Navigator Holdings' (NVGS) CEO David Butters on Q2 2014 Results - Earnings Call Transcript

Aug. 9.14 | About: Navigator Holdings (NVGS)

Navigator Holdings Ltd. (NYSE:NVGS)

Q2 2014 Results Earnings Conference Call

August 7, 2014, 09:00 AM ET

Executives

David Butters - Chairman, President and CEO

Niall Nolan - CFO

Oeyvind Lindeman - CCO

Tommy Hjalmas - COO

Analysts

Ben Nolan - Stifel Nicolaus & Company, Inc

Jon Chappell – Evercore Partners

Doug Mavrinac - Jefferies & Co

Michael Weber - Wells Fargo Securities, LLC

Fotis Giannakoulis - Morgan Stanley

Operator

Thank you for standing by ladies and gentlemen and welcome to the Navigator Holdings Conference Call on the Second Quarter 2014 Financial Results.

We have with us Mr. David Butters, Chairman, President and Chief Executive Officer; Mr. Niall Nolan, Chief Financial Officer; Mr. Oeyvind Lindeman, Chief Commercial Officer and Mr. Tommy Hjalmas, Chief Operations Officer of the company.

At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session (Operator Instructions). I must advise you the conference is being recorded today, Thursday August 7, 2014.

And I now pass the floor to your speaker today, Mr. Butters. Please go ahead.

David Butters

Thanks Jenny and good morning, everyone and welcome to Navigator’s second quarter 2014 earnings conference call.

As Jenny mentioned on the call today with me will Niall Nolan, our Chief Financial Officer and Oeyvind Lindeman, our Chief Commercial Officer. Also with us today is Tommy Hjalmas who is running our new build program. After a few brief remarks, we will open the call as usual to question-and-answer period.

Last evening, we released our financial and operating results for the quarter. We reported earnings per share of $0.36 for the second quarter of 2014 versus $0.25 for the same period last year, a 44% increase in spite of a significant number of additional shares outstanding as a consequence of our November 2013 IPO.

In a moment Niall Nolan will take us through the details of the quarter's results, but from my perspective the quarter was quite solid and reflects the continuation and the strength of the handysize LPG and petrochemical gas sector as well as reflecting the impact of our expanded fleet now numbering some 25 owned vessels in the water.

Now as a reminder, Navigator has an additional 12 vessels under construction and due for delivery through 2016. We did take delivery of one of the 21,000 cubic meter ethylene capable vessels during this past June and after completing gas trials, it’s now on its way for her first cargos.

With the current strength in the handysize market and the scheduled delivery of the 12 new vessels into our fleet over the next two years, we’re hopeful we can continue to deliver now with a little bit of luck, a progressive improvement in operating and financial performance throughout this timeframe.

Our strength is in the operating complex gas ships and operating them in the handysize market where Navigator has a preeminent position.

We intend to remain in the handysize segment and protect our market share and continue to build on our strength while at the same time, capitalize on our unique technological knowhow and experience in handling complex gas and diversifying into other LPG and petrochemical markets.

To this end, this morning we filed with the SEC on Form 6-K, an announcement of our entering into a long-term shipping contract with Borealis on of our 35,000 cubic meter ethane carriers cannot currently being build in Jiangnan Shipyard in China.

Headquartered in Vienna, Borealis is one of the major polyolefin produces own 65% by Abu Dhabi and 35% by OMV major Austrian based oil and gas company.

The vessel is intended to transport Ethane from Sunoco Logistics Marcus Hook terminal to Stenungsund, Sweden where Borealis operates a major ethylene cracker. The ethylene will replace a higher priced mix of naphtha and LPG and petrochemical resources announced last evening they would be the supplier of the 11,000 barrels of ethane to Borealis.

Now we believe the Borealis agreement is part of a growing movement for foreign petrochemical companies to access relatively cheap U.S. feedstock.

We are in detailed conversations with a number of other European petrochemical producers and remained optimistic that we will reach long-term charter dominance on the three remaining 35,000 cubic meter vessels that we are constructing.

Our goal is to develop an industrial-type shipping leg providing Navigator with a visible and predictable cash flow balancing our spot exposure in the handysize sector.

While the 35,000 cubic meter ethane carriers were targeted for the European market, we’ve also been approached by a number of far Eastern petrochemical companies whose favorable economics also exist for the import of ethane replacing in part, the current use of naphtha or LGP stock in their ethylene crackers.

Many of the same companies discussing and negotiating ethane supply contract with the U.S. terminal operators are also in conversation with Navigator for their transportation requirements.

We have been discussing with shipyards the design and construction of very large ethane carriers or VLECs. Now because of their unique nature of these vessels we would not order them without securing long-term time charter agreements in advance.

While we cannot predict or assume we will receive any of these, we believe we do have an edge because of our already honing and operating the largest tonnage of ethylene carriers and having the in-depth knowledge knowhow and experience in operating these complex vessels.

At this point, I think I would like to move the conversation over to Niall who will take us through the detail on our operating and financial results, so Niall?

Niall Nolan

Thank you, David and good morning. The results for the second quarter that is the three months to June 30, 2014, were very satisfactory as David mentioned with net revenues up 39% compared to the second quarter of 2013 and net income of 71% for the second quarter compared to the same quarter last year.

Revenue for the second quarter at $76.1 million compared to $60.5 million for the same quarter last year as a result of the additional vessels acquired from AP Moller June 2013 and a current increased charter rate environment and also improved utilization.

As David mentioned, we operate a total of 24 vessels for most of the quarter until the Navigator Atlas was delivered on June 20, 2014, against an average number of vessels of 19 in the water for the second quarter of 2013.

Charter rates too, have risen over the past year up from $880,000 per month or just under $29,000 per day for the second quarter of 2013 to an average of just under $918,000 per month or $30,200 per day for the second quarter of this year.

Utilization also contributed to our strong second quarter results, which average utilization for the most recent quarter at 99.4% bring the utilization rate for the full six months to 98.1% and this compares with 95.9% for the six months to June 13 and 95.3% for the second quarter of 2013.

As I just mentioned Navigator Atlas was delivered by Jiangnan Shipyard in China in late June and following delivery the vessel undertook excessive gas trials before sailing for China to the Middle East where next week she will load her maiden cargo of ethylene bound for Northwest Europe. It is likely that she will undertake repeat voyages from the Middle East to Northwest Europe with ethylene for the remainder of 2014.

As with Navigator Atlas, which was delivered two months later than originally scheduled, the remaining 2014 new buildings are also likely to be delivered between one and three months later than their respective original delivery dates.

With Navigator Europa our second vessel now scheduled to be delivered in late September and therefore we will not see any contribution from this vessel until the fourth quarter.

Constantly we now have an order book of 12 vessels, four ethylene capable semi-ref gas carriers, four semi-ref vessels without ethylene capable and four larger 35,000 cubic meter ethane and ethylene capable vessels.

As David referred to we’ve announced this morning that we’ve entered into a long-term charter for one of the 35,000 ethane carriers with Borealis a leading global provider of chemicals and plastics for a minimum period of 10 years and we remain confident that further contracts will be coming for the additional vessels.

I will refer to last quarter; we’ve had three vessels enter shipyards during the second quarter for their respective five year scheduled drydocking surveys. Although the costs of these drydockings are predominantly capitalized and amortized over the period to the next drydocking in approximately five years time, we do not earn any income while the vessels are in or sailing to the yards.

Since June 30, 2014, we’ve completed the drydocking for a further two vessels, the second of which departed Rijeka in Croatia last weekend. The sixth and final vessel to be dried up this year is likely to be in early September in Singapore, although it is subject to change depending on the time that it takes for the vessel to discharge its current cargo in South Korea.

Each vessel is taking approximately 12 days to undertake their most recent dockings and this includes the time taken to reach the drydock from the previous discharge port.

The voyage expenses decreased this quarter from $14.5 million to $12.2 million as the volume of cost associated with voyage charters such as bunkers and port costs and canals were reduced. The voyage expenses are essentially a pass-through, and that we are compensated for all the voyage expenses incurred by increased voyage charter revenue.

Vessel operating expenses on the other hand are those for the crewing and maintenance of the vessels on average amount to $8,470 per vessel per day during the three months to June 2014 up by a 5.4% from the $8,033 incurred during the past three months to June 2013 and we continue to monitor these costs closely.

General maintenance and corporate expenses for the three of June amounted to $3.5 million, up from $2.4 million during the second quarter of 2013. This increase is attributed to the enlarged operations associated with the fleet's expansion and additional cost as a result of being a publicly traded corporation.

Interest cost rose from 6.9% for the second quarter of 2013 to $7.8 million for the three months ended June 30, 2014, as borrowings have increased as a result of drawing down of the loan facility during 2013 to facilitate the acquisition of the 11 handysize vessels from AP Moller.

On June 30, we entered into a supplemental loan agreement, which enabled us to prepay $120 million on July 7 from existing cash balances and thus reducing interest expense and this prepaid amount is available to us to withdraw at any time over the term of the facility in tranches of $30 million each, a full year of interest would amount to a saving of approximately $2 million on this agreement.

Earnings per share, sorry, EBIDTA for the three months to June 30, 2014, rose 43% to $38.7 million compared to $27 million generated during the second quarter of 2013. Our net income rose 71% to $19.7 million for the three months to June 2014 from $11.5 million for the comparative three month period last year.

As David again mentioned, earnings per share was $0.36 for the quarter based on weighted average number of shares of 55.3 million shares in issue compared to $0.25 for the second quarter of 2013 based on the lower 46.3 shares in issue at that point, though those latter shares have been adjusted for the three volumes that we did in October 2013.

On the balance sheet, cash as of June 30, 2014, stood at a $159 million down $30 million from the balance held at the end of Q1. This maybe as a result for the payment to Jiangnan Shipyard during the quarter of $24 million for the various new build contracts as well as regular quarterly repayment on the various loan facilities.

Total debt therefore at June 30, 2014, was $575 million following the drawdown of first tranche of $30 million on the new loan association with the four 2014 new buildings. This loan facility was put in place in April 2013. Net debt at this June 30 was $416 million equating to a debt to capitalization of a modest 42%.

On average our debt cost is 4.8%, which includes the 9% in the $125 million Norwegian bond and finally following the delivery of Navigator Atlas at the end of the second quarter at a total delivered cost of $53 million our 12 vessel order book total commitments now amount to $688 million of which we have paid a total $93 million to date to the shipyard.

We have sufficient funds to fulfill this entire capital commitment from existing cash resources and from existing and expected future of bank borrowing facilities. And with that I will turn you back to David Butters to open line for any question.

David Butters

Thanks Niall. And Jenny, you can open the line for the now for Q&A period.

Question-and-Answer Session

Operator

Thank you very much Mr. Butters. (Operator Instructions) From Stifel, your question comes from the line of Ben Nolan. Your line is now open sir.

Ben Nolan - Stifel Nicolaus & Company, Inc

Thanks, and congratulations, guys. It's both a good quarter and nice to have a contract under your belt. My first question or, I guess, sets of questions relates to that contract. Could you maybe give me any idea what the -- what you might expect the rate of return to be, associated with that contract, or some sort of an EBITDA contribution, or some way to frame out what you think the vessel will be generating for you guys.

And then, associated with that, do you think that, along with the Borealis contract they could -- there could be additive vessels? That's a really big ethylene cracker in Sweden. I mean, is this just, potentially, the first of several, or is that all they should be needing, do you think?

David Butters

Let me ask -- let me attempt to answer the first part of that question. Ben, we do have 30 agreements in place, confidentiality agreements with our counterparties about disclosing details and we certainly want to honor those. When we enter into long-term charters, we obviously are not going to get the kind of returns that if successful we can get in the spot market and the spot market has been producing some as you know some rather robust returns.

Therefore I would say that we will get in the teens earns on a cash-on-cash basis on leverage but high teens. The other spot is of course, if we wish to we can leverage this because; A, they are long-term contracts and B; the contract counterparty is a very reputable and creditworthy customer.

So it will turn out to be a highly profitable for us and a highly profitable contract for us and the second part of the question, I will let Oeyvind Lindeman talk about the cracker in Sweden that we’re going to be servicing.

Oeyvind Lindeman

Hi Ben, so on Borealis of the Stenungsund cracker, the unique feature with this cracker is that they can switch between propane, butane, naphtha and ethane. So that’s the unique position and the probable volume in barrels is about 10 million to 11 million barrels per year ethylene production and propylene production.

They have downstream polyethylene and polypropylene plants there. So at the moment they have ethane supplier contracts with Statoil in Norway being transported on smaller vessels. I believe that’s going to continue. I think Borealis have expanded that contract from 2015 for another seven years, so that’s more volume.

We will do about one third on that one ship from our conservative settings and we will do one third of their annual demand for feedstock there essentially pushing out more expensive naphtha and perhaps to some extent propane, but butane, we’re not part of the exact economics of that cracker.

Borealis is of course a big system, a big plastic producer. They have crackers also in Porvoo, in Finland. So the question is of course whether they will expand and take further advantage of cheap U.S. feedstock. So let’s see, this is a great example of what’s happening in the U.S. and European petrochemical producers taking advantage of that to cement to competitive advantage.

Ben Nolan - Stifel Nicolaus & Company, Inc

Right. That's extremely helpful. And then, sort of associated with the ethane side of it, I know that -- well, I guess, again, two parts, and then I'll -- I guess I'll, even though I don't want to, I'll turn it over to someone else.

Number one is, Enterprise, I guess, last week in their earnings call said that they now have contracts for 85% of their total off-take. That clearly means that there are some unspoken-for contracts out there in terms of the shipping capacity.

How soon would you expect the buyers of that ethane to come to the market to find the shipping capacity associated with whatever 100,000 barrels a day or so of contracts that appear to now have been signed? Is that something that should happen in short order? Or do they kind of have the luxury of waiting it out until they get closer to delivery?

Oeyvind Lindeman

As David mentioned we are in detailed conversations with all petrochemical producers both in Far East and then Europe and all these guys there are talking to the outfits in the U.S. Now the exact details of those dry contracts we are not talking to. It depends a little bit upon the timing that these companies -- when they want the ethane. Of course, Enterprise starts off a fourth quarter 2016.

But I think at least what are the very large volumes that you have seen, Reliance for example, I think it’s very awkward for people to enter into a supply contract without having shipping in place, particularly for the larger volumes that are allegedly bound for Asia. So you would imagine that announcements will come to full. When those announcements will be made by the various purchasers of those -- that ethane from Enterprise, time will tell.

Ben Nolan - Stifel Nicolaus & Company, Inc

Okay. And then my last ethane question, I meant to include on the last one, but maybe, David, could you talk about where you guys are thinking with respect to the potential for participating in an ethane terminal? Obviously, you've spent a lot of time on that. Is that still sort of at the forefront of your thinking, or taking a bit of a back seat to what everybody else is doing?

David Butters

Well, thanks Ben. It never contemplated ethane terminals as part of Navigator’s portfolio. Ethane, it will be a limited of players as terminal operators for obvious reasons and limitation on ethane exports to be with the volume.

We’ve interest in infrastructure and we continue to pursue that with other parties to see if we can prevail on that type of platform and it’s still in progress but I just want to clarify that it’s not ethane.

Ben Nolan - Stifel Nicolaus & Company, Inc

Right. I meant propane on that, but, yes, absolutely. So, it's still a work in progress, still something very much in discussion, I suppose?

David Butters

That’s right. It is of great interest to us on to provide a balanced portfolio of shipping and logistics and the nature of it is that we work with other parties, so we don’t have full control of the progress as we would like to because you need suppliers and you need off-takers and so on to put it all together, but it is definitely something of keen interest and something that remains on that effort.

Ben Nolan - Stifel Nicolaus & Company, Inc

Great. Okay. Well, that does it for me. I'll let somebody have a shot. Thanks. And, again, nice quarter, guys.

David Butters

Thanks Ben.

Operator

Thank you very much indeed sir and from Evercore, your next question comes from the line of Jon Chappell. Your line is now open.

Jon Chappell – Evercore Partners

Thank you.

David Butters

Good morning, Jon.

Jon Chappell – Evercore Partners

Good morning, David. Just a couple more questions on ethane. Now that you have one commercial contract in place, and it sounds like you're pretty far down the road on commercial contracts for the other three, can you remind us, do you have any options outstanding right now for other 35,000 cubic meter ethane carriers and what's your appetite to potentially order more in that asset class?

David Butters

First of all the three that we’re building now that are under construction, of the four, one was a firm contract, the three were options, so we already exercised our option based upon the feedback we were getting from charterers about their interest in it. That’s why we exercised those options.

We do not have any further options on the 35,000 cubic meters. We did and have gone out for pricing and found that the pricing has gone up substantially since we have entered into our contractual agreements with Jiangnan.

So we will probably work and will respond once we complete the contractual commitments on the existing three that we have not contracted off.

Jon Chappell – Evercore Partners

That's helpful, and it dovetails into my next question. You mentioned you've been in some conversations with yards on potential VLEC orders. Has the pricing there moved up to the same magnitude as the 35,000 cubic meters? And also, have you had initial discussions with customers because, obviously, you'd have to have a contract in place there before you move forward with the yard.

David Butters

Yeah, we're pretty far advanced. We have a design. They are significantly more expensive than the 35,000 because we’re talking 84 plus cubic meter in size for the VLECs and they will be a little bit more complex vessel than the 35,000. We want them to be flexible enough to carry a merit of products be able to carry LPGs, LNGs and ethane and we think we have that design in place. We think we have a pretty firm idea where that cost is going to come out. We have a pretty good idea of where we want to get them build and we have a pretty good idea as to the delivery schedule.

We've been sharing all of that information with a number of potential charterers who are in discussion with the various ethane terminal operators and I think just to follow-up on an earlier question, the potential charterers and users of the ethane don’t want to be too far off in their supply-demand agreement with their transportation agreement.

They don’t want to find themselves with a lot of supply that they’ve committed for without having a transportation agreement in place as one of them mentioned to us that they feel if they do that, if they’re too much exposed, that they may not have as good a negotiating stance with the potential shipper knowing that they've got the supply and have to act quickly.

So this will all dovetail I believe. Enterprise is putting pressure on the petrochemical companies. They’re putting pressure in the sense that they know they’ve a limited amount of capacity and first come first serve and so there is a bit of scramble. I think this will all fall out over the next four or five, six months and it’s a relatively quick process now that it’s moving quickly.

Jon Chappell – Evercore Partners

Does it have similar economics to the low to mid-teens that you have with the 35,000 cubic meter ships?

David Butters

Yeah, when you’re building vessels that are unique and that you’re one of the first movers and you’re going to take long term secured business with good credits, I would have thought that that is the kind of returns that you would expect and the charterer would be prepared to give, so yeah, I think that’s right.

But the difference between the European business on the 35 and the Far Eastern business that we’re possibly with larger vessels is that typically the Far Eastern producer needs more vessels and the vessel cost is much higher.

So your capital commitment and therefore your earning base if you will is much more significant. The projects we’re looking at in the Far East we’re discussing about typically require anywhere between four and six vessels and the price is anywhere from $120 million to $130 million per vessel you’re talking $750 million a project and then your earning base on that is a lot different.

Jon Chappell – Evercore Partners

Okay, incredibly helpful. Just one last thing, I don't want to ignore the semi ref business, which has done exceptionally well. Just two quick questions on that; one, now that you seem to be focused a lot on ethane and there could be some capital commitments there, are you happy with the fleet you have in the semi ref are you still exploring expansion opportunities there?

And then, two, as you look at the longer-term contracts as they come into place with ethane carriers, would that give you the flexibility to be a little bit more short term in nature, maybe a little bit more spot-focused in the semi refs, especially as the market is really strong?

David Butters

Well, in the handysize market, there’s very little long-term business. It’s a spot business and when I say spot I am talking about anything from a voyage to a year’s contract. That to me is all spot business. So it’s a overwhelmingly spot business. It is good now. We hope and believe that it’ll be good for a couple of years. We would like to continue to get the returns we’re getting.

I don’t think we intend to be aggressive on incremental ships into that segment except on responding to certain needs that may be unique and we’re talking to a number of people who have some unique needs that the existing type of vessels in handysize would not really meet their criteria. So Jonathan, I don’t have a good answer for you. We like the business. It’s good. It’s our bread and butter. This is business we have such a significant hold on and our goal is very simply to protect that market.

It's our market and we intend to keep it and dominate that market and provide the premium service to our customers with high-quality vessels in the best way and that's the way we're going to earn money. That’s why we have the kind of utilization we have because we are a reliable, very knowledgeable, very experienced operator of this type of vessel.

Jon Chappell – Evercore Partners

Sounds great. I really appreciate the time. Thanks, David.

David Butters

Thank you, Jon.

Operator

Thank you very much sir. Now from Jefferies, you have question from the line of Doug Mavrinac. Your line is now open sir.

Doug Mavrinac - Jefferies & Co

Thank you, operator. Good morning, guys, and congratulations on a great quarter and on your contract announcement this morning.

My first question, David, pertains to your bread and butter. There's been a lot of talk about the ethane contract, and I'll get to that in a second, but 2Q was very strong for you guys, a strong utilization level, strong charter rates. Can you talk about kind of what you were seeing during the quarter, and how you expect that bread and butter market to develop, I don't know, through year end?

Because when we look at this year, we didn't have the same story in place as we did last year where last year you had a lot of U.S. export terminals coming online. This year we don't have as much, yet the market continues to strengthen. So, can you talk about, maybe, geographically, and even by product mix, kind of where you seeing the sources of the incremental strength this year, relative to last?

David Butters

Sure, I can but the fellow who be – Oeyvind, Oeyvind is in the frontline of all of this everyday and so Oeyvind why don’t you describe the market and why it exists today and how you got in the next -- from year end?

Oeyvind Lindeman

Well, Doug we definitely see a pull towards the Atlantic but we have three four ships east of the U.S. and the rest of the west of U.S. The pull comes predominantly and very much lately from the U.S, from the U.S. East Coast and from the U.S. Gulf. Just looking at an example during the quarter, we did 15 voyage charters. 12 of those were LPGs. 11 of those LPG voyages were sourced from the U.S. So, that's just a little insight into the pull, which has and we are definitely seeing same pull for quarter we’re talking -- the next quarter and for the year end.

There are new projects coming on stream all from the East Coast, the landing these type of vessels and there’s no stop in sight for us. We’ re -- the utilizations we are expecting continue to be high for the remainder and -- but we generally, this is generated by the US at the moment.

Doug Mavrinac - Jefferies & Co

That is fantastic. Thank you for that color. Now, as it pertains to the ethane exports contract that was announced, and then the potential for additional contracts down the road, I guess my first question is, in addition to Enterprise announcing that they had secured 85% of their contract capacity, they also announced that they were exploring expansion options, and then we've also seen Targa talking about maybe bumping up what their ethane export thoughts were.

So, my question is, do you guys have any feel for what the additional quantities could be out of those two guys, in particular, that's over and above what we already know is going to come online, and then the shipping requirements that could be as -- could come about as a result.

David Butters

I don’t think we have any special insight. I’ve listened -- we've regular dealings with both Enterprise and Targa and we’ve certainly listened to their conference calls and they have not been too open about the size of their expansions. I think there is a lot of interest and we know there is an appetite for ethane.

Doug Mavrinac - Jefferies & Co

Right, right.

David Butters

So how they’re going to respond to it whether it’s another 300,000 barrels a day but I can’t -- I just don’t have an idea. I know so much that the appetite is there. It’s just a matter of putting the infrastructure and the time required to connect the two pieces.

Doug Mavrinac - Jefferies & Co

Got you. No, I hear you. I hear you, David. And then, so for the VLECs that you guys are contemplating building, and it sounds like pretty far along in the planning process, would you characterize those VLECs as providing the transport requirement for the existing announced capacity or is it something over and above, and any additional announcements from Enterprise or from Targa would just be additive to what you already kind of have a feel for?

David Butters

We do not have any firm contracts yet for the…

Doug Mavrinac - Jefferies & Co

Right, right.

David Butters

And we also do not know specifically what in detail coverage of the 85% that Enterprise talks of. The answer to your question is simple, we do not have any of that as far as I know because I don’t know who has the 85 or whatever it is all actually contracted or is it subject to, so I just -- we can’t give up an answer, I can only tell you we do not have a contract yet.

Doug Mavrinac - Jefferies & Co

Got you. No, I hear you. And then -- so, from this perspective, I guess just my final question is, as you guys are building your 35,000 cubic meter ships, and you've got 3 left to contract, and you're also, obviously, contemplating the VLECs, in order of preference from your standpoint, would you rather get contracts on the three 35,000 cubic meter ships, before you secure contracts on some VLECs down the road, or do you see those as independent events? I mean, do you prefer doing one over the over or before the other, or are they unique independent events that are just dependent upon kind of conversations, and what customers needs are?

David Butters

I want them all. We're going to fill out the three that we have and we working diligently and aggressively on the VLECs and I am confident that we have a good shot at that. But the shot is anybody.

We do because of real knowledge and the other thing we have is of course the sort of ships in the water that can be front runners to any kind of shortfall that a potential charterer might have. So, in honesty, I want it all, period.

Doug Mavrinac - Jefferies & Co

Right, right. No, that's fantastic, and I'm sure that you will get it. So, once again, congrats on a great, great job.

David Butters

Thank you.

Doug Mavrinac - Jefferies & Co

Thank you.

Operator

Thank you very much indeed sir. Now from Wells Fargo, you have a question now from the line of Michael Webber. Your line is now open.

Michael Weber - Wells Fargo Securities, LLC

Hey, good morning, guys. How are you?

David Butters

Hi.

Michael Weber - Wells Fargo Securities, LLC

Hey, I just wanted to touch on a couple more ethane questions, oddly enough, but, first, I wanted to go back to Ben's question around potential terminal involvement. And I know you guys have actually been interested, have thought butane storage, and maybe some mixed terminal infrastructure around the Marcus Hook area, and I know it's pretty project dependent and it's tough to call, but as you sit today, relative to the ethane investment needed for the shipping side, how much capital do you feel comfortable investing today in some terminal infrastructure or new line of business around that?

David Butters

I am comfortable in any size and that is predicated on the understanding that I would have to have about several things. Number one, what kind of throughput agreements that one would be able to attain and length of those throughput agreements, the kind of returns that would generate, if everything falls in place, there is no real limitation on the amount of capital one can put to use…

Michael Weber - Wells Fargo Securities, LLC

Sure, but from a realistic perspective, in terms of helping to kind of frame up that opportunity, in terms of what you guys have looked at in the past, and where you might be looking now, is $0.5 billion something that's in the ballpark? Is it lower? Is it higher? Some sort of frame of reference would be helpful.

David Butters

That’s probably on the high end of what -- say the capital projects that would be looking – capital projects not talking about what kind of equity and what kind of that capital project of even higher than that would be appropriate but remember if we do some of this stuff, it would be done with partners, partners who pay to have use of the products, partners who maybe suppliers of the products etcetera.

So I can’t give you a model right now because of the variables that take place. Be assured that we have an appetite and capability of structuring something that will provide a highly leveraged, high return type of business if we’re successful in implementing that logistics opportunity.

Michael Weber - Wells Fargo Securities, LLC

Got you. No, that's helpful, even just to help frame it up. I also wanted to go back to your comments around the return levels on the ethane charter. I know you can't give a specific rate, and you're talking kind of a high -- or kind of low teens type cash-on-cash return…

David Butters

Not too low.

Michael Weber - Wells Fargo Securities, LLC

You guys have been in -- I'm sorry…

David Butters

Not too low teens.

Michael Weber - Wells Fargo Securities, LLC

Not too low. Yes, not too low. So, you guys have been involved in those negotiations for a while now with a couple different projects. I'm just curious as to where that return is, relative to the conversations you were having a year ago. Have you seen them compress at all, or are they in line with what you were talking to six months to a year ago?

David Butters

I think they are pretty much in line. I haven’t seen any squeeze and I would say for us in many ways, I think they will expand simply because -- so example on the 35s, we have very relatively good cost on the vessel.

One of the competitor now wants to compete with us on a piece of business, they’ll go and have to build a vessel that maybe 15% more than what we have those vessels on order for. So they’re going to be looking for a higher rate. Oh, I think we have an ability to expand our returns on the other three when we have on the first. We will see, but I -- certainly not lower and possibly higher returns than I would have expected a year ago.

Michael Weber - Wells Fargo Securities, LLC

Okay. That's helpful. One more for me, and I'll turn it over. It seems Reliance has gone out and placed an order for 6 VLECs on their own, and I know there were a number of industry competitors that were or are looking at that business. When you think about the idea of them going out and acquiring those vessels on their own and not using a third-party asset owner, at least now, do you view that as a one off or do you think that's a bit of a shift in the paradigm where you're going to start seeing these guys actually own their own tonnage?

And then, as kind of a secondary question to that, if you don't think that's a change in the paradigm, do you view that as a sale/lease-back opportunity down the line? And are you continuing to talk with them?

David Butters

Reliance marches to a different drummer, and they decided with all the full confidence that they seem to have without having experience that they can own and operate the vessels. It’s disappointing to watch disappointing to the other two folks who have a spent fair amount of time with them and giving them as much information on the vessel design and operating things or whatever have you, but they chose to on their own.

Interestingly, I don’t believe they have any real experience operating these complex gas vessels, so I just will be seeking some kind of alternative, who knows we will see.

I think it’s one-off. I think they are a unique company that has their own way of doing business. I don’t think it’s a model that we will consider to be broad based at all and they may come back because they will have to face the reality. Ethane ships are the most complex vessels to operate in the industry. They are more complex than LNG. That could be a learning process.

Michael Weber - Wells Fargo Securities, LLC

Okay. That's helpful. I appreciate your time, guys.

Operator

Thank you very much indeed sir. Now from Morgan Stanley you have question from the line of Fotis Giannakoulis. Your line is now open.

Fotis Giannakoulis - Morgan Stanley

Yes, good morning, gentlemen. Thank you. I would like to ask if you can give us a little more background about the contract with Borealis. Was that a tender? Was that a negotiated contract? And were there other companies that you had to compete with? If there were, what were their characteristics, and what were the advantages that Borealis saw in this cooperation with Navigator Gas that made you win this contract?

David Butters

Oeyvind spent a lot of time with them so I will let Oeyvind answer that question.

Oeyvind Lindeman

Yes. Hi, Fotis. Bearing in mind we signed some NDAs and things with Borealis, but I think the answer to your question lies with what David already mentioned.

We have the largest current ethylene vessels on the water and the most of them, at least in cubic capacity. And in order to provide a continued guarantee a continuous flow of ethane from the US to the cracker, without having -- if Borealis had one ship, what if something happened to that ship, you can’t have a cracker on a supply contract without having guaranteed uptake.

So yes, the existing ships, we have the 10, albeit a little smaller, but it’s the largest today and that guarantees and brings a safety net for Borealis, which of course is very important and that it’s unique feature of Navigator what we have can have we can offer our client.

Fotis Giannakoulis - Morgan Stanley

And can you tell us if there were other companies that they were looking at the same contract, or that was some exclusive discussion that you had?

Oeyvind Lindeman

No, Borealis being a prudent company, they ran a process with several people. That’s right.

Fotis Giannakoulis - Morgan Stanley

Okay, very helpful. Thank you. You mentioned, also, that the operation of these vessels is quite complicated, even more complicated than LNG carriers. There were some people discussing about potentially LNG carriers converted in order to be able to transport ethane. Is this something that is possible?

Do you anticipate, given the number of older LNG carriers that they are having trouble in finding employment right now, could we see some conversions like that? And what would be the cost of such a potential thing? And would you be interested in buying some older vessels to convert, I mean, to ethane carriers?

David Butters

Tommy, why don’t you answer that question?

Tommy Hjalmas

There are many people trying to convert LNG products, but the problems are both technical and port restrictions have a thing in that. The energy carriers that are older generally have a restriction over the densities of the cargo they can carry and it’s not easy to change that. The very old ones could but they will not be accepted by oil majors in the import ports where you want to have these effects. So they are not pursuing this kind of strategy to convert, if that answers your question.

Fotis Giannakoulis - Morgan Stanley

Yes, thank you very much. I think, David, you mentioned earlier that these ethane carriers are quite versatile, and they can transport a very wide range of products. Given the fact that this first contract is going to start at the end of 2016, and, if I'm not mistaken, the first vessel will hit the water during the second quarter, are you planning to deploy this vessel before it starts the Borealis contract or we will have to assume one of the latest vessels for the Borealis contract?

David Butters

Oeyvind why don’t you ahead and answer that, but when I was certainly let me just qualify that the VLECs that we’re working with on the design we want those to be actually more complex in the sense of being able to carry as many products as possible because with a 10-year contract, we would like to see at the end of the 10 years, there is no renewal of the ethane business.

We have a vessel that we could use in LPG, propane, butanes, very large sophisticated vessel that can be even used hopefully in LNG. But on the 35,000s are somewhat different. Those are being built right now. Oeyvind why don’t you pick it up about what you would do with those vessels in the short term.

Oeyvind Lindeman

Fotis, we put a lot of thought into constructing a ship that, yes, is going for ethane trade that can be used in other cargos and other trades, be it ammonia, be it LPG or other petrochemicals, which these mid size or 35s can do. It’s important for us to be able to compare apples-with-apples with other midsized vessels.

So, short of it is what the ship has delivered from the yard, we will trade her until the late arrives where we will deliver the ship to Borealis, whether that is the first ship or any of the other of the four ships that is yet to be decided but yes, we are comfortable with being to able to trade in all the as I mentioned all the current gas markets, in petrochemicals, LPG and ammonia, for those ships.

Fotis Giannakoulis - Morgan Stanley

Thank you. That's very helpful. And one last question, about the LPG market, and particularly for the rest of the year. We saw that there is big spike during 3rd Q for a VLGCs in the spot market, which is -- which gives much, much higher return compared to the one year contract. Have you been experiencing something similar for the handy-size vessels? And where are the earnings during third quarter, quarter to date, if you can talk to us a little bit about the seasonality of these markets? Shall we expect a very strong second half of the year?

David Butters

Oeyvind?

Oeyvind Lindeman

It can be a continuation of what you see in the second quarter. The spot rates or time charter equivalent earnings, they vary. We will have to almost all up to $2 million down to $1 million, the time charter market, it’s hovering around a million on $33,000 a day, but as I say, the spot market for us as well particularly with the spot fleet employed in the Atlantic from the U.S. they have seen a spike in time charter equivalent so we’re experiencing similar trend of the VLGCs I suppose but it’s less apparent to the market because we don’t have an index like they have.

Fotis Giannakoulis - Morgan Stanley

Thank you. That's very useful. Congratulations for the good results.

Oeyvind Lindeman

Thank you.

Operator

We have time for one question I believe. [Operator instructions]

David Butters

Well Jenny, if there are no other questions.

Operator

No Mr. Butters, there are no further questions at this time. So I shall pass the call back to you for closing remarks.

David Butters

Thank you very much. We enjoyed the meeting with you all today and look forward to again having a chat in the three month's time. Thank you, again.

Operator

And with many thanks to all our speakers today, that does conclude our conference. Thank you for participating. You may now all disconnect. Thank you, Mr. Butters. Thank you gentleman.

David Butters

Thank you, Jenny.

Operator

Thank you. All the best. Bye, bye.

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