Teekay Tankers Ltd

NYSE:TNK

Earnings Call Transcript 2017-Q4

[Operator]

Good day. Welcome to Teekay Tankers Ltd.'s Fourth Quarter and Fiscal 2017 Earnings Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded.

Now for opening remarks and introductions, I would like to turn the call over to Mr. Kevin Mackay, Teekay Tankers Ltd.'s Chief Executive Officer. Please go ahead, sir.

[Unidentified Company Representative]

Before Kevin begins, I'd like to direct all participants to our website at www.teekaytankers.com, where you'll find a copy of the fourth quarter 2017 earnings presentation.

Kevin will review this presentation during today's conference call. Please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from results projected by those forward-looking statements.

Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the fourth quarter 2017 earnings release and earnings presentation available on our website.

I will now turn the call over to Kevin to begin.

[Kevin Mackay, Chief Executive Officer]

Thank you, Lee. Hello, everyone, and thank you very much for joining us today. With me here in Vancouver, I have Stewart Andrade, Teekay Tankers' newly appointed Chief Financial Officer. Stewart joined Teekay in 2002 and he's worked in a variety of increasingly senior roles across the organization.

Most recently, Stewart was Vice President, Strategy and Business Development, for Teekay Tankers. Vince Lok, whom Stewart is taking over from as CFO, continues in his role as CFO of Teekay Corporation. I'm also joined today by Christian Waldegrave, Head of Strategic Research at Teekay Corporation, and Brian Fortier, Group Controller of Teekay Corporation.

During today's call, I'll be taking you through Teekay Tankers' fourth quarter 2017 earnings results presentation, which can be found on our website. Beginning with the recent highlights on Slide 3 of the presentation, Teekay Tankers reported an adjusted net loss of $5.9 million or $0.03 per share in the fourth quarter of 2017 compared to an adjusted net loss of $14 million or $0.08 per share in the third quarter.

We generated cash flow from vessel operations of $32.1 million during the quarter compared to $20.6 million in the previous quarter. While crude tanker spot rates increased in the fourth quarter of 2017, they did not experience the typical winter seasonal spike, which I will touch on in more detail later in the presentation.

Teekay Tankers declared a dividend of $0.03 per share for the fourth quarter of 2017. And at the end of November, we completed our strategic merger with Tanker Investments Ltd., or TIL, increasing our fleet by 18 vessels to 58 conventional tankers.

In addition to strengthening our balance sheet, the transaction also positions us to capitalize on a potential market turnaround through expanded scale and market presence, helping drive fleet utilization and improved earnings for the company. The integration of TIL has been seamless as we were previously responsible for both the commercial and technical managements of this fleet.

We concluded the planned refinancing of two of TIL's debt facilities, which was oversubscribed and, which I will touch on in more detail on the next slide. So turning to Slide 4. I will highlight the proactive steps we are taking to further strengthen our balance sheet.

In December, we refinanced two TIL debt facilities covering 14 vessels with a new five year $270 million facility, which aligns the covenants with Teekay Tankers' more favorable covenant package, lowers the cost of this refinancing by 50 basis points, while also significantly improving our debt profile through lower principal payments, lower revolver reductions and the extension of maturities from 2019 and 2020 out to the end of 2022.

The graph at the top of this slide shows our debt repayment profile before and after the refinancing, and as can be seen, our schedule repayments and revolver amortization has been reduced by approximately $43 million over the next two years with the majority of our debt maturities now occurring in 2021 or later.

After this refinancing, we only have one near-term maturity of $64 million. We are actively working with lenders to refinance the three vessels within this facility, which matures in August 2018. We expect to finalize the term sheet in the coming weeks and complete the transaction over the next few months.

Our liquidity position as of December 31 was $162 million and our current liquidity balance is approximately $155 million. We continue to monitor our liquidity position and should the tanker market remain under pressure, we have several options available to further strengthen our balance sheet, including further sale leasebacks, select asset sales, obtaining financing on our services business and an evaluation of our minimum quarterly dividend.

Turning to Slide 5, We look at recent developments in the tanker spot market. 2017 proved to be a difficult year for the tanker market with rates sinking to cyclical lows, as shown by the chart on the top left of the slide. The two main factors that drove rates lower were higher fleet growth and OPEC supply cuts. The tanker fleet grew by almost 5% in 2017, following net growth of 6% in 2016.

In addition, the number of ships returned to the trading fleet from floating storage as accrued futures curve moved into backwardation, further adding to fleet supply. On the demand side, OPEC was able to achieve 95% compliance with their 1.2 million barrel per day production cut implemented in January of last year. This led to reduced demand for tankers and forced VLCCs into the Atlantic market to compete with Suezmaxes for cargoes, thus putting pressure on midsized tanker rates. An increase in U.S. exports to a record high of 2 million barrels per day by October 2017 gave some support to crude tanker demand.

However, this was not enough to offset the negative impact of OPEC supply cuts. We were particularly disappointed by a lack of a strong winter spot market this year with rates falling through the course of the fourth quarter. Lower OPEC production, supply outages and a lack of significant winter weather delays were the main reasons behind this decline and crude tanker rates have remained relatively weak into the early part of 2018.

Turning to Slide 6. We look at tanker supply and demand fundamentals and why we believe in a tightening market starting later in 2018. Beginning on the supply side, tanker fleet growth is set to fall just over 3% net this year and around 2% in 2019 as the order book starts to roll off.

Shipyards are now mostly full for 2019 delivery due to a pickup in ordering from other ship types. The order book for the two next years is almost set. Scrapping in 2017 was the highest in five years at around 11.5 million deadweight tonnes. And importantly, it has remained strong since the start of 2018 with five VLCCs and six Aframaxes scrapped already this year.

In a low freight environment and with scrap prices at relatively firm levels, we expect scrapping to remain strong in the coming months. On the demand side, global oil markets are rebalancing. Global oil demand remained strong with estimated growth of around 1.5 million barrels per day this year and oil inventories are rapidly falling back to five year average levels.

With oil inventories declining and prices finding support, we believe that OPEC may revisit their supply agreement during the second half of this year in order to keep oil markets relatively balanced. In addition, we expect U.S. crude exports to continue to rise as U.S. production reaches new record highs. This should provide additional tanker tonne-mile demand throughout the year.

In summary, we remain encouraged by both supply and demand developments and believe that these tightening fundamentals will drive an eventual tanker market recovery later in the year and into 2019.

Turning to Slide 7. We'll briefly look at tanker asset values, which appear to have found a floor. As shown by the charts in the slide, tanker newbuild and secondhand prices have bottomed out. Newbuild prices are increasing as shipyards get more comfortable with their forward order books, while secondhand prices are showing resistance despite a weak spot market. Secondhand tanker values are currently around 35% below long-term average levels, which means there is significant upside potential for asset prices as the market recovers.

Turning to Slide 8. We believe Teekay Tankers is well positioned to capitalize on the potential market recovery, and our current share price represents a compelling value proposition to investors. At the current share price, Teekay Tankers' shares trade at a discount to net asset value, or NAV, reflecting the challenges affecting the overall tanker market.

Given the high degree of operating leverage through Teekay Tankers' position as the world's largest publicly listed midsized tanker company, the benefits of a recovery are very attractive. Based on our 2018 operating leverage, a $5,000 per day movement in time charter equivalent Aframax rates equates to approximately $0.32 in free cash flow per share.

A return to mid-cycle tanker rates would increase our free cash flow to approximately $1.05 per share, which is extremely attractive relative to our current share price of $1.10 per share. Similarly, an increase in vessel values to mid-cycle levels would increase our NAV by over 140%. With a combined fleet of 58 tankers operating in key global markets, Teekay Tankers is well positioned to capitalize on a potential market turnaround through both scale and market presence.

Turning to Slide 9. I’ll provide an update on spot tanker rates for the first to date. Based on approximately 63% and 60% of spot revenue days booked, Teekay Tankers' first quarter to date Suezmax and Aframax bookings have averaged approximately $13,400 and $12,700 per day, respectively. For our LR2 segment, with approximately 50% spot revenue days booked, first quarter to date bookings have averaged approximately $13,900 per day.

With that operator we are now available to take questions.

[Operator]

[Operator Instructions] And we will take our fist question from Magnus Fyhr with Seaport Global.

[Magnus Fyhr, Seaport Global]

Thank you. Good afternoon. Just one question to follow up on the capital allocation strategy going forward. Looking at current cash position of $70 million, and you have some additional liquidity on the revolver, but basically, using some $17,000 a day for Suezmaxes, you still wouldn't generate more than $90 million of cash in 2018 and that would barely cover the dividend and also the debt repayments, even after the $64 balloon payment. What is it going to take to address that dividend because it seems like you're borrowing money now to pay the dividend?

[Kevin Mackay, Chief Executive Officer]

Hi, Magnus it is good question. As we've said in our remarks, we have taken steps following the TIL transaction, which did bolster our liquidity position quite significantly. We have taken steps to refinance those financings, which also produce in a better place. But going forward, I think you're right, this market is currently very weak. And if it was to continue at these levels, we would have to look at the different levers that are available to us, which doesn't only include the capital allocation piece but also looks at the potential for additional sale leasebacks, financing of our services business, even asset sales on some of our qualified assets. So it's a mixture of levers that we can pull.

Dividends is obviously one of those levers, and it's something that we talk to the board about on a regular basis. And if the market continues, it's something that we would -- we'd certainly take into consideration. But there's – even with the dividend itself, we can look at different ways of approaching that, and it's really just looking at what we do to make sure the sustainability of the organization is there through this weak period as we face a much better and improved market towards the back end of the year. So we'll factor in a lot of those things, and I'm quite comfortable that we can ride through this portion of the cycle and come out strong with a much bigger fleet of 58 tankers going into stronger market.

[Stewart Andrade, Chief Financial Officer]

Hi Magnus, this is Stewart. Just to add a little bit to that. So for 2018, we have approximately $103 million of principal repayments. You'll see on the schedule on Page 4 that we have the $64 million balloon which is due this year, which we're currently in the process of refinancing and working through the refinancing on that. And we're confident that we'll have that refinanced before the maturity in August.

So with the $155 million of liquidity that we currently have, plus the cash flow from operations, which you mentioned, the refinancing of that $64 million facility and a few other options that we have for raising liquidity that Kevin has mentioned, we feel confident on our liquidity position through 2018 at the levels you mentioned.

[Magnus Fyhr, Seaport Global]

You mentioned $103 million of repayments. Is the $24 million something will be refinanced, too, on that bar chart for 2018?

[Stewart Andrade, Chief Financial Officer]

The $24 million is actually amortization of undrawn revolver capacity. So it's a reduction -- it is a reduction of capacity, but it's not a repayment.

[Magnus Fyhr, Seaport Global]

Alright, thanks for clarifying. And then just kind of one last question on the, it seems like you're getting a little bit more bullish on the outlook for recovery by the end of 2018. You signed a time charter for Suezmax here at $17,000. When was that done? And are there, I'm sure, I mean, if it was done prior to the new year, those rates probably won't be there right now.

[Kevin Mackay, Chief Executive Officer]

Yeah, that was a short-term hedge that we took on based on our outlook for the first and second quarter of the year. So it's six month time charter that we did at the back end of last year. It commenced in early January and will roll off, if it's a six-month straight, it will roll off in July. And if the customer exercises the three month option, it would roll off in September.

[Magnus Fyhr, Seaport Global]

Thank you that is it from me.

[Operator]

Our next question comes to us from Gregory Lewis with Credit Suisse.

[Gregory Lewis, Credit Suisse]

Thank you, and good afternoon. Just would like to follow up. I mean, I guess, it's part of your response to Magnus' comment, you talked about the various levers and you mentioned the potential sale and/or lease of, I guess, unencumbered assets. Could you talk a little – I mean, not expecting you to give specific vessels, but could you talk a little bit about what that fleet of unencumbered assets that you could pull levers on look like?

[Kevin Mackay, Chief Executive Officer]

Well we do have mortgages on all the vessels in the fleet. But as you saw last year when we did the sale leaseback on four vessels, there is a market there with lessors to do sale leaseback transactions, so that's certainly one of the avenues that we have to raising liquidity. And there's a fair amount of liquidity in the fleet that we could tap into. In addition, we have our pool and our global lightering service businesses, which currently don't have any financing, and there's also a possibility to raise financing to support those operations, which could inject additional liquidity as well.

[Gregory Lewis, Credit Suisse]

Okay, great. And the just kind of curious on sort of, clearly, the market has been backwardated. That looks to be having a negative impact on supply. Do you kind of have a sense for where we are today in the backwardated market versus where the last time we saw contango in the market in terms of what vessel speeds for the fleet might have looked like? I'm trying to understand if the fleet is being more efficient in a backwardated market.

[Kevin Mackay, Chief Executive Officer]

I think one of the key points that people have to be aware of in a backwardated market isn't so much about the relativity of the owner's reaction to that. It's what happens to the supply of vessels. And what we've seen, especially and importantly, this added to the effect of the fourth quarter lag in rates. The backwardation in the oil market drove unwinding of a large position in the floating storage area. And if you look back to the beginning of 2017, we had about 4% of accrued tanker fleet under floating storage condition.

And by February of 2018, that number dropped to under 1% of accrued tanker fleet. So you're effectively adding a significant number of vessels to the trading fleet. And we particularly saw that post the summer months when

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effectively adding a significant number of vessels to the trading fleet. And we particularly saw that post the summer months when all those vessels were unwound and that – those positions were taken out. So I think the backwardated market really drives the storage story in front of how owners then react in terms of slower speeds and things like that.

[Gregory Lewis, Credit Suisse]

Perfect. Thank you guys very much.

[Kevin Mackay, Chief Executive Officer]

Thanks.

[Operator]

And we have a question from Jon Chappell with Evercore.

[Jon Chappell, Evercore]

Thank you. Kevin, just on the way that you've laid out this backdrop, let's call it six to nine challenging months and then an improvement maybe back half this year but maybe more realistically, 2019. Obviously, you're going to be integrating the TIL fleet, which shouldn't be too difficult because under the TNK umbrella before. How do you think about strategy, whether it's getting exposure to an upturn in the market through more charter-ins, it's the only one left, versus not a lot of probably wiggle room on acquiring ships right now, but kind of flexing the fleet through ownership or time charter based on how you foresee the market for the next 12 to 18 months?

[Kevin Mackay, Chief Executive Officer]

Yes, hi, John. It's a good question. I think the TIL acquisition has really helped us, as we said on previous calls, not just from a scale perspective but also the various other aspects, including the financial strength it gave us. But it's positioned us well with a bigger fleet to increase our leverage as the market starts to increase our leverage as the market starts to pick up. I think you're correct in saying that we're not in a position and we're not looking to do a repeat of the TIL transaction or to go out and order newbuilds or buy secondhand at this point unless there's some compelling case that we couldn't turn down.

But at this point in time, and for the foreseeable future, I don't see that arising. So it's really concentrating on the fleet we've got. You've seen in our supporting documents that our time charter-out fleet is starting to roll off in 2018. And that's another vehicle that we'll look at to increase our exposure to strengthening spot market as we move through the back end of this year into next year, although I think the commercial guys are talking on a continual basis around how do we rebuild our in-charter portfolio, as we so successfully did in 2014.

But at this point in time, until we get further clarity on what OPEC is doing around production cuts, I don't think you'll see us move in a large way in the coming weeks. And that obviously will – is a moving dynamic and we continue to assess that on a daily basis almost. But essentially, you're correct. That is the main – the two main levers is the out-charter portfolio, which diminishes, and the in-charter portfolio that we will look to rebuild.

[Jon Chappell, Evercore]

Great. That makes a lot of sense. And then also on the capital deployment again, I understand the concerns in this kind of deep downturn to play defense, and I guess, it's questionable whether a 10% yield is an efficient use of capital. But you didn't give your NAV specifically, but you put out there that is a discount, and based on our numbers, the discount is quite steep.

Have you thought about or has it come up with the board, to the extent you can talk about it, a combination of return to shareholders of dividend and buyback or maybe even shift more to buyback in a period where there is such strong value in your shares that you're trading today?

[Kevin Mackay, Chief Executive Officer]

Yes, I think we have those discussions on an ongoing basis. It's not something that is just coming up because of the state of the market. We do on a quarterly basis, and sometimes in between quarters, discuss these things with the board with a view to rewarding shareholders for owning our shares. We also have to be prudent and we have to realize that current spot rates that are trading below OPEC's levels in some regions, our primary goal at this point is to make sure that the health of the company is maintained, so we can get to that improving spot market.

I think you will – you could expect us to have those ongoing conversations with the board. And as you said, it's not just a question of rewarding shareholders through dividends, it's – we have to consider buybacks. We have to consider other uses of capital. But all of those come into the equation. They are – it is things that we will consider.

[Jon Chappell, Evercore]

Okay, that’s very helpful. Thanks Kevin.

[Kevin Mackay, Chief Executive Officer]

Thanks, Jon.

[Operator]

And we'll take our next question from Mike Webber with Wells Fargo. Please check your mute function. We are unable to hear you.

[Mike Webber, Wells Fargo]

Hey, good morning, guys. How are you?

[Kevin Mackay, Chief Executive Officer]

Good morning, Mike.

[Mike Webber, Wells Fargo]

Sorry about that. Just I think these – I've heard you kind of touched on most of the outlook questions, but I'm just curious when it comes to asset values, particularly given the sheer sensitivity rather to its NAV. It seems like the idea of the market kind of growing its way out of a supply-driven trough in 2018 rather than 2019 certainly seems like it's getting more traction now than it was, say, three or six months ago. And I'm just curious, you can get that chart, I think it's on Slide 7, kind of showing the asset cycles and it looks like you're sitting kind of 5% or 10% below or above kind of absolute trough, if you will.

Do you think that, that degree of optimism that's kind of crept into the market for an 2018 recovery has worked its way into the S&P market to the extent that we won't see additional balance like that? That values, even if rates kind of stay where they're at for the balance of the first half of the year, do you think we basically hit bottom and that optimism has crept into the S&P and accepted it supports your NAV, I guess?

[Kevin Mackay, Chief Executive Officer]

Yes, it's a very good question, Mike. I think if you take the two elements of the graphs that we're showing, on the newbuild side, we definitely feel we've bottomed. There has been an uptick in ordering across the other segments in containers, gas, bulk, and there's also been a lot of rationalization in the newbuilding capacity at the yard. So I think the yards are a lot more confident than they were six or nine months ago, and we're starting to see that in the newbuild price. So yes, I think newbuilds have bottomed and will uptick from here, especially with labor costs increasing and steel prices going up.

On the secondhand side, I think it's been a story of really three segments of the vessel classes. We saw the greater confidence in newer vessels earlier in 2017, while the 10-year old and the 15-year-old prices continue to slide. I think as we've moved over through the end of 2017 into 2018, we then saw the 10-year price stop sliding and then we're seeing the 15-year price stop sliding. So I think our view is it's been a progression and we're at the point now where people can see the light at the end of the tunnel and are maybe not overly confident but certainly more bullish than what they were at six months ago.

[Mike Webber, Wells Fargo]

Okay, all right, that’s helpful. And then finally, I don't know how relevant it is for you guys with your ship-to-ship transfer business, saw the first export cargo directly loaded via LOOP earlier in February. Just curious, as that continues to kind of grow and evolve, what kind of impact do you think that's actually going to have on your business down there?

[Kevin Mackay, Chief Executive Officer]

Yes. I think they loaded their first VLCC as a – similar to what we saw in Corpus Christi as an experiment, it can be done. LOOP is interesting proposition at the face of it. But when you get down to the details, I think it'll be a challenging load port to actually drive a lot of crude export through. Currently, there is only – there's one pipeline, the Zydeco pipeline, I believe, that goes from West Texas across to – into Louisiana. And by the time you get past all the refinery offtakes, the reason not much left by the time it gets to LOOP to build an export capacity there.

So we're really looking at the potential of LOOP being driven by an increase in flows from a cap line reversal on the Marathon pipeline. And at the moment, indications are that they're gauging interest from shippers, but that wouldn't be an event that would take place no closer to 2020 where you see a ratable supply of export through that line. I think given the – in the meantime, your – the general export market is obviously going to grow with greater production increases in the U.S.

So the significance of LOOP, I don't see us being a major factor. And just looking at the way exports are channeled at the moment, we only see about 15% of the export volume coming down the Mississippi anyway. The majority is out of Christi and Houston sort of Sabine area.

[Mike Webber, Wells Fargo]

Okay, helpful color. Appreciate your time guys. Thanks.

[Kevin Mackay, Chief Executive Officer]

Thanks Mike.

[Operator]

Our next question comes from Amit Mehrotra with Deutsche Bank.

[Chris Snyder, Deutsche Bank]

Hi, this is Chris Snyder on the line for Amit.

[Kevin Mackay, Chief Executive Officer]

Hi, Chris.

[Chris Snyder, Deutsche Bank]

So my first question is around kind of the fleet development. I think I counted you guys have about 10 vessels built in 2000 through 2004, which are coming up on their 15-year survey over the next 24 months. So just kind of wondering what is your – kind of how do you view these vessels going forward just obviously given the low crude rates and the higher scrap prices, just how do you think about that?

[Kevin Mackay, Chief Executive Officer]

Yes, I think, obviously, our Aframax fleet is a little bit of a younger – or older generation, sorry, than our Suezmax fleet. So it's an area that we are focused on. Our perspective is the regions in which we are trading those vessels, for example, U.S. Gulf lightering trade, those vessels are actually very economical in the trade pattern that they're being used for. So from our perspective, looking forward, yes, the ships are getting older and we have to think longer term. But in the meantime, they're assets that we can continue to milk and the returns that we expect over the next few years will definitely cover the dry docking expense that we would expect to incur for those.

[Chris Snyder, Deutsche Bank]

Okay, thanks. Can you actually make provide any color just on what you think that dry dock expense as it – either the 15-year or the 17.5-year intermediate survey, what you kind of expect on a per vessel basis?

[Kevin Mackay, Chief Executive Officer]

I think it varies a great deal depending on the asset itself, whether we built it, we bought it, which part of the world it's traded in, what kind of harsh trading conditions it's had or not had. So it really varies between sort of the upper $1.75 million to a $2.5 million, depending on what – how much money has been put into the vessel in previous dry dockings and how the maintenance profile has shaped up over the life of the asset.

[Chris Snyder, Deutsche Bank]

Okay, thank you. that’s very helpful. And then the next question, just kind of about global refining capacity additions. It seems like over the next couple of years, there's a lot of refining capacity coming online. A lot of this is in the Middle East, which seems generally bad for crude tankers and then also a lot coming online in Asia where I think the impact on the crude tanker market is a little more uncertain. Can you just kind of maybe talk about how you guys are thinking about this and how you expect it to play out in terms of crude seaborne trade?

[Kevin Mackay, Chief Executive Officer]

Do you want to take that one question?

[Stewart Andrade, Chief Financial Officer]

Yes, so you're right. There is a lot of new refining capacity coming online in the next three or four years and the next wave of Middle East expansion really comes kind of 2019 to 2021. And it will change the dynamics of global trading, but it should be quite positive for the product market, for example, in terms of long range product exports. So that should be positive for the LR2 sector because I think what you'll see is the Middle East becoming more of an export hub for things like high-spec, low sulfur diesel going into Europe and into Asia.

So from a product market perspective, that should be fairly positive. Like you say, it could take away from a little bit of export capacity on the crude side in the Middle East, although very minor, Saudi Arabia does have quite a bit of spare production capacity. So they could decide to channel their crude both into the refineries but also maintain their crude exports. And then like you say, the refineries that are coming online in the Far East, in India or China where they're serving sort of domestic consumption, that should be a net positive for crude tankers. So actually, I think when you net it out over the next three or four years, we should see positive benefit for both the crude and the products.

[Chris Snyder, Deutsche Bank]

Thank you for that. And that’s all from me.

[Kevin Mackay, Chief Executive Officer]

Thanks Chris.

[Operator]

And we'll take our final question from Fotis Giannakoulis with Morgan Stanley.

[Fotis Giannakoulis, Morgan Stanley]

Yes, hi, good morning. Thank you. I want to ask you if in your analysis about your liquidity, you have included any CapEx for ballast water or if you can give us some guidance for ballast water. And also, if you can comment, how are you going to deal with the new low sulfur regulations? Are you considering at this point to install any scrubbers? And what is going to be the impact for the market and the attitude of shipowners towards this regulation?

[Stewart Andrade, Chief Financial Officer]

Hi, Fotis. This is Stewart. So on ballast water, we are not anticipating – we won't have any expenses related to ballast water in 2018. In 2019, we are working through on a ship-by-ship basis to determine if we need to install any ballast water treatment systems during those dry docks. At the moment, we have allocated approximately $18 million to ballast water for 2019.

But we think there's actually a reasonably good chance that we won't have to incur those expenses for a variety of reasons on those vessels, which we can update you on as things progress. And then really, it's out into 2020 when we would start incurring expenses related to ballast water treatment systems.

[Fotis Giannakoulis, Morgan Stanley]

Okay. And can you also comment about low sulfur, yes?

[Kevin Mackay, Chief Executive Officer]

Yes. On your second question, Fotis, at this point, we don't have plans to install scrubbers on our fleet. We feel that our trading patterns, for example, our ships in the U.S. Gulf are already trading at an eco-zone and the emissions change won't materially affect the areas in which we're trading. I think it's an interesting topic because it's been described as a – and the focus of the emissions regulations tends to always come up around scrubbers.

And to my mind, it's not really a scrubber issue. It's not really even a shipping issue. It's an oil industry issue because this is going to have a significant effect on trade patterns. Not just around distillates and diesel flows but also around crude purchasing and around fuel oil trades because it really is a refining issue in terms of how do they reduce the fuel oil yields through the refining process. And that will drive different crude purchasing measures and possibly trade patterns from that. The fuel they do produce is high sulfur that can't be in decoked. That has to then be transported to these newer, more sophisticated refineries in the Middle East and in Asia.

So that's going to drive new trade patterns that currently don't exist today. So as a sort of high-level answer, I'm fairly positive on the impact of this regulation on tanker demand but it's going to be interesting how it plays out in terms of the areas of the world that may be challenged to supply the low sulfur fuel such as South America.

[Fotis Giannakoulis, Morgan Stanley]

Can you also comment what is the average speed of your fleet? Is the speed of your fleet right now during the weakness that we have been experiencing the last two months versus to what it was a year ago? And if you think that the implementation of the low sulfur regulation will have any impact on the speed that the charterers will require from shipowners by reducing – in order to reduce their fuel expense?

[Kevin Mackay, Chief Executive Officer]

I'll take your second point first. I think owners' reaction to speeding up or slowing down is really a function of price and what the freight rates are offering. So if we're in a strong rate environment, I don't see the impact being owners slowing down too much. In terms of our specific speed parameters on our fleet, it depends on the vessel trade and the region they're in.

I think as a general comment, I'd say you will have seen our Suezmax fleet slow down marginally, less so on the Aframaxes, which are much more short run where the speed up or slowdown effect is less significant. So our U.S. Gulf and our inter-Far East runs, we haven't done much to change anything.

[Fotis Giannakoulis, Morgan Stanley]

Thank you very much. Appreciate your answers.

[Kevin Mackay, Chief Executive Officer]

Thanks Fotis.

[Operator]

And there are no further questions in the queue at this time. I would like to turn the conference back over to Kevin Mackay for any closing remarks.

[Kevin Mackay, Chief Executive Officer]

Thank you for joining us today, everybody, and we look forward to speaking to you next quarter.

[Operator]

And once again, ladies and gentlemen, that concludes today's conference. We appreciate your participation today.