International Seaways Inc (INSW) 2018 Q3 法說會逐字稿

Good day, and welcome to the International Seaways Third Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, today's event is being recorded.

I would now like to turn the conference over to Mr. James Small, General Counsel. Please go ahead.

Thank you. Good morning, everyone, and welcome to International Seaways Earnings Call for the Third Quarter of 2018.

Before we begin, I would like to start off by advising everyone on the call today of the following: during this call, management may make forward-looking statements regarding the company or the industry in which it operates, which could include, without limitation, statements about the outlooks for the crude and product tanker markets; changing oil trading patterns; forecast of world and regional economic activity; forecast of demand for and production of oil and petroleum products; the company's strategy; purchases and sales of vessels; anticipated financing transactions; expectations regarding revenues and expenses, including both vessel and G&A expenses; estimated bookings and TCE rates for the fourth quarter of 2018 and other periods; regulatory developments and the company's responses to such developments; estimated capital expenditures for 2018, 2019 and other periods; projected scheduled dry-dock and off-hire days; the company's ability to achieve its financing and other objectives and its consideration of strategic alternatives; and economic, political and other developments around the world.

Any such forward-looking statements take into account various assumptions made by management based on a variety of factors, including management's experience and perception of historical trends, current market conditions, expected and future developments and other factors management believes are appropriate to consider in the circumstances. Forward-looking statements are subject to risks, uncertainties and assumptions, many of which are beyond the company's control. These may cause actual results to differ materially from those implied or expressed by those forward-looking statements. Factors, risks and uncertainties that could cause actual results to differ from expectations include those described in the company's annual report on Form 10-K for 2017 and its quarterly reports on Form 10-Q for the second and third quarters of 2018 and in other filings that we have made, or in the future, may make with the U.S. Securities and Exchange Commission.

Now I would like to turn the call over to the company's President and Chief Executive Officer, Ms. Lois Zabrocky. Lois?

Thank you very much, James. Good morning everyone. Thank you for joining International Seaways earnings call to discuss our third quarter 2018 results.

Please turn to Slide 4. We will review third quarter 2018 highlights and recent accomplishments. During the third quarter and consistent with our focus throughout 2018, we continued to position the company to capitalize on the tanker market recovery.

Looking at the first bullet. We have maintained our strong balance sheet and liquidity position through the major acquisition of 6 VLCCs at the end of the second quarter even as we continue to operate through a low point in the tanker cycle. Specifically, year-to-date, we had increased our cash position by $53 million, giving us a total cash of $124 million and total liquidity of $174 million as of September 30, 2018. This represents an increase in total liquidity of $83 million since December 31, 2017, including $50 million of an undrawn revolver.

We also continue to maintain one of the lowest net loan-to-value profiles in the sector with a net loan-to-value of 55%. In addition, the earliest debt maturity is 2022.

Moving to the second bullet. We have made strong progress executing our fleet growth and renewal strategy, capitalizing on attractive asset values at the bottom of the cycle. Since our spinoff in December of 2016, we have invested $600 million without issuing equity in 9 modern vessels, including 6 VLCCs acquired in the second quarter as well as 2 Suezmax vessels and 1 VLCC acquired in 2017.

In addition to investing in modern vessels with an average age of 2.3 years, we continued to opportunistically sell older ships, including 3 since our second quarter call, with an average age of 16.5 years, reducing our fleet age by 3 years to 8.6 years and increasing the fleet's deadweight by the 13%.

Continuing to the third bullet. In September, we announced a plan to install scrubbers on our modern VLCCs, which we believe will provide International Seaways an economic advantage and further demonstrates our commitment to the environment, consistent with our acquisition of highly-efficient ECO-ships.

I would like to highlight that we are taking a balanced approach installing scrubbers on 10 vessels that are the highest consumers of bunkers and that account for close to 40% of our annual bunker consumption. Our decision was a result of a thorough economic and technical analysis and evaluation of different scrubber systems as well as considering the likely availability of both low and high-sulfur fuel oil in the period shortly after IMO 2020 becomes effective. And we are pleased to have executed contracts with leading companies, with Clean Marine of Norway, who will provide the marine exhaust scrubber system and Hyundai Global Services, who will perform engineering and installation. We expect that at least 7 of the 10 scrubber systems will be installed by the end of the fourth quarter of 2019, maximizing the benefit from the spread between compliant fuel and the high-sulfur fuels currently used.

We continue to expect the upcoming IMO 2020 regulations will boost demand for both crude and product tankers as refinery utilization increases and refiners produce more very low-sulfur fuels and middle distillates, increasing overall crude volumes and likely the seaborne transportation of petroleum products as trading patterns change and adapt to the new regulatory environment.

The third quarter of 2018 continued to be a challenging tanker market environment. While we continue to benefit from our lean and scalable operating model and our predictable cash flows from the joint ventures and fixed-rate charters, our results were affected by the low rate environment as well as the positioning of 3 older ships for sale, which resulted in higher number of off-hire days.

For the third quarter, we reported an adjusted EBITDA of $6.3 million on time charter equivalent revenues of $51.3 million.

The net loss for the quarter was $47.8 million or $1.64 per share, which reflects the impact of a loss on these vessel sales, including an impairment charge of $17.4 million. Excluding these items, the net loss was $30.4 million or $1.04 per share.

One final point on this slide. I would like to note that we are seeing a much stronger rate environment so far in the fourth quarter relative to the third quarter's lower rates, reinforcing our view that we have passed the cycle's lowest point based on supportive supply-demand fundamentals, not one-off events. As an example of the improved rate environment, VLCC TD3 benchmark rates averaged $35,000 per day in October compared to $12,300 per day in the third quarter. Later on the call, Jeff will provide a more detailed Q4 earnings update.

Next, on Slide 5, we highlight the increased scale and reduced age profile of our fleet, evidenced by the charts to the right, which illustrates our success in reducing the average age of the fleet by 26% and increasing deadweight capacity by 13%. Importantly, we have grown the fleet, including completing our acquisition of the 6 VLCCs in the second quarter without issuing equity during the low point in the tanker cycle. With rates starting to strengthen, we believe International Seaways has enhanced its operating leverage at an opportune time, and we're excited about the company's potential for upside, capitalizing on a market recovery in both the crude and product sectors. It is also significant to note that the 9 modern vessels that we acquired have appreciated in value since their acquisition.

Now turning to Slide 6. We provide an update on tanker demand. During the third quarter, we saw increased oil production, which, combined with continuing strong oil demand and decreasing inventories, which are now below 5-year averages, marks a very positive development for seaborne transportation of oil and ton-mile tanker demand.

The top right chart shows the impact of non-OPEC and OPEC increases on global oil supply since January 2016. As can be seen from the chart, non-OPEC supply, including The United States, has been the main driver of recent increases in production. The IEA expects this to continue and forecasts non-OPEC supply will have increased by 2.2 million barrels per day this year. In addition, OPEC has added 640,000 barrels per day since the May agreement to ease supply cuts and increase production with a reported additional 400,000 barrels per day of production in October, further contributing to the increasing oil production picture.

As mentioned earlier, global oil demand also remains strong and supportive of a recovering tanker market as the IEA estimates 1.3 million barrels per day and 1.4 million barrels per day of increases in 2018 and 2019, respectively.

In terms of inventories, global oil stocks continued to trend downward during the third quarter, driven by lower crude inventories. Overall, the IEA estimates that OECD inventories at the end of August were 34 million barrels below 5-year averages. The bottom right chart illustrates this point, highlighting the 21 million barrels decline from July to August. A further 14 million barrels decline is indicated to have occurred in September. At the end of Q2 2018, OECD stocks, excluding SPR barrels, were down to 59 days forward demand. This compares to 66 days forward demand at the beginning of 2016, further demonstrating the effect of the reduction in inventories.

Regarding product inventories, while still below 5-year averages, the gap narrowed in August as a result of strong refinery margins, although recent U.S. data indicates a further draw in both distillates and gasoline inventories. This combination of increased production and reduced inventories bodes well for tanker demand growth.

Turning to Slide 7. We provide an update on tanker supply, and to start, we want to highlight that in the third quarter, we saw the fewest new building orders since the second quarter of 2016. The top right chart shows 3 consecutive quarters of declining new billing orders across all vessel types. Of particular note, there were no VLCCs ordered in the third quarter, marking the first time this has occurred in the last 7 quarters. Additionally, based on favorable order books and increased scrapping, we have seen flat-to-negative fleet growth for VLCCs during the first 9 months of 2018. Although there is a substantial VLCC order book for 2019, we expect this to be tempered both by ships, temporarily leaving the market for scrubber installations as well as continued scrapping of older vessels given the high current scrap rates in advance of IMO 2020.

Another important point to note regarding the future order book is that strength in dry bulk, container and LNG ordering continues to put limits on tanker new billing berth availability at shipyards for ships delivering over the next couple of years.

Now turning to scrapping. In 2018, thus far, 33 VLCCs, 17 Suezmaxes and 35 Aframaxes have been scrapped, primarily due to a weak rate environment and stronger steel prices. Given that the VLCC fleet is aging and CapEx requirements are increasing, we continue to expect increased scrapping in the coming quarters as highlighted in the chart at the bottom right.

The yellow and red bars represent potential removals and the green line shows muted net fleet growth based on expected deliveries and removals.

Regarding VLCC fleet growth, we expect minimal net growth in 2018 following growth of 5% in 2017 and 7% in 2016.

I will now turn the call over to Jeff to provide additional details on our third quarter results.

Thank you, Lois, and good morning, everyone. Let's move directly to reviewing the third quarter results in more detail.

Before turning to Slide 9, let me quickly summarize our consolidated results. Net loss for the third quarter was $47.8 million or $1.64 per diluted share compared with a net loss of $21.8 million or $0.75 per diluted share in the third quarter 2017. This difference primarily reflects the impact of the loss on vessels -- of vessel sales, including an impairment charge of $17.4 million. Excluding these items, net loss was $30.4 million or $1.04 per share.

Also reflected in net loss was reduced TCE revenues of $5.2 million and higher interest expense of $6.1 million compared to the prior period. A decrease in equity and income of affiliated companies of $7.5 million also contributed partly due to the leverage placed on the FSO JV as well as a reserve for potential off-hire claim on one of the LNG vessels.

These factors were offset to a large degree by decreases in expenses associated with the changes to the company's debt facilities, which aggregated $1.2 million as well as decreases in vessel expenses of $2.7 million, of depreciation and amortization of $1.2 million, and general and administrative expenses decreased by $1.1 million.

Now let's turn to Slide 9. As reflected in the chart, which is top left, consolidated TCE revenues for the third quarter 2018 were $51.3 million compared to $56.5 million in the third quarter of 2017. This decrease was principally driven by lower average daily rates earned across the VLCC and Product Carrier fleets this quarter compared to Q3 of last year as well as fewer MR revenue days resulting from vessel sales and redeliveries of charter rents during late 2017 and 2018.

Let me now discuss the results of our business segments beginning with the Crude Tankers segment. TCEs for Crude Tanker segment were at $40.3 million in the fourth quarter -- for the quarter -- third quarter compared to $34.9 million in the third quarter of last year. The increase primarily resulted from the acquisition of modern VLCCs and Suezmax tonnage, which contribute to an incremental $9 million and the impact of higher average blended rates in the Aframax and Suezmax sectors which accounted for approximately $1.2 million.

This increases are partially offset by the impact of revenue days of the dispose of older tonnage, which included a 2001-built VLCC idle from August prior to its sale in October 2018, a 2000-built VLCC sold in April 2018, the company's only VLCC sold in June 2018 and a 2001-built Aframax sold in May 2018.

Additionally, this quarter lightering generated $8.4 million of revenue and $1.7 million of EBITDA, which is an improvement on the $7.2 million revenue and $1.3 million EBITDA from the second quarter of this year.

TCE revenues for the Product Carrier segment were $10.9 million for the quarter compared to $21.6 million in the third quarter of last year. This decrease was primarily due to a decrease in MR revenue days, which arose from the sale of 5 MRs between August 2017 and April 2018 as well as the redelivery of 3 MRs to their owners between December 2017 and June 2018 at the expiry of their respective bareboat charters.

Declining average blended rates earned in our MR LR1 and LR2 fleets also contributed about $4.1 million to the overall decrease.

Looking at the chart on the top right of the page. Adjusted EBITDA was $6.3 million for the quarter compared to $16.0 million in the same period of 2017. This decrease primarily reflects lower daily rates earned in the VLCC, Panamax and Product Carrier fleets in the third quarter of this year compared to the third quarter of last year as well as a decrease in equity and income of affiliated companies of $7.5 million, which was previously discussed.

In terms of the trailing 12 months, you can see at the bottom of the slide, TCE revenue was $215 million for the latest 12 months through the third quarter of 2018 compared to $292 million for the comparable period last year. Adjusted EBITDA was $45 million for LTM through Q3 '18 compared to $132 million for the same period of 2017.

Turning now to Slide 10. We provide a Q3 review and a Q4 rate update. As we did last year, we've broken out spot rates for the VLCCs over 15 years old in addition to the breaking out spot rates for the modern VLCCs in our fleet and spot rates booked for our VLCCs overall. As I mentioned on the previous call, regarding spot rates for VLCCs at low points in the tanker cycle, such as the third quarter, modern VLCCs earn appreciably higher rates than VLCCs 15 years or older. As the market recovers, these gap will likely narrow significantly. We have seen evidence of this in recent pictures in the fourth quarter.

Speaking of the fourth quarter, looking forward, we booked 66% of available Q4 spot days for our modern VLCCs at an average of approximately $30,000 a day. 67% of our VLCCs that are over 15 years old have been booked at approximately $19,700 a day, so that overall 66% of our VLCC spot days have been fixed at approximately $27,600 per day.

In Suezmax, 51% of available days have been -- spot days have been booked at an average of approximately $23,400 a day, 48% of the available Aframax LR2 spot days have been booked at $16,600 per day, 51% of the Panamax 1 spot days have been booked at an average of $14,900 per day and on the MR side, we have so far booked 38% of our fourth quarter spot days at an average of approximately $11,400 per day.

It is important to note that rate environment thus far in the fourth quarter has been positive as we've earned significantly higher rates across both our crude and Product Carrier fleets compared to the third quarter.

As Lois mentioned, we feel we've had significant success implementing our fleet growth and modernization strategy, which has positioned International Seaways to increase our revenue days and enhance our upside potential for capitalizing on the market recovery in both the crude and product tanker sectors. This operating leverage means that a $1,000 increase in spot rates in every vessel class will result in about a $14 million per year increase in cash flow, while $5,000 and $10,000 increases would add about $68 million and $137 million in cash flow per year, respectively.

Now turning to Slide 11. We talk about our breakeven. The cash cost TCE breakevens for the 3 months ended September 30, 2018, were $22,100 per day for VLCCs, $22,900 per day for Suezmaxes, $16,900 per day for Aframaxes, $12,200 per day for Panamaxes and $15,800 per day for MRs.

International Seaways' overall fleet wide breakeven rate was $20,200 per day for the 3 months ended September 30, 2018. These rates are the all-in daily rates our owned vessels must earn to cover operating costs, dry-docking, G&A, excluding noncash, scheduled debt service costs, which means both principal and -- principal amortization as well as interest expense. And of note, taking into distributions from our JVs, the overall breakeven rate for the company drops from $20,200 to $18,200, which highlights our strong position for optimizing cash flows in a challenging market environment.

I would note on this page that we changed our breakeven presentation to the latest 3 months instead of the latest 12 months to more accurately reflect our recent acquisitions and financings. Considering our acquisition of $600 million worth of assets without issuing equity, these breakevens are still extremely competitive.

For the remainder of 2018, to update from previous guidance, we give you the following: our expected regular daily OpEx for various classes are, VLCCs, $9,000 per day, reflecting the acquisition of 6 modern vessels in Q2; Suezmax will be $8,100 per day; Aframax, $8,400 per day; Panamax, $8,200 per day; and MRs, down to $7,000 a day, which reflects the disposal of 3 older vessels in 2018.

For the remainder of 2018, we expect dry-dock and CapEx expenses to be $6.6 million and $13.4 million, respectively. The $13.4 million principally represents payments for both ballast water treatment systems and installments for scrubber systems on our 10 modern VLCCs.

Along with these expenses, you should model the following that we expect out-of-service days as follows: Modern VLCCs 0; older VLCCs 8 days; Suezmax 0 days; Aframax/LR2 33 days; Panamax LR1 93 days; and MR 61 days.

Also, looking forward for interest expense, we expect Q4 interest expense of $17.6 million, similar to Q3, which will be comprised of $15.8 million of cash interest expense and $1.8 million of amortization of owned amortized discounts and deferred fees noncash interest expense, therefore.

Additionally, we will have $19 million of principal repayments in Q4, which is a little higher than usual because including -- it will include the payment of $6.1 million of principal installments, which otherwise would have been due at the end of September of Q3, but because of when the business day fell were in fact paid in the first business day of October.

G&A, we expect Q4 to remain in the region of $6.2 million, which includes the noncash charge of approximately $0.7 million. Finally to wrap up a couple of other items for guidance of Q4 to help with your modeling. If you look at the appendix, you'll see the charter hire expense is expected to be as follows for Q4 time charter, $4.7 million; bareboat $1.6 million. We note that these numbers do not include LIBOR and charter rents, which vary with volumes. Also earnings from joint ventures, which I talked about a little earlier, the FSO and LNG are expected to contribute just over $8 million for Q4, consistent more or less with Q1 and Q2 numbers. Hopefully, this gives you what need to modeling. To model Q3 was bit of a noisy quarter, but hopefully Q4 will be more easy for you to model along with TCE rates, which will be for you.

Now if we could go to next slide. Page 12 is our cash bridge. So moving from left to right, we started the third quarter with total cash of $143 million. During the quarter, as noted, we generated $6 million of adjusted EBITDA. This amount includes $5 million of equity income from the JVs, which is a noncash item, so, therefore, we deduct it in order to reach a cash figure, but then add back cash distributions from the JVs, which were $7 million. The sale of vessels contributed $6 million and we also expended $2 million on the redemption of some of our 10.75% subordinated notes. Cash interest paid on our debt is scheduled principal amortization combined for an aggregate of $24 million in this quarter, and finally, changes in working capital and other noncash items and other items had a positive $1 million impact.

The net result was at end of the quarter was approximately $124 million of cash and a $50 million undrawn revolver yielding substantial total liquidity of $174 million.

I would also note that during the quarter that some of these cash outflows of about $6 million were attributable to various transactions related to the 6 VLCC acquisitions rather than any ongoing operations.

Also I would note that the cash at December 30th is before the settlement of a $21 million payable, which is the last part of the payable to the acquisition of 6 VLCCs, which was made -- which completed in the first half of October. And also as I mentioned before, certain principal and interest payments that fell at the end of the third quarter because it wasn't a business day, were actually paid in the fourth quarter, so that will aggregate between principal and interest about $10 million.

Cash that is restricted in nature will increase from September 30th balances by about approximately $27 million due to the sale and delivery of 2 vessels. The aforementioned 2001-built VLCC and 2001-built Aframax, which closed in October of 2018.

Now turning to Slide 13. I just want to talk about the balance sheet for a minute. As of September 30, we had $1.4 billion of conventional vessel assets against $770 million long-term debt, excluding the $58 million current portion thereof. In addition, we have a $50 million revolving credit facility that remains undrawn at this point.

As you can see on the right-hand side of the slide, our total debt to capital stood at 45% and our net loan to value stands at 55%.

Overall, our strong balance sheet with moderate leverage protects us in the challenging environment, where our spot vessels provide significant upside opportunity as the market turns.

Also on the right side of the slide, we noted book values for our 2 joint ventures, which we continue to believe are representative of their fair values. As of the end of the third quarter, the FSO and LNG joint ventures had net book values of $142 million and $112 million, respectively.

At the bottom of the slide, we outlined our debt facilities, all of which importantly, as Lois mentioned earlier, mature in 2022 or later. That now concludes my comments, so I'd like to turn the call back to Lois for her closing remarks.

Thank you very much, Jeff. Please turn to the summary page on Slide 15. During the first 9 months of 2018, we've taken important steps to increase our earnings power ahead of a market recovery, while ensuring a strong financial position. Notably, our liquidity position in the third quarter remained strong at $174 million, representing an increase in total liquidity of $83 million since December 31, 2017.

In addition, our current net loan to value is a very reasonable 55% and our earliest debt maturity is not until 2022. Our considerable success growing and modernizing the fleet has enabled International Seaways to decrease its average age by close to 3 years and increase our deadweight capacity by 13%.

Based on our increased scale, reduced age profile of under 9 years and significant operating leverage, we're well positioned to benefit from a strengthening rate environment. With 38 vessels trading in the spot market, every $5,000 per day improvement in rates represents $68 million in EBITDA and $2.35 in EPS annually.

Our decision to install scrubbers on 10 modern VLCCs also strengthens company's ability to take advantage of potentially stronger tanker markets resulting from the IMO 2020 regulation as both crude and product tankers stand to benefit from the increased transportation demand. Since becoming an independent publicly traded company in December of 2016, we have deployed capital in a disciplined manner with a focus on renewing and growing the fleet at the low point in the cycle and creating significant value for our shareholders.

We believe our considerable progress has further enhanced International Seaways' ability to take advantage of recent rate improvements as well as a broader recovery in the crude and tanker sectors.

Thank you very much. We will now open up the call to questions. Operator?

(Operator Instructions) And our first question comes from Magnus Fyhr of Seaport Global.

Just one question on -- I mean, much of the focus has been on renewing the larger ships with your VLCC acquisition. With the IMO 2020 coming up, how do you think about repositioning your older ships, maybe the Panamaxes and LR1s? I guess, there'll be some ships there and the new fuel oil coming out and just wanted to see your thoughts there?

Magnus, I'll take that question. Our Panamax fleet throughout this economic downturn in the tanker rates has really outperformed pretty much other sectors and certainly other competitors of similar size. And we expect to continue to be able to do that with our ships deployed in Panamax International with Ultragas of Chile and the Flopec of Ecuador and really doing a lot of triangulation trade in North and South America. So I think, to your point, as LR1 strengthens, some of the LR1s that are trading dirty may move out of the dirty sector and into clean, and that can improve the economics across the board.

Okay. And then just one more question on the U.S. crude exports. When you're talking with your clients, refineries, what are their concerns right now with the upcoming IMO 2020? And also what are the constraints as far as pipeline capacity versus shipping capacity to facilitate more crude exports out of the U.S.?

I definitely would say that we are seeing constraints on exports to some degree out of the U.S. Gulf, but we still continually increase the exports and crude production will continue to increase. So on the lightering unit, we are seeing more reverse lighterings out of the U.S. Gulf to VLCCs as well as the traditional business of lightering from the Middle East crudes into the Gulf. So it seems to me that, that's the second part of your question. And the first part of your question around concerns, I'm sure the market is very efficient and you start to see the refineries position themselves to take advantage of what they think will be increased spreads on products. And I think that you're seeing refineries that are more sophisticated will be in position to be a winner in the IMO 2020 shakeout.

Our next question comes from Noah Parquette of JPMorgan.

I wanted to ask -- in the TI Pool, obviously, one of the other big participants is, I wouldn't say antiscrubber, but doesn't seem to be installing scrubbers in their ships. Have you guys discussed or how do you think it would shake out? How the kind of the pool is run or how the calculations are done versus ships with scrubbers and ships without?

It's a good question. And what I would say is that the Tankers International, the founding members that have been part of that pool for 18 years. And we've always managed a way to have fair distributions, and in fact across all of the pools that were involved in across all of our sectors, this is a question everyone is grappling with, and thus far, early indications are that -- those with scrubbers or those without will be able to receive a fair distribution in a manner with their investment.

I think an additional piece to that is very important to International Seaways as we look forward to IMO 2020, when we add these newer VLCCs to the fleet that are eco, their overall consumption is around 15 tons per day less than even modern vessels built in 2010 and '11, and that's part of our program for reducing emissions and really kind of moving forward in addition to a program that we've started -- asked Bill from our operational team to join. Bill maybe if you could just touch on our get to green program that you're working across the fleet.

Certainly Lois. Noah, we have a comprehensive program to reduce our emissions on all of our vessels, scrubbers or not through a really detailed analysis and data gathering and Big Data approach to every piece of consumption on board each vessel. And in doing that along with lot a of analysis and a lot of human interaction from ship to shore, our goal there is to reduce our sulfur emissions, our CO2 emissions, our particulate matter and really raise the profile and change the dialogue within the organization. And looking forward, then not just past 2020, but to 2050, when we start to -- when IMO talks about reducing CO2 emissions by 50%, which if we thought 2020 was a challenge, 2050 is going to be something completely beyond. Lois, I hope that was enough.

Yes, thank you very much, Bill.

Our next question comes from Randy Giveans of Jefferies.

Now in recent weeks, spot rates have rallied pretty substantially. Obviously, VLCC spot rate is $50,000 a day, Suezmax $35,000 a day. So if you can kind of talk on the biggest driver of that improvement? And if you expect this kind of improvement to continue throughout 4Q '18? Or how -- what kind of legs does this rally have?

I'll take that. Interestingly I think you have a confluence right now of factors where oil prices were ratcheting up. Brent was up around $85, $86, people were becoming concerned. And you really saw OPEC respond. Between the United States, Russia and Saudi, I think, we're producing about 33 million barrels a day. So you're seeing OPEC respond to the call and oil prices are, I think, Brent somewhere around $73 per day -- per barrel right now, which I actually like to see because it's very important that we have that 1.4 million barrels per day of demand next year. So I think, coming off of a really, really tough market, you saw a lot of scraping. I think the market was more finally balanced then what it looked and then you have a call on the demand because inventories have come down, and the oil market is responding. So we do expect for that to extend through Q4 to have a pretty robust Q4.

Okay. And then for a chartering strategy, does ISW plan on kind of locking in some of these higher rates for 6, 12, 18 months per se, switching over some of your spot coverage to time charter?

We are definitely finally seeing the time charter market react and start to recover. So that's something that we will constantly be taking a look at as markets move upward.

Okay. And then last question, you referenced earlier a little bit some of the switching between crude and products tankers. Have you thought about switching maybe some of your older LR1s, your LR2, from products to the crude trade?

It's interesting. All of our LR1s and Panamaxes are trading dirty. And that TI Pool pretty much outearns all the competition. Our only LR2 is actually trading clean, the overseas -- the Seaways Shenandoah. And we are really watching that because the earnings on the LR2 have lagged the Aframaxes, but so far we are committed to keeping her clean for now.

(Operator Instructions) Our next question comes from Peder Jarlsby of Fearnley Securities.

Just following a bit up on Randy's question. Last year, I guess, a few people were disappointed because we saw a lot of the owners positioning them for year-end cargoes and then the market came off quite brutally. Do you see any indications that this will happen this year as well? Or are you a bit more comfortable now?

I guess, I mean, we are getting very into the immediate next voyages and positioning and exactly where everything is. I would say you never have a straight line upward, and so we're going to see the market within a band. But I do think that Q4 will stay strong through the end of the year.

Okay. And just kind of looking a bit further ahead into 2019, I'm trying to figure out how that year will develop. Do you think the refinery industry will focus or change its maintenance to the spring turnaround rather than the fall period next year? So you -- given that they have to kind of ramp up for gas sort of output in the second half of '19. Is that something you see affecting the market in a big way?

I mean, I think it's interesting that the refineries and the oil industry is extremely efficient market, so like yourself, we're reading all about it daily. And I think that these guys are looking forward and they'll make their preparations. And it's going to disrupt the market, which overall should be positive for us with the amount that we think that refineries will have to increase production next year, so to gear up for 2020.

Our next question comes from Phil Lee of Mangrove Partners.

On the scrubbers that you're installing, have you decided upon the scrubber type, whether it's open-loop, closed-loop, hybrid system or an open-loop that's hybrid ready?

Bill, you want just go ahead and answer that?

These are open-loop scrubbers, and we do have the ability to convert them to hybrid if we so desire.

And I guess, how did you think about the economics of that like in terms of maximizing the return on your investment versus kind of having some certainty on future changes and what -- what's the lading port and things like that?

So one of the things is right now you are burning 0.1% sulfur in the ecozones, right? So in many of the ports around the world, you're burning 0.1% already where the scrubbers will be able to reduce to 0.1%. Our economics were based on it actually burning MGO or 0.1% in the ecozone. So we feel that, that investment will stand even if in port areas we are burning MGO and not using the scrubber in that at that point.

Okay. So you're still burning 0.1% MGO in ports in ecozone?

That is the requirement. And then in many areas in the world that has been in place, and will continue to come into effect.

I'm sorry, Lois, if I could just jump in for one moment. Phil, yes, we -- our intention in all our economics is to within the ecozones burn 0.1% fuel and not in those areas scrub down to 0.1%.

Our next question comes from Eirik Haavaldsen of Pareto Securities.

Just a quick one on your docking schedule because you must have well 15 dry-dockings, either 17 or 20-year old. Over the coming 18 months or so, how are you thinking? I mean, a lot of the tanker optimism is also based on many of those ships leaving the fleet. So how are you thinking in terms of scrapping? You have been scrapping quite a few, keeping them for optionality and then taking them through this fairly costly dockings?

So I guess, if you watch what we actually have done as you clearly have, we have sold 2 of 5 older VLCCs in 2018 and the remaining vessels presently, it's our present intention to keep those ships. And we will, of course, look at the economics and as every quarter and every month, every ship goes through discounted cash flow, and we make estimations on whether to keep or to sell. And we will continue to do that as part of our rigorous process in making sure we're looking at the bottom line.

All right. But then just to if you look at your LR1 fleet or Panamax fleet, for instance, then you -- so far all the renewal focus has been on the big ships. So if you are to continue in that market a couple of years down the road, I guess, that's the segment you will have to focus on then in terms of renewal?

It is true that we do have a number of the Panamaxes that are built in '02, '03 and '04 and those vessels as I mentioned earlier, have performed particularly well throughout the market cycle. And certainly, for 2019, our present intention is to trade those ships.

This concludes our question-and-answer session. I would now like to turn the conference back over to Lois Zabrocky for any closing remarks.

Thank you very much. And at International Seaways, Jeff and I and James, we just all want to thank you very much for joining us. And we look forward to a good Q4 and speaking with you in the next quarter. Thank you.

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