Scorpio Tankers Inc (STNG) 2016 Q3 法說會逐字稿

Hello and welcome to the Scorpio Tankers Inc. third-quarter 2016 conference call. Today's conference is being recorded. I would now like to turn the call over to Mr. Brian Lee, Chief Financial Officer. Please go ahead.

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

The information discussed in this call is based on information as of today, November 14, 2016, 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 statement disclosure in the earnings press release that we issued today, as well as the Scorpio Tankers SEC filings, which are available at scorpiotankers.com.

Call participants are advised that the audio of this conference call is being broadcast live on the Internet 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 Emanuele Lauro.

Thank you, Brian, and good morning and thank you for joining us today.

It is a sad day today at Scorpio Tankers. Don Trauscht passed away yesterday. He was a director of the Company since the Company IPO back in 2010. In this occasion, it is always difficult to say something meaningful, and especially for someone like Don. His caliber and vast experience spoke for himself, really. We will miss him both professionally and as a person and remember him with a lot of gratitude and admiration for what he did, for what he brought into our Company.

Our thoughts at this time, of course, are with his family, with his wife, children, and grandchildren. And personally, I'm extremely grateful to Don myself, first of all for accepting to serve on the Board of Scorpio Tankers, which back in autumn 2009 when we met and discussed this possibility was -- we were a want-to-be public company owning only three vessels. And second, for the way he did it. Being the green and inexperienced Chairman of a listed Company with people of this caliber on the Board, it is not easy, but Don always made me feel comfortable and guided me in the most constructive of ways. So, I really owe him a lot.

Now changing the topic and going onto business, we have released our third-quarter results. As highlighted in those, we have seen a softness in the product tanker rate environment throughout the third quarter. We think it is mainly driven by destocking of product inventories, in combination with lower refinery throughputs, and this is actually also combined with the reduced oil trading activity that we have experienced over the summer. This is generally given to the relatively stable oil price, which we had in the last few months.

The same situation has persisted in the fourth quarter, although we do expect firmer rates for the remainder of the quarter in line with seasonality.

Having said that, the market fundamentals remain intact, with demand outlook for product tankers that continue to be positively driven by the continued oil consumption and the increased output from export Middle Eastern refineries. The supply side looks increasingly favorable, with the MRs order book being at close to its 20-years low, and this will soon result in demand growth actually overtaking supply growth in the second half of 2017.

All of the above, of course, is helped by the Far Eastern shipping and industry situation, which struggles to attract new orders in any meaningful size. And the combination of it could actually outline a pretty bullish scenario for the product tanker market on a medium-term basis.

I am sure we will discuss this in the Q&A session, but before that I would like to turn the call to Robert.

(technical difficulty)

This is the operator. We are unable to hear you on the line. Please check your mute function.

Sorry, that was on mute. I would just like to say good morning, everybody. I'd like to echo what Emanuele said about Don. He is going to be missed by all of us here, and for the management, he was not only a great mentor, but his optimism, his values provided a great shining light and compass for us all to follow in the development of this Company.

Before starting this morning, we got in general a great group of analysts. I'd really hope that, as most of you are doing, you have withheld your publications before either this conference call or talking to the CFO. A couple of people haven't, and I'd -- and they, of course, are going to have to republish, because they got numbers wrong, after this conference call. And I would just really hope going forward we provide the time and the opportunity always for analysts to talk to the Company or the CFO.

I'd like to look at a couple of things that -- what I think is very encouraging is our cash balances. Normally, it is the end of -- earlier in the quarter. This is mid quarter. It is on a low point, since it is midmonth where your expenses have exceeded your points of income, so in some ways the cash balance understates the present strength.

We continue to work hard on improving the balance sheet going forward and various financings, which we are very optimistic to achieve. We believe rates will continue to improve. They have been improving over the last weeks, and today they are improving, and we have always said plus, minus one week of Thanksgiving, you will start to get that movement, and we are confident that that is taking place at the moment.

Our fleet is strongly weighted to the markets that we think are going to be the strongest in the winter. For example, our MRs and our Handys in total are over 75% weighted to the Atlantic market. This deliberate positioning has actually -- has cost us a little bit in the end of our third-quarter results and the beginning of our fourth quarter in positioning the fleet for that weight. But the small $1,000, $1,500 a day it may have cost us in that end period, we expect to be more than end up having the vessels in the right place. But when that Atlantic starts to benefit from the combination of a northern winter and the really strong underlying demand in the southern Atlantic related to gasoline.

There have been six really big changes since our second-quarter conference call. All of them have been positive to the fundamentals. The banks have remained very disciplined. However, they continue across the shipping sector to provide strong support to those people in the top quartile of each of the industry sectors in shipping.

We were, at the end of the -- on the second-quarter conference call, hoping for yard capacity cuts. We said it was possible, may even probable. Now it is no longer probable; it is happening. We're getting those yard capacity cuts right into our areas of the product market, and we expect more to come.

Environmental legislation, we had hoped that there would be ratification of the water ballast and there would be the low sulfur coming in in 2020. Now that's no longer a hope; that's being ratified and it has being ratified to Scorpio's favor, and our modern fleet is -- there really is no other fleet in the world that's better placed for those environmental legislation changes.

The world itself is working. We are seeing headline growth across the commodities we ship. We are seeing a China that is functioning. We only have to look at the dry cargo market. Across the dry cargo market itself, whether it is from the small ships to the large ships, despite there being actual supply growth in an already over tonnage market in the second quarter -- I mean, the third quarter and the fourth quarter, that dry cargo market continues to strengthen, continues to strengthen now across numerous commodities and numerous areas. That is very encouraging for Scorpio Tankers in the product market.

We also saw the news from Japan. Japan has traditionally been a very high volume user in naphtha products, and that's a very encouraging sign we saw.

Fifthly, US. As a result of the election, US oil and energy policy now reduces, in our opinion, the charts of OPEC cuts or at very least the endurance of it. The oil markets seem to have priced this possibility or probability that you will not have disciplined OPEC cuts, whereas if we look across the tankers space, it is as if the stocks are trading on a certainty of those cuts. That's whether we look at our own peer group in the product space or we look at those other companies, specifically crude oil companies, that would benefit tremendously in the crude oil sector.

The spot market in crude is belying that, though, as it remains strong, and that will be of benefit to the product market.

Finally, destocking has occurred and there are almost no newbuildings delivering into fixable positions in the product market or the crude oil market in the next two months, and what has changed now is that rather than in the second quarter we were looking into the teeth of destocking, a weak seasonal period with refinery turnarounds, we are now looking straight into entering the strongest season of the market, and that -- and the base rate of that market is already well off its bottom.

The last two, three, four, five weeks have been very constructive, and as I say, it doesn't necessarily show in our guidance so much or in our results because we have made this conscious transition to position the ships in a very long weighted way to the Atlantic basin.

With that, I would like to open it up to questions, please.

(Operator Instructions). Jon Chappell, Evercore ISI.

Brian, my first one is actually for you. The Credit Suisse facility, the $61.2 million, that seems to be the only one with any availability right now. Obviously, you have done a lot on the refinancing front. As that $61.2 million matches up with the remaining CapEx, how many ships are associated with that? And then, what is your comfort level and what is the timing on being able to attain financing for the remainder of the newbuilds?

That is with the two LR2s that are under construction now, so roughly $30 million each, and we're working on the newbuilding financing and we hope to have something in the next few weeks.

Okay, so based on Robert's comments, becoming a little bit more difficult for the average player, but you have seen no real change in the conversations with the banks as one of the blue-chip counterparties?

There is a change. It is a little bit more difficult, but, as you have seen, we did a loan with HSH and we're working on a few other things. So it is difficult, it's out there, but I think we're getting through it pretty well.

Right, okay. Robert, I noticed the newbuild schedule pushed back a little bit, one of the newbuildings now into the first quarter of 2018. Has that been something that you have been looking to do, maybe spread out the operational leverage, or is that a function of what you spoke about with the yards starting to face some issues and not being able to meet their commitments?

I think it is really all down to the yards. They are across the space, not just ourselves, not just in products, but across the entire industry, trying to stretch their workload out to as long as they possibly can, and that obviously is slowing down supply growth.

To go back to Brian's comment, I don't think we are -- we remain extremely confident of the financing of those vessels. I think it's completely true what he is saying, that the environment itself as you are doing it is getting slightly difficult. I think that overall is a good thing in the sense that we are confident of getting it, but the great thing is across the capital spectrum here, you have got the unwillingness to just go and fund any form of speculative position.

So, when you get the improvement in the rates, that is unlikely to lead to a lot of ordering, despite the large amount of yard capacity that even if it is coming down, very little bookings have been put in there. And then when you put the combination of ships being delayed consciously by the yards on their work schedule, it means you are as about as close as guaranteed as you can be of a supply side that is really under some control for a period here.

Okay, I appreciate the answers. I will turn it over. Thank you.

Gregory Lewis, Credit Suisse.

Could you just provide us a little bit of an update on your chartered-in strategy and how we should think about that over the next couple of quarters? Just as we look into 2017, we start to see some vessels roll off at the same time, as Jonathan was talking about, newbuilds are coming. Should we expect that total chartered-in fleet to drift lower here or is this really just going to continue to be a function of how the Company views the market and the opportunistic nature?

Well, I think you've got a couple of things. In our favor is that fundamentally the book itself is reasonably short historically for us, and with charters rolling off, in some cases, higher rates than where the time charter market is now, that does provide opportunistic possibilities of deals.

The difficulty in that is that despite what may be thought out there, there actually aren't that many. We try every day. We have a bullish view to the market, especially medium, long term, and you are now going close into winter. So, the irony is there just isn't much quality tonnage out there at rates, for example, that are quoted in indexes.

But to answer your story, I think that you would see a combination of expensive -- of higher-rate tonnage rolling off or the option periods renegotiated combined with opportunistically, if we can, taking tonnage in.

Okay, great. And then, Cam, are you on the line?

How are you doing?

Great, hi, how are you doing? I just wanted to (multiple speakers). I'm doing great. Could you talk a little bit about the impact of Colonial Pipeline on the product tanker market? And I realize that it is back online, but it seems like rates have still held up a little bit here. Could you talk about maybe that impact and then where, maybe, we go from here?

Sure, Greg. Well, I think in our view, like any positive demand shock, it has a great deal of persistence. In other words, once you get panicked fixing during the course of that pipeline interruption, it will take weeks, if not months, for the market to reset back to where it was, all other things being equal.

Now in this case, you don't have all other things being equal, so you have a positive shock, which throw a position list completely head over heels, and so, naturally, you have much more stretch allocation of tonnage around the Atlantic basin, and it will take a long, long time before those rates get back to where they were before, absent any other positive catalysts, like weather or rebuilding or repositioning of stock, this sort of thing.

So it was, say, a positive surprise for the market, notwithstanding the tragedy, but like I said, it has a long, long tail associated with it.

Okay, guys, perfect. Thank you very much for the time.

Doug Mavrinac, Jefferies.

I just had a couple of follow-ups as well. First, Robert, when you were talking about the six developments since the end of the second quarter that have been positive, one that you mentioned was the reduction in yard capacity and how that is coming to fruition. My question is, can you talk about the long-term implications of that closing of yard capacity and how long it would take for that yard capacity to ramp back up in the event of an increase in earnings?

And so, basically, how permanent is that and how important is that to the overall supply/demand balance not just over the next couple quarters, but over the next two or three years?

Sure, look, I think that's a very difficult position. Obviously in any industry, you're going to have the ability over time to reignite it.

I think in this specific industry, the yards here are losing skilled people. They are trying to form some form of consolidation, but it's not just about STNG in the product market. You are having the whole of shipping every day -- there is such a correlation to the whole of shipping to world GDP over time that what happens is you are setting the stage for strange things. The dry cargo market, it will recover at some point, so will other sectors. And then, all of them in one go or within a short period, like a year, start to try and get in through the gap of the yard capacity.

But it's not just stimulated -- that demand isn't just going to be stimulated by raw demand for economics, but regulation and aging fleets, too. And in each of the cycles, each of the super cycles, that's what really ends up happening, whether it's 1985, whether it's 2003, or whatever, the yards start off undermanned. There is undersupply. Now give it three, four, five years, yes, of course, then the yards come back on like they did in 1990 or in 2008-2009.

Right, but it sounds like it could take some time before that happens, even once people see the light of day.

Yes, because they can't completely turn the switch on and off real quick in the sense that shutting down yard capacity needs, in many cases, government approval, setting redundancies, dealing with unions. Well, the opposite occurs, too. You have got to hire your people at the yard, et cetera, et cetera, and reopen docks, which take time.

Got you, got you. Thank you for that.

And then, second question, and I think I know the answer to this, but I still wanted to ask it, just in case. Over the last couple of months, you guys have chartered in three MRs. To me, that indicates or at least shows your view of your outlook for the market going forward, and then also your preference as far as time chartering in vessels versus acquiring vessels at these very, very low asset values.

So my question is how do you think about that balance, increasing your operating leverage, because I think that this is a fantastic opportunity, the market that was provided by this transitory destocking of refined product inventories. But how do you think about taking advantage of this roll in charter rates against a backdrop where the long-term fundamentals are very attractive? How do you think about increasing your operating leverage in time chartering in vessels versus maybe even looking at picking up some assets on the cheap?

First of all, again, it is not quite so easy in the same way as time chartering in great tonnage; it is even harder. At least we are -- there aren't a whole load of Eco 2013 built onwards product tankers lying around willing to be sold right now.

Right.

Now I think if we approached Ardmore and we said, hey, can we have some of your MRs on the cheap, please? They would probably say no. In fact, I am almost sure they would say no.

So, the same as BW. BW have loads of product tankers, but I don't think the power family has any other view than we do that things are going to improve. Yes, of course you have -- where has the price deterioration occurred? It has happened with older tonnage and it has happened with companies who are just like TK for other reasons, just getting rid of their last two product tankers. They weren't modern product tankers. They were like we have to for own reasons just get hold of -- get rid of ships.

Ironically, you have actually now got the potential of some inflation coming back into the industry, which ultimately is good for pricing. So it is not as easy as saying, oh, wow, let's take this opportunity to buy assets, et cetera.

What we have done is we have prioritized ourselves. We have got very selfish. So we have prioritized our cash or balance-sheet strength on to maintaining the dividend. And the biggest dislocation is between, let's say, our stock price and the undervalued -- and the value of those assets themselves.

Got you (multiple speakers)

So (multiple speakers) just buying, going around buying one or two product tankers is like null.

Right, right. And actually, that's a segue to my final question. I think some of the market were questioning your commitment to that dividend, yet there it is. And you talked about the cash balance that you have and the strong balance sheet in your prepared remarks. My final question is, as we go forward, how do you think about that capital allocation process? Has it changed because of market conditions or is a dividend still a top priority, and then --

So far, and I appreciate the question, but so far in those prepared remarks, it was -- we were pretty clear on the second-quarter conference call. We said we expected a weak market. We said that we expected it to strengthen into winter. We said we were -- what we were going to do related to the dividend, and we warned that our balance sheet itself may be more flexible than may first appear.

We're also saying now in these prepared statements that we actually expect the market to get stronger, therefore cash flow to improve. We are saying that we are confident in doing financing. We've said we are not -- we haven't finished working in opening up that balance-sheet position, and this is a time where the Company just wants to be consistent.

Perfect. That answers my question.

And for better or worse, of course I can run a cash flow model that says if you had rates at $7,000 a day for MRs and $5,000 a day for LR2s, of course you can't carry on paying the dividend ad infinitum.

But what is an acid test to the Board's decision is to take the one-year Clarksons time charter estimates, to nick those a little bit, i.e., be more conservative than those, but at least that's some form of compendium of market thoughts and third party, even as we have said we can't charter in at those rates, and see whether the Company can -- functions for the quarter and the following year after that. And if you run that through our models, the Company is fully able to pay its dividend and be in compliance of its loans.

Yes.

That is about as long or as far as the Board meeting was on that subject.

Right, right, right. That is very helpful, Robert, and I think you for the time.

Ben Nolan, Stifel.

I wanted to circle back to something, Robert, that you were talking a little bit with Jon about in terms of the slippage of the newbuildings. And you had said that the yards were doing everything that they can to stretch the schedules to provide cash flows for going concern purposes, I suppose, or to employ their welders and everyone else.

Is there anything at this point that your MR schedule might be stretched or is that Hyundai Mipo in that yard pretty well situated so that what you see is what you got?

Cam?

It has pretty much been what you see is what you get, at this point.

Okay, that's helpful. Go ahead. Well, and then the other thing is just thinking about, and, Robert, I think you laid out all the things that should cause the market to tighten and so forth, but when I -- is it possible to at all quantify how big of a deal weather is in the winter, or at least conceptually? Normally, it is seasonally stronger, but how and why, I guess?

It's huge, and we haven't had a normal winter for a time. But it has the double combination of more demand in the North Atlantic and, at the same time as you have got that driving season, gasoline season in the southern Atlantic. In the South American countries, demand has been steadily increasing year over year for some time now.

The next aspect to it is that -- normally -- normal winters have bad weather, so you have congestion, which slows down the supply side. The whole operations side starts to slow down. If you get ice in northern Europe, that can be a tremendous boon to shipping, too. So it's hard to underestimate the value of a normal winter against a warm winter, and we have only seen warm winters for a while.

At the moment, it is starting off as if it's going to be at least normal. So it is really hard to understate how important it is.

It also is important because a tough winter or a normal winter means that everything is depleted as you're coming out of winter. It means that people can't store or get ahead of the next season, and that's been so damaging in warm winters is when you're not only drawing product from the season you are in, but people are able to have time to prepare and not get ahead of the next ones. Cameron, would you like to add to this?

Just to say that also under the load line convention, ships actually carry less cargo in the winter, so they are restricted from carrying the same quantity, and this obviously has a nice effect on the supply/demand balance.

That's very helpful and that goes for my questions. Thanks, guys.

Spiro Dounis, UBS.

Sorry to hear about Don. Robert, I just wanted to follow up on the inflection point here around Thanksgiving. I think you made that prediction last quarter, and directionally, it looks to be about right so far. Just curious, I guess, if you thought rates would be in a better place right now, if they are more or less where you thought, and how that factors into maybe doing additional charter-ins from here.

I think that, first of all, it wasn't a very brave call as 18 out of the last 20 winters it has been plus or minus two weeks from Thanksgiving.

Secondly, look, rates, as Cameron indicated, are higher than where we would have expected. That's a function of a couple of things. One, the Colonial Pipeline, as Cameron pointed out, there is a certain dynamic where the present supply and demand is much tighter.

Secondly, we think, like in many markets of shipping, the underlying supply and demand balance is much tighter than is actually observed. Clearly, something must have been happening in the dry cargo and the crude markets for those vessels to be trading where they are right now, the crude oil side to be trading where it is, and very often in these markets sentiment itself is a 50% rate change.

So, we are very happy with where rates are right now. We're really encouraged, for example, about how Aframaxes have been moving up and hard in the Mediterranean area, in Europe, and we're very encouraged at the base rate at this point that there is in the Atlantic and, more importantly, the position list. So, I would say we are a little bit ahead.

Okay (multiple speakers)

Keep fingers crossed. As it comes to time chartering in, well, the penalty for being a little bit ahead and six factors of fundamental reasons that the market is intact going forward -- actually, it is a harder environment to take ships in at the moment. And I think that's a bullish sign, too.

Got it, got it. Appreciate that. Second question, just around, I guess, use of cash in deleveraging. I think two quarters ago you made it more of a priority to deleverage. And I think, from what I can tell here, it looks like you prepaid about $16 million in debt on the K-Sure facility. Is that part of this goal here to deleverage or was there something specific at play there?

We are looking at a few different things, and that just helped with getting our covenants all in line together.

Yes, I think you have got to take a responsible partnership attitude with your lenders. The lenders are being very accommodating to the Company, and we have got a lot of operating leverage to the upside. We are committed to the dividend, and you have got to measure that with balance at the same time with your lenders, because we think that the probability is very weighted to what we are saying, but you can never be 100% sure.

Got it. Appreciate your comments, everyone.

Ken Hoexter, Merrill Lynch.

I want to [remind] you on my condolences as well. Just on the Eco vessels, just given the new rules, you mentioned that real quick. Any adoption you have to make, given your recent deliveries, on how the rules panned out?

Cameron?

On the sulfur cap that is coming in 2020, there is obviously lots of conversations on what options exist for owners, scrubbers being one, but scrubber technology analogous to what happened in ballast water treatments has been -- scrubber technology is still evolving and there's a long way to go between now and the deadline.

But suffice it to say that given the enhanced fuel consumption of our fleet, as and when there is a greater disconnect between the price of marine gas oil and marine diesel, ultralow sulfur fuels, and conventional high sulfur fuel oil, given when there is that price separation leading into 2020, we will be in a very good position to capture a lot of that benefit that our competitors will not, simply on a apples-to-apples world-scale basis. In other words, as freight is priced, we will have better take-home economics than anybody else because we have the most efficient fleet out there.

Whether or under what conditions we would invest in scrubber technology is an open question that will take many, many months and years to address.

So, some investment may have to be made by everyone to that level. It is unknown yet based on what you can install onto the system, is that (multiple speakers)

It is a complex piece of technology and a complex capital investment decision for any owner, but our position is one of more of a luxury position, just given the alternative, which is operate our ships as they are. Other owners won't have that luxury and they will be facing down the barrel of a rather long gun as that deadline approaches.

I appreciate that, and, Brian, the discussion on the commitments going back to, I guess, the early capital call question on your newbuilds, is there a timing of discussions or timing of need to get it locked in ahead of your CapEx schedule? Is there a time, a deadline, that we need to see the next layer of capital availability?

You're talking about the financing of the newbuildings, right (multiple speakers)

Yes, for the newbuilds, yes.

The first one that is being delivered is scheduled for the first quarter of -- end of the first quarter of 2017. So, that would be a deadline, an ultimate deadline, but we like to do -- we are working on it to do it beforehand.

Okay, and thoughts on having the next -- is it too expensive to have the next package available for the entire newbuild program? Is it just cheaper to get each commitment as you go along?

No, I think we -- look, I think that Brian has said that he is working on something, that we are comfortable in working on something, and that it will be in a matter of weeks, right? That's what he said earlier, and I think we will leave it at that.

Okay. And then, I guess maybe --

And a factor of weeks is well before the end of the first quarter next year.

Okay. Not a matter of weeks being by the end of the year?

It can be a matter of weeks; it can be by the end of this month, right? We're not giving any more detail other than what we are saying, and so far we have got a pretty good track record of financing things.

What I would take from that is he is in the last throes of negotiating and doesn't want to negotiate in public, right, and maybe part of his negotiations are that he can split the financing up or he can keep it in one place or do bits and bits. Sometimes, it is just not good to be too transparent.

Okay. Just one last one on the rates, Robert. You gave great insight in the plus two weeks. Is there a point where you become worrisome if weather, I guess, holds out as we're in this or a normal year -- you mentioned just before so far it seems like a normal year. Is a normal year good enough to get you the tightening that you want?

Normal would be really good.

Because you're comparing to the last few years where it was just too warm to get the normal trajectory.

I'm comparing it to years of it. Normal has always been really good.

Okay.

Unfortunately, shipping doesn't work in these -- it doesn't work in the plus 2, 3 standard deviations. Normal is really good. Warm weather and normal is not good at all and colder than normal is generally fantastic.

Okay, I appreciate the time and you taking this. Thank you.

Noah Parquette, JPMorgan.

Can you just talk a little bit about what you think drove the weakness in the LR2 market in September and why it has come back a little bit? I guess what I'm trying to get at is that could be seen as the canary in the coal mine for this idea of high product stockpiles and low arbitrage. Thanks.

I think it has the anticipation of the -- in the LR2s, you had a lot of things working with not just a -- that is your biggest destocking area, but also here some of those Middle Eastern refineries were not doing their turnarounds in September, early October, but the ships were anticipating those turnarounds that were going on in end October or now.

And, again, I would argue that in many ways it is the canary in the coal mine, that the rates themselves or the returns in total were actually not so bad for what was thrown at them. There have been times historically where they do react a little bit like VLCCs or Capes, where the market will drive your earnings down to OpEx itself. And either way, through that [worst] period, the rates we made returns on were significantly above OpEx. So I think, yes, again I see that as pretty constructive.

Okay. And I wanted to ask just a follow-up to the sulfur regulations. For the product tanker fleet, how sensitive is speed to fuel cost now, especially as [Eagle] class becomes more common? And do you see the room for a slowing down as the world fleet uses more expensive fuel?

It's a great question. The latent speed of a vessel, as you know, is something contractually negotiated between the owner and the charterer. We haven't seen over the last number of years that that speed moves very much. It is usually around 13, 13.5 knots.

What does change quite a bit is when the ship is not laden, when it is in ballast, what speed the owner chooses to run their vessels, and that is what is quite elastic to freight rates and would logically also be quite elastic to the price of fuel. You're making a dynamic trade-off between the opportunity cost of slowing down your vessel and what the economics are on your next -- your probable next employment.

So the answer to your question is maybe. It really depends on what the freight market is like at the time as those spreads on bunkers start to widen.

Okay, and then just a quick one, G&A expenses, cash expenses come down a lot the last couple quarters. Can you say what's driving that and if we can assume that to be constant going forward?

We're just looking at everything and making sure that we do it wisely, so it should be -- it will probably be up a little bit on the next quarter, so I think you should probably look at it for that when you're modeling.

Thanks.

Fotis Giannakoulis, Morgan Stanley.

My questions have all been answered. Thank you.

Herman Hildan, Clarksons Platou.

Just some very short questions. I understand it is not always good to be fully transparent, but is it possible to give some guidance on what the annual debt repayment will be going forward and how much the new facilities have reduced the annual debt repayment?

The new facilities will reduce the interest payments going forward, right, so we will do that. So, in the third quarter -- or fourth quarter, just about the debt principal payments is about $20 million, and then for 2017, it is about $140 million right now in the principal payments for the entire year (multiple speakers)

Herman, look, we will always be as transparent as we can on things that are being done, right?

Yes.

It is a different matter when things are being done as they were.

I understand. And just a final short question, I feared that you might be annoyed by this topic, but I agree with you that there are in general impacts, dislocation between how things are priced and how the future looks like. And you have been very committed to paying your dividend, even though there is -- it is a volatile stock market. Is there at any point where you said at this current price it makes more sense to buy back stocks than paying dividend? Or will you stick to that regardless in the, call it, near term?

You never want to use the words any, never, and wherever, but your paying of your dividend is more -- who knows, right? I don't know. So you take rates to $30,000 a day, you can pay your dividend, and if the stock is still at $4, you can buy stock, right?

Yes.

If you took rates to zero, you probably shouldn't be paying your dividend to the amount that we are paying, but you probably shouldn't be buying back your stock, either.

Yes. I think that's a fair answer. Thank you. That's all for me.

That concludes today's question-and-answer session. At this time, I would like to turn the conference back to our management for any additional or closing remarks.

I want to thank everyone for joining us today and we will speak to you soon. Thank you, bye.

That will conclude today's conference. We appreciate your participation. You may now disconnect.