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StealthGas, Inc. (NASDAQ:GASS)

Q1 2011 Earnings Call

May 16, 2011 11:00 am ET

Executives

Harry Vafias – President and CEO

Konstantinos Sistovaris – CFO

Analysts

David Cohen

Bruce Berger

Tom McKay

Natasha Boyden – Cantor Fitzgerald

George Berman

Jeff Geygan – Milwaukee Wealth Management

Operator

Thanks for standing by. Welcome to the StealthGas First Quarter 2011 Financial Results Conference. At this time, all participants are in a listen-only mode. There will be a presentation followed by question-and-answer session. (Operator Instructions) I must advise you this conference is being recorded today, Monday, the 16th of May, 2011. I would now like to hand the conference over to your first speaker for today, Harry Vafias. Please go ahead, sir.

Harry Vafias

Thank you, and good morning, everyone. Welcome to our conference call and webcast to discuss the results for the first quarter ended March 31, 2011. I'm Harry Vafias, CEO of StealthGas and I would like to remind you that we'll be discussing forward-looking statements in this conference call presentation.

Regarding the Safe Harbor language, I would like to refer you to slide number one of this presentation as well as to our press release and our first quarter results. With me today is Konstantinos Sistovaris, our CFO. If you need any further info on the call or the presentation, please contact myself or Konstantinos.

Slide number two, we have added this slide because we get a lot of investor enquiries regarding our business. So while most of you are familiar with our company, let me briefly discuss what we do for those participants that are joining for the first time.

We own a large fleet of ocean going vessels transporting a number of different cargos on behalf of our charters. All our vessels are 100% owned and we do not charter any vessels owned by others that we may then relet to third parties.

The main focus of our company is in transportation of liquefied petroleum gas. We own 35 vessels between the sizes of 3,000 and 8,000 cubic meters that is a smaller Handy Size segment of the LPG market.

In that segment, we are by far the largest owner of such vessels in the world. Our vessels carry liquefied petroleum gas, LPG, which is different from natural gas, LNG. By LPG, I refer to a number of different gasses as you can see on this slide, which are liquefied through pressure or low temperatures in order to be carried safely and in bigger volumes.

In addition to the LPG ships, we own three modern medium-range product tankers. These vessels are much larger than the LPG vessels. They have a carrying capacity of about 45,000 dead weight and they carry byproducts of petroleum refining like these large jet fuel and naphtha. We also own one Aframax crude oil tanker with carrying capacity of 115,000 dead weight.

The core product we carry, LPG, is a byproduct of natural gas and crude oil. About 10% of the natural gas that is extracted is LPG that has been methane. About 60% of LPG comes from natural gas extraction and 40% comes from crude oil refining.

These gas products whose more common names are propane, butane and ethane, may be further processed as a feedstock in petrochemical production in order to produce other gases which are more commonly called petrochemical gases also carried in our ships. There is a wide variety of uses for LPG products as you can see further down on the slide.

About half of the LPG produced is used directly by consumers and the other half by the petrochemical industry. And to close this business review, I'd just like to add that LPG used to help protect the environment since it's lower carbon content and the fact that it burns much cleaner than petro can reduce the amount of greenhouse gas emissions.

Moving to slide number three, to review how we’re implementing our business strategy. As previously announced our medium-term goal is to renew our fleet with the delivery of five-year building gas ships. In February, we took delivery of the first vessel to Gas Elixir. For the remainder of the first quarter, we did not engage in any other S&P activity.

Then at the end of April, we took delivery of the second new building Gas Exelero and various regulatory to show for our older vessels in our existing fleet. We wish to maintain a strong focus on our operational side and that's the reason behind the sale of these four older vessels. We believe that removing them from fleet and replacing them with brand new larger and higher specification vessels will improve the overall performance of the company going forward.

As far as our new building program is concerned, we have three more vessels to take delivery of. One is scheduled for July this year; second was scheduled for the end of November, but we moved the delivery by one month to January 2012 in order for the vessel to be classed as a 2012 build instead of 2011 build. And the last one is scheduled to be delivered in May 2012.

After taking the consideration, the total fleet of 39 ships at the end of the first quarter 2011, our net debt-to-capitalization ratio stood at 45.6% similar to the previous quarter, and taking in consideration the scheduled vessel deliveries, we still will continue to have a moderation of below mid 50s by the end of the year.

We'll peak at about $370 million with the sale of all the vessels we expect to receive after paying the debts timing on three out of the four vessels about $15 million, which will further strengthen our balance sheet. We look at the sales from an operation side as a good opportunity to enhance our liquidity and remove from the previous vessels that due to their age and condition will stick to the trade and profitably.

On the flip side, we are going to book a loss on these sales of about $5.5 million for the second quarter of 2011. We continue to strive to obtain a secure and visible revenue stream through stable and predictable cash flows.

At the moment, fixed employment for our fleet for the remainder of '11 is about 63% of our available days. We've about 40% already fixed for 2012. While the equivalent full re-coverage numbers at the same time last year were about 60% and 25% respectively.

Our focus has been to own and operate a modern fleet of gas carriers. In this respect, our averages of today's 12 years, not including our three modern product ties and one Aframax anchor, which is rather young compared to the industry average. Including the product anchors, the Aframax and the newbuildings vessels, we estimate that the end of 2011, our fleet has an average age of 10.8 years.

We continue to believe that within our cost sector, this gives us a competitive advantage as younger [ph] vessels have less operating expenses, consume less bunkers and are more appealing to Blue Chip Charters and by this factor, it will be important as we move forward into 2011 and beyond.

Our next objective has been to maintain close customer relations. The quality of our customer relationships is exemplified by the quality of our charters, which also lowers our counterparty risk.

I'm pleased to say that today we continue not to have any issues in term of charter's performance, and we continue to secure new business with new and highly respectable clients. Our stated goal has been to maintain cost efficient operations.

I'm pleased to report yet another good performance in the first quarter. Our net income breakeven level per vessel excluding losses on derivatives was $6,426 per vessel per day compared to $6,188 in the fourth quarter and $6,311 per day per vessel in the third quarter last year. The increase was due primarily to an increase in depreciation expense and higher operating expenses per vessel as a consequence of the reduction of the number of variable chartered vessels and increased volume expenses due to the higher exposures in the spot market.

We continue to concentrate heavily on managing our cost base and we expect that with four additional vessels going on variable charters during the year and the addition of brand new vessels in the fleet, we'll be able to contain upward pressures or operating expenses.

I would also like to like to point out that our general and administrative expense for the first quarter amounted to $570,000, which I believe is among the lowest, if not the lowest in the public shipping company sector and a testament to our efforts to contain cost not only on the operations side but also on the managerial side.

Let's us move to slide four. This slide demonstrated the development of our fleet. During the first quarter of last year, we sold three older LPG ships and we replaced with one Aframax crude oil ship.

During the first quarter of this year, we added to our fleet one newbuilding LPG ship with the announced sale of four more older vessels and the addition of other four newbuilding ones. We will maintain a strong presence in the LPG sector.

StealthGas continues to hold the number one ranking in known vessels in the 3,000 to 8,000 CBM segment. We continue to believe this segment of the LPG space has strong fundamentals, capital availability to stable charter rates as we are demonstrating.

As of today, we have taken delivery of two new building vessels, financed partly through bank financing and partly through our own internally-generated cash flow. The same will apply for the remaining three as we have already committed financing in place. As of March 31, $27 million have already been paid as advances for the newbuildings and we expect another $75 million of capital expenditures.

Slide five. This slide demonstrates our fleet and environment profile and provides you with the earnings visibility for each of our 38 current ships. At the bottom of the environment profile chart, we have included a percentage of the voyage days fixed. This enables you to access the stability and profitability of our earnings.

As you can see, 63% of voyage days are already fixed for '11, 40% for 2012, with a number of charters extending up to 2014. We recently extended the charters of Sir Ivor, Lyne and the Evoluzione for one more year at a combined average 10-charter equivalent of about $10,000 per ship per day, a significant improvement from the previous rates.

As a result of the recent sale of the four vessels, three of which we were trading on the spot market, we expect that out of a fleet of 36 vessels, 13 of these vessels will be on long-term bearable charters, 15 on time charters and eight on spot charters. The company policy is to ask for long-term charters, however, we have a staggered employment profile, so there are always opportunities to take advantage of a firming market.

Total contracted revenues were approximately $156 million, and we estimate that this sea equivalent for the LPG vessels on long-term charters is 8,300 per day. We now turn to the financial highlights for the first quarter '11, so we'll pass you onto our CFO, Mr. Sistovaris

Konstantinos Sistovaris

Thank you, Harry, and good morning, everybody. Let me continue the presentation with slide number six, the financial highlights for the first quarter 2011. With an average of 38 vessels owned and operated in the first quarter, we realized net income of $1.5 million on voyage revenues of $30.5 million and an EBITDA of $10.5 million.

Included in the net income figures is a $2.3 million expense due to the change in the fair value of derivatives. This consists of a non-cash loss of $0.8 million on interest rate swaps and currency hedging arrangements, due to the movement in the fair value of these instruments as well as a cash loss of $1.5 million relating to payments under the interest rate swaps.

Also included in the net income figure is a non-cash loss of $0.5 million on the valuation of a foreign currency deposits in yen that we hold mainly for the payment of installments for the new building vessels.

Excluding non-cash items I just mentioned, our net income was $2.8 million or $0.13 a share calculated on $21.1 million average sales outstanding. The free cash balance at the end of the quarter was approximately $35 million versus $30 million at the end of last quarter.

Our net debt to cap stood at $45.6 at the end of the quarter, similar to last quarter's levels. We continue to believe that maintaining our leverage at moderate levels is important and believe that when all vessels have been delivered we will maintain a debt to capital ratio below 55%.

We'll now turn to slide number seven. This slide provide you with an overview of the development of our income statement for the same quarter last year and the previous quarter. In comparing our results from the first quarter of 2010 when we had an average of 41 vessels in our fleet to the first quarter of 2011, when we had an average of 38.4 vessels in the fleet, revenues increased by 6.2% and amounted to $30.5 million, which I may add is the best revenue figure since this company became public.

Net income for the first quarter was $1.5 million. EBITDA was $10.5 million and earnings per share was $0.07. Excluding the non-cash items related to the interest rate swaps and currency deposits, our earnings per share were a solid $0.13 compared to $0.12 a share in the last quarter and $0.15 a share in the same quarter of last year.

Please turn to slide number eight. Looking at our balance sheet, in terms of cash, we continue to maintain a healthy cash balance that will be strengthened by the addition of the net proceeds from the sale of the vessels – of the four vessels of about $15 million. Our vessels book value, net of depreciation stood at $616.5 million; increased compared to the last quarter due to the additional of the Gas Elixir, the new building vessel.

In terms of liabilities, the current portion of our long-term debt increased slightly to $36 million. Other current liabilities relate to products and services provided to us by our manager and other third parties, these of course stand at around $26 million. Our long-term debt also increased due to the new facility for the Gas Elixir. Total debt will top around $370 million after we take delivery of all the new building vessels.

I would also like to point out that we have no debt maturing over the next couple of years. The first balloon payments on our loans are due in 2014 and then 2016. Other liabilities of $10.3 million relate to the interest rate swaps that we have with our banks to protect us from increases in LIBOR rates. As of today, we have around 45% of the interest rate exposure on our loans hedged. Equity for the three months ended March 31st, 2011 was at $307.9 million.

We now – please turn to slide number nine. These are operating highlights for the first quarter of 2011 and 2010 and the fourth quarter of 2010. In terms of fleet data, in the first quarter of 2011, we owned and operated an average number of 38.4 vessels compared to 42 vessels last year.

Other result of total voyage days for the fleet, the first quarter of 2011 were reduced by 6% to 3,395 days. On the other hand, for the vessels that remained in the fleet, operating utilization ratio was higher due to the increased activity in the winter especially for the vessels on spot market.

In terms of average daily results for vessel, in the first quarter, we achieved the time charter equivalent of $8,967 per day per vessel on the adjusted basis that is, including all vessels in the fleet, as if they were trading under time charters compared to $7,989 per day per vessel in the first quarter of 2010 and $8,024 per vessel per day in the fourth quarter of last year. Once more, this include numbers were result of the improvement we saw in the spot market during the first three months of this year.

Total vessel operating expenses per day on an adjusted basis, again was $4,375 per day for the quarter elevated from the previous quarters. This increase in operating expenses was partly due to the increased trading of our vessels and partly due to the budget overence on some of our vessels.

We estimate that this was circumstantial, as sometimes more expenses are allocated during certain periods and that going forward, the operating expenses numbers will be reduced. We still firmly operate above breakeven levels in terms of income and cash flow.

We now turn to slide number 10, where we are going to provide you with some estimates for the remainder of the year that is the second, third, and fourth quarters. We have contracted revenues under time and variable charges of approximately $56 million. We expect that with the sale of the four vessels and the bareboat charters for another four vessels, our operating expenses will be reduced to around $9 million in the second quarter and then by another $1 million in the quarters after that that is $80 million for the third and fourth quarter.

As far as drydock expenses, our initial estimates would have to be revised down for the remainder of the year, since two of the vessels being sold are due for drydock and we would expect that figure to be around $3 million for the remainder of the year. As previously mentioned, we also estimate a non-operating loss on the book values from the sale of the four older vessels that will be around $5.5 million in the second quarter.

Finally, as far as the payments for the new building vessels are concerned, as we said we have committed finance for all three covering the full amount of the future cash out flows and we will be paying like before and pre-delivery installments and get the finance at the end of each – at the time of each one's delivery.

Thank you very much. And now, I'll now hand you back to Harry for some further comments on the market.

Harry Vafias

Slide 11. This slide illustrates a volatile freight market over the past eight years for the medium size and the larger size gas ships. In comparison, mid-size and smaller semi ref-fully pressurized ships, our core sector have expense much lower of volatility recently. A mild recovery in one-year charter rates in this sector’s evident. The same applies for the larger vessels in the LPG sector.

These LPGs, which are – most are not included in the slide, but as for these 80,000 should be investments fluctuation in the last five years from 30,000 a day to 3,000 a day. It's also clear from this data that all types of ships, which form the core of our business have over the past couple of years not experienced a significant fluctuation in rates that our average shipping sectors have and we hope that this will be elected a non-volatility trading pattern will continue.

It's also visible in this slide that the rates for the smaller size ships have steadily increased during 2010. Of course there are seasonal patterns in this freight that's the winter must have – they are most active, that we hope that this pattern will continue.

During the first quarter of '11 rates for Handy Size LPG ships continue to improve, as we showed during the winter months of 2010 and we're able to renew some charters at high levels. We do expect the summer months not to be as strong, but still better than what we experienced last summer.

Turning over to slide 12. I'd like once again to compare volatilities for our niche sector of the first 1,000 CBM fully pressurized ships, which are typical of the majority of our fleet to the Drybulk and Crude Oil Tanker segments, as you can see based on the main average for these sectors over this quite extended period, the level of volatilities was higher in the dry and wet in our non-LPG segment.

These Handy Size LPG ships may never have the earning potential of a 300,000 debt rate VLC or 150,000 king size. May have, but these vessels a couple of years ago cost more than $150 million per piece, but at this particular point they can earn as much as these larger vessels. We believe we can offer investors in this shipping market a safer alternative in a sector where there’s inherently less risky with better potential for growth.

These are shown in the cases of the supply of LPG product will increase unit in 2011 and beyond supported by strong economic growth in Asia and we will position our company to take advantage of these improved markets.

Slide 13, in this slide, I will briefly update you on the freight rate evolution for one-year time chart of our market. The figures are based on independent estimates by Lorentzen & Stemoco. We have updated this slide, these current rates and future estimates as you can see highlighted in yellow. One here chart ratio have been reasonably slightly and if you remember from the forecast from our last presentation, the first quarter access rates, which were a bit better than what was forecast a couple of months ago.

There was – there has been an improvement in our segment over the fourth quarter of 2010, which was demonstrated in our revenue figures. As I previously mentioned, we would normally expect rates to slightly ease during the summer months, but at the elevated levels that keep operations comfortably in a profitable territory.

It's also encouraging to see that rates in the larger categories that are usually much more volatile have been in apple trajectory. Just to remind to everyone that $800,000 per month rates for VLCCs are solid numbers. If you consider about last year the spot rates were about $90,000 a month.

Slide 14

We continue to believe that the fundamentals in our sector are favorable. Since LPG is supply driven, we expect the completion of several large energy projects that are due to come on stream after unfortunate delays due to the financial crisis will prove to be a catalyst for this trade. There were 54 million tons of LPG shipped in 2010 and estimates are for 58 million tons for 2011, and steady increases after that. But what is most important in the shipping market these days is the forecasted fleet loss [ph] as you can on this slide.

For the Handy size LPG segment, fleet growth is small, pointing to a balanced market and could either be negative in 2012 and beyond. What is also encouraging is the fact we still have not seen increases in the order book recently as we saw last year in other shipping segments and this new billing prices have not come down as much as the most dedicated LPG builders. The Japanese are finding it difficult to compete because of the strength of the yen and we do not expect the order book situation to change radically.

Slide 15

We have included this slide to re-emphasize the point that I have just made regarding the different order book outlook for the LPG sector as opposed to the more mainstream sectors of shipping. Actual dry bulk figures shown here in the graph are for all LPG sizes and not just the Handy size segment.

As you can see for the two mainstream shipping segments, tankers and bulkers, the order book remains to be at very high historical levels. That could point to difficult years ahead. For containers, this situation has somewhat improved, but we have seen lately a renewed interest in new buildings. There are two sectors where the order book is very low, that’s LPGs and LNGs. It is not just the order book that is low for the Handy size LPG ships, it’s also the fact that the fleet is aging and currently around 20% of the fleet is over 25 years of age making these older vessels unfit to compete in international markets.

I would like to close this presentation by saying that we are very pleased with the results that we’ve announced today. We managed to take advantage of improving markets and posted solid operational profits even when we’ve had to face some difficult markets in the past we have never posted a loss from the operational side.

I believe that we have significantly improved our balance sheet and liquidity recently and we are focusing on the operational side of the business so that we are in position to take advantage of the sustainability turnaround in the markets when we see it.

We believe that we continue to present a very attractive profit to investors in shipping, and with our share trading at about $6, we feel that we are valued inappropriately by the market. At close to 50% discount to our NAV, we are a safe investment, and in my view, based on the fundamentals we have discussed here today, the outlook for our sector is the best amongst all other shipping segments.

We have now reached the end of our presentation. We would like to open the floor for questions. So please, open the floor. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from David Cohen. Please ask your question.

David Cohen

Yes. Could you talk a little about whether your strategy with regard to the mix between long-term charters and spot – and running under spot agreements has changed given either the market – overall market changes driven by demand or specifically the Japanese nuclear situation? Thanks.

Harry Vafias

Since – I found the company in 2004 our strategy has been the same i.e. approximately 75% of the fleet are better than 25% of fleet’s spot, and this has not changed till today.

David Cohen

Do you see – do you think that the Japanese situation is likely to affect the markets in which you trade?

Harry Vafias

We expect a small positive effect, but this doesn’t mean that we will change our strategy because of that.

David Cohen

Thank you.

Harry Vafias

Thank you.

Operator

Your next question comes from Bruce Berger. Please ask your question.

Bruce Berger

Yes. Hello. I was a bit surprised the TCE is up $1,000, utilization is increased and yet we really didn’t see any of the operating leverage come through to the earnings. So I was wondering if you were a bit disappointed with the quarter and that earnings weren’t a little bit higher.

And then second question is, your recent press release indicated close to a $10,000 TCE with your recent charters. When do you expect that to flow to the rest of the fleet?

Bruce Berger

Thank you for the double question. Number one, we have the majority of the ships on period. Therefore, even if there was a significant increase, we can only fill it in the free vessels and the spot vessels. Number two, we had some extraordinary expenses during the first quarter plus we had more expenses because we had less ships on bare-boat.

Otherwise we are very pleased with the quarter because it showed a significant improvement of the market for this small gas ships, and if we didn’t fill it a lot in the first quarter we hope to fill it more in the remainder of the year end 2012. So, generally we are very happy. Obviously if we had more free ships we could renew them at higher numbers, but as you’ve seen from our – from the longevity of our charters, a lot of them are not very long. So hopefully, we are going to renew them; we’re going to renew them at better numbers.

The $10,000 that we hedged for the – as others for the free vessels is actually very, very good. This is close to the peak for these small vessels. Now when are we going to see benefits for the remainder of the fleets, I’ve answered already the question. Ships come open every quarter and we always try to find the best rate and the best name to take the ships. We’ll continue to do the same, and hopefully continue to renew at high levels than previously done.

Bruce Berger

Could I ask one additional question?

Harry Vafias

Yeah.

Bruce Berger

What is your thought on buying back shares versus dividends as the company’s profitability continues to improve?

Harry Vafias

At the moment, we’re not going a neither of the two, but if we had to choose, we would go for buying back stock because obviously the stock at the moment is very, very cheap, and therefore it’s better for the company’s money to be used that way than dividends.

Operator

Okay. Your next question comes from Anna Pan [ph]. Please ask your question.

Tom McKay

Okay. This is Tom McKay. Good afternoon. With your current debt level at about seven times EBITDA, I was wondering why it makes sense to have so much of a fleet on bare-boat charters as opposed to time charters where you’d be operating the ships?

It doesn’t seem to make sense to use up debt capacity for bare-boat charters, but maybe I am missing something?

Harry Vafias

Sorry. I didn’t understand the question. What has the debt to do with – if I charter my ship out on TC or bare-boat?

Tom McKay

Well, why would you use debt capacity to cement a ship that you put out on bare-boat charter and don’t operate yourselves?

Harry Vafias

Because it’s cheaper for the company and less risk.

Tom McKay

But it increases your total debt?

Harry Vafias

Right. It increases my total debt.

Tom McKay

Well at seven times EBITDA, and they’re essentially financing transactions?

Harry Vafias

No. You have probably misunderstood. We are buying ships. We always take an amount of the purchase price in debt. So, let’s say 60% or 70% depending on the age of the ship, and then we choose if we’re going to fix it out on bare-boat or time charter. In the majority of cases, not always, we prefer bare-boat, as I told you before, because it’s cheaper. It uses less of the company’s resources. It’s safer, because if an accident happens or pollution or whatever, then the charter must pay not the owner, i.e., us. And thirdly, you have less of hire and less technical costs because all these costs are covered again by the charters.

So I have to disagree with you on that.

Tom McKay

Okay. Well then we disagree.

Harry Vafias

Thank you.

Tom McKay

Thank you.

Operator

Your next question comes from Natasha Boyden. Please ask your question.

Natasha Boyden – Cantor Fitzgerald

Thank you. Good morning, gentlemen.

Harry Vafias

Hi, Natasha.

Konstantinos Sistovaris

Hi, Natasha.

Natasha Boyden – Cantor Fitzgerald

You’ve been obviously very busy selling some of your smaller, older vessels and when you look at your fleet now, are there more ships that you would consider selling or have you pretty much sold everything that you’d like to sell for the time being?

Harry Vafias

When you are trading at 55% discount, anything is up for sale.

Natasha Boyden – Cantor Fitzgerald

Okay. Again, would we expect you to look for the sort of more older vessels or it just depends on what offer you might get for any vessel you have in the fleet?

Harry Vafias

We are open for all ideas but obviously we want to get rid of the early-mid, and early and mid ‘90 ships.

Natasha Boyden – Cantor Fitzgerald

Okay. And what is the liquidity like in the S&P market right now? What are you seeing in these?

Harry Vafias

We always get accused that there's no liquidity, but as I proved for one more time, there's ample liquidity because there were eight ships sold during the first quarter, smaller ships, four from us and four from different sellers.

And you will see, as time passes by there will be more and more demand for these vessels, not only because supply of product is going up, but because the yards are not building those ships. And, therefore, somebody wants to get his hands on a readymade ship, ready for sailing, there are not too many options out there.

Natasha Boyden – Cantor Fitzgerald

Okay. Great. And in terms of asset values right now, do you find them attractive and intend to continue expanding the fleet? Or do you focus primarily on cash flow generation and de-leveraging?

Harry Vafias

As we've discussed many, many times, the prices for LPG ships have not dropped, only for the over 15 years old maybe there's been a small drop. On the modern vessels, less than 10 years, there's actually been a strengthening. Thus, no, at the moment we are not looking to buy. We will deliver, keep the cash and then we decide what we're going to do.

Natasha Boyden – Cantor Fitzgerald

Sure. That makes sense, but you've obviously got other sectors apart from just LPG, you've got the product tankers and the Aframax out there. And with asset values kind of coming down in those sectors, would you tend to look at those particular assets in those sectors? Or again, as you just pointed out, would you just focus on cash flow generation right now?

Harry Vafias

The tankers start becomes interesting. I think if it continues like that and nothing changes, there's going to be attractive assets in the summer and the autumn, but we are not actively looking to buy at the moment. We are just watching what happens and we are continuing to generate cash.

Natasha Boyden – Cantor Fitzgerald

Okay. Great. And just lastly, I just want to touch on a question I think the first caller asked about. Just with the situation in Japan, I know you said you expect there to be a small positive impact, but would you not expect that to, especially with the fears of nuclear power right now, to really – for people to turn to LNG and LPG, as an alternative source of fuel? Or wouldn't that be helpful to the industry?

Harry Vafias

Yes. But don't forget Japan is the biggest importer of LPG anyway, so any way they're importing huge quantities of LPGs, that's why I'm saying it's going to be a small positive impact, because they're already huge users of LPG. If they were not big users of LPG, we would expect them to increase far more, but because already they import so much, I don't think there's going to be such a huge difference.

Natasha Boyden – Cantor Fitzgerald

Okay. Great. Thank you very much.

Harry Vafias

Thank you.

Operator

Your next question comes from George Berman. Please ask your question.

George Berman

Good morning, gentlemen. Kalimera, as they say in Greece.

Harry Vafias

Kalimera.

George Berman

Nice quarter for now, trading at a very low valuation, I just recently gotten into building some positions in the company. Could you tell me the vessels that you just sold, compare their day rates to the one you just put up at $10,000 per day? What kind of advantage do we have in selling the older vessels and then taking delivery off the newer ones?

Harry Vafias

I didn't understand your question. Your question is about size or what?

George Berman

No. You just sold some older ships. What kind of day rates would they receive versus the newer ones?

Harry Vafias

The difference in day rates?

George Berman

Yeah.

Harry Vafias

Depends not only on the age, but depends also on the size and it also depends on the approvals, but if you are talking about the 3,500 cbm vessels, without approval, so I would say minimum 25% discount.

George Berman

So, it makes sense for you to delete the older ships bring on new ones and over time your entire fleet will roll over to hopefully higher day rates?

Harry Vafias

Depends on many things, but we are looking to, as discussed, to slowly, slowly sell the slightly older vessels and slowly renew the fleet through acquisitions and through new buildings and have the biggest fleet in the industry and also have the youngest fleet in the industry. That will make them very flexible and hopefully command the premium and comparison with the older vessels.

George Berman

Yeah. Excellent. Explain to me real quick then and the hedging losses that you are taking, actual cash losses? How does that compute?

Konstantinos Sistovaris

I suppose you refer to the interest rate swaps we have?

George Berman

Yeah.

Konstantinos Sistovaris

I mean this is due to the fact that rates have come down so fast after the financial crisis and they have been very low. So, we had hedged a very large part of our debt at around 3%. And now that rates are low, I mean we have to pay for this, but if interest rate rises which will give us protection on the other hand.

George Berman

And you would have that then conversely either non-cash gains or your interest rates costs are basically stable.

Konstantinos Sistovaris

Yes. There will be many things. I mean, if interest rates rise, the first thing that will happen is, the liability that is shown for these derivatives will decrease.

George Berman

Right.

Konstantinos Sistovaris

So, we're going to write profit from that. Secondly, that we're going to pay less cash because of this interest rate swaps. And the third thing is that we will be protected from further increases in the rates.

George Berman

Great. Great. Are you considering using the currently ridiculously low rates to hedge further?

Konstantinos Sistovaris

We are thinking about it. At the moment, our policy remains to have about half our debt hedged. And we are covered. But we are looking at it, in case, we see interest rates rising. We will proceed and increase our interest rates hedging as well.

George Berman

Great. And then you had mentioned that all additional, new, free cash flow generated into the future you would rather deploy in buying back shares in the market based or you had half of its value than in entertaining a cash dividend. Is that correct?

Harry Vafias

We would look at buying back shares or buy ships. We would not be giving dividends for the short, for the medium term.

George Berman

Great. I think that's a good move here. Thanks very much for your time.

Harry Vafias

Thank you.

Operator

(Operator Instructions). Your next question comes from Jeff Geygan. Please ask your question.

Jeff Geygan – Milwaukee Wealth Management

Good morning, gentlemen.

Harry Vafias

Hi, Jeff.

Jeff Geygan – Milwaukee Wealth Management

Hi. I have to beg a little bit further on Natasha and David's comments related to the situation in Japan, as there was somewhat of a knee-jerk reaction around the world, particularly in Germany where nuclear is being questioned, which I would think bodes positively for demand and consumption of LPG, which may have an unexpected consequence on pricing for your services.

Harry Vafias

Yes. What is the question?

Jeff Geygan – Milwaukee Wealth Management

You've publicly stated that you think the situation in Japan will only have a modest impact. Is it possible that there could be more than a modest impact?

Harry Vafias

Jeff, if I knew that, I would be not be speaking now on the phone with you, I would be probably somewhere else.

Jeff Geygan – Milwaukee Wealth Management

Very good.

Harry Vafias

But, we all want to be very conservative in our predictions, especially on things that we do not control and we cannot forecast accurately. So, we prefer to say modest increase and if it's a super increase and extraordinary increase, then obviously would be very positively impacted directly to the bottom line.

Jeff Geygan – Milwaukee Wealth Management

And, Harry, during your prepared comments, you did conclude by saying that you felt your shares were inappropriately valued in the marketplace. Can you add some color in terms of what you feel an appropriate valuation would be?

Harry Vafias

You cannot have a company, which is a leader in its field. Number one, it has very relatively low debt in comparison to other shipping companies and has never had an operational loss. The order book of each segment is actually negative and it's trading at half of its NAV. This is never heard of. We've never heard of something similar, so, I don't know what is the valuation but I think it should definitely at NAV.

Jeff Geygan – Milwaukee Wealth Management

Okay. Thank you.

Harry Vafias

Thank you.

Operator

(Operator Instructions). You have no further questions at this time. Please continue.

Harry Vafias

We would like to thank everyone for joining us at our conference call today and for your interest and trust in our company. We like for – we look forward to having you with us again at our next conference call for our second quarter results in August of this summer. Thank you very much.

Operator

That does conclude the conference for today. Thank you for participating. You may all disconnect.

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