Capital Product Partners L.P.
Q2 2013 Earnings Call Transcript

Published: 31 Jul 2013

[Operator:]

Thank you for standing by and welcome to the Capital Product Partners’ Second quarter 2013 Financial Results Conference Call. We have Mr. Ioannis Lazaridis, Chief Executive Officer and Chief Financial Officer of the Partnership. 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). And I must advise you this conference is being recorded today on Wednesday, July 31, 2013. The statements in today’s conference call that are not historical facts, including our expectations regarding the developments in the markets, our expected charter coverage ratio of 2013 and 2014, and expectations regarding our quarterly distribution may be forward-looking statements, such as 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 the conference over to your speaker today, Mr. Lazaridis. Please go ahead, sir.

[Ioannis Lazaridis:]

Thank you. And thank you all for joining us today. As a reminder, we will be referring to the supporting slides available on our website as we go through today’s presentation. Starting with slide one, I’m going to make some comparison on today’s call between the second quarter of 2013 and the second quarter of 2012, as this is the most meaningful analogy in our business. On July 22, 2013, our Board of Directors declared a cash distribution of $0.2325 per common unit for the second quarter of 2013, in line with the management’s annual distribution guidance. The second quarter common unit cash distribution will be paid on August 15, 2013 to unit holders of record on August 7. The partnership’s net income for the quarter was $39.3 million including a $32 million gain related to the sale to Deutsche Bank of the partnership’s claims against Overseas Shipholding Group and certain of OSG’s subsidiaries. The claims relate to the bankruptcy of OSG and the rejection by OSG of three long term bareboat charters of the Partnership’s product tanker vessels. The partnership operating surplus for the quarter amounted to $56.6 million or $19.3 million adjusted for the payment of distributions to the class B unit holders and excluding the $32 million in proceeds related to the sale of OSG claim. Common unit governance for the quarter excluding the gain from the sale of the claim stood at 1.2 times. We extended the employment of the M/T Avax and M/T Axios to our sponsor, Capital Maritime for an additional 12 months at an increased rate of $14,750 per day and fixed the M/T Akeraios also to our sponsor at an increased rate of $14,950 per day for 18 months. All transactions were previously earning $14,000 per day. As of the end of the second quarter, the average remaining charter duration of our charters stood at 6.9 years with charter coverage of 90% for the remainder of 2013. Turning to slide two. Revenues for the second quarter were $41.8 million. Total expenses for the second quarter were $30.8 million compared to $25.7 million in the second quarter of ‘12 due to higher operating expenses incurred as a result of the high number of vessels in our fleets. Vessel operating expenses for the second quarter of ‘13 which included the cost of the dry-docking of Alexandros II at $0.8 million amounted to $13.4 million compared to $11.2 million in the second quarter of 2012. The total expenses for the second quarter also include $12.8 million in depreciation and amortization compared to $12 million in the second quarter of ‘12. General and administrative expenses for the quarter amounted to $3.4 million, which include a $1.6 million non-cash charge related to the Partnership’s Omnibus Incentive Compensation Plans and certain legal expenses related to the OSG claim. Excluding the gain of $32 million from the sale of the partnership’s claim against OSG, total other expense net for the second quarter of ‘13 amounted to $3.6 million compared to $8.8 million for second quarter of ‘12. The decrease in the interest expense and final scores for the second quarter of ‘13 reflects the expiration of all interest rates swaps and the reduction of the partnership’s total debt when compared to the second quarter of ‘12. After taking into account the $5.3 million preferred interest in net income attributable to the unit holders of the outstanding class B units issued during the second quarter of ‘12 and the first quarter of ‘13, the results for the second quarter was $0.48 net income per limited partnership unit, which is $0.20 higher as the $0.28 net income per unit of the previous quarter ended March 31, 2013 and $0.49 higher than the $0.01 net loss per unit in the second quarter of ‘12. Moving on to slide three, you can see the details of our operating surplus calculations that determine the distributions 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. As mentioned adding non-cash items back to net income would have generated approximately $56.6 million in cash from operations before accounting for the class B prefer unit distribution. After adjusting for the class B distribution, the adjusted operating surplus amounted to $51.4 million or excluding the gain from the sale of the OSG claim to $19.3 million, which translates into approximately 1.2 times common unit coverage as mentioned earlier. On slide four, you can see the details of our balance sheet. As of June 30, 2013, Partner’s capital amounted to $672.4 million, which is $98.6 million higher than the Partner’s capital as of December 31, 2012 which amounted to $573.8 million. This increase primarily reflects the issuance of 9.1 billion class B units which raised gross proceeds of approximately $75 million and the net income for the six months period ended June 30. As of the end of the second quarter, the Partnership’s total debt has increased by $52.6 million to $511 million compared to total debt of $458.4 million as of December 31, 2012, as a result of the $54 million draw down of the partnership credit facilities during the first quarter of 2013 in connection with the acquisition of the 5,000 TEU container vessels and their respective quarterly loan amortization payments of $1.4 million in the second quarter of 2013. Overall our balance sheet remains strong with the net debt to capitalization of 38.6% and with Partner’s capital representing 55% of our balance sheet. Turning to slide five you can see our fleet list. The Partnerships average fleet age in times of 5.9 years and comprises of 18 product tankers, four Suezmax crude tankers, four post panamax container vessels and one capesize bulk carrier. The young age the higher specifications of our fleet as well as the all major qualifications for long term employment of our sponsor and with the extensive network and the relationships with charters and liners, are distinct competitive advantages for a partnership especially in today’s markets with increased focus on safety, security, efficiency and financial strength. Turning to slide six, we are pleased to have extended the employment of three of our product tankers to our sponsor at increased charter rates reflecting the firming product tanker market. In particular, we have extended the employment of Avax and Axios for 12 months at a day rate of $14,750 with added delivery in April and May 2014 respectively. The new charters represent an increase of $750 per day when compared to the previous employment. In addition the M/T Akeraios has been fixed with Capital Maritime for 18 months with earliest delivery in December 2014 at $14,950 per day and was previously fixed with Capital Maritime at the rate of 14,000. Turning to slide seven and taking into account the extended employment of Axios, Avax and Akeraios to Capital Maritime at increased rates, the average remaining charter duration is 6.9 years. And additional five vessels will see the charters expired during the remaining months of 2013. All of which being product tankers that are fixed at an average rate of $13,880. The fixtures in the product tanker market recently have been at higher levels on this average and we expect to take advantage of the attractive fundamentals of the product tanker market. The increased activity in terms of period fixtures as well as the improving period market to secure favorable employment for these vessels. Turning to slide eight, I would like to remind you that on November 14, 2012 OSG and certain of its subsidiaries made the voluntary filing for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware. The Partnership has had three medium range product tankers all built in 2008, employed on long term bareboat charter to subsidiaries of OSG. After discussions with OSG, the partnership agreed to enter into new charters with OSG on substantially the same terms as the prior charters. But at the bareboat rate of $6,250 per day. The new charters were approved by the $bankruptcy Court on March 21, 2013 and was effective as of March 1, 2013. On the same date, the bankruptcy court also rejected the previous charters as of March 1, 2013. Rejection of its considers a material breach of such charter. On May 24, the partnership filed claims for a total of $54.1 million against each of the charterers and the respective guarantors for the damages resulting from the rejection of each of the previous charters including other things for the difference between the reduced amount of the new charters and the amount due under each of the rejected charters. The Partnership has since transferred to Deutsche Bank Securities all of its rights, titles, interest, claims and causes of action in and to arising under or in connection with the claims pursuant to three separate assignments of claim agreements dated as of June 24, 2013 and effective as of June 26, 2013. The price at which Deutsche Bank purchased the claims was $72.05 to the dollar. The total proceeds to be received by the partnership from the sale of claims to Deutsche Bank a substantial part for $32 million of which has already been received, is dependent on the actual claim amount allowed by the bankruptcy court. The partnership maybe required to refund a portion of the purchase price, up to a maximum of $9 million or may receive an additional payment from Deutsche Bank. In connection with the assignment agreements on July 2, 2013 Deutsche Bank filed with the Bankruptcy Court six separate evidences of transfer of claim, each pertaining to the partnership’s vessel owning subsidiaries claims against each charterer party to the original charter agreement and each respective guarantor thereof. We’re very pleased to have successfully assigned our claim against OSG to Deutsche bank and we believe that the funds received in connection with the assignment further enhance the growth prospects of the partnership. Turning to slide nine, we review the product tanker market developments in the second quarter of 2013. Spot earnings for the second quarter continued their positive momentum as average earnings in the second quarter of ‘13 reached their highest level for a second quarter since the second quarter of 2008. Demand for product tankers were stronger in the Atlantic market at the beginning of the quarter while in the second half of the quarter and as the U.S. oil product rates reached new highs, spot rates were more supported by exports out of the U.S. Gulf. The product tanker period market remained active with an estimated 58 fixtures in the second quarter of ‘13 as charterers’ appetite for period employment was boosted by improving stop market. Analyst expectations regarding overall demand for product tankers is estimated up 4.6% for 2013 as the structural changes in the refinery industry and the increased exports from the U.S. Gulf are expected to result in increased long haul product movements and increased ton miles. On the supplier side, net fleet growth for product tankers for 2013 is forecasted to be in the region of 3.7%. The product tanker order book continues to experience substantial slippage year-to-date as approximately 51% of the expected MR and handy sized tanker new buildings were not delivered on schedule. In addition, the product tanker order book seems to have stabilized with most product tanker [slippage] capacity until the end of 2015 being accounted for. We believe that the current low product tanker order book at 12.7% of the total fleet in combination with the demand fundamentals and the order book slippage should positively affect spot and period charter rates going forward. Turning to slide 10. And the product tanker market prospects, analysts expect that product tanker market fundamentals saw a benefit from the shale oil and gas production boom in the States. U.S. oil production is expected to continue to increase from 9.1 million barrels per day in ‘12 to 11.9 million barrels per day in 2018 according to the IEA. As a result, U.S. based refiners have now access to cheap natural gas and discounted crude which has dramatically increased the competitiveness and have helped turn the U.S. along the world’s top importer of refined products into one of its largest net exporters of oil product. Year-to-date U.S. oil product exports are estimated by the IEA at 2.9 million barrels per day compared to 1.9 million in 2010 and only 0.9 million barrels per day in ‘91. Currently we see increased oil product exports of middle (inaudible) as well as gasoline to Latin America, West Africa and Europe with Latin America expected to be the major outlet for U.S. gasoline exports. Overall this trend is highly beneficial for the product tanker market, has a traditional backhaul in the transatlantic trade is becoming increasingly important and drives the product market utilization higher. This is especially advantageous for medium range tankers as the bulk of U.S. exports are listed by MR product tankers as you can see from the bottom graph of the slide. Turning to slide 11, refinery capacity dislocation continues to positively affect the product tanker market. Global refinery capacity has expanded by 20% between 2001 and 2012 with 60% of that expansion taking place is of Suez. At the same time, refinery capacity in Europe and the former Soviet Union has declined by 1.2 million barrels per day. This trend has accelerated of late with 0.8 million barrels per day of refining capacity in Europe being removed between 2012 and 2013. At the same time, refining capacity rates is expected to continue to expand over the next five years in China and other Asian countries where the planned new refinery capacity amounts to 5.6 million per day and the Middle East where an additional 2.1 million barrels per day will be coming online. And a number of the new refineries are expected to focus on oil products to the OSG as the capacity process start growth and more efficient cracking will allow for higher margins when compared to the older less profitable OCG counterpart. As a result, we expect that the lopsided refinery expansion in Asia and developed economies will lead to longer trading distances and supply chains which in turn will continue to positively affect on mild demand for product tankers as larger oil product volumes will have to be transported over longer distances. Turning to slide 12, we discussed the Suezmax tanker market which is the only crude market exposure we have. The Suezmax spot market remains at seasonally low levels as increased vessel supply continue to put downward pressure on rate. The IEA forecast for global demand growth for 2013 for oil is little changed at 0.93 million barrels per day to 90.8 million barrels per day following unseasonably cold weather in the first and second quarter of ‘13. Oil demand in 2014 is forecasted to grow by 1.2 million barrels per day to 92 million, according to the IEA momentum is forecasted to build in 2014 as the economic backdrop that underpins demand is stopped to improve with global GDP growth rising from 3.3% in ‘13 to 4% in ‘14. Suezmax tanker deadweight demand is expected to grow by 3.2% for the full year on the back of increasing market share for Suezmaxes on traditional aframaxes and the European crude sourcing shift towards West Africa. On the supply side, analyst expect 2013 to be the last year of rapid net slip growth which is estimated at 8.5% for the year. The total Suezmax order book now stands at 12%, the lowest in percentage terms since 2001. Slippage continues to affect total supply as approximately 27% of the expected Suezmax new buildings year-to-date were not delivered on schedule. Industry analyst expect the slippage and cancellation rates to increase going forward due to the historically weak spot market, the soft shipping finance environment and downward pressure on asset values. Finally given the market backdrop very few new Suezmax orders have been placed over the last 12 months, which should help improve the demand supply picture going forward. Turning to the final slide I would like to highlight the improved common unit coverage which amounted to 1.2 times for the second quarter of 2013 compared to 1.1 times in the previous quarter as a result of the acquisition of the two 5,000 TEU container vessels towards the end of the previous quarter and improving product tanker market. We believe that common unit distribution coverage is well support going ahead. As the partnership has good revenue visibility as we have secured contracts with remaining duration of 6.9 years following the recent container acquisitions. The product tanker market fundamental remain positive as the dislocation of refinery capacity and increased U.S. oil exports positively affect product tanker demand going forward. An improving overall tanker market and the partnership profit sharing arrangements that can potentially generate increased cash flow. The partnership’s shorter term and staggered employment strategy for our product tankers positions us well to capture improving product tanker period rate as five product tanker charterers expire in the remainder of ‘13 and more in 2014. The partnership may potentially grow its unit coverage through accretive acquisitions in the product and container market. And finally the partnership boosts of a strong balance and liquidity and it has no new building commitments. Thus I would like to reiterate that Partnership’s commitments to the $0.93 per unit annual distribution as well as the positive fundamentals of the product tanker market going forward which further enhance our financial flexibility to in order to pursue growth opportunity and further force a pathway to distribution growth. And with that, I am happy to answer any questions you may have. Operator?

[Operator:]

Thank you sir. (Operator Instructions). And your first question today comes from the line of Jon Chappell of Evercore Partners. Please go ahead.

[Jonathan Chappell:]

Thank you. Good afternoon Ioannis.

[Ioannis Lazaridis:]

Hi Jon.

[Jonathan Chappell:]

So you mentioned a couple of times the five vessels that are expiring in 2013. I just had a couple of questions about those. First of all, four of them I’ve noticed are unchartered to Capital Maritime, so as you think about the reemployments of the ships have you thought about potentially diversifying the counter parties associated with those vessels?

[Ioannis Lazaridis:]

As we have mentioned before that we look at every charter on its merits and in the past what has been on offer from Capital Maritime the Board and the cost committee found it’s more attractive for the Partnership. So we will judge its charter opportunity based on its individual merits.

[Jonathan Chappell:]

Okay. And then regarding the duration obviously the sentiment in the product tanker market has been improving, first half much stronger than expected. Are there longer duration contracts available for those vessels maybe three years in duration or would you kind of expect one year type duration, not like the one you just rechartered recently?

[Ioannis Lazaridis:]

Look, on the one hand we have certainly seen in the market more of a tight from operators as well as oil majors to fix vessels for longer duration. On the other hand, though we still believe that the market is historically at the low level and we believe this is the fundamentals of the market, so our charter rate to date has been based on the rates that we see to stay on the shorter end of the period market.

[Jonathan Chappell:]

And then you know you obviously reiterated your commitment to the distribution and then mentioned potential for growth, clearly a lot of that growth could come from the upside in the product tanker market. But as you think about fleet growth initiatives, obviously you diversified in the containers recently. How is that going and when you think about your fleets additions, do you think that you would continue kind of diversify the container business or given what you just talked about the fundamentals of the product tankers, would you try to re-up on the product tanker side.

[Ioannis Lazaridis:]

I think if you look at the last slide as I mentioned, we have said that there is many different factors that influence long term distribution growth and one of them is acquisitions. And a lot has to do with where we fix and for how long our product tanker vessels open up in the coming quarters. You know and we have said in the past that we are committed in growing the Partnership through acquisitions and we look for acquisitions that are accretive and enhance the distributable cash flow. We evaluate every acquisition. We depend on the conference committee approval and we also depend on the financing that is available. So each acquisition will be judged on its merits and we haven’t made any decisions of what to do next.

[Jonathan Chappell:]

Okay. And then final one, and then I will turn it over. If you were to go down the product tanker out there has clearly been a lot of noise mainly about the benefit of the newer vessels. Would you think that you know CPLP would look at new build ships in order to maybe gains on fuel efficiency if you were talking about or given the fact that the shipyards are basically booked into 2016, do you think second hand assets at this part of the cycle make more sense?

[Ioannis Lazaridis:]

Look, certainly technology has developed and newer vessels perform better than the older vessels, and certainly the eco type characteristics of these vessels are attractive. Capital Maritime has been active a lot and the Partnership itself doesn’t have any new building commitments. We will see a very good market for second hand vessels as well, which perform well. Our vessels are very good consumption characteristics, speed consumption is very attractive, so we believe that looking ahead we’ll certainly look into the newer technologies, but at the same time when it comes to acquisitions overall I think that to date we have been very active in other segments and certainly what we will be looking is for acquisitions that add to our distributions above everything else.

[Jonathan Chappell:]

Okay, I Understood. Thank you, Ioannis.

[Ioannis Lazaridis:]

Thank you.

[Operator:]

Thank you. Your next question comes from the line of Michael Webber from Wells Fargo. Please go ahead.

[Michael Webber:]

Hey, Good morning Ioannis. How are you?

[Ioannis Lazaridis:]

I am good, yourself?

[Michael Webber:]

I am good, I am good. I just wanted to follow up on Jon’s question around potential growth and you know it performed very well year-to-date almost kind of without a large kind of gross rate attached to it and see whether it’s kind of the direction you are heading and you guys are pretty patient in terms of letting that kind of develop. But when you kind of look out over the landscape and generally you’ve got the two containers ships two and three container ships that could be dropped from the parent and you are looking to charter more get more coverage on the product tanker side. Now what sort of timeframe do you kind of view that you know build out in terms of the visible growth ramp, in terms of the ability to really kind of come out say in three or six or nine months and then kind of put out a potential growth scenario for the units that could drive a lower yield kind of even be on rate that you are at right now.

[Ioannis Lazaridis:]

Look, certainly the Partnership has been active in growing the size of its fleet over the past two years from the acquisition accrued to the entry to the containers. So as I mentioned earlier to Jon, we tried to describe in the last slide which are the important factors in determining distribution coverage and growth in the future. And I think second to that, as I mentioned, each acquisition that we will be looking at we will be looking at it on its merits no matter what segment we are talking about and I think that the opportunities ahead there are many but we haven’t made any decisions yet.

[Michael Webber:]

Yeah, that’s helpful. If you can kind of talk of I guess I have read about the product tanker space and you already talked about eco ships to begin with and we mentioned that the order book capacity being more or less absorbed in the Korean yards. Can you maybe talk a little bit about some of the capacity that may or may not kind of Korean affiliated Chinese yards and whether you know that scenario where you guys potentially look to grow either by CPLP or the parent?

[Ioannis Lazaridis:]

Let me pass across to Jerry to give you a little bit of input on the ship yards first.

[Jerry Kalogiratos:]

Hi, Mike.

[Michael Webber:]

Hi Jerry.

[Jerry Kalogiratos:]

Product tanker shipyard capacity is more or less accounted for when you look at 2015 you have a capital of top tier shipyards and then another couple of medium tier shipyards in Korea. And you have now the STX capacity both in China and South Korea being removed at least for the time being as that shipyard does not have the ability to issue refund guarantees or take more orders.

[Michael Webber:]

All right.

[Jerry Kalogiratos:]

And I think a number of key players will also avoid doing business with STX at least for a while until there is more visibility. So that’s a big advantage because that must have accounted for anywhere between 30 to 50 MRs capacity in the year. Now with regard to China that you mentioned there is only one shipyard that has been producing consistently acceptable product tankers that is Guangzhou, GSI. The thing is that we have looked at that shipyard as Capital Maritime and it is a shipyard that whose specifications are not necessarily up to par. So we wouldn’t expect that a lot of new capacity will be coming from China.

[Michael Webber:]

Got it, that’s helpful. And any, I guess a little bit more color around what you guys are looking at the parent level and potentially be added to that dropdown five point that’s already in place?

[Ioannis Lazaridis:]

Look as I said, Ioannis here, we as a parent we have always tried to build at top spec yards, top spec vessels and we are very selective. But separate to that we are very excited about what’s going on in the product tanker market today with existing vessels because the vast majority of the vessels are vessels built more recently 2006, ‘07, ‘08, ‘09 and these vessels are very good characteristics. We have seen demand for these vessels going up. The U.S. export boom is helping towards that. You can see as I mentioned to you on the U.S. export slide that the bulk of the volume exported from the U.S. of refined products is with MRs. So mentally we are well positioned for that as our charterers effectively employ a number of our vessels in that area. I think that has helped a lot in terms of what we have seen in the market recently both in terms of number of features, the rates also duration which as I mentioned to you earlier more charterers want to fix for longer period than before. So that end I think that there is plenty of opportunity with our fleet. Our fleet is young, overall the age is below six years. Our specs speed consumption are very good, so we believe that there is plenty of opportunity as the market is improving to take advantage of that as well.

[Michael Webber:]

Got you. Great. One more for me and I will turn it over and just around the use of the OSG proceeds and I guess any thoughts on potentially moving where your reserves are at right now.

[Ioannis Lazaridis:]

Look I think that if you look at OSG, certainly we are very happy with the cooperation we had with Deutsche Bank and having sold the claim there is upside to that claim because how much we receive is a combination of how much of the claim is allowed and the purchase price was $0.725. The claim in total is $54 million so if the full claim is allowed then that is subject to the court and they will take some time to determine that, then there is upside. So that end, we are very happy with that. I think at the same time if you look where our rates were and what they are with OSG and if you adjust for that money I think that –from this situation was certainly brought down to close to very little. So I think that this money we will use as we have said in the future potentially for growth. And certainly as you can see following our recent report, the cash in the balance sheet has gone up to $88 million. So we’re very happy with the whole development there.

[Michael Webber:]

Okay, all right. Thanks for the time guys.

[Ioannis Lazaridis:]

Thank you.

[Operator:]

Thank you. Your next question comes from the line of Ken Hoexter from Merrill Lynch. Please go ahead.

[Ken Hoexter:]

Hi, good morning. John, can you just talk in terms of that your finally seeing that supply demand spread work in your favor. In this kind of environment where have you seen rates move to in the past? Do we see a quick – do you expect a quick snapback in terms of rates or is this something as you got nearly $1000 over this period, you would expect kind of a gradual return offering certainly I guess 17,000, 18,000 level.

[Ioannis Lazaridis:]

Let me pass it over to Jerry to start a little bit with the supply demand situation at first place.

[Jerry Kalogiratos:]

Hi, Ken. No, it is interesting as you mentioned that we now see a more sustained good spot market, spot rates has been at reasonable levels for quite a while now. And I think what was very interesting in the second quarter and what we have seen in the third quarter so far is that earnings have not been only supported by the traditional routes as we have discussed before the ETA market or even the export charter of Eastern Suez, but now the U.S. Gulf exports are becoming a keen trade route which is affecting trade relation and of course vessel utilization. You know in 2009 exported out of – further volumes exported out of U.S. Gulf on product tankers was only 5% of the whole trade. Today and by the end of 2013, it’s expected to be more like 10%. So this has been the trade which has been important in the past but increasingly more important in the future. And as it helps spot rates to a closer to their historical averages and as operators as well as traders start becoming more profitable then it is easier to say how we can help period rates kind of move from existing levels closer to the historical averages. Today we have one year TC rates that’s 14.5 calling for an MR for a one year TC or around 15 or in excess of 15 for three year time charter. While then 10 year historical leverages I would like to remind you it’s closer to 19 for one year time charter out MR rate and around 18,000 for the three year. So there is potential to return just to the averages especially if the spot market continues to perform as it does today.

[Ken Hoexter:]

Great. So just following up on that. Do you see kind of a structural change going on with on the U.S. export side? Is this, how do you view this as changing your thoughts on ton mileage and vessel demand in terms of U.S. production?

[Ioannis Lazaridis:]

It’s Ioannis again. I think what we have tried to describe in the presentation is two trends. Certainly it is a grass root change of what’s happening in the U.S. If you look at the margins of the U.S. Gulf and the Midwest refiners are making compared to the past they’re certainly better. So that is the shale oil boom is here to stay I believe. So that’s certainly good news. Also what is also very strong trend is the new refiners that are built out in this. And these are very high spec refineries that operate at better margins on the European or U.S. East Coast refineries. So this is the trend, these two trend will boost the ton mile demand. And most of 2012, I think 2013 is sustained and that’s positive for the period market activity.

[Ken Hoexter:]

But I guess is there a specific milestone using that period reaching to go to before you all fixed may be on longer terms?

[Ioannis Lazaridis:]

I think we’ll decide for how long we fix when we see the fundamentals of the market at the time. But we have said before that unless it’s significantly north of 15,000 then we’ll not be fixing for much longer than a year.

[Ken Hoexter:]

Got it. And then just on more before I turn it over may be this is for Jerry. Can you talk about I guess some of the drivers of the 50% non-delivery rate in the product tanker sector, is that your delay is that cancellations, you have any more insight on that?

[Jerry Kalogiratos:]

Hi, [Jose]. We have been using the same class of database now for a while and in order to be consistent we are still using the slippage. But if you ask me and if you actually go through the database and you look at the expected deliveries one by one you will find a number of vessels in there that either we suspect that have been cancelled or postponed or in certain cases they refer to much older orders that have never been confirmed and cancelled. So to give you an example you will find of course you might find the certain orders of on the back of Petrobras contracts in Brazilian shipyards which according to the press might have been cancelled. You might see a number of orders such as the Exelon which there is a question mark next to them. And of course there are certain chemical carriers and other type of vessels that might not necessarily be included in that order book. So I think there is a structural kind of bias and that’s why you are seeing that type of slippage but that means in reality that the real order book as opposed to nominal order book is a fraction of what we have today. Of course as we go deeper into 2013, 2014 deliveries I think the slippage should be falling as there are more confirmed deliveries more at prices that are more connected to the market today. But I think the slippage has very much to do with past orders or the orders that have been placed the shipyards with had to be a double track record.

[Ken Hoexter:]

Got it, I appreciate the time guys. Thanks.

[Jerry Kalogiratos:]

Thank you.

[Operator:]

Thank you. (Operator Instructions). And your next question comes from the line of Ben Nolan from Stifel. Please go ahead.

[Ben Nolan:]

All right, great guys. And I do have a few questions for you. First of all, just a few modeling type questions. So on the new contracts that were announced in the quarter for the product tankers, it didn’t appear as though those contracts included profit sharing. Is that correct? And they may be along with that how do you think about profit sharing or with respect to the vessels that are coming off contract over the next few months how do you think about profit sharing relative to what you might have to give up in terms of a base rate.

[Ioannis Lazaridis:]

Hi, Ben. Regarding your question, these vessels were expansion to existing once and these vessels had profit sharing based on IWL. So there is profit sharing for certain routes. Now when it comes to the future, if you look at what is on offer in the market today, I think our investors prefer to have the certainty of high base rate rather than a low base rate plus profit share, haven’t seen yet many profit share deals that provide an attractive base rate.

[Ben Nolan:]

Okay. Now that’s very helpful. And then again sort of a modeling type question with respect to utilization I missed I know you said that there was a vessel that was dry docked in the quarter if you could repeat that and then also may give some sense of how much dry docking is on the table for then, rest of the year into 2014?

[Ioannis Lazaridis:]

During the quarter we had the Alexandres II vessel that was given backdrop of before we redelivered this back to them and that was part of our agreement to Alexandres II is one of the three vessels that have employed 2018. This is the only vessel dry dock now we have to we will have itself. So that was approximately 25 days higher. We have three more vessels going on dry dock this year two sort and one MR that is in third and fourth quarter this year and we’ll see exactly when the MR will go. We have only one vessel going off on dry dock next year and that first second quarter

[Ben Nolan:]

Wow that’s perfect. Thank you very much for that. And then two last question no one going backgrounds to the bankruptcy the sale of the bankruptcy claim just trying to think about what the ultimate settlement could be and to the extent that the OSG bonds currently trading at about of course those include accrued interests which the claim would not if the claim were $0.80 on the dollar would it be right to just take the difference and that you get and that could be the potential upside once it settles. Is that how that math works on that sort of thing? And then any idea on the timing of when the whole transaction will be closed with respect to final settlement?

[Ioannis Lazaridis:]

No we have sold our claim we sold at so we’re out. Somebody else has the claim so that’s the price. What matters to how much we received is how much of the claim is allowed. The decision for that is not now it depends on the cost and I don’t have visibility for that

[Ben Nolan:]

Okay. Okay. But if the claims were to settle at $0.80 you would effectively get the difference between the…

[Ioannis Lazaridis:]

We have sold our claim

[Ben Nolan:]

Okay

[Ioannis Lazaridis:]

So we have sold we don’t have a dividend

[Ben Nolan:]

Alright.

[Ioannis Lazaridis:]

And how it settles it’s not something that will affect us from here on.

[Ben Nolan:]

Okay. And then the last question I think I know the answer to this one but it’s something that comes up an awful lot and given that you guys are on both crude and product tanker assets you might have some color on. There are some thinking that the product tanker market materially outperform the crude tanker market over the course of May next year and the 2015. And there are have continually asking what sort of capacity to take a crude tanker to convert into a product tanker after may be occasionally Could you may be just talk to the practical logistics of that how much it would cost and how much it’s even feasible in the first place

[Ioannis Lazaridis:]

Look we don’t have any and neither in the sponsor nor at the partnership level and our crude exposure is specific and all vessels are fixed but regarding this question This could be potential trade LR2s versus tankers or Panamax crude tankers for but given the physical restrictions of many ports this will not affect in a material way the MR product rate where we do all of our product under business. So if there is a trade in that it will probably larger product tankers not the MRs

[Ben Nolan:]

Right, right. I guess my question was from a broader market perspective is if it’s a call it is purpose built to be crude tanker can it ever be converted into a crude tanker that adds capacity into product tanker and thus add capacity to the product tanker market

[Ioannis Lazaridis:]

As I said we don’t have so we are not really specialist on that

[Ben Nolan:]

Okay. Right Okay. Very good. Thank you.

[Ioannis Lazaridis:]

Thanks a lot Ben

[Operator:]

We have no further questions I would hand back the floor for closing remarks.

[Ioannis Lazaridis:]

Well thank you very much everybody. We are always available to answer any further questions you may have. Thank you.

[Operator:]

Thank you ladies and gentlemen, that does conclude our conference call today. Thank you all for participating. And you may now disconnect.