Navigator Holdings Ltd (NVGS) 2018 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 2018 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, the conference is being recorded today, Tuesday, 7th of August, 2018.

And I'll now pass the floor to one of your speakers today, Mr. Butters. Please go ahead, sir.

Thank you, Tracy, and good morning, everyone, and welcome to the Second Quarter Earnings Conference Call.

Our format this morning will be changed just slightly so that Niall Nolan, our Chief Financial Officer, will lead off covering the financial highlights of the quarter and that will be followed by Oeyvind Lindeman, who'll give us an overview of the markets and all the things commercial.

So why don't I give the phone to Niall; and Niall, what happened this year?

Thanks, David, and good morning all. The challenging market continued into the second quarter with charter rates particularly for LPG remaining under pressure, although some positive progress has been seen with utilization rates across our fleet.

Revenue for the second quarter was $73.2 million, $1.2 million less than the $74.4 million generated during the second quarter of 2017 and $3.6 million down from the $77.8 million generated last quarter, Q1 2018. Revenue for the 6-month period ended June 30 was $151 million against $151.7 million generated during the first 6 months of 2017.

During the second quarter, we had the benefit of 2 new vessels in the fleet, compared to a year ago, resulting in the fleet size of 38 vessels, 14 of which are ethylene and ethane capable, 17 are semi-refrigerated and 7 are fully refrigerated. We have no newbuildings on order. These 2 additional vessels contributed to an incremental $3.1 million revenue for the quarter.

Also, utilization increased to 90.3% for the second quarter against a low of 86.2% during the second quarter of 2017 contributing an extra $2.7 million to revenue compared to Q2 of last year.

However, as I mentioned, charter rates continue to be a challenge with average rates obtained during the second quarter at $19,089 per day or $580,700 per calendar month compared with rates of $21,600 per day or $657,000 per calendar month for the second quarter of 2017.

During the second quarter, time charters accounted for an increased 67% of all vessel operating days while 33% of the operating days were spent undertaking voyage or spot charters. Although LPG was transported for the majority of time charter days, petrochemical gases accounted for 81% of all spot charter days with LPG only accounting for 19%.

We undertook 3 drydockings during the first half year, taking an aggregate 51 days off-hire and costing a total of $3.2 million. We are scheduled to drydock a further 3 vessels during the second half of 2018 estimated to cost a total of approximately $3.1 million. For next year, 2019, we expect to drydock 10 vessels at a provisional cost of approximately $14 million, which includes the installation of ballast water treatment systems on 8 of those vessels as they do not currently have one fitted and which is mandatory for all vessels if drydocked or built after January 1, 2019.

Vessel operating expenses, or OpEx, increased by 4.2% to $26 million for the 3 months ended June 30, compared to $25 million for the comparative 3 months of last year, solely as a result of the increased number of vessels in our fleet. The daily rate for vessel operating expenses for the quarter were $7,530, slightly less than the $7,641 per day incurred during Q2 of last year. The average daily operating expense for the 6 months of both 2018 and 2017 were pretty consistent at almost $7,700 per day.

General and administrative costs and corporate expenses increased to $4.8 million for the quarter from $3.9 million for the comparative period of 2017, principally as a result of foreign exchange movements on non-U. S. dollar bank accounts and for costs associated with facilitating in-house technical management for currently 10 of our vessels.

Interest costs for the quarter were $11.4 million, an increase of over 21% or $2 million compared to the second quarter of 2017, all of which was as a result of increases in U.S. LIBOR. There were also compensatory differences with increased borrowings of approximately $120 million associated with our final newbuildings, offset by regular quarterly loan repayments and lower interest costs following the refinancing of both our bond and a bank loan last year. Our next loan maturity remains in June 2020.

We reported a net loss for the quarter ended June 30 of $3.2 million or loss per share of $0.06. This compares to a net income of $2.3 million for the second quarter of 2017 or $0.04 per share. Despite this loss, the company continued to generate cash and generated $21.1 million cash from operating activities during the quarter and had an EBITDA of $27.2 million, just $2.7 million less than the EBITDA of $29.9 million reported for the second quarter of 2017.

Moving on to the balance sheet. At June 30, 2018, cash stood at $55.1 million, not including a further $38.1 million we had for drawdown for general and corporate purposes on one of our revolving credit facilities.

Since the end of the quarter and following our announcement on May 29 that construction of the ethylene terminal is underway, we have contributed a further $15 million from available cash resources towards the total capital cost of approximately $155 million. This follows an initial contribution of $10 million made in January 2018. This joint venture investment will be equity accounted and is shown separately on the balance sheet under noncurrent assets.

We're currently advancing with the negotiations for 2 debt facilities to finance the remaining capital requirement for the ethylene terminal, one of these being a typical bank project finance facility and the other being debt from an infrastructure fund.

At June 30, total bank debt stood at $732.4 million, along with the $100 million Norwegian bonds.

During the second quarter of 2018, as a consequence of the prolonged downturn in the LPG markets, the recent significant increases in U.S. LIBOR, as well as the additional interest that is expected to be incurred on incremental debt associated with the Marine export terminal prior to it becoming commercially operational, we sought and have received approval from our banks to amend one of the covenants contained in each of the bank loan facilities. The covenant, which required the ratio of EBITDA to be at least 2.5x interest in 1 facility or 3x interest in the other 3 facilities, has been amended to a requirement of 2x interest on each facility for periods up to and including September 30, 2020.

In addition, the definition of interest was redefined to exclude any interest due or payable relating to the debt financing expected to be obtained by the company in relation to its obligations associated with the construction of the export marine terminal. And under the terms of these amendments, the payment of dividends by the company are prohibited until on or after December 31, 2020.

And with that, thank you, and I will hand you over to Oeyvind.

Thank you, Niall, and good morning, all. The second quarter of 2018 continues in more or less the same vein as the first 3 months. Our customer portfolio mix remained relatively confident for the quarter with about 50% of our earning days carrying LPG, 40% of our earning days carrying petrochemical gases and the remaining 10% for ammonia cargoes. About half of the fleet servicing voyage charters, which continues to be heavily weighted towards petrochemical cargoes, as Niall mentioned, was about 80% of those earning days.

We managed to maintain an overall utilization rate hovering above 90%. In theory, a high utilization rate should translate into stronger sentiment in any shipping segment. Both the Very Large Gas Carrier segment and handysize segment are currently experiencing high utilization rates, but with limited effect on the freight rates, which is a conundrum.

At least for the handysize segment, additional factors are at play. Complexity of other ship sizes comes into the equation. Some competition is seen for petrochemical cargoes from the smaller 8,000 to 12,000 cubic meter ship size, and some competition is seen -- has been seen for LPG cargoes from the larger midsized 35,000 to 38,000 cubic ship sizes.

On a positive note, the vast overhang of newbuildings for the midsize segment, i.e., the segment immediately above [us], is coming to an end with only 5 vessels yet to be delivered and rates are starting to solidify, which in turn could ease some of the cross segment competition in the -- for LPG cargoes.

Last week, the 12-month Clarksons time charter assessment for midsized vessels was set at $465,000 per calendar month. Comparatively, the handysize semi-refrigerated 12-month time charter assessment was set at $435,000 per calendar month, a small reduction from $450,000 per calendar month at the end of first quarter.

In the near term, we are focusing on further developing propylene flow from the U.S. with Europe and Asian destinations. We facilitated 2 such incremental cargoes during the second quarter and we are exploring additional volumes, subject to prevailing arbitrage.

A second relatively new incremental strength of business for our segment is that of transatlantic C4 cargoes; and similar to propylene, we have so far concluded 2 Europe to U.S. cargoes and are working closely with our partners exploring the possibility of adding more over the coming months.

We are continuously assisting Mitsubishi in optimizing the ethylene loading terminal schedule in Houston to ensure a maximum quantity of exports given the current restrictive characteristics of that dock.

[Cold] ethylene exported on handysize boat is heading to Asia providing decent ton mile demand. Our current and future earnings stem from our mixed bag across LPG, petrochemicals and ammonia with vastly different supply/demand dynamics. Some of the products are undergoing fundamental change.

And I will hand over to David, and he will give you some color to what we believe are the macro milestones over the next 2 years.

Thank you, Oeyvind. Thank you. Now as you have read and heard, our second quarter was a struggle; and I suspect that the same negative market pressures will be with us for the next quarter or so before we begin to experience a recovery.

Now if you were to believe that the management of your company, the team here in New York, our team in London and the folks in Poland were discouraged, having endured almost 2 years of a slowing market, you would be wrong, dead wrong. Yes, we understand that not much can be done in this current market to turn things around. But we recognize that the seeds we have sown over the past few years, the new specialized vessels we recently took delivery of and the positive shifts that we have entered into, will over the next 18 months to 2 years have the potential of producing near record earnings and profitability. That is a pretty bold observation and it is, of course, conditional upon incurring no unusual delays or incidents.

So what are the milestones we should be looking for on this road to 2020? To begin with, some of our old friends are still drivers in waiting, namely Mariner East 2 expected to open in this year's fourth quarter; ME3 or ME 2X expected to be operational approximately 12 months following completion of ME2.

Another important milestone on our 18-month journey on the road to 2020 is, of course, the opening of our own joint venture ethylene terminal owned jointly with Enterprise Product Partners. Based upon updated construction estimates, we now expect first exports to begin in the fourth quarter of next year with full operation of the terminal 4 to 6 months later. This is about 3 months ahead of our original estimates and, as I stated many times in the past, this is a transformational project for Navigator.

Another key driver, especially for our semi-refrigerated handy vessels, is the continued expansion of propylene exports out of the U.S. Gulf. Oeyvind just covered some of that, but it is being promoted by the current planned expansion and infrastructure improvements that have produced strong interest from the international propylene buyers; and while we have carried only a handful of propylene cargo so far this year, this trade is expected to ramp up significantly by 2019 and beyond. These petrochemical gas cargoes are ideal for our handy semi-refrigerated vessels.

Lastly, but just as importantly, we are seeing serious progress in the development of LPG exports out of Western Canada. Two projects underway are in the Prince Rupert area of British Columbia. AltaGas, a Canadian infrastructure company, is building a propane export terminal on Ridley Island and is expected to be operational by the first quarter of 2019. Product is expected to be railed in from Alberta and exported to Asian and Latin American markets. We expect this terminal to favor Very Large Gas Carriers.

On the other hand, a second Prince Rupert project is being built by Pembina Pipeline company, a large Calgary-based midstream company. This terminal is currently under construction and is expected to be operational by early to mid-2020. While smaller than the Ridley Island facility, it is expected to utilize only handysize semi-refrigerated vessels for its targeted Asian markets. Again, the propane is expected to be transported from Alberta on railcars; and on this, we expect no particular delays.

While we are all aware of the problems the Canadian producers have had in moving product, LPG and natural gas, across the Rockies and into the international markets, the current spat between the U.S. and China over tariffs may give the Canadian provincial and federal government more incentive to coordinate their efforts in order to capture a large share of the export market. The U.S. loss may be the Canadian gain.

All these milestones are the real projects that are actually under construction now and all are expected to be fully operational by mid-2020. If there are no serious delays, the excess tonnage currently played in the handy LPG segment should be fully absorbed and rates and utilization should normalize and profitability exceed -- could exceed that experienced in our last good operating year, and that was 2015. In that year, we generated approximately $182 million of EBITDA and [earned] $1.78, and we did this on 4 fewer vessels and we did that without having the ethylene terminals.

And so that finishes my prepared remarks and I would open -- ask Tracy to open up the conference call for question and answer, please.

(Operator Instructions) We will now take our first question.

This is Randy Giveans from Jefferies. A few quick questions. Do you have the quarter-to-date rates, or utilization now that we're about halfway through the third quarter?

This quarter, the current third quarter?

Correct.

Just a second, we may have something.

The only thing, Randy, we have would be July at this point, but it's -- July is looking like just slightly over 92%.

92% utilization in July. So again, in the right direction.

Sure, sure. Okay. And then for the JV Enterprise, what is the time line for that remaining CapEx? And when do you expect the debt financing agreements to be completed?

The CapEx is in the 6-K, so it's split over the years between now and there's another $45 million payable in 2018 of which, as I just mentioned, we've paid $15 million of that; so $30 million in the remainder of '18, and then $80 million in '19 estimated, and $30 million in 2020. With respect to the facilities, I think we're advancing pretty well and I would -- certainly, before the end of this year and ideally before the end of next quarter, we would be fully done.

Last question here. David, you mentioned the U.S. pain is Canada's gain. What are your thoughts on Chinese tariffs on U.S. hydrocarbon exports and maybe the risks there to Navigator?

The tariff situation is quite a dance at the moment. The issue is -- at the moment there is -- obviously -- it's a political situation. We have an election coming up in midterm and I think a lot of that tariff negotiations are focused around that particular event. Every indication we've had up to this point has been that once the negotiations are settled and a resolution is made, it will be extremely beneficial to both the agricultural industry in America and, of course, the hydrocarbon industry; and big focus on exports of LPG oil and LPG, and petrochemical gases obviously.

Now much of the stuff that is being imposed at the moment is a fungible product. Tariff on oil won't mean too much, because U.S. won't ship oil directly to China. It will be indirect. It is a problem for the LNG, because LNGs will need long-term contracts and -- to build the required liquefaction facilities and the regasification facilities. And I think you're not going to have a major development on LNG for exports until the tariff resolution is resolved.

It's the same way with ethane, because ethane has got a separate market. U.S. is the only country capable of providing large-scale ethane exports to China. And without the proper licenses and contracts that would be flowing out of a tariff resolution, I don't believe you'll see much in the way of ethane contracts. However, propane but particularly ethane -- particularly ethylene, there's such a margin there that I don't believe that, that will be altered much in the short term. I think ethylene will continue to flow there because the margin is -- can easily absorb whatever tariff maximums they're talking about.

It's not a good thing to have these negotiations blocking and stumbling around, because a lot of decisions cannot be made, both in China and in the United States. But I don't think it stops a great deal of current activity, certainly not in the commodity area. So I don't like it. I think it will be a resolved and I think it gets resolved sometime after the midterm elections, but we will see. But it's a good question to ponder. It's an appropriate thing to plan for; and I think out of all of these things, there will be some winners and losers.

I think right now, Canada is going to be a winner. And I think they'll accelerate their efforts. After all, there has been a bit of spat between Canada and United States on tariffs and trade as well. So I think an export outlet on the Western Canada is -- would be a terrific thing for that country, and I think they recognize it. And I think we're seeing cooperation now that we haven't seen before in getting these 2 relatively small terminals up and running, and they will be quite beneficial. Certainly the Pembina line will be quite beneficial for Navigator.

We will now take our next question.

It's Jon Chappell from Evercore ISI. David, first question for you on the terminal. As we get closer to the start-up of that and you provided a bit more information as far as total CapEx and the timing of it and hopefully a bit more visibility on the financing within the next 3 months. Is it possible to give any commentary on the return dynamics of that? How we should think about cash flow generation or impact on revenue once it starts and let's even call it the first quarter of 2020?

Thanks, Jonathan. It's a good question. I hope I can give you the answer and not violate any confidence with our partners in Houston. But look, I think you can look -- one way I've always looked at it is, does it have comparable returns to our investing in a LPG vessel? And our target has always been kind of a 15% cash on cash type of return before we even would look into what the outlook is and how we can improve on that and what kind of financings we could get.

Since we entered into an agreement with Enterprise, we've had some very -- some quite positive developments. Those 2 positive developments were, number one, is we just stated this morning, we're able to get this thing up and running somewhat earlier than originally anticipated, perhaps a full quarter. And the second, which we didn't go into detail, but our cost has come down. The original estimates of that terminal are now -- we're quite a bit under those original estimates. So our profitability, whatever it may have been when we initially set out to construct this terminal, has only gotten better than what our original time frame was.

The returns, you might also look at how we're going to be developing this terminal. The first is, we talk about it being open in the fourth quarter of 2019, and that's true. But it won't be fully up and running at that point because the storage facilities take a bit longer to complete and to construct. So we will initially be operating directly from the chiller into our vessel, which takes a bit of time to load a vessel. So instead of 1 day, it may take as much as 4 or 5 days, but it does generate cash right away. Once that storage is complete, we can put product into the storage and load a vessel directly from the storage tanks; and therefore, we get it in 1 day. So you won't see the full impact of both earnings and cash flow until probably second quarter of 2020, but you will see cash generation in the fourth quarter of next year.

We have, of course, as you know, a strategic value, and I can't overestimate this, the strategic value of having control of that export terminal in a very valuable product such as ethylene. It gives us obviously a great advantage to be able to lock in our ethylene-capable vessels. And we -- as you know, we have the largest tonnage of ethylene carriers in the world, and the only big 4 of the midsize ethylene carriers available.

But it also is a window. That terminal is a window on all things petrochemical, working with Enterprise and the people who approach Enterprise, the people who approached us on gaining these products, share with us all of their concerns. So we are in such a unique position that we have an opportunity to scale out all these opportunities and rate them and work on them with those customers and potential customers. So it is a multifaceted and complex asset that we have that I think is going to produce far beyond what would -- might just seem an asset that can generate cash.

That's very helpful, David. And then just a follow-up on something you alluded to before. With the financing process underway right now, I think it becomes a bit more real. And as -- when you think about the timing of chartering your fleet versus a broader kind of industry tender, how much before the start-up of the terminal would you think you would need to have the transportation in place?

Yes, Oeyvind has been working on that on a regular basis, Jonathan. And I think it's appropriate that he cover that one, if that's okay.

Yes, sure.

Jonathan, so on the ethylene side, this whole project related long-term contracts in discussions. I think over the last quarter or 2 quarters ago, we talked about one contract, which is in place. But for sure, many of the offtakers and potential offtakers are very keen to explore the freight element to logistics or the extensions of the pipeline to their destinations, primarily in Asia, but also in Europe. And it's all long-term.

So the advantage we have is obviously because we're the joint venture partner and so forth, but we also have the assets on the water, so there's not a chance of delay and so forth. So the discussions are definitely ongoing. We expect to have things -- more of these contracts in place before this terminal commences next -- last quarter next year.

Okay, but probably more of a 2019 event than a second half of '18, you would think?

Well, we shall see. We're working hard on it. So we'll let you know.

We will now take our next question.

Ben Nolan at Stifel. So I just wanted to follow-up on a few things actually, following on Jon's question. I believe, Oeyvind or David, that there are 2 offtake agreements on the terminal itself, at least as I recall, which make up, I don't know, around or a little less than half of the total capacity. Has there been any evolution in how you're thinking about the remainder of that capacity? Is it -- any portion of that, that you and your partner would be comfortable marketing on your own? Or how should we think about the rest of the capacity?

I'll take this. There is a lot of interest in those surplus available tonnage, okay? In spite of our not having lined up specific contracts at this point, there is a terrific interest in it, and there should be. There should be because the spread, the arbitrage, the difference between U.S. ethylene and ethylene that you can source in Europe or the Far East, is so wide that it is just very, very tempting. The pressure has been from us -- is to get that terminal up and running earlier than later. And that's why we're going -- we're making all these efforts to pump directly from the chiller into the ship, and we're making all that preparation so we can get product going quicker.

Now as far as how we want to sell that excess that we haven't sold at the moment and we're negotiating it, you can argue that -- I won't say argue, you can have a discussion between what Enterprise would like and what we would like. I think right now, we're both committed to sell down a good portion of that 50% that is not committed; sell down under long-term arrangements. We both [eye] that spread, I'm sure. There is a big spread and whether or not the spot market for some of that would be appealing for us. And I think, we're early; for most of the major midstream U.S.-based companies, international markets are virgin territory and Enterprise is no different.

Most of these companies are very parochial in their approach and it's understandable why they are parochial. They're parochial because they built themselves around the MLP structure, and the MLP structure favors U.S. operations for maximum tax advantages. I believe that we are now making upgrades into the international markets by all the midstream companies. This is going to be a gradual move; a move that is small steps. Export terminal is one of them. They're the propylene terminal and the propylene production, the PDH plant, that Enterprise is doing is another example targeting the international markets as opposed to domestic markets.

But if sustained growth is going to be needed by the midstream companies, they must reach out. And what that will mean is a different way of marketing over the traditional methods that they've used when they were so oriented towards U.S. markets exclusively.

So I think the first stage, Ben, will be the lockup. I don't think there's any disagreement between ourselves and Enterprise. The first stage will be the lockup, fairly substantial portion of the capacity of the terminals. Maybe we allow some to be available to spot market, maybe.

But then I think there's a whole different route to be examined and followed perhaps and that is reaching out to all international markets. And do the midstream companies try to duplicate what they've been so successful doing in the United States with their infrastructure deals, with their fee-based income? Would that be extended? I think that's the real question is where we are going with the international companies? Where were we going with the U.S. midstream companies in their reach, the unavoidable reach into the international markets.

That is a whole avenue of excitement I think and potential for ourselves and for the midstream companies. Boy, I don't think I've answered you very precisely, but I can get fairly (technical difficulty) about what I'm seeing in our own potential of being a participant in that movement.

Right. Okay, so -- and then, switching gears briefly, David, you had mentioned that there had been a handful of propylene cargoes, but you're expecting there to be more as the ramp-up of export capacity adding on [United States] increases. Is it at all possible to quantify what that might mean in terms of where we are now versus where you think we might be in terms of the cargo count a year or 2 years from now?

I think the suggestion -- at least what we're seeing with both the suppliers, producers here and the consumers is potentially 1 to 2 cargoes a month at its height, which -- and 1 voyage to Europe is 30 days. So of course, it takes the ship out. If it goes to Far East, which is a puzzle in itself, but we've seen some demand from Far East for propylene from U.S. That's a two-month job. So each cargo -- incremental cargo has quite an impact on this segment. As you recall, it's only 110 ships. So if we take -- we start ticking off single-digit ship numbers, of course, it will start having an impact. So that's what we're looking -- that's kind of the volume which is being envisioned if the arbitrage is there. But 2019 onwards, that seems to be the suggestion.

Okay, that's 1 to 2 cargoes. Maybe...

Yes. In the Enterprise conference call held last week, they did talk about keen interest on propylene exports and the profitability of that and their vision that there will be greater propylene export, so much so that there was talk around the conference call of whether or not Enterprise would perhaps even build another PDH plant just for the export markets again.

So it again is the force whereby United States, with their low hydrocarbon prices, with propane prices as cheap as they are, is an attractive manufacturing base for petrochemicals. And the basic market would be for the United States, but surplus to the international markets and everything crossing the dock to go there. And we want to be right at that dock with all that -- with the vessels to carry into those markets. It's happening, it's accelerating.

Okay, David, and then lastly for me and I'll turn over. Niall, I might have mentioned -- I might have missed it but in there you were talking about making good headway on the facilities -- on the credit facilities for the export terminal. Is it -- could you maybe put a number at least roughly around how much capital you might envision that being? Just trying to work through sort of what the cash component off your balance sheet will need to be for the remainder of the CapEx.

Well, as I mentioned earlier, the total expected cost at the moment, Ben, is $155 million, or at least our share is $155 million or thereabouts. We have paid to date $25 million. So we're looking at facilities to cover the balance.

We will now take our next question.

This is Fotis Giannakoulis from Morgan Stanley. David, I want to follow-up a little bit on the Chinese tariffs on LNG and the impact that they can have on creating an incremental demand for LPG carriers. I'm wondering whether a potential increase in citygate prices for natural gas in China can have any meaningful impact for your sector.

No, I -- look, not that I can see, Fotis, the -- listen, the LNG that will go there -- and it will go there eventually, I don't -- I can't see us at a trade war for very long, but I'm surprised at the intensity of the war right now. But on the assumption that it tails back and we have somewhat a percent of settlement here, the LNG market will go for a variety of -- so it -- U.S. LNG will flow to China principally for power generation and some petrochemicals as well. LPG to China for power generation I just don't think makes sense. I don't think that will happen. It will be LNG and LNG only. LPG would be used for a more valuable upgrade into petrochemicals as we've seen with feeding the PDH plants.

The question always is, why do they build PDH plants in China and import propane? Why don't they just import the propylene? Well, China is unique. The reason China is unique: it's got a central government and a controlled economy and they like to create their own jobs. And so we will continue to see the raw material as we will see with ethane going into China as well. And the only source of ethane in the kind of months that they're looking for is the U.S. There's no other country can supply them with the ethane.

But all of this is very fundamental and very determined upon a settlement with some degree of resolution quickly. If it is not resolved, any of the new ethylene crackers that are planned for China will be done on naphtha, not on ethane, which is not going -- is neither economical nor is it environmentally friendly.

So I think the big thing will be whether or not we can come to a resolution quickly. The demand for U.S. ethane into China is real. It is significant. And it is very determined upon a resolution, a friendly resolution with a tariff situation that we have. And unless that happens, it's not going to flow. So I think that's the issue. It's not so much how we -- how LNG impacts us; I don't see quite the connection there, Fotis.

David, then switching a little bit on the improvement of the LPG or especially on the large sizes sector, the VLGCs, the last few weeks. You mentioned earlier that you expect one more quarter of weakness, is that correct? Is this sort of a confidence that the market for LPG shipments is turning around towards the end of the quarter? And is this increase in VLGC going to make eventually its flow to the midsize carriers?

I'm not sure -- look, it's all about volume for the Very Large Gas Carriers, totally about volume, and, of course, ship capacity. The volumes that will make a different in the -- the incremental volumes for the Very Large Gas Carriers have to come out of the Delaware River or Marcus Hook. And that's ME2, ME3; 275,000 barrels on ME2, that will cure a lot of problems, another 275,000 barrels for Mariner East 3. Until those volumes get cranked up, I'm not so sure that the VLGC market will be as strong as we have seen it in the past.

We don't compete, as you know, with the VLGC market. But the VLGCs do compete with the midsized vessels, the smaller midsized vessels, who in fact have taken some of the cargoes away from us. To extent they take it away, that's just the little less LPG and not a -- it's not a great amount, but it's enough to take the edge off of our trading and our rates and that's what's happened over the last couple of years. Now if they get better -- and they can get better by having more volume; and the volume will probably come -- hopefully come by the end of this year, when we see the Marcus Hook facility open. And then those Very Large Gas rates can continue to be supportive, midsized rates, and then we won't have that little cutting edge from the midsize taking away that extra little volume.

And it does -- remember, we only have 110 handysize vessels. So if there is someone, such as midsized vessels taking 5 or 6 cargoes away, that hurts us. When they go away, it helps. That's why I'm so confident about what I see over -- into the road of 2020 because I see these incremental things coming in our favor finally. Yes, we'll get more volume from the handysize out of Marcus Hook. It won't be nerve shattering -- it won't be a game changer for us, but it will be enough to start to clear the excess tonnage in the handy, which my guess is maybe 6 or 8 vessels too many in the handy space.

When you start eroding that excess capacity by 2 or 3 vessels out of Marcus Hook, propylene needing a couple of ethylene vessels, going to be taken away out of the spot, handy ethylene carriers will be coming out of the spot market and going into long-term ethylene trade. The opening up of the Pembina -- particularly the Pembina in Western Canada, that's all handysize vessels and it's all going to go to the Far East and probably absorb 6 vessels there. You add them all up and you get a shortage. And that's where I'm so optimistic about. It's just the small incremental things, all working gradually in stage over the next 18 months to 2 years. It's nothing -- no one big event, it's these small ones, it absorbs, these incremental 2 or 3 vessels that will take away the excess tonnage, which I expect and believe it's probably only 6 or 8 vessels in the handy sector, Fotis.

So I am quite optimistic. And this is all on the plate, these things are happening now. We're -- not have to wait from them to start; they are in the process and let's hope that nothing gets stopped. But I think it's a good time. I think it's (inaudible) I don't want to call anything the bottom, that's too dangerous a thing, but I feel very good about the next 18 months, how it will change fundamentally and incrementally for us.

We will now take our next question.

It's Mike Webber from Wells Fargo. Long call already, but I did want to dig back into both ethylene and then the change in your covenants. So maybe David, starting with you, when you were describing the ethylene facility, the last few quarters basically 50% sold with a pretty strong backlog behind it, which is what helped get EPD over the line. Can you give us a sense of how much of that backlog is Chinese?

Well, zero. Zero is Chinese. Whether it winds up there or not, I cannot tell you. All right? It may very well go to China, but the offtakers are not Chinese, if that's what you're referring to.

Yes, maybe taking it a step further, I mean, realistically to what extent do you think -- if we assume it lasts to the midterms and maybe at that point through the end of the year, does this create some mix shifts within that backlog? Do you think you'll see anybody move out or step in as a result?

No.

No, on the tariffs there, Mike, so most of the polyethylene is being taxed, or on the tariffs. So it's 25% or something like that; same on ethylene, an absolute relative proportion -- so the -- if the competition is polyethylene and a ton of polyethylene to buy from the U.S. is $900 a pound or whatever. So the 25% is more [detrimental] than 25% of a ton of liquid, which is $300, $400 today, so...

Helps the relative math, I guess, yes.

So in that sense, it's a good thing, quite frankly. But going back to David.

I'll quote you on that over the next (inaudible). No, I'm kidding. The -- that makes sense. So the next question, I guess, is more for Niall just around the change in your covenant and the restriction on distributions through 2020. In looking at -- you got a half turn back, I guess, on your interest coverage ratio and you got the exclusion of the export terminal debt. But looking at our numbers and stress testing them, it didn't seem like -- I mean, you could have gotten certainly below 2.5, but it wasn't set to plummet by any stretch.

So I'm just curious, it seems like a pretty steep price to pay and I'm curious as to whether -- just how that conversation went? Or did you encounter, I guess, a more difficult conversation with your lenders than you expected? What did you -- aside from simply just being able to exclude the export Marine terminal debt from that calculation, maybe just a little bit of color on that, because it just strikes me as being a little bit expensive just given where your coverage actually was.

What in -- in not -- in having a dividend prohibition, you mean?

Yes, for the next 2.5 years, right? So it's a significant period of time.

The last time we paid a dividend was 2007.

I wasn't planning on paying a dividend any time soon, Mike, if you --

No, I understand, but it's next 2.5 years, right? So if you're right in the market turning in -- for the next quarter or 2, right? You're looking at a 2-year ramp where your hands are going to be tied around that and obviously there are things you can do. But typically giving up that degree of control, usually, is something that the management teams don't like to do. I can understand why you might not view it as a particularly large cost; I'm just curious just how that conversation went.

And then maybe that's the answer. Maybe you just don't view it as particularly large costs, I'm just curious, because we don't often see that sort of restriction on a covenant that was maybe by 0.1 or 0.2 of a point, you could [reach] in the next couple of quarters.

No, I mean, the -- you're right in terms of the level of the covenant. We got it down to below where we would expect it to go any time -- on any scenario over the next couple of years. The calculation of the interest coverage is a trailing 12-month basis, which is why it needed to go out to September 2020, because that incorporates -- that would incorporate the back end of 2019. So to get clear of that, it's really 2018, 2019 was a sensitive part with that covenant, but we needed to get 2020 because of the trailing fees.

It is quite normal that if you're looking for an amendment of a facility like that, that the dividend restriction would be for the duration of that amendment period. If you're asking the banks for something then they don't want to give you something in a covenant amendment and then for you to distribute it all away or excess cash away to shareholders.

And Mike, can I add to that? You're right, dividend I don't envision here in the next couple of years, period. Okay, so why? I outlined what my strong view is how optimistic I am over the next 18 months; that we're going to recover, and recover in a very significant way with everything that we are working on today that is in place, that's in place, the constructions are going on in all these projects that will add this incremental business to us. And that we don't have -- except from the terminal, we have no exceptional expenditures. Our newbuilding vessel is done. So you would argue in your position that maybe I'm going to be -- we're going to be generating so much cash that we could pay.

But what I didn't discuss, which adds just another very strong bullish case, is the projects that we didn't discuss, the projects that are not under construction but are under discussion; and there are a lot. There's potentially new construction, all kinds of projects that we are working on. Our plate is full with potential delicious morsels of expansion and opportunities. And what clearly is in conflict to carry and do those at same time as you would be thinking about a dividend.

Yes, I think, the question wasn't why won't you be paying a dividend in the next year or 2, but it just seems like giving up the optionality to do that, right? It just -- it seems -- it just stuck out to me, that's all. I understand what you're saying. It just seems like a -- it seems something that most companies in this space seem very hesitant to do and to just giving up that tool at least for a 2.5 year period. But I certainly understand what you're saying.

Well, change was agreed to in a couple of days and we'd just put it -- and I never thought it was an issue. Because as I just told you, I don't envision it because I'm -- we've got lots of things going on.

At that point, if you're done, Mike, I'm going to thank you for joining us and the rest of the people on the phone, because our time has run out. I love to see everyone and let's watch this road and the milestones as we develop. Thank you. Tracy?

Thank you. That does conclude our conference for today. Thank you all for participating. You may all disconnect.