Teekay Tankers Ltd.
Q2 2013 Earnings Call Transcript

Published: 9 Aug 2013

[Operator:]

Welcome to Teekay Tankers Limited Second Quarter 2013 Earnings Results Conference Call. During the call, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question and answer session. (Operator Instructions) As a reminder, this call is being recorded. Now, for opening remarks and introductions, I would like to turn the call over to Mr. Bruce Chan, Teekay Tankers Limited's Chief Executive Officer. Please go ahead, sir.

[Unidentified Company Representative:]

Before Mr. Chan begins, I would like to direct all participants to our website at www.teekaytankers.com, where you'll find a copy of the second quarter 2013 earnings presentation. Mr. Chan will review this presentation during today's conference call. Please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from the results projected by those forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the second quarter 2013 earnings release and earnings presentation available on our website. I will now turn the call over to Mr. Chan to begin.

[Bruce Chan:]

Thank you, Ryan. Hello, everyone and thank you very much for joining. With me here in Vancouver is Vince Lok, Teekay Tankers' Chief Financial Officer, Art Bensler, Teekay Tankers' Chairman and Director and Brian Fortier, Corporate Controller of Teekay Corporation. During today's call, I'll be taking you through Teekay Tankers' second quarter earnings results presentation, which can be found on our website. Beginning with our recent highlights on slide 3 of the presentation, Teekay Tankers generated cash available for distribution of $0.07 per share in the second quarter, down slightly from the $0.10 per share generated in the first quarter, mainly due to the change in employment of certain vessels from fixed rates to lower spot rates on expiry of their time charter out contracts. For the second quarter, we reported an adjusted net loss of $0.08 per share, compared to our adjusted net loss of $0.04 per share reported in the first quarter. The company declared a dividend of $0.03 per share for the second quarter, Teekay Tankers' 23rd consecutive quarterly dividend, which was paid on July 31st to all shareholders of record on July 19. Teekay Tankers dividend is currently fixed at an annual level of $0.12 per share payable quarterly. Our 50% owned VLCC newbuilding, the Hong Kong Spirit delivered in June 2013 and is now employed on a five-year fixed-rate time-charter contract with a major Chinese company at an attractive about market rate of $37,500 per day as well as an additional profit share if market rates are about 40,500 per day. In addition to the three-year time-charter out contract that we entered into in April for the Everest Spirit, we recently extended a fixed time-charter contract on one of our Aframax tankers, the Kanata Spirit for an additional year securing more fixed rate business at a rate that is above the current spot market average. These two time charters will enable Teekay Tankers to maintain a fixed cover of approximately 40% for the 12 months commencing July 1, 2013. During this period of cyclical weakness in the tanker market, we continue to be very focused on managing our fleet employment mix to ensure we preserve cover from fixed-rate charters to support and provide stability for cash available for distribution and our cash dividend. On slide 4, we have provided an updated overview of Teekay Tankers' fleet employment mix and fixed rate coverage. Excluding our recent LR2 newbuilding orders, Teekay Tankers fleet currently consists of 28 owned vessels and one time chartered in Aframax. As of August 1, 2013, 13 of the vessels including our 50% VLCC newbuilding are trading under fixed rate time-charter out contracts, while the remaining 16 vessels are trading in the spot market within TK managed commercial tonnage pools except two of our MR product tankers, which recently commenced trading in an externally managed pool following the expiration of their recent time-charter contracts. As I mentioned earlier, in the current weak spot tanker rate environment, opportunistically locking in fixed cover, continues to be our major focus as we expect the current spot market weakness and volatility to continue for at least the near-term. Turning to slide 5, I will cover some of the recent developments in the spot tanker market. As shown by the chart on the slide, spot tanker rates softened during the second quarter due to a combination of structural and seasonal factors. In the crude tanker market, a reduction in U.S. crude oil imports due to rising domestic production put downward pressure on rates, particularly in the Suezmax segment A weak VLCC market caused by a reduction in Middle East OPEC production also affected Suezmax rates during the quarter. In addition to these structural factors, the conclusion of spring refinery turnarounds and the onset of a heavy North Sea field maintenance season put further pressure on spot tanker rates. Looking at the third quarter today, Suezmax rates have undergone a recovery with spot earnings at the end of July reaching highs for the year. This strength is largely due to an increase in volumes out of West Africa and a rebound in U.S. light crude imports on the back of a narrowing spread between the price of Brent crude and U.S. domestic crudes such as WTI and Bakken Shale oil. In the product tanker market, LR2 rates softened during the course of the second quarter despite the continued strong inflow of naphtha volumes from the West into Asia. The decision by some owners to switch vessels from the dirty trade to the clean trade led to an increase in available vessel supply, which outweighed the positive demand side developments and led to lower rates which are persisted into the third quarter. Turning to slide 6, looking at the developments in crude tanker supply, the period of rapid crude tanker fleet growth is coming to an end. A lack of ordering in recent years has reduced the size of the tanker order book to just $51 million deadweight tonnes of which approximately 28 million deadweight tonnes is crude tankers. New vessel ordering has been particularly low in the Suezmax and uncoated Aframax segments, where the order book stands at just 42 vessels and 33 vessels, respectively. When expressed as a percentage of the fleet size, the Suezmax order book represents just 9% of the existing fleet versus 49% at the peak in 2010, while the uncoated Aframax order book represents just 5% of the fleet versus 31% of the fleet versus 31% at its peak. As shown by the bars on the chart, the bulk of the remaining order book for midsize tankers is expected to be delivered by the first quarter of next year with nothing to indicate anything other than very low fleet growth through the remainder of 2014 and 2015. In the Aframax sector, the fleet has actually shrunk since the start of the year as the scrapping of old vessels has outpaced new vessel deliveries. Furthermore, a total of 110 Aframaxes are currently aged 15 years or older with a further 50 vessels expected to reach 15 years by the end of 2015. These vessels are coming under increasing pressure in the marketplace due to growing charterer discrimination against ships greater than 15 years of age. In addition, the relatively high cost of drydocking and maintaining older vessels compared to expected returns on the spot market may also encourage owners to scrap ships before the end of their useful life. As a result, we expect that the removal of older vessels will continue to outpace new vessel deliveries through the remainder of 2013 and also in 2014 leading to a tighter supply/demand balance over the next 18 months. Slide 7, looks at the short-term outlook for crude tanker demand during the second half of this year as well as some positive and negative factors for 2014. Crude tanker demand is expected to strengthen during the second half of the year due to normal seasonal factors. As per estimates from the International Energy Agency, global oil demand is expected to average 1.5 million barrels per day higher during the second half of the year, reaching a peak of just under 92 million barrels per day in Q4. In addition, we expect that the usual winter weather delays will begin to provide some upside to rates towards the end of the year, particularly towards the end of the fourth quarter when tanker rates typically spike in the northern hemisphere. In addition to seasonally higher tanker demand, a narrowing of the spread between U.S. crude oil prices and international prices such as Brent, could lead to an increase in U.S. crude oil imports in the coming months. As I noted a moment ago, this has already had an impact on the Suezmax sector in the form of stronger U.S. Atlantic Coast imports of West African crude in recent weeks. If this continues, we could see some additional strength in the crude tanker rates during the second half of the year. Looking ahead to 2014, the current outlook for global oil demand is for growth of 1.2 million barrels per day. This is an improvement on the 0.9 million barrels per day of growth expected in 2013, and should translate into stronger tanker demand growth. When combined with the lower expected fleet growth, we expect that crude tanker fleet utilization will improve in 2014, which should translate into a gradual improvement in rates. However, a number of potential headwinds also exist which could threaten a tanker market recovery, chief of which is the continued increase in U.S. crude oil production and possible corresponding decline in OPEC oil production that could weigh down on crude tanker demand. This, combined with the uncertainty over the health of the global economy, results in us remaining cautious on our outlook for the crude tanker market in 2014. In the medium-term, we believe there will be an improvement in crude tanker rates, so lower number of newbuilding scheduled to be delivered should lead to a better supply picture, possibly even a shrinking tanker fleet. Therefore, any outside in the demand outlook such as the potential for U.S. crude oil exports and/or increased Canadian seaborne exports, a healthier rebound in the U.S. or world economy, or pricing developments that encourages more oil trading in and out of the U.S. all would spur our recovery in tanker rates. Turning to slide 8, we look at developments in the product tanker market. Product tanker demand fundamentals remain positive fueled by a significant increase in global refining capacity over the next five years. As shown by the chart on the top half of the slide, global refining capacity is set to grow by over 9 million barrels per day by 2018, driven by additions and China, the Middle East and Asia. At the same time, refining capacity is being rationalized in Europe and in OECD Asia as older, less complex refineries struggle to remain competitive. Accordingly, we expect that with significant expected growth in the global refined products trade in the coming years, more products will be shipped longer haul on larger ships which favors the LR2 fleet. Looking at supply, there has been a significant increase in new product tanker orders during 2013 with 7.2 million deadweight tonnes of new vessels ordered since the start of the year. On an annualized basis, this is the highest level of new tanker orders since 2006, with most of the orders in the medium-range or MR and LR2 vessel classes. As a result, product tanker fleet growth is set to accelerate in 2014, in contrast to the crude fleet which is expected to show minimal growth. We remain optimistic that the product tanker fleet utilization will strengthen in the medium-term due to the strong demand fundamentals and expected growth in tonne mile demand. However, the sector could become overbuilt should the current pace of ordering be maintained over the next 12 to 18 months, a situation that needs to be monitor especially if some of the major new players continue to raise equity capital to expand their fleets, or if we see private equity money entering but currently in vogue product tanker space. Moving on to slide 9, I would take a moment to update you on our term loan investments secured by two 2010 builds, VLCC. In July, our investment in the two, three-year, first priority ship mortgages matured without repayment. Certain affiliates of the borrowers filed for Chapter 11 bankruptcy protection in June 2013, which does not include the special purpose entities that own the two VLCC tankers securing our loans. With the borrowers' cooperation and consent, Teekay Tankers took over management of the vessels during the second quarter and we are working with the borrowers and the second mortgagees to realize the value of the loans. Since the inception of these loans TNK has earned $24.8 million of interest received in cash. And despite recording a loss provision on the loan of $4.5 million in the second quarter of 2013, TNK's loan investment principle receivable remains intact. Moving to slide 10, now that we have assumed management of the vessels, we will be in a much better position to achieve our return objectives. For each vessel trading day, we are currently cash flow positive as TNK's cash breakeven for the VLCC, including OpEx and interest expense is approximately $10,000 per day compared to the current average VLCC spot rate of approximately 15,500 per day since May 2013, when TNK took over management of the vessels. All amounts earned over our cash breakeven are for our account bringing us closer to realizing the value of the loan. Regarding the latest status of the vessels, one of the VLCC vessels is actively trading and generating positive cash flows. The second vessel is currently being detained in Egypt following an incident which took place prior to TNK taking over management, in which the vessel was accused of damaging a subsea cable. The vessel is fully insured and as P&I Club insurers are in active discussions with the Egyptian authorities to negotiate a settlement to release the vessel after which it is expected the vessel will commence trading. In summary, while we work through the process with the borrowers and the second mortgagees, our plan is to trade the ships and generate positive cash flow for our own account bringing us closer to realizing the value of the loan while providing us with time to evaluate options on how best to realize our investment in the loans. Turning to slide 11, I will provide an update on the order replaced in early April with STX Offshore & Shipbuilding in Korea for four LR2 newbuildings. In late May, STX commenced a voluntary financial restructuring program with its lenders. At that time, all reviews of refund guarantee applications were suspended pending the outcome of the restructuring process. Teekay Tankers' installment payments were contingent on receiving these refund guarantees from the yard. So, to-date, we have made no installment payments. STX completed the restructuring on July 31st and its lenders will be restarting the review process for refund guarantees by mid-August. The yard has been keeping us up-to-date and has provided assurances that they will be applying assurances that they will be applying for refund guarantees for our order as soon as possible. Our primary concern is that due to recent orders at higher prices, the shipyard and/or their creditors might try to use this as an opportunity to renegotiate our order and related options. If we do not receive these refund guarantees, we will not proceed with the deal in its current form and can cancel the orders at any time prior to receiving the refund guarantees at our discretion. Should we not receive the refund guarantees, we will consider legal recourse against the yard for damages. For now, we wait and we will update you as new material information becomes available. Turning to slide 12, Teekay Tankers' total liquidity at June 30, 2013 was $256 million, which excludes any estimated value for amounts we expect to recover on our VLCC term loan investments. Any amounts recovered would be additive to Teekay Tankers' available liquidity. In addition, our moved to a fixed dividend policy in the first quarter will enable us to retain a greater portion of our cash from operations as the market recovers which can be applied towards future growth opportunities. In addition, our favorable debt amortization profile requires low principal repayments through to 2017, enabling us to retain a greater portion of our operating cash flow for future growth. Lastly, our covenant light debt facilities means that we have no financial covenant concerns like many of our shifting peers providing us with considerable financial flexibility. Wrapping up on slide 13, I will provide an earnings update for the third quarter. Based on weighted average of approximately 50% of spot revenue days booked for Suezmaxs and Aframaxes, our third quarter spot rates have averaged approximately $10,600 per day and 14,500 per day, respectively but recent pictures in the Suezmax, market have been higher than our quarterly average today. For our spot traded product tanker fleet, based on approximately 65% of spot revenue days booked for LR2s, third quarter spot rates have averaged approximately $10,900 per day. As a reminder, TNK currently has four conventional tankers that are scheduled to drydock during the third quarter of 2013 resulting approximately 104 lost revenue days during the quarter. The timing of our heavy drydock schedule during the third quarter is timed to coincide with the seasonally weaker summer market which ensures that our fleet will be fully operational and optimally expose to a potential winter market rally. With that, operator, we are now available to take questions.

[Operator:]

Okay. (Operator Instructions) The first question comes from Michael Webber from Wells Fargo. Please go ahead.

[Michael Webber:]

I wanted to kind of zero-in on the STX orders and they've been kind of widely debated in market. From your advantage point, I know you give pretty much that all that you can, but maybe from a perspective has the delivery window moved back for you guys to the point where if you were to walk away from these orders and look for growth elsewhere. Is it likely coming in a later window? Then maybe if you could maybe kind of walk us through a timeframe for how you think STX and this refund given to you issue plays out?

[Bruce Chan:]

Mike, in terms of the delivery window when we placed the order, I think we had said that we had put it out quite far, because we always thought the recovery would be gradual and that as the recovery took place we would be exposed to it. So, I think we do have some cushion in there in terms of the delivery schedule. They weren't scheduled until late 15 and 16, and so that's still where newbuildings that are ordered today would be delivered.

[Michael Webber:]

The 15 deliveries what I was basically getting at, do you think that…

[Bruce Chan:]

They were late. I think we said they were late 2015 and so in terms of slippage that's not something that we were really that focused on.

[Michael Webber:]

Got you. In terms of kind of what kind of what timeframe around this, how are you thinking about?

[Bruce Chan:]

Yes. I mean, as we said in our prepared remarks the yards latest correspondence with us is that they are going to be reapplying for them once this process has been finalized. But, as we all know in this processes, it's still uncertain so we are really on their schedule more than anything that we can dictate.

[Michael Webber:]

Got you. You talked in your prepared remarks, you gave a bit of review on the sector, on the product and crude, the risk, the product side gets a bit overbuilt over the next two to three years and it seems like you are a bit more positive on the crude supply side. Would there be a thought to potentially can diversifying that future order kind of maybe placing more growth towards the Crude segment given that you've got the bit more overcapacity risk growing in the product space right now?

[Bruce Chan:]

Yes. I mean, we still like the LR2 sector because of the optionality of being able to go back and forth between crude and products, but certainly we are looking at the product supply side that there is finely balanced than the crude. And, while we still think the balance is still okay, we certainly will be watching like everyone whether people continue to expand in that segment. So, that's obvious the supply of over ordering in that segment would be concerning.

[Michael Webber:]

Got you. Okay. That makes sense. One more for me and I'll turn it over and let someone question on these, but from a growth perspective there's a newbuild orders, they are still relatively fresh as it replace a few months ago. If you kind of think about other avenues, your equity is trading well above [NAV]. You've got a strong brainer management and there are bunch of distressed tank runners out there that would probably wouldn't mind having (Inaudible) back paper. Is M&A a realistic opportunity for you guys here?

[Bruce Chan:]

I think, we continue to look at different ways growing, but with our are current fleet excluding the newbuilding order, we still feeling that we have a lot of good exposure to a rebound in rates as I said in my remarks and you mentioned, we think there is potential for some upside surprises in the medium-term and that's we think were fully exposed to that.

[Operator:]

Thank you. The next question comes from Jon Chappell from Evercore Partners. Please go ahead.

[Jon Chappell:]

Thank you. Good morning, guys.

[Bruce Chan:]

Jon, how are you doing?

[Jon Chappell:]

Pretty good. Bruce, I just want to follow-up on STX as well. Maybe ask you in a different way. Clearly we've seen some orders placed since you placed the original order in April or talked about the original order, that was really placed without a refund guarantee but naphtha prices have definitely gone up. So, how sensitive are you STX potentially trying to mark the orders to, what I guess in the market right now and then how do you compare that with kind of on that last question you just had, your growth ambitions. Because, if the market is starting to recover, now still may be an opportune time vis-à-vis your rates per [asset estimate] maybe in year or two.

[Bruce Chan:]

That's a good question. In terms of STX and I am looking at other orders of higher prices are certainly a concern of ours. Certainly not unheard of for people to try to renegotiate contracts like that, I think what's different this time is most times is when shipyards default on contracts it's because they are failing or have failed, but STX survives is because they have support and so there is a more solid shipyards to stand behind the contracts upon which we would enforce all of our legal remedies there, so that is our primary focus is to still follow through with that order. But as you say if that order has to be replaced at higher current values, then we have to see how that evolves. It's certainly been a lot of orders that have driven up the prices recently and whether that's sustainable is another question and so we will have the benefit of them sometime here to see how that market develops then make the appropriate decision.

[Jon Chappell:]

Have you been in conversation with any other yards for kind of similar assets, just so you have that bid compare what potentially could be a new price range from STX?

[Bruce Chan:]

We certainly have the data, because within the TK group and as you heard Peter say on his earlier on his earlier call there's a lot of other activity going on with the yards from our other parts of the business, and so we constantly have the good calls on what replacement orders would look like, but we are still primarily focused on resolving our current binding contract with STX.

[Jon Chappell:]

Okay. Then regarding the VLCCs, this Egyptian arrest is somewhat near legit, or at least surprising and I am just trying to figure out what that means financially for you as the manager of that vessel now? Is there any liability for TNK even though this incident happened before you to management of it? Then also you if it's 10,000 a day kind of breakeven for the ships and assuming you are marketing your revenue that's why you are still paying the operating costs the [vessel]?

[Bruce Chan:]

The biggest downside as you just touched on is, every day they are certainly not earning revenue, but in terms of reliability the P&I insurers are actively engaged in this and are the ones actually negotiating the release, so we are confident that that liability is insured and will be taken care of. So, it's really just a matter of expediting that process as much as you can in Egypt so that that ship can start trading. Fortunately for the first ship, [Allison A], which has been trading, we've done pretty well on the timing of some of the contracts for that ship, so on average we are still pretty close if not at I'd cash breakeven for the two ships combined.

[Jon Chappell:]

My last question is just on the OpEx front. It's clearly high, big sequential step up in the second quarter. There was really no significant drydockings to kind of explain that. Was there any timing issues in the second quarter and should we expect that to be the run rate going forward or be something in between first and second quarter run rate?

[Vince Lok:]

Hi, Jon. The OpEx was a little bit higher than we had expected in the Q2. I can't pinpoint anyone particularly reason. There were a number of small items and some of it is related to the heavy drydock schedule. Although, we didn't have a lot of drydocks in Q2, specifically, there are four drydockings happening in the third quarter and typically you do need more purchases in preparation for those drydocks, so we expect the run rate in Q3 to be somewhat similar to Q2, but we should see it maybe come back to more normal levels in Q4.

[Jon Chappell:]

Thanks, Vince. Since I have you, I didn't remember my follow-up before. That provision that you took for VLCC, does that include the anticipated off-hire time of the second vessel also under arrest or is that strictly from the payments that you are basically writing off now for TMT ships?

[Vince Lok:]

The loss provision takes into account our expected future cash flows and from operating the ships, so we have taken into account the fact that we can't trade that second vessel for the very near-term, so that's already taken into consideration.

[Operator:]

Thank you. The next question comes from.net Justin Yagerman from Deutsche Bank. Please go ahead.

[Josh Katzeff:]

Hi, it's actually Josh Katzeff on for Justin. I just want to switch maybe just the product crude market markets and just taking look at your Suezmax rates in Q3 to-date, you mentioned that retail West Africa have improved, but I guess they remain a bit weaker in the Mediterranean, Black Sea and AG as well. Is that the reason for the for the weaker Suezmax rates so far?

[Bruce Chan:]

That's partly the reason and also there's time lag between that and reported pictures, so I think based on where the market is today that rate is certainly trending higher weather that holds through the rest the quarters is up for debate, but it's certainly trending higher right now.

[Josh Katzeff:]

Okay. Then with regard to fleet employment you mentioned maybe you are fixing up some more ships, how should we think about fleet employment going forward? Should we expect you to actually take ships out of the pools and into fixed-rate contracts or is this more just a renewal of expiring contracts?

[Bruce Chan:]

It's been a renewal so far of expiring contract, but really as our track record shows it's really opportunistic fixing of the ships when the fixed rate time charters present themselves, and so that just happens when customers have the new requirements, so we will pursue those when those become available. They are not readily available all the time. They are consistently through the year, and so we've I think demonstrated that as those opportunities come up, we pursue them and that enables us to earnings those higher fixed revenues over and above what the spot market would have provided.

[Josh Katzeff:]

Got it, and I guess switching back over to VLCCs; you mentioned potentially disposing of the assets. Can you just maybe give us a little bit of insight into, I guess, who is running that process and I guess whose determination that would be and maybe the role of the secondly lender in this whole process as well?

[Bruce Chan:]

Right now, we are still through. As Jon mentioned earlier that Egypt arrest and then once that ship is released, then we will be trading the ships and looking for opportunistic ways of selling it, but as Vince mentioned the impairment may move up or down depending on the cash flows and with the low breakeven we've taken a of view of what we can earn, but that may surprise us on the outside in which case the corresponding sale value would be higher or conversely it may be other ways, so that process is something that is really just evolving and will depend on the outlook of VLCCs in the coming months.

[Josh Katzeff:]

Then I guess maybe to follow-up with that, you are already concerned that maybe these subsidiaries would be followed into the into the bankruptcy proceedings and what effect that have?

[Bruce Chan:]

With any proceeding like this it's uncertain, but these entities are separate from the other business that's going on with the borrower and so the fact that we've been able to take over commercial and technical management showing the ongoing cooperation and we are hopeful that this will continue to be amicably resolved.

[Josh Katzeff:]

Okay. Then just one more before I turn it over. Just for an accounting basis for these loans, I guess the VLCC's earnings will be counted as, will that be treated as revenue and OpEx as expense?

[Bruce Chan:]

No. I think that requires a little bit of clarification. We haven't taken ownership of the vessels, so therefore the actual vessels are not on our balance sheet. We are not recording any revenues or OpEx ,so we are essentially technical and commercial managers. So, the operating cash flows are essentially going toward to pay our accrued interest and to recover on our book value of the loans. So from an accounting perspective, what we would expect that we would stop accruing the interest income in the third quarter then the balance sitting on our balance sheet about $123 million. That's depending on what the cash flows we can get from the VLCCs.

[Josh Katzeff:]

So, any sort of operating income or losses will I guess be flow through some sort of year loss provision calculation.

[Bruce Chan:]

Yes. So, cash flow is coming higher than what we projected in the provision. Part of that could be reversed.

[Josh Katzeff:]

Well, I appreciate the time. Thank you.

[Operator:]

Thank you. The next question comes from (Inaudible) from Morgan Stanley. Please go ahead.

[Unidentified Analyst:]

Good afternoon, gentleman. Mostly of my questions were already answered. There's just one follow question I want to ask with VLCCs. You said that you were looking to sell them. Do you maybe see the possibility of taking them over onto your balance sheet or are you definitely looking to sell the vessels.

[Bruce Chan:]

Well, I guess, first, they are on our balance sheet as investment and loan right now. The cash breakeven is attractive at $10,000 a day and that provides us the optionality of seeing how the market evolves. We are certainly not going to be distressed sellers and we'll time to sale in an orderly fashion, but if the market improves that has an opportunity to generation some cash and provide a recovery on that loan. So, again, it's hard precisely forecast how that's going to play out, but we're trying to leave all of our options open right now.

[Unidentified Analyst:]

Okay. Great Then you mentioned the change in trading patterns due to the WTI Brent spreads coming close together. I was wondering if you could maybe give us a bit more color on that. How do you think Suezmax rates kind of develop and how long do you think it's going to carry on going? And, what sort of changes in trade patterns you've seen there?

[Bruce Chan:]

Yes. It's certainly has been a higher volume of pictures for Suezmaxs, particularly early in July one of the highest month number of pictures in a month for the year and amongst the highest going back for few years and August was shaping up to be okay, but I think there's probably some downside risk in that as well VLCC rates or weak. You'll see some of those cargoes maybe starting to go back on VLCCs. So, again in short-term, it's nice to have this volatility and certainty no complaints on the higher fixtures that we are seeing currently in the market, but again in the near-term here we do see some volatility over the sustainability of our trading pattern,.

[Unidentified Analyst:]

That was very helpful. Thank you very much.

[Operator:]

Thank you. The next question comes from Chris Combe from JPMorgan. Please go ahead.

[Nish Mani:]

Good afternoon, guys. It's actually Nish Mani on for Chris. Just want to ask question about the drydock. Could you give us a quick rundown if possible which vessels are being upheld for repairs in the third quarter?

[Bruce Chan:]

Yes. For the third quarter we have four vessels that are drydocking. Two of them are in the spot traded rate and then two of them in a fixed-rate fleet and the smart ships are the Godavari Spirit the Narmada Spirit and the fixed-rate tankers are the Kanata Spirit and Nassau Spirit.

[Nish Mani:]

Great. Thank you so much. Then just wanted to get sense, I noticed that you had some voyage revenue annual expense both, pick up in the quarter, which is opportunistic from vessels in the spot and pool trading kind of doing small voyages or was there something else?

[Bruce Chan:]

Yes. We did had some ships that trade outside the pool, so that's where you would see some voyage expenses as opposed to net pool revenues, but I guess what's important is really just the total net revenues which is revenues less voyage expenses.

[Nish Mani:]

Right. Then taking up in the quarter is a result of increased voyage activity?

[Bruce Chan:]

Yes. The increase in the voyage expenses or I guess they are clearly comparable actually quarter-on-quarter we had some shifts that were trading out pools, so that's why you see some voyage expenses directly.

[Nish Mani:]

Got it. That's actually it for me. Thank you so much.

[Operator:]

Thank you. (Operator Instructions) There are no further questions at this time. Please continue.

[Bruce Chan:]

All right. Thanks, everyone, for joining and we look forward to speaking to you next quarter.

[Operator:]

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your line and have a great day.