Navigator Holdings Ltd (NVGS) 2016 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 2016 financial results.

We have with us Mr. David Butters, Chairman, President, and Chief Executive Officer; Mr. Niall Nolan, Chief Financial Officer; and Mr. Oeyvind Lindeman, Chief Commercial Officer.

(Operator instructions)

I must advise you that this conference is being recorded today and now I pass the call to one of your speakers, Mr. Butters. Please go ahead, Sir.

Thank you Melanie, and welcome everybody to Navigator's second-quarter earnings conference call. As you all have seen from last night's press release, I reported $0.20 per share earnings for the period was quite disappointing, whether against last quarter's numbers or against last year's second-quarter results.

Our comments this morning will focus on attempting to explain some of the underlying causes of for the rapid deterioration that the LPG shipping space has undergone this quarter. We will also examine how our flexible semi-refrigerated handy sized vessels were able to offset some but not all of the weakness in the LPG shipping by shifting to longer haul petrochemical gas cargoes.

While the petrochemical gas shipping is more operationally challenging, it does offer Navigator a potentially profitable link that could eventually more than offset LPG shipping weakness even if this sector recovery is delayed. We believe that there are, we are in the beginning of a trend that will do just that.

Niall Nolan, our Chief Financial Officer, will cover the financial and operating details, while Oeyvind Lindeman, our Chief Commercial Officer, comments on the market conditions and market trends.

Beginning at the very end of this year's first quarter, we began to see an increasing competitive pressure initially coming from the US East Coast specifically Marcus Hook the terminal. The issue at Marcus Hook was a sudden drop-off in export volumes of propane loading on handy size vessels. The principal cause of this decline was the result of Sunoco Logistics commencing the shipment of ethane on the Mariner East one pipeline that feeds Marcus Hook for the Marcellus and Utica basins. The start of the ethane shipments on Mariner East I around March 1, pushed out propane, cutting deliveries of this LPG product into the Marcus Hook by almost half.

In addition, operational problems since fixed limited flow volumes on the line to less than 70,000 barrels a day design capacity. Mariner East I is not a big pipeline.

The installation of a chiller at Marcus Hook has also allowed larger fully refrigerated vessels including VLGs to move cargoes out of the terminal. The expansion of the pipeline capacity to accommodate an additional 275,000 barrels a day of propane, butane, and methane, has once again been delayed of the opening of the on the Mariner East 2, ME2 as they refer to it, is now scheduled for the second quarter of 2017 according to Sunoco Logistics. The opening of an ME2 should have a significant improvement in the number of handy sized LPG cargoes that lift out of Marcus Hook.

Now, as an aside, it is important to note that our newly delivered 30,000 cubic leader ethane carrier The Navigator Aurora is scheduled in December to commence a ten-year time shot with Borealis to move ethane from Marcus Hook to Sweden. With the delay in completing ME2, we're discussing with Borealis alternative sources and routes for ethane deliveries to Sweden until ME2 is actually completed.

Now while the East Coast slowdown is Company specific, the answer to the poor LPG shipping on a more macro level is more complex. I think there are number of issues involved, first, the world is well supplied with hydrocarbons from oil, coal, natural gas, and liquids. There appears no shortage and priced more availability than convenience has been the moving force. A good example is in Europe, the European economies are growing albeit slowly but oil and product inventories are near record levels and Russia is pipelining as much natural gas as needed into Europe and liquids are being shipped into all areas of the continent in increasing amounts all in competition with longer haul US exports.

Second, price competition from growing Mid east liquids production and slowing Asian economies are pressuring US exports to the Far East. We have seen a number of large propane cargoes canceled by traders over the past two months as traders who have committed to take the product opted to pay a terminal, a cancellation fee, rather than take propane volumes that they might have to sell at a loss to Asian customers.

Third, within the VLG segments, new buildings delivered in 2015 and continuing through 2016 suggested that developing oversupply of this category of vessel if it is not already oversupplied. So far, newbuildings have not been a significant issue in our handy segment since only about eight vessels or so have delivered into our segment over the past 20 months and six of them have been for our own account. We will see more handy vessels delivered by competitors in the second half of 2016 and into 2017. But there is speculation that a significant number will be canceled due to the financial and operational problems at a particular Chinese shipyard.

Fourth, the past five months or so there has been virtually no arbitrage of price differential after taking into consideration pipeline, terminally, and shipping cost between the US propane prices and global LPG pricing and prices for crude-based feed stock such as NASFA. The lack of any significant price difference has restrained the flow of US LPG exports to foreign markets.

So what has happened to the principle that we have learned that LPG 101? I.e., that LPG is a supply driven product and because it's a byproduct, it will price adjust to clear the market provided the infrastructure to move product is in place. Well, one theory is the US is developing infrastructure to export large volumes of LPG but it also has in place significant soft dome storage facilities close to the LPG hub Mount Bellevue.

As the price of crude moved up from around a dramatic low in February, propane product prices opted -- producers opted the propane into storage hoping for higher prices and willing to pay storage fees to capture potentially higher product prices. This is some logic to this is propane inventories are close to last year's record high in spite of decline in drilling rate activity in the United States.

Looking at future events that could turn around the current LPG market environment, I would highlight three potential factors. Number one, obviously a global economic recovery would help, growth cures all ills. Number two, completion of the Mariner East II pipeline system and the consequent export of an incremental 275,000 barrels a day of LPG out of Marcus Hook will provide an enormous lift to our business. Number three, oil price improvements sufficient to open the arbitrage opportunities allowing domestic propane to compete globally on a more competitive basis.

Now turning from the LPG leg of our business to the petrochemical sector, one of the unique aspects of Navigator's fleet of high spec semi-refrigerated vessels is of the flexibility and adapting to changing market conditions. We have seen this flexibility play out these past few months as the LPG sector turned down.

After recognizing that the propane market was not about to come back quickly, we moved aggressively to capture petrochemical gas cargoes and Oeyvind will shortly cover some of the long haul cargoes that we were able to secure. While the transport of petrochemical gases, the butadienes, the propylenes, the ethylenes can be excellent business, it is perhaps the most technically and operationally challenging in all of shipping.

Each of the products require tank separation and each must be cooled to a different temperatures or pressure. In addition, available cargoes are often less than a vessels capacity, requiring us partnering up with different shippers to accommodate economies of scale.

Looking out over the next several years, we are all encouraged by we see regarding our petrochemical gas business. In Saudi Arabia, there is continued expansion and development of their petrochemical industry with promise of up sizing there exports.

In Iran, we have seen growing inquiries regarding exports or propylene and ethylene. We understand since sanctions have been lifted, much work has been done in Iran de-bottlenecking and expanding their very large chemical complex.

While we have not yet moved any Iranian cargoes, we're studying how and when we can participate in what could be a very important export market. We are also watching very closely the petrochemical industry development in the United States. More specifically, the potential of large scale exports of propylene and ethylene.

Since the advent of fracking and the development of shale gas the emphasis in the United States had been building the infrastructure that exports of LPG, mostly propane. But now -- but raw material exports are basically a third world activity. Developed economies process raw materials into value added feed stocks.

Iran has been processing their off shore natural gas to petrochemical since the 1970s and Saudi Arabia more recently. The US petrochemical industry is currently in amasses olefins expansion with the objective of increasing ethylene cracking capacity by nearly 50% by the end of 2018. These plans for states to begin production by mid-2017.

While undoubtedly most of the new ethylene capacity will be used internally to be processed into oxides, glycols, and polyethylene's, a reasonable amount is sure to find its way to the export market. At the moment, there is only one ethylene export facility or terminal in the United States but it lacks the capacity to move significant quantities of ethylene.

Companies such as enterprise product partners have indicated their interest in looking at the potentials of building a dedicated ethylene terminal but none has yet committed. It's worth noting that Enterprise has recently began turning propylene from its Houston facility and have expressed interest in expanding that trade.

In summary, America's on the very -- is on the verge of completing what has been nearly five years effort to revitalize the countries petrochemical industry, expanded plans and newly constructed crackers have been premised on having some of the worlds cheapest hydrocarbons as feed stock. Navigator has approximately one-third of its shipping capacity capable of carrying ethylene. There really is no number two.

We cannot determine how much of any of the olefins coming out of onstream, over the next two years will find their way to the export market but it will not take much to have serious and meaningful impact on Navigator. And now I'll pass the phone to Niall, who will cover the financials.

Thank you David, and good morning.

The Company's revenue for the quarter ended June 30, 2016, in the amount of $72.5 million has been in affected by the impact of the market weakening as David just refer to, decreasing by $11.5 million or 13.8% from the $84.1 million generated during the three months ended June 30, 2015. Revenue less voyage expenses decreased to $9.6 million to $63.2 million for the quarter compared to $72.8 million generated during the second quarter of 2015.

This reduction in that net revenue was a result of a number of compensating factors. First revenues rose by $7.8 million due to the increased number of vessels in our fleet increasing from an average of 27.7 vessels during the second quarter of 2015 to 13.8 vessels operating during this second quarter.

Secondly, a decrease in charge rates reduced net revenue by $8.9 million as rates reduced to an average of $27,233 per day or $828,000 per month during the second quarter of 2016, from $30,596 per day during the second quarter of 2015 and from $29,560 per day during Q1 of 2016.

Thirdly, fleet utilization for the second quarter has reduced dramatically to 86% compared to 97.7% during the second quarter of 2015, reducing part of net revenue by $8.5 million.

Our fleet currently stands at 32 vessels following the delivery of two semi refrigerated carriers, Navigator Restto and Navigator Copernico in January and April respectively and since the quarter end, our larger 37,000 cubic meter ethane ethylene carrier Navigator Earl was delivered. We now have six new businesses remaining in our new building program in with deliveries scheduled for between October 2016 and July 2017.

During the second quarter, a total of six vessels went into dry docks for their respected five year surveys and overhauls for an aggregate of approximately 100 days. One further vessel requires dry-docking during Q3 of this year as well as the completion of one already in dock at June 30. The total cost of all nine dry-docking's undertaken or to be undertaken during 2016 is expected to be approximately $9 million costs which are capitalized and amortized over typically five years, a period to the next respective dry-docking. There are no scheduled dry-docking's required in 2017, followed by an expected six in 2018.

Voyage expenses for the quarter were $9.3 million, a decrease of $2 million from the $11.3 million incurred in the second half of 2015. Voyage expenses are a passthrough and decreases or increases are as a result of changes in the charter mix between time charters and voyage charges.

At June 30, 2016, we had 15 of our 31 vessels on time charter, 4 of the vessels on contract of [freightment] committed to carry ethylene from the US to China throughout much of 2016, and the remaining 12 trading on the spot market transporting petrochemical's as well as LPG. Vessel operating expenses or OpEx was $23.7 million for the three months ended June 30, 2016, compared to $19.3 million for the same period in 2015.

In part as the vessel count increased by 11% as I just mentioned, the daily average OpEx across the fleet during the second quarter was $8,445 per vessel per day which represent a 10% increase from the daily rate of $7,670 incurred during the second quarter of 2015. This increase is primarily as a result of additional repairs and maintenance incurred whilst undertaking the six dry-docking's during the quarter as well as continued hired and expected repair maintenance expenditure on some of the older planet type vessels. The average age of our fleet at June 30, 2016, was 6.6 years.

General admin and corporate expenses were $3.8 million for this quarter, a slight decrease from a $3.9 million incurred in the same period in 2015. General and admin costs included additional cost associated with an increase in the number of employees as we began to take technical management of our vessels in-house. This was more than offset by favorable foreign exchange movements due to the strengthening of the US dollar against sterling and euro, and the euro in particular but also against the Indonesian Rupiah.

Three vessels have been successfully taken into in-house technical management during the quarter and a further one vessel is scheduled to be taken in-house during the second half of this year. Interest costs for the quarter were $7.7 million, up $700,000 compared to the same period of 2015, primarily as a result of commitment fees on our new but yet undrawn December 15, $250 million loan facility. But also due to additional bank debt associated with four new building deliveries since June 2015.

Net income for the three months was $11.1 million compared to $27.4 million for the same period in 2015 and earnings per share as mentioned earlier were $0.20 for the second quarter against $0.49 for the same quarter in 2015. EBITDA was up $34.2 million for the quarter.

Despite the market downturn, the Company's balance sheet remains strong with cash at June 30 of $66.9 million and debt of $651.1 million. The debt includes $526.1 million of bank loans, two of which mature in the next 12 months in April 2017. The aggregate amount outstanding of these to specific loans at June 30 was $149.3 million and as a result, the current assets on the balance sheet exceed current liabilities.

We are currently in the process of refinancing these loans in terms and rates likely to be more favorable than those are the maturing loans and we expect to have a new loan in place by the end of this year, well in advance of the other loan maturities. The Company's debt also includes $125 million of an unsecured bonds listed on the [Oslo Bors] repayable in December 2017. The Company has an option to redeem this bond currently at 104% falling to 102% in December 2016.

We are currently evaluating alternatives as to whether to extend or to repay this indebtness. At June 30, 2016, the aggregate contractual commitments to shipyards across the then remaining seven newbuilds was $315.5 million against which bank facilities exist to provide up to $290 million of that requirement. The final newbuild, the 38,000 cubic meter fully [refrigerated] vessel has yet to be financed and will likely be included in the new loan together with the refinancing that I just refer to.

Our previously mentioned that since June 30, we have taken delivery of our first ethylene carrier, Navigator Aurora, on August 3. The entire delivery installments of the vessel was financed from our December 2015 bank loan facility. And this vessel will enter a ten-year time charter with Borealis in December this year.

With that, I'll hand you over to Oeyvind Lindeman.

Thank you, in January of this year, very large and medium-sized charter rates are quoted at $1.6 million and $1.4 million per month with respectively. At the end of the second quarter, rates for the same five vessels quote that $640,000 and $650,000 per month.

Comparison, the handy size charter rate quoted at $920,000 per month in January and $625,000 per month at the end of June. Interestingly, all three of these segments are converging at similar rate levels despite the vast differences in size capacity.

The larger filler refrigerated vessels are exerting significant downward pressure on LPG rates, however some of the resilience of the handy charter rates can be attribute it to changes in the petrochemical trade which we will touch upon shortly. During the quarter, we had an average 30.8 vessels carrying a total of 1.4 million metric tons of LPG petrochemical and ammonia gases. Of the total [$2321] earnings base, 57 of these were covering LPG cargoes, 36% were petrochemical gases and 7% for ammonia.

In comparing this quarter with second quarter of 2015, we experienced a reduction of 540 earnings base, or 21% of our proportion of LPG employment and an increase of 491 earnings base or 22% to our employment of petrochemical's. The change is even more notable if you compare first half of 2016 with first-half of 2015.

We had an increase of 80% in our petrochemical participation from 686 earnings base to 1,237 earnings base. Is this is a trend for Navigator Gas and (inaudible) going forward? Absolutely.

The fleet is firmly taking advantage of the petrochemical gas opportunities where we offer economics of scale to our customers in the long-haul nature of this business. For example, we have loaded petrochemical cargoes up to three different grades on the same ship in Brazil every month during the quarter, from Far East (inaudible) compared to only one such cargo during the same period of last year.

And to remind, one such voyage almost covers the (inaudible) of one ship for the entire quarter and is therefore easy to understand the implication of such trade. One of our close partners is continuing to employ our vessels in the Trans-Pacific trade between US Gulf and Asia and we're seeing other customers actively contracting and handy sized petrochemical cargoes from Europe and the Middle East on a forward basis.

We have for the first time seen large handy size vessels in cargoes being quoted and concluded from Iran, while we have not yet pursued these opportunities, it does show that additional supply and emerging employment opportunities are available to our segment.

David described the situation at market export terminal earlier and I would like to comment that our fleet loaded five LPG cargoes during the first six months of 2016 compared to 11 during the same period of last year. Despite this decline, LPG from US is by no means game over for handy sized owners. As a matter of fact, we have one of our vessels in markets right at this minute loading full cargo propane for South Europe discharge, this despite the challenges with regional arbitrage.

Lastly, our coverage at the Cortland, excluding any contact for (inaudible) about 50-50. With committed charter revenue for the remainder of the year at about $64 million.

Thank you.

Operator, I think you are in a position now to open the call up to question-and-answer period.

Certainly, sir. It's question-and-answer time, ladies and gentlemen.

(Operator instructions)

Jon Chappell, Evercore ISI.

Thank you. Good morning, afternoon, guys.

Good day.

Niall, first one for you, you mentioned the debt amortization of the facilities plus the bond in 2017 which adds up to almost to hundred $75 million.

Can you just walk us through a little bit some of the alternatives for those? And also given the recent market weakness as well as the tighter lending restrictions across the entire industry, has it become a little bit more difficult when you think about refinancing or extending those facilities or repaying the bond that you might have thought six months ago?

Okay. This is a rough question there. Has a become more difficult? Possibly not. Have the rates increased? Yes, they have. Financing rates throughout all banks with the backdrop of potential Basel IV have certainly increased rates but not to where they were some time ago. I think banks generally as they have been over the last number of years have been more selective in who they lend to but there is adequate finance there for companies like Navigator.

With respect to alternatives, you will appreciate that the two loans that we took out in 2011 and 2012, these two loans that are due to mature next year have had reasonably significant debt amortization over the last five or six years because 2011 and 2012 was not a strong period for bank financing at the time. And therefore to refinance those at a normal shipping bank loan to value levels would increase significantly the amount of indebtedness relevant to those secured ships, and that provides us with some optionality.

Okay. And then also just to the extent that you can about the bonds, what are some of the options there?

The option is to, we could, we can repay it or we can extend it. We are looking at both options whether we extended far, 2 to 3 years, further out, really depends on the coupon that we would achieve is, as you can imagine, fluctuating.

Okay.

We are looking at that.

Okay. And then just one more for me for David. You mentioned both in your comments and in the press release some contract re-negotiations and even reneging of contracts is it comes to the exports of LPG. I'm just curious, what does that mean from a shipping perspective?

Were they renegotiating or reneging on a contract for a product that has already been sold or supposedly sold where freight has been lined up for it? Does that threaten the time charter coverage of any of your vessels or the industry as a whole?

Well, first of all, we have not experienced any of those cancellations. They haven't come on the handy-sized, whether for us as far as I know, none of the other handy-sized players. It has come about on very large gas carriers and perhaps Oeyvind will have a little bit more color on that than I have. But you know, listen it's never good. Whenever you have that type of action by customers, it sets a sour note clearly, whether it be shipping or any kind of business. I do not think it is good thing to have.

I don't think it's a matter of shipping. I think it's just a matter of bad business practice. But maybe, Oeyvind got to have a particular insight into what those trades were? We weren't, as I say, involved and have just information coming from the press more than anything else and some of the brokers.

What it adds is uncertainty and what we do not want is more uncertainty in the LPG space. It causes hesitation to do business with some partners. What it does, of course, with the companies that are involved have based their whole trading strategy or parts of their trading strategy on this and if one piece falls apart, then that cause a ripple effect of those programs.

So is it going to effect VLGCs and the demand for those" Possibly. But the cargoes being canceled either day, inventories building up or they need to divert it to different customers. But generally it's not ideal.

Okay. I appreciate it. Thank you.

Thank you.

Thank you. Ben Nolan, Stifel.

Thank you. I guess my first question is maybe more broad with respect to the current environment that we are in. Day rates having fallen, utilization having fallen, obviously you guys have better balance sheet I would imagine than many of the smaller players in the industry.

Is there a potential scenario developing whereby some of your competitors might become a bit more let's say stressed. And I know that in the past you guys had done certain things in terms of acquiring vessels or chartering in vessels from weaker hands. And how are you, how are you thinking about that and is that evolving currently? Are there opportunities in terms of being able to consolidate distressed situations?

Well, of course falling rates and other issues are certainly helping us in one sense. It is, as I alluded to there have been substantial, well, there is a potential of that order book shrinking dramatically with the failure of shipyards to be able to deliver. And I think they would have delivered if environmental conditions, the market conditions were better. The people who have to audit is vessels would have probably fought a little harder to get them delivered.

More specifically and directly to your question, Ben, there are not a lot of competitors of ours that have vessels that we would like to own. Just a couple. We know them and I do not think they are in a position that they are all healthy because they have, for the most part, a balanced portfolio of activity. I do not think that any of them have a mindset to sell the vessels. I can think of one who would probably like to have done that. Probably more likely have regretted ordering the vessels. The price ideas right now would be prohibitive as far as we're concerned.

So I do not see consolidation as an opportunity within the handy space. You know, again, the business is suffering at the moment but there are elements in place that will correct it. I cannot tell the timing but it certainly will and if you have sophisticated vessels, again, the emphasis that we have been placing in the last number of years is to build the vessels that reflect what we believe is going to happen sooner or later. That is a shift from the export of the commodity-based business, propane and butane, to the more value added products, the propylenes and the ethylene and the butadiene, where you need a much more sophisticated vessel then just a fully refrigerated handy size ship.

So we have got them. I think we, are the envy of the industry and having that type of high quality, high spec vessel. And I do not see much in the way of consolidation bottom line.

Okay. And you know, certainly looking at the data, we tend to agree at least with respect to ethylene and propylene, but that certainly leads to my next question. You guys have already taken delivery of the first of the 35 ethane, ethylene capable vessels and you know, I believe the rest are set to be delivered in pretty short order. Three of those do not yet have contracts.

How -- at this point out that we are very close to delivery, how do you envision those being deployed? Do you think that in the absence of a long-term contract, they will compete for you know, ammonia and propane cargoes or is there potential opportunities within the, you know, higher end petrochemical business for cargoes of that size?

Sure. First of all recognize that the 37,000 cubic meter ethane/ethylene carrier said we have coming onstream, the three that are on fixed, they are extremely flexible vessels and they can handle just about any cargo you can think of cup propane, butane, ammonia. And then the whole stream of petrochemical gases including ethylene.

We have one vessel that [will front run], the contract we have for ammonia so that, the second vessel is covered as far as employment is concerned and so we are really looking at the third and fourth vessel and the fourth vessel does not come until 2017. So I think we -- now it begs the question as to what might happen should they terminal operators get together or someone steps forward with contracts for ethylene terminal. And we're trying to keep those open for that for potential.

And I just like to leave it at that because we are in discussions so our dream objective really, is to put them in on to business either in ethane or ethylene. And I think there is still a strong possibility that they find their home there.

Okay. Well, and that was going to be my last question. But I am curious just to follow on to that. I know that in the past there you mentioned that the ethane business was, lent itself to long-term contracts whereas the ethylene business is more of a spot oriented market. Is that changing?

I believe that there will be opportunity. Let's step back for a second. Ethane is a raw material. Ethane therefore is most likely going to be shipped under long-term contract to feed a manufacturer who needs a reliable long-term supplier of their raw materials. Hence it has the elements of long-term charter.

On ethylene, it will probably be more optimistic, more of an arbitrage, more of an opportunity for traders to step in and take advantage of shortfalls in Europe or the Far East where cargoes of ethylene are needed and the price disparity is a certain [type]. So we see ethylene normally as a traders market. And that's fine. We can handle that.

But I think there is an argument to be made and we will see whether or not some of the ethylene manufacturers around the world see an opportunity to lock in a portion of their requirements under long-term ethylene supplies from US producers. I think that may play out. We will see.

I do not want to mention anything more than that. But I think there is a possibility. But in the whole you are right about the distinction between ethane being basically a long-term charter opportunity because it is a raw material needing to supply with a reliable volumes into the manufacture of ethylene. And ethylene being a very optimistic product that will be used to take advantage of different disparities in arbitrage and pricing.

Okay. That does it for me. Thank you, guys.

Thank you.

Thank you, sir. Doug Mavrinac, Jefferies.

Great. Thank you, operator, good morning guys. I just had a few follow-ups on market related items. David, in your prepared comments and Oeyvind in some of your comments, I thought you guys did a great job in explaining what transpired in LPG market to get us to where we are now.

So my questions are more first on the ethane market and then second on the petrochemical gases market. On the ethane market, David, you mentioned how Mariner East 1 is come online and pushed some of the LPG commodities kind of out of the market or aside. But if you guys are really positioned for that with taking deliveries from your ethane ships and ethylene ships and so on. So my question as it pertains to ethane market is when you look at Mariner East 1, would you say in terms of their ethane exports, are they at full capacity now or are they still ramping up? Trying to get a sense as far as we going to see more ethane coming out of Marcus Hook or Mariner East I? And second, when you look at Enterprise's ethane terminal on the Gulf coast, that thing is ramping up right now and my question is on that, have you guys seen an impact in the market and some of those volumes hitting the market yet

Yes. Well, thank you. Again, one of the things, understand the most of this ethane, most all of ethane that is being shipped whether it be in Mariner East I or in the Enterprise terminal, has been committed already under long-term purchase arrangements and attached to those has been the shipping requirements.

Now one of the things we never really get our hands on, for I think for some strategic business reasons on part of the owner, the terminal owner, is that we are never sure exactly what their capacity to move ethane is. In Marcus Hook, I believe that there is a some modest amount of access available. I think. But ethane does not normally come and sold on a spot basis. So we would not have been able to see that.

And the same with Enterprise. Enterprise does talk about their capacity being sold out or close to being sold out at 200,000-some odd barrels of ethane per day. Again, I would have thought that if someone had interest in some long-term modest amounts of ethane, they probably could find some out of Enterprise but I am not sure.

So it does not lead us to any opportunities in the spot ethane business. The spot business will come from ethylene. But that, if someone were to decide to build an ethylene terminal which could have very significant impact on us, even a 50,000 barrel a day, modest terminal, that little needle movement could have a disproportionate move on our business because we have so dominant a position in ethylene carriers. But at the moment, there is not a great deal of US spot business and most of it we are handling. But only one single terminal in Houston capable of handling ethylene.

Right. And David I was thinking more about just kind of this sheer volumes of ethane coming out. And maybe the absorption of some, even if it's on term contract, the absorption of some of the capacity that could be out there in terms of tightening the market.

But you did kind of mention on the ethylene side and just also just in general on the petrochemical gases, just -- Oeyvind in his comments was talking about the proportion of your fleet that is now moving some of those petrochemical gases. And so my question on that front is can you guys give us an update on some pricing [arms] which has been a big driver for some of the demand for US petrochemical gas exports. Is your ability to basically achieve premium rates over just your normal LPG types of vessels, does that still exist? And just basically an update on general conditions that market that was supportive of how many vessels you were employing during Q2.

Okay. I will try to answer that. But let me go back to your first part of the question on the ethane. Let me just point out that on Mariner East II, the Sunoco Logistics pipe that is expected to open up a year from now, 275,000, we believe that there is significant excess capacity on that line that can be used for exporting ethane.

We again, it's not very clear, not transparent line of thought process in how Sunoco Logistics details what they have sold and the volumes. But we believe that there is substantial ethane. So we will have to wait until there is a clearer picture of exactly when they are going to open up that line and maybe that gets filled later.

To answer the question on the economics, that is a difficult question again, I am sorry, to answer, because we're not terribly involved in a particular shipper's economics. But one of the most significant things we can point to is the trade in ethylene out of the US Gulf Coast.

You know, we are taking 150,000 barrels a day, barrels of ethylene from that terminal in [Targa] all the way, halfway around the world. And we are making good money off of that, and we presume the trader, it's a trader who is buying it, is making reasonably good money off of that trade.

So somehow, and we're also doing that from Brazil to the Far East. And there is a significant potential we are making reasonably good money. And we are getting, yes, we do get a premium because we have the largest of the ethylene capable vessels. So if you want to move large volumes at economic rates, you would reach out to a Navigator vessel.

The economics on the 37,000 cubic meters that we are getting delivered are even more dramatic. So that would increase the potential. I do not know, Oeyvind, if you can add anything to that?

Just on your point there, Doug, what are the ramifications. I mean, during the second quarter now, we have 10 vessels, so 821 days of earnings in petrochemical which equates to about 10 ships, compared to 330 days last year same quarter with four ships. So we have more than doubled and you can see the trend continuing.

So it was LPG is struggling, petrochemical trade lanes are definitely opening up. And then we clearly are taking advantage of that.

Perfect. Great. Thank you for that, guys. That is all I had so thank you David and Oeyvind.

Thank you. Oeyvind Hagen.

Thank you for taking my question. I just note that you recorded the utilization of 86% now for Q2. Could you give the utilization on the spot vessels as well?

Well, that is the overall utilization that takes into consideration vessels that are at 100%. And because of time charters and then the spot vessels so obviously the spot vessels are going to be considerably less than 86%.

Yes. I understand. But is it 60% or 70% or thereabouts?

We do not have a number offhand. We can get back to you, but yes.

The majority will be on -- the overwhelming majority will be on the spot vessels. Obviously the time charters barring some of the movement in and out of dry dock and repairs, they will be on full utilization or near there.

So from a general guesstimate, the utilization on time TCs would be around the 95% mark or higher. So the spot takes up the slack.

Yes. I am just trying to get the understanding on how much utilization we can expect on spot or vessels trading in the spot market going forward. But I guess we can have a discussion on that.

Yes. I generally, I think the utilization in the mid-80s is where we see it. We have been there in Q1, Q2 is slightly less than Q1. And Q3, albeit reasonably early stages of it, but it's looking something similar too. So the mid-80%.

Okay. Okay. Thank you. That is helpful. And then just a question on the rate levels that you are seeing at the moment. I note that you quoted a few rates as of June. Do you have figures on the leading edge day rates? Now in August for example?

Clarksons, they quote every -- they have a 12 month charter assessment for the entire market and they publish it every Friday. So last Friday, VLGC 12 month charter, 570; midsize, 600; handy, 580. That is what they are quoting.

And some petchem cargoes we are doing are more than that and so forth. So we tend to look at is of course our average. What are we earning average? But that is estimate for new time charter today. Whether it is correct or not is for debate but that is what they quote.

Okay. So but the rates that you're seeing, that's fairly in line with that on the spot vessels?

I think more or less. Depends. It's very much case-by-case what cargo, what trade lane it is. If it's ethylene from the US to Far East, it is much higher than that. If it is LPG transatlantic, for instance, it might be less. It all depends.

Okay. Thank you. That is all for me.

Thank you. Michael Webber, Wells Fargo.

Hey, good morning, guys, how are you

Morning.

David, it has already a bit of a long call but I wanted to go back to one of your comments, either it was in the press release or within your prepared remarks comparing this market and the parity you are seeing between larger, midsize, and smaller assets to the 2009, 2010 market. If you look at that period, that was a trough that lasted about four years and while VLGC's fell to actually below OpEx levels, the small and midsize carriers still saw another 20% down side from where we are today.

So I guess, first and foremost, if you could kind of comp at a high level the current cycle to that cycle. Then maybe give an assessment as to whether or not you think that's a relevant floor for where we are at today in the cycle.

Okay. Oeyvind will try to cover that question.

You are right. From the beginning of 2009 to 2010, there was a decline on all rates whereby the handy sized kind of flooring out at 600 and then the very large and midsizes were below that, below OpEx level, and that continued for a while until 2011, so that was the period. And then you see the same thing happening now whereby you have a convergence of the rates around the 600 level mark.

And our belief is that if you only are relying on LPG, so the large [full of ref] ships, I think you will repeat what happened in 2009, 2020, 2011 so they become below the handy sized floor and I think that is likely happening, and it's happening now. Because it's only LPG and those couple of trades that are involved with unfortunately.

So I think history repeats itself from that time, the last recession. But at least we can talk about that, we are doing petrochemicals and you see in the percentages, the fleet is definitely moving into that segment now. And that again creates a floor for us which we are left with.

Right. And I guess kind of maybe the second half of that question is if the floor is within 20% of where we are at now, the real question is kind of the duration and length of that trough. If that was a four-year stretch where we touched those levels, are we really seeing the majority of this slide -- now I am kind of in the trailing 12 months, maybe a bit longer, maybe 18 months. Can you kind of, David or Oeyvind, can you talk the similarities between were you're seeing now and what bears itself out in the historical data?

I think the whole LPG segment, shipping segment, what needs to happen is the production is there, the ships are there but the demand side. So there has been such a glut of supply and the demand centers need to have time to adopt to accommodate the cheap gas. For many customers, they can't switch flip a switch and go from oil, for instance, to gas.

So there is a time, and there is a time period thereby people can, need to adjust their infrastructure to do these things. So I think, not necessarily the US prices need to adjust downwards but I think perhaps more importantly the Far East or Asian prices needs to -- the purchasing price needs come up. And then that will deviate LPG cargoes from the US to Asia and not have them go to Europe and that will trickle down positively to say us. So the arbitrage for us opens again on LPG.

When this happens, when the entire consumer base is switched to gas, are more inclined to switch to gas, well, I think it's happening but it will take some time.

Right. Okay. I appreciate you answering that. There is just one or two more for me and then I'll turn it over. This is actually for Niall.

As it relates to that question and the length of the current trough and whether or not we are in early to mid innings, in your conversation around renegotiating that debt, aside from pricing which I would expect to go up and the idea that you probably sourcing it from -- probably with a heavier concentration in Asia than previously just given the restrictions around the European lending base -- is there any push to reset covenants and, specifically, looking at that EBITDA coverage covenant, do you think we'll see any movement there?

No. Not at all. The three banks or three separate offers that we're looking at or speaking with are three European banks.

Okay.

And we're pretty far advanced on this and we (multiple speakers)

With no further restrictions on covenants.

No movement in the covenants?

No.

Okay. That is helpful. And I guess one more high-level question for you, David, you spent some time already talking about the more reliance on spot, on spot cargoes and just a general shift in terms of, in terms of excess capacity, availability, you guys have COA that runs through the end of the year, I noticed quarter on quarter you have added another vessel to that. I guess the first question is that just a function of kind of the lumpiness of how those volumes are getting shipped as far as the volume-based contract?

And then separately, when you think you can renegotiate that, how early, and is it early enough that you could start to look at that? And then more broadly, do you think we will start to see a higher concentration or a higher prevalence of COA based contracts in this market as people try to keep themselves from being long tonnage when it is not needed?

Okay.

I think that the existing COA, contract of affreightment, we do have, so there is a process and I think we are at the early stages of that process to renew. It takes two tango but the other partner is definitely open to debate.

Okay.

So there is no indication that it's going to stop.

And remember, we do have right now the largest fleet of ethylene carriers bar none. So you do not have many places to go to if you are the trader, period. And the function would not be availability, the function will be where is the spread for the trader during that time when he is negotiating.

Right now, I think there is a healthy margin, expected to be healthy margin, prices of ethylene in the Far East are considerably higher than they are in the United States. And considerably higher than when you add on the terminalling expense, the shipping expense and all other costs associated with moving a barrel of ethylene from the United States to Far East. So it's a healthy market. And that is why I think there are people interested in further availability of terminalling and exports, why the producer the Far East may be considering ethylene as, on a long-term basis.

So yes, that is the function rather than just what the shipping cost is at any one moment. You know, we are encouraged. I think a lot of people are encouraged. But it ain't there yet.

Okay. In terms of the, I guess, the Oberon that added to that COA group this quarter, is that just -- should we think of that as being the utilization for the assets within that, serving the contract as slightly lower or is it just kind of a lumpiness in terms of the way you guys are shipping the volumes?

[It's not three ship size, it's not four ships.] It's somewhere in between. So right at that time, four ships were taking care of servicing contracts.

Sure. Okay. All right guys, I will turn it over.

Melanie, I think we are at the top of the hour, a bit past, so I think we would have to wrap up, unfortunately.

Okay, sir.

Today's session.

Okay, that is not a problem. Thank you very much, sir. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may now disconnect. Speakers, please stand by.

Thank you, all. And we will be back in a few months time.