Scorpio Tankers Inc (STNG) 2017 Q1 法說會逐字稿

Hello, and welcome to the Scorpio Tankers Inc. First Quarter 2017 Conference Call. I would now like to turn the call over to Brian Lee, Chief Financial Officer. Please go ahead, sir.

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

The information discussed on this call is based on information as of today, April 27, 2017, 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 Scorpio Tankers' SEC filings, which are available at scorpiotankers.com and SEC.gov.

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.

If you have any specific modeling questions, you can call me, we can address those off-line. But now I'd like to introduce Emanuele Lauro.

Thank you, Brian. Good morning or afternoon to everybody. As highlighted in our first quarter results announced yesterday, we've been able to execute on what we had planned in terms of strengthening our balance sheet and increase our liquidity position in [the right] environment, which has been more volatile than what we would have hoped for.

All the steps that we've undertaken are mentioned in our earning release, and I will not repeat them to you now in order not to be repetitive. But across the board, you would have seen management using most, if not all, the available tools to adapt constantly to the best possible position in the marketplace. We are positive about the way the market is shaping up. We remain optimistic on the product tanker market outlook, with the fundamental drivers of our market that have been remain largely unchanged. We are 1 quarter closer to the recovery, and we're getting even more bullish than we had previously thought we would be.

Our markets have absorbed well the large number of new buildings that have been entering the market so far this year. Bar for the United States, the world product inventories have continued to decrease, showing headline demand is stronger than expected. Going forward, the number of new deliveries is rapidly declining, with the MR order book that remains close to its 20-years low. We still expect demand growth actually overtaking supply growth in the second half of this year.

The shipbuilding industry, as mentioned before, continues to struggle to attract new orders in any meaningful way in the product tanker market. And at the same time, asset values have now turned a corner and have started going up. So in general terms, we have a very positive expectation of the product tanker market going forward and are excited about our company position to benefit from the expected upside.

With this, I'd like to turn the call to Robert.

Hi. Good morning, everybody. So thank you all for your patience. But as Emanuele said, we're really excited going forward this last 3, 4 months since we last spoke. Virtually everything has gone better than expected, whether that's headline demand, whether that's rates, whether that's lack of newbuilding orders, whether that's on the regulatory side. And this market is clearly much better balanced than any of us would have expected. None of us, including you analysts, expected the market to be as strong as it is today. And most importantly, that base, that high base, even though we're in a weak part of the cycle, that high base is going to result as soon as these lines start crossing. You can't carry on drawing inventories forever. The new building deliveries are rapidly declining. At some point, pretty soon, you are going to get really substantial increases in rates.

And what do we mean by that? That's not 1, 2, 3, 4, 5 a day. These are expansions of 5, 10, 15, 20 in the larger ships.

We really don't have anything more to add to the release, so let's turn it over to Q&A.

(Operator Instructions) And our first question comes from the line of Doug Mavrinac from Jefferies.

I just had a few questions for you all this morning and, Robert, kind of maybe extrapolating on some of your comments. When we look at kind of how the market is performing and we see how you have outperformed some of the broker-reported rates, on the one hand, that kind of jumps off the page as being very good. But I'm not so sure that it even tells the whole story because what I'm alluding to is during 1Q, you had a fire at Ruwais, you had Ras Laffan down, you had Yanbu down, all of these refineries down. And yet, LR2 rates are still $16,000 a day. So my question is, is the market just that much tighter, I guess, than people even realize given that you can absorb all of those significant outages and still see LR2 rates of $16,000 a day?

Yes, I think that's another really important thing. I mean, we're really thrilled with the LR2 performance. I mean, that one has had -- it's had those refinery outages, so it's having everything thrown against it. That's the part that's most affected by the Asian drawdowns in inventories. That's the one that's been really hurt by these outages. Yet, as you can see by those rates, those results, that is way above what you could normally expect. So that's being driven. That's your pure indicator. The headline demand out there for products worldwide is accelerating and accelerating pretty rapidly. And that's the one that I allude to that can -- once you're up in that territory of the 15, 16s in a market like this, once this inventory destocking stops or the refinery outages come -- stop and come back online, that market can move and move in multiple thousands of dollars at any moment.

Right. Because when you're talking about setting that stage or the lifting off point, that's LR2 rates are $17,000 a day before this stuff comes back online, so obviously that will just like add fuel to the fire.

Yes, and we've got -- we've had a lot of practice now in our LR2s. We've got a fantastic fleet. They're all modern. They're really good, and they're absolutely ideal for this very articulated trade now. The LR2 rate, I had some sympathy for you analysts now. Previously, I've sort of complained a little bit, but I've got a lot of sympathy. There simply isn't an index out there that you guys can begin to relate to actually how our ships are trading. I mean, I will give you an example of one of the ships went from loaded in the Arabian Gulf, discharged in Northwest Europe, reloaded in Northwest Europe, discharged in Korea, reloaded in Korea, in the same place, and discharged in the Arabian Gulf. There's not an index around that can cope with that sort of triangulation. And the idea for us 2 years ago, that an LR2 could actually have more loaded time than an MR could have, is crazy. But you have to have a size. You have to have fleets. You have to have certain contracts. We're not going to tell you all how we do it. That's just not what we're going to do. But clearly, size and quality of ships help. You can see it in our own results, we have one LR1. Well, that's nowhere near close to where that LR2 performance is, and that's simply because we just don't have -- one ship is whatever. You can't do what we can do in the LR2s. But that's really exciting.

Right, right, got you. No, totally. And Robert, I mean, so when we're talking about the increased triangulation and the strong earnings even before some of the big Middle East refineries come back, another notable thing is that when we look at the MR market, you guys earned a little bit over $13,000 a day in 1Q and in 2Q, you've earned $15,500 a day. And that's a much deeper, much bigger market. So is that also a kind of part of the story or another way to kind of gauge just how tight the market is? Is that not only you're not get some...

Yes, I think in the MR market, I mean, I think all MR [moment], I think -- I'm very sure if Ardmore is having their conference call today, they'd be as excited because you've really had a lot of expansion of volume west of Suez. You've had a lot of deliveries in those first 2, 3 months that have been absorbed. And another thing that's fairly unique here is, I think, this is only like the third time in my career that the second quarter has started off higher than the first quarter in MR. And that's only happening because their headline demand is so strong. And again, it's happening against the headwind of non-U. S. inventory drawdown. So I'm sure it's going to be choppy. But I'm really convinced that sometime fairly shortly, we're just going to wake up and this whole market would just lift to a different place.

Right, got you. And then just -- I'm sorry, go ahead, Robert.

And we've been pretty cautious for over 1.5 years to now. We've been talking -- the last conference call, we're saying we have very little visibility. That's changed these last 2, 3 months. It's actually acting rationally. From our desks again, we can actually say with reasonable certainty whether the market is going to be moving up or down over the next week or 2.

Right, right, right. Yes, and that's a big change. And then, Robert, so we know kind of how tight the market is now. I think everyone kind of should see that the demand side should only continue to firm. And as we also have visibility, this supply growth is really going to start to slow in the second half of this year. So in terms of other things that we haven't seen yet, can you comment on whether or not you've seen any increases or changes in ordering behavior? Has there been any changes in capital availability to the broader industry that would change that? Or are we still expecting that demand is not only going to be good, but your supply is still going to flow no matter what can be done about it?

Look, I think there are 2 or 3 really exciting things in the product. Yes, the capital is constrained. Yes, there are hardly any new building orders. There's pretty good reasons for that. First of all, available shipyard capacity for products has actually declined. Japan is filled up for a long way. Korea has lost key product yards. No side of the business, the major 3 trades, is more affected by this shutdown in Korea in capacity than the product side. But then, those yards in China, those few yards in China that can build products, is starting to get dry bulk orders. I mean, this is the irony. I mean, Scorpio Tankers ironically is probably the best investment you can make on a dry cargo recovery, not just on a product tanker recovery.

That's all right. And then I think Emanuele mentioned that also that we're starting to see asset values moving higher as well. So it truly seems like at all levels, that the inflection point has been...

You would expect in this environment that asset values to start moving higher because look at cash flow. I mean, it's not -- look at what we're reporting on the MR and assume that that's sort of where people were doing things. Yes, of course, you can buy an MR at present price and cash flows out.

And our next question comes from the line of Fotis Giannakoulis from Morgan Stanley.

This is Ben stepping in for Fotis. So just to piggyback kind of on the last question, I was curious. It seems as though we have visibility in certain factors, the order books at record lows, rates keep and the order books coming down, refinery margins are trending upwards, U.S. exports are increasing. So I was just curious, and you said over the next few weeks, but what would trigger this inflection point? And are you seeing any changes in behavior of charters at this time?

The first behavior you're seeing in charters is that there's much more competition to chartering vessels. So the charter is they're trying to put risk on or cover on in the trades. Okay? So that's one. It's a good conservatory thing. What triggers it is, you just don't know. I mean, you're obviously pretty tight on supply demand. When the markets ripped up or in the last weeks has done so very quickly and very hard, taking a long time to sell off, so that's why you know it's really balanced. You can't predict that point where people sit there and say, "Whoops, we better not draw any further on our inventories." And that's one caveat. As soon as that happens, obviously, more spot demand comes in. We're already seeing it in the crude oil side. I mean, the crude oils side itself, which is also helpful here, is performing better than what people expect. You just can't literally predict that to the week. You know you've got the ingredients for it because everybody, including ourselves, is talking about this weak environment. But somehow, in this weak environment, the rates are basing at the pretty constructive levels. So unfortunately, you just don't know. You just know the ingredients are there. The risk, therefore, is to the upside every single day. Every time the markets got bid down in the last 10, 12 weeks, it's reached a -- it's made a higher bottom. And every time it's bid up, it's made a higher top.

Our next question comes from the line of Jon Chappell from Evercore.

Just 3 hopefully relatively quick ones. First off, Robert, I appreciate your sympathy. It's obviously incredibly difficult for us with some of the different trading routes. But to the extent that STNG has kind of continuously outperformed the industry benchmarks, difficult to quantify maybe, but how much of that is associated just with the general lack of transparency in the market for kind of outsiders? And how much of that is associated with fleet size, scale, pooling arrangements, et cetera?

Well, first of all, yes, you have a benefit in fleet size and pools and maybe that can give you a 10% to 20% edge with, obviously, the new ships consuming less fuel and et cetera and being wanted by the customers. But the fact of the matter is the actual indexes that you all have available to you are useless. They're completely useless. There's no point in actually them being printed. So there's no comparison. It's not a question of how are you outperforming the index, the index is not relevant. It's as relevant as how many ice creams are sold in Central Park today.

Okay. Let's start working on that.

Well, I mean, just look at the numbers. I mean they're being completely -- they haven't been beaten by one standard deviation. They've been smashed out of the park because the index itself is only based on AG to Japan and back again in one specific cargo. And I've already indicated that that's just not what we're doing. And we wouldn't expect...

There is a [compelling] then that's what you're doing as far as the positioning of your fleet and the backhauls that you're able to (inaudible).

Yes, but everybody -- but that part of it, we may be able to do it better than the average. But that part is just what the trade is. You're trying to compare those indices are like saying, "Well, what's the cost of -- how much does it cost to go by steam train from New York to Boston?" It doesn't -- it's like so -- it's old-fashioned, the description of a market that no longer exists.

Got it, all right. We'll keep trying. Second question, pretty noteworthy, the bullish tone, I think, of this call especially relative to the last few and there was kind of like a noncommittal on the timing, understandably so. So obviously, 3 months ago, we were talking about a dividend cut. Now we're talking about a strong balance sheet. So maybe this is for Brian or Robert, but what's kind of the comfort level now with overall liquidity? And as the market shifts to such where you will be very cash flow positive again, how do you kind of think of use of operating cash flow going forward? Is it related to either the stock or the market, which has somewhat bottomed?

I'll answer. The first one is, obviously, we're comfortable with our liquidity. We've done -- Brian has done tremendous. The team has done a tremendous amount of work on that balance sheet in the last 6 months. As to what are you going to do if you start earning $1 or $2 a share, let's just see what's available as the alternatives.

Got it. Final one, insider buying seems to be a little bit of a copycat to what happened with SALT last year. A lot of insider buying with the management company of Scorpio Bulkers who seem to pull back from that...

We love sequels, especially when they can be better than the first film.

Those are rare. All right.

And I'll leave it at that.

And our next question comes from the line of Gregory Lewis from Credit Suisse.

Yes, I mean, Robert, clearly, there's a little bit of a swagger or extra stride in your step. As that pertains to where the market is now and how you think about the chartered-in fleet, should we be thinking about that? I mean, I feel like as we're taking delivery and winding down the new build program, it sounded like in the past, we would maybe see the chartered-in fleet shrink. Just given your tone, it looks like maybe we could actually see more opportunistic -- and to...

It's a double edge, it's a double position. Look, we have taken in charters where we -- because we're bullish on the market and where we're seeing this opportunity and optionality. In my comment earlier, we're now starting to get competition from the actual customers themselves when we're looking at charters. And the market itself has strengthened, and the real -- and the time charter rate forward has strengthened. And there are less owners because of what's happening, willing to charter out quality-operated tonnage. So your desire may be the same, but your ability to get deals may be drastically lower. So you're not actually -- you may not actually see much of a build on the charter book.

Okay. I guess, congratulations on the third, I guess, we're executing on the previously announced sale on leasebacks. Is that a market that the company continues to explore? Or to Jonathan's comments about your comfort with liquidity, should we be thinking about what -- is there more opportunities for STNG to do that? Or that was sort of a one-off where we're on...

There are more opportunities to do that, but we're not in the process of doing that at this moment. I mean we've got -- as you know, from January, early February, we felt very little visibility. We were extremely cautious. We were really, really focusing hard on making sure that we built that liquidity in the balance sheet. That has been done, combined with a material change in our cash flow and our cash position from the fact the market was much stronger through that period than what we would -- than what we were predicting in our real low cases. And now we believe going forward, that we've not only charged the battery or created the liquidity, but that the chance of the market falling into a distressed position is much, much lower. And even if it does, it will be much, much shorter. And the risk now in our own internal models is, like we said to one of the previous questions, is to the upside. I mean, we're not -- it really matters now that the new building delivery order book is slowing very hard. It matters that those refinery margins are there. It matters the refineries are coming up, and the guys that would take them down are doing it. So our risk parameters are less. So we don't see the need to go and do that at the moment.

And our next question comes from the line of Ben Nolan from Stifel.

So I have a couple of questions for you guys. First, on the new building side. Obviously, as you said, Robert, there has not been much activity, a handful of orders, but most of them seem industrial in nature. One of the things that came up yesterday was -- in the Internet call was that the yards have been really aggressive in trying to win new business and hard selling opportunities. Is that something you guys have seen on the product tanker side? Is it a little bit more relegated to the larger ship classes?

No, it's not the -- I mean -- Cameron wants to say anything to it.

I think it's a nuanced answer. It varies from yard to yard. What really has changed over the last couple of years is that because the shipyards themselves are going through stressed, if not distressed, situations, you have lenders and creditors behind them who are stuck between a rock and a hard place, which is to say they are faced with either closing down or reducing capacity or only booking capacity that meets certain financial hurdles, i.e. cash flow positive or de minimis losses. And so really there's been for the most part a pretty wide bid-ask spread that has kept a lot of orders from happening. Where orders have come in the product tanker space have largely been to clear out old contracts and [queue] blocks in advance of a new regulation that captures engine emission, air emissions. That's where you've seen a little recent blip in ordering. There really hasn't been a lot of activity.

Yes, and I think it's different in the price, as we've said. I mean, it's affected. I mean, you yourself did this really excellent report on the diminished yard capacity. And if someone goes through that report, they're going to see that it's in that product tanker range that the biggest hits have come in. So they really aren't any bargain basement deals on the product. And if anything, I would expect the prices to be moving up as they are trying to push them also up in the dry bulk area. The VLCC market is -- the VL market is slightly different, right? I mean, you've got the really big yards there that are still up and functional.

Right, okay. That's helpful. The next question relates to -- and you actually alluded to this a little bit ago, Robert, that the LR1 business, the one remaining, it looks like it comes off contract pretty soon. And I know that it was in the Panamax pool. How are you guys thinking about that asset class structurally? It looks like you're almost entirely out of it longer term. Is there any (inaudible) ?

I think there's no problem with the asset class structurally. I think that the asset class is -- as I've said many times before, you cannot have a situation where MRs are strong and LR2s aren't or Handys are strong and MRs aren't. So the LR1s, you put in the same box as the rest of the clean space. It's more of a point that one ship just doesn't kind of do it. Whether over time we can find a way to increase that position to a meaningful point where we can trade them as effectively as the other classes we have, who knows? I'm never going to say never, but that's it.

And then last one for me is and this comes up from time to time, but just curious, your latest thoughts. Obviously, in the crude tanker space, there's been decent amount -- well, some noise and some actual activity around M&A and so forth. There still are a lot of private-equity-backed product tanker vehicles out there. As we get closer to this sort of upward inflection point and stronger portion of the cycle, is that something that you would expect to pick up? And is it something that you might would be involved in or you haven't scaled on it?

I think you'd -- look, across all of shipping, if you're a shareholder, you would hope that M&A activity picks up, one, because you've got the chance of creating proper sizable entities that can benefit from the economies of scale in the markets and be able to access different forms of capital, whether the lenders would like that as well as most shareholders. You hope that for the industry. The difficulty in the product market itself is the disparity or difference between fleet ages and fleet types. There are not many, many fleets that kind of compare to ours. But yes, but hopefully consolidation -- consolidation is good, so I hope that it happens.

And our next question comes from the line of Noah Parquette from JPMorgan Chase.

It was in the news lately that China is thinking about putting in place export quotas for refined products. I'd love to hear your thoughts on that. The trade has really been dynamic the last 1.5 years. It's stayed local. Can we see even ton mile accretion for that? Or what do you think that would do to the product market?

Well, firstly, I think that China is generally positive to the product market, whether it's because they -- consuming the stuff; whether or not it's because they are taking the vegetable oils and palm oils in as well, which is very helpful to the product demand; whether or not they're increasing their own refinery capacity. And normally, what happens like in Europe or the United States, if a geographical zone increases and matures its refinery capacity, they start ultimately trading in and out. But China is still a pretty small part or a very small part of product tanker overall trade. So whether or not it's positive, I wouldn't like to hype it too much in the sense of -- China is not really that relevant to products at the moment. What is relevant is that the Chinese economy is growing and it's taking the crudes and it's taking overall energy and is supporting the dry bulk market, which competes ultimately for shipyards and shipyard space and products.

Okay. And then I wanted to get your thoughts on the upcoming ballast water treatment implementation. Given the ability to remove the IOPP certificate from the special survey, do you think -- what do you think the effect will be how this plays out over the next few years in terms of scrapping?

I think there will be, in the end, a very little -- a very minimal impact for the following reasons: so far the United States is not granting any sort of blanket waivers or extensions to the implementation of the regulations, which means that if you want to trade to the United States, your timeline for that CapEx and that cost is set. And so I just don't see -- unless there is some remarkable change of heart in the Coast Guard, I don't see any way for most owners to get around that implementation schedule. And consequently, as you see in other transportation industries, you'll see a further segmentation. You might not see increased scrapping, but what you will see is tankers relegated to second tier tertiary markets, leaving wide open the premium trades and premium markets to the most modern vessels with the systems installed. And you'll see that price differentiation in those segments or between those segments. That's how we're looking at it now.

And our next question comes from the line of Herman Hildan from Clarksons Platou.

Just some short questions. The first one, could you comment on how much are we allowed to (inaudible) cargo storing in the first quarter?

0.

0? Okay, very good. That's a good confirmation. And the second question I have, obviously, as we've kind of moved away from balance sheet focus and so on and back to fundamentals and higher rates, massive prices and so on, you don't have a tradition of sitting still and watching the recovery of the markets kind of might be not surprising, the early question in that sense about (inaudible). But could you give us some thinking on what kind of visions you have for the company going forward?

What type of what?

Vision and what kind of ambition, missions.

Ambition? Yes. The first ambition is to get the company back into profitability. I mean, I think it's like we've said before. I mean, it's a -- this is very similar to -- I don't know, this is very similar to we have a sister company that's in the dry bulk market. And this is very similar to around July, August last year where the bottom had been already set in, prices are gently moving up ways. Rates are gently stronger than expected. And I would say -- if I had the choice, I would say, on dry bulk calls, you could say what a difference 6 months has made. In products, it's probably better to say what a difference 6 months will make. So for us, let's accomplish the easy ambition first, which is returning to profitability, and then we can set some more dreams and more ambitions.

Sure. And I mean, you talked about on the yard capacity side...

And it's exactly the same questioning, by the way. The interesting thing is that the last quarter, the questioning was all about how on earth are you going to survive and how are you -- what's your runway, et cetera? And now already we're getting to how you're going to return cash to shareholders. This is like a dry cargo rerun. But as I said, we love sequels. We love them.

I agree. Just kind of try to think it had -- thinking about your potential for growth, although it might be related and so on but given...

Wait, you got a company that has a $0.22 leverage per $1,000 a day, right? So let's think about profitability. Or you think about profitability before you worry about our growth, all right?

(inaudible)

Or better still, better still, talk to your research department and try and solve the mystery for the world, which is creating an LR2 index that reflects the market.

Yes, I'd make a suggestion. But really, if you look at the MR side, it's only -- it's about 12 (inaudible) that became an official route and that's now part of the (inaudible).

Yes, exactly. That's what I'm saying. It's nobody's fault. It's none of you analysts' fault. In some word, you're going to create something that reflects the modern world. And you're totally right, they change.

And where do you see the incremental, call it, growth in trade volumes? What do you suspect could be the new TC14 for the (inaudible)?

That's the point. It's literally going all over the place. You got (inaudible), you got Singapore, Korea, you've got -- crossing both ways into Europe, out of Europe to the east, into West Africa. It's all over the place. There won't be -- you won't be able to solve the LR2 issue by a simple route. You have to get a group of lump sum -- a basket of lump sum paid voyages and the TC voyages.

And our next question comes from the line of Ken Hoexter from Bank of America Merrill Lynch.

Robert, your confidence is obviously clearly palpable as others have talked about. But just want to check in, have you seen head fakes on rates like this before? Or do the trends give you confidence that there's just too much fundamental turn in your outlook?

It's hard to get a head fake from a market that is -- and the reason why I wouldn't -- of course, you can see, you had head fakes. But it's hard to describe this as either -- there's a probability of a head fake simply because you know that you've had a big increase in supply in the first 4 months and you've had inventory drawdowns. So that tells you that your headline demand must be stronger than you'd first thought.

Great. And just another one on -- and kind of let me step back, a bigger picture, if I can. Just on the OpEx shifts in production as they decrease crude production or try to, non-OpEx seems to be picking up a little bit. Is there a derivative impact on the product market in terms of length of haul that derives from the shift in crude patterns?

Sure. Look, I mean, the U.S. export capability is being a beneficiary with U.S. crude production coming up. That's been fine. West Africa being able to afford to being able to sell crude and afford to take in products again is also a benefit. Yes, I mean, it's all good. I need to chat with you afterwards, right, because you have us earning $0.60 in '18 with a price target of 4 10 and an underperform. So from my PA, I want to know in the BofA portfolio what they have as overperformance.

Happy to chat with you afterward. Let me just ask another question on the -- maybe to Brian. On the sale leaseback, you did that at a loss now. Just want to understand or I know it was done -- announced before. But if rates are firming or your view is firming, was that done because of the need for capital now? Or I just want to understand why you...

Wait, wait, wait. If you listen to the first quarter conference call, the first quarter conference call, we announced that we had agreed to sell these 3 vessels and lease them back, but the trade had not been executed and the vessels not delivered. In the first quarter conference call, we -- if you remember, we were really making sure we had liquidity. We did not expect the market to be as strong as it is or fundamentally strong as it is. And we focused on ensuring we would get through the path of weakness. So we had done all our financing and the sale leasebacks were creating the liquidity. Earlier in this call, I said, "Look, we've done what we've done. We're pleasantly happy with the progress the market has made." We have more cash than what our forecast were, and so we're not working on any more sale leasebacks even though they would be available to us.

Okay. And then, similarly, the debt you took out at a higher rate versus what's retiring. Again, was that just because the deadline for that was coming up soon?

Correct. The deadline for that is coming up in October-November. Again, we wanted to play this market from strength and make sure again that we wouldn't have anything. I mean, yes, we can be really sure and really confident in the market, but you can always have some stupid Mac event coming in the world. So when we did the baby bond, for that few extra fraction of percentage costs, we were able then to ensure that we had prefunded the purchase of the bonds due in October, November, thus ensuring the company had no debt due until the middle of '19.

Okay. And just to clarify, if I can, lastly, you're now fully funded for all your prospective deliveries with the recent actions, right? So you're positioned well in terms of this rebound now.

Yes.

And our next question comes from the line of Spiro Dounis from UBS Securities.

Robert, I just want to circle back real quick, if I could, just around the optimism around the demand side for tankers here in the short term or medium term. That's one I've always struggled to get any real conviction around just because it seems to be so arbitrage-driven. So I guess I'm just wondering, is your basic call that stockpiles globally come in, we get back to imbalances, and that's going to drive rates up? Or is there something else that's really driving it?

Well, what's driving it in the first place is head world GDP, headline product tanker demand, the shift in where refineries are and people like Australia are closing down refineries being importers, all of that. And then that very simply the market, although it's weak, is still positive cash flow or close to positive cash flow for the players in the market despite the fact that you've had 3 or 4 months of the remaining large period of deliveries, plus destocking, which is in itself is taking demand away from the headline growth. So the thesis is that your supply-side growth will start to slow pretty dramatically. That's even excluding scrapping the ships or extended repair time or modification time for the environmental changes. And at some point, you just can't keep going to the inventories and draw inventories down. At some point, you have to stop doing that. And just the stopping of it will increase spot demand for ships. And God forbid, if you actually turn the other way and start to build inventories, that will add even further demand to the market. So that's where our enthusiasm is based on here.

Okay, that's clear. And then, I guess, if I could think of a risk to the supply side and I'm not sure how meaningful it would be but -- and I know, I guess, a reasonable amount of LR2s are trading in the dirty market. I believe Teekay has got a few in there, but I don't have a good sense for what that means in total. So the rates do actually get stronger. Is there a real risk that LR2s come back into the clean trade and maybe (inaudible)?

Well, I don't know. I mean, Teekay's particular ships are like to go to the scrapyard before they come back to the LR2 market, okay? I mean, a lot of these ships that are so-called LR2s that are trading in the crude market, I don't know what they need to do to get back into the product market because they may have been trading in there a long time or they may be older, et cetera. It's just not -- it's a really easy thing to do, to take an LR2 and trade it in crude. It's very hard to take it from crude and put it into LR2. You would have to have a sustained delta, a sustained delta where product LR2s are trading significantly above Aframaxes for that person to make the move to transfer into the LR2 trade, because their first voyages are going to be at a steep discount until they've had 3 voyages in consecutive clean.

Got it, very clear...

And the actual trend is quite the opposite. There was a super responsible Bloomberg article where there were -- the opposite, you were getting ships drifting from the LR2 market into the crude market as they are. They don't want to upgrade their tanker teams and do the maintenance or it's just easier because they're older ships to trade in that Aframax market. So the trend is the other way at the moment.

And I'm showing no further questions over the phone lines at this time. I would like to turn the call back over to Brian Lee.

All right. I just want to thank everyone for joining us today, and we look forward to speaking to you soon. Thank you.

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