Euronav NV
Q4 2017 Earnings Call Transcript

Published: 25 Jan 2018

[Operator:]

Hello, and welcome to the Euronav Q4 2017 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Paddy Rodgers. Mr. Rodgers, please go ahead.

[Paddy Rodgers:]

Thank you. Good morning and afternoon to everyone and thanks for joining Euronav's Q4 2017 earnings call. Before I start, I would like to say a few words. The information discussed on this call is based on information as of today, Thursday, January 25, 2018, and may contain forward-looking statements that involve risks and uncertainties. Forward-looking statements reflect current views with respect to future events and financial performance, and may include statements concerning plans, objectives, goals, strategies, future events, performance, underlying assumptions and other statements, which are not statements of historical fact. All forward-looking statements attributable to the Company or to persons acting on its behalf, are expressly qualified in their entirety by reference to the risks, uncertainties and other factors discussed in the Company's filings with the SEC, which are available free of charge on the SEC's website at www.sec.gov and on our own company's website at www.euronav.com. You should not place undue reliance on forward-looking statements. Each forward-looking statements speak only as of the date of the particular statement, and the Company undertakes no obligation to publicly update or revise any forward-looking statements. Actual results may differ materially from those forward-looking statements. Please take a moment to read our Safe Harbor statement on Page 2 of the Slide Presentation. I will now pass you over to Euronav's CFO, Hugo De Stoop, to run through the first part of the presentation. Hugo?

[Hugo De Stoop:]

Thank you Paddy, and good morning or afternoon wherever you are, and thanks for joining our fourth quarter 2017 earnings call. Turning to the agenda slide, I would like to take you through the highlights of our fourth quarter followed by a full review of our key financial figures before handing over to Paddy to take you through the latest market themes as we see them at Euronav. We will then turn over to the operator for a short Q&A session. Slide 4, Q4 was a challenging quarter with the usual seasonal trend of rising demand as we move into a Northern Hemisphere winter helping to drive freight rates progressively higher during Q4. This was largely absent this year. As the two charts show on Slide 4 in both the VLCC and Suezmax segments, rates were not high enough to cover our P&L breakeven rate. The results remains positive, thanks to the capital gains of 36.5 million made on the sale of ships. The capital gains refer to three vessel sales and I will come back to that later. Just before the end of the quarter, we announced a proposed merger with Gener8 Maritime. We will update the market Investors on the progress of this transaction when appropriate and we hope to publish a proxy statement within the next couple of weeks. So far everything is moving according to plan on this transaction. Moving to Slide 5, Q4 was a fairly routine quarter all the way with lower freight rates. The three vessel disposals referred to the VLCC Flandre, which were sold at a premium for an offshore project. The VLCC Artois which at the time was the oldest vessels in our fleet and was sold for $22 million and before that, the Suezmax Cap Georges sold on just before it's 20th anniversary. The total capital gains of $36.5 million associated with these disposals will be retained within the balance sheet and are not eligible for dividend distribution. Turning to Slide 6, the balance sheet remains strong with a leverage of around 41% on a mark-to-market basis and available liquidity of over $750 million as the slide shows. We will begin to make final payments on and take delivery of four new Suezmax supported by seven-year time charters during 2018. Delivery should be in February, April, May and August of this year with the outstanding payment schedule highlighted on Slide 6. With that I will now pass back to our CEO Paddy Rodgers for some thoughts and observations on the tanker market. Paddy, over to you.

[Paddy Rodgers:]

Thank you, Hugo. The aim of the next three slides is to give you an added view on the key dynamic in the tanker market at present, mainly vessel supply. After this, I'll give a summary update of our view on the five key drivers of our business going forward. With the almost total absence of scrapping during 2015 and 2016, the average age of VLCC fleet around 9.5 years at present is at its highest level since 2003. So the fleet is aging. This has prompted some encouraging signs that the rebalancing of the market is underway. There were two VLCCs taken out of the fleet in 2017 for FSO contracts, of which one was our vessel, the Flandre in Q4. Scrapping has started to gain some traction as Slide 7 illustrates with an uptick in both VLCC and Suexmax being taken out of the fleet. Indeed, you need to go back to 2003 to find a similar number to the 22 taken out in the second half of 2017. Why this change? One of our key drivers to this has been rising and volatile scrap price. Volatility is important as dynamics prevent complacency. Take the scrap price now or it may not be there tomorrow. The rising scrap price is a function of the steel price. We've taken the steel price index at randomly here, the green line in Slide 8 showing the firmness in secondary pricing has been in place now for 15 months. This has begun to kick into the second values as shown on Slide 8 with 15-year-old vessels now commanding $24 million each, up 12% from the low seen in Q3. It is important to remember that the scrap price is just one function of a complex set of inputs that each wrestle with before deciding to scrap. Outlook on freight rates, environment legislation costs proximity to the next drydocking and availability of financing. However, a combination of short-term challenges in the rates and relatively high scrap values should provide a supportive background increased scrapping and therefore fleet rebalancing. But that is not the whole story. Slide 9 sees the return of our bathtub slide and an inconvenient truth, the tax of new vessel supply remain on. As a result of industrial owners looking at fleet replacement, which indicates its preempting scrapping. Whilst fleet rebalancing looks to have started as the previous two slides show, there remains the issue of new supply coming on stream over the next 12 months. This is the bad news. The good news is that we believe the market is oversupplied but only by around 40 to 50 VLCC equivalence. So rebalancing could happen very quickly. The key factors are; one, sustained low freight rates bringing negative cash flow. Two, incoming regulation from ballast water treatment systems in 2019 and particularly sulfur emissions legislation in 2020, meaning negative cash flows. Three, rising compliance and regulatory costs from dry dockings, meeting negative cash flow. And finally for the optionality provided by high scrap price meaning positive cash flows if you scrap. The combination of these factors provide a supportive environment for the market to rebalance and sustain affirmative action as required to deliver. Moving on to our summary Slide 10. The five key drivers of the tanker market remain unchanged in our view. GDP upgrades in recent weeks reflect a positive demand background with consensus for growth this year of 1.5 million barrels per day. Supply of oil is clearly being restricted from the OPEC actions but U.S. shale continues to grow in other areas such as Brazil are increasing their supply. Ton miles remains a positive drive not just from the U.S. export growth but also from the actions of OPEC forcing on a strong gauge in nontraditional routes. China is increasing restrictions on ships over 15 years of age. Sources of financing of our businesses continues to remain under pressure which is a medium term positive but driving more rational behavior. However vessel supply remains the key issue, supply of new vessels for the next 12 months will provide a headwind along with continued compliance by OPEC nations in the cuts that already been agreed but whilst there are early and encouraging signs of market rebalancing, these do need to be sustained before the market can improve. That concludes the formal part of our presentation. And I will now pass you back to the operator for questions and answers.

[Operator:]

[Operator Instructions] And the first question comes from Jon Chappell with Evercore.

[Jon Chappell:]

Paddy first question, strategic question, given your views on the challenging market, the liquidity that you have right now and kind a lot on your plate with getting the Gener8 acquisition across the finish line and then integrating it. How do you think about still being opportunistic in a challenging market? Do you kind of just focus on Gener8 and worry about the integration there? Or are you still looking to do other things with the balance sheet that you have?

[Paddy Rodgers:]

No, I think that so - we certainly have a lot of work to do. So that might mean we are obviously very focused on getting the deal that we've already agreed concluded. I think once we go after that, we will like to see how the market settles down and see how our shares pricing and of course will keep our minds open to additional transactions. I don’t think that we are drawing a line and saying, that's the end of M&A for Euronav simply because we've done this deal. We’ve always been quite ambitious but I doubt these are going to be top priority. The first thing is to make sure first of all that this deal goes through, and let's not forget with all due respect that is subject to the approval of Gener8 shareholders. So, first of all we get this deal done quite a lot of work to get done there, let's see how you guys and the rest of the market reacts to when it's actually closed and done deal, but you know us, we are always ambitious and we’re pretty pushy.

[Jon Chappell:]

My follow-up is, I know people might ask this in a broader sense but I want to ask you specifically as it relates to Euronav with the environmentally regulations coming in 2020, I’m sure you started to do some research on your alternatives. Clocks kind of ticking, how do you kind of you view the scrubber technology we've heard some good, some bad. How do you plan on attacking that in the next two years?

[Paddy Rodgers:]

Well if I could just take the sort of general market position first of all, I think that the stats that I last saw from into tanker, that 1% of the world fleet has scrubbers on board and of course this isn’t just tankers that’s the world shooting fleet. And the total scrubber capacity in production is 1% of the world fleet. So by 2020 there is never going to be more than 3% of the world fleet with scrubbers on board, and I think that's always going to present a challenge about two things. First of all, if you believe the scrubber makes good sense economically, you also have to make sure the same time that you have suitable availability of heavy high sulfur heavy fuel oil off-take. So you have to make you could actually buy the oil, that's going to give you any value discount. We are very close as you know to a couple other refiners. They talk a lot about what their plans are. I think there is going to be quite a lot of change in the patents of the trade of oil. A lot of people are going to have to but sweet oil to run through their refineries and the refineries that can deal with sour oil over the heavy fuel oil are going to have widening discounts and spreads increased margin from their investment in the complexity of their refineries. So I think it's going to be a really interesting time. So it's not just a negative around what our shipping going to do with it. The question is what are the refineries going to do with it and we could see a very significant increase in trade on top of whatever the demand growth is during those years. So we're looking at it with a high degree of excitement and anticipation and we're trying to do a pretty thorough study, but the answer isn't just a question, all do you scrub or don't you?

[Operator:]

And the next question comes from Gregory Lewis with Credit Suisse.

[Gregory Lewis:]

Paddy, you touched on a little bit, but can you talk a little bit more about what happened in Q4 and as we moved in October, it seemed like there was some rate momentum and then really the rug just got pulled from under the market and the market really just collapsed around November. What was -- was there any noticeable differences between those two periods in Q4?

[Paddy Rodgers:]

I think that if you look -- if you look at the stats that we get through the commercial arms that we run at TI and at Euronav, the information we get from our commercial exploitation, we never really think that the cargo moved numbers change as much as people seem to think they do. But I think that looking back on it now and with the advantage of some of this statistical evidence, it looks as if there were of course too many ships and maybe the number start to move up Q3 to Q4 on the basis of people having a knee-jerk reaction to it being Q4 and assuming that rates go up. And then perhaps don't forget the oil price was really beginning to move as a result of some of the problems around the world and the effect of that of course is to put the oil price up high enough where people start to think about consuming inventory. So I think those two little movement maybe a few too many ships actually coming in and being active in the market and at the same time having people think while at this price I'd rather eat up my inventory and then see where we are in the new year. So I think those two things combined, so that took Christmas away from us.

[Gregory Lewis:]

And then just the outlook for 2018 is challenging. You pointed to the order book, clearly the order book is going to -- does that help the order book in 2017? As you look back in previous years where the outlook was challenging and the order book was big, is there any sort of sense for how many of these -- how much of the 2018 order book in the oil price environment in the tank rate environment that we're in where people are talking about scrapping that we could see some of this order book of '18 shift out into '19?

[Paddy Rodgers:]

Yes, I think it's not our data, but we've seen a lot of data from the key ship brokers with good research departments who seem to think that we're almost routinely seeing drift over one year to the next. That's certainly in the 20% if not higher. So you're just getting this continual drift. So if the rate environment is not absolutely cooking in Q3, I think people already start to think about pushing back into the following year. And a lot of the people that have ordered, may have ordered more in hope than expectation of how they were going to organize their financial or how long it will take to organize their finance. So we do tend to see that kind of drift.

[Operator:]

And the next question comes from Ben Nolan with Stifel.

[Ben Nolan:]

So I am - well I am not one for needles planted, but you guys did much better than the market with respect specifically to your VLCC rates release what it look like the market was doing and I think that's also been the case thus far in 1Q . Is it perhaps a function of having a bigger and a larger scale fleet in a bad market earns you a bit of a premium or what would you attribute that level of outperform?

[Paddy Rodgers:]

Yes. No absolutely. I think that what we're seeing in a weaker market is that of course we're very much the sort of go-to company if you want to be absolutely certain about your supply and we have a much bigger vision on the natural buyers, the people who are out there, not looking to trade, but really the industrial leaders of the long whole crude and so we're able to schedule into their cargo positions even in a weak market which means that we been more assured about how we can go about planning which means that we been able to cut speeds, reduce consumption, and still get cargoes and beyond them. So I think this is really been the evidence that you know size matters and the reliability that comes from size is appreciated by the customer.

[Ben Nolan:]

And then as a follow-up to that data, at least relative to what I was looking for and certainly relative to the third quarter your OpEx was lower as well, was that sort of that belt-tightening that you mention their feeling for you on an OpEx line as well.

[Paddy Rodgers:]

I think that's certainly true and also we've been quite focused on that. I think that as the company grows, we’ve been really pulling everybody to test their metal on whether they can do, they can do more with less.

[Operator:]

And the next question comes from Chris Wetherbee with Citi.

[Chris Wetherbee:]

I want to go ahead of myself in terms of the combined company post merger but when you think Paddy about the Euronav part curly maybe some of things you might want to do as you move out a year or so from now. How do you think about it? Have you finished sort of the calling of older tonnage – I just want to get a rough sense of maybe how you think about sort of what you have or your side of the sense today and maybe how that might change a year from now?

[Paddy Rodgers:]

Well I think we have set ourselves fairly clear objectives and we have a structure around the way that we want to work. So I think the other sort of standing lines on now wherever you want to go on fleet development and replacement. So within Euronav, within the fleet that we have, we know how many ships will need to go off on an annualized basis based on active agent failures or the success of getting alternative business that can give them life extension. But over and above them in terms of growth strategy, I don't think as I said earlier to Jon Chappell, I don’t really think that - we're certainly not calling time on additional M&A and we’ll certainly be looking forward to any great opportunity that comes along.

[Chris Wetherbee:]

And I guess I just wanted to check in on, on the cost side of things when you think about where we are in a pretty challenging environment. What more levers are left if any in terms of ratcheting down cost whether it be sort of on the corporate overhead side or from even from an operating perspective. Is there any more that you’re going to expect as we move through '18 assuming we’re going to have these challenge rates for at least a period of time?

[Paddy Rodgers:]

Well I mean, I think the - certainly as far as fine-tuning costs go that's a never-ending exercise and certainly whenever we add scale, one is going to be able to say that the average share breakeven's and the application of the number of people per ship and the amounts of G&A per ship should go down. Of course 2018 provided that we get the support from the processes that are required to close the transaction with Gener8 will result in a significant gain in terms of size for the fleet and will be over a process in 2018 of trying to maximize the value we get from that as a result of trying to find synergies. Going out beyond that, I think that's all the time the commercial sits very closely to the most important expense lines and whether it's a question of making sure that we buy when it's cheap and so when its expensive and at the same time try to manage our cost and logistical approach, so we reduced our bunker bills. Those are properly the two biggest movable parts that we can hope to achieve a year-on-year in the expense line.

[Operator:]

And the next question comes from Fotis Giannakoulis with Morgan Stanley.

[Fotis Giannakoulis:]

Paddy, once again you did an acquisition on the low part of your cycle. It seems that you have been consistent to expand when the market is low. I was wondering how confident you think that this downturn that we’re experiencing right now is cyclical downturn or it might have some element of structural change and I am referring to the chart about for the first time in the tanker market OPEC is not a marginal producer and the U.S. that is the marginal producer. How does this change the expectation for recovery?

[Paddy Rodgers:]

Well, I think that's a very powerful statement Fotis because I think that it goes straight to where we are with the oil price today. We had a sustained breakthrough now at $70. I think if their $70 is the flat price for oil then I think that there is going to be a lot of oil producers in the U.S. rubbing their hands and there will be a lot of people in both Russia and Saudi Arabia saying job done, let's get back producing. If that happens, then I think you see the oil price hitting the top end of its range and maybe coming off and as it comes off, that could be very extinct in terms of what happens on the shape of the market and give great opportunity for surges in re-inventory building -- inventory rebuilding. So I think that -- and that may well be a sort of swings and roundabouts that becomes the norm for us. So that's a very important point. I think in terms of structural change, we're really looking to see the situation today on the fleet size change and I think if we get just that marginal ship scrapped, we could get ourselves into quite a good structural shape for '19 and '20.

[Fotis Giannakoulis:]

Can you try to give us some idea of how the demand for VLCCs is expected to change from this ramp-up of U.S. production and there is a lot of discussion about U.S. exports. So what is your expectation of U.S. exports growth in the next two three years and whether there is need for the VLCC market given the constraints that there are in infrastructure and the need for reverse lightering in the cases of VLCCs?

[Paddy Rodgers:]

Fotis, it's very interesting process because we had no U.S. exports in crude of course because we did have a very heavy product export market a few years ago. But once export of crude was allowed, the market took off and very quickly built and the expectation of the forecasts that we've seen is that it adds another 50% this year going from 1 million barrels a day of export to 1.5 million barrels a day of export with I think one of the most significant leaders in that being Chinese receivers of crude. So that's huge ton miles. At the same time, we're of course seeing a couple of infrastructure changes being proposed, most important of which will be reversal of one pipeline in the U.S. to bring the potential for Canadian heavy crudes to be brought down to the Gulf Coast. We've also got Corpus Christi getting confirmation that the Corps of Engineers will start to dredging the Suezmax births that are entering VLCC births and we know that it will be a partial reversal although it may not be very big capacity on the Louisiana offshore pipeline. And of course on top of that, there is much reverse lightering as you want. So the U.S. looks like it's geared up to be a permanent exporter of crude oil in significant volume and the most likely receiver of that looks to be the Far East. So for us, this is a very good story. And so when the Southeast and Russians come back on, I think that is going to be very, very active business.

[Operator:]

And the next question comes from Noah Parquette with JPMorgan Securities.

[Noah Parquette:]

I just was curious your G&A expenses bumped up a little bit, was that just from the generate acquisition or it was something else there?

[Paddy Rodgers:]

I think it's probably as a result of having to answer all these complicated questions asked by analysts. No, of course once we go through a process like this, you'll see slightly lumpy G&A, but of course a lot of that may well be, my feeling is professional fees that will gradually be able to squeeze out once we're over the hump.

[Noah Parquette:]

And then the follow-up is what does that look like post-acquisition? You guys think you can integrate without too much G&A expense increases or what can we expect there?

[Paddy Rodgers:]

I can be fairly sanguine about it now, but it will be a question of rolling our sleeves up and making sure that in the next 12 months, we keep everything under control and that ultimately we're able to deliver some synergy on the two businesses post '18, but I think in '18 it's going to be a year -- it's largely about the transaction.

[Operator:]

And the next question comes from Spiro Dounis with UBS.

[Spiro Dounis:]

Just wanted to - hopefully the first one is not out of balance, but just wondering you can walk us through to the decision to sell six of the Gener8 vessels as part of the potential merger here. I believe leverage is one of the drivers just making sure that's the right size on a pro forma basis. But obviously you mention all that the new regulatory regulation coming online in the next few years, why to make sense get rid of this your weaker vessels.

[Paddy Rodgers:]

Look as far as - first of all it’s a good question and we are never embarrassed to answer it and our decision making about is of course, we've always try to make sure that we had balanced managed approach to what we’re doing. I think that the whole market Euronav is that we want people when they think of name of our company not to think about inspirational figures who have huge orders capable of predicting the future and upon which we are prepared to bet our balls. We’re much more interested in having a professional balance worth approach which says we know what we know and we know what we don't know. Therefore in a situation like that being able to balance a fleet acquisition at the same time as maintaining leverage and liquidity means that you can have both sides as an analyst and as investor to see that the company doesn't lose its resilience and at the same time improve it upside.

[Spiro Dounis:]

Second one just on Venezuela. Obviously seeing a lot of the production come off-line there I think we’re breaking records on the low side here and there is concerns that Venezuela production could come off even more as we go to the year. So it's how important is that the tanker demand or how important has it been as you look forward are there any offset that make you feel a little better about that situation?

[Paddy Rodgers:]

Yes of course, I think Venezuela has always been important to us simply because of the ton mile associated with their trade to China. Their failure of production and the breakdown and the relationship with China one naturally follows the other, but its more than offset by the amount of oil that is being taken from the U.S. and the Gulf of Mexico. So it normally would have been a big problem I think today it's not.

[Operator:]

And the next question comes from Mason De Lapp with Seaport Global Securities.

[Magnus Fyhr:]

This is Magnus Fyhr. Just a quick question on the chartering strategy going forward. I mean rates are currently extremely weak, I don’t think they’re going to get much better over the next six months. So, would you unlock in any time charter rates I know they’re not that attractive but what’s your thoughts on at least lock in a few ships on your time-charter before we get through these challenging market?

[Paddy Rodgers:]

I think that we wouldn't be particularly excited about locking in time charter today. I think generally speaking no one is offering you know high rates at long terms so it’s not really supportive of the business case. Having time charter at low levels for short periods doesn’t do anything to offset the volatility or risk particularly not when as you've heard from the answer I gave Spiro where we've taken the step to make sure the company is resilient in any event. So for us we don’t need that protection if we take a step so we’ve already have done by ensuring that we have good liquidity and low leverage.

[Magnus Fyhr:]

And just as a follow up, what’s your thought process of this - the older ships in the fleet. Do you have a few older ships as you take them through special service over the next two years, you got a couple of approaching 20 years of age?

[Paddy Rodgers:]

Well I think we're unlikely to take a ship beyond 20 years of age unless it’s against the specific project. And so normally we will be looking to offload ships as they begin to move into what we might call to use our traffic light analogy, the amber phase and if we sold 20 years is than being red and amber being 17.5 to 20 in that 17.5 to 20 will normally be thinking about offloading the ships. But certainly being very active to see if we can find projects in which these excellently maintain vessels could serve in a non-spot voyage basis because quite clearly once they are over 20 years of age, they’re really not well come in spot trade except by one or two customers.

[Magnus Fyhr:]

Yes, and you did - there was a great sale on that offshore - for that offshore projects. Are there any more or was that just kind of one-off?

[Paddy Rodgers:]

Well it’s not a one-off because if you look back over the years you’ll see we've done it on ships previously, but it's about having a strong relationship with people in offshore and giving them open book to review a ship in detail to see strengths and weaknesses and helping them - and giving them support in helping them in preparing their bids. So I would think it's a kind of very loosey-goosey relationship where we can repeat it. I am not always saying we'll repeat it with the same effect as we did on the Flandre, but certainly the relationship is continuous and we would like to continue to stay in that area.

[Operator:]

And the next question comes from Amit Mehrotra with Deutsche Bank.

[Amit Mehrotra:]

Thanks for taking my question and congrats on the Gener8 deal. I wanted to ask a follow-up question. I think the first question that Jonathan asked on the sulfur cap in 2020. As you said, there is a finite amount of scrubber capacity globally. I think that would kind of create an interesting opportunity for companies that may be have the scale and capital structure like you guys do to invest in the long-term. I think you just talk about that in terms of would you are not equipped with all your vessels with scrubbers and what the costs or benefits are that maybe waiting given the finite amount of capacity? And then related to that, would you consider evolving your chartering strategy more toward voyage charters as kind of a way to capture the arbitrage opportunity so to speak between the higher and lower bunker cost, thanks.

[Paddy Rodgers:]

I think it's difficult to sum this one up because it inspects rather than being continuous. So A equals B equals C doesn’t quite work when they're in different periods of time. The first issue is going to be the fact that fuel is going to be made which meets the specification on low sulfur and the first alarm that people have been calling is that that's going to mean that there isn't going to be enough fuel that's compliant. And there aren’t going to be enough ships that are compliant to build the old -- to burn the old fuel spec. So one way or another, it looks like a choke point on supply of ships capable of burning the fuel spec that's available. So that's an area that concerns and in tanker, they have a solution for that. They think that the fleet worldwide should slow down and if it slows down or not, there will be enough fuel to go around and that will deal with the chock point and the second point that's concerning its tank at the moment and should concern all ship owners is we need to see what the details of the regulatory scheme are going to be. Is it going to be possible that you burn high sulfur heavy fuel oil simply on the basis of having a certificate to say that the port you were at, you couldn't buy alternative fuel. So before you start working out the economics of whether you have a scrubber or not, you better work out whether anybody is going to be penalized for not having a scrubber because it would be absolutely infuriating to install a scrubber and then find a ship next to you burning heavy fuel oil with high sulfur content because they had a piece of paper rather than a $4 million scrubber unit. And then in terms of time out, if you go out three or four years, I think most of the refiners we've spoken to have said there will be no high sulfur heavy fuel oil being produced by 2023.

[Amit Mehrotra:]

And one of my follow-ups and thanks for letting me ask a follow-up. Just one quick one on the seaborne trade, the shifting I guess seaborne trade, back in back in 2015 one of the drivers of ton mile demand was higher U.S. production. You saw a lot of the West African cargoes diverting to Asia and China, which obviously created a nice ton-mile effect. We obviously have a different world now as you mentioned earlier with allowable U.S. exports, but rig counts in the U.S. are expected to be up double digits this year or back of a really stronger last year and so I'm just curious about if you are -- if there is kind of a ton mile story that's kind of a repeat of what we maybe had may be albeit of a lesser magnitude. Any thoughts there in terms of how you see ton miles evolving over the next 12 to 18 months on the back of the higher U.S. production? I think you've mentioned it a little bit before, but I just wanted to understand this year.

[Paddy Rodgers:]

So I think we know two or three basic things that first of all India -- sorry China is the first month equals is the highest importer of crude oil and they're own domestic production is falling and their expectation is that their demand is going to grow. So the second amongst those equals is probably India and the rest of Southeast Asia is not far behind in terms of demand for oil. So we have a natural home and the additional production that's coming on of course is coming on in the Atlantic and we're seeing that whether it's in the Caribbean, whether it's in the U.S. Gulf or whether it's in the northern part of South America and all of that is adding significant ton miles. So I think that we're going to have a strong ton mile story, but we're also going to have an increasing cost rate story which has always been one of the things that supported the product story in the past but it's going to be a reality for the crude story as well. So I think we're in for exciting times it just that we got to get that and in the meantime we got to see a number of ships getting scraped and work our way through the fleet.

[Amit Mehrotra:]

You know when the deal is going to get closed roughly because obviously that impacts our modeling so any rough guidance there in terms of when you expect the merge to close?

[Paddy Rodgers:]

Yes, I mean it's that your third question.

[Amit Mehrotra:]

No, it a two…

[Paddy Rodgers:]

I just wanted to pull you often because otherwise I think there is some people on the phone who might think I can’t count and they must be worried about checking the financial figures. But I think that all I can say to is this. We’ve been relatively clear - we’re working now - I mean you guys know more about M&A than I do I mean. We've signed a deal a proxy statement will be out soon as we can get it out, but there is a deal of work to be done on that on writing and counting. And once we got in the SEC and once it's been approved then we will be out will be talking more about the exact close date and any other information that you want but we’ll something effective to market and you’ll have the ability to see it and ask us very specific questions. So I think we just have to twiddle our thumbs, but know that won’t be a very long process.

[Operator:]

And the next question comes from Herman Hildan with Clarksons.

[Herman Hildan:]

I have a follow up questions to Ben’s comment about the Q4 and Q1 rates which are remarkably strong and obviously, there was a rechange of bulk price which could explain parts of with just for that there is a huge scalp and you mentioned the strong relationship with your clients and the size of your fleet and so on. Should we read this as a retreat you think to other missing pairs or do you expect that you’re going to beat only frontline on trade rates and so on normal rates for Q4 and Q1?

[Paddy Rodgers:]

I think you’re on the wrong call because I don’t think I can answer other people’s number and I don’t think to call.

[Herman Hildan:]

No you mentioned that you have names in terms of sizing fallen right, so the question are you not working…

[Paddy Rodgers:]

I believe over the last few quarters we've noticed - I think it was Greg that asked, I mean I think we noticed that we were outperforming and certainly TI told us that their view was that it was the ability to scheduling to longer voyages now to the extent that our peer group can do that they'll have to explain to how they do it because that’s what we’ve been doing.

[Herman Hildan:]

Then my second and last question, should we focus a bit from call it tree to the forest. Looking at the 2019 and 2020 how do you compare the setup that we have for union market in the next couple years compared to the last term we have where we had - seven quarters I think with $60,000 in average in VLCC?

[Paddy Rodgers:]

Well I mean I think - there is normally a story behind those changes its not I mean the '14 through '17 story was demand growth outpacing fleet life as a result of both the price of oil driving demand and U.S. lifting off export ban increasing ton miles significantly. So I think that was our seven quarters story. The story that we're now in where we would have to see a completion on that story in order to get out of the dip that we’re in is that we got to see some scrapping and we got to see some people taking advantage of the high scrap price, I mean there are people in the market today whom I said you know I fancy the future, let's hang on, they hang on, they make a few million dollars and they’re very pleased with themselves. But in the end when they go to scrap the ship instead of getting 18 million they get 12 million. And then all of sudden they’ve got ego on their face, tears in their eyes, no money in their wallet but along the way they will have also taken a lot of the spring out of our market expectations. So it’s very important that people face up to it and just accept that this is a fantastic scrap price get behind it and get into the yard. And if that happens then we can look forward to the next step but let’s not get too far ahead of ourselves.

[Operator:]

The next question comes from [indiscernible] from Wells Fargo.

[Unidentified Analyst:]

Could you just touch a little bit more on the availability of financing in the market as a whole and how you think you might impact any further consolidation or purchases for the secondhand assets in 2018? Thanks.

[Paddy Rodgers:]

Yes, I think - look I think that story behind traditional asset-backed finance is well covered. Everybody understand the banks shrinking portfolios partly because of the requirements for additional capital to be put against those lendings but also because of portfolios that really stank and that they’ve had to deal with eventually. So that's been the story of the banks. We know where they are all on that. I think the big question mark, and that probably what the one that you’re begging at is, where are we going with the rest of the financial structure, and I think what we can definitely say is, there is still an awful lot of capital that’s very yield hungry. So whether we see it in the sale-leaseback or in the other private equity involvements in structured finance through sale and leaseback for more imaginative methods remains to be seen. It's one of those things that’s been more talked than done and I think the trouble for tankers in particular is that it's very difficult to get any customer support from that kind of structure. So we haven't drawn on much capital from that side so far.

[Operator:]

Thank you. And as there are no more questions, I would like to the turn the call to management for any closing comments.

[Paddy Rodgers:]

No, I would just like to say thank you all for coming on today. And I look forward to speaking to you again soon. Cheers.

[Operator:]

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.