Scorpio Tankers Inc (STNG) 2012 Q2 法說會逐字稿

Good day, everyone, and welcome to the Scorpio Tankers Incorporated second-quarter 2012 conference call. Today's call is being recorded, and at this time I would like to turn the call over to Brian Lee, Chief Financial Officer. Please go ahead, sir.

Thank you for joining us today. This is Brian Lee, the Chief Financial Officer of Scorpio Tankers. On the call with me are Emanuele Lauro, Chairman and Chief Executive Officer; Robert Bugbee, President; and Cameron Mackey, Chief Operating Officer.

Before we begin I would like to direct your attention to our customary disclaimer concerning forward-looking statements, on slide 2 of our presentation, which is available at ScorpioTankers.com. The information discussed on this call is based on the information as of today, July 31, 2012, and contains forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statement disclosure in the earnings press release we issued earlier today as well as Scorpio Tankers' SEC filings.

All participants are advised that the audio for this conference call is being broadcast live on the Web and is also being recorded for playback purposes. An archive of the webcast will be available on the Investor Relations page of Scorpio Tankers' website for approximately 14 days.

Now I would like to introduce Emanuele Lauro.

Thank you, Brian, and thanks, everyone, for being with us today. As you are already aware probably, we've released our second-quarter earnings today. If you need a copy of the press release, you can go to the Investor Relations section of our website; that is www.ScorpioTankers.com.

Before I begin I would like to make you aware that management is not in the same location today, so we apologize in advance for any communication disruptions which may occur. What I would like to do is first go over the presentation that is available on our website and then open the floor for questions.

So, starting with the presentation, if we start at page 3, we are going to tell you why the MR market indexes cannot be relied upon to reflect actual earnings or to reflect the vessels actually -- how vessels actually trade. We are going to talk about how traders and end-users view the market these days, whether they are increasing or decreasing their exposure to the market.

And we're also going to give you a comparison of the STI Coral, which is an MR built 2008 which we have just sold, compared with an eco-newbuilding which we have just taken delivery to, or just ordered another two additional units. We are investing and reallocating your capital into new design assets, and during this presentation we will try to explain why.

On page 4 you can see all the product tanker routes which are published by Bloomberg or the analyst reports. This is probably the maximum degree of transparency which the product tanker market offers to investors, shareholders, and other stakeholders.

If, for example, in the second quarter of 2012, we had only used TC2 as a benchmark rate, we would have achieved $8,000 a day, or slightly above that, as an average for the quarter on an MR tanker, as opposed to the $13,200 a day which we have achieved ourselves at Scorpio Tankers.

Now turning on to page 5, we see that, for example, the MR market is highly diversified, not only in terms of routes but also in terms of the variety of transportable cargos available. In the past earning calls we have talked about new trades and new routes coming into the market or which we are seeing developing in the market, and we can confirm that we keep seeing these developing.

We have growing demand from emerging economies and new sources of cargo supply and demand. All of the above results in higher actual earnings achieved through triangulation, maximizing utilization and cargo opportunity, as opposed to the average returns provided by the indexes, as indicated above.

Turning on from page 6 to page 10, we actually outline the traditional as well as the new routes which we are seeing in the product tanker markets -- the ones we are experiencing. You will see that whilst a lot of the routes are present in the indexes, a lot are actually not.

Switching on to page 11, we have put out an example, or maybe we can call it a case study, for the Pacific Duchess. The Pacific Duchess is a ship which STI has on time charter.

We have taken delivery of the ship in March in India, and we have fixed her for the first cargo loading out of the West coast of India into the Arabian Gulf. This was a cargo which was -- we were carrying gasoline. After that, we have fixed the ship with a jet fuel cargo from the Middle East into Brazil.

We were able to reload in Brazil and discharge in Bangladesh a veg oil cargo, after which we had to go to Indonesia to reload veg oil and discharge in Rotterdam. As you can see, none of the performing voyages of this ship is present on the standard reported routes.

We understand that this lack of transparency in our markets is frustrating for you, or for our shareholders and potential investors, and is definitely not beneficial for companies like ours. This is the reason why we're trying to open our trading books with you in an attempt to make you understand what we do and how we do it.

Turning on to page 12, we can see that the level of time charter fixtures in 2012 has increased very much compared to the year before. We are at 128 fixtures for more than one year from -- in 2012, which is a testament of increased confidence by charterers in the product tanker market.

Lastly on page 13, we are giving you the comparison I was talking in the executive summary. We have put together two ships, the STI Coral, 2008-built MR which we have just sold, and a newbuilding; for example, the Amber, which we have taken delivery on the July 18.

We can see that if we take the average TC2 Worldscale rate for this year, which is 130 points, and we use $670 per tonne for bunker assumption purposes, we can see that the Coral, the old-generation ship -- but still modern, 2008-built -- equals $7,530 a day as opposed to the time-charter equivalent of a newbuilding, which is close to $11,200 a day. Now, this difference of $3,650 or $3,660 a day is actually very significant.

And not only that, but we have also in the newbuilding another positive factor, which is the reduction in OpEx, which -- from $500 to $850 per day cheaper, it is cheaper to run a newbuilding than a five-year-old ship. And this equals in a potential EBITDA differential between the old and the new ship of in excess of $1.5 million per annum.

Now, I have been myself at Hyundai Mipo, which is the yard building our series of 10, now nine, newbuildings, because we have taken delivery of one. And I'm extremely pleased to report to you today that the quality probably has exceeded our expectations. We were able to get more than what we wanted.

We have been discussing about quality and fuel savings for a while. Now that the first ship is on the water and it has successfully passed the sea trials, we can actually talk about actual results, rather than fantasizing about whether this will, would, or would not have happened. So we are again extremely pleased to report that the quality of this ship has exceeded our expectations.

Operator, I would like to turn the floor now to questions, please.

(Operator Instructions) Doug Mavrinac, Jefferies.

Thank you, operator. Good morning, everyone. I just had a few follow-up questions to your presentation, which I thought was very, very helpful and insightful. And actually my first question pertains to the explanation behind why you guys have been able to so far exceed the benchmark routes to date.

The question is, is there a way to decipher how much of that outperformance is due to your modern ships? Or how much of it is due to the fact that you have new routes out there that you are servicing that there may not be as much competition within?

Or how much of it is due to the simple fact that there are so many backhaul opportunities that you are able to achieve better utilization levels and then therefore better earnings? So is there a way to decipher how much of that outperformance is more weighted towards one or the other of those three factors?

Emanuele, shall I answer that?

Sure, sure.

I think that all three obviously pertain. Because we have got a modern fleet, but the key driver is that the modern fleet that you have actually allows you the opportunity to take the diversity of those different routes and cargoes.

In other words, we have a very wide spectrum to choose from. Our fleet, being modern, can carry -- it is not prohibited from carrying the same cargo as an older ship would.

And we have a very -- and then the actual route itself just has all these triangulation and cargo opportunities. So it is a little bit like the market itself is giving you the opportunity, but unless you have the modern vessel and a chartering department that has the contacts with the traders and the bandwidth to get those phone calls, you are not going to be able to take the opportunity.

Got you, got you. That's very helpful, Robert. Thank you very much.

Then, just sticking with the theme of the more modern ships that you guys are investing in, just a directional question. Is it fair to say that, just given the increase of modern capacity that you have, that even if market rates stay flat, that the earnings that Scorpio realizes perhaps a year from now or two years from now could increase just as your fleet, the modern age, improves?

Yes, just simply because you would have expected that, as Emanuele pointed out in the presentation, that if you took the second quarter -- if you had had one of those new eco ships in that quarter trading spot, all things being equal it would have earned significantly more. And not just by the fuel efficiency factor, but also because it can carry the widest spread of all, with brand-new tanks and brand-new pump systems, etc.

Right, right. Thank you. Then just two more questions.

First, Emanuele mentioned the increase in time charter inquiries this year. Just as a follow-up, are we seeing that inquiry interest going out in duration? Are we seeing guys trying to lock up for more years, rather than just one year or so, as well?

It's a combination of both, Doug, actually. We are seeing more activity, definitely. As I said, 128 fixtures.

But also as you say, duration for which charterers and end-users are out there to seek tonnage for has increased. So a lot more three- and five-year deals than what we saw before.

Okay, got you. Thank you very much and then just one --

And I would -- sorry, Doug. I would have thought that, from what the chatter we are hearing, we would expect increasing evidence of that coming in the next two to three weeks.

Okay. That's very helpful. Thank you, Robert. Then just one final question before turning it over.

During the quarter, you guys successfully extended the credit facility, which in this environment is quite an accomplishment. My question is, are there any anecdotal data points or stories that you can share that would give us some insight as far as -- you guys were able to get it done and you're in obviously a very strong financial position. But just with that process, what takeaways could we basically glean for the rest of the industry whenever they are going through such a process?

I would say obviously the first thing is we have been supported by our lenders. So it is clear that if a company is showing that its capital commitments are funded, it's positive, it's got a modern fleet, I think where a bank can, with strong relationships, it is going to try and follow on.

However, what I would also say is two takeaways. In the process, it is increasingly clear that there is going to become a dividing fork in the road between how you can finance a present ship in the water, i.e. a non-eco-designed vessel, and these eco designs in the future. So, you will get better, preferential terms on the eco design than ships in the water.

Secondly, the process itself -- I mean the lending area is pretty stressed, and they've got various structures and various committees to go through. So the process itself is -- even with good people, what we learned during this is anything to do with credit, even if you've got access to it, just takes longer.

I mean we had the great goodwill of banks working and great support from them. But the time and administration to -- in the application process is much more cumbersome today than I've ever seen it in the industry.

Got you, got you. That is actually very, very helpful. Thank you for the time, both Robert and Emanuele.

Ben Nolan, Knight Capital.

Hey, guys. Thanks for taking my call, first of all. I had a couple questions.

First, as relates to the vessel that you guys took delivery of a few weeks ago, have you -- is there maybe any empirical evidence that you could maybe point to just -- and I know it is only two weeks into it. But just in terms of maybe relative performance with respect to what the charterers are willing to pay or have thus far been willing to pay for that vessel, as opposed to similar vessels that might be available in the region?

Yes. No, I understand the question. The question now is -- great, you are willing to put up on a Board slide that these things actually work and they are better than what you expected; but does that mean the customer will pay for it? Will you get the benefit?

Okay.

And the answer to that, our empirical evidence by contract is yes. All of our vessels that you are seeing delivering now are fixed on short-term charters, whereby not only is the present rate much higher than the present rate there is in the market, but also in the contract itself we get the pass-through benefit even if it exceeds the actual warranted speeds we put into the charter.

So here on a spot basis you are getting 100% benefit of the fuel efficiency aspect. And there is no reason to think on any spot market trade you wouldn't. I mean, maybe if you were building a vessel specifically for a major that was, for example, giving you a five-year charter and letting them use their balance sheet to fund your entire purchase, yes, maybe you have got to give a little bit.

But in the spot market, it is just the same. You don't get into a taxicab and ask the taxi driver what his expenses are and base that fare on that basis.

Yes. Yes, you're absolutely right.

I think it's a great question. This is a total crazy thing that is going to people's minds. The spot market is the spot market. It is dollars per tonne, dollars per barrel, Worldscale rate, or whatever.

In fact, we get a benefit. You're certainly not going to give et a discount when you are presenting a customer with a brand-new vessel. There should be less risk of cargo contamination on them, for example.

Yes, certainly. And just to -- not to belabor that point, but to -- as the fuel savings are passed through to you, as it sounds like they are, have thus far you been able to realize the fuel savings that you expected to realize?

We have -- as Emanuele said, we are more than pleased with what we have had delivered. And the calculation that we put up on the slide, we are comfortable in having that in a presentation format, on that theoretical voyage basis. And we so far haven't shown you through the whole process any tendency for exaggeration.

Right, and I --

And we voted with our feet. I mean literally the moment we had that ship in the water and had validation beyond the sea trials, we crunched that order in and sold the Coral and the Diamond.

Right, and that is actually what I was going to point out next. I mean clearly you are putting your money where your mouth is. So that is helpful.

My next question I guess relates to the state of the market. I guess, we have seen the larger LR2 and LR1 rates pick up a good bit, but at the same time it seems as though some of the MR and the Handy rates have come off. First of all, any color that you might -- can provide as to why that is happening?

Then secondly, is there anything going on, whether it is Carlyle buying a Sunoco refinery, or maybe demand softening, or anything else that is giving you any cause for concern or pause as to the validity of the product tanker argument, I guess?

Okay. What I would do is caution people at the moment to look at this on an absolute basis, saying -- okay, rates in TC2 and TC14 have come off since 2Q. What I would do is look at this in relative to where the market was last year.

Look at it, and take a little bit of the guidance that Emanuele had given you that, frankly, statistically TC2 and TC14 is only representing between 15% and 17% of MR listings. And you've got this great expansion of Southern hemisphere triangulation, period.

So we know always that the third quarter is the seasonally softer quarter. We have already stated that the markets are higher than last third quarter.

And then I would look at something truly significant, which is that the AG/East, those power trades, clean petroleum product, naphtha on the big ships, AG/EAST have got their first bid under them since 2008. I mean, those vessels have turned from $6,000, $7,000 a day, barely breaking even, to at some point into the midteens, which does a couple of things.

That stops vessels coming into the West. It also takes vessels out of the Northern Atlantic into the Southern trades and the East. Now, where that sets up a situation that if you keep a bid under AG/East going into September and into October, and then you move into the seasonally stronger periods in the Northern Atlantic, that can set yourself up with some very steep rises in the Northern hemisphere trades.

So for our side we are seeing this as a cup half full, based on the strength East, the strength of the new developing trade, the relative earnings at this point to the market in what we know is a seasonal industry to last year, as opposed to the absolute number of TC2 to downwards. And that --

Perfect.

-- from second Q. And of course, what we like to see in terms of validation, the time charter activity and the lengthening of the trading books from the traders and the oil companies.

Absolutely. So, I guess the answer is there is nothing that is causing you to think again.

Oh, sorry, in terms of refineries, in terms of refineries, I mean -- look. It is like only a question of less good news.

You've still -- Northeast is uncompetitive. You've still got some positive development, but you don't know what to weigh off.

We had an announcement earlier in the week that we didn't expect, didn't ever talk about. It was Australia shutting down refineries and taking things in. It is a wild world right now.

Our first ship, the Amber, the charterer as I said is [primarily] palm oil. That ship actually is going to do its first voyage carrying caustic soda from China to Australia, and then go to Malaysia to load palm oil. I mean it is a wacky place, but it's fun.

Yes, well, that's good. Okay. The last question for me and I will turn it over to somebody else. But with respect -- you guys have obviously been pretty busy chartering in vessels, while obviously selling a few vessels as well.

Can you maybe just walk me through the thought process of how you are thinking of chartering in vessels at the moment? Both in terms of duration and how that fits into the decision to sell those vessels, and whether it was even considered to maybe do a sale and leaseback on those. I don't know. Just what is the thought process at the moment with respect to the charter (multiple speakers) ?

Okay, so the first one is pretty clear. That when you take into account the newbuilding, the pricing, it is just a really easy trade for us to say -- you know what? The equity is better off in the new eco ships than it is in the Coral and Diamond.

The second aspect to a sale and a leaseback, you know, you do a sale and a leaseback and you're probably going to pay someone else 17% or 16%. So here, you have an active time charter market where we know there are still people there that want a time charter out, and we really do what we have done before.

When we can sell the -- we will sell the Coral and the Diamond. You can hear our optimism and conviction in the story.

So we will replace that operating leverage by time chartering in vessels at less than you could probably do a sale or a leaseback. And we don't really want to go into too much detail at this moment, because -- rather than leave it that we are actively engaged in maintaining and increasing the operating leverage in a balanced manner.

Okay. All right, I can --

And I appreciate you --

I certainly appreciate that.

(multiple speakers) through the lines on that one.

Yes, yes, certainly. All right. Well thank you, guys, for taking my questions. Very helpful.

Randy Laufman, Imperial Capital.

Thanks, good morning. Just a couple of questions. One to touch on the broader market position, particularly in the MR class.

We have heard reports of some increased ordering, as the MR class seems to be a popular class of vessels. I was wondering if you could touch on the supply environment and if we are seeing some -- a greater order book outside of you guys and the MR class. And if you could comment on the comparability of those new orders to your eco-designed newbuilds, and if there are any competitive assets out there.

Yes. Firstly, I think the thing to remember in the MR market is it is a huge market. MRs and Handys are in the thousands. It's not a small market like the Suezmax markets or Aframax market or LNG.

So, here you've got probably 80 -- you are still in the mid -- in the low single digits for what is on order for each of the particular years. There is hardly anything on order in the Handys or the LR1s or the LR2s. So overall product ordering is definitely going to be in the low single digits.

And just to keep going just at 5% or whatever, you're going to have to throw out 80, 90 orders a year in these MRs and Handys. So you're going to have to get used to headlines of so-and-so orders three, or so-and-so orders four.

And that may seem as if you are having a building supply side. But supply growth through newbuildings is really being kept in check at the moment.

The people who are ordering are pretty strong players. Credit is tight. There are not many of them, really.

I don't really want to get drawn into comparing our orders to other people's orders. The people who've ordered -- people like John Fredriksen, the Ofer Group, the Martinos family, these people are fantastic shipping groups over time, and we are confident that they too are building good ships.

The only thing I would say is that in terms of the public companies -- I mean, I don't think you're going to have access to Ofer; you can buy Frontline '12 if you want to. But in terms of the public companies, we are clearly the leader in terms of percentage of fleet in the eco design, and we lead our competitors by about 10 months in terms of the first vessels in the water.

Great, thanks for that color. Just adding on to that, as we look into the other classes of vessels, looking at LR1s, are you finding any opportunities maybe to expand the fleet in those classes and some of the bigger vessels? Or are you still just primarily focused on the MRs?

We could find time charter opportunities in the LR1s and the LR2s. Right now we are benefiting tremendously from ordering sister types in Hyundai on the MRs. At this point in the market it's, let's say, the best risk/reward element to do MRs because that is the one that has -- those are the vessels that have the most flexibility in terms of diverse cargo and opportunities, and those are the first vessels of choice by the traders.

That isn't to say that the other two markets are -- they are developing pretty well. There is not much ordering, and the underlying fundamentals are improving in those markets, too.

Right. Maybe to look further down the road, when we talk about some of the fundamental drivers of the product tanker market and the global shift to refining capacity and elongated trade routes, is that going to maybe longer-term, maybe three, four years out, is that going to really be positive for the bigger class? Or you think the MRs are going to be able to really benefit from that elongation of trade routes as well?

I think they are all benefiting. I don't think you have to look three or four years out.

It is a pretty violent strengthening in those LR2s are happening in the East at the moment. From nothing to $15,000, $16,000 a day with hardly any vessels on order into an overall strengthening demand curve.

It's a -- I'm pretty confident on the broad product market, and I don't think it matters. I think we really want to have the LR2 market trading strong, because then the LR2s won't come and cannibalize the MR trade.

Products is -- it is rather like the crude oil market. It is impossible really to have a strong Aframax or VLCC market or Suezmax market if the VLCCs are getting crushed.

They all ultimately rise or sink on the tide. It is just that we think the MRs have that greater flexibility right at this point.

It is not -- we are not selling the Coral and Diamond either because we think -- the buyer is a very smart buyer. We would expect that that trade would make money. It is just a better utilization of capital for us.

Got it. Great. Thanks for that color. That does it for my questions.

Herman Hildan, RS Platou Markets.

Hi, guys. Just one question first. We know that we have low supply growth on the product tanker side next year. We have also seen a large part of the Pacific crude newbuildings have taken product cargoes.

Do you have any -- can you quantify how much product trades have been taken up by newbuilding (technical difficulty) routes in the crude sector?

Well, you can't really quantify it. But you would expect virtually all the AG-to-UK/Cont gas oil is being taken by the crude. But it's a little bit difficult for them to be taking -- if they are uncoated, to be taking the naphtha and the clean petroleum to the East. So they can load off their first voyages and, you know, thank you.

Yes. I mean it's a good reason to be optimistic at least on the low supply growth next year, if you're both having product tanker supply growth coming down and also you get this artificial supply from the crude sector going away as well. So that is really why I was wondering on the LR side will you continue to own (multiple speakers) ?

I think the LR is having -- that is the thing that is incredible. The crude market isn't doing great, so there is still taking gas oil cargoes, the newbuildings that are delivering. But the Aframaxes themselves, their delivery effects on crude actually start declining. So that's beneficial for products too.

And also one question on the newbuilding side. I mean the example that you are giving is indicating that you are saving about 5.5 [tonnes] per day on the TC2 with I guess 14, 14 .5 knots, right? That is the speed assumption that you have used in your example, is that correct?

Cameron?

Now, the charter party speeds we are seeing today that apply across our markets are usually 13 or 13.5 knots for a base speed assumption.

Okay. So could you say -- I mean [it's] to say that the product tanker market returns to a more balanced market the next year, 2014, what kind of fuel savings would you have on these eco designs at to the higher speed? I guess that would be greater, right?

In tonnes per day, it would be greater, yes.

Yes, that is why I was being -- that's why we're being reasonably conservative.

So would you say that now you are saving 5.5 tonnes at the low speed; and if you get back to, call it, all design speed of 14.5 or so you would save, say, up to 10 tonnes per day?

The relationship isn't quite that steep. But yes, we will save, say, another several tonnes a day more as speed picks up.

And also, on your fleet renewal, you now basically only have one SR vessel left and the remaining is eco design and LR1s. Will you -- you have already been asked this question, but would you consider, for example, selling all these LR vessels and ordering more MR vessels? Or would you like to keep a mix of large MRs?

Well, the LRs now are, first of all, they are pretty low anyway in our books. It is not like there is a whole bunch of cash in them.

And that market is doing pretty well. I mean, at this point 15, 16 for older ships, they are cash flowing all right. So, we will take care of things as it comes along the way.

I mean, I think it's easier now because you're going to generate EBITDA. You have already got 10 new ships over seven older ones. So each step now gets easier.

All right. Yes, sorry?

It was much harder if you go back to earlier in the year, where we had only five new, 12 old.

Also, I just have one more question on the chartering strategy, I mean now that you have, I guess, proved the pudding by getting delivery of the vessel and you can actually show the actual, call it, eco-design efficiency. We have seen in the past that newbuildings have been chartered out before delivery at $2,000 a day higher than, call it, the current charter market.

If you say you get $3,000 higher or $4,000 higher than the benchmark, would you be willing to charter out your vessels on a long-term charter basis? Or will you continue to be spot focused?

Right now we are pretty committed to the spot market, and we are even more committed to the spot market that we are taking tonnage in. But you -- right now I don't think that is one of our issues, our concerns.

Okay. A final question, you have done some share buybacks in the quarter. Do you still -- are you still able to do that, if I am correct? Is that something that you plan on [repeating]?

I haven't got any comment to that.

Okay, but you're still allowed to do that, right?

Yes.

Okay. That's all for me.

Jon Chappell, Evercore Partners.

Thank you. Good afternoon, for the most part. Just a couple quick follow-ups. One to one of the real recent questions on the newbuilds.

You have four delivering between now and the end of the third quarter. Are any of those poised to enter any pools? You plan on just operating them in the spot in the near term? Any plans to diversify into a little bit of coverage in the near-term with some of the newbuilds, especially the eco ships?

All of them are employed on the what I would call high-paying short-term contracts that ultimately deliver them into the Atlantic basin, hopefully just before winter. And then we'll just keep them on the spot market.

Okay. Then there is a brief mention in the press release about the Spirit being off-hire a little bit in the second quarter. Can you just talk about what happened there?

Was that strictly a second-quarter event? And what was the off-hire time and cost associated with that?

I would say it is a second-quarter event with maybe 8, 9 days into the third in total. And between unexpected costs and loss of venue, revenue is probably somewhere between $1 million and $1.2 million. But it's done, dusted, once-off, thank you, fixed.

Got it. Then there was also a brief mention in the press release regarding a modest paydown of one of your facilities, regarding staying in compliance with the debt covenants. As you look forward for the third quarter, and you have seen the way that the asset prices have developed, is there any thought about potentially prepaying any more facilities for that reason?

Jon, it's Brian. As of now, there is no reason to pay that.

All right. Then finally, just the chartering opportunity; and I think it's been addressed a little bit on the call already. You continue to take some in.

You have talked about the explosiveness of the LR2 market of late. But most of your, I guess, bought tonnage and a lot of the recent charter-in have also been in the MR side as well.

Would you continue to focus on just the MR side with the charter-in? Or is that your real opportunity to play in the bigger trades?

I think that -- look, it's across the board. We have got a skill set from the Handys all the way up to the LR2s, and it is whatever it is creating the best value in that particular trade.

Value to us is not necessarily determined by the short-term rate. It is determined perhaps by whether or not a person want -- what price -- what other things, with the optionality and the duration.

And we are very flexible in taking vessels in anywhere between six and three years or longer, depending on the vessel type and the optionality we are getting. We see the product side improving ultimately across the curve.

Got it. All right, thanks.

(Operator Instructions) Urs Dur, Clarkson Capital Markets.

Good morning, guys, and good afternoon. Really one final question that I can come up with. You sold the two MRs here at prices clearly down from where you bought them. And it may be a statement as to the demand, I guess, for -- or clearly it's a statement, that's the demand there is for non-eco-spec ships.

What is your current view of the ongoing market for MRs of that age class? Is it still going to significantly decline here? Or is it going to stabilize, and where?

And then what does that say about the value of the LRs? And what might that mean for the LR asset values?

I will do the LRs first. There aren't many LRs that are on order.

Right.

So you are not really exposing them. The LRs are a little bit of a niche market anyway, in the sense that there is a lot smaller players, and that there are indications why you can see in the rates that were earned in the second quarter and what has been following into the third, that you've had a reasonable amount of consolidation. Small players, and that seems to be okay.

And the non-eco MRs, again, it's a -- in one hand, obviously, there is a cash buyer out there who believes that the present rates and outlook support their purchase. And as we have said we expect -- we just think it is a better use of funds, putting it into the newbuilding. So we obviously believe that spreads between newbuildings and secondhand should widen.

But I think the MRs and the Handy factors, I think they are going to be supported. My expectation is you are going to -- from what I am hearing, you are going to reasonably soon see another very big private equity firm enter that product tanker market for vessels between 37,000 and 80,000 deadweight. And they will be all secondhand vessels and modern.

Right.

So it's a hard thing to say. As I said, it's not -- if we have a recovery, it's what we said before.

Right, okay.

We are kind of going along on our own way, and we are quite happy what we are doing. And other people can have the problems now of what they value the older-design MRs at.

Right, understood. Then you've explained this before, too, but I think it is valuable for investors, and I just want to hear your current views on the development of the LR market, which you say is a niche market. Can you -- is this much more directly related to what the traders are able to trade on a liquid basis, and hence the cargo size is the issue? Or will expanding ton-mile demand eventually bring on the LR market?

Well, the second quarter and what is going on in the third is definitely the expanding ton mile and the new trades.

Sure.

I mean, you have moved this market from a Caribbean market and a UK/Cont into a truly worldwide market now.

Right. All right. Very helpful. Thank you.

There are no other questions, so at this time I would like to turn the conference back to Emanuele Lauro for any additional or closing remarks.

Thank you very much. I have not much to add, apart from thanking everybody for joining us today; and we look forward to speaking with you soon. So thank you.

Thank you very much. That does conclude our conference for today and you may now disconnect.