Tsakos Energy Navigation Ltd (TEN) 2010 Q1 法說會逐字稿

Good morning. My name is Christy, and I will be your conference operator today. At this time I would like to welcome everyone to Tsakos Energy Navigation's Q1 earnings conference call. (Operator Instructions). (inaudible) you may begin your conference.

Good morning and thank you for joining us for Tsakos Energy Navigation's first-quarter 2010 earnings conference call. By now you should have received a copy of the earnings press release. If you have not, please e-mail Sarah Freeman of CJP Communications at sfreeman@cjpcom.com, and she will e-mail you a copy of the release.

Again, this quarter TEN is providing a supplemental slide presentation with fleet employment and financial data, which can be accessed from the front page of TEN's website at www.tenn.gr.

Please note this is an informational presentation only and will not directly reflect the flow of management's comments on the call this morning. As a reminder, this conference call is also being webcast. To access the webcast, please refer to the press release for the URL, which will direct you to the registration page.

At this time I would like to read the Safe Harbor statement. This conference call and the accompanying slide presentation contains certain forward-looking statements within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties which may affect TEN's business prospects and results of operation. Such risks are more fully discussed in TEN's filings with the Securities and Exchange Commission.

Thank you. Now I would like to turn the call over to Mr. Nikolas Tsakos, President and CEO of Tsakos Energy Navigation.

Thank you and good morning to everyone. Again, it is with great pleasure that we are announcing another profitable quarter in these difficult financial times for TEN. These first-quarter results have been a turning point for our Company and I think for the market. We have been seeing more and more demand from our charters and our clients for our vessels, the quality of our ships. We took advantage of this turning in values also to secure again capital gains for our first generation double-double ships, while at the same time replace them with modern state-of-the-art vessels as we have done in the past.

It is also an important time on our eighth full year of operation. We have achieved a net income since we came to the New York Stock Exchange of $1 billion, of which a quarter of that, about $260 million of that has been coming in from our capital gains. And this is a strategy which we have been going on on a constant basis. On average that means about $125 million on average per year, $25 million comes from our capital gains year in and year out as Paul will also present when we talk about the figures.

Well, again, we would like to hope that the worst is behind. TEN has started its 17th year as a public company and hopefully our 17th year as a profitable public company.

And with that, I would like to ask our Chairman, Mr. Stavropoulos, to give us some of his wise words. Chairman.

Well, thank you very much and hello, everyone. I don't know if they are wise but these are my thoughts.

We are in a period where economic and political turmoil is widespread. The list of negatives is too long to catalog. The need for prudent corporate management has never been greater. I am most pleased that TEN's management has followed this course and has sought to build and maintain a strong financial position, a viable visible flow of revenues and earnings, while at the same time developing a young and growing fleet.

I find this fact interesting. Since 2004 TEN's fleet has grown from 2.82 million deadweight tons to 4.97 million deadweight tons. That is a 76% expansion in five short years.

At the same time, shareholder equity has also expanded from $520 million to $914 million coincidently also plus 76%. But, very importantly, this is after having distributed dividends in that five-year period of $249 million. We think Benjamin Graham and David Dodd and maybe even old Warren Buffett would give TEN very high marks for this performance, especially since our CEO is a Columbia grad. (inaudible)

But that is history. What about the future? I think it is equally bright. TEN's seasoned relationships with its (inaudible), its modern and diversified fleet, its solid financial discipline, and its strong management team have a platform for future success. Niko, I'm confident that you and the Tsakos team will deliver on my promise.

Thank you.

Thank you, Chairman and with these kind words giving us more encouragement to continue is our COO, Mr. George Saroglou, who will give us the details of what has happened in the first quarter and what has been going on until then. George?

Thank you, Nick, and thank you, Mr. Chairman. It is my pleasure to speak with all of you today to provide you with the details of another profitable quarter. We are coming out of the fourth market trough since 1993, the worst global financial crisis the world has experienced in the last 80 years.

Our annual profitability record continues to be perfect. Every year we operated since 1993 regardless of the state of the economy or the state of the shipping market we have remained profitable thanks to our fleet employment commercial strategy. TEN operated on average a fleet of 46.6 tankers during the first quarter of 2010 versus 46 in the same quarter in 2009.

During the first quarter, we continued to see notable progress from previous quarters as we continued to operate in an improving economic environment. The world economy is coming out of a steep recession and is growing again, although there are imbalances in the economic growth instead of recovery between developed and developing economies with emerging Asia led by China leading the recovery.

Global demand is growing again at healthy pre-crisis levels after two consecutive years of negative growth. The oil price contango has come back, tying up a significant part of the global fleet on medium storage contracts and driving spot rates higher, especially for VLCCs in Suezmaxes. Scrapping and removal of single hull tankers continues at a strong pace and is expected to intensify following the unfortunate events in the Gulf of Mexico.

The tanker order book, if one considers deferrals and cancellations, points to a balanced and manageable fleet growth for 2010. We expect that a softening in freight rates since we're in the middle of the second quarter heading toward the summer months where oil and tanker demand is typically the lowest in any given year. However, spot rates have remained relatively firm for crude tankers with the Aframax class being the last to enjoy improved rates, especially in the Atlantic basin and the [med] in the Caribbean, raising the average for the year to date above the 21,000 level.

Let's look at the highlights of the first quarter. We operated, as we said, an average fleet of 46.6 tankers. We continued the tight cost containment program on the expense side of the business and registered a 10.1% reduction of daily average OpEx of the fleet for the quarter as Paul will explain. Our (inaudible) Tsakos shipping and freighting recently announced the formation of a joint venture company with Columbia ShipManagement under the name of Tsakos Columbia ShipManagement, TCM.

TCM will assume the technical management of the TEN fleet from July 1, 2010. The same pool of short and seagoing personnel employed by (inaudible) will be employed by the new company, ensuring that the services to TEN and to TEN's clients will continue to be flawless. We are already beginning to see the economic benefit and in additional savings from both purchasing of lubricants purchased and improvements in logistics. Of course, in TEN we expect additional operational and financial benefit from the new ship management company once it is in full operation.

If you go now to slide nine in the online presentation you will see that the sale and purchase of tankers is an integral part of our operation, and as we have demonstrated, we demonstrated with a series of transactions over the years. In the first quarter, we sold the 2002 built Suezmax tanker for a capital gain of $5.9 million and in 2003 built Aframax tanker for an $8.5 million gain.

Since 2002 we have sold 23 tankers with a capital gain of approximately $261 million. The Company reinvested these capital gains in the renewal of the fleet by ordering the majority of these newbuilding tankers before newbuilding prices started to rise. 52 tankers have been acquired in the same period, of which 49 were newbuildings. This way we manage to grow the size of the fleet and maintain its (inaudible).

We also sold one of our oldest tankers, Hesnes, a 1990 built Panamax tanker for recycling, which we delivered to the new buyers in early April and intend to do the same with a sister vessel, Victory III, later in the quarter. TEN has an active newbuilding program with Aframax and Suezmax orders and has already replaced the Aframax tanker we sold where the Sumitomo built Sapporo Princess, which we took delivery in mid-April.

We continue to preserve a strong cash position. The Company ended 2009 with cash balances of approximately $300 million, and at the end of the first quarter, the cash balances stand at approximately $324 million. We reduced the newbuilding contract size for the two Suezmax tankers that we ordered last summer by $2.5 million per vessel for our agreement with the Sungdong shipyard for an early payment of $32 million in March. We operated the fleet at 99.2% capacity, almost full utilization compared to 98.5% in 2009, equally a great number, especially during a time when the average utilization of the global tanker fleet was around 85%.

For the remaining of 2010, we have five tankers that have scheduled repairs over the next three quarters. Paul will give you more details on these scheduled repairs.

We continue to balance employment strategy of the corporate fleet through a mix of four charters, contract of affreightments, pooling arrangements and bigger charters with fixed rates and bigger charters with profit sharing arrangements.

If you turn to slide number six, you will see that we have 10 tankers trading in the spot market, three tankers in contract of affreightments, four vessels in pooling arrangements, and 28 tankers in [built] charters with fixed rates and profit sharing arrangements. In fact, as we were entering the conference, we have one of our spot freight vessels thanks to time charter, and I'm going to get into the details of this arrangement in the sector that talks specifically about the chartering arrangements.

In deadweight terms, TEN operated during the quarter 5.2 million deadweight tons with an average age of 6.8 years versus 8.9 years for the world tanker fleet. If you turn to slides three and four in the online presentation, you will have a fleet of TEN's fleet details.

In the S&P front, we have seen more transactions after very low activity in 2009. Asset prices for mobile tankers bottomed out after declining on average 50% from the 2008 peak levels. A global macroeconomic recovery evolving better than expected, an improving spot rate environment for tankers since December of last year, the rise in commodity prices, including steel prices, which is putting a floor on newbuilding prices, and the recent IPO and secondary fundraising by newcomers and existing tanker leasing companies has increased the confidence in the tanker market for the remainder of 2010 and beyond, and other reasons for the increase in the activity. Ship finance capacity continues to be restricted and available primarily to bigger, better capitalized shipping companies with good track records.

The US capital markets continue to provide an alternative way for shipping companies to finance their projects for capital expenditures as the deal flow indicates since the second half of 2009 and more recently March of 2010. Cash-rich shipping companies are now looking for opportunities that begin to realize that the distressed tanker sales will probably never materialize. The slippage in newbuilding deliveries according to Clarkson Research Services grew in the first quarter of the year.

Last year approximately 25% of the tanker deadweight capacity originally scheduled for delivery in 2009 had been deferred for delivery in 2010. In the first quarter of this year according to Clarkson's, this figure has risen to 33%.

Single-hull and early 1990 built double-hull tankers, the third generation of double-hulls, continued to get recycled at a high pace. We are in May, and approximately 6.5 million deadweight tons have been scrapped against 8.6 million for 2009, 4.3 million in 2008, and 3.5 million in 2007.

In concluding, newbuilding tankers nondelivery the (inaudible) looks to remain a key figure, making tanker tonnage supply growth not as large as originally expected. And if you add to that the pace of recycling of the older tonnage, which we believe that it will continue, especially following the recent Gulf of Mexico events, where, of course, no tanker vessel was involved, all this will reinforce the point about the order book and the balance of the fleet.

In TEN we took delivery in April of Sapporo Princess, the seventh Sumitomo DNA-Aframax tanker in an (inaudible) order we initiated back in 2004. Sapporo Princess timely substitute (inaudible) were delivered to their new owners in government state company in April. The vessel was fixed (inaudible) when a position (inaudible) from the Far East to the Atlantic basin.

The last vessel in the Princess series, Uraga Princess, will be delivered to TEN on July 7. The vessel has already been fixed (inaudible) on a similar 60-day reposition in volumes. Upon completion of the Princess series order, our newbuilding order book will stand at two Suezmax tankers that we will deliver from the Sungdong shipyard in South Korea, and the delivery schedule is in the second and third quarter of 2011. These two Suezmax tankers will replace the recently sold Decathlon and Pentathlon.

Although in the last 18 months we have seen attractive investment opportunities in other energy-related sectors, the Company's main focus is the ownership and profitable operation of tankers. We continue to, therefore, actively look at investment opportunities in our core business.

Slide eight gives details of our newbuilding program, including the CapEx. We have already fixed the finance arrangements for the July delivery, and we are very confident that when we look closer to the delivery window of the two Suezmaxes in 2011, we will report similar finance arrangements.

On the commercial front, our profit-sharing arrangements and the majority of our time charters allow the Company to participate in spot market value, but also protects our cash flow generation and the profitability, especially in weaker freight rate environments.

In slide seven you will see that charters continue to have an appetite to fixed tankers forward. We are beginning also to see an uptick in time charter rates, a sign of increasing confidence in the market. As of today, we have fixed 70% of the available 2010 fleet operating dates at 50% of the 2011 fleet operating days. We have currently 35 vessels with fixed time charters and time charter reprofit setting, contract (inaudible) and in pooling arrangements out of an operating fleet of 45 tankers. If we just take the vessel that has fixed time charters and time charters with profit sharing 28 and we apply the [meaning], then we have secured 442 months of forward employment or 1.3 years per vessel and $270 million in gross revenues until the end of their respective charters.

The Company charters a reliable first class counterpart. For a list of their names, please turn to page five in the online presentation. As I said a few minutes before, this slide needs an update as we just fixed one of our spot trading Aframax tankers, (inaudible) tanker, who had one year fixed time charter contract with an international industrial conglomerate.

Going to the market in 2010, core GDP is expected to grow by about 4.25% totaling 0.5% contraction in 2009. This is according to the latest revision of the International Monetary Fund in late April of 2010. Economies that are also a strong start are likely to remain in leap as growth in others is scaled back by lasting damage to financial sectors and household balance sheets.

Among the advanced economies, the United States is off to a better start than Europe and Japan. Among emerging and developing economies, emerging Asia is leading the way with China expected to grow at 10% if not higher in India at 8.8%.

In this environment of multi-street recovery, oil demand is growing again in 2010. International Energy Agency in their main assessment expects global oil demand in 2010 to rebound by 1.9% or 1.6 million barrels to 86.4 million barrels per day from $84.8 million in 2009, again led by emerging and developing economies of the world.

China will be responsible for one-third of the oil demand growth in 2010. We are back -- as far as the oil demand is concerned, we are back at the 2007 global oil demand level. The price of oil so far in 2010 is trading in a narrow range of approximately $17 as far as the WTI is concerned from $70 to $87. The year-to-date low seems to have been reached yesterday. The main concern is that Europe's soaring debt prices may derail the global economic recovery and reduce fuel consumption. For the time being, most analysts have not revised downward their 2010 year-end oil price predictions with fleet oil over the 75 level, and so the risk especially at current levels continues to be to the outside.

OPEC has not raised production quotas yet as OECD inventories as of the end of the March had 16.5 days of forward demand. Still, however, 1.1 days below March 2009 levels, but not good enough for OPEC to be convinced to raise production levels. Nevertheless, compliance with 4.2 million production currently stand at 50%, which means that OPEC is still pumping more oil into the market, and that has a positive effect for fleet utilization and freight rates. The market still expects OPEC to increase production levels from the fourth quarter of 2010.

Vessel conversion projects to FPSOs and FSOs are very much alive at these oil price levels as our conversion of single-hull tankers to dry cargo vessels as the recent sale of five single-hull VLCCs demonstrate. The contango, the discount of [full] supply vessel related deliveries has reemerged, and this is good for the industry.

Group loading storage levels are currently estimated at 66 million barrels, up from 13 million barrels around March. The peak for good startup was in April of 2009 of about 100 million barrels. Product floating storage, particularly middle distillates, are estimated today at 55 million barrels, down from 79 million in March. The peak was in November of last year of around 97 million barrels. This fuel is now between 17% to 20% of the total products due mainly to the disruptions in the airline industry from the clouds of the volcanic ash coming from Iceland.

Since the driving season in the US is about to kick start, the recent events in the Gulf of Mexico might help the product tanker market as well. Since there are no strategic gathering function in the US, if the progress in the US Gulf proceeds, we might see an increase in the gasoline inputs going to the US.

Overall thanks to the contango we have 102 vessels or approximately 3.3% of the current fleet of tankers over 10,000 deadweight tons to be used worldwide for storage. So the tanker market continues to be very resilient as we head over to the third quarter, the slowest quarter of the year.

Big charters, oil majors and government companies continue to have an appetite to fixed tankers forward. Our record for (inaudible) in the last two quarters is a testament of this strength. We have a good time charter portfolio, which thanks to the profit-sharing element and the full exposure element of the combined charter for (inaudible) and pool mix, will help us capture the market upside. The Company continues to grow and to operate profitably. We operate profitably in all 17 years the Company has been in existence.

In slide 11 you will see the Company's dividend distribution since 2002. Since we listed the Company on the New York Stock Exchange, we paid in total -- paid total dividends of $8.18. For full-year 2009, we paid $0.60 per share in October of 2009 and April of 2010 in two semi-annual payments.

On a split adjusted basis, in March 2002 we listed TEN on the New York Stock Exchange at $7.50. So investors for both the Company and demand (inaudible) levels and still have the shares, their initial investment fully repaid. Since the listing, we paid back approximately $308 million in the form of dividends and since 2005, we purchased stock worth approximately $83 million.

In the meantime, all of us in TEN will continue focusing on the day-to-day operation of the fleet and keeping vessels employed at full utilization. If possible, we came very close this quarter to 100% utilization in managing cost pressures, controlling costs and in navigating the Company safely through these challenging times. The TCM joint venture is already beginning to impact in a positive way our OpEx, the expense rate side of our business. We have high expectations and aspirations from this joint venture for saving in the OpEx and operational organization that will enhance the Company's profit margins. We are also actively looking at investment opportunities in our core business, both new buildings and modern resale tankers. We are confident in the Company's strength, financial power, strategy, personnel and TEN's ability to grow in difficult times as the Company's track record indicates since 1993.

Without further ado, I would like now to turn the call over to Paul Durham for a review of the financials.

Thank you and thank you all for joining us today. A summary of selected financial data is included in the press release, and I will say a few words more on the significant items carrying in quarter one.

TEN achieved net income of $19.5 million in quarter one, including capital gains of $14.3 million compared to net income of $24.5 million in quarter one 2009 with no capital gains. Total revenue was $105 million compared to $126 million in quarter one 2009. The decrease being due to the softer trade market compared to the previous quarter one.

There was only a slight increase in the average size of the fleet to 46.6 vessels from 46 in the previous quarter one, and the increase in vessel utilization to 99.2% of available days. Lost days this first quarter primarily related to repairs on the (inaudible), dry docking of (inaudible) and the end of trading for the Hesnes before its sale in early April.

At the year-end, there were five vessels that counted for as held for sale. Two were delivered during quarter one. Parthenon for $39.5 million with a gain of $8.5 million and Decathlon for $51.5 million with a gain of nearly $6 million.

In quarter two Hesnes was sold at close to its book value at $7 million, and Marathon was sold for $38.5 million with an estimated gain of $6 million. We expect the fifth vessel, Victory III, to be sold before the end of quarter two.

Just to repeat the point, since our IPO in 2002, we have generated $1 billion in net income, of which over one quarter of that is derived from gains on the sale of vessels. Vessels designated held for sale are not depreciated. Also, the unit two's book value was reduced after impairment in quarter four. As a consequence, quarterly depreciation is $2 million less in quarter one than in quarter four. The average daily TCE rate achieved per vessel was $20,700 compared to the previous first quarter of $27,500.

With almost the same number of vessels, total vessel operating costs decreased to $34.5 million from $37.9 million in quarter one 2009. Because of the decrease in daily average cost per vessel, which despite a weaker dollar, fell by 10% to $8414 from $9355 due to lower repairs and spares expenditure and reduced insurance and lubricants costs. The growing cooperation between our technical managers and Columbia ShipManagement in anticipation of the start of the new joint venture ship management company, TCM, has contributed to these savings by already utilizing the combined purchasing power to achieve price reductions.

G&A expenses also fell by nearly $0.5 million to $1 million due to reductions in all categories, including professional fees, promotional expenditure and OpEx costs. Overall overhead costs, which include G&A, management fees and stock compensation costs, were down to $1139 per vessel per day compared to $1155 in the previous quarter one. Total finance cost amounts to $14 million compared to just over $15 million in quarter one 2009, mainly due to reductions in the all-in interest rates, including interest on swaps from 4.6% to 3.6%. The commitment at the end of quarter one to sell the Panamax Hesnes and repay the respective loans rendered the interest rate swap covering the loan for Hesnes totally ineffective for cash flow hedging, and this resulted in a non-cash charge of approximately $400,000.

Otherwise, the impact of valuation fluctuations on non-hedging interest rate swaps and bunker swaps was neutral this quarter one. During quarter one our net debt fell to $1.45 billion, having paid $23 million in scheduled repayments and a $28 million debt repayment following the sale of Parthenon. This brought our net debt to capital ratio to 54.9% as of quarter-end.

In quarter one, we paid a $6 million installment on one of the Aframaxes under construction and $32 million relating to installments on the two Suezmaxes under construction. This followed the successful renegotiation by which we achieved a $5 million reduction in total on the new buildings contract for the Suezmaxes in return for accelerated installment. The first $2 million advanced payment was in part financed by funds raised from our ATM program, which today totals approximately $20 million on the sale of 1.2 million shares.

The combination of funds generated from operations, ATM programs, vessel sales, and more recently new debt has kept our overall cash balance over $300 million, in fact to date $320 million. The new debt amounted to $40 million, which was drawn down on delivery of the Sapporo Princess on April 14 to pay most of the final installment of $43 million.

There now remains $135 million to be paid on the last DNA-aframax and the two Suezmaxes. $75 million will be paid during the remainder of 2010 and $60 million in 2011. For the last Aframax, we have just decreed very competitive terms for a $39 million loan, which will cover most of the final installment, and we are in discussion with banks to finance for the two Suezmaxes.

And finally, our drydock schedule. In quarter two, Eurochampion and La Prudencia are in drydock. In quarter three, Euronike and in quarter four, we have Ariadne and La Madrina scheduled.

And this concludes my comments and now I will hand the call back to Niko.

Thank you, Paul. And I think with Paul's financial presentation, we would like to open the floor for any questions, and then perhaps we can help you with our answers. Thank you.

(Operator Instructions). Jon Chappell, JPMorgan.

You made mention of this joint venture with Columbia and the savings it has already provided to your OpEx even before the joint venture has really been implemented. What type of magnitude of operating expense cost savings do you think you can see once this joint venture is up and running in the second half of the year?

Well, as Paul said, according to his figures, we had a 10% reduction in the first quarter, of which I would say three quarters could be on the new bulk purchasing that we are doing. So I think a 10% reduction is what we are aiming for in the first 18 months of operation. And then as more synergies work forward, I think we can enhance that even further.

So, of course, the benefits from the recent strengthening of the dollar -- long may it last -- because, as you might remember, about 25% of our costs are, in fact, in euros. So the recent strengthening of the dollar should show some advantages for us.

That is also helpful. And Paul, just a quick follow-up. You went through the drydock schedule pretty quickly. I got Eurochampion and La Prudencia for the second quarter. What were they for the third quarter and the fourth quarter again?

Third quarter is the Euronike? The Victory was also scheduled, but hopefully that will be gone by then. And in the last quarter, Ariadne and La Madrina.

Got it.

And I think this shows you -- I think the management, the technical management I think some have advised to bring forward for last year five of our specialty rates that were due for 2010, and that was mainly the product of the products. Since we did this, we have seen a significant betterment of the product market. So that is why this year it would have looked much worse, and that is why our utilization is drifting close to 100% because of all of these measures taken last year when things were not good.

Right. Okay. That makes sense. Two other quick ones and then I will turn it over. Paul, you have the financing already for the vessel to be delivered in July and your net debt to cap benefit 54%. Can you just remind us how much is left on the ATM, and what are the plans for the remainder of that? Do you still plan to finish the program, or is your balance sheet and cash flow in a strong enough position now where you may think about just ending that program?

Well, at this stage, of course, the program we are only using a small ATM program, which is less than 10% of our liquidity. And the reason behind it was to pay for financing the two -- the $32.5 million, the $32 million that we paid in order to save $5 million downpayment for Suezmax. So I think where we are today, where the sale price is today, there is no more ATM program.

Good to hear. Alright. Then on the last one, George was pretty clear in his comments that you are looking for potential acquisitions in your core fleet, and that is probably a conversation for another time. But I think we would be remiss if we just skipped over part of the big issue that was going on in March about potential acquisition of a drillship, whether that was through a joint venture or whatnot. Is there any update on your expansion into the offshore sector?

Well, as I said, the offshore sector remains a very interesting sector. I think the recent events have made the management and the board decide that TEN should not be taking operational risk in different sectors. And we are maintaining our position of sticking to our main core business, which would be the tankers and tank carriers and products, including product tankers. So, as we speak today, I think we would not want to participate in this sector not because it's not attractive, but I think a lot has happened since the last time we saw you unfortunately six weeks ago.

Natasha Boyden, Cantor Fitzgerald.

I wanted to follow-up on the rig question that John asked you. When we spoke six, seven weeks ago, you were very positive about entering the space and going into it. Obviously things -- circumstances have changed with the spill in the Gulf. But can you just tell us what really changed your mind on the whole?

As I said, we believe that this is a very good proposition, but I think the bidder has a lot of operational risks that perhaps are not -- not perhaps but should not be for a public company focusing on tankers and products. So I think if individuals from private companies would like to participate in the business, they can do it. I think it will be very profitable, but I think as a public company that it maintains a very large part of its business in crude and products so we would like to maintain that.

Okay. That makes a lot of sense. George, I think you touched on this in your prepared comments, but maybe to answer my last question, the spill in the Gulf. What kind of impact do you see that potentially having primarily on tankers, particularly on the crude side and then on the product?

I think we have already seen an improvement in Aframax rates significantly in the Caribbean. And also with the driving season, the US driving season, faster approaching, we are also seeing an increase in refinery utilization. And we expect that we are going to see this spread over to product tankers because as we do it it does not have any strategic reserves in gasoline. We could see imports of gasoline into the US increasing, which could be good for the product sector.

Do you have any other comments, Chairman?

I think undoubtedly this is going to accelerate the expansion and the tightness of regulations of anything that is in the water. What will be the total ramifications of this, I think we will see over the next two or three years.

Do you mean that we might see an even accelerated path to the scrapping of single-hull?

Yes, definitely.

Okay. And then just lastly, Paul, last quarter you had some impairment charges. Have you had any further impairment charges or impairment tests done to the fleet or any vessels held for sale?

No, there were only three vessels at risk, and those three were impaired. Two, of course, had to be or were going to be sold. (inaudible) We have performed further tests to make sure that it did not require a further impairment test and we are fine. We believe it will generate enough cash flow over its remaining life to cover its carrying value.

Okay. Great. So there is nothing more that generates?

Nothing more.

(Operator Instructions). Gregory Lewis, Credit Suisse.

In the press release, you mentioned the opportunities in the second hand and newbuilding markets. At this point where we are with strengthening and crude tanker rates and your outlook for a strengthening of product tanker rates potentially later this year, are you seeing more opportunities to expand your fleet in product, or is it more -- are you seeing equal opportunities in crude?

Well, I mean we are in the market for both. We are still way below the highs that we had invested in in 2006, 2007 and 2008. And I think as you very correctly said, the market that has suffered the most in the last 18 months has been the products, and we are looking into strategic investments in this part. We have already and we will be selling some of our third-generation Panamax products. We have a lot of interest from our strategic alliance in Central America with a major oil company there with the oil company there to expand this relationship.

So I think right now the way it looks the interest lies within the product sector that has been the most severely hit.

Okay. Great. And then just two quick follow-ups. Paul, could you disclose the gain for the Victory III that is going to be booked in, I guess, Q3 or late Q2?

We don't anticipate a gain really, possibly a minor amount. But the vessel was impaired and written down to its fair market value at the end of the year. It might have picked up a little bit. But if there is a gain, it will not be significant.

But we still have capital gains coming for the second quarter from the Marathon.

From the Marathon we will have capital gains, and that will be, as I said, about $6 million.

Okay. And then lastly, the Sapporo, the repositioning rate into the Mediterranean, are you able to disclose that? And you mentioned that the other vessel that is coming online in July is also at a repositioning rate. What sort of rate should we estimate that to be? Is that -- I'm assuming that it's going to be a discount to, say, average Aframax rates just given that it is a repositioning.

Well, I think the way we are -- we are very I think proud of the fact that out of our 55 new builds, we have never taken a new build without employment from the yard. I think there are very few companies that can say they were trade plays. And this has to do again with the relationship, long-term relationship we have with a major oil company and the major traders.

The repositioning, I think the Sapporo will come back to their natural trading area, which is the Mediterranean, the continent or the Caribbean with something in the mid-20s, and I think similar rates we expect from the Uraga.

[Ome Dao], Bloomberg.

I'm sorry I just wanted to follow up with a rig question. I wanted to see that Nikolas just mentioned that we are not going to participate in the acquisition. I don't really see this oil spill has changed our view, or is there anything to do with the oil spill?

I think the management and the board would like to be able to take responsibility for operations in which we have control, and I think that is one of the reasons that right now we will be focusing on tankers, product carriers with opportunities in which we can control 100% of the operation.

How about the oil rig, does that change your view? Sorry, oil rig, oil spill, does that change our view?

As I said, it is something that a public company would not want to find itself involved with unless it was able to control the whole operation as we do in our tankers and product tankers from all the way from the cadets up to the officers and every part from the propeller to the steering gear and to the wheelhouse. So, yes.

So you are now going to be able to have a total control of the rig acquisition?

We were passive investors. The proposition would have been to be passive investors. We are not going to be a passive investor in anything other than our main business.

Alright. Thanks so much.

It is outside our expertise.

This concludes today's Q&A session. I will now turn the floor back to Mr. Tsakos for closing remarks.

Thank you very much, and, as I said, this has been -- we get the feeling that we are on a rebound in our business. I think our COO, Mr. Saroglou, talked to us about the demand statistics we are seeing, the actual demand on the day to day basis from our clients. We are being able to charter our ships even straight from the yard. Our clients are taking like the (inaudible) chartering our ships with minimum on profit shares. So there is a big appetite for the good quality of our vessels.

We are seeing the ton miles increase. We are seeing the build between Venezuela and China and China and Nigeria on the refining side. We have -- the product side has been lagging behind. When we have a period which is perfectly divided between products and crude carriers, I think where we enjoyed a good first quarter for the crudes, it has not been as good for the products. Since then the product market has a significant recovery not to where we want it yet, but I think much better than it used to be.

The contango is much higher. Storage is much higher. We have a significant amount of vessels being stored. Right now close to 27% of the fleet is all storage or slow steaming, I would say, and our Company has been public since 1993. This has been or is still the third downsizing that we profitably have come out to, always increasing the size of our fleet, increasing the profitability. I think when looking at the slides of the sales and purchase, we have been able to increase the size of our fleet by 3.5 million deadweight tons, reduce the average age selling ships of 10-years-old, and buying ships of one-year-old average, and in the meantime make more than $260 million in capital gains.

Again, we are trying to convince perhaps it would take another 17 years, but we will keep on trying, to convince our friends here that we are the company, capital gains is on a high return basis average is 25% over income. So they should not discount this because we take this part of our business seriously, and I hope that we have proved for the last 17 years that we are doing it in that respect. And we are glad that the Company has been continuously profitable. Since eight years we went public, we have over $1 billion of net income, of which $260 million comes from the capital gains.

People tend to ask me if we believe our share price is low. We believe, of course, everybody can do their own net asset value in a month, and we believe it is low. One of the things $325 million in cash, out of a $14 stock, $9 of our dollars are sitting in our banks in cash. So we believe the prospects are good. We will weather any storm that is coming up, and we are looking very optimistic in the next two or three quarters.

And with that, again, I would like to thank all of you for supporting the Company, and I will ask the Chairman for his closing comments.

I think you summed it up. I have the audacity to suggest to my fellow analysts that was my first occupation, go back and read Benjamin Graham's book and see what he says about capital gains and how they influence book value. And then maybe over a test of time, time book value is a tool that you might use in order to measure the real improvement in shareholder value.

Thank you, Chairman. It is good we will go back and do some studying before our August conference call. Thank you very much. Bye-bye.

Thank you. This concludes today's conference call. You may now disconnect.