Navios Maritime Acquisition Corporation (NYSE:NNA) Q4 2015 Results Earnings Conference Call February 10, 2016 8:30 AM ET
Angeliki Frangou - Chairman of the Board, Chief Executive Officer
Leonidas Korres - Chief Financial Officer
Ted Petrone - Vice Chairman and Director
Michael Webber - Wells Fargo
Noah Parquette - JPMorgan
Christian Wetherbee - Citi
Spiro Dounis - UBS
Thank you for joining us for this morning’s Navios Maritime Acquisition Corporation Fourth Quarter and Full Year 2015 Earnings Conference Call. With us today from the company are Chairman and CEO, Mrs. Angeliki Frangou; Vice Chairman, Mr. Ted Petrone; and Chief Financial Officer, Mr. Leonidas Korres.
As a reminder, this conference call is also being webcast. To access the webcast, visit the Investors section of Navios Acquisition’s website at www.navios-acquisition.com. Also on the website under the Investors section you’ll see a corresponding presentation that we’ll reference throughout this conference call.
I’d now like to read the Safe Harbor statement. This conference call contains forward-looking statements under the meaning of the Private Securities Litigation Reform Act of 1995 by Navios Acquisition. Forward-looking statements are statements that are not historical facts.
Such forward-looking statements are based upon the current beliefs and expectations of Navios Acquisition’s management and are subject to risks and uncertainties which could cause actual results to differ from the forward-looking statements. Such risks are more fully discussed in Navios Acquisition’s filings with the Securities and Exchange Commission.
The information set forth in this conference call should be understood in light of such risks. Navios Acquisition does not assume any obligation to update the information contained in this conference call. Thank you.
Now, I’d like to outline the agenda for today’s call. First, Mrs. Frangou will offer opening remarks. Then, Mr. Petrone will explain the operational update and industry overview. Next, Mr. Korres will review Navios Acquisition’s financial results and finally we will open the call to take questions.
Now, I’d like to turn the call over to Navios Acquisition’s Chairman and CEO, Mrs. Angeliki Frangou. Angeliki?
Thank you, Laura and good morning to all of you joining us on today’s call. Navios Acquisition reported net income of almost $90 million or $0.57 per share for the full year of 2015. The net income is almost 7 times greater than the prior comparable period in 2014 and reflects the underlying robust charter market and supplier volume.
We declared a dividend of $0.05 per share for the quarter, resulting in a dividend yield of about 10.5% on an annualized basis. In 2015, we also repurchased about 2.7 million shares of common stock under our share repurchase program. As a result, Navios Acquisition provided a 12.2% return of capital to investors through its dividend and share repurchase programs.
Please now turn to slide 3 for our company highlights. NNA has 38 modern high-quality vessels, with an average age of 4.9 years. Our vessels are in the water and are generating cash flow. Our fleet is 84.2% fixed for 2016 and about 44.3% fixed for 2017.
We benefit from the economies of scale of the Navios Group and our OpEx is 17% less than the industry average and has been fixed through mid-2016.
We earned $32.1 million in profit sharing for the full year of 2015 and we are well positioned for further upside, as we have profit sharing on about 54.5% of our fixed days in 2016.
Please now turn to slide 4. We are a leading tanker company of 38 vessels and the sponsor of Navios Midstream Partners. We expect to receive $21.3 million in distributions from Navios Midstream in 2016 and our common equity interest, Navios Midstream, this was about $122 million. This adds $0.81 to NNA’s per share NAV, about half of NNA’s share trading value.
Slide 5 highlights key developments during the quarter and the year. By any measure, Navios Acquisition had a great year. NNA reported net income of about $0.57 per share, which means [indiscernible] to the company. We had overall net income of about $90 million and adjusted EBITDA of $217.4 million.
NNA enjoyed strong cash flow in 2015 assisted by the profit sharing arrangements that earned $32.1 million. That profit sharing was almost 5 times the amount we had for the full year of 2014.
In 2015, we agreed to sell our oldest MR2 product tanker vessel, the Nave Lucida, for $18.6 million. The sale closed in Q1 of 2016 and we expect booking of about $2.1 million. Of the sale proceeds, $12.1 million was used to repay debt and $6.1 million will be retained as cash on the balance sheet.
On a pro forma basis, our net debt to book capitalization improved by about 70 basis points to slightly under 55%. Although net debt ticked up from the acquisition of two VLCCs in Q4 of 2015, we believe that net debt will continue to decline through the cash flow we expect to generate.
Slide 6 details our chartering strategy by which we balance market opportunity with long-term employment. The strategy is designed to provide protection from market volatilities of the previous charter coverage, 84.2% and 44.3% of our fleet is contracted out for 2016 and 2017, respectively. Any market improvement will be captured through one of the three mechanisms: open days, days fixed on floating rates and days with base rates in profit sharing.
Slide 7 details our balance sheet management. We purchased newbuildings where we determined they were being sold cheaply and subsequently [indiscernible] vessels on the water. To date, we have no growth CapEx commitment. Our credit ratios have significantly improved over time.
Since 2012, NNA debt to EBITDA ratio improved by almost 5 turns and EBITDA to interest coverage ratio improved by 55%. We intend to use our significant cash flow to delever our balance sheet, while returning capital to our investors through the share buyback program and our existing dividend policy.
Slide 8 demonstrates our strong liquidity position. We have $61.6 million of cash as of December 31, 2015, and $67.8 million in cash pro forma for the sale of the Nave Lucida. We have no committed growth CapEx and no significant debt maturities until fourth quarter of 2021.
Slide 9 shows the cash flow cushion through a low breakeven. 84.2% of our fleet is contracted for 2016. We expect to end an average contracted daily charter out rate of $19,238 compared to the 2015 average fully loaded cost of $16,657 per day. In 2017, 44.3% of our fleet is contracted at the Navios contracted daily charter out rate of $22,475 per day compared to a fully loaded cost of $16,614 per day.
As you know, our daily cost includes operating expenses, drydocking, general and administrative expenses, interest expense, and capital repayment. We can see at the bottom of the slide our breakeven analysis. NNA should be able to generate significant cash flow in 2016 and 2017, further assisted by days that are open and contracted on floating rates.
And at this point, I would like to turn the call over to Mr. Ted Petrone. Ted?
Thank you, Angeliki. Please turn to slide 11. With the completion of our newbuilding program last year, we have no growth CapEx requirements and can accumulate cash from our fleet on the water of 38 vessels.
Navios Acquisition continues the Navios Group policy of locking in secure cash flow with creditworthy counterparties. In 2015, we extended the coverage of our fleet for 33.5 years via new fixtures, continuations and exercised option periods at higher levels with profit sharing. We added a further 5 years of coverage so far this year. Rates continue at healthy levels and charters continue to look for longer periods.
Please turn to slide 12. Navios Acquisition’s diversified fleet consists of 38 vessels on the water, with an average age of 4.9 years totaling 4 million deadweight. The fleet consists of 8 VLCCs, 18 MR2 product tankers, 8 LR1 product tankers and 4 chemical tankers.
Since the beginning of 2013 and after the sale of the Nave Lucida, our oldest MR2, our product tanker fleet on the water has grown 117%, from 12 to 26 vessels, and the total fleet on the water grew 100% to 38 vessels. 17 product tankers have delivered since the beginning of 2013.
Please turn to slide 13. Our chartering strategy revolves around capturing market opportunity, while also developing dependable cash flow from a diverse group of first-class charters. As a result, the average duration of our charters is about 1.4 years. Due to the continuing strong markets for our vessels, we earned $5.9 million of profit-sharing in Q4 of 2015 and a total of $32.1 million for all of 2015. In comparison, we earned $6.7 million of profit sharing in all of 2014.
Please turn to slide 14. Slide 14 recaps our strong relationship with key participants in our industry. We continue to build a portfolio of quality charter counterparties, which provide vessel employment with a strong diversified customer base. The attributes we seek in our counterparties are a healthy credit quality and the ability to conclude long-term charters. I note that these charters are only available to those owners that have been thoroughly vetted.
Please turn to slide 15. Navios Acquisition enjoys vessel operating expenses significantly below the industry average. Currently, Navios Acquisition’s daily OpEx is about 17% below the industry average. We achieve these operational savings through a management agreement with Navios Holdings. The operating costs under this management agreement are in force until May of this year. Please note that the operating costs shown here include all estimated drydocking costs.
Please turn to slide 17. During the fourth quarter of 2014, we launched Navios Midstream Partners, a midstream MLP. Navios Midstream brings Navios Acquisition flexibility and liquidity while providing a new platform in the wet sector for dividend-seeking investors. NNA owns 60.85% of Navios Midstream Partners, including a 2% GP interest with a market value of approximately $120 million as of yesterday’s closing price.
Turning to slide 18, Navios Midstream Partners’ fleet of 6 VLCCs is fixed with average charter duration of 5.3 years, expected to provide approximately $500 million in long-term revenue with top-tier counterparties. In 2015, Navios Midstream earned $62.2 million of EBITDA, including $8 million of profit-sharing.
Navios Midstream declared a cash dividend of $0.4225 per unit. This distribution provides NNA with approximately $21.3 million in annualized distributions.
Turning to slide 20, according to the IEA, refinery capacity is expected to increase by 6.4 million barrels per day for the period of 2015 to 2020. About 70% of that capacity will be added in Asia and the Middle East, with the IEA projecting China and other non-OECD Asia to increase refinery capacity by 1.5 million barrels per day to 1.2 million barrels per day, respectively.
New low-cost capacity in Asia is forcing rationalization of old high-cost capacity in the OECD. Recent refinery closings in Europe and the Caribbean as well as closures due in Australia and Japan can be partly attributed to the age and efficiencies of these facilities. Because of this structural shift, the growth in ton miles of refined oil products is expected to continue to outpace the general demand for refined oil products.
As expected, in slide 21, refineries have opened or expanded in Saudi Arabia and China. These refineries are now contributing significant volumes of products export. Saudi Arabia is now exporting about 1 million barrels per day of product in order to capture higher revenue per well while crude prices remain low.
China had five rounds of export quotas issued last year for a total of 29.8 million tons, up 53% from 2014. This year, China has set a first round export quota of 20.9 million tons, which is more than double last year’s first round of 9.8 million tons. Also, these developments should support product tanker trades in the East this year.
Turn to slide 22. US crude production has increased by 88% since the end of 2008, reaching 9.3 million barrels per day in November of last year. The US has increased its total product exports by 370% to about 4.5 million barrels per day since 2004.
US Gulf refineries, which benefit from inexpensive domestic crude and natural gas supplies, are finding a natural export market to neighboring Mexico and Latin America as well as Africa. US product imports have declined over the past couple of years, but continue to come from further away, adding to product tanker ton miles. There has been little to no effect on US export products after the lifting of the ban on exporting US crude, but this development bears watching. The fundamentals of product tanker trading patterns continue to adjust in relation to these changes.
Turning to slide 23, oil refineries vary greatly in their quantity, variety, and specification of products that they produce. As depicted in this slide, regional surpluses and deficits combine with relatively low-cost transportation, drive arbitrage trades, and increase product ton miles. Increasing worldwide product imbalances point to an increased ton mile development. These global multidirectional trade patterns enable product tankers to triangulate, thereby minimizing ballast time and maximizing revenue.
Please turn to slide 24. In 2015, we saw a 37% non-delivery figure with 8.8 million deadweight delivery out of 3.9 million deadweight projected. When combined with the 1.3 million deadweight of scrapping, this led to 7.6 million deadweight or a 5.6% net fleet growth for 2015.
About 6% of the product tanker fleet is 20 years of age or older. As of the end of 2015, the order book totaled 25 million deadweight or about 18% of the fleet, a level usually considered adequate for regular replacement of an existing fleet with no or little growth. The order book for 2017 onwards is only 12.3 million deadweight.
Turn to slide 26. As global demand for energy continues to grow, major oil companies and oil producers should seek to secure more vessels on long-term charters. While there’s always seasonality, healthy rates are projected going forward. As noted on the right-hand graph, there were 73 fixtures of longer-term time charters in 2015, which is 2.4 times the number of long-term fixtures in 2014. Through the end of last week, there have been an additional 5 long-term fixtures done.
Turning to slide 27, the IMF projected global GDP growth for 2016 and 2017 at 3.4% and 3.6%, respectively, led by emerging and developing markets growth of 4.3% in 2016 and 4.7% in 2017, increases in world GDP growth year-on-year have generally led to higher time charter rates for VLCCs as we have seen since the middle of last year.
The IEA raised their forecast of global oil demand for 2015 8 times last year to 94.4 million barrels per day or an increase of 1.6 million barrels per day, the largest yearly increase in 5 years. The IEA increased its forecast for 2016 to 95.6 million barrels per day.
Please turn to slide 28. As noted in the top half of slide 28, in terms of ton miles, the movement of crude from West Africa and South America to China uses about as many VLCCs as the movement from the Arabian Gulf, even though the Arabian Gulf shipped 1.9 times more oil to China. The growth in VLCC ton miles will continue as China imports more crude from Venezuela, Brazil and West Africa as it diversifies its sources of oil.
In addition, with the US shale production decreasing slightly, there has been an increase in VLCC movements from the AG to the US Gulf. The bottom half of the slide shows that spot fixtures are following this trend as long haul trade fixtures have increased substantially this year over last year.
Please turn to slide 29. China is the world’s second-largest consumer of oil, importing more than half of its requirements. Chinese imports have more than doubled since January 2009, representing a 15% CAGR. Crude imports reached 7.8 million barrels per day in December, an all-time record leading to average imports of 6.7 million barrels per day for all of 2015.
As you can see on the upper right and in the table below, on a per capita basis, the US oil usage is 7.3 times that of China. European usage is 3.4 times and world usage is 1.6 times. If China goes to world per capita consumption levels, China would require an additional 285 VLCCs, assuming all crude is imported by sea. This represents an expansion of the existing fleet by about 45%.
Please turn to slide 30. In 2015, non-deliveries were 31%, 6.3 million deadweight delivered against an expected 9.1 million deadweight and scrapping amounted to 1.1 million deadweight. This led to a modest fleet growth of 3.1% in 2015. 41.3 million deadweight or 21% of the VLCC fleet is 15 years old or older.
Thank you. This concludes my review and I’d like to now turn the call over to Leonidas Korres for the Q4 financial results. Leo?
Thank you, Ted. I will discuss the financial results for the fourth quarter and the year ended December 31, 2015. As shown on slide 32, our operating metrics for the fourth quarter of 2015 have significantly improved compared to the same period in 2014. With 39 vessels on the water, we were able to benefit from the strong tanker market.
Revenue for Q4 2015 increased by approximately 6% to $76.7 million from $72.4 million in Q4 2014. We had almost 100% fleet utilization and a time charter equivalent of $22,477 per day compared to a time charter equivalent of $21,124 per day in Q4 2014.
During the quarter, we earned $5.9 million through profit-sharing. Please note that our revenue was adversely affected by the scheduled drydockings and special surveys of 5 vessels, 1 VLCC, 2 MR2 product tankers and 2 chemical tankers.
Operating and voyage related expenses were $25.1 million and G&A expenses were $5.4 million. Equity net earnings from affiliated companies were $6.5 million, mainly reflecting our equity portion in Navios Midstream Partners’ earnings.
We continue to have significant EBITDA growth. Adjusted for the $0.4 million non-cash share based compensation expenses, EBITDA for Q4 2015 increased by 16% to $53 million from $45.7 million adjusted for one-off items EBITDA in Q4 2014.
Other expenses include depreciation and amortization of $14.8 million and interest expense and finance cost of $18.4 million. Excluding one-off items, net income increased to $20.5 million or $0.13 per share from a net income of $10.7 million in Q4 of 2014 or $0.07 per share.
Turning to the financial results for the year ended December 31, 2015, revenue increased by 18% to $313.4 million from $264.9 million last year, reflecting a 99.7% fleet utilization and an increased time charter equivalent of $22,538 per day compared to time charter equivalent of $19,633 per day in 2014. During the year, we earned $32.1 million through profit-sharing.
Operating and voyage related expenses were $99.8 million and G&A expenses were $15.5 million. Equity in net earnings from affiliated companies for 2015 was $18.4 million. Adjusted to exclude one-off items in the non-cash share-based compensation expenses, EBITDA for 2015 increased by 39% to $217.4 million from $156.2 million in 2014.
Depreciation and amortization was $59.2 million and interest expense and finance costs were $73.6 million. Excluding one-off items and non-cash share-based compensation expenses, net income for 2015 increased to $87.1 million from $14.9 million in 2014.
Slide 33 provides selected balance sheet data as of December 31, 2015. Cash and cash equivalents, including distributable cash, was $61.6 million. Net book value of our 39 vessels fleet as of December 31, 2015, was $1.4 billion. Investment in affiliates of $186.2 million mainly reflects Navios Acquisition’s subordinated units and GP interest in Navios Midstream Partners.
Total assets amounted to $1.8 billion. During the quarter, we gained $108 million of debt related to the acquisition of 2 VLCCs and refinancing on existing debt facility. Total debt as of December 31, 2015, increased $1.2 billion temporarily affecting our net debt to book utilization ratio of 65.5% since it reflects the increased amount of debt without the earnings contribution of the 2 acquired VLCCs.
Pro forma for the sale of Nave Lucida, our net debt to book cap ratio decreased by 70 basis points to 64.8% and we anticipate that during the remainder of this year, our leverage ratio will continue to improve. As of December 31, 2015, Navios Acquisition was in compliance with all of the covenants of its credit facilities and ship mortgage notes.
Turning to slide 34, we announced a dividend of $0.05 per share for the fourth quarter, equivalent to $0.20 per share on an annualized basis, providing a heal of about 10.5%. The dividend will be paid on March 23, 2016, to shareholders on record as of March 17, 2016. Furthermore, as of December 31, 2015, the company provided an additional return of capital equal to 1.8% by repurchasing 2.7 million common shares under its $50 million share repurchase program.
At this point, I would like to highlight that given our 60.9% ownership in Navios Midstream Partners, we expect to receive in 2016 $21.3 million in dividends from NAP at a current distribution of $1.69 per unit.
And now, I will pass the call back to Angeliki. Angeliki?
Thank you, Leo. This completes our formal presentation. We’ll open the call to questions.
[Operator Instructions] Your first question comes from the line of Mike Webber with Wells Fargo.
Angeliki, I want to start off with a higher level question around how NNA fits within the broader Navios complex and dig into assets and then an expense question. But I guess first, just would love to get some color just around your thought process around managing cash on leverage for the entire Navios Group and whether that’s from a top-down perspective or from a bottom-up perspective and NNA and NAV is probably two strongest vehicles within the Navios Group of companies, how do you see them factoring into that mix over the next year to two years?
One of the things we like in Navios [indiscernible] but we have to realize this is an NNA, Navios Acquisition call. This is an independent company, with credit ratios independent, and independent from – viewed from rating agencies and also a company that – no company guarantees the debt of any other company. So this is a very clear-cut situation.
I’ll give you what is the target of the company and we are operating in a good environment. The VLCC market’s product foundation is robust. So our ratio is an important number and focus is deleveraging because we are about 65% and we like to delever. We like to continue providing return to our investors via dividends and buyback. I mean, we did that with 12.5% return last year.
But actually we are also very mindful that we are in a very volatile financial market and we – again, you have to be cautious [indiscernible] you are mindful that overall the financial market is volatile. So I guess it’s a good environment, but you have to be mindful of – and your direct number one priority is to delever.
If you say correctly – we like to be lower than what we are and this is a strategy that with the vessel we have in the water which are cash generating, we can be about 10% employed in end of 2016 and 10% employees more in the year after deleveraging, which is good. This is where you have to be in this kind of an environment.
I know you’re in a tricky division, so I appreciate you trying to answer to the extent that you could. So thank you. I guess moving on just to the tanker space in general, one of the themes I think we’ve seen for the past – at least this earnings cycle and probably last couple are that asset values [indiscernible] where people thought they would be and they slid a bit.
And I’m curious we hear a lot about the fact that there are a lot of assets for sale and few buyers. I’m curious what you think it will take to actually clear the market and is it just a function of the fact that you’ve got a lot of cash-rich buyers that are trying to bottom and take other markets in this cheaper discount, if needed, I’m just curious what you think it will take actually to clear the market of all the excess inventory?
I think the one that is interesting about this market and asset values, I think you have a lack of liquidity generally in the market, meaning there was a point where you had a lot of new buyers coming in, you had a lot of financing. And even though the market is good, the tanker market is very good; there is a lack of liquidity and a lot of sellers are therefore from other positions.
And also I think the second issue that people are watchful is the new deliveries. You have newbuilding deliveries, let’s say, about 60 VLCCs a year, I think that will be easily absorbed in the market, but people are watchful how this will come, how this will deliver and how this will be absorbed in the market. And I think unless you see that, I don’t think you will see significant movement.
Just one more from me; I’ll turn it over, just around your operating contracts rolling; I believe it’s May, and then I think the contract for NAP is in November. Just curious it seems historically hasn’t been a ton of inflation around that, but you guys are well below Street. Just curious what your expectations are around, inflation around those operating contracts with Navios parent and whether or not that would be a straight pass-through to NAP or whether that would be negotiated separately?
I think it is always the same, I mean, the asset, each one is negotiated with holdings, but we don’t see an inflationary environment, so I will be very surprised to see anything of substance.
Your next question comes from the line of Noah Parquette with JPMorgan.
Just wanted to follow-up on the deleveraging question. I mean, you guys have – your capital structure is in a unique position and you don’t have lot of near-term maturities. How do you approach that deleveraging target? I mean, would you prepay the term loans first or [indiscernible]?
I think we will start first with the bank debt, we have some short maturities bank debt we’re looking and choose couple of small maturities within 2016 and 2017. So about half of our debt is in bank debt. I think we will be looking more on that first. And don’t forget that the bonds is maturing in five years. So that’s why it is too early to look at that kind of refinancing.
Regarding to share repurchases, can you give any color on what you’ve done year-to-date or have you been active?
We had about – in Q4, we wrote about – almost the same amount as in Q3. So it’s about $1 million versus $1.5 million that was in Q3. Overall, this is a two-year program and I want to remind you that we have seen a very volatile capital market. So this is something that we are very mindful.
And then Ted, maybe this is for you, just on the industry, you talked about floating storage, just one, can you give me any insights of charters asking for floating storage options and two, have you seen any interest in floating storage in the US Gulf given WTI’s contango?
I think the Gulf is an interesting situation because as you get higher with the storage being sold, I think you’re in like 80% rate here. Some of that storage has gone up, the futures as you call it out, the pricing. I don’t think we’re at a point yet where they are going to go from plant storage to floating storage.
I’ve read a lot about it, but when you look at the contango in the oil futures, whether it’s Brent or WTI, [that you’re only at $3.75] I think you’re going to have to get that – it’s going to have to steepen or you’re going to have lower prices for the [indiscernible] happening. So there maybe some storage on some clean products, arbitrage, geographically, I think really the story of floating storage is [indiscernible] ships waiting at load and discharge plus more than pricing at this point.
But pricing may commence with that, both to fulfilling lands or even though there is a lot being built this year, you could see – remember a year ago, we did have the $6.5 spread six months out. So there was a lot of floating storage back then. I don’t see a lot of it just yet.
Your next question comes from the line of Chris Wetherbee with Citi.
Just sticking on the deleveraging topic, it’s obviously an important one, what is your target in terms of leverage? I mean, where should we expect you to take this before maybe you can transition and prioritize other uses of cash and maybe how quickly can you get to a target?
We like to see the company moving more to the 40% to 50% environment and I think that is [indiscernible]. And also it depends also very much with financing environment, you’re seeing a very volatile, I think being conservative today is something that makes sense.
And with the combination of the dividend coming from the MLP and sort of internally generated cash, is that something that you think you can be at 12 months’ time or so? Can you give us some sense of maybe how you think that plays out?
Yes, I think 12 months out, we will be able to reach that level.
And then when you think about where we are in the cycle, so thinking about the industry, generally speaking, I guess on the tanker side, on the crude side, Ted you talked a little bit about that, that’s a mild demand dynamic, where do you see that in terms of what inning are we in of that process? Obviously, we got a lot of growth last year, just want to get a sense maybe the growth rate decelerating, should we see that later in the game, just kind of sense – how do you think about that?
I think there is a lot of concern that we’re maybe later in the game because of this newbuilding program, but I don’t really see it that way. I think when you look at the numbers, strictly speaking newbuilding, with the 66 on paper, the last three years you had about a third non-deliveries, even last year in a very high market, almost a third non-deliveries. So you’re into the mid, low 40s actual deliveries. You’re going to have a couple of scrap. IEA is saying 1.2 million barrels increase, I would say most of that now, obviously not a mistake though, over 50% of that’s going to go seaborne. And then that back on the envelope, 30, 35 [indiscernible] ton miles, this is volume. So I don’t see the end of the game just yet.
And then in that construct, if we can see similar charter rates that we’re enjoying now can continue a bit, how do you think about that chartered out percentage of the fleet as we move towards the end of 2016 and look into 2017? I think you are in the 40 now. How does that number look towards the end of the year if we can maintain at least the next couple of quarters a pretty decent rates here?
I think you will see – I mean, you have seen that we have increased our coverage. I mean, we see always as a portfolio environment and a portfolio approach, and let’s say, we fixed all our LR1s three years and two years and let’s say the six LR1s we fixed and we did three year deals and two year deals [and followed the] profit sharing. So you realize this extra bit that will continue. We will do the same thing on the MR fleet.
And if you see VLCC portfolio, the way it was done, two year deals, two we have done [indiscernible] 100% wells in profit sharing for 2000 and then we have in floating rate. So we will always look at an approach of – that is conservative. We like to have the float always with a lot of cash savings. So this will continue as a strategy. This is irrelevant to what we view the market, we like to have a nice flow with the profit sharing element there.
Final question just on the fleet, when you think about the next several quarters or so, is there anything you should be doing in terms of opportunistic sales, is there anything in the fleet right now that you think might be interesting in terms of getting rid of?
I think what we will look is usually you care about your older vessels and replacement, this kind of replacement of fleet.
So we can potentially see a sale or two this year if the market supports it?
Yes. I think that is also a way that makes sense. If you see what we have done, where we have sold vessels are older vessels above book values and we are buying – so we are selling our vessels at above book values and buy your vessels below NAV. So does the answer makes sense?
Yes, that certainly makes sense to me.
Your next question comes from the line of [indiscernible].
You just discussed the vessel sales, I think it’s quite interesting because it does really take [indiscernible] leverage. And then in terms of – obviously you continue to sell further vessels and [indiscernible] do you foresee any step-up in case of buy back of shares given how the market expressing your cash returns at the moment?
I apologize, because your line was a little bit – your telephone. So are you talking about sale of assets and buyback?
Yes, exactly. So will you actually come and do additional vessel sales, will you use that liquidity as you deleverage quickly to buy back more shares than you’ve done. It’s a two year program, right? The last year you bought back $10 million worth of shares and you still have $40 million remaining in the program.
This is a strategy of the company and we are implementing on that. So if we see an opportunity we will also sell vessels that we like to disown from our portfolio, it’s something we will continue at above our book values and buy back shares which is again a way that we can provide back return to our shareholders. So this is part of our strategy.
To frame the question differently, you have the two-year program, you have $40 million, obviously it’s price sensitive, but at current prices on your stock, do you expect to utilize the full buyback program?
This is a longer – the program is over a period, so it’s a staggered program.
Your next question comes from the line of Spiro Dounis with UBS.
Just had some quick ones here, so I noticed maybe one item that’s not been discussed in a few quarters, it’s just been doing JVs I guess with HSH Nordbank. And the last time you did one, you mentioned that there was potential to do a third, just wondering how you’re viewing those vehicles for maybe small cash injections with high returns delivered later on?
I think it’s something that we will come more and play. You have a lot of stress in the system, in the banking system, and I think companies with mixed fleet will – you will see an accelerating movement there. This is something that we are well positioned to capture this kind of an opportunity, but they take time. That’s the reality. And also, but we see that this is going to be definitely a source of deal.
Just something that continues to pop-up I think every week now is the potential of OPEC production cuts and just last night I think the Rosneft President was out saying that he’d be open to global coordinated custom production, just wondering how you’re assessing that risk and maybe how that flows through to the tanker space?
I think if you go to their policy that they talked about, this is a year’s policy, this isn’t measured in quarters or months. Their primary goal has been just to reduce non-OPEC investment and production, right. And your share on Canadian sands, deepwater, presented to do a cut here and bring the price back up into the [50s] is not what they have been talking about.
So especially their income, $0.5 million by the end of the year and another half up to $1 million more, I don’t see that Saudi is letting the [indiscernible] market share, nor reverse their cost on this. Again, it’s like floating storage, we’re reading a lot about it, but – so who is going to cut? The Saudi, the Venezuelans and the Russians and everyone else not cut. They have been playing this game for a long time. And I don’t see the Saudis being fooled anymore by the rest of this group.
Just last one, I think 3Q 2015 was probably one of the best quarters that you’ve seen in a while and it seems like the market for tanker rates, product and crude really came off since then, a lot of us blame on seasonality and seemed to be getting better earlier this year and maybe it took a leg down recently. Just I guess, one, wondering if you can just bridge the gap on exactly what changed in the tanker market in that time, if anything, and how much are tanker rates actually impacted by the volatility we see everywhere else, whether it’d be currency, or crude prices, or just general market data, PMI type data?
Let’s just compare markets into the winter, again, last year you had a very bad winter in Northern Hemisphere. You had floating storage. So there was a couple of other things, keeping rates at higher levels. I think now, if you look at the first part of the year, shipments out of the Gulf, the Arabian Gulf is down a couple of percent. I think what you are seeing is some of the receivers have some oil stocks, so they can be a little bit tougher in the negotiations. I don’t expect the numbers over the year to be lower, but I do think right now in a mild winter there is a bit more negotiating going on, so I think you’re a little bit behind in oil being moved, just slightly.
The supply/demand fundamentals have really not changed. Again, you’re right, it’s seasonality. It’s interesting we’ve always talked about seasonality being, Q1 being the strongest, but if you look at the last four or five years, it’s been Q4 that’s really have been the strongest. And I think this may play out this year also.
And let’s not forget guys that they are $48,000, no matter what.
No, it’s certainly not a bad situation, just wondering directionally momentum wise what sort of feeding through, but that’s helpful color.
We’ve reached the allotted time for questions and answers. I’ll now turn the call back over to Angeliki Frangou. Please go ahead.
Thank you. This completes our Q4 results presentation.
This concludes today’s conference call. You may now disconnect.
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