Scorpio Tankers' (STNG) Management on Q2 2016 Results - Earnings Call Transcript

| About: Scorpio Tankers (STNG)

Scorpio Tankers Inc. (NYSE:STNG)

Q2 2016 Earnings Conference Call

July 28, 2016 11:00 AM ET

Executives

Brian Lee – Chief Financial Officer

Robert Bugbee – President

Cameron Mackey – Chief Operating Officer

Analysts

Amit Mehrotra – Deutsche Bank

Jon Chappell – Evercore ISI

Doug Mavrinac – Jefferies

Joe Nelson – Credit Suisse

Ben Nolan – Stifel

Spiro Dounis – UBS Securities

Magnus Fyhr – Seaport Global

Fotis Giannakoulis – Morgan Stanley

Ken Hoexter – Merrill Lynch

Noah Parquette – JPMorgan

Operator

Welcome to the Scorpio Tankers Incorporated Second Quarter 2016 Conference Call. Today's conference is being recorded. I'd like to turn the conference over to Brian Lee, Chief Financial Officer. Please go ahead, sir.

Brian Lee

Thank you. I thank everyone for joining us today. On the call with me are Robert Bugbee, our President and Cameron MacKey, our Chief Operating Officer.

The information discussed on this call is based on information as of today, July 28, 2016, and may contain forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statement disclosure in the earnings press release that we issued today as well as Scorpio Tankers' SEC filings, which are available at scorpiotankers.com.

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

Now I'd like to introduce Robert Bugbee.

Robert Bugbee

Hi. Good morning, everybody. First, let's apologize that Emanuele Lauro can't be with us this morning. He has a pretty important meeting with one of our customers. So this morning, first of all, after I've spoken for a couple of minutes, we'll open to questions right up to the analysts. We're looking forward to those analyst questions, and we expect to do some handholding combined with a little bit of tough love.

The first thing is we remain very confident in the long-term fundamentals of the product tanker market. In fact, literally every day in this last six months, those long-term fundamentals have improved. Forward supply growth is coming down. There is no new ordering. And for the first time, certainly in my career, there is a chance of having material cuts in forward capacity for shipbuilding. Secondly, headline demand continues to grow. And thirdly, we expect quite large increases in export capabilities going forward from 2017, 2018, 2019 and 2020 in new refinery expansion.

First, let's have a little look at what's going on right now in the spot market. I know that some of you are fairly new to the industry and have reference points that are, for example, comparing this third quarter to last year. In my experience of 32 years in this industry, the first point of perspective is that third quarter usually at 90% to 95% of all of those years, the third quarter is the weakest part of the year. It is the seasonal downturn.

Last year was quite an aberration, largely due to the super falling of oil pricing and the stimulus of the exports at that point. And maybe, right now, the markets are partly going through a period of paying back Paul after Peter robbed him last year. Through this first quarter, we've had lower -- bloated inventories, lower refining margins coinciding with a growing fleet, and distillate refinery capacity additions. This is what's been driving these rates lower.

However, the demand for refined products, that's the headline demand, continues to remain robust. We've had delayed refinery maintenance that should have been happening in 2015. It's been happening in Q1 and the end of Q2 2016, lower refinery margins, the high inventory levels. And, we've been, most importantly as well, digesting the last bulge of big supply. There's been a 4.1% fleet growth in the first half of 2016. That will not be repeated going forward.

The order book is declining very fast and is probably declining further than most analysts will look in their research because we ourselves know, in our own order book, the shipyards are delaying vessels. We've originally anticipating having all of our MRs that are being built at the moment to be delivered next year. We've already disclosed that one of those vessels has already slipped into 2018. That is not uncommon. We are not unique. Shipyards are trying to stretch out their order books and, therefore, slowing the supply growth.

But most importantly, despite a warm winter, very flat start to the summer and all these short-term headwinds as we go through the changes in arbitrage, the oil pricing, this inventory position, which we all see as temporary, the market actually, on a relative basis to normal third quarter, is actually quite strong. What's surprising us is not the weakness of the market with these headwinds, but the strength of the market.

When you're having LR2s up in those high teens and we have given you guidance that's conservative. We have no interest, no reason to pump or drive the stock. We're not looking to raise equity with it's -- wherever. We're just trying to show that even at these numbers we're cash flow positive, covering everything.

But these high teens and we've even seen an acceleration in the last two, three days from the LR2s, which is a real driver, the real sounding bell for overall demand in the product market. Those vessels have moved significantly higher just in the last few days. So that's telling us that this overall demand does remain robust.

This is not a weak market. This is an incredibly strong market that we can understand the present relative weakness to, let say, the first quarter or the fourth quarter last year, but at this rate level, this utilization level, the risk is to the upside at any point.

We will work through these headwinds at the moment. It may take four or five months to do this. But where the rates are right now, it creates a very strong springboard as you go into those stronger seasonals roundabout early November. So, we look forward to that part with great optimism.

In the long term, there are tremendous refinery additions. 2017, 2018, 2019 compared to 2016, in every one of those years, the refinery export coming online is over three times what we're seeing this year. But the supply of vessels is declining, not just declining because of ships not being ordered, it's declining because of the regulations coming and the actual fleet itself is aging. That's pretty exciting going forward.

So I think that from our perspective, we are surprised that the market is so strong with all that is being thrown at it, and especially in last six, seven, eight weeks. We see what is happening right now, with oil price coming down, there is tremendous boom to the long-term fundamentals. It virtually ensures that we will continue to see that headline demand growth in crude oil, in product tankers and in related commodities or products that we take. We're not at a situation running a risk now that we could have run in March or April, where oil could get ahead of itself and then crimp the demand curve.

And I think we will leave it at that. And we will open everything up for questions.

Question-and-Answer Session

Operator

We'll take our first quarter from Amit Mehrotra from Deutsche Bank.

Amit Mehrotra

Thanks Robert and thanks Brian. Good morning. Just had a question – I appreciate your comments Robert. I just had a question on the dividend, obviously, it represents a significant fixed cash call on the company and in an environment where currently at least – hopefully that improves and I am sure it will, but currently breakeven or near breakeven net earnings. Just wondering how you're thinking about the sustainability of the dividend? And then if you can just give us your view on that? Thanks.

Robert Bugbee

I think the first thing I would say is that Scorpio Tankers is coming off, excluding the second quarter of this year, five consecutive quarters of very superior earnings and cash flow. The second thing I would say is that the board and management is not looking at the dividend related to EPS. They're looking at the dividend relating to cash flow generation. And even at these rates in the third quarter, we're covering that dividend in terms of that cash flow. The third thing I would say is that there's tremendous irony when I listen to the fear, the angst and read some of the analyst reports around dividend because it was only a few months ago that those same people were questioning why we were only keeping the dividend at $0.125, why we weren't going out to a higher payout ratio because of our tremendous surplus cash.

Now in the same time, we really don't believe in just pandering to short-term positions in either way. So, in the same sense as we didn't raise those dividends in that stronger environment, our model is such that we see no reason why we should lower the dividend in what we consider is a short-term environment. I mean, our confidence level of this market getting much stronger than where it is right now in a one-year period is very high.

We have a 75% probability as we cross one week plus or minus of Thanksgiving. It goes up to the 95% region once we get one year forward, simply because of the export capacity that is coming on, combined with the complete deceleration of newbuilding orderings and the aging of the fleet. Then I guess, the fifth thing is, look, we keep announcing that we're refinancing lower in margin, longer in tenor and less costly in terms of amortization. And the commercial lenders who, frankly, know the balance sheet the best outside of management, they're the guys who are getting the reports every week, there is a huge arbitrage between that knowledge and their pricing compared to some analysts and the actual trading of the public securities.

Then, finally, when you're sitting on a $165 million of cash and your probable outcome on financing your newbuildings is actually a net cash back to the Company, because we just might end up financing more than 50%, we really feel in a very, very comfortable position that the dividend policy that we have, which is a -- not just a fair-weather dividend policy. The dividend is designed for this. It's designed for rates actually that are much lower than what we're having in the third quarter. That's what I'd say.

Amit Mehrotra

Well, that's seven great points. So thank you. Let me just ask one follow-up, I don't want to ramble on, but let me just ask one quick one. You mentioned the newbuilding came in relative to the available debt capacity or you mentioned that. It is true that the available debt capacity is a lot higher than the newbuilding payments. Brian, could you just help us out in terms of how much actual debt you're going to draw since, I guess, it's going to be more than the newbuilding payments? And also, related to that, is there any potential in the back half of this year? Because it seems like you're accelerating the repurchase of the convertibles, at least you did in the second quarter. And so I was wondering if we can continue to see that in the back half of the year. Thank

Robert Bugbee

Okay. I'm just going to intercede here that we're really not going to answer the second question.

Amit Mehrotra

Okay.

Robert Bugbee

There is a conflict and we are not going to answer that.

Amit Mehrotra

Okay.

Brian Lee

And in terms of the debt that we are going – we are negotiating our debt and we'll get back to you, but it's very likely to be somewhere around to that number of the remaining payments or even a little bit higher. So I like to be a little bit conservative on that and you'll see it.

Amit Mehrotra

Okay. Great. Thanks guys. I appreciate it.

Operator

Moving now, we'll take our next question from Jon Chappell from Evercore ISI.

Jon Chappell

Thank you. Good morning Robert. One thing to explain what's been going on in the market, and there is nothing to -- to do something about it. So I've noticed that these three MR time charter-ins that you've done in July at levels that are much higher than anyone would give as a benchmark rate to the market right now and both for spot and time charter, I should add. Are those rates more representative of what assets are really getting now in a time charter market between good counterparties? And then second of all, is that more of a comment on your views on what you just laid out before? If you're willing to take in tonnage at 15.5 and people are worried about 12 13,14 in the third quarter, that you think it's a very good arbitrage for you that you could take advantage of going forward.

Robert Bugbee

I think that's a perfect expression of our views that we're really not concerned in the short term. And we think that there can be significant improvement in not too far away because those deals are structured with a high degree of optionality to each of those deals. And I think, yes, they were competitively bid trades. There is a functioning market. We're not the only people in the world who believe that. You are likely to see, with a bit of luck, for example, right now, we're trading to taking an LR2 with options. Now we might get lucky and actually end up taking that ship at a rate that is below the present spot market that has moved up. But those things are irrelevant. What is more relevant is that or what is more relevant to us is that these really are, in our experience -- it's obviously a tautology, but strong weak markets.

The Street seems much more afraid of the short term and many people seem to have totally lost perspective in what is really going on. And so what is simply going on here is headline demand for products and crude oil is increasing and forward capacity growth is shrinking. Now we don't exactly know what time that will meet itself, but we know that it won't take much because the present utilization and rate structure is so strong relative to the past. And I really beg those people who are focusing just on third quarter last year or blah, blah, blah to go over historical seasons of both the crude and the product market. They have to have data that is longer than one year.

Jon Chappell

Got it. And if I can just follow-up on another topic of note lately is the two-tiered financing market. Now clearly, you've been able to refinance, like you said, lower spreads, longer duration, and I think that's kind of borne out in asset values overall across the entire shipping. But is that two-tiered market extending now into the time charter market? What I mean by that is, if this really is an opportunity given the disruption in the market today. Is it highly competitive for you to time charter-in ships as it would be maybe last year at this time or is there a much smaller group of people that have the financial wherewithal today to aggressively take advantage of these opportunities?

Robert Bugbee

No. I think the group – ironically sort of remains the same, and it's the same when it comes to debt side too – it is just that the division has got wider, that that instead of there was the Group that could do time charters at better terms because of their credits and more ability than the other group. You now have the group -- that group is the ones that can do charters full top and the other group can't do charters. You have in terms of debt financing the group that the lenders are comfortable with their balance sheets, and the lenders are wanting to have those premium securities. And they don't want anything to do with the less secure companies.

Operator

Moving on, we'll take our next from Doug Mavrinac from Jefferies.

Doug Mavrinac

Thank you, operator. Good morning guys. Robert, in your commentary, you talked about the LR2 market. And last week, you saw LR2 rates up 17%, and you talked about the continued momentum that we've seen in that one particular market. So 2Q seasonal weakness aside and then also with what's going on within the refining complex. Can you talk about what has been behind that uptick in the LR2 market specifically?

Robert Bugbee

I think we've saw – what was the catalyst that injected the driver into the LR2 market was really last year, the first Saudi new refinery is coming up and there's very, very strong correlation between export capacity and LR2 demand. So that was the first driving position. Now that's obviously – you then got India, you even got now Korea, Singapore et cetera, and you just got strong headline demand in terms of the world. Forget about the internal structures or whatever and forgot about refinery spreads at a moment. Each day the world is using more refined product than it did a day before. And the most efficient dollar cost vessel to take that on is the LR2.

Doug Mavrinac

It's very helpful.

Robert Bugbee

And the risk to that -- I mean, look at what we're reporting now in that third quarter, which obviously doesn't reflect. This is stuff that was booked a while ago. Brian isn't going to put into an earnings report estimates. He is going to put in what has been done and reconciled. And yes, you have had this tremendous movement in the last four, five days. It's even continued today. And that's why, I think, in general, even though we are preparing for, it's taking four or five months to work right through, the risk, especially in those LR2s, is to the upside.

Doug Mavrinac

Right. And then within that, and saw it got downward.

Robert Bugbee

But there won't be any difference -- if they clear at $21,000, $22,000 a day, there won't be any difference in trading terms at $22,000 or $30,000. They have that much volatility. It's either people want them when the utilization is strong or they don't. You've got a warning sign right there that that market, despite all those headlamp [ph] flow in, we're able to drive from where they were 10 days ago to where they are now in literally 10 days.

Doug Mavrinac

Right, got it. And you just mentioned the key word that I think within the historical context you believe is important, that's volatility. I mean whenever you go through a period of softening that it kind of gets a little bit humdrum and boring. When you see volatility, within that historical context that you provided earlier, how important is that in terms of not necessarily pinpointing an inflection point, but at least seeing an inflection point coming up?

Robert Bugbee

Well, I think, what's most important is what's happening in oil, this sort of restocking, destocking, this titration of oil at the moment is actually really good for the headline demand. It continues that stimulation as demand. So, right now the market seems across the tanker space, whether it's crude oil product to pricing these things for distress when history tells it. History tells you this is the time. This is the time to be buying those tanker stocks to chartering in tankers to creating that long expression, whether you're an owner or a shareholder, simply because the markets, despite all the help are holding together in off season against an expanding demand cycle.

Doug Mavrinac

Got it. It makes a total sense. And then shifting gear a bit, Robert……

Robert Bugbee

And I mean, look, you can go on in products, it's like crazy. I mean the actual new building delivery booking total right now is an incredibly low point.

Doug Mavrinac

Right, right. And then when you look and take that industry backdrop and apply to what you guys are doing. One of the things that stands out to me as it relates to what you're putting up in terms of 2Q daily earnings and then thus far in 3Q daily earnings, is your ability to outperform even those industry averages. And so, when you look at, say, like the MR market, for example, so shifting gears from the LRs to the MRs. And I see that you guys are outperforming some of the industry benchmarks. Can you go over, in this current environment, how you're able to do that? I mean, even in this low bunker fuel price environment, is it the eco? Is it the ability to triangulate or is it just that people are looking at maybe misrepresented traders that are coming up with daily averages and when you guys really are focused on more profitable routes? So, can you talk about your ability as a company to outperform some of these industry averages people are looking at?

Robert Bugbee

Look, we obviously have an incredibly high quality fleet. There were new, very high standards of operation. We have very experience hard and coordinating trading teams. We have all intents and purposes have unique systems across the fleet. We also have a tremendous amount of information. In the pool we almost have 10% of the spot product tanker market. We have incredible strategic relationships with key customers. All these things are great. The company should trumpet off. But we're not going to, for example, pay off chartering departments -- their full bonuses based off the spread to the indexes because the indexes actually don't fairly reflect at all what is actually going on.

For example, the index most used in the LR2 trade is the TC1 Baltic index, which is [NFTA] AG to Japan and there have been times when, in our entire LR2 pool, we haven't got a single ship trading AG Japan in NFTA. You actually can triangulate LR2s now. They have a much more diverse trade. So it's a little bit of both. And I can understand -- I am very empathetic to you guys, where the industry actually does not provide you with the base index resources to have a proper reflection of what a company like ourselves is doing. I am very empathetic to that and I'm empathetic to shareholders or investors who see those reports and get really scared.

Doug Mavrinac

And then final question for you, Robert, and it pertains to a combination of ideas, but it kind of comes together in the form of asset value. So obviously, the order book is probably one of the most important attributes as far as where we are in terms of the cycle, the duration of the cycle, kind of the low hurdle rate demand has to overcome. But what's to me very surprising is that despite that very attractive outlook on the supply side, asset value has been coming down. So I guess, if you can summarize, kind of what is your current take on current asset values? Is it an opportunity? Is it just maybe not reflective of the outlook? Is it just one-off event? So what's your take on asset values here?

Robert Bugbee

Well, my first take is that the asset values in product tanker, yes very few, for instance, some special situations don't really reflect what the values are. I think that Ardmore are going to make a lot of money on their purchase. I don't think that they could repeat that purchase, to their credit, okay? So I think that was a special situation that's non-reflective. That's the first point.

The second point is that, as I said to Jon Chappell, the world is split into the haves and the have-nots and another great irony is that STNG who has, frankly -- I didn't mean to bluff so much. But frankly, and I think he was trying to go there, a company like Scorpio Tankers have so many better alternatives of capital allocation right now than buying an extra ship or two to add to the 90 that we have, right?

So you'll see the strong buyers just have alternatives, and the weak buyers aren't buying. But if we look at the basic structure, if we look at time charter rates $14,000, $15,000, $15,500 or whatever on an MR and you put $6,000 cash on it roughly, that's $8,000. These things are generating $3 million EBITDA in a very low interest rate environment. Ultimately, that's again, supportive and I should say come on, guys, that's a pretty good buy at that point. Then you get to the public companies, whether it's ourselves or others, this is the problem. The problem is, is that our stock price for an Ardmore for example, is valuing those ships and those yields at way below the actual price of buying a ship.

Doug Mavrinac

It total makes sense. Well, thank you, Robert for the time and those very good answers. Thank you.

Operator

Moving on, we'll take our next question from Gregory Lewis from Credit Suisse.

Joe Nelson

Hi. Thank you. It's Joe Nelson on for Greg, and thanks for taking the question. Just maybe a quick one from me kind of following up on the previous question regarding asset prices. Given the discounts we see to NAV, how do you think about capital allocation as it relates to maybe…

Robert Bugbee

Yes. I'd say, early past my comments, I think we do have a conflict, okay, in even discussing our thoughts. It's obviously a conflict, right? We have securities buyback. We have cash. We have an optimistic view to the forward. And you know what – it's not so bad for us in the long-term the stock is trading where it is. So, I really don't want to give you a road map here.

Joe Nelson

Okay. That's fair enough. And maybe just one for me on the market. You mentioned earlier that the benchmark index doesn't for the LR2s particularly, doesn't really help us as analysts. So I mean, just kind of your thinking, what would sort of provide some guidance in thinking about the market?

Robert Bugbee

I don't know. Effectively, a company like, for example, a Clarksons, as they'd probably end up working with the Baltic Exchange. And with the combined datasets, it has to formulate some kind of basket or way to deal with it or open up the Baltic Exchange creating a blended rate. I think that the indexes – the one thing indexes are – they're directionally reflective. I mean that's the one good thing, is that, generally, there is a reasonably high correlation, not always, between the direction of TC1 and the direction of our LR2 earnings. We of course increase our guidance, but we have canvassed our key shareholders and they don't feel that that's appropriate. In fact, one of those key shareholders – one of those people we canvassed basically said that we're already giving three times as a much guidance every year than we should do. That just focuses people on the short-term when people should be focused on the long-term. So I think that, obviously, with a bit of patience, people are going to see those every quarter anyway. And as time goes on, as you get the continued proof that there is a discrepancy between index and our earnings, maybe you yourselves as analysts will create some compensation to that, that you'll work out to whatever. You add a 40% ratio to – we will earn 40% more than the index, for example, but the Company isn't going to do much about it.

Joe Nelson

Okay, great. Thanks guys. That does it for me.

Operator

Moving on, we'll take our next question from Ben Nolan from Stifel.

Ben Nolan

Hi Robert and the rest of the team. I have a couple of quick ones. Number one, you guys have been pretty active in refinancing. Just looking for an update on where that stands at the moment, Brian, maybe if you could.

Brian Lee

Yeah. We're talking to some banks, and by the end of September we'll have some news for you on that.

Ben Nolan

In terms of – I guess what I'm driving at is, how much of the refinancing that you were out to do has been done and how much is left to do, I suppose?

Brian Lee

There is not that much left to do. The bulk of the work has been done. It's just now actually going through with the announcements that we've had and maybe a few other deals there, but the bulk of it has been – the announcements have been made.

Ben Nolan

Okay. And then I had a couple of cost questions. One was it looked like the G&A in the quarter was off of what it was in the first quarter a good bit. Is that indicative of how we should think of it going forward or is it kind of a one-off or how do you think of G&A?

Brian Lee

I think you should look over what has been done over the past four quarters. That would probably be a good run rate. So you're probably looking at $64 million, $65 million, somewhere in that range.

Ben Nolan

Okay, that's helpful. And then something that came up on the SALT call, and I don't know want to bringing it up as it relates to SALT, but was that, that you guys have been somewhat successful in finding ways to cut operating expenses and improve the efficiencies of the assets. Is that same focus being put on the STNG fleet as well? And do you think that there are ways to save money on the operating expenses or is it already fully baked?

Cameron MacKey

Ben, it's Cam. I would expect that there would be continued improvement over multiple quarters. But bear in mind that this doesn't always follow a straight line. There is some lumpy pieces to operating expense. But we are absolutely using our time and our energy to improve our efficiency on some of our major cost items.

Robert Bugbee

I think, look, the balance sheets of both the companies are affording management to spend its time, whether it's efficiencies in operating cost, whether it's prioritizing, improving your chartering spreads, improving your charter teams, whether it's the CEO prioritizing sitting down with a major customer today rather than you guys. This is where the focus is on the Company, and that's our opportunity. We have a great product in STNG and it's taken us a while, some years to have this. This fleet is virtually now fully delivered. I mean it certainly got that critical mass and it's got that stability where somebody like Cameron can really start to effect change and overall efficiency and revenue enhancement because you've got the platform now, the time and the tools to do it. But as Cameron said, it is not a straight line, but it's being worked on every day.

Ben Nolan

Okay, great. And then last one for me. It seemed like at least last year, the spread between the MRs and the Handys was relatively small. But this year, it's been widening out a bit. What fundamentally is going on there that might be causing that or is it just sort of market dynamics?

Robert Bugbee

Again, I think that's a clue to how strong these markets really are. Because the MRs obviously, are the vessel of arbitrage and trading choice, okay? So it is the one that is affected by what we consider this short-term stock flouring [ph] and that volatility. So it's suffering a little bit in that sense, but the -- compared to the LR2s and the LR2s, are the expression of – much more the expression of real fundamental demand. You cannot shift, it's the base load, you cannot shift your everyday position. So your MRs are suffering because it's losing the marginal arbitrage trade against the LR2s, which are much more prone to just solid, straightforward, day in, day out demand. But going forward, once we get through this period, the MRs look fantastic. I mean, there is virtually – the new building deliveries grind to a stop. And the MRs do have aging in their fleet, and they do have vessels that are turning 15 years old. So this, again, I think, is a temporary phenomenon and when we normalize, you'll simply have both lifting.

Ben Nolan

Okay, that's helpful. I was looking between Handys and MRs. I'd appreciate the difference –

That's helpful. It's the same. I mean, they're just smaller, right.

Operator

Moving now, we'll take our next from Spiro Dounis form UBS Securities.

Spiro Dounis

Good morning everyone. Thanks for taking the question. As one of two new guys, I think hopefully this doesn't inspire too much tough love, but here goes nothing. So Robert, I think where I agree is that there probably is more upside here than downside on just where rates are. And I think I also agree on the supply outlook, especially for MRs, really strong, especially out in 2018. But I guess where I struggle and where my concern is just on the demand side for refined products, and just indulging for a second, but it seems like stockpiles globally are all really high. There's a threat of refiners cutting. Just yesterday, Valero said that they expect industry to see more cuts versus Europe and East Coast.

Robert Bugbee

I get that, and I read your piece. But it's all short-term. You're just caught up in the noise of the short-term position and that's a distraction to the long-term fundamentals. So, let's simplify this question, this answer, and I'll ask you, is headline world product demand increasing or decreasing?

Spiro Dounis

It's increasing, but at a slower rate.

Robert Bugbee

But it's increasing.

Spiro Dounis

Sure.

Robert Bugbee

Okay. So we have that. Newbuilding orders or the order book increasing or decreasing?

Spiro Dounis

They are decreasing.

Robert Bugbee

Okay.

So those two curves are starting to come together, and that's where it is. Now before they come together, you've got all this noise going on with drawing inventories. And yes, the short-term, it is very different. The short term, right at the beginning of the call, we described. The short term is completely contradictory, has been completely contradictory in this last three months or four months to the long-term thesis. Supply, actually, as we've said, that last bulge of peak supply. 4.1% of the fleet delivered in six months, okay.

Not any scrapping, not yet in the year and not yet in 2017 where that aging and regulations come into context. And on the demand side, yes, you have had, in part, a reduction of demand, certainly in the arbitrage demand. But if you look -- so that's all. That's why you're just doing this -- it happened in the 1980s in crude oil and products that as we titrated, as the Saudis and the OPEC did then what they're doing today, they created spots where the market got ahead of itself in inventory in oil pricing and then suddenly, it got behind itself.

Spiro Dounis

I think I agree there. There probably is an inflection point. I guess, you know obviously these are volatile stocks. They tend to trade on momentum, and so your decision as a ship-owner.

Robert Bugbee

I understand, but that's what I'm saying. We just don't care about the short-term position. We're turning that into an opportunity. We are -- some good things. We're out there looking to chartering ships. Good things have happened. The forward interest rates have fallen. We're paying less interest. It's like, we don't care, we're not looking to issue stock, and our lenders aren't focused on the next month or two.

And if we did care, we'd look at our careers and now I'm going to give you some tough love. We look at our careers, then we would say, wow, it's actually pretty darn good with all these headwinds. I mean, every time something -- I understand where you are. You're caught up in this momentum of the shareholders. What's the catalyst to make the stock go up? Oh my God, if rates aren't going to go up tomorrow, how does the stock go up? And oh my God, the rates have gone down, so the company has to cut its dividends.

We just don't manage life in that way. It's sticks to the long-term fundamentals and we'll get there. The stock market actually has been pretty good, so far. It's discounted what's going on right now. In the same way as it will -- for all I know, if someone asked me what's the catalyst for the stock going up? I would say, because it's discounted, the stuff that could make it go down.

Spiro Dounis

I mean I feel like that sounds like more of a call for neutral, but there's dirty discounting there. I feel you just need more to actually make it go up here. Obviously, going up today, great results, no doubt about it.

Robert Bugbee

Whatever, so what are you going to do? You're going to wait until the rates are $23,000 again for MRs and $35,000 for LR2s? Are you going to wait for that point? And the stock's now trailing at 10, and you're then going to change from neutral? No.

There are shareholders buying STNG that have investment records in both the quantum of dollars made and the percentage of returns made that are unbelievable. And these people have been in shipping stocks for 30-odd years and their views are, wow, the long-term fundamentals get better every day.

Spiro Dounis

Fair enough. Then just, you kind brought up capital markets a little bit there, I guess equity market?

Robert Bugbee

And you are getting paid, you are getting paid, what, I don't know, what's it know, a 10%, 11% to wait. That's not so bad.

Spiro Dounis

No. No, it's not. Okay. I appreciate you indulging on that.

Robert Bugbee

After we're done, afterwards I'd love to give you a call on my PA if you've got buys the better than this, because obviously I'm missing out somewhere.

Spiro Dounis

Okay, we'll chat after this call then. Then just last one real quick hopefully, just on capital markets. You guys have been really good at timing it in the past, and Robert, you've been pretty open on your views, just in general, in terms of upcoming IPOs. It seems to have, obviously been died down over the last few months for obvious reasons. But just based on your outlook now, obviously, you're pretty bullish on the product tanker market. Would you be surprised that if it all kind of works out the way you're saying, then you could see a few more listed product tanker companies in 1Q of next year?

Robert Bugbee

I don't care. I mean there is not a product tanker company out there that can, out of the gate, provide the liquidity, the newness of the fleet. It's kind of -- again, whatever, because what is much, much, much more important than whether or not there will be another listed product tanker company is no orders are going into the yards but you do have the possibility of meaningful shipyard capacity reduction. That's never happened.

Spiro Dounis

Okay, alright, makes sense. Appreciate the color. Thanks Robert.

Robert Bugbee

No, we're not the only product tanker that's going to make money. I mean, I could probably do the Ardmore call for them too, and it would be in the same vein except their chemicals are probably doing better than their MRs, like our LR2s are doing better than our MRs. I mean this is not the time to be negative.

Operator

Moving on, we'll take our next question from Magnus Fyhr from Seaport Global.

Magnus Fyhr

Robert, you're obviously very bullish on the product tanker market going forward. With 87 vessels on a fully-delivered basis and another 13 chartered in, you have tremendous operating leverage. Maybe you can help. I mean I saw you're chartering two more ships during the quarter. Maybe you can help me clarify the TC and chartering strategy going forward and why you need more operating leverage when you already have such a big fleet.

Robert Bugbee

Well, if you saw what we did and trying, we ran down our chartering book in anticipation of sloppiness and volatility. We don't need to take in ships. But when you are -- the right and optionality that you made that you are getting as such related to the risk of that is an asymmetric trade to call a high degree.

Magnus Fyhr

So I mean with the sloppiness that we have in the market now, is this more opportunistic or I guess, going forward, with…

Robert Bugbee

Chartering in ships, once you've built your platform, like we have, and you have your relationships, your customers and you have significant platform for information and delivering a service to the customers, all chartering in is fundamentally opportunistic.

Magnus Fyhr

Okay. That's all I needed as far. Just one more question on the demand side, LR2s versus the MRs. I mean you see lot of more product demand growth for the LR2s going forward, but you also have more supply growth on that side. What can you tell us about the MR demand growth going forward? I mean, you have lower fleet growth there and we probably don't need to see as much demand growth.

Robert Bugbee

I think you pretty well summed it up. You've got these refineries coming and going forward that are going to be really helpful for the LR2 demand, and yes, there is some slightly higher supply growth. And the MRs virtually will have no supply growth going forward. But we will get back to those arbitrage markets. The ancillary markets to products for MRs is going to be healthy. We would expect there's going to be more palm oil consumptions and vegetable consumption going forward. So again, it's -- I have boy, girl twins, and I love them both dearly. They have different characters and it's the same for the MRs and the LR2s.

Magnus Fyhr

Alright, thanks Robert.

Operator

Moving on, we'll take our next question from Fotis Giannakoulis from Morgan Stanley.

Fotis Giannakoulis

Hi Robert. Obviously, you are quite optimistic about the market. I just want to ask you if you can identify the reasons that last two weeks we are seeing the indexes from Clarksons and other providers being weaker than a year ago. You mentioned about the lower refinery margins. How do you view refinery margins moving forward? And how important is the recovery in refinery margins for the product tanker market?

Robert Bugbee

Let's say, it's very difficult. We said for some while -- I mean, again, we were pretty conservative off our last call, calling sloppiness. We've acted very conservatively off the balance sheet. And for us, as I said earlier in the quarter, it's a surprise for us that things, despite the headwinds, is so strong. And we're not even going to try and speculate, on a weekly basis, where these refinery margins or the short-term demand is going to be, because we just see this market titrating every day at the moment, and it is difficult. I mean I don't think last week, despite our optimistic view, we would expect LR2s to move up 24% in seven, eight days. So we're not spending any time on that, Fotis, is the honest answer.

Fotis Giannakoulis

Okay. I'm just trying to understand your answer. How important are refinery margins. I'm not talking about the week-to-week volatility, I'm talking about between now and year-end. Is this something we should look at it or are you seeing that…

Robert Bugbee

Look, I think, yes, you should look at it. But we're really saying we just don't know, we're not expecting, we're not modeling for really much to happen from now until one week plus or minus Thanksgiving. And it doesn't actually matter to us if it actually takes till the end of December or the end of January. We are much more focused on the long-term curve of the actual increase in exporting and seaborne trade for or our products and it's other related cargoes against the slowing supply curve.

Fotis Giannakoulis

Thank you very much Robert.

Robert Bugbee

Thank you.

Fotis Giannakoulis

That's all from me. Thank you.

Operator

Moving on, we'll take our next question from Ken Hoexter from Merrill Lynch.

Ken Hoexter

Robert, just you mentioned about the delay on the newbuild vessel, your thoughts on the rest of the fleet? Have you had any discussions with the yards on the pace of deliveries?

Robert Bugbee

No. This is just a generate observation that shipyards aren't getting orders. So it's a little bit like housebuilding contractors. They don't want to pay overtime and rush something. So there is some contractual allowance for a yard to deliver a ship later or earlier and the yards are choosing to deliver this series slightly later because it's more economic in the face of lack of ordering for them to do that. There is no discussion required. We have a great relationship with the yard, and they are contractually allowed to do that.

Ken Hoexter

So would you -- I guess are you -- in question I'm asking, do you expect additional delays or spreading out of those deliveries? I know it's contractually allowed. Just wondering if that's something they're already telling you to plan on in terms of your planned delivery dates.

Robert Bugbee

Cameron.

Cameron Mackey

The yards are pretty transparent with us. So I wouldn't expect significant changes to our delivery schedule from here. However what's say even more exciting is what's happening to some of the other shipyards where we don't have contracts and the rather dramatic decline in capacity that's going on there.

Ken Hoexter

Cameron or Rob, when you were talking about that before, you were mentioning kind of the historic change in the yards. Are you talking about seeing yards close or just a dramatic scale back in the order book and production going on right now?

Cameron Mackey

No the scale back in production order book is now translating into consolidation and/or permanent closures of capacity which is great to see, but that's a process that is as much political as it is economic. So, we're watching that with great care and cautious optimism.

Robert Bugbee

And I think the overall takeaways you should take from this is that, you know and this is again, it's so difficult for you analysts in this environment. It is not just the index. It's also this very simple thing. You would think it would be a pretty simple answer. What is the actual newbuilding delivery schedule for the fleet? That's a pretty simple question. Unfortunately, you guys just are not getting the option, even in the best research, they are not accounting for the time the delays or the options that aren't getting or taking out the options that aren't being declared along the way. So the important thing to understand here is the supply curves that you are using are at -- they're really, really conservative. You are going to get slippage.

Ken Hoexter

Yes. No, I think that's been an annual trend.

Robert Bugbee

And so the overall thing here is you have a supply side and this is the beauty of the tanker market or shipping. You have a supply side that is inelastic relative to the demand side that is very elastic. And if those things cross, you aren't going to be trading. I see other analyst reports talking about, well, if the market recovers to $23,000 or $18,000, that isn't going to happen. When those things cross, they go way above that.

Ken Hoexter

Yes. But as you saw -- it doesn't take too long, right, on the tanker side, where you saw, once the bulker side got over-ordered, they kind of shifted and started building…

Robert Bugbee

Sure. But you not having -- you haven't got that danger at the moment, because you've got a credit crunch from the lenders who are under all their regulations, and you haven't got the private equity lunatics to load the money, they are going to come driving into funds, speculative new orders.

Ken Hoexter

Yes. And if you have permanent closures, it can constrain that a little bit more.

Robert Bugbee

Right, and that never happened ever. You saw what happened -- if you got back into real history, go back into the 1980s, which was the last time that we had this similar phase in oil pricing and OPEC expression, you've started off in 1985 with nearly 75% of the total tankers laid up in Fjord and outside of Greek islands, 75% full surplus capacity. Then the market drove up for five consecutive years, despite the fact you had one of the largest expansions of shipyard capacity in percentage terms of all time, which was all those Korean yards coming online.

Now you don't have that right now. So if this market gets charged, those Korean yards, some of those Chinese yards, they've had to let go already designers, welders, people. They're already doing different things. Engine makers have been running down their positions. Even if the market ripped out to $50,000 a day for MRs and $70,000 a day for LR2s tomorrow, it would take a little while to put that newbuilding back in place because who's going to order? Tell me who's going to order. Our shareholders quite rightly should go nuts if we went and ordered the ships with our stock trading where it is at the moment.

Ken Hoexter

Right, and especially since you keep saying we're taking a longer view, not just because they're down today, up tomorrow.

Robert Bugbee

Of course.

Ken Hoexter

So sticking with that theme, I guess, a little bit. I maybe kind of got dropped a little bit when you were answering Jon earlier on the taking on more time chartering vessels. I just want to understand what gets you to look at the market and say, you know what, I want to go ahead and start adding more of those time charter-ins. I got the answer before, you want to be opportunistic. But is it a relationship between charter and spot or is there something that you would…

Robert Bugbee

No. When you sit there and you have a deal where, in the short term, you're actually not going to lose much to the market, right, so fine, so whatever, you charter in at $15,000. Well, okay. So maybe you trade at $14,000 and you lose $1,000 a day for a few months. But if you have options on that ship, shipping has never done Black Scholes modeling to when it gives out options. So you have a ship that you take in at $15,000, and then it has for one year, and then it has another option for $15,500 for the year out. That's a great place to be if you think that your fundamentals are going to kick in within that year period.

Ken Hoexter

Alright. Wonderful. Appreciate the insights. Thanks Robert.

Operator

Moving on, we'll take our final question from Noah Parquette from JPMorgan.

Noah Parquette

I know we're over an hour, but since the longer the call goes on, the higher the stock goes. So I just have one question on supply.

Robert Bugbee

I just want to tell you that was the best comment, statement or questions anyone has said on this call so far. Thank you

Noah Parquette

No problem. Historically, all the product tankers have come from Japanese and Korean yards, I guess, a little figuratively. But going forward, how do you view kind of Chinese yards' ability to enter this market?

Robert Bugbee

Fortunately, that's a Cameron question.

Noah Parquette

Like what's the quality disconnect like now? Are they gaining ground and just your thoughts there will be really helpful.

Cameron Mackey

Look, in the long term, as far as I'm aware, everything that China has put its mind to do, they've succeeded in doing. So over the long term, we see the quality gap closing. In the short term, the sale and purchase market and newbuilding market priced at probably a discount, pretty -- in our minds, pretty fairly and pretty consistently at about 10%. There are only a few yards in China that have chosen to pursue product tankers. We don't expect that to change, particularly in light of the consolidation of capacity that's going on. You don't see a lot of yards now branching out into different product lines. Quite the contrary, they're sticking to what they do well.

The longevity of this quality discount, we think it might take some time. There are a number of obstacles to China substantially or structurally improving their quality, including mobility of labor and wage inflation and these sorts of things. But like I said, over the long term, we're realistic that they will get there.

Noah Parquette

Okay. Perfect. Thanks.

Operator

And at this time, that will conclude today's conference. We thank everyone for their participation.

Robert Bugbee

Thank you.

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