Ardmore Shipping's (ASC) CEO Anthony Gurnee on Q4 2015 Results - Earnings Call Transcript

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Ardmore Shipping Corporation (NYSE:ASC)

Q4 2015 Earnings Conference Call

February 3, 2016 10:00 am ET

Executives

Anthony Gurnee - CEO

Paul Tivnan - SVP, CFO

Analysts

Amit Malhotra - Deutsche Bank

Doug Mavrinac - Jefferies

Jon Chappell - Evercore ISI

Noah Parquette - JPMorgan

Donald McLee - Wells Fargo

Ben Nolan - Stifel

Fotis Giannakoulis - Morgan Stanley

Vishal Bhutani - Pyrrho Capital Management

Adam France - 1492 Capital

Operator

Good morning, ladies and gentlemen, and welcome to Ardmore Shipping's Fourth Quarter and Full Year 2015 Earnings Conference Call. Today's call is being recorded. And an audio webcast and presentation are available in the Investor Relations section of the company's Web site ardmoreshipping.com.

We will conduct a question-and-answer session after the opening remarks, instructions will follow at that time. A replay of the conference call will be accessible anytime during the next week by dialing 877-344-7529 or 412-317-0088 and entering passcode number 10080251.

At this time, I'd like to turn the call over to Anthony Gurnee, Chief Executive Officer of Ardmore Shipping. Please go ahead.

Anthony Gurnee

Thank you, Chad. So good morning, everyone and welcome to our fourth quarter earnings call. First, I will ask Paul to describe the format and discuss forward-looking statements.

Paul Tivnan

Thanks, Tony and welcome, everyone.

Before we begin our conference call, I would like to direct all participants to our Web site at ardmoreshipping.com, where you will find a link to this morning's fourth quarter and full year 2015 earnings release and presentation. Tony and I will take about 15 minutes to go through the presentation and then open up the call to questions.

Turning to Slide 2. Please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from the results projected from those forward-looking statements. Additional information concerning factors that could cause the actual results to differ materially from those in the forward-looking statements is contained in the fourth quarter 2015 earnings release, which is available on our Web site.

And now, I will turn the call back over to Tony.

Anthony Gurnee

Thanks Paul.

So I will go over -- look on Slide 3, you can see the agenda for today, which is our usual format. I will talk about our recent performance and activity update our views on the product and chemical tanker markets and provide an update on the fleet, financial results, I will then recap and open up the call for questions.

So, if we can go to Slide 5, so just a review now of our fourth quarter and full year results as well as some other recent important activity. We were reporting EBITDA of $17.1 million and net income of $5.4 million equating to $0.21 per share for the quarter.

We delivered strong spot performance with our MRs 18.5 a day for the fourth quarter and 21.5 for the full 12 months. We generated record earnings of $1.23 per share for the year and as on average of $20 vessels in operation, which is attributable to our well time fleet growth, our efficient operating platform and successful execution of our chartering strategy.

We took delivery of the remaining two vessels in our newbuilding program in the fourth quarter and that brings a total of 10 delivered over the last 12 months bringing our fleet to a total of 24.

We agreed to terms of the sale of the Ardmore Calypso and Ardmore Capella that's an en bloc sale at a price of $38.5 million, which will result in a small net gain on delivery in April of this year. So that will be a 2Q event.

We completed refinancing of $344 million of our debt reducing our interest expense by around $3 million per year and improving our surplus cashflow in 2016 by $6 million.

And today, we are declaring a quarterly dividend -- cash dividend of $0.13 a share, which brings the total dividend declared for 2015 to $0.64 a share. And since we changed the new policy with the third quarter, we are providing an annualized run rate under the new dividend policy of $0.88 a share that compares to the old policy of $0.40.

So turning now to Slide 6, for a quick look at our fleet, the main points here or this is now a fully delivered fleet generating cashflow, it's a high-quality modern fleet including a series of shifter ships all built in excellent Korean and Japanese yards. And our focus remains on operational efficiency and fuel economy because the price of oil maybe cheap today, but even at these prices it still matter and as crude oil pricing recovers so too the importance of fuel efficiency for reasons of economics and longer term as well to reason of carbon emissions.

So going down on to Slide 8, the product tanker market. So the rates eased in the fourth quarter, but they were still strong as I mentioned we did 18.5 a day that stand admittedly from a very strong 23,900 in the third quarter. The easing of the rates was really in the first half of the quarter, it was driven by refinery maintenance in the U.S. Gulf and reduction of Asian Cargo volumes that resulted into and a slow start in the fourth quarter. But the product tanker market continue to be supported in 2015 by a very strong demand growth, seaborne product rate increased by 1.3 million barrels a day to 22 million barrels a day for 2015 which is about 6% year-on-year increase and ton mile demand for the same period grew by about 7%, which would indicate that there is an average lengthening of voyages continuing.

The EIA data shows that PADD 3 exports are showing products average 2.3 million barrels a day through 2015 and that's a 7% increase. And if you all know that's an important market for MRs. It's also relatively volatile market with the U.S. Gulf refinery utilization having a direct and immediate impact. So for example, just recently U.S. Gulf refineries, their utilization rate dropped down to surprisingly low level of 83.5% that was due to schedule maintenance turnaround but more importantly a power outage and shut down at Exxon's Beaumont refinery on January 21. That's coming -- that's back on line now and it's going to gradually build up over the next couple of weeks to full volumes and so all the refineries that are in turnaround, so we do expect that to rebound fairly quickly and now to bring up that that western the Atlantic base and triangulation significantly.

And so, but, I think that the most important point to make today is that the orderbook MR now stands at around 9.5%, which is the lowest level it's been since 2011.

So let's go over what's happened over the last year, in 2015, 146 MR delivered and 20 were scrapped and that resulted in a very high net fleet growth of 6.5% but that was nevertheless fully absorbed by strong demand growth. We estimate this 99 MRs will deliver in 2016 and accounting for some scrapping, we think that will result in net fleet growth of around 4%. So when comparing that to the ongoing strong demand growth, we should experience a meaningful tightening of supply and demand throughout the year. But the really big question is whether or not we will see large scale ordering again in the near term because I think that really will determine whether or not we're going to have an excellent market in a next few years or whether it might peter-out again.

We don't think there is going to be a lot of ordering in the near-term. There is very little capital available or willingness to the capital by shipping companies, further more yards that traditionally built MRs are financially constrained and in fact controlled by the banks and new regulations are making construction more expensive and ironically the new ship design is lot fuel efficient making it in fact less attractive. So these factors keep the brakes on ordering for 2016, we will be down to an orderbook at historical lows and this is perhaps, we think the most exciting development for MRs in years.

Turning to Slide 9, we talked about the current market, now let's discuss a little more the demand outlook for product tankers. So first of all, let's look at the table on the upper left, this is [somewhat closer] [ph], but really excellent snapshot of the global product tanker market and highlights some very important things.

First is that, total trade is expected to rise to around 22.5 million barrels a day in 2016, a continuation of strong demand growth underpinning an expected ton mile demand growth rate of 5% or more. Second is that, it highlights one of the most important trades of the product tanker market, the huge product fleet and regional imbalances -- huge product fleet imbalance and regional imbalances that drive two-way trade and that's the overall product tanker market.

The third point is the relative unimportance of China, granted they become a fairly large exporter of diesel lately and that's a good thing for our business. But in the bigger scheme of things, they are not a major player in the product tanker trade at least not yet.

And then, fourth is something it's actually not shown on the chart and that's intraregional trade, for example, there was a huge amount of product that moves around within the Middle East region or Europe for that matter. But overall, we think this chart -- this table of data gives a very good overall picture of the global product tanker business.

So looking at the lower left, we summarize the demand of a new refinery capacity coming on stream in the next few years. This is of course to be expected as global oil consumption is growing about 1.2 million barrels a day and it has to be refined to be consumed. What's really important it's to divide that number, the 1.2 million barrels a day by the amount of the existing product trade which is 23 million barrels a day. And there you get the main driver of demand growth for product tankers. We estimate that 75% of this growth will result in seaborne movements out of the exports or cross trading and we are taking into account expanded voyage length and trade complexity, we arrive at continued ton mile demand growth in the 5% to 7% range over the next few years at least.

So on summary, we have strong ongoing demand growth driven by secular trends coupled with rapidly -- with rapidly dwindling orderbook presenting potentially a serious supply squeeze in the next 12 to 24 months.

Okay, turning to Slide 10, the chemical tanker market. Chemical tanker charter rates were strong in 2015 and that's evidenced most directly by our performance which is up 8% year-on-year.

The chemical tanker market, we think is continuing to improve on the back of very strong veg oil and biodiesel volumes and in spite of the slowdown in China, imports of chemicals into China remain strong particularly use of those -- those are used in light industrial and textile manufacturing. And I think very notably, there is a continued expansion of petrochemical plants in the U.S. Gulf and the Middle East Gulf leading to increased exports and commodity chemicals from both at about -- of about 6% per year.

Our simpler, coated chemical tankers are benefiting also from the strong product tanker market. We are continuing to engage in regional CPP on our ships to a greater degree than normal. If we look at our chemical tankers, they are spending about half their time in CPP, about 25% in veg oils and 25% in commodity chemicals. That is the chemical market strengthens further, we know that these ships can and will swing back into more chemical business.

And then, looking at the supply side for the chemical tanker market, the order book is around 11% to the existing fleet. That results, we thinking around 5% net fleet growth in 2016, and then, at the end of the year, we should be left without additional ordering at around 5% of the fleet which is extremely well -- basically historical low as well.

On Slide 12, our chartering profile, as you can see, we're continuing to run with about 70% spot and 30% one year TC which is where we want to be, so placing a slightly greater emphasis on TC for chemical tankers as we feel this is good relative value less with MRs where the spread between spot and TC narrower than it was a year ago, it still fairly wide.

On Slide 13, here you can see the 10 product and chemical tankers that we've taken delivery of in 2015, also to point out that we have four schedule documents in 2016, one in the first quarter and then three later in the year, timing to be decided based on their geographical positioning.

And as a final point, although the fleets delivered, we do have continued year-on-year growth in revenue days and so for 2016, the revenue days will increase by about 16% over 2015.

And with that, I will hand the call back to Paul to discuss our financial performance.

Paul Tivnan

Thanks Tony.

Starting with Slide 15, we are pleased to report a very strong financial performance with a net profit of $5.4 million and $0.21 per share for the quarter and a net profit of $32 million or $1.23 per share for the full year. Our strong profit reflects our fleet expansion, operational efficiency and continued strength in the charter market.

The company reported EBITDA of $17.1 million, which represents an increase of $9.1 million from the fourth quarter of 2014. EBITDA for the full year came in at $70.6 million. Revenue was $41.7 million for the quarter and $158 million for the full year which is a substantial increase.

Our operating cost came in under budget for the full year at 6,333 per day across the fleet. OpEx for Eco Design MRs were 6,128 per day, while Eco Design product chemical tankers came in at 6,130. Our Eco Mod's that are -- which are little older came in at 6,616 per day for the full year. We expect total OpEx for the first quarter to come in at approximately $14.5 million.

Appreciation, amortization for the fourth quarter was $7.4 million and we expect the first quarter to be approximately $7.8 million.

Corporate overhead costs were $3.4 million for the fourth quarter which on a fully delivered basis works as at around $1200 per ship per day. We expect our corporate ahead to be approximately $11.5 million for the full year 2016. To point out, approximately $1.5 million of this relates to commercial cost, which in many situations with other companies are incorporated into net revenue. This leaves our comparable overhead of $10 million which is among the lowest of our peers at $420,000 per ship annually.

In interest in finance cost were $4.3 million for the quarter, which is net of capitalized interest related to newbuildings of 160,000. We expect interest in finance cost in the first quarter 2016 to be approximately $4.8 million which includes amortization of deferred finance fees of $800,000.

Turning to Slide 16, we are again reporting strong charter rates for the year even if they ease slightly in the fourth quarter. We have 12 MRs operating in the spot market for the quarter earning an average of 18,500 per day including voyages in progress, whereas our spot vessels here in 21,500 for the full year.

Turning now to the various ship types across time charter full and sparse, we had eight Eco Design MRs in operation, which earned an average of 17,700 per day for the quarter and as you will see on the prior chart, 19,100 for the full year. Our six Eco Mod MRs earned an 16,900 per day for the quarter and 20,200 for the full year.

Just to point out the fact, Eco Mod's outperformed Eco Design has nothing to do with earnings power. It just happen to be in better position during the year.

As of today, our spot prices are coming in just north of 18,000 per day for the voyages in progress with approximately 40% of the days booked for the first quarter.

Our Eco Design product and chemical tankers earned an average of $17,800 per day in the fourth quarter and $17,500 for the full year, while the Eco Mod products chemical ships earned $13,200 per day in the quarter and $13,400 for the full year.

We are very pleased with our charter performance in 2015 achieving significant rate increases from the prior year. Again, to point out, Ardmore have substantial upside potential and every $1000 to increase in rates across the fully delivered fees equipped to $0.34 per share in EPS, which was our constant payout dividend policy equates to an extra $0.20 per share in the dividend.

On Slide 17, we have our summary balance sheet, which shows at the end of December, our total debt was $424 million compared to total capital of $780 million leaving our leverage of 55%. Our cash on hand was $40 million, which leads our net debt of $384 million which equates to leverage of 52%.

In terms of net asset value, as vested value improve every $1 million increase in vested values equates to $0.92 an additional NAV per share for our shareholders.

Now turning to Slide 18, as we all know, we recently completed a refinancing of $344 million of debt achieving an improved margin and a smoother repayment profile.

We have also obtained $20 million in committed funding for acquisition of an additional vessel along with inbuilt accordion features in the loan for further expansion.

As a result of the refinancing, our cash interest expense will reduce by approximately $2 million in 2016 and surplus cashflow will increase by $6 million.

We've also extended our debt maturities out to 2022. Importantly, all of our debt is amortizing with repayments of $38 million annually, so we continue to do leverage and strength the balance sheet in the strong charter market.

And with that, I would like to turn the call back to Tony.

Anthony Gurnee

Okay. Thanks Paul.

So in summary then, we reported strong financial results of net income of $5.4 million and EPS of $0.21. The near term outlook is positive and we are anticipating a solid charter market in 2016 driven by the -- what we discussed are the ongoing strong demand growth underpinned by continuation of new oil market dynamics and other volatility in congestion. And this ongoing demand growth comes from the export refinery expansion and complexity of trade driving ton mile demand. And that's almost independent of underlying oil consumption growth, so I think an important number to consider is, because over the last seven years product tanker ton mile demand growth has been in the region of 6%, whereas oil consumption growth has been about 1.4%. So that's something much bigger going on in just underlying consumption.

The MR orderbook is now at its lowest point since 2001, and is set to decline to around 5%, less by year end without additional ordering. We are maintaining our flexible chartering strategy within spot and time charters in order to maximize earnings. We had significant upside potential with every $1000 a day equating to $0.34 in EPS and dividend policy that's also $0.20 in incremental dividend. And we are declaring quarterly cash dividend of $0.13 which brings the total to $0.64 for the year for 2015 and annualized run rate of $0.88 per share since we changed our dividend policy that's up in $0.40 under the old policy.

So with that, we are now pleased to open up the call for questions.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] First question comes today from Amit Malhotra with Deutsche Bank. Please go ahead.

Amit Malhotra

Yes. Thanks very much operator. Thanks guys. Tony maybe as a mini-education lesson given that recent volatility in rates, can you just talk about or sort of renew your thoughts on the seasonality in the business to the course of the year whether weather driving season or refinery turnaround driven. And also, if you could just provide some insight obviously the demand environment was really strong in 2015.

If there was a way or provide some of your thoughts in terms of how you view that demand environment breaking down between the secular trends which are quite significant versus the low oil price environment and demand driven consumption growth?

Anthony Gurnee

Sure. Hi, Amit. So it's interesting, I mean, normally we would have expected the kind of -- the majority of all the turnaround for U.S. Gulf to happen in -- sometime in the late summer -- very early on, but clearly some of it was deferred, and I guess, it's hard as far as they could and it's happened in the last couple of weeks. But importantly was that refinery outage was excellent. I think that could strike TC14 at the moment.

So but I think we are in such a volatile oil market and probably for refiners as well. I think the sort of the more normal pattern is might be a little bit scrambled at the moment. And so I guess that's -- that's all really to say. I think it's a good question, how much of the demand growth has been -- the new oil market and how much is, those underlying secular drivers.

I happened to think that most of it's the underlying secular drivers. If you look at the -- that simple equation of one-to-one 0.5 million barrels a day increase per year on a base of sort of 20 to 22 million barrels a day seaborne trade that gives you very, very clear picture of where the real demand growth was coming from and that will continue regardless of the oil market or even the global economy. So I think that's by far the most important factor.

The reality is that the boost in -- it's very hard to measure exactly the ton mile demand being created by all the volatility and poor congestion. What we can say is, it is continuing. It is important. Interestingly, one of our ships now as actually have asked to slowdown significantly on its way to report.

We have been asked kind of go slow before but not deliberately slowing down in the middle of the passage simply because the tanks are full at the receiving end, usually they kind of get down weight. But so we might even be getting to a new face in terms of supply chain congestion. So we don't think that's going to go any time soon, volatility is prevalent on the upside, it is on the downside. So as we do see oil, oil pricing begin to recover, the pricing recovery is going to be volatile as well. And that should continue to drive extra demand growth.

So we see that continuing at least through 2016. When it eventually ends, I think our view is that, if you had that underlying secular demand growth of at least 5%, combined with a very, very low orderbook and we think that the delivery of ships is going to really drop-off in the second half of this year. We think those were the factors that will take over driving the market.

Amit Malhotra

Got it. Thanks for that comprehensive answer. Let me just ask one quick one for Paul and then I will hop off. I probably saw the -- obviously, the debt amortization of about $38 million per year, I don't think that bar chart includes the debt pay down that the company is going to make for the Calypso and Capella sales. Can you just sort of provide some color in terms of how much you think the gross proceeds of that those sales will actually go towards debt pay down? That would be helpful. Thanks.

Paul Tivnan

Yes, perfect. Thanks Amit. We post the en bloc sales price for those ships is $38.5 million and the total amount on the capital lease is about $26.5 million, $27 million. So net cash of the company will be about $11 million from those ships deliver in around April or kind of early 2Q.

Amit Malhotra

Great. I have more questions but I will hop off. Thanks guys. Appreciate it.

Anthony Gurnee

Thanks Amit.

Operator

The next question is from Doug Mavrinac with Jefferies. Please go ahead.

Doug Mavrinac

Thank you. Good afternoon, guys. I just have a handful of questions as well. First, when you look at kind of how you guys are positioned for 2016. I mean spot market volatility aside, time charter rates are firm, asset values are firm and the outlook is, as you guys described. So from a fleet standpoint, I mean you guys reach the milestone in the fourth quarter taking final delivery of all of your newbuilds, even got rid off a couple of smaller ships.

So are you about [indiscernible] for 2016 or do you think there is some additional tweaks that you could make maybe selling another older ship or maybe expanding here. I mean, how do you guys see your position for 2016 from a fleet standpoint?

Anthony Gurnee

I think overall really happy with where we are with the fully delivered fleet, there is excellent ships generating a lot of cashflow so that's all good. The question is really where do we go from here? I don't think we feel any great need to sell the older ships. They are generating a huge amount of cash right now. In fact, some of our best performers of the older ships and so as investments they are terrific. And just pass it on to somebody else.

Doug Mavrinac

All right.

Anthony Gurnee

We also would be in a position to buy some more ships. So I think it's more a matter of deciding what's the best way to accrete value to the shareholders and as soon as we have decided and done it. We will tell you.

Doug Mavrinac

All right. Got you. Perfect. Well, thank you that's kind of what I was expecting. So Tony, whenever you look at the other aspect of your positioning in your spot versus time charters, you mentioned you kind of where, where you wanted to be there as well with more spot on the CPP side and more time charters on the chemical side. But when you look at kind of -- when some of those chemical time charters are expiring, some have recently expired, some are about to expire, do you foresee kind of keeping that preference of those guys of the time charter market as well. Or do you kind of maybe see right well in the near term the spot market may make some sense. So kind of where do your thoughts stay in terms of those soon to be expiring contracts from the chemical side?

Anthony Gurnee

Yes. So with chemical ships we got roughly half of TC half trading spot through the very good pool. We can always when the ship run -- when ship run off the TC, we could move them into the pool or we could put more on TC. It's very tactical. So it's really what we feel is the best way to maximize value over the next 12 months. We don't think it's a really significant risk mitigator, it's just value maximization.

So in that situation we do -- we feel that it might the ships that we own because the chemical tankers we have are -- they are somewhat rare, given the ties and pipe and the fuel efficiency. So I don't think they are particularly attractive compared to that kind of older versions of them and we are getting more pay for that because they are very productive ship.

So long story short, I think the -- we do see a greater disparity between spot and PC on the MR side and that's where we think the upside excitement is -- sooner than chemicals. But we do think the chemical tankers are going to have the very big day in the sun at some point.

Doug Mavrinac

Got you. Just out of curiosity, how deep is that the market right now in terms of the time charter demand on the chemical side? I mean is it fairly easy to secure time charters or is it more of a relationship type of a thing?

Anthony Gurnee

Smaller market it's a little more heterogeneous than MRs. And I think given that their chemical tankers you really have to have the operation -- operating capability to perform.

Doug Mavrinac

Got you.

Anthony Gurnee

So it's very operational and relationship driven and these are relationships we have working on for quite a while. So it's quite niche in what we do.

Doug Mavrinac

Got you guys. Thank you. And then, just one final question, this is more kind of industry background type of a question. But in your slide deck, you guys mentioned how little China exports right now, yet, when you look at 2016, they are one of the biggest sources of refiner capacity, growth that's taking place. So even though you are starting at a very small base, could you see China become a more important driver of CPP demand given that they [just grew] [ph] exports up over 60% last year and they are adding almost 0.5 million barrels a day refiner capacity this year. Could you see those guys developing into a bigger source of demand for the market overall?

Anthony Gurnee

To be honest, I think they are roughly in balance in terms of demand versus -- they got about 15 million barrels a day of oil consumption that's about the size of their refinery base -- keeping pace with domestic demand. I think it would be wonderful if they were -- if they were really big and balance maybe that will happen.

Doug Mavrinac

Right.

Anthony Gurnee

I think you could see a situation where -- they are basically short get gasoline and diesel.

Doug Mavrinac

Correct.

Anthony Gurnee

If there is unexpected growth in China and the refiner capacity having kept up probably the diesel exports would decline but you've seen much bigger for product imports. Overall, we think it's an interesting thing to watch longer term but the capacity to building in is really for domestic use and if they continue to grow, we will see incremental diesel exports either coming out of that as well.

Doug Mavrinac

Got you. That's all I have. Thanks for the time, Tony.

Anthony Gurnee

Thanks Doug.

Operator

The next question is from Jon Chappell with Evercore ISI. Please go ahead.

Jon Chappell

Thanks. Good afternoon guys.

Anthony Gurnee

Hey, Jon.

Jon Chappell

So Tony, just thinking about how you balance the entire fleet employment with the positive commentary around the industry obviously on the demand side. And then, the supply side really stands out. There was MR orderbook in 15 years. But also now as you're a dividend paying company and there has been seems to be a little bit more liquidity on time charters that rates that have probably performed better over, I would say the last six months and then, the spot market which has been incredibly volatile. How do you balance kind of locking in some cashflow in this improving market despite the favorable outlook you have. To kind of give more transparency and comfort with the sustainability of the dividend.

Anthony Gurnee

Yes. So again, I think when you are thinking about one of your time charters, we don't really feel it is huge amount of visibility long-term maybe would quarter-to-quarter, I'm not sure how much that would in the end really be worth in terms of perceived value but I think our objective would be to find to really not go into the time charter business in a big way until we thought that it was at least a fairly close correlation or close matching of TC one or TC in spot. And that's just still not the case.

We would of course go longer if we felt that as we expect at some point there is going to be kind of the shift in our market psychology where there will be a real scramble for ships on longer term basis. And if we feel that some of our good customers that are credit worthy and serious and want to go longer than a year, we would love to do that at the right time. But, it's got a support not only good dividend but good earnings base. And today's level that wouldn't be the case.

Jon Chappell

Okay, understood. And then the $11 million in cash proceeds from the sale that you smaller tankers plus the $20 million freedom from a new refinancing. How would you lever that $30 million kind of in your mind as far as potentially adding one or two more steps. I've would imagined from the second end market, what type of leverage would you be comfortable with their signature about 52%, right now?

Anthony Gurnee

Yes. I think we would probably -- the thing is -- we are stepping out of capital leases on those vessels so that the release of cash equity hasn't as much you think. So but I think the -- Paul, maybe you can -- I mean in our view it's a roughly 50:50 leverage it's about where we want to be in this market. And so we do have the capacity for picking up a couple of shifts. And that's certainly something that we are looking at.

Jon Chappell

Stay on target?

Paul Tivnan

Go ahead, Jon. Sorry, I was going to say in terms of the individual ship acquisitions, you can probably levered off 55% to kind of 60% on a vessel probably wearing towards the former. But when you buy a ship obviously, the sacrifice is one, than the working capital and the course entered.

Anthony Gurnee

So I think you will end up if you were to buy a ship, we will end up at net leverage around 55 direction, does that answer you question?

Jon Chappell

Yes. Then what I was going to ask is that the target leverage for the entire organization and 60% payout ratio is robust but there is also 40% of the cash that you are generating, is there a target net to capital ratio coming closer to 40% where do you view any access cash above and beyond what you are paying out is kind of growth capital?

Anthony Gurnee

Again, we -- there is a few things we do with the cash, with the 40% remaining and once we can expand the fleet. We can buy back shares. We can reduce debt. We can just keep it -- keep the cash on the balance sheet often there is big reason. So we are interested in all of that. And again, we are just trying to figure out what's the best have to -- what the way to maximize accretion. And it may there well be additional ships. So we just have to pick our timing on that.

Paul Tivnan

I think just pick up that one was well. I mean, under the new debt that we are paying down close to $40 million a year, so your leverage is coming down quite significantly year-on-year, so you will level off 50% closing in on the -- as you said the magic 40% number control the end of the year. I think that's strong market now and it makes sense to relever and strengthening of balance. What's that's given you the fire power for additional acquisition. But I don't think there is any magic number in terms of leverage. But, I think getting below 50% and closer to 40% give the company a significant strength to kind of continue, to continue to kind of move forward from here. So --

Jon Chappell

Right. Okay. Thanks Paul. Thanks Anthony.

Operator

The next question is from Noah Parquette with JPMorgan. Please go ahead.

Noah Parquette

Yes. Thanks guys for taking my question. Most of my questions have been answered. I just want to get your opinion Tony on -- have you seen any changes in trade ups in your vessels or since the [indiscernible] filled, I know it's early but anything you are seeing?

Anthony Gurnee

Sorry, no, can you repeat the impact on our business of the crude export then?

Noah Parquette

Yes. Have you seen any changes in trades and trade routes in your business?

Anthony Gurnee

No. It's -- we are only engaged in products. I think the way it would potentially impact us would be if it had an effect on pricing of feedstock for U.S. Gulf refinery to the extent that they started curtailing production. We just don't see that happening. I mean if [indiscernible] seems to be doing exceptionally well, other where the integrated companies also as long as they continue to run flat out or as much as they can, we are in really good shape. More broadly though, it looks like, I think four ships have loaded so far. I think one or two in other ones or Panamax and couple of Aframaxes. So I think it's certainly good for the tanker business overall, particular for Aframaxes where the ton mile demand picture hasn't been brilliant over the last 10 years because the average voyage length has really shrunk a lot. But those voyages are actually very long up to Europe and so it could have a meaningful ton mile impact on Aframaxes which could then have an indirect positive impact on LR2s and then the product market overall.

We think it's positive. We don't see any negatives in it.

Noah Parquette

Yes. So I want to follow up on that Aframax that’s the primary way of crude and product tankers are linked, right, so what do you estimate the LR2 fleet is trading crude right now is still about 50%, you see that changing at all over the next 12 to 18 months given your view?

Anthony Gurnee

Yes. What we do know is that, I think in the first half of last year about -- LR2 is went from clean to dirty. But we also remember a couple of years ago, when you had couple of guys trying to clean up. And it's very expensive, it can be $1 million of ore to get from a dirty trading LR2 condition to the last three clean. So it's not something anybody is going to do lightly and so we -- we think it's a much easier decision to go dirty, right hard to go back. So we think that it helps the flow kind of helps lot more than it hurts potentially. And it's not a very significant linkage. I mean there are -- I don't know something like 150 LR2 is trading clean right now that compares to 2000 MRs in world fleet. So it's not a huge sector.

Noah Parquette

Okay. And then just last week there is a news, that a couple of newbuild crude tankers took clean products from Asia, I guess that Europe -- what do you takeaway from that that's just kind of one-off thing. Does it tell you anything about diesel in the Asia region, just trying to get a sense of Chinese diesel exports are going to be neutral or negative in ton miles or potentially accretive as it goes further?

Anthony Gurnee

Everything else being equal, more cargo means more demand. I think those kind of trades being going on for a long time, we just haven't heard about them, but I think for at least a year some of the oil traders have been takes in Suezmaxes right out of the yard and loading them up with products to go somewhere.

We also heard a while ago that they [indiscernible] type vessels that were taken on for jet fuel storage. So even though their vessel slowing down -- so I think there is a lot going on that's created demand that's related to the whole congestion problem. And we don't see it going away and we feel it could even get more interesting.

Noah Parquette

Okay. That's all I have. Thanks.

Operator

Our next question comes from Mike Webber with Wells Fargo.

Donald McLee

Hey, guys, this is Donald stepping in for Mike. Thanks for taking my question. I just want to follow-up on your last point, we keep hearing rumors the footing just slip storage in the market, is this still primary short-term storage based on the discharge ways due to [indiscernible] inventories or do you see is longer term, container base storage developing like you have mentioned with those [indiscernible] is that becoming a wider spread trend or are you hearing more increase for that charters relative to say three months ago?

Anthony Gurnee

Well, there is more inquiry. I don't really have a lot of data on how much is actually happening now. But it seems to be literally today is the first time we have ever been asked to slowdown dramatically at sea -- reason a port just nothing able to take the ship for long time. So it is a developing situation. I think it's much less likely to be pure container go coverage rate driven with products and crude but it has happened in the past and we might see that really develop in the near-term. But that would be more on the bigger ships.

Donald McLee

And just following on that when you say slowdown dramatically, what speed would you slowdown to say relative to like the 14 knot steaming speed?

Anthony Gurnee

That ship is probably doing 12.5 knots to begin with. So haven't had a chance yet to call the office and find out what we are actually able to do. When you can run it -- it's kind of complicated, but when you get below a certain speed, the turbo charger needs to be backed up basically reinforced with blowers and that calls for second generators, so there is some calculations you have to do. So it's not something you can do for very long period unless you reconfigure the engine. So don't have the details but it’s an interesting development.

Donald McLee

Got it. Thanks for the color. And that's it from me guys.

Operator

Thank you. The next question is from Ben Nolan with Stifel. Please go ahead.

Ben Nolan

Great. Thanks. I've a few questions and maybe just a follow-off one that Donald is asking there. Storage and your vessel that is going slower obviously as the global inventories are refined product build and the need for storage builds and infills, it would seem as though crack spreads might come into a little bit of pressure and if they do, then you might get a reduction refinery around, is that something that could be a risk to the volume side of it and if so, is it something that is short-lived typically in your experience?

Anthony Gurnee

Yes. That’s a good question. I think in that kind of situation, the impact is usually very short-term. So we have been through this in the last 12 months period when you hear a certain region all of a sudden they -- there is not taking in the ships. Very often it's actually associated with taking excess amount in anticipation refinery turnaround. So I put the West Coast to South America.

So we haven't really seen that happen the way you described it. But what we have seen happened is, awful lot of scrambling of what would be normally fairly routine supply arrangements. And port delays resulting in, ships missing their next voyage et cetera. So I think -- we think what countervails that are or counterbalances that even more is the -- the volatility and the trading opportunities that are created. Because ultimately these cargos, they kind of freight. So at some point even if the -- yes, I mean I would say if the refineries they start cutting back in production because this is too much congestion. Well, that means there is an awful lot of product tankers sitting waiting to discharge maybe that more than offsets it.

Ben Nolan

Got you. Now that's good point. And then, my next question relates to something that you guys alluded to or talked directly to -- with respect to the orderbook for the MRs and as you said, I mean below 10%, it's been a long time since we have been at that level. But the LR2 and the LR1 market, the ratios could be higher. In your experience, is it possible for there to be a legitimate decoupling of the one particular asset class like the MRs, if it -- maybe it takes a little bit longer for the demand side to catch up to the LR2 is the function of the new vessels coming to the market?

Anthony Gurnee

Yes. I mean there is definitely a small overlap between LR1s and MRs, but since we talked about many times, the value of an MR is essentially its flexibility. And that's what traders need. So unless we know where the cargo is going, specifically they are not really able to take advantage of the bigger spend. So that means that there is a fairly limited amount that LR1s for example could push.

LR2 is very often to hear, people doubling up stems and moving it on an LR2 instead of an MR, but again, once you do that you pretty much have to lock in where the cargo is going. And so the amount of opportunity for that is actually kind of surprisingly limited. Now, in the last five years, we have been in periods where not just LR1s but even LR2s has been trading at or below what MRs are earning.

So I'm not saying, it would drag us down a little bit, but there is a sufficient decoupling where you got ships that had kind of 35% to 70% more capital invested with higher OpEx earning less money. And the other problem with the bigger ships very often is, MRs are doing increasingly complex trades, they will do multi-port loads, multi-port discharges, onboard blending et cetera. And you just can't do that economically with LRs. So --

Ben Nolan

Okay. That's helpful. That's helpful.

Anthony Gurnee

I can't tell you that an oversupply with LR1s and LR2s is going to be have no impact, since it's not potentially negative. But it's not like the container business for example.

Ben Nolan

With cascading. So and then, my last question relates to one of the other topic has come up a little bit in terms of buying maybe one or two assets. In this market, I mean I don't think there is anyway that you can cut that your shares are trading at a pretty steep discount NAV. I'm just wondering how much sense does it really make to be out there buying assets when you can buy the shares at a pretty substantial discount to where you can buy the assets?

Anthony Gurnee

Yes. Well, if you may detected a fleet lack of listing stock this morning, excuse me the stock price, reaction so, yes, will be rethinking share repurchase if these were kind of levels. But, we are just -- every day and every step the way we're just trying to figure out what's going to create the most value. And if we can buy shares and have that in future buying a ship but 10% to 20% below market value and yes, so we will certainly consider that.

Ben Nolan

Okay. All right. Good answer. Thanks a lot guys.

Paul Tivnan

Thanks Ben.

Operator

The next question is from Fotis Giannakoulis with Morgan Stanley. Please go ahead.

Fotis Giannakoulis

Yes. Hi, guys. Thank you. My questions have been answered already. Thank you very much.

Anthony Gurnee

Oh, Fotis, come on.

Fotis Giannakoulis

Okay. Let me ask about the asset values, I want to know where asset value stand right now and what happens with ship years and this is the only question left to ask and how do you view the cashflow yields on MR vessels going forward?

Anthony Gurnee

Fotis that's unfair, we are not going to answer that question. So, okay, so answer now, you can chip here. Look I mean, values are holding up reasonably well certainly better than share prices. The markets -- really its making money right now. So why sell? I think some of the pressure to sell comes from the fact that these ships maybe owned by people that are in other shipping sectors. But overall, operationally it's a very healthy market right now.

Ship yards, it's really interesting because they're really caught been rock and hard place. They really are not going to be allowed to get below their variable cost of reduction. Yes, they are a little more hungry and maybe they are prepared to do at a little lower price. But, guess what, the cost of construction has gone up with the new regulations. So those probably more or less balance each other out at the moment. And they literally are -- most of the yards that filled MRs were actually controlled by the banks now and that's very different from a few years ago when you had management teams that had kind of been hanging on. They kind of manage those companies, those yards through the good times and we are kind of hanging on and their whole framework was market share and orderbook and they made some catastrophic mistakes paid forward with their jobs and with the solvency of the company. So now they are -- they are bankrupt, the banks have them, SBT where we build most of our ships was just sold. But they used to have three operating yards, now they are down to one. And so there has been tremendous shrinkage in capacity and we don't think there is really the willingness, the ability to get below their cost. They are not going to get refund guarantees below that level. So that's our view on it. So we will see how it plays out.

But, the other side is, that you got to have somebody willing to buy and afraid to commit significant amounts of capital and where is that going to come from?

Fotis Giannakoulis

Okay. Can you remind us where the price of newbuilding today and where it was a year ago? And what kind of payment terms you can have how much money we have to pay up on signing of a contract? Is this something that might be interesting for you or for others and what I'm trying to understand is, this low orderbook that we have, what is the risk of people putting $3 million, $4 million down payment to order a bunch of newbuildings?

Anthony Gurnee

We have gone from, I have no questions to -- okay. That's fine. That's fine. I think the slight increase in hunger of the yards to build MRs has been offset by the increase in costs. And so I think were roughly at the same levels that we were a year ago maybe 36, 36.5 for a well stacked MR, which by the way -- by the time it delivers with additional stuff and supervision cost and capitalized interest and sitting out. That 37.5 million delivered. So we don't think that really changed very much.

Fotis Giannakoulis

Thank you very much, Tony.

Anthony Gurnee

And in terms of okay, who is going to put $3 million down for 10% to order ships today? I think there are dramatically a fewer people prepared to do that today than three years ago.

Fotis Giannakoulis

Thank you very much. I appreciate.

Anthony Gurnee

Sure.

Paul Tivnan

Thanks.

Operator

The next question is from Vishal Bhutani with Pyrrho Capital Management.

Vishal Bhutani

Hi, guys. I wanted to know products being generally oversupplied both gasoline and diesel. Do you expect that to put pressure on the product tanker market because refineries are going to be might be taking additional run? So we have [PBS] [ph] come out yesterday and said they are taking additional runs or down time are going into maintenance early. So do you expect significant pressure on product tanker rates at least in the near -- very near term?

Anthony Gurnee

Look -- there is if you look at the past for utilization rate, it is way down, I think a good chunk of that is the Beaumont refinery. But refineries had gone into turnaround and they will come back. I just -- there is a dwindling but admittedly a continued oversupply of oil and gets refined and then it gets shifted. And the -- but the global stockpiles of refine products are higher than normal but nothing like crude. So clearly this [cut] [ph] have been refined, either the margins are good enough and it's moving. So we don't think it's a major factor.

Paul Tivnan

Just to add to that, I mean you have -- your refining margins are at all time high particularly for gasoline and that's encouraging refineries to keep running. You now have very low -- your finalization in PADD 3 and U.S. Gulf and as a consequence of that you could build up the cost -- I really don't think it's possible for refinery to kind of scale back significantly, they might be a little bit on the margins. But I think it's -- you have continued demand for gasoline, diesel is kind of for the most part a byproduct. I think refineries would keep running, while margins are strong. They are making a lot of money now. They may scale back a little bit. But I don't think they will do so significantly. And I think while cargo was coming out and while they are continuing refinery expansion that business will become more competitive, but I think it gives rise to a lot of arbitrage and a lot of product. So I think you may have some other margins, but I don't think would expect to see a significant impact on the tanker market.

Vishal Bhutani

Okay. Thank you guys.

Operator

The next question is from [George Birman with IFS] [ph].

Unidentified Analyst

Good afternoon. Thanks for taking my call. Can you give us a couple of examples of a triangulation route, would be the first question. Second, is your fleet primarily in the Atlantic area or are you also doing the Far East?

Anthony Gurnee

So examples of triangulation routes would be TC2, TC14 which is gasoline Northern Europe to New York then Baltistan to Houston and then TC14 back to Europe, with -- usually with [indiscernible]. So that's [indiscernible] triangulation. The triangulation is Singapore up to Japan and then Korea down back to Singapore. That's TC114. So those are the key triangulation routes. But there are others that aren't as readily folded that kind of provide the ability to do utilization about 50%.

And then these [technical difficulty] second question was -- sorry, can you repeat your second question?

Unidentified Analyst

Where your fleet mostly operate in the Atlantic basin or Pacific?

Anthony Gurnee

It's not necessarily by design but by some intent that's roughly balanced. But look at -- if you see a great cargo that's moving from one region to the other you will do it. And then maybe SAG, if I can find something else out on another ship, I will do that too. So we are happy to be roughly balanced between them.

Unidentified Analyst

Okay. And a lot was talked about additional waiting times, when you do a cargo and you experience a weak delay in discharging, are you still being paid your day rates or do they drop substantially?

Anthony Gurnee

You get paid on the [indiscernible] which is basically the day rate plus some additional costs for fuel consumed to the generator and some additional cost. So typically, the [diminishing] [ph] rate is a little bit higher than the TCE or the time charter equivalent calculated for the voyage.

Unidentified Analyst

Okay. And maybe reiterating today's stock price, I don't know if you guys expected this apparently the expected earnings were a little bit higher than you reported. How would you weigh buying back your own shares and indirectly buying ships versus picking up some ships in the secondary market?

Anthony Gurnee

Yes. Well, anybody regarding stock price reaction and our earnings, we are with our main analyst, we have very much in mind and I think no surprises there. We have some outliers that don't really follow us very closely. But they still factored into the consensus number. But look, I mean as I said earlier share repurchase is one of the alternatives we have for use of cash and when the stock price goes down it's that much more attractive.

Paul Tivnan

And it's actually quite surprising on a day that you put our record earnings $1.23 for the year and your stock price goes down. So it is interesting, we have given -- we give a lot of color on to give guidance couple of weeks back. But, unfortunately there were still some outlying analysts, but, yes, the stock price today has certainly been surprise to us.

Unidentified Analyst

Okay. Appreciate it. Thanks.

Operator

The next question is from Adam France with 1492 Capital.

Adam France

Couple of quick one guys. Thanks for squeezing me in. I don't know if you could offer percentages along these lines Tony, but how many ports out there are MR accessible versus LR and LR2 accessible?

Anthony Gurnee

Let me think. My guess is that, yes, I wouldn't take -- I think it's a very small percentage. I think maybe way to rephrase question as, you know, how much of the MR trading could be done by LR1s or LR2s if traders knew where the cargo was going? And could be a quarter of it but the point is the traders don't know where they are going and they don't want -- they are not going to commit to that because that bake into the flexibility and the optionality adds tremendous value to them. And very often these cargos trade hands several times on the water. So it's really the flexibility in the standard lot size that's the key.

Adam France

Got you. Tony, this is a difficult question, I'm asking. Today is obviously an overreaction, but you guys have done a first-class job of running the company and I believe it make sense that your NAV is somewhere between 13 and 14. How do you know that being a publicly traded company is worthwhile?

Anthony Gurnee

Well, I think you can say in every walk of life, some days are better than others. So --

Adam France

Sure. Sure. I don't want to overreact.

Anthony Gurnee

No, no, we are committed to being public. We think that that the tanker business is an important industry, it requires a lot of capital. Our objective as the management team is to create value for shareholders. We don't do that by following the stock price everyday. We do it by trying to develop a strategy which maximizes value, puts us in strong competitive positions and where we get the timing right. We feel we got the timing right with our idea. With the orders, the timing of those deliveries and the market is great. There is a real disconnect. That's -- there are many things we can control and the stock price isn't one of them. But we all time the ability to buy shares back, the problem with that is that, if capital market saw by signaling, a sense of signal that maybe we want to decapitalize or reduce our market cap and that's not actually the case. We would like to grow but we want to grow accretively. And we want to grow for the right reasons. And so we are not about to take the company private, let's do it that way.

Adam France

Thank you. Very good. Thank you for squeezing me in guys.

Anthony Gurnee

Sure.

Paul Tivnan

Thanks Adam.

Operator

Ladies and gentlemen, this concludes today's question-and-answer session. And thus concludes today's call. We thank you very much for attending today's presentation. You may now disconnect.

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