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Teekay Tankers Ltd (NYSE:TNK)

Q1 2014 Earnings Conference Call

May 15, 2014 01:00 PM ET

Executives

Ryan Hamilton - IR

Bruce Chan - CEO

Vincent Lok - CFO

Brian Fortier - Group Controller

Analysts

Donald McLee - Wells Fargo

Jon Chappell - Evercore Partners Inc.

Taylor Mulherin - Deutsche Bank AG

Nish Mani - JP Morgan

Hardin Bethea - HSB Capital Corp.

Operator

Welcome to Teekay Tankers Ltd.'s First Quarter 2014 Earnings Results Conference Call. During the call all participants will be in a listen only mode. Afterwards you will be invited to participate in the 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 Ltd.'s Chief Executive Officer. Please go ahead, sir.

Ryan Hamilton

Before Mr. Chan begins, I'd like to direct all participants to our web site at www.teekayTankers.com, where you'll find a copy of the first quarter 2014 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 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 first quarter 2014 earnings release and earnings presentation available on our web site.

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 us. With me here in Vancouver is Vince Lok, Teekay Tankers' Chief Financial Officer; and Brian Fortier, Group Controller of Teekay Corporation.

During today's call, I will be taking you through Teekay Tankers' first quarter 2014 earnings results presentation, which can be found on our web site.

Beginning with our recent highlights on Slide 3 of the presentation, Teekay Tankers generated adjusted net income of $0.20 per share in the first quarter compared to an adjusted net loss of $0.03 per share in the fourth quarter and an adjusted net loss of $0.04 per share in the first quarter of 2013. Cash available for distribution, or CAD, was $0.36 per share in the first quarter, up from $0.10 per share in the first quarter of 2013 which demonstrates the company’s tremendous operating leverage to our recovering spot Tanker market. These increases were primarily due to stronger Suezmax, Aframax and MR spot Tanker rates earned in the first quarter and an increase in interest income recognized on our term-loan investments secured by two modern VLCCs.

In accordance, with our current fixed dividend policy, the company declared a first quarter dividend of $0.03 per share. This was Teekay Tankers' 26th consecutive quarterly dividend, which was paid on April 30 to all shareholders of record as of April 17. Since inception, Teekay Tankers has paid a total of $7.33 per share in dividends. Teekay Tankers' dividend is currently fixed at an annual level of $0.12 per share payable quarterly.

As a result of the strong winter market rally in the first quarter, Teekay Tankers achieved its highest quarterly spot earnings since 2010 with our spot Suezmax Tankers averaging $28,100 per day and our Aframax Tankers averaging $22,600 per day. In late March Teekay Tankers took over full ownership of two 2010-built via Very Large Crude Carriers or VLCC that previously secured our investment in term loans that were in default. Subsequently, in early May we sold these vessels to Tanker Investments Ltd for a combined purchase price of $154 million.

Recently, Teekay Tankers agreed to acquire a 50% joint venture interest in Teekay’s conventional Tanker commercial and technical management operations for $15.6 million. These operations currently commercially manage a fleet of 89 vessels and technically manage a fleet of 51 vessels.

In January 2014, Teekay Tankers has co-created and invested $25 million in Tanker Investments Ltd or TIL, matching the $25 million investment by Teekay Corporation; and in late March, TIL completed its initial public offering on the Oslo stock exchange. At IPO the value of TIL shares had appreciated by approximately 15% from Teekay Tankers initial investment price and we see the potential for further growth as the Tanker market recovers.

Turning to Slide 4; I would provide an update on Teekay Tankers' $115 million term loan investment secured by two 2010 build VLCCs. As I noted on my opening remarks, in late March Teekay Tankers exercised its right as first priority mortgagee and assumed ownership of the two vessels through a mortgagee and possession process. At that time Teekay Tankers took over ownership, the vessels had a fair value of approximately $144 million which exceeded the carrying value of the loans. And as a result, for the first quarter of 2014, the company recognized $9.1 million of interest income owing under the loans.

In early May, we sold these vessels to TIL for a $154 million and used the proceeds to repay a portion of our revolving credit facility which reduced our overall leverage. Based on the selling price of the vessels and interest income received, net of cost incurred Teekay Tankers earned a 12% annual return on this investment since its inception in July 2010. The final annualized return on this investment exceeded our expected return of 10% per annum and provided additional interest revenue for Teekay Tankers during cyclically low tanker market.

Turning to slide five, in April, Teekay Tankers agreed to acquired a 50% interest in a new joint venture which will own Teekay Corporation’s conventional tanker, commercial and technical management operations or as we’re calling it Teekay Operations, for a 50% interest Teekay Tankers will pay Teekay Corporation $15.6 million in the form of new common shares at an agreed upon price of $3.70 per share. Commercial management operations include a 33% interest in the Gemini Suezmax pool and a 100% interest in the Aframax revenue sharing agreement and Taurus LR2 pool. In total Teekay Operations currently provides commercial management services for a fleet of 89 vessels.

Technical management operations will be provided through Teekay Marine Limited which is currently 51% owned by Teekay Corporation and currently provides technical management services to a fleet of 51 vessels. While Teekay Corporation will retain a portion of its legacy ownership and provide strong sponsorship, the day to day management of these operations will effectively be provided by Teekay Tankers. We believe this provides us with greater control and the decision making process relating to the operations of our conventional tanker fleet.

Once the transaction closes we expect to generate approximately $2.5 million in additional annualized equity income based on a commission fee of 1.25% on gross freight revenue and a daily management fee for commercial and technical management. As a number of vessels under management grows audit through Teekay entities and TIO which have a contractual obligation to use Teekay Operations or via new arrangements with third party ship owners. Both Teekay Tankers and Teekay Corporation can expect to earn even greater fee revenue and will be even better positioned to benefit from recovery in the spot tanker market.

Overall this accretive acquisition is strategically important as it is the last step in Teekay Tankers’ evolution into a full service conventional tanker platform which we believe will allow us to better serve our customers and generate greater value for our shareholders.

On slide six, we provide an update on Teekay Tankers’ fleet employment mix and fixed rate coverage including Teekay Tankers’ current fleet of 28 owned vessels and one time chartered in Aframax. Commencing in the third quarter of 2014, we have also agreed to in chartered one additional Aframax tanker bringing the total number of vessels in our directly owned and in chartered fleet to 30. As of May 1, 2014, 13 of the vessels including our 50% owned VLCC are trading under fixed rate time charter out contracts. The remaining 16 vessels in our current fleet are operating in the spot market through Teekay managed commercial tonnage pools with the exception of two of our MR product tankers which are trading in an externally managed pool.

The significant improvement to Teekay Tankers’ earnings and cash flow in the first quarter demonstrates the benefit of our operating leverage in a recovering tanker market. During the cyclically low tanker market over the past several years, Teekay Tankers maintained a fixed rate coverage between 40% and 50% which protected earnings from market downside.

Now looking forward over the next 12 months we anticipate that a greater portion of our fleet will begin trading in the spot tanker market as current time charters expire. Our decision to let our fixed rate coverage reduce to approximately 34% between Q2 ’14 and Q1 ’15 reflects our belief in the improving tanker market fundamentals and the need to ensure our fleet can further benefit from an expected improvement and spot tanker rates.

Over the coming months we expect to increase Teekay Tankers’ operating leverage further by acquiring and in-chartering additional on water vessels in our core mid-sized crude and product tanker segment through the strategic initiatives we expect to increase our potential upside and capture greater value for our shareholders when the spot tanker market improves.

Turning to slide seven, we take a look at developments in the crude tanker spot market. As shown in the two charts on the slide, the five year high spike in rates at the start of the first quarter increase average global spot rates for Aframax and Suezmax tankers to approximately $28,000 per day and $31,000 per day respectively, with earnings on certain routes exceeding $100,000 per day during the rally early in the quarter. On average, spot rates were the highest achieved for Aframax and Suezmax since the fourth quarter of 2008 and the second quarter of 2010 respectively.

The strong first quarter rates were due to a combination of positive tanker market fundamentals and seasonal factors, especially during January and February. As well as Chinese strategic stockpiling that brought generally Chinese imports to a record high of 6.6 million barrels per day. Specifically ease in imports of African crudes increased over the quarter, as buyers took advantage of volumes benchmark up Teekay price branch compare to Dubai.

By the end of the first quarter, rates began to drop off with the commencement of seasonal refinery maintenance and winter weather delays in the North Sea, Black Sea and U.S. Gulf began to subside. Chinese crude oil imports also dropped to 5.6 million barrels per day in March, with the conclusion of stockpiling activities.

In April however, Chinese crude imports reached a new record of 6.8 million barrels per day due to seasonal demand factors and the start of a second phase of strategic stockpiling. Overall rates in the first quarter of 2014 averaged significantly higher than the first quarter of 2013 and it continue to be relatively strong into the second quarter due to a combination of Chinese demand the completion of maintenance on certain refineries and tightening fleet fundamentals.

Turning to Slide 8, we look at the crude shipping market outlook for the second and third quarters of 2014. As illustrated in the chart on the slide, global refinery throughput is expected to dip in the second quarter due to seasonal refinery maintenance in the Atlantic basin and in the Pacific. U.S. refinery maintenance peaked in March while ace and refinery maintenance is expected to continue through to the end of June.

Throughputs are set to average, 75.9 million barrels per day in the second quarter, down from 76.4 million barrels per day in the first quarter but up 0.9 million barrels per day year-on-year due to higher runs in the U.S. Russia and the Middle East. By the beginning of the third quarter, throughput is expected to reach 78 million barrels per day as the maintenance period concludes.

Compare to the same period in 2013, spot tanker rates are expected to be higher in the second and third quarters as a result of higher refinery run as they come out of seasonal maintenance. New refinery capacities coming online in the Middle East and Asia and a further expected tightening of supply demand fundamentals.

Some wildcard factors including the Russia, Ukraine crisis the potential increase in volumes from Libya and Iran and the second phase of Chinese strategic stockpiling could have an impact on tanker demand. For example a Russian volumes are distracted there could be an increase in tanker turn mile demand as Europe turns further a feel for crude volumes.

Well, the situation in Libya remains unfavorable there’s also potential for an increase in Mediterranean Aframax demand should the geopolitical tension ease enough to open all port. Finally, the second phase of Chinese crude stockpiling began in April and could have the potential to offset seasonal weakness in tanker demand.

Turning to Slide 9, I will review the outlook for the mid-size conventional tanker fleet supply. As you can see from the graphs on the slide, free growth in both the Suezmax and the Aframax segments is currently negative and the size of these fleets is expected to shrink between 2014 and 2016.

In the Aframax segment, the uncoated fleet is expected to shrink by approximately 7% from 2014 through the end of 2016, a scrapping of early to mid 90s build tonnage is expected to out-way the modest delivery schedule during this period.

I will point out that the graph at the top right of the Slide, combines coated and uncoated Aframax vessels and illustrate that even if owners choose to trade crude on their LR2 there is still very little fleet growth.

Overall, the total Aframax size fleet including uncoated and coated vessels is expected to shrink by 1.7% in 2014 and grow by only 1.3% in 2015. The Suezmax fleet is not expected to have any fleet growth in 2014 unless than 1% of growth in 2015.

We expect very few deliveries will be added to this forecast out to 2016 as most major shipyards are booked out to 2016. For shrinking the mid size fleet is expected to be a main contributing factor to an expected recovery in spot tanker rates.

Slide 10, which shows our forecast for tanker fleet utilization for 2014 and 2015, reflects the improving outlook in the spot tanker market. In the chart on the slide, the dark blue bars show tanker demand growth with forecast growth for 2014 and 2015. And the red bar show tanker fleet growth. The green line shows tanker fleet utilization which is simply tanker demand divided by tanker supply.

As you can see from the chart, tanker fleet utilization has been in the low 80% range, since 2011 which has coincided with the period of very low tanker rates. It is our view that 2013 will prove to be the trough of the latest market cycle and utilization is set to improve from 2014 onwards, as demand begins to outweigh supply. For 2014, we are forecasting the tanker fleet to grow by just over 1% which is the lowest level of fleet growth since 2001. With tanker demand growth expected to reach approximately 3% in 2014, the net overall fleet utilization for 2014 is forecast to increase by approximately 2%. For 2015, the trend is similar with fleet growth again expected to come in at just under 2% while the man growth remains steady at 3%. This means that over the next two years we expect tanker fleet utilization to return to the mid 80% range or higher which in turn should mean an improvement in spot tanker rates compared to the very low level seen in recent years.

In summary, based on our view of the fundamentals, we believe the tanker market is at a turning point with a tighter supply and demand balance supporting higher fleet utilization and providing the basis for a sustained tanker market recovery in the coming months and years. I would like to remind investors as well that our head of research Christian Waldegrave post regular monthly tanker market updates on our web site.

On slide 11, I will provide an update on spot earnings for the second quarter today. Compared to average rates for the second quarter of 2013, we realized Suezmax, Aframax and LR2 rates for the second quarter of 2014 to date have been significantly higher. Based on approximately 55% of spot revenue days booked, our second quarter-to-date Suezmax bookings have averaged approximately $17,200 per day, up significantly from the $12,150 per day in the second quarter of 2013. And our second quarter-to-date Aframax bookings have averaged approximately $15,800 per day, up from the $12,400 per day in the second quarter of 2013. Based on approximately 70% of spot revenue days booked, our second quarter-to-date LR2 bookings have averaged approximately $14,000 per day, up from $12,800 per day in the second quarter of 2013.

Prior to taking questions, I want to wrap up by saying, that while we haven’t named my successor yet, we expect one to be named prior to next quarter’s earnings call. And therefore this is most likely my last quarterly investor call as CEO of TNK. TNK has weathered the tanker market downturn of the past few years better than most of our peers and I’m pleased that the one thing I don’t have on my Teekay resume is chapter 11 experience. I believe that TNK is very well positioned to benefit from the recovery in the spot tanker market. And as I will be a continuing TNK shareholder past my departure date, I will be rooting for a strong tanker market recovery that translates into significant value for TNK shareholders.

With that, operator, we are now available to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) the first question comes from Donald McLee of Wells Fargo. Please go ahead.

Donald McLee - Wells Fargo

It looks like forward fundamentals of pretty attractive given the shrinking mid-size fleet and the current rate of backlog; I just want to know how that affects your posted growth over the next year or two?

Bruce Chan

I think that the fundamentals are pointing towards, us wanting to increase our exposure to that market, and we’re naturally doing that as our fixed rate portfolio declines and having the ability now of having sold the VLCCs to have additional financial liquidity to grow, is something that we’ll be looking at doing.

Donald McLee - Wells Fargo

And will there be a particular focus on maybe Suezmax’s versus Aframax’s or it’s kind of either way?

Bruce Chan

I think the lots are either way, it depends on quality of the ship and availability and the right price.

Donald McLee - Wells Fargo

And also, kind of does that improving backlog effect is growth coming directly at TNK or TIL?

Bruce Chan

It will come through both ways, being a co-investor in TIL as well as direct growth at TNK.

Donald McLee - Wells Fargo

Got it, and then just kind of talking about how rates move during Q1. Could you speak a bit about how much, I guess of that, I’ll try to - due to tightening fundamentals and how much of that was of a seasonal nature?

Bruce Chan

It’s a combination of both. It’s very hard to pinpoint which of those two is the main catalyst. It’s obviously a combination of that. But I think, the fact that, rates were higher in Q1 is a sign that the supply demand balance is close and then therefore when the fundamentals due to towards being short of ship supply, the rates do have these potentials to go to high levels.

Donald McLee - Wells Fargo

Got you. And then just one quick question on your Q2 spot earnings guidance. I don’t think you guys gave any guidance for MR spot rates?

Bruce Chan

It’s correct. Year to date so far looking at right now it is about 14,000, 13.5, 14,000.

Operator

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

Jon Chappell - Evercore Partners Inc.

Pretty good. I wanted to ask you about the Teekay operations joint venture. Maybe this is just my misunderstanding but I thought when the TIL entity was announced, that TNK would be taking the entire Management structure from Teekay Corp. Was I incorrect with that and if I wasn't, kind of what lead the decision to just do the 50/50 split? Was it Teekay didn't want to let go of the whole thing or was it TNK wasn't prepared to take on the entire Management structure?

Bruce Chan

I think the day-to-day Management control part of it from TNK is achieved and in a way that still shows long term commitment from the parent, especially through the fact that they're taking equity back and achieves our goal of having that platform embedded at TNK, without paying for the whole 100% up front so I think the goals are at the end of the day we've achieved a structure that I think works well for both entities and so that's the structure we wound up on.

Jon Chappell - Evercore Partners Inc.

And then also maybe for Vince I wanted to be clear on the accounting and economics of the VLCC sales so out of the 154 million roughly 115 goes to the loans that were backing that ship which is would leave about 39 million of excess. Is that all going to the revolver or are there other fees or stuff that I'm missing?

Vincent Lok

No, the 154 million in proceeds, pretty much all that is going towards retaining the revolver so you'll see that coming through in the June 30 balance sheet.

Jon Chappell - Evercore Partners Inc.

So then when you look at call it fire power or whatever for acquisitions and Bruce talked so first time I've seen in awhile about kind of gaining more market leverage through acquisitions or chartering and more tonnage, you mentioned 300 million of liquidity in the Press Release, how do you see the total acquisition capability if you levered it say 50% conservatively to actually add tonnage in the next 12-18 months.

Vincent Lok

Yes, as you said we do have pro forma those 300 million of liquidity through the revolvers and that gives us quite a bit of near term capacity to act quickly on any on the water acquisition opportunities. I don't think we should give any specific guidance as to Quantum or anything but we certainly have the flexibility to act quickly as well as access to new capital.

Bruce Chan

And it gives us the balance sheet capacity to support increased leverage through in charters as well.

Jon Chappell - Evercore Partners Inc.

And then just finally when we think about the 2017 pretty big bullet payment obviously you've made a big step towards paying that down with the sale of these VLCCs but how are you thinking about potentially refinancing that facility? I know it's still a long way away but we're moving up in this part of the cycle versus using any new liquidity and cash flow well above what you're paying in the dividends towards expansion.

Vincent Lok

As you said, that still is a long ways away, that revolver is due at the end of 2017 and I think given the some of the positive results that we seen so far this year, as well as the sales of VLCCs, that's all moving in the right direction in terms of helping delever Teekay Tankers and generating that cash flow so that we're in a much stronger financial position, and so I think we're in pretty good shape there.

Operator

Thank you. The next question comes from Taylor Mulherin of Deutsche Bank. Please go ahead.

Taylor Mulherin - Deutsche Bank AG

Just wanted to start off with a quick one. I wanted to make sure the interest recognition from the sale that around 9.5 million from the VLCCs, there's none of that continuing on a go forward basis, that was just a Q1 specific event?

Bruce Chan

That’s correct. That’s a Q1, it was 9.1 million.

Taylor Mulherin - Deutsche Bank AG

Okay, perfect. And then just wanted to dig a little bit into the tanker operations acquisition. So just on a sort of nuance question, can you help me understand where that fits into the Income Statement? Is it just like a revenue line and then if you could just talk a little bit more about you alluded to this but just sort of how you expect to grow that 2.5 million or so of annual income over time and then the last part of it was this has come up in the past but as far as TIL's relationship in the pool, when there's any sale or purchase activity at TIL, would TNK now benefit from that from its ownership in tanker operations? I know that was a lot of questions.

Bruce Chan

Okay. I’ll start with the first question that was the income statement. First of all, I think one of the benefits of the 50/50 joint venture structure we've come up with between Teekay Corporation and TNK is first of all it strategically aligns both parties to grow that business and I think both parties are very much aligned and the other benefit in a way, it actually keeps that fee business in a very clean on the financial statement so given that it's a 50% joint venture it will be equity accounted for and so the 2.5 million that we provided here that would basically show up as equity income on the Income Statement. So it should help keep the Income Statement fairly clean.

Taylor to your second and third questions around how we can benefit from the operations. The big component of those fees is a Commission of 1.25% on gross freight and so as the market, the guidance we've given is based on the current tanker market-rates but as we expect an improving market-rate recovery, the fees will increase as those rates get higher, as well as additional ships which ties into your third question around TIL. As TIL stated the goal or strategy is to increase and buy more ships to benefit from the tanker market asset improvement though TIL is contractually obligated to use Teekay operations to manage those ships so that will be an additional income from managing those ships as well as expanded income as the rates improve.

Taylor Mulherin - Deutsche Bank AG

Great it makes sense and I'll finish up with just one more sort of market question. So obviously Q2 has been fairly weak so far and you guys laid out your expectations for Q3. Just wanted to get a sense of basically what you thought the timeline and I know this is a moving target but what the thought it timeline would be for more normalized rates when you look back historically. You're obviously putting your money where your mouth is in terms of increasing spot exposure so just wanted to get a sense of your timeline for what you thought or when you thought improvement in the market might happen.

Bruce Chan

A good way to look at it is on the utilization slide where we look at it going forward, typically Mid 80% utilization is what we call or car mid cycle rates or where rates would be where they got to be at a 10 year average type rate level and anything kind of in the higher 80s and low 90s is really into the high cycle rate level and below that is the low cycle like we saw and so as you see the supplies and demand going forward and as you saw last year, when the rates did kind of spike during the quarter, it shows that that utilization number is moving up and so based on that chart then it's in the next couple years you kind of get back to that Mid 80% utilization live.

Operator

Your next question comes from Nish Mani of JP Morgan. Please go ahead.

Nish Mani - JP Morgan

Wanted to ask a question about the commercial transaction to see if I understand the financing correctly but the roughly $15.5 million consideration are there new shares going to be issued to fund that transaction and if so is it on the handle of about 4 million shares?

Bruce Chan

That is correct. That 15.6 million divided by $3.70.

Nish Mani - JP Morgan

Okay, got it. So there is going to be an initial share offering, correct?

Bruce Chan

Correct.

Nish Mani - JP Morgan

And then I kind of wanted to touch back on your guidance and kind of shifting towards the spot market and what you view as being the recovering market. Obviously we're looking at about 1/3 cover for the next 12 months. I mean realistically,, how low would you be willing to go kind of in the medium term and do you see yourself letting several of the charters that come up later this year expire and then go immediately to the spot market or do you envision yourself maintaining this roughly 1/3 cover?

Bruce Chan

No, I can see those charters expiring and us not renewing them. I believe the market is going to be improving here and they do naturally run-off through the year and into 15.

Nish Mani - JP Morgan

Just eyeballing it, it looks like you can get as low as 20% by the end of the year, that doesn't seem like it's out of Sink -- with your think something.

Bruce Chan

That’s right. It could definitely get that low and we could have forward starting in charter which also exposes us to further leverage and that's a benefit because that in charter doesn't start until later in the year where some of the seasonal period is already behind us and so that's an opportunistic in charter and I think we would be looking at doing more of those as well.

Nish Mani - JP Morgan

Great and you know kind of picking back on what John asked earlier with regards to growth opportunities and dry capital, clearly you guys are in a position to grow given the cash infusion of the VLCC sale but I kind of wanted to get you to help me think about what the growth strategy is at TIL versus TNK, and how they kind of differ. I understand that TIL is kind of asset value focused but are we likely to see the similar kind of transactions replicated at one vehicle versus the other over the next several months?

Bruce Chan

It is certainly complimentary. TIL's intended strategy is to buy assets below their historical average values and then wait until they increase and yield a gain and TNK will benefit through its ownership of TIL, and we could also participate in further equity raises if those happen at TIL, but then aside from that, in a complimentary strategy as we just discussed around the in chartering and rolling off of the existing ships and as demonstrated now, we already have significant operating leverage or exposure to our recovering market and we will be looking to enhance that further and that may be ships Director further in charter, so it's all complimentary around trying to create the most value as the market recovers for TNK shareholders

Nish Mani - JP Morgan

Sure, and you know it's complimentary but in some sense also competitive right theoretically speaking TIL and TNK could be bidding for the same assets in the open market; correct

Bruce Chan

Theoretically but being part of the overall Teekay Group, we're certainly going to be not having bidding wars among ourselves if it came down to it. That would be destructive.

Nish Mani - JP Morgan

And then I just guess the asset value play does that imply TIL will be pursuing a more distressed transaction and TNKs has a broader acquisition mandate?

Bruce Chan

No, I won’t say that’s a distress. They are certainly looking at buying assets below the historical average and obviously if it's distressed, that is a benefit, but they will be looking at accumulating those types of assets. They aren't necessarily also as it's focused around like we have core operating segments where we had a lot of value to our customers since we're full shipping platform and that's why they bought the VLCCs because again, they're in it looking for areas where it can have a lot of asset value appreciation.

Nish Mani - JP Morgan

Got it and my final question. I know you sold the VLCC due to its precarious nature and odd situation but that doesn't preclude you from going after the VLCCs in the future right, even though the Aframax Suezmax in this segment has been your core focus?

Bruce Chan

It doesn't preclude us from going after anything in particular although my view has always been and I think is supported by a lot of analysts that those segments are largely correlated and that cargoes do move around between those segments on the periphery all when there is over demand or lack of supply in different areas so those rates in the medium term tend to be correlated.

Operator

Thank you. (Operator Instructions) The next question comes from Hardin Bethea from HSB Capital. Please go ahead.

Hardin Bethea - HSB Capital Corp.

Hi. I have a question regarding the FCX (ph) contract if you have any updates on the status of that?

Bruce Chan

That contract is no longer valid and we’re in proceeding towards arbitration for a claim against them for damages.

Hardin Bethea - HSB Capital Corp.

Is there a status or a time line you could provide on your anticipate recovery or what’s the current status of it?

Bruce Chan

No, I can’t speculate on that.

Operator

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

Bruce Chan

All right. Thanks everyone for joining. I look forward to listening in next quarter.

Operator

Ladies and gentlemen, this does conclude the conference call for today. You may now disconnect your line and have a great day.

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