Tsakos Energy Navigation Ltd (TEN) 2018 Q1 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to the Tsakos Energy Navigation Conference Call on the 15th of June 2018 First Quarter 2018 Financial Results.

We have with us Mr. Takis Arapoglou, Chairman of the Board; Mr. Nikolas Tsakos, President and CEO; Mr. Paul Durham, Chief Financial Officer; and Mr. George Saroglou, Chief Operating Officer of the company.

(Operator Instructions) I must advise you that this conference is being recorded today.

And I will now pass the floor to Mr. Nicolas Bornozis, President of Capital Link, Investor Relations Advisor of Tsakos Energy Navigation. Please go ahead, sir.

Hello, Mr. Nicolas Bornozis?

This morning, the company publicly released its financial results for the first quarter of 2018. In case you do not have a copy of today's earnings release, please call us at (212) 661-7566 or e-mail us at TEN, t-e-n, ten@capitallink.com, and we will e-mail a copy to you right away.

Please note that parallel to today's conference call, there's also a live audio and slide webcast which can be accessed on the company's website on the front page at www.tenn.gr. The conference call will follow the presentation slides so please, we urge you to access our presentation on the webcast -- on the website. Please note that the slides of the webcast will be available as an archive on the company's website after the conference call. Also, please note that the slides of the webcast presentation are user-controlled and that means that by clicking on the proper button, you can move to the next or to the previous slide on your own.

At this time, I would like to read the safe harbor statement. This conference call and slide presentation of the webcast contain 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 operations. Such risks are more fully disclosed in TEN's filings with the Securities and Exchange Commission.

Before turning over the floor to Mr. Tsakos, I would like to mention that we just came back from very -- from a very busy, productive and successful Posidonia week, where we visited the company's headquarters. TEN is celebrating this year, 25 years as a public company; 25 years of continuous growth, growing the fleet from 4 to 66 double-hull vessels.

We should also point out TEN's track record of uninterrupted dividend payments. Inclusive of the recently declared dividend, TEN will have distributed a total of $10.71 per share in uninterrupted dividends to its common shareholders since the company's listing on the New York Stock Exchange in March 2002 against an issue price at the time of $7.50.

And now, before turning over the floor to Mr. Tsakos, I would like also to point out how the company's prudent and balanced fleet deployment strategy has resulted in outperforming the spot market in the first quarter of 2018 by over 100%.

Ladies and gentlemen, at this point, I would like to turn the call over to Mr. Nikolas Tsakos, President and CEO of Tsakos Energy Navigation. Mr. Tsakos, please go ahead, sir.

Thank you, and good morning to everybody. Thank you from Greece, and thank you for all your good comments and I hope that we will continue to many more profitable years.

The first quarter of this year has not been a very positive quarter, but we looked at it as the bottom of the recent market. We will be in a down cycle for, I would say, the last 2 years. And we hope and we have the feeling that the Q1 was the bottom of the cycle. We are looking -- it starts reminiscing -- if you look at the graph of 2013, and by this, the first quarter of 2013 was the weakest part and then the market, for different reasons, started turning around.

However, in TEN, we have followed a very prudent and sometimes boring model of running the commercial side of our business. And with 80% of our ships on long-term time charters, we always cover our financial and operational obligations with the 80% of that fleet and it covers the whole obligations of the fleet. And that leaves us, the 20%, of course, still a significant part, together with another 20% of profit sharing, to take advantage of a higher market.

So although it has been a very difficult period, I think, operationally, we have, again, more than 96% utilization, although we took the decision to take out of service 5 of our vessels and take advantage of this low market and pass the Spectra survey, which incurred, of course, expenses and downtime. We're very proud also of our operational record, 97% utilization. And also, we have moved, year-to-date, 600 million barrels of oil and products, including gas, which is 6 days of world production of energy. And all of this, and I knock on wood, with no operational issues, which is always very important.

So we're looking forward to -- for a better quarter in the second quarter, which we're in into this quarter. We are seeing signs of betterness from a big part of this business and various segments of this coming mainly from the [deal and the uppers]. We are seeing a big appetite of major oil companies for long-term business, not only for newbuildings, but for existing tonnage, which is always a very good sign. And you know that we are always looking at this.

We are proud to announce another -- after finishing in the fourth quarter of 2017, our 15 vessels in newbuilding program, we are proud to be back in building responsible ships with employment for major oil companies. And this is something, again, which falls within the company's strategy and repeat business.

Another segment that makes us believe that the second quarter will be significantly better or better from this quarter and the remaining of the year will return back profitable has to do with the turnaround of the LNG market. And as we see today, we have the LNG market almost doubled in the recent -- in -- within the last year.

So we have renewed the Maria Energy. She went up from $33,000 to $43,000 starting in April and we'll take this positive effect within this quarter. And of course, our other vessel, the Neo Energy has almost doubled. Her employment will start in the third quarter from $19,000 to $38,000. So this goes straight to our bottom line as we speak.

Also, there are things that are not completely on the day-to-day business that have to do with the legislations that we are seeing. We're seeing the [scrubber] and the worker balance arrangements on legislation that will make a significant part of the world click to either slow-steaming or being out of service for fitting and upgrading its technical capacity. So I think we are looking at better times going forward.

And then with that, I will ask George to tell us a little bit of the first quarter and [key process.]

Thank you, Nikolas.

We announced today the operating results of the first quarter of 2018. However, since 2018, this year marks the company's 25th year anniversary. Allow me to try to summarize the 25 years in one slide. Perhaps you can understand, it's not easy. But let me put out some key figures of the first 25 years.

As you know, we started with 4 modern vessels back in 1993 and we find ourselves sort of today with a pro forma fleet of 66 vessels. Most of the vessels, especially since -- after 1997, have been built with newbuildings, meeting clients' requirement. The total net income generated since inception is $1.25 billion, of which $565 million, a figure growth to 55%, had been returned to the company's shareholders in the form of cash dividends and buybacks.

Turning now to the first quarter numbers. OPEC supply cuts and an oversupply of tonnage, together with seasonal refinery utilization, continue to weigh on the crude tanker rates during the first quarter. The environment has been weak, but thanks to TEN's proven commercial strategy of fixing most of the fleet on medium- to long-term signed time charters, it paid dividends again as it helped the company to outperform the average spot market indices by beating them over 100% in all vessel categories that we operate. We believe that tanker rates have reached the low point of the current cycle. As we move into the second quarter, we already see signs of improvement.

For those of you who are connected to the Internet and our website, there's an online slide presentation whose format we will follow during the call.

Turning to Slide #4, to the key corporate highlights. We have announced today the company's agreement with an oil major to build 2 new state-of-the-art Aframax tankers against long-term contracts. We have also sold our oldest vessel, the 1998-built VLCC Millennium, after 20 years of profitable trade for the company. With this order, has now -- TEN has now a pro forma fleet of 66 vessels and 25 vessels in the fleet have ice-class capabilities. The average age of the fleet is 7.4 years against 10.3 years for the world tanker fleet.

We have a balanced employment strategy that takes advantage of market peaks with profit sharing arrangements. Out of the 66-vessel pro forma fleet, 53 vessels are on secured employment contracts with an average duration of 2.5 years. The emphasis is on charters with profit sharing arrangements that enable TEN to take advantage of spikes and stronger freight markets.

We have secured minimum contract -- contracted revenue of $1.3 billion with potential additional revenues from profit sharing arrangements. We have a modern diversified fleet covering client transportation requirements in crude products, shuttle and LNG. And we have become the carrier of choice for many of the top oil majors, commodity traders and refineries. We have continued to keep a very high utilization with the latest figure being closer to 97%.

In the next slide, we have a breakdown of the fleet, 66-vessel pro forma fleet, with 48 vessels being engaged in crude trading, 13 in products. We have 3 shuttle tankers and 2 LNG vessels.

The next slide has a main financial -- the next slide has -- basically, they're all in blue chip clients of the company with whom we are doing repeat business over the years thanks to the modern fleet, the safety record and the quality of service. These 10 names that you see represent 72% of the revenue generated for the company.

Strong secured coverage with upside potential. We have so far announced during the year new charters and charter extension of a total of 15 vessels in the fleet. The charter periods for these vessels ranges from 6 months to 3 years. 51 vessels out of the 66-vessel pro forma fleet are fixed under secured contracts, a combination of time charters, time charters with profit sharing and contracts of affreightment. 38 vessels are on market-related charters, including the vessels currently trading spot, securing the company's ability to immediately capture the market's upside. The revenues expected from the vessels in the fleet with secured employment cover the company's annual operating and financial obligations. We have seen in the LNG -- we continue to see improvements in the LNG markets with 2 of our vessels that we operate having secured extensions in their rates and charter figures of significantly higher levels; 30% in the case of one vessel and doubling the rate in the second one.

On the next slide, we present basically the breakeven costs for the various vessel types that we operate. And as you can see, the cost base is very low. In addition to the low shipbuilding, of course, we must highlight the purchasing power of our technical manager, Tsakos Columbia Shipmanagement, and the continuous cost control effort by management in order to maintain a low OpEx average flow for the fleet while keeping a very high fleet utilization rate quarter after quarter that we believe qualifies as full employment. With 80% of the fleet on secured employment, the revenue these charters generate cover the company's operating and finance expenses, including the dividend.

In addition, the combination of time charters with profit sharing, contracts of affreightments and spot charters guarantee for TEN a share of the market's upside every time we have a spike or a sustained strong freight market. Based on the current number of vessels operating in the spot market and time charter with profit sharing, for every $1,000 increase in the spot market, we have a positive $0.07 impact in annual earnings per share.

The next few slides, from 10 to 12, tell us what we see in the market. Despite the weakness we have experienced in the market, we are near the bottom or we have passed the bottom of the current cycle and we see positive signs that point to the market's recovery.

Some of these things are, first of all, the solid global economic background which translates to strong global oil demand. And the growth for global oil demand in 2018, it marks the fourth year in a row with global demand growing by at least 1.4 million barrels per day against the long-term demand growth figure of closer to 1.1 million barrels per day. This trend appears to be holding strong as the International Energy Agency, in their latest report, forecast the same demand growth number of 1.4 million barrels per day for 2019 as well.

With global oil stocks currently below the 5-year average level that OPEC was targeting in order to reduce oil oversupply, the reintroduction of economic sanctions against Iran by the United States and with key OPEC producers suffering continuous production declines, OPEC and friends appear to be ready to increase production by a figure of up to 1.5 million barrels per day following the June 22nd meeting. Increased OPEC production historically has always been faulty for tanker demands and freight rates.

The U.S. continue to develop as a major crude oil exporter to the world. During 2017, the average U.S. exports were in excess of 1.4 million barrels per day. The latest Department of Energy 4-week average of U.S. crude oil exports exceeded 1.9 million barrels per day. The growing U.S. exports have created new long-distance trade routes, mainly to Asian destinations, adding to tonne mile growth.

High scrap prices and the weak market resulted in a significant increase in tanker scrapping, the highest that we have seen in quite some time. The average age of the scrapped vessels is coming down to about 20 years. With the upcoming regulations for the water ballast in 2019 and the global sulfur cap from 2020, we believe in the company that owners of older vessels will continue to prioritize in scrapping their older tonnage rather than passing them to an expensive forced special survey, the effect of which will be a lower net [lead] growth for the next couple of years.

In lieu of all the above, we announced today another dividend of $0.05 to be paid on August 8 to the shareholders of record on August 2. In total, since 2002, TEN has paid $10.71 in cash dividends or in excess of $466 million. And this compares with the listing pricing in our IPO of $7.50. The average yield since the New York Stock Exchange listing in 2002 is 5.25% per annum. We believe that we have turned the quarter and we are going to be positive again in 2018.

And with that, we are turning to the numbers. Paul?

Thank you, George.

Well, as Nikolas described, the tanker market in quarter 1 was not conducive to generating strong results by any large tanker company, although we probably fared better than most others. Our net loss was limited to $11.9 million, thanks to our time charter cover and our fleet enjoying full employment. As a result, our vessels earned significantly better than market rates, with an average daily TCE rate of nearly $18,000.

We had 16 vessels on spot, Aframaxs and Suezmaxs at least comfortably covering their running costs. The spot MR has performed relatively well, with an average TCE of $13,000.

We had 5 vessels dry-docked, as Nikolas mentioned, 4 losing their time charter revenue, including shuttle tanker Brazil losing $53,000 daily. However, our time charter vessels still managed again to generate enough cash to cover our operating, overhead and finance costs, but leaving a smaller surface than in recent quarters.

Our average daily OpEx per vessel increased, but we regard this as a temporary aberration due to the 5 dry docks, the heavy restocking of vessels and a weak dollar. In quarter 2, we expect a reduced dry dock schedule, regular supplies to vessels and a stronger dollar, so average daily OpEx per vessel should return to normal levels.

Our daily overhead cost per vessel remained stable as there is no management at all and vessel management fees remained stable as they have been for 6 years. Finance costs increased by $6 million, mainly due to the loans relating to the new vessels and increased interest rates. Unlike the prior quarter 1, there was no capitalized interest and no gains from early termination of interest rate swaps in this quarter 1.

There were no new loans in quarter 1. Repayments amounted to $42 million, bringing our outstanding balance to $1.72 billion. Net debt-to-capital is 51%. Our average cost of debt in quarter 1 was only 3.9%.

In quarter 2, we have successfully refinanced the debt on 11 of our vessels, extending the original life of the debt on these vessels for another 5 years with a reduced margin. We have also refinanced the shuttle Brazil, providing an extra $16 million of cash. Our old VLCC Millennium was sold and $10 million worth of debt repaid from sale proceeds. We soon expect to complete negotiations to finance the 2 newbuilding Aframaxs just announced at very competitive terms.

And this concludes my comments. And now, I'll hand the call back to Nikolas.

Thank you, Paul, and thank you, George.

And as we said, this has been a challenging quarter, but the prospects look positive and we hope that 2018 will be another profitable year. It has -- in many ways, it is reminiscent of the end of '13 when the market started turning around and we see a lot of this because of the appetite of the major oil companies for long-term business happening almost on a daily basis. And big names, all the majors are out there to take in vessels. And I said, again, not newbuildings, just the vessels out of the market.

So with that positive note, I would like to open the floor for any questions.

(Operator Instructions) Your first question comes from the line of Donald McLee from Berenberg.

So just to start with the newbuildings, could you provide any details around the Aframaxs in terms of just pricing, expected delivery, contract tenure, et cetera, and just things that will be helpful from a modeling perspective?

We will tell you this in private when you are going to offer to finance it. No, I'm just kidding. Well, I think these are vessels capturing all the new Tier 3 technology, which is required, and it's in the low 50s depending on the extras that the major company is going to be -- to adding. Yes, it's very close to 50 or under depending on the specification -- on the price.

Great. And just in terms of the tenure on the contracts that's attached to the Aframaxs?

It's anywhere between 5 and 7 years. I mean, 5 is the minimum and then there are options up to 7 years.

Okay. That makes sense. And then just taking a step back. In the past, you've talked about taking time to digest the recent CapEx program when referencing potential LNG carry orders. But with that Aframax order on the books, could you provide an update on if you still see LNGs in near-term avenue of growth and if there's been any change to the level of activity for any negotiations around those orders?

No, no. As I said, we are

(technical difficulty)

It's not October '19. It's October 2020, the 2nd one.

[The CRC?]

Yes.

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

Two quick follow-ups on the newbuilds. When is the delivery set for those? Is that mid- to late-2020?

Perhaps, yes, perhaps as early as the last quarter of '19 for the first vessel.

Okay. But that might slight -- I mean, you probably don't want to take a December 2019 delivery, right?

Yes. So although these -- the tankers are pushing because they need the ships, you're right, which is what we would do.

Okay. And then, Nik, you were on the record earlier this year saying that your constituents, I'm not sure if that's the right term, but your fellow owners in INTERTANKO would "shoot" you if you ordered newbuilds. So can you explain, with the Aframaxs that you have in your fleet today on the spot market, why those ships couldn't be used for this particular charter?

Yes. You are right, but you have missed my quotation, which has been responsibly -- like drink responsibly. So I think I've always said that we cannot stop anybody ordering ships that a client will give to somebody else unless they are going to do it. So we are not looking to build opportunistic ships because of low prices of newbuilds or so, but we have never, and you know this, because we just delivered 15 ships last year, we'll never shy out of doing business -- one of the reasons -- and one of the reasons that we think that the market will also be positive is, as you know, we have moved for environmental reasons into Tier III and new designs of engines and more environmental and a lot of (inaudible) for specific rates require this type of effort instead of existing. Our priority has been to offer them existing ships, but they need new technology.

Okay. So the other -- maybe another way to ask it then is, is there a 2-tiered market developing for time charters? And if you have a handful of 2007 and 2010 builds of Aframaxs in your fleet, when a customer comes to you, they specifically wanted the new technology and maybe even be involved in the oversight of the newbuild process rather than take existing ships?

Many of the clients that are asking for newbuildings, but as I said, we have a lot of business for existing charters by the major oil companies. And I think this is also very encouraging because it's not -- we see, I would say, 75% of the business out there for existing ships, for 2007, 2010, 2012, we're planning to announce some of this business, I think, later in -- within the third quarter. But this -- but there are some specific clients that we have, Statoil, earlier -- later in 2017 that need specific ships for specific (inaudible) rates, so yes.

And then -- so that leads then to my last question. You laid out a pretty optimistic view on the bottoming of the cycle in the near- to medium-term outlook. And you have a fair amount of spot ships today but a bunch of contracts rolling off to -- in the relatively near future. It sounds from that comment that you're still looking to kind of recharter ships and maintain the current time charter coverage as opposed to maybe be getting a bit more spot exposure in what you think would be a recovering market. Is that accurate?

Yes, because, I mean, as you know, in order to -- or as I said in the beginning, we are a bit of a boarding company because we tend to have long-term charters. And because of the company's reputation, we tend not to have time to have our ships open for too long before the next client comes for a long-term employment. And I'm here with a charter agreement. We are -- we have recycled [the grabbings] on a daily basis. And if you recall, I think, we made an announcement back in March, that already in March, we have already chartered 16 vessels from the existing fleet. So 2 charters. So there is an appetite for that. I think, we have big companies out there, like the Exxons, Shells, that are looking for cover for existing.

Okay, final thing. More of a comment rather than a question. And I've spoken to some of my peers about this as well. It's June 15. We're 15 days away from the end of the second quarter, and most of your peers have reported weeks, if not months ago. If possible, as far as staying relevant with the investor community, if you can kind of move the timeframe up a little bit and be closer to peers, I think that would be helpful to the company, to us and the analysts and to your valuation. That's just an observation.

[Frankie] your line is open, please ask your question.

Two quick questions here. On Slide 5, you show that your 3 LR2s and 2 LR1s are currently operating on the crude trade. How hard or easy would it be to switch those vessels to transferring refined products? And is that something you're thinking about doing?

I think, operationally, it's not -- those ships have been designed [but they've been built in the best yards] operationally, it's not more than 1 week, and perhaps depending we're paying for about $0.25 million of expenses to turn them from dirty to cleaner trades.

Okay. Is that something you'd think about doing? Or you're pretty committed to crude trade on this?

Well, I think, [all] the ships are on charter employment, so the owners are -- started under charter are working now more on the crude trades. But they can turn into clean.

Sure. Okay. Right now, with those 2 buildings, basically, to be delivered, the recent orders, any other plans for fleet growth or maybe additional fleet sales, now that you've already sold the Millennium, in the coming quarters?

I think, yes. On specific segments, we are looking as we have with gas. Like gas is a growth priority for us. And all of our first-generation ships, as we started with the Millennium, are -- have been for sale and we're -- some of them, we are negotiating closely.

Got it. Okay. And then, back to the market. Can you give some guidance on quarter-to-date or maybe current spot rate on some of your open Suezmax or even open Aframax [through] tankers? Obviously, the headline rates, according to some of brokers, are pretty low. Obviously, I would assume you're outperforming those.

Yes. I mean, we are [addressing] -- like I give you the comparison in the first quarter. I think our -- and again, this has to do because we have coverage of our ships in a market that has -- our (inaudible) are close to 27 -- about 27,000 in a market of 11.5. Suezmax is 18 in a market of 5, Aframax is 18 on a market of 7, and so on and so forth. So I think today, some of these markets, mainly the Aframax, have recovered substantially, and we're seeing a (inaudible) on the Suezmax trade.

Okay. So 2Q rates higher than 1Q for the spot vessels?

Excuse me?

2Q rates higher than 1Q for the spot vessels?

Yes. Mainly, the (inaudible) and Aframaxs are the ones who have started reacting more positively.

Sure, sure. Okay, last question. Share price. Obviously, still trading at a pretty steep discount to NAV. Are share repurchases part of your kind of return to capital plans this year? Are you just focused on buying back those preferreds first?

I think buying back the preferred is our priority and maintaining our dividends is the #1 -- the 2 first priorities.

You're next question is from the line of Ben Nolan from Stifel.

So my first question relates to, I guess, just the newbuild, and ultimately, the returns on them. Kind of backing into it, it sounds like your (inaudible) returns are 10%, 11%, if that's correct, correct me if I'm wrong, but -- which is, I think, probably in line with where things have been historically for longer-term contracts on newbuildings. But as you look forward, are you seeing any changes there? Any evolutions in terms of what you guys in the market will and do require in terms of kind of a minimum level of return in order to be incentivized to build new vessels?

I think, Paul, our equity return is closer to the mid-teens rather than 10%, 11%. I think we're trying -- we have lost a lot of business to others at 10% and 11%. There are other people that would go for that. I think we will follow.

I agree. I mean, we've always -- in the past, we've gone for as much as 15%. But of course, that's been whittled down over the past 2 years, our target that is. But I think we would be -- we are very happy to get 10% or 11%, but do -- even that, these days, can be a bit of a struggle. But we feel that by the end of the year, we'll be up again around the 12% kind of level.

Yes, (inaudible) has to do with the return on the fleet overall, but my comments have been on the time charted market. But we let other people get the 10% or 11% on long-term charters. We are looking at something with mid-teens. I think, 15% is our sweet spot and we have examples in businesses that we let it go to undercut the market.

Next question is from the line of Fotis Giannakoulis from Morgan Stanley.

I also want to ask about your capital allocation, your -- how comfortable you feel with your liquidity. I know that you want to have plenty of cash in your balance sheet for opportunistic acquisitions. Given the fact that you have to -- and you plan to repay back the 2 preferreds, which is $100 million, and you have also some equity to contribute for the newbuildings, what are the sources of liquidity that you can have? And if you would consider of raising external capital?

Well, I mean, as I said, our intention is -- we have the 2 preferreds, the first one will be repaid, I think, will be in 2019; the second is due in October 2020. And we're planning to -- as you know, priority to repay those preferreds or at least to refinance it. In the market, as you know, preferreds have performed very, very, very well, and they're performing very well because we have a very constant dividend from that side. Also, we're looking at fixed sales to create liquidity, and we're doing that. We're enhancing the company's liquidity, which as we said is always on the high side for these (inaudible). And we are securing businesses that the equity participation because of the signature of our name and the [tanker's] name, it's not so demanding. So I think the existing growth of the company will come from existing net cash flow for the new ships.

So is there any minimum threshold over cash that want to have in your balance sheet? And you mentioned earlier your first priority for the repayment of the preferreds will be (inaudible) new preferreds. Is this the game plan here?

Well, depends how the market conditions are going to be at the time. I mean, it is something we do not exclude.

Okay. And Nick, you are, except of being the CEO and the Chairman -- or the CEO, but then, you're also the Chairman of INTERTANKO, the association of the tanker ship owners. I want to ask you if you was, with both hats, about the [MP case] of the [IM] of 2020, and the way that your fellowship owners are reacting to that. We heard earlier this week one of your peers in the dry bulk sector mentioning that they have already ordered a number of scrubbers for capesize vessels, very similar size of the Suezmax that you own. Is this something that you expect to have a wide adaptation now that the first steps have already been done and it seems that the cost is a little bit lower than we previously talked?

Well, I think, first of all, Fotis, we will have to take -- you will have to spend here up to dinnertime in New York to discuss this issue. But I would try to give you a small summary of our thoughts here. I think, every one of our peers has his own right. We believe that scrubber is one the solution. We believe scrubber is a short-term solution. Owners are doing -- are taking this stance. However, whichever way it will go, even if scrubber becomes much more acceptable day to day, the disruption and the dislocation that this will create in the market will be very positive for (inaudible) both in tankers, dry cargoes, and I'm not sure what will happen with containers because containers were actually the majority of the CO2 comes out from. So I think any disruption of that sort, even by slow steaming, even by people going to the yards, working for fitting scrubbers is going to make a big change for the market within -- starting early in 2019. And that's why I say -- now my opinion is that scrubbers is a short-term solution, and that might pay -- to fit them. So I think everybody is taking a chance on that. There are not enough scrubbers in the world to fit all the world's investments with scrubbers. And most of all the ships will go for scrap. But I think -- you mentioned that I sound optimistic. I'm not over-optimistic. I'm just looking also at the supply and demand figures, which you are much more analytical about. I mean, there are, let's say, more than 100, 120 VLCCs in the order book. But close to 200 of those ships are [above] 15 years old, and more than 30 of those ships are (inaudible). So really, if you imagine that some, at least of the 20-year-old ships, will not, for sure, as we did with the Millennium, will not go through the scrubber or the water ballast treatments. And neither of them -- the market is much, much more balanced than we think, and that is the reason that we feel optimistic. Our opinion as an association, wearing my INTERTANKO hat about scrubbers is that it's a short-term cure with no real positive long-term effects for the environment we're talking about. But every owner takes his own economical decisions. The truth is, whichever way it goes, it's going to be positive for the market because it will create significant disruption.

Can you also give us your view about the level of compliance that you see after 2020, and also if you believe that this date is set in stone or there might be some extensions similar to what happened with the ballast water treatment?

What I can tell you is that, as we speak today, from now until September, a lot of very important discussions will be taking place in all the (inaudible). And by September, there will be a decision. If you would ask me based on supply and demand, supply of oil pipe and demand for oil pipe, I would believe that some sort of transition time has to be given for vessels to comply. But I think, in September, the final decision will be taking, and then we will know much more on the effect on the market, depending on that, will be significant.

And jumping to the U.S. Gulf market and the ramp-up in exports, it seems to be one of the high expectations for the tanker sector. Can you give us an idea of how many vessels that you are engaged in U.S. exports right now? Why there are VLCCs or Suezmaxs, Aframaxs for reverse [lightering]? And how many vessels do you expect that will be engaged in the future if we have this growth in U.S. exports? People are talking about 4.5 million, 5 million barrels per day growth.

Well, as we have seen, this is a market that we think is biting more and more into the demand for transportation business. The Aframaxs are basically used, as you rightly said, for [trade,] for reverse [lightering] and we have the first couple of VLCC cargoes that have been exported, and Suezmaxs. But so far, the market has been more effective and we see this because of the best performing market in 2018, is the Aframax Gulf market. And, I mean, today, it has gone close to $20,000 a day, which is very important.

The next question comes from the line of Magnus Fyhr from Seaport Global.

Just 2 follow-up questions. First, on the scrubbers. We're seeing some of the oil companies taking a bigger interest in putting these on their ships. Maybe you can tell me a little bit about your -- the -- of the 2 most recent time charters for the 2 Aframaxs, was there any talks about putting scrubbers on these?

Yes. I think, scrubbers is one of the options but it's being discussed and evaluated with the shipyard. And as you know, there are various types of scrubbers and we're learning more about scrubbers than we ever envisioned in our life when we started out, [often looked] for hybrid scrubbers. So yes, these are options that are being discussed very, very seriously.

All right. And then, second question on the LNG market. I know we've set out on some goals here a few years back. We're mid-2018, we still have 2 LNG ships. Are the returns getting closer now? We've seen some longer-term charters being awarded, that you think it could have maybe 1 or 2 ships more by 2020?

Yes. I think you are right. We went through a period that I think some owners, for their own reasons, more out of -- because they had a significant amount of ships, idle in the spot market -- as we said, the spot market has almost doubled in some segments of that, and that carries some weight on the long-term side of the business. I think some of the owners that had idle ships have now employed them at low respectable level. And the market is going through a period that we are approaching our -- in terms of, I mentioned earlier, of the mid-teens returns, at least for our equity.

Next question comes from the line of James Jang from Maxim Group.

So I know you'd mentioned that LNG is a focus for the near term but any plans on replacing the Millennium?

I mean, yes. Big ships are always interesting. And there is a big appetite for big ships by the oil companies. So it is a segment that we are looking, not as a priority, more opportunistic. And we're looking also at ships that are resales.

All right. And Nick, since you are the Chairman of INTERTANKO, can you give us some insight into whether INTERTANKO is working with someone like (inaudible) on the scrubbers?

I think, INTERTANKO is not -- INTERTANKO is giving information to its members for every technology available. We are -- we have our annual meeting for 5 beautiful different days in a row next week, and I know that the majority of those 5 days we'll be talking about scrubbers and (inaudible) so we will have to bring a lot of graph (inaudible) for all these technical issues. But yes, I mean, we are providing a forum for suppliers to come and talk to our members. We're not influencing companies. We're not a commercial organization because INTERTANKO -- but we have had in Houston in the last year, in our annual meeting, we had a lot of the water ballast treatments with the U.S. Coast Guard approval presenting the technology we will have (inaudible) and others presenting their technology in our annual meeting now. But I mean, we're not making a profit out of this. We're only telling our members what is our plan as an option.

I mean, wouldn't it benefit, I guess, the industry, if you guys would come to some type of consensus on a scrubber system to help with costs? Or is that not part of the discussion at this point?

I mean, we have strong opinions on scrubber technology, and we have a very competent technical team in INTERTANKO dealing with issues like this. But their aim is not to -- our aim is not to influence one technology.

Got you. Okay. And one last one is, you mentioned that you believe that the sector is kind of exiting the trough right now. What are you seeing kind of to support that outlook?

Okay. You're talking about why we believe that the market has turned the corner?

Yes.

Perhaps, I said before, it reminds us very much, if you look also to the graphs of where we were in this same time -- same period in 2013, which was, again, a very low period of time, we had a difficult summer in 2013 for those of us who have long memories remember, and then, I think, October of that year, the market turned the corner without specifically, we didn't have any major wars other than the usual Iraq skirmishes at the time. The reason is now because we are seeing that supply and ships are getting older. And the supply, (inaudible) the numbers is a bit scary. It is imbalanced, and the other segments that we're seeing is the dislocation which you guys have mentioned, it will have to go to slow steam or have scrubbers treated on their ships, they will have to have a lot of time out of service. And that will create significant market disruptions and dislocations, which [of the rate] as long as demand, as George mentioned in his presentation, states increases where we expect it to increase. So we're going to see a positive remaining of the year. I mean, we know how many ships are coming in, we know -- we hope -- we have already had the, let's say, more than 70 ships since -- in the first 6 months, and tankers have been scrapped. 15 (inaudible), 10 Suezmax and 20 Aframax, and then about 22 smaller ships. So that's a good sign.

Okay. And one final one is on the 2 new contracts. I think John touch upon this. Currently, you have Sapporo, Uraga Princess off charter. Why were these vessels not looked at as candidates for [every] charter? Is it because of the age or the technical specs?

No, no, no. Actually, the ships are participating in contracts of a freight with major oil companies. They're not -- just because the ships are not necessarily attractive does not mean that they're not operating. Actually, they're operating in the spot market. And if you look at our utilization of 97% is way, way above the industry average of 80% to 85%. So the ships are operating, and there is a big appetite. I mean, let's say, one of the major companies is out there as of this week, looking for this type of vessels for long-term employment. Now if they meet the rates that we believe is appropriate, we might charter them long term. But the ships are working with 96% utilization. So they're working with the majority of -- every single day.

Got you. One quick one. The 2 new Aframaxs, are they coated?

Of course. Yes.

There are no further questions at this time.

Okay, thank you all. We would like to thank you very much for your interest in the company and the questions. We would be out in Marine Money next week, so you can see and have any more clarifications with our results being out. We believe that it has been a tough start of the year but our strategy of 80% employment and more than doubling -- outperforming by double the spot market has put us in the right direction. We still have the positive cash production, a small one, but still, our strategy with 80% of the fleet are paying all our operational and financial obligations has started to operate. It's been the first real quarter that we have a full fleet working. We took the decision to take a number of our ships out of service and passed the special surveys because of the low market. It's something we will not have, I think, in this degree at all in the second quarter. So hopefully, our news will be either be much better when we talk to you after the summer. And with that, we would like to thank all of you very much. Thank you.

Thank you. That does conclude our conference for today. Thank you for participating. You may now all disconnect.