Capital Product Partners L.P.
Q2 2018 Earnings Call Transcript

Published: 27 Jul 2018

[Operator:]

Thank you for standing by, and welcome to the Capital Product Partners' Second Quarter 2018 Financial Results Conference Call. We have with us Mr. Jerry Kalogiratos, Chief Executive Officer of the company. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, the 27th of July, 2018. The statements in today's conference call that are not historical facts, including our expectations regarding cash generation, future debt levels and repayments, our ability to pursue growth opportunities, our expectations or objectives regarding future distribution amounts, capital reserve amounts, distribution coverage, future earnings, and our expectations regarding employments of our vessels, redelivery dates and charter rates, fleet growth, and market and charter rates maybe forward-looking statements as such defined in Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties that could cause the stated or forecasted results to be materially different from those anticipated. Unless required by law, we expressly disclaim any obligation to update or revise any of these forward-looking statements, whether because of future events, new information, a change in our views or expectations to conform to actual results or otherwise. We assume no responsibility for the accuracy and completeness of the forward-looking statements. We make no prediction or statement about the performance of our common units. I would now like to hand over to your speaker today, Mr. Kalogiratos. Please go ahead, sir.

[Jerry Kalogiratos:]

Thank you all for joining us today. As a reminder, we will be referring to the supporting slides available in our Web site as we go through today's presentation. On July 18th, our Board of Directors declared the cash distribution of $0.08 per common unit. The second quarter unit cash distribution will be paid on August 14th to common unit holders of record on August 2nd. In addition, our Board of Directors declared a cash distribution of $0.21375 per class B unit for the second quarter of 2018. The second quarter class B cash distribution will be paid on August 10th to class B unit holders of record on August 2nd. The Partnership's net income for the second quarter stood at $4 million compared to $5.3 million in the previous quarter. The Partnership's operating surplus for the quarter prior to class B unit distributions on the capital reserve amount to $24.9 million compared to $30.5 million for the second quarter of 2017, and $26 million for the first quarter of this year. Common unit coverage for the second quarter stood at 0.9 times. As previously announced, we concluded, in early May, the acquisition of the motor tanker, Anikitos, for a total consideration of $31.5 million, effectively replacing the motor tanker, Aristotelis, which we sold in April. Moreover, during the question we secured time charter employment for eight of our vessels at attractive rates relative to the current period market. As a result of the new charters and as at the end of the second quarter of 2018, the remaining charter duration of our charters stood 4.6 years, with approximate charger coverage of 77% for 2018, and approximately 60% for 2019. Turning to slide three, revenues for the quarter increased by 5.5% to $65.5 million compared to second quarter 2017. The increase was primarily a result of the acquisition of the Aristaios and the higher number of voyage charters performed by our vessels during the quarter compared to the second quarter of 2017. The rise in revenue was partially offset by the lower charter rates earned by certain of our vessels during the quarter, and by an increase in off hire days in connection with passing special surveys for certain of our vessels. As we will discuss in more detail later, both the product and crude tanker spot market remained depressed during the quarter, with Suezmax rates in particular remaining in multiyear historical lows. This had a negative impact on the Partnership's top line as three of our Suezmax tankers were trading in the spot market following their time charter expiries of the last few quarters. Concurrently, the period market was similarly uninspiring with period rates further retreating close to historical lows, while period employment opportunities remain scarce. Looking ahead, we will continue to trade certain of our Suezmax vessels in the spot market or on short period charters until we see a sustained market recovery. While this might add more volatility to our cash flow generation in the short-term, we believe it is a price worth paying given the state of the market and its prospects in view of the positive demand fundamentals, the rapidly improving supply picture, and the potential beneficial effect of IMO 2020. Of course, as period employment opportunities arise we will evaluate them on their merits as we remain committed to providing cash flow visibility to our unit holders. Moving on, total expenses for the quarter were $55 million, compared to $45.7 million in the second quarter of '17. Voyage expenses for the second quarter of '18 were $9.4 million compared to $3.5 million, again for the second quarter of '17. The increase was mainly attributable to the increases in the number of voyage charters performed by certain of our vessels in the second quarter of '18 compared to the same period in '17. Total vessel operating expenses during the quarter amount to $25.4 million, compared to $22 million during the second quarter of 2017. The increase in operating expenses mainly reflects the increase in the number of vessels in our fleet in carrying operating expenses following the redelivery of three vessels previously employed under bareboat charters, and the acquisition of the Aframax Aristaios in January 2018. In addition, the partnership incurred increased operating expenses during the second quarter of '18 in connection with the special surveys of certain of our vessels, including the dry docking of the Suezmax Aias and the product tanker, Alexandros II. As a result of the aforementioned developments the Partnership's net income for the second quarter of '18 decreased to $4 million compared to $9.8 million for the second quarter of last year. At this point, I would like to highlight that we expect two of our vessels to undergo their scheduled dry docking in the third quarter, namely the product tanker size Aristotelis II and Aris II, which were redelivered to that partnership in May and July respectively following the expiry of the respected variable charters with International Seaways. There are no other scheduled dry dockings for this year. Turning to slide four, you can see the details of our operating surplus calculations that determine the distribution to our unit holders compared to the previous quarter. Operating surplus is a non-GAAP financial measure which is defined fully in our press release. We have generated approximately 24.9 million in cash from operations before accounting for the Class B units, distributions, and capital reserve. In line with the previous quarter, we allocated 13.2 million to the capital reserve. After adjusting for the reserve and the Class B unit distributions, the adjusted operating surplus amounted to 8.9 million which translates into 0.9 times common unit coverage. Looking ahead, the two imminent dry docks site previously and related to higher in combination with the depressed Suezmax market are expected to continue to keep our common unit distribution coverage close to 1 times for the next quarter. However, taking to account our remaining charters including the recent charter renewals of eight of our product tankers, our sound balance sheet with no material short-maturities and the fact that we do not expect any addition dry docks for the year other than for the aforementioned vessels, we expect our common unit distribution coverage to pick up in the subsequent quarters. On slide five, you can see the details of our balance sheet. As of the end of the second quarter, the partner's capital amounted to 916.9 million. Total debt increased by 3.1 million to 478.9 million compared to 475.8 million as of yearend 2017 due to the assumption of 20.3 million term loan under credit facility with Credit Agricole in connection with the acquisition of Aframax Aristaios and over 15.6 million term loan in relation to the acquisition of the eco MR Anikitos, partially offset by scheduled loan principal payments during the first-half of '18 in the amount of 26.4 million and a mandatory prepayment of 14.4 million made under the 2017 credit facility in connection to the sale of the product tanker Aristotelis. Total cash as of quarter end amounted to 51 million. Overall, our balance sheet as of the end of the quarter, remained strong with a net debt to capitalization of 30.7% and with partner's capital representing approximately 63% of our total assets. Moving to slide six, we are pleased that we concluded the acquisition of the product tanker Anikitos for a total consideration of 31.5 million in May. As previously discussed, the purchase of the Anikitos was funded through 15 million net proceeds received from the sale of the Aristotelis to an affiliated third party, which we completed in April. The remaining balance was financed by 0.9 million cash from the balance sheet and the assumption of 15.6 million term loan under credit facility with ING. The Anikitos is currently employed under 30 months' time charter to Petrobras. Turning to slide seven, we are delighted that we have secured time charter employment for eight of our vessels. In particular the product tankers Avax, Axios, and Assos have been fixed to Petrobras for two years at a gross daily rate of 13,850. The charter can be extended for an additional 11 months at the same rate in the charter's option. In addition as previously announced, we have an entered agreement with Petrobras to charter for additional vessels namely the product tankers Alexandros II, Aristotelis II, Aris II, and Ayrton II for two years at the gross daily rate of 14,700 with options for an additional 11 months at slightly higher rate. Certain of these new charters are subject to vetting inspections of the respective vessels and they are expected to commence in the third quarter of 2018. Finally, the handy product tanker Alkiviadis has been extended to Total for an additional 20 months at gross daily rate of 12,500. The charter extension will commence in August 2018. Overall, we are very pleased to have secured employment for eight of ships to reputable counterparties such as Total and Petrobras and have substantial increasing our cash flow visibility at attractive rates compared to the current market. This series pictures at a difficult turn in the tanker market highlight the excellent reputation and commercial expertise of the partnership and our manager and the ability to secure period employment at attractive rates when the right opportunity arises. Moving to slide eight and taking to account the new charters, the average remaining charter duration of our fleet is 4.6 years. We have six product tankers and four Suezmax tankers that we will look to re-charter until yearend. This includes the eco MR Amor which is trading in the spot market since its redelivery from a short-term charter with Cargill in the beginning of April. On the Suezmax side as aforementioned three of our ships trade currently the spot market namely Aias, Amor, and Amoureux, and Amore Mio II. On slide nine, we will review the product tanker market development for the second quarter of 18. MR product tanker spot rates experienced lower charter rates on most routes. The depressed crude tanker market weighed on product tanker earnings as certain crude tanker new builds delivering for CPR carried clean cargos at the maiden voyages from east to west thus exacerbating pressure on product tanker rates. On the right side, the market of the Atlantic registered strong volumes as according to the EIA gasoline importers into the U.S. Atlantic coast saw a marked increase quarter on quarter. Despite this improvement, MR rates on the benchmark TA trade retreated due to the tonnage oversupply and the negative sentiment in the wider product tanker market. Rates at the U.S. Gulf were similarly weak as the declining refinery utilization rates in the first part of the quarter resulted in reduced product export volumes from the region while lower imports into Mexico and Brazil and an increasing number of balance coming from the U.S. Atlantic coast combined to drive the market lower. In the period market, product tanker rates retreated in tandem with the spot market. On the supply side, the MR product tanker order book stands at around 8% as a percentage of the fleet close to record low levels. Simultaneously, slippage remains high as approximately 36% of the expected new builds were not delivered nor scheduled during the first-half of the year. In addition, CPR capacity for product tankers have shrunk over the last two years, thus limiting the amount of new vessels that can be ordered in the short to medium-term. In particular our MR product tanker ship building capacity has been hit the hardest, as the number of specialized Korean shipbuilders have either closed down, reduced capacity or are targeting larger, more profitable vessel types. Overall, analysts estimate the net fleet growth of product tankers were slow at 1.5% in 2018; the lowest since 2000. While on the demand side, analyst expects growth of 2.6%. Given the robust demand fundamentals on the back of the continuing refinery capacity expansion of Suez, the strong U.S. product exports, and the potential trade disruption from the 2020 cup, as well as the increasingly more favorable supply picture, we expect that the product tanker market will see a sustained recovery in the medium to long run. We are well-positioned to take advantage of this recovery as most of our re-chartering exposure lies over the coming quarters. Moving to slide 10, the Suezmax crude tanker market slow rates continue to hover at historically low levels. This performance reflected a number of factors including the buildup of a significant over supply of vessels following strong fleet growth in recent years and in particular in 2017. The demand side, China's crude oil imports declined for second month in a row in June to the lowest since December as shrinking margins and volatile oil prices led some deeper refineries to scale back purchases. June shipments came in at 8.4 million, down 9% from 9.2 million barrels in May and down from 8.8 million barrels per day in June last year. Mover over, demand for Suezmax was limited by the oil production cut agreement between in OPEC and non-OPEC oil producers which continue to be in place for most of the quarter. OPEC and their non-OPEC partners have since announced that they plan on producing at 100% compliance with a 30 million barrel production quarter implying an increase in crude production of 1 million barrels per day. Overall, we believe that if production increases are implemented, it could be an important first step to a more sustained crude tanker market recovery. Also on the positive side, U.S. crude oil exports continue growing during the quarter with exporters spiking to a record of 2.6 million barrels per day in early May. In the period market, we saw little demand for Suezmax tankers for long-term charters of 12 months or longer while period rates have retreated historically low levels. Despite the current weakness, fundamentals for crude oil demand remained firm. The IEA expects solid demand growth at 1.4 million barrels per day for both 2018 and 19. In addition, Chinese seaport crude imports are projected to see robust growth in 2018 of 6% despite the recent slowdown, while Indian seaborne imports are forecast to increase by the same rate. On top of this, U.S. crude oil exports are becoming increasingly significant to the crude oil tanker trade, as it was evidenced during the second quarter. Altogether, Suezmax deadweight demand is expected to grow by 3.5% in 2018. Looking at the supply side, the Suezmax tanker order book has decreased to 8.8% with no new vessels orders in the first-half of 2018. It is also important to highlight that while the hefty vessel deliveries over the last year have exerted pressure on rates, the number of Suezmax new builds that are expected to enter the market decreases to 17 and 19 for the remainder of 2018 and in 2019 respectively. In addition, we have seen 13 Suezmaxes sold in the demolition market year-to-date on top of the 13 ships scrapped in 2017. On aggregate, and turning to slide 11, demolition activity has significantly accelerated in 2018 compared to the already high demolition activity rates in 2017 when 11.1 million deadweight of tanker tonnage was scrapped. In particular, total tanker demolition amounted year-to-date to 15.8 million deadweight which represents the highest demolition level in record for this period of time. Turning to slide 12, I would like to conclude by saying that our common unit distribution is well underpinned by the accretive acquisitions that we have completed year-to-date, such as the Aristaios and the Aristotelis Anikitos swap, both with long-term time charters attached at attractive rates. Our strong balance sheet, with net debt to cap ratio at less then 31% as at the end of the quarter, and no near-term debt maturities. The solid common unit coverage which amounted to 1.1 times for the last four quarters after the capital reserve and the class B distributions. The 77% and 60% charter coverage for the remainder of 2018 and 2019 enhanced by the recent fixtures of eight of our product tankers at attractive rates. As well as the long-term positive tanker fundamentals, including the improving supply picture. And finally, our modern high-specification fleet and cost efficient manager who enjoys an excellent track record and is ready for pure business with oil majors, traders, operators, and liners worldwide. And with that, I'm happy to answer any questions you may have. Hello?

[Operator:]

Hello, this is the lead operator.

[Jerry Kalogiratos:]

Yes.

[Operator:]

Hello, Mr. Kalogiratos. Would you like me to commence the question-answer session?

[Jerry Kalogiratos:]

Yes, please.

[Operator:]

Thank you very much. Ladies and gentlemen, we will now begin the question-answer session. [Operator Instructions] Your first question comes from the line of Jon Chappell from Evercore. Please go ahead.

[Jon Chappell:]

Thank you. Good afternoon, Jerry.

[Jerry Kalogiratos:]

Hi, Jon.

[Jon Chappell:]

Jerry, first question is on the seven contracted MRs to Petrobras. And I'm just trying to understand the rate structure there. So the first three, obviously a little bit smaller, one to two years younger, but the rate is almost $1000-a-day less. And they were done first. They're also 1A ice class. So what I'm trying to figure out is were these contracts specific to these ships in the trading routes, or could we potentially read into that the four that were done later are indicating that there has been a little bit of a floor and maybe a big of a strengthening in the charter market for term MRs.

[Jerry Kalogiratos:]

Well, actually they have been put in the tender for some time, all of them, and actually the first the STX ships, they're the bigger ships, the 50,000 deadweight ships were the ones that were fixed first. The idea here is I think mostly that Petrobras like the bigger ships and is prepared to pay up for that. And of course, the ice 1A ships, up to a certain extent, have also worse consumptions compared to the non-ice ships. But of course age plays a role, cubic capacity. But in the end I think also the fact that the Assos, the Axios, and the other 47,000 deadweight ship were already trading there. Actually for two of our 47s this is direct continuation. For the Assos, it has been redelivered back to us this quarter, and she will go back into a new Petrobras time charter. So I wouldn't read too much about the market other than that you have an oil company like Petrobras that has quite a bit of appetite for period business for MRs. I think they have a preference for the larger ships as well as for operators like us whom they know and with whom they have done extensive business in the past.

[Jon Chappell:]

Okay, that's helpful. And then, obviously, you've made it clear that, at least at this point in the cycle, spot market is where you're going to most likely have the Suezmaxes. Assuming contracts like the Petrobras ones don't come along, do you still plan on using kind of shorter-term employment on the MRs, or is potential that some of the MRs that are rolling, two may enter the spot market just given the weakness in that market today?

[Jerry Kalogiratos:]

So we have about six MRs coming of charter until the end of the year -- five or six depending on when the last one will be redelivered, and another six to seven next year. We do believe that we are seeing the worst in terms of the tanker market, actually both crude and product. So we wouldn't rush to fix long-term charters for the remaining vessels that come up. Now, having said that, the, for example, the Petrobras opportunity arose, we took advantage of that. We're not going to try to time the market to absolute perfection as we are aware that we want to be providing cash flow visibility to people for the largest part of our fleet. But I think we won't rush into fixing today, unless of course a great opportunity comes up. And it's dissimilar for the Suezmaxes. Again, there is very little liquidity on the Suezmax period side. And we do believe that the numbers currently are quite low. And if higher rates are on offer, typically they come with a lot of optionality for the charters, which will cap upside. So we will be a little opportunistic in fixing. But to answer your question, I think it's going to be shorter-term than longer-term at this point.

[Jon Chappell:]

Okay. And then finally, balance sheet puts you in a good position. Obviously second quarter, there are some dry docks that made the coverage ratio kind of oscillate right around one times, and it sounds like it'll be the same case in the third quarter. So it seems like maybe spot market rates for Suezmaxes in dry docking schedule is going to dictate whether in the 0.9 to 1.1 coverage ratio. So in that vein, what's the dry docking schedule for 2019?

[Jerry Kalogiratos:]

So, that's actually a great question. The answer is that for 2019 schedule dry docks, there are only two. So you have the Ayrton II, one of our product tankers, and the Amore Mio II, one of our Suezmaxes, coming up for dry dock theoretically in the second quarter of 2019. But depending on our discussions with manufacturers and charterers with regard to scrubber retrofitting on certain of our vessels, there is a good chance that we might bring certain of the scheduled dry docks of 2020 into 2019 as we will be trying to maximize the benefit of installing a scrubber, which as you would expect it will be higher the front-end rather than the later end of the next three-four years. So the answer is that under class requirement it's only two ships, but I think depending on what happens on our plans to fit scrubbers this might change going forward.

[Jon Chappell:]

I mean, I'd imagine it to move pretty imminently if you make that scrubber decision. Should we expect an update on that by the time you report the third quarter?

[Jerry Kalogiratos:]

Yes. We are already in advanced discussions with both charterers as wells the manufacturers on scrubber retrofits. Here in our case for certain of our vessels that we have charters that go well beyond 2020. Theoretically, again charters will be asked to pick up the potentially inflated bankers' bill of the regulatory impact. However, we are working with some of our charters for mutually profitable solutions, potentially including extensions of the employment that there is in place or increase the rates in certain cases. But we are also in fairly advanced stages of ordering scrubbers for some of our vessels that don't have long-term employment such as the more modern Suezmaxes as well as some of our eco MR tankers. So yes, I think you should expect, at the latest, an update by the next quarter earnings call.

[Operator:]

Thank you. Your next question comes from the line of Randy Giveans from Jefferies. Please ask your question.

[Randy Giveans:]

Hey Jerry, how's it going?

[Jerry Kalogiratos:]

Hi, Randy. How are you?

[Randy Giveans:]

Great. So with all the dry docking in the first-half of 2018, the coverage ratios fell to one I guess last quarter, and 0.9 this quarter. So just going forward, do you have a distribution coverage target? I know obviously you're expecting it to pick up 1.2 or maybe even 1.3, but just kind of medium to longer-term just kind of looking at distribution coverage targets?

[Jerry Kalogiratos:]

Sure. So this quarter we have reserved $13.2 million in the form of capital reserve which equals the amount repaid during the quarter under the $460 million credit facility. And taking into account the above, that we'll continue to have a capital reserve in place, and the number of vessels that come up for charter renewal this year, we will seek to continue to build distribution coverage closer to 1.1 times. And that's without a significant movement in terms of day rates. And I think as we are building that coverage together with putting up more of our ships under long-term contracts as soon as we see more attractive rates we will continue to hold back that cash in order to grow our asset base with a goal of increasing our long-term distributable cash flow. As we see MLP and shipping markets recover, and our distribution coverage build up from where it is now, we will of course consider increasing common unit distribution and providing a long-term common unit distribution coverage target from there.

[Randy Giveans:]

Okay. Now we had the ATM no proceed from issuance of new units so far this year. So what's kind of the status of the ATM and in terms of outstanding availability? And then should we expect any new units to be issued the back half of this year?

[Jerry Kalogiratos:]

Right. So our ATM filing is for up to $50 million. And for three years, and commenced in September, 2016. And since the ATM was put in place on September 12, 2016 we issued approximately 6.6 million units, brining in about $22.4 million in net proceeds. This translates into less than 3% of the volume traded in the stocks since inception of ATM. Now, as you say, we have not sold any units under the ATM since early October, 2017. We do see the unit price being quite depressed. And we don't necessarily have a use for the ATM at this point. We will again consider restarting the ATM if we thin that we can put an accretive transaction in place by complimenting potentially internally generated cash flow with incremental cash from the ATM. But that's not on the cards, at least in the short-term.

[Randy Giveans:]

One more quick strategy question, so I hear there's been some news or recent LNG orders by Capital Maritime. Are those dropdown potential in the coming years or basically any plans for diversification to different sectors other than just crude and product on the next two years for Capital Product Partners?

[Jerry Kalogiratos:]

Well, we do own a substantial amount of container tonnage. And when you look at what the sponsor owns today there is, again, there are containers with long-term charters, there are crude tankers with long-term charters in place. So they are fully diversified assets there. To your question with regard to the LNG and affiliate of our sponsored has ordered a number of LNG carriers. And what I also think is a very exciting turn in the LNG market. Of course, these vessels are due for delivery in 2020 and 2021, so it is a bit early to discuss concrete plans. However what I can tell you is that if these assets secure long-term contracts they could be ideal dropdown candidates for CPLP, and quite transformative for the Partnership. So it's still early days, but it's definitely assets that we would like at one day to see in CPLP if possible.

[Randy Giveans:]

Sure. I can imagine so. Well, that's it for me. Thanks again, Jerry.

[Jerry Kalogiratos:]

Thank you, Randy.

[Operator:]

Thank you. Your next question comes from the line of Ben Nolan from Stifel. Please go ahead.

[Ben Nolan:]

Yes, thanks. Hi, Jerry. Since you brought it up, I thought I'd dig in a little bit more on the scrubber idea. Obviously you mentioned potentially looking at installing them on some of the vessels that have longer-term contracts. I assume those would be the larger container ships or maybe the Capesize vessel as well as the more modern Suezmaxes, maybe even some of the product tankers. So it seems like just about everything is on the table in terms of what you're looking at, maybe other than a few of the much older assets. Is that fair? I mean is that a good way to look at it?

[Jerry Kalogiratos:]

That is correct. I think for vessels like the older MR, for example, the very old Suezmax that we have are not necessarily in at the top of the list. But in terms of the more modern assets, Suezmaxes, product tankers, containers, and the Cape, yes they are there. On the containers, it's something that we're looking at very, very closely. But there, as I said, the discussion is one that we're having with charters, and they are different, if you want, tactics. As I say, it is a different discussion that we're having with charters that is there until 2025, another one with a charter that is there until 2020. But overall, we do believe that the scrubber retrofit strategy is going to be a good one, where effectively we can deploy, if you want, additional equity in a profitable manner, but also importantly for a company, like CPLP, able to secure longer-term contracts on the back of the retrofitting.

[Ben Nolan:]

Right. And I, at least personally, am in the camp; I think it makes an awful lot of sense. Although it brings up another question, so looking over the scope of your fleet, especially if the charterers are maybe not necessarily directly paying for them. Maybe there's a contract extension of something. It could potentially be quite a lot of money. First of all, do you have any ballpark number as to what that might be? And then secondly, how would you consider going about paying or financing those?

[Jerry Kalogiratos:]

So I think I would like to get back to you on the total investment once we have concluded what we want to do. But in terms of the financing of that, there are multiple sources of financing, be it DCA or unsecured financing or even increased financing on the back of the first mortgage credit facilities that we have as this is a credit enhancing transaction. And I think typically you'll find that 60% to 75% is on the table for financing this type of installation. So in reality the actual equity component is not great. And the returns can be quite attractive.

[Ben Nolan:]

Okay. No, that's helpful color. And then lastly from me, just sort of switching gears, the time charters that you did announce on the MRs nice addition to the backlog. They did come with options on the backend as you were mentioning earlier where the charters can add an extra year effectively flat rates. I am just curious as to the state of the market is basically everything that is being tendered or sort of put out there in market at the moment does it come with those options? I mean is that just sort of the world we live in at the moment?

[Jerry Kalogiratos:]

Yes, there is a lot of that. I think people if they are prepared to pay up, there will want also some optionality with that. And the crude tanker side, for example, the Suezmax side that's even more pronounced. Here Petrobras that was part of the tender. The idea was also that we have another 12 products tankers coming off charter over the next 24 months. So there is a plenty of exposure. And while we recognize that this might be the bottom of the market, we didn't want to have everything up there trading spot. We are not changing the business model. So, I think it was a fair trade off. These are good rates for many of our vessels which is direct continuation. That means zero idle time and/or balance lag. It's in certain case especially for the bigger ships, it's potentially a $1000 - $1500 above what other charters were prepared to pay. So, yes, we are giving some optionality, but it should still -- we should still be open at we perceive to potentially be a very interesting time in 2020 - 2021 for old tankers alike.

[Ben Nolan:]

All right, great. I appreciate your good answers.

[Jerry Kalogiratos:]

Thank you, Ben.

[Operator:]

Thank you. Your next question comes from line of Amit Mehrotra from Deutsche Bank. Please go ahead.

[Chris Snyder:]

Hey, good morning. This is Chris Snyder on for Amit.

[Jerry Kalogiratos:]

Hi, Chris.

[Chris Snyder:]

So my first question is around the container ship fleet and kind of how you view these assets going forward. Clearly they are very strong cash flow generating assets for you guys. That stable cash flow can become more valuable here as it sounds like some of them have been moved into shorter term contracts. I mean but on the other side we have seen pretty strong prices paid for container ships and contracts attached over the last few months. And your fleet in general is more tanker dominant. So just kind of how do you view those assets or are there core position to the fleet going forward?

[Jerry Kalogiratos:]

Yes, I would very much say so. Containers, one or the other reason that we diversified into containers was that maybe they are a little better suited for our business model given the longer term nature of contracts. As you say, their cash flow allows us to work through the volatility of the tanker market where you have shorter term contracts availability but potentially also a higher rates when the upside comes. So, yes, I would say that we are a little let's say asset agnostic. But we do like cash flow visibility, and containers I think take that box.

[Chris Snyder:]

Okay, yes, makes sense. And then I think you guys kind of said you are even considering putting scrubbers on these vessels clearly there on long-term fix rate contracts. So I would assume that the moves higher to reflect the investment. If you can maybe provide any more color on that like is there a certain like return threshold that you guys would target obviously in conversation with the charters? Any color on that would be appreciated.

[Jerry Kalogiratos:]

These are all ongoing discussion. Hopefully, we can provide more color on that next quarter if not early than that. But let me -- let us get into it and at when we have reached more definite decisions. But as I said earlier on, it's a different discussion with the charter whose charter comes off 2020 and another one charter that whose charters expire in 2025. So, different strategies there, and different discussions. Hopefully, everything will be in place when we next speak.

[Chris Snyder:]

Okay. Fair enough. And then just second question around MR chartering activity, I think you guys said in your release that time charter activity was relatively robust during the second quarter. But then it also kind of sounds like the vessels that are coming off contract here in the back-half will likely be shorter term or potentially with spot market. Should we read this that there is not really demand in the market right now? Or just that the terms are little onerous whether it's certain concessions you guys have to give or options you have to provide.

[Jerry Kalogiratos:]

I think it's a little bit of both. It's mostly the later that the product tanker market on the short-term let's say 6 to 12 months tends to be quite liquid. And charters they lag this kind of levels. I think people see that there is upside from here, but when the spot is market is as depressed as it today and say a charter is looking into earnings of [technical difficulty] or less for the next two - three months. And he is willing to pay 13.5 that will come potentially with some optionality attached that you might not willing to give. So we fixed a number of ships to make sure there is cash flow visibility and what are good rates compared to market. But we don't necessarily want to fix out everything at similar levels and cap the upside. We don't need to because we have the cash flow visibility from other assets that is at very reasonable levels. We have no short-term debt maturities. So we are in a good position to weather this out.

[Chris Snyder:]

Okay, yes, makes sense. That's it from me guys. I appreciate the time.

[Jerry Kalogiratos:]

Thank you, Chris.

[Operator:]

Thank you. Your next question comes from line of Mike Gyure from Janney. Please go ahead.

[Mike Gyure:]

Hey Jerry. Can we talk a little bit on the operating cost side? You talked a little bit about the dry docking sort of expenses and sort of that weighing on the operating cost? Can you talk about I guess some of the other drivers that's impacting the sort of the operating cost line and what can do there to maybe minimize some of those cost going forward?

[Jerry Kalogiratos:]

So a big component of the change in the operating expense is is the fact that we have more vessels incurring operating expenses compared to, for example, last year. And that alone has a very big impact. Last year, we had three of our vessels from bareboat charters that by now all of them have been delivered to us. And they are on time charter basis or spot which means that we incur the operating expenses. So a big component is that. Then another part is whatever we expense from the dry docking. And we had two vessels dry dock this quarter. One of them is Suezmax. And that tends to be the larger vessel with -- and expensive dry dock. And the MR Alexandros II also dry docking. But also I think this quarter as well as a bit of last quarter, one thing that tends to be underestimated I think is the redelivery of bareboat vessels back to their owner. So taking delivery of vessels that were previously on bareboat means that typically you will incur of higher days as there is -- as the redelivery happens, there is the replenishing of the vessel with supplies, spares, lubricants and what not. And that's typically because the bareboat charter will deliver the vessel with minimum quantities and with the exception of lubricants all the rest is expense. So we don't have inventories of spares part. So you see a bit of a spike in operating expenses when this happens. And finally, of course some of our vessels are getting older and there is a natural inflation to that side of the business.

[Mike Gyure:]

Great. And then, maybe just bigger picture on some of the talk up tariffs and what's going on I guess on in the various markets, are you seeing the impact of tariffs more so on the customer willingness to take long-terms or short-terms on charter rates, or I guess what's the view there of really kind of the impact of tariffs and sort of the customer negotiations that are going on these days?

[Jerry Kalogiratos:]

On the tanker side of the business, I don't think this is much of a topic right now, I don't think it is for the forefront of discussions. It might become later on, but it's not to aware at this point. On the container side, again I'm talking to liners, it's still I think people are more perplexed as to what they should make of it. And I think it does change the psychology liners that want to put newer strings in place, they might be more reluctant to do so, and throwing us so forth. But it's still early to tell. On the container side, I think there is a switch in psychology, but not in any material way. I mean rates continue to be quite good actually, and there is demand. But people I think want to see what happens next before they take final decisions.

[Mike Gyure:]

Great. Thanks, Jerry.

[Jerry Kalogiratos:]

Thanks, Mike.

[Operator:]

We have no further questions at this time. Please continue.

[Jerry Kalogiratos:]

Thank you all for joining us today. Have a good day.

[Operator:]

Ladies and gentlemen, this does conclude our conference call for today. Thank you for participating. You may all disconnect.