Scorpio Tankers Inc (STNG) 2019 Q4 法說會逐字稿

Hello, and welcome to the Scorpio Tankers Inc. Fourth Quarter 2019 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. Welcome to the Scorpio Tankers 2019 Fourth Quarter Earnings Conference Call. On the call with me are Emanuele Lauro, our Chief Executive Officer; Robert Bugbee, President; Cameron Mackey, Chief Operating Officer; Lars Dencker Nielsen, Chief Commercial Director; James Doyle, senior financial analyst.

Earlier today, we issued our 2019 fourth quarter earnings press release, which is available on our website. The information discussed on this call is based on information as of today, February 19, 2020, and may contain forward-looking statements that involve risks 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 on 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 web page of our website for approximately 14 days. There are slides available at scorpiotankers.com on the Investor Relations page under Reports and Presentations. If you have any specific modeling questions, you can contact me later and discuss off-line. As a reminder, in the variance -- the Explanation of Variances section in the press release, we gave guidance on future depreciation, G&A, charter hire expense and interest expense. Now I'd like to introduce Emanuele Lauro.

Thank you, Brian, and welcome to the fourth quarter and full year 2019 earnings call, everybody. Thanks for being with us today. 2019 showed significant improvements from 2018 for both Scorpio Tankers and the product tanker market in general. The Trafigura transaction was transformational and well-timed. We are pleased with the way these new additions to our fleet are performing and our enhanced presence in the MR and LR2 segments. Aside from this deal, we continue to retire debt and delever the company. As we have discussed in the past, this will remain a core objective for the rest of 2020.

Throughout the year, product rates posted strong improvements from the previous year. And 2019 ended very much on the front foot, with the expected strength coming into the market after Thanksgiving and somewhat supercharged by some abnormal factors such as the U.S. sanction on the COSCO fleet and other geopolitical unrest like in the Arabian Gulf, for example. The positive effect on the dirty tanker segment that these geopolitical aspects have had has impacted by pulling more product tankers into dirty trades. And this has helped and will help the already tight supply picture throughout 2020.

Operationally, the fourth quarter was affected by the scrubber retrofits. We will discuss more about it during this call. Across the industry, off-hire periods were undoubtedly extended as repair yards struggled with the volume of work. We were not immune from this. Against that backdrop was the decision taken to delay some yard visits to benefit short term from the higher rate environment.

Here in mid-February, we sit with over 50 vessels already retrofitted, including a substantial amount of our LR2 fleet. We can already say at this stage that the envisaged paybacks in our base case look to have been far exceeded. We expect that spreads between low-sulfur blends and traditional fuel oil to remain wide so that as more of our fleet becomes scrubber-equipped, we will benefit from enhanced time charter equivalents.

We remain confident in the industry fundamentals. But clearly, the first quarter has so far been dominated by the coronavirus and its effects, which are as serious and real as they can be. It is not my place to comment or speculate on how the situation will unravel. We keep watching it with utmost attention. And we are and will continue to take all those measures that can protect our people, especially those who are close to the affected areas, always following the World Health Organization and other relevant international and local authorities' advice and guidance.

So far, our markets have been cushioned from the demand disruption in China as surplus product flows from Asia mitigate some of the seasonal refinery maintenance in the West and the Middle East. However, looking ahead into the second quarter, we remain cautious and prudent, preparing for multiple scenarios in terms of product flows, vessel demand and logistical constraints.

With that, I will now hand the call to Lars Dencker.

Thank you, Emanuele. Good morning, everyone. The fourth quarter displayed significantly improved market conditions across all product market segments, showing increased rates at levels not enjoyed since 2015. A confluence of factors, including regional arbitrages; seasonality; IMO fuel changeover; scrubber retrofits; and mainly, as well as most importantly, the simple supply-demand fundamentals, which provided the backdrop for the substantial and widely anticipated surge in rates.

In Q4, the Scorpio LR2 fleet achieved time charter equivalent of USD 25,000 per day, a 57% improvement in daily time charter equivalent compared to the Q4 of 2018 and 55% better than the preceding third quarter of 2019. The MR segment performed well in Q4, showing time charter equivalent increase of 27% to USD 17,600 per day quarter-on-quarter. Overall, the Handy fleet and LR1 segments both saw daily increases of about 35%, representing a considerable improvement year-on-year.

The above-average winter temperatures experienced in the Northern hemisphere saw some reduced winter distillate heating oil demand, which impacted the arbitrage barrel and pushed the product market into further backwardation, hitting refining margins and curtailing opportunistic cargo trade. The September 2019 attacks in Saudi Arabia's oil infrastructure resulted in the reduction of Saudi product exports of 600,000 to 1 million barrel of product per day in the Q4 of '19.

This combination of the warm winter and the reduction of Saudi exports created a challenging market for LR1, LR2s at the end of the quarter, Q4 and Q1 of '20. However, despite these challenges, freight rates traded up on simple fundamentals, and 2019 ended with a robust finish across all segments. Lately, we followed the current viral outbreak in China, and we constantly review all credible information that we can provide for contacts when considering likely outcomes for the product shipping market from the COVID-19 outbreak.

In the short term, demand can respond faster than supply. It's unlikely that run cuts in Asia will be enough to cover the loss in demand from the virus and this surplus product is going to hit the export market. And today, Asian gasoline, jet and diesel are all trying to find homes in the West.

We are seeing volatility in the forward freight curve. And surplus product is pricing itself into new discharge areas, creating new trade flows, which, on balance, will impact other regional product freight markets positively.

The market is understandably focused on the COVID-19 impact and the warm winter, but we should also highlight the coinciding refinery turnarounds in the Middle East, which, in aggregate, provided further and immediate downward pressure to rates in February. We anticipate some interesting supply-demand dynamics during 2020 as these Middle East refinery turnarounds complete and the risks from COVID-19 are clear or dissipate.

Despite the uncertainties in the market, we expect to see a demand benefit from IMO 2020. The demand for MGO and distillate blending components were muted by the VLSFO storage accumulated in preparation of IMO 2020. Further, since the fourth quarter of '19, 38 LR2s left the clean market and went into the dirty trade, further tightening supply of the larger product vessels.

We are encouraged that the market will normalize post COVID-19, and it's not as much a matter of if but when. In the short term, we see uncertainty as a result of coronavirus. But in the long term, we see even stronger product tanker fundamentals. These fundamentals underpin the long-term rebound in product tanker rates, ton-mile demand continues to grow and the lowest newbuilding order book in percentage terms not seen in 30 years.

And with that, I would like to hand over to Robert Bugbee. Thank you.

Hello, thank you. I'd like to add a couple of things, but more specifically to Scorpio Tankers from Lars. I think that we're starting to see the commercial platform that the -- Lars' team and the operations and technical teams have, I believe, put in place start to emerge. And I think that we're starting to see the benefits of the contracts and direct relationships we have with customers for cargo to better improve our utilization.

And just as importantly, we're starting to see the differentials showing on the quality of the vessels, whether they're new and, above that, whether they're scrubber fitted as well. And we would expect that phenomena to continue as we proceed through this year and especially as we proceed through the scrubber program. I think that there's always the temptation just to sort of be disappointed in not having a market that you think you should have at this stage in the economic cycle, but we've really got to trade the market that we have.

And to that extent, I think this first quarter guidance has shown that we're certainly not in a bad market. It's a profitable market. In actual factual terms, it's going to be the best quarter that the company has had for a considerable amount of time, and that's in the middle of a warm winter, plus all these operational constraints related to scrubber turnaround. So that is setting up really well for the future and later in the year.

And the other thing is that every cloud has a silver lining. And the supply side is really, really tightening right now in products. And this is what's happening at the moment in the world, and the uncertainty is leading to really no new orders. And no new orders, combined with an aging fleet in a more regulated fleet, is really -- could really, really extend things further in this cycle and prove, ultimately, with a short-term hiccup now, a great beneficial thing in the future.

And with that, I'd just like to throw it open to questions, please.

(Operator Instructions) Our first question comes from Amit Mehrotra with Deutsche Bank.

I wanted to maybe start with just asking about where leading-edge rates are today. It's obviously a fast-moving volatile market and now a multi-tiered market. And so I think it'd just be helpful to understand where the rates are today that you're achieving on your eco scrubber-fitted vessels relative to the first quarter bookings, which I would imagine would be done some while ago. And so just help us think about our people on the call, think about kind of the earnings power of the company today here and now in the context of all the volatility and change or developments in the world.

Sure. Lars, would you like to take that one? I think he's asking for right now, at this moment, what are you fixing in the 4 -- what rates are you fixing in the 4 categories?

Okay. So let's keep it easy, first with the LR2s. The LR2 market dropped considerably as the coronavirus unfolded. We started seeing some supply-demand fundamentals change. The market moved from a worldscale 80 to a worldscale 105 from last Friday to Monday today or -- yes, this week. That's a $9,000 increase in earnings over those 2 trading days.

So today, if you are a modern scrubber-fitted vessel trading at the 105-level fixing at the moment, you're doing $26,000 a day. The LR1s were of the same type of move. You're going to do around $19,000, $20,000 a day. And the MRs, of course, is a much more fungible asset play, where it depends a little bit on your ballast legs and so on, but you're doing probably somewhere between $15,000 and $17,000 or $18,000 a day as a snapshot.

So right now, we're seeing a big amount of volumes moving out of Asia, both on the 3 different categories that I mentioned. It's not only on the LR1s or LR2s, we're seeing that also transpacific on the MRs. We're seeing an increase in rates, as we speak, in the TC2 transatlantic runs. There's been a bit of a lull in the U.S. Gulf, but that's also now picking up as well. So this is moving very fast.

So what is good about it, and what I would say is the takeaway, is that the volatility has remained, which means that the underlying strength of the market and the fundamentals there still speak volumes of what is the ability of the market to move.

Right. Great. And so I mean, I think that at a high level, the underlying market is still relatively strong in the context of all the change that's going on. And maybe this is a question for Cam now. I just wanted to understand, talk about your experience using VLSFO blends and the thinking -- or either maybe using gas oil given the price has narrowed quite a bit between those 2. There's obviously some operational risks that gets introduced with the blends. If you can just speak to your experience given a significant percentage of your fleet is still nonscrubber fitted. Just how you're thinking about that?

Thank you, Amit. So in our planning for this year, as a greater percentage of our fleet becomes scrubber fitted and our dependence on compliant fuels or VLSFO reduces, we made a very conscious decision to have contracts with physical suppliers. In other words, go straight to the horse's mouth to ensure not only availability but also and critically the quality of this compliant fuel.

As we've said over the last number of quarters, VLSFO isn't a commodity. It's a bespoke blend that varies considerably across producers, regions, intermediaries. And there are very significant risk of stability and compatibility that we're now seeing in the market. We haven't experienced it ourselves, probably because our -- again, of these direct supplier relationships. But we expect this to be an ongoing and very, very serious issue for the industry until such point that VLSFO is commoditized.

And to your last part of your question, we think that will only come when distillate forms the basis for VLSFO. So we've used MGO, and we have to use it, and we'll continue to use it from time to time. But the owners that are depending on VLSFO as a long-term solution, I think it's going to be a real process of discovery and iteration and negotiation until the industry consolidates around a single specification.

Great. And just one quick follow-up to that, Cam, if I could. The spread between high and low sulfur fuel have come in quite a bit, obviously, as you've seen. It would just be helpful to understand like, cumulatively, how much fuel or bunker does the Scorpio Tankers consume every year across the entire fleet? Just so we can get a sense of like maybe what the incremental cash flows could be based on different spread scenarios. Is that a number you have offhand or you're willing to share with us?

Yes, it's well over 1 million tons a year across Scorpio. But like I said, there's so much variability depending on where the vessels are trading, how much time in port, again, the process of introducing a greater percentage of scrubbers in our fleet.

Again, when it comes to the spreads, a lot of people have talked about what they expect to happen in terms of VLSFO pricing. But not a lot of people are talking about where all the HFO is meant to go. So obviously, the spread is highly correlated to the price of the barrel. And so it's come down as the price of the barrels come down. But over the longer term, we expect a healthy wider-for-longer spread, well north of $200.

And our next question comes from Ken Hoexter with Bank of America.

Can Robert, or maybe Cam, can you just talk a bit about the warm weather and COVID-19, maybe your thoughts on demand impact? And can you quantify maybe just to understand the longer-lasting impact or medium-term impact of the kind of extremes here?

Well, maybe I'll take the latter part of your question first. We're not here to take a view on what sort of recovery we can expect when the coronavirus is ultimately controlled or curtailed. Whether that looks like a V or a U or an L, we just don't know.

Going to what Lars was speaking of, the first-stage impact of a demand disruption or demand decline is counterintuitive for container shipping, for example, or airlines, it's an immediate sort of step function down. For us, it's quite different because the refineries can't slow down so quickly. Cargo flows get disrupted, ships get repositioned, and so it's somewhere between a neutral and a positive impact for us just because of this dislocation of our vessels and those of our competitors.

Over the medium to longer term, of course, demand disruption is problematic. But I'm not sure anybody has a very clear view on how this is going to go. There's a lot of skepticism of the news coming out of China, of course, and the success of their efforts to control or quarantine significant numbers of people. So again, it's -- we can speculate, but we really don't have a clear view to that. We're just trying to manage as best as we can in this period of uncertainty.

And when it comes to warm weather in the winter, I mean, generally is boot for a product demand, whether it's dirty or clean products. If you have a Northern hemisphere winter that is cold, this has been unusually warm. So in that sense, that's why this is not a complaint, and it's not excuse because we think that, overall, the first quarter guidance is pretty good, especially in historical terms. The -- this is what's so good about what's happening at the moment is despite a warm winter, despite the dislocations that are there, the product market rates, particularly the MRs and LR2s, have remained fairly solid and fairly robust. So that's telling you that there's a very, very strong underlying fundamental balance between supply and demand. And with a order book that's getting lower and lower going forward and the fleet that's getting more aging, that's really good.

And then on the vessel OpEx, which, in the text, you noted that it increased because of the Trafigura 15 vessels. But the per day cost went up to almost $7,000 from $6,500. Maybe you can delve into why such a large increase. You noted some of it was due to timing of dry-docks, maybe expand on that a little bit?

Sure. I can try and take that. What you'll see on the blended OpEx figures really are a result of the acceleration of the dry-docking program. So as vessels go into dry-dock, there's an accounting determination on what expenses can be capitalized or purchases can be capitalized and which are expensed. And so you'll naturally have so many of our vessels get either ready for dry-dock or get through dry-docking. You would naturally expect to see a short-term increase in their OpEx.

Okay. And then you noted a delay in the scrubbers for a bit. How many did you delay? And have -- did you get the slots back? And can you push and will you push more into scrubber overhauls in a faster pace than you've got listed in the release, given the near-term decline in rates or decline relative to kind of outlook?

Trust me, if it were so simple, we would be doing that. Really, it's a decision that has a number of different variables involved, among them are the ones you mentioned, when we get a slot back or what the localized rate environment is. But again, up to now, it's been a question of measuring what the shipyard capacity is versus the number of vessels, ours and others that happen to be there. It might be some supply chain constraints.

But I guess, the best way to think about it is, number one, the number of vessels we've delayed really are a handful. It's not a huge reordering of our scrubber program. Number two is the progress on the scrubber retrofits continues. We feel the argument is still quite compelling. The economics are compelling to continue. The risks in the shipyards in China are still low as far as the effect of the coronavirus on the coast line. That being said, a consequence of that risk being low is the government's restriction on so many workers returning from the Chinese New Year.

So what one would have expected back in January is a slowdown in the yards during the new year and then a rebound back to full productivity. That slowdown has actually continued or persisted for several weeks and that has a knock-on effect of the natural timing of any particular scrubber installation to the tune of several extra weeks.

Appreciate that. And then just a real quick wrap-up. Robert, you said 1Q guidance -- you just mean in terms of what you've given in rate, there was no actual targets or anything, except other than just providing -- you need to take rates, right?

That's correct.

Our next question comes from Omar Nokta with Clarkson Platou.

Okay. I just wanted to ask a couple of questions just related to maybe more commercial items, especially on the performance of the LR2s recently and the Handys. And Lars, you made some comments and you gave a bit of a perspective. But when we think about the LR2 guidance, you guys have of $25,000. That's obviously very strong and well above what we would say the index averages are, which may be closer to $11,000 or $12,000, at least year-to-date. And as Lars mentioned, the market's really improved here over the past 2 or 3 trading days, so some of that recent weakness we had been seeing post coronavirus, I guess, may not be seen in your results. So that's -- put that aside for a second.

And then when we look at the Handys, in the third quarter, when you reported earnings, you had guided $15,000 for the fourth quarter. You ended up getting $19,000 versus everything else basically being stable. And when we look so far into the first quarter, you're now at $24,000, which is well above the MRs and LR1s. And so, I guess, when I think about it, the Handys have now, for 2 straight quarters, outperformed in a big way. So the question is basically if you can give us some perspective on what's happening in the Handy market over the past, say, 6 months? And two, could you give us maybe a perspective on the LR2s, how -- what are the dynamics that are driving such a big outperformance on your part relative to what we're seeing in the index?

Lars, you want to take that?

Sure. Well, let us start with the Handy. I mean, first of all, the Handy is a workhorse in the short-haul market. But the thing, I think, to keep in mind is that the Handy market is seasonal over time, so it always tends to have a very strong relative fourth quarter and a very strong Q1. We anticipate that, of course. But what we're seeing here, which is also back to Robert's point about even with the seasonally warm weather, the Handys have actually outperformed. And I believe it's outperformed, a, because you have a consolidated owner profile, perhaps, which provides some resilience to rates going up or continuing to stay up.

But I think also the aging fleet profile here is something that we should take into consideration. If I remember correctly, I think the average age on a Handy today is about 14 years old. So over time, I think you're going to see a really interesting balancing of supply and demand on the outlook, and I think it has a lot of potential to move up further.

And the other question, I think, was on the LR2 market. We anticipated that the market would have a dip in February and March, and that's up from the expectation of the refinery turnarounds that are published to take place out of the various refineries in Saudi Arabia and in the United Arab Emirates. So we have obviously moved some of our ships long-haul or to other areas to make sure that we have a balanced profile in terms of trading February and March. What we saw, of course, was the coronavirus and things got a little bit hairy in terms of where we think this market now will move. But I think there's a few things that we need to take into consideration, which I also mentioned before.

The overall number of LR2s has diminished substantially since the fourth quarter of 2019. And at our last count, I think it's 38 units or something like that, which is quite a few. So basically, what we have is a negative fleet growth since 2015 and '16 in actual modern LR2s trading in the spot market, which is a lot, considering the ton-miles have increased and you have a lot of new businesses increasing where you load and discharge LR2s. Few LR -- few newbuildings are being built that have been delivered in the first half of 2020.

And then finally, it is really interesting to see that the volumes of business that suddenly increased out of Asia going to their usual homes in Australia, but also now something that, back to the continent, in a market that otherwise had been somewhat quiet on distillates but because of the VLSFO trade that we talked about earlier on. So you're seeing a lot of these quotes coming in, which means that the supply of LR2s in the normal trading market has diminished substantially.

So when suddenly you have small changes in the market, because their position list has changed dramatically in terms of number of vessels available, you see spikes quicker. And this is what we've seen from the market dropping down to towards the worldscale 80 level that I mentioned up to trading Monday. And I think the market is that today as well, around 105, which is a substantial drop as our increase in earnings of about $9,000 a day in a trading day.

Right. And that speaks to the volatility you were talking about earlier?

Yes.

I think, Omar -- I think, I'd add a couple of things here, specifically to how we've been outperforming. You've, one, got, let's say, whatever you call, market judgment, then you literally got a fleet that is the largest fleet out there with a great access to customer profile and voyage choices, where, without going into it, the ability to triangulate and pick voyages that will outperform one index is quite clear. I mean, they've done it now for quite a few periods.

But I think the more fundamentally here to than even Scorpio Tankers sort of performance, I think, if we just look at products in general, then you've got 2 companies reporting. You've got ourselves and you've got Ardmore, and both companies have done pretty well on their MR guidance. And it's partly because, if there's a market that's less affected by the coronavirus in China, it's actually the product market at the moment. Because the product may know if you have an extreme market like Capes, where, virtually, the whole of the iron ore trade is China, well, that's going to get hit, even products relative to crude oil.

Crude oil trades much more of its demand that goes to China than products do. It's only been a recent phenomenon that China itself has been involved in the product market. So in some senses, even though, obviously, you could have headline demand disruption here, if this continues for a long time, the actual product market itself is one of the shipping markets that is least directly affected by what's going on in China.

If I could just maybe then -- just one follow-up maybe on that because there has been a lot of questions that -- I know you've gotten this before, and we get it as analysts. The switching over from LR2 into potential crude trading, how do you guys think about that right now? Obviously, you've stayed clean. Is there any -- would you guys see yourself shifting at all? Obviously, post coronavirus, once we get a bit clarity there, does transitioning some of the LR2s into crude, especially given the strength in that market recently, does that -- is that in the cards at all for STNG?

No, not at this point, maybe some of the LR1s but not the LR2s.

Our next question comes from John Chappell with Evercore.

This is Sean Morgan on for John this morning. So Robert, on past calls, you talked about the potential cash flow generation of the fleet following a rate inflection. And with regard to the capital return potential, you've, I think, in the past, used the term delayed gratification. So previously, we talked about maybe 6 to 9 months before there was some firm communication regarding the capital return policy. Has any of the turbulence in demand and related to kind of what's going on in China right now impacted the timeframe for any announcement? And I mean, in the call, you seem to be kind of a little bit maybe more optimistic in terms of the ability for the product market to sort of weather this issue in China. Does that push things back at all? Or are you still kind of thinking about the same timeframe for any communication on that?

Okay. Thanks for the question, Sean. Firstly, can we please extend to John all the best wishes from everybody here at Scorpio and all the best to his family at the moment. Then, okay, so I think at the moment, what you're referring to here is, look, we've come with -- we've maintained the dividend where it is, and there's no intention to increase at the moment nor is there any intention to discuss an increase of the dividend at the upcoming Boards.

I think that you've got -- we've got the clear intention at the moment and have been in -- and focusing things to -- focusing, paying down debt, using cash to pay down debt. And I think that, right now, if you were to sit -- if you were sitting right now and making the choice, would you give a dividend? Or would you even do something else other than pay down debt? If you were forced to do something else than pay down debt, it wouldn't -- a dividend would not be a first choice. You would buy back stock where the stock is trading at the moment. And you've got overt or not overt, you have a couple of executives of the companies with big dividend policies now perhaps regretting having to give all their money back right now, where their stock's trading at 50%, 60% of NAV.

Okay. All right. So you prefer the flexibility, I guess, on opportunistic [buyback of stocks]?

Yes. I mean, now is about making sure, but you are focusing on operating the company, which is what we're doing. We're focusing on 2 things primarily right now, which is getting the most out of the ships, in terms of Lars' area. And in terms of Cameron's area, trying to efficiently, where there was much efficient and safe way possible, get the company through these dry-dockings and scrubber fittings. And right now, there's not a great urgency to increase the dividend.

Okay. Yes, I think that makes sense. And then this is a bit of a follow-on to Omar's question. But I thought it was interesting you guys talked about the sort of effective reduction in supply of LR2s due to switching to crude. And then the second follow-on to that, you mentioned that crude was going to be more exposed to any long -- longer-term damage to Chinese demand. How long would it take for -- and what do you think the likelihood is that some of the vessels in the LR2 category that have switched over to crude trading could come back to the clean market and sort of timeframe? And I guess, your thoughts on that?

Lars?

I mean, it's obviously a question of the timeline here. I mean, if the differentials are large for a long period of time, we will start seeing some wanting to switch back again. But I think everybody should keep in mind that the -- you incur a substantial cost for cleaning up from dirty to clean. And it's not only one cargo. You need to have 3 cargoes on the truck to be fully clean, suitable. And the LR2 markets are pretty long haul, and you would have to discount the vessels through those rewards as quite massively before you could do that. So it's just not something you just do. But obviously, if the spreads are wide enough, some will start switching back. It's been done before.

Okay. So for the 3 cargoes then, if we assume a long haul, like 40 days, we're talking a minimum of 120 days or so to trade back to clean?

Yes, I think, normally, you would say between 3 and 6 months.

Our next question comes from Randy Giveans with Jefferies.

All right. So on Slide 8, you show that the LR1 scrubber premium slightly outperformed the LR2 scrubber being premiums despite burning less fuel a day, obviously. So was this due to regional price differentials for the HSFO? And also on Slide 8, you show 25 vessels scheduled to get scrubbers installed in the first quarter. Any of these currently stuck in the yard or Chinese yards declaring force majeure on these retrofits?

Hey, Randy, it's James. In terms of the fuel savings, you're correct. There's a slight price differentials between the LR1s and LR2s. But also this was just for the month of January so, obviously, voyage length can change, and that will impact your scrubber savings. For example, the longer voyage, you go on, the greater the savings. So keep in mind, it's just been 1 month.

For force majeure on the scrubbers, I will point to Cam on this, but...

Yes, Randy. Force majeure is more an issue for newbuilding construction or commercial contracts. It hasn't been an issue for repairs or scrubber installations. As far as getting vessels stuck, no, actually, we had a vessel sail out yesterday, one of our vessels and another one coming up in a couple of days. Of course, there are vessels going in behind those. So again, we haven't seen any problems of -- I don't know, risk of things stopping. It's more been the pace of work has slowed, as I said before, since the start of the Chinese New Year, and it's only starting to pick back up now as workers return, having sat through a extended quarantine period.

Got it. Okay. And then in your earnings release, you have a table showing 12 LR2s and 7 LR1s going in for dry-dock in 2021 but no scrubbers. So does that mean you're installing the scrubber in, obviously, in late 2019 or sometime in 2020 and then going back to the yard next year for the dry-docking of these vessels, were you're not able to kind of pull forward the dry-docking to do all of it at once?

That's correct, Randy. As you know, if you want to pull forward a statutory dry-docking, it's a little bit like shortening your own life. So I don't know how old you are. If you wanted to celebrate your birthday in advance and take the time off the end of your life, that's how it works with the ship going into a dry-dock.

Got it. Okay, okay. And then, I guess, lastly, we still expect pretty substantial free cash flow for Scorpio this year, maybe a little less now than 6 weeks ago. But with that, what are your expected uses of free cash, specifically in terms of expected total debt repayment this year?

That extra cash will be used to pay down debt. But once we collect it, we're going to start.

Okay. What's the minimum debt repayment this year?

Well, we laid out in the press release what it is by quarter for the -- going forward for that period for the next 2 years, for the next 8 quarters.

Okay. And everything incremental -- straight for that.

Exactly, Randy. Yes. (inaudible)

Our next question comes from Greg Lewis with BTIG.

So I guess, mostly, a lot has been covered already. So I guess, I would like to kind of go back and look at Q4 and kind of -- you touched on it in the prepared remarks, but just kind of curious if you can kind of highlight some of the things that kind of drove the -- the lower rates maybe than I think many of us were expecting.

I think a lot of it – well, Cam, can go into it, but a large -- but I mean, a lot of it is related to actually getting shipped into position in and out of the scrubber fittings.

Right. There were 3 things, right? There were the voyages to get to the yards, which you have to take; the voyages to get out of the yards; that the trading in the East is a little bit weaker than the Atlantic Basin, so you have to discount where our ships are trading. And one market is going to be stronger than the other, and that was the way it was now. The East was weaker than the West.

And you also got to look at the ships when they loaded the fuel, when they loaded the higher-cost fuel, and that had to take place in December. So that baked it into the earnings into the Q4 because everything was being priced upon the high-sulfur fuel, but you weren't going to take that chance if you were going to have high-sulfur fuel on your ships on January 1. So you have to load the higher-cost fuel during the month of December, thereby driving earnings during that period for ships that did not have scrubbers.

Okay. So as we think about -- because we're going to be in this period throughout the year where we're going to be repositioning ships for scrubbers, so it's not something where we can -- I mean, it looks like your forward guidance showed that. So we should not be thinking about this -- potentially revisiting some sort of impact like this in -- over the next few quarters as we reposition a lot more ships to get scrubbers?

I think you can. I'm not going to sort of tell you how to model the business, but I think you would expect over time for that impact to come down because you've already taken the upfront costs of sort of taking VLSFO on the vessels that need it for some time. That value gets released as more and more vessels get their scrubbers fitted. And then the rest is really something of an estimate on what you think the relative Eastern markets are compared to the West.

Okay. And so, I mean -- and then, so Cam, since we're having all these ships go in to get scrubbers, is that -- I mean, I know it's never just one thing, but is that sort of why -- because it seems like something that we've noticed over the last few -- pretty much since some point in December, we've really seen the Atlantic Basin be a lot stronger than the Pacific Basin, is that kind of -- would you sort of attribute that to some of the relative weakness in the Pacific versus the Atlantic?

Yes, I think that's a fair point. I think that's exactly right. There are a number of vessels trying to crowd into the yard, and they all are looking for the cargoes available to get there and get out. Of course, traditionally, we think the Atlantic should pay something of a premium to the Pacific in any event, but it certainly exacerbates that difference. Yes.

Okay. And then just one more for me. As we think about the scrubber guidance or the scrubber premium guidance, should we -- is that an annually adjusted number? Or is that something where we need to adjust for the fact that the ship is not always going to be using a scrubber?

So those are for the month of January. But in our company presentations, we've outlined how much fuel our ships burn on an annual basis on average, which accounts for waiting days and ballast legs and things like that based on actual consumption. And you can find the tons per year per vessel, and that's what you want to use and apply whatever spread you think is out there in that market or an average of those spreads.

And our last question comes from Liam Burke with B. Riley FBR.

Robert, I believe you mentioned -- or it was you that mentioned in the prepared comments about surplus product hitting the export market due to the disruption in the first quarter. It was also mentioned that you're cautious on the second quarter due to a lot of uncertainty. Do you anticipate any sort of derived benefit from the surplus product in the second quarter?

We don't know. We don't really know how this one plays out in terms of its pricing. You've got -- whether or not they continue to supply that is one benefit. You've got that as you get into the second quarter anyway. You've got the -- you're going to work through all the stuff to do with IMO 2020, so you're going to be stepping up all the VLSFO shipments, which is real positive. And -- but what will matter more than anything is -- are things like what is the pricing curve as the pricing turbine to contango. Are we in a situation where people are confident that the world economy will be getting back to growth? Those are the things that are going to impact rates more as we approach the second quarter.

So it won't be particularly in terms of the routes, it'll be the overall macro demand as laid out and increased energy consumption in the second quarter?

Yes, and how traders feel at that point. If the traders feel that there is time for them to get ahead of a situation, if they feel that the Chinese situation and the world economy is going to be constructive, i.e., whatever, somewhere in the back half of the year or even June, July, it's going to get constructive, then they can just come in and start going along the products and buying, which would, on a balanced fleet that we have at the moment, immediately take the rate structures upwards. But on the other hand, the traders could sit there and say, "Well, we have enough product. We'll wait and see." I think that's the comment that the company doesn't want to make any prediction as to how this plays out. It's simply just wants to focus on doing the best it can in the market it's given and getting through the company's dry-docking and scrubber program.

And at this time, I'm showing no further questions. Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.