Scorpio Tankers Inc
NYSE:STNG
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Scorpio Tankers Inc
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Hello, and welcome to the Scorpio Tankers Inc. First Quarter 2019 Conference Call.
I would now like to turn the call over to Brian Lee, Chief Financial Officer. Please go ahead, sir.
Thank you, and thank you, everyone for joining us today. Welcome to the Scorpio Tankers' 2019 first quarter earnings conference call. On the call with me today are: Emanuele Lauro, Chief Executive Officer; Robert Bugbee, President; Lars Dencker Nielsen, Commercial Director; David Morant, Managing Director; James Doyle, Senior Financial Analyst.
Earlier today, we issued our 2019 first quarter earnings press release, which is available on our website. The information discussed on this call is based on the information as of today, May 2nd, 2019, and may contain forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements.
For a discussion of these risks and uncertainties, you should review the forward-looking statement disclosure in the earnings press release that we issued today as well as Scorpio Tankers' SEC filings, which are available at scorpiotankers.com and SEC.gov.
Call participants are advised that the audio of this conference call is being recorded live on the Internet and it is also being recorded for playback purposes. An archive of the webcast is being - will be made available on the Investor Relations page of our website for approximately 14 days.
If you have any specific modeling questions, you can contact me later and discuss off-line.
Now, I'd like to introduce, Emanuele Lauro.
Thank you, Brian, and thanks, everybody for your time today.
I am pleased to report our first quarter 2019 earnings which bear witness to the strong recovery in the product tanker markets. We have now put the Company in the optimal position to profit from the upswing in these markets. It is pleasing to see the results of the hard work is returning the expectations in what are our first quarter numbers.
As those who have followed our commentary will know, the upswing has not surprised us. Nonetheless, it is satisfying to see Scorpio Tankers capturing this opportunity as the largest, most modern, and most liquid product tanker Company. We are close to be perfectly positioned to benefit from the unique market development we believe is now up on us.
On this call you will hear from Brian Lee regarding the ongoing work to position the balance sheet optimally. Our technical departments are engaged in one of the largest drydocking and scrubber retrofit programs in the industry. Lars Dencker, our Commercial Director will also take us through the first quarter and the current quarter to date trends. Before that, I wanted to take a step back and summarize why we believe the unique confluence of factors now play in our favor.
Firstly, cyclically, the product tanker order book stands at multi-year lows. A factor which is almost unique amongst the shipping sub segment. Coming quarters, the underwater fleet continues to age, whilst demand at least normalizes back to its 20-year long GDP plus trend growth.
Structurally, new routes and arbitrages are opening. This much anticipated shift further enhances our ton mile growth into the upswing of the cycle. Many of the biggest factors such as Middle Eastern refinery capacity additions have yet to bear fruit, but are now imminent.
Lastly, secular growth. This is assured from the enormous dislocations that the IMO 2020 measures are providing. This one time expansion in the size of the market for seaborne refinery product is unique in recent memory.
Furthermore, it comes with enduring positive secondary effects such as expanded physical arbitrage, global distillate imbalances and improved refinery margins. In short, our first quarter numbers demonstrates that we had started to see the much anticipated acceleration of product tanker rates and markets. We think that after a slower second quarter due to refineries maintenance and turnarounds, the best is yet to come.
With that, I would like to hand the call to Lars Dencker, our Commercial Director.
Thanks, Emanuele. Good morning, everyone.
I'd like to take a moment and reflect on the first quarter clean tanker markets which demonstrated a strong recovery in the product market segment. In Q1, freight rates in all of the four product segments; LR2, LR1, MR and Handymax were at levels not seen since 2015.
We anticipated this market move back in October and November of 2018 and the market continued with some strength into January, February and to a large extent into March. The tightness in capacity for quality units was apparent and the product shipping markets enjoyed a robust trading quarter.
The rise in rates was not formed by extenuating factors like partial winters, geopolitical shifts or a sustained contango in product markets. In shipping terms, we had an uneventful fourth quarter of 2018 and first quarter of '19, but still experienced a remarkable rate recovery. More so, we are witnessing a fundamental change in market dynamics.
Going forward, we anticipated a weaker second quarter influenced by greater refinery turnaround activity in Asia and the U.S. Gulf, and in Europe. Refineries in various regions have been offline providing routine maintenance and front loading refinery work in preparation for IMO 2020.
We do expect refiners to maximize production of middle distillates in the second half of the year and many will prepare to run flat-outs in anticipation of IMO 2020. Enhanced dry docking and scrubber installation will impact tonnage availability during the second half, introducing the potential of further market tightness during the third quarter.
We are currently in the tail end of this large refinery turnaround. Nevertheless, we are already seeing signs of an earlier than expected rebound in LR2 markets. In the last ten days, LR2 rates have moved up 25 points on the benchmark TC1 route from the Arabian Gulf to Japan, increasing triangulated earnings with the North Asian backhaul by $5,000 per day, seeing time charter equivalent returns moving back to $22,000 per day.
For comparative purposes, the markets in 2017 and the first three quarters of '18 didn't experience proportional rate rallies as seen in the last two quarters. This is arguably a clear indicator of underlying market resilience and reduced tonnage capacity negating protracted flat-lining of rates.
Products including ULSD are moving long haul and we're expecting Naphtha moves to provide further market stimulus following a quiet period in exports. LR1 has seen turbulence with this refinery turnaround period, but this market is also seeing similar signs of an uptick in the second quarter of '19. On MRs, the first quarter was solid in all main trading regions. The Atlantic basin, TC2 & TC14 condos and Asian markets including the Transpacific runs showcase EU returns in the mid to high teens.
In the West, this was realized on the back of increased Mexican and West African imports, the declining U.S. inventory, widened U.S. gasoline cracks, supporting increased 1Q imports. And for the East, Chinese exports underlying healthy tonnage demand.
As we look to the second quarter of '19, the MR sector has seen limited impact in utilization by the turnarounds as efficient triangulation has provided sustainable returns during the slower maintenance season. We do expect some turbulence in rate levels through the second quarter in MR rates and in the short term in the smaller Handy segment.
Overall, market volatility has been elevated indicating higher levels of utilization impacting true supply demand economics. We should not discount a shift in general market sentiment providing market participants the impetus to push for market elasticity earlier than had been experienced in prior time periods.
Cargo backhauls, voice triangulation, reducing ballast rates and a increase in ton mile issues are playing an important part in the mix for the market to extract the marginal freight dollar. In the past, the smaller MRs and LR1 were considered the odd work force enjoying a higher utilization level and superior laden to ballast ratios.
Today on the heel of expansion of the global refinery and terminal footprints, LR2s as well are experiencing new arbitrages and backhaul routes increasing utilization. In essence, LR2s will likely outperform at the margin as economies of scale with the advent of increased triangulation will magnify the earning as such.
Exports from the U.S., the U.K. continent, the Baltic and Black Sea areas are now finding homes in Australia and North Asia. West African product exports going to Asia or the U.S. And conversely, finally we see North Asian modern fuels going long haul west. We can anticipate an increase in incremental tonnage demand as product flows at the margin again move in new directions adding the benefit of triangulation an important backhauls of new loading areas to the increased ton mile demand.
So to conclude, four points: We are pleased with our first quarter performance, while we have seen the strength we anticipate across all vessel segments. Secondly, Q2 seasonal weakness has been as expected more pronounced than normal with refinery outages front loaded. This effect is increasing behind us, reinforcing our expectation for a strong second half.
Thirdly, new routes and physical arms are now coming on line increasing ton miles and utilization particularly in our LR2 segment. Lastly, with the Q2 lower margin behind us, we can now look forward to the unique opportunities of IMO 2020 with our large modern best-in-class scrubber equipped fleet.
Thank you. And with that, I'll hand the call back to Robert.
Thank you very much, Lars.
Just a couple of things. First, we'd like to apologize to everybody who's incurred some waiting this morning, simply there's been a lot of activity and the systems had some queuing. So our apologies for that.
Secondly, Cameron won't be able to join us today. So we prefer if possible that analysts don't really ask too many questions on scrubbers, we've published a lot on scrubbers on the - there's something in the earnings about our budgets, and on the slides on what we think.
But by all means, after today, please take direct contact with Cameron if you have any questions on those scrubbers. And thirdly, you know, the main takeaway that I would take from Lars' introduction is - we're really happy with the way this product tanker market is developing.
It's showing - continues to show year-over-year strength on the fundamental demand in the product tanker market and that's without any effect yet on IMO 2020, and I think that the - you know, what the market unlike to the second quarter should be understood that we have some really deep refinery turnarounds around the world.
So for the fact that the market is stronger than where it was this time last year, despite the really deep refinery turnaround gives us really great confidence that sooner these refineries start coming back on, that the market is going to move higher and then as we move into the IMO position, they're going to move significantly higher.
And as Lars said, we would expect that the LR2s are really going to expand their differential over the MRs and the rest of the fleet as that demand comes in.
And with that, let's - like to open it up to everybody for questions. Thank you.
[Operator Instructions] Our first question comes from the line of Amit Mehrotra with Deutsche Bank. Your line is now open.
This is Chris Snyder on for Amit. First on the market. So rates have certainly held them better than expected especially when considering front loading refinery maintenance. It does seem like underlying demand has been strong with reduced global inventory levels and we're seeing refinery capacity additions, but I was wondering, has there been any sort of IMO tailwind creep into the market earlier than expected whether it be from some storage opportunities, point capacity out or just product testing?
I'll let - happy to add Lars or Emanuele to it. But, no. I mean it's a - you might have some very small testing that's not really affecting the market. I mean without, I don't know how open we can be Lars, but we've done one or two ship-to-ship transfers in preparation for later, but nothing has really helped the market much.
Yes, the short answer is no. It hasn't - there's no tail to it yet in the product market. We're still - this is still a very normal market.
And then just finally following up on rate. I think that most kind of suspected that MRs would be the primary IMO beneficiaries with just increased oil volatility driving demand from traders. But lately, oil traders has been more active on the LR side and you guys seem pretty bullish on the LRs in the prepared remarks. So I'd just be interested to hear what segment you guys think is better positioned for IMO.
Well, again, I can start. I mean, they're all going to benefit from IMO. There's no question. It's that you would expect anyway in a strong market for the highest vessel, you know in the food chain, the one with the most economies of scale to do great in a strong market. That would be what you'd expect in the VLCC to outperform, you know, Aframaxes in the same sense as you expect very large gas carriers to outperform medium ones.
So first of all, we're going into a strong environment. So LR2 should expand and start to trade at a multiple. We saw that this winter. I mean, this winter we have fixed it on the MRs in the 30s and the LR2, couple of voyages hit the 60s.
The second thing is, historically, that is what happened, that's what happened in the last cycle that at the beginning, the differentials aren't very high, and then as you got into the upswing of a bull market, LR2s was performing 50% to 60% more in earnings than MRs.
Now add to this cycle whereas - and Lars can go into detail here where LR2 is becoming a trading vehicle too in the sense that we used to ten years ago just take LR2s from the Arabian Gulf and discharge in Japan and come back to the Arabian Gulf.
Now there's - their part of the arbitrage itself triangulating in a big way. The last point is the LR2 market is probably in bulk shipping the most consolidated asset class. There are very few owners who have LR2s.
And if and a lot of their vessels are taken by traders and the owners who have LR2s are pretty strong owners, who are you know, working in a consolidated market so that gives them certain advantages too over MRs that have a more disparate and fragmented ownership.
Lars, do you like to add to that?
Well, I mean - I think you judged it very correctly on the different points, you know, the economies of scale obviously, are very apparent. In the past, you know, the LR2 were more constrained by terminal restrictions and other limitations around that.
As the world has developed and the expansion has taken place, there's a lot more places where the traders can point the LR2s at, giving them the flexibility that they need to trade the position. You know, we are seeing today ships that we are fixing out of the Arabian Gulf during the standard voyages into Japan, reloading the vessel out of Korea, taking that cargo into the Arabian Gulf, reloading in the Arabian Gulf or in the Red Sea, taking that to the continent and then reloading that car - that vessel, out of Norway and taking it to Australia. And you know, that's obviously a beautiful example, it's a true example, but this is where we're going.
Yes. And for this call, we haven't really done it. But later in the year when we - we can get more descriptive and everything will - you know, I think you'd be shocked to see that, you know, the utilization on LR2s is going to be as strong as on MRs. And we'll start putting some statistics up later in the year on that.
And then just lastly, you guys generated pretty meaningful free cash in Q1. And if rates inflect the way most of us suspect over the next 12 months, I think the next leg of the story will be around breakeven level or some. I know it's kind of early, but can you maybe talk about the Company's ability to bring that down over the next couple of years whether it's just to naturally deleveraging or, you know the opportunity to refinance maybe some of the sale and leasebacks, I think most of them have purchase options kicking in after the third year if I remember correctly?
Well, some of them come - kick in after the second year, and some of them kick in as early as the first quarter of next year. So you know, we could immediately start to, you know from next year, start to move to creating less costly finance positions.
And, you know, and yes, you know just on the projections that are generally out there from the analysts who are there, that can be fairly meaningful and if we get into - generally markets are going to move at some stage to well an earlier spike. So it's not unreasonable to expect LR2s in a reasonably short order here to hit $50,000 a day, MRs to hit $30,000. You know, we'd be generating, you know, even without any scrubber differentials of about $25 a share in cash.
And maybe up to $28 or so if you added the scrubbers. And, you know that - you know that's supported in the last cycle. You still wouldn't be at the top of that last cycle. So yes, what happens in shipping is when you turn from a deep cyclical bear market that we've had for ten years and you move into a bull market where you've clearly got a demand side catalysts in the IMO 2020, then, you know, your cash flow and cash is transforming. And the first thing it's going to transform is the cash break evens.
Your next question comes from the line of Fotis Giannakoulis with Morgan Stanley. Your line is open.
This is Max Yaras on for Fotis. Just wondering if you could give us some color on the time charter market, maybe one to three year rates in scrubber versus non-scrubber period, kind of what you are seeing out there in the market and maybe what levels you would be willing to put away ships at.
I will answer the last question for Lars. We haven't even considered putting the ships away. I mean, nowhere near what we could potentially earn in this market, but Lars is happy for you to answer the first part.
Yes. I mean as an overview, the time charter market in all product segments primarily probably in the bigger ones have started to move quite considerably as the end users and traders have start taking positions in the same anticipation as we just went through. So, you know, there's no doubt that time charter rates have moved up to $15,000, $16,000 a day on MRs, non-ECO, non-scrubber and LR2s are up in the 20s and high 20s if you go into a ECO scrubber setting.
There is a differential that is being discussed depending on who the end users, what that differential would be, some are willing to put dollar down to it upto $7,000, $8,000 a day on the bigger units and obviously as you progressively go down to size that delta creeps in.
It is very difficult today to find high quality super ECO scrubber fitted MRs willing to do time charter. It's impossible pretty much defined in size, any LR2s willing to do it. So we are today in a market situation where you are going to struggle finding ships if you have a big precision to cover on timecharter.
I think this is probably the hardest thing for you guys to actually see out there is to see that the traders and the end users are really extending and wanting to extend the length of their books. And as we - this has been going on now for three to four months and what is left, and if you imagine, all the weaker fish and the price takers have given up early.
And as you get deeper and deeper into what's left, you are left with stronger and stronger owners and I think you know Emanuele, it'll be great for you to comment on our attitude, but if anything right now, we'll be inclined to charter in good quality tonnage. Now there's no way we'd charter out, but we'd still be happy I think to add length to our book at these rates.
And then kind of following up on Chris' last question on capital allocation. Expecting to generate a lot of cash here, you obviously strengthened your liquidity position. How do you weigh dividends, buybacks maybe growing the fleet here what are your top priorities?
Well, I think the top priority right now is to continue what we've been doing. We saw in Q1 that we - that we were doing the baby bond, very shortly we've already started to buyback the '19 convert. We will finish acquiring the '19 convert by, I think the end of June right, Brian?
Beginning of July.
Beginning of July, end of June, early July and we will continue to take down debt and on the margin and strengthen the balance sheet because really from about the first quarter 2020, we've got extremely little CapEx going out as Emanuele has indicated, the fleets renew. Then we can really play everything from a position of strength.
And I think the first thing to do is to take down that leverage and to take down our expensive capital.
And then just one final question. The release dates that you're in discussions for about $120 million of the liquidity boost for scrubber financing just any details you could provide on that? Should we expect maybe something similar to SALT where there's more range in your current facilities or is it a new facility?
Brian?
The scrubber will be of multiple facilities including ones that we are expanding and then some new ones.
I think the testament here is - a simple thing here is that, this is pretty efficient financing. It's adding to our additional ones, especially our bank finance. And that just - the banks are happy to lend on the additional flexibility that gives the Company and they immediately see it accretive to the value of the vessels.
With the collateral going up, it's very easy for them to do it.
And you know, that's another thing you'll see in the future you're going to start seeing differences in valuation between scrubber fitted vessels across shipping and non-scrubber fitted vessels.
Your next question comes from the line of Randy Giveans with Jefferies. Your line is now open.
This is Chris Robertson on for Randy. Thanks for the time. So with regard to the refinery maintenance season, you gave a lot of commentary around that, but can you quantify that a little bit in terms of how much throughput on a percentage basis are you seeing kind of impacted by the maintenance this season versus last year?
Well, it's difficult to really quantify it, but I mean it's there, it's real, every single refiner has been reporting in its results and giving guidance that it's - you know, having extended refinery maintenance in order to prepare for the increased demand in IMO 2020. It's difficult to translate accurately into ton miles, but I mean this is the deepest turnaround I think any of us have ever seen. So that is tremendously bullish for us, you know, really as soon as it stops.
And then the other thing is that, you know, what people have to understand is that if - there's not that much time left, I mean Ardmore have already said on their conference call quite accurately that, you know, they're going to start putting low sulfur fuel on their ships starting the end of October, where haven't got vessels scrubber fitted.
We're going to do exactly the same and so are a bunch of others and we already have delivery windows of end May, early mid-June on what we're delivering now. So I think that we would not be surprised if the product market starts to move upwards much earlier than September, October. It could move back instantly, the refineries come back online and the LR2 market in the last two, three days has shown up some indication of that already as you can see in the market reports.
And a follow-up question from me on your comments around the use of free cash going forward. So you talked about strengthening the balance sheet and operating from a position of strength. So I'm just curious after that, would you give priority more to looking at returning capital through the share repurchase program or perhaps looking at the dividend or a combination of both?
Well, I think we have to get there. When we get there, for - the first thing is to fully stabilize and increase the options for the Company and if you then move to a dividend, you know that it's repayable and it's steady and then we'll see.
The share options, the share plans and things are dependent largely what happens with your stock price at the time. But, you know for - for the foreseeable future, and we've already indicated, you know, certainly through the end of this year, you know the priority is going to be on really paying down debt and really making sure we have a rock solid balance sheet.
I mean, I think that's the only thing that's missing, in the Scorpio Tankers' story. I mean and as Emanuele pointed out, the fleet is great. There is fleets in the water, it's going - it's modern and it is very flexible to fix in the market. You've got liquidity in the stock price, highest in market cap.
Let's just have a knock out balance sheet. I think in the history of shipping there's never been a shipping company that's had too much liquidity. Never, and I've never seen one. So let's get to the point where we've got too much liquidity and then we'll take it from there.
And then following up on your comment Robert about chartering, potentially chartering in some vessels. What's the opportunity like out in the market in terms of finding modern vessels that would fit into your fleet, who'd be willing to do that right now?
Really, really hard, really hard. There's not a day that goes by that I've - that I dial-in to Lars and hope he has a nice ship for us to do. Emanuele, are you seeing the same?
Yes, absolutely. I think, you know, consistent with what you were saying, Robert, it's there, it's apparent. We should - we're excited about it. We are monitoring the opportunities. We would take some more lends. We are not desperate for it. We have a presence which allows - allows us to be selective. But you know, the dynamics are unprecedented. That's for sure.
Your next question comes from the line of Noah Parquette with JPMorgan. Your line is open.
I want to ask about obviously, other two markets has been pretty good last couple of quarters especially relative to Aframaxes. What do you guys see in terms of how much of the fleet is trading dirty versus clean. Just want to get a sense of how much of the strength is also been at the same time as there has been a supply increase too, I imagine there has been a switch. So some color there would be great.
Well, I don't think that we haven't had older - I mean, I don't see any switching of Aframaxes into clean because it's pretty hard to do that. And most of those Aframaxes are trading dirty, you know, and much older than the LR2 clean fleet.
So you really need to have a really significant sustained spread even for some of them to come over. And the vast, vast majority, I don't think could come over any way to simply because of the condition and age to doing it.
Adding to what Robert is saying, I think that the way for us to answer the question is, you know, whilst last year a lot of LR2 owners have chosen to dirty up their vessels, we were consciously keeping the fleet trading clean. Maybe even actually the last 24 months there has been a substantial number of LR2 vessels trading or switching to dirty. We were consciously keeping the whole fleet trading clean and we're very happy about our decision.
Yes. And I guess what I'm saying though is that those other owners have they kind of switching as well now that they're seeing that strength. Because if that's happened already, It's certainly a poor sign, but if it's yet to happen, then it's a different story. So I just want to understand.
It's not as easy as taking a decision and switching from one to the other. You need to go through a process which may take anywhere - I mean, technically it's not impossible. It can take as little as 90 days to clean up a ship. However, you need to have the right cargo to put on that ship and, you know, it's not unprecedented that it takes a month or a year to do that, to find the last three cargoes that allow you to actually be classified as a clean trading vessel.
So, you know, it's not impossible. But people are always looking for opportunities. However the traders which are historically the ones that have those cargoes that allow you to clean the ship up are not that willing to give it away, because they know what's coming and they are looking for as Robert was saying in his earlier comments, they are looking for tonnage themselves.
So they try and retain their optionality for themselves, and you know, don't give it away to the open market.
I think we're also - if you're sitting there as a dirty Aframax owner, you know, you had a very good winter. Things have been fine. The forward position looks good for you too. I mean it's - you know, your oil demand is going up. You are going to come today the crude oil market should move up higher too as soon as these refinery positions are over.
I think what's going to happen in the world for crude oil too, it's a really - could be a perfect storm here because so much of the U.S. crude excess is being produced is going to have to be shipped out of the United States, and others too - we're fighting a more modern refineries around the world that are better suited to refine, you know, the products that are required for the future.
And that's one of the tremendous great ironies here is that the U.S. is finally an exporter, got a the refinery complex to deal with some of it. So the crude oil market should do very well too.
Well, it's also reflective I may say so in the timecharter rates of Aframaxes which is still pretty strong.
And I just had a question about, the SALT investment and STNG. You know, obviously it made sense - because we understand why it happened at the time but it gives your stock a bit of exposure to dry bulk and some set of dry bulks. We were concerned about an overhang, you know, fast forward a year, you guys should be in a pretty good shape financially. Is that an option in terms, if you look at stock buybacks, is that an option versus open market purchases or you would rather just not touch that?
No, I think it's a-- I don't think that's really, you know, really the way you would do that. You're going to do things in an efficient basis which we've ever did, stock buybacks you do it in the open market. That's the most efficient to do it, especially as I just cannot imagine that knowing the management of Scorpio Bulkers and who owns Scorpio Bulkers, because I can't imagine they're exactly going to sell that Scorpio Tankers shares on block discount.
So, you know, I don't - I think it is neutral. I think the great thing with Scorpio Tankers is it has number one shareholder so committed to the future of Scorpio Tankers, I think that's a really good thing.
You guys probably have the inside track on Scorpio bulkers are thinking to. Thanks.
Thank you.
Your next question comes from the line Jon Chappell from Evercore. Your line is now open.
This is Sean Morgan, I'm on for John this morning. So you guys talked pretty glowingly about LR2s and as we kind of are coming into this expected upturn, is there any thought about possibly getting more aggressive in either buying an existing second hand tonnage or new orders. And would that be weighted towards the LR2, given what you've kind of said about increased arbitrage opportunities, consolidated ownership and the other attributes of LR2s versus say MRs.
I don't think whether I would need to buy anything. We are the largest fleet. Any addition of tonnage would be marginal at best on the acquisition side. You know, we've already pointed out that, you know where we think the rates could easily go. We're going to be, you know, throwing off nearly $30 a share in cash flow. That's pretty good on a stock that's a $25. That's a pretty good upside. And we think that the right and correct thing to do at the moment is to deleverage the balance sheet.
So there is nobody in our group that is looking at second hand tonnage and we're not looking at any companies to buy. We've bought the fleet that was the best fleet, the most modern fleet for this company to buy. And nobody is within visiting shipyards that can build product tankers.
That's one of the beauties the Scorpio Tankers is that you know, the assets are in the water they're fully finance. The age profile is fantastic. It's the most modern fleet. There's no requirement for Scorpio Tankers to go out and purchase fleets to create operating leverage, to create market share, to be relevant or to renew its fleet because it's got vessels that are approaching 15 years of age.
And then so you said that you're not interested in chartering out at this point and that you said if anything you'd favor chartering in of additional tonnage. I think the seven bear boat charters that you have extended that makes a lot of sense. But is there any change operationally from your perspective of the new IFRS rule changes regarding variable charters and does the impact, what your strategies are or is it just accounting semantics.
It's just accounting semantics. I mean, this is - at the end of the day this is a cash-on-cash business. You know, we don't pay taxes and those changes are something that Bryan had to deal with, something that you have to deal within your models. But in terms of your business decisions, your capital allocation decisions, your - they don't matter to us.
Your next question comes from the line of [Barry Covey] with Clarkson. Your line is now open.
So with everyone having completed drydocking and scrubber installation that's everything progressing as scheduled or do you perhaps see some issues to the expectations and secondly about the fleet I guess, already being the most fuel efficient power fleet and on top of that scrubbers, so making this supercharged fleet. So in practice how do you think about this and positioning you amongst your peers and customer interest. Could you talk about this position you have in the run up to 2020.
First of all, we've included in the earnings release a fairly detailed timetable for the scrubbers. That's the latest scrub timetable. We haven't really seen any changes or delays in that over the last week. And we will continue to update the market regularly on that.
First thing with regard to “competitors,” we strongly believe that the whole scrubber story is really a little shiny toy that's a distraction. If we think it's better to have scrubbers than not, but the most overwhelming thing here is that the actual supply and demand in the product market is improving already, prices are moving up on a seasonally adjusted basis.
And we expect the demand side to get a tremendous catalyst very, very shortly. That is going to create a rate inflection and a potentially large expansion of earnings and cash flow to any product tanker that is a clean tanker that is under 15 years old.
Your next question comes from the line of Liam Burke with B. Riley FBR. Your line is now open.
You talked a lot about the order book early on in the prepared remarks. How much you factoring in the back end of the year, any additional scrapping as the inefficiencies of some of the older vessels become parent and less economical?
Not much. We're also saying that we expect the general market to be strong. We even expect the dirty market to be reasonably strong. So I guess there's some lessons approach you know coming into 20 years time you might have some scrapping on the full special surveys et cetera, et cetera.
But the biggest thing that you are going to have in the product market for every year now and it's going to increase quite substantially, is basically the effective removal from the premium trades of vessels that are over 15 years old. And that's not a scrapping, they'll just move from the premium trades to the dirty trades.
Now with that movement, I mean how long would it take the order book to begin to build again from what you mentioned earlier is being at record lows?
Its got to take a while because to you know you may get the odd one or two vessels that you could deliver in 2020 but not many. The other thing is that the shipyards themselves have consolidated some of the yards to closed down, some of them have been paved over into commercial or residential real estate and not all yards isn't like a dry bulk ship.
There are - you know only a select few yards in China that can build product tankers and they're mainly confined to Korea. So you know I think that's a good opportunity and we hope this is what potentially can set up a multi-year you know the good position.
Your next question comes from the line of [indiscernible]. Your line is now open.
Just a question on the trade dynamics on the LRs I mean it's obviously not all easy to grasp but as the refiners are running, kind of full throttle from second half of this year. There's going to be a lot of [indiscernible] gasoline and especially in the Atlantic basin. I mean in the crude market, we're talking about potential floating storage scenarios next year. Could we see something similar happening on the product side?
Lars?
Most certainly. Well, the oil markets have generally over the last period or time period have been in some parts of degradation and we start seeing you know structural contango as well. We will start seeing a lot of vessels moving into storage place as well.
But that aside you know, I think where we'll start seeing is that as we logistically need to prepare ourselves for 2020. Lot of the product needs to move into areas, where tankers might not be that easily accessible and you will have to use floating storage as your logistical solution. So there's all reason to believe that we will see floating storage moving around in different parts of the world.
I know that that some of the oil traders are using very large vessels now testing out floating storage in Singapore and so on for some of the products for low sulphur. How that means for the product trade in terms of moving middle distillate in particular they'll be very interesting to follow. But the whole way through is going to be positive.
I mean if we start seeing storage. You know. Obviously, any rate potential that we're talked about so far you know will become low because storage would create a whole different view because you're restricting supply. But we're not counting on storage. It would be great to have it.
Again and then maybe as a follow up I mean the U.S. refiners they report to be pretty much in kind of full distillate mode already. Is there a scenario where those refiners will be cutting runs simply due to the poor gasoline yield or I guess you know will they continue to regardless, just on the basis of the anticipation of strongest distillate margins.
Gasoline margins have actually gotten a little bit better and there's been some discussions that they can pull some of the inputs going into gasoline and put them into diesel and the FCC, so I think what you'll see is actually better gasoline margins based on reductions in production.
We have no further questions at this time presenters. Please continue.
We'd like to thank everybody for joining us and we will talk to you shortly. Thank you. Have a good day.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.