Q3 2019 Earnings Call
Good morning, ladies and gentleman and welcome to the Ardmore Shippings third quarter 20 night team earnings Conference call.
Today's call is being recorded and an audio webcast and presentation are available in the Investor Relations section of the company's website Ardmore shipping dot com.
We will conduct a question and answer session. After the opening remarks and instructions will follow at that time.
A replay of the conference call will be accessible anytime during the next two weeks by dialing 187734475 to nine or one for one to 317 0088.
And entering passcode number 10136638.
At this time I will turn the call over to Anthony Gurnee, Chief Executive Officer of Ardmore shipping. Please go ahead.
Good morning, and welcome everyone to Ardmore Shippings third quarter 2019 earnings call first let me ask our CFO Paul tenant to describe the format for the call and discuss forward looking statements.
Thanks, Tony and welcome everyone before we begin our conference call I would like to direct all participants are website at Ardmore shipping Dot com, where you'll find a links this morning third quarter 2019 earnings release and presentation.
Tony and I would take about 15 minutes to go through the presentation and then open up the called to questions.
Turning to slide two please allow me to remind you that our discussion today contains forward looking statements actual results may differ materially from the results projected from those forward looking statements.
Additional information concerning factors that could cause the actual results to differ materially from those in the forward looking statements is contained in the third quarter 2019 earnings release, which is available on our website.
Now I will turn the call back over to Tony.
Thank you Paul let me first outlined the format of today's call to begin with I'll discuss the quarterly highlights and then keep market developments.
After which Paul will provide a summary of our performance an update on tanker market activity and detailed at a detailed financial update and then I will conclude the presentation and open up the call for questions.
Turning first to slide four.
After three difficult years, we believe the tanker market is in the early stages of a sustained upcycle characterized by repetitive spikes with settling periods in between but at levels well above the recent past.
Sentiment has fundamentally changed over the past month with rates now pushing up against what we would describe as the demand ceiling rather than bouncing along the supply floor.
Breakthrough RMR sticks since October 5th had been a bit over 20000, a day compared to an average for the third quarter of 13800.
Immediate driver is only about 2020 preparations are well underway and adding an additional layer of demand for product tankers with more to come.
On the back of these positive developments and with a fleet of 25 modern fuel efficient ships, which are 100% employed in the spot market Ardmore is well positioned to deliver strong results, where every $1000 a day increase in rates translates into 27 cents any P. S.
Based on these new rate levels, we expect to be profitable in the fourth quarter and as a consequence, we will recommence our dividends a dividend payout as per our policy of 60% of net income from continuing operations.
One nonmarket item to highlight is that we've agreed refinancing terms with our existing banks onto credit facilities totaling 202 million on substantially improved terms, which Paul will describe later.
Turning next to slide five on key market developments.
Many factors, which we've been discussing in anticipating are now coming fully into play most notably tightening product tanker fundamental supply and demand.
As well as the impact of Weibo 2020.
Other positive factors are now emerging which we will also address.
Regarding IMO 2020 preparations are accelerating well, but third quarter stockpiling was lower than we anticipated as a consequence, we expect there will be particularly heightened disruption and trading activity to cover demand in the fourth quarter and into 2020.
The demand for gas oil is likely to be higher than it's been forecast as a consequence of far fewer scrubber installations, the strong tanker market, resulting in higher Boyd speeds and that's consumption.
And anecdotal evidence of companies risk aversion about pls AFFO at least initially.
Also keep in mind that the new Violette CFO blends will be heavily middle distillate in the beginning overall this means more gas oil demand.
More refinery throughput more oil transport and more trading activity.
Meanwhile, Middle East tensions persist reasonably sanction tanker fleets are not expected to return to worldwide trading anytime soon and of course other disruptions are possible.
The winter market is coming but as of yet has had no impact which usually starts in late November .
Well consumption growth driver for 2020 is predicted to rise substantially from 2900 levels. According to <unk>.
Recession fear seem to be dissipating global GDP growth through 2020 may in fact be better than the consensus view, which would logically result in a further demand lift for product tankers.
And an important final point, which is worth dwelling on a longer term basis, we see constraints and tanker supply arising from regulatory uncertainty around the shifting industries targets are greenhouse gas emissions.
As well as an emerging preference among charters for Green transport.
Well, we don't believe ordering activity will exactly grind to halt we do think it will put a meaningful damper on activity until this next set of IMO legislation becomes clear and new ship designs emerged to meet these rules.
And on that note ill hand, the call back over to Paul.
Thanks, Tony moving to slide seven for a summary of our quarterly performance.
Well the GAAP net loss on the net loss from continuing operations was 5.7 million or 17 cents per share for the third quarter compared to a net loss from continuing operations, a 3.4 million or 10 cents per share for the second quarter.
Ardmore State average Tc in the third quarter was 13029 per day made up of 13784 per day on the M. ours and 11013 per day on the chemicals.
As Tony mentioned charter rates have rebounded significantly in October .
As we look ahead, the fourth quarter will be a tale of two markets what fixtures at lower levels coming through from the third quarter and fixing things since the market right in early October at about 20000 a day.
As of today for the fourth quarter, we have 45% or days booked on the margin 17000 per day and expect rates for the remaining 55% of the quarter to be approximately 20000, a day in line with current market levels.
The defeat continues to perform very well operationally and dockings are coming in under budget for the year, What's one remaining dry dock scheduled for the fourth quarter.
Turning to slide eight for an update on the tanker market activity.
In terms of activity in the third quarter. The charter market was more subdued, particularly in the atlantic's due to increased refinery maintenance and downtime in the U.S. in Europe .
The market East of Suez was farmer in particular, a strong Chinese exports to a Chinese refinery throughput up 700700, 30000 barrels a day year on year.
There was surprisingly low stockpiling in preparation for IMO 2020 with many bunker suppliers delaying preparations of vs. It until DSL EFO liftings commenced in earnest.
Industry estimates that 10% to 15% of the barge infrastructure was prepared for Pls AFFO as at the end of September .
Most recently middle East tensions exposed to tightness in the tanker markets and as you can see from the chart on the upper rice rates increased across all the tanker sector is at the same time as I am or 2020 preparations started to intensify.
In terms of market outlook, the product tanker, but look product tanker market looks set for a sustained market upturn.
I am or 2020 is now delivering as expected as can be seen at the chart on the bottom rice slide Marine got solid demand is expected to jump over the next few quarters board for bending and consumption as the industry transitions to BLS AFFO.
Many shipping companies, including Ardmore are expected to significantly increase liftings of Pls AFFO in early November in advance of the year end, causing expected delays and potentially increased wait times.
Meanwhile, continued strong crude tanker markets driven by the middle East tensions HFO movement and storage U.S. crude exports I know fire for scrubber installations is expected to further support product tanker demand what approximately 10, LR twos switching from seem to dirty over the last few weeks.
Finally, the winter market is expected to provide a typical seasonal uptick which increased cargo volumes of refined products and weather related delays.
On slide nine would take a closer look at the underlying product tanker supply demand fundamentals.
The product tanker demand fundamentals continue to be positive oil consumption growth is increasing with estimated growth in 2020 , a 1.2 million barrels up from 1 billion in 2019.
As you can see on the chart in the upper ice refinery capacity growth is to averaged 2.2 million barrels a day annually between 2020 and 2020 three with addition centered within export oriented locations.
Hi, My 2020 should result in a new layer of demand for product tankers.
The impact on refined products demand in particular gasol is expected to be significant.
Looking at the supply side overall product tanker fleet growth comprising LR as an EMR tankers remains exceptionally low.
The order book today stands at 170 product tankers or 5.8% of the fleece delivering between the fourth quarter of 2019, and the first quarter 2020 tree.
We are forecasting 120 product tankers to deliver for the full year of 2019 of which 114 have delivered to days.
We expect scrapping to be the range of 35 to 40 product tankers for year 61 tankers was crop last year.
Taken together product tanker fleet growth net of scrapping is expected to be approximately 3.2% in 2019 and falling to 2% in 2020 .
And the more fleet alone is expected to grow by 2.8% in 2019.
The chemical tanker market outlook is also positive within historically low order book, a 4.6% and fleet growth net of scrapping expected to be between two and 2.7% in 2019.
As Tony mentioned, we think the market is changing.
Regulatory uncertainty around IMO targets for greenhouse gas emission reductions on charter preference for Green transport should put a damper on newbuilding activity until the regulations become clear and the new ship designs emerge.
Overall, we believe the strong fundamentals will provide a solid foundation for a sustained upturn and product and chemical tanker rates.
Moving to slide 11, we take a quick look at fleet days.
Revenue days are estimated at 9103 in 2019, we completed one dry docking would ballast water system installed at the end of July which accounted for 22 Drydocking days in the third quarter and we were complete our seventh and final dry dock out the year in the fourth quarter, what 15, Drydock days budgeted including repositioning.
Turning to slide 12, we would take a look at our financials.
Let's see on the second line reporting a net loss from continuing operations of 5.7 million or 17 cents per share for the quarter.
Total overhead costs were inline with expectations at 4.7 million for the quarter, comprising corporate expenses of 3.9 million and commercial and chartering expenses of 800000.
As mentioned before in many companies the commercial in chartering cost are incorporated into voyage expenses, which means that the corporate cost is our comparable overhead.
For the fourth quarter of 2019, we expect total overhead, including corporate on commercial to be 4.4 million, including cash and noncash items.
Depreciation and amortization was 9.2 million for the third quarter, and we expect depreciation amortization for the fourth quarter to come in at 9.3 million.
Interest and finance costs were 6.1 million for the third quarter, comprising cash interest of 5.6 million unamortized deferred finance fees of 500000.
We expect interest and finance cost for the fourth quarter to be approximately 6 million in kidney unamortized deferred finance fees of 500000.
In addition, we expect to write off deferred finance fees as a consequence of the new refinancing of approximately 2 million in the fourth quarter.
Moving to the bottom of the slide operating costs are well under budget at 14.9 million for the quarter.
Centered opex for the Eco design of ours was 6262 per day, the eco Mod MRF came in at 5982 per day, the chemical tankers came in at 6264 per day.
Looking ahead, we expect operating expenses for the fourth quarter to be approximately 16.2 million.
Turning to slide 13 would take a look at charter rates on the left hand side, you can see a dramatic rebounded emirates. The market rallied in early October and RMR fixing since October the fifth are averaging 20085 per day.
Spotty Mars reported Tc of 13784 per day for the quarter or the fleet average came in at 13029 per day for the third quarter basis discharge discharge.
Looking ahead as I mentioned, the fourth quarter will be a tale of two markets would fixtures at lower levels coming through from the third quarter and fixtures since the market rise in early October at about 20000 a day.
As of today for the fourth quarter, we have 45% of the days booked on the Amar's at 17000, a day and expect the remaining days, 55% to be approximately 20000 in line with current market levels.
On slide 14, we have a summary balance sheet, which shows at the end of September our total debt and leases was 40 $420.5 million, while leverage on a net debt basis was 52.3%.
Turning to slide 15, we remain focused on maintaining a strong liquidity position and continuing to pay down debt.
Our cash balance at the end of September was 46.2 million and we would 19.8 million in networking capital.
As Tony mentioned, we recently agreed terms on two new credit facilities for 201.5 million in the aggregates to refinance 12 ships on attractive terms.
First facility is for 140 million to refinance eight ships and includes a $40 million revolver components. The second facility is 61.5 million term loan to refinance four ships.
Both facilities reduce the margin by 10 basis points to LIBOR, plus 2.4% and extend the maturity to 2024.
And also provides a cash release after fees up close to 60 million and is expected to contribute an additional 1.7 million in cash flow annually.
We're continuing to maintain low leverage and pay down debt all our debts and leases are amortizing at approximately 40 million per year.
And finally, LIBOR has been reducing with 90% of our debt and leases been LIBOR base every 25 basis points reduction in interest is expected to contribute an additional 1 million and earnings are three cents an EPS annually.
I went out I would like to turn the call back over to Tony.
Okay.
Thanks, Paul So to sum up then after three difficult years, we believe the tanker market is now in the early stages of a sustained upcycle.
Hello, 2020 is playing out as expected gas oil demand arising from Mimo 2020 is anticipated to be higher than forecast.
Geopolitical tensions in the middle eastern resulting in tanker tonnage out of service for extended periods with more disruptions possible.
Winter market is coming but it's not yet here.
Global recession appears seem to be dissipating. This could result in an unexpected layer of product tanker demand next year.
Oil consumption growth is projected to recover to 1.2 million barrels a day in 2020 and could rise higher if the global economy is stronger than expected.
The order book for product tankers remains at historical lows.
The new consideration is that regulatory uncertainty should put a damper on newbuilding activity until regulations become clear and new ship designs emerge.
In the midst of these positive market developments, we remain focused on operating performance and effective capital allocation to maximize maximize returns.
The modern fuel efficient fleet trading 100% spot, we believe we're well we're well positioned to take full advantage of improved conditions and to generate strong returns for our shareholders were $1000 per day, each $1000 per day increase in rates translates into 27 cents EPS and in addition, as we expected.
Be profitable in fourth quarter, we believe our dividend will recommence as per our policy of paying out 60% of net income from continuing operations and with that we're happy to open up the call for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you are using his speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
At this time, we'll pause momentarily to assemble our roster.
The first question comes from Jon Chappell with Evercore. Please go ahead.
Thank you good afternoon, everyone.
Yeah.
Tony maybe Paul I.
I think for the first time ever you've given a little bit of forward guidance on the rest of the quarter by saying that the last 55% of the M. ours would be at about 20000, a day. So I'm just trying to match that up with you've done a little over 20 day since October Saft, but then you lay out all the positives that are still coming up like winter.
The full impact of IMO, Tony Tony disruptions to the trade, which is somewhat seasonal as well. So you just being conservative with using that similar number to what you've done in October or do you have a little bit more visibility on what's kind of already lined up and you think that some of those forward looking catalyst will be more of a first quarter impact as opposed to Fourq you.
Well the age on the 45% that we quoted is captures everything that we've done up until last Friday.
Maybe we're being conservative, but it feels like rates are settled in at that level and maybe we should have been more complete in our statement.
We can talk about risk of the upside being much more than downside at the moment.
Okay.
I wanted to ask a couple of questions on the chemicals, you guys called them product to slash chemical tankers.
Don't seem to have as much upside as the PRM ours, but are you seeing any kind of filter down into those ships from what's been happening in the core RMR or even just a broader product tanker business.
Yeah, that's a good question John .
When we think of our chemical tankers, we've got before 20 fives in the 237 37 start performing at around the same level currently as me I'm ours.
The 20 fives are more kind of core chemical tanker units in there they are lagging a little bit.
But you know we only have to go back to last year to go through a period when when those ships were actually outperforming the of ours. So they do have their moments. They are I wouldn't call them core to our strategy, but they strategically give us insights and capability into trading the a the m. ours into some chemical type business and we.
Like that that's one of the.
The things, it's that under under underlies our performance.
Tamar sector.
And I mean, we can certainly recall periods, where they've done just as good if not better bundle lag makes sense. Just one last thing on that Theres been a lot of kind of media coverage in the last couple of days on this you ban on palm based bio diesel and how that's going to hurt the chemical tanker business or your 20 fives exposed to that.
And are you worried that that could cause maybe a bigger disconnect between historical relationship on the m. ours in the 20 fives.
No because it actually that that's more of in a more trade and Handysize trade. So in fact, the 20 fives typically don't do that kind of trade all the way into into northern Europe .
Okay.
Final thing on the on the comes and then I'll leave it alone and then move on you've given kind of an outlook on what the rest of the quarter can be for the Emrs. Obviously, what do you booked quarter to date on the comes has been a little bit lighter should we expect a kind of similar GAAP up to what you've done since October or kind of inline with what you've done.
To date, so far in the Cubs.
Yeah, I think you know.
Unfortunately, with the chemical tankers, we're dealing with a fairly small dataset and so voyage specifics can have a big impact on the performance, but like I said, the 30 sevens or or trading very well at the moment and the 20 fives. We do expect will will improve through the quarter. Okay. Thanks, a lot Tony.
The next question comes from Ben Nolan with Stifel. Please go ahead.
Hey, good morning, guys I saw I have a it's I was going to ask John's question on the comes there any get beat me to it but the a I can just curious sort of strategically obviously the markets better you're earning more than 20 time charter rates have come up maybe thinking about locking in some of these.
Some of these higher rates here or hold out for a better a better market.
We think the market has a long run ahead of it and so we wouldn't be interested and locking in.
Time charter rates have gone up a lot that probably for eco design that probably 18000, a day for year, that's nice, but we think it needs to be a lot higher before we consider locking in.
Okay.
And to that point and it is as <unk> time charter rates have moved up so have second hand asset values. <unk> is you look forward and kind of it strategically how you would expect to develop the fleet and that sort of thing <unk> first of all the is it is there an appetite.
To buy second hand equipment and sort of it with that Newbuilding prices haven't gone up as much is there any interest at all if you were to expand in placing new new building orders is that completely off the table.
Yes, I think to answer the first part of the question. It's definitely we always look at it is a just part of a larger capital allocation decision and so it's a question do we.
Hey pay dividends do we.
Pay down debt do we.
Invest in additional assets.
And you know, we always approach it that way and try to figure out what's the.
Best step to to create the most value for our shareholders I think it's interesting when you it's a little bit different when you talk about newbuildings, because you know as I alluded to in the comments about the IMO regulations that are coming up Theres just unit for all the reasons. We've been talking about you know there's another one that is really emerging now in terms of really nobody wanting.
To order the last last model.
Well, let you know the last unit of an old model.
The amount of uncertainty around.
The future for propulsion technology, Greenfields et cetera is so significant at the moment that you know I think most most senior executive executives in the industry would probably joining me in saying that you know newbuilds to it just doesn't feel like the right thing to do right now.
We just don't know what to build and I want to add also that even if you were to order today's model, it's actually not as good as yesterday's model because the tier three engine is less fuel efficient.
And you incur more opex and that's what you'd have to order today. So there's a whole bunch of reasons, including the new regulatory issues and some tactical issues why it just doesn't feel like the right thing to do.
Got you now that's very clear appreciate it.
And then lastly, just short sort of a more from.
Macro level or or trying to understand the business I think.
Paul mentioned that something like 10, LR to said switched from clean to trading crude.
From an EMR perspective, how long did it take that just sort of trickle through.
You probably don't see as many EMR switching but is the LR market tightens, what's the time period before that can sort of drag up Tamar market ordinarily.
It I wouldn't say its immediate but it happens reasonably quickly because once those ships leave the clean market, there's less competition means that LR to rates improve.
And then charters.
On the margin are more interested then in chartering MRC instead, I mean, the real damage to the Amar sector is one LR to rates get so low that that charterers and traders can they can double up cargoes and incur the higher cost, but enjoy the the of the lower freight. So I think we're certainly back in an environment.
Where that's not happening very much and as those ships leave you know, it's a very easy switch to go to dirty, it's very hard to get back.
But I would say it probably is having an impact already and the number of 10 is something maybe somewhat different from what you might hear from others and the number we're using is validated by an analytical source as having made the switch others I probably switched over already but are being recorded as such and others are intending to do.
So to the actual number of ships that have switched over in process switching over it might be more like 20.
And then you starting another similar on the other one size similar on the other one sizing if you add it all up it's probably a couple of percent less addressable supply for cargos in our business and that and that that's not the game changer, but it's it's quite meaningful.
No yeah, absolutely no alright, well I appreciate that was very very detailed and helpful. Color appreciate it thanks Tony.
The next question comes from Randy give hands with Jefferies. Please go ahead.
Howdy, Joan How's it going.
Thanks Randy.
Yeah, I'll make sure it asked two questions so don't like.
Speaking of switching kind of although Ben's question was regarding cargo switching what's your strategy and likely timing for bunker fuel switching from Hs at Botha Villus, AFFO or mgo is that happening across your fleet. This month next month.
A good question. So you know to make a point our ships or spot trading generally on relatively short voyages. So we'll be switching over later than others would have bigger ships or kind of minor type vessels.
We think the switching is now underway.
We expect to be switching later this month I think we were I think we were considering doing one stem as early as right around now I'm not sure that's happened.
But but it's from what we're hearing the bulk of the switch over is going to happen very end of November early December so that by probably December 10th the switch over is more or less complete and on that basis, it's going to be extremely abrupt and quite impactful. We think on the on the oil trading market.
Sure.
That's helpful and to my second and final question a spot rate certainly been volatile in recent weeks time charter rates as you said it ticked up a little bit but relatively stable over the past month I know you mentioned a few minutes ago, you're not interested in time trying out your vessels based on your current kind of bullish outlook. What are your thoughts are on time chartering in ships to.
A little more operational exposure out without having to acquire vessels over the next year.
Yes, it's always a possibility and it's something honestly that we've done we've done in the past not not recently, we've done in the past and we would consider.
Appropriate and appropriate moment, but it's certainly something that's it's in the tool kit and for a variety of reasons, we have an actor acted on it.
Yet I'm sorry.
Oh, it's fair well that's it for me thank you.
That's right.
The next question comes from Omar Nokta with Clarksons Platou Securities. Please go ahead.
Thank you I, Tony on Paul I'm, just nice to see the carbon emissions table.
And.
As a public company Theres a lot of metrics that we focused on.
Got TCV and Opex utilization now you've got carbon emissions, which is clearly a good thing.
Just before I ask like the actual question.
The the I'm looking at the nine month, so far for the year.
Cotwo emissions, our 324000 tons is that am I doing the math correct in that basically means 47 to 48 tonnes a day per ship.
I'm sorry, if the math leads to what again about 47 tons or 48 tonnes per day.
Yes that would be about right because the if the ratio between fuel oil and tons Persio two is about 3.1.
Okay, and so the multiplied yeah. So our divide that by 3.1, and you probably getting what our consumption would be on a on a calendar day basis remembering that the ships are idle important about 40% of the time.
Right Okay.
And then those Cotwo emissions is that basically is that primarily coming from just the bunker fuel.
Yeah. So it would be it's the old and total fuel consumed we don't have it methane and we don't no nothing else that I'm aware of going out from the shifts into the atmosphere. So it's largely fuel oil, but some gas oil.
Okay, and then so I guess, just kind of thinking about that say the that 47 to 48 tonnes. A day I know it's early and this is your first time publishing it how should we be reading that figure going forward. Obviously, you know, we want that or you want that to be lower.
How does that happen is that something.
That does it require different vessels as part of the fleet going forward are there things you can do with existing fleet to Ah to reduce it.
Well I think the number that we're probably more going to target is the out of the to the two numbers further down. The eight you are in the line because that's more of the specific you know work work based a calculation.
We're learning we're certainly this for the first time, along with everyone else. We do know that we have a fairly modern fuel efficient fleets are numbers are probably pretty good to begin with.
We do know that every time, we burned less fuel and improve our TC. We're also getting less carbon so there's a full alignment of interest in terms of focusing on that and we do.
Focus on various technical and operational measures to improve performance and thereby also reducing cotwo emissions.
Beyond that.
I think we're really waiting for the IMO to take leadership role in laying out legislation that tells us what the future holds and over what period. So that we can begin to comply with that through operational measures such as speed limits.
Finding ways to increase efficiency in port.
As well is new designs and new fuel technologies that will enable us to dramatically reduce that.
Yes that makes sense thanks, Tony.
Maybe just to that.
Regarding the IMO. It is there any it from your obviously part of the you know the different boards that are involved and cleaner environment within shipping any any sense on timing of when we'll get some some information from IMO regarding mandates and how things need to look to get to those targets and 2030 in 2050.
Yeah I can if you like maybe for the next call I'll get a bit more specifics from Mark Cameron Who's very closely engaged and we also have a new board member curious Utica, whose closely involved in in the process as well last week I was in Singapore and I've spent time at the global Maritime Forum, which is a.
Kind of a CEO level forum that focuses on key issues and looking looking ahead.
The Big theme, obviously was de carbonization for shipping.
And.
What what was emerging from those discussions.
Was was really to two things one is that.
Nobody has any sense of how those targets are going to be Matt.
The technology is theoretically there, but it's not really being developed yet because there is no incentive.
The process within the IMO, it's going to focus on initially very heavily on operational improvements.
Speed limits or engine load limits.
And secondly on technology improvements and.
The just the deliberation within the IMO, we think could take a couple of years.
The legislation coming out of that could take longer.
And then the phase in.
Could take many many years so we're talking about a fairly.
Long term process, but one which has to start very soon.
And where the decisions that shipping companies are going to make will be heavily impacted by in terms of what to build and one. So we think it's a it's it's real the you know the the.
Public pressure and investor pressure.
It's only increasing.
Certainly the big companies in the industry or are facing that full force as our their large clients.
And you know we think that it's really income at now on the IMO to kind of step up and you know listen to the industry in terms of what we think is workable, but to arrive at legislation that's going to make all this happened, but it's up its definitely multiyear it's definitely going to be phased in.
And it's going to have a profound impact.
Yep.
Ah Tony Thank you so much for that discussion I appreciate it.
Yes.
Again, if you have a question. Please press Star then one.
Our next question comes from Mike Webber with Weber Research. Please go ahead.
Hey, good morning, guys how are you.
Hey, Mike.
Yeah, squeezing me and I am I wanted to loop back Tony to <unk>.
Well, you're just talking know more about and actually your your comments in your prepared remarks around.
The impact that there's deliberations are having on on the order book in new build pricing.
I find it kind of screw around with it but you've seen the same thing in crude right now, but you're seeing and product where you've got you've actually got newbuild prices and prompt prices moving in opposite directions, which is only happened for time since four months I guess since 2007, so about 2% of the time this ever happens, where you actually get new build pricing.
Inching down because no one wants to put in a bit where the cash flows it dictate that pump prices are ramping so I.
I guess, considering how rare that is and then what you just went through with Omar in terms of the idea that the solution to enticing owners to come in and an order new ships.
It is a is that a legislative issue effectively which.
You framed in terms of that timeframe measured in years, where do you think that's if the spread right now between prompts in new build tonnage is $4 million.
I think the time the lag associated with the IMO getting something clear out the ship owners is long enough that we see new build prices get discounted down to the mid thirtys again to entice the bid and that spread widened out the.
15, 20%.
Canada the peak levels I'm, just curious how you see the dynamics between prompts and Newbuilds tonnage.
Working in this scenario you just laid out for clarity around.
Around.
Technology and obsolescence risk.
<unk> that's good question Mike.
Let me pick how to answer it I think up until up until now there's been a whole bunch of reasons not to want to order ships.
Lack of lack of access to capital.
You know you know uncertainty around the market outlook et cetera.
No no you know in addition, this has been there for awhile, but now that the other excuses, maybe going away a little bit we do think there's going to be ordering activity, but we think that more than just on the margin. We think there's going to be a real dampening effect from what we just talked about and.
But but I think theres another factor that I want to introduce to you that that discussion because.
I think I think more than anything just at the moment I think I think its recency bias, which is limiting ordering activity and driving up that prompt delivery price I mean, who based on what we've been through the last literally 10 years, he wants to order shipped delivering into and a half years right.
You know where will the market be and on top of that people are thinking okay, well in two and a half years future probably will be clear and there's a very high probability of the I've just taken delivery of and obsolete ship not obsolete immediately but with a shorter life and this this actually there's an interesting precedent to this if you go back to the early mid.
Turning to use after the double haul legislation came in there were some shipping companies. It was still building single halls, because that would they were safer and more efficient and the new designs were really unclear they were quite conservative.
And those ships in particular were the ones that got hurt.
They were heavily discounted you know at an earlier points in their life sure than they otherwise the others were so I think that's the fear.
It's not that something is going to be immediately obsolete, but that the life expectancy of it will be much shorter.
Got it so I guess do you think you see need to see that new build out you get tees down significantly more to entice people that come in and take that kind of risk within the last owner to buy obsolescent deck.
Maybe but I think the differential right now is more you know wanting to grab the upside now rather there take taking a bad you know and and on top of that Theres the regulatory uncertainty.
Okay. That's helpful. And then one more for Paul actually along those lines. If you think about that you know the cash flows and the windfall. It looks like you guys are going to step into over the next couple of years from a rate perspective.
It forgive me Bobby mentioned this before but your target leverage level I know you're kind of down in the low fiftys now at a pretty.
Pretty healthy spot and even with a variable.
With a relatively flexible dividend policy, you're gonna have an opportunity to de lever the are you.
Where where are you going to be comfortable kind of taking your leverage of the next the next couple of years and do you have a a kind of a bull case target level. If you will.
Thanks, Mike No. We don't we don't have specific or leverage target levels. You know, we all are dead as amortizing. So we continue to pay it off I mean, this business largely as about you know being counter cyclical and having that capacity to two to buy and take advantage of ships you know when when the market is low so we know for the foreseeable future.
Sure. If we do generate superior earnings I think we would look to to continue debt reduction and pay it down and take it down well below 50%.
And then give it you know give give good strong most so to take advantage of opportunities that a protection. The next downturn. So there's nothing no targets in mind, but over the next wide, we'd certainly continue to pay down debt and potentially and aggressively pay down days as the markets a as we get enjoy stronger market.
Got you okay. Thanks for time guys appreciate it.
Thanks, Mike sorry.
This concludes the question and answer session and the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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