with one-off events occurring late in the second quarter and continuing into the third quarter, and some encroachment of larger tankers into MR trades, which looks now to be easing with the improvements in crude tanker rates. MR rates have recovered from summer lows and appear to be on an upward trajectory into the winter months. Our fleet is performing well, with operating expenses and overhead below budget year to date. Our cash at quarter end was $53 million on a pro forma basis, reflecting the refinancing of four vessels on favorable terms in October. Looking ahead, supply-demand fundamentals remain very positive, while at the same time, IMO 2020 is expected to create upside for the entire tanker market and product tankers in particular, from mid-2019.

Turning to Slide six for a look at our fleet profile. This is unchanged since our last earnings 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 we'll go to Slide eight on MR supply-demand fundamentals. As is shown in the graph on the upper right, MR ton-mile demand is continuing to grow at about 4% per annum. This is underpinned by strong oil consumption growth, matched by refinery capacity additions in trading-oriented locations. And it's also important to highlight that the crude and refined products destocking process that had persisted from 2016 to mid-2018, and weighed heavily on tanker rates, is now a thing of the past.

Meanwhile, looking to supply, as you can see on the graph, in the lower right, the MR order book remains at all-time lows at just 4.7% of the existing fleet. Only 50 MRs are expected to deliver this year, matched by an almost equal number being scrapped, resulting in roughly zero net fleet growth for 2018. Looking ahead, we expect 1% or less net fleet growth in 2019. These strong supply-demand fundamentals are expected to provide a solid foundation for the MR market as we go into a period of what we expect will be very positive oil market dynamics, creating incremental tanker demand. Turning to Slide 9 for an update on the tanker market, in terms of activity and trends.

Our MR fleet averaged $10,300 per day for the quarter, while our chemical tankers averaged $10,100 per day. This relatively strong performance versus the market was achieved with less than optimal fleet deployment, which was and is currently weighted toward the Atlantic Basin. This proved to be a headwind in the third quarter, as the East was much stronger, but has now shifted in our favor, as we will discuss further on. In terms of recent market activity, you'll see in the graph to the upper right that the Atlantic Basin hit record low rates in late summer, driven by unrelated one-time events in the key consumer regions of Mexico and Brazil. Globally, in other words, taking into account markets in the East, not just the Atlantic, MR rates dropped in September.

Atlantic Basin trading activity has returned to more normal levels, and winter market conditions are starting to emerge there. Meanwhile, as you can see to the lower right, a very strong and continuing rebound in tanker and crude tanker rates is leading a general tanker market recovery, and is also resulting in the easing of the encroachment of larger ships on product trades, with LR2s expected to migrate to dirty trading, which actually nine have done so far. Looking ahead, we believe that the strong crude tanker rates are leading a general tanker market recovery. We also believe that there may be more momentum in MR rates than is generally recognized, given the very strong underlying supply-demand fundamentals. And as we'll discuss next, the impact of IMO 2020 on oil market dynamics, and thus on tanker demand, is expected to be felt beginning in mid-2019.

On Slide ten, we take a look at the changes that IMO 2020 is expected to bring. Let me take a moment to start at the start here to explain the fuel type terminology. High sulfur fuel oil, or HSFO, is the type currently used worldwide and contains 3.5% sulfur. Marine gas oil, or MGO, is essentially the spec of diesel that ships use and contains 0.1% sulfur. Essentially, it's diesel, sometimes more generally called middle distillate. And very low sulfur fuel oil, or VLSFO, is the new IMO-compliant substitute for high sulfur fuel oil, containing only 0.5% sulfur. Both marine gas oil and very low sulfur fuel oil will be IMO 2020 compliant.

Implementation is now fixed for January first, 2020, with the switchover resulting in a significant increase in demand for compliant fuels. As shown on the graph in the upper right, the global market for high sulfur fuel oil is currently 3.5-4 million barrels a day, and it's expected that about two million barrels a day will be replaced by either gas oil or yet to be created very low sulfur fuel oil blends of various types. This is a major change, and preparations for compliance are well underway in both the oil and shipping industries. In particular, refineries will need to increase output and shift their product slate away from fuel oil and toward middle distillate, as well as find ways to make the new very low sulfur fuel oil blends.

Bunker providers will need to prepare their logistics chain, including storage and barging, by cleaning tanks and managing down their inventories of high sulfur fuel. Ship owners are either preparing to use the compliant fuels or, on a more limited basis, installing scrubbers to enable continued burning of high sulfur fuel, at least for a period of time. The transition is not going to happen with the flip of a switch. The anticipated limited initial availability of very low sulfur fuel oil, combined with what we believe will be a slower than expected pace of scrubber installations, will create a market gap that can only be filled by gas oil and create up to two years of market disruption before equilibrium is reached. Moving to Slide 11, we take a look at the impact of IMO 2020, specifically on tanker demand.

Transition to compliant fuels will have a significant impact, leading to higher seaborne volumes of gas oil, as demand is forecasted to increase by 1-1.5 million barrels a day, commencing January 1st, 2020. Surplus high sulfur fuel will have to be redirected from current consuming regions for further processing or alternative uses, thereby boosting demand for crude tankers. There's also expected to be a direct redirection of crude flows as refineries look to respond to the new market conditions, with high complexity refineries sourcing heavy, heavy sour crudes and simpler refineries searching for light sweet crudes. More specifically, demand for product tankers is expected to increase substantially. Generally speaking, global imbalances, for whatever reason, create oil price volatility, increased arbitrage opportunities, and thus oil trading activity. IMO 2020 looks like it's going to create some very serious imbalances in the oil market.

This should lead to a significant ton-mile demand boost. As an example, Europe, which is roughly 30% of the global bunker market, is anticipated to substitute at least 700,000 barrels a day of high sulfur fuel oil compared with compliant fuels, initially, mostly MGO, and thus create a very sizable two-way trade of gas oil in and locally produced high sulfur fuel out. The U.S. Gulf, Middle East, and Asia regions are all expected to become significant exporters of compliant fuels, not only to Europe, but to scores of other local bunker markets worldwide, substantially increasing ton-mile demand. It's also worth highlighting that the new VLSFO fuel blends will be made with a large percentage of gas oil to meet the sulfur cap, thus adding to the incremental demand for MGO.

Overall, IMO 2020 looks set to create a substantial amount of incremental demand for tankers in general and product tankers in particular, with estimates ranging anywhere from 5%-15%. Even the lower end of this estimate will be enough, we believe, to significantly boost charter rates. And now I'll turn the call back to Paul to take us through fleet update and our financials.

Paul Tivnan (CFO)

Thanks, Tony. Moving to Slide 13, we will take a run through the fleet days. Revenue days this year will increase by 2% to 9,933 days. We had 59 dry dock days in the third quarter, four dry docks and 2 in-water surveys, and we expect to have 35 dry dock days in the fourth quarter. Turning to Slide 15, we will take a look at our financials. As you will see on the second line, we are reporting a net loss for the third quarter of $12.2 million, or $0.37 per share. Total overhead costs were $4.4 million for the quarter, comprising corporate expenses of $3.4 million and commercial and chartering expenses of $1 million.

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 approximately $1,250 per ship per day across the fleet. For the fourth quarter, we expect total overheads, incorporating cash and commercial, to be $4.3 million, which includes both cash and non-cash items. The depreciation and amortization for the third quarter was $9.9 million. We expect depreciation and amortization for the full year to be $39 million, which equates to $10 million for the fourth quarter. Interest and finance costs were $6.2 million for the third quarter, comprising cash interest of $5.6 million and amortized deferred finance fees of $600,000.

We expect interest and finance costs for the full year to come in at $26.1 million. For the fourth quarter, this equates to $7.9 million, comprising cash interest of $6.2 million, amortized deferred finance fees of $600,000, and deferred finance fees written off of $1.1 million related to the refinancing of four vessels in October. Moving to the bottom of the slide, operating costs for the quarter came in at $16.3 million, or 6,176 per day across the fleet, including technical management. OpEx for the Eco-Design MRs was 6,279 per day. The Eco-Mod MRs came in at 5,903 per day, while the chemical tankers came in at 6,249 per day.

Looking ahead, we expect total operating expenses for the full year to come in at $67.3 million, or $6,620 per day, and this equates to OpEx for the fourth quarter of approximately $17.6 million. Turning to Slide 16, we take a look at charter rates for the third quarter. In spite of soft charter market conditions, the spot MRs reported TCE of $10,314 per day, basis discharge to discharge, while the fleet average came in at $10,261. Looking at the various ship types, we had 15 Eco-Design MRs in operation, which earned an average of $10,684 per day, and the seven Eco-Mod MRs earned $9,645 per day.

Our six chemical tankers had average rates of $10,093 for the quarter, continuing their strong performance relative to the larger MRs. Looking ahead to the fourth quarter, with 50% of the days booked to date, the spot MRs have earned approximately $11,000 per day, while the chemical tankers, tankers have also earned approximately $11,000. Overall, we remain focused on managing performance and voyage efficiency to maximize TCE. On Slide 17, we have our summary balance sheet, which shows at the end of September, our total debt and leases was $442 million, leaving our corporate leverage at 54.9%. Turning to Slide 18, we remain focused on maintaining a strong liquidity position. Pro forma cash balance at the end of September was $53 million, including the refinancing of four vessels.

As mentioned, we completed the sale and leaseback of four vessels in October. Two 2015-built chemical tankers, which we refinanced under a 12-year capital lease with Ocean Yield, while two 2014 MRs were financed under seven-year capital leases with a top-tier Asian financier. Both transactions closed and funded at the end of October, and the terms and pricing is in line with our existing debt and lease arrangements. And finally, we note that all of our debts, including capital leases, is amortizing at $44 million per year. And with that, I would like to turn the call back over to Tony.

Anthony Gurnee (CEO)

Thanks, Paul. So to sum up then, we're reporting a net loss of $12.2 million or $0.37 per share, reflecting product tanker market weakness during the third quarter. Meanwhile, MR rates have recovered from the summer slump and are increasing into the winter months, with the strong rebound in crude tankers leading a general market recovery. MR ton-mile demand growth is robust, underpinned by an estimated 1.4 million barrels a day oil consumption growth for 2019, and matched by refinery capacity additions in trading-oriented locations. The MR order book remains at a record low of 4.7%. Supply growth is expected to be close to zero in 2018 and around 1% in 2019.

IMO 2020 is expected to be a game changer, with increased seaborne volumes of compliant fuels, increased arbitrage opportunities and oil trading activity, all contributing to a significant boost in ton-mile demand. While we're very bullish on the market outlook, we are maintaining a strong liquidity position and financial flexibility, with quarter-end cash of $53 million on a pro forma basis and conservative leverage at 55%. All told, Ardmore is well positioned to benefit from the expected recovery in product tanker charter rates through significant earnings power, with each $1,000 per day increase in rates translating into $0.31 of EPS. And with that, we're now pleased to open up the call for questions.

Operator (participant)

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

John Chappell (Senior Managing Director)

Thank you. Good afternoon, guys. One for each of you. Paul, if I can start with you, on the sale and leaseback transactions. First of all, can you just explain the thought process behind it? Obviously, the market's gotten a little bit better. You're very optimistic about 2019. Was this a situation where the terms were kind of too good to be true, and you felt that you needed to act, or did you feel that you needed to be more defensive, at this time because we're yet to really kind of break out?

Paul Tivnan (CFO)

That's a great question, John. Yeah, I think we, you know, the market obviously hit a trough in September. You know, in terms of financing, we always try and continue to evaluate the financial profile of the company to match the needs of the business in terms of balance sheet, liquidity, and capital allocation strategy going forward. So I think on this occasion, the terms presented were quite attractive, and also recognized the market outlook for the third quarter and early into the fourth quarter as well.

I think rates are definitely improving now, but, you know, we certainly where I sit, it's partly risk management and making sure that we have financial flexibility and adequate liquidity for market conditions, and also if the opportunities arise, that we can do something more.

John Chappell (Senior Managing Director)

Okay. And there's probably some commercial sensitivities, and maybe we can talk about it offline, but just to speak to those terms, can you give us a rough idea of what the actual sales proceeds were as we try to figure out asset value trends and also the same thing on the terms of the debt, you know, spread over LIBOR?

Paul Tivnan (CFO)

Yeah, there is some commercial sensitivity around that, particularly for the other side. As they negotiate other deals, clearly, they don't want to disclose the specifics of our transaction. But the Asian-based financier was slightly higher advanced than a standard senior loan. And then the deal with Ocean Yield was typical kind of sale and leaseback financing with a much higher advance.

John Chappell (Senior Managing Director)

Okay. Tony, just one for you. I appreciate putting some meat on the bone of the IMO 2020, and, and hopefully that really does start to impact the market soon. You probably deal a lot with a lot of the, the oil traders who you know, move a lot of product and therefore are your customers, but also, I would imagine, are kind of licking their chops at the opportunities of this arbitrage, which will probably happen. So to that extent, have they reached out to you at all, looking for, any type of term contracts associated with preparing their fleets and, and their cargo movements for this new regulation?

Anthony Gurnee (CEO)

Honestly, the answer is not, not yet, but that's probably coming when we get into 2019. Because typically the charters are one year, and if they can do it, they do an option one year. So it's probably not in the fixing window yet for that.

John Chappell (Senior Managing Director)

Okay. Thanks, Tony. Thanks, Paul.

Paul Tivnan (CFO)

Thanks, John.

Operator (participant)

Next, we have Ben Nolan of Stifel.

Ben Nolan (Managing Director)

Yeah, thanks. Hey, Tony, I had a question. I know that, or if I recall correctly, last time you spent some time talking about the impact that the Brazilian truck driver strike had had on the MR market. I was curious if you have any update there or, you know, I believe that the government is providing subsidies for the refineries. How does that change the Atlantic market going forward, if at all? If you could talk to that a little.

Anthony Gurnee (CEO)

Yeah, sure. The volumes into Brazil have actually recovered substantially. This is, in part, a result of a reimbursement program that the Brazilian government put into place, not just for Petrobras, but for others as well, to compensate them for the subsidized price they have to sell diesel at in Brazil. So that's actually resulted in a fairly substantial recovery. It's not quite where it was, but it's reasonably healthy at the moment, and we think that that'll continue to improve as the government policy incrementally shifts back toward more, you know, market-driven solutions.

Ben Nolan (Managing Director)

Okay, that's helpful. And then switching gears a little bit, but kind of staying more on a macro level, how are you viewing the chemical side of your business or the IMO chem side of it? And then maybe more specifically, do you think that there are any potential impacts from IMO 2020 on that side of the business, in addition, you know, or rather than just sort of focusing on the product side?

Anthony Gurnee (CEO)

Well, you'll notice that we didn't put a slide in the deck this time on the chemical sector because nobody ever asks questions about it. The reality is that the actual chemical, the volume of chemical cargoes that we move is only about 10% of our overall revenue, so it is relatively small. It's important to remember that our ships, the chemical tankers do roughly a third to a half of their business is refined products. So they've actually been trading quite well. What we do is we do a kind of a very simple capital adjustment in our mind to MRs of, if you look at all six of them, around $700 a day. And on that basis, they've been actually trading very well for the last few quarters relative to MRs.

We think that the big driver for the chemical sector, and especially our end of it, which is the simpler coated end, over the next period, is gonna be the MR market, because there's so much cross-trading and overlap between them in terms of cargo. So, yes, we think that to the extent that the MR market benefits from IMO 2020, we think that'll filter down to chemicals as well.

Ben Nolan (Managing Director)

Okay, I appreciate it. Thanks, guys.

Operator (participant)

The next question we have will come from Randy Giveans of Jefferies.

Randy Giveans (SVP of Equity Research)

Hey, thanks, operator. Good morning, guys.

Anthony Gurnee (CEO)

Randy, how are you?

Randy Giveans (SVP of Equity Research)

Great question. Okay, thanks. So you were mentioning that nine LR2s have already switched, kind of from products to crude. I guess, one, do you see that kind of trickling down to maybe LR1s and possibly even MRs? And two, for those first cargoes, for a new build, VLCC, Suezmax, coming out of the shipyards, are they still taking products, or are they going straight to crude with the rates being so high?

Anthony Gurnee (CEO)

We would expect a continued flow. If there's this much of a differential as there is right now, we would expect a continued flow of LR2s from clean back into dirty. It's not gonna be the newest ships or the ones that are, you know, part of core clean product trading fleets, but there's a lot of LR2s that are trading clean, that are in the hands of mixed fleets or others, or maybe older, where it would make sense to switch over. And it's very tempting because the rates on the Aframax routes have been much stronger. And so we think that'll continue.

And, you know, for every one LR2 that moves over, that's effectively taking two MRs of supply out of the market, out of our business. We don't really see a lot of activity on the LR1 side in the same way. They tend not to switch back and forth quite as often, but we can check into that. And then there was a last part of the question that just escaped me.

Randy Giveans (SVP of Equity Research)

Yeah, no problem. Just those first cargoes when a vessel gets delivered-

Anthony Gurnee (CEO)

Oh, yeah, yeah.

Randy Giveans (SVP of Equity Research)

Got a clean hull. So yeah, go ahead.

Anthony Gurnee (CEO)

We don't have any information, but again, you have to imagine that if Aframax rates are this strong, they're probably not going into initial gas oil trades. But again, that's something that this is all relatively fresh in terms of market development, and that's something we'll look into.

Randy Giveans (SVP of Equity Research)

Sure. All right, and then I guess one more question. Can you provide some more color on, obviously, your, your plans to comply with IMO 2020, no scrubber orders? Maybe why have you not, scrubbers? Is it fuel availability? Is it, you know, a lack of really fuel burn on your smaller MRs? You've had some competitors put scrubbers on MRs. Obviously, you are not doing that. Can you discuss that a little bit?

Anthony Gurnee (CEO)

Yep, happy to. So I think it's important to highlight the fact that every company has its own set of particular circumstances and framing and decision-making process. So it doesn't mean that one answer is right and the other one is wrong. We've chosen for the time being not to go down the scrubber route. Our own view is that the return on investment and the risks around it for an MR are, you know, not particularly compelling, the way we see it. You know, if we were to install scrubbers across our fleet, it would be $60 million or $70 million. Quite frankly, we would be buying ships rather than installing scrubbers if we had that kind of capital ready to invest.

Randy Giveans (SVP of Equity Research)

Excellent. Very political answer at the beginning there, in theme with the election. Great. Thank you again.

Anthony Gurnee (CEO)

It also happens to be true.

Randy Giveans (SVP of Equity Research)

No, that's fair. Thanks again.

Anthony Gurnee (CEO)

Sure.

Operator (participant)

The next question we have will come from Fotis Giannakoulis of Morgan Stanley. Please go ahead.

Fotis Giannakoulis (Executive Director)

Yes. Hi, Tony. I wanna follow up on Randy's question, and give us a little bit more detail about how do you view the returns of installing scrubbers? And if you can tell us how many days does your vessel spend in at sea, sailing, steaming fuel? And also, at which routes do you think that there's gonna be availability of the existing 3.5% high sulfur fuel? And at which routes you think that there might be a risk of not being able to find the current fuel?

Anthony Gurnee (CEO)

Well, Fotis, rather than answer that, you can just buy my book. No, just, just kidding. That's a very, a very, very detailed, involved, set of questions there. I'll do my best to answer it, a little bit succinctly, but also happy to talk about it offline. So look, in terms of the economics, you know, it, it's very much a function of your, your view of the spread between gas oil and 3.5%, or, or the new 0.5% fuel. So, I think that's not worth dwelling on right now, but that's the main driver.

I think when it comes to MRs, it's important to remember that we really very often have no idea where the ship is actually going when it's committed to a charter, because we give the oil traders such a broad range of discharge options. And therefore, the availability of 3.5% sulfur is, if you have a scrubber on an MR, really you know kind of the key concern, because we tend to trade to what you would call outports rather than the main ports. So it's fairly clear that 3.5% sulfur fuel will be certainly made available in all the main bunkering hubs in the world, and very low sulfur fuel oil as well. But what will be available in the outports is really the question.

And the other point I'll make is that at least the way we train our MRs, very often the cargo intake is constrained by draft. And so if you're You know, so you typically optimize the bunker intake to get the most out of the cargo intake to maximize your TCE. And if you're going to a location where you're not sure about the availability, you know, with a scrubber-equipped ship of 3.5% fuel, you might end up loading more high sulfur fuel oil in the load port, and then shutting out cargo, which would have a typically an outsized impact on your TCE. So there's a whole bunch of issues around this.

It's not that it's not a good investment or something that we think is a good move by some companies, but we don't think it's... The way we trade our ships and the way we think about capital allocation, it's interesting, but not compelling for an MR.

Fotis Giannakoulis (Executive Director)

Thank you, Tony. You mentioned that instead of installing scrubbers, you find more value in acquiring ships. Can you be a little bit more specific? We've seen a big discrepancy in the movement of asset prices between younger and older vessels. Is there more value right now on older vessels, or with new IMO regulations, you would stick in a relatively modern tonnage?

Anthony Gurnee (CEO)

Well, we've made no secret of the fact that if we were allocating capital to acquisitions at the moment, it would probably be in the seven-10-year age bracket. And we think that those are compelling investments right now. So.

Fotis Giannakoulis (Executive Director)

Thank you very much, Tony.

Anthony Gurnee (CEO)

Yep.

Operator (participant)

Again, as a reminder, if you'd like to participate in today's Q&A, please press star then one on your touchtone phone. Again, that is star then one to ask a question. The next question we have will come from Magnus Fyhr of Seaport Global.

Magnus Fyhr (Managing Director)

Hey, guys. Most of my questions have been answered, but just if you could, as a follow-up on the last question, you've seen the, the shipyards getting more aggressive on their new build slots, or is pricing relatively firm?

Anthony Gurnee (CEO)

The pricing seems relatively firm, and the yards that are still in business, I think, are really just operating on a drip-feed basis, where they're taking in the minimum number of orders that they have to to keep things ticking over. And, interestingly, the more, you know, kind of top-tier yards are holding out for some pretty high prices. So it's, it's not, it's not cheap at the moment.

Magnus Fyhr (Managing Director)

Your thoughts, ordering new builds versus secondhand acquisitions if you had the cash?

Anthony Gurnee (CEO)

Secondhand.

Magnus Fyhr (Managing Director)

All right. Good. Thank you.

Anthony Gurnee (CEO)

Yep, thanks, Magnus.

Operator (participant)

Next, we have Michael Webber of Wells Fargo.

Speaker 8

Hey, guys, it's Greg on for Mike. How are you?

Anthony Gurnee (CEO)

Hey, Greg.

Paul Tivnan (CFO)

Hey, Greg.

Speaker 8

So just starting with the vessel positioning, did you guys see a migration of ships from West to East in the past quarter? And did Ardmore participate in that migration, or do you expect that to continue if you haven't seen it yet? Any color there?

Anthony Gurnee (CEO)

We did when there was a big, big differential in rates, we did see a migration of ships from the West to the East. That was also augmented by some naphtha trades, which took some MRs, but also a lot of LR2s from West to East. We didn't participate in that. And at the moment, we're roughly 60%-65% Atlantic and 35%-40% Pacific at the moment, so we're pretty happy with that.

Speaker 8

Okay. Just hopping over to IMO 2020. Does the adoption rate of the VLSFO have any effect on product tankers demand or ton-mile? You know, if we think about it, for consumption of MGO versus VLSFO, especially at the beginning, does that matter if VLSFO has more of an uptake or if it's more MGO, or is it gonna be the same trade lanes, the same demand, the same ton-miles, you know, whichever way it falls out?

Anthony Gurnee (CEO)

Well, I think that everything else being equal, more MGO and less very low sulfur fuel oil would be better for the product tanker market. But we think it'll be overall strong enough that that's not gonna have a major impact. But that, that's a big question: How much VLSFO is going to be made available on day one, and where will it be, and what's the spec compatibility? But also, interestingly, as I mentioned in the presentation, we've read estimates of around 30% of VLSFO is actually gas oil or gonna be gas oil, right? So they're, you know, they're clearly what they're doing is they're trying to find, you know, extremely low sulfur fuels that they can then blend to bring the sulfur content down to 0.5%.

And at least some of the ones we've looked at are 30% gas oil, so that clearly will have an impact. The other thing that's not really been discussed, but you have to wonder about, there has been some limited discussion about taking intermediate product out of refineries, like vacuum gas oil, that could be feedstock for the new, the new fuels. And how will that be shipped? Will that go on crude tankers, or do they have to be cleaned up or can go on CPP, or clean trading product tankers because of the sulfur, the risk of sulfur contamination? So it's all interesting and largely unknown. And that's the part of it, which is particularly intriguing.

Speaker 8

Got it. Okay. And then just a quick one for Paul. Apologies if you've put this out already, but, do you have anything on dry dock days in 2019, what you expect, just for modeling?

Paul Tivnan (CFO)

We haven't put anything out on that yet. I would estimate about 150 days, but I'll confirm and I'll come back to you on that one.

Speaker 8

Okay. Sounds good. Thanks, guys. That's it for me.

Paul Tivnan (CFO)

Thanks, guys.

Operator (participant)

Okay. Well, showing no further questions at this time, we will conclude today's question-answer session and the conference call. I would like to thank the management team for their time today and all of you for joining today's conference call. At this time, you may disconnect your lines. Thank you. Take care, and have a great day, everyone.