Ardmore Shipping Corp (ASC) 2015 Q3 法說會逐字稿

Good morning and welcome to the Ardmore Shipping Q3 2015 conference call.

(Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Anthony Gurnee, Ardmore CEO. Please go ahead, sir.

Thank you and good morning and welcome to Ardmore Shipping's third-quarter 2015 earnings call. First let me ask Paul, our CFO, to describe the format for the call and discuss forward-looking statements.

Thanks, Tony and welcome, everyone. Before we begin our conference call, I would like to direct all participants to our website at ardmoreshipping.com where you will find a link to this morning's third-quarter 2015 earnings release presentation. Tony and I will take about 15 minutes to go through the presentation and open up the call to questions.

Turning to slide 2, please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from results projected from those forward-looking statements. 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 2015 earnings release, which is available on our website.

And now I will turn to call back over to Tony.

Thanks, Paul. So turning first to slide 3. We will follow our usual format to discuss the quarter, but we'll also take some time at the end to explain the impact of our new dividend policy.

Turning first to slide 5, we are reporting net income for the quarter of $13.6 million equating to $0.52 per share. We are continuing to deliver strong spot MR performance with our TCE coming in at just over $24,000 a day, underpinning an excellent quarter. Our well-timed fleet growth is further boosting performance with eight tankers delivered so far in 2015 and the remaining two in November.

The outlook for the product tanker market is very positive as in the short-term a strong winter market appears imminent, and in the medium term, supply demand fundamentals are continuing to improve notably with the MR order book set to drop to around 10% to 11% by year end, its lowest level since 2001.

We're continuing to maintain control of operating costs and overhead expenses and are below budget year to date, thus sustaining a meaningful cost advantage.

And finally, consistent with our dividend change announced in September, today we are declaring a quarterly dividend of $0.31 a share under the new 60% constant payout ratio policy, representing it more than tripling from the second quarter.

But before we move on, I think it's worth taking a step back to reflect on what we've done since the IPO. We've grown the fleet as we said we would. We've done this with modern high quality and fuel-efficient tonnage, which is reflected in our earnings performance, and we've reserved and now demonstrated our operating leverage upside by being judicious on new equity issuance. And we've not only grown our earnings-per-share, but are now returning those earnings in the form of cash to shareholders through our new dividend policy.

I know there are always questions regarding our next moves, so if anybody is looking for guidance on our approach going forward, they only have to look back over the last two years to find the answer, at least with respect to our objectives.

So turning to slide 7, product tankers have had a great run so far in 2015, and the market looks set to continue for the foreseeable future, given the very strong secular trends and the ongoing boost from oil market volatility and supply chain congestion.

MR triangulations east and west for the first nine months of 2015 have increased significantly from the same period last year with Atlantic Basin up 112% to around $26,000 a day and east of Suez up 78% to around $24,800.

US refineries are currently operating at only 86% of utilization due to scheduled maintenance turnarounds, setting the stage for a strong winter market as they come back online. The EIA is reporting US petroleum products exports are up 12% through July compared with the same period last year, so there continues to be meaningful growth in this important market.

Middle East and India refinery expansions are set to add more than 1 million barrels per day of product volumes over the next year being driven by very simple fact. With global oil consumption growing now by 1.2 million barrels per day annually, the new refinery capacity required to meet this demand is coming mostly from the Middle East and India, adding probably around 1 million barrels a day in cargo volumes on a current base of only 20 million barrels a day transported by sea. So this factor alone is driving demand growth by around 5%.

Meanwhile, the order book is set to drop to its lowest level since 2001. This is hugely significant. While the order book had risen to close to 20% about two years ago, a large part of this tonnage is now delivered and has been fully absorbed by demand growth.

Going forward, we think the activity for ordering will be muted for three key reasons. First is that most shipyards are unwilling to take in orders at current pricing, which is below their breakeven. Second is that new regulations on engine additions are going to cause a hiatus in ordering activity as it will increase newbuilding prices and actually reduce fuel efficiency on those new ships. And third is that there does not appear to be any of the enthusiasm that existed two years ago among capital providers to support new orders.

So our conclusion on the product market is simple. The outlook is extremely bright in view of the impending winter market and the excellent supply demand fundamentals.

Turning to slide 8, the chemical tanker market. Chemical tanker rates have strengthened in the third quarter as evidenced by our chartering performance up 31% year over year. The chemical tanker market is clearly at an earlier stage of recovery than product tankers, but the outlook is nonetheless positive. First, feedstock for most chemical and product chemicals are petroleum and gas related, so cheap pricing is boosting production. Second, seaborne transport continues to grow with global trade. Third, continued expansion of Middle East Gulf petrochemical reduction is an important driver of long-haul chemical tanker trade. And fourth, the US Gulf is set to continue growing on the back of cheap shale gas.

Simpler coded chemical tankers such as those in our fleet are benefiting from the strong product tanker market by engaging in CPP trade to a greater degree than usual with, for example, our fleet currently spending 50% of the time in CPP, 25% in veg oils, and only 25% in commodity chemicals. Importantly, though as the chemical market strengthens, these ships can and will swing back into more chemical business, which can provide a meaningful boost to our earnings.

Need time fleet growth in the chemical sector is supposed to be -- is expected to be relatively moderate with an estimated 75 deliveries representing net fleet growth of around 5% this year and an order book declining to around 11% by year end.

Moving on to slide 10, we're continuing to position our vessels to take full advantage of the strong spot market. Around 72% of our revenue days will be spot for the fourth quarter, up from 67% for the first nine months. As we explained before, our chartering strategy is focused solely on revenue and value maximization, and at the moment, other than for some of our chemical tankers, we see the most value in stock trading.

So turning now to slide 11, the average number of ships in operation for the third quarter was just over 21 and will rise to 24 by the year end. Our new building program remains on track. Eight have delivered so far this year with the remaining few deliveries in the next few weeks. And with these new building deliveries and taking into account two drydockings in the fourth quarter, our revenue days will increase by 5% to the fourth quarter as compared to the third quarter and by 70% for the full year as compared to 2014.

In 2016 our revenue days will still increase by a further 23% as compared to 2015. So the revenue growth momentum will continue well into next year on a year-over-year basis, even in the absence of any further growth, which we intend to do if the conditions are right.

Of the two remaining vessels, the one MR will join a proprietary spot trading arrangement with a leading oil trader, and the 25,000 deadweight chemical carrier will be employed on a one-year contract.

And with that, I'll hand the call back to Paul to discuss our financial performance.

Thanks, Tony. Starting with slide 13, to reiterate Tony's comments, we are pleased to report a very strong financial performance for a net profit of $13.6 million and $0.52 per share for the quarter. This was achieved at an average of 21.3 ships in operation, which is very significant in light of our built-in fleet growth this year.

Our strong profits reflect our fleet expansion, operation efficiency and continued improvements in the charter market. The Company reported EBITDA of $24.5 million, which represents an increase of $18.7 million from the third quarter of 2014. Revenue was $47.2 million, an increase of $28.3 million from the same period last year.

Our vessels are running under budget for the first nine months. Net operating costs for the Eco-design MRs were $6042, while we Eco-design product chemical tankers came in at $5896.

Our Eco-mod vessels were on average for both products and chemicals $6556 per day for the first nine months. Depreciation and amortization for the third quarter was $7.1 million, and we expect the fourth quarter to be approximately $7.9 million. Corporate overhead costs were $2.8 million in the third quarter, which on a fully delivered basis works out around $1200 per ship per day, which is among the lowest of our peers. To point out, this is about our run rate due to timing and one-time expenses, but we're on budget for the year to date.

Our interest and finance costs were $3.8 million, which is net of capitalized interest related to the newbuildings in the quarter of $350,000. We expect interest and finance costs in the fourth quarter to be approximately $4.5 million, net of capitalized interest of $50,000. The above resulted in net profit for the third quarter of $13.6 million or $0.52 per share. As Tony mentioned earlier, if our full fleet of 24 ships was in operation, Ardmore's EPS would have been $0.56 per share for the quarter.

Turning to slide 14, we are again reporting very strong charter rates. We had 11 MRs operating in the spot market unspooled at the end of the quarter and an average of $24,269 per day. Fitting out with the various ship types, we had 80 co-designed MRs in operation, which earned an average of $20,540 per day for the quarter. Our six Eco-mod MRs earned $24,625 per day on average.

As of today, we have eight ships trading in the spot market directly, and in line with the stronger market, the passengers are earning an average of approximately $20,500 per day for voyage and progress with approximately 34% a day both for the fourth quarter.

Our Eco-designed product and chemical tankers earned an average of $18,139 per day in the third quarter, while the Eco-mod product chemical tankers earned $13,840 per day, which is a significant increase from one year ago.

Again to reiterate, Ardmore has substantial upside potential, and every $1000 a day increase in rates across the fully delivered fleet equates to $0.34 per share in EPS. And MR spot rates of $24,000 and based on 12 MRs in the spot market for pools, we estimate that our earnings will be around $2.20 per share annually. As Tony will highlight later, this also has a very significant impact on our future dividends with our new dividend policy.

On slide 15, we have our summary balance sheet, and at the end of September, our total debt was $389 million compared to total capital of $750 million, leaving our leverage at 53%. Our cash on hand was $43 million, which included working capital. These are net debt at $316 million.

In terms of net asset value, as vessel volumes improved, every $1 million increase in vessel values equates to $0.92 in additional NAV per share for our shareholders.

Turning to slide 15, you all know we are fully funded with committed bank financing in place for all of our newbuildings. At the end of September, we had $39 million remaining in yard installments and delivery costs, and we have $42 million in committed debt. Our current MR rates will be generating around $20 million in surplus cash per quarter over the full fleet, which is significant.

As I mentioned, our leverage stands at 53%, and we expect our leverage to peak out at around 55% with significant cash on hand. We feel the Company is appropriately levered, and it is important to note that all of our debt is amortizing. So our leverage will start reducing again from December of this year.

And with that, I would like to turn the call back over to Tony who will discuss our dividend, as well as some closing comments.

Thanks, Paul. So turning to slide 18, we've like to take a moment to highlight our new dividend policy which we announced in September. This new policy is a constant payout ratio of 60% of earnings from continuing operations, which is net income adjusted for gains and losses. As such, it's very transparent and can be anticipated based on earnings forecasts from analysts. It will be announced with each earnings release and paid out about two weeks later.

Given our current stock price and earnings performance, the annualized yield based on this dividend is around 10%, a meaningful number when compared to other indexes and yield instruments. And if anything, it highlights the very attractive trading level for ASC today. It also highlights our operating efficiency, which we've worked hard to build by maximizing our chartering performance and running a tight ship when it comes to OpEx and overhead. And it leaves us with 40% of our earnings to engage in growth, debt reduction and share repurchases over time.

And to underscore a final point, we routinely comment that every thousand a day across the fleet adds $0.34 to earnings, but it also means a $0.20 increase in our annual cash dividend to shareholders.

So to recap then on slide 19, we are reporting strong financial results. The near-term outlook is very positive. We are anticipating a strong winter market, driven by refineries coming out of turnaround and underpinned by continuation of oil price volatility and supply chain congestion relating to the new oil market. Strong secular demand growth continues as Middle East refinery expansion and complexity of trade drives tonne mile demand over the long-term, almost independent of underlying oil consumption growth.

The MR order book is set to decline by year end to 10% to 11%, the lowest since 2001 as deliveries continue, and new ordering activity remains relatively low with regulatory changes expected to create an ordering hiatus starting shortly.

We are maintaining our spot-oriented chartering strategy and positioning the fleet for continued strong performance. And we are announcing today a quarterly dividend of $0.31 a share under the new policy, representing it more than traveling over the previous quarter. And we are well-positioned now to take advantage of further improvement in rates as I just mentioned. Every increase in -- of $1000 a day across the fleet is $0.34 and now $0.20 in dividend.

And with that, we are now pleased to open up the call for questions.

(Operator Instructions) Doug Mavrinac, Jefferies.

Thank you, operator. Good morning or good afternoon depending on where you are. Obviously the third quarter was tremendous, so first off congratulations I think are definitely in order.

When we look at the third quarter, clearly the market itself strengthened for many of the reasons that you guys have talked about in recent quarters, but what I was most impressed by was the I think relative outperformance of your MRs. I mean when we look at what your ships earned relative to some of the industrywide benchmarks that we watched, we have you guys outperformed by a good $2000 a day.

So my question is, what do you attribute that strengthened performance to? Over and above just the market being strong, was it your positioning? Was it some of the Eco-mod/Eco-design premium that you've received during the quarter? So if you had to attribute something in terms of how well your ships perform relative to the industry, what would it be?

Well, first of all, this is the third quarter. I think we're one of the first to announce, and I would expect that other companies are going to come in with equally strong results.

I think one point worth highlighting is the fact that we all don't trade our ships just on the benchmark rates. And it does indicate the fact that when the market is strong, there are other of these non-core trades or the non-benchmark trades which can be actually even stronger than the benchmarks would suggest. So that's West Africa, South America, various Asian trades, etc., ad it's very often the access to backhaul or next like trades, which really dramatically shorten the balance trends that results from these types of numbers.

Got you. So, Tony, would you say that your scale maybe now that you've grown to this point enables you to take advantage of some of those non benchmark routes and non benchmark opportunities?

Well, I don't think anybody could accuse us of having scale just yet, but we try really hard and we've got a great chartering team. (multiple speakers)

Also remember that we have in our spot employment is in a variety of forms. Some we trade ourselves, some are with others. So I think some of this might be the strength coming through from the strategic relationship we have with one of the major oil traders.

Got you. Okay. And then just second question, looking ahead to the fourth quarter, refinery turnaround season is going to be coming to an end here soon. You are starting to see it showing up in MR spot charter rates. So that seasonality that normally happens during the quarter seemingly is upon us, and you guys mentioned that in your presentation.

In your presentation, you also mention Paradip. So that thing is finally supposed to start producing in December. My question is, do you see that as being a potential needle mover for the market given that 300,000 barrels a day of capacity? And if so, is there a particular asset class that would benefit from that thing coming online?

Well, refineries typically don't just flip the switch and run at full capacity. So there will be a ramp-up. I think that is one point. I think it's clear that these new refineries opening up in the Middle East and India, they benefit not just LRs but MRs as well.

Right.

So I would say, look, I think these new refineries are just part of this ongoing -- you can call it a juggernaut of new refinery capacity, which is oriented toward export markets, which is really dramatically driving demand growth in the product sector. So I would say it's all part of the continuum of demand growth created by these new refineries.

Got you. And then just two final questions. One, whenever I'm talking with investors -- people that know the refining business very well, one of their concerns is that you have a glut of refined products. Refining margins are going to be that great going forward, etc., etc. Maybe they are just extrapolating the currencies and the weakness, but my question for you, as a product tanker owner, in the situations where you have oversupplied markets and a quote-unquote glut of inventories, from your perspective, is that a good thing or a bad thing as it pertains to refined products demand as it pertains to the potential for pricing disconnects and dislocations and just the ability to move all of that excess? So when you view a glut of refined product inventories, is this a good thing or a bad thing as a refined products tanker owner?

Well, it's very certainly a good thing because what it means is that ships are engaged and not only in very interesting long-haul trades, which are price-driven arbitrage opportunities that typically wouldn't necessarily be, but it also means that ships are taking longer to load discharge imports. And then also then -- because that has a knock-on effect when ships start missing their canceling dates for their next voyage, then charters have to scramble to replace that with market tonnage. So overall it's very, very positive for the business.

Got you. Very helpful. Then just a final question before I turn it over. Looking at your employment profile, you guys have a number of vessels coming off of time charter contract in the December/January timeframe. We saw a time charter contract announcement today at a very strong rate. Spot rates are obviously very strong and probably strengthening.

So my question is, how do you weigh time charter versus spot on those ships? Is it an opportunity type of decision that you're looking at in terms of, say, can we lock in at this rate, or would you prefer to have a certain proportion of your fleet on time charter almost regardless of rate? So how do you kind of weigh that on these ships that are coming up in terms of the expiration on them?

We don't really think of one year time charter as giving any kind of meaningful -- either risk mitigation in terms of the market because on average a portfolio of one year TC runs off in six months. So that's not the reason to do it. We do it simply for revenue maximization, or in some cases time charter deals are attached to larger packages in kind of a relationship arrangement.

I think we could expect those charter rates to reset at much higher levels in line with the market. If we do that, we might just take them back and trade the spot. We'll just have to judge that when the time comes.

Got you. Very helpful. Thanks for coming and congrats, once again, on a very good quarter.

Jon Chappell, Evercore ISI.

Thank you. Good morning, guys. Paul, a question for you regarding capital structure of 55% at year end with all the capital commitments now in the rearview mirror. What do you feel is kind of like your target leverage as you go through the next couple of quarters?

And the associated follow-up to that is, when you think about the remaining 40% of EPS, which is obviously if you had cash would be even more, how do you kind of prioritize uses of cash going forward?

That's a great question, Jon. I think our leverage right now is 53%, and it peaks out for the next three or four weeks at 55% when we take delivery of the last ships and draw down the remaining debt. After that, all our debt is amortizing over the course of -- through December, and through 2016 and beyond, the leverage starts coming down and probably next year finishes in the low 50%.

I think we are appropriately levered right now. I think over time depending where you are in the cycle, you want to get your leverage down a little bit further. So that's something we will -- that's one use of excess cash which we will start thinking about. And then the two other kind of remaining perspective uses of cash is obviously further growth and the share buyback.

So in terms of further growth, I think we do have excess cash and will have excess cash to tack on a few ships, and it will depend really on the opportunity set at the time. And then for smaller uses of cash, we can continue with the share repurchase program.

So I don't think in terms of how we prioritize -- and it's hard to say right now -- it's more as we see it at that point in time. But as of now, I think we would be -- the deleveraging is happening automatically, and I think we would probably be keen to tack on a few more ships given our outlook on the market and also share repurchases for kind of smaller amounts of cash, I guess, because it's a little bit harder to put significant amounts of cash to work in the share repurchase program.

Right. And that's a good lead into the next question. Obviously it's pretty clear that you'd like to grow if capital was available to you. I'm not going to ask how you get that because I'm not sure there is a good answer for that right away. But how long is the window of opportunity open for assets? The time charter market is moving on. You said yourself, Tony, it's probably going to reset at a higher level. Asset values have kind of lagged across the Board, the cash flow generation from the assets today. Do you see the asset values kind of resetting as well as the time charter market resets, and how narrow is that window for you to move tag ships before they kind of run away from you pricewise?

We won't know that until we see it happening, and we're not quite seeing it happening yet. But I will say that when you see the kind of charter rates that one of our colleague companies announced this morning, it's an excellent level, and I think those kind of levels will definitely support a rise in secondhand values.

And, look, the reality is I think we have engaged in some pretty aggressive growth over the last two years. We'd like to continue growing, but if it's not going to be accretive or if the opportunities are not there to acquire high-quality ships, we obviously won't do it. But in terms of building momentum and building value in the shares of what we've done already, that's all certainly heading in the right direction.

Got it. One, just an industry follow-up to something that Doug brought up before, it's becoming more widespread in ship broker reports that there's almost kind of forced floating storage in the product tanker market, whether that's actually ships being parked or whether they are being rerouted along the tip of Africa as opposed to the Suez Canal? Are you seeing any of that, whether it's through your relationships or even more directly through the chartering of your own ships?

There is -- it's hard to put a number on it that's reliable in terms of applying it to a global fleet average. But we definitely compared to, let's say, a year or 18 months ago, we're spending a lot more time in particular waiting to discharge. And so a lot of that is because the short tanks are full, and they can't move the cargo on. But it's either I think largely related to diesel where there is a glut, and for gasoline it's happening where something else is going on, which is countries where they've got fairly significantly rising import volumes but they don't have the infrastructure to handle it. So that's kind of a separate issue, which is also a factor in the market today, but it does not really relate to the glut, per se.

Okay. And then 30 more seconds, just a clarification. Paul, you ripped through a lot of numbers really quickly. And 34% of the MRs at $20,500 for the spot fourth quarter, was that all the MRs, or was that Eco- or Eco-mod?

That's for all the MRs that are trading. The spot ships -- 34% of the spot days on the MRs for the fourth quarter have been fixed at $20,500.

Okay. And I got the depreciation and the interest cost run rate. Did you give one for OpEx? Did I miss that?

No, I did not.

Okay. I didn't miss it. All right. Well, thanks for the time, Paul. Thanks, Tony.

Michael Webber, Wells Fargo.

Morning, guys. How are you? Just wanted to follow up on a couple of questions. You've already touched on the negative, Tony, a bit on the floating stores and the delayed discharge. Just curious if you could try to put a number around that in terms of what impact you think it's having on utilization? I know that's kind of a speculative question, but trying to frame that would be helpful.

And then maybe as you look out into the market for the next couple of quarters, what inning do you think we are in in terms of seeing an elevated degree of structural floating storage, if you will?

It's hard to put a number on because our fleet -- the ones that we trade ourselves is relatively small. So I think it appears to be significant, but again, somebody should be able to use AIS data to calculate this on a global basis, which would be an interesting number to track. But we don't have the time to do that.

But so in terms of where we are, there doesn't appear to be any real end in sight to the glut, and it's apparent that it's becoming more and more a distillate issue. There's going to be enough gasoline demand. In fact, gasoline stocks are down in China. But China now is exporting about 1 million barrels a day of diesel. So that, again, highlights kind of the amazing thing about this business is that I keep on referring to trade complexity. That's what I'm talking about. You get these imbalances, which are continuing to add to demand.

And look, if China is going to be growing at the kind of level it's at now, that's probably structural. That's going to be there for a long time. So it's probably going to get worse. It's probably going to take a long time before it gets any better, and that's just all good news for our business, especially against that backdrop of all the refinery expansion.

Got you. No, that makes sense and actually kind of dovetails into my next question around the fact that we've seen so much demand for low gas and jet fuel and other distillates. But there's a glut of diesel, and it's tough to figure out who exactly wants it.

As it pertains particularly to, I guess, European diesel demand -- and I get questions around Volkswagen and the stuff that is what sort of a systemic impact that could potentially have, it is either going to be pretty minimal or could be pretty important. Just curious as to how you think long-term European diesel demand -- if we were to see that really roll, what sort of long-term impact do you think that has on the tonne mile structure within the market? If the backhaul trade rolls off, what does that do for tonne miles, and does it make the overall level of tonne mile structure significantly more efficient than what we are at today?

You know, I think the structural imbalances around the world other than China, which has been pretty dramatic, they move relatively slowly, and we don't think there's going to be any dramatic move with the diesel deficit in Europe. But they do change over time, and some things fade away a little bit. Others expand a little bit.

So we were as fascinated, I think, as anybody else by this revelation from Volkswagen and thinking about what the impact could be. But we don't think it's going to have an impact in the near-term or even medium-term.

Got you. Okay. And just one more. Just wanted to follow up on one of Jon's questions, actually. So you are either going to talk about that measured acquisition strategy. It all seemed pretty transparent, but just curious around what you see from a value prop perspective here? You've got shipyards probably dragging down prices in an attempt to kind of win new business which is hampering newbuild value and probably bleeding through to secondhand values to a degree. But on the other hand, you've got forward cash flow profile that looks pretty robust.

Net net it would stand to reason that we would see MRs improve in value and give a bit of a NAV uplift. I'm just curious, when you look at current asset values, on a general percentage basis, how do you think about those moving higher? Is there a level at which you are not maybe the high [30s], [40], you know you are not interested in really aggressively expanding? I'm just curious how you think those dynamics play out right now? Because we are seeing that dynamic across a lot of shipping spaces right now, and it's pretty interesting for product because there's such a strong forward cash flow profile?

Well, we do feel that there is a real tailwind behind the market, and the last thing to be lifted are vessel values, and we think that's going to happen.

It's really interesting to note that over the last year vessel values in our sector haven't really moved much at all, whereas they have, for example, in crude tankers. So we think that a lot of that had to do with the fact that people were staring at the order book and saying, wow, this is going to kill the market at some point. But guess what? It hasn't. And now we're going to be down to a level that we haven't seen since 2001 by the end of the year. So I think that combined with the strong winter market could really result in a fundamental shift in psychology in our market in terms of chartering and S&P, and we could see values rise from there.

If you do a straight line from newbuilding down, secondhand values are still below that line. So there's quite a bit of movement upward. And typically in a strong market, secondhand values will rise above that line because they are in the water, and they can generate cash flow from day one and take advantage of that two-year window before a new building would deliver.

Korean shipyards, in particular, are under tremendous financial pressure, and I don't think there's really any interest on the part of their now owners, which are all the banks, like Jackson and KBB, for them to engage in new orders where they are doing it below breakeven.

So we think breakeven is probably now $35.5 million, $36 million. When you add the noise abatement rules and CSR and the new engine, that probably adds $1.5 million to $2 million to an MR cost. So plus nobody really wants to be the first one to order these because they've been bench tested and they seem to work, but operationally they are not proven yet in terms of the new engines. So we think there could be a real hiatus there. But at some point, there's going to be real pressure, and there will be ordering just to meet the ongoing demand. But it will probably be on the back of continued strong spot performance, higher term charter rates at a meaningful rise in secondhand values.

Got you. That was really helpful. Thank you, guys, for the time.

Ben Nolan, Stifel.

Thanks. So my question gets back a little bit to the chartering strategy, and you guys have sort of outlined how you for CA going forward, but really I suppose it is more about what you are seeing from your customers. Has there been a change or a higher level of inquiry for those longer-term time charters like we saw from Scorpio today coming into you guys, and do you think that there is sufficient liquidity in that market? If you wanted to, it would be no problem to lock away vessels at pretty good rates?

Well, look, I think our hats off to Scorpio. Those are great rates, and we think it's a good move on their part, and we think it's the sign of probably something that -- a sign of times to come.

I think that we have always felt that if we could lock in long-term rates in the low [20s], that would be very interesting for us. So I think we maintain that view, and we will just see how the market develops.

So far it's a relatively thin market. One year TC is obviously fairly liquid, but when you get beyond that, it's been fairly thin and kind of backwardated from the one year rate. But that may be changing now, and that's probably on the recognition that we're probably in for a really good winter, and that's on the back of a very low order book.

So it's something that we do track every day. It's on our agenda. We do have ongoing discussions, but we haven't done anything get.

Okay. That's helpful. And my next and last question I guess is for Paul. Obviously the topline revenue is really good, but OpEx is also a little bit below where we expected and where you guys have kind of indicated in the past. Should we think of that as sort of a one-off and that nothing has really changed, or are, in fact, seeing sort of a better, lower operating expense line?

Yes, that's a good question. OpEx is always going to be lumpy from quarter to quarter. We are running slightly under budget, but not materially. So I think you're seeing evidence of us running a proven operation. Obviously we had a lot of new buildings this year which brought down the OpEx as well on a per share basis. But I would expect in the fourth quarter you might have -- there was probably some slight reduction in the third quarter. It might come back a little bit in the fourth quarter. But overall we are running -- the ships are running under budget, and I think it is hardly [202 beta] ships and be also just the efficient platform.

Okay. I appreciate it.

And that's under budget on a forecast basis, not just for the third quarter.

Sure. Okay. Thanks a lot, guys. Nice quarter.

Fotis Giannakoulis, Morgan Stanley.

Hi, guys. Congratulations on a great quarter. Tony, I want to also ask you about the demand for products. There seems to be some uncertainty in the market given the fact that the primary margins have come off from the peak -- whether there is enough demand -- and I'm talking about both distillates and gasoline and how do you see the weakness in the distillate demand in both sides of the Atlantic, and if you see any potential link back on the refinery ramp given the latest weaker refinery margins?

Good question. Look, the bottom line is that with oil consumption growing at 1.2 million barrels a day, which is up a lot from a couple of years ago, product consumption is growing by 1.2 million barrels a day, right? It all eventually gets refined and consumed. So that number is up, not down.

The EIA had forecasted a slightly higher number a few months ago, but this is still a pretty good number. Obviously gasoline is more advantaged than diesel. We're not saying refinery experts but on the refinery sector, but it would appear to us that basically the only way for crude oil to get into the consumers vehicle or power generation is to be refined.

So it's being produced. Probably the price of crude is going to have to drop to make sure it's still attractive for refineries to run, and it's going to get refined and shipped out. You are going to have this imbalance of demand for gasoline versus distillates, which means that for the tanker market -- that's products anyway -- that's pretty excellent news because the distillates are going to get -- it's going to create various congestion and price volatility and cargo movements that you normally wouldn't see.

So overall we're very bullish. European refinery margins are down, but the European refinery business is kind of a dinosaur that's gradually going out of business. So I don't think that's really necessarily a benchmark.

In terms of being a two-way trade across the Atlantic, we'll just have to wait and see if all these revelations about diesel emissions are going to have much of an impact. We're not sure they will, and if they do, it will be a fairly long period during which other things will change.

But, again, I think it's really adjusting. It's not headline stuff right now, but it's one of these very subtle things that's continuing to build is the fact that you have these economies in South America, Africa and other places which either have deteriorating or declining refinery capacity themselves on the back of increasing consumption so that their imports are expanding and expanding and they are not improving their infrastructure so that it's, again, creating more congestion and more disruptions to trade.

So I don't know if that answers your question, but overall we're not concerned about what we see happening with refinery margins at the moment.

So pretty much what you are telling us is that you view the refinery runs will not be affected by weaker margins, and I want to ask you. Even the quite weaker distillate demand and the much stronger gasoline demand, how does the flows of a cargo ship change? Where do you see this distillate that is coming out of China going? Who is absorbing it? What kind of tonne mile differences you have seen the last couple of months?

So, again, just a point on refineries, as the margins get squeezed, the demand is there, but they are going to basically hold off buying until crude price drops and they start running again.

So with regard to distillates, China is a big factor now in terms of their growing exports, and we see that going. It's mostly staying in Asia or down to Australia. It's not necessarily going long-haul, but it's having a knock-on effect so that you are seeing -- overall you are seeing some fairly long-haul trades taking place.

So we think it's positive. I don't think it's quite as simple as saying, well, it's going to have to be shore to sea or it's all going to go into tanks for sure. It's a very, very complex aggregate picture on a global basis. But in the end, it's probably going to result in diesel probably displacing other energy sources for various uses.

And any directions that you see that this distillate is going or have you seen Australian cargos picking up? If you can give us some snapshot of how the market looks like in terms of flows?

Again, we very often we show this map of where all the MRs are at any point in time. It's a very complex global pattern. In fact, it's just seemingly almost random, so no, we can't. But in the aggregate, we can tell you that when you see those kind of export volumes, it is underpinning ongoing demand growth.

Maybe one thing I will point out is that a lot of people maybe don't quite get the very powerful demand growth that has been going on for a long time in our business, and one very, very simple calculation is that over the last seven years really since the peak of the market in 2008, global oil consumption has grown about 1.4% per year.

At the same time, the product tanker demand has grown by about 6%. So these things you talk about now are feeding into an ongoing very powerful ongoing trend of demand growth.

That's very helpful. And can you also talk to us about the forward-looking supply growth? We have seen obviously very strong supply growth the last couple of years, which it has been easily absorbed by the product tanker market. You touched upon the lack of capital, but we all know that the ship owners are not the most disciplined people in the world. How do you see the next couple of years, the supply growth developing, and how long would it take until an increase of supply to bring the market down again?

Okay. So, as we mentioned at the end of the year, if things continue as they are and we think they will, we should be down to 10% or 11% of MRs a quarter as opposed to the existing fleet. So the existing fleet now, by the way, if you think about numbers, the existing fleet is up to around 2000 ships.

So when you think about numbers of orders, you have to think about the fact that that's by far the largest sector, and in fact, that represents by number of ships more than a third of all tankers in the world fleet.

It looks like the order book is going to continue to be very -- deliver rapidly over the next year or so. So by this time next year, all the ships who were ordered kind of two years ago or a year and a half ago, they will all have delivered.

Then the question is, what's going to be coming in -- well, the delivery schedule is lighter, and then there are still open berths in kind of late 2017, right?

So then the question is now, who has the wherewithal and the interest to order in, let's say, the next six months -- six to nine months -- and who's going to finance it? Really those are the questions that we've been pondering.

So let's go back to this Tier 3 issue, right? So here you have a new engine design, which there are two options. Nobody really seems to know which one to pick. Some yards are pushing one versus the other. They create operational issues, and they are much less fuel efficient by about a tonne a day for a MR, plus the operational problems. So who wants to be the first one to order a whole bunch of those? I don't know anybody that's putting their hand up right now.

Really literally as we speak, we think we are kind of at the very end of a window where you could order the old design, if it's an existing design off the shelf and get everything arranged so the keel could be laid by the end of the year. Because after January 1, any new keels laid, the ships have to have all these new features. And it's not just the engine. It's also noise abatement and some additional structural requirements.

So we think that the ordering activity we've seen in the last three months or so has been in anticipation of that, and we think after this it's going to really slow down.

So then I don't really -- we don't have a lot of investors when we meet with them begging us to order new ships. I think the recognition is that one of the surest ways to kill a market is, now they know, is to support companies to go out and order a bunch of ships. That seems to be a pretty unpopular strategy among investors today.

And the other thing is the yards themselves. And I mentioned earlier they are in pretty bad shape, and there's not a lot of patience among the banks in Korea to continue supporting losses. You might see here and there some ships ordered, but not to the kind of numbers you see that are needed to really sustain the fleet to match the demand growth that we are seeing.

So pretty much from what I understand you see that at least the next couple of years with the exception of the next few months, we are going to have a lower fleet growth. Given this view, can we assume that you are not planning to order any additional newbuildings, and your main focus for fleet expansion will only be secondhand tonnage?

Yes. Okay. So, again, to be clear if, let's say, spot rates went to $30,000 a day, three-year time charter rates went to $24,000 a day and newbuilding secondhand values rose by 30%, you are going to see ordering activity. But then we have a whole different problem, and it's a good kind of problem, right? So because once people start ordering, it is going to take quite a while for the ships to deliver.

In terms of what we're going to do, we have to evaluate the circumstances that exist at every point in time and every phase of the market. As we sit right now, we don't envision ordering a lot of new ships, and we would much rather buy secondhand where it promptly resells.

Thank you very much, Tony.

Magnus Fyhr, GMP Securities.

Good morning, guys. Just a question on the chemical tanker market. With the strength that you've seen in the CPP market, I'm kind of curious on your thoughts on the outlook for the chemical market in 2016? You have an interesting fleet with both trading products and chemicals. Have you seen any changes in your fleet with more of your final two, three ships trading CPP rather than veg oil over the last year, and maybe that could tighten up the markets further going into 2016?

No. As I mentioned, now we are trading roughly 50% CPP on our chemical tankers, 25% veg and 25% commodity chemicals. And we think as long as the -- because the reality is that size is a -- there are a lot of ships that just engage in products at that size and more regional trades. So it is a reliable business for the ship type and especially when the overall product sector is as strong as it is. We think that's going to continue.

Meanwhile, we think that the demand for commodity chemicals is also going to grow. And it kind of highlights the very deliberate strategy that we have of operating relatively simple coated chemical tankers because they can really trade both ways. So when the chemical market gets strong, they can benefit and do very, very well in a strong chemical market. But when the chemical market is not quite there, they can trade in these other activities like CPP and veg oil.

Okay. That 50% number, how does that compare with maybe six months ago or a year ago?

So a year ago I think the number would've been about one third each.

Okay. So you definitely see more of the ships going into the CPP trade?

Right.

All right. Good deal. Thank you.

Noah Parquette, JPMorgan.

Thanks. Good morning, guys. I just had a question on scale. You have a pretty good platform right now -- very low overhead and effective chartering. As you grow, how large can you get and kind of keep this type of platform? And in terms of do you see further economies of scale or at some point do you see those economies, how does that factor into your growth strategy?

So growth has always been an important part of our strategy from day one, and it's something that we are continuing to focus on. But it's got to be the right kind of growth at the right time, and we've got very clear criteria. So I think it's clear that we are looking for high quality ships, not just specification, but where they are built and the condition they are in. We are also looking for good pricing, both where we feel we are on cycle and also relative to the market at that point in time.

But we also want to grow in a way which is strategically coherent and above all that's going to be accretive to our shareholders because we are only incentivized to maximize value and improve the stock price.

So having said that, we are -- we could, for example, I think we've got the capacity now to probably double the fleet, but maintain or even improve on the efficiencies that we have. So we've got great systems in place now. We've got a great team. I think the kind of people we would have to add now would be kind of mid-level or low-level, not senior-level, and so we are ready to do that.

The incremental overhead would be a fraction of what it is right now on a per-share basis, and we have to believe that we had more scale on the charter side that would also probably improve our performance as well.

I think that the diseconomies of scale come from becoming diversified in a way which is in no way synergistic. So we're in chemicals and products, and we think there's a lot of overlap and benefits to being in each and the way we work doing it. That wouldn't necessarily be the case in really disparate type of sectors.

So I think we're engaged in growth by truly diversifying. That would probably result in diseconomies of scale. But I think as long as we can grow in a way which is very tightly focused and operationally focused on sectors that are closely related to the MRs, we would be able to continue to improve our performance.

Okay. Great. And then just a question, within your dividend, what do you expect the DRIP participation to be?

Well, we encourage everybody to take it because we think the shares are still very attractive, and Greenbriar has been very supportive, and I think they believe in the value of the Company and the fact that we are undervalued today. So they've been the largest participant in the DRIP, but there have been a couple of others.

Okay. Thanks.

Charles Rupinski, Seaport Global.

Thank you very much for taking my call. Congratulations on the quarter. I just had a couple of questions. Just first one for Paul, I'm sorry I missed this, but did you guide on depreciation for fourth quarter?

I did. It was $7.1 million for the quarter, and for the fourth quarter, we estimate we got $7.9 million.

Got you. Great. Thank you very much. And I guess I appreciate all the color on the macro, and I'm just curious about one theme that had been brought up over the last few months was the ballast water regulations. Maybe that falls into some of the other things you are talking about with the new vessels, but is there anyway you can quantify or maybe give us color on what you have seen in terms of the world fleet drydocking ahead of this? Is this something that is still a factor going forward in terms of driving up utilization and so forth? Thanks.

Well, the ballast water treatment situation has become quite murky because the Coast Guard -- there are some legal appeals taking place in the US now, which -- no pun intended -- have kind of muddied the waters in terms of what to do.

So the international regulations are still in place. They haven't been ratified yet. Everything was been driven up until couple of months ago by the Coast Guard. They are now pulling back a little bit, but the fact is that all newbuildings are still being fitted with ballast water treatment, and we anticipate that in the near future the Coast Guard is going to clarify the position and the IMO legislation will be ratified.

So at that point, we think it will happen sometime later this year. Ships going into drydock will have to install and retrofit ballast water treatment, and our estimate is that could cost up to $1 million per ship.

Okay. Great. And then is it a longer drydockings from what I understand?

It could take a little bit longer, but it's mainly the capital costs. Because some of the newbuilds were delivered shortly before the requirements were laid out, so there was room and power on board and switchboards and everything to install a system. It's just a ship that's 15- or 18-years-old. You are kind of scratching your head -- a), where are you going to put it? Where is the power going to come from? Do you want to spend $1 million on a ship that's 18-years-old? That could accelerate scrapping at that point.

Okay. Great. Thanks for the color and thank you.

Amit Mehrotra, Deutsche Bank.

Thanks. I guess most of my questions have been asked and answered. But just one follow-up, Paul, on the earlier comment you made on deleveraging. And the question is, will deleveraging the balance sheet basically be your priority or the Company's priority after the final couple of deliveries here, or does the Company sort of prefer to remain at that 50% level, and anything that gets below that will be accrued for acquisitions or reduction in the share capital?

And then just a follow-up for that for Tony, and it sort of piggybacks on the scale question. But I would be curious to get your perspective, as you did say that no one would accuse Ardmore of having scale. So in that respect, could you just comment on what number of ships do you think -- philosophically speaking, I guess what number of ships do you think would get a company to scale and sort of allow, I guess, to optimize the cost structure? Thanks.

I'll answer the deleveraging question first. I guess as I mentioned on the last question to Jonathan, the Company is delevering from kind of December when we take delivery of the last two ships and amortizing our charts coming down from there. Total leverage in November will be about 55%, and actually net net leverage, when you take away the cash, it will be below 50%.

So we think we're in a pretty strong position where we are now. I think as we move through the cycle, I think we would place emphasis on deleveraging. It obviously puts the Company in a much stronger position for future growth, so it is a priority. I'm not sure it is the priority right now, but it is one of the priorities as we move forward over the next kind of six to 18 months. And I suppose that dovetails into your next question then about growth in ships.

Tony?

So when I made that comment, I should have also said that on the other hand we are not sure that scale has a needle moving type of impact. So I think only with respect to Ardmore and the way we think about it, we believe that let's say if we were to add another 25 ships to the fleet, the incremental overhead would be significantly lower for those 25 ships. And overhead per ship is a very big number. It has an impact. But it's on an operational level, and we think that's very important. But it is not something that investors always notice.

With respect to the market power, I think we're kind of there. I think it's more just a reputation you have whether people really want to fix you, and one of the reasons charters want to fix you is if you can do them a favor in return down the road if they are kind of stuck in a situation. So a lot of it is kind of building relationships. And so far I think we felt that we've been very, very fortunate and have worked hard to develop those commercial relationships.

So I think we're okay where we are. We think that there might be some real cost benefits for us in particular as we grow and maybe some ongoing relationship benefits on the commercial side.

In terms of bank support, we've got plenty of bank support and capacity for growth. I think that we are generally regarded as being on the list of companies that banks want to do business with.

And then just one question on the supply side. Over the next, I guess, three to four years, there are going to be a number of ships that reach that 15 year plus -- product tankers that reach that 15 year plus age mark. Can you just talk about sort of the marketability of those relatively older ships, and how that may sort of impact the supply picture over the next three years or so?

Yes. I think it very much depends on who owns the ship and what condition it's in. So if you -- and I won't name nations but some people -- and it's not European-based, by the way -- that basically just let their ships absolutely deteriorate and run down. And very logically after 10 plus years, they start having real problems with vetting, which is the inspection process. And those are the ships that have a really hard time fixing business after, say, 15 years of age. If they are well-built ships, well-maintained, operated by a good company with otherwise newer ships as well, they can still trade okay. Maybe they won't have access to time charter business with majors and then big oil traders, but I do okay. And meanwhile, the invested capital is going down.

So we think that if it's done the right way, it's not necessarily a bad strategy. But the reality is that I'd say -- I'm going to be pretty presumptuous here and say that if you look at the fleet of ships globally over the 15 years, over 15 years of age, a very large percentage of them are in poor condition because the owners haven't maintained them.

Got it. Great. Thanks so much. Appreciate it.

This concludes our question and answer session. I would like to turn the conference back over to Ardmore CEO, Anthony Gurnee, for any closing remarks.

None here. Thank you all for your time today, and we look forward to speaking to you in about three months.

Thank you, sir. The conference has now concluded. Thank you for attending. You may now disconnect.