Teekay Tankers's (TNK) CEO Kevin Mackay on Q2 2016 Results - Earnings Call Transcript

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Teekay Tankers Limited (NYSE:TNK) Q2 2016 Earnings Conference Call August 4, 2016 1:00 PM ET

Executives

Ryan Hamilton - IR

Kevin Mackay - CEO

Vince Lok - CFO

Christian Waldegrave - Head of Strategy & Research

Analysts

Jon Chappell - Evercore ISI

Mike Webber - Wells Fargo

Fotis Giannakoulis - Morgan Stanley

Amit Mehrotra - Deutsche Bank

John Humphreys - Bank of America/Merrill Lynch

Magnus Fyhr - Seaport Global

Noah Parquette - JP Morgan

Operator

Welcome to Teekay Tankers Limited Second Quarter 2016 Earnings Results Conference Call. During the call all participants will be in a listen-only mode. Afterwards you'll be invited to participate in a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded.

Now for opening remarks and introductions, I would like to turn the call over to Mr. Kevin Mackay, Teekay Tankers Limited, Chief Executive Officer. Please go ahead, sir.

Ryan Hamilton

Before Mr. Mackay begins, I would like to direct all participants to our Web site at www.teekaytankers.com, where you'll find a copy of the second quarter 2016 earnings presentation. Mr. Mackay will review this presentation during today’s conference call.

Please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from results projected by those forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the second quarter 2016 earnings release and earnings presentation available on our Web site.

I will now turn the call over to Mr. Mackay to begin.

Kevin Mackay

Thank you, Ryan. Hello, everyone and thank you very much for joining us today. With me here in Vancouver are Vince Lok, Teekay Tankers' Chief Financial Officer; and Christian Waldegrave, Head of Strategy & Research at Teekay Corp. During today’s call, I will be taking you through Teekay Tankers’ second quarter 2016 earnings results presentation, which can be found on our Web site.

Beginning with our recent highlights on Slide 3 of the presentation. Teekay Tankers reported adjusted net income of $31.6 million or $0.20 per share in the second quarter of 2016 compared to adjusted net income of $41.3 million or $0.35 per share in the same period of the prior year. We generated free cash flow of $59.6 million compared to $57.9 million in the same period of the prior year. Our results for the quarter were lower primarily due to lower average spot tanker rates compared to the same period of the prior year partially offset by an increase in our fleet size as a result of the acquisition of 19 mid-sized tankers during 2015.

In accordance with our variable dividend policy, Teekay Tankers declared dividend of $0.06 per share for the second quarter representing a payout of 30% of adjusted net income which is consistent with the previous quarter. The dividend will be paid on August 19, 2016 to all shareholders of record as of August 15, 2016. In June Teekay Tankers agreed to sell one of its non-core MR product tankers for proceeds of $14 million which when combined with cash flow generated during the quarter is expected to further delever our balance sheet to 51% on a net debt booked capitalization basis. We've also continued to manage our fleet employment mix using a variety of levers. Over the last few months we have secured four new term charters increasing our fixed rate cover to approximately 30% over the next 12 months, which I will discuss in further detail in the next slide.

Turning to Slide 4, we look at development in the crude tanker spot market. As shown on the charges on the slide, mid-sized tanker spot rates declined during the second quarter of 2016 and have continued soften into the early part of the third quarter. However, it should be noted that rates in the first half of the year have been above the five year average and are well above the low seen in the period 2011 to 2013. The decline in rates during the second and third quarters is in line with normal seasonal patterns. Though a number of factors have served to exacerbate the weakness in mid-sized tankers in recent weeks.

First supply outages in the Atlantic Basin have reduced cargo availability for both Aframax and Suezmax. Repeated attacks on all infrastructure in Nigeria and reduced output in Latin America due to the impact of lower oil prices have reduced Atlantic supply by around 700,000 barrels per day since the start of the year which is equivalent of one full Aframax cargo per day. Atlantic supply outages were particularly acute in July with around 20 fewer Suezmax cargo from West Africa and around 20 fewer Aframax cargos in the U.S. Gulf Caribbean region compared to the average cargo account seen in the first half of the year.

Secondly, high global oil inventories have weight on refining margins and led to a decline in refinery throughput which has been negative for crude tanker department. According to the IEA global refinery throughput registered a year-on-year decline during Q2 for the first time in three years. Although, rates are trending lower during the summer months, we expect an uptick during the fourth quarter as we have seen in previous years. Stronger oil demand during the Northern Hemisphere winter and an increase in weather delays will act as catalyst for this uptick while ongoing low oil prices should continue to be positive for both global oil consumption and stockpiling during the second half of the year.

In recent months Teekay Tankers has taken several steps to mitigate the softer rate environment and maximize earnings through a weaker point and cycle. Firstly, we have concluded three new out charters comprising one Suezmax and two Aframax's as well it as a tank charter swap agreement which effectively provides a fixed charter rate on approximately one Aframax vessel equivalent also at attractive rates.

Secondly, we have increased our fixed rate lightering coverage for our U.S. Gulf lightering business which we are continuing to expand. Using these various commercial levers, we have increased our fixed rate coverage in the next 12 months to approximately 30% up from 21% in the same period last year.

Turning to Slide 5, we take a look at medium term tanker supply fundamentals. As shown on by the chart on the left of the slide the latter half of 2016 and 2017 are set to an increase in mid-sized tanker deliveries as ships ordered in the past two to three years deliver into the market. Together with a potential rebalancing of global oil markets this would suggest a challenging outlook for 2017. However, as the graph on the right illustrates the lack of scrapping during the strong rate environment in the last two years has built up a significant number of older ships that will face increasing marginalization in their trading patterns as they age. In addition, they will have to confront challenging capital cost demands to pass expense special surveys as well as the potential significant expense of new equipment to comply with Ballast Water Treatment regulations.

In softer market we therefore anticipate an increase in vessel scrapping that's helping to mitigate the impact of the order book that delivers in the next two years. Looking ahead beyond 2017, the order book for vessel delivers in 2018-2019 is currently very light due to low levels of tanker ordering so far this year. In fact 2016, is on track for the lowest level of new tanker orders since the mid-1990s. With the access to new capital remaining a challenge on potential for some rationalizing shipyard capacity in the months ahead, we view this as positive for long-term tanker supply fundamentals sowing the seeds for another uptick in the tanker market once current order book has been absorbed.

I will now turn it over to Vince to discuss the financial portion of the presentation.

Vince Lok

Thanks Kevin and good morning, everyone. On Slide 6 I will discuss our financial priorities. Our focus remains on generating total shareholder return through strong cash flows to both delver our balance sheet from return cash to shareholders through our variable dividend policy.

As Kevin noted earlier, for the second quarter of 2016 Teekay Tankers declared a cash dividend of $0.06 per share which equates to approximately 30% of our adjusted net income for the quarter. The graph on the left side of the slide shows our projected free cash flow yield and dividend yield for a range of Aframax equivalents spot TCEs based on an assumed dividend payouts of 30% of adjusted net income and a share price of $3 per share. Even based on relatively low spot TCE rates, the company is expected to generate healthy cash flows over the next 12 months which will provide both an attractive cash dividend and further de-levering of our balance sheet.

The graph on the right of this slide highlights the strengthening of Teekay Tankers balance sheet since the fourth quarter of 2013 and further potential reductions in leverage that should result at different projected spot rates assumptions over the next 12 months.

Assuming we maintain our current 30% of adjusted net income dividend payout ratio, Teekay Tankers leverage is projected to decrease to between 39% to 45% by the end of the second quarter of 2017 assuming we realize Aframax spot TCE rates between $20,000 and $30,000 per day. Using our cash flows generated to further delever our balance sheet remains a top focus as it enhances our net asset value and provides Teekay Tankers with future financial flexibility.

I will now turn the call back to Kevin to conclude.

Kevin Mackay

Turning to Slide 7, I’ll wrap up with an update on spot tanker rates for the third quarter of 2016 to date. Although spot rates have been on a decline quarter-on-quarter, seasonal demand and weather delays are expected to provide support to rates in the fourth quarter of 2016. Based on approximately 45% and 39%, spot revenue days booked, Teekay Tankers third quarter states Suezmax and Aframax bookings have so far averaged approximately $23,600 and $17,900 per day respectively. For our LR2 segment, with approximately 40% spot revenue days booked, third quarter to date bookings have averaged approximately $18,100 per day.

In closing, although we expect some weakness in the near-term, Teekay Tankers is taking the appropriate steps to increase its fixed rate cover by locking in cash flows, thereby reducing our cash flow breakeven PCE. As a result, we expect our fleet to continue to generate healthy cash flows which will enable further strengthening of our balance sheet and support for our dividend.

With that, operator we’ll now turn it over to take questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. The first question comes from Jon Chappell from Evercore ISI. Please go ahead.

Jon Chappell

Since you are pretty clear on the financial plans for the next couple of quarters, so I am going to focus my questions on the operational side. First of all, Kevin is it possible to explain the dynamics of that TC spot agreement that you agreed to this quarter for the Aframax and also was that kind of a one-off or there are other opportunities like that available?

Kevin Mackay

It is a unique deal that was done that you don’t typically find readily available, it’s something our commercial teams have worked hard to try and develop with various counter parties. Having said that, it’s essentially a swap agreement where we get a fixed charter hire on a monthly basis paid in advance reconciled against how the spot market performs.

Now it did take us several months to work the actual mechanics of the deal with our counterparty and as such we’re quite pleased because it was done at a time when rates were higher than what they are today. So the differential between our charter hire and where spot rates are today has been very lucrative.

Jon Chappell

Did that swap agreement reflected in the appendix sheet with the employment profile or one of those Aframax?

Kevin Mackay

Yes, it is.

Jon Chappell

Do you mind identifying which one just to have an idea for what the rate was on that particular?

Kevin Mackay

Yeah, it's the first one down on the list.

Jon Chappell

Okay. Very helpful. Thanks. And then also we're kind of in this interesting period right now where the seasonal weakness did exacerbated it I think from some global macro headwinds, but you spoke about your views on the fourth quarter getting better, you've spoken about how post ’17 the demand sets up really well, which we agree with. So then just wondering how you are trying to position the fleet from there, would you look to do even more ton charter out, may be get closer to the 50% that may be TNK had historically had in the first two years of its existence? And then how you kind of view the time charter in business as well, is that something that you're going to pull back from at the moment or the current is that presenting opportunities where you could even increase your operating leverage given the optimistic view on the market going forward?

Kevin Mackay

Overall Jon we started out the year with a goal internally to reach roughly 30%, cover for the year and then reassess where the markets were at that point. You can't go out and just pick time charters as and when you want them, you have to look at what's available and what you're being offered relative to what you're forward view of the market is. I think looking at our view if we could get lucrative time charters that we can lock in some additional cash flow, yeah I think we'd certainly entertain that.

But it's also -- I've spoken in the past about TNK looking at various levers that we can pull and different types of commercial deals that we can do to manage our exposure. And at this point in the cycle our investment in the [indiscernible] business is something that I am excited about and it's another avenue that we have access to lock in cash flow at reasonable returns that other owners don’t have access to.

So, it's another lever that we can pull. And then going forward in terms of our in-charter portfolio that's very much a trading book that we look at and is based on individual opportunities that we see coming along. So you may see us take cover if we think we can get deals done with [indiscernible] to give us an attractive return relative to our forward view.

Jon Chappell

And then just a quick follow up and then I will turn it over. Can you just speak to what the time charter market looks like as far as both liquidity, availability of time charter but also rates as you kind of put them up against spot market? I mean obviously I think we’d agree that today's spot market is somewhat artificially low. But if the time charter rates have come down closer to those levels that may present more of an opportunity than risk.

Kevin Mackay

Yeah I think we never, I would never look at the time charter market in the depths of December doldrums. You've got to look at what we think the markets going to be over the next 12 or 24 or 36 months that you're looking to put tonnage away on. But I think obviously it's tracked down during the course of the year and that's why the back end of last year we went out and part of our coverage strategy was going out when rates were high prior to December and locking in three time charters for three years just to secure that base line income.

Operator

[Operator Instructions] The next question comes from Mike Webber from Wells Fargo. Please go ahead.

Mike Webber

Vince I’ve got one for you to start and then Kevin will transition with some operating stuff. But Vince around the dividend, obviously it came in towards the lower end of the range you guys tossed out the -- in terms of kind of soft items. I am curious as to what we should expect there on a go forward basis, I will suspect probably something towards that kind of region, where we’re down from 38% last quarter to 30% this quarter. So I would imagine some more in that range but correct me if I’m wrong?

And then maybe more broadly, when you think about the dividend here given the landscape which Kevin just went through. Can you kind of compare and contrast for us how you think about it differently now or sooner or later now compare to this time last cycle in which there is ultimately a cut to the dividend. It would just be helpful if I get kind of this cycle versus last cycle kind of a view from you in terms of where the balance sheet stands now versus then and where the market outlook looks like now versus last cycle?

Vince Lok

Sure, first of all on the dividend range, it’s consistent with what we communicated last quarter, which is over the near-term we expect to be paying out at the lower end of range which is the 30% we did last quarter and this quarter and again over the next few quarters, we would expect to be around that level as well because of our desire to continue to delever the balance sheet and that’s going to be one of our main focus areas. We think it’s important, especially in this environment that we have a strong balance sheet to maintain financial flexibility.

So that’s what we should expect going forward. In terms of the cycle, I think we’re in a very good position as we sit right now, I mean if you look back when we originally IPO’d the company we had a much higher dividend payout and it was the full payout that ultimately wasn’t sustainable when we hit the low point in the market and so therefore we moved to a fixed dividend.

The current dividend policy is much more conservative at 30% to 50% in net income with a minimum of $0.03 per quarter and I think when you look at the market outlook as Kevin articulated, we do see some weakness in 2017, but then given the life of new orders in the market, it’s a bit of a bluff and we expect the market to rebound back in 2018. So it’s a relatively short period of weakness as we see something in it. So I think that puts us in a good position to maintain our current dividend policy through this period.

Mike Webber

Okay, thank you Vince. I appreciate that and Kevin just kind of to piggy back on that, Vince mentioned and then you talked about it in your prepared remarks, the idea that, expect some weakness, obviously seasonally now and then in ’17. Inventory draws and kind of seasonal weakness aside, can you maybe kind of parch that how much of that expected weakness comes from maybe kind of just lumpiness I think global trade flows and inventories versus maybe a leg down in crude demands you know relative to say kind of BIA or [indiscernible] number or anywhere within that range, instead of 1.3 or 2 million barrels a day. How much of that softness in ’17 are you expecting comes from the softer demand?

Kevin Mackay

Actually on a macro level, Mike, I’m more focused on the supply side that I am on the demand changes. I think global oil demand is growing, it will fluctuate throughout the course of the year, but I don't think the issue going forward is going to be necessarily demand economies around the world seem to be kicking along at a usually robust pace, but sufficient to keep demand growing. Gasoline demand is going up globally. I think the issue that we will be facing is vessel supply and which we overhang specifically in the product sector which drives refining throughput.

So I think we may have to go through a period of some rationalization on inventories, but the underlying strength of demand should lead into those inventories fairly quickly. And then obviously we've got to deal with an uptick albeit short in the new supply ships that are coming up.

Operator

Thank you. The next question comes from Fotis Giannakoulis from Morgan Stanley. Please go ahead.

Fotis Giannakoulis

I want to ask you about the increase in contango over the last few weeks. We have seen the spreads rising significantly yet the charter market has not moved at all. Do you see any request for floating store as given the fact that rates right now are so low and that could potentially -- that means that traders they can find it profitable to charter vessel for floating for us?

Kevin Mackay

Hi Fotis. Talking to the lads on the chartering that we haven't seen a lot of enquiry directly for floating storage. What we're seeing is a tendency to ask for storage on the back of a voyage, so the option to extend the discharge time or the delay going to a discharge port. But it's fairly short term and it's not specific to one trader or one region at the moment.

Chris do you want to add anything on the contango structure?

Christian Waldegrave

Yeah I think it's become [indiscernible] the guys have given that the freight rates have come down. So that obviously brings the dollars per barrel per month down. I think on a VLCC now you probably the break even on the contango [indiscernible] $0.65 per barrel a month. The contango is not quite there to do it, but I think it's getting closer, so it's definitely something that could emerge in the second half of the year, but like Kevin said we're not seeing any firm enquires for it yet.

Fotis Giannakoulis

Thank you. I also want to ask about the product inventories that they think that to have increased significantly both in recent year and also in the China. Can we expect this to effect the tanker market growth for the product trade with a potential export from this product but also for the demand for crude primarily from China?

Kevin Mackay

I think generally speaking as I said to Mike earlier about this, we're going to a period where the product oil inventories are relatively high compared with historic norms. That does put pressure on the crude suppliers, refiners to work of that backlog. So I think in the short-term which is what we’re seeing right now, you’re seeing a drop in demand for crude oil as refining margins weaken and refiners use inventory on hand to meet their needs, but I think the underlying fundamental is that base demand for certainly gasoline jet fuel is growing.

As more people travel, more people are driving cars, I’ve read somewhere yesterday that 60% of new car sales in the U.S. is SUVs and light trucks. So that bodes well for the demand structure which I think will obviously help to absorb some of this overbilled that refiners have produced based on high margins they had earlier in the year.

Fotis Giannakoulis

And I want to focus also on the sale of this, of the one MR, you still have another MR in your fleet and some LR vessels. Is that focus on the company going to increase in the crude tanker space and gradually exiting the product tanker or is just MR that is non-core business? And how do you view the relative performance between product carriers and crude carriers, both in terms of rate development but also in terms of returns given where asset prices are in the two segments?

Kevin Mackay

Yeah, I think the sale of the MR as we put in a release in our remarks is not a core mid-sized tanker for Teekay Tankers and we want to concentrate on our Suezmax and Aframax LR2 segments. So we will look to offload the additional MR that we have because it’s not a trade that we feel we can grow scale in or that we want to focus on. In terms of the relative balance between product returns and crude returns, at the moment we’re seeing the LR2 market outperform the Aframax. Earlier in the year it was the other way around and that’s one of the things we do like about our LR2 purchases that we made late ’14, early ’15. The LR2 vessel gives us that flexibility to trade in and out of the different market over periods of time and we’re very pleased with those purchase because to date we’ve been able to take advantage of stakes in both sets of market as and when they come.

Operator

Thank you. The next question comes from Amit Mehrotra from Deutsche Bank. Please go ahead.

Amit Mehrotra

Just had a couple of quick ones, just wanted to get an update on where you think the breakeven levels are and I took a look at obviously the cost profile in the first half excluding some of the maybe non-recurring items and if you analyze that it looks like the break evens are on $22,000 per day on a cash basis and are around $28,000 a day on the net income basis. Just wanted to see if you can add some color to that or just provide those numbers?

Kevin Mackay

Yeah those numbers are obviously changing a little bit as our fleet mix changes what some new out-charters and some in-charters coming out. If you look it on a cash breakeven which is OpEx with in-charters and G&A and interest expense we're roughly around $10,000 a day. So a very low breakeven, if you were to add debt amortization to that that would add roughly about $10,000 a day. So you’re looking all in on about 20,000 cash flow breakeven on an Aframax equivalent basis.

Amit Mehrotra

Great and so, 25 to 30 on a net income basis, right?

Kevin Mackay

That's on Aframax basis that's around five actually.

Amit Mehrotra

I am just talking about [multiple speakers] basis in terms of what you guys actually -- I mean -- I am sorry if I am kind of over complicate this question, but I am just trying to understand because your dividend is tied to your net income and so what I am trying to understand is at what point would the dividend disappear at on an average rate basis?

Kevin Mackay

Okay. Well, first of all our dividend policy has as minimum dividend of $0.03 per share per quarter. So our dividend wouldn't drop below the $0.03. But as your question is, where does sort of cross when we hit that floor on Aframax equivalent basis is probably in the high teens at that level.

Amit Mehrotra

Okay. Thanks. One more if I could. With respect to the increased coverage relative to where it was may be at this point over the last couple of years. I know if you sort of look at the seasonal movements this year compare that to -- I guess it sounds really fair to compare it to last year, what I’d term as a super cycle. But if you look at this year's seasonal movements relative to history and then sort of overlay on that some exogenous factors, disruptions and things like that. It doesn't seem like we had overly, overly bearish level.

And so I am just trying to foot what may not be that weak of a market than what sentiment would suggest and if you sort of adjust for those factors versus sort of the increase in coverage, I am just trying to get understand if Kevin your view of the market has moderated over the last three months because the nothing has really changed and it's just really the decline in the rates you've seen have been so severe may be you're starting to question your conviction, just if you can offer more color on that?

Kevin Mackay

Yeah, sure. I think I sort of alluded to it in one of the previous questions. Our time charter approach, our coverage approach isn't something that we start to worry about when rates come off, it’s something that we look at on a monthly basis in high markets and low markets. And starting last year when rates were nice and high going to the fourth quarter we were able to secure some long term attractive time charter cover with some strategic customers.

Going into this year we wanted to increase some of the shorter term cover, being realistic we did see an increase in the supply of tonnage coming in late 2016 and 2017 and our strategy then was to put some more tonnage on the coverage pile as oppose to the spot exposed file. But it is something that we monitor very closely on an ongoing basis, not panicking when rates drop and not getting overly excited when rates get too high. It's managing the portfolio through the cycle and it's trying to make sure that when we look at individual deals we weight it against what we feel are the risks on the forward 12 months or 24 months versus the overall exposure of the fleet and that percentage number will shift as we go through the cycle.

Amit Mehrotra

Okay, great. And one quick one for me in terms of the earlier question comparing and contrasting the crude with the product tanker market. When the product tanker market was quite strong last year specifically the LR2s from my understanding it's somewhat easier for an LR2, just Aframax to go to trade in the product market and obviously to come back it's a lot harder and did you see a lot of that happening last year? And just how should we think about if those two markets get fairly out of lack with each other over the next 12 to 18 months if that happens? What can we expect in terms of how those ships trade?

Kevin Mackay

Yeah, if you compare the returns on the two different classes obviously you can take into account slightly so on product rates last third quarter, overall the crude tankers have outperformed. So I think one of the insights that we get running a pull of ships we do see other owners input to trading between clean and dirty. TK takes the approach of using our operational expertise to manage those bits and curves in the various markets to maximize our returns, other owners tend to look at their ships as other investment in LR2 is being tied solely to the product sector.

So, different owners bring a different approach to whether they dirty up their ship or keep them clean. Some remain very adamant that they are clean players, eventually I think some come to the assessment that they need higher returns and may swap them over into the crude market if that the one that consistently outperforms.

Amit Mehrotra

Right, I guess it's a fluid issue and no pun intended. But I appreciate the interest thanks guys.

Operator

Thank you. The next question comes from John Humphreys from Bank of America/Merrill Lynch. Please go ahead.

John Humphreys

I just wanted to go into the other revenue line little over 10 million this quarter that ship-to-ship transfer revenue. If you could just sort of walk me through that's a good run rate going forward and kind of the dynamics there and what you see going forward?

Vince Lok

Yeah, you're right most of that is relating to the ship to ship transfer lightering business. Kevin you want to comment going forward.

Kevin Mackay

Yeah I think one of the reasons that we looked at buying the TMS Teekay Marine Solutions business is that relative consistency of returns from the various businesses that they are involved in. There will be some seasonal changes within the segments they operate in, but our forward view is that it should be a fairly consistent run rate.

John Humphreys

Great, thank you. And then next one you touched on this a little bit earlier where you hoped to see the seasonal lift in fourth quarter and first quarter to offset the oncoming deliveries if I just look at last year's Suezmax rates could you just give me a little more clarity on where basically how much you think weather and the seasonal lift could offset delivery should we be -- are we looking at ’15 rates ’14, just to get an idea of where you expect the spot market should be?

Vince Lok

No, we don't wouldn’t try and suggest a fixed number of where we think the rates are going to be. There is some many variables that come into the market that can either drive rates to climb higher or not sustained where we saw rates coming last year. I think on a macro level we have to look at where supply and demand is, demands I think will pick up you have the seasonal factors that eat into supply of tonnage i.e. whether delays which cause congestion increase or decrease day light operating hours coming in and out of ports that all sucks up supply.

How do you match that relative to the volume of ships coming in you’d have to factor in how many crude ships that crude ships that come out of the shipyard and decide to trade on a clean cargo first as oppose to crude cargo. There is too many variables to actually pick a projected TCE for any specific month in the cycle.

And what we do tend to look at is trends, and if you go back historically the increased demand from the Northern Hemisphere winter and all the associated changes in the logistics efficiency of the system all tend to come into play in the fourth quarter and the first quarter and that's what gives us a boost in rates.

John Humphreys

Okay, thank you very much. And then the last one just being your 50% ownership in the VLCC it looks like you had a 1.5 million profit sharing recognized given the weakness in VLCC spot right now it seems as though we'd expect that to go away if you give me sort of any clarity on where you see that equity income line going into third and fourth quarter?

Vince Lok

Yeah, I think we've got a base rate on that vessel of I think its 40,000 -- sorry 37,500 a day. So if you look at where VLCC rates have been over the last few weeks and are projected to be over there in the next few weeks and obviously that's going to be below that number. So I don't think we'll see a repeat of the 1.5 million that we saw last quarter. But as we've said the fourth quarter we do expect to pick up and that number hopefully could return or even be higher.

Kevin Mackay

And just to clarify that profit share is actually recognized every six months as oppose to every quarter, so the next one would be if we see any profit share it would be in the fourth quarter.

John Humphreys

Great. I appreciate that clarity that's it for me. Thank you very much.

Operator

Thank you. The next question comes from Magnus Fyhr from Seaport Global Please go ahead.

Magnus Fyhr

Yeah hi guys. Most of my questions have been answered, but I just had one question on the charter-in vessels you mentioned you're seeing good performance on the LR2 during the quarter I think you have one ship that's expiring in August that's still on the fleet list. What's your thinking on the LR2 market and to have that to extend that charter is an option to do so?

Kevin Mackay

No, I think we’re -- our view on that vessel is we're going to return it at the end of its current period. The other LR2 that we have is booked against an out charter and is covered locked in at a good return for us. At the moment our focus is really around what we're doing with our own fleet. We haven't as yet seen a good opportunity to take in some additional tonnage be it Aframax or LR2s I think the summer doldrums have kicked in, a lot of people are out of the markets and I think we'll wait until probably later in the year before we'll start seeing an uptick in that sort of opportunity.

Operator

Thank you. The next question comes from Noah Parquette from JP Morgan. Please go ahead.

Noah Parquette

I wanted to ask on Slide 5 you have a nice chart with the existing fleet grade and 15 years also in the order book. Can you talk a little bit about what situation we need to see that get that average scrap down below significantly 20 years? The comments I am hearing from you guys is similar to listening to your competitors is that, this downturn is going to be short, quick and what needs to be changed in terms of sentiment for that scrap to really pick up?

Kevin Mackay

It comes down to costs relative to return. A lot of these ships are past the 15 year mark, they are looking at docking surveys every two and half years and depending on the condition of the ships typically a fair amount of skilled work and CapEx associated with that. In addition to that we've got Ballast Water Treatment that granted to date has been pushed back, but should come into force in not too distant future and that is significant additional expense that owners are going to have to face.

So, I think a lot will depend on where the markets at as in when these owners fact these cash crunches and whether their drybulk segment is allowing them the ability to invest in the tanker fleet at that age. But I think you also will see marginalization of older tonnage. In a softer rate environment charterers typically get a lot pickers about the age profile of the fleet they have on the water carrying their oil and as such idle time, waiting days all increased for owners with older tonnage which drops their return significantly below what you and I see as an average spot market.

Noah Parquette

Okay. And then to that point do you have a number of ships in your fleet that are at that age level or approaching it, how do you think about those vessels in the next couple of years?

Kevin Mackay

Yeah, we’ve assessed those vessels obviously we've had those three ships since they were built, we've taken good care of them over the life of those assets and we don't feel that our capital exposure going into a dry-dock with those ships will be too significant. So we're comfortable to hold onto them in the near term. That's why we kept them because they’re very special. But it's something that we evaluate ongoing, it will be something that we evaluate again when it comes time to dry-dock them for their intermediate. It's not a given that once the past dry docking that automatically treat them through the next one.

Noah Parquette

And then just kind of a modeling question real quick and get balance sheet accounts receivable in particular have grown quite a bit in the last couple of quarters, [indiscernible] somewhat too. Is that -- can you just tell me what's driving that, is that going to save the level or is that source of cash potentially an [indiscernible].

Unidentified company representative

[Indiscernible] On the accounts receivable line that increases in June compared to march is almost entirely an insurance specific pull [ph] related to the vessel that was involved in a drowning incident and there is a similar increasing accounts payable this quarter. From affiliates line the increase in compared June compared to March is almost entirely the timing of intercompany settlements, settlements that we received really, when I brought that balance back down to March levels.

I guess just to point out that most of that remaining balance about run rate balance represents working capital as advances provided various pulling arrangements. And as our fleet size has grown over the past year so and it results in number of vessels that we have in pool has increase, the average balance due from affiliates has grown compared to the same period last year. And we guess those working capital balances back when our vessels leave the pools.

Noah Parquette

And just really quick, can you just say how much of your LR2 fleet is trading in crude now versus product?

Kevin Mackay

Yeah, on our owned ship basis we have six out of the seven ships that we own are currently trading crude. I am not sure about on our pool basis what that number is, I can check and get back to you on that.

Noah Parquette

That's very helpful. Thank you.

Operator

Thank you. So this concludes today's question and answer session. Mr. Mackay, I’d like to turn the conference back over to you for any additional or closing remarks.

Kevin Mackay

Thank you very much for listening in and we look forward to talking to you again next quarter. Thanks very much.

Operator

Ladies and gentlemen, this concludes today's call. Thank you for your participation.

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