Ardmore Shipping Corp (ASC) 2016 Q4 法說會逐字稿

Good morning and welcome to the Ardmore Shipping Q4 and full year 2016 conference call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Anthony Gurnee, Chief Executive Officer of Ardmore Shipping. Please go ahead, sir.

Thank you. 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.

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 fourth quarter 2016 earnings release and presentation. Tony and I will take about 15 minutes to go through the presentation and then we will 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 our fourth quarter 2016 earnings release, which is available on our website.

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

Thanks, Paul. So on the call today, we will follow our usual format -- first, discussing our performance and recent activity, then the product and chemical tanker markets. Paul will provide a fleet update and review our financial results in detail, after which I will provide some concluding remarks and then we will open up the call for questions.

So turning first to slide five, on our performance and recent activity, we are reporting earnings from continuing operations of $6.3 million for the full year of 2016, which includes a loss of $3.7 million in the fourth quarter. The difference between continuing operations and GAAP profit for 2016 is largely due to the net loss of $2.6 million relating to the sale of three vessels. Our spot performance started off strong in the first half of 2016 but the full year reflects a softer charter market in the second half, with overall MR performance at $14,600 for the full year and chemical tanker performance of $15,400.

Throughout 2016 we took a number of important steps to position Ardmore to benefit from the long-term trends driving the market for MR products and chemical tankers. As part of this, we acquired six MR tankers in June, receiving delivery of the last of these in November. Based on these deliveries, Q1 2017 will be the first to fully benefit from our enhanced fleet profile.

Also earlier in the year, we refinanced substantially all of our debt on improved pricing and terms and toward the end of the year we completed an opportunistic refinancing of the Ardmore Seatrader under a sale and leaseback arrangement resulting in gross proceeds of $9.25 million. We are maintaining our dividend policy of a payout of 60% of earnings from continuing operations. Consistent with our policy, we are not declaring a dividend for the fourth quarter of 2016.

On slide six, you can see our now fully-delivered fleet, including the six MRs acquired and net of the three smaller chemical tankers we sold in 2016. This is a fleet of high-quality ships, all built in Korea and Japan, and it's the hardware underpinning our cost efficiency and fuel economy which enables us to maximize cash flow and earnings.

Turning to slide eight on the product tanker market, charter rates were strong in the first half of 2016 with our MRs earnings $17,300 per day, declining to $12,600 in the second half as a result of declining demand due to high oil inventory levels, lower oil trading activity and further aggravated by a heavy pace of MR newbuilding deliveries in the first half. Nevertheless, rates improved towards the end of the fourth quarter and through January, as a result of typical winter market activity, indicating a close supply/demand balance.

The most important short-term demand factor for MRs at the moment is the high level of refined product inventories, which dampens oil trading activity, as well as the ongoing drawdown of those inventories through lower refinery throughput, which diminishes cargo flows and MR ton-mile demand. The data available on global oil stocks is limited but the IEA has produced some interesting analysis in their most recent monthly oil market report, which sheds light on what is happening with global refined product inventory levels by looking at global refinery throughput versus consumption over the past three years. Their analysis concludes that while OECD inventories remain close to all-time highs, global CPP inventories peaked at roughly 300 million barrels above 2014 levels in the second quarter of 2016 and have declined since then and are now down 50% to 150 million barrels, suggesting a significant ongoing global drawdown in refined products, which would go a long way toward explaining the low demand levels for MRs over the past six months.

Meanwhile, turning to supply, MR supply growth is decelerating as the pace of deliveries declines and scrapping continues. The order book now stands at 4.7% of the existing fleet, its lowest level in at least 20 years.

Deliveries per month are very telling. We had 12 per month in the first half of 2016, seven per month in the second half and looking forward after a spate of deliveries in January, the remaining 11 months should average five or maybe six per month. Meantime, scrapping is continuing at a rate of 20 to 25 ships a year or about two per month, so net fleet growth is now down to three or four units per month. The result should be around 2% net fleet growth in 2017 and importantly -- and this is the first time we are looking ahead to 2018 -- 1% or less in 2018 and beyond until things turn.

Newbuilding activity is currently being dampened by low charter rates and depressed second-hand values, which limits appetite for ordering even at attractive newbuilding levels. A shipbuilding industry in turmoil, with capacity significantly reduced as a result of financial distress, and with shipping company access to equity and debt severely constrained. But the upshot is that the combined impact of strong demand fundamentals and diminishing supply growth will result in a further tightening of the supply/demand balance, which in turn should lead to a significant rebound in charter rates at some point. The big question is when and whether the oversupply of larger product tankers will push that recovery out some.

Turning to slide nine, the chemical tanker market, first as a reminder, we presently own six coated IMO 2 chemical tankers; four 25,000 tonners; and two 37,000 tons. All eco design and thus highly fuel efficient as well as being particularly commercially flexible, as compared to older similar units. These ships represent about 20% of our revenue base but in addition we cross-train our MRs into chemical and similar cargos whenever we can, whenever we can do so profitably, leveraging off our chemical tanker knowledge, and so this is a relatively small but still important part of our business.

So now, looking at the market, similar to MRs, the chemical tanker market was relatively strong in the first half of 2016 driven by, in particular, higher methanol spot cargos and other petrochemical cargo flows and aided by a robust CPP market, where there is an overlap. The chemical tanker market also softened in the second half, as spot methanol and other petrochemical movements declined, which was further compounded by the weaker CPP market and by an overall dampening of trading activity. As a consequence, our chemical tankers averaged 17,300 in the first half, declining to 13,400 in the second half.

Fundamental chemical demand is highly correlated to the global economy. With global GDP growth forecast at 3.4% in 2017, chemical tanker demand growth is expected to remain relatively strong in the range of 4% to 5%. In 2017 we expect continued solid demand growth for commodity chemicals, with ongoing petrochemical plant expansion in the U.S. and Middle East, resulting in increased exports and lengthening average voyage distances.

The chemical tanker order book currently stands at moderate levels but there is a difference between stainless and coated type chemical tankers. The total order book is 10.5% of the existing fleet but within that, stainless steel chemical tankers represent two-thirds of the order book, which amounts to 17% of the existing stainless steel fleet, whereas the coated IMO 2 tankers, the type that we own, on order amount to only 6% of that segment of the existing fleet. So the situation for coated chemical tankers such as ours is much more favorable. Overall, net of scrapping, we expect fleet growth across the chemical fleet, coated and stainless steel, of approximately 4% to 5% in 2017, which is broadly in line with demand growth.

And with that, I will hand the call back to Paul to discuss our fleet update and our financial performance.

Thanks, Tony. Moving to slide 11, we will run through our fleet update. Starting with the chart on the right, you will see that following the recent accretive acquisition of six MRs, our revenue days have increased by 13% for the full year 2017 to 9,727 days. In terms of drydock, we had no drydock days in the fourth quarter and we expect to have 45 drydock days in the first quarter. As Tony highlighted, during the fourth quarter we took delivery of the Ardmore Enterprise on November 2, which was the last of the six eco-design MRs we acquired in the summer, and we now have the full 27 ships in operation.

Turning to Slide 13, as you can see in the middle of the page, we reported net income from continuing operations of $6.4 million or $0.21 per share for the full year, including a loss of $3.7 million or $0.11 per share for the fourth quarter. Earnings from continuing operations strips out any gains or losses on vessel sales in the period.

The Company reported adjusted EBITDA of $57 million for the full year, which represents a decrease of $14 million from 2015. Adjusted EBITDA for the fourth quarter was $11 million.

Moving to the bottom of the Slide, our operating costs for the year came in at $6,405 per day across the fleet, including technical management. OpEx for the eco-design MRs was $6,078 per day, while eco-design products chemical tankers came in at $6,289. Our eco-mod MRs came in at 6,688 per day.

Looking ahead, we expect total OpEx to be approximately $16 million for the first quarter. Depreciation and amortization for the fourth quarter was $9.2 million and we expect depreciation and amortization in the first quarter to be approximately $10 million. Corporate overhead costs were $2.8 million for the quarter and we expect overhead for the first quarter to be approximately $3.9 million. Again, to highlight, our overhead includes commercial management costs of $2.8 million annually, which in many situations with other companies is incorporated into net revenue. This leaves our comparable overhead at $13 million for a full year, which works out at approximately $1,300 per ship per day across the 27-ship fleet.

Our interest and finance costs were $5.5 million for the quarter, which includes $600,000 of amortized deferred finance fees and a further $600,000 of deferred finance fees written off as part of refinancing and vessel sales. We expect the interest and finance costs in the first quarter to be approximately $5 million, which includes amortization of deferred finance fees of $600,000.

Turning to slide 14, we take a look at charter rates for the full year and the fourth quarter. 2016 was a year of two halves. Charter rates were strong for the first half of the year. This was offset by a softer second half. Overall for the year, the charter rates were comparable to those in 2014. Overall for the fleet, we earned an average of $14,785 for the full year, including $12,307 for the fourth quarter. Splitting out for the various ship types across all [employment] -- time-charter, pool and spot -- we have 15 eco-design MRs in operation, which earned an average of $15,098 per day for the full year, including $12,389 for the quarter. Our six eco-mod MRs earned $14,318 for the full year, including $11,910 per day for the quarter. And as of today, our spot MRs are earning approximately $12,500 per day for the voyages in progress, with approximately 50% of the days booked for the first quarter. Our eco-design chemical tankers earned an average of $15,395 for the year, including $12,502 per day for the quarter.

Overall, we are satisfied with the financial performance for the year, in spite of some market softness in the second half. Based on the Company's policy of paying out dividends equal to 60% of earnings from continuing operations, we have not declared a dividend for the quarter, following a loss from continuing operations of $3.7 million. The Company has paid out $0.27 in cash dividends for the first half of 2016 and we remain committed to our policy.

On slide 15 we have our summary balance sheet, which shows at the end of December our gross debt was $473 million, which net of deferred finance fees was $462 million. We have total capital of $884 million and cash in hand of $56 million, leaving our gross leverage at the end of the quarter at 53.9%.

Turning to slide 16, as mentioned, we completed a refinancing of the Ardmore Seatrader in the quarter, resulting in gross proceeds of $9.25 million for general corporate purposes. Our cash balance at the end of the year stood at $56 million plus a further $20 million in net working capital. Finally, as shown on the chart, all our debt is amortizing and with principal repayments of $45 million annually, we are continuing to delever and strengthen the balance sheet.

With that, I would like to turn the call back over to Tony.

Thanks, Paul. So in summary then, we are reporting earnings from continuing operations of $6.3 million for the full year, which includes a loss of $3.7 million in the fourth quarter. MR charter rates were strong in the first half but softened in the second half, as a result of declining demand due to high oil inventory levels, lower oil trading activity and further aggravated by the heavy pace of MR deliveries in the first half. Nevertheless, rates improved toward the end of the fourth quarter as a result of typical winter market activity, indicating a close supply/demand balance.

The most important short-term demand factor for MRs at the moment is the high level of refined product inventories but there is evidence that the drawdown back to normal levels is well under way and once over should result in a jump in MR demand. We believe underlying demand growth remains robust, in the 4% to 5% range, driven by 1.3 million barrels a day oil consumption growth, ongoing refinery development away from points of consumption and increasing trade complexity. On the supply side, the order book now stands at historical lows and net fleet growth should be in the region of 2% in 2017 and lower in 2018 and beyond, until ordering activity resumes and ships begin delivering after a typical two-year construction period.

Based on the steps we have taken in 2016 to strengthen our balance sheet, fleet and earnings power, we believe Ardmore is well-positioned to capture the charger market upside for our shareholders. Through a combination of a fully delivered, high-quality fleet, our focus on spot charter and performance and cost efficiency, moderate leverage and significant earnings power, every $1,000 a day equates to $0.29 in EPS and $0.17 in dividends per share.

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

(Operator Instructions). Mike Webber, Wells Fargo.

Tony, I wanted to start off with a higher-level question and then kind of dig into a couple of company-specific things. But just with regards to forward supply outlook -- and you mentioned restrained shipyard capacity. It certainly seems like a relatively interesting dynamic and a big concentrated to the product space. Just curious -- one, can you kind of throw out a figure around -- bit of ballpark, how impaired the MR production capacity actually is right now? Then, two, how long do you think we actually kind of sit at that level? We have heard STX is marketing LR2 designs. Some of the guys that have been a bit impaired or kind of dead in the water might be starting to resurface. Just curious how impaired it is and how long you think that lasts.

Really, the only yard that -- in Korea, which is able to carry on with business as usual is Hyundai Mipo. But they are severely constrained themselves because of the new financial discipline that's being imposed. So I think whereas they might take in a few orders, just enough to keep things ticking over, at currently marketed levels of 32 million, 33 million they are not going to do very much at that level. SPP, where we built, sadly enough is almost completely shut down now. Sungdong we believe has slowed down significantly. STX has gone through a rehabilitation process and we understand they are marketing and we will see what they are able to do. But again, they are under significant financial constraints.

The big question for these yards is not whether they can find orders; it's whether they can afford to take them. Having said that, there aren't a lot of real open interests at the moment either. But the point is that it's not clear whether or not any yard other than Hyundai Mipo could take in orders below 32 million. And so we think that when you match that capacity against the ongoing requirement, if you are looking at a fleet of roughly 2,000, now 2,200 ships, in the MR space altogether and you figure on say 4% demand growth and ongoing scrapping, you need 80 to 100 delivering a year. That's how much is on order now. So we think that -- look, it's clear that if rates went back up to, let's say, 20,000 to 25,000 a day and second-hand values and resale got bid up, at some point newbuilding prices would also rise and it would put a number of these guys back in business. But that's going to take a while and then you are going to have a roughly two-year minimum delay before they start really delivering in any kind of numbers.

Got you. No, that's helpful. Kind of along those lines, as we start thinking about the industry potentially being caught a bit short on tonnage in some of the out years, would expect to see charters starting to get a bit longer in terms of the requests for term. I know you guys have kind of transitioned. I think you are 99% leveraged now in the spot market as part of that kind of strategic push. But, one, are you guys getting more inquiry for term business and if not, when do you think you would start to see that, and how interested in it would you be?

There is activity but not at levels we would be interested in and I think everybody is taking it fairly cautious wait-and-see attitude right now.

Okay. That's helpful. Just one more from me and I will turn it over. On the sale leaseback financing, just curious how deep a bid for that kind of business is there? I believe [N02] is a bit older. Just curious whether that's something -- that's a well you think you can go to again in the future and how robust the market is there for that kind of a financial arrangement right now.

I think it was -- well, that was done on fairly short notice with a longstanding relationship and the numbers worked for both sides. I think they are obviously looking at the corporate guarantee and the balance sheet, much more so than at the ship itself, which is actually the oldest ship in our fleet. So how deep is the bid, I think it's -- you know, I would characterize it as fairly thin. I think the challenge is that you could -- I think there are a number of entities or firms that would do that kind of business but the question is the cost and we are pretty choosy in that regard.

Jon Chappell, Evercore ISI.

Tony, I just wanted to follow up on Mike's last question there. To the extent that it's possible, could you provide the terms that you have for the sale and leaseback, just so -- for modeling purposes? The duration, the rate you are paying -- is it a time-charter rate, is it a bare boat rate? And then also, probably unlikely, given it's a 15-year-old vessel, but is there a purchase option associated with it?

Yes. I think we would rather not disclose it, for reasons of confidentiality, but the terms are comparable to the rest of our senior debt. Admittedly a little more expensive but it is a five-year lease; I think we can say that. You know, it actually results in a lower financial breakeven than our senior debt would be.

Exactly.

And is it a bare boat structure?

It's a bare boat, yes. It's a capital lease bare boat structure.

And then maybe we just look at the market and kind of back into what we might think a five-year bare boat rate may be. I mean, is it substantially out of market? It's just kind of difficult to model that vessel going forward without any guidance on where that number might be.

Paul, do you want to comment?

Let me just say, it's a standard finance lease. The actual repayment amount is slightly under what you would expect to pay on the senior debt. So the repayment is a little bit under but otherwise it's -- for all intents and purposes it's comparable what we were paying, albeit a couple of hundred dollars a day less than your breakeven.

Okay, then just the reason behind it. I mean, Tony, you mentioned it's a longstanding relationship in a pretty illiquid market and obviously a 2002-built ship has a use-of-life issue coming forward. But your balance sheet is in pretty good shape right now. You have quite low debt amortization, no capital commitments. It's certainly not out of a position of weakness that you had to do this. Is it just kind of priming the pump for opportunities or is it complete kind of one off?

No, I think it's part of an interest to continue to maintain good cash balances, either for defensive purposes or for opportunities as they arise. So we believe we are in a market where cash is king.

And just one other thing to mention, Jon -- that ship was almost fully repaid, in terms of debt, so it had very little finance attached to it. So it made sense for a variety of reasons.

Okay. That makes sense.

One last one. Just industry-wide, this is obviously the billion dollar question, but I thought your comment on the product tanker market regarding OECD inventories versus the global CPP inventories was pretty interesting. Probably very difficult to quantify or put numbers around but I think there is probably an unhealthy focus on the OECD side of it, maybe just because that's the most transparent markets out there. But what's the importance of kind of traditional OECD markets as it relates to the bloated inventories there, as opposed to the global flexibility of your fleet? If the global CPP inventories are indeed down 50%, probably starts to move in other regions a lot quicker than maybe the traditional benchmarks for MRs.

Yes, I think the reason why we made the point was that we kind of sat up and took notice when we saw that. It's in the oil market report on page 46 from January and thought it was very interesting. You know, I think we tend to -- analytically we tend to go to the data that we have and the harder part is to try to fill in the gaps, in terms of data that we don't have. And I think it was an interesting analysis that they did with some conclusions which feel -- intuitively they feel like there's something to it because it's been pretty bad in the MR -- in terms of MR demand for the past six months. And during that period, their analysis would indicate that there's been a very substantial run-down in non-OECD stocks and maybe that also ties in with a little more financial market turmoil and inability of those kind of buyers and regions to actually hold stocks. So you can almost see why it would be happening. So I think it's just a lesson that it's important to kind of look at the total picture. The other thing to point out is that OECD is obviously really important but that represents about half of the oil market today. The other half is non-OECD and in our business the non-OECD destinations tend to be further away from refinery sources -- you know, South America, Africa, etc. So it could mean that we're closer to a turn than conventional wisdom might suggest otherwise.

So would that mean then even more so than usual, because it's always the case that just focusing on the TC2/TC14 may be misleading to the actual health of the underlying market.

Well, I think those are -- I don't think you are going to -- just as we have talked about before, I mean, you need to look at a global basket of rates to -- and right now the market is probably at about 12,000, 12,500 a day on a global basis and that includes TC2/14 combo but the east is definitely stronger than the west at the moment. But I think that the market -- the ships are completely fungible on a global basis, given the amount of time to reposition, etc. and it's a global market and so if you get to a point where stocks get down to -- one of the things that really we understand is one of the real drivers of oil trading activity are regional physical imbalances and price disparities. That drives -- that opens up arbs and drives cargo flow and that's been pretty weak in the last six months and the profitability in oil trading has been fairly compressed. So they have not wanted to take lot of risk. Now if you get down to more normal levels that volatility comes back, the profitability comes back and you could see a significant jump, more or less a onetime jump in MR demand back up to more normal levels.

Noah Parquette, JPMorgan.

Just wanted to touch on the back of the inventories questions. How do you think the OPEC production cut affects this, if at all? I know obviously it's clear cut what it does to crude tankers but how does that affect your business, in your view?

Well, that's the feedstock for refineries, right? But there is plenty of it around. So the impact on product tankers is less immediate. I think our focus and I think the focus ought to be on refined product stocks because as they get drawn down and if you're dealing with ready access and lots of inventory and stockpiles of crude to refinery runs, you could see a resurgence in refinery activity. So short answer is it feeds into but I don't think it really has a direct impact on the MR market.

Okay, and then it's been a little over a year now. You know, China has emerged as kind of a pretty big exporter. Going forward it's going to be probably a trend that we have to get used to. Has that been good or bad for product tankers right now in terms of voyage accretion and dilution?

It's really been neither. You know, in reality they are exporting a lot of diesel and now gasoline as well, but for the most part it's effectively a backhaul run down to south Asia and there are plenty of ships to come and do that. So it hasn't really had a big impact on boosting ton-mile demand that, for example, going down to Chile or Brazil or Argentina would. It's definitely head-haul, front-haul and probably not with any backhaul business or limited. So the answer is, at this stage it's an interesting trend; it's something worth noting and talking about but it hasn't had a big impact. But I think we need to watch it carefully to see over time if the trading patterns or the destinations for Chinese exports changes and results in real demand growth.

It's interesting. So to clarify, you are saying that the ton-mile demand hasn't really been huge but what it's doing is allowing the existing fleet to be used more efficiently?

Yes. I mean, basically instead of balancing all the way back down from Korea/Japan, you kind of pull in, take some Chinese stuff, bring it down to Singapore, you know, that region. So it's priced as a backhaul. That means that it doesn't have a big impact on ton-mile demand the way an increase to the front-haul would. Now, as the flows increase or change, you might see some of that going to destinations that would represent a real front-haul and therefore a big boost to ton-mile demand.

Ben Nolan, Stifel.

This is Steven Tittsworth on for Ben. Just had a couple questions. The first one really deals with the new administration in Washington potentially talking about imposing new U.S. import taxes. I was wondering what color you could provide in terms of what impact that would have on the refined product market potentially.

Don't really have a view, other than the obvious that anything that's going to facilitate the competitiveness of U.S. refineries would help boost exports and that tends to be really good for MRs, and anything that would do the opposite wouldn't be good. So based on our understanding, it should be positive but obviously we have a long way to go.

Okay. Then my next question deals with the MR order book you were talking about. Just wanted to piggyback on that a little bit. Is that any portion of the order book you believe isn't likely to get delivered or isn't really real in your opinion?

Yes. When you look at the list, there are some orders that are very, very old and in strange places, so you can delete those. In addition, there is a change in regulations that took place at the end of last year, in terms of the engine type in the ship. So a number of yards, mostly Japanese, took the opportunity to lay their own keels with the old engine type and they are listed in the order book as unknown buyers. Those are effectively just placeholders for the old type of engine, so those are not real orders.

Okay. Then just my last question deals with -- we saw this earlier last year at the newbuilds for Suezmax and Aframax, is they're actually doing a little bit of a product trade before they transition back to crude. Are you still seeing that occurring or has that pretty much been removed from the market right now?

Our understanding is there is still some of that happening but it's a relatively small component of the overall market.

So not really having a big impact on refined product trade?

Not a big one.

(Operator Instructions). Magnus Fyhr, Seaport Global.

Just a question on the market outlook. I know inventory levels are coming down. Do you see any leading indicators from the traders, the Trafiguras and the Vitols of the world positioning for a recovery or are they still short freight?

Well, they are always going to be short freight but our understanding is that their TC books are pretty low right now.

Okay. But you haven't seen any changes there?

That's not necessarily a bad thing. That means there is more upside and more volatility on the upside in spot rates.

Okay. I mean, the charter in books have come done quite a bit like from the levels that we saw a few years ago. I mean, do you see that changing going forward?

Well, yes. I think typically it moves with the market so I think when they feel that the market is on a tear, on a run, they will probably build up again. The interesting thing is for them, it makes more sense to charter in at higher rates if there's more upside at that point because the numbers are just bigger. So chartering in at 12,000 a day thinking you might make 13,000 is not that exciting for an oil trader compared to chartering in at 16,000 thinking you might make 22,000.

Interesting point. Just -- and then, I mean, the LR market has been very weak. I mean, do you see a lot of encroachment there on the MR markets or, I mean, do we need to see the LR market improve before the MR markets start moving?

We were quite concerned about that at the beginning of this dip back in August/September and watched it carefully and it seems that it definitely -- there is an overlap, relatively small, where LR1s and LR2s can move in but it's all about relative pricing. It's clear that it is having a dampening effect on MRs. It's also -- you know, I think it's hard for us to envision a full-blown cyclical upturn in MRs without the largest ships also doing quite well. So I don't think we are going to see 25,000 a day in MRs until the LRs are doing quite well also.

So what do you think needs to happen on the LR market for that to happen?

Well, I think with LR2s, the great thing about the LR2 market is that when Afromax's do well, LR2s tend to get sucked into dirty trading and it's very hard to get back. So we saw a lot of that in the second half of 2016. That took out as many as 30 ships. For them to trade back into clean is quite expensive and time-consuming. So I think that's always a positive factor. So I think if we go through a period where Afromax rates are at a sustained higher level than LR2s, the temptation is just too great.

The reality though is that the order book, as a percentage of the existing fleet for LR1 and LR2s, is not huge. I think in both cases you have to look across the dirty and clean spectrum to understand the total order book and delivery schedule. It's not -- lined up against the demand growth outlook, it's not unreasonable. So we think that it's just a matter of time and obviously the same factors in terms of the oil market inventory levels draw-down, that's obviously having an impact on LRs as well as MRs. So when that's over and when that changes, they could benefit from that significantly as well.

Okay and just one last question on the drydocking. You mentioned 45 days -- maybe for Paul. Is that the Seatrader going in for the 15-year survey or does it -- it looks like they have a pretty light schedule for 2017.

That's actually a mixture of ships. There's some in-water surveys on a few of the ships and there's two drydockings. So it's actually a combination, about four ships in there as well. So it's in aggregate; it's not one big ship.

So, I mean, do you have a budget and schedule for 2017 for the remainder --?

In terms of overall CapEx, I think we are looking at about $4.5 million in drydockings this year towards the kind of middle. It's kind of spread all over the course of the year. I think we have got one proper special survey in the first quarter and then I think we have got two in the second half of the year. So overall it's about $4.5 million spread over the course of the year.

Right. How do you think -- I mean, the Seatrader is 15 years of age. How do you see trading that vessel and what -- with new regulations coming into place, I mean, are you going to address the water ballast treatment there or has that been postponed?

Well, she doesn't go to dock until later in the year. We are not expecting a very -- I mean, she is in great shape. We have put her through docking twice ourselves so we are not -- that's not a concern. The ballast water treatment installation on her will not happen this year. That would happen later if she is still in our fleet at that point.

It's a good ship. I mean, it's got an excellent record; customers like it. We think if we are in a continued weak market, after she hits 15 years of age, then maybe that's going to diminish her earnings prospects a little bit but at the same time, she is still running very well and the invested capital is going down and down. So the returns on those kinds of ships, if they are well maintained and efficient and if they have got a good reputation, probably pretty damn good.

Ladies and gentlemen, this concludes our question-and-answer session and thus concludes today's call. We thank you very much for attending today's presentation. The call has ended. You may now disconnect your lines. Take care.