Scorpio Tankers Inc
NYSE:STNG
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Scorpio Tankers Inc
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Hello and welcome to the Scorpio Tankers Incorporated Fourth Quarter 2018 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 everyone for joining us today. Welcome to the Scorpio Tankers Fourth Quarter Earnings Conference Call. On the call with me are Emanuele Lauro, our Chief Executive Officer; Rob Bugbee, President; Cameron Mackey, Chief Operating Officer and James Doyle, Senior Financial Analyst.
Earlier today, we issued our fourth quarter earnings press release, which is available on our website. The information discussed in this call is based on the information as of today February 14, 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 statements 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 played live on 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. On the call there will be a short presentation with slides. The slides are available at Scorpiotankers.com on the Investor Relations page under Reports and Presentations. If you have any specific modeling questions, you can contact me later and we can discuss offline.
Now, I’d like to introduce Emanuele Lauro.
Thank you, Brian and good morning or afternoon everybody. Thanks for being with us today. I am pleased to report the strong performance of Scorpio Tankers in the fourth quarter. This strength has persisted into the first quarter of 2019 and show signs of enduring through the year.
In short, the positive evolution of the product tanker market is now fully underway and our conviction has further strengthened from the picture we were able to share with you during our Investor Day in mid-December in New York.
We started 2019 already engaged with a significant and important drydocking and scrubber retrofit program. This will ensure our fleet remains the best equipped. We firmly believe in the sustained commercial advantage from our status as the most modern and efficient fleet on the water. This investment is well timed for the significant secular demand that we expect from implementation of the regulations of IMO 2020.
Furthermore, there is increasing depth in our commercial relationships which continues to deliver market-leading results on the time charter equivalent fronts. New vessel supply remains benign and increasing demand has created a higher price environment across all our vessel categories. This has manifested itself in higher spot rates, time charter rates, and vessel value as well.
We remain very respectful of the macroeconomic and geopolitical uncertainty which has created so much equity market volatility over the last months. Despite this, our underlying business performance and visibility has continued to improve day today. We believe the best is yet to come.
With this, I would like to turn the call to Robert Bugbee.
Thanks, Emanuele. If everyone could turn to Page 4 of the short presentation please. So these relates to some of the highlights. I mean, we have really significant operating leverage. We have the world’s largest and youngest product fleets and also, the vast majority of that fleet is employed on the spot market and we intend to keep it that way because as Emanuele pointed out, we believe that the market is going to continue to strengthen.
We also are really well placed where this increase in fuel expenses, environment that we are likely to face going forward. We already have by definition a very fuel-efficient fleet. It being the most modern that is in the world product tankers and as we like to point out, we are getting it scrubber ready as well.
And we have great liquidity which will allow us now flexibility to do things as cash flow continues to improve and we will be able to amongst other things lower our cost of debt along the way.
And in summary, we just simply think that – believe that Scorpio Tankers is the best investment expression there is like in any company, refiners or anything at this value related to the IMO 2020 theme and on top of that, the actual recovery of the product market cycle itself.
We go to Slide 5, this is really kind of my personal favorite slide and the reason for it is it shows that we’ve already got this market improving. It’s turned from the bottom cycle and it’s starting to move upwards and you’ve got a pretty big difference between the first quarter this year and the first quarter last year. And that’s not IMO 2020 effective.
This has got nothing to do with IMO 2020. That’s going to come later in the year and from about the second quarter. This is simply the supply and demand balance sheet to the product market itself showing the growth in demand in general and the supply that Emanuel was talking about whether growth is fairly benign.
And I’d like to hand it over to James now to go through the scrubber slides.
Thanks, Robert. So, on this slide, we’ve shown the consumption figures provided or the actual average consumption figures of our vessels in 2018. This only includes consumption outside of Emission Controlled Areas. So the scrubber does not operate during port activities, loading and discharging and also to be conservative, we assume that every load and discharge port is in an ECA area. Thus, the scrubber does not operate in the 200 nautical miles when entering and leaving the port.
Today, the average spread of the MGO-HSF forward curve in Rotterdam from 2020 to 2022 is $289 per metric ton. However, using a $200 spread, this would equate to the following daily TCE savings on an MRO to roughly $2500 on an LR1 roughly $2800 and on an LR2 roughly $3300. Every $100 change in this spread leads to daily savings of roughly $1200 on the MRs, $1400 on the LR1 and $1700 on the LR2s.
With that, let me turn it back to Robert.
Thanks. We don’t have anything else. So, then, just to like to give apologies for Lars Dencker won’t be on the call with us today, but he will be – he is our Head of Trading. He will be joining us on our roadshows to Boston and New York next week.
Thanks. Just on that, we’d like to open it up to questions.
[Operator Instructions] And our first question comes from Amit Mehrotra with Deutsche Bank. Your line is now open.
Thanks, operator. Hi, guys. Thanks for taking my question. So, you obviously have a lot of cash on hand over $600 million. I think that maybe – I joined a little bit late. So I am not sure if you covered this. But I think it maybe understates that just giving the surging and bookings in recent weeks.
And I guess, when the funds, the pool funds are distributed, can you just talk about maybe how much additional inflows you would expect over the next month or so which I guess maybe a better way of looking at it versus the cash cost you’ve outlined in the release?
Hi, Amit. It’s Brian. In our copyright, well it takes a while for a voyage to be completed and from cash flows to come through. For example, if you look at these accounts receivable balance between September 30 and December 31, there is about – there is over $12 million that number went about. So the money came in, but there is still $12 million more and as you said, a lot of the voyages that kind of the highest rates were post start that’s why we had a very good, so far, Q1 results. So it’s going to take a while, money comes in, but it’s definitely a positive. Things are looking better.
Okay. And then, obviously, retiring debt a little bit early which saves some – I guess, interest cost, insurance cost. I mean, are you guys – Brian, are you guys basically happy now in terms of where the capital structure and liquidity is? I mean, you’ve done a lot of liquidity in capital structure gymnastics so to speak over the last year.
Are you guys happy with where it’s today or is there something more we can expect that may impact the breakeven position over the next few months? And also just related to that, Brian, any help on when you do kind of address some of these cash calls, now with all the liquidity you have, where the breakevens can go over the course of the year?
Okay, so the breakevens, on a fleet basis is about $17,000 a day. It will go down with the interest, but it will take some time. So, in addition to the $57.5 million of baby bonds are retiring, on an annualized basis, we have amortization payments of about $220 million that’s obviously significant and we also have the convertible due on July 1 of $145 million.
So, we have some additional work to do paying on the debt and I think those are all positives and I think one of our goals is to reduce our leverages on storage. And as you said, we are in good point we will bring down the breakevens as the interest comes down.
And as we go through the next, obviously 15, 18 months, you would – you have other opportunities on other baby bonds and then ultimately and then along that way, you would also have opportunities to – as your balance sheet is – then would really start to improve from a lending point of view, you would have opportunities to do refinancing in the more traditional way and perhaps substitute them things with normal commercial bank debt at less cost. So it’s like a rolling price system.
Yes, now that makes sense. I mean, if the market continues how, we and you and it seems like everybody kind of expect it to progress over the course of the year. Can you just talk about, I guess, the balance sheet arguably will continue to be deleveraged.
Is there - will you just allow that to be deleveraged continuously or are you kind of targeting the 60% - 50%, 60% leverage target in the excess cash flow over and above that will be used to grow the fleet further or maybe return more cash to shareholders? How do you guys think about that sort of cost of fleet?
I don’t think that we – we really have – we have the world’s biggest fleet already. We have a lot of operating leverage. I mean, every thousand dollars a day increases approximately $45 million improvement in cash flow, and as you de-gear the fleet tooth and obviously, your general cash flow gets higher.
I don’t think from a strong market this company is lacking in fire power or opportunity to generate cash flow. I think the first thing to – but I do think that we shouldn’t be returning every dollar there is to shareholders right now. We should be mindful that the company has a high debt profile. So, as we should take that debt down too and as we discussed before, that improves the cash flow.
We haven’t at this point yet got around to determining actual target. So, whether it’s 50%, 60% or 40%. I think that we will watch general interest curves and financing and take that as it is and I think that would be a discussion to have obviously we could have in six months, nine months, twelve month time. This is specific to our objective.
And just last question for me is, if you are in that advantageous position where you kind of have the options would be cash flow, would you – is there a likelihood that you may buyback the stock that is held by Scorpio Bulkers? Is that a potential use of cash flow if you have the excess liquidity down the road?
It probably be fairly inefficient in the sense that Scorpio Tanker, Bulkers would probably demand a premium for being the largest shareholder in Scorpio Tankers. I mean, there is – we know Scorpio Bulkers fairly well and we know that Board and their management very well. And we, as insiders own 27%, 28% of that company and we are highly confident of that investment, that is an investment.
We think that the price of Scorpio Tankers in product market itself will go up and go up significantly. And we have read various things that maybe Scorpio Bulkers would sell the stock. We even have banks bring this up enough, because we do that. But Scorpio Bulkers thinks that Scorpio Tankers has a tremendous way to run in terms of its stock price and its investment.
And it is not going to be a seller at market and one of the great things of Scorpio Tankers is it’s a liquid stock. So Scorpio Tankers is thus far been able to, obviously, we’ve been blacked out since December 31, but thus far, we would expect that Scorpio Tankers should it wish to acquire stock and do so most efficiently from the actual market is – the actual daily market itself.
Got it. Okay, all right. That’s all from me guys. Thanks for taking my questions.
Thank you. Our next question comes from Randy Giveans with Jefferies. Your line is now open.
Hi, gentlemen, how are you?
Good, thanks.
I had a few quick questions. So, on Slide 5, as you mentioned quite attractive here at these levels, just to put this into context, that’s all the refinancings and sales leasebacks what have you, what are your kind of current cash breakeven rates for the LRs and MRs?
Hi, Randy. So, as we said before, the overall fleet is easier to deal with, but it’s around 17, but if you look at it on a segment basis for the MRs, you are getting into about 16,000 and for LRs, you are – in terms of the sale leasebacks that we inherited from Navigate you are looking at just under 18, I am sorry, just under 19.
Okay, it’s perfect. And then, turning on the page on Slide 6, great detail here. Is the scrubber strategy driven more by economics because of the likely rate premiums as you kind of lay out here or more of an operational decision, because of maybe the fuel compatibility concerns or some blends.
Specifically, do you think there will be HSFO or VOSFO available in ports next year? And with that, have you been able to purchase in advance some of your HSFO fuel needs for next year?
Hi Randy, it’s Cam. The answer to your question is, yes. In other words, both played apart as we review what we’ve said on previous calls, we spent a great deal of time looking at various risks to adopting scrubbers which includes the technology and CapEx required.
The regulatory and political risk and also the economic risk and what our future projections are for the spread between gas oil are compliant distillates and HSFO. So, in there, of course, the economic returns played a big role, but not without careful understanding of the risk.
So, the latter part of your question, yes, we are in the process of contracting and securing volumes for the next 18 to 24 months of HSFO and gas oil in strategic bunkering ports for us which not only include primary bunkering hubs but also secondary and tertiary bunkering ports as an aside, we don’t think enough attention has been given to the surplus of heavy fuel oil that the market would have to absorb post-2020. So, apart from say the supply chain, we do believe globally, HSFO will be widely available.
Okay. Great. And then, one quick question. So you have about 1300 off hire days in the back half of 2019 and another 1000 off hire in 2020. Do you expect the charter in some vessels to offset these days? Or just kind of use your current fleet as it is?
It’s a great question. I don’t think we will charter in vessels on that – just say on that kind of short-term trading mentality. Our charters in historically have been more strategic in nature based on our view of the market. To the extent vessels are available to charter that don’t reflect our forward view of the strength of the coming one to two to three years will be there to charter in vessels opportunistically.
I’d also add to that something to that Randy is that, it sounds dramatic when you say a 1000 off hire days in this period, 1000 off hire days in that period. But like it’s only 5% or less than 5% of the total fleet, we have 20,000 on hire days.
Sure, sure.
But actually 40,000 on hire days, so.
Yes, the level of – the degree is…
Not huge, just a question.
All right. Thank you so much.
The off hire days is pretty relevant if you think where it is.
That’s fair. All right, thanks again.
Thanks.
Thank you. And our next question comes from Greg Lewis with BTIG. Your line is now open.
Yes. Hi. Thank you and good morning. I just wanted to touch a little bit on the scrubber strategy. I mean, clearly you guys are committed to it. You’ve laid it out in detail. But I guess what I am wondering is just, given that there is some still uncertainty – there is – it’s a stall of fluid situation.
How much flexibility is there with the company? And what is scheduled at shipyards and capital outlays? How much flexibility is there? Should there potentially be a potential reason to change that strategy?
Thanks, Greg. Well, first of all, we think that the market is overplaying or quite skewed and that’s interpretation of various political and social voices on the lists of scrubbers. So, the first comment to make is, we don’t see a great deal of risk in slippage of the implementation date of IMO 2020.
And there is a lot of color we can add to that comment. However, be that as it may, should there be some unforeseen change to the regulation, we still hold some significant amount of optionality in our program. I can’t go into details, but obviously, as we’ve done in the past, we will adjust.
Yes. Okay, great. And then, just one question, it looks like there was a nice – there looks like there has been a nice surge in MR rates in the Atlantic Basin really just this week. Could you just talk a little bit about that? And maybe what’s driving that?
I think that – I think we wanted to stay off the week-to-week vest in the month-to-month vessel movement and we should have said on the investors call, as you see a market tightening which is what we are doing and it’s a multi-regional, multi-site. So what we’ve seen is literally, one week the LR2s do great is to the next week and is in Northern Europe doing great.
Now the next week MR doing is being the best in the U.S. Gulf. But generally, what we’ve seen is we’ve gone through is that on a year-on-year comp basis, all of these areas and all of these markets have improved significantly. And to go back to the statement we’ve made on the investor thing, at each point, we are aware that, yes, you can have refinery turnarounds.
We expect the markets to go up and down in regions sizes as we just move remotely towards the third, fourth quarter this year. But each point as we said back in November, the risk is to the upside is what we are finding. We continue to underestimate every time we think a market is going to slide, like the recent here is – two or three weeks ago, most of the commentators were expecting that the MR market in the U.S. Gulf would actually go downwards and continue to go downwards.
And it’s gone the other way. It’s gone upward. So we did want to back off this week-to-week thing. It’s really not going to matter in nine months, twelve months. I mean, the company at the moment is focusing on, now the commercial guys are focusing on the utilization, better choices in their trade, better choices in positioning, getting ready for the changing world, coming in the next six months or so, increasing customer contact and et cetera.
That way and the rest of the company is trying to control what it control on the operating terms and it will come. So we prefer not to comment any more on week-to-week questions.
Okay. All right guys. Thanks for the time.
Thank you. And our next question comes from Jon Chappell with Evercore. Your line is now open.
Thanks. Good morning. Good afternoon. Robert, you mentioned, guys kind of operationally trying to position and it’s unfortunate that Lars isn’t on the call. But when you think about the timing of starting to see the impact, mostly on the demand side from the January 1, 2020 regulations, would you think that really starts to hit the market? Is that kind of soon out of the refinery maintenance in August?
Or is that been so accelerated in the first half of the year that you can potentially see it even sooner? And then a third part to that question, are you expecting that to hit the bigger assets the LR2s before the MRs or is it going to be just kind of product tanker industry-wide?
First of all, Cameron goes on this. This is like literally pot lock because do the refineries come up in Asia, first the new ones come. They lay prime loads first. If China continue to export first, which is all related to these LR2s. Do we have an extended cold period in Northern Europe which will keep those ice clot Handy is ripping forward.
I mean, I think in the results now, most of these should be fairly surprised that the Handy is running $18,000, $19,000 a day or so. And as to, very complicated question, as to exactly what the refineries will do is timing or how they will start to switch to produce more low sulfur that’s super hard to predict.
What is easier to predict is, the actual off hire time that people have in the fleets of ships, crude oil tankers, product tankers, when they were moving them from the market for scrubber installations, the curve itself, the decision-making, I mean, as oil prices firm, the premium to heavy fuel, the spread to increase quite dramatically and all these things will feed into the customer. So, I don’t know, Cameron, you got any better?
The only thing I would add to that Jon, is it’s a bit early for distillate production to be leading through to the end of the year and IMO 2020. But what we are, say pleasantly surprised by and you can get this just by reading through the results of some of the independent refiners in the oil majors is the healthy distillate spreads that they are enjoying and the utilization that comes with that.
So, our big ships or small ships are all moving a lot of distillate around right now and through the year particularly when we get into the third quarter after the summer, we expect that to accelerate, because that’s the natural time when they will be worried about January 1 and March 30 next year respectively.
I mean, again, it’s like a lot of people, I guess in the last weeks have been hurt one way or other in trying to gain what the actual spot market has been doing, or what the first quarter is doing in terms of products while looking at the stock prices. I see various things about people, well, we’ll better hold off to do things until the end of the second quarter, because there is going to be a refinery turnaround.
All of these are – if we go back to November, it was – well, better enough by now, because the market is bound to go down in January. These are the short-term things are just – we just don’t want to be part of it anymore. I mean, we are running it for the long-term. We’ve invested for the long-term whether it’s with our shareholders’ money or own money in this and it will – one thing that we are sure of is the cycle had turned.
The next thing we are sure to shore off is that the demand - already increasing demand against a flat supply line will be further stimulated by IMO 2020 which is coming soon and that’s pretty much all we know. The rest of it day-to-day who knows?
All right. Balancing that short-term in that long-term it’s been reported in the trade press from sources that you may be chartering some ships with some of the major traders. Now the sources are typically pretty well placed. But let me ask a couple questions on that. First of all, are traders coming to you already for the scrubber fitted ships looking for charters six months out?
And if so, how are you structuring or how are you thinking about structuring any profit share payment terms around that? And then the second part of that which kind of goes with the first part as well is, how much roughly speaking would you be look to kind of lock away to kind of absorb the arbitrage economics of the scrubber versus kind of just remaining keeping all of your ships in the spot market based on the cyclical turn that you already talked about?
We are very confident of the improvement in the market. So, we want to charter out at absolutely little as we possibly can with the company has in the past and will continue to do it in the future, take one or two vessels to the extent that they can – to be helpful to perform for example, strategic partnerships or beneficial to the actual trading efficiency and flow of trading information to the broader fleet as opposed to doing it for an economic decision. Yes.
That makes sense. Thanks, Robert. Thanks again.
Thank you. And our next question comes from Ben Nolan with Stifel. Your line is now open.
Yes, thanks. So, obviously, you guys are going to be buying in the one baby bond. Just curious if as you look out to what’s left to the converts little bit later in the year, if you are doing as the plan as to take a similar approach there and just to retire that as part of the debt repayment process that you outlined a little bit earlier.
I mean, that we look to that all the time. It’s like, it’s when you go to buy something, suddenly the seller wants more money and it’s going to come to us anyway in June.
So, whether it’s now or later?
So the wonderful thing with the baby bond is it’s – even though it’s trading above par at the moment, we have the call option at par. And we can force the seller to sell to us. With the 90 – now the June convertible, it’s simply – look, if someone rang up and said, here is $50 million, $40 million, $20 million and made it worth our mathematical while we’ll openly say we are there to buy it.
Gotcha.
But whenever we put a bid into the market, suddenly what was one number suddenly moves to another number. So we’ve kind of given up. So, all the sellers out there, please ring up and make your offers.
Yes, there is convert holders they are sneaky. The – but, one way or the other.
And they have a company that’s pretty clear that we are going to pay them anyway in June.
Right, right. And that I guess is my point is, at this point, you are not looking to refinance that know it anyway what’s left of it, the intent is to simply take it off the market and whether it’s now or later is that the idea.
Yes, absolutely.
Yes. So, and then, I want to touch on something, Robert that you mentioned on the ice class Handies which at least from RC it’s a little harder to get visibility and could you maybe, obviously you are doing pretty well on those at the moment. Is there pretty substantial – is there currently a pretty substantial ice premium that you are able to get in the market?
So, yes, and no. In other words, Ben, yes, there is a premium, but don’t understate that we’ve invested in the handies because the general age profile and composition of that sector is heavily skewed towards older vessels that are just not acceptable to major customers around Europe and the Baltic.
So, we are enjoying the fruits of our decision we made several years ago to invest in that space knowing that flows and customer demands would continue to evolve and grow. Now, the Ice class specifically, it’s a great option to have and it’s a great option not just for ice, but for the fear of or expectation of ice.
So, even in relatively mild winters, you can still enjoy the appreciable premium simply for the – to hedge against a weather event that may present ice accretion.
And just to highlight one of Cam’s point, the Handy side of the read, the first class in the product that is showing the effect of ice, showing the impact of what happens when product tankers stop, ten, fifteen years plus as we go through beyond those that will affect that.
Okay. Now that’s helpful. And then, last for me, it does seem like, with respect to – well, both what you did, we are able to do in the fourth quarter and then also what you’ve been able to book thus far in the first quarter. It seems like those rates are better with respect to the spot market than what we’ve seen in other places.
And I am just curious why you would – or what you would attribute that to? Do you think it’s a function, as you say of having newer modern ships that are more efficient and more desirable? Is it the pools? What do you think is the most important secret sauce there?
I think that we’ve got a great fleet. We got a great product itself. We got very good captains crew. The operations people and then you’ve got a chartering that’s – Lars isn’t on the call, so he can’t blow his team’s trumpet. So, I’ll do it. They’ve come in. They’ve spent now since last February, well, March, last year getting together, getting used to this fleet, changing things, adapting things, testing things, putting models, putting trading programs in.
And I think finally, we’ve seen this first period where that hard work is starting to really pay off. And then the second thing is, is that, when the market is like, a 9,000 10,000 11,000 a day, it really – the difference between a great trading team and a average trading team doesn’t really show up, because everything is a mess and as soon as you start getting an expansion and in trading opportunity and right, that’s when, that’s what separates the great teams from the average teams.
Okay. That’s great. I appreciate it. Thanks guys.
Thank you. And our next question comes from Noah Parquette with J.P. Morgan. Your line is now open.
Thanks. I wanted to ask about the kind of the growing environmental push back, I think on scrubbers, you saw that you commissioned – or the commissioned the IMO report last week. How do you guys think about that risk, I mean, in terms of maybe a strategy to push back on it or the timeframe of open loop scrubbers, their ability to operate profitably, has that changed at all in your mind?
Yes, so, I’ll let Cameron answer that question. But as an introduction for that, we are sort of in this unique position at Scorpio Tankers is that despite investing in scrubbers and having the option to have scrubbers, our – we don’t think it will happen, but the best thing to rule for us right now would be to have scrubbers banned entirely in shipping.
If you think that one through, the benefit to Scorpio Tankers in terms of further increased demand for what is shipped would far out way in the advantage we could have in the market in terms of scrubbers. So, I think, when you listen to Cameron now, you should sit there and think that, we are able to take what I would take a non-extreme decision.
We are neither sitting there colored by the idea that, oh, we have to have scrubbers work or oh, my god, like some companies and some people’s view scrubbers can never work. So, Cameron?
Sure. Noah, I think the media and probably the analyst community is well has been dominated recently by extreme views here. One extreme is that, scrubbers are a long-term, almost a permanent solution and business model adjacent to our industry. And the other extreme view is that, they will never be. We will refer you back to what we said previously is that, the industry is in transition.
We’ve maintained that scrubbers represent an opportunity for us with an anticipated life span, regulatory life span of five to ten years. We are maintaining that position. If you look at the EU sort of position, recent position, it refers to a couple of interesting things. Number one is, it relies on a German study from 2014 that puts scrubbers in the context of other forms of potential harm to marine environments like run-off from farms, tourism, extraction of minerals.
And so we acknowledge that there are potential harms from scrubbers alongside those other sources. The other thing, I think that you will find is that, the EU while it is free to act unilaterally, we will have a great deal of difficulty making a sudden and significant reversal or change of course with the IMO. The topic of whether environmental limitations to scrubber wash water are appropriate or not, we will require many more months, if not years of studies.
And that’s why we are not here to take an ethical or scientific view. We are just compliant with regulations but we do think that the timeline for a scrubber in the broad context of the political sort of environment we live in is five to ten years.
And reflected in the – were the calculations that we have given in our websites in today is, based on the actual consumption patterns that we’ve had on the fleet in 2018 that based on the same information that’s presented to our Board and as Cameron says, they are sort of in the middle. They are neither done with two extremes or less extremes.
And a final point I would make, Noah is that, even in the next few years, there isn’t enough attention being paid to what the world does with all this residual fuel. So, IMO 2020 is an exciting topic for shipping, but it is an essential topic for refiners and when you look at winners and losers in refiners, the pricing risk for residual or HSFO is very, very far down to the downside, something along the lines of where coal is priced, which is about half the current price per ton of HSFO.
Yes, that’s really helpful. And the details and the correct numbers are great. Thanks for preventing that. And just a follow-up on that, I mean, in terms of uses of HSFO in the future, I mean, do you have any kind of thoughts on what that could be? And whether the product tanker market will capture any of that new trade or will that be more of a dirty trade?
Thanks for the question. Well, as we’ve mentioned, maybe not directly enough, obviously where we are predominantly focused is on incremental demand of distillate from IMO 2020 and it’s something that we haven’t seen yet. We don’t think the recent strengths really is caused by that, but it’s something we are looking forward to say, starting in the third quarter.
So there will be a lot of incremental ton miles from distillate moving around. When it comes to HSFO, it’s a great question. There will be some barrels, it will be a dirty trade. There will be quite a few barrels moving from, say, locations of surplus which is largely where simple refineries currently exist Middle East, parts of Asia, Russia, et cetera to areas where it’s in deficit like the centers of more complex refining. But like I said, we won’t be engaged too much in that, that will be a trade largely for the crude tanker space.
Okay. That’s all I have. Thank you.
Thank you. And our next question comes from Magnus Fyhr with Seaport Global. Your line is now open.
Hey, good morning. I guess, as long as you guys report quarterly earnings, we analysts have to come up with the net to net for quarters. So, I was just curious if you can maybe provide some color on with all the cyclical recovery underway on your thoughts about seasonality this year that would be very helpful. Thank you.
Not really. As we said before, this is a very, very difficult one to game here and simply because, we’ve got the sort of calculations related to – we have to work out what’s going to happen with these new refineries that are coming up in the East and how the actual refiners and the traders are going to place themselves going forward for a low sulfur that’s coming later.
So, we are just not confident that the normal process in earnings would be first quarter, it would be, let’s say, first quarter strong, second quarter is also fairly strong, fourth quarter is strong and the weakest quarter is the third quarter. You don’t really know some people are calling that there will be extended refinery turnaround in the second quarter.
But if you take the United States right now, people – I see reports of people get stretched out about the increase in gasoline inventories in the United States. Well, this is crazy, because the United States is an exporter of products. We would want to see the United States build – have good inventories if we are product tanker owner, so that they can export it.
So, it’s just too hard to calculate that. That’s why we are trying to say here that if you are trying to invest or not invest, because you think something is going to happen in the next four weeks or six weeks, good luck to you.
All right. Thank you, Robert
Thank you. And our next question comes from Melvin Shieh with Bank of America Merrill Lynch. Your line is now open. If your line is on mute, sir, please unmute it. Okay. And our next question comes from Liam Burke with B. Riley FBR. Your line is now open.
Thank you. Good afternoon. You mentioned several times during the call a benign supply, vessel supply environment. Is that something that can continue as sustainable? And what’s causing that low supply? Is it financing restrictions or just general rationality in the markets?
Thanks. I think it’s a combination of both. You have to remember that the last twelve months were an extremely weak period for tankers and when you look at the broader context of our industry, most of which is held in private hands that are diversified across different asset classes. You have people that have come straight out of a great weak drybulk market and if they happen on both types of assets and into a weak tanker market.
So there isn’t a lot of spare equity capital around. There is certainly not a lot of cheap debt around when you look at the condition of the traditional lenders who are to our industry, particularly for private players and then you add, say the icing on the cake which is some – let’s call it disarray or maybe disruption in the traditional ship builders.
So, Korean yards going through a difficult time, Japan continuing to consolidate and China continuing to consolidate. Can it continue forever? Of course not. We are realistic, but what we do think is that will take a much higher and sustained market to really bring out additional capital to hit shipbuilders.
Great. Thank you.
Thank you. And our next question comes from Frode Mørkedal with Clarkson Securities. Your line is now open.
Yes. Thank you. I guess, if you look at the peer group, it’s trading roughly like 60% of that maybe. So the question is, what will that carry on the market? I mean, 2020 is almost here. People are certainly bullish on the markets and the rate this year are good. So, why is the evaluation so lower in your minds?
Well, I think two things. I think that, firstly, it’s very difficult for people to adapt to NAV changes when if you take our company, it tends to send increase in ship values. The NAV goes up $8 and you are seeing the rapid shift in cash flow. So, I would say that round about October, our NAV would have been somewhere around $2.40, $2.50 and now our NAV is $3.25, $3.30 going fast in.
And that’s based of December 31, cash going fast towards $4. That – there is a question of information and speed that has come out. And secondly, look, I think we have to be honest with each other is, companies like Scorpio Tankers are being nothing but disappointing to investors very long time. So, just because we suddenly have a market that rapidly changes in four months doesn’t necessarily mean.
And especially as all the analysts now, every single analyst repeat every analyst expectation in earnings and guidance. So we can’t blame investors for not valuing the company for that improvement or forward expectation when no one else has and we can’t blame investors for being a little bit gun shy when there has been such terrible disappointment for such a long time.
I think those are the reasons. But that will come as we consistently do well in cash flow as information gets out to the market where NAVs really are and the cycle has changed. I am confident that that spread will start now and the NAVs will continue to move upwards.
And just to reiterate that, I was the old share guy which I was talking about, getting $2 of the $40 from the new share count.
Yes, yes.
It will come, I mean, it’s not – in the two big cycles I’ve being at $4 and now at $45 and $9 in 2023 at this point, the stock generally trade well below the NAV. It’s really ironic, but that’s what happened. They make the turn in their fundamentals. They start to generate cash flows. Their value start to move up and they trade below NAV and then, whatever magic things happen, the shareholders start to go from fear to well, this is actually happening.
And then, it’s valued at a NAV matrix and then it starts to get valued even higher than NAV on the cash flow and return to shareholder matrix. So nothing is abnormal right now either. We are not complaining about it. We’ve taken advantage of that situation and may continue to do so. It’s a good offer for people right now.
Yes. Okay, thank you.
Thank you. And our next question comes from Max Yaras with Morgan Stanley. Your line is now open.
Hey guys. Thank you. Definitely appreciate the Slide 6 and the detail you provide here. Just digging in a little bit deeper, if we look at this estimated scrubber TCE savings, is this what you expect to charter your vessels at, let’s say, like a premium to normal rates? And how do you expect this capture of the savings to develop over time?
So, as you know, being largely engaged in spot trading, we fix on what’s called world scale. So, basically a flat price for freight. So really this is a comp to what a non-scrubber fitted vessel or whatever own vessels without a scrubber would earn. And then, as it comes to overtime, we expect a few things.
One is that, depending on the spread we experience, that number will move up or down. That over time, let’s say the next three, five years, those comps may change depending on whether the rest of the industry continues to invest in scrubbers or not, so that’s really it.
Okay. And then, any other color you guys could provide on the expected financing rates? And then the likeliness of you exercising the additional options for scrubbers I believe those 18 vessels?
In terms of financing, we are looking into that, but we have many options. So we are just keep going with that. We will soon bring it up here.
The cash returns are so compelling. It really is something of a luxury question for us. As far as the options go, I’d say, at this point, we fully expect to declare the options. But being an option, we don’t have to declare them today.
All right. Thank you guys.
Thank you. And we do have a follow-up with Melvin Shieh with Bank of America Merrill Lynch. Your line is now open.
Hey, good morning. Good afternoon. It’s Ken Hoexter. Sorry, good morning. Just, Robert, on the – I know you’ve chatted a lot on rates earlier and a lot head fix in the past and the bounce in rates and your confidence in the structural balance in the past.
Is there any difference in what makes you confident that you are going to see this structural balance versus those head fix you’ve seen or I guess, is there anything that could go the other way where the refiners are better prepared and the distribution of this network is more ready than we expect for the upcoming switch into 2020?
Well, first of all, supply is low. So we’ve actually had supply constrained itself. And the future newbuildings are low, the ordering is at multi-year lows and the ordering as Cameron pointed out, recently in the last year or two, is there has been no money in the products industry is low itself.
The supply is very constrained from the order book point of view and will be further constrained in the sense that vessels are going to – product tankers will turn 15 years or older and move away from the clean petroleum trade. So the supply side is very, very constrained here. We, in either events, we are seeing a improvement in the product market with nothing to do with the IMO 2020 is – 2020 as we started with.
This is simply old fashioned increase in demand as a result of the fact that we work through an inventory overhang in the world of product tankers and we just have a continued growing demand for products in the world itself. So, I guess, the – what could derail it is if we had a complete world slump, a 2002 or 2009 event or something like that as to the refinance preparedness for IMO2020.
The refiners, the traders are trying to charter in a lot of product tonnage. So, that tells us that they are prepared for a very steep increase in rates and demand for product tankers.
It’s helpful. I want to come back. I know you guys gave great detail on – into Noah’s questions before on the scrubbers. So, thank you for that. But, given the port span of the use of open loop scrubbers in some regions, any thoughts on change in payback periods for your investment?
Sure, let me help you with that. So the Slide that James prepared reflected what we had said previously on the last call I believe, which was, we don’t doubt that port states, which essentially is from 12 miles out in may and in many cases will prevent the discharge of scrubber wash water. It is entirely consistent with existing limitations they have for over port discharges from ships today.
So, no – these are not at all a surprise to us. So baked into the calculations on that slide is now conservative assumption which is every port in the world acts like Europe, which is the entire region bans the use of scrubbers. And only in the open ocean can you use an open loop scrubber. And as you know, that still is a small fraction of the overall utilization period of a scrubber on one of our vessels.
So, we’ve taken the most conservative assumptions we could to just reassure our audience here that the payback is still compelling.
And if you want to change them to close loop, did you highlight how much that would time to do so and cost associate?
No, we haven’t. We are taking the view that that’s something we may look at down the road. Again, our estimated view of the scrubbers’ useful life from a regulatory point of view is 5 to 10 years. So, something we are factoring in for later on.
And then, just lastly, your cost per scrubber increased, did I catch that right, from $1.5 million to $2.2 million up to $2 million to $2.5 million. Is there anything that’s driving that?
No, I think, again, it may have been a miscommunication on our part. The cost of the scrubber itself is about $1.5 million the actual unit and then on to that, you have to add some installation and commissioning cost. So that’s how you get to about $2.2 million.
Okay. All right. Great. Look forward to - I guess, as we progress through the year seeing the rates continue. Thanks guys.
Thank you.
Thank you.
Thank you. And that concludes today’s question and answer session. I would now like to turn the call back to Brian Lee, Chief Financial Officer, for any further remarks.
I like to thank everyone for joining us together and we look forward to speaking to you soon. Take care. Thanks.
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a great day.