Ardmore Shipping - Q4 2017
February 7, 2018
Transcript
Operator (participant)
Good morning, ladies and gentlemen, and welcome to Ardmore Shipping's Fourth 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 passcode 10116752. At this time, I will turn the call over to Anthony Gurnee, Chief Executive Officer of Ardmore Shipping.
Anthony Gurnee (CEO)
Good morning, and welcome to Ardmore's Fourth Quarter Earnings Call. First, let me ask our CFO, Paul Tivnan, to describe the format for the call and discuss forward-looking statements.
Paul Tivnan (CFO)
Thanks, Tony, and welcome, everyone. Before we begin our conference call, I would like to direct all participants to our website at ardmoreshipping.com, where you'll find a link to this morning's First Quarter and Full Year 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 fourth quarter of 2017 earnings release, which is available on our website. Now I'll 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'll highlight our recent value-creating activity, 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. Turning first to slide five on our performance and recent activity. We're reporting EBITDA of $46 million for the full year of 2017, and $11 million for the fourth quarter. Overall, we're reporting a net loss for the full year of $12 million, or $0.37 per share, and for the fourth quarter, $3.8 million, or $0.12 per share.
MR spot rates remained challenged for almost all of 2017 on the combined impact of a persistent oil inventory overhang and low levels of oil trading activity, as well as reduced refinery output in September and October in the aftermath of Hurricane Harvey, which in particular, put downward pressure on Product and Chemical Tanker rates late in the third quarter and into the fourth quarter. Despite the soft market environment, we believe we delivered satisfactory chartering results, with MR rates averaging $12,975 per day for the full year and $12,131 per day for the fourth quarter. In November, we completed an accretive share repurchase, acquiring 1.4 million shares at a significant discount to NAV as part of Greenbriar secondary offering and resulting in earnings accretion of approximately 3.5%.
We continue to execute on our strategy of improving returns on invested capital and building value. We took delivery of the Ardmore Sealancer in January, a high-quality Japanese 2008-built MR product tanker with attractive financing under a Japanese Operating Lease arrangement. Of note, the purchase price of this vessel equates to a 30% discount to current newbuilding prices on an age-adjusted basis. As we will discuss in more detail, we believe the market outlook is positive. Oil demand growth is strong on the back of accelerating global economic growth. Global oil inventories are now almost back in balance, and the pace of MR newbuilding deliveries is decelerating, with MR net fleet growth in 2018 expected to be less than 1%.
As a final point, we're maintaining our dividend policy of paying out 60% of earnings from continuing operations. Consistent with this policy, the company is declaring no dividend for the fourth quarter. Turning to slide six for a quick look at our fleet profile. As you'll see, the only change to the fleet is the addition of the Ardmore Sealancer. This is a high-quality vessel built at Onomichi Dockyard in Japan, and it's an identical sister to the Sealeader and Sealifter. What attracted us to the ship was not just the price, but also the excellent spec and condition as compared to other candidates we looked at. This translates into meaningfully lower OpEx and dry docking costs and corresponding improvements in ROIC. This latest acquisition brings our total fleet up now to 28 MR Product and Chemical Tankers.
Turning now to slide eight on the product tanker market fundamentals. As noted earlier, MR product tanker rates remained soft for the majority of 2017, despite some strength in the summer months. Our rate weakness through the year stemmed largely from high oil product inventories and thus low levels of oil trading activity, putting downward pressure on product tanker demand and thus charter rates. An improving freight rate environment late in the fourth quarter and into the first quarter of 2018 has resulted in significantly improved performance. Nevertheless, we believe that the outlook for 2018 is overall positive for a number of reasons. Global oil inventories declined by approximately 370 million barrels throughout 2017, with year-end crude and product inventories back to 2014 levels.
As and when futures backwardation eases or goes into contango, restocking and increased trading activity should resume on a full scale. Oil demand remains strong, with 1.3 million barrels per day growth forecasted for 2018, which, when matched with refinery capacity growth in export-oriented locations, should lead to continued increases in ton-mile demand. China continues to grow in importance for MRs. Export quotas for oil products are set to increase by 30% in 2018, and destinations are increasingly farther afield. Overall, we believe that increased cargo volumes, regional imbalances, emissions regulations, ramping up of Chinese product exports, and increased trading complexity overall are continuing to drive demand growth at around 5% annually.
Looking at supply, the MR order book is now at all-time lows of 4.1% of the existing fleet, and net, net fleet growth is correspondingly low as well. For 2018, we're forecasting 42 MRs to deliver against scrapping of 20-25 units, which results in net fleet growth of 1% or less for the year. Shipyard capacity remains constrained, with continued rationalization and limited incremental product tanker orders. There remain only seven active MR yards currently, down over 60% from the 20 that were active in 2008. Turning now to slide nine on the Chemical Tanker market. Chemical Tanker rates improved in the fourth quarter, with our chemical tankers averaging $13,369 per day vs $11,949 for the full year, which is actually a very respectable performance compared to the MRs.
The combination of increased Southeast Asia oil, veg oil volumes and a shortage of veg oil suitable ships enabled freight rates to tighten on these trade lanes. European soy imports also increased following an import tariff reduction, resulting in firmer South American volumes in this direction. Overall, though, despite some strength in veg oils, the chemical tanker market continues to be affected by weaknesses in the broader CPP market. Looking ahead, fundamental Chemical Tanker demand is highly correlated to global economic activity. With global GDP forecast to grow at 3.9% in 2018, according to the IMF, chemical tanker demand growth should increase as well. Expected solid demand growth for commodity chemicals, coupled with production expansion in the U.S. and Middle East, will boost exports in long-haul voyages.
Meanwhile, the chemical tanker order book is continuing to decline, and at current levels, is 8% of the existing fleet. As we've said before, there is a difference in the order book as a % of existing fleet for stainless steel tankers vs MR-type, which are coated IMO 2 tankers. With the stainless steel order book as % of that segment of the fleet is 11.3%, but for the coated tankers, which are MR-types, it's only 5.8%, so it's much smaller in comparison. Overall, Chemical Tanker net fleet growth for 2018 is estimated to be 3.4%, which should be well below demand growth. Turning to slide 11 for an overview of our recent value-creating activity.
As mentioned, we completed an accretive share repurchase in November, acquiring 1.4 million shares at a discount to NAV as part of Greenbriar's secondary offering, which will deliver EPS accretion of approximately 3.5%. Greenbriar is now fully divested of their 17% holding, and the overhang around the timing of their exit is now fully removed. Post-transaction, Ardmore has a highly diversified shareholder base with no shareholder above 10% of ownership, and in fact, just two shareholders above 5%. Long term, we believe that the increased public float and trading volume as a result of the offering will benefit all shareholders. Meanwhile, management remains focused on activities intended to drive continued improvements to Ardmore's ROIC.
Recent transactions also demonstrate our focus on effective capital allocation and long-term value creation, most notably the acquisition of the Sealancer, the share repurchase in November, and as a reminder, the acquisition of the six Eco Design MRs in June 2016 from Frontline at a price that's as yet unmatched in the S&P market, and which was and is significantly accretive to earnings even under current market conditions. With that, I'll hand the call back to Paul to provide an update on our fleet and our financial performance.
Paul Tivnan (CFO)
Thanks, Tony. Moving to slide 13, we'll quickly run through the fleet days. As Tony mentioned, we took delivery of the Ardmore Sealancer on January 23, and as you will see from the chart on the right-hand side, our revenue days increases by 3% for the full year of 2018 to 10,058 days. We had one dry dock in the fourth quarter for the Ardmore Seamariner, and we expect to have 18 dry dock days in the first quarter of 2018. 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 full year of $12.5 million, or $0.37 per share, and of $3.8 million, or $0.12 per share for the fourth quarter.
Total overhead costs were $14.6 million for the full year, comprising corporate expenses of $12 million and commercial and chartering expenses of $2.6 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 costs were $12 million, which works out at $1,200 per ship per day across the fleet. For the first quarter of 2018, we expect total overheads, that's corporate and commercial, to be approximately $3.8 million for the first quarter of 2018. Depreciation and amortization for the full year was $37.2 million and $9.6 million for the fourth quarter, and we expect the depreciation and amortization for the first quarter 2018 to be approximately $9.5 million.
Our interest and finance costs were $20.9 million for the full year, comprising cash interest of $18.4 million and amortized deferred finance fees of $2.5 million. We expect interest and finance costs for the first quarter 2018 to be approximately $6.1 million, which includes amortized deferred finance fees of $650,000. Moving to the bottom of the slide, our operating costs for the year came in below budget at $62.9 million, or 6,298 per day across the fleet, including technical management. OpEx for Eco Design MRs was 6,185 per day for the year. Eco-Mod MRs came in at 6,597 for the full year, and Eco-Design chemical tankers came in at 6,282 for the year.
Looking ahead, we expect total operating expenses for the first quarter to be approximately $16.3 million. Turning to Slide 18, we take a look at the charter rates for the full year of the fourth quarter. Overall, as Tony said, in spite of a softer charter market, we delivered a satisfactory chartering performance. Full year TCE for the pool and spot MRs was 12,970 per day, and the fleet average came in at 12,709 per day. Looking at the various ship types, the 15 Eco-Design MRs in operation, which earned an average of 12,902 per day for the full year, and our six Eco-Mod MRs came in at 12,975 per day.
Our six Eco-Design chemical tankers performed well in the fourth quarter, with average rates of $13,369 for the fourth quarter, and the full year TCE came in at $11,949 per day. Looking ahead to the first quarter of 2018, as of today, the spot MRs are earning approximately $13,300 per day for voyages in progress, with 45% of the days booked, while our chemical tankers are currently earning approximately $12,000 per day, with 87% of the days booked for the first quarter. Overall, we are satisfied with our chartering performance. The fleet continues to perform well in spite of a challenging charter market over the course of 2017.
On Slide 17, we have our summary balance sheet, which shows at the end of December, our gross debt was $453 million, which net of deferred finance fees, was $442 million. Our leverage at the end of the year was 64%. Our cash in hand at the year-end was $39.5 million, and pro forma for the delivery of the Sealancer and drawdown of the financing, cash at the end of January was $44.8 million. Moving to Slide 18, we have a strong liquidity position, and we are continuing to pay down our debt. As mentioned, our cash balance at the end of January was $44.8 million, and our gross debt is $463 million, following the drawdown of the lease on the Sealancer and some scheduled debt repayments in January.
In the fourth quarter, we completed an attractively priced $15 million revolving credit facility, and as of January 31, we have approximately $11.4 million drawn down, leaving us with additional financial flexibility. As you all know, all of our debt is amortizing, with principal repayments of roughly $44 million per year. Based on scheduled debt repayments for the remainder of 2018, our year-end debt will be approximately $425 million. With that, I would like to turn the call back over to Tony.
Anthony Gurnee (CEO)
Thanks, Paul. So, so to sum up, we're reporting EBITDA of $46 million and a net loss of $12.5 million, or $0.37 per share for the full year. The MR spot market remained challenged for almost all of 2017. Persistent oil product, product inventory overhang and thus low levels of oil trading activity, as well as reduced refinery output in September and October, put downward pressure on rates. In spite of the market, Ardmore delivered satisfactory chartering performance, with MR tankers averaging $12,975 for the full year. We completed an accretive share repurchase transaction in November, acquiring 1.4 million shares at a significant discount to NAV and resulting in EPS accretion of approximately 3.5%.
In January, we took delivery of the Ardmore Sealancer with attractively priced financing under a Japanese Operating Lease. Overall, the market outlook is positive and we believe primed for a recovery. After years of challenging charter markets characterized by heavy fleet supply growth and oil inventory overhang dampening demand, conditions are now in place for a sustained upturn, and in fact, feels very similar, similar to that stage of previous cycles. Meantime, we're continuing to execute on our strategy, and we're waiting for the spark that typically ignites a full recovery. With that, we're now pleased to open up the call for questions.
Operator (participant)
Thank you. At this time, if you would like to ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Our first question will come from Noah Parquette of JPMorgan.
Noah Parquette (Analyst)
Hey, thank you. I just wanted to ask, Tony, you talked about China product exports increasing this year. Do you see what you've seen operationally in terms of where these cargoes are going, and perhaps where what it's displacing?
Anthony Gurnee (CEO)
Thanks, Noah. The Chinese exports typically have just gone south to kind of Singapore in that area. So that was effectively a backhaul, and it didn't really add much. But we've observed that they've been going as far as West Coast, South America, West Coast, U.S., into the Atlantic Basin on occasion. And that's a meaningful improvement. I don't think they're necessarily displacing anything, or at least we couldn't identify it, but we think that historically, China has just not been a factor in the MR space, but now it is, and we think that's overall a good thing.
Noah Parquette (Analyst)
Okay, great. And then I just wanted to ask, one more about, you know, the 2020 sulfur regulations. I mean, what, what is your view on how the product tanker market will respond and, and what your strategy is, you know, for the use of scrubbers vs, low sulfur fuel?
Anthony Gurnee (CEO)
Yeah, I think that these 2020 SOx Sulfur limit is, in summary, fairly simple. In detail, it's very complex, but in summary, we don't believe that very many ships in the MR space are going to put scrubbers on. As a consequence, the MR sector is going to be burning MGO, and possibly some ultra-low sulfur fuel oil grades if they get developed in time. Overall, there's going to be a significant increase in demand for MGO as bunker fuel. We believe that that's going to result in a lot of cargo movement... relating to MRs. In other words, moving MGO around the world to meet the needs in local bunker markets.
It's also a possibility that MRs get picked up for storage, at least on a temporary basis, while the transition takes place and short tankage gets cleaned out. So we think it's. I think the overwhelming approach and response from MR owners is gonna be MGO or ultra-low sulfur fuel oil. And on the demand side, it you know we're expecting that it's gonna have a perhaps meaningful impact, a positive impact on demand.
Noah Parquette (Analyst)
Okay, that's great. Thanks.
Operator (participant)
The next question comes from Jonathan Chappell of Evercore.
Jonathan Chappell (Analyst)
Thank you. Good afternoon, guys. Tony, a couple comments on asset values, without maybe focusing on them too much. You mentioned that the prices you got for the Frontline ships in mid-2016 haven't been replicated since, so that indicates that they're moving up. And an interesting comment from Paul about the every $1 million increase in vessel values and the accretion to your NAV. Seen some broker reports that asset values have been moving up, you know, despite kind of the volatility within the charter rates. But you obviously see things a lot closer than we do as you inspect ships. Can you confirm that asset values have been, indeed, inching up in the MR space specifically and, you know, up against your outlook for the market this year, what your anticipation is for 2018 asset value momentum?
Anthony Gurnee (CEO)
Yeah, I think the story for the older ships is a bit different than the newer ships, so there perhaps hasn't been a move up in the values for older ships. But for the newer ones, particularly Eco designs, which is, in reality, the bulk of our fleet in terms of value, they do appear to be moving up. Obviously, transaction volumes are very light, but there have been a couple of reported sales at, you know, meaningfully higher numbers. And so it seems like the sentiment has shifted a bit and the trend line is up. And indeed, every $1 million per ship is about $0.90 in the EPS.
Jonathan Chappell (Analyst)
Yeah.
Anthony Gurnee (CEO)
Yep.
Jonathan Chappell (Analyst)
In six-
Anthony Gurnee (CEO)
$0.86, yeah.
Jonathan Chappell (Analyst)
Is there a way to kind of gauge... I mean, once again, we get the broker reports weekly, so we can kind of make our own estimates, but you're in the market closer?
Anthony Gurnee (CEO)
Mm-hmm.
Jonathan Chappell (Analyst)
That creative acquisition, that was a great chart that you put in there on, you know, what the buyback did to your EPS at different rate assumptions. Is there any way to gauge kind of how much asset values are up since you made that transaction in late November?
Anthony Gurnee (CEO)
So in late November, you could—I mean, you could argue that, the modern ships have increased in value by $1.5 million.
Jonathan Chappell (Analyst)
All right. I mean, so that's incredibly meaningful. You bought stock at a discount to NAV, and your NAV is up-
Anthony Gurnee (CEO)
Yeah.
Jonathan Chappell (Analyst)
You know, at least a dollar since that time.
Anthony Gurnee (CEO)
Yeah.
Jonathan Chappell (Analyst)
So that just leads to my last question, and maybe we've talked about this in the past in a different way. But if I look at your fleet, there's four ships that are, I think 12 years or older. Three of them are 14 or older. And it seems to be like a tremendous arb right now of your stock trading at a massive discount to NAV. Would you look at potentially monetizing those ships, kind of focusing on the core eco fleet, the very modern ships, and executing another buyback to, you know, get that same type of accretion that you did through the Greenbriar transaction?
Anthony Gurnee (CEO)
It's an interesting idea. Yeah, you know, I think the challenge with share purchases that given our average daily trading volumes, it's difficult to do anything in scale, which is why the Greenbriar transaction was such an opportunity for us. But yeah, if especially at current levels, if we saw a way to kind of meet all of our other considerations and buy back a meaningful number of shares at these levels, obviously that would be attractive.
Jonathan Chappell (Analyst)
Mm-hmm. All right. Final one for me, I'll turn it over. It seems also from broker reports that the time charter market's also been strengthening a little bit amid the volatility. And at least to me, it seems like there's been a two-tier market kind of widening, where eco ships are sitting maybe in the high 13,000s, up to $15,000 a day, and maybe some of the older ships a little bit lower. Once again, can you confirm that? And obviously, you wouldn't be expected to lock in ships at time charters at the perceived trough of the market. But kind of how does that translate then into views on asset values as well?
Anthony Gurnee (CEO)
Well, it is correct that time charter rates for MRs have been moving up, especially for the newer ships. And what's happening is that, in particular, oil traders are taking on more tonnage and rebuilding their controlled fleets. They're trying to do it quietly, but they're doing it at higher levels than, let's say, three months ago. And that's clearly a very strong signal. I mean, they're the most knowledgeable people in our segment. And so when they start doing that, that's a very bullish sign, and that also bodes well for asset values longer term.
Jonathan Chappell (Analyst)
Mm-hmm. Okay. Thanks for the comments, Tony. Thanks, Paul.
Operator (participant)
The next question comes from Ben Nolan of Stifel.
Ben Nolan (Analyst)
Yeah, thanks. So I have a handful. The first one is, I suppose, Tony, may be a little bit theoretical, but one of the things that we've been trying to wrap our head around is what is causing the weakness in the product tanker market despite strong demand? And I think that the consensus view is that the inventory drawdowns have been the culprit there. I am curious if you guys have sort of thought through what the ultimate impact of that would be, or maybe another way to think about it is, inventory drawdown is neutral, what do you think the product tanker market would look like today?
Anthony Gurnee (CEO)
...Well, we are in a much improved rate environment from three months ago. So I think that's one important point to make. Rates have come off just recently in the last couple of weeks. But, you know, even firm markets or firmer markets are a bit volatile, and we don't think the winter is anywhere near over. So we think, you know, in fact, even the last day or two, rates have been strengthening quite a bit. So I think we believe we're set for a reasonable winter market. I think what's holding back the MR market at the moment is probably two factors. One is that even though inventories that are at a low level right now, oil prices have increased significantly, you know, therefore, bunker prices have gone up a lot.
If we were dealing with oil prices from six months ago, our TCE would probably be $3,000 a day higher, but that's all been taken away because higher bunker prices, but that, that's just the way it is. But on top of that, you know, the oil market, at least last look I had, was in backwardation, and that's, that's not good for storage activity. So I think, I think if you see a return to a contango shape in the curve and, you know, combined with currently low levels of inventories, you would see a lot more activity, a lot more trading activity and a lot more cargo going or product going into storage, and that, that would be good for the business.
So I think there is a, you know, component of demand that could return to the market very quickly under those conditions.
Ben Nolan (Analyst)
And so to that extent, is your view that the market is sufficiently tight enough currently, such that, you know, should the curve flatten or whatever, and trading activity pick up, that it would have a meaningful impact on day rates and, you know, ultimately, earnings?
Anthony Gurnee (CEO)
Yes. Yeah, we-
Ben Nolan (Analyst)
Okay.
Anthony Gurnee (CEO)
Yep.
Ben Nolan (Analyst)
So then my next question is, something that we've kind of been hearing around a bit is that a number of other of your private competitors in particular have been facing some more severe cash flow challenges as of late, given the market conditions that have been a little bit persistent. Are you seeing any distressed opportunities beginning to materialize? Obviously, asset values for modern ships have held in reasonably well or going higher, but you know, again, we're kind of hearing that there are some issues in the market for certain owners. Is that materializing in any way with respect to opportunities that you've seen?
Anthony Gurnee (CEO)
Yeah, I think in short, not yet, but it could. But then, of course, the challenge is always to make sure that the opportunities represent ships that we would actually want to own.
Ben Nolan (Analyst)
Okay. And then lastly, following on something that Noah had brought up in your answer to his question on the potential demand side developments of the low sulfur or sulfur emission regulations. You'd mentioned that obviously, there will be a lot more MGO needed, and that would translate into demand for, you know, MRs carrying MGOs. Curious, what, what that looks like today? How much, how much gas oil are you moving currently? And, you know, and, you know, what would that delta perhaps look like in a, in a, in a 2020 environment?
Anthony Gurnee (CEO)
That's a really good question. I don't have that, you know, at hand. We'd have to kind of think that through. But I think the global bunker requirement is, like, 5 million barrels a day, and if something like two-thirds of that or three-quarters of it went from heavy fuel oil to MGO, that's probably a significant increase in demand for gas oil and middle distillates in general. And, my favorite quote around the topic is from a while back, but this oil analyst said that there appears to be enough distillate production to meet the requirements that are going to come into place in 2020, but the problem is that that production is not in the right place.
Ben Nolan (Analyst)
Mm-hmm. All right, sounds good. I appreciate your time.
Anthony Gurnee (CEO)
Thanks.
Operator (participant)
Our next question will come from Michael Webber of Wells Fargo.
Michael Webber (Analyst)
Hey, good morning, guys. How are you?
Anthony Gurnee (CEO)
Good.
Michael Webber (Analyst)
Hey, Tony, I wanted to try to tie together a couple lines of thought here just around the conversation you just had around MGO and the 2020 regs with the comment that you thought that higher crude prices were providing a headwind for TCEs in the back of firmer bunkers. In the scenario where we're actually short MGO and post-2020, and we've got to store and/or, you know, have some less efficient ton miles or kind of less efficient moves to get that into the right spot.
Is the right way to think about this, that kind of a scenario is would actually end up being a headwind for MR rates, unless you're actually the one providing the MR for storage or that particular move, that wouldn't that have a larger impact on bunkers and ergo, your TC levels?
Anthony Gurnee (CEO)
Any source of employment or demand for MRs is good for the overall sector because MRs are completely fungible. So if you're taking ships out of the market for storage, just like with VLCCs, it definitely helps. So we think that you know that additional cargo movements and potential storage increases demand. Now, if you're in a relatively tight market to begin with, and bunker prices go up, then the ship owner is in the driver's seat and can actually negotiate higher rates. The difficulty is when the market's weak and bunker prices go up, or let's say, bunker prices go down, even then, you know, then the charter is able to extract that value in the negotiation.
Michael Webber (Analyst)
Right. So, the expectation is the market is firm enough that, you know, any sort of knock-on impact on demand is going to supersede the inevitable bump in bunker prices globally, as everybody's basically short?
Anthony Gurnee (CEO)
Yeah. So the question is what, what happens first?
Michael Webber (Analyst)
Right.
Anthony Gurnee (CEO)
I don't know.
Michael Webber (Analyst)
I guess if we're in a scenario now where higher crude prices are already weighing on TCEs, I guess it just seems a little, a little too rosy, I guess, to suggest that it would only be a net positive.
Anthony Gurnee (CEO)
Well, it'll be a net positive, but it won't, won't only be positive. And clearly, you know, everything else being equal, the higher bunker prices that we pay because we're burning MGO will obviously take away from our TCE. But, but again, you know, this was our experience in 2015, is that when, when bunker prices dropped, freight rates didn't. In fact, freight rates, freight rates went up because the ship owner, you know, was basically effectively a seller's market, right?
So, you know, in this situation, if demand is increasing, and hopefully we're in a much better place anyway in 18 months, so that we're in a strong charter rate environment, any incremental demand is going to help things and any incremental cost associated with burning a more expensive fuel, I think, could be fairly effectively passed on.
Michael Webber (Analyst)
Okay. Yeah. No, I mean, there are a lot of moving-
Anthony Gurnee (CEO)
Yeah
Michael Webber (Analyst)
... moving pieces of that, so I appreciate you swinging at it. Just one more from me, and you touched on this a bit earlier, I think, with Jon's questions on around buybacks. But you know, the dividend policy, you know, while you're not paying a dividend now, it's the policy is actually working as intended, right? You're not paying something out and getting over your skis, so it seems prudent and probably the reason why this policy is in place to begin with.
Anthony Gurnee (CEO)
Yeah.
Michael Webber (Analyst)
I'm just curious, as you look at 2018 and 2019, are there any factors that you think could ultimately change that? I guess you're thinking around that longer term or when you evaluate, you know, your policy around return of capital, you know, what are the bigger things you're looking out for in terms of potential pivots?
Anthony Gurnee (CEO)
Well, I think we frame up our dividend policy, which we're quite happy with at the moment-
Michael Webber (Analyst)
Mm-hmm
Anthony Gurnee (CEO)
... in terms of overall capital allocation, not just returning capital. And that's really what we want to focus on is, you know, what capital allocation decisions can we make over time that will maximize value in a very cyclical business? So far, we think we've gotten it right. We've returned a lot of capital. In fact, we've returned about $1.50 through dividends and share repurchase, perhaps even more with share repurchase, you know, since we went public five years ago, and that's a pretty large number. At the same time, we've made some pretty astute investment decisions as well, we think.
So, you know, our focus is on the, you know, the aggregate factors that play into overall capital allocation. And at the moment, we're happy with our dividend policy.
Michael Webber (Analyst)
Fair enough. One more, and I'll turn it over. Just in terms of what you're seeing today within the Chinese trade, obviously, a lot of pressure on naphtha, which I think is stemming from the new tax laws. Have you seen any structural changes there, in terms of what that might mean for your inbound mix, and whether you see any potential? I know it's going to be mostly, I guess, LPG that would make up the difference, whether there's any sort of kind of pet chem kind of knock on that you could potentially benefit from there.
Anthony Gurnee (CEO)
Well, that's a good question, and to be honest, I'd have to go back and talk to Gernot about that to get a proper answer. But what we're observing is that there are some fairly long-haul MR voyages taking place with naphtha.
Michael Webber (Analyst)
Mm-hmm.
Anthony Gurnee (CEO)
So there is an arb, and it has been employing MRs in particular, or at least on a larger scale, and that's been good for us. But there is this ongoing battle between Naphtha vs LPG, the feedstock for petrochemicals. I think that's more of an issue for LRs than for MRs.
Michael Webber (Analyst)
Okay, that's helpful. All right, I'll turn it over. Thanks, guys.
Operator (participant)
Next, we have a question from Magnus Fyhr of Seaport Global.
Magnus Fyhr (Analyst)
Yeah, good morning. Just a question on the 2020 regulations. Seems like the shipping industry is getting ready for 2020, but this seems like a huge logistical challenge for the refinery sector. In your conversations with them, what do they say about getting ready for this within two years? And do you think they're going to be ready?
Anthony Gurnee (CEO)
I don't really have an educated response to that. You know, I can talk about what we're hearing from other shipowners and maybe oil traders a little bit-
Magnus Fyhr (Analyst)
Sure
Anthony Gurnee (CEO)
... you know, in terms of as it, as it pertains to kind of freight and cargo movements and that kind of thing. But, you know, I-- the complaint is that the, the IMO was insufficiently clear far enough in advance to give the refineries confidence to make, make the, capital investments required to produce the, the grade needed. But somehow, I think they're going to manage it. And as I mentioned earlier, I think it's more a question of where is it produced for vs where is it going to need to be consumed, and that could result in a lot of cargo movement, in particular on MRs.
Magnus Fyhr (Analyst)
... Okay. Thank you. And just one question on the, I guess, the fix- the bookings for 1Q. It seemed like the % was pretty high for the, for the IMO, and the MRs, 87%. Should we read into anything of that? Why, why was that number a little higher than, than normal?
Anthony Gurnee (CEO)
It really, it's just, we have a relatively small number of those ships, and they, they can sometimes engage in fairly short voyages and other times on very long haul voyages. So in particular, they're doing some very attractive veg oil voyages at the moment, which, which are filling up the quarter, you know, almost completely now.
Magnus Fyhr (Analyst)
Okay. Very good. That's it for me. Thank you.
Anthony Gurnee (CEO)
Thanks, Magnus.
Magnus Fyhr (Analyst)
Thanks.
Operator (participant)
Again, if you'd like to ask a question, please press star, then one at this time. Our next question will come from Fotis Giannakoulis of Morgan Stanley.
Fotis Giannakoulis (Analyst)
Yes. Hi, gentlemen, and thank you. Tony, I want to ask to follow up on the weakness of the market that we saw since the beginning of the year. It seems that part of that has been the weak demand out of Europe because of a drop in refinery margins. Last few days, European refinery margins have started to pick up, and I'm wondering if you start seeing some better activity out of Europe that will spread the fleet wider throughout the Atlantic.
Anthony Gurnee (CEO)
Yeah. Thanks, Fotis. The Americas market is also tightening at the moment. The tonnage list is relatively short, and there have been a lot of cargoes in the last two days, so that's definitely firmed. Europe remains, you know, the trend there is also firming. So we think that the Atlantic Basin should look a lot different in a week or two.
Fotis Giannakoulis (Analyst)
Okay, and how do you expect this tightening market in the Atlantic to play out during this turnaround season? When shall we expect to see rates reaching or even exceeding the levels of the period contracts indicate right now?
Anthony Gurnee (CEO)
Well, at the moment, activity in the Atlantic is up to around $12,000 a day. And so if you're talking about one-year TC rates being up in the mid- to high 13s, we could get there fairly quickly. I mean, we were over that level two weeks ago. So, you know, we think that it's... My own view is that the winter is far from over, that we have a lot of weeks and months ahead of us, which should deliver some pretty good results, in the Atlantic and in the Far East. So, you know, overall, we're relatively bullish, at least for the next few months.
But I think overall, there is a dampening of activity relating to, you know, the higher fuel price, which higher oil price, which has squeezed refinery margins and pushed the market into backwardation, and that discourages storage activity.
Fotis Giannakoulis (Analyst)
Thank you, Tony. Can you give us a little bit more color about the financing of the latest acquisition? I think you mentioned in your press release that you did an operating lease. Does this mean that it's a sale-and-leaseback, it's off-balance-sheet with this vessel again? Can you indicate for how long is this operating lease?
Anthony Gurnee (CEO)
Yeah, six years. It's called—I mean, the terminology is the Japanese Operating Lease. However, we're booking them as capital leases because of just the, you know, U.S. GAAP requirements and the interpretation of that. So these are being booked as debt or capital lease obligations on our balance sheet.
Fotis Giannakoulis (Analyst)
Okay, that's clear. And one last question. The last few months, if not year, there is a lot of discussion about private fleets controlled by financial investors that they might be looking to, in one way or another, to exit their position or even going public, either directly or through a reverse merger with an existing player. I understand that at this point, issuing a stock below NAV, it wouldn't make any sense, but if there were an NAV to NAV transaction, is this something that you would consider? Are there any discussions that they are that might be in development and that we might see something in the future?
Anthony Gurnee (CEO)
Yeah, obviously, we wouldn't comment on any activity, but I would say that, you know, in principle, an NAV to NAV transaction could be attractive, but it's got to be with the right ships, and it's got to result in a continuation of our current shareholder profile and distribution. So it certainly is, in principle, something of interest, but at this point, it's more theoretical than practical.
Fotis Giannakoulis (Analyst)
Thank you very much, Tony.
Operator (participant)
Our next question will come from Randy Giveans of Jefferies.
Chris Robertson (Analyst)
Hey, guys. This is Chris Robertson on the phone for Randy. Thanks for taking my call. My first question is in regards to current rates. Could you provide any details, regarding current rates vs the headline numbers that are out there?
Anthony Gurnee (CEO)
Which headline numbers are you referring to?
Chris Robertson (Analyst)
Just in terms of what's published, either through Clarksons or Howe Robinson and kind of the things that are public and out there.
Anthony Gurnee (CEO)
Yep. Yeah, I think the Howe Robinson report is a particularly good one. If you're looking at the daily one, that's got, like, the 40 or 50 different routes on it. And if you look at the one column vs the other, it's not Eco design, it's actually just Eco speed. So in reality, the markets... And they have enough routes that they come up with a good balance. And I've always noted that I think that's actually a pretty fair assessment of where the market is. And so that would indicate today that the MR market globally is probably around 12,000 a day, but that's down significantly from a few - a couple weeks ago.
Chris Robertson (Analyst)
Okay. Then, my second question is in regards to slide 13. I was wondering if you could provide any additional kind of color around your dry docking cadence for the year, specifically the number of ships you expect?
Anthony Gurnee (CEO)
Yes. I think we have 6 ships in dry dock this year, and approximately CapEx on that is about $5-$5.5 million, so under $1 million per ship, kind of between $600,000 and $800,000. And that would include some ships that are in water surveys and special surveys as well.
Chris Robertson (Analyst)
Okay, that makes sense. Thank you very much for answering my questions. Appreciate it.
Anthony Gurnee (CEO)
You're welcome, Chris.
Thank you.
Operator (participant)
And this concludes our question and answer session. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.