CMB.TECH NV (CMBT) 2017 Q3 法說會逐字稿

Hello, welcome to Euronav Q3 2017 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Paddy Rodgers. Please go ahead.

Thank you. Good morning and afternoon to everyone, and thanks for joining Euronav's Q3 2017 Earnings Call. Before I start, I would like to say a few words.

The information discussed on this call is based on information as of today, Tuesday, October 31, 2017, and may contain forward-looking statements that involve risks and uncertainties. Forward-looking statements reflect current views with respect to future events and financial performance and may include statements concerning plans, objectives, goals, strategies, future events, performance, underlying assumptions and other statements, which are not statements of historical facts. All forward-looking statements attributable to the company or to persons acting on its behalf are expressly qualified in their entirety by reference to the risks, uncertainties and other factors discussed in the company's filings with the SEC, which are available free of charge on the SEC's website at www.sec.gov and on our own company's website at www.euronav.com. You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement, and the company undertakes no obligation to publicly update or revise any forward-looking statements. Actual results may differ materially from these forward-looking statements. Please take a moment to read our Safe Harbor statement on Page 2 of the slide presentation.

I will now pass you over to Euronav's CFO, Hugo De Stoop, to run through the first half of the presentation. Hugo?

Thank you, Paddy, and good morning or afternoon, wherever you are, and thanks for joining our third quarter 2017 earnings call.

Turning to the agenda slide, I would like to take you through the highlights of our third quarter, followed by a full review of our key financial figures before handing over to Paddy, who will take you through the latest market themes as we see them at Euronav. We will then turn over to the operator for a short Q&A session.

Kicking off with Slide 4, Q3 was a challenging quarter as we discussed on our results in August, the most difficult since Q3 2013, indeed. Freight rates were effectively capped by sustained delivery of newbuildings, 13 VLCCs and 15 Suezmax during the quarter combined with fragile owner sentiments.

So far in Q4, rates have improved with seasonal trend, but the environment remains very difficult. We have booked 45% of our VLCC days at around $26,000 per day and 56% of our Suezmax fleet is covered at around $16,000 per day.

I would now like to move on to the income statement on Slide 5. It's fair to say that Q3 was an uneventful quarter as far as the financial side was concerned. Such a low key quarter comes after a lot of affirmative action taken over the previous 18 months in securing new source of finance and building our liquidity buffer. This is precisely to be prepared should the challenging freight rate market seen in the third quarter continue into the following quarters.

One highlight, not directly related to Q3, was a payment of $0.06 per share dividend during September for the first half of this year. This was the first dividend payment made and there are new policy of paying $0.12 minimum annual fixed dividend independently of the results made by our company.

Turning now to the balance sheet on Slide 6. Euronav moved on to the new 5-year contract of the FSO during Q3, and as part of this process, we paid down about $60 million, half of it being our share of outstanding debt, meaning the FSO joint ventures are now debt-free. This repayment, along with $12.5 million worth of installment payments for the 4 Suezmaxes currently under construction with Hyundai in South Korea, represent the main out of the ordinary changes to our cash position.

Remember, these new vessels, which will be delivered approximately 1 per quarter during 2018, are each accompanied by 7-year time charters.

Our leverage increased modestly, but remains in the lowest bracket of the tanker sector and stands around 44% when marked to the market value of our fleet and 36% when marked to the book values. The available liquidity at the quarter end was around $735 million, with a breakdown shown on Slide 6.

I will now hand over to our CEO, Paddy Rodgers, to give you an update on current tanker market themes and the outlook. Paddy, over to you.

Thank you, Hugo. Slide 7, demand for crude oil has continued to see sustained upgrades. The chart on Slide 7 shows the progression in recent years from start of the year to end by the IEA forecasts.

Demand is robust and, just as important, diversified. China continues to be strongly driven by a number of sources, replacing lost domestic production, underlying economic growth and supportive refinery expansion. However, it is important to recognize that the stimulus here for lower oil price has caused OECD demand to grow consistently since the end of 2014, reversing the trend since before that, which dated back to 2005 of reducing oil demand from OECD nations.

Reported demand growth has been running at over 400,000 barrels per day from the OECD since 2014. So the demand part of our equation remains encouraging. What about supply ships?

Slide 8. Slide 8 shows the very simple way we look at overall vessel supply like a bathtub. The taps have been on for a while, with around 100 VLCCs net added since the first quarter of 2015 to the world fleet. The recent increase and removals from the fleet is a very encouraging development, but requires some caution. Ten VLCCs and 6 Suezmaxes disappearing down the plughole has to be taken in the context of 13 VLCCs coming down the taps over the same period.

The table on Slide 8 shows the outlook for future vessel supply, which the current strong demand can do a lot to absorb. But as Hugo pointed out earlier, the concentrated nature of this new supply requires more action at the other end of the bathtub.

Now, we finished our washup, let's move on to Slide 9. Our traffic lights continue to remain mixed, with demand, oil supply, financing and ton miles largely constructive, but vessel supply remaining amber/red. One feature of shipping demand that is encouraging is the further expansion of U.S. crude export market. This is something we have heavily focused on in recent earnings calls and presentations, and it is pleasing to see this thesis gaining traction when there are number of recent reports, estimating current U.S. Crude export capacity between 2 million and 3.2 million barrels per day.

The recent spread between WTI and Brent has clearly encouraged more exporting, but as we have stressed previously, Euronav sees this as a structural change evolving and reflects a robust and diversified crude demand structure.

To conclude then, we repeat a little from our last earnings call. If the illness is low freight rates, then the cure is more and further low freight rates. Our bathtub needs to get a better balance before an inflection point in rates can be reached and sustained and until then, Euronav retains a substantial balance sheet capacity and fixed income visibility to navigate a period of lower rates, but retaining flexibility to take advantage of opportunities.

That concludes the formal part of the presentation. Thank you for listening. I will now pass you back to the operator.

(Operator Instructions) And the first question comes from Jon Chappell with Evercore.

Paddy, wanted to ask about growth initiatives again that we talked about at last quarter, but we're kind of in this really interesting environment right now where the freight environment, obviously, weaker year-over-year, the headwinds that you pointed out, completely agree with your outlook for '18, yet it seems like some of the last sale and purchase transactions have been ticking up as far as asset values are concerned. So how do you kind of see the asset price environment vis-à-vis how you just laid out the market for the next 15 months? And given that context, how aggressive do you think you need to be in the near term to use that liquidity that you have kind of built up to get in before the prices run away from you?

Hi, Jon. So -- well, it's one of those things I suppose that there is never ever going to be a very easy answer to that. It's a question of getting the slide rule out and checking all the different elements. I think at the moment, we do believe that we're seeing some stability on secondhand prices. And I think that there have been some -- there has been some evidence that there is some rationalization, the thinking of if not the shipyard, then at least there are bankers around issuing refund guarantees. And so that really feels like we're seeing some support for secondhand and, indeed, newbuilding pricing. Of course, we're going to go through a critical phase in Q4 now because we are entering what would normally be the time when shipyards begin to look at their budgets for 2018 and see what they really need to put in the books. So we'll see what the newbuilding order book really does in the next 2 or 3 months. But I -- whilst every newbuilding order is disappointing, at least hearing that a couple of refund guarantees haven't been issued must be positive news. I think the slight recovery in rates, again, is because it's based off quite strong demand from the Far East and the way that ton miles has worked, really absorbing capacity, looks very positive. But it's still a little bit fragile, and we're not sure how much debt there is to it. In terms of opportunities, of course, some -- we're -- as I've said too many times, we're always looking, and I think that we'll be looking up for how we would fund or acquire, so that's part of the matrix, putting those things together. And lastly, by no means at least of course, we're just seeing the oil price ticking up and it's going to be very interesting to see if that's sustained, which, obviously, from our point of view, hoping that we'll just see that get capped out with additional shale and U.S. Exports, which should be good for ton miles as well. So all the usual things -- sorry, I can't really give you a specific update, but I promise you, you'll be the first person to know if we do something.

So -- I doubt that. My follow-up for Hugo, then, $735 million of liquidity is, obviously, a huge number, it's about 55% of your market cap actually, and if we take out the committed CapEx [for the Suezmax], it's still over $500 million. How -- if there were opportunities that were to be present themselves, part A, how much leverage would you be comfortable taking at this point in the cycle? And then, part B, given where your stock trades right now, maybe around NAV, maybe premium, maybe discount, depending on what asset values you use, what's your willingness to use shares for ships as opposed to the kind of traditional method of bank financing and cash?

Yes, thank you, Jon. I think that we've said during the many presentations that we've had with investors over the last 3 years that at this sort of cycle, as long as we were below 50%, 55%, we would be happy. As far as the leverage is concerned, I think, it continues to be the case. If the leverage was to go much higher than that, it would be because we are using some of the available credit lines or revolver lines that we have, not so much to acquire assets but to defend the company in the low freight markets, and so at the moment, that's not what we're doing, obviously, and we hope that, that's not going to be the case in the future. As far as the share price is concerned, I think that we agree with you that where we are seems to be much better than where we were a few months ago. And so we would -- we would certainly be tempted to use the equity, but always on a mark-to-market basis, i.e., the vessels that we buy have a certain price and then with that price, we plug that in our model and we see if the NAV that comes out is in line with that, taking into account that you always have some friction of cost and fees to pay. So we are very careful about making sure that we do create value for shareholders. But indeed, we are a lot happier with where the share price is than we were a few months back.

And the next question comes from Gregory Lewis with Crédit Suisse.

Paddy, could you talk a little bit more about the improvements that we're seeing in the freight market? Clearly, you mentioned in the prepared remarks that the Q3 was the worst quarter since 2013, I guess not a surprise. But if you could just talk a little bit about what's happening in the market right now that's given the market a little bit of an uplift here?

I think that -- we think -- what we've seen is a significant increase in buying from the Chinese refineries. And particularly, they've taken the opportunity in this third quarter to cherry-pick modern tonnage so -- and that's just pushed back some of the older tonnage. And we're hoping that, that will slightly bifurcate the market, so that ships over 15 years will begin to get slightly worse economics and hopefully, negative cash flows and encourage them to scrap it. I think this kind of shift where -- I don't know whether it's a step change or whether it's opportunistic, but anyway, we've certainly seen a number of Chinese ports closing their doors to older ships. And if that has a longer-term and sustained impact through the winter, then for us, you could see the best of both worlds, which is that we don't have to endure worsened cash flows ourselves, but we do get to see people with older tonnage being squeezed. So if that happens, that would be good, I think, and alongside that, of course, is that there's an ongoing big development, which is very interesting on the Chinese buying of U.S. oil, where we're talking about quite big quantities. It will be interesting to see what happens with the higher oil price that we're seeing in the last week or so because that should bring on more shale. And if it brings on more shale, we believe there will be more infrastructure commitment. We've recently seen that Corpus got budget approval for dredging, so they could well take in fully laden Suezmaxes relatively quickly. We know that there's a pipeline reversal at LOOP, which might -- whilst it may not be huge volumes, nevertheless, it's a step in the right direction and that should be coming on sometime in the first half of 2018. And the great thing about this is that we're just seeing discounted oil in the U.S. being brought to the Gulf Coast and exported in a way that is extremely, extremely accretive to the value of the big tankers. So this is going to be an ongoing story, we believe. And of course, as far as Chinese-U.S. relations go, that must improve the balance of payments and be positive, which is always good. And secondly, I think we can possibly see the oil price supported by the Saudis on a longer-term basis, but really more to support their IPO of Aramco than necessarily because they need the cash. The problem for them, of course, is that they are shutting themselves out with over 1 million barrels a day of income from the oil that they don't sell. But I think, long term, we're going to see the oil price moderate from where it is, but nevertheless, stay high enough to interest the shale producers and yet, also, not high enough to be demand destructive. So I think way -- the way -- the place we've been set up on the demand side has already impacted in Q3. I think it could go on quite positively in Q4, but older ships are going to come under a lot of pressure.

Okay, great. And then, just one quick follow-up for me, it ties into actually, it sounds like, what you're seeing in China with the bifurcation in the market. As we -- as you look at reports or estimates of implied rates out there, it looks like in the VLCC market, there's a spread between, I guess, eco and non-eco vessels of anywhere between $4,000 to $6,000. As you guys managed the TI pool and see that, is that something -- is that -- how real is that? And or is that just -- how does that -- how is that process working where it's really that much of a bifurcation where an older vessel really just has to come in that much lower solely on positioning or fuel burning or can you just talk a little bit about that?

One moment please.

Just had an interruption from the operator, so I wasn't sure whether we had lost you.

Do you need me to reask the question?

No, no, that's fine. All I need of you is you just speak or to breathe more heavily, so that I knew you were still there. We'd dropped one of our lines there. Now, the only reason why it's a slightly complicated question is, of course, if you burn less fuel, you'll net back to a higher TCE, but I think the critical phase, as you've seen in our results, whether it's on our VLCCs or on our Suezmaxes where our fleet profiles are a little bit different, we've been able to perform well in Q3. But I do think that first and foremost is the access to information and the ability to ensure that your distribution system and your organization is better because a lot of the gains that you can pick up from an eco-ship are improved significantly if you can run and schedule your voyages properly. So I think that being part of a bigger machine enables you to make better returns. And I think that's the lesson that's coming to the market. And I think that a lot of the smaller operators will find that they are squeezed out of the most lucrative voyages in the coming markets. So I think that it's not only about performance of the individual ship. I think a good ship in the wrong hands is going to earn less than a good ship in the right hands and, therefore, I think you need expertise and size to really make an impact, and that's what we're seeing.

And the next question comes from Chris Wetherbee with Citi.

I wanted to come to your oil demand side and sort of think about where we are heading into 2018, so we have coordinated global growth probably at a pace we haven't seen in a few years. When you look at 2018, what's the risk that you the see upside moving back towards a number like 2015? So why wouldn't we see maybe significantly better demand growth than what we've seen this last year or 2?

Well, so if I understand you, is there a risk that you actually get considerably better than currently projecting growth, and I think that the answer is that we pretty much depend for our views on growth on the various market commentators. But as I know, your bank is often questioned, look, how many times this gets revised during a year, how serious is -- it's been since the IEA, if they have to revise their figure up with 6...

(technical difficulty)

Hang on a moment please.

Are you guys still there?

Yes, this is Hugo, I'm still there. But I think important lines are gone, Christian. But I think as what Paddy was going to transfer is that, yes, it's moving parts, it's being changed every year on the upside from the IEA perspective, certainly. And then when you look at the oil analysts, was toward all the investment bank, it's true that everybody has a different view. And so it's very difficult to predict. If the market becomes considerably better, that will absorb the new tonnage a little bit faster. But we continue to insist on saying that the old ladies can go, and then if we are surprised by the markets, so be it, and the market would be even be better. But I think that the -- what we are also seeing in the market is, as Paddy highlighted in the previous question, that the Chinese, which is obviously one of the biggest customers today, is being more and more reluctant to take care old ships and old ships that are maybe performing a little bit less appropriately than modern ships.

Okay, okay, that's helpful. I appreciate it. I mean, it's just our sense that we're seeing coordinated global growth in sort of a robust way for the first time in a few years at least and so, it would seem like there's upside potential. Just to try to measure some of that, to the extent that you see demand like you had in 2015, the 48 VLCCs, do they seem sort of much more digestible, I mean, what would be the environment that you'd expect in that scenario?

Sorry, I dropped off there. But look -- if you look back from the end of 2013, we've had 7 million barrels of demand growth over 5 years. And I think that, that's an extremely good trajectory and it's, obviously, been very varied. If you were to get that repeated trajectory through the next couple of years, I don't think the order book is that much of a problem. The simple fact is that today, we're probably 30 to 40 ships too long for VLCCs and probably 20 to 30 ships too long for Suezmaxes. That's not a huge amount. That's less than 5%. If the ones that are reaching 20 years of age shuffle off to the scrapyard, this structurally sets up for a fairly positive recovery and one that could be sustained.

Yes, that's what it sort of looked like to me, so I just wanted to get your thoughts.

The next question comes from Ben Nolan with Stifel.

I was actually going to follow up on, Paddy, something that you mentioned in Greg's answer about sort of the advantage that you have in the scale of your operations and clearly, that came through in the quarter. I think you put up rates that were better than both what I and, looks like, everybody else had. That lends itself to at least some degree of cause for consolidation if the bigger players, especially, in a weak market are able to outperform in a relatively meaningful way, then the bigger player should get better -- bigger in my mind. Is that -- do you think the same way? Is that -- is there some rationale to that or is it the same old, same old?

Well, I mean, I'm very reluctant to utter these words just because I've heard them so often in shipping behalf before and it had never come true. But the idea that a ship is more valuable in the hands of Euronav than it is in the hands of a small owner wouldn't necessarily mean that there's going to be consolidation. Simply, the value that you can extract from the same deployment of capital is different. And that should be rewarded and recognized in the stock market. So I hope that on this quarter's release, we will see a strong reaction that people will look past the sector at the moment and just see the company and say, that's high performance and that's worth backing. Now, I said I was nervous about saying it, just because I know that there have been many false thorns, and we don't really want to be part of the long list of people that have made promises that never got delivered on. But what I would say is that it's slightly different this time. And the reason I say that is that I honestly believe that in the market, if you talk to people, what they'll tell you is that this really is the rise of the national oil companies. The drive here is from the Saudis with a huge amount of oil to sell, the Americans looking more as oil sellers more than anything else and the Chinese as buyers. And they are looking for logistical solutions rather than getting the lowest possible rate. Now I'm not saying they're giving money away, but on the other hand, there are different set of drivers. And I think that's very interesting. And if it sustains, I think there will be a good cause for consolidation and justifiable returns for bigger fleets.

That would definitely be a shift change in the tanker market. But we'll see if you're right. And then just my -- on a follow-up unrelated, Hugo, obviously, you guys paid down a decent amount of debt this quarter and you used cash to do it. Just curious how you think through, in your own mind, especially in a weak market, the advantages of reducing debt and -- or conversely, carrying larger cash balances.

I think it's obvious and quite frankly, at Euronav, we don't manage our cash position in a much different way be it in a low market or in the high market. We're not cash manager or asset manager to the extent that -- I'm talking cash management, of course. And so what we have as a structuring or term loans is that there is always a revolving element. And so repaying that revolver means that you pay less interest, right, you only have to pay a commitment fee. And so we try to hold our cash position at $100 million. Of course, we always check the covenants, and we make sure that whatever we repay is truly available for whenever we want to use it or we need to use it. And that's how we manage the cash. So between $100 million and $150 million is the cash that we want to hold at all time, and all the rest is being used to repay the revolvers and when we need that cash, we draw on it.

And the next question comes from Amit Mehrotra of Deutsche Bank.

Paddy, I just had a follow-up on the demand line of questioning. One of the biggest drivers of demand, at least in 2015, was the fact that the rig counts in the U.S. have basically doubled from where they were the prior year and kind of doubled from actually where they are even today. So that took the oil price down and redirected West African cargoes to China, creating some ton mile effect. So I think the demand side this year at least, at least in the first half, has been helped by rig counts having doubled in the first half of the year off of, obviously, a very low base. But they have actually started to decrease, if you look at the more recent data. So I'm just wondering, everyone is talking about sort of demand improving potentially, but actually if you look at the -- what's happening in U.S. production, there's actually risk that it could decline. So I was just wondering how closely you're watching this in terms of the risk if demand turns more negative, and also, has there been any positive ton mile effect this year based on the higher U.S. production kind of what you had back in 2014?

Well, I mean, I think we actually saw close or at 2 million barrels a day being exported not so long ago, and I think that we can only say that our experience is a story the -- a surprising story and 2010 to 2014 was the development of U.S. shale, adding 5 million barrels of additional productive capacity. The big story of this year is the export story. And from -- almost expanding, started nil to nearly 2 million barrels. I think you can look at the WTI-Brent spread and see that it almost guaranteed that it makes sense that freight cost of going extra distances is absorbed in the discounts. So I think that there's some -- there are very strong signals that not only are we going to keep seeing a continuation of this, but very specifically, the Saudi cuts have been in the grades of oil, which were the ones that have the largest discount, which were heavy crudes, and they were vehicle heavy crudes anyway, not that heavy but -- and those went to the West, to the U.S. The U.S. is not buying Saudi crudes today. There is some Saudi import into the U.S., which is largely from their own refineries. That means that the ships that need to go to the U.S. Gulf to load oil from the U.S. and go to China with it are going on a round-trip basis. That means that they are doing enormous voyages. And that is hugely absorbing of supply. And that's been one of the features that we've seen in the last 3 to 4 months.

Okay, that's helpful. And then, one for my follow-up is really on the sale and purchase market. And I just wonder if you could provide some color on -- if there is a significant, I guess, bid and ask spread between buyers and sellers, which would make secondhand purchases more difficult, and I guess, I ask this question in the context of the fact that asset values are not declining as Jonathan pointed out earlier, and also, owners I guess do have a decent buffer from the booming market in 2015, so is it correct to think the deals like what you did in 2014 and then, again, in 2000 -- sorry 2013 and, again, in 2014 are much harder to come by kind of all else equal today? And so when we think about prospective growth for Euronav, I guess maybe it's more appropriate to think that growth will be much more organic rather than you guys being more aggressive like you were 3 or 4 years ago at the low point in cycle because of just there's less opportunities in that regard after the market we've had in 2015?

Yes, I think this is -- that we can all run calculators and models on when we think is the right time to invest. And we can all do our own research on with our relationship bankers, with our -- look at our asset values and our shares, and we can see what the bond market is doing in terms of how we're going to finance transactions. But I'm afraid we're still left with the trader's inevitable problem, that you need a willing buyer or a willing seller. And I think that it's all about when they come to market. And I think you've identified that by saying that a lot of people are reasonably cash rich in the space. Dry cargo has stopped bleeding as much as it did, maybe the sellers are more willing to hang on. but I think, it's just a case-by-case basis. I think that we're tending to see 2 or 3 buyers potentially for every ship that comes to market within a certain age range. So I think that it's fair to say that probably the flavor of the moment is 5- to 7-year-old ships and there seems to be a reasonable amount of inspection. So it looks like there is some buying and selling interest. The question is, is it there on a one ship deal and is it there on what age of ship, and then is it there for 5-ship deal, 10-ship-deal, 15-ship deal. I think all of them, you just have to wait and see, watch and make your mind up. So there isn't, I'm afraid, much guidance that I can give you, but it is all about willing buyer and willing seller.

And the next question comes from Spiro Dounis with UBS Securities.

I just wanted to follow up on some of the prior questions, 2 things stood out for me on the release and both related to freight rates here. So first, do you see a top line expectations on result? And second on the guidance, looks like you're ahead by a few thousands a day more than we expected and more than the average spot market would indicate and, as Ben noted, maybe some of that is due to the size of your fleet and, obviously, the TI pull, just looking for additional color on how you really see the expectations on both those accounts? Are you taking different routes? Is there something different that's happening that we can sort of pinpoint here?

Well, I think we can tell you, but then I have to shoot you. This is the expertise of the operational magnificence of our systems. And -- look, I'm joking a little bit. But we work a lot of accounts. We're always looking to see how we manage the proper distribution of the capacity that we have. And I think that this is a quarter where we've shown that even with quite a wide range of ships, we can do very well. And so it's bits and pieces here and there decision-making and choices that we take. So this is -- it's been a good quarter and we're pleased about it. I'm afraid that's about all the guidance we can give you.

No, no, no. I fully understand that. Just wanted to make there wasn't anything sort of systematic that was sort of changing around there that allows you to do this, but obviously, you're just firing on all cylinders. Second one, just on fleet composure, sort of on 2 fronts, obviously, I think we have just established that you guys were big buyers of vessels given the right opportunity maybe later next year, but from a vessel sales standpoint, you, obviously, don't need the liquidity right now, but just from maybe a portfolio mix of the fleet or just selling into to the strength that we mentioned, is that still something that's on the table from your perspective?

Yes, all the time. And I think just -- as you know that's something that we often explain to the investors that we're not really people who trade in ships, but clearly, there are people who are very careful about what our expenditure is around deployment of capital into assets and equally, if we can cleverly extract capital from deployed assets, then we are actually driving very strongly the returns of our investment. And so on that basis, on the one side, we just talked about the excellence of the capacity management within the commercial systems. But a critical part of it is buying fleet when possible, when you want to sell for whatever reasons that you sell expensively. So, of course, both processes are ongoing at all times.

And the next question is from Fotis Giannakoulis with Morgan Stanley.

Paddy, I want to ask you about what is the sentiment among your fellow shipowners? We saw first in newbuilding VLCCs in the third quarter more than 40 during the year. How this newbuilding orders have changed your outlook for a potential recovery around 2019 or '20?

I think the -- I think there are a couple of things there, Fotis. I mean, first of all, of course, we are still convinced that the oil price is going to stay range-bound in what they call the shale band somewhere between $40 and $60. So I think that if that's the case, then we believe the demand structure should remain good, and we think that the IEA and other agencies probably under predict demand. So on that side, and of course, maybe all of it, and I say, nearly all, I mean, all of it is really weighted toward shipping, and in particular, big ships, long distances. So I think that's the starting point for any thesis about how you manage the order book and the second one then, of course, is scrapping. But it brings us into an issue that is becoming, let's say, less important than it was in the sense that I believe that scrapping will pick up. And it's very natural that it picks up. We've been through a scrapping desert for 4 or 5 years, simply because we did a huge amount of scrapping of single-hull vessels a decade ago. Certainly, these fleet and the Suezmax fleet are relatively (inaudible) and quite young, but now we move into ships that will be 20 years old at the end -- from launch dates in the late '90s. And then, a significant number of the ships are -- will become 20 years of age. And as I said earlier on, we are seeing customers' strong preference about that. So I believe that if we step back into that regular scrapping of 4% or 5% of the world fleet, it can be a very positive from -- a very -- this can be a very positive influence, but it does require demand to stay good and thus the incremental growth. But I think that all in all, we can manage the order book, but if you know anybody who is thinking of ordering a ship, (inaudible) .

Paddy, one follow-up for me. You mentioned earlier about the U.S. exports. I'm trying to understand how important U.S. exports are for the supply-demand picture of steel volumes relatively to their Middle Eastern volumes are miniscule. But we saw in the recent weeks this surge in VLCC rate in the Middle East, part of it is attributed to the fact that the fleet is split between East and West. Can you give us a little bit more color how does this work, the fact that right now you have one additional market that did not exist before. And the rule of thumb that we had for about 30 to 35 VLCCs for its 1 million barrel of seaborne supply, how has this changed because of the U.S. exports?

Yes, certainly. And I think that the -- so the surge in the last 4 to 6 weeks has partly been around age of ships as well. And I think there you'll probably see that a lot of people with 20-year-old ships are looking at the rates they see quoted. In fact, that's great, but I don't get it fixed. And I think that it's picking up waiting days for the ships. So they are too old for the current market. It will be a feature that I hope we will see push through the winter, so that they don't enjoy pickup in rates and they are encouraged to go to the scrapyard. I think as far as the world fleets that goes, it's just -- if you go out to the Atlantic, you're probably not going laden. So you're probably going to have to take the risk on the long ballast to a potentially good freight. But nevertheless, if you can't, if you don't have the commercial network in order to know when to pick a cargo, where to pick a cargo and you could find yourself getting your voyage back eventually, but having to wait. And you wait a week, you wait 10 days and it begins to affect your voyage economics, but much more importantly for us is anybody who goes out there and does that also takes capacity out of the market for longer on a voyage which is already potentially 1/4 of the year. So I mean that's where the impact comes. And I think that as we've shown in some of the presentations that we do, which you've seen, Fotis, the differential would be that if the equivalent absorption rate, if you imagined all the ships, the incremental million barrels going to the U.S. Gulf and going at a sea from China, then would be into the 50s of ships required rather than the 30s. So that's the kind of impact ton mile difference would make.

And the next question comes from Noah Parquette with JPMorgan Securities.

Just wanted to follow up on the U.S. exports. It's really interesting what you guys are talking about. It's a new trade. I was wondering if you can give more color on how do your ships now trade around that in terms of how they position themselves into the region? What cargoes do they take after they discharge in China?

Almost -- I mean, increasingly, we're inclined to get it straight to the Caribbean, but I mean, it's not (inaudible) to the Atlantic. But I think that the -- it really is on a case-by-case basis. If the market comes back a little bit more strongly and we see the AG west market improving, then of course, we'll be happy to carry cargo.

So it's just dependent on -- I was just curious if you do any triangulation at all? Because you mentioned at one point that it's a round-trip voyage from China, and I don't know if that changes it depending on different things or if you're just trading round-trip.

Well, I think we can do both, I think -- and we have done both typically. But I think the big thing now is just that if you're getting into the Atlantic, maybe you can pick up cargoes onto Northwest Europe and then go to the Atlantic or to the U.S. Gulf, you can go to the Red Sea and then maybe go to the U.S. Gulf. But ultimately going into the U.S. Gulf with a cargo from Saudis going to the U.S. is becoming problematic I mean because they're not selling much.

Okay, as a whole, would you consider that more efficient in terms of your laden percentage versus some of your more...

(inaudible) Here's the riddle. It is the complete riddle of this market. The fact is that logistical efficiency will not trump market shortage. So if you end up with ships trading inefficiently, the result can be a very strong freight market, and a very strong freight market will net back to a higher TCE than not having a strong freight market but having logistical efficiency within a low freight market.

Yes, yes. I mean, I was just curious because I was wondering if that had anything to do with -- I mean your rate this quarter was fantastic, right? So -- okay, and then just another quick follow-up. How inefficient is the loading in the U.S. Gulf? I mean, the co-loading with other oil in the region, as the infrastructure develops, do you -- how much of an improvement do you think that will be in time?

Well, the big improvement is not really on our time, it's not an inefficient process. Obviously, reverse monitoring takes a little bit longer, but the important thing is the cost. So while it attracts us, it's not having a more efficient loading. What attracts us is that if you were to drop (inaudible) at $2, all of a sudden you're making American grades that bit more competitive. And in a margin-driven world, that could bring on even more. So let's not forget that the U.S. still has plenty of oil, which is effectively landlocked and bottlenecked and isn't reaching the coast for export. And the critical thing for us is if all that gets freed up with some pipeline reversals that you will have no doubt follow through the quarterly basis of Valero and others, then you could see a lot more oil coming to the coast. And if the infrastructure is there for it not to have a significant cost to go onboard a big ship, then, of course, it's going to be in the East, very competitively priced against other grades. And that's what excites us about it, not so much our lost time in port.

And the next question comes from Magnus Fyhr with Seaport Global.

Just a follow-up question on the U.S. exports. How much do you think, I mean, with the U.S. exports at unit 1.6 million barrels up from Harvey, how much do you think is seasonal? And how much do you think is related to Hurricane Harvey?

I think it's -- I don't think it's related to Hurricane Harvey. I think that this isn't some -- I'm just -- I don't think it's because the U.S. refiners aren't taking up the oil. And I think most of the refineries were back up in shape pretty quickly, although I know some of their power supplies weren't. But I don't think it's really related to Harvey. I think it's much more related to the fact that the Chinese are buying American oil in volume.

All right. And just as a follow-up. Suezmax rates have lagged a little bit here, but firmed in the last few weeks. You're booked $26,000 a day on the Vs and a bit lower on the Suezmaxes, what do you think the risk is here in the fourth quarter as far as bookings for Suezmaxes versus VLCCs to those that you already booked?

That would be extremely speculative of future earnings, honestly. Couldn't accurately predict that. There'd be no sensible measure.

And the next question comes from Mike Webber with Wells Fargo.

Paddy, most of the tanker stuff has been parsed over more than once at this point. I just wanted to ask you a question on the FSO JV. At this point, you've got a new 5-year deal. I think you've got 10-plus years on the back of that deal in terms of economic or viable economic life, filling off an healthy amount of cash and it's debt-free. So I guess my question is twofold. One, if you ever -- kind of independent of the market, I guess, if you ever wanted to sell that asset, it seems like this would be a pretty good time. So I'm curious what kind of inbound interest you end up having on that just given the dynamics and play there and the life and the contract cover on it now? And then two, if and when you wanted to lever that up, how would that process actually work with ISW? Can you just lever up your portion. Does that take longer than a traditional asset? Just a little bit of color there would be helpful.

Yes. I think the short answer is that plenty of people have asked if they could intermediate the transaction. And our approach to that so far has been we like the balances of having debt-free assets and good cash flow supporting a very volatile business. Of course, there's a price for everything. It's -- we're not wedded to any of our assets. So I'm sure you wouldn't want to do it in this forum, but if you have any -- if you have some brilliant offer, then please don't be shy. I'm sure you wouldn't be. So that's very straightforward. I think as far as how it would work with ISW, and again, it's a structuring issue, isn't it, if you were going to sell the asset, I suppose you'd do it jointly. And if you're going to lever it up, you can do that jointly. I, mean we've done it in the past. We've had bets on it jointly before, and jointly completed and done. So I think it's one of those things -- it's definitely an unencumbered asset, whose cash flows we thoroughly enjoy. We're not specifically seeking buyers on it at present or looking to sell it. But certainly, we're not wedded to any asset and would always be willing to consider anything that was sensible.

Yes, no. No one put me up to it, it's just it looks like it's just a better FSO business than the typical business most of the companies that focus on FSOs have, so it's probably the nice asset or nice feather in somebody's cap, which is a fair way. Anyway, I appreciate it.

And as there are no more questions at the present time, I would like to return the call to the speakers for any closing comments.

No, in which case, I'd just like to thank everybody for attending today. And thank you very much for hosting the call. So have a very good day, the rest of you. Good bye.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.