Euronav NV

F:OCW

Earnings Call Transcript 2017-Q4

[Operator]

Hello, and welcome to the Euronav Q4 2017 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.I now would like to turn the conference over to Paddy Rodgers. Mr. Rodgers, please go ahead.

[Patrick Rodgers, Chief Executive Officer and Director]

Thank you. Good morning and afternoon to everyone, and thanks for joining Euronav's Q4 2017 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, Thursday, January 25, 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 its 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 statements 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, and good morning or afternoon, wherever you are, and thanks for joining our fourth quarter 2017 earnings call.Turning to the agenda slide, I would like to take you through the highlights of our fourth quarter, followed by a full review of our key financial figures, before handing over to Paddy to take you through the latest market themes as we see them at Euronav. We will then turn over to the operator for a short Q&A session.Slide 4. Q4 was a challenging quarter with the usual seasonal trend of rising demand as we move into a Northern Hemisphere winter helping to drive freight rates progressively higher during Q4. This was largely absent this year.As the 2 charts show on Slide 4, in both the VLCC and Suezmax segments, rates were not high enough to cover our P&L breakeven rate. The result remains positive, thanks to the capital gains of $36.5 million made on the sale of ships. The capital gains refer to 3 vessel sales, and I will come back to that later. Just before the end of the quarter, we announced a proposed merger with Gener8 Maritime. We will update the market and investors on the progress of this transaction when appropriate, and we hope to publish a proxy statement within the next couple of weeks. So far, everything is moving according to plan on this transaction.Moving to Slide 5. Q4 was a fairly routine quarter, albeit with lower freight rates. The 3 vessel disposals refer to the VLCC Flandre, which was sold at a premium for an offshore project; the VLCC Artois, which at the time was the oldest vessel in our fleet and was sold for $22 million; and before that, the Suezmax Cap Georges sold on just before its 20th anniversary. The total capital gains of $36.5 million associated with these disposals will be retained within the balance sheet and are not eligible for dividend distribution.Turning to Slide 6. The balance sheet remained strong with a leverage of around 41% on a marked-to-market basis and available liquidity of over $750 million, as the slide shows. We will begin to make final payments on and take delivery of the 4 new Suezmax supported by the 7-year time charters during 2018. Delivery should be in February, April, May and August of this year, with the outstanding payments schedule highlighted on Slide 6.With that, I will now pass back to our CEO, Paddy Rodgers, for some thoughts and observations on the tanker market. Paddy, over to you.

[Patrick Rodgers, Chief Executive Officer and Director]

Thank you, Hugo. The aim of the next 3 slides is to give Euronav's view on the key dynamic in the tanker market at present, mainly vessel supply. After this, I will give a summary update of our view on the 5 key drivers of our business going forward.With the almost total absence of scrapping during 2015 and 2016, the average age of the VLCC's fleet, around 9.5 years at present, is at its highest level since 2003. So the fleet is aging. This has prompted some encouraging signs that a rebalancing of the market is under way. There were 2 VLCCs taken out of the fleet in 2017 for FSO contracts, of which one was our vessel, the Flandre in Q4.Scrapping has started to gain some attraction, as Slide 7 illustrates, with an uptick in both VLCC and Suezmax being taken out of the fleet. Indeed, you need to go back to 2003 to find a similar number to the 22 taken out in the second half of 2017. Why this change? One of our key drivers for this has been a rising and volatile scrap price. Volatility is important as dynamics prevent complacency. Take the scrap price now or it may not be there tomorrow. The rising scrap price is a function of the steel price.We have taken a steel price index at random here. The green line in Slide 8 showing the firmness in secondary pricing has been in place now for 15 months. This has begun to kick in to the secondhand values, as shown on Slide 8, with 15-year-old vessels now commanding $24 million each, up 12% from the lows seen in Q3. It is important to remember that the scrap price is just one function of a complex set of inputs that each owner will wrestle with before deciding to scrap: outlook on freight rates, environmental legislation costs, proximity to the next dry docking and availability of financing. However, a combination of short-term challenges in the rates and relatively high scrap values should provide a supportive background to increased scrapping and, therefore, fleet rebalancing.But that is not the whole story. Slide 9 sees the return of our bathtub slide and an inconvenient truth: the tax of new vessel supply remain on as a result of industrial owners looking at fleet replacement, which indicates it is preempting scrapping. Whilst fleet rebalancing looks to have started, as the previous 2 slides show, there remains the issue of new supply coming onstream over the next 12 months. This is the bad news.The good news is that we believe the market is oversupplied but only by around 40 to 50 VLCC equivalents, so rebalancing could happen very quickly. The key factors are: one, sustained low freight rates, bringing negative cash flow; two, incoming regulation from ballast water treatment systems in 2019 and particularly sulfur emissions legislation in 2020, meaning negative cash flows; three, rising compliance and regulatory costs from dry dockings, meaning negative cash flows; and finally, four, the optionality provided by higher scrap price, meaning positive cash flows if you scrap. The combination of these factors provide a supportive environment for the market to rebalance, and sustained affirmative action is required to deliver this.Moving on to our summary, Slide 10. The 5 key drivers of the tanker market remain unchanged in our view. GDP upgrades in recent weeks reflect the positive demand background with consensus for growth this year at 1.5 million barrels per day. Supply of oil is clearly being restricted from the OPEC actions, but U.S. shale continues to grow, and other areas such as Brazil are increasing their supply. Ton miles remains a positive driver not just from the U.S. export growth, but also from the actions of OPEC forcing owners to engage in nontraditional routes.China is increasing restrictions on ships over 15 years of age. Sources of financing of our businesses continues to remain under pressure, which is a medium-term positive for driving more rational behavior. However, vessel supply remains the key issue. Supply of new vessels for the next 12 months will provide a headwind, along with continued compliance by OPEC nations in the cuts that have already been agreed. But whilst there are early and encouraging signs of market rebalancing, these do need to be sustained before the market can improve.That concludes the formal part of our presentation, and I will now pass you back to the operator for questions and answers.

[Operator]

[Operator Instructions] And the first question comes from Jon Chappell with Evercore.

[Jonathan B. Chappell, Senior MD & Fundamental Research Analyst]

Paddy, first question, strategic question. Given your views on the challenging market, the liquidity that you have right now and kind of a lot on your plate with getting the Gener8 acquisition across the finish line and then integrating it, how do you think about still being opportunistic in a challenging market? Do you kind of just focus on Gener8 and worry about the integration there? Or are you still looking to do other things with the balance sheet that you have?

[Patrick Rodgers, Chief Executive Officer and Director]

Yes, hi, Jon, and thanks for calling in. No, I think that we certainly have a lot of work to do. So at the moment, we're obviously very focused on getting the deal that we've already agreed concluded. I think once we go after that, we'll like to see how the market settles down and see how our share is pricing. And of course, we'll keep our minds open to additional transactions. So I don't think that we're drawing a line and saying that's the end of M&A for Euronav simply because we've done this deal. We've always been quite ambitious. But I don't think it's going to be top priority. The first thing is to make sure, first of all, that this deal goes through. And let's not forget, with all due respect, that is subject to the approval of Gener8 shareholders. So first of all, to get this deal done, quite a lot of work to get done there. Let's see how you guys and the rest of the market react to it when it's actually a closed and done deal. But you know us, we're always ambitious and we're pretty pushy.

[Jonathan B. Chappell, Senior MD & Fundamental Research Analyst]

Okay, completely understand. My follow-up is, I know people might ask this in a broader sense, but I want ask you specifically as it relates to Euronav, with the environmental regulations coming in, in 2020, I'm sure you've started to do some research on your alternatives. Clock is kind of ticking. How do you kind of view the scrubber technology? We've heard some good, some bad. How do you plan on attacking that in the next 2 years?

[Patrick Rodgers, Chief Executive Officer and Director]

Well, I think, I mean, if I could just take a sort of general market position. First of all, I think that the stats that I last saw from Inter Tanker were that 1% of the world fleet has scrubbers onboard. And of course, this isn't just tankers, that's the world's shipping fleet, and that the total scrubber capacity in production is 1% of the world fleet. So by 2020, there's never going to be more than 3% of the world fleet with scrubbers onboard. A challenge about 2 things. Well, first of all, if you believe the scrubber makes good sense economically, you also have to make sure at the same time that you have suitable availability of heavy -- high sulfur, heavy fuel oil offtake. So you have to make sure you can actually buy the oil that's going to give you any value discount. We're very close, as you know, to a couple of the refiners. They talk a lot about what their plans are. I think there's going to be quite a lot of change in the patterns of the trade of oil. A lot of people are going to have to buy sweet oil to run through their refineries. And the refineries that deal with sour oil over their heavy fuel oil are going to have widening discounts and spreads for increased margin from their investment in the complexity of their refineries. So I think it's going to be a really interesting time. So it's not just the negative around what are the shipping going to do with it. The question is, what are the refineries going to do with it? And we could see a very significant increase of trade on top of whatever the demand growth is during those years. So we're looking at it with a high degree of excitement and anticipation, and we're trying to do a pretty thorough study. But the answer isn't just a question of do you scrub or don't you.

[Operator]

And the next question comes from Gregory Lewis with Crédit Suisse.

[Gregory Robert Lewis, Senior Research Analyst]

Paddy, you touched on it a little bit, but could you talk a little bit more about what happened in Q4? And as we moved into October, it seemed like there was some rate momentum, and then really the rug just got pulled under -- from under the market, and the marker really just collapsed around November. What was -- was there any noticeable differences between those 2 periods in Q4?

[Patrick Rodgers, Chief Executive Officer and Director]

Well, I'm -- I don't -- I think that if you look to the stats that we get through the commercial arms that we run at TI and at Euronav, I mean, the information we get from our commercial exploitation, we never really think that the cargo move numbers change as much as people think they do. But I think that looking back on it now and with the advantage of some of the statistical evidence, it looks as if there were, of course, too many ships, and maybe the numbers start to move up Q3 to Q4 on the basis of people having a knee-jerk reaction to it being Q4 and assuming that rates go up. And then perhaps, don't forget the oil price was really beginning to move as a result of some of the problems around the world. And the effect of that, of course, is to put the oil price up high enough where people start to think about consuming inventory. So I think those 2 little movements, maybe a few too many ships actually coming in and being active in the market and at the same time having people think, well, at this price, I'd rather eat up my inventory and then see where we are in the new year. So I think those 2 things combined sort of took Christmas away from us.

[Gregory Robert Lewis, Senior Research Analyst]

Okay, great. And then just, I mean, the outlook for 2018 is challenging. You pointed to the order book. Clearly, the order book is going to -- there's a healthy order book in 2017. As you look back in previous years where the outlook was challenging and the order book was big, is there any sort of sense for how many of these -- how much of the 2018 order book in the oil price environment -- I mean, in the tanker rate environment that we're in where people are talking about scrapping, that we could see some of this order book of '18 shift out into '19?

[Patrick Rodgers, Chief Executive Officer and Director]

Yes, I think it's not our data, but we've seen a lot of data from key shipbrokers with good research departments who seem to think that we're almost routinely seeing drift over 1 year to the next. That's certainly in the 20%, if not higher. So you're just getting this continual drift. So if the rate environment is not absolutely cooking in Q3, I think people already start to think about pushing back into the following year. And a lot of the people that have ordered may have ordered more in hope than expectation of how they were going to organize their finance or how long it will take to organize their finance. So we do tend to see that kind of drift.

[Operator]

And the next question comes from Ben Nolan with Stifel.

[Benjamin J. Nolan, Director and Senior Analyst]

So I -- well, I'm not one for needless platitudes, but you guys did much better than the market with respect specifically to your VLCC rates or at least what it looked like the market was doing, and I think that's also been the case thus far in 1Q. Is it perhaps a function of having a bigger and a larger scale fleet in a bad market earns you a bit of a premium? Or what would you attribute that level of outperformance to your [ fleet there ]?

[Patrick Rodgers, Chief Executive Officer and Director]

Yes, no, absolutely. I think that what we're seeing in a weaker market is that, of course, we are very much a sort of go-to company if you want to be absolutely certain about your supply, and we have a much bigger vision on the natural buyers, the people who are out there not looking to trade, but really the industrial needers of long-haul crude. And so we are able to schedule into their cargo positions even in a weak market, which means that we've been more assured about how we can go about planning, which means that we've been able to cut speeds, reduce consumption and still get cargoes and beyond them. So I think this has really been the evidence that size matters and that the reliability that comes from size is appreciated by the customer.

[Benjamin J. Nolan, Director and Senior Analyst]

Okay. And then as a follow-up to that. At least relative to what I was looking for and certainly relative to the third quarter, your OpEx was lower as well. Is that sort of that belt-tightening that you mentioned there feeding through onto the OpEx line as well?

[Patrick Rodgers, Chief Executive Officer and Director]

Yes. Well, I think that's certainly true. And also, I mean, we've been quite focused on that. I think that as the company grows, we've been really putting everybody to test their mettle on whether they can do more with less.

[Operator]

And the next question comes from Chris Wetherbee with Citi.

[Christian F. Wetherbee, Vice President]

I wanted to -- I don't want to get ahead of myself in terms of the combined company post merger. But when you think, Paddy, about the Euronav fleet and maybe some of the things you might want to do as you move out a year or so from now, I mean, how do you think about it? Have you finished sort of the culling of older tonnage? I mean, I just want to get a rough sense of maybe how you think about sort of what you have on your side of the fence today and maybe how that might change a year from now?

[Patrick Rodgers, Chief Executive Officer and Director]

Oh, well, I think we have set ourselves fairly clear objectives, and we have a structure around the way that we want to work. So I think that there are sort of standing lines on where we want to go on fleet development and replacement. So on -- within Euronav, within the fleet that we have, we know how many ships will need to go off on an annualized basis based on asset age and the failures -- or the success of getting alternative business that can give them life extension. But over and above that, in terms of growth strategy, I don't think, as I said earlier to Jon Chappell, I don't really think that we're certainly not calling time on additional M&A. And we'll certainly be looking forward to any great opportunity that comes along.

[Christian F. Wetherbee, Vice President]

Okay. Okay, that's helpful. And I guess I just wanted to kind of check in on the cost side of things. When you think about where we are in a pretty challenging environment, what more levers are left, if any, in terms of ratcheting down cost, whether it be sort of on the corporate overhead side or even from an operating perspective? Is there anything more that we can kind of expect as we move through '18, assuming we're going to have these challenged rates for at least a period of time?

[Patrick Rodgers, Chief Executive Officer and Director]

Well, I mean, I think the -- certainly, as far as fine-tuning costs go, that's a never-ending exercise. And certainly, whenever we add scale, no one is going to be able to say that the average breakevens and the application of the number of people per ship and the amount of G&A per ship should go down. Of course, 2018, provided that we get the support from the processes that are required to close the transaction with Gener8, will result in a significant gain in terms of size for the fleet. And we'll be going through a process in 2018 of trying to maximize the value we get from that as a result of trying to find synergies. Going out beyond that, I think that all the time, the commercial sits very closely to the most important expense lines. And whether it's a question of making sure that we buy when it's cheap and sell when it's expensive and at the same time try to manage our cost and logistical approach so that we reduce our bunker bills, those are probably the 2 biggest movable parts that we can hope to achieve year-on-year in the expense line.

[Operator]

And the next question comes from Fotis Giannakoulis with Morgan Stanley.

[Fotis Giannakoulis, Vice President, Research]

Paddy, once again, you did an acquisition at the low part of the cycle. It seems that you have been consistent to expand when the market is low. I was wondering, how confident you think that this downturn that we are experiencing right now is a cyclical downturn or it might have some element of a structural change? And I'm referring to the fact that for the first time in the tanker market, OPEC is not a marginal producer and it's the U.S. that is the marginal producer. How does this change the expectation for recovery?

[Patrick Rodgers, Chief Executive Officer and Director]

Well, I mean, I think that's a very powerful statement, Fotis, because I think that it goes straight to where we are with the oil price today. I mean, we had a sustained breakthrough now at $70. I think if $70 is the flat price for oil, then I think that there's going to be a lot of oil producers in the U.S. rubbing their hands, and there will be a lot of people in both Russia and Saudi Arabia saying, job done, let's get back producing. If that happens, then I think you see the oil price hitting the top end of its range and maybe coming off. And as it comes off, that could be very interesting in terms of what happens on the shape of the market and give great opportunity for surges in reinventory building -- sorry, inventory rebuilding. So I think that -- and that may well be a sort of swings and roundabouts that becomes the norm for us. So that's a very important point. I think in terms of structural change, we are really looking to see the situation today on the fleet size change. And I think if we get just that marginal ship scrapped, we can get ourselves into quite a good structural shape for '19 and '20.

[Fotis Giannakoulis, Vice President, Research]

Can you try to give us some idea of how the demand for VLCCs is expected to change from this ramp-up of U.S. production? There is a lot of discussion about U.S. export. So what is your expectation of U.S. exports growth in the next 2, 3 years? And what does this mean for the VLCC market, given the constraints that there are in infrastructure and the need for a reverse lightering in the cases of VLCCs?

[Patrick Rodgers, Chief Executive Officer and Director]

Yes. Well, Fotis, it's a very interesting process because we had no U.S. exports in crude, of course, because we did have a very heavy product export market a few years ago. But once export of crude was allowed, the market took off and very quickly built. And the expectation of the forecast that we've seen is that it adds another 50% this year going from 1 million barrels a day of export to 1.5 million barrels a day of export with, I think, one of the most significant leaders in that being Chinese receivers of crude. So that's a huge ton miles. At the same time, we are, of course, seeing a couple of infrastructure changes being proposed, most important of which will be reversal of one pipeline in the U.S. to bring the potential for Canadian heavier crudes to be brought down to the Gulf Coast. We've also got Corpus Christi getting confirmation that the Corps of Engineers will start dredging the Suezmax berths and then eventually VLCC berths. And we know that there'll be a partial reversal, although it may not be very big capacity on the Louisiana offshore pipeline. And of course, on top of that, there's as much reverse lightering as you want. So the U.S. looks like it's geared up to be a permanent exporter of crude oil in significant volume, and the most likely receiver of that looks to be the Far East. So for us, this is a very good story. And so when the Saudis and Russians come back on, I think there's going to be very, very active business.

[Operator]

And the next question comes from Noah Parquette with JPMorgan Securities.

[Noah Robert Parquette, Senior US Equity Research Analyst]

I just was curious, your G&A expenses bumped up a little bit. Was that just from the Gener8 acquisition or was something else there?

[Patrick Rodgers, Chief Executive Officer and Director]

I think it's probably as a result -- and I hate to ask all these -- answer all these complicated questions asked by analysts. No, I mean, of course, once we go through a process like this, you will see a slightly lumpy G&A. But of course, a lot of that may well be, my feeling, is professional fees that we'll gradually be able to squeeze out once we're over the hump.

[Noah Robert Parquette, Senior US Equity Research Analyst]

Okay. And then the follow-up is whether that look like post acquisition, you guys think you can integrate without too much G&A expense increases? Or what can we expect there?

[Patrick Rodgers, Chief Executive Officer and Director]

Well, I mean, I can be fairly sanguine about it now, but it will be a question of rolling our sleeves up and making sure that in the next 12 months, we keep everything under control and that ultimately, we're able to deliver some synergy on the 2 businesses post '18. But I think in '18, it's going to be a year that's largely about the transaction.

[Operator]

And the next question comes from Spiro Dounis with UBS.

[Spiro M. Dounis, Director and Equity Research Analyst of Shipping]

I just want to -- hopefully, this first one is not out of bounds. But just wondering if you can walk us through the decision to sell 6 of those Gener8 vessels as part of the potential merger here. I believe leverage is one of the drivers, just making sure that's the right size on a pro forma basis. But obviously, you mentioned all the new regulatory -- regulations coming online in the next few years. Why does it make sense to get rid of those [indiscernible] vessels?

[Patrick Rodgers, Chief Executive Officer and Director]

Well, look, as far as -- first of all, it's a good question, and we're never embarrassed to answer it. And our decision-making about it is that, of course, we've always tried to make sure that we had a balanced managed approach to what we're doing. I think that the hallmark of Euronav is that we want people, when they think of the name of our company, not to think about inspirational figures who have huge auguries capable of predicting the future and upon which we are prepared to bet our balls. We are much more interested in having a professional down-to-earth approach, which says we know what we know and we know what we don't know. Therefore, in a situation like that, being able to balance fleet acquisition at the same time as maintaining leverage and liquidity, means that you can have both sides as an analyst and as an investor to see that the company doesn't lose its resilience and at the same time improves its upside.

[Spiro M. Dounis, Director and Equity Research Analyst of Shipping]

That makes sense. Appreciate that color. Second one, just on Venezuela, obviously, seeing a lot of the production come offline there. I think we're breaking records on the low side here, and there's concerns that Venezuelan production could come off even more as we go through the year. Curious, how important is that to tanker demand or how important has it been? And as you look forward, are there any offsets that make you feel a little bit better about that situation?

[Patrick Rodgers, Chief Executive Officer and Director]

Yes, of course. I mean, I think that we -- Venezuela has always been important to us simply because of the ton miles associated with their trade to China. The failure of production and the breakdown in their relationship with China, one naturally follows the other, but it's more than offset by the amount of oil that's being taken from the U.S. and the Gulf of Mexico. So it normally would have been a big problem. I think, today, it's not.

[Operator]

And the next question comes from Mason De Lapp with Seaport Global Securities.

[Magnus Sven Fyhr, MD & Senior Shipping Analyst]

This is Magnus Fyhr. Just a quick question on the chartering strategy going forward. I mean, rates are currently extremely weak. I don't think they're going to get much better over the next 6 months. So would you lock in any time charter rates? I know they're not that attractive, but what's your thoughts on at least locking in a few ships on a year time charter before we get through this challenging market?

[Patrick Rodgers, Chief Executive Officer and Director]

Yes. I think that we wouldn't be particularly excited about locking in time charter today. I think, generally speaking, no one is offering higher rates at long terms, so it's not really supportive of the business case. Having time charter at low levels for short periods doesn't do anything to offset the volatility or risk, particularly not when, as you will have heard from the answer I gave to Spiro, where we've taken the steps to make sure that the company is resilient in any event. So for us, we don't need that protection if we take the steps that we already have done about ensuring that we have good liquidity and low leverage.

[Magnus Sven Fyhr, MD & Senior Shipping Analyst]

All right, good. And just as a follow-up, what's your thought process of this -- the older ships in the fleet? You have a few older ships as you take them through special service over the next 2 years, you've got a couple of approaching 20 years of age.

[Patrick Rodgers, Chief Executive Officer and Director]

Well, I think that we're unlikely to take a ship beyond 20 years of age unless it's against a specific project. And so normally, we'll be looking to offload ships as they begin to move into what we might call, to use our traffic light analogy, the amber phase. And if we saw 20 years as then being red and amber being 17.5 to 20, in that 17.5 to 20, we'll normally be thinking about offloading ships, but certainly being very active to see if we can find projects in which these excellently maintained vessels could serve in a nonstop voyage basis. Because quite clearly, once they're over 20 years of age, they're really not welcomed in the stock trade except by 1 or 2 customers.

[Magnus Sven Fyhr, MD & Senior Shipping Analyst]

Yes, and you did -- that's a great sale on that offshore -- with that offshore project. Are there any more or was that just kind of a one-off?

[Patrick Rodgers, Chief Executive Officer and Director]

Well, it's not a one-off because if you look back over the years, you'll have seen we've done it on ships previously, but it's about having a strong relationship with people in offshore and giving them open book to review a ship in detail to see its strengths and weaknesses, and helping them -- and giving them support and helping them in preparing their bids. So it's -- I would think it's a kind of very loosey-goosey relationship where we could repeat it. I'm not always saying we'll repeat it with the same effect as we did it on the Flandre, but certainly the relationship is continuous, and we'd like to continue to stay in that area.

[Operator]

And the next question comes from Amit Mehrotra with Deutsche Bank.

[Amit Singh Mehrotra, Director and Senior Research Analyst]

Congrats on the Gener8 deal. I wanted to ask a follow-up question. I think the first question that Jonathan asked on the sulfur cap in 2020. As you said, there is a finite amount of scrubber capacity globally. I think that would kind of create an interesting opportunity for companies that maybe have the scale and capital structure like you guys do to invest in the long term. I mean, can you just talk about that in terms of would you or not equip with all your vessels with scrubbers and what the costs or benefits are to maybe waiting given the finite amount of capacity? And then related to that, would you consider evolving your chartering strategy more towards voyage charters as kind of a way to capture the arbitrage opportunity, so to speak, between the higher and lower bunker cost?

[Patrick Rodgers, Chief Executive Officer and Director]

Yes, thanks, Amit. I think it's difficult to sum this one up because it's in steps rather than being continuous. So A equals B equals C doesn't quite work when they're in different periods of time. The first issue is going to be the fact that fuel is going to be made which meets the specification on low sulfur. And the first alarm that people have been calling is that that's going to mean that there isn't going to be enough fuel that's compliant, and there aren't going to be enough ships that are compliant to build the old -- to burn the old fuel spec. So one way or another, it looks like a choke point on supply of ships capable of burning the fuel spec that's available. So that's an area that concerns Inter Tanker. They have a solution for that. They think that the fleet worldwide should slow down. And if it slows down or not, there'll be enough fuel to go around, and that will deal with the choke point. And the second point that's concerning Inter Tanker at the moment and should concern all shipowners is we need to see what the details of the regulatory scheme are going to be. Is it going to be possible that you burn high sulfur, heavy fuel oil simply on the basis of having a certificate to say that a port you were at, you couldn't buy alternative fuel. So before you start working out the economics of whether you have a scrubber or not, you better work out whether anybody is going to be penalized for not having a scrubber because it will be absolutely infuriating to install a scrubber and then find a ship next to you burning heavy fuel oil with high sulfur content because they had a piece of paper rather than a $4 million scrubber unit. So -- and then in terms of time-out, if you go out 3 or 4 years, I think most of the refiners we've spoken to have said there will be no high sulfur, heavy fuel oil being produced by 2023.

[Amit Singh Mehrotra, Director and Senior Research Analyst]

Okay, that makes sense. And one of my follow-ups, and thanks for letting me ask a follow-up, just one quick one on the seaborne trade, the shifting I guess at seaborne trade. Back in 2015, one of the drivers of ton mile demand was higher U.S. production. You saw a lot of the West African cargoes diverting to Asia and China, which obviously created a nice ton mile effect. We obviously have a different world now, as you mentioned earlier, with allowable U.S. exports, but rig counts in the U.S. are expected to be up double digits this year, back of a really strong year last year. And so I'm just curious about if you are -- if there is kind of a ton mile story that's the kind of a repeat of what we maybe had, maybe albeit at a lesser magnitude, any thoughts there in terms of how you see ton miles evolving over the next 12 to 18 months on the back of a higher U.S. production? I think you've mentioned it a little bit before, but I just want to understand...

[Patrick Rodgers, Chief Executive Officer and Director]

That's right. Yes, so I think we know 2 or 3 basic things. That first of all, India -- sorry, China as the first amongst equals is the highest importer of crude oil, and their own domestic production is falling, and their expectation is that their demand is going to grow. So the second amongst those equals is probably India. The rest is Southeast Asia, not far behind in terms of demand for oil. So we have a natural home. And the additional production that's coming on, of course, is coming on in the Atlantic. And we're seeing that whether it's in the Caribbean, whether it's in the U.S. Gulf or whether it's in the northern part of South America, and all of that is adding significant ton miles. So I think that we're going to have a strong ton miles story. But we're also going to have an increasing cost trade story, which has obviously been one of the things that supported the product story in the past, but it's going to be a reality for the crude story as well. So I think we're in for exciting times, it's just that we got to get there. And in the meantime, we've got to see a number of ships getting scrapped and work our way through the fleet.

[Amit Singh Mehrotra, Director and Senior Research Analyst]

Do you know when the deal is going to get closed, roughly? Because obviously, that impacts our modeling. So any rough guidance there in terms of when you expect the merger to close?

[Patrick Rodgers, Chief Executive Officer and Director]

Yes, I mean, is that your third question?

[Amit Singh Mehrotra, Director and Senior Research Analyst]

No, it's [ 2-tiered ], sorry.

[Patrick Rodgers, Chief Executive Officer and Director]

Yes, no, I just wanted to pull you off, Amit, because otherwise, I think there are some people on the phone who might think I can't count and then they might be worried about checking the financial figures. But I think that all I can say to you is this, I think we've been relatively clear. There's -- we're working now. And I mean, you guys know more about M&A than I do. I mean, we've signed a deal. A proxy statement will be out as soon as we can get it out, but there's a deal of work to be done on that on writing and counting. And once we've got it in the SEC and once it's been approved, then we'll be out and we'll be talking more about the exact close date and any other information that you want. But we'll have something effective to market, and you all will have the ability to see it and ask us very specific questions. So I think we just have to twiddle our thumbs, but know that, that won't be a very long process.

[Operator]

And the next question comes from Herman Hildan with Clarksons.

[Herman Hildan, Research Analyst]

I have a follow-up question to Ben's comment about the Q4 and Q1 rates, which are remarkably strong. And obviously, there was a big change to bunker price, which could explain parts of it, but you only adjust for that if there's a huge gap. And you mentioned the strong relationship with your clients and the size of your fleet and so on. Should we read this as reiterating to the other listed peers? Or do you expect that you're going to beat [indiscernible] and DHT and so on, on tiered rates in Q4 and Q1?

[Patrick Rodgers, Chief Executive Officer and Director]

I think you're on the wrong call because I don't think I can answer other people's numbers on our earnings call.

[Herman Hildan, Research Analyst]

No, you have an edge in terms of size and so on, right? So the question is really around...

[Patrick Rodgers, Chief Executive Officer and Director]

I believe over the last few quarters, we've noticed, as I think it was Greg that asked, I mean, I think we noticed that we were outperforming. And certainly, TI told us that their view was that it was the ability to schedule into longer voyages. Now to the extent that our peer group can do that, they'll have to explain to you how they do it, but that's what we've been doing.

[Herman Hildan, Research Analyst]

And then my second and last question, simply focused a bit from, call it, the tree to the forest, looking at '19 and 2020. How do you compare the setup that we have for the [indiscernible] market in the next couple of years compared to the last upturn we have where we had 6 quarters -- 7 quarters I think with $60,000 a day on average in VLCC?

[Patrick Rodgers, Chief Executive Officer and Director]

Well, I mean, I think the -- there's normally a story behind those changes. It's not -- I mean, the '14 through '17 story was demand growth outpacing fleet growth as a result of both the price of oil driving demand and U.S. lifting of export ban increasing ton miles significantly. So I think that was our 7-quarter story. The story that we're now in, where we would have to see a completion on that story in order to get out of the dip that we're in, is that we've got to see some scrapping. And we've got to see some people taking advantage of the high -- the scrap price. I mean, there are people in the market today who might say, do you know what, I fancy the future, let's hang on. They hang on, they make a few million dollars and they're very pleased with themselves. But in the end, when they go to scrap the ship, instead of getting $18 million, they get $12 million. And then all of a sudden, they've got egg on their face, tears in their eyes, no money in their wallet. But along the way, they will also have taken a lot of the spring out of our market expectations. So it's very important that people face up to it and just accept that this is a fantastic scrap price, get behind it and get into the yard. And if that happens, then we could look forward to the next step, but let's not get too far ahead of ourselves.

[Operator]

And the next question comes from Greg Wasikowski from Wells Fargo.

[Gregory Adrian Wasikowski, Associate Analyst]

Could you just touch a little bit more on the availability of financing in the market as a whole and how you think it might impact any further consolidation or purchases for second-hand assets in 2018?

[Patrick Rodgers, Chief Executive Officer and Director]

Yes. I think -- look, I think that the story behind traditional asset-backed finance is well-covered. Everybody understands that the banks' shrinking portfolios is partly because of the requirements for additional capitals to be put against those lendings, but also because of portfolios that really sank and that they've had to deal with eventually. So that's been the story of the banks, and we know where they all are on that. I think the big question mark, and that's probably what the one that you're begging at, is where are we going with the rest of the financial structure. And I think that what we can definitely see is there's still an awful lot of capital that's very yield hungry. So whether we see it in the sale and leaseback or in other private equity involvements in structured finance through sale and leaseback or through other more imaginative matters remains to be seen. It's one of those things that's been more talked of than done. And I think the trouble for tankers in particular is that it's very difficult to get any customer support for that kind of structure. So we haven't drawn on much capital from that side so far.

[Operator]

And as there are no more questions, I would like to return the call to management for any closing comments.

[Patrick Rodgers, Chief Executive Officer and Director]

No, I would just like to say thank you all for coming on today, and I look forward to speaking to you again soon. Cheers.

[Operator]

Thank you. Your conference has now concluded. Thank you for attending today's presentation. You may now disconnect.