Scorpio Tankers Inc (STNG) 2013 Q1 法說會逐字稿

Hello and welcome to the Scorpio Tankers, Inc. first-quarter 2013 conference call. Today's call is being recorded. I would now like to turn the call over to Brian Lee, Chief Financial Officer.

Thank you for joining us today. On the call with me are Emanuele Lauro, Chairman and Chief Executive Officer; Robert Bugbee, President; and Cameron Mackey, Chief Operating Officer.

The information discussed on this call is based on information as of today, April 29, 2013, and may contain 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 statements disclosure in the earnings press release that we issued today, as well as Scorpio Tankers' SEC filings, which are available on our website, www.Scorpiotankers.com.

Call participants are advised that the audio of 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 made available on the Investor Relations page of our website for approximately 14 days.

Now I would like to introduce Emanuel Lauro.

Thank you very much, Brian. Good afternoon or good morning to all and thank you for attending this first-quarter earnings call of Scorpio Tankers.

You may have read our press release, and I believe that the first-quarter results of the Company are a confirmation of the value of our operating platform. We've been building the platform since inception, and now it's showing its results.

We also believe, actually, that the earning potential of our Company is still to show its true colors. As you are all well aware, the majority of our equity is tied up into our new building program, which, as we stand today, will see 38 vessels delivering from this summer, 2013, into the third and fourth quarter of 2014. So buying seasonality to which we are not immune obviously, we will start to see the true earning potential of the Company as we take delivery of our new building program.

There have been a lot of discussions on why we have invested so much capital into these new eco-ships -- eco-vessels. And I would ask Cameron Mackey, our chief operating officer, to walk you through the main reasons giving you material to actually -- or the reasoning why we have invested so much of our shareholders' capital into these type of vessels. So Cameron, after you.

Thank you, Emanuele. Thank you. First of all, I want to apologize to everyone. A short presentation that we had prepared is not available right now for your review to follow along with my comments, but rest assured, it will be posted on our website shortly after this call for you to verify or circle back on the things I am about to say.

Secondly, I just want to describe for a minute that the scope of my comments are not purely technical in nature. I think we've done a great deal of explaining to people how fuel efficiency works on our vessels -- on our new building vessels. What I want to do now, rather, is to discuss this rather significant spread between how our new buildings are performing and the results we have reported and your standard ship.

The issues, of course, are how should we think about this spread. Is it sustainable? Will it expand? Could it become more narrow?

And, secondly, when we talk about savings, we're talking about savings versus what. What baseline are we using and how can our investors, or the market, follow along and have some transparency into how our ships should perform vis-a-vis different benchmark rates?

So first of all, as you know from our press release, the owned vessels outperformed the rest of the TC fleet, by about $4200 a day. One note of interest is that, of course, our time chartered fleet does include some very modern assets, including a fuel-efficient type ship. But just for sake of simplicity, we drew that distinction so people would understand how these ships are truly performing once they are on the water.

If one looks at a comparative set between how these owned ships are performing against other ships in the Scorpio pool, you strip out any distortions that come from these time charters, i.e. the delivery voyages, the palm oil voyages, these sorts of things, and you get to a very similar spread of about $3900 a day. That's an apples-for-apples comparison between ships that are on the spot market competing with each other in the hands of Scorpio management.

Now, we'll say, right now, that there are a number of, say, reasons or drivers behind this discrepancy, but by and large the biggest is the fuel consumption of the new ships. And we've been asked to offer proof for different types of verification that these consumption -- or the consumption data that we are relying on is, in fact, real.

In the presentation that you'll see on our website going forward, you'll see some samples of the type of independent verification we receive. Before any of you on this call ask us whether these claims can be supported, you should know that our counterparties, our partners, various regulators, are keeping an eye also on our consumption data. So there's no question about what is real or what is illusory. We undergo third-party surveys, third-party verification, independent bodies that administer bunker consumption data for the simple reason that it's such a high value item and it's often a term in charter party contracts.

That being said, fuel consumption data is quite noisy. There are a lot of different factors that can affect consumption data of ships on a day-to-day basis, for instance things exogenous to the vessel like weather, current, sea stage, even the depth of water. Obviously, the quality and the properties of the fuel affect the consumption data of the vessel. And, of course, the condition of the ship itself, whether it's imbalanced, whether it's laden. Also, people talk about the idea that ships can get fouled with barnacles or seaweed if they're in the water or stationary for a long period of time. By and large, this doesn't affect the data set that we are comparing because most of you may know that ships can have their hauls and propellers cleaned while they are in service to avoid this unnecessary cost of friction or drag on the haul.

If one chooses to look at the economic of fuel savings and how it works in practice, what one would have to do -- and, again, there's an example of this in the presentation -- one would have to look at different benchmark voyages, a like-for-like comparison between a fuel efficient ship and a, say, historical design ship. There, because we all speak in, say, capital markets or analysis, in terms of TCE, you actually have to go back to the voyage calculation, which starts either at a world scale rate or a lump sum. From there, gross revenue is calculated and then you have standard deductions of a voyage such as brokerage commissions, port costs, and bunkers. And this difference in bunkers is what drives the difference in TCE across one ship to the next. If one were to do this calculation, for example, on two ships that Scorpio currently manages, such as the STI Garnet and another ship in the Scorpio pool, what one finds on a standard TC-2 voyage, which is Rotterdam to New York round-trip with 37,000 tons of cargo, a difference of approximately $3400 a day.

But there are other baselines we can use as a point of comparison because we know the market uses different sources of information. We went back and looked at how a Scorpio new building vessel would do against Clarkson's and all the different MR rates that it reports every week in its Shipping Intelligence Weekly. And there you find differences in TCE based on this fuel savings of between $3200 and $4200 a day for each voyage. This is our presentation of why you see this type of earnings premium across fuel-efficient and older assets.

Now, when one wants to ask, what's going to happen to this spread going forward, because typically we get the concern of, well, if the price of the barrel collapses, won't this eliminate your fuel saving advantage? And we would say, maybe it does, but I would look very carefully first at what's going on in the market for fuel, for marine fuel, otherwise known as bunkers or residual fuel. And here we would make four observations.

The first observation is that marine fuels, or heavy fuel oil, are a very unattractive product or output for refiners. If one were to look at crack spreads for heavy fuel oil, you would see that this is a very unprofitable business. There are people that can profit in that area but, in general, if refiners didn't have to produce it, they wouldn't. This means that the pressure is on to produce less of it. Right now, of course, there's ample supply of fuel oil predominantly because other forms of shipping, such as dry bulk and containers, are in such a mess. However, over time, we expect that, as refining capacity improves in its sophistication, that this type of heavy fuel oil will be harder to come by and have a natural bid under it because it will become scarce.

In addition, there are many, say, toxins or other undesirable components of fuel oil that make it very, very sensitive to quality and also make it the target of regulators. Here, we are referring most directly to sulfur emissions and the quantity of sulfur that is in fuel.

So point number two, observation number two, is that, as regulators hone in on reducing sulfur in fuel, this acts as a significant tax on the price of fuel and acts to complicate and fragment the market for fuels. How does this work? Different parts of the world, just like different parts of the United States, impose different standards for the quality of fuel. This increases the complexity of the supply chain for fuel and increases pricing and increases the difficulties of different owners with different ships of managing their sources of fuel so that they can burn the cheapest type of fuel, regardless of where they are.

Observation number three is that there are different costs of removing sulfur from fuel. Sulfur, for example, as one tries to remove it from fuel, it interferes with other catalytic processes in refining. Sulfur is a natural lubricant, so it places stress on a ship's lubrication or an engine's lubricating system and increases the cost of lubrication, which shows up in our operating expense. And marine fuels are generally difficult to transport and store. All of this is providing support to the idea that fuel will be expensive for ships and the spread of fuel efficiency will stay where it is or grow over time.

The last observation, building on this point, is that the correlation between marine fuel and the barrel is breaking down over time. They aren't necessarily highly correlated or as correlated as they were in the past. Different parts of the world will start to impose -- or more parts of the world will start to demand that ships use gas oil, which comes at a significant premium to fuel oil in order to clean up both sulfur and other regulated materials like particulates or nitrous oxide.

Finally, I want to refer some comments to critics or other skeptics of fuel efficiency and walk through a few of these for your benefit. The first thing we hear is that the data set is too small to thoroughly analyze and form conclusions on. Our view is that, for us, the data set is quite noisy, but it is by no means small. We've been in this process, in this game, on product tankers since the first contract we signed for these new buildings. It's quite a matter, of course, to see this benefit accrue to us every day. We are just delighted now to be able to show this benefit in our quarterly results to our shareholders.

The second skepticism we hear are that these ships are somehow underpowered. Now, this is quite amusing because anybody who has studied power transmission or been on a bicycle or flown a kite knows that if a system's efficiency improves, the power necessary to achieve the required output goes down. So what you have here is ships that are now narrower in form, more efficient in consuming fuel, and more efficient in applying that rotational energy of the tail shaft into forward thrust by a propeller. All of this is improved. So, therefore, the engine power necessary goes down. This is exactly what fuel efficiency is about. Is it a bit obtuse to suggest that this makes a ship underpowered because we are not wasting energy in drag or friction; we are not wasting energy in not consuming most of the fuel in the cylinder or we are not wasting energy by having an undersized propeller. It's a matter of semantics, really, but it's rather silly.

The third skepticism we hear is that slow steaming negates the benefits of fuel efficient design. Now, we have not had to, in the course of the last four or five years, resorted to much slow steaming. So therefore, we can't conclusively comment on this. There are lots of very, very able and well respected competitors in the cape-size market or in the container market who would differ with this view. However, our view is that, so far, charter party rates have -- charter party speeds have only declined about a notch or a notch and a half since 2008. But through the depths of the worst shipping trough in the last 20 years, we have not seen slow steaming take hold in product tankers -- in the Product Tankers segment.

As an aside, really, two things have to happen for slow steaming to take hold, in our view. One is you need the customer and the shipper to agree on a lower rate to transport their goods. And the second thing is, in the ballast leg, where the ship is unemployed, you need a level of transparency forward to incentivize owners to slow steam. And in Product Tankers, largely because of the way the market is developing, the variety of cargoes and ports, and also the amount of volatility that's been stained in the rate structures throughout the last couple of years, you just haven't seen slow steaming take any meaningful effect at all.

The last criticism we hear about fuel efficiency is that it all looks very good on paper, but let's see when the results come in. And we hope we've addressed some of that today in our earnings report and this presentation that you'll see later on.

What we would say is, look, designs and talk among people with -- either without the means or the capability to invest today, all that is very cheap. Quality shipbuilding capacity, quality commercial and operational execution, and the equity of our shareholders is extremely dear, which is why we are taking these decisions, these investment decisions, so seriously.

So we suggest that, of course, we are talking our own book. We are living our own book. And you are too. So we suggest you ask for the motives of either economists or other observers of the market who do not have real information at their hands why they do not want fuel efficiency to become a meaningful part of the shipping market.

With that, to conclude, we would say that the fuel-efficient product tanker is here to stay. One could anticipate a sustainable savings of $3000, $4000, or even more per day for a fuel-efficient ship off a relevant baseline.

In addition, what I haven't talked about very much is the cost advantages of operating a fuel-efficient ship, which largely come from savings in lubricating oil and also savings on insurance and other claims, which naturally come as a virtue of owning modern ships. And, of course, having spoken about intangible benefits because customers and other industry participants now favor greener ships with a lower carbon footprint. In either event, we are expecting to see the savings persist for at least the next several years, based on constrained shipyard capacity.

And, with that, I'll hand it over to the moderator for questions.

(Operator Instructions). Doug Mavrinac, Jeffries.

First off, congratulations on a very strong first-quarter result. And then, secondly, Cameron, thank you for that detailed analysis of fuel efficiency. I mean, first off, it saves me a question because I was going to have a question on that. But then, second, I think, in summary, the proof is in the results. I mean, what you guys earned versus the chartered-in fleet is very, very impressive.

That out of the way, since your last conference call, I guess there's been a couple of other parties out there ordering new LR2 carriers. And now we are seeing those delivery dates stretch out into early 2016.

My question is, how has that affected asset values over the last month or so? And then, how does that also affect the optionality premium on your new build options that have delivery dates in 2015?

Okay. Doug, it's Rob Bugbee here. I think that it's pretty clear that we'll, in general terms, we've had a movement up in yard prices over the last week and a movement out in terms of time, in terms of berth availability. And this isn't really coming just from the product market. It's coming from the container market and the dry dock market. You've had some pretty strong orders into those Korean major yards, into Japan too. And so the prices in the yards are moving upwards.

I think that, in general, the owners of the eco-ships themselves are very strong. And they themselves -- the industry, the lenders, that have seen our confirming data probably four or five weeks before you guys are seeing it now. And so you are starting to also see a widening spread between eco-ships and non-eco-ships. And I think that eco-ships have been moved up in price and recent sales and practices done in the non-eco-ships are being flat or flat at best.

What does this mean for us? In our overall fleet, it generally means we don't comment on net asset values in detail, but obviously asset values have been moving up for us. And, obviously, our options are almost 100% in the money and, in some cases, been quite a reasonable amount in the money.

And I think that one thing I would add to Cameron's presentation is it does come back to the shareholder. It comes back to the shareholder's return on equity. And if you are using spreads between operating costs and actual time charter revenue of somewhere around $5000, $6000 a day, that's equating to somewhere between $1.8 million and $2.2 million a year. You are starting the day 15% to 20% return on equity at any point better than your existing competition. That's pretty good.

Right. No, that's 100% right. And, Rob, that's why I was so impressed with seeing those numbers jump off the page. Man, it's the first thing we noticed for Q1, and then, obviously, the implications for the rest of the investment and then the thesis overall.

My second question is, kind of given all of that, can you just simply provide us an update in terms of Scorpio's firepower in terms of being able to continue to take advantage of what's going on in the refined products tanker market?

Sure. I think there are two areas we've got plenty of time charter firepower. Obviously, our outlook going forward, as we get confirmation of these spreads and these earnings potential and continued confirmation that the underlying market is firming, your self-generated firepower is increasing every day. And I think it's a little bit early to go into exact details. We ourselves are surprised about how well the second quarter has started. If you take the MRs, the first four weeks or so are pretty damn similar to the first quarter, which is pretty surprising. So we continue to be pleasantly surprised on that part of things.

And we -- our firepower also is dependent upon our product side. We've announced before that have we fully syndicated the $267 million. We are now in the process of upsizing that credit facility from $260 million. We are not in a position yet to say what that position is, but we are very confident that that will come -- the confirmation of that and the exact number will come shortly to you. And then we will shortly follow with a second new facility after that. So, we're very happy that the debt side as well is improving.

Got you. And then, just thank you for that, Robert. And then just the final question, talking about your fleet appreciating in value and your new builds being in the money and then all of the fire power that you have to continue to grow. I guess the one thing that surprised us positively during the quarter was the announcement of the dividend. It happened a little bit sooner than we were anticipating.

So, I guess my question is, kind of given your cash flow is ramping up now, you have a lot of this growth that's going to be really -- the growth trajectory is going to be accelerating -- how should we think about that dividend in terms of how are you thinking about it? Is it something in terms of a way to return cash to shareholders? With your cash flow ramping up, should we expect it to increase? I guess, what are your thoughts on that because I don't know that you guys have addressed it in a public forum since it's been announced.

Well, I think the first thing that we would say on the dividend is that the management and the Board are united that dividends of any form must be paid out of real EPS. Can't borrow for dividends; you can't pay dividends unless you're making annual EPSs.

The second aspect is that we felt we had said some many months, years, that the company would, when it feels that it has, in its own mind, a view that the market turns (inaudible) don't even get sustained profitability, that we would insert a nominal dividend as soon as we could. We have a number of existing shareholders that like some form of income aspect and we have a lot of people that have been unable to acquire our shares so far and are interested in having some form of nominal dividend.

At this stage, that's about where we would like to leave it. We obviously have a very high return on equity investment at the moment. I mean, if you were just to take simply what those MRs have earned -- $20,000-plus -- they've seen returning something like 10% -- I mean, I don't know exactly what the calculation is, but they've returned basically 10% of their equity in the first quarter of the year. That's pretty good. So that's the kind of equity returns that we now are opportunity for equity is. So you're not likely to see in the coming -- in the next quarter or so -- a moving up of the dividend, regardless of how well we do because we want to invest shareholders' capital at the moment. But, clearly, over time and especially as we start getting into next year, and we -- at some point, our future curve of CapEx declines as opposed to -- and revenue increases, we expect to have plenty of opportunity to raise dividends.

Got you. Perfect. Thank you very much for the comment.

But now I have to caveat, we'll do what we did at OMI, which is, if the market isn't giving us what we think is right in its forward assessment, well, then, we'll probably buy back stock instead of buying dividends -- issuing dividends at that point.

Got you. Got you. Very clear. All right. Great. Thanks a lot for the time, Robert, and congratulations, once again, on both a very strong first-quarter result and then also confirmation on your thesis of investing in these eco-ships. Thank you.

Herman Hildan, RS Platou Markets.

Just a quick question. You talked a lot about fuel savings on the MRs, Cameron. Is it too early to say anything about how much potentially you can save on the other two vessels?

Herman, thanks for the question. I think that the best way to put it is we don't go investing our shareholders' money without having a very, very clear idea of what the payback on that equity will be. Okay. So we have a pretty good idea. We are not prepared to put it out there at the moment, but given our discussions with the yards, along with development of these new designs, given the track record or the experience with the MRs, the best guidance I can give, it would be something similar based on, say, the size of the ship -- if you pro-rate it to the size of the vessel. Okay?

However, I'll add one caveat to that is, in MRs, we have the benefit of a largely homogenous asset class. The dimensions of the ships and the carrying capacity of an MR has been the same for 20 years. It's not likely to change very quickly. This isn't true on Handys and LR2s. So, while I'll tell you that we are going to be very delighted with the amount of fuel we're saving on these ships, again, it gets back to the sort of pedantic conversation of, well, what are you measuring that against? Are you measuring it against, say, an LR2 out of a greenfield yard in China that was spit out in 2008, or are you measuring against a smaller Korean design that's incredibly competitive, but has a smaller haul form anyway? It gets more into, say, confusion or technicalities on the baseline discussion. But we are extremely, extremely positive and confident that the return will be at least as good as it is on the MRs.

I think I would add one more thing to this Herman -- is on the LR2s, you're going to spend more. The chances are you're going to spend much more as a percentage of your time at sea. Therefore, you are likely to capture even more on a dollars-a-day benefit, whatever that differential is.

That's right, exactly, that was my kind of follow-up question. Okay. My next question comes on the -- sorry. Did you want to add anything?

No. That's okay.

On the chartering side, I mean, we see a year-to-date chartering activities about half of total fixtures that we saw last year and getting close to the total fixtures in all of 2011. Rates here to date are close to (inaudible) average rates but still it seems like the charter market is not really moving up a bit. Could you add some flavor to why you think that is?

Yes. I think that you've got still some weak players out there who feel that they have to get time charter coverage because their loan-to-value is probably too high still on the existing MR fleet. They are not getting the working capital requirements. They've probably been quite high with fuel where they are. But you've still got a supply of people who need to have that security just to stay in the game. Well, they're going to have to hand the keys over or come up with new equity to give to the lenders.

But I think that, more importantly than where the rate is, the forward curve is higher and the most important thing is you've just seen cuts from one customer after another just continue to go along the market. I actually wouldn't mind this to carry on for another two, three, four months because every time you get one of these weaker hands fixing out the ship on time chartering and giving it a straighter or a stronger owner, you get a form of consolidation of the market at the operating level.

So, I think what you're going to see in the time charter land is you're just going to see it going along like this. And at a certain point, it will hit an inflection point and then move forward.

The other thing is you've got like a two-tier market in time charters at the moment because it's quite hard to anticipate. If, for example, you're going to take a ship on time charter that's going to go into the years of 2015 and 2016 and it's a non-eco-ship, well, who's going to pay for the retrofitting of that 2008-, 2010-built ship? What's going to happen? Who is going to keep the vessel compliant? So this is another area that is going to give a little bit of a gray area. Even if you look at the dockets of OSG, you could see a shift in who pays for what in terms of retrofitting costs for time charters of older vessels. But that also is keeping a little bit of a lid on the ability for the non-eco-vessels to command any short form of price increases at the moment.

All right. And also, you briefly discussed about ordering activity. We saw -- I think it was mentioned (inaudible) orders for late 2015, early 2016 (inaudible). I think that was at the yard that actually well soon after went bankrupt. So my question is, if you go to, say, a quality yard and meet (inaudible), et cetera, and you don't have an option, what is the likely delivery schedule for a new owner?

Herman, it's Cameron. I think that if you go to an established yard with a track record, it depends on the size of the ship. Let's just make an arbitrary distinction between small ship capacity and larger ship capacity. The smaller ship capacity, you're looking probably into the middle of 2015 at the earliest, but availability is quite spotty because large amounts of capacity have been booked up already on competing ships or from very large, credible customers like Shell, for example.

On the larger ships, there is also very spotty availability, but it's a different reason, which is, the larger, credible yards will always prefer to build long series of higher-margin vessels like your container ships or your offshore facilities or gas carriers and this sort of thing. So really, they are, as a matter of choice, doing as little as possible on conventional ship types. And this is also what is driving up -- driving the price. In either event, we are seeing new building prices up somewhere in the 8% to 10% range, at least.

I'd sort of like to add something in general on this from an operating perspective here. We are not pleased with a fence. We know that that's going to be and can be improved on, et cetera. But what is really pleasing is the Company is profitable with so much of its equity stuck in a shipyard somewhere. And the vessels that we are going to get delivered over this next 18 months or so have better margins; they have lower breakeven points; they are younger, fitter; their fuel efficiency is likely to be better.

But, for us, what's very important at the moment and what you guys should do out there is simply just put in -- just pretend we had that fleet in the first quarter. And you're going to have a company that is throwing off pretty good profits even where the market is right now. That's the facing point. Then, on top of that, it is impossible, as what Cameron is putting out in terms of new building, it is really impossible for anybody to replicate this fleet within 2, 2.5 years. If they can't order their first ships until the third, fourth quarter of 2015, that's a long way for a competitor to start to be able to replicate the position. And even if they can replicate it in size, they are not going to be able to replicate it in price and breakeven levels.

So maybe taking the next question would be great.

Just my last question then on the options. Is it impossible to say anything about how many options you have or what kind of asset classes tilt it towards?

No. Not more than what we have guided to at the moment.

Okay. Thank you very much.

(multiple speakers). We have kind of got our lead. We've given our position to everybody. This is -- we are giving information related to the eco-positions. But at the same time, we playing fleeing in a market against competition. You don't necessarily want competitors or yards or anybody to know at the moment. So, there's going to be a little bit of a tightness from us at this point.

Okay. Thank you.

Urs Dur, Clarkson Capital Markets.

I appreciate the discussion on the eco-ship. I did see the slide presentation now. I didn't have it up before. And you mentioned about the physics of the matter that the ships aren't underpowered because they are designed in a manner that makes them more efficient and, therefore, they need less power to produce the same propulsion. One of the arguments -- and you have mentioned it, so I'm not trying to aggravate anything here, just get a little bit more color. One of the elements of people who criticize eco-ships is that they can't handle heavy weather given -- or may not be able to. Let's put it that way. Given your experience with these ships to date, which is now, as you point out, you guys are on the leading edge of that and, frankly, have a lot of data, have you experienced weather and headwind? And have you had any issue whatsoever with speed and performance that would somehow not meet charter party standards?

I'll let Cameron give the more detailed and less flippant answer, but the (technical difficulty) first quarter with vessels trading primarily in the Atlantic, the North Sea, the Atlantic, the US East Coast, and they both are getting known for its kind weather in January and February and March. But I will let Cameron give a more detailed look at it.

No. I'll give you sort of a more, say, thorough answer. There is a couple of things going on. One is weather is a form of -- or provides a form of resistance or drag on a ship as it's trying to propel itself through the water. Okay? And as everybody knows, a power curve is actually a cubic function, i.e. as the power demands on the vessel increase, the amount of power to meet those demands goes up as a cubic function. Okay?

Sure.

So, naturally, any inefficiency you have in your system is exacerbated at higher speeds. So therefore, the difference -- if you want to put it that way -- between what an eco-ship can do and what a legacy design can do is wider. The spread is greater as the ship either tries to go faster or as it hits certain types of increased drag or friction in the water. Okay?

There is, as an academic point, there is a choice that an owner can make of whether or not or how much to reduce the power on the ship. This choice has always been there, has been there with old design and new designs, they will continue to be there. And a lot of it has to do as the speed or the optimum speed that the owner feels his ship will be asked to go. So, this is why we are not in the container business, for example, is because that choice on what optimum speeds the container ships will be going forward is quite a complex decision and affects greatly the amount of power that one installs in a container ship.

With tankers, it's quite easy. You have sort of the worst markets over the last 25, 30 years. You have charter party speed not dipping much below 13 kn. So we know the optimum speed. We don't anticipate a world in which charter party speeds get above 15.5 kn. So, we have a relatively -- relatively you need time in choosing the power of (inaudible) for our ships and how to tune and optimize the ship around those speeds.

So the short answer to your question is no, we haven't seen anything or we don't have any evidence to suggest the ships are underpowered. And, if anything, we would challenge any older ship to a drag race across the North Atlantic to prove the point. We'll go back to the days of the Sea Cloud, it's no problem. We will get to San Francisco around the Cape faster than an older ship.

But, as an academic point, it's rather ludicrous to suggest, as a class of ships, these vessels are underpowered. That being said, someone can go find a design. Ship designs are passed back and forth around shipyards and around market participants all the time, so a pundit could easily say ships are underpowered based on something they've seen from a yard that's never produced one.

I think I would add, again, in simplified positions here, this isn't just Scorpio sort of doing this. There's a lot of people that have seen our data now, and we have a reason to share things with friends or whatever. And -- like in customers.

But look at what the customers are doing. The customers are ordering these eco-ships. Shell has confirmed orders. Shell has confirmed options. Valero, Vitol, BP, Total are trying to charter these vessels like this. It's across the line that the customer is also saying this is what we want. And that should bring a lot of comfort to you as well as anybody else who is not actually seeing the data like we are.

Right. Right. No, and I see what you're saying. It's just more to give you an opportunity, a little bit more color of that.

The other question, then, heads towards the barriers to entry, if any, question. Because if it makes as much sense as you say it does, and we've generally been believers as well, so it's not -- this is not a veiled question in any way, but is the yard space at high quality yards now pretty much booked through 2015 or 2014 and into 2015? And what is the potentiality of yards that haven't previously built this quality of ship -- this style of ship, this eco-spec ship, what is the possibility of other owners mimicking the design and doing it at yards that haven't done it before and what are the limitations there, if any?

First of all, the yard space has, 100% across-the-board, gone in 2014. So that's been a relevancy. In the top yards, we can clearly see that it's pretty well, apart from a couple of burgs, booked out through to that third, fourth quarter that Cameron is talking about. Even a top quality company like Pica is having to start a new building program starting with a couple of ships coming in 2015 and the balance in 2016. It is not just the products that are competing for these yard spaces, as we've said before. It's the capes, it's the containers, et cetera.

The whole country is being taken off the table with the revival of the interest with the dry cargo, which is Japan, which is predominantly booked out until the end of 2015 anyway, and is dealing with numerous dry cargo requests. And China is a long way away from its, let's say, sustained quality and the willingness for people to go in there.

Its Cam. I'll say two things. One is, as a general matter, on the demand side, the balance sheet of shipping as a whole is under incredible pressure. So you're --

Absolutely.

Right. So this is going to keep a lid on inquiry for some time. But, similarly, the income statement of the shipbuilding industry looks broken as well. If you look at how ship builders, at least those that are publicly listed, are doing, you see incredible problems with their profitability. And you still see contracting yard capacity. So, of course, if the market -- if any shipping segment were to take off in its profitability, of course you would stimulate shipbuilding demand. But what you have now is a window where the amount of money that it takes for a yard to be profitable, building an MR tanker is far above where new buildings prices are still, even where we are talking about today, which means that new inquiry of struggling yards or second-tier yards is not sufficient to be profitable and, therefore, the yards are going to have a lot of trouble booking any significant capacity. They will not get the credit support in order to carry on loss-making operations if their balance sheet is already screwed up.

And without going into too much detail, you can see in the press, the trouble that even one of the former top three in yards is having right now at these price levels.

Right. No, no, that's helpful.

I guess my final question is what does the charter-in market look like? You've had a lot of very attractive ones over the last year to charter-in obviously now as to what the ships are earning. And, clearly, these are largely legacy design ships, but what does the charter market look like? Are there still a lot of owners out there that are very interested in locking in cash flow for the next year or so? I know you typically look at one year or so. What does it look like?

Well, I think they're getting -- notwithstanding what I said before, there are less opportunities. Our capability of time chartering ships has increased but -- and our interest is still there, but you're seeing, even in this conference call, that we haven't announced a new charter-in of a vessel. So, that's telling you something, that market is starting to get less opportunities. That's a healthy sign going forward, that it is tightening up. I mean, it's had 12 months of weak tonnage going to strong hands. And it's starting to take a toll now, one in the lack of -- less opportunity to time charter-in from weak hands with options and, secondly, in its consolidation itself from the customer on the operating side.

we will continue to try and find opportunities where we think there is value, so that's it.

Great. Sure. Yes. No, I got you. I believe you. All right. Well, thank you very much for your time. That's all I got.

Jon Chappell, Evercore Partners.

Robert, you mentioned the two facilities. Will the potential upsizing of the $267 million one that you've already announced and then your efforts after that one is upsized to move onto another one? I'm obviously not expecting you to give us any specific numbers around that. But when you think about the potential, what you can get from these two facilities and how that matches up with your CapEx program, does that fully finance the 38 new builds that you've committed to already?

Well, I think that our plans when we are doing finance would be, between now and the end of the summer or whatever, would be not to just fully finance the new buildings that we have, but to also provide finance for anything else that we may not have.

That was going to be my follow-up, then. When you think about the options -- I know you won't give us the number -- but what's the timing on exercise or expiration of the majority of those options? And then, when you think about (multiple speakers).

Again, we've seen the commercial importance of that as too high at the moment. It overweighs the wish to always be transparent on that (multiple speakers).

Okay. But as we think about equity, you don't need any for the current new builds, but if you were to exercise options, is that kind of the next move that you would think an equity raise would be required for?

Well, if you look at options, options, by definition, are options, so you don't have to do anything. We definitely don't have to raise any equity, we don't think, for our present commitment. As I explained to Doug earlier, with our improving outlook, maybe there is, let's say, a better outlook on the present balance sheet. But you are at that point where you, obviously, you would like to exercise options that are in the money, but you're not going to do that at full cost. So you're now in, let's say, the more luxury position that you, A, don't have to exercise an option; B, you've got the premier fleet already. So, you're going to be at a risk to equity at your own ledger. You are certainly going to pass on any options, even if they are in the money, rather than do an equity offering that is a weak offering. And your requirement for equity as a ratio of any capital expenditure that you would need would be less because your ratio of expected cash flow is going to be higher than your option time period. Your delivery time period for the ship is going to be later.

So the answer is that, of course, to the degree that you are getting sensible pricing, that it's accretive, and whatever, and you wanted to do something substantial, you would issue equity. But you have to know. Are you willing to pass on options that are in the money? Absolutely. If that means that you protect the positions there at the moment. So, I would think that anybody hanging back, hoping that they are going to get shares in a public offering, that's not really a good strategy, especially as many people have only seen that there's been an offering at the time that we've actually already done it.

Understood. One more for me.

And, finally, you're getting much, much closer. As you go through this period and you have that wall of EBITDA coming next year, you start opening up different avenues like the bond market and whatever. So --

Yes. Understand. Last one, G&A down sequentially first quarter about 10%. As we think about you taking on delivery of 38 more ships and Emanuele mentioned earlier the platform that you have built, can you operate that fully delivered fleet with the current infrastructure in place, or should we expect to see some G&A ramp in 2014 as the bulk of the deliveries come in?

Oh, you are going to see G&A go up, one, because the fleet itself is much bigger. The Company itself is much bigger. And we haven't had any -- we haven't asked our Board or disturbed any pay rises or bonuses up until 2013, so hopefully with what we think will be make in 2014, hopefully will be paying staff a little bit too. That's just -- you would expect G&A to move up with a combination of an expanding company and, hopefully, an increasingly profitable company.

Okay. Thank you.

I know that hasn't been the norm because you normally have to file to get bonuses, but that's it.

Omar Nokta, Global Hunter Securities.

I just have a quick one. On the LR1s, I noticed that the charter had came in a bit lower than the other -- than the LR2 and the MRs and were also lower versus last year. And I'm just wondering what you attribute that to. Are they trading in a completely different lane than, say, the LR2s, or was this just sort of a Q1 type of event?

Omar, it's Cam. I think you have a couple of things going on in the LR1 sector. One is, of course, the results reflect both trading in dedicated clean markets and also fuel end markets, and you see a sort of counter seasonal or short-term weakness in those markets driven by such things as, A, the, say, significant reduction in refining capacity in the AG that we expect to turn around heading into May, but also reduced fuel oil movements in the Atlantic basin largely because some of these movements are cannibalized by the crude market, which, as you know, is on its knees, and other factors. We don't expect these to be, say, long-lived, largely because of the refining capacity question, both in the US Gulf and the AG starting to ramp up. But, sure, it is a factor. It's not as much of a factor on the LR2, if that's your next question, simply because the customer base and the natural trading routes are slightly different than they are in the LR1, so you haven't seen the same type of dynamic there.

Okay. Thank you. And then just one more thing. Robert, you had mentioned earlier in the call that, so far, the first four weeks of this quarter have been off to a surprising -- surprisingly strong start, similar to what we were seeing in Q1. Is there something in particular that you are seeing this shoulder season that's different than, say, last year, that's allowing for rates to be much stronger, or is it just simply, from your eyes, a firmer supply-demand dynamic?

Well, I think you've got a firmer supply and demand dynamic and you've got a market that is more balanced, so it's reacting to refinery altitude changes, dislocations such as what's going on in Argentina. But primarily it's being dragged along by really the firming demand side. And I think this is something that is pretty important, is that we are also surprised that -- we are just generally surprised that the market has been this strong or this resilient now for four or five months now, and we keep sort of saying that. Obviously, we would have liked to have more ships on time charter in '12, '13 and (inaudible). But we didn't anticipate that we would. We felt it would get stronger, but it keeps surprising us and lead so much more to this year and the next sort of 18 months where we still haven't had the full effect of US Gulf exporting, [Montiva] coming up. We've still got to come, the Saudi Arabian refineries and the next phase of the expansion of the Indian refineries. And every day we get the forward future good news such as potential closures of refineries in established countries like Australia, et cetera.

And we get incredible ancillary demand good news. I mean, if we look at the expected export growth of vegetable oils from Argentina and Brazil, or palm oils from Malaysia and Indonesia, these are long -- a lot of these are long voyages, and the export growth figures are pretty high. And that, combined with more growth than general economic well-being in the product side, I think is leading to these more positive demand environments. I mean, it's pretty exciting because we've got two things that are on the come, as it were, that our present earning are discounting. They are discounting the -- not only the fact that we've got 38 ships in shipyards, which is more than our entire fleet, including time charters that we had in the first quarter in operation, but also the market is discounting, on the demand side, the continued good numbers on demand. And it's discounting what can happen when we get to 2015 when you have the culmination of the low sulfurs combined with the new environmental regulations and potential retrofitting of old vessels. It's just, right now, it's just pure demand.

That's interesting. Well, thanks, Robert, for that backdrop. That's all for me.

Fotis Giannakoulis, Morgan Stanley.

Cameron, I would like to clarify a few of the numbers that you mentioned earlier at your presentation. You said that the premium of eco-ships is estimated around $3500, $3000 to $4000. I just want to ask, is this on a time charter equivalent basis, or it's on the steaming base of the ship?

No. Thank you very much for that, Fotis. First of all, as I think Urs mentioned earlier, it appears the presentation is now on our website, so people can sort of look through the discussion points. It's on a time charter -- the answer to your question is it's on a time charter equivalent basis, so picking your baseline, whether it's a Clarkson vessel or your Clarksons average MR result published weekly, that savings should be somewhere between $3200 and $4000 a day TCE, but typically our utilization of our ships one would count as 360 days out of the year.

Okay. Thank you for that.

Just further clarification. Given the fact that even existing vessels, they have some fuel consumption differences, is the -- what is the comparison based upon? And I'm just trying to understand an existing, let's say, (inaudible) like the ones that you have ordered versus a vessel that was delivered in 2008, like other public companies like Capital Partners or (inaudible). What would be the difference on these type of vessels?

Thank you again for that. We stand by our previous statements that we made late last year that it's around 7 to 9 tons, but remember that, like we're trying to clarify in this presentation, that's on main engine consumption. There are other consumptions. There are other types of fuel. There are natural delays of the ship as it tries to turn itself around in port. So there are a lot of different variables that translate that main engine consumption into a TCE. And this is the purpose of the presentation.

But the answer to your question is, again, operating these types of ships in our pool and on time charter-in, we have a very good data on what those ships are consuming, so we'll stand by that comparison we made late last year.

Okay. Thank you, Cameron. I appreciate your answer.

One more question regarding the value that we can apply to this fuel efficiency. And also, if there is any price arbitrage right now that one can take advantage, given the fact that you bought some fuel efficient vessels of 36.5 five-year-old vessels are selling lower. Where is the difference right now, this $3500 or $4000? Does it create any arbitrage opportunities and for which type of vessel? Which age?

I think absolutely it does. If we weren't public and did not have to disclose all this, obviously we would be out time chartering-in the eco-ships of others that either don't appreciate or don't believe in the savings. You'll note that we already have one fuel-efficient Hyundai meat boat type on time charter-in, which is one form of arbitrage that we were lucky to capture. But we don't expect these types of opportunities to continue too much.

I mean, the other arbitrage is out there. Again, it's very difficult to do, but if you could take the present valuations on lost sales of five-year-old MRs and brand-new proper eco-designs vessels like ours, A, you would get go to long (inaudible) index on the ecos and short the five-year old ones all day long, just all day long. Unfortunately, all you have as an investor is the opportunity to go along with Scorpio because there has not been (multiple speakers).

This is the only public company anyway that is a product tanker. So this is clear the option. What I want to understand is that a five-year-old is $25 million, an eco-ship is at $36 million, $36.5 million. Is there -- the five-year-old, do you think it's an expensive vessel for you to make an acquisition or the fact that (multiple speakers)?

I think -- I understand the question. I think it's a little more complicated than this because a five-year-old MR, at whatever price you are putting it, in reality gets worse financing terms on the debt side that an eco-vessel. And there is a big contingent liability in there. You don't really know how much you're going to have to spend once the environmental rules start coming in, 2015 or whatever. You have no idea. So, is it really costing you $25 million or is it really costing you $25 million plus $2 million you have to fork out in 2015? It's an unknown quality.

One of the great things with these new vessels, in the eco-design vessels, we know what our cost structure is and so does the lenders. There is no obsolescence risk for the lenders at this point whereas, if you are looking at the non-ecos, you just do not know what your cost structure is. You have no idea.

And finally, Robert, and Emanuele here, I actually think that we have the duty and responsibility to show our shareholders how we invest their money and to show them the performances of their investments. But if other people are still so reluctant and want to buy old assets, be our guest. I mean, we are not going to force them to invest in new eco-ships. If they want to buy secondhand tonnage, at the end of the day, it will only benefit us. So they should go ahead.

Yes. I mean, I totally agree with that. Now, we are setting out our (inaudible). But the best thing for our investors is to invest in the eco-design. We have seven non-eco-design ships that we can't have our cake and eat it. We know that we've got to choose with these ships once we get into the 2015 area. But obviously, it won't affect us that much because we've got so many new ships delivering.

We may change the metrics in the next conference call, actually, saying that eco-ships do not work, to have people actually starting to believe it and stop investing.

This is pretty much going to be the last -- this is -- we've put out the data. It's empirical data, and it doesn't serve us, as Emanuele says, strategically well to keep having to explain why it is that we are doing a good thing. We are happy that other people, as Emanuele says, have a different view.

Clearly, I am not challenging your strategy. But (multiple speakers).

(multiple speakers) I also frankly believe that, look, obviously, it matters in the first quarter. It doesn't take a rocket scientist to work out that virtually all of our profit came from the eco-vessels plus the time chartered-in fleet and our existing vessels actually didn't make much in the first quarter. But as the market improves, it is impossible, in where we think the market can go to, that you actually make a great money on non-eco-ships. The market can't go that high. It's just that your return to equity was going to be probably 15% to 20% less than ours.

Just to ask, given this big difference in time charter rate, as you demonstrated, what do you think is going to be the order book beyond 2014? Do you see this order book increasing, especially in about 2015?

Sure. I think that you would expect that -- I mean, 2013 and 2014 are two of the lowest order books there is on record and they are back-to-back for the product market. And you would expect that, once 2015 is finally booked, it's probably going to be a little bit higher than 2014. But it's still going to represent one of the lowest years, excluding 2013 and 2014, in the last 12.

And my last --

I think that's a great point, that we've got three years ahead of us here by historically below actual individual years order book, not alone the three years together.

I just want to ask also about the overall market. We have seen some of the closures of refineries in Australia helping a lot the Pacific market. Can you give us an idea of what is the situation out there and how many cargoes these refinery closures have added to the market? And just to have an understanding of how many are the cargoes every month in the Atlantic -- I mean, the Gulf of Mexico, and how many new cargoes have been added because of Australia?

Okay. We don't track things in that way. We take it in terms of where the trends are going. I think you yourself and Morgan Stanley do great work on the specific refinery space. It's not useful to us in terms of tracking it in that sense because you're not 100% sure which cargoes are going to be taken and also there's always a multiplier on top of the arbitrage as well. But something like Australia is extremely valuable to have increases on refinery imports because it's stuck in the middle -- Australia is stuck in the middle of nowhere. It's a long way to get to Australia from anywhere. And you are just seeing this continued theme of demand being in places that are a long way from the refineries such as South America and Africa. But the data, unfortunately, you would only be attractive in reverse. I mean, like right now, we are only right now getting the cargo liftings and the cargo data for the fourth quarter. It will be two or three months before we get real accurate assessments of the first quarter.

Can you add, do you see any cargoes from India primarily going to Europe right now, or this is something for the future to come?

One of our vessels is on such a voyage right now, but I don't think that's answering your question about the trends of these flows. We obviously expect them to increase because we continue to see pressure under refining capacity in western and northern Europe. Have we seen it in, say, volume of cargos? Gradually. It's not moving quickly, but we are seeing gradual as we've seen for the last couple of years. Just slow, but it's very, very steady, almost inexorable progress.

It really is. I think Cameron has put it right. What's so exciting about this for us is this is just a slow and steady grind upwards. And that's fun.

Thank you very much, Robert. Thank you Cameron.

Oyvind Berle, DnB Markets.

It's Nicolay from DnB on the phone. In most of your positive view on eco-ships, at what point does the (inaudible) that improve liquidity by any meaningful amount or was it just did you exit that part of the fleet when new arrivals are coming?

Well, obviously, right now, despite their lack of profitability to eco-vessels, they're still creating -- they're still creating positive cash flows. We still think the market is going to improve and you're not going to do anything with these vessels at the present, but by the time you get -- you can think of reading between the lines, what we're saying here is that we believe we have unknown expense, unknown risk on these vessels. Even if you were to retrofit them, they are still not going to be the customers' first vessel of choice. And right now, we still have 38 new buildings to come. So it's not a decision that's going to be taken, I think, this year, but it's sort of a decision that's going to be taken as we get into 2014 with the new buildings delivered, but you've got time. If someone wants to throw us a great price on a conversion project in between or someone trying to -- I mean, we don't know. We have time, but it's obviously not there in the long-term strategy of the Company. This company wants to get to all eco along the way as fast as practical.

Okay. Thank you.

Chris Snyder, Sidoti.

My only question is on the Handys. They had a really strong performance this quarter. I was wondering if there was anything in particular on the demand side that was driving that and if this is where you think that they need to operate during the seasonal stronger periods.

Hi, Chris. As we've explained in some of our other disclosures, the Handys are a more regional asset and because of their regional trades, they are more susceptible to seasonality. So naturally, you would expect Q1 to be, say, the high point of their earnings a year. We've seen, notwithstanding that it was a mild winter here in New York, you still see tremendous weather disruptions because the natural trading legs are shorter. They are further north; they're more prone to ice, weather disruption. They are more, say, pure trades or distribution assets that this uncertainty in perception and risk is what drives up your premium at this time of the year, even if you don't have a lot of ice out there or a lot of, say, cross med movements.

So the answer to your question is yes, it's a seasonal -- it's a certain seasonal uptick, but I would also refer to Robert's earlier comment that Q2 has started very strong. The winter in the Baltic lasts at least until May, if not end of May. So, we've seen some very, very positive numbers and demand on these new ships.

Thank you.

I would just like to add one thing to the previous question -- call -- that obviously if you ended up selling the older non-eco-fleet, the early 2015 delivery or in 2014, it would create liquidity that obviously would allow us to invest more into the eco vessels.

At this time, I show that we have no further questions.

Then we will end up the conference call. We apologize, again, for the technical issues on the presentation and reiterate that now the presentation is actually posted on our website. So if anybody has any questions on the presentation, we are happy to answer them off line once you've reviewed the material. And otherwise, thanks for attending and look forward to speaking to you all soon.

This does conclude today's conference. We thank you for your participation. You may now disconnect.