Eagle Bulk Shipping's (EGLE) CEO Gary Vogel on Q4 2016 Results - Earnings Call Transcript

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Eagle Bulk Shipping Inc. (NASDAQ:EGLE) Q4 2016 Earnings Conference Call March 31, 2017 8:30 AM ET

Executives

Gary Vogel - Chief Executive Officer and Director

Frank De Costanzo - Chief Financial Officer

Analysts

Magnus Fyhr - Seaport Global Securities

Espen Landmark Fjermestad - Fearnley Securities

Operator

Good day, ladies and gentlemen, and welcome to the Eagle Bulk Shipping, Inc. Fourth Quarter and Full-Year 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded.

I’d now like to introduce your host for today’s conference, Mr. Gary Vogel, CEO. Sir, you may begin.

Gary Vogel

Thank you and good morning. I’d like to welcome everyone to Eagle Bulk’s fourth quarter 2016 earnings call.

To supplement our remarks today, I encourage participants to access a slide presentation that is available on our website at www.eagleships.com.

Please note that part of our discussion today will include forward-looking statements. These statements are not guarantees of future performance and are inherently subject to risk and uncertainties. You should not place undue reliance on these forward-looking statements.

Please refer to our filings with the Securities and Exchange Commission for a more detailed discussion of the risks and uncertainties that may have a direct bearing on our operating results, our performance, and our financial condition.

Now please turn to Slide 3 for an agenda of today’s call. We will first provide you with a brief recap of our fourth quarter results and recent business highlights and proceed with a more detailed review of our financials, followed by an update on company performance. Finally, we’ll end the call with a discussion on the industry fundamentals before opening up the call for Q&A.

Please turn to Slide 5. The dry bulk market continued its recovery during the fourth quarter on the back of improving trade demand and more favorable vessel supply fundamentals. The Baltic Supramax Index, or BSI increased over 17% quarter-on-quarter to average approximately 8,300 per day gross for the period, representing an almost three-fold increase since the lows it reached last February.

It’s also noteworthy that the market improved largely – the market improvement largely occurred from mid-November onwards, where the quarter started at just $7,100 a day and ended at $9,500. The improvement in the spot market can be attributed to a number of factors, including increased trade volumes of iron ore, coal, and grain, as well as pet coke and cement on the minor bulk side, along with lower net supply growth, and along with a significant imbalance in the global fleet distribution.

Chinese coal imports continued to recover with volumes increasing almost 60% quarter-on-quarter. This notwithstanding the fact that China had temporarily paused or at a minimum slowdown that previously announced production cuts. It’s also important to note that an increased portion of Asian coal imports have been getting sourced from the U.S. due to its price advantage leading to increased ton-miles and hence high utilization rates across asset classes.

The Atlantic and front haul markets also benefited from a strong U.S. grain harvest and increased pet coke exports to India, which also had a positive ton-mile demand effect. These factors led to an increased shortage of ships in the Atlantic basin, helping drive round trip rates to over 10,000 per day for the quarter, or 78% premium to the Pacific, which averaged just over to $5,900 per day.

On the supply side, new building deliveries totaled just over 7 million deadweight tons during the fourth quarter or approximately 90 vessels, a decrease of 36% from the prior period and down 15% year-on-year. Demolition of older tonnage amounted to 3.7 million deadweight tons during the quarter or roughly 55 vessels, representing an increase of 32% over the prior period, but almost 40% lower than the fourth quarter of 2015, which averaged 5.9 million deadweight tons, almost 80 ships.

Although the dry market and specifically the BSI has improved significantly from the distressed levels seen during the first quarter of 2016, it is important to note that the market remains at low levels when viewed from a historic standpoint.

Please now turn to Slide 6. For the fourth quarter of 2016, Eagle Bulk generated net revenues, adjusted for voyage expenses and charter hire of $21.8 million and realized a net TCE of 6,279, representing a 66% increase compared to the fourth quarter 2015. Eagle incurred a net loss for the quarter of $19.5 million, or $0.41 per share. In addition, as part of our ongoing fleet renewal initiative, we wrote down to market the values of 16 ships we’ve earmarked for potential sale over the next few years leading to a non-cash impairment charge of $129 million. Adjusted for these non-cash charges, the net loss was $142 million.

Overall, earnings continue to be driven by weak but recovering rate environment. Notwithstanding our improved performance relative to market, it’s important to note that timing issues exist with earnings, especially when employing an active owner/operator model, and we will discuss this aspect later on in the call.

On the Capital Markets front, we closed on our previously announced $100 million private placement common stock offering in January, bringing the total gross – growth equity raised almost $190 million in just six months. This capital provided us with significant drypowder, which has allowed us to take advantage of opportunities in the sale and purchase market.

For example, as recently announced, we reached an agreement to acquire nine modern CROWN-63 Ultramax vessels from Greenship Bulk Trust for a total cost of $153 million. We view this as a milestone transaction for the company and I will discuss it in more detail shortly.

In terms of sale and purchase, we also remain focused on fleet renewal. We sold and delivered the Motor Vessel Redwing to her new owners in January, and we just ended into an MOA for the sale of the Sparrow, the oldest vessel in the fleet at 17 years of age and the only vessel in the Eagle Bulk’s fleet smaller than 50,000 deadweight tons.

Please turn to Slide 7, for a more detailed discussion on the Greenship fleet acquisition. As mentioned earlier, we view the Greenship fleet acquisition as transformative, significantly increasing our operating scale and giving us substantial exposure to the Ultramax segment, which will total 11 vessels or 22% of the existing fleet on a pro forma basis, including the Greenship vessels.

This deal was unique for a number of reasons, including the en bloc nature or the fact that we’re able to purchase a fleet of nine ships in just one transaction and given the improving sentiment, there is a shortage of good quality ships available for purchase into the market today. It’s the young fleet with an average age of just four years, we believe an attractive price equating to $17 million per vessel, and there were sister ships, meaning they were built by the same builder, Sinopacific, and to the same specification.

In this regard, operating sister ships leads to economies of scale, both on commercial and technical fronts. The fact that the ships are identical means they’re easily interchangeable from a chartering perspective and hence provide our commercial team with extra flexibility when evaluating business.

On the technical side, efficiencies are also realized from crew knowledge and rotation, purchase of spare parts, and general maintenance management. Based on our inspections, we believe the vessels are in excellent condition. The ships were built for long-term ownership by the previous owner and the construction as well as management was carried out by [indiscernible], which is known for its quality management and operations. We expect to take delivery of the first vessel within the next couple of weeks and then approximately two per month completing the deliveries by September.

In terms of financing, we’re currently discussing financing terms with banks and it’s our present intention to apply moderate leverage of less than 50% to the nine ships. And notwithstanding our view that the rate environment will continue to improve long-term, given drybulks volatility, we believe it is prudent to take advantage of recent gains in the forward market to lock-in some cash flows related to the newly acquired vessels.

In this regard, we just fixed one of the vessels to be delivered in July for a period of about 17 to 19 months at a gross charter rate of $10,250 a day, essentially taking the charter through the end of 2018.

Please turn to Slide 8 for a discussion on our fleet renewal strategy. Alongside growth, fleet renewal remains a critical aspect of our business strategy with the objective to improve the relative earnings power of our fleet as well as reduce the overall fleet age.

To this end, we’ve sold six of our oldest smallest vessels over the past 12 months for total gross proceeds of approximately $24.8 million. Upon closing of the Sparrow sale, which is expected in April, we will have repaid almost $11 million in debt. In addition, we’ve been able to save almost $4 million in related CapEx as these were all – ships were all sold prior to the special survey on our drydock due dates. In summary, the sales have allowed us to delever the balance sheet, while increasing liquidity by almost $15 million.

Please turn to Slide 9, for a current snapshot of our pro forma fleet profile. Including the nine Ultramaxes just purchased and taking into account the sale of the Sparrow, which is to be delivered to our new buyers in April, Eagle’s pro forma on fleet now totals 49 vessels equating to almost 18,000 annual days, an increase of 20% over the prior quarter. The average age of the fleet is now 7.8 years, younger by almost one year, as compared with the fleet prior to the recent transactions.

Subject to how the market develops, it’s our intention to continue executing on our fleet growth and renewal strategy selling off some of the older and smaller, as well as less-efficient ships and purchasing newer and more efficient ones.

I’d now like to turn the call over to Frank, who will review our financial performance.

Frank De Costanzo

Thank you, Gary. Please turn to Slide 11, for a summary of our fourth quarter and full-year 2016 results. For the fourth quarter of 2016, the company reported a net loss of $142.4 million, as compared to a net loss of $79.7 million in the fourth quarter of 2015. The losses include a non-cash vessel impairment charges of $122.9 million for Q4 2016 and $50.9 million for Q4 2015.

For the full-year 2016, the company reported a net loss of $223.5 million, as compared to a net loss of $148.3 million in 2015. The Q4 2016 impairment charge was recorded on 16 vessels, which the company expects to sell in the next few years as part of our fleet renewal strategy.

I will now walk you through our results for the three months periods ending December 31, 2015 and December 31, 2016, excluding the impairment charges. Net revenues in the quarter ending December 31, 2016 were $41.8 million, as compared to $25.7 million recorded in the comparable period in 2015. The $16.1 million increase in revenue is primarily attributable to increased charter rates, as well as increased available days due to chartered in vessels.

Net loss for the fourth quarter of 2016 was $19.5 million, as compared to a net loss of $28.9 million in the fourth quarter of 2015. The $9.4 million improvement is mainly due to increased charter rates along with lower vessel expenses. Total operating expenses for the quarter ending December 31, 2016 were $54.7 million, as compared to $51.5 million recorded in the fourth quarter of 2015. The increase of $3.2 million is primarily due to increases in voyage and charter hire expenses, largely offset by savings in vessel operating expenses.

Now, let’s take a look at our results for the year ending December 31, 2016 against the year ending December 31, 2015, excluding impairment charges. Net revenue for the full-year 2016 was $124.5 million, an increase of $20.6 million from $103.9 million in 2015. This revenue increase was attributable to an increase in the number of freight voyages performed and increase in available days. The increase in available days was due to the charter-in of vessels, partially offset by the sale of four vessels in 2016. Our fleet utilization increased from 97.6% during 2015 to 98.7% in 2016.

The net loss for full-year 2016 was $94.5 million, as compared to a net loss of $97.4 million for the full-year 2015. Total operating expenses for the year ended December 31, 2016 were $196.7 million, as compared to $188.5 million for the full-year 2015. The $8.2 million increase is primarily due to the increase in voyage and charter hire expenses, which were offset in part by the savings from vessel operating expenses.

Please turn to Slide 12, for a review of the changes in class flows. In Q4, net cash used in operating activities was negative $5.3 million. The negative cash from operations was roughly covered by a $5 million revolving credit facility drawn. You can see that net cash from ops has improved in each quarter in 2016 from negative $19.5 million in Q1 to negative $5.3 million in Q4 2016.

Let’s now turn to Slide 13, for an overview of our balance sheet and liquidity. The company had total cash and cash equivalents of $76.5 million as of December 31, 2016, as compared to $24.9 million at December 31, 2015. Our total liquidity increases to $101.5 million when you add the $25 million of undrawn availability on our revolving credit facility to our cash balance.

Accounts receivable decreased by $2 million to $5 million at December 31, 2016. The decrease is made up of $1 million in reduction of trade AR in receipt of insurance claims totaling $1 million.

Inventories increased by $5.3 million to $10.9 million at December 31, 2016, due to an increase in bunker fuel, both volume and price. The increase in inventories has been driven by a change in our business mix with voyage and time charter-ins making up a larger part of our revenue.

Total debt as of December 31, 2016 stood at $276.4 million. The outstanding debt under our First Lien Facility as of December 31, 2016 was $209.1 million and is made up of the term loan balance of $184.1 million in the revolving credit facility of $25 million. The outstanding balance for our Second Lien Facility as of December 31, 2016 was $60 million plus the accrued PIK interest of $7.3 million.

Let’s now review Slide 14, our full-year 2016 cash break-even per vessel per day. Our daily vessel operating costs was $4,803 per day. Drydocking equated to $243 per day. Our cash G&A expenses, excluding one-time items related to redundancy costs and extraordinary legal expenses amounted to $1,246 per day.

Cash interest expenses was $631 per day. Therefore, the total cash break-even per vessel per day for full-year 2016 was $6,923 per vessel per day. Total break-even per vessel per day for 2016 was $942 lower than 2015.

This concludes my review of the financials. I will now turn the call back to Gary, who will continue his discussion of the business and provide context around industry fundamentals.

Gary Vogel

Thank you, Frank. Please turn to Slide 16, for a review of our commercial performance. I’m pleased to report that we are continuing to increase our active management model through a number of means. For example, we’re contracting more and more business on voyage terms directly with cargo interest, where Eagle has paid a $1 per ton rate for carrying cargo, and then actively managing all aspects of the vessel operation in the voyage. This contrasts with the [reorder of] [ph] time charter where the counterparty operates the vessel.

In the fourth quarter, approximately 30% of the cargoes lifted were done on voyage basis, three-fold increase over the comparable period last year. Clearly, development of our business remains a work in progress and we expect to continue to grow the amount of business we contract directly with shippers, receivers, and traders going forward.

As mentioned earlier on the call, and as you can see from the chart located from the bottom left-hand corner Slide 16, the Atlantic market was trading at significant premium to the Pacific during the fourth quarter, approximately 78%, significantly higher than the five-year average of 28%. With the majority of our ships in the Atlantic and given the spread dislocation between the two markets, we decided to capitalize on the premium sending some ships to the Far East.

It presently appears to be the right call as the spread differential has reverted around its historic mean level currently around 30%. It’s also important to note that, there’s always a lag in vessel earnings, so a significant portion of the revenue stream from this action we earned during Q1. In this regard, you will note in the lower right-hand portion of the slide now we estimate Q1 TCE to be $7,852 per day as of March 24, up 25% quarter-on-quarter and 160% year-on-year.

In addition to active management of our own fleet itself, we continue to build out our operating model affecting arbitrage trades around our vessels and cargoes and building both the time charter and a cargo book. We believe it’s worth highlighting that implying an active business model entails both front haul or revenue lags as well as backhaul, or investment lags with implications for revenue flows in timing. As an example, during 2016, we opportunistically charted in two Ultramax vessels on period. And given our naturally long position on the own fleet and the fact that we had a little fixed coverage, we entered into FFA hedges on the charter and fixed period to mitigate market risk, while leaving the optional periods open.

We refer to this as creating asymmetric optionality. Between the hedges and positioning of the vessels into the Atlantic from the delivery points in the Pacific, we have through December 31, invested just over $400,000 in total. However, majority of the fixed periods are now completed on both ships. And based on the improved market environment, the current mark-to-market gain for 2017 is approximately $1.5 million on these two ships. So overall, a net gain of $1.1 million, of which the $1.5 million has yet to be realized.

Notwithstanding the timing issues, it’s noteworthy that this mark-to-market gain as a result of the structured transaction is separate from the Eagle-owned fleet business. Inclusive of the two aforementioned period vessels, during the fourth quarter, we added total of 749 days of vessels taken in by Eagle on charter, as compared with just 355 in Q3. These vessels, including vessels taken in to arbitrage positions of our own fleet also serve to increase our operating footprint and operational efficiencies.

Lastly, I’d like to report that subsequent to year-end, we charted in another SDARI-64 Ultramax for about 11 to 14 months, where we again used the structured strategy hedging the fixed commitment period using FFAs and leaving the optional period open.

Please turn to Slide 17, for a discussion on OpEx. On the technical management front, I’m pleased to report that we continue to improve our OpEx performance. Thanks to the structural and strategic changes initiated over a year ago. Excluding extraordinary items related to unscheduled intermediate drydocks for whole painting and upgrades, Q4 OpEx was $4,563 per day relatively in line with Q3.

For the full-year 2016, OpEx was $4,741 per day, or 10% lower than the prior year, equating to a savings of over $7.7 million based on our fleet profile in 2016. On an annualized basis, the OpEx achieved in the second-half of 2016 equates to an annualized savings of more than $10 million year-over-year.

While cost savings are meaningful, it’s vitally important to point out that we’re achieving these savings while actively improving the makeup and condition of our ships, including drydocking four vessels on a discretionary basis to upgrade coatings among related vessel improvement initiatives. For 2017, we’re budgeting OpEx at $4,633 per day, or 2% lower than 2016 actual.

Please turn to Slide 18, for decision on maintenance CapEx. The chart on Slide 18, depicts the 2016 actual and forecasted drydocks by year, taking into consideration the nine Ultramaxes we just agreed to acquire. As mentioned earlier on the call, all six of the ships we have sold today were due for drydocking either 2016 or 2017. Selling these ships prior to their drydock saved over $4 million in CapEx spend. As such for 2017, we’re only required to drydock one vessel.

In terms of the IMO ballast water management convention, all existing ships globally are required to be fitted with ballast water treatment system by their international oil pollution prevention for IOPP certificate renewal dates following after September of 2017. As it is now a common practice, Eagle is in the process of decoupling its IOPP certificate renewal dates from that a special survey, which will have the effect of extending IMO ballast water treatment system installation dates by approximately five years.

This notwithstanding, the U.S. Coast Guard has published its own ballast water treatment system requirements with a compliance date that has already passed, but allowing extension requests for installation up to one year prior to the vessels next drydocking.

In this regard, Eagle has received extensions for all its vessels due for drydock prior to 2018, and we will continue to apply for extensions with respect to the vessels with drydocking due in 2018, requesting time to carry out appropriate feasibility studies, engineering analysis, and installation. Clearly, this is a dynamic situation for all owners, including Eagle, and we will keep you informed of material developments.

As you well know, we drydocked nine vessels during 2016 for an aggregate expense of $3.7 million. Looking forward, this slide covers the drydock schedule for 2017 and 2018. In 2017, we expect minimal cash outlays relating to CapEx. And you will note that in 2017, there’s just one ship undergoing drydock. There are 14 drydock schedule for 2018, half of which are related to the recently announced Greenship’s acquisition. Of course, the eventual number may change depending on vessel sales and acquisitions.

Please turn to Slide 20, for discussion on market fundamentals. On the supply side, although scrapping of all the tonnage started off 2016 at a record pace, momentum slowed over the year on the back of an improving rate environment. In total, just over 29 million tons of drybulk vessels were scrapped during 2016.

So far year-to-date through February, just over 3 million deadweight tons have gone to demolition. Notwithstanding the general improvement in spot rates, we believe demolition will pick up somewhat as scrap rates have improved to the mid upper 300s per lightweight ton.

In addition, the ballast water management convention depending on how it plays out in terms of timing will have a marked effect on the decision to take older vessels through a third for special – for its special survey. As such, analysts are estimating that the total for 2017 could reach 21 million deadweight tons equating to approximately 3% of the on-the-water fleet.

On Slide 21, we discuss forward supply. Projected new supply growth continues to decrease as ordering has dramatically slowed over the past few years, leading to an order book, which now stands at 8% of the drybulk fleet. Looking forward, second-hand values have increased significantly in recent months, with the spread discount to new buildings. narrowing considerably. Undoubtedly, we believe this will lead to some orderings being – orders being placed.

However, we don’t foresee a significant increase and a number of factors lead us to this view, including the fact that financing remains difficult to access for most many yards, which were prolific suppliers to drybulk are no longer viable and many industrial participants are simply not in a position to place new orders.

Depending on actual scrapping and eventual deliveries, which is affected by slippage, net supply growth is expected to be marginal this year anywhere from zero to 2%. It’s important to note that although the order book has shrunk dramatically in recent years, there’s broad consensus that it remains inflated due to legacy orders, which have effectively been cancelled, or not yet reflected accordingly.

Please turn to Slide 22, for an overview of demand factors. Iron ore imports, as depicted in the top left corner of the slide, continue to increase at a robust pace, with levels at plus 20% to where they were just last February. The pick up in demand has been driven by increased domestic steel production, which in turn has been due to accommodative policies in place to support investment and growth.

In addition, imports have been benefiting from the substitution effect, as local production of iron ore has been decreasing. Imported iron ore has an advantage in terms of both quality and cost. Chinese iron ore inventories, as depicted on the bottom left corner of the slide, are now at a record level of over 120 million tons. It’s unlikely this momentum can continue indefinitely and we would expect stocks at some stage to be drawn down to more normal levels.

On the top right-hand corner, we depict monthly coal imports, which have come off their two-year highs. This appears to be primarily attributable to peak winter heating season coming to an end, but also to the recent production restrictions being eased someone. There is, however, some speculation that restrictions on domestic coal mining may be brought back in the near future.

On the bottom right-hand corner, we depict the Chinese coastal bulk trade index. Although volatile, the index is still trading well above its five-year average and at a three-year high. We believe this has had a direct impact in helping the rates move higher during the quarter, especially in the geared segment, as tonnage gets taken up into a significant trade.

Please turn to Slide 23. As mentioned earlier on this call, U.S. grain exports were robust in Q4 and this continued well into Q1. Overall, fundamentals for the grain market remain healthy with growth for 2017 expected to be 3%. The global grain trade totals over 500 million tons for about 10% of all drybulk, but it accounts for more than 20% of the Supramax trade.

One of the major drivers of growth in this trade is China, the world’s largest soybean importer, representing approximately 60% of the market. It primarily sources products from Brazil, which represents over 40 million tons and the U.S. with over 30 million tons, both long haul trades with significant ton-mile effect.

Please turn to Slide 24. Minor bulks, which make up approximately half of the trade for Supramax class vessels continue to generate consistent trade demand growth. According to Braemar, infrastructure investment, such as China’s One Road initiative and Trump’s plans for U.S. infrastructure will be particularly supportive for steel and cement demand.

Fundamentals for pet coke have been very strong as of late, with U.S. exports rising dramatically over the past year. Thanks in part to a large increase in demand from India, as depicted in the bottom left-hand corner chart.

On the bottom right-hand corner, we depict Chinese steel exports. Levels have been coming off primarily due to tariffs imposed by some importing nations. What we haven’t seen though is that, some Chinese products being taken to country in Southeast Asia and then some of that being reexported from there. This phenomenon could continue and possibly act as a catalyst for growth in geared seaborne trade.

Please turn to Slide 25, for summary on macro demand fundamentals. As we’ve discussed before, when compared to historic norms, trade demand remains at a sync with GDP growth trailing significantly. In this regard, we believe a normalization or version towards the historic mean ratio could lead drybulk growth to surpass 4% in the medium term. For 2017, drybulk growth expectations are 2% to 3%, up by 1% to 2% from 2016.

Please now turn to Slide 26, for a snapshot of current expectation. The FFA curve although not a good predictor of rates does represent a good and interesting snapshot of current expectation for future and it is actionable. While the current forward curve is fairly flat, it is dramatically higher than where it was during our last earnings call in November.

As an example, calendar 2018 has moved up by over $2,000 a day since that time to approximately $9,200. And this change equates to almost $36 million per year for our fleet, can add a contribution, which goes straight to the bottom line.

This concludes our market discussion, and I now would like to end the call with a few takeaway points. Firstly, drybulk fundamentals are continuing to improve especially on the supply side. Secondly, today marks the one year anniversary of our balance sheet restructuring. And over that time, we’ve made significant progress in a number of areas.

We strengthened our balance sheet, increasing – raising over almost $250 million, renewing and growing our fleet including the acquisition of 11 modern Ultramax vessels at historically low prices. And finally, we’re continuing to develop our team and business model, which are now contributing to improving performance on both the top and bottom lines.

And now, I’d like to turn the call over to the operator and answer any questions you may have. Operator?

Question-and-Answer Session

Operator

[Operator Instructions]. And our first question comes from the line of Magnus Fyhr with Seaport Global. Your line is now open.

Magnus Fyhr

Yes, thank you. Good morning. Just a couple of questions related to your presentation. First, on the fleet renewal strategy. You said, you had 16 ships earmarked for sale. And does that include the two that were sold early in the year?

Gary Vogel

No, the impairment does not include the two ships that were sold earlier in the year. And I think it’s worth reiterating that the view is to sell these vessels in the coming few years dependent on market conditions.

Magnus Fyhr

Right, so…

Gary Vogel

So it’s not – they’re not eminently marked for sale in total.

Magnus Fyhr

Right. And then, you have up to two capital raises, I mean, you have, I guess, about $175 million, $200 million of liquidity on the balance sheet, funding the Greenship acquisition and also the one that was delivered in the first quarter leaves you about $100 million of liquidity. What – what’s kind of are you comfortable with to have a liquidity, I guess, you still have some dry powder left here to add more ships?

Gary Vogel

Yes, I think it’s very much a dynamic evaluation from our side. So as we mentioned, we’re currently discussing with banks to apply moderate leverage to the nine ships. And we intend to take in the vessels and we’ll determine what we feel comfortable with.

But I’ve used the word before, we intend to be prudent in terms of our balance sheet. It was only 12 months ago that we did the restructuring. And while we’re confident in the overall recovery, we don’t think it will be a straight line necessarily and we want to make sure we have the necessary dry powder.

Magnus Fyhr

Right. And you took one, I guess, ship on time charter one of the newly acquired ships. What – how should we think of the mix going forward? I mean, you’re primarily a spot operator, but what do you expect here over the next year as far as putting more ships on time charter?

Gary Vogel

Yes. So I think the way to look at it is that we are – we like to operate our own ships. Having said that, we can hedge market risk to not just by timesharing ships out, but by building our cargo book as well as using FFAs and we’ll intend to do that. So the decision to charter out one ship so far, I mean, I think, we’ll continue to look at that and would likely do some additional. But we don’t look to walk in the revenue streams on the majority of the ships that we acquired.

Magnus Fyhr

Okay. Thank you. And just one last question, on the charter hire expense increase in the quarter you took in, I think, you ran about eight average ships during the quarter though it’s up significantly from the third quarter. What was the thinking behind taking in that many ships in 4Q? I know in retrospect, rates have improved, so I guess they’re in the money right now?

Gary Vogel

Yes. So I think the way to look at it is to bifurcate into two. We mentioned the two ships, where we illustrated the revenue stream on those two period ships and then one that we took subsequent to the fourth quarter. And those are more opportunistic market-related. And as I mentioned, we hedged the fixed period, and so we see those as structured trades with upside optionality.

The other ships that we took in were done to either lift cargos that that the company contracted on a TVN basis, where we don’t have a specific name ship or to effect an arbitrage essentially, where we have an Eagle ship and an Eagle cargo. But we decided to charter in another vessel, because the combination of putting that ship in for the cargo creates an overall better P&L in combination.

So some were done opportunistically and then some were done to effectively increase the effective TCE by supplementing the fleet. And some of those ships are taken in for individual straight voyage, just for one leg. But some could be taken for two to three legs, where again we have optionality, where we can extend the ship and capture the upside in the market.

Magnus Fyhr

Thank you. That’s it for me.

Gary Vogel

Okay. Thank you, Magnus.

Operator

Thank you. And our next question comes from the line of Espen Landmark with Fearnley. Your line is now open.

Espen Landmark Fjermestad

Yes, good morning, guys. I just had one question. The decision to sell the Redwing 2007 built Supra. I presume there might be more of these sales giving the target of 16, but there is currently a very large discount between the Korean and the Japanese and the Chinese vessels. Do you think those kind of 30%, 40% discount, do you think that will continue, or do you think it’s going to be tightened based on the outlook?

Gary Vogel

Yes, I think in general, we see these spreads widen and tighten and so things do revert to their mean. And I think, we’ve already seen it actually. We’ve seen some of the Chinese vessels improve on a relative basis, so I do expect that to continue.

Espen Landmark Fjermestad

All right. Thank you.

Gary Vogel

All right. Thanks, Espen.

Operator

Thank you. [Operator Instructions] And I’m showing no further questions at this time. I would like to return the call to Mr. Gary Vogel for any further remarks.

Gary Vogel

Okay. With that, I’d just like to thank everyone for joining us today for our earnings call and wish everyone a great day. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.

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