Navigator Holdings Ltd (NVGS) 2014 Q1 法說會逐字稿

Thank you for standing by ladies and gentlemen and welcome to the Navigator Holdings Conference Call on the first-quarter 2014 financial results. We have with us Mr. David Butters, the Chairman, President and Chief Executive Officer, Mr. Niall Nolan, the Chief Financial Officer, Mr. Oeyvind Lindeman, the Chief Commercial Officer, and Mr. Tommy Hjalmas, the Chief Operations Officer of the Company. (Operator Instructions). I must advise you the conference is being recorded today, Wednesday, May 7, 2014 and I now pass the floor to your speaker today, Mr. Butters. Please go ahead sir.

Thank you Jenny and good morning everyone and welcome to Navigator's first-quarter 2014 earnings conference call. With me today, as just mentioned, will be Niall Nolan, Tommy Hjalmas and Oeyvind Lindeman, and after a few brief comments from Niall and myself we all will be available for a question and answer segment.

Our first-quarter operating and financial results were pretty much as expected. Niall will cover some of the quarter's financial highlights in a moment or so, but I would like to simply characterize the quarter as firm. It was a bit topsy-turvy, however, and that for most part of the quarter we saw an almost complete stoppage of US LPG exports as a result of the polar vortex. But what followed was a rash of propane imports to cover the shortfalls. Navigator carried most of the US imports. The international petrochemical gas market was relatively slow during the quarter, but we did see a pickup of ethylene cargoes from the mid-east to Europe. We are expecting this trend to continue.

The quarter also reflects for the first time the results of the Navigator Leo and the Navigator Libra, which commenced 10-year time charters to Russian petrochemical company. Some minor slippage occurred in the delivery of our first new building, the Navigator Atlas, a 21,000 cubic meter ethylene-capable vessel. Instead of a May delivery, it looks like it will be delivered in early June. Thereafter we expect the vessel delivery of approximately every other month.

One of the highlights of the quarter was our decision to exercise the option to build an additional three 35,000 cubic meter ethylene- and ethane-capable vessels. Our decision to move forward with the construction of these vessels without having a contract -- having contracted the one vessel already under construction was based upon our strong conviction that a global ethane trade will develop and vessels of this size and flexibility will be needed. Our conviction is rooted in conversations and dialogues with international petrochemical companies who are at various stages of implementing programs to convert to US ethane as a feedstock versus the use of naphtha or LPG feedstocks.

Obviously we cannot discuss these negotiations but not surprisingly we were delighted to see Enterprise Products Partners' announcement of their intention to build a 240,000 barrel a day ethane export facility in Texas. While we have not had discussions with Enterprise, it would be safe to assume we both are talking to the same petrochemical companies. Now that Enterprise has opened the gate for exports, we believe that buyers of ethane will now move with more deliberation to secure their shipping arrangement.

We also note that Sunoco Logistics' planned Mariner East Pipeline project has at least one producer, Antero Resources, who has nominated almost 12,000 barrels a day of ethane to be shipped on that pipeline. Of course the open season on Mariner East 2 has yet to be closed -- has yet to close so that the Antero announcement may seem premature, but it does give one a clear indication that there are international petrochemical companies actually negotiating ethane feedstocks and they're looking at pipeline transportation and ultimately will be trying to tie down their shipping arrangements.

I'm sure there will be questions on the Q&A segment on our ethane project, but I doubt we will be able to add any further clarification on the subject. Both Enterprise and Lyondell dealt extensively on their recent conference call and I'm sure left many questions unanswered. But these conference calls are reference points which can be useful in your own independent judgment on the size and scope of the future of US ethane export market.

As a personal note, I think the management team at Enterprise are among the brightest bunch of people in the mid-stream sector and I wouldn't bet against them.

Now I would like to pass the telephone over to Niall Nolan to take us through the quarterly financials in detail. Niall?

Thanks David and good morning. The first quarter, the three months ended March 31, 2014, got off to a solid start with revenues up 65% compared to the first quarter of 2013. Throughout the three months to March 31, 2014 we had 24 vessels on the water, which generated revenues of $69.8m compared to $42.3m for the three months ended March 31, 2013 when we had an average of 15 vessels in our fleet.

Average charter rates rose to $28,648 per day, which equates to $881,400 per month for the three months to March 31, 2014, up from $27,300 for the fourth quarter of 2013. These rates are blended rate of both semi- and fully-refrigerated vessels, with market rates for fully-refs generally trailing the semi-ref equivalents by $3,500 to $4,500 a day or $100,000 to $150,000 a month.

Utilization too increased for the first quarter to 96.9% across the 24 vessels, up very marginally from the 96.8% achieved for the three months to March 31, 2013. However, the utilization rate for the first quarter of 2013 was at a time before any real impact of the 11 vessel fleet acquired from AP Moeller. But perhaps a more important number is the utilization that this utilization of 96.9% recorded for the first quarter of 2014 was materially higher than the 92.9% achieved for the full 12 months ended December 31, 2013 and is now back towards the Navigator seven-year average.

Following the announcement last month that we exercised the option to build an additional three 35,000 cubic meter ethane carriers, we now have a total of 13 new build orders, also new refrigerated vessels, nine of which are ethane and ethylene capable. Of the 13, five are 21,000 cubic meter ethylene carriers, four are 22,000 cubic meter semi-ref gas carriers and four are the larger 35,000 cubic meter ethane or ethylene carriers. These larger vessels are being built with LNG propulsion as a dual fuel, which adds approximately $7m to $8m to the construction price, but saves significantly on the future fuel costs with some tests suggesting savings of up to 50%.

All of these new build vessels are scheduled to join our fleet between next month, June 2014, and December 2016.

As David mentioned, the fist 21,000 cubic meter ethylene vessel was due to be delivered in April this year, but has been delayed by the Chinese yard and is now expected to be delivered early to mid June. Thereafter the vessel will undergo gas flows lasting about a week and will then sail to its first nominated load port so there will be no contribution from this vessel until the third quarter. Similarly, the second vessel in the series, which was due for delivery in June, will be pushed back approximately two months to August 2014; therefore revenue will only begin in late Q3. Currently, the third and fourth vessel in this series are due to be delivered as originally scheduled.

I've previously mentioned that each of our vessels must enter dry dock every five years for service, maintenance etc. and during 2014 six such vessels required dry docking. No vessel entered dry dock during quarter one. However, three vessels will enter during Q2, Navigator Scorpio, which has already been in and out during April, Navigator Gemini, which is currently in dock in Croatia, and Navigator Pegasus, which will go into dock later during Q2. We then plan to have two further vessels docking in Q3 and the final one in Q4.

Although the cost of each docking, approximately $650,000 for the first dry dock at year five, is capitalized and amortized over the following five years up to the next dry docking, the vessel will not earn revenue while sailing to and from the dock or of course while the vessel is in the dock. This results in approximately 15 to 25 days lost revenue per vessel per dry dock.

Voyage expenses, which increased from $7.7m to $7.9m, are costs associated with the voyage charters only as when a vessel is on time charter, the charter directly incurs and pays all voyage expenses, such as bunkers, port costs and canal tolls. All voyage expenses incurred by us on voyage charters are compensated for by increased revenue.

Vessel operating expenses, on the other hand, are costs to running the vessel, principally crew costs, which account for 57% of this number, but also repairs, maintenance, oil major vettings, insurance and so on. And on average this amounted to $8,330 per day per vessel during the three months to March 31, 2014, up 2.7% from the $8,115 incurred during the 12 months to December 31, 2013.

General and administration costs and corporate expenses increased for the three months to March 31, 2014 to $3.3m, up from $1.8m during the first quarter of 2013. This increase can be attributed to the enlarged operations associated with the fleets' expansion and also additional costs as a result of being a publicly traded entity.

Interest also rose significantly from $5.8m for the initial three months of 2013 to $7.9m for the three months ended March 31, 2014 as a new term loan facility was entered into during 2013 to facilitate the acquisition of the 11 handysize vessels from AP Moeller Maersk.

EBITDA for the three months to March 31, 2014 was $35.9m compared to $20.7m generated during the first three months of 2013. Net income rose 121% to $16.9m for the three months to March 31, 2014 from $7.6m for the comparative three months in 2013. And the result in earnings per share for third quarter was $0.31 based on a weighted average number of 55.3m shares in issue compared to $0.18 for the first quarter of 2013 based on a lower 41.6m shares in issue at that time. The 2013 numbers have been adjusted for the three forward stock-split which was effected in October 2013.

And looking at the balance sheet you will note that little has changed from that published at December 31, 2013. Cash at March 31, 2014 was $188.7m, down slightly by $6m in fact from the $194.6m held at December 31, 2013. Payments of $21m were made to Jiangnan Shipyard for the various new builds during the first quarter of 2014 and regular quarterly payments on the different secured loans and on to the $15.2m during the quarter. It may also be worth noting that there are sufficient funds to finance the equity portion of all existing new-build orders, assuming normal loan-to-value borrowing capabilities, from existing resources and from future cash flows.

The balance sheet therefore remains strong, with net debt at March 31, 2014 of $371m and total debt at $560m, which equates to a debt-to-capitalization of a modest 42%. The book value of our total assets at March 31, 2014 increased to $1.3b and we have 13 new builds on order with a total outstanding payment to the shipyard of $658.2m, the majority of which, some 70% to 80%, which is payable in each vessel's delivery. At March 31, 2014 we paid a total of $69m to the shipyard and a further amount of $168m will be paid by the end of 2014 as four of the 21,000 cubic meter ethylene vessels get delivered. A secured loan for 60% of the total construction cost of these four vessels is already in place.

Finally, as I mentioned earlier, the number of common shares and issue as of March 31, 2014 was 55,326,765, the same number as was outstanding at December 31, 2013.

And with that I will turn you back to David Butters.

Thank you Niall. And, Jenny, I think we can open up the conference call for Q&A please.

(Operator Instructions). Douglas Mavrinac, Jefferies.

Great. Thank you operator. Good morning guys and congratulations on a good quarter. I think it was better than firm. I think it was very good.

My first question, David and Niall, is that when you look at how the market has developed, I'm talking about the mid-size carrier market, in your first-quarter results it reflects the fact that utilization levels have increased, rates have strengthened, so things are playing out. When we look at how the market has developed since the end of 1Q, since the end of the winter, a lot has been written about the VLGC market, but can you share with us how the mid-size market has evolved, say, since the end of March or, I guess better, during the second quarter.

Okay. Thank you Doug. Yes, we're really happy about how this market is developing. The first quarter, as I said, had some distortions in it, but as we see the market today it's all but sold out. It is a very tight market. And we normally would expect a summer low with the heating season disappearing. I think that's going to be off the table this time. I think it's actually going to be stronger than we've ever seen it.

And that in part is a result of the exports from the Gulf of Mexico, but particularly the renewed business coming out of the East Coast, specifically out of Marcus Hook and Sunoco Logistics' exports. They're beginning to ramp up and Mariner East 1 pipeline is completed in a few months' time that could increase significantly. My guess today, for example, Doug, they're exporting something on the order of 10,000 barrels a day and that tucked in principally, in a few railcars taking it into Marcus Hook from Marcellus. With a pipeline connection in two, three, four months time -- I'm never sure exactly when they are going to get it completed -- that could ramp up to 65,000 barrels a day.

So what we see is a very firm market, but let me pass the phone to Oeyvind, our Chief Commercial Officer, who is on the desk day to day and get him -- let him give you a feel of this market, particularly how it relates to the VLGC market. Oeyvind?

Yes, David. So, Doug, the VLGC market is very volatile. It goes up and down, as you know, and the handysize segment has traditionally been more stable. So while the VLGCs are $100 on the Baltic today, they can also fall substantially lower than what traditionally we have had.

But anyway a lot of what David mentioned on the US East Coast and also Gulf Coast exports is ambient cover. So our ships are largest that can load these kinds of temperatures and we benefit from that currently. And it's correct what David says; we're almost fully booked out of June today, which is quite extraordinary in our market. So there is a big pool from the US, more products US East Coast, US Gulf, and some of these products, a lot of these products go on the handysize gas carriers to Europe, to Caribbean, to Morocco, to Mediterranean.

Right. No, that's perfect. That's perfect. And then just as a follow up to that, so the market is developing obviously quite nicely and you guys are not only positioned well to that given the types of ships that you own, but also your employment strategy. So when we see the market sold out and this firm, you are well positioned to that because obviously, A, you're taking deliveries of new ships, but B, most of your contracts are shorter time and duration.

So my question is as the market continues to strengthen do you anticipate changing your strategy at all or do you anticipate still having or maintaining a lot of near-term exposure to the strengthening rate environment so, you're not going to be locked in up here basically?

Yes, that's right. So typically we have had 75% coverage. That's been our rule of thumb. But now we're operating on a lesser percentage because, as you correctly say, we want to take the advantage of the tightness that is developing. And because of the short-term nature generally on time-charter contracts, we can be quite flexible in deciding our exposure to spot market.

Got you. Perfect. Great. Thank you Oeyvind. And then just a couple of final questions before I turn it over.

And this obviously is going to be potentially the new significant area of growth in the form of ethane exports. So, David, you referenced Enterprise's announcement during the quarter, I guess during those (inaudible) few weeks and I know that you can't probably talk specifics about it, but my question pertains to just math. Have you guys run any estimates -- I know we have but I'm just curious about your take -- on how many ships are going to be needed, if you assume an average capacity of somewhere between 25,000 and 35,000 cubic meters, how many ships are going to be needed to facilitate moving 240,000 barrels a day?

That's a good question and of course we have. I was just taking back. We hadn't talked to Enterprise, absolutely didn't talk to them. Our announcement came out without even a reference to what Enterprise was doing. We were surprised by the size of that facility.

Right. It's huge.

Absolutely. And we do have some numbers and perhaps Oeyvind can give those to us right now because we shared each other this morning before the conference call. Oeyvind, give us some idea of what magnitude this really means.

Yes, it is big. So on the announcement it says 240,000 barrels of ethane per day. Our large ethane carriers can then carry -- just simple conversions, let's use 10 -- so 200,000 barrels per shipment. We can load that on our ships in seven, eight hours from this Enterprise facility. So if you base it on 200,000 barrels per cargo on our large ships to Europe, call it 31 days round voyage, that equates to 37 ships going continuous pendulum service to Europe back to the US Gulf. That's a big number.

Right. So, Oeyvind, how does that compare to the number of ships on the water today and what's being built that can even do that? Does that absorb basically everything that's out there plus being built with this one project?

The tonnage available today on the water is miniscule. It can't carry these kind of volumes at all so it needs to be built and we are building in anticipation for this ethane export boom that will come. And also in the Enterprise announcement, as they have estimated in 2020 700,000 barrels of ethane could potentially be in excess, and if you run the same math from that, that is 106 mid-size ships. So the numbers are big. I'm not saying that everything is going to Europe, everything is going on this size, but it is quite astronomical.

Got you.

In addition, Doug, we have Marcus Hook and Sunoco Logistics. They are building their ethylene -- ethane storage and dedicating one of their three docks/berths just for ethane. So you've got significant amounts of ethane coming out of the East Coast as well as what Enterprise is doing.

So we believe the first movers having this type of flexible tonnage was going to put us right in the forefront of what is happening and I think we just all have to be patient and this will unfold. In my view over the next three to six months I think we'll see more development and specificity on exactly who is going to be contracting and the timing of that. But we're extremely confident that it will all play into our way.

Yes, no, perfect. Thank you for the time Dave. Must be very exciting and congrats again on a great first quarter.

Thank you Doug.

Ben Nolan, Stifel.

Okay. Thank you. Yes, I had a few follow-up questions and one related to Doug's first question. You mentioned that what's happening in Marcus Hook at the moment is ambient cargo loading. So does that imply that the recent improvement in handysize rates is not simply a function of vessel rates being dragged up or a tightness of the market as a result of the VLGC market? Is the strength in your market effectively independent of what's happening for the larger asset classes?

Yes, I would absolutely say so. We march to a somewhat different drummer. The macro is there, the macro being the world is actually moving away from oil and into gas, and within the gas sector LPG playing an increasingly important role. That scenario is in place but we are really independent of the VLGC market. Why don't you again explain, Oeyvind, do you see any? Do you feel anything? Is there in your market on a day-to-day basis any impact whatsoever on the VLGC?

I think if you run regression from those different segments there's no correlation or significant correlation, but that's statistics. On a day to day we don't meet them at the door so the VLGCs, as David mentions them, they are in a different market. We are independent. Yes, customers and so forth are the same, but when you add in terminal restrictions, different product temperatures, businesses, storage facilities, then that is our market and the VLGCs cannot -- they are not operating in that. And likewise we don't operate on long-haul LPG voyages from, say, Gulf to Japan. So they are different.

Okay. So it looks as though lately the VLGC market has topped out or has met some resistance at around these levels. Is it fair to assume that you guys have not seen any resistance and feel as though rates are going to accelerate further?

I think there is scope for higher rates in our segment for sure. It is of course easier if the VLGC owners or ship owners earn more than us because then the glass ceiling is higher, so that is helpful, just because of conceptual rates. But, yes, there is scope for higher rates and we are doing our best to push that ahead.

And in point of fact, it's not just -- the VLGC market is primarily a propane market and what we are seeing now is the development of more butane out of the US. And there has been some announcements, for example, that MarkWest is making arrangements for exports of butane, not out of the Marcus Hook, their traditional export facility, but they're moving it, going to be moving it out I guess sometime in the fall out of [Chesapeake]. And, yes, that's pretty significant. So we're going to see a butane market develop as well as the propane, and that's again the point being that propane is principally the carriage of VLGCs.

Okay. That's helpful. And then along those same lines, currently are you seeing much of a differentiated market with respect to rates for the ethylene-capable vessels that are already in your fleet relative to the similarly sized or close to same size semi-refrigerated vessels that are not ethylene-capable?

So, Oeyvind, maybe you can answer that.

So we've seen a big pull towards the US. A year ago our fleet was spread worldwide generally but now there's a big pull towards the US, US exporting propane and too soon to be exporting butane, and that's what they do. So a lot of our tonnage capacity is pulled towards LPG and they are paying healthy levels so there is no reason for us to fight to keep some of the ships in ethylene.

So the answer is really there isn't any differential on our -- on the western hemisphere, west of Suez, on those rates because the LPG there's tightness, there's a lot of volume on the LPG. So we of course go where the money is and right now that's in the US and we believe that's to continue for us for many years.

Okay. Perfect. That's helpful. Then lastly, I'm not sure if you guys saw this morning but there was another operator of similar size ships that exercised some options for some handysize LPG vessels that also have LNG capability. I was curious if you guys have looked at that vessel design at all and if it's something that you would entertain or, if so, why or why not?

Tommy, you might comment on what we've [seasoned] what we have versus the smaller vessels.

Yes, I'm Tommy. We have looked into carrying LNG as cargo as well, but our niche is petrochemicals and propane and butane LPGs. The LNG market will develop for the short-haul more into the bunkering segment of supplying LNG to be used as fuel. This is one area we're looking in. One of the downsides with choosing an LNG-capable ship is that you lose some of the petrochemical advantages for trading with, for instance, ammonia. And we see that the petrochemical size, not doing the LNG is better going forward. We don't know which size will develop for the LNG ships.

The 27,000 LNG-capable ships that are being built are also in a size range which doesn't fit into any current market. So, if anything, we wouldn't build a ship within a size range that doesn't have sister ships in it. We prefer to stick to the 35,000 cubic market or the 20,000, 22,000 market where there is a good flow of cargoes.

Okay. Alright. That's helpful and that does it for my questions. Appreciate you guys taking time.

Thank you.

John Chappell, Evercore.

Hi. Good morning. This is actually Darren in for John.

Hi Darren.

Just have a few questions and I'll start out with has there been any update on the timing of the ethane contracts?

And would you look further into expanding that segment, investing in that segment, without contracts on the first ships?

Things move slowly. I think if you follow the logic of how these things get done, you'll understand that the first mover of course is for the petrochemical company to search for a source of ethane. They will reach out to the producers in the Marcellus and Eagle Ford and the rest of the shales to locate a long-term supply of ethane. I think the Antero announcement, as premature as it is, attests that process is done. Pricing formulas have been recognized and developed.

And once that happens the next stage of course is for that producer to seek out how we can move that product, ethane, to a terminal, a shore-side terminal. The Sunoco Logistics Mariner East 2 is one source of that type of transportation and clearly that process is going to work so the transportation is done.

Now once, for example, Mariner East 2 closes and people have specific quantities of volumes guaranteed to be moved then the next stage of course is logical is that buyer, the petrochemical buyer of the ethane, from the producer will seek to firm up any kind of preliminary negotiations that he may or she may have had with the shipping company. So I think we're in that kind of stage where it is not done, but a lot of the pieces are in place and it's just simply a matter of time before things get finalized. I'm a bit vague on that, but I think you can assume that negotiations are pretty advanced.

Okay. Understood. And just as follow up, is there any more new building options?

No, we do not have any. In fact we -- Oeyvind had outlined the potential was significant for transportation and we did test the market for other opportunities to build the size vessel that we're comfortable with. Trouble is that prices have gone up dramatically. And availability of slots, of being able to get in there, we don't think we could probably get another delivery until 2017 in any kind of quantity.

But we don't want to speculate. We're going to tie these things down and then move from there. Our objective is to have a decent portfolio of ethane carriers that can create an industrial leg for Navigator based upon long-term charters, secure revenue and a pipeline to create financial flexibility.

Okay. Understood. And is it possible for you to provide us with an update on the terminal in the Philadelphia area? Just curious if this project is still moving forward or if it's been placed on the back-burner somewhat.

So we're exploring all alternatives on how to be productive and useful to our customers. And one of the things that it clearly is the case that exit vehicles, terminals, pipelines and so on really need to be built or rebuilt.

So we are constantly working and talking with various parties to see if we can be of help and expedite some of those efforts. Many of them will materialize. Some of them won't. But let's just say that we are -- we have a strong interest in this. We continue to have dialogue. We continue to evaluate. We are prepared to do it. We have the capabilities, actual capabilities, the financial capabilities and the wherewithal to be extremely helpful in executing an integrated business shipping component. So I don't know if that answers the question but, yes, we're interested, it's still flowing and I can't tell you the timing of that.

Okay. Thank you very much.

You're welcome.

Omar Nokta, Global Hunter.

Hi. Thank you. Thanks David for the commentary on the market in your opening comments. I did want to just follow up and just I don't want to hold you to it, I don't want to be somewhat frustrating, but I remember on the last earnings call you'd mentioned the, I don't know if it was maybe in passing, but you said you would expect to get a contract on the ethane carriers or at least on the first one within the next three months. Is that -- should I just assume or should we assume that maybe it'll be more of a second half event than to say within that three months that you'd initially said.

Yes, it's a little frustrating for us too, Omar, but, look, I think you have to look at the progression of the Mariner East 2 project. For one reason or another it appears that they've been delaying the closing of the open season, partly because the demand apparently has been growing and they wanted to keep it open to accommodate a lot of different interests. Again Antero is a very good little open window of what is happening.

Until that Mariner East project gets closed, nobody can guarantee a seat that transportation ride from Marcellus to marketplace. And without a guarantee, they can't secure -- they won't secure; nobody would want to secure long-term shipping arrangements.

So I think it's the frustration is that things go very slowly. That pipeline, which will be one of the sources of ethane coming out of the United States, that pipeline has to get firmed up and now suddenly we have the Enterprise project. But I think one has to be patient. We don't control it. There is nothing I can tell you that has moved or has put this thing in any doubt whatsoever. It's just the timing and we all have to be patient, okay?

Yes. No, that's fair. And I just wanted to hear, just to hear what you had to say about that. But, yes, it's a very complicated process with a lot of moving parts.

We are the last component. The shipping arrangements are the last piece finalized in that whole chain, but you see that other pieces are being put in place so it's only a matter of timing.

Right. And then just thinking about the Enterprise project, obviously you've been concentrating so far on the mid-size LPG tonnage with respect to ethane. And I know we touched on it also last call regarding VLGCs and potential to build those to carry ethane. Enterprise at least seems to have been discussing with their investors the potential for VLGCs to be used in that ethane in a few years.

How do you feel about that? Is that something would you think of as the next step? Now that you've got the four under construction you don't have options. Prices obviously, like you said, have taken off. Do you see a potential for maybe going up to those VLGC-size ethane carriers to participate in the Enterprise project or do you think the 35,000 vessel size is a bit more realistic out of the Gulf Coast?

Okay. Look, I believe that VLGCs will be adapted. It takes it -- it's almost a misnomer, VLGCs. That size converted into an ethane-capable vessel would be very expensive, but it's our belief that the technology is there to get it done and they are a logical step in the export of ethane, particularly to Far Eastern petrochemical producers. So it's logic, logical to expect some of those volumes to be moved on very large gas carriers as they get developed. Now as far as I know nobody has one on order. It would be a risky component to do that without a charter.

Now our 35,000, in my opinion, we're (technical difficulty) with very little risk involved, because if you look at the logic of what as an investor or as a manager that we went through, we are in deep discussions and are highly confident about an ethane market developing for export.

What happens if it didn't? Then what we would have on our hands is a 35,000 cubic meter ethylene-capable vessel and ethylene for sure is going to be moved out of this country because of the build-out of the extensive new ethylene volumes throughout the Gulf Coast. So we would have as a fallback a very profitable operation, probably more profitable than long-term arrangements for ethane. But if you were building a very large gas carrier in that business on speculation and that business didn't develop, you've got yourself a very oddball vessel that you would be binning very quickly.

So ours was a very low risk, but very practical, building a vessel capable of ethane, capable of ethylene and we're extremely confident it's going to be a real money maker for us. We hope that they wind up in ethane with long-term contracts. We expect that to happen. There's a lot of financial flexibility and the creation of other financial instruments that might be helpful if it's an MLP. But it's a very good vessel to own. VLGCs will come in our opinion, but I think we wouldn't do that without a firm contract upfront and then we would build against that contract. That's not what we're doing now with the 35s.

Okay, Omar, I don't know if that answers it, but that's my view.

No, thanks David. That's very helpful. And you're right; the ethylene is definitely sitting very nicely as fallback plan. And just one final thing just on the VLGCs, could you give a sense what do you think just based off of your discussions with the yards, if you build a VLGC equipped to do ethane, if that's maybe, if it's maybe 80 to 85 to do just a standard refrigerated vessel, is it what, maybe, 120, 130 to equip it with ethane or is it higher than that do you think?

That's probably around ballpark. Tommy again might be helpful on that question. Tommy has been just back from China talking to a number of yards and we're working on a design as well. Give us an idea, Tommy.

First of all, it's very difficult to convert an existing VLGC carrier into an ethane carrier. Anything is possible, but the economics wouldn't work. So really you have to change rules, regulations to be able to do it.

So you're left with an option to build something and design something. And it's also very tricky to find a yard that is happy to build a couple of ships in a niche market like this. Most yards would like to build longer series of LNG carriers and they don't want to invest in heavy small ships. Also there's the worldwide. You have to make sure that these ships can trade in and out of the various places that the ethane is going to go and these very large gas carriers will, if ever built, be in the Far East.

We have some designs for very large ethane carriers, but we're still evaluating which design to go with, which route for a fully-refrigerated, semi-refrigerated vessel type. Both are options, but the economics must be further studied.

Ballpark figure Tommy on what a VLGC ethane carrier would cost, a 120, a 130?

I think if you add another 10 on that you'll be fairly close I think. The whole market is tightening quite a lot so the prices that were three months ago, they were 10% lower than they are today, so probably 150.

Okay. That's helpful. Thanks Tommy. Thanks David for the time.

Okay.

Michael Webber, Wells Fargo.

Morning Michael.

Hi. Good morning guys. How are you?

Good. Thanks.

Good. I'm going to throw you a curveball here and ask one or two more ethane questions. And Omar just talked about, just touched on the VLGC side of ethane carriers and certainly we've thought a fair amount about that. I think both Teekay and Exmar are looking at VLGC size ethane carrier and a handful of other people as well. But you mentioned in one of your earlier comments that there's pretty limited slot availability. And also it looks like (inaudible) the schedule to start producing I believe is third quarter of 2016, so it's getting pretty tight.

What do you think the likelihood is that we do see people come in and start placing spec orders for a larger tonnage or a smaller tonnage in the ethane space, simply given the tight delivery window and the fact that there are some players out there that do have a fair amount of swing with these shipyards and can probably get slots pretty cheaply? Do you really think we're going to see that and maybe how much of that capacity do you think will be ordered in advance without a contract?

I think it's going to be limited. First of all, on slot availability, shipyard capacity, one thing that I've learned over my years in the shipping industry and in the capital-intense industry, while the shipyards will always say that they're running out of space, they're running out of capacity, you give them enough money, give them a little time, they'll elbow and push and find a way of increasing capacity. It always has happened. But right now it's clear that they are somewhat limited on their capacity. And, by the way, the shipyards' capability and the number of shipyards is limited as well.

So I would think that until they come up with some firm contracts, I don't know if it would -- others would want to push into ethane space on speculation. I think everyone will feel more comfortable -- particularly with ethane because it's a tricky gas to handle. You have to have the knowledge and the know-how. You have to have a team that has experience. And the petrochemical company will look to that company with that expertise and if you don't have it you're going to be at a complete disadvantage.

So to answer your question, Mike, I live the world of anticipating competition any day, every day and it would not surprise me to find people trying to thrust into this. Of all the different sectors, I think it's going to be tough, but it could happen. But it's not going to be a groundswell. It's not going to be the [MR] business. It's not going to be a (technical difficulty). Very few, very specialized people will deal with that if and when it comes, and we'll, hopefully we'll be tying down long-term contracts against any of that.

So it seems a bit like the LNG market. We did see some, I guess a bit of spec ordering there as well, but I guess in a long-term market maybe there's not quite as much. But along those lines actually and around the fact that there's going to be more of a period-oriented market, I'm curious and I know you pulled the trigger on the options without having firm contracts that you guys have been commercial negotiations for quite a while and that was probably simply a function of the fact that the options were rolling. When you think of -- I guess, can you maybe lay out what sort of cash on cash return, maybe a band you guys are thinking about with those assets?

And is that above a normal infrastructure return simply because there is a scarcity value to these assets here and early in the cycle you may get maybe a slightly better return than you would say two or three years from now when the fleet's a bit more developed?

Since we don't have a contract, I can talk with great authority on what the return.

Sure.

But, look, I think you can look to companies like GasLog etc. that have young new LNG tankers and they've been able to secure long-term commitments for business at the low teens return. And that's a business that there are many competitors so that bidding on that business for long-term contracts is a bit competitive. In the LPG space and particularly in the ethane space, it's a new industry. I would expect you could do as good as that, if not somewhat better. And you will be, as you were able to do with LNG, get secure, very high leverage on that, 85% in today's very low interest rates, so the returns on it are quite handsome.

But, yes, I think that's what you'd be looking at. I think very comfortable. I think better in my opinion than LNGs only during this period when, as this business develops. And if you have the slots and if you have the vessels being built, you're obviously going to be in a better negotiating position than if you were just to approach to build a vessel, negotiating contract against a ship-building business. So, look, I'm convinced that this business is going to develop very nicely. We want to be in the first movers and get the best terms and pricing possible.

Right. No, that makes sense. That makes sense. One more from me and I don't want to belabor the ethane carrier, but it seems like it could be the backbone of an MLP for you guys and it's a pretty interesting business.

But if you think about maybe quarter over year, maybe year to date, it seems like the opportunity size has expanded. If you think about the ethane carriers on order, you've got Evergas with about three to six depending on who you believe and you've got four on order. But it seems like those have generally, well, we're not sure, more or less (inaudible) and that entire [EPG], certainly the entire [EPG] volume is more or less unaccounted for, hence the VLGC-size ethane carrier talk.

When we think about the size of the ethane carrier, if you just want to maybe boil it down to handysize equivalents right now versus where we were six months ago. If you think about where that market will eventually be in three or four years, how many vessels do you think generally speaking we're going to see in the global ethane fleet? I know it's a shot in the dark, but has it increased significantly over the last quarter or two?

Enterprise's announcement of the size of their terminal and ability to move 240,000 barrels a day is a game changer. Now that's just the capability; of course it doesn't reflect potential demand and actual contracts, but I think a lot of stuff will go to the Far East and I think a lot of volumes will move to Europe and other places to the petrochemical trade. And there's a likelihood that ethane also could be used in potential power generation for places that are willing to adapt and adopt this ethane as a fuel for electrical generation.

So I think we're at the early stages, Michael, trying to make a judgment of how big this potential industry could be and I think it will evolve. The capacity for ethane delivery is there in terms of production. It is now getting there in terms of pipeline and terminal availability and then it's trying to get there in ship transportation. So I'm not going to -- I don't have a good answer for you, but I think it will evolve here. And we're excited about it and I think our objective is to build more of these flexible vessels to be a leader in this trade.

Yes, okay. No, that's fair enough. I appreciate the time guys. Thank you.

And, Jenny, I think we have reached 10 o'clock and that usually is the cut-off point for calls. Any people do have questions and would like answers they can call our London office or me here in New York, and we can do offline and answer whatever questions you may have. Otherwise, within three months time hopefully we can be more definitive on what we're doing on ethane in three months time. But it was a delight to have you with us this morning and thank you for joining us. Jenny.

Yes, thank you very much indeed Mr. Butters and many thanks to all of our speakers today. That does conclude our conference. Thank you for participating. You may now all disconnect. Thank you gentlemen.