Euronav NV

F:OCW

Earnings Call Transcript 2018-Q3

[Operator]

Good morning, and welcome to the Euronav Third Quarter 2018 Conference Call. [Operator Instructions] Please note the event today is being recorded.I would now like to turn the conference over to Paddy Rodgers, Chief Executive of Euronav. Please go ahead.

[Patrick Rodgers, CEO & Director]

Thank you. Good morning and afternoon to everyone, and thanks for joining Euronav's Q3 2018 Earnings Call. Before I start, I would like to say a few words. The information discussed on this call is based on information as of today, Tuesday, 30th of October 2018 and may contain forward-looking statements that involve risks and uncertainties. Forward-looking statements reflect current views with respect to future events and financial performance and may include statements concerning plans, objectives, goals, strategies, future events, performance, underlying assumptions and other statements, which are not statements of historical facts.All forward-looking statements attributable to the company or to persons acting on his behalf are expressly qualified in their entirety by reference to the risks, uncertainties and other factors discussed in the company's filings with the SEC, which are available free of charge on the SEC's website at www.sec.gov and on our own company's website at www.euronav.com. You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement, and the company undertakes no obligation to publicly update or revise any forward-looking statements. Actual results may differ materially from those forward-looking statements.Please take a moment to read our safe harbor statement on Page 2 of the slide presentation.I will now pass you over to Euronav's CFO, Hugo De Stoop, to run through the first part of the presentation.

[Hugo De Stoop, Chief Financial Officer]

Thank you, Paddy. Good morning or afternoon to wherever you are today, and thanks for joining our earnings call. As always, I would like to start with the agenda slide on Slide 3. I will run through the Q3 highlights and provide a full financial review of the income statement and the balance sheet before handing back to Paddy to run through the current market themes in the tanker market and Euronav's outlook before we open the call to questions.So turning to Slide 4 and the highlights page. The freight market was challenging during Q3 but with a twist. While freight rates were under pressure, they were actually higher than those achieved in Q2. This is interesting as it is a rare feature in our market for Q3 rates to be better than those in Q2. The last time this happened was in 2014, and this preceded a very strong freight market.Freights have started improving from early October, and we have booked so far for Q4 around $27,000 per day for VLCC fleet and just over $19,000 per day on our Suezmax fleet for 53% of the available days. Finally, we took delivery of our final 2 new Suezmax, the Corpus Christi and the Port Arthur, during Q3. Both of them are fixed on the time charter for 7 years.Turning to the income statement on Slide 5. The operational integration of Gener8 is now almost complete. One line to focus on is the G&A line, where around USD 5 million of one-off items related to the Gener8 merger were taken. These covered layoffs and accounting fees.We have one outstanding item related to a property lease, which should be resolved during the current quarter. Finally, we recorded a gain on the disposal of the Cap Romuald of just under $9 million.Moving on to the balance sheet on Slide 6. Leverage has crept up a little bit as we paid final installment for the 2 remaining Suezmax mentioned earlier of $87 million. This also explains the reduction in available liquidity falling to $677 million. There still remains a considerable buffer. Euronav now has no outstanding capital commitments beyond usual dry docking activity and fitting of Ballast Water Management Systems.That concludes my section on the presentation, and I will now pass back to our CEO, Paddy Rodgers, to conclude the prepared remarks. Paddy, it's over to you.

[Patrick Rodgers, CEO & Director]

Thank you, Hugo. I will now turn to Slide 7. Whilst there will always be a number of complicating factors impacting our business, the tanker shipping market is a relatively simple one based on the interaction of demand for oil and supply vessels. I intend to look at both of these in the next couple of slides. Firstly, despite the oil price rising by 1/3 from Q2 until the recent peak of $86 per barrel and geopolitical concerns rising throughout the current calendar year, demand forecasts have remained resilient. Above-trend growth is expected for both 2018 and 2019 as Slide 7 shows. Turning to the vessel supply side of things, let's look at Slide 8. 2019 will be a challenging year in terms of the number of VLCC equivalents that are due for delivery. Remember, we classify our VLCC equivalent as one VLCC or 2 Suezmax. With 66 units due to hit the market, this is quite correctly a key issue for investors. What we have attempted to do in Slide 8 is to assess how this can be absorbed. If we assume an additional 0.5 million barrels per day of U.S. crude exports and 300,000 additional Middle Eastern exports, that would take care of around 30 VLCC units. Iran has around 14 VLCCs in storage, which in simplistic terms would have to be replaced by the world commercial fleet.Add-in modest assumptions for recycling at 18 units and capacity taken out for IMO-related dry dockings, and the 66 VLCC equivalents are covered. A deliberately simple approach but one which should provide confidence to shipowners that this high level of deliveries is nonetheless manageable. I now turn to Slide 9 and our outlook and views on IMO 2020. We believe our view and outlook has been consistent on this subject. We undertook a specific presentation on IMO 2020 in June, which we recorded on video and remains available on our website. The dislocation that will arise from the new fuel regulation should drive additional benefits for the tanker market in 3 forms: firstly, we should expect an increase in trading routes as focus swings to the sulfur content of each barrel; secondly, storage opportunities are expected as both crude oil and fuel will require separation, and that needs to take place; and three, more crude throughput will be required to produce enough of the new compliant fuel.All of these factors, along with potential for slower steaming, reducing capacity and more pressure on older tonnage to recycle will benefit all crude tanker operators.However, the debate has been largely narrow and focused on scrubbers. Our skeptical stance on this technology is based on 3 principles. Firstly, the strong indications we're getting from the oil producers is that there will be sufficient quantities of compliant fuel and that it will be competitively priced. The only justification for fitting a scrubber is based on economics, but a wide fuel price spread is required to underwrite such a speculative upfront investment. We do not believe at this point, 14 months out, that the economics will be sufficiently rewarding for the risk involved. Secondly, there is a range of operational concerns, which we list in our press release, allied to the risk of pollution from this technology. There have been no major studies on the environmental impact of scrubbers, and we remain concerned that the effective transfer of pollution from the air to the sea has not been adequately tested by public opinion. Lastly, we have concerns over regulatory oversight going forward, which will require clarification ahead of January 1, 2020.So in summary, we remain cautious on the technology. We simply do not see the reward or returns being consistent with the risk profile as a speculative investment.We are actively engaged with partners in assessing how we can benefit from the anticipated volatility in fuel prices in and around the new regulation. And I look forward to further discussion on this in the Q&A section. Lastly, on our summary slide, 10. We upgraded 2 of our traffic light symbols in August with the Q2 results. We do not make any changes on our outlook for 2019, but overall, Euronav's management is upbeat over the prospects for the tanker market in 2019 and beyond. Demand has remained resilient, and supply of oil, whilst fragile in part, is returning as OPEC are actively switching on the taps. U.S. export growth is underpinning ton mile growth today and will increase over the next few years as infrastructure investment starts to kick in.Vessel supply, the key factor in our industry, is affected by an elevated delivery schedule for 2019. But even here, there is good news. We showed earlier how we think this can be adequately absorbed, but also there have only been 4 Suezmax ordered during 2018 so far and no VLCCs ordered in the past 5 months. This adds further support to our outlook. That concludes the formal part of the presentation. I will now pass back to the operator for Q&A. Thank you.

[Operator]

[Operator Instructions] And our first question will come from Jon Chappell of Evercore ISI.

[Jonathan B. Chappell, Senior Managing Director]

I'm somewhat reluctant to use my one question on industry and especially IMO 2020, but you kind of asked for it. So good information on the scrubber debate, very nonconsensus in the press release. So what I'm wondering is as you think about your options, 2020, how do you envision the market kind of playing out? And what I mean by that is what percentage of the VLCCs do you estimate today to be scrubber fitted? And will they essentially set the marke? Or do you think the ships without scrubbers with access to the compliant fuel will essentially set the market? How do you view Euronav in a competitive landscape in that environment?

[Patrick Rodgers, CEO & Director]

Well, I think it's -- as always, Jonathan, it's a very good question because it goes straight to the heart of the issue, doesn't it? That's when people look at this. The great problem that we've always faced in tanker shipping and in oil shipping but tanker shipping in particular, is just that so much of our cost is fixed cost based around capital expenditure, and that we calculate that, of course, as a noncash item and depreciation. But when we get under the pump on oversupply, then of course, it's the operating expenses that determine how low the market could go, not the capital expenses, which is why I think anybody today who's thinking of adding capital expense to a VLCC in the hope of what the market will deliver in the future is nevertheless adding to or exasperating a problem that the market already has. Shipowners, if they want to enjoy good returns on their investment, need to ensure that their operating expenses go up and their capital expenses go down because it's the operating expenses that will put a floor under the market. So it comes back to that question. What do you think the balance supply and demand will be? And how do you think that will shape the market? Well, I think the thing -- a number of things are being missed in the discussion because quite frankly, the analysis of 2020 and post 2020 has become completely monocular. People are absolutely focused on one subject only, and they're not really seeing the wider picture, which is that heavy fuel oil, what we call -- what we burn on our ships is called residual in a refinery, and it's the last dumping ground of the only place that you can put sulfur. And as effectively, that's now ruled out. Sulfur is going to have a price right the way through the oil matrix. And what does that mean? Well, it means that there's going to be a premium for sweet oils, there's going to be a discount for sour oils, there's going to be, obviously, an arb between the 2 in which there will be an opening for freight to go up and to fill that gap in order to move the oils to the place where they're most needed and where people are prepared to bid to buy them or whether they're prepared to accept their impurities because they have the ability to deal with them. And that's going to be good for trading and shipping. So all of a sudden, there's going to be almost like a products trade but in crude oil, and this is really powerful. I don't think that, that's been properly taken notice of by analysts looking at what happens in 2020. But there's another twist on this. You can no longer start dumping your crudes one on top of the other because once you've got a segregation based on a premium for sulfur, you need to keep them separate. That means logistics. Everybody's talked about the logistical problems around the bunker market, but exactly the same sort of logistical problems are going to exist around the crude market because these things are going to get differentiated on sulfur content. So I think that there's a very, very significant element of a need for additional storage in ships, and by the way, when you store, you don't burn fuel. So there's a level playing field in terms of earning capacity and usefulness between a scrubber-fitted and a nonscrubber-fitted ship. And then in addition to that, there will be a competitive market. But judging from what we're seeing and where the availabilities of heavy fuel oil are likely to be, we still believe that we're probably looking at no more than 10% to 15% of the VLCC market being scrubber-ready or scrubber-fitted, and that -- and I just have to put a caveat on that because a lot of people are talking about it. We're yet to see anybody really doing it significantly on VLCCs, and that will happen in 2019. So at the moment, it looks like compliant fuel should price freight, but there's a little caveat, as I said, about when are these ships actually going to get fitted, how long is the fitting going to take. No one's going to be doing this at sea or quick and dirty for tankers. That might be the story around dry cargo, but the tanker shipping, you better get this right. If you're going to have a VLCC, and you're going to put 30,000 cubic meters of seawater through your engine room every day, it better not leak. So I think people are going to spend a lot more time on outfitting than they think they are, and I think that's one of the reasons why 2019 is going to be a stellar year. And if we start chasing this market, where we're being hounded for coverage because people have short ships, then of course 2019 will lead nicely into 2020, and we should have the market really rocking on our side.

[Operator]

Our next question comes from Chris Wetherbee of Citi.

[Christian F. Wetherbee, Vice President]

One quick point of clarification on the comments you just made and then sort of a follow-up. Are you implying from a crude trade perspective something similar to a dirty and clean products trade? I just want to make sure I understand from a vessel perspective if you think there's going to be segregation. And then the second one is as you think about the fleet in the -- your fleet in the context of what you're talking about and the opportunities there, what do you do? What moves do you need to make? Are you done post Gener8? Or is there more that you want to do either from an acquisition or divestiture standpoint?

[Patrick Rodgers, CEO & Director]

Yes. So I think what I'm saying to you is that if you -- I think it's not so much -- we're not talking about -- I don't imagine there'll be multiple grades of crude loaded onboard a ship as a result of this any more than it would have been on cargo sharing in the past. But I do believe that if you have a light oil in the Atlantic and somebody has a simple refinery in the Mediterranean, they're going to have to buy that light oil, and that's going to have to be shipped. At the same time, streams of crude that they might bought from the Black Sea will have to go out into the U.S. Gulf. And as you start to see those cross trades, you will be pulling on a lot of tanker capacity. That's what I meant. As far as we're concerned, look, I don't think that -- one of the things I would probably like to remind people of, because I think sometimes there's a little bit of thinking that we are fighting a lonely battle. We are, but our lonely battle is only about fighting for good value for shareholders. When we went into buying the Maersk fleet, everybody told us that we were crazy, that the only thing that you should have been buying in 2013 was so-called eco-tankers, and the only place to get them was at the shipyard. And some of our competitors went in and they bought ships at $90 million, $100 million, $110 million. Well, we went out there, and we didn't do what everybody else did. We took a countercyclical view. And for our $80 million, instead of buying a so called eco-tanker, we bought 2 10-year-old tankers and hit a boom market. That's why Euronav has a strong balance sheet, because we didn't follow the herd, because we focused on shareholder value and we always looked for transactions that were accretive, not what was being shouted from the rooftops but what was real value. And let's not forget that we just completed the merger of Gener8, at which ships were valued at $75 million, where they were bought in that eco rush at $110 million.So let's seek value for shareholders, be cautious, be clear-minded and not follow a herd.

[Operator]

Our next question comes from Greg Lewis of BTIG.

[Gregory Robert Lewis, Managing Director]

Paddy, when you kind of talk about the outlook for the 2019 in the slide chart on Slide, I guess, 8 that is, you highlighted U.S. crude exports. And I think at this point, it's pretty understood in the U.S. that there's issues with takeaway capacity from some shale basins like the Permian, but that's expected to be alleviated starting in the middle of next year. I kind of have my questions really around -- so that pipeline capacity gets alleviated in the middle of '19. How ready is the Gulf Coast in terms of loading vessels and dredging? And where are we? Should we expect -- my question really is could we see that bottleneck that's inland moved to the coasts in the middle of next year before it's maybe alleviated down the road?

[Patrick Rodgers, CEO & Director]

I think that's a reasonable assessment. I think there'll be -- as we know, there is some activity on the coast already, but I think it's when it becomes urgent and apparent. And I think that the coast would always get alleviated at least by reverse lightering as a temporary bridge until more fundamental changes are made. A lot of things like -- I know that the loop offloading -- so loading at loop is rather more of a bottleneck around storage into the pipeline than it is around the shippability to move on and off the key and load. So I think there are lots of things that can be done, but they will get done. I mean, I think you've really got to understand, and I don't mean that to affect you, but just to say, look, I think all of the people involved in this value chain tend to live a little bit hand-to-mouth. And so whether you're a refiner or whether you're an exporter, people are very cash-flow focused. They're going to get very much more focused in the next year on how they get stuff to market. So I think there'll be a lot of changes next year because the urgency will be on and people will be ready to start spending money and actually doing the work.

[Operator]

Our next question comes from Randy Giveans of Jefferies.

[Randall Giveans, Equity Analyst]

So a quick question. So in recent weeks, spot rates have rallied pretty substantially. Average VLCC rate is around, I don't know, 50,000 a day, Suezmax 25,000 a day. What have been some of the biggest drivers for this? And do you expect this to continue throughout the remainder of 4Q '18? Or is it going to pull back pretty soon here?

[Patrick Rodgers, CEO & Director]

Well, I mean, we don't have a crystal ball. We do know that the -- what's interesting is that a lot of the lifting coming out of the U.S. Gulf has not just been the China story, and this probably reflects the impact of Iranian sanctions being taken much more seriously this time around because the Japanese and South Koreans have both been active there as well. We've seen even loads from Hound Point into South Korea. So from the U.K. to South Korea or from Northwest Europe. So this feels like it's got legs. I think what's really important to us is there's no point and there really is no mileage being in a game of trying to predict the unknowable. But this is in line with what was needed in order to rebalance the IEA's figures on expected demand growth for the year, because we had a good first quarter on demand growth, then it slackened off Q2 and Q3. If we're going to get close to the numbers they're currently predicting, then we need to have a fairly big Q4. And now that we're getting -- it looks like we're getting the pull-through on those numbers, that they are being added ton miles to it as a result of the Iranian story, then of course, what we can see is that the tipping point is there, that the balance between supply and demand is there and I think owners and charters are clear that they need to secure their tonnage. So I think that as they do that, that's good for rates, and it should give us some momentum through the fourth quarter.

[Operator]

Our next question comes from Noah Parquette of JPMorgan Securities.

[Noah Robert Parquette, Senior US Equity Research Analyst]

I just wanted to ask. You guys referred to the slowdown in new orders, with no VLCC orders since May. Can you talk about what do you think is driving that? Is that a sentiment shift, owners look at the order book -- or shipowners look at the order book going forward? Is it increasing newbuild prices? And how do you kind of think of that risk going forward?

[Patrick Rodgers, CEO & Director]

Well, I mean, there's always -- so in terms of the newbuilding order book, I think that we've seen the capacity reduced, and certainly in terms of the marketing effort from some of the shipyards. They've reduced their workforces. They've outsourced some of the different functions, and they've cut back their expected budgets that they need to make for the year because they recognized that they've simply oversupplied the industry. Right now, I don't see anybody standing on the edges of the VLCC market and saying, "I've got to get in." Because when are they going to get their ship delivered? It'll be 2021. I mean -- and the environment in 2021 will be very different from what it is in Q4 of '18. So I don't see it being a really, really compelling argument today. But if, of course, we got sustained 5, 6 quarters of good earnings, then I would see people beginning to perk their ears up and thinking, "Okay. This looks interesting."

[Operator]

Our next question comes from Amit Mehrotra of Deutsche Bank.

[Amit Singh Mehrotra, Director and Senior Research Analyst]

So I had just a quick follow-up to a previous comment and then a question. Paddy, there's obviously a significant spread today between IFO and MGO, and the futures market frankly is pricing in a significant additional spread. So I just want to understand what happens if you're wrong and this spread kind of continues to widen out? And then on the displacement of the residual fuels, we've obviously heard that theory of it being stored on VLCCs. That itself could absorb a massive amount of capacity. I don't think people really appreciate that with respect to the VLCCs. But I just wanted to see if you've actually had any inquiries or discussions on that topic just given the impact it could have on the supply-demand dynamics. And that's it for me.

[Patrick Rodgers, CEO & Director]

Yes. So I think, look, the promoters of scrubbers, and I use that term deliberately because I think it's not just analysis, it's active promotion, have been advertising the spread between MGO as a proxy for compliant fuel and HFO for the last -- certainly the last 6 to 7 months. And the fact is that as all of the oil majors and refiners come through and start to make clear how they will make that fuel, none of them is proposing that they would blend HFO and MGO nor would they expect MGO to be the product that's sold. It's going to be a light sulfur, heavy product, probably made from residual fuel oil as a result of cracking light sweet crudes or alternatively, already existing low-sulfur residuals that are not just tipped into the melting pot of bunker supply, and there will be some intermediate feedstocks that are redirected within the refineries to make the compliant fuel.So the result is that I don't think MGO is an adequate proxy, and certainly we saw the Chinese saying that they thought that the spread -- it would be no more than half the spread. So already the promoters' view of how much you could make from having a scrubber has been halved, and yet that's received virtually no commentary. But we're 15 months out and there may be further developments. But certainly now, the refiners are close enough to it to be focusing on it and concentrating on it, and all of them are saying that relatively straightforward to make this, they can make just about anything provided they're given the incentive to do it. So on the one side, we're looking then at the premium between compliant fuel and where HFO is today, and we're saying we don't think that's a bit overstated or a bit exaggerated. If we looked at the other side and said there's going to be a complete disruption of the value of HFO, well, I think the nature of HFO will change. Of course, it will become much more sour, high sulfur, heavy fuel oil, no longer have a 3.5% limit. It will go wherever it needs to go because that won't be restricted anymore by the IMO. And we believe, that there might be some deterioration in quality. You'll have all of the issues about dumping of waste product into the HFO. So it becomes a less reliable body of fuel. But in addition to that, will there be a price collapse? Will it go to -- the numbers that have been banded around have been around destruction value in the power industry, and that's been suggested as anything between $15 and $20 or maybe $25 a barrel. Now at that price, that is very attractive to people who want to use it in the refining industry, and it may well mean that we got it wrong. But there are 2 things to getting it wrong that are important to us -- or 3 things actually. One is, first of all, that there has to have been a public and active debate that we understand that the pubic don't care about the industrialization of pollution. If that's clear, then who are we to be judges of that? That's a fact that the public opinion would've spoken, and if they don't care, they don't care. Secondly, are there operational risks? And if by the start of 2020 it's clear that the operational risks are overstated, then Euronav is in an extremely strong position, both in terms of its cash liquidity and its storage capacities on enormous ships to buy as much heavy fuel oil as we want and install bunkers in our -- install scrubbers in our own good time to burn those bunkers. And I just want to make one additional point, Amit, because I think it's one that really does make your eyes widen, is why is it that so many of the analysts keep saying you have to hurry up to get your scrubber fitted because if it's a permanent solution, it's a permanent solution. The spread will be there. And whether you get it in 2020 or 2021 will make a marginal difference. But you know, when you question them about it, their anxiety is that the spread will be very short-lived. In which case, there's a real risk that somebody might miss out on some of that simply because of the positioning of their vessels, where they're moving to or what's going on. And therefore, I think that Euronav could have a much stronger play at that time, once the regulatory issues may have been dealt with, once the operational issues have been dealt with, to simply buy a lot on a price fall or on a price spike and then use it in our own good time and therefore, capture the benefit without putting at risk some of the shareholder value that a lot of people are being quite cavalier with.

[Operator]

Our next question comes from Magnus Fyhr of Seaport Global.

[Magnus Sven Fyhr, MD & Senior Shipping Analyst]

Just one question on Slide 8. The IMO dry dockings there for about 5 vessels, is that, what does that assume for dry docking? And how many ships goes into that assumption?

[Patrick Rodgers, CEO & Director]

So I think the numbers that we used were actually quite low. We put 30 VLCCs retrofitted, taking 30 days to fit out plus 15 days positioning either side. It gave us 1,800 days and our view on that with regards to 5 VLCCs. Of course, I think that number could be significantly undercooked, but then on the other hand, we put in a forecast recycling of 18 and an Iranian additional loss of active VLCCs of 14, both of which are also rough guesstimates. So I think it makes sense for us to be a little bit conservative on the timeout for these.

[Operator]

Our next question comes from Fotis Giannakoulis of Morgan Stanley.

[Fotis Giannakoulis, Vice President, Research]

Paddy, regarding the expected pricing of the compliant fuel midway through MGO and HSFO, is this something that you can translate into a contract? Do you have this confidence that the pricing -- the spread of the MGO and the HSFO is irrelevant because the compliant fuel will not be produced by the blend of this 2? And also, I understand you are the only company or one of the few companies that is testing the new blended fuel. Can you talk to us about the quality of these blended fuels? Because we've been hearing a lot of comments about the operational difficulties and the lack of stability of this fuel from the potential damage on electronic main engines.

[Patrick Rodgers, CEO & Director]

Unfortunately, we can't go into great detail on the results of the trials because we signed nondisclosure agreements on those. But I think that the panic around -- the panic from a lot of the ship owning operations, and I think this is -- I say panic, I don't mean that in any disrespectful way, it's just because with the suggestion that this was going to be made by blending substantially different materials, everybody assumed there was going to be a blend, and I think some people being put together an index assuming 7 parts diesel and 1 part HFO, which would be unstable. Now that might be a proxy on price for somebody, but it's not the way that the fuel will be made. So I think the fuel will be more stable simply because it will have a lot more compatibility, and certainly, what we're looking at is not going to have those issues. So that's about as much as I could really say on the subject. But Fotis, what's -- shipowners are being blamed all the time for not having made their mind up or not having gone in the right direction or being behind the game or not having understood what's going on. But let's be clear about what we're talking about. There is no fixed dollar differential. A refiner doesn't make stuff on the basis of a forward-known price. They are working their feedstocks against their product prices assuming that the refinery gate within the week or the month that they're looking at buying and selling. So the whole thing is totally dynamic. And so all margins are only functions of a percentage of the input feedstock price of crude oil. So until they begin to know their crude oil prices, they won't have a feeling for knowing what their output product prices are. And until they know their product demand, they won't know their product pricing, so they won't know what they're prepared to pay for crude oils. And as margins are a function as a percentage of the barrel cost -- of the input barrel against the product prices, all of these things are completely dynamic. So what we know so far is, that any way, the Chinese have said they think it's halfway house, and from what we've seen of the materials being made, the feedstocks are not that expensive. So it doesn't seem to us that it should be an enormously high price, and I think that it's too dynamic today to fix any of it in an effective way for buying forward.

[Operator]

Our next question comes from Michael Webber of Wells Fargo.

[Michael Webber, Director & Senior Equity Analyst]

Paddy, I'd certainly agree with your comments on floating storage and appreciate you're not using scrubbers as an excuse for dilution. Just I wanted to follow up actually on, I guess, the second question that Fotis asked around blended fuel oil kind of quality. I believe the TI pool is actually already running into some issues with blended fuel in the U.S. Gulf. It seems like if that's already happening with fuel originating in the U.S. Gulf, it could be a pretty pervasive problem. I'm just curious, as you look at that, is that something -- one, how widespread do you think that actually ends up being in 2020? Are there areas you look to avoid in that scenario if possible? And then is it something you think as an industry gets figured out maybe within the first half of 2020? Or is it kind of a nagging issue that it's going to take a bit longer to work out?

[Patrick Rodgers, CEO & Director]

Well, I think it's a really good question, but the one thing I have to clarify is that there was no issue around blended fuels. This was normal bunkering of HFO. TI Pool did have 3 or 4 ships that were affected. Fortunately, none of them badly. About 180 ships worldwide were affected. It seems that the origin was in the U.S. Gulf Coast, and the products were not detected by normal bunker survey on delivery of the product because it wasn't a question of the fuel being out of spec. In fact, the fuel was in spec, but somebody had dumped waste material into the fuel in large quantities. So this is quite interesting. I mean, the -- I think it was -- it suggested that it was resin products from the timber industry or from something else, maybe a cleaning product or whatever. So we had substantial fuel contamination. Initially, it was in the U.S. Gulf where people had loaded it, but then additional loads were picked up in both Fujairah and Singapore, where people realizing that they had bought bad fuel, and I don't mean shipowners, I mean bunker operators, resold it in order to get rid of it before it was detected. So it was spread quite widely. This is a continuing problem with the bunker pool, and it goes back to what I was saying about this really being residual oil. This is the waste products of the refinery. This problem for bunker users, and in 2020, it will be for the people who are using scrubbers and high sulfur, heavy fuel oil, they will have a bigger problem because that bunker pool will shrink. It will become more sulfurous, and it will become the obvious place to tip any waste product. So that's going to be a very, very hot topic come 2020 but not for the compliant fuels because in the compliant fuels, I think we're going to see a completely different story. There I'm going to see -- I think we're going to see the potential for some of the key oil refiners to say that they want to reenter the bunker market because if they think that that's a real product again rather than a waste product, then they don't have to distance themselves from it the way they have done in the past, and they can reenter it and perhaps gain some brand premium for reliability, assurance of quality and provenance.

[Operator]

[Operator Instructions] Our next question comes from Espen Landmark of Fearnley.

[Espen Landmark Fjermestad, Equity Analyst]

I mean, one of the concerns you're raising on IMO currently is kind of the implementation and enforcement there. I'm just curious. Have you guys seen any indication as to what kind of penalties the frac states are considering for an owner bringing a ship with HFO and no scrubber? I mean, is it a potential seizure of the ship? Is it a dollar notional amount? Anything else?

[Patrick Rodgers, CEO & Director]

In short, the answer is no. Under current legislation, it's very variable. And I think a few people have done analysis of if you just assume that it fell under current legislation, then it could be anything from the net value gained on the voyage, or it could be a penalty per day of noncompliance, or it could be a fixed amount with some caution for directors. But what we've seen so far on ecozone enforcement is that it's not been very impressive. Ecozones are beginning to see increased noncompliance with the 0.1 fuel allowance. And at 0.2, it's considered noncompliant through sniffing -- through sniffing the exhaust gases, and there has been very little enforcement, which is why I think noncompliance is going up.

[Operator]

This concludes our question-and-answer session. The conference has also concluded. Thank you for attending today's presentation. You may now disconnect.