Navigator Holdings Ltd (NVGS) 2014 Q2 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to the Navigator Holdings conference call on the second quarter 2014 financial results.

We have with us Mr. David Butters, Chairman, President, and Chief Executive Officer Mr. Niall Nolan, Chief Financial Officer; Mr. Oeyvind Lindeman, Chief Commercial Officer; and Mr. Tommy Hjalmas, Chief Operations Officer of the Company.

(Operator Instructions).

I must advise you the conference is being recorded today, Thursday, August the 7th, 2014.

And I now pass the floor to your speaker today, Mr. Butters. Please go ahead.

Thanks, Jenny, and good morning, everyone, and welcome to Navigator's second quarter 2014 earnings conference call.

As Jenny mentioned, on the call today with me will be Niall Nolan, our Chief Financial Officer, and Oeyvind Lindeman, our Chief Commercial Officer. Also with us today is Tommy Hjalmas, who is running our newbuild program.

After a few brief remarks, we will open the call, as usual, to a question-and-answer period.

Last evening, we released our financial and operating results for the quarter. We reported earnings per share of $0.36 for the second quarter of 2014 versus $0.25 for the same period last year, a 44% increase, in spite of a significant number of additional shares outstanding as a consequence of our November 2013 IPO.

In a moment, Niall Nolan will take us through the details of the quarter's results, but from my perspective, the quarter was quite solid, and reflects the continuation in the strength of the handy-size LPG and petrochemical gas sector, as well as reflecting the impact of our expanded fleet, now numbering some 25 owned vessels in the water. Now, as a reminder, Navigator has an additional 12 vessels under construction and due for delivery through 2016.

We did take delivery of one of the 21,000 cubic meter ethylene-capable vessels during this past June, and after completing gas trials, it's now on its way for her first cargoes. With the current strength in the handy-size market, and the scheduled delivery of the 12 new vessels into our fleet over the next two years, we're hopeful we can continue to deliver now, with a little bit of luck, a progressive improvement in operating and financial performance throughout this timeframe.

Our strength is in operating complex gas ships, and operating them in the handy-size market, where Navigator has a preeminent position. We intend to remain in the handy-size segment, and protect our market share, and continue to build on our strengths, while, at the same time, capitalize on our unique technological know-how and experience in handling complex gas and diversifying into other LPG and petrochemical markets.

To this end, this morning we filed with the SEC on Form 6-K, an announcement of our entering into a long-term shipping contract with Borealis on one of our 35,000 cubic meter ethane carriers, currently being built in Jiangnan Shipyard in China. Headquartered in Vienna, Borealis is one of the major polyolefin producers, owned 65% by Abu Dhabi, and 35% by OMV, a major Austrian-based oil and gas company.

The vessel is intended to transport ethane from Sunoco Logistics Marcus Hook terminal to Stenungsund, Sweden, where Borealis operates a major ethylene cracker. The ethylene will replace a higher-priced mix of naphtha and LPG.

Antero Resource announced last evening they would be the supplier of the 11,000 barrels of ethane to Borealis. Now, we believe that Borealis' agreement is part of a growing movement for foreign petrochemical companies to access relatively cheap US feedstock. We are in detailed conversations with a number of other European petrochemical producers, and remain optimistic that we will reach long-term charter agreements on the 3 remaining 35,000 cubic meter vessels that we are constructing.

Our goal is to develop an industrial-type shipping leg, providing Navigator with a visible and predictable cash flow, balancing our spot exposure in the handy-size sector. While the 35,000 cubic meter ethane carriers were targeted for the European market, we have also been approached by a number of Far Eastern petrochemical companies, whose favorable economics also exist for the import of ethane, replacing, in part, the current use of naphtha or LPG feedstock in their ethylene crackers.

Many of the same companies discussing and negotiating ethane supply contracts with the US terminal operators are also in conversation with Navigator for their transportation requirements. We have been discussing which shipyard the design and construction of very large ethane carriers, or VLECs. Because of the unique nature of these vessels, we would not order them without securing long-term time charter agreements in advance.

While we cannot predict or assume we will receive any of these (inaudible), we believe we do have an edge, because of our already owning and operating the largest tonnage of ethylene carriers, and having the in-depth knowledge, know-how, and experience in operating these complex vessels.

At this point, I think I'd like to move the conversation over to Niall, who will take us through the detail on our operating and financial results. So, Niall?

Thank you, David, and good morning. The results for the second quarter, that is, the three months to June 30, 2014, were very satisfactory, as David mentioned, with revenues up -- net revenues up 39% compared to the second quarter of 2013, and net income up 71% for this second quarter, compared to the same quarter last year.

Revenue for the second quarter, at $76.1 million, compared to $60.5 million for the same quarter last year, as a result of the additional vessels acquired from AP Moller during 2013, and a current increased charter rate environment, and also improved utilization.

As David mentioned, we operated a total of 24 vessels for most of the quarter, until Navigator Atlas was delivered on June 30th, 2014, against an average number of vessels of 19 in the water for the second quarter of 2013.

Charter rates, too, have risen over the past year, up from $880,000 per month, or just under $29,000 per day for the second quarter of 2013, to an average of just under $918,000 per month or $30,200 per day for the second quarter of this year.

Utilization also contributed to our strong second quarter results, with average utilization for the most recent quarter at 99.4%, bringing the utilization rate for the first -- the full six months to 98.1%, and this compares with 95.9% for the six months to June '13, and 95.3% for the second quarter of 2013.

As I just mentioned, Navigator Atlas was delivered by Jiangnan Shipyard in China in late June, and following delivery, the vessel undertook extensive gas trials before sailing from China to the Middle East, where next week she will load her maiden cargo of ethylene, bound for Northwest Europe. It is likely that she will undertake repeat voyages from the Middle East to Northwest Europe with ethylene for the remainder of 2014.

As with Navigator Atlas, which was delivered two months later than originally scheduled, the remaining 2014 newbuildings are also likely to be delivered between one and three months later than their respective original delivery dates, with Navigator Europa, our second vessel, now scheduled to be delivered in late September, and, therefore, we will not see any contribution from this vessel until the fourth quarter.

Consequently, we now have an order book of 12 vessels, 4 ethylene capable semi ref gas carriers, 4 semi ref vessels without ethylene capable, and 4 larger 35,000 cubic meter ethane and ethylene capable vessels.

As David referred to, we announced this morning that we've entered into a long-term charter for 1 of the 35,000 ethane carriers with Borealis, a leading global provider of chemicals and plastics for a minimum period of 10 years, and we remain confident that further contracts will be coming for the additional vessels.

As I referred to last quarter, we have had 3 vessels enter shipyards during the second quarter for their respective five-year scheduled drydockings and surveys. Although the cost of these drydockings are predominantly capitalized and amortized over the period to the next drydocking in approximately five years time, we do not earn any income while the vessels are in or sailing to the yard.

Since June 30th, 2014, we've completed the drydocking for a further 2 vessels, the second of which departed Rijeka in Croatia last weekend. The sixth and final vessel to be drydocked this year is likely to be in early September in Singapore, although this is subject to change, depending on the time that it takes the vessel to discharge its current cargo in South Korea. Each vessel is taking approximately 12 days to undertake the most recent dockings, and this includes the time taken to reach the drydock from the previous discharge port.

Voyage expenses decreased this quarter from $14.5 million to $12.2 million, as the volume of costs associated with voyage charters, such as bumpers and port costs and canal tows reduced. Voyage expenses are essentially a pass-through, in that we are compensated for all the voyage expenses incurred by increased voyage charter revenue.

Vessel operating expenses, on the other hand, for those -- those for the crewing and maintenance of the vessels, on average, amounted to $8,470 per vessel per day during the three months to June 2014, up by 5.4% from the $8,033 incurred during the first -- during the three months to June 2013. And we continue to monitor these costs closely.

General admin and corporate expenses for the three months to June amounted to $3.5 million, up from $2.4 million during the second quarter of 2013. This increase is attributed to the enlarged operations associated with the fleet's expansion, and additional costs as a result of being a publicly traded corporation.

Interest costs rose from -- 6.9% for the second quarter of 2013 to $7.8 million for the three months ended June 30th, 2014, as borrowings have increased as a result of drawing down of the loan facility during 2013 to facilitate the acquisition of the 11 handy-size vessels from AP Moller.

On June 30th, we entered into a supplemental loan agreement, which enabled us to prepay $120 million on July the 7th from existing cash balances, thus reducing interest expenses, and this prepaid amount is available to us to redraw at any time over the term of the facility in tranches of $30 million each. A full year's interest would amount to a saving of approximately $2 million on this agreement.

Earnings per share -- I'm sorry, EBITDA for the three months to June 30th, 2014, rose 43% to $38.7 million compared to $27 million generated during the second quarter of 2013, and net income rose 71% to $19.7 million for the three months to June 2014 from $11.5 million for the comparative three month period last year.

As David, again, mentioned, earnings per share was $0.36 for the quarter, based on an average -- a weighted average number of shares of 55.3 million shares in issue compared to $0.25 for the second quarter of 2013 based on a lower 46.3 million shares in issue at that time. So, those latter shares have been adjusted for the 3 for 1 split that we did in October 2013.

On the balance sheet, cash at June 30th, 2014, stood at $159 million, down $30 million from the balance held at the end of Q1, principally as a result of further payments to Jiangnan Shipyards during the quarter of $24 million for the various newbuild contracts, as well as regular quarterly repayments on the various loan facilities.

Total debt, therefore, at June 30th, 2014, was $575 million, following the drawdown of the first tranche of $30 million on the new loan associated with the 4 2014 newbuildings. This loan facility was put in place in April 2013.

Net debt at June 30th, was $416 million, equating to a debt to capitalization of a modest 42%. On average, our debt cost is 4.8%, which includes the 9% on the $125 million Norwegian bond.

Finally, following the delivery of Navigator Atlas at the end of the second quarter, at a total delivered cost of $53 million, our 12 vessel order book total commitments now amount to $688 million, of which we have paid a total of $93 million to date to the shipyard. We have sufficient funds to fulfill this entire capital commitment from existing cash resources and from existing and expected future bank borrowing facilities.

And with that, I will turn you back to David Butters to open lines for any questions.

Thanks, Niall. And, Jenny, you can open the line now for the Q&A period.

Thank you very much, Mr. Butters. (Operator Instructions). From Stifel, your first question comes from the line of Ben Nolan. Your line is now open, sir.

Thanks, and congratulations, guys. It's both a good quarter and nice to have a contract under your belt.

My first question or, I guess, sets of questions relates to that contract. Could you maybe give me any idea what the -- what you might expect the rate of return to be, associated with that contract, or some sort of an EBITDA contribution, or some way to sort of frame out what you think the vessel will be generating for you guys?

And then, associated with that, do you think that, along with the Borealis contract they could -- there could be additive vessels? That's a really big ethylene cracker in Sweden. I mean, is this just, potentially, the first of several, or is that all they should be needing, do you think?

Let me ask -- let me attempt to ask -- answer the first part of that question, Ben. We do have 30 agreements in place, confidentiality agreements with our counterparties about disclosing details, and we certainly want to honor those.

When we enter in to long-term charters, we obviously are not going to get the kind of returns that, if successful, we can get in the spot market. The spot market has been producing some, as you know, some rather robust returns.

Therefore, I would say that we will get in the teens returns on a cash-on-cash basis, unleveraged, but not high teens.

Okay.

The other part is, of course, if we wish to, we can leverage this, because A) they're long-term contracts; and B) the contract counterparty is a very reputable and credit-worthy customer. So, it will turn out to be a highly profitable business for us, and a highly profitable contract for us.

And the second part of the question, I will Oeyvind talk about the cracker in Sweden that we're going to be servicing.

Hi, Ben.

Hi.

So, on Borealis, at the Stenungsund cracker, the unique feature with this cracker is that they can switch between propane, butane, naphtha and ethane. So, that's a unique position.

And the total volume there, in barrels, is about 10 million to 11 million barrels per year ethylene production, propane production. They have downstream polyethylene and propylene plants there.

So, at the moment, they have ethane supply contracts with Statoil, in Norway, being transported on smaller vessels. I believe that's going to continue. I think Borealis has extended that contract from 2015 for another seven years, so, that's more volume.

We will do about one-third on that one ship from Marcus Hook to Stenungsund. We will do one-third of their annual demand for feedstock there, essentially pushing out more expensive naphtha, and, perhaps to some extent propane, but -- butane. We are not party to exact economics at that cracker.

Borealis, of course, is a big system, a big plastic producer. They have crackers, also, in Porvoo in Finland. So, the question is, of course, whether they will expand and take further advantage of cheap US feedstock.

So, let's see. I mean, this is a great example of what's happening in the US, and European petrochemical producers taking advantage of that to cement their competitive advantage.

Right. That's extremely helpful.

And then, sort of associated with the ethane side of it, I know that -- well, I guess, again, two parts, and then I'll -- I guess I'll, even though I don't want to, I'll turn it over to someone else.

Number one is, Enterprise, I guess, last week in their earnings call said that they now have contracts for 85% of their total offtake. That clearly means that there are some unspoken-for contracts out there in terms of the shipping capacity. How soon would you expect the buyers of that ethane to come to the market to find the shipping capacity associated with whatever 100,000 barrels a day or so of contracts that appear to now have been signed? Is that something that should happen in short order? Or do they kind of have the luxury of waiting it out until they get closer to delivery?

We -- as David mentioned, we are in conversation, detailed conversations with lots of different petrochemical producers, both in the Far East and in Europe. And all these guys are talking to the outlets in the US and the exact details of those supply contracts we are not party to.

It depends a little bit about the timing that these companies -- when they want the ethane. Of course, Enterprise starts off fourth quarter of 2016.

But I think, at least for the very large volumes that you have seen, I mean, Reliance, for example, I think it's very awkward for people to enter into a supply contract without having the shipping in place, particularly for the larger volumes that are allegedly bound for Asia. So, you'd imagine that announcements will come twofold.

When those announcements will be made by the various purchasers of those -- that ethane from Enterprise, time will tell.

Okay. And then my last ethane question, I meant to include on the last one, but maybe, David, could you talk about where you guys are thinking with respect to the potential for participating in an ethane terminal? Obviously, you've spent a lot of time on that. Is that still sort of at the forefront of your thinking, or taking a bit of a back seat to what everybody else is doing?

Well, thanks, Ben. We've never contemplated ethane terminals as part of Navigator's portfolio. Ethane -- it will be a limited number of players as terminal operators, for obvious reasons, a limitation on ethane exports to begin with, the volumes.

We have interest in infrastructure, and we continue to pursue that with other parties to see if we can't develop that type of platform, and it's still in progress, but I just want to clarify that it's not ethane.

Right. I meant propane on that, but, yes, absolutely. So, it's still a work in progress, still something very much in discussion, I suppose?

That's right. We -- it is of great interest, trying to provide a balanced portfolio of shipping and logistics, and we just -- the nature of it is that we work with other parties, so that we don't have full control of the progress, as we'd like to, because you need suppliers, and you need offtakers, and so on, to put it all together. But it is definitely something of keen interest, and something that is -- remains an active effort.

Great. Okay. Well, that does it for me. I'll let somebody have a shot. Thanks. And, again, nice quarter, guys.

Thanks, Ben.

Thank you. Thank you very much, indeed. Now from Evercore, your next question comes from the line of Jon Chappell. Your line is now open.

Good morning to you.

Good morning, David. Just a couple more questions on ethane. Now that you have one commercial contract in place, and it sounds like you're pretty far down the road on commercial contracts for the other three, can you remind us, do you have any options outstanding right now for other 35,000 cubic meter ethane carriers? And what's your appetite to more in that asset class.

First of all, the 3 that we're building now that are under construction -- the 4, one was a firm contract. The 3 were operations. So, we already exercised our option based upon the feedback we were getting from charterers about their interest in it. That's why we exercised those options.

We do not have any further options on the 35,000 cubic meter. We did and have gone out for pricing, and found that the pricing has gone up substantially since we entered into our contractual agreements with Jiangnan. So, we will probably work and respond, once we complete the contractual commitments on the existing 3 that we have not contracted for.

Got it. That's helpful, and it dovetails into my next question. You mentioned you've been in some conversations with yards on potential VLEC orders. Has the pricing there moved up to the same magnitude as the 35,000 cubic meters? And also, have you had initial discussions with customers? Because, obviously, you'd have to have a contract in place there before you move forward with the yard.

We're pretty far advanced. We have a design. They are significantly more expensive than the 35,000, because we're talking 84-plus cubic meter in size for the VLECs. And they will be a little bit more complex vessel than the 35,000. We want them to be flexible enough to carry a myriad of products, be able to carry LPGs, LNGs, and ethane. And we think we have that design in place. We think we have a pretty firm idea of where that cost is going to come out. We have a pretty good idea of where we want to get them built, and we have a pretty good idea as to the delivery schedule.

We've been sharing all of that information with a number of potential charterers, are in discussion with the various ethane terminal operators. And I think, just to follow up on an earlier question, the potential charterers and users of the ethane don't want to be too far off in their supply agreement with their transportation agreement. They don't find themselves with a lot of supply that they've committed for, without having a transportation agreement in place.

So, as one of them mentioned to us, that they feel if they do that, if they're too much exposed, that they may not have as good a negotiating stance with the potential shipper, knowing that they've got the supply and have to act quickly.

So, this will all dovetail, I believe. Enterprise is putting pressure on the petrochemical companies. They're putting pressure in the sense that they know they have a limited amount of capacity, and first come, first served, and so, there is a bit of scramble.

I think this will all fall out over the next four or five, six months, and I think it's a relatively quick process, now that it's moving quickly.

Does it have similar economics to the low-to-mid teens that you have in the 35,000 cubic meter ships?

Yes, when you're building vessels that are unique and that you're one of the first movers, and you're going to take long-term secured business with good credits, I would have thought that is the kind of returns that you would expect, and that a charterer would be prepared to give. So, yes, I think that's right.

But the difference between the European business on the 35s, and the Far Eastern business that we're (inaudible) aggressively with larger vessels is that typically the Far Eastern producer needs more vessels, and the vessel cost is much higher. So, your capital commitment, and, therefore, your earning base, if you will, is much more significant.

The projects we're looking at in the Far East, that we're discussing about, typically require anywhere between 4 and 6 vessels, and if the price is anywhere from $120 million to $130 million per vessel, you're talking $600 million, $700 million, $750 million a project.

So -- and then, your earning base on that, is a lot different.

Right. Okay. Incredibly helpful.

Just one last thing. I don't want to ignore the semi ref business, which has done exceptionally well. Just two quick questions on that. One, now that you seem to be focused a lot on ethane and there could be some capital commitments there, are you happy with the fleet you have in the semi ref? Are you still exploring expansion opportunities there? And then, two, as you look at the longer-term contracts as they come into place with the ethane carriers, would that give you the flexibility to be a little bit more short term in nature, maybe a little bit more spot-focused in the semi refs, especially as the market is really strong?

Well, in the handy-size market, there's very little long-term business. It's a spot business, and when I say spot, I'm talking about anything from a voyage to a year's contract. That, to me, is all spot business. So, it's an overwhelmingly spot business.

It is good now. We hope and believe it will be good for a couple of years. We'd like to continue to get the returns we're getting. I don't think we intend to be aggressive on incremental ships into that segment, except on certain -- responding to certain needs that may be unique, and we're talking to a number of people who have some unique needs that the existing type of vessel in the handy-size would not really meet their criteria.

So, Jonathan, I don't have a good answer for you. We like the business. It's good. It's our bread and butter. This is a business we have such a significant hold on, and our goal is, very simply, to protect that market. It's our market, and we intend to keep it, and dominate that market, and provide the premium service to our customers, with the high-quality vessels in the best way.

And that's the way we're going to earn money. That's why we have the kind of utilization we have, because we are a reliable, very knowledgeable, very experienced operator of this type of vessel.

Sounds great. I really appreciate the time. Thanks, David.

Thank you, Jon.

Thank you very much, sir. Now from Jefferies, you have a question from the line of Doug Mavrinac. Your line is now open, sir.

Thank you, operator. Good morning, guys, and congratulations on a great quarter and on your contract announcement this morning.

My first question, David, pertains to your bread and butter. There's been a lot of talk about the ethane contract, and I'll get to that in a second, but 2Q was very strong for you guys, a strong utilization level, strong charter rates. Can you talk about kind of what you were seeing during the quarter, and how you expect that bread and butter market to develop, I don't know, through year end?

Because when we look at this year, we didn't have the same story in place as we did last year where last year you had a lot of US export terminals coming online. This year we don't have as much, yet the market continues to strengthen. So, can you talk about, maybe, geographically, and even by product mix, kind of where you seeing the sources of the incremental strength this year, relative to last?

Sure, I can, but the fellow who be (inaudible) Oeyvind. Oeyvind is in the front line of all of this every day, and so, Oeyvind, why don't you describe the market and why it exists today, and how you got in the next -- from year end?

So, Doug, we definitely see a pull toward the Atlantic. So, we have 3, 4 ships east of Suez, and the rest of the fleet west of Suez.

The pull predominantly, very much lately, from the US, from the US East Coast, and from the US Gulf. Just as an example, during the quarter we did 15 voyage charters. 12 of those were LPG. 11 of those LPG voyages were sourced from the US. So, that's just a little insight into the pull we have, and we are definitely seeing the same pull for the quarter we're talking -- the next quarter and for the year end.

There are new projects coming on stream, also, on the East Coast, demanding this type of vessel, and there's no stop in sight for us. The utilization is expected to continue to be high for the remainder, and we -- generally, this is generated by the US at the moment.

That is fantastic. Thank you for that color.

Now, as it pertains to the ethane exports contract that was announced, and then the potential for additional contracts down the road, I guess my first question is, in addition to Enterprise announcing that they had secured 85% of their contract capacity, they also announced that they were exploring expansion options, and then we've also seen Targa talking about maybe bumping up what their ethane export thoughts were.

So, my question is, do you guys have any feel for what the additional quantities could be out of those two guys, in particular, that's over and above what we already know is going to come online, and then the shipping requirements that could be as -- could come about as a result?

I don't think we have any special insight. I've listened -- we have regular dealings with both Enterprise and Targa, and we have certainly listened to their conference calls, and they have not been too open about the size of their expansions.

I think there is a lot of interest, and we know there is an appetite for ethane.

Right. Right.

So, I -- how they're going to respond to it, whether it's another 300,000 barrels a day or what, I can't. I just don't have an idea. I know from our perspective that the appetite is there. It's just a matter of putting the infrastructure and the time required to connect the two pieces.

Got you. No, I hear you. I hear you, David.

And then, so for the VLECs that you guys are contemplating building, and it sounds like pretty far along in the planning process, would you characterize those VLECs as providing the transport requirement for the existing announced capacity? Or is it something over and above, and any additional announcements from Enterprise or from Targa would just be additive to what you already kind of have a feel for?

We do not have any firm contracts yet for --

Right. Right, right.

And I don't -- we also do not know specifically what, in detail, coverage of the 85% that Enterprise talks of. So, the answer to your question, I simply -- we do not have any of that. As far as I know, because I don't know who has the 85% or whatever it is all actually contracted, or is it subject to -- so, I just -- we can't give you an answer. I can only tell you, we do not have a contract yet.

Got you. No, I hear you. And then -- so, from this perspective, I guess just my final question is, as you guys are building your 35,000 cubic meter ships, and you've got 3 left to contract, and you're also, obviously, contemplating the VLECs, in order of preference from your standpoint, would you rather get contracts on the 3 35,000 cubic meter ships, before you secure contracts on some VLECs down the road, or do you see those as independent events? I mean, do you prefer doing one over the over or before the other, or are they unique independent events that are just dependent upon kind of conversations, and what customers needs are?

I want them all.

(Laughter).

It's independent. We're going (inaudible) the three that we have, and we're working diligently and aggressive on the VLECs. And I'm confident that we have a good shot at that, as good a shot as anybody. We do, because of real knowledge and experience. The other thing we have is, of course, the 12 ships in the water that can be front runners to any kind of shortfall that a potential charterer might have.

So, in honesty, I want it all, period.

Right. Right. No, that's fantastic, and I'm sure that you will get it. So, once again, congrats on the great, great job.

Thank you.

Thank you very much, indeed, sir. Now from Wells Fargo you have a question now from the line of Michael Weber. Your line is now open.

Hey, good morning, guys. How are you?

Hi.

Hey, I just wanted to touch on a couple more ethane questions, oddly enough, but, first, I wanted to go back to Ben's question around potential terminal involvement. And I know you guys have actually been interested, have thought butane storage, and maybe some mixed terminal infrastructure around the Marcus Hook area, and I know it's pretty project dependent and it's tough to call, but as you sit today, relative to the ethane investment needed for the shipping side, how much capital do you feel comfortable investing today in some terminal infrastructure or new line of business around that?

I'm comfortable in any size, and -- but that is predicated on the understanding that I would have to have about several things. Number one, what kind of throughput agreements that one would be able to obtain, the length of those throughput agreements, the kind of returns that that would generate. If everything falls in place, there is no real limitation on the amount of capital one can put to use.

Sure, but from a realistic perspective, in terms of helping to kind of frame up that opportunity, in terms of what you guys have looked at in the past, and where you might be looking now, is $0.5 billion something that's in the ballpark? Is it lower? Is it higher? Some sort of frame of reference would be helpful.

That's probably on the high end of what -- say the capital projects that we would be -- capital projects, not talking about what kind of equity and what kind of debt --

Yes.

-- capital projects, of even higher than that would be appropriate. But, remember, if we do some of this stuff, it would be done with partners, partners who pay to have use of the products, partners who may be suppliers of the product, et cetera.

So, I can't give you a model right now, because of the variables that take place. Just be assured that we have an appetite and capability of structuring something that will provide a highly leveraged, high return type of business, if we're successful in implementing that logistics opportunity.

Got you. No, that's helpful, even just to help frame it up. I also wanted to go back to your comments around the return levels on the ethane charter. I know you can't give a specific rate, and you're talking kind of a high -- or kind of low teens type cash-on-cash return --

Not too low.

You guys have been in -- I'm sorry?

Not too low teens.

Not too low. Yes, not too low. So, you guys have been involved in those negotiations for a while now with a couple different projects. I'm just curious as to where that return is, relative to the conversations you were having a year ago. Have you seen them compress at all, or are they in line with what you were talking to six months to a year ago?

I think they're pretty much in line. I haven't seen any squeeze, and I would say, for us, in many ways, I think they will expand, simply because, for example, on the 35s, we have relatively good cost on the vessel. Someone -- a competitor that now wants to compete with us on a piece of business, they're going to have to build a vessel that may be 15% more -- cost 15% more than what we have those vessels on order for.

Got you.

So, they're going to be looking for a higher rate. So, I think we have an ability to expand our returns on the other three than we have on the first. We will see, but I -- certainly not lower, and potentially higher returns than I would have expected a year ago.

Okay. That's helpful. One more for me, and I'll turn it over. It seems Reliance has gone out and placed an order for 6 VLECs on their own, and I know there were a number of industry competitors that were or are looking at that business. When you think about the idea of them going out and acquiring those vessels on their own and not using a third-party asset owner, at least now, do you view that as a one off? Or do you think that's a bit of a shift in the paradigm where you're going to start seeing these guys actually own their own tonnage?

And then, as kind of a secondary question to that, if you don't think that's a change in the paradigm, do you view that as a sale/lease-back opportunity down the line? And are you continuing to talk with them?

Reliance marches to a different drummer, and they decided with all the full confidence that they seem to have without having experience, that they can own and operate the vessels. It's disappointing to us, disappointing, I know, to the other two folks that spent a fair amount of time with them, and giving them as much information on the vessels design and operating things, or whatever.

But they chose to, on their own. Interesting. I don't believe they have any real experience operating these complex gas vessels, so I suspect they'll be seeking some kind of alternative. Who knows? We'll see.

I think it's one off. I think they're a unique company that has their own way of doing business. I don't think it's a model that we will consider to be broad-based at all, and they may come back, because they will have to face the reality, ethane ships are the most complex vessels to operate in the industry. They're more complex than LNG. But it may be a learning process.

Okay. That's helpful. I appreciate your time, guys. Thanks.

Thank you very much, indeed, sir. Now from Morgan Stanley you have a question from the line of Fotis Giannakoulis. Your line is now open.

Yes, good morning, gentlemen. Thank you.

I would like to ask if you can give us a little more background about the contract with Borealis. Was that a tender? Was that a negotiated contract? And were there other companies that you had to compete with? If there were, what were their characteristics, and what were the advantages that Borealis saw in this cooperation with Navigator Gas that made you win this contract?

Okay. Oeyvind spent a lot of time with them, so I'll let him answer that question.

Yes. Hi, Fotis. Bearing in mind we signed some NDAs and things with Borealis, but I think the answer to your question lies with what David already mentioned. We have the largest current ethylene vessels on the water, and the most of them, at least in cubic capacity.

And in order to provide a continued -- guarantee a continuous flow of ethane from the US to the cracker, without having -- if Borealis had one ship, what if something happened to that ship, you can't have a cracker and a supply contract, without having guaranteed uptake. So, yes, the existing ships we have the 10, which are a little bit smaller, but it's the largest today, and that guarantees and brings a safety net for Borealis, which, of course, is very important.

And that is the unique feature of Navigator what we have, that we can offer our clients.

And can you tell us if there were other companies that they were looking at the same contract, or that was some exclusive discussion that you had?

No, Borealis, being a prudent company, they ran a process with several people. That's right.

Okay, very helpful. Thank you.

You mentioned, also, that the operation of these vessels is quite complicated, even more complicated than LNG carriers. There were some people discussing about potentially LNG carriers converted in order to be able to transport ethane. Is this something that is possible? Do you anticipate, given the number of older LNG carriers that they are having trouble in finding employment right now, could we see some conversions like that? And what would be the cost of such a potential thing? And would you be interested in buying some older vessels to convert, I mean, to ethane carriers?

Tommy, why don't you answer that question?

I'll try to. Hi. I think there have been many people trying to convert older LNG tonnage, but the problems are both technical and port restrictions have a thing in that.

The LNG carriers that are older generally have a restriction of the density of the cargo they can carry, and it's not easy to change that. The very old ones could, but they would not be accepted by oil majors in the import ports where you want to have this ethane.

So, they have been -- they're not pursuing this kind of strategy to convert, if that answers your question.

Yes, thank you very much. I think, David, you mentioned earlier that these ethane carriers are quite versatile, and they can transport a very wide range of products. Given the fact that this first contract is going to start at the end of 2016, and, if I'm not mistaken, the first vessel will hit the water during the second quarter, are you planning to deploy this vessel before it starts the Borealis contract? Or we will have to assume one of the latest vessels for the Borealis contract?

Oeyvind, why don't you go ahead and talk to that. But when I was (inaudible) -- I mean, just to qualify that, the vessels, the VLECs that we're building -- or not, we're building, we're working with on the design -- we want those to be actually more complex in the sense of being able to carry as many different products as possible, because with a 10-year contract, we would like to see at the end of the 10 years, if there is not a renewal of the ethane business, we have a vessel that we could use in LPG, propane, butanes, a very large, sophisticated vessel that can be even used, hopefully, in LNGs.

But the 35s are somewhat different. Those are being built right now. Oeyvind, why don't you pick it up about what you will do with those vessels in the short term?

Fotis, I mean, we put a lot of thought into constructing a ship that, yes, is going for ethane trade, but can be used in other cargoes and other trades, be it ammonia, be it LPG, or other petrochemicals, which these mid-size, or 35s, can do. It's important for us to be able to compete apples -- compare apples with apples with other mid-size vessels.

So, the short of it is, once the ship is delivered from the yard, we will trade her until the (inaudible) arrives where we will deliver the ship to Borealis. Whether that is the first ship or any of the other of the four ships, that is yet to be decided, but, yes, we're comfortable being able to trade in all the -- as I mentioned, all the current gas markets, in petrochemicals, LPG, and ammonia, for those ships.

Thank you. That's very helpful.

And one last question, about the LPG market, and particularly for the rest of the year. We saw that there is big spike during 3rd Q for a VLGCs in the spot market, which is -- which gives much, much higher return compared to the one year contract. Have you been experiencing something similar for the handy-size vessels? And where are the earnings during third quarter, quarter to date, if you can talk to us a little bit about the seasonality of these markets? Shall we expect a very strong second half of the year?

Oeyvind?

I think it'll be a continuation of what you see in the second quarter. The spot rates or time charter equivalent earnings, they vary. We'll have almost all up to $2 million down to $1 million. The time charter market is hovering around $1 million or $33,000 a day, but, as I say, the spot market price for us, as well, particularly with the spot fleet employed in the Atlantic from the US. They have seen a spike in time charter equivalent earnings.

So, we are experiencing a similar trend as the VLGCs, I suppose, but it's less apparent to the market, because we don't have an index like they have.

Thank you. That's very useful. Congratulations for the good results.

We have time for one more question, I believe.

Just once more, then. (Operator Instructions).

Well, Jenny, if there are no more questions?

No, Mr. Butters, there are no further questions at this time, so I shall pass the call back to you for closing remarks.

Thank you very much. We enjoyed meeting with you all today, and look forward to again having a chat in three months' time. Thank you, again.

And with many thanks to all our speakers today, that does conclude our conference. Thank you for participating. You may now disconnect. Thank you, Mr. Butters. Thank you, gentlemen.

Thank you, Jenny.

Thank you. All the best. 'Bye-bye.