Scorpio Tankers Inc

NYSE:STNG

Earnings Call Transcript 2019-Q3

[Operator]

Hello, and welcome to the Scorpio Tankers Inc. Third Quarter 2019 Conference Call.

I would now like to turn the call over to Brian Lee, Chief Financial Officer. Please go ahead, sir.

[Brian Lee, CFO]

Thank you, and thank you operator. I want to thank everyone for joining us today and welcome to the Scorpio Tankers' 2019 third quarter earnings conference call. On the call with me are Emanuele Lauro, Chief Executive Officer; Robert Bugbee, President; Cameron Mackey, Chief Operating Officer; Lars Dencker Nielsen, Commercial Director; David Morant, Managing Director; James Doyle, Senior Financial Analyst.

Earlier today, we issued our 2019 third quarter earnings press release, which is available on our website. The information discussed on this call is based on the information as of today, November 7, 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 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 broadcast live in the Internet and is also being recorded for playback purposes. An archive of the webcast will be made available on the Investor Relations page of our website for approximately 14 days.

There are some slides available for this call at scorpiotakers.com on the Investor Relations page under Reports and Presentations. Just as a reminder, if you have specific modeling questions, you can contact me later and discuss offline. And in our press release, we did have an explanation of variances that give guidance on future depreciation, G&A, charter hire expense and interest expense.

Now, I would like to introduce Emanuele Lauro.

[Emanuele Lauro, CEO]

Thank you, Brian, and thank you all for attending today's call. In many ways, Q3 mark the calm before the storm. I have rarely felt that a quarterly earnings call refer so much to the past, rather than to the present. Even for those of us with many years of experience in this industry. This serves as a timely reminder for the rapidity with which the shipping markets can inflict. As the market in the third quarter bear little resemblance to the strength we anticipate.

Despite the rear view mirror, I am pleased with the way the company performed in the third quarter. This period also mark an important milestone for our company, in that we concluded the transaction with Trafigura to further extend our market leadership position in the charter tanker market. Today we had announced the technical details of the ATM program we announced five weeks ago at the time of the Trafigura transaction announcement. We had been in no rush to use it though.

In our view, we now stand in the foothills of a powerful inflection, driven by the confluence of seasonal, cyclical and structural changes substantially the impact of IMO 2020. We are satisfied to have brought the company to this point, with the largest the most modern, most efficient scrubber equipped spot market exposed fleet. Our financial gearing, operational gearing, and market liquidity allows us and our equity holders optimal position for the upswing. It has been a long time coming, longer than we may have expected, but the waiting may now be over and the best is to come.

With this, I'd like to turn the call to Robert Bugbee.

[Robert Bugbee, President]

Hi, good morning, and good afternoon to everyone overseas. We are very excited. It's really hard not to be like really very, very bullish. And after 10 years or so of bad market we’ve got a lot to look forward to. Our markets are at very strong levels right now pre our season. As you can see from the slides we sent out the strength has been slowly developing quarter-over-quarter now for well over 15 months. And so it's pretty well set in and this has happened before any email regulation, this happened before any IMO regulations, this has happened during a period of fleet growth both and we'll talk a little bit about what will happen in the future.

MR today are in a low-20s and our LR2s, modern LR2s are fixing on a triangulating basis around $30,000 a day. That's just a fantastic level right before the season starts in a couple of weeks around Thanksgiving, traditionally our market start that strong winter season. So we can be confident that our remaining bookings will be substantially above where they are today. The fundament and that's not what we’ve just released that’s above the actual earnings that we are at this point at the moment.

We can be -- the fundamentals, as Emanuele says continue to improve, I just like to highlight that we've got through another quarter with very few orders. Companies and capital markets are unwilling to make or fund speculative new orders. We expect that to continue. And finally next year, the fleet will start to age and it's actually possible that we could have small or zero effective fleet growth in the clean petroleum product market for the next couple of years. And this optimism is already starting to be reflected in higher values and higher time charter rights.

And on that, I’d just like to pass it over to Lars Dencker.

[Lars Dencker Nielsen, Commercial Director]

Thanks, Robert and good morning and good afternoon, everybody. During the second quarter earnings call, I made a reference to the front loaded refinery maintenance season, which was underway in August, reducing the tonnage demand. However, I also remained optimistic at the time that we would start to see a firm market in the back end of the third quarter. The market certainly came in mid-October MR rates began to approach $20,000 a day and LR2s at $40,000 per day these are highest rates for the month of October since 2004 to 2008 period; and all of this despite September and October having the highest level of offline refining capacity in several years.

Take a step back into the last two quarters during the immense refinery turnarounds, we have focused Scorpio on the positioning, the drydocking and the scrubber retrofitting as a substantial number of vessels in preparation of the regulatory changes in January. This has been a substantial operational and logistical undertaking, which in size and number of retrofits has few, if any, competitors in the product tanker segment.

Enter the fourth quarter, and the market volatility and utilization levels increased dramatically. As I mentioned earlier, the rates we experienced for the month of October have not been seen since the 2004 to 2008 period. The arts are now opening, volumes are moving and refining capacity is coming back online. Our forecast for the fourth quarter and 2020 is certainly constructive and we're seeing a robust and healthy start to the quarter.

We're also now seeing the benefits of IMO 2020 and in November and December owners will start in a big way the changeover moving towards consuming compliant fuels and the freight markets will be reacting positively to these disruptors. Apart from normal seasonal change, we anticipate a prototyping from the actual fuel changeover as the incremental product demand accelerates in the logistical critical supply preparation during December.

Most refineries previously in turnaround are back online in November, which will act as a catalyst for additional product tanker demand. Amid these turnarounds and the talk of IMO 2020 preparation, geopolitical tensions and asymmetrical market reactions provide further impetus to the upside. The strong step change in extreme rate volatility experienced beginning of the Q4 has underpinned the future market outlook.

Interestingly, the massive crude freight spike in early October, influenced in part by the Saudi attacks and the sanctioning of the Costco [ph] fleet had 13 LR2s move into the dirty trade, further tightening the supply on the large product carriers. This emerging reality along with the historically low order book, the downtime of tonnage for scrubber fittings, the strong crude tanker fundamentals, the increased tonne to mile demand are very positive market indicators. They provide a solid foundation for more sustainable and firm product tanker market than we’re experiencing even today.

Thank you and operator we’ll now take questions. Thank you.

[Operator]

[Operator instructions] First question is from the line of Omar Nokta from Clarksons Platou Securities. Your line is now open.

[Omar Nokta, Clarksons Platou Securities]

Hi, thank you. Hey, guys. Obviously, some really positive commentary in the release and in the call thus far. With the Saudi Aramco IPO underway they've been publicly discussing making investments, increasingly more downstream and then refining, to us it’s obviously creates what we think is the positive backdrop for the product sector. Just curious, do you guys see it that way? And also, do you see opportunities to work with Aramco on any projects in the future? I know if I recall maybe several years ago you've done business with them. Yes, I think either sale of assets or long-term contracts. But just wanted to just double check kind of your thought process on how you're seeing the Aramco discussion?

[Robert Bugbee, President]

Yes, I think that first of all, we put Saudi Aramco in the context of the product market and the growth at refined or expected growth and continue growth of refinery capacity for export in the Middle East in total. So we've seen the first stage of the Saudi refinery expansion in as soon as mid-January, February, we're going to see a pretty huge refinery come up at Kuwait.

And all of this is obviously helping us this change or change in the ratio and lowest starting to look to export more of a higher ratio, the value added product, as opposed to the crude is naturally a big benefit to the product market going forward. And we see that as -- and it's not short-term, it's long-term it's really part of the investment thesis as to the specifics. Cameron do you want to add?

[Cameron Mackey, Chief Operating Officer]

With not able to disclose or discuss our particular relationships with customers, but what I would say Omar is that it stands to reason that exports and trading go hand-in-hand. So you're not only looking at a dominant regional player, but actually someone who has global aspirations around trading of refined products. And naturally, you'd expect us to be very keen on maintaining and developing a relationship with them.

[Omar Nokta, Clarksons Platou Securities]

Got it. Yes. So that clearly not just in Middle East market, but more of a global trading opportunities?

[Cameron Mackey, Chief Operating Officer]

Yes, exactly right.

[Omar Nokta, Clarksons Platou Securities]

Okay. And just a follow up, maybe kind of bigger picture in thinking about how things are today for Scorpio, obviously, you time the Trafigura acquisition, we think very well ahead of the market spike. How do you feel about Scorpio’s fleet today. You have scale in the LR2s and the MRs being the biggest player in both of those segments. Do you feel like you've reached a good scale of work overall for the company? And it's about generating cash from here or do you think there's a need to expand the scale within the LR1s and the handys?

[Robert Bugbee, President]

Well, I think that we've clearly got scale. We've got the scale that's proven in many ways, whether it's our contractual relationships with customers, the actual size or the fact that we could attract a company or trader with a quality of Trafigura to want to do the deal as they did and the structure of the deal that they did with us.

We have a great handy fleet, it’s an ice class fleet very modern, that's a small fleet in that area that itself is a small fleet with almost nothing on order. And we have a significant enough position in that market itself. The LR1s we don't feel we have to grow that at all for the sake of growing it because we get all the marketing information we need through the MRs and the LR2s is sort of a market so the size ranges sort of somewhere in between.

We are really excited about the investments we've made in the last two, two and half years to expand the LR2 market because that LR2 market now as markets get stronger, we would expect the highest economy of scale vessel to outperform in earnings and cash flow to value vessel, the rest of the size group rather like a VLCC does that in crude or a case does that in dry cargo, and those markets are strong. And obviously, we think that the next three, four years are going to be strong markets.

So we would expect to see LR2s widen, over MRs or any other category. And as first signs of that is really in what we've just announced now in terms of guidance. So we're pretty happy with the age profile of the fleet that's important and the size of the fleet. So we’ve got no reason to chase anything, do anything. We can focus on cash flow.

[Omar Nokta, Clarksons Platou Securities]

Okay. All right. Thanks, Robert. That’s helpful and Cameron, as well. That's it for me.

[Operator]

Your next question is from the line of Ken Hoexter from Bank of America. Your line is now open.

[Ken Hoexter, Bank of America]

Good morning. Maybe either Lars or Robert it seems to be a sizable delay on the schedule for dry docking scrubbers, ballast water treatment seem to be a lot pushed out. Maybe talk about the impact we should expect in the near-term. I don't know whether it's more vessels out and so therefore maybe not as big of a ramp or alternatively maybe even a bigger spike on rates given more capacity is being held up in the yards. Maybe just talk a little bit about from both sides?

[Lars Dencker Nielsen, Commercial Director]

Sure. I can take that Ken. So there's a few things going on. Number one is, as we've said previously, there are some modest delays that we're experiencing in the shipyard themselves somewhere between 5 and 15 days, which as the off hire time, we haven't yet experienced say more significant delays on any sort of continuous basis.

But that adds up over time. Number two is in the early part of our program, we have about 100 days that were due to a Typhoon in China and in the middle of August with about 10 of our vessels affected. So that in and of itself was a very, very large event with a big disruption associated with it.

And then the third and probably most important thing to bear in mind is, a vessel isn't pulling into a gas station, you're trying to hit a very specific window and when you're fixing vessels on the spot market and trying to position them globally, to a specific shipyard at a specific time it's a bit of art as well as a science. So while we aren't experiencing significant delays in yard, there is a very complex -- it's a process of optimizing vessels positioning and trades to get them in the right place at the right time.

When the market improves or spikes materially, obviously, we re-jigger things to make the most of the potential trades for that vessel. So that's why our schedule will continue to be updated and modified depending on both market conditions where specific vessels are, and where we're trying to get them.

[Robert Bugbee, President]

I think, you should also add that, we've also been able to create flexibility in the actual acquisition of the Trafigura fleet itself, because they were already all in the water, all scrubber fitted. So, that made them very advantageous in this environment too.

[Ken Hoexter, Bank of America]

So, actually, Robert, that leads me into my next question, which kind of on the Trafigura, you kind of have been focused on solely paying down debt as prices ramped up and using that free cash flow to kind of reset the balance sheet. Maybe kind of, I guess, step back on whether Emanuele or yourself, just kind of talk about why you decided to kind of change that path. I get the opportunity to scale up, but there's always the opportunity. But you've been so religiously focused, it seems like I'm saying we're going to focus on debt pay down as rates finally ramp up.

[Emanuele Lauro, CEO]

Yes, sure. First of all, the actual construct of the deal. We weren't really increasing the net debt to equity very much in doing that deal, because the deal came with an equity component, and we issued further equity in the transaction. So the deal wasn't really a leverage position. And the other side of it, of course, is we instantly took over the SPVs and the cash flow of the vessels.

So on a market was that strong a month, ironically -- well, I mean, certainly after two months, we're nearly there in two weeks' time, that actual transaction was itself being deleveraging, because it created so much equity that came in the transaction combined with the cash flow, at high positive cash flow numbers instantly that deleveraging.

So we didn't see that as a conflict to our stated strategy that we had and we still have. And the actual deal itself wasn't this to add scale, we did quite right we didn't need it, this is quite a unique deal in shipping, where you have a major, major customer and user of product tankers with incredible information and market knowledge and expertise.

Actually wanting you to do well, not just wanting you to do well, benefiting for us to do well. Being a major shareholder of the company, and that just the information synergy itself and what we can learn and bring that relationship closer. And having a customer with great knowledge validating the business concept of Scorpio Tankers is fantastic.

[Ken Hoexter, Bank of America]

That’s helpful. Just one quick one, I mean it is a phenomenal time and finally seeing the rates rebound. Just a quick one because you put out a couple of releases on your option buys. I don't think I can recall in all my years covering transport seeing President putting out option buys, but do you have to do the same thing when you release or when exercising those options put on in a release. Since I don't think you have to do a 13D, just want to understand how we should expect over the next few months.

[Robert Bugbee, President]

I haven't asked yet. But I asked the question related to what we had to do personally to buy. And whatever the rules are then I'm sure myself will have to -- will follow the rules. But there are various different things you can do with options. And certainly it's not something I intend to deal with right now.

[Ken Hoexter, Bank of America]

Okay, appreciate the time and nice answers.

[Robert Bugbee, President]

Might find more. You never know.

[Operator]

Your next question is from the line of Amit Mehrotra from Deutsche Bank. Your line is now open.

[Amit Mehrotra, Deutsche Bank]

Hi guys, it's Amit Mehrotra by the way, it's not Amike. Thank God. So I wanted to start with a couple of financing questions if it's okay. First on the $100 million ATM facility, I know you finalize the terms today with respect to the program. But I just want to -- I don't think that means that you actually expect or have to use it. So just hoping you could tell us what the intentions are with respect to that $100 million program. And under what circumstances would you actually utilize it?

[Robert Bugbee, President]

Well, first of all you're correct, it's a largely administrative thing consistent with the announcement we made on the Trafigura transaction. The company was preparing at that time for, a couple of things. First of all, you are putting in the prudent position if we wind back sex-seven weeks ago as to how long the market will take to recover?

Where it would be, et cetera? Clearly, six weeks on from that the market has performed absolutely to the upside of what we could have expected. And as we said earlier, it set -- the company is set for some very superior cash flows going forward into this winter.

The second aspect is that you would expect us to as Brian has indicated in the announcement that, we've announced various financings relating to scrubbers. We've also been very consistent in the last three conference calls saying that as we take down the debt at some point, we would want to refinance some of the more expensive debt in the company, whether it's the leases for example on some of those. And that you would expect us to be negotiating or discussing various credit lines with lenders to do that.

And I think it's fair to say that a lender these days the best way you can have tick in a lending package is not just a basic P&L or balance sheet of the company, but the other boxes you're are the quality of the fleet, which is a great tick the liquidity. And seeing itself has a very good box that can be picked and few companies can tick this box, which is in the bank's minds great access to the capital markets and putting in the ATM is just the further ticking of that box.

[Amit Mehrotra, Deutsche Bank]

Right. So I guess it's safe to say that where your TCE rates are in the high-teens or low-20s or higher it maybe it's probably not going to be a source of capital for you in the foreseeable future.

[Robert Bugbee, President]

I think the best thing I can do is to reiterate what, Emanuel, said was look we haven’t been in a rush to use it. And you're correct the company is creating positive cash flow and has a very, very positive outlook to the share price at the moment add to the executive, as what the previous caller brought up.

[Amit Mehrotra, Deutsche Bank]

Okay. Let me just ask a couple of quick market questions if I could, the time charter equivalent rate in the fourth quarter was I think a little bit lower than what I would have expected, now I know it’s going to be impacted by positioning and which vessels are open for trading and you do still have the majority of days left to book for the fourth quarter. So, I'm just trying to understand do you think when it’s all said and done, the fourth quarter CTE is going to be significantly higher than the 19,000 plus that you guys disclosed today?

Just help -- I'm trying to think about what the impact to the fourth quarter’s CTE could be given what Emanuel said is in terms of the release being backward looking relative to what the market is seeing today?

[Robert Bugbee, President]

Sure, sure. And I think also if backward looking during that period, I mean, it’s very hard in these sort of wide statistics that, also included was a very -- for example in the LR2s was a very, very weak period related to when we had the Saudi -- beginning with the Saudi bombing of their oil installation you had export shutdown. You had a very, very weak period at that point in the market.

So, as we go through, we’re already stating that present pictures are more like 20 and 30 so they’re already above what we have guided and we stated right at the beginning, we would expect the markets to firm substantially in a couple of weeks' time as we -- if not before, as we turn towards our traditional winter season and you get that real full biting of what’s happening with IMO in combination. So, yes, we would expect to not only be above the 17 and whatever it was the 26, but above the 20 and the 30 first half.

[Amit Mehrotra, Deutsche Bank]

Okay, that’s helpful. One very last quick one for me, if I could, maybe this one’s for Lars I don’t know, but one of the benefits to the product tanker market from what happened to the crude tanker market not by long ago, was that you had some LR2s that were switching from trading clean to trading dirty. And so, could you just help us think about how much capacity -- obviously it’s hard to go back, and so how much capacity do you think is maybe structurally come out of the LR2 market because of that?

And what are the -- are there any other lingering effects from the surge and maybe uplift in the crude tanker market that we can read through in product market?

[Robert Bugbee, President]

Lars?

[Lars Dencker Nielsen, Commercial Director]

Yes, thanks, Amit. I mean, as I mentioned in September and October I mean just within the last six, seven weeks, 13 LR2s moved from the clean to the dirty. And as you know, the difficulty of switching back is quite profound. In terms of the tightening of the LR2 fleet, the modern LR2 fleet is not a very big fleet, I think we’re trading around 210 vessels or something like that. So, it’s actually quite a substantial number of vessels that left the product tanker pool on the LR2 market.

It’s a little bit keen to what happened also like about a year ago, when we had the crude spike in the fourth quarter, was suddenly the run up on the crudes suddenly could be felt quite quickly into the product market. And it stayed longer in the product market than it did in the crude market, and I anticipate that where we saw this as a more of a seasonal move last year, this is a lot more significant.

There’s various reasons why people move LR2s into crude. One is, because of the inefficiency of that particular unit, because of age of being non-eco and there could be other elements to that. It could also be that the vessels are controlled by some of the end user that can see that the crude market is so strong, that they simply need to move the vessels into the other markets. Irrespective of it, one of the other, it’s extremely positive for the LR2 market as a whole. And we can see that tightening quite considerably.

[Amit Mehrotra, Deutsche Bank]

Okay, all right thank you everybody for answering my questions. Appreciate it.

[Robert Bugbee, President]

I’d just like to add before we go to the next question is that, the supply thing in general is going to start really mattering in the product side for the first time and you just don’t have a low -- it is not just the low order book, it’s that, and it’s not just that we had switching of products from clean into dirty. You could actually start next year there are a number of product tanker ships that turn clean petroleum ships that turn 15 years old, which starts to make it much harder to trade in the clean petroleum market.

And that hasn't shown up yet, because it doesn't matter and traditionally in dry cargo or crude 15 year old ships don't matter, right? But here, it matters and it's going to matter a lot. So, okay, we're ready for the next question.

[Operator]

Next question is from the line of Randy Giveans from Jefferies. Your line is now open.

[Randy Giveans, Jefferies]

Gentleman, how's it going?

[Robert Bugbee, President]

Good morning. Good.

[Randy Giveans, Jefferies]

Couple of questions for me, one, you're starting to see some IMO prep happening more flows of NGO, VOSFL. So I guess two part question one, have you all seen moving more NGO for blending purposes? And then secondly, once it's blended into the VOSFL [ph] is that moved on your refined products tankers or those kind of dirty cargoes?

[Robert Bugbee, President]

I can try this. Randy, yes, we've seen a lot of distillate flows and gas oil flows recently in anticipation of the 2020 implementation. So the answer to your first question is, yes and I can elaborate or Lars can elaborate as you wish. The second part of question is, yes, once it is blended, then it turns to sort of a conventional bunker distribution vessel that goes on the usually an older barge or dirty vessel.

[Randy Giveans, Jefferies]

All right. And then, I was following up on the other question about the ATM. You also have $122 million in share repurchase authorization. So, how do you balance those two? Obviously, your share price now is almost $32 well below now in our estimate $36 feel free to correct me if you want Robert on that. So with that and attracted outlook for rates kind of how do you implement the ATM versus share repurchases if the share prices stays at let’s say $34 to $35 for the next two months?

[Robert Bugbee, President]

It might do up we might do neither. Now as we've been doing neither for the last three quarters, I mean, it's a -- we made it fairly clear I think that we are going to focus on a delayed gratification to improve the quality of the investment prospect that we have been very consistent saying that until we get to the first quarter earnings cycle or the board meetings around there, we're not even going to consider things like increases of dividends, et cetera or other ways such as buying stock, et cetera, et cetera. Because we want to take the leverage of the company down and improve the investment.

We also believe that we're going to make substantial cash over the next three, four months. That's great. And we will then be playing from where we want to play, which is a position of overwhelming strength, then we can -- we're into a position where we can really do what we want and pull any levers that we need to create value for all of us, shareholders here. And obviously, we stand by with that if there's some crazy aberration that happens in the market along the way, something that we've never been afraid in the past of going in and creating some form of order of the buyback that way.

So we put in the ATM as we described as part of a ticking of boxes as a strategy, et cetera and Emanuele and I've said and we haven't -- we didn't rush to put it in we could have put that thing in six, seven weeks ago it’s just the process of doing it. So I think you can do neither you can either buyback stock, and you could neither use the ATM for few months.

[Randy Giveans, Jefferies]

All right, that's fair. Thanks so much.

[Operator]

Next question is from the line of Jonathan Chappell from Evercore ISI. Your line is now open.

[Jonathan Chappell, Evercore ISI]

Thank you. I was going to start with, Lars, but Robert, I was going ask about capital return and then you just said in a few quarters time with the cash flow you think you're going to generate, you can do what you want. What is the strategic plan for six to nine months down the road? What is it that you aspire to achieve? And should we also read that though to mean that, even if we have a really robust winter 4Q and 1Q that any meaningful capital return whether it’d be dividends or whatnot, is probably six to nine months in the future as you kind of -- I don't know maybe get the balance sheet in order. How should we think about that timing?

[Robert Bugbee, President]

First of all, we’ll restate this. And we're not really going to even think about to take the cash in first and take that position. I don't think that a lot can happen. I mean even as these -- even as the present run rate 30 and 20 the company is creating, I can't remember exactly where it is, but it's got to be something in the region of $50 million, $60 million of cash a month. So you can do a lot damage just of these positions.

And if the market goes up $10,000 from here in those positions, then which I would take as a base case. Then that's something in the region of an additional $50 million a month, and if you actually get some a month or two or three, where you have some really good earnings, if you start getting those LR2s backup into the 50s, 60s and 70s. By the time you get to March, you can have a huge amount of capital.

So that's why it's so important to delay this type of -- the first part of your answer what are we going to do. When are we exactly going to do it until we ourselves can see better the curve of where we are.

[Jonathan Chappell, Evercore ISI]

Okay, that makes sense. And then, Lars, tying a couple of comments earlier together with maybe some bigger macro headlines that we've seen recently. I mean, you guys have said that the rates are setting right now higher than what you booked so far. You're expecting November and December to be stronger. I'm sure there's a seasonal element to that.

But OPEC had said earlier this week that they didn't think IMO 2020 would be as meaningful as they once thought. I think people read that to mean this is going to come and go with no impact on the market, which in our view was a misinterpretation. Just because the refiners are prepared doesn't necessarily mean there's going to be disruption to the shipping supply and demand dynamic.

So long way of introducing, can you just tell us what you've seen so far, both from vessel supply being removed and demand dynamic whether it be new trading routes, extended trading routes, ships being hired in advance. And where we kind of are? I hate this baseball analogy, you're over there but where we kind of are in the innings of the IMO impact? Are we kind of middle of the game here or are we still just kind of the top -- of the second top of the third inning?

[Lars Nielsen]

Okay. I mean, let's start with the last part of your question. It is quite clear to us that we can see a lot of ship owners are now starting to get their bunker tanks cleaning up for the IMO 2020. There is disruptions already now in terms of availability of different types of products when you want to go and have bunkers in the prompt without contracts. So there's no doubt that we see during the changeover that there will be disruptors in play.

We also see that there is a huge amount of volumes moving different parts of the world in terms of the refining capacity coming on stream huge amount of distillate moving West. The big discussion of course, is the pricing structure between high sulfur and low sulfur fuel oil, which is also now starting to blow out, there was an article about that today which is of great interest. Whereas now let's say the twice what is anticipated.

So, if you just look at the forward curve here, Jon. And you can see that the market is pricing in that particular kind of difference. So, people can do the high sulfur scrubber fitted vessel will benefit in the -- and pass 2020 January. And we see that right away.

I think the other part of your question was, do you see kind of demand increasing in terms of volumes and so on? Well, to be honest, it is quite interesting to see that as the refineries have come back on stream, the U.S. Gulf is starting to pop North Asia and the TransPacific routes are popping as well.

There have been a huge amount of volumes coming out the AG and the Red Sea moving all over the place on the larger units. Where, of course on the back of the screen volatility for the crude spike they suddenly were taking one breather and saying well, you know, we have never seen a market increase 200 points on an LR2 within 10 days.

Now, I've been in the business for 25 years or even more unfortunately, maybe. And I have not seen an LR2 market move 200 points in such a short space of time. It tells you a few different things as far as I'm concerned. One is that the capacity utilization in the different fleet segments have come to a place where these type of events, some are smaller, and that can be seasonal, as we talked about, or they can also be the different ones that we talked about previously. They have a much greater impact in the market to the upside.

And this is what we're experiencing right now. The questions that received from our customers, the type of voyages that we're doing on our vessels across all four segments or primarily the MRs, LR1s and LR2s, in particular, we're seeing wonderful new types of businesses that are taking place.

This is doing business out of the U.S. Gulf now with naphtha with the op open, with the bigger units going to Japan through the canal, we're doing big units into Brazil, we’re going into West Africa, we're reloading out of West Africa. We're doing stuff where the tonne mile is interesting, but also the efficiency by which you can trade the vessel with a higher let’s say ratio on lane to balance.

So these things are all playing in and I think we're in for a very interesting time.

[Robert Bugbee, President]

Jon, I’ll just -- with regard to I'm over here in the state, so I understand this innings thing. I would say that we're literally at the -- what you would get the bottom of the first and the reason why is because almost zero of our non-scrubber fitted vessels, either in Scorpio Tankers or Scorpio bulkers, or our pool ships. So we got like, an awful lot of ships involved if you total those have any -- have very low sulfur fuel yet on them except to the extent that that’s required for the shorter ECA trading. So you just -- you so you haven't really -- that's where it is you haven't even completed the first innings yet of getting the stuff onto the ships.

[Jonathan Chappell, Evercore ISI]

That's super helpful. Thanks, Rob. Thanks, Lars.

[Operator]

Your next question is from the line of Greg Lewis from BTIG. Your line is now open.

[Greg Lewis, BTIG]

Yes, thank you. Good morning, everybody. Brian, just kind of looking for some more color around some of Robert’s comments earlier about the deleveraging. As you look out realizing that, you know, it's a diverse capital structure. But as you look out over 2020 and you think about maybe doing some of the refinancings, knowing -- assuming that we’re bringing or swapping more expensive debt for cheaper debt, is there any way to quantify or think about the potential interest expense savings from maybe some of the refinancings that we might see over the next I don't know a year?

[Brian Lee, CFO]

Yes. So we're having about 84% of our debt right now is floating. So as you point out, there is a potential saving as interest rates will go down and now margin will go down when we refinance. But as you say, it's 2020. So first is, as Robert said, we're going to wait for the cash to come in, because as you know, rates just increased a few weeks ago, and some of our ships are still on some voyages at lower rates.

That's why the rates that we put in there, something you were not thought it would be a little bit higher, but voyages just don't finish overnight and start again at a new higher rates for example, the LR2s, and the LR1 had an average of about 47 days on a voyage in Q3 and the MRs about 34 days and 18 for the handys.

So, we get the cash in at that point. And second as time goes along as you have seen out there market values go up so, that should help -- that makes financing easier. And then third, we have to talk with our current lenders and their potential lenders, which we are engaging and getting offers here but it's I think in 2020 we will do that and the savings will come along as you pointed out the margins going down.

[Robert Bugbee, President]

And obviously we will take out the low hanging fruit straight away, which is the baby bond.

[Greg Lewis, BTIG]

Okay, great. And then just one more for me, shifting gears it was definitely more highlighted in the crude market around some Chinese vessels being sanctioned, did those sanctions have any type of -- what type of impact if any did Chinese product tanker vessels being discriminated against time on the market? And is that something that is still kind of impacting the market as we sit here today?

[Robert Bugbee, President]

Greg, it can. The Costco issue I wouldn't describe as material to the product market, what we're seeing is, more has to do with fundamentals than that which is really to put as the short-term and not very large impact. There is some impact around our customers being more responsive and sensitive to sanctions. So there is some impact on the Venezuelan sanctions and the customer response to that.

But again, I'd say by and large, what we're really seeing has to do with IMO 2020 and say positive fundamentals than any short-term catalyst like that. There may be some impact on volatility, but over the medium and longer-term, it's not really going to have a huge consequence for us.

[Greg Lewis, BTIG]

Okay, perfect. Thank you everybody for the time.

[Operator]

Your next question is from the line of Espen Fjermestad with Fearnley. Your line is now open.

[Espen Fjermestad, Fearnley]

Hey, good morning. It's been a long call. So I’ll try to be brief, just in terms of having a lot of ships in the Pacific and in terms of the relative PC performance in 4Q. Are you able to quantify how much of the impact that had on your bookings versus peers? And maybe if there's a similar amount of off hire days in first half of 2020, whether that’s kind of impact will continue?

[Robert Bugbee, President]

Well, the off hire time we will look and we will review. So we'll look at it and related to the positions and obviously that's a tossup maybe you delayed some ships into 2Q if you're getting great fixtures.

And as to the peers with -- I mean it's not really -- we don't really have a -- the closest peer we have in the LR2 is Frontline. And otherwise, I don't think there are really many companies who hold any ships in that. In the MRs, if you take the dry docks, the positioning, this is all pretty much of a muchness between all the different players that among them that have reported.

[Espen Fjermestad, Fearnley]

Right. And maybe, rephrase. For your LRs for instance, I mean, if you are able to trade them freely, would you have 10% better booking for 4Q or wouldn't that matter?

[Robert Bugbee, President]

It's really hard to do what is analysis, as if we didn't have to position vessels for dry docking or scrubbers. So unfortunately, we don't have a very crispy answer for you there. Just to say that, yes, of course, they'd be higher, because you're absolutely right. The whole business model of being a spot player with high quality assets is delivering optionality to your customer. So naturally, as you limit that optionality, you're going to take some discount on your earnings. How much, it's really difficult for us to say.

[Espen Fjermestad, Fearnley]

All right. Fair enough. And finally, in November and I appreciate all your market comments. It still feels like, we have a lot of unanswered questions as to next year would pan out. So on yes or no basis, are you guys surprised that we aren't smarter in all this yet seeing I guess we've been speaking about this now since 2015, 2016?

[Robert Bugbee, President]

Sorry, I didn't understand the question.

[Espen Fjermestad, Fearnley]

I guess, just shortly are you guys surprised that we don't have the full answers as to how next year will pan out yet, seeing we're now in November.

[Robert Bugbee, President]

We're in shipping, we would never have the full answers as to how the following year would pan out yet. I mean, what we have got is some incredibly strong levels without yet having any IMO effect. It's literally is said, it’s just in the first inning to that, it's just come in the last week where MRs are starting to move the extra capacity around and doing it.

I think that we have got some terrific answers in this last year that without IMO despite new buildings being delivered in the last two years, the rates have every single quarter as is on our slides are significantly better this year than the previous two years.

And that’s therefore gives you -- doesn't give you the answers for 2020. But it gives you a great degree of confidence that 2020 is set up to be a great year and that is supported also by the behavior of your customers in their willingness and their desire to continue to go along the market through time charters.

[Espen Fjermestad, Fearnley]

Alright, fair enough. Thank you, Robert. Thank you.

[Robert Bugbee, President]

It wouldn't be fun if we actually all knew what 2020 was really going to be.

[Operator]

Your next question is from the line of Liam Burke from B. Riley. Your line is now open.

[Liam Burke, B. Riley]

Yes. Thank you. Robert, I wanted to go back and talk about the demand side again, you've termed as we got closer to the end of the year, more and more chaos is coming into the market. As we get closer, are you looking at more or less chaos? Or is there any more orderliness in the market for you?

[Robert Bugbee, President]

No, I think there continued some chaos, right, we've had chaos we've had massive spikes, we've had weak markets, now just proceeding that with things that we didn't even expect to be chaos, like, oil installations in Saudi Arabia getting blown up. S

o there's no reason to think that this chaos aspect isn't going to continue and as Lars was pointing out, the great thing now is that most of the things that with a market tight, chaos can lead to pass the rate environment position. The next thing that could create more chaos, could be if we have actually a proper northern hemisphere winter, which we haven't had one of those for a few years either, that could get interesting.

[Liam Burke, B. Riley]

Okay, thank you.

[Operator]

Your next question is from Amit Mehrotra from Deutsche Bank. Your line is now open.

[Amit Mehrotra, Deutsche Bank]

Thanks for taking the follow up. I just wanted to follow up on Brian's comment about the voyage days on the different vessel classes. I thought that was interesting and helpful. So one, I guess, Lars maybe, could you just talk to us has the voyage -- the average voyage days for the LR2 ones and MRs involved or changed a lot in the last six months or do you expect them to change over the next six months?

And then, I think, that also helps us understand at any given time, how much -- what percentage of your fleet is actually open for fixtures and one of the problems we have looking from the outside is translating a big spike in rate to your TCE. And so, is it safe to say that 10% or 15% of your fleet is available at any given time? Is that the right number? So if you could just address those two points. Thank you.

[Robert Bugbee, President]

Give a stab at the voyage duration part first, I mean, the LR2 business is by definition because of the size is a long haul business right. And the voyage durations on the different types of businesses that these type of vessels do has been pretty much the same. What we have seen that is different is that the new kind of voyage that are coming in which also tend to be long haul.

It is very seldom that we see LR2s doing short haul business apart from when suddenly that there was a big difference between a MR or handy to an LR2 price point in the Baltic, so they can take and substitute three handys to one LR2, and they will suddenly do a short haul. And that's just a time it tends to be very long haul business.

To the second part of your question in terms of percentages available for business, we operate, including with the shifts that we operate in the pools over 180 vessels. So, we have as a matter of course, a vessel in any loading area during any week, any part of the world, which is part of our kind of offer to our clients that they can pretty much choose any segment they want. And we will have a ship that of high quality that can provide them their logistical solution.

So, the trick really is to make sure that we position the ships in the right areas at the right time where we see the markets move, and where the markets kind of change in terms of the disruptions between east and west and north and south and so on. We all attempt sometimes to make sure that we understand what we are on the curve to go short a long where it’s possible for us. So to put a percentage on, in terms of what is available at any given time is very difficult. It's a very fluid type of business, and it also changes depending on what segment and what areas we’re trading in.

[Amit Mehrotra, Deutsche Bank]

Got it. Okay, thank you very much.

[Operator]

There are no further questions, I turn the call back over to you presenters.

[Emanuele Lauro, CEO]

Okay. Thank you everyone for joining us today and we look forward to speaking to you soon.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and have a wonderful day. You may all disconnect.