Ardmore Shipping Corp (ASC) 2017 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Ardmore Shipping's Third Quarter 2017 Earnings Conference Call. Today's call is being recorded and an audio webcast and presentation are available in the Investor Relations section of the company's website, ardmoreshipping.com. (Operator Instructions)

A replay of the conference call will be accessible anytime during the next 2 weeks by dialing 1 (877) 344-7529 or 1 (412) 317-0088 and entering the pass code 10111083.

At this time, I will turn the call over to Mr. Anthony Gurnee, Chief Executive Officer of Ardmore Shipping. Please go ahead.

Thank you, and good morning, everyone. Welcome to Ardmore Shipping's Third Quarter Earnings Call. First, let me ask our CFO, Paul Tivnan, to describe the format for the call and discuss forward-looking statements.

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 2017 earnings release and presentation. Tony and I will take about 15 minutes to go through the presentation and then open up the call to questions.

Turning to Slide 2, please allow me to remind you that our discussion today contain forward-looking statements. Actual results may differ materially from the results projected from those forward-looking statements and additional information concerning factors that could cause the actual results to differ materially from those in the forward-looking statements is contained in the third quarter 2017 earnings release, which is available on our website.

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

Thanks, Paul. On the call today, we'll follow our usual format. First, we'll discuss our performance and recent activity, followed by an update on the product and chemical tanker markets. Then, we will highlight some of our recent value-creating activities, after which Paul will provide a fleet update and review our financial results, and then I'll conclude the presentation and open up the call for questions.

So turning first to Slide 5, on our performance and recent activity. We're reporting EBITDA of $10.1 million and a net loss of $4.6 million, equating to a loss of $0.14 per share for the third quarter. This compares to a net loss of $0.06 per share for the prior quarter. We delivered satisfactory chartering results in the third quarter despite the difficult operating environment. Spot and pool MR rates averaged $12,970 per day, a decrease from $13,765 in the second quarter. MR spot rates during the quarter were impacted by reduced cargo volumes resulting from refinery outages caused by Hurricane Harvey as well as scheduled maintenance. We believe the near-term outlook is positive with recovery in U.S. Gulf refinery output, rapidly rebalancing global inventories and the onset of the typically stronger winter period. We continue to execute on our long-term strategy, focusing on operating performance, cost efficiency and other steps to improve ROIC. On that note, we're pleased to announce that we've agreed to acquire a high-quality 2008-built Japanese MR product tanker, an identical ship to our Sealeader and Sealifter at an attractive price, which equates to a 30% discount to current newbuilding prices on an age-adjusted basis. We'll talk more about that a little later. We also recently completed an attractively priced $15 million revolving credit facility, further enhancing our financial flexibility. And we're maintaining our dividend policy of paying out 60% of earnings from continuing operations. Consistent with that policy, the company is declaring no dividend for the third quarter.

Turning to Slide 6 for a quick look at our fleet profile. There's been no change to the fleet since our last earnings call. But as a reminder, this is a high-quality, modern, fuel-efficient fleet all built in top tier yards with significant earnings power in a rising market.

Now to Slide 8 on the product tanker market. As noted earlier, MR product tanker rates were softer in the third quarter. Nevertheless, we believe the outlook for the year-end and into 2018 is positive for a number of reasons. U.S. Gulf refinery throughput is increasing meaningfully following a heavy period of maintenance and outages associated with Hurricane Harvey, which should contribute to a recovery in Atlantic Basin MR ton mile demand. Additionally, refinery margins in the Atlantic Basin are now at their widest level since 2013, which should further incentivize elevated refinery runs.

Global destocking of refined products was higher than expected during the quarter according to PIRA, bringing commercial stock 70% of the way down from their peak levels in 2016 back to 2014 levels. And with the market now closer to being at balance, we believe more normal oil trading activity could resume soon giving a further boost to MR ton mile demand. And as a final point on short-term factors, regional inventory imbalances, particularly for middle distillates, should result in increased trading activity as products are shipped over longer distances to points of consumption.

Looking at the longer-term factors, underlying MR ton mile demand growth remains strong. Oil demand growth has been revised upwards from -- for 2017 to 1.6 million barrels a day and is expected to rise another 1.4 million barrels a day in 2018. The resulting growth in cargo volumes, regional products slate imbalances, emissions regulations and increased trading complexity all continued to drive healthy demand growth at what we believe is around 5% per annum.

Turning now to supply. The order book is at a historical low of 4.1%, and most notably, supply growth is continuing to decelerate. So far this year, 55 MRs have delivered and 14 have been scrapped, and we expect 8 vessels to deliver for the remainder of 2017 after taking into account slippage. As a consequence, we anticipate net fleet growth for 2017 of 1.8%, then 1.1% or less in 2018, which we believe will be an unprecedentedly low level. Meanwhile, shipyard capacity remains very constrained with only 9 active MR yards stand from 20 or more in 2008 and the ability of these remaining yards is further constrained by limited access to capital and refund guarantees. So putting this all together, the fundamentals of supply and demand are very compelling. Anticipated demand growth of 5%, combined with supply growth of 1.1% or less in 2018, should significantly tighten the market and lead toward a full recovery.

Turning now to Slide 9 on the chemical tanker market. Charter rates remained flat in the third quarter for chemical tankers with ours averaging 10,700 per day. The cargo split on our vessels has changed. It's weighted now heavily toward chemicals and veg oils, reflecting the broader weakness in the CPP market. In total, chemical cargoes generated 12% of revenues in the quarter, which is higher than normal.

Overall, the chemical tanker market remains soft. Most notably, volumes of methanol, which is an important commodity chemical shipped by chemical tankers, fell in the third quarter from the combined impact of U.S. production disruptions from Hurricane Harvey as well as other Asia Pacific outages.

Turning to veg oil trades. Asian Palm oil cargoes as well as South American soybean exports remained weaker in the third quarter, limiting triangulation opportunities. Looking ahead, the demand growth is nevertheless positive. The outlook is positive. We expect continued growth driven by improving global GDP, as well as the build-out of large-scale export facilities in the U.S. Gulf and Middle East.

Additionally, improving product tanker market conditions will boost demand for chemical tankers trading in CPP, taking up more of their capacity than at the moment. Underlying fundamentals remain strong with seaborne chemical trade growth expected to be around 5% per annum, which is comparable to MRs as we discussed.

And looking at supply for chemical tankers. The order book overall is currently at moderate levels. But on top of that, there continues to be a difference between stainless and coated-type tankers. The total order book is 9% of the existing fleet. But within that, the percentage on order for stainless amounts to 13.5%, whereas for coated tankers, the amount is only around 5.5%. Net of scrapping, we expect fleet growth of about 4.5% in 2017 and around 5% in 2018, broadly in line with the demand growth. But again, the outlook is more favorable for coated tankers, where the dynamics are more similar to MRs, and we expect TCE performance for our 6 coated chemical tankers to follow the MR market.

Turning now to Slide 11. We'd like to highlight some aspects of our financial policy as well as recent value-creating activity. The first point to make is that we have a clear policy of putting financial strength and efficiency first. We're maintaining low leverage, currently at 53%, along with strong cash balances in order to weather a challenging market. To this end, we recently completed an attractively priced $15 million revolving credit facility, further enhancing financial flexibility. And we're maintaining low earnings and cash flow breakeven levels in part through transactions such as Japanese tax leases to sustain our low cost of capital.

The second point is that we remain very focused on operating performance, cost efficiency and further improvements to ROIC. We're always working on operational enhancements in our chartering and post-fixture activities and ways to further reduce our overhead cost per vessel, which we believe are already the lowest in our peer group. It's also worth remembering that in June 2016, we acquired 6 MRs, Eco-Design MRs, setting a market low, which we believe is still unmatched and have significantly strengthened our earnings power. In that same vein, we've recently agreed to acquire a 2008-built Japanese MR at a compelling price equating to 30% below a newbuilding equivalent level. This value, we believe, is the same level as used by analysts for NAV estimates, so it does not represent a new low, but rather a continuation of current levels and as a reminder of how cyclically low are the current valuation estimates for Ardmore stock. The acquisition is subject to completion of financing for the vessel under our Japanese tax lease, which we've done in order to preserve cash but also to maintain our low breakevens in a forward, very high, project-specific equity returns.

While this is just a one-ship transaction and arguably not a needle mover, we believe it does have the potential to create meaningful value. For example, in an $18,000 a day market environment, the EPS accretion from this one vessel alone over the entire fleet would be 5%. We believe this acquisition reflects our disciplined approach to capital allocation, and we will continue to seek opportunities such as this, whether large or small.

And with that, I'll hand the call back to Paul to provide an update on our fleet and our financial performance.

Thanks, Tony. Moving to Slide 13, we will run through the fleet days. Starting with the chart on the right-hand side, you will see that our revenue days were increased by 13% for the full year 2017 to 9,761 days. We had one drydock in the third quarter for the Ardmore Seamaster, and we expect to have 20 drydock days in the fourth quarter.

Turning to Slide 15, we'll take a look at our financials. As you will see on the second line, we reported net loss of $4.6 million or $0.14 per share for the third quarter. Total overhead costs were approximately $3.9 million in the third quarter, comprising corporate expenses of $3.2 million and commercial and chartering expenses of $700,000. As mentioned before in many companies, the commercial and chartering costs are incorporated into voyage expenses, which means that our corporate cost isn't a comparable overhead. Our full year corporate costs are expected to be $12.9 million, which works at a $1,300 per ship per day across the 27-ship fleet. Overall, we expect total overheads, that's corporate and commercial, to be approximately $3.8 million for the fourth quarter of 2017.

Depreciation and amortization for the third quarter was $9.4 million, and we expect depreciation and amortization in the fourth quarter to be approximately $9.7 million.

Our interest and finance costs were $5.4 million for the quarter, comprised of cash interest expense of $4.8 million and $650,000 of amortized deferred finance fees. We expect interest and finance costs in the fourth quarter to be approximately $5.6 million, which includes amortization of deferred finance fees of $650,000.

Moving to the bottom of this slide. Our operating cost for the quarter came in at $16.3 million or $6,538 per day across the fleet, including technical management fees. OpEx of Eco-Design MRs was $6,341 per day for the quarter and $6,190 for the year-to-date. Our Eco-Mod MRs came in at $7,175 per day for the quarter and $6,583 for the year-to-date, while Eco-Design chemical tankers came in at $6,392 for the quarter and $6,330 for the year-to-date. The differences between the quarter and year-to-date numbers are timing related. And looking ahead, we expect total OpEx for the fourth quarter to be approximately $16.6 million.

And turning to Slide 16. We will take a look at charter rates for the quarter. Starting on the left, overall across the fleet, we saw a decline in charter rates with the fleet earning an average of $12,376 for the quarter, compared to $12,996 in the second quarter.

Looking at the various ship types, we had 15 Eco-Design MRs in operation, which earned an average of $12,938 per day for the quarter, while the 6 Eco-Mod MRs earned $12,534 per day. The 6 Eco-Design chemical tankers earned an average of $10,768 per day for the quarter.

Looking ahead to the fourth quarter, as of today, our spot MRs are earning approximately $12,500 per day for voyages in progress with 35% of the days booked with upside potential for the remainder of the quarter. Meanwhile, the chemical tankers are currently earning approximately $12,000 per day with 35% of the days booked for the quarter.

Overall, we are satisfied with our chartering performance and our fleet continues to perform well in spite of a softer charter market.

On Slide 17, we have a summary balance sheet, which shows at the end of September, our gross debt was $452 million

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leaving our gross leverage at 52.8% at the end of the quarter. It's also worth pointing out that our leverage on a net debt basis is just over 50%.

Turning to Slide 18. As I mentioned, our balance sheet remained strong and we have cash and net working capital of $73.5 million at the end of the quarter. And as Tony mentioned, we completed a $15 million revolving credit facility in October, further enhancing our financial flexibility.

Finally, as you all know, all of our debt is amortizing with principal repayments of $44 million annually, so we are continuing to delever by approximately 3% a year and strengthen our balance sheet.

And with that, I'd like to turn the call back over to Tony.

Thanks, Paul. To sum up then, the outlook is positive for year-end and into 2018 as normal trading activity resumes on the back of increased refinery throughput. As always, global product inventory is heading back to normal levels. Underlying fundamentals remain strong. MR ton mile demand growth is estimated to be around 5%, underpinned by strong oil consumption growth, export-oriented refinery capacity expansion and increasing trade complexity. At the same time, supply growth continues to decelerate. The order book remains at historical lows, resulting in net fleet growth of approximately 1.8% in 2017 and anticipated to be 1.1% or less in 2018, setting the stage for a significant rebound in charter rates.

We're completing a vessel acquisition at a compelling price, which we estimate is 30% below the age-adjusted newbuilding equivalent, and we -- which we also believe is in line with currently depressed NAV estimates, signaling value not just in the acquisition, but also in the current company share price. We're continuing with policies oriented toward maintaining financial strength through low leverage and healthy cash balances. To this end, we completed a $15 million revolving credit facility in October, further enhancing our financial flexibility. Overall, with our modern fleet, our industry-leading cost structure, Ardmore is well positioned to take advantage of a charter market recovery and to generate strong returns and meaningful value creation for our shareholders.

And with that, we're now pleased open up the call for questions.

(Operator Instructions) And our first question comes from Doug Mavrinac with Jefferies.

I just had a few follow-up questions for you all this afternoon with the first one being on the market. So, Tony, in your comments, your prepared remarks and then also your summary, we're all, particularly you out of everyone, kind of waiting and looking for an inflection point. And clearly, the rate environment in the CPP market hasn't changed much between 3Q and 4Q. But when we talk about declining global inventories, when we talk about U.S. refining capacity returning or even the positive impact that the widening spread is having on refining margins, how we -- are those still things on a near-term horizon? Or have we seen any sort of indication in terms of activity levels changing, like regional chartering activity here or things like that, that would suggest that some of these things are actually starting to happen? Or are they still kind of on the come, so to speak?

Yes. So, Doug, to answer that first question, we are looking very, very closely at what's happening in the U.S. Gulf. And what we're seeing is an increased cargo loading count week on week. We've also estimated that we think that the export volumes out of the U.S. are arguably halfway back to where they were in July. So we do think that there's something underway in -- with U.S. Gulf loadings, which is critically important to the MR market. In addition, the tonnage list is shrinking as well. So that's probably the most important item at the moment. The reality is that East of Suez rates are actually quite strong. They're sort of $14,500, $15,000 a day, perhaps in part because there are shipments into the Atlantic Basin at the moment. But as the U.S. Gulf comes back fully, not just with refinery throughput but also export volumes, we think that the Atlantic Basin will recover rapidly.

Got you. Very helpful, Tony. And then I would imagine, just as a follow-up, that any sort of ARP traded -- or ARP trading would be kind of additive to the base business, kind of getting back to the normalized levels?

Yes. I think the reality is, at the moment, there's just a lack of availability of cargoes for export and -- but they're finding ready markets when they are available.

Got you. And then transitioning slightly over to the chems market. So in your commentary and as we saw in rates, not much changed between 2Q and 3Q. But yet when we look at days secured thus far in 4Q, I think you have 35% or $12,000 a day versus less than $11,000 in 3Q. So when we talk about improving global GDP and expansion of petchem plants and whatnot in the U.S. and the Middle East, are we starting to see that happen? Is that what's behind the improvement in earnings there?

Well, I think in reality, there's some timing difference on fairly long voyages in terms of backhaul versus front haul, which would actually suggest that on a more -- unlike on a load-to-load basis, the results in the third quarter might've actually looked better for chemical tankers. So in reality, the chemical tanker market is holding up relatively well. We think that the MR market has got a lot of near-term upside, perhaps more than the chemical sector. But we think that the biggest factor that's going to have an impact on the chemical market, at least for our type of ship, over the next sort of 3 to 6 months is going to be greater activity in the CPP trades.

Got you. Got you. Very helpful. And then, obviously, you guys announced some -- an acquisition during the quarter and it kind of leads me to thinking about just kind of how you think about growing strategically. I mean, we know that you guys said transaction, I guess, the previous summer, that was sizable. And when we look at your lack of CapEx commitments, when we look at what charter rates could do to your earnings and cash flow going forward, in our models we have you deleveraging fairly quickly. So how do you balance improving financial strength with what could be some very attractive opportunities in the near term given the outlook?

Well, that's just it. I mean, I think we have to reconcile the 2 and that's what we focus on. But we're constantly on the lookout for good deals. And when we see exception deals, we feel like we have to move on them. So there are further opportunities that are comparable to, we think, to the one we just did. There might be other larger scale opportunities, but we have to balance that against maintaining our financial strength and getting the timing right.

Our next question comes from Jon Chappell with Evercore.

Tony, following up on that last question and let's talk about when as opposed to if. So let's say -- you said you're focusing on your overhead pretty closely, but you've opened a bunch of chartering offices, I think, in Singapore and Houston. So as we think about what Ardmore could become, the overhead that you have today scales over 28 ships, 28 once you complete this next acquisition, how big could you get fleet-wise without adding significant overhead?

Well, I mean, for example, we could probably add another 10 ships with fairly nominal incremental overhead, maybe $1 million or something. So we do -- we really watch our overhead per ship per year or per day, if you want, very carefully, and we're trying to maintain it at a low level. But the real opportunity is to drive it down through growth because the incremental cost is very nominal. On the chartering side, we measure our performance there on a cost basis as a percentage of pool fees. So at the moment, we're at about 60%. So if we had all our ships out in pools, we would be spending that much more. At the moment, we're at 60% of that number. Again, with scale, we can drive that number way down.

Okay. And then also on the chartering side, one thing that kind of stood out to me, both in the presentation and the press release, is that the Eco-Mod spread to the Eco-Designs has narrowed significantly over the last couple of quarters. Is that a function of fuel not being as expensive as it was maybe a couple of years ago? Is that just a timing thing? Or is there some reason we should be thinking that those 2 should be trading in a much tighter range than they had been historically?

No. I think we're dealing with a fairly small sampling size. And so the reality is that there's no reason to disbelieve the theoretical differential, which should be kind of 500 to 1,000 a day. Anything else is really just timing difference and the differential is, of course, fuel efficiency but also a bit more commercial flexibility of the newer ships.

Okay. And then, finally, Paul, to the extent that you can talk about it now, I guess, it's still probably under negotiations. But can you kind of help us through some of the math involving the Japanese leasing? Should we think about prior transactions as a base? Or what kind of guidance can you give to that?

Yes. I mean, that's a fair question. I think as you mentioned at the outset, it is still under negotiation and subject to completion and financing. But in terms of indicative pricing, it's -- in terms of the acquisition price of the ship, it's comparable to previous ship acquisitions. And as we highlighted in the press release, about 30% discount on current newbuilding prices age adjusted. And then in terms of the financing, it will be previous transactions that we've done. Capital leases on the Sealeader, Sealifter, will be very similar in terms of the class rate and pricing, et cetera.

Okay. I imagine you wouldn't have disclosed this, even though it's still subject to the finalization, if you weren't highly confident that's pretty close to the finish line.

That's correct. I mean, we can't say 100% but it's -- we've done these before in Japan and we've got no reason to believe it won't go through.

Our next question comes from Ben Nolan with Stifel.

Just following up on the acquisition. I think we've seen a clear preference among particularly the public owners for owning or buying or acquiring much more modern assets. Obviously, this most recent one has been older and I appreciate that it's a sister ship to several other ones you already have. But could you maybe walk through how you think of the things that you're looking at and your opportunity set and how you weight the age of the asset in terms of preference or if it matters at all?

No, Ben. It's a good question. I think it's worth highlighting that we do screen virtually every secondhand Japanese ship that comes out for sale. We've got some particular preferences regarding design, et cetera. But also, the condition of the ship is critical. That has a big impact on OpEx. This one not only is identical to the other 2 that we own, but it's also in the same condition. Those other 2 ships are arguably the best performers in our fleet. Now she is on the older side, but she's got a long life ahead of her, and we believe that this ship will perform like the others that we have already. That's why we moved on this one in particular. So we -- it's not that it's the only one in the last 2 years that we could have bought, but we just -- the stars aligned in terms of the price, the lease opportunity and the condition of the ship. The reality is that if you look at the -- granted the newer ships generate greater cash flow because they earn a bit more in the market, the OpEx is a little lower. Arguably, that's not the case with this one. But generally speaking, that's the case. However, the invested capital is much higher. So in the end, in a sort of reasonably normal kind of market, the returns on invested capital are about the same. However, the older ships, because essentially you get the same dollars per day increase in a rising market for both, the fact that this has a lower invested capital level means that the upside is much more -- is more significant. So that's why we've, in the end, balanced the 2. And we're very happy to pick up the frontline ships a year ago and we're equally happy to pick this one up.

Right. Although, I guess, the counter to that argument would be that you have a shorter period of time in which you need that inflection point in terms of a market improvement in order to capitalize on that increased leverage with respect to the rate of return. So is this at all -- and obviously, you're a positive on the market, but is it indicative of sort of the timing that you expect things to improve? I mean, is this a time when holding older assets is, in your view, kind of the optimal scenario?

Well, I'll make a slight joke about this and maybe I shouldn't, but when you go to the sushi restaurants with a conveyor belt, that's a little bit what it's like investing in our business. Things come along and you look at it and you decide you're going to take it off the belt or not. This one with the lease, that mid-cycle rates, not talking about $18,000 a day, quite a bit lower mid-cycle rates, generates a 30% return on equity. So yes, we took this one off the conveyor belt.

Okay. And then just lastly, you mentioned that refinery utilization in the Gulf Coast is the highest that it's been since 2013. Obviously, 2013 and the first part of 2014 was relatively lackluster. I know we went to a really healthy market for a period of time in the back half of '14 and '15. Is this current market environment, in your view, something similar to that? I mean, are we -- is the opportunity set at the moment similar to what we saw in that environment in your view?

Yes. So when mid-2014 rates were low, we remember it well, it was a difficult time and nobody knew that the price of oil was going to collapse in October. But I remember at the time, it was characterized by relatively short-distance voyages. You didn't have a lot of long-haul trading happening and everything had become fairly compressed and stable in our business, and that's a little bit the way it's felt now. I think that's been exacerbated by the -- what we all thought was going to be the positive impact of Hurricane Harvey, turning into a very negative where -- I mean, the real issue there is that for an extended period of time and just kind of we think ending now, a lot of the barrels we produced in the Gulf were being held back for domestic needs and therefore not available for export. So I think a relatively subdued oil trading environment, combined with that whole back of cargoes out of U.S. Gulf refineries, has really created all the short-term pain that we've been experiencing.

Okay. But in terms of sort of your looking into the future, the opportunity set is similar or at least not too different than what we saw moving into 2015. Is that a fair...

Yes. Again, we don't know today what the price of oil is going to do in a few months and that was the situation into 2014. But I will say that we spend a lot of time on the call kind of laying out all the factors that we see coming into play now. Refinery utilization back up and heading probably back up to the 90%, 95% level; a ramp-up in export volumes; very, very low middle distillate stocks in the Atlantic Basin. Global -- very interesting report this morning from PIRA. They're even more bullish than they were in their prior report, suggesting that they think that the oil market is going to be back into balance with regard to inventories at the end of this year. They have a fundamentally different view on what represents normal levels than the IDA does, but it makes for interesting reading. And our view has always been that when inventories get down to more normal levels than regional imbalances and shortages of product emerge and drive oil trading activity, which has a big impact on ton mile demand. So all of those factors are adding up. And then underneath that, you've got good -- very, very strong fundamentals. So I think first, we see and we believe, we hope we'll see a good seasonal run this winter and then let's see where the fundamentals take us after that.

All right. Okay. Perfect. And I don't want to deliberate too much further, but I guess what I'm asking is you don't see anything that could potentially, at least as far as you can see, stand in the way of rates possibly at points getting back into the high teens or 20s? I mean, that's -- there's nothing that says that's off the cards, right?

No. No. I'd only add one thing on -- just to add one point on this, I think, that's worth mentioning. I think a lot of analysts, whether in industry or otherwise, make a point that they don't believe that you can have a strong MR market without a broad tanker market recovery. And I'd take that point to a degree. However, I think the correlation analysis that they do indicates that there is a fairly tight correlation at least on a longer-term basis. But the reason for the correlation is that the sectors are driven by fundamentally the same factors most of the time. However, this time, we think that the supply outlook for MRs in particular is sort of different from the bigger ships that you could really see a detachment. And we're not saying that we're going to see $30,000 a day with MRs when these are trading at $20,000, but you could see substantially better performance on a kind of a capital return basis with MRs while the bigger ships are still in a recovery mode.

Our next question comes from Magnus Fyhr with Seaport Global.

Just a follow-up question on the -- on this acquisition. You mentioned a 30% ROE at mid-cycle rates and 5% accretion at $18,000 a day. I share your positive outlook for the MR market, but $18,000 seems a little high. I think we've only been over that one time in the last 8 years. So would you give some rationale using $18,000 for the accretion?

Well, I think we were at or above $18,000 for about 1.5 years, right, from late '14 up until early '16. So that was a market that nobody believed in, but the rates were very strong. I think 1 quarter we tracked $25,000 a day?

Yes.

On the MR -- on the Eco-Design MR. So it's not like that's a blip that we've seen and kind of went away for a long time. And of course, we all have to remember back that this is a long cycle business and rates were above $18,000 a day for the better part of 3 or 4 years in the mid-2000s. So I'm not -- we think that's a perfectly legitimate benchmark to point out, and the mid-cycle rate that we're thinking of is probably $15,500 a day. And it's simple math on the acquisition price. The resulting depreciation cost, OpEx, drydock cost, incremental overhead, that's the number that you arrive at.

Right. So I mean, the time charter rate definitely lower for -- over the next 12 months. So you wouldn't be surprised to see these rates develop in 2018?

Well, you were sitting at an interesting point where we think that we're coming out of a really bad period driven by very specific factors, oil market dynamics meaning the global inventory destocking and then the lack of export-oriented cargoes -- lack of export cargoes out of the U.S. Gulf refinery complex and into a period which is typically stronger in the winter months, backed up by a whole bunch of other factors that we described earlier. So on a short-term seasonal basis, we're feeling pretty good about the outlook. And I know we've been singing the same tune for a while, but in shipping, it's -- there's something mathematical about demand growth in around 5% versus supply growth well under 2%.

Our next question comes from Noah Parquette with JPMorgan.

A lot of the market questions kind of dealt with. I just was curious, do you guys have plans to do an Eco-Mod modification of the new vessel and just remind me sort of -- remind me how much that costs?

Well, we will. The cost is not significant, but we don't typically disclose it. But it will involve modifications to the propeller to onboard monitoring. And when we go in for the first docking, we'll do some other work to it as well. But yes, we will -- as always, we tinker with the ships to maximize their fuel efficiency and their cargo flexibility.

Okay. That doesn't include the ballast water treatment system, right?

No. That's the one thing that we were happy to delay as long as possible, along with everyone else. We believe very strongly that we want to be in the forefront of implementing new regulations. But that's one that -- in fact, the technology in terms of the systems hasn't even really been very well worked out yet, so that's still a bit in flux.

Our next question comes from Fotis Giannakoulis with Morgan Stanley.

We have seen the chartering activity, as you mentioned, increasing in the U.S. Gulf in the last 2, 3 quarters. Still, we haven't seen the charter rates responding. I assume that this is because of the accumulation of vessels from the previous time. Can you give us your picture of how many vessels we are shipping right now available or in the U.S. Gulf? What is the oversupply? And how quickly do you expect that this will go away?

Okay. So I think what you're asking is the -- basically, cargo volumes over the last 2, 3 quarters. As I mentioned, volumes were actually pretty high in July. I don't have the numbers right in front of me here, but they came down significantly, maybe 50%. So as a consequence of Hurricane Harvey, and we think that, that recovery, not of the refinery throughput which is right back up again, but the cargoes being loaded is probably halfway to full recovery. As a consequence of that lower volume and also with ships coming in from the East into the Atlantic Basin, that has created an overcapacity. So in terms of how many ships are waiting or kind of 1 week out, ready to load, the number right now is maybe 15. That's down quite significantly. We think that the volume of like week on week, the volume of export cargoes last week was up 35% from the prior week. So these are all very, very bullish signals. Rates are moving up a little bit in -- for TC14, but there hasn't been a really big move yet.

And I assume that when these 15 vessels disappear from the market as refinery utilization picks up, then we can see some meaningful changes in rates. I was wondering if there are any other catalysts, for example, if you see the trading activity to pick up now that oil is at slightly higher levels or if you see voyages that they weren't apparent 3 months ago.

Again, I think we're waiting for liftoff basically when it comes to oil trading activity. But again, given the decline in global inventories and the greater activity with refineries, et cetera, we think that's going to really kick up this winter.

(Operator Instructions) And our next question comes from Chris Snyder with Deutsche Bank.

It's Amit here. So maybe this is an overly, I guess, elementary question. But Tony, for the last 2 years, we've been talking about the relationship between supply-demand order book and historical lows that will drive a tightening in the market. But unfortunately, the market has still been relatively lackluster. And like you said, I think there's obviously some specific things that warrant that or explain that. But kind of in that context for the people on this call that maybe aren't familiar with the day-to-day aspects of the MR trade, I was wondering if you could talk about the top 2 or 3 things that need to happen for this market to inflect or maybe even reflect the prospective supply outlook and whether that's oil prices, specific projects as it relates to new refining capacity. Anything that helps us get a bit more, I guess, tangible about the cadence of the market recovery.

Yes. Thanks, Amit. So I would say the 2 big things are the U.S. Gulf market is so important for overall global MR ton mile demand, that seeing an increase in liftings and a shortening of the tonnage list is key. But the other part is where this cargo is going. So once we get back into a more volatile world on a physical regional basis and you start seeing MRs loading cargoes that end up going halfway around the world, that's -- that will be symptomatic of the reason why rates have gone through the roof. So that's why, for example, voyages down to -- you could watch voyages to Brazil, Argentina, Chile, they're very important because they're fairly long haul. And although we all like to try to find triangulations, the reality is most of that business has to come back empty to the U.S. Gulf. So as a consequence, it uses up an awful lot of ton miles or ship days to do that business. So I'd say it's longer-haul arbitrage combined with higher volumes.

And then in terms of diesel penetration of light vehicles in Europe, I mean, I guess, one of those key routes is kind of, I guess, gasoline to U.S. and then bouncing over to Houston and picking up diesel and going to Europe. I mean, is there any secular thing that we should think about related to maybe diesel penetration of light vehicles in Europe?

Yes. I think in the short term, not really. It's -- we go over here and we all drive diesel cars and that's fine, and that's not going to change in the short term. Longer term, that could be an issue and that could change the cargo flows a little bit, but that's nothing that's on our radar screen at the moment.

Right. Yes. It's more secular, yes.

Yes. Yes. So you have European middle distillate requirements being net by a combination of U.S. Gulf, Russia, by pipeline and by sea transport and the Middle East and even from South Asia sometimes. So they're -- and it really depends on the relative pricing to determine where those cargoes are coming from.

Okay. And then one last one for me is, obviously, it's -- I've said this before in terms of the way you guys manage your debt repayment and your balance sheet is obviously, I think, great. But we're kind of now 2 years into maybe -- I think last year, when you had your Analyst Day, you would have expected the market to be kind of at $17,000, $18,000 today. And so now we're further along to the down cycle, which implies that we're closer to an up cycle hopefully. And so the question is, as you guys think about managing your balance sheet and I guess you want to be prudent and cautious, but it also, at the same time, kind of is beneficial as you turn a little bit more aggressive as well as it relates to where you want to take that balance sheet relative to where the asset values are in the cycle. And so maybe this question has been asked a little bit late, but would you be at all maybe -- are you turning a little bit more willing to be a little bit more aggressive on taking that LTV a little bit up at this point in the cycle because of the outlook for the market on a 2- to 3-year basis?

Yes. It's -- to be honest with you, we don't feel that that's -- I think we can achieve our objectives in terms of earnings power without leveraging up. The other problem is that normally the way you would have to do that in shipping in this kind of business where you basically got first mortgages on all the vessels is to leverage up beyond the level we are now. We could arguably get up another few percent with senior debt. But beyond that, you're relying on very expensive mezzanine and that tends to not work out well, not even in the long term, but the medium term. So it's really a function of us being as conscious and careful as we can be regarding cost of capital as it is about outright financial risk. The incremental return that you can get by levering up and kind of leaning forward is offset by not just the risk, but by the incremental cost of the capital that you're raising and the difficulties and the complexities that, that creates longer term.

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