Scorpio Tankers' CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.28.14 | About: Scorpio Tankers (STNG)

Scorpio Tankers Inc. (NYSE:STNG)

Q1 2014 Results Earnings Conference Call

April 28, 2014 11:00 AM ET

Executives

Brian Lee - Chief Financial Officer

Robert Bugbee - President

Emanuele Lauro - Chairman and CEO

Cameron Mackey - Chief Operating Officer

Analysts

Jon Chappell - Evercore Partners

Herman Hildan - RS Platou Markets

Nicolay Dyvik - DNB Markets

Doug Mavrinac - Jefferies

Ben Nolan - Stifel

Joshua Katzeff - UBS

Omar Nokta - Global Hunter Securities

Fotis Giannakoulis - Morgan Stanley

Gregory Lewis - Credit Suisse

Sarah Hunt - Alpine Funds

Operator

Hello. And welcome to the Scorpio Tankers, Inc. First Quarter 2014 Conference Call. Today’s conference is being recorded. I would now like to turn the call over to Brian Lee, Chief Financial Officer. Please go ahead, sir.

Brian Lee

Thank you. Thanks everyone for joining us today. On the call with me are Robert Bugbee, President; Emanuele Lauro, Chief Executive Officer and Chairman of the Board; and Cameron Mackey, our Chief Operating Officer.

The information discussed on this call is based on information as of today, April 28, 2014, and may contain forward-looking statements that may involve risks and uncertainties. Actual results may differ materially from those set forth in such statements.

For discussion of these risks and uncertainties, you should review the forward-looking statement disclosures in earnings press release that we issued today, as well as Scorpio Tankers, Inc.’s SEC filings, which are available at scorpiotankers.com.

Call participants are advised that the audio of this conference call is being broadcast live on the web and is also being recorded for playback purposes. An archive of the webcast will be made available on the Investor Relations page of our website for approximately 14 days.

Before we begin, I’d like to just clarify for the stock buyback program. In the second quarter, we purchased 1.2 million shares at an average price of $8.83 per share, so $8.83 per share. But from July 2010 until now we have repurchased 2.4 million shares at an average price of $7.80 per share.

Now, I’d like to turn the call over to Emanuele Lauro.

Emanuele Lauro

Thank you, Brian, and thanks everybody for joining us today. The format of the call is known to most of you. I will make a few comments together with Robert Bugbee and then we will open the call for questions.

And as far as my comments are concern, I just wanted to highlight that since the middle of the first quarter of this year we’ll experience freight rates for product tankers which have been under some pressure.

Actually, as we speak, the second quarter is even under more pressure compared to the first one and basically what happened is reduce volatility in underlying commodity pricing, refinery turnarounds and draw downs of excess winter inventories which have dampen some seasonal trades.

However, we still see robust demand from emerging markets. Growing capacity for exports from both the U.S. and the Arabian Gulf, and we expect gasoline volumes to increase substantially in the coming weeks and months.

This year we have another 42 new vessels which are going to deliver from the shipyards in which we have ordered, I mean, South Korea and this will increase our cash flow and our profitability substantially.

Accordingly, our Board of Directors has authorized an increase in our quarterly dividend to $0.09 and as well put in place $100 million share repurchase program, which extends to the $20 million share repurchase program, which Brian has just referred too.

So, having said that, Robert, I don’t know if you want to add anything or if we want to go to the Q&A directly.

Robert Bugbee

No. I’d just like to echo your comments. But we remained very confident in the long-term fundamentals here. We actually see during the period newbuilding delivery percentage going down as deliveries exceeding new orders with a weakness referred product on the capital market. But we are seeing our customers actually pay us higher for forward rates and they have done at this time last year.

We see the weakness at the moment not something that is fundamental long-term. There are other factors involve such weak vegetable oil productions in South America combined with a generally weak production in palm oil.

So, for us, I guess, we have a little bit of luxury and not having worry to much about the first quarter or second quarter at the moment. We have made a substantial cash gain in the sale of VLCCs and it’s really what we think going forward the matters as we have the large preponderance of our deliveries coming in this next quarter. We are very pleased in our position and by this time next year we will virtually complete the CapEx position.

So for us the message on this call is that, yes, the short-term weakness, we have the sort of weird thing and I’ll just make comment to general analyst that it appears that those analysts that are most negative to Scorpio actually have the highest earnings going forward.

So we would hope that they would address this and at least try create a fair playing field to their views rather then keep EPS expectations high to mid. And but most importantly, the company is showing its confidence in not only its balance sheet, it confidence that we really turning towards this harvesting phase.

Today, another important milestone was taken the Dorian which we have well over dollar the share of investments in has finally launched its IPO on the New York Stock Exchange and we feel that we are just focusing now on execution.

And with that, we really just like to turn it over to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) So we will go first to Jon Chappell with Evercore Partners.

Jon Chappell - Evercore Partners

Thank you. Good morning, guys.

Emanuele Lauro

Good morning.

Jon Chappell - Evercore Partners

Sorry, I just want to ask a couple of strategy questions first. I noticed there are a lot of extensions on some of the chartering. We talked about the general market weakness, so probably, difficult to make a lot of money in the near-term on chartering? But how do you kind of see the chartering strategy going forward and how does that match up with your market expectations?

Emanuele Lauro

Well, I take first, the auctions that we have exercised previously in the quarter are, first of all, ships that we had under charter that approved into us that they have strong operation good quality ships. Their rates that were at below what the oil makers are willing to pay elsewhere.

But going forward, I think, we are going to be consistent to what we have said along that the fundamentally the time charters were there as a stepping stone or bridge to the new deliveries. The new vessels we are delivering across the Board whether they are LR2s, whether they are Handys, whether they are MR, have such significantly lower cash breakeven points that we will maintain that strategy where we will start, you will see in the second quarter that we will start to run down our forward book as we started dovetail and take deliveries of this huge fleet.

That allows us as we get to this distributional harvesting phase of the company and much better platform overall in terms of being able to gauge our arbitrage between dividends, stock buybacks, et cetera, because we are doing it all the time from the lowest cost producer. So if the market is really strong we do great and if the market is medium for any reason, we are still making significant cash flow positive.

So but at the moment, this next year, you are going to see it in a measured way. We will still tight those ships that have proven to us to be outperformers, because we have to do in a balance way and we are confident that once we have start approaching this third, fourth quarter and risk is massively to upside here on the first quarter when those regulations kick in and hopefully, we don’t have 150-year cold winter again and we get the vegetable oil and palm oil up to more normal flow.

Jon Chappell - Evercore Partners

Yeah, I want to ask about the veg oils and the palm oils as well. You obviously had a lot of, kind of, newbuilds ruling out of the yard under pretty lucrative contracts. Are those still available or those completely dried up now given some of the issues, you mentioned with those kind of risk?

Robert Bugbee

I think we have to be a little bit careful in answering that question. And we’re unable due to contractual terms to either say the rate nor say who the party is but I think it will be fair to say that the predominant amount of our deliveries are contracted to take palm oils from their first voyage, that have been done and that contract has been in the existence for some period. Is that a reasonable way of answering that John? Can you read between the lines or not?

Jon Chappell - Evercore Partners

I can read between the lines. I understand. Also want to talk about the charter-out strategy. I noticed Texas City was on a two-year contract. I believe that was of Valero, probably not the time to be locking in. But when you think about kind of development of your fleet and maybe some diversification as you take delivery of more newbuilds and if the market does improve, especially that kind of time rise in your time of first quarter ‘15 and match that up with kind of the buyback program when we think about your previous company, would it be fair to expect some maybe increases in charter-outs going forward?

Robert Bugbee

Well, first of all, we -- the management doesn’t really view charter-outs as a call. You know, in the case of the Texas City that deal was actually struck back in November when we actually took delivery of the ship themselves. It was part of the actual sale agreement because Valero very much wanted to keep spot exposure. It was fairly done rate. That’s a good rate with the 50% upside to us.

Secondly, look, we remain really confident to the long term. So we’re not really as we go back to conversation before, we’re not really a seller of freight, we’re more buyer of a freight. So the tendency is going to be keeping it on the spot market.

Now, there are couple of caveats to that. We haven’t opt for lot of vessels and we have a lot of valuable customers that are feeling the pressure related to these regulations and it’s quite clear to us that charters adjust them to show that as an exception. But in the main, they are extremely reluctant to take non-ECO vessels beyond a year and beyond that period where next year you’re going to start having these new regulations.

Now we may come across customers that it maybe tactically correct for us to fix one of those ships to them for a year or so, which is not a market cause that will almost settle, if it be some, let’s say, extra duties behind in terms of relationship with them et cetera. And then you always have that situation where maybe, if you get a first class grade credit and some one just wants to take you out in five years, that could be viewed as not again, not a market cause but a way in which we could create more balance leverage the way we could, even put a different leverage position on that company or create the packaging to create more visibility towards yield.

Jon Chappell - Evercore Partners

Yeah, completely understand.

Robert Bugbee

But in no account, will there be market cause of defense so concerned about the market.

Jon Chappell - Evercore Partners

Right, yeah, understood. One last quick one and I’ll turn it over. For pre-2012 bill, own vessels on the fleet, any reason to believe that you wouldn’t look to monetize those that you have as you have some of the other older ones earlier this year?

Robert Bugbee

No, they are going. I mean, we’ve been fairly clear that we would heightenedly like to enter 2015 with only ECO vessels. And our ships we consider is, they are not immune. We’ll have to spend a bunch of money to our freight if we kept them. They would still be at the lower tier that lifts the customer compliance and they would still be returning the worst EBITDA any point in the market. So yeah, we will transition out to them in a continued orderly manner.

Jon Chappell - Evercore Partners

Great. All right. Thanks a lot, Robert.

Robert Bugbee

Thanks.

Operator

We’ll go next to Herman Hildan with RS Platou Partners -- RS Platou Markets.

Herman Hildan - RS Platou Markets

Good afternoon guys. Talking 14 months from now, you will have all your vessels at leverage. Is it possible to give some color on what kind of strategy you expect to have from there, I mean, in terms of dividend and share buyback. Is there intention to use all the cash proceeds to repurchase shares and ramp up dividends?

Robert Bugbee

I think we set up our scores in this earnings release and it’s very much upto the market itself now. We have basically said everybody is going to be good boys and girls, we want to continue to move up the dividend as cash flow becomes available. If everybody is not going to be good guys and try to gain this position then we are not going to be afraid of buying back stock. So to tell you -- and that basically is creating a hammer in an anvil. It’s not -- that don’t mean to be that the management is against the shareholder basis, it’s quite the opposite. Management is there to create what it sees as the best value and the best returns to the shareholder.

So it is -- we are agnostic as to which way to do this. I mean, it can be fantastic to be allowed to just keep buying back stock on a personal basis. Please keep the stock trading weekly and let us just take the company because that’s the easiest way I can imagine to create long-term value from a management perspective but if the shareholders are willing to recognize the strengths and the position going forward, or buyers then fine, we are not there to buy stock back at any price. So it literally is the hammer on the anvil. If the stock responds the dividend, fine, if the stock doesn’t than you’re going to get the buyback.

Herman Hildan - RS Platou Markets

Second question, when you entered into the, call it partnership with Dorian, you said that you’ll take the company to the IPO process. Dorian, I guess, is in a process of going public at the moment. Can you just shed some color on what you think about kind of your investment in Dorian going forward?

Robert Bugbee

But the only color I can provide at the moment is obviously we are happy with the investment in the OGC sector. I mean, it’s hitting whatever it is, 10-year highs, 12-year highs, values are going up. We would expect it in that space, all assets, all stocks to benefit from this market. So and I think we’re doing what we’re doing which is taking it through the IPO process and once that IPO processes happen, we would expect to be an investor like anybody else at that point.

Herman Hildan - RS Platou Markets

Will it be in any kind of lock-up some of the shares which will not make able to dividend parts of your ownership to the Scorpio holders?

Robert Bugbee

I think that the -- I think that we -- well because I don’t have to think. There is a clear lockup of 80% of the stock is locked up for 180 days and 20% is locked up for 120 days. So we have an early release on lockup of 20%. You have normal standard business provisions that you can ask for an underwriter’s release or whatever these rules disclosed. But I think that going back to your question, we have more than sufficient liquidity right now to take advantage of our stock buyback program with or without having any liquidity from Dorian at all for the next four, five, six months.

Herman Hildan - RS Platou Markets

Yeah. And just a final question. I mean, (indiscernible) has been quite vocal in the media but makes a lot of sense to merge with Dorian. What’s your as a big area, I guess as a shareholder what’s your thoughts on Dorian and the launched Gas?

Robert Bugbee

We don’t have to worry about what our thoughts are at the moment because, there has been all talk and no travel so far.

Herman Hildan - RS Platou Markets

All right. Okay.

Robert Bugbee

There is nothing to discuss and tell. They actually move from talking and making pretty speeches to actually putting something on the table.

Herman Hildan - RS Platou Markets

Sure. Nothing else to be cleared. Thank you very much.

Operator

We’ll go next to Nicolay Dyvik with DNB Markets.

Nicolay Dyvik - DNB Markets

Hi. I’m just -- obviously my questions in terms, so now the deal, dividend strategy and most likely becoming a threefold with the potential Dorian shares and dividend. Just a follow-up on the last one. Of course, I know that you will be a long-term shareholder of Durian but would it be fair to assume both of them that there were buyback dividend strategy to or distribution of Dorian shares and like in periods some call it weakest operator we could cash flow to maintain your yield high and then also premium valuation or if that’s not a fair assumption?

Robert Bugbee

I see them as independent because as I said earlier, if you took Dorian off the balance sheet entirely, we’ve got an balance sheet instinct without it. So you’ve got the luxury of not having to worry too much about Dorian to execute this in next part of our strategy. Then what do you do? The indication that we become like any other investor is you are going to do to act in what is your best interest at the time and that’s it. That will depend on how you see the wheel, do you see curve developing that will depend on a whole host of practice.

Nicolay Dyvik - DNB Markets

If you were to -- the full effect to mark to cuts that the point is somewhat at least historic precaution. And if you were to mention like three short bullet to why and when they should recover near term, what would you then expect open lots of your shorter portfolio?

Robert Bugbee

Well, I think that we’ve explained why we think it is short-term. I think long-term…

Nicolay Dyvik - DNB Markets

Yeah. But when, what will be catalyst driving the market over the next, call it, three big bulk years?

Robert Bugbee

No. I mean, next week, you could suddenly risk at a much stronger output in the U.S. Gulf and the market suddenly starts to move up. And then the risk when you get trade is back engaged, et cetera, et cetera. So you have a fairly balance market. So there are a number of catalysts with respect to it to happen. You have -- if you look at good things right now, react to aging markets trading firmer than they have done before. So it’s really the west that is weaker, so anything -- if you pushed the west upwards it won’t take where very long for that rate structured to keep moving up because the east is fundamentally okay.

You can’t get what that defining catalyst is. We would just simply expect that with the fundamentals related to refinery closures or demand that at some and regulation, at some point we are just going to wake up and the market is going to be refining in. And not even our customers are getting this. I mean, we are in pretty close contact with some of those guys that are asking for one and two-year charters. And they themselves just believe demand is relatively strong.

Nicolay Dyvik - DNB Markets

Okay. Thank you.

Robert Bugbee

And we’ve booked it as Brian said, we bought back a region that what we could in the last, in this part of the first quarter and that was with all the restrictions. I mean, it’s not easy doing buyback to these days. Anybody -- for us to do a buyback really affectively, we need some help. So anybody who had blocked orders in week markets should give up notification of that early in the day before we actually stop buying in the market and show if they are shy about things you can always contact the company and we can create a private deal around that.

Operator

We’ll go next to Doug Mavrinac with Jefferies.

Doug Mavrinac - Jefferies

Thank you, Operator. Good morning, guys. I just wanted to follow-up on the previous question because I happened to think that if MRH were much stronger, this would be a completely different, call it different questions or what not. So therefore, I think that it’s the most important think to kind of zero in on and to try to discuss. So, Robert, my first couple of questions really pertain to the spot market because it is telling us something different than the period market.

And so the first one is when you look at the MR market, in the previous question you discussed how in the west that’s where you are seeing some weakness. So if you could zero in maybe a little bit more of where you are seeing that weakness, maybe potentially identify kind of the primary source of the current weakness in this spot market? Is it more exports coming out of Europe? Is it exports coming out of the Gulf Coast of the U.S.?

Rob Bugbee

Okay. I get it. So we’ve got a fundamental couple of things happening. As you have had a delayed turnaround of actual fundamental exports and moving out, okay. Buying with no op at the moment where you can shift ships west to east. So you are not getting those cargos moving west to east at this point. So that means that vessels that’s been delivering into the west after carrying palm oils like newbuilding, that market is trapped. The other part is you don’t get that movement at the moment in big volume from Argentina or Brazil out to China and India in vegetable oils because of their crop position. So it’s like a combination of all of these factors that are getting to it at the moment.

Doug Mavrinac - Jefferies

Right.

Rob Bugbee

None of which we expect to repeat itself either in the first or the second quarter next year. You can Google palm oil production. It’s stopped right year-on-year. I Google South American vegetable oil position and the flood is the same as you've had a delay in dry cargo movements in South America partly because of the flooding to it.

Doug Mavrinac - Jefferies

Right, right. So you are not just kind of what I was thinking and just kind of circle into my second question is, is it accurate from a big picture standpoint to say like, U.S. exports are rising but you have all this seasonal factors that are kind of offsetting some of?

Rob Bugbee

In a big picture, just take what our big picture is. In a big picture, this is going to sound weird, but this is the best thing that’s ever happened to us because if we had this fantastic winter in product and I don’t know how much more equity would have come into this market, what the newbuilding order book would look like you’ve got this fantastic situation where because people are short-term focused you are starving the market of equity. Certain public equity deals have failed or being delayed.

The newbuilding order book is ironically coming downwards because ships are delivering at a faster rate than new orders and this is setting itself up for a very good long-term position as you have the continued trend if refinery closures in place like Australia, Europe, opening refineries in Arabia, etcetera and this remorseless growing of U.S. exports, and then you’re going to have the rule change hammer in January.

Now for us, we don’t care about our monthly marks or our quarterly marks. We have had the luxury of great cash flow in total when we talk about the sales of the VLCCs and we consider what is happening in the spot market as an abnormally two factors that we can pinpoint and expect that they will not be repeated. That as simple as where we are at the moment.

Doug Mavrinac - Jefferies

Got it. Very helpful. And then actually that’s a segue to my third and final question is that I kind of mentioned that the first two are more spot market focused questions, whereas my third one is going to be more kind of longer-term time charter focus. I mean, when you look at one year MR rates at $15,000 a day and the fact that MR asset values are remaining quite firm. Do you view that as much more accurate as far as what’s going on in the market and they would be reflective of the fact that we are seeing 1.2 million barrels a day of export refining capacity coming online in the Middle East? I mean, is that a more accurate depiction in your view as far as kind of the state of the market as opposed to some…?

Robert Bugbee

Again, just taking as it is, it is -- another factor is important as the Korean won has strengthened like crazy in the last month, okay. So your forward newbuilding pricing is remaining very solid too. But in terms of what we look at, we do think it is far more relevant that our customers are putting the length on at higher rates than they were willing to last year. Think what a customer is expecting. BP Tesoro paid $155 for one of [Diamond STI] (ph) ships. Well think what this means that taking a ship at $155, the out-of-the-money, they are going to lose on that first voyage if they pick that ship.

Doug Mavrinac - Jefferies

Right.

Robert Bugbee

So by definition that person, which I believe, has greater knowledge than we do, is saying we think that balance of that year’s charter must be significantly higher.

Doug Mavrinac - Jefferies

Exactly.

Robert Bugbee

They are not saying, okay, that the market is going to go up in May or it definitely going to go up in June, but they are saying that we are prepared to take a hit on our first voyage that we definitely know will be a hit. We might have to take a hit on our second voyage, but we expect the balance of the year to be higher than the charter rate of $155, plus the built-in loss.

Doug Mavrinac - Jefferies

Perfect. That’s all I had. Thank you for the time, Robert.

Robert Bugbee

And we are just going with that side of the trade rather than the worries related to the short term at the moment.

Doug Mavrinac - Jefferies

Totally, hear you. Thank you.

Operator

We will go next to Ben Nolan with Stifel.

Ben Nolan - Stifel

Hey, guys, couple of quick questions. First of all, I guess, is it fair to assume that at this point -- I know late last year you said that you would look at near-term deliveries, maybe trade stock for ships, but given the share price and the share repurchase program that at least for the moment is sort of that strategy is on hold and you are more focused on acquiring the equity of the company rather than outside acquisitions?

Robert Bugbee

Well, I think that if we look at this properly, we think that the best acquisitions we can possibly make is our own fleet. That’s what you are doing. When you buy back stock, you are buying your own fleet.

Ben Nolan - Stifel

Right. And today that’s a better pricing you could buy vessel in the market I guess is the implication, correct?

Robert Bugbee

Sure, because we get the highest qualify fleet, that’s out there. We know what the fleet is, what condition that ship is. It is amazingly efficient on the no friction cost related to the purchase. There is no extra financing cost required because the fleet is fully financed and you -- when you -- you’re never going to issue equity at the relationship to NAV that were at the moment.

Ben Nolan - Stifel

Okay. Well, that’s what I thought is wanted to verify. And then the second question Robert, you mentioned in relation I think to John’s question a few times about the regulations and I assumed the low sulfur emission regulations that are coming online at the beginning of next year. Could you maybe just walk through how you think that might ultimately impact the market and how maybe put an order of magnitude somehow or another on what the ultimate implications of that could be as it relates to your fleet and just the shipping, in general?

Robert Bugbee

Okay. We are not going to put any order of magnitude on it, but it is pretty clear that those regulations have two jaws to them, one is related to emissions, which is a little bit more subjective in the sense you have to take it by ship and by ship and date by date basis, but the net result of that it is cost to all the ships, plus at the worst case even if they hopefully decided for some unbelievable reason to do modifications, it results in taking out supply. The next aspect is much clearer which is the requirement to use ultra-low-sulfur fuel and ethane which at the moment is somewhere between $300 and $350 per ton difference to marine fuel which clearly means that this is advantageous to your eco-ships that actually burn less fuel anyway. It secondly advantageous because those eco-ships not just ours but other people have the eco-ships, they were designed with these regulations in mind with that bunkers tanks, that systems, etcetera that way, whereas a conventional vessel may not be so efficient not just in price terms but actual ship operations terms in that episode.

Ben Nolan - Stifel

Okay. Well, that’s helpful, and I can appreciate you. Now wanting to put numbers on what the implication could be frankly?

Robert Bugbee

We are kind of happy with this slow burn position at the money. It’s really nice to have a situation where new building are stopped where there is a little bit of fire taking out at the market because we are not interested quite the opposite. We are not interested in where the stock is going to be.

Ben Nolan - Stifel

Right . Thinking more a longer term. All right.

Robert Bugbee

That’s why you are not seeing the slides of the presentation. We are openly telling you that the market is not great right now.

Ben Nolan - Stifel

Right. And then my last question gets back to the capital side of it, and you increased the dividend again which is nice, is there a level of which you would think you will reach given your existing fleet or the fleet that will be delivered over the next call it year that you would say this is sort of a target dividend level ultimately as a percentage maybe of your cash flow or something else, how close to that I guess is the question -- how close are we to?

Robert Bugbee

I don’t know. Look it’s a great question, it must too early to say because we don’t know where things will be in relation to the stock and etcetera. And we clearly have enormous dividend paying power if you take into account the deliveries of the vessels and even moderately normalize product market. And what we have free and clear in Dorian for example, but we haven’t made any judgment or had those discussions that you are asking about because it does depend on the stock and where that is. And at the moment, what we are interested in is simply just moving the divided up, steadily and remotely and we will get to that question later.

Ben Nolan - Stifel

Okay. Perfect. That's very helpful. And thanks again for taking the questions.

Operator

We will go next to Joshua Katzeff with UBS.

Joshua Katzeff - UBS

Hi. Good afternoon. Just wanted to quickly start off on the buyback and dividend program and you may change your fairly ambivalent towards buyback or dividends? But can you maybe talk out broadly, I know you can’t give exact levels of, where you think that kind of breaking point is between the buyback and the dividend? Is it at NAV, is it around NAV and how do you think about that?

Brian Lee

We think about it all the time. We have a number in our head all the time, everyday at what would buyback stocks and we would, I mean, we are not going to discuss it with anybody.

Joshua Katzeff - UBS

That's fair enough.

Brian Lee

Our job is to buy stock buyback at the cheapest price we can. So we have some handicaps and what we can -- can’t do in the stock buyback, it would be great, stock buyback is the, we not only compete there anytime especially when those being rate base.

Joshua Katzeff - UBS

Got it. And when I think about, I guess, some of your competitors, you mentioned this briefly, there have been some several failed IPOs in the broader shipping sector? Have you seen this bring any opportunities to you guys? Is anyone kind of now approach to you or do you expect to see any increased opportunities from your competitors because of the maybe nice closure of the capital market for some people?

Brian Lee

Yeah. Of course, we have had people come to us and whatever. But just outside of our strategy. We said, there is not a will here to put growth as the first priority. We have the biggest retail product tanker fleet, there is in existence. The emphasis is on execution, delivery to deliverability of that product, that fleet, combined with maximizing shareholder value. And so far we obviously haven’t seen anything that’s even began to take a lot of entities, it’s better than our own fleet that the prices are represented.

Joshua Katzeff - UBS

Okay. And then just one last industry question, yeah, we did beat dead horse, but one of the things we have been most focused on is and you briefly mentioned this earlier, is just some weaker deal on stocks in the U.S. and maybe a little bit more modest demand for (indiscernible) and Europe? I know this is short-term but, I guess, do you or your customers have any sense of, I guess, how long this kind of inbounds will play out? Is it a two-month trend or is it just going to go to the summer?

Brian Lee

No. Again, you are getting into -- both of those to me a very short-term periods, whether its two months or the summer, okay. And but the key to it, again, is that your customer is signaling that it will -- that the market will recover earlier just by the customers actions of going in and playing what they are playing for ships at the moment. For us, I stated earlier, the exact point or the exact reason, the exact catalyst for why end market changes from negative to positive you just can’t guess.

Joshua Katzeff - UBS

I appreciate your time this morning. Thanks.

Brian Lee

So, we -- just quick, I mean, we run our model expecting the market to, we run our financial models, expecting the market to remain weaker than a time period longer than you have indicated which is the summer and we think that will be the case, that's the safety element we put in our model.

Operator

We will go next to Omar Nokta with Global Hunter Securities.

Omar Nokta - Global Hunter Securities

Hi. Thank you. Good morning. We spend a lot of time on the call talking a lot about strategy, which has been very helpful. I just wanted to get a sense on your more tactical regarding the dirty trades, last quarter you talked about moving the LR1s in the Handys into that market which is so far proved very well-timed based on those results today? And obviously, how the market has been so far. Just wondering to get a sense from you, how is that playing out and currently, can we expect similar type of dynamic in Q2? And then from a bigger picture or prospective as the Handy is delivered to newbuilding this year, how should we think about their deployment in the clean versus dirty?

Emanuele Lauro

Rob, do you want me to take this?

Robert Bugbee

Yes, sure.

Emanuele Lauro

I think, Omar, you have a situation where starting from the last point, starting from the Handys, you will have probably 50-50 employment of the fleet between clean and dirty petroleum products. You see the regional markets for the Handys been Europe and demand mainly with, of course represents also across the Atlantic and the U.S. Gulf. But I would say, if apart from the repositioning voyages which are going to be clean, is going to be largely 50-50 or 60-40 in favour of clean.

As regarding to -- instead the move that we have done in Q1 to dirty after few of the ships because of what was happening in the DPP markets as oppose to the CPP, it was the right thing to do. Today, if you look at the rates, they are actually very comparable. So probably still DPP is paying a cad more but is not going to be significantly impacting our earnings in Q2 I believe. So it’s a washout basically.

Omar Nokta - Global Hunter Securities

Okay. Yes, that’s pretty helpful, Emanuele. That was all I had. Thank you.

Emanuele Lauro

Thank you.

Operator

We’ll go next to Fotis Giannakoulis with Morgan Stanley.

Fotis Giannakoulis - Morgan Stanley

Yes. Good morning. I want to ask about your guidance about your expenses during the rest of the year. I see that the last couple of quarters your earnings breakeven has been around $15,500 per day, how do you view this number changing during the rest of 2014?

Cameron Mackey

Fotis, this is Cameron. I can start on this and then maybe, Brian can follow up with you if I am not sufficiently detailed. But there is a couple of things that will almost certainly take our breakeven down as we move through the reminder of the year. The first being as Robert mentioned before on balance. The exchange of a larger time chartered-in fleet on the margin and on fleet. So obviously the breakevens go down as the ships deliver and we start to redeliver those ships that we are having on time charter, factor number one. Factor number two is when it comes to operating expense, I think we have tried to make it clear that the preparation for this raft of deliveries has required some upfront expense. You know that OpEx is largely comprised of recurring expense in order to get sufficiently qualified seafarers trained, screen tied, familiarized it requires some additional investment on our part that shows up in OpEx. Now as those seafarers been allocated among the larger owned fleet, you would see OpEx start to fall through the reminder of the year. On the margin, there are some other things for example enhanced purchasing power on supplies and this sort of thing but those are the really the two big factors.

Fotis Giannakoulis - Morgan Stanley

Is there a guidance range that we can use as for all models?

Cameron Mackey

I would help state to give you formal guidance but I would say just as an informal comment, you probably see the OpEx go back down to where it was prior to the previous two quarters. And I think for the earnings breakeven, i.e. the other expenses, there’s probably enough information disclosed on the financing that we have in place for the ships.

Fotis Giannakoulis - Morgan Stanley

Okay. Thank you very much Cameron. Thank you for your answer.

Cameron Mackey

Sure.

Operator

And we’ll take a follow-up from Nicolay Dyvik with DNB Markets.

Nicolay Dyvik - DNB Markets

How should we will see in the increase the number of articles in the press and the American petroleum into the vessels to elaborate that are doing a lot being for U.S. crude export. How should we think about the increase likelihood of U.S. crude exports relative to the product export out of the U.S. which has been one of the main stories?

Robert Bugbee

I think we’ve been fairly consistent as we don’t really see crude all exports whether they actually decide to export crude or not having that much relevance to us.

Nicolay Dyvik - DNB Markets

So U.S. crude exports will look to impact the tanker markets there, why not?

Robert Bugbee

Because we don’t see those exports to be in such a huge volume and we don’t think that those exports will be done at a sacrifice to general products. You can have it as incremental to products.

Nicolay Dyvik - DNB Markets

But the large call is the WTI-Brent spreads on the back of the low export. This of course giving refineries the higher margin and wouldn’t have closed and enhance lower turnaround that you open up for crude exports?

Emanuele Lauro

Of course, I guess what we’re saying to translate Robert’s remark is we don’t see a whole sale and to depend on crude exports. What you could see are wavers on a say more tactical or case-by-case basis. But we simply don’t see that as a large political or high probability political case.

Nicolay Dyvik - DNB Market

Okay. Thank you.

Operator

We’ll go next to Gregory Lewis with Credit Suisse.

Gregory Lewis - Credit Suisse

Yes. Thank you and good morning guys. I mean clearly all the questions on Sting have been answered. I guess, I have a different question more on the overall industry. And I mean, clearly when I think about Scorpio’s position and the financing that you’ve done placing your cash position. Clearly, you guys are not -- are fine and better than fine in taking delivery of your new builds better schedule to be delivered. As we think about the overall shipping industry over the next two years, I mean, it look like there is -- and this includes product tankers and beyond.

But as we think about the product tanker markets specifically, I guess, there is about $13 billion of overall newbuild schedule to hit the water. How should we think about the capital needs been met so that owners can take delivery of all those vessels? And as where Scorpio sits, is that a potential opportunity for you not in the next 6 to 12 months but maybe in the next two to three years?

Robert Bugbee

There is so many factor to work that out. I mean, our actual view at the market would dictate that you’re going to be at a rate capital to that to take those deliveries that are in place between now and the end of ‘16. Because we obviously think the market is going to improve and that would mean that those companies that maybe only raise the portion of their equity for the newbuildings will still be able to get a print, they may get a print down from what they have expected because that will be to issue equity. In the meantime they maybe to able to -- have to pay an extra couple of points through the banks to get that equity, but in an environment that we’re are foreseeing in right environment, those ships get delivered.

Gregory Lewis - Credit Suisse

Okay. Thank you guys for the time.

Operator

And we’ll go to Sarah Hunt with Alpine Funds.

Sarah Hunt - Alpine Funds

Hello, gentlemen, how are you?

Robert Bugbee

Good. Thank you.

Sarah Hunt - Alpine Funds

Quick question on the vegetable oil and the palm oil trade, is that something that could be better by the second half of this year or is that cycle really a first half of the year cycle?

Robert Bugbee

Typically, Sarah, it’s a seasonal trade that strengthens into the fourth quarter.

Sarah Hunt - Alpine Funds

Okay. So we’re waiting for catch up next year than for production because the flooding and the issue this year are going to -- I just don’t know enough about the growing cycle or the crushing cycle or whatever you call it for those. So we’ll be waiting then for that for next year.

Robert Bugbee

Correct.

Sarah Hunt - Alpine Funds

Okay. And you’d answered a lot of the questions about forward pricing. Is there anything that concerns you? I know that market could turn because right now it’s balanced sort of on a dine, but is there anything that worries you the things could get worse or are we out of the cold trade that sort of stopped a lot of exports out of the U.S. now that it’s finally signing to warm up? Was that sort of the biggest issue in terms of balancing it on the less demand side of the equations?

Robert Bugbee

Yeah. But you could also, if you’re going to correct that what are we worried about position. If you have escalating positions and geopolitical events and worrying uncertainty that took trading borrow risk away from the big traders, then that wouldn’t do much for demand either.

Sarah Hunt - Alpine Funds

Okay.

Robert Bugbee

So, yes, you always worry about that that can create an environment where financial markets are in a mess for some reason or rather that takes away a lot of businesses down to arbitrage.

Sarah Hunt - Alpine Funds

Okay. That makes sense. Thank you.

Robert Bugbee

No problem. Thank you very much, everybody. I think we’ve finished. Thank you.

Operator

And that concludes today’s conference. We thank you for your participation.

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