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Capital Product Partners L.P. (NASDAQ:CPLP)

Q3 2012 Earnings Call

October 31, 2012 10:00 AM ET

Executives

Ioannis Lazaridis – CEO and CFO

Jerry Kalogiratos – Finance Director

Analysts

Justin Yagerman – Deutsche Bank

Jon Chappell – Evercore Partners

Mike Webber – Wells Fargo

Ken Hoexter – Merrill Lynch

Paul Jacob – Raymond James

Operator

Thank you for standing by and welcome to the Capital Product Partners Third Quarter 2012 Financial Results Conference Call. We have with us Mr. Ioannis Lazaridis, Chief Executive Officer and Chief Financial Officer of the Partnership; and Mr. Kalogiratos, Finance Director of Capital Maritime. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today, Wednesday, October 31, 2012.

The statements in today’s conference call that are not historical facts, including our expectations regarding developments in the markets, our expected charter coverage ratio for 2012 and 2013, and expectations regarding our quarterly distribution may be forward-looking statements, such as defined in Section 21E of the Securities Exchange Act of 1934, as amended.

These forward-looking statements involve risks and uncertainties that could cause the stated or forecasted results to be materially different from those anticipated. Unless required by law, we expressly disclaim any obligation to update or revise any of these forward-looking statements, whether because of future events, new information, a change in our views or expectations to conform to actual results or otherwise. We assume no responsibility for the accuracy and completeness of the forward-looking statements. We make no prediction or statement about the performance of our common units.

I would now like to hand the conference over to your speaker today, Mr. Lazaridis. Please go ahead, sir.

Ioannis Lazaridis

Thank you, Laura, and thank you all for joining us today. I hope this call today finds you and everyone in the weather-affected areas safe and well. As a reminder, we will be referring to the supporting slides available on our website as we go through today’s presentation.

Starting with slide one, I’m going to make some comparison on today’s call between the third quarter of 2012 and the third quarter of 2011, as this is the most meaningful analogy in our business.

On October 23, 2012, our Board of Directors declared a cash distribution of $0.2325 per common unit for the third quarter of 2012 in line with the management’s annual distribution guidance. The third quarter common unit cash distribution will be paid on November 15, 2012, to unit holders on record on November 8, 2012.

The partnership’s operating surplus for the quarter amounted to $21.9 million or $18.6 million adjusted for the payment of distribution to the Class B unit holders following the issuance of 15.6 million Class B Convertible Preferred Units during the second quarter of this year.

Revenues for the third quarter include $1 million in profit-sharing revenues and by the modern tanker, Achilleas, as the crude tanker spot rates that our charters earned on this vessel were at levels higher than the base rate it is fixed at. The profit-sharing arrangements in the charters of a number of our crude vessels allow us to share our excess over the base rate on a 50/50 basis with our charterers and are settled biannually. We also benefited from lower interest – net interest expenses as we will discuss shortly.

We are pleased to announce that we have a secured two-year floating storage employment for one of our Suezmaxes, the Motor Tanker Miltiadis M II, with PEMEX through Subtec at an improved rate compared to its previous employment with Capital Maritime. In addition, the Partnership secured employment with Capital Maritime for four of our MR product tankers for a period of between 11 to 13 months at the same or improved day rates when compared to the previous employment. All transactions were unanimously approved by the Conflicts Committee of our Board of Directors.

Turning to slide two, total revenues for the third quarter of 2012 were $38 million compared to $30.9 million in the third quarter of 2011. The Partnership’s revenues mainly reflect the increased fleet size following the acquisition of Crude Carriers on September 30, 2011, and include $1 million in profit-sharing revenues and by the motor tanker Achilleas.

Total expenses for the third quarter of 2012 were $26.9 million compared to $21.4 million in the third quarter of 2011, primarily due to the higher operating expenses incurred as a result of the higher number of vessels in our fleet, following the acquisition of Crude Carriers.

The vessel operating expenses for the third quarter of 2012 amounted to $11.3 million, including expenses for the third quarter of 2012, including a $5.5 million charge by a subsidiary of our sponsor, Capital Maritime, for the commercial and technical management of our fleet under the terms of our management agreements compared to $8.6 million in the third quarter of 2011. The total expenses for the third quarter of 2012 also include $12 million in depreciation compared to $8.6 million in the third quarter of 2011.

General and administrative expenses for the third quarter of 2012 amounted to $2.4 million, which include a $1.1 million non-cash charge related to the Partnership’s Omnibus Incentive Compensation Plans.

Total other expenses net for the third quarter of 2012 amounted to $3.8 million compared to $6.8 million for the third quarter of 2011. The decrease in the interest expense and finance cost for the third quarter reflects the termination of $414.9 million in certain interest rate swaps and a reduction of $170.1 million of the Partnership’s total debt when compared to the third quarter of 2011.

The Partnership’s net income for the third quarter was $7.2 million. After taking into account the $3.3 million preferred interest in net income attributable to the unit holders of the Class B units, which were issued during the second quarter, the result was $0.06 net income per limited partnership unit, which is $0.07 higher than the $0.01 loss per unit from the previous quarter and $1.44 lower than the $1.50 net income per unit in the third quarter of 2011.

By also taking into account the preferred interest in income attributable to the Class B unit holders, the result limited partnership unit for the third quarter was a net income of $0.10.

I would like to remind you that the Partnership’s reported net income for the third quarter of 2011 included a $65.9 million gain from bargain purchase related to the excess of the fair value of the Crude Carriers Corp. net assets acquired over the purchase price under the terms of the merger agreement between Crude Carriers and the Partnership completed on September 30, 2011.

At this point, as some of you have requested, I would like to give you some information to facilitate your financial modeling of CPLP for the first quarter of 2012. In particular, we expect the average daily operating expenses for our product fleet that is on floating rates to stand between $6,000 to $6,500 per day and for our crude tanker fleet, that is in floating rates to stand between $8,000 to $9,000 in daily OpEx for the fourth quarter. Interest expense and vessel depreciation for the fourth quarter is projected at approximately $4 million and $12 million respectively.

Moving on to slide three, you can see the details of our operating surplus calculations that determine the distributions to our unit holders compared to the previous quarter. Operating surplus is a non-GAAP financial measure, which is defined fully in our press release. Adding certain non-cash items back to net income would have generated approximately $21.9 million in cash from operations before accounting for the Class B preferred units distribution. After adjusting for the Class B units, the adjusted operating surplus amounted to $18.6 million, which translates into 1.1 times common unit coverage.

On slide four, you can see the details of our balance sheet. As of June 30, 2012, the Partners’ capital stood at $627.4 million, which is $110.1 million higher than the Partners’ capital as of December 31, 2011. This increase largely reflects the issuance of the Class B units which raised gross proceeds of approximately $140 million, reduced by the amount of common distributions paid year-to-date.

(inaudible) have decreased by $170.1 million to $463.5 million compared to total debt of $633.6 million as of December 31, 2011. In connection with the issuance of the Class B units, the Partnership executed amendments to its three credit facilities and prepaid debt of $149.6 million, also utilizing part of its cash balances.

The amendments provide for a deferral of all remaining scheduled amortization payments under each of the Partnership’s credit facilities until March 31, 2016. As of September 30, the Partnership had swapped $59.1 million of its debt into fixed rates, whereas the remaining $404.4 million of its total debt of $463.5 million is in floating rates.

Overall, our balance sheet is strong with a net debt to capitalization of 37.9% and with Partners’ capital representing 55.8% of our total assets.

Turning to slide five, you can see our fleet list. The Partnership average fleet age stands at 4.6 years, which is among the youngest fleets of this size and type in the industry. The young age and high specifications of our fleet, as well as the oil major qualifications for long-term employment of our sponsor are distinct competitive advantages for the Partnership, especially in today’s markets with the increased focus on safety, security and efficiency.

Turning to slide six, as of the end of the third quarter and in line with our business model of providing full period coverage for our fleet, the average remaining charter duration of the Partnership stands at 4.2 years with charter coverage for 96% and 75% of the available fleet days for 2012 and 2013 respectively. We will continue to monitor the period market for opportunities to improve the charter coverage of our product tankers over the coming quarters.

Turning to slide seven, we are very pleased that we have secured floating storage employment for Miltiadis M II for two years till September 2014 with PEMEX with a Subtec at an improved rate of $23,185 gross. The vessel was previously employed with Capital Maritime at $18,250 per day cost. Following the unanimous approval of the Conflicts Committee, Capital Maritime has agreed to terminate its employment of the vessel, which was expected to expire in April 2013.

Turning to our product tanker fleet, Capital Maritime agreed to extend the employment of the Akeraios and Agisilaos for 11 to 13 months at a daily gross rate of $14,000 and $13,500 respectively, while it agreed to extend the employment of the Alkiviadis for an additional year at an increased daily rate of $13,417 gross per day.

Finally, the Apostolos was also charted to Capital Maritime with earliest delivery in August 2013 at a daily rate of $14,000 gross after it was redelivered from the previous charterers upon completion of its previous charter. All charters include a 50/50 profit-sharing split arrangement for breaching IWL and were unanimously approved by the Conflicts Committee.

On October 19, 2012, Overseas Shipholding Group issued a statement that it was in negotiation with its bank creditors that it was evaluating its strategic options, including the potential voluntary filing of a petition for relief under Chapter 11 of the U.S. Bankruptcy Code. The Partnership has three IMO II/III chemical/product tankers, the motor tanker Alexandros, Aristotelis II and Aris II, on long-term bareboat charter to subsidiaries of OSG.

These charters are scheduled to terminate in February, July and September of 2018 respectively, and are at rates that are substantially above current market rates. In the event OSG files for relief under the U.S. Bankruptcy Code or otherwise restructures its affairs, it may seek to terminate or seek to restructure or modify its charter arrangements for the three IMO II/III chemical/product tankers and, depending on various factors, including prevailing market conditions, such actions could have an adverse effect on our future revenues from the three vessels.

At this point, I would like to discuss a couple of things about Capital Maritime, which has provided us with certain unaudited balance sheet information as a courtesy in light of the percentage of revenues attributable to our sponsor for the period and has undertaken no obligation to provide additional information. Capital Maritime & Trading is a profitable private diversified shipping company. Having divested a large number of vessels in the last few years, it currently owns three tanker vessels, one VLCC, one Suezmax and one medium-range tanker, all trading in the spot market or on spot-related charters.

Capital Maritime has also a presence in the dry bulk and container markets through the ownership of two Handy bulk carriers, two 1,700 TEU containers and has recently acquired two 830 TEU container vessels, which since it has employed on charter contracts between three to seven years long. It’s only newbuilding commitment is for the construction of five 5,000 TEU container vessels. It’s against a 12-year charter with delivery in the first half of 2013.

On the (inaudible) order, Capital Maritime has paid today the vast majority of the pre-delivery installments, and it has finance in place for the delivery of these vessels. Capital Maritime boasts a strong balance sheet with low leverage. Total assets amounted to approximately $776 million at the end of the first half 2012, and the total stockholders’ equity at the end of the first half of 2012 stood at approximately $496 million or circa 64% of the total assets. The net debt as a percent of the market value of its vessels is approximately at 25% currently.

Turning to slide eight, we review the product tanker market development in the third quarter 2012. The average spot earnings for the third quarter of 2012 were similar to those experienced during the previous quarter and slightly higher when compared to the third quarter 2011. For most of the quarter, sluggish economic growth in the U.S., weak demand in Europe and few short-term arbitrage opportunities failed to support a higher spot market environment. The month of September saw a more active transatlantic market as increased demand from West Africa coincided with opening up of the gasoline arbitrage between the U.S. and Europe.

The product tanker period charter market remained active, albeit at lower levels compared to the first half of 2012 due to the softer rates prevailing in the spot market.

On the supply side, the product tanker order book continued to experience substantial slippage during 2012, as approximately 45% of the expected medium-range and handy-size tanker newbuildings were not delivered on schedule.

Analysts expect that net fleet growth for medium-range and handy-size product tankers for 2012 will be in the region of 3.1%, while overall demand for product tankers for the year has been revised downwards to 2.8% as European and U.S. demand for seaborne oil products continues to decline.

We believe the current low product tanker order book is among the lowest in the shipping industry, and given the demand fundamentals and the order book slippage, it should positively affect spot and period charter rates going forward.

A recent oil market outlook report by the IEA confirm the favorable fundamentals of the product tanker trade over the next five years, as is suggested that the change of the U.S. to a non-products exporter with Mexico and other South American countries increasingly turning to imports to satisfy the growing product demand. The shutdown of refineries in Europe and the growing European Middle East deficit, as well as the dislocation of refinery capacities all bode well for an expanding product trade both in terms of volume but also in terms of average voyage distance.

Turning to the next slide, the crude tanker spot market dropped sharply in July and remained at depressed levels for most of the remaining summer months. As a result of a number of factors including low fixture activity due to seasonal weakness, the build-up of commercial crude inventories that occurred during the first half of the year, the shutdown of the Motiva refinery in the U.S. Gulf, as well as high bunker prices and increased tonnage supply.

Slippage for the crude tanker order book as of the end of September 2012 continued to affect tonnage supply as approximately 26% of the expected crude newbuildings were not delivered on schedule. Industry analysts expect the crude tanker order book slippage and cancellations to increase going forward due to the historically weak spot market, the soft shipping finance environment and downward pressure on asset values. Crude tanker deadweight demand is expected to grow by 2.6% in the full year 2012.

The IEA foresees a muted economic recovery in 2013 and, as a result, expects a 0.8 million barrel per day rise in oil demand to 90.5 million barrels per day.

To conclude, I would like to know that having completed a very important transaction for the Partnership during the second quarter of 2012 with the issuance of the Class B units, we’re very pleased to have secured employment during the third quarter for five of our vessels at favorable day rates enhancing further our charter coverage for this year and next.

We are pleased to have profit-sharing revenues for the second consecutive quarter, which demonstrates the value of our profit-sharing arrangements. Although market conditions remain soft, we remain positive on the fundamentals of the product tanker market as the improving supply side and the expected tonne mile demand growth should continue to drive period demand for product tankers and positively affect the future outlook of our cash flows.

We remain firmly committed to our $0.93 per unit annual distribution guidance going forward, and we will continue to enhance our financial flexibility to pursue growth opportunities and forge a pathway to distribution growth as the underlying market recovers.

And with that, Laura, please open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Justin Yagerman of Deutsche Bank. Please ask your question.

Justin Yagerman – Deutsche Bank

Hey. Good afternoon, Ioannis. How are you?

Ioannis Lazaridis

Hi, Justin. I’m good. Yourself?

Justin Yagerman – Deutsche Bank

I’m good. I was curious, and I may have missed it when you were commenting around OSG. But we already start double-hull take down their OSG exposure as a write-off. How come you guys have decided given the duration and the above-market nature of the charters right now to wait and see what’s happening as opposed to take the early step and write down the charters here?

Ioannis Lazaridis

There are two things there. First, we haven’t had anything on our books in terms of future revenues to write down. And as I understand from double-hull, and you should check with them beforehand, the reason why they took the write-off was because by bringing down the level of the charters in their impairment test, they had to take a write-off because they had an impairment problem. We don’t have that. Even if we take down our numbers, we don’t have an impairment problem. Therefore, we don’t have nothing to write down.

Justin Yagerman – Deutsche Bank

Okay. All right. And on the PEMEX charter...

Ioannis Lazaridis

Tanker, you should check, if I may, with double-hull the exact reasons why they have written down there.

Justin Yagerman – Deutsche Bank

Yeah, we’ll check that. And if we have many questions, we’ll follow up with you offline on that. In terms of the PEMEX charter, I think this is the first step as those charters that you guys have announced, is there anything different that we should be thinking about in terms of OpEx when it comes to a vessel that’s being used for FSO purposes as opposed to trading?

Ioannis Lazaridis

I gave you some guidance for the approximate OpEx per day in the fourth quarter between $8,000 and $9,000 for the crude vessels. And I believe that largely should reflect the trade, if something changes and we’ll see how it goes then we’ll look into these numbers again.

Justin Yagerman – Deutsche Bank

Okay. So that should be incorporated into guidance. And then, I guess, the last question, I’ll turn it over to somebody else, there’s been a lot made in the – especially in the products around eco-type vessels. And you guys obviously haven’t been in an acquisition mode recently. Curious what your thoughts are about those types of vessels and any potential incorporation of them into your fleet over the next year or two.

Ioannis Lazaridis

Our fleet is a young fleet, and the speed consumption characteristics of our vessels are quite attractive. We follow with interest what is going on among eco-type, and certainly there are certain publications that show that these vessels perform well. But when these vessels actually come in to trade and they trade under different conditions over a longer time period, then we would be better – we would be in a better position to establish exactly what the real consumption is.

Jerry Kalogiratos

Hi, Justin. This is Jerry. The only thing that I would like to add is that if there is an advantage with regard to eco-type ships, probably this advantage is in hand when it comes to spot trading for companies like CPLP, which trades more on the period charters. This advantage is less of an advantage as the charters are willing to pay at a discounted level in terms of what we say the consumption savings actually are.

Justin Yagerman – Deutsche Bank

Fair enough. Okay. Thanks, guys. Appreciate the time.

Ioannis Lazaridis

Thank you.

Operator

Your next question comes from Jon Chappell of Evercore Partners. Please ask your question.

Jon Chappell – Evercore Partners

Thank you. Good afternoon, guys.

Ioannis Lazaridis

Hi, Jon.

Jon Chappell – Evercore Partners

Ioannis, just a couple super quick follow-ups on OSG. Are they still current on the charters and have they approached you with any discussions as of yet?

Ioannis Lazaridis

OSG is current with all its payment slots and there’s no outstandings. We’re in regular contact with them the same way we have always been. And at this point, we cannot say that much more.

Jon Chappell – Evercore Partners

Okay. And then, just you’ve been very clear since you did the convertible preferred of your commitment to the dividend now that you’ve been able to restructure your balance sheet. Obviously, if OSG were at default or if you needed to reemploy these ships into the spot market or into other charters, that would be a somewhat material change of your structure. Would you anticipate that you’d still be able to maintain the $0.93 cash distribution even if you had to mark the OSG charters down to the current market levels?

Ioannis Lazaridis

We remain committed to our $0.93 distribution. And as I’ve mentioned, there may be a restructuring. In case they file for Chapter 11, we have to wait and see the rates at which these vessels are haul higher than what the market is today. So that will have an adverse effect, but we are looking at other things. We are always, as I mentioned to you in my – as I mentioned in my closing comment, we pursue always different options and to build our financial flexibility. So we remain committed even in this scenario to our $0.93 distribution.

Jon Chappell – Evercore Partners

Great. And then obviously the slowdown at the market and the kind of inability to do long-term charters is somewhat negative. But maybe on the positive side, you could also free up maybe some tonnage for you whether it be newbuild slots or secondhand modern tonnage. Have any opportunities come across your desk that you may be interested in?

And then kind of as a secondary question to that, Capital Maritime has proven to be a very strong sponsor as far as taking tonnage on. Are there opportunities for you to work with them to grow the fleet and expand the distribution capacity?

Ioannis Lazaridis

I will answer both questions. Basically, the Partnership does not plan to invest in any newbuilding projects. Any newbuilding projects will be something that Capital Maritime will look at. Subject to the project’s merits and financing available, we look at a potential MR or any other type of projects that make sense. But as I mentioned to you earlier, at this point, we have been able to trade the vessels well, profitably. And we believe on the long-term fundamentals of the product tanker industry. I actually believe that the deliveries of the vessels, given the financing as well as charter environment, cannot be as high as the order books (indiscernible) so slippage will remain high in the future.

Jon Chappell – Evercore Partners

Great. Thanks, Ioannis.

Ioannis Lazaridis

Thanks.

Operator

Your next question comes from Michael Webber of Wells Fargo. Please ask your questions.

Mike Webber – Wells Fargo

Hey. Good morning, guys. How are you?

Ioannis Lazaridis

Hi, Mike. How are you? We’re good.

Mike Webber – Wells Fargo

Good. Good. I wanted to jump in and talk a little bit about the crude charters you guys have. Obviously there’s a lot going on right now with OSG and the sustainability of the distribution. But if you just kind of rewind a little bit, those crude charters back, the capital are kind of at the (inaudible) $0.93 distribution. It looks like they’ll be included in your forward charter coverage, but to my knowledge we haven’t actually seen an actual extension or the extension on those options to exercise, yeah, by capital. When would we see that and I guess maybe why haven’t we seen an announcement to date and is there any chance that those could be renegotiated lower because there is a significant step up in those options?

Ioannis Lazaridis

The crude vessels charter of the Capital Maritime come up for renewal during later in the fourth quarter and in the first quarter of 2013. So we’re a bit early on that, but we will plan to announce this when the time is due later in the quarter, beginning of next. And the $0.93 distribution, as you mentioned, is underpinned by all our charters.

Mike Webber – Wells Fargo

Right.

Ioannis Lazaridis

I think that it’s important to say further to announcement that I give earlier that we remain committed, and we feel very confident about our $0.93 even in the scenario that we discussed on OSG.

Mike Webber – Wells Fargo

Sure. And just to be clear and the kind of indicated by the fact you are including, I mean, your forward charter coverage that the intention there is to exercise those options should a better rate not be available?

Ioannis Lazaridis

As I said, you’ll hear the announcement later in the quarter, beginning of 2013.

Mike Webber – Wells Fargo

Right. That’s fair. With regards to the termination of these – the one charter to CMTC, were there any termination fees associated with that or were there just kind of clean break?

Ioannis Lazaridis

Clean break.

Mike Webber – Wells Fargo

Clean break. Okay, good. And then just – in terms of thinking about ways to support the distribution assuming a worst-case scenario with OSG, you guys have a drive (inaudible) currently in your fleet. And as you mentioned, when you went through the CMTC fleet, which we’re grateful for the detail there, you did mention that there are a number of container assets there that are backed up by long-term charterers, is there – could you envision a scenario on which you have a container asset within capital just to support the distribution?

Ioannis Lazaridis

Any transaction between Capital Maritime and Capital Products has to be approved by the Conflicts Committee on the promise that these transactions will be accretive to the distribution. So it is very premature for me to talk about these things.

Mike Webber – Wells Fargo

Okay.

Ioannis Lazaridis

But any transaction, container or non-container tanker or a motor or crude is subject to the Board – the Conflicts Committee in particular to decide.

Mike Webber – Wells Fargo

Okay. But the asset class itself were not necessarily excluded from being within capital. It’s something that is least feasible?

Ioannis Lazaridis

As I said, it’s important to grow the distribution in the future.

Mike Webber – Wells Fargo

Right. Okay. All right. That’s helpful. That’s all I’ve got. Thanks for the time, Ioannis.

Ioannis Lazaridis

Thank you.

Operator

Your next question comes from Ken Hoexter of Merrill Lynch. Please ask your question.

Ken Hoexter – Merrill Lynch

Hi, good morning. Can you just kind of review, Ioannis, the state of the Capital Maritime vessels as far as their charter out, so are they operating a spot market and how are they performing currently the vessel that you have chartered to Capital Maritime?

Ioannis Lazaridis

As I said earlier, Ken, and hello to you, by the way, we have been given limited information from Capital Maritime. As I mentioned, it’s a profitable, diversified company, and evidence of the crude market share, both in the third quarter and the second quarter. I think that’s a good way to suggest that they are making money.

If the vessels that they have fixed and, as you know, the crude market was a little bit more problematic than the product spot market. And as I understand is that spot market (inaudible) has been a bit better.

Ken Hoexter – Merrill Lynch

And can you just clarify your comments here, I just want to make sure I understood. You said you’re not yet writing down the OSG vessels, yet you’re still confident irrespective of that reduction in the dividend. I just want to clarify what you were saying there.

Ioannis Lazaridis

No, I didn’t say any of that. In the question why we did not write anything down, I said something else. I said we have never booked any revenues or we have not had any prepayments or anything received from OSG to write-down. And the write-down that you saw in double-hull, I understand that it was related to an impairment charge that they took on the back of OSG charters that they have to write down. As I understand, their vessels are much older than ours. And even if we do a similar impairment test in our vessels that are fixed with OSG at much lower rates, there’s no issue about impairment either. So for us there is nothing to write down.

Ken Hoexter – Merrill Lynch

It was just a factor of where your future revenue streams would come from. And were you clarifying that irrespective of if you were to get lower rates on there, you would still be holding that $0.93 dividend or does that become at risk if those few vessels need to be put back to the market?

Ioannis Lazaridis

As I said earlier, I said we always pursue different projects. We always look at different things. And based on what we know today, notwithstanding what I said about OSG, we remain fairly committed on our distribution of $0.93.

Ken Hoexter – Merrill Lynch

Okay. And I’ll just review again if you would for me, just as my final question, the state of the market as you see it in terms of I know you were reviewing it briefly before, but on your outlook currently for where you see pricing in the market right now.

Ioannis Lazaridis

I think that as we said about the product tanker market, and I think also the IEA supports that, the way that the rollout of the refineries is taking place. And also, given the demand/supply fundamentals, we’re optimistic about the future (inaudible) period rates. I have to say that slippage will remain high. I’m not sure if that is fully appreciated by certain (inaudible) reports.

And on the crude market, I think that the supply is an issue, but at the same time demand has remained a little bit better than what’s forecasted earlier in the year.

Jerry Kalogiratos

Overall – hi, Ken, it’s Jerry. Overall, the...

Ken Hoexter – Merrill Lynch

Hi.

Jerry Kalogiratos

Product tanker spot market has become more active as of the last couple of months after a seasonal weak quarter. The Mediterranean market is currently quite lively, especially for Handy tankers but also the TA, the transatlantic market, has seen better spot rates as of the last few weeks. We are yet to see how the Sandy storm will affect the rates going forward, but given the – at lower utilization of certain U.S. East Coast refineries and fairly high gasoline prices in the U.S. East Coast, we could see more inputs coming into the U.S. East Coast, which would be (inaudible) with product tankers.

All in all, because of supply for product tanker fleet being almost non-existent, the fleet growth has been almost zero for the years with 26 new MRs delivered year-to-date and 27 scraped, 27 removed from the fleet. We need to see more stronger demand in the U.S. and Europe in order to also see the more lively spot rates going forward.

On the crude side, we’re still facing an oversupply in the market and together with the weakness that we saw in terms of demand and in the summer, both seasonal and also because of the high inventories that were filed out in the first half. And we, of course, expect an improvement towards the fourth quarter and first quarter 2013, but it obviously (inaudible) in terms of spot rates going forward.

Ken Hoexter – Merrill Lynch

Great, Ioannis. Jerry, thank you very much.

Ioannis Lazaridis

Thanks.

Operator

Your next question comes from Paul Jacob of Raymond James. Please ask your question.

Paul Jacob – Raymond James

Good morning, Ioannis.

Ioannis Lazaridis

Hello.

Paul Jacob – Raymond James

Just wanted to spend a little bit of time on product tanker markets. So recognizing the shift in dynamic as it relates to U.S. crude oil production and how that’s kind of mitigated import products into the U.S. How you see this shaping out over the next several years, particularly with the Panama Canal expansion set to open in the next couple of years? I mean, do you think that product tanker day rates could go up over the medium-term given that expansion?

Jerry Kalogiratos

The change of the U.S. to a net oil product exporter has been positive so far for product tankers. As effectively in South America and their growing oil product demand has been served by that surplus of oil products that comes from the U.S. as they have been lagging behind in terms of their expansion plans for new refineries.

The fact that the U.S. has access to cheaper crude as well as feedstock, it means that it can compete fairly well for exports. And it’s becoming the main export hub in this part of the world. So, so far we have positive tonne mile out of the U.S.

The main shift that we expect to happen and has been described also very well in the medium-term outlook report of the IEA is the fact that the new refinery capacity coming online east of Suez, that is the Middle East and Gulf, India as well as the Asia-Pacific region, we’ll be exporting at very competitive prices, oil products that would be destined mainly to serve the middle distillate deficit in Europe as diesel and gas oil, despite the declining demand in Europe, will continue to have to be imported from the places where they can be exported more competitively.

So, if anything, what we expect in terms of the longer-term fundamentals is that there will be longer quantities traveled as well as larger volumes transported on products from the East Europe as well as from the U.S. to South America as well as to Europe.

Paul Jacob – Raymond James

Okay. So, given all of that, how do you think about these three vessels that are currently under contract with OSG, supposing that those vessels, that charter, those charters were to terminate, would you look at more short-term chartering until you think that those fundamentals start to improve or would you look for a longer-term charter?

Ioannis Lazaridis

As I’ve said earlier, there has been no communication yet on that. So we don’t really speculate. So we have to wait as I can’t really talk further. But as a general comment, be aware that the period market in products has been very active with close to150 pictures so far this year compared to 85 for the full year in 2011. So it’s quite a liquid market at this point.

Paul Jacob – Raymond James

Okay. Thanks, Ioannis. That’s good color. And then, last question from me, recognizing that you’ve got $1 million profit-sharing on the Achilleas, do you think that you could see something similar on Alexander The Great?

Ioannis Lazaridis

Well, we booked something for the Alexander The Great in the previous quarter. We’ll have to wait and see how the market so far in this half has been much softer than in the first half of last year.

Paul Jacob – Raymond James

Okay.

Ioannis Lazaridis

First half of 2012.

Paul Jacob – Raymond James

Okay, great. Thank you.

Ioannis Lazaridis

Thank you.

Operator

(Operator Instructions) Your next question comes from Michael Webber of Wells Fargo. Please ask your question.

Mike Webber – Wells Fargo

Hey, guys. Just wanted to hop and ask a couple of more modeling questions and, I guess, a detail around OSP. You mentioned that they were current. When do those charters pay you out? I guess, what date are they current as of?

Ioannis Lazaridis

They pay once a month.

Mike Webber – Wells Fargo

All right. So they’re current as of the end of last month basically.

Ioannis Lazaridis

Yes.

Mike Webber – Wells Fargo

Okay. So, that could...

Ioannis Lazaridis

As of the end of this month. Anyway, up to now, they are current.

Mike Webber – Wells Fargo

Up to now, they’re current, but that could change starting within a day or so? Okay. And then the Panamax rate, I believe – just want to – I believe you gave that in your prepared remarks, so just see if you could reiterate it.

Ioannis Lazaridis

It’s not – was that – it’s 23, how much? I think 23 – hold on a second, we’re trying to figure. I think $23,185 gross

Mike Webber – Wells Fargo

Great. All right. Thanks, guys.

Operator

There are no further questions at this time. Please continue.

Ioannis Lazaridis

In case there are no more questions, I want to thank everyone of you, given the circumstances in the U.S., that they had the time to participate in the call. Thank you and stay safe. Bye-bye.

Operator

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

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