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Edited Transcript of NVGS earnings conference call or presentation 9-Aug-19 1:00pm GMT

Q2 2019 Navigator Holdings Ltd Earnings Call

London Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Navigator Holdings Ltd earnings conference call or presentation Friday, August 9, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David J. Butters

Navigator Holdings Ltd. - Chairman, CEO & President

* Niall Nolan

Navigator Holdings Ltd. - CFO

* Oeyvind Lindeman

Navigator Holdings Ltd. - Chief Commercial Officer

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Conference Call Participants

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* Benjamin Joel Nolan

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Jonathan B. Chappell

Evercore ISI Institutional Equities, Research Division - Senior MD

* Randall Giveans

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Thank you for standing by, ladies and gentlemen, and welcome to the Navigator Holdings conference call on the second quarter 2019 financial results.

We have with us Mr. David Butters, Executive Chairman; Mr. Niall Nolan, Chief Financial Officer; Mr. Oeyvind Lindeman, Chief Commercial Officer.

(Operator Instructions) I must advise you, this conference is being recorded today.

And now I'll pass the floor to one of the speakers, Mr. Butters. Please go ahead, sir.

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David J. Butters, Navigator Holdings Ltd. - Chairman, CEO & President [2]

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Thank you, Joanne, and welcome, everyone, to Navigator's second quarter earnings conference call.

Today, we'll follow the usual format with comments from Niall Nolan around our financial performance, followed by Oeyvind Lindeman who will cover the state of the market and the near-term outlook. After their remarks, I will come back with a few observations of the macroeconomic and political environment that we're operating in.

But first, let me begin by saying that while there was not a whole lot of good news coming out of the second quarter report, we did achieve a significant milestone in convincing Harry Deans to join us as President and Chief Executive Officer. Dr. Deans, or Harry, as he prefers to be called, is an individual whose education, experience and general background matches perfectly with what we will need to take Navigator to its next and important level.

Our first stage is nearing completion with the expectation that various pipeline and export terminals currently under construction will drive our business and provide a high level of tangible and visible free cash flow secured by long-term contracts. We expect much of this construction will be operational a year from now. But Oeyvind, who recently visited all of the major construction sites, will cover this in his prepared remarks.

Once pipelines and terminals are, in fact, operational, we will embark on an even more exciting second growth stage in our development, which is likely to involve an expansion of our transport network into a global partnership with our midstream and petrochemical company colleagues.

Harry's background and hands-on experience in the petrochemical industry, especially his early career at BP Chemicals and later at INEOS, will provide a perfect match with Navigator's technical strategy and ambitions. We very much look forward to Harry's joining us later this month.

And now I'd like Niall to give us an overview of our financial performance during this recent quarter.

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Niall Nolan, Navigator Holdings Ltd. - CFO [3]

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Thanks, David, and good morning.

The challenging market continued in the second quarter with charter rates not yet benefiting from the upturn seen on the larger midsized LPG carriers and the very large gas carriers. However, more recently, since the quarter end, we've seen some early indications of modest increases in our charter rates.

Revenue for the second quarter was $73.6 million, $400,000 more than the $73.2 million generated during the second quarter of 2018, but $2.5 million down from the revenue generated last quarter, Q1 of '19. Revenue for the 6 months period ended June 30 was $149.7 million against a slightly higher $151 million generated during the first 6 months of 2018.

During the quarter, charter rates improved relative to the second quarter of 2018 at $19,940 per day or $606,600 per calendar month compared to rates of $19,100 per day for the second quarter of 2018. However, utilization fell during the quarter relative to the second quarter of last year from 90.3% to 85.2%, which had the impact of reducing the comparative revenues by $3.4 million. Although this second quarter, utilization was a marginal improvement from the $84.8 million achieved during the first quarter of this year.

During the second quarter, time charters accounted for 59% of all vessel operating days while 41% of the operating days were spent undertaking spot or voyage charters. Although LPG was transported for the majority of time charter days at 72%, petrochemical gases accounted for the majority of spot charter days at 79%, with LPG at 17% and ammonia accounting for 4%.

We undertook 4 dry dockings during the first half year, taking an aggregate of 117.5 days, including the time taken to sail to the respective dockyards, and costing a total of 7 -- $5.1 million plus an additional approximate $1.6 million for the cost of installing ballast water treatment systems. We are scheduled to drydock a further 5 vessels during the second half of 2019, estimated to cost a total of approximately 3 -- $6.3 million. For next year, 2020, we expect to drydock 9 vessels at a provision cost of approximately $13 million, which includes the now mandatory fitting of ballast water treatment systems, which costs approximately $400,000 each to purchase and to fit.

Vessel operating expenses, or OpEx, increased by 5.4% to $27.4 million for the 3 months ended June 30 compared to $26 million for the comparative 3 months of last year as a result of increased expenditure on some of our older vessels and the additional expenditure on our ethane-capable vessels. The daily rate for vessel operating expenses for the quarter was $7,938, less than the $8,618 incurred during the first quarter but an increase from the $7,500 during -- incurred during Q2 of last year.

General and admin expenses increased to $5.2 million for the quarter from $4.8 million for the comparative period of last year primarily due to a release of share compensation cost in the second quarter of last year. Interest costs for the quarter were $12.2 million, an increase of 7.5% compared to the $11.4 million incurred during the second quarter of 2018. This increase was primarily as a result of interest under $1.7 million November 2018 NOK bond generally relating to contributions made for the ethylene terminal investment, partly offset by capitalized interest of $1 million relating to that investment.

We reported a net loss for the quarter ended June 30 of $7.7 million or a loss per share of $0.14. This compared to a net loss of $3.2 million for the second quarter of 2018 or a loss per share of $0.06.

EBITDA for the second quarter was $23.2 million, a reduction from the $27.2 million generated during the second quarter of 2018.

As of June 30, cash stood at $47.3 million with an additional $35 million being available for drawdown for general corporate purposes from one of our revolving credit facilities. This excludes any amount available on the terminal credit facility, which has a maximum amount available of $75 million, subject to percentage of committed throughput. At June 30, and based on the three 5- to 7-year throughput agreements currently in place, $36 million is available for drawdown from this terminal credit facility once the equity portion has been contributed. We expect this amount to increase in the near term as additional throughput agreements are executed. The term of the loan is for a total of 7 years with a margin varying between 2.5% during construction and up to 3%-plus LIBOR in the final 2 years of the term loan.

The amount contributed to the ethylene terminal at June 30 was $90.5 million with a further $12.5 million contributed since the quarter end. That gives a total of $103 million contributed thus far, out of an expected total contribution of $155 million. Of the balance, $31 million is expected to be contributed during the remainder of this year and the remaining $21 million being contributed for the -- principally, the cryogenic tank during 2020.

At June 30, total debt stood at $863.4 million, which includes our now 5 bank loan facilities and both the $100 million and the NOK 600 million Norwegian bonds.

And with that, I'll hand you over to Oeyvind.

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Oeyvind Lindeman, Navigator Holdings Ltd. - Chief Commercial Officer [4]

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Thank you, Niall. Good morning, everyone.

We mentioned the short-term headwinds we experienced during the second quarter in the press release. In short, the key events being the ripple effects from the U.S. import sanctions on the Venezuela national company, PDVSA. Historically, Venezuela employed 6 handysize vessels on the cabotage LPG trade on the coast. These vessels were forced to cease the trade at the end of first quarter due to the oil pact actions and seek employment in alternative trades during the second quarter in a segment with 118 vessels, which out of 25 vessels were trading in the spot market have influx of such an unanticipated vessel capacity to the spot market has been a struggle. During the same period, 3 newbuild handysize vessels were delivered from the yards, adding capacity to the spot market in this period.

The second event was that of reduced petrochemical ton mile demand as a result of an extensive European chemical turnaround period. There was a major halt in the traditional Europe to Asia butadiene shipping. Vessels contracted to service this trade were left idle seeking other cargoes having ship capacity in the Atlantic Basin.

U.S. ethylene exports, which typically are discharged in Asia, transit in Panama, then Pacific Ocean were diverted to supply the ethylene short position in Europe, further reducing overall handysize ton mile demand.

These were the 2 key headwinds capping our ability to follow the right theme to the larger gas vessels during the same period. It's important to highlight the fact that we do not live in complete isolation from other segments. The optimism in the wider LPG environment plays a role across the various ship sizes. The very large gas carriers, as Niall mentioned, after several years with extremely low rate levels, have finally entered into a higher supply-demand balance situation with rising freight levels. This, in turn, has had a positive effect on the medium-size segment.

We have seen in the past that when the medium-size segment is doing well, it reduces some cannibalization down to the handysize LPG trade and usually has a positive effect from our business, albeit unfortunate that there's a time lag to this due to the events described earlier.

Whilst the positive fall from the large- and medium-size vessels is welcome, the handysize segment has never been relied solely on the state of other segment to perform, as the specialized and complex nature of our assets and how we operate them help cover the path ahead of us. We have mentioned several ongoing infrastructure projects during previous calls, which should have meaningful incremental volume, specifically to the handysize segment. These are all located in North America and all are underpinned by the enormous NGL development across this continent. Due to the importance of these projects, we took it upon ourselves to visit each 1 over the last 2 weeks to personally check for ourselves. We walked the land, we touched the [seam], and we talked to the key people behind each project to get a sense of it all.

First, we went to the Canada West Coast, more specific, Prince Rupert in British Columbia. Back in November 2017, Pembina, a large Canadian midstream company, announced its FID for our LPG export terminal project, connecting Pembina's Redwater fractionation complex near Edmonton, Alberta, to West Coast of Canada by utilizing unit trains connecting the 2 points. Realizing value for Western Canada NGL produces by accessing international markets. The terminal itself is on target to be operational third quarter 2020, featuring acreage for unit train storage, rail offloading back above ground, liquid storage and connectivity to an upgraded jetty. When we visited, about 250 construction workers were busy getting everything done. Due to the ambient condition of the LPG at this terminal, semi-refrigerated handysize vessels are the most efficient and largest vessels to be utilized for the trade and are all the targeted vessels -- the vessel size for this project. Larger fully refrigerated vessels cannot be used.

Pembina refers to this project as a small-scale rail terminal with a nameplate capacity of 25,000 barrels per day throughput. It may be very small compared to the total export capacity of North America, but it is very significant for the handysize segment. The volume and location translate to about 4 to 6 vessel employment charters, depending on the discharge location. So this project is very real.

Heading south to the Gulf, we arrive at our joint venture, ethylene export terminal at Morgan's Point, Houston. So we -- the Chile unit is almost complete and the 60,000 cubic ethylene storage tank is rising fast on the horizon. At any point in time, when we were there, 350 to 400 construction workers were working around the clock to complete the project. The nameplate capacity of 1 million pounds per annum won't be reached until the tank is complete later in 2020. However, the Chile will provide up to 75% capacity, [want] commission at the end of this year. It is all incremental volume and should give employment to more than half a dozen handysize ethylene vessels. And this project is obviously very real.

Next, we move on to the East Coast. As much as -- just outside Philadelphia, construction is clearly continuing on the 800-acre sites to build additional storage tanks to accommodate takeaway capacity associated with the Mariner East -- Mariner 2X or Mariner 3. Mariner 2X should have a capacity of about 250,000 barrels per day. And according to ETP, Energy Transfer Partners, it's scheduled to be completed by the fourth quarter. The full capacity of the 275,000 barrels of Mariner East 2 is expected to be achieved sometime during first half next year. In the meantime, they're using the loop around. Yet to be realized, full capacity of the Mariner East NGL system is expected to add employment to a number of handysize vessels, particularly in butane, albeit the majority of the volume goes onboard larger ships.

The final stop was just across the Delaware River in New Jersey. Who would have thought that near the small town of Gibbstown, a beautiful little town on an old DuPont site, Fortress Transportation and Infrastructure company have been quietly developing an LPG export terminal. We were extremely impressed by the rather large 1,600-acre site already operating butane on railcars, storing it in an existing cavern with added truck hostage. In fact, our manifest train went into the site when we were there, proving that it is operational and operating on butane today. So what they're doing, they're putting in rail storage for the unit trains' offloading racks. They've already developed a fantastic jetty, it's brand-new, which they will then put the butane or LPG from rail to ship on. The stock above that is expected to be -- they're aiming for second quarter of next year. And Fortress Transportation and Infrastructure has a similar mindset to Pembina, i.e., quick to market, low CapEx, ambient LPG on rails to ship, meaning that semi-refrigerated handysize vessels are to be used. We estimate additional employment for this project of about 4 to 5 vessels in the Atlantic. Again, very much a real project.

So these 4 infrastructure projects are under development, all going well and are scheduled to become operational over the next 12 months. The Pembina in West Canada, the Enterprise Navigator Terminal in the Gulf, and particularly the Fortress terminal export project on the East Coast target handysize vessels, providing substantial demand for the segment.

If you superimpose the outlook for just this supply with the tonnage situation, there's only 3 handysize vessels on order yet to be delivered on the order books. So if we add them all together, the basic supply-demand economics should produce significantly higher earnings once it all kicks in.

With that, I'll give it to David.

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David J. Butters, Navigator Holdings Ltd. - Chairman, CEO & President [5]

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Thank you, Oeyvind.

There's nothing like visiting a construction site and getting your feet wet and hands dirty to get excited. And indeed, when Oeyvind returned, we all shared his excitement on the quite favorable market outlook that he has presented. And if all goes and comes together as planned, and we know from experience, nothing ever comes together exactly as planned, but nevertheless, if everything comes together, Navigator should be operating at a new record level of profitability a year or so from now. But getting there will still require our leaning into the headwinds of tariffs and sanctions and currency volatility and, of course, trade uncertainty. But we are confident we will get there successfully.

No one knows for sure how the current trade negotiations between the United States and China will play out, but signs suggests that there will be no near-term resolution. We certainly are not planning on it. That lack of trade agreement does not mean a lack of trade. Our business is global, and most of what we transport is fungible. And so while high tariff trade barriers may exist on one country, trade can prosper by alternative routes. Trade barriers persist for one length of time, for any length of time, we will see redrawn trade routes developing that may not be the most efficient, but will add ton mile demand, which would, in fact, may be quite beneficial to shipping and to Navigator, in particular.

So that -- with that, Joanne, I'd like to open up the call for the question and answer.

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Questions and Answers

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Operator [1]

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Your first question comes from the line of Randy Giveans from Jefferies.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [2]

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So on the last call, you mentioned utilization in 2Q should be better than Q1. Now obviously, you did a pretty good job explaining the unforeseen weakness through your prepared remarks. That said, how has utilization been in the past, let's call it, 6 weeks? And when do you expect utilization to exceed 90% again?

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Oeyvind Lindeman, Navigator Holdings Ltd. - Chief Commercial Officer [3]

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Randy, this is Oeyvind. Very good question. And the timing is a bit tricky to pinpoint because we're working through these -- particularly these 9 additional ships that we have in the spot market that we just referred to, so the 6 from Venezuela and the 3 newbuilds. So we're working through that. And I think the utilization hasn't dropped. But when will it go back to 90%, our expectation is clearly in parallel with these particularly 4 projects we just mentioned. So the first one on the list that we visited is obviously our own in the Gulf Coast, which is about end of the year. But they should improve before that because customers and so forth are waking up to the fact that these projects will have a fundamental impact on the rate environment and the availability of the ships. So if you are smart, you rather try to go something in today, you'll start earlier or -- to get hold of ships. But the timing on that is difficult to say, Randy.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [4]

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Okay. What about utilization the last month or so?

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Oeyvind Lindeman, Navigator Holdings Ltd. - Chief Commercial Officer [5]

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Yes. It was about the same. So same as second quarter, the first 3 months, something like that.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [6]

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All right. Now switching over to the ethylene export terminal. You've guided that most of the cargoes will be exported on Navigator's ethylene-capable ships. So with that large arbitrage still out there between the U.S. and Asia and now Europe ethylene prices, what do you expect these vessels to earn per day on a full year average in 2020 for the ethylene-capable handysize?

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Oeyvind Lindeman, Navigator Holdings Ltd. - Chief Commercial Officer [7]

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The arbitrage today has gone up since the last month, which is a good thing. So today, you can buy a spot can of ethylene, I think, around $830 a ton in the U.S., add on terminal fees, shipping fees and so forth, and then you get to Asia. Today, Asia delivered price quota and some deals were down for September at $930, $940 a ton. So in the last month, that's gone up by $130, so -- which is a good thing. So the arbitrage today is in there. We expect that to continue into the future.

The question when you're talking about Asia destinations, clearly, the tariffs on ethylene today is under 25% tariff. We're hearing that this 25% is on the FOB price, which is a low price. So the absolute impact of that, well, we shall see. But the arbitrage is still there to accommodate that tariff today.

In terms of earnings of the ships, clearly, if there's an arbitrage, we will try to participate as much as we can in that job. So the earnings on the ships on a day-to-day basis clearly is higher than what it is today. How high can it go? Time will tell.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [8]

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Okay.

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David J. Butters, Navigator Holdings Ltd. - Chairman, CEO & President [9]

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But...

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [10]

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Go ahead, David.

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David J. Butters, Navigator Holdings Ltd. - Chairman, CEO & President [11]

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Yes. I was just going to try to put some clarity to that. Today, an ethylene carrier, they might be making -- how much if you got an ethylene cargo?

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Oeyvind Lindeman, Navigator Holdings Ltd. - Chief Commercial Officer [12]

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Yesterday, it's about -- depending a little bit, but everything between $600,000 and $750,000 a month, depending a little bit. It will be higher than that. It's strictly higher than that because, as you know, Randy, having an handysize ethylene-capable ship is not 118 ships, [it's 30 all]. So the market in that is very small. But if you have 1 million ton incremental supply in the market, we think that we'll be able to push the rates. And there shouldn't be any reason why we couldn't.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [13]

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Okay. And then how much of that 1 million tons of capacity is contracted today?

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David J. Butters, Navigator Holdings Ltd. - Chairman, CEO & President [14]

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It's over 50% -- still, it's over 50%. 55% is under long-term contract. And we've -- again, and I repeat what we've said in the past that the time is -- terminal is open at the end of this year, we fully expect to have it all, essentially all under contract. The demand is there. If we were open today, we will be selling every ton. So the question from our customers are isn't how much can I take, but how soon can I get it. They want it as soon as possible. So every time we have a call, it seems as though that next contract is ready to be signed, but it always gets a bit delayed. But I think you'll see by the end -- by certainly by the time we open up the terminal later this year, now just a few months from now, that substantially all of the capacity will be contracted.

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Operator [15]

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Your next question comes from the line of Ben Nolan from Stifel.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [16]

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I -- maybe just actually follow-up on what you're saying there, David. Based on customer demand and the anticipation that you'll be fully contracted really within the next 3, 4 months, how do you think about the ability to -- and obviously, in conjunction with enterprise, the ability to maybe expand the capacity if demand is so strong. What's the viability of actually upsizing it at some point?

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David J. Butters, Navigator Holdings Ltd. - Chairman, CEO & President [17]

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Okay. Well, I'll take a risk in answering that. First and foremost, we live in the world of Enterprise. And as you know, Enterprise, which is probably the premium midstream company, built its reputation and footprint that's the biggest in the business being very conservative, building against long-term contracts, earning fee off of that in a very conservative way. Expansion, and that's how we began our existing terminal with a base of contracts before we agreed to construct the terminal. And we've added on that, and I think Enterprise will share the enthusiasm with us about the success of our -- that terminal and the decision to go forward.

Same token, moving forward on an expansion would entail the same kind of thought process that has nailed down the support on the contracts. Be sure that you have sufficient cover that can justify moving from 1 million tons to whatever we agreed to do that. Technically, we can do it. The space is there. The equipment is known what it would take to expand. So I believe there is the capability, technical capability to double the size of that facility and handle the -- both the processing of it and the handling it on to the ships themselves. The Barretts and so on can -- are completely capable of handling an expansion. But I want to reiterate that, that decision has not been approached. It's logical at the right time and again, with the right type of backstop in terms of contractual commitments by off-takers, who not just express verbally their interest, but actually put their name and contract on a piece of paper. I'm -- it smells good.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [18]

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Right. Understood. I certainly appreciate not wanting to put the cart in front of the horse. But just thinking that usually, in these petchem infrastructure projects, it's a lot cheaper, and the returns are a lot higher when you're expanding rather than when you're starting from ground zero. So...

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David J. Butters, Navigator Holdings Ltd. - Chairman, CEO & President [19]

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And that's where you make your money. Now one of the interesting things, let me tell you, if we were -- if tomorrow, we wake up and our friends in Houston said, we've just gotten a bunch of equipment, and we're going to expand by 50% and will be operational 12 months from now with the increased capacity to 1.5 million tons, I'd say, "Hold on, we don't have the ships." The ships are going to be the problem. So it's interestingly enough that we made -- this has to be done again. The horse has to be there ahead of the cart. The cart doesn't get in the front part. We need to coordinate. If we are to pursue that expansion, it would have to be done in coordination with Enterprise, with contracts and with the ability to deliver the vessels, which are critical to moving the stuff. So it's not that simple. It's -- it will be a coordinated effort. And believe me, I look forward to making that decision, participating in that.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [20]

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Right. Great. And I appreciate that. But to that end, and this sort of goes back to a little bit something that Oeyvind was talking about, utilization was 85% in the quarter on the basis, so whatever it is, 118 ships in the fleet. That would imply, what, something like 20-ish, a little over 20 ships of, let's call it, excess capacity. Is that the right number? Is -- or at what point do you think utilization rises enough such that you really begin to see pricing power and rates move? Do we need another 10 ships to be employed firmly? Or is it more like 20? Just curious if you have a line of sight on that.

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Oeyvind Lindeman, Navigator Holdings Ltd. - Chief Commercial Officer [21]

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Well, if you see today, 10 ship goes away back to Venezuela and 4 goes to some other captive trade, then you will see effect. We're not talking 20 ships. Remember, the spot market, which sets the rate and the mood, is about, today, 25, 30 ships. So remember, we're dealing with a small segment here compared to the very large gas carriers and so forth. So -- but you see, when you get up to starter approach 90%, you can theoretically or at least historically, you become -- the tables have turned, and you're talking about pricing power is a dangerous word, but you're getting a bit more -- you can ask and demand more in contracts and so forth into -- alongside freight rates. So 90% is a very good number. I think on the very large gas carriers, I think they have 90% themselves. I don't know if you could see what they're earning. So we don't need to move much before you can see a tangible effect.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [22]

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Okay. That's helpful. And then as it relates to Venezuela, I know obviously, it doesn't seem as though there's been any political changes thus far. I believe that last quarter, you guys had said that you put in a request for some sort of a waiver or something like that. Has there been any movement on that front, either broadly speaking or as it relates to what you guys are trying to do?

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David J. Butters, Navigator Holdings Ltd. - Chairman, CEO & President [23]

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OFAC is a black hole. There's no way of penetrating it. We haven't had any word from them whatsoever. Actually, I didn't really expect to have word back from them. I think they've made up their mind on what they're doing, the State Department has in conjunction with the Treasury. And our foreign policy today is based around tariffs and sanctions. Diplomacy negotiations don't exist. Tariffs, sanctions, and that's the language of diplomacy today. So we're not hearing anything, and I don't expect it. That means we're not counting on Venezuela coming back quickly, for sure. It will resolve itself. But let me tell you, once it does come back and eventually it has to come back, it's a serious and cultured country under a great deal of strain. But once it does come back, those 5 to 6 vessels, wherever they are, they must go back and they must be handysize semi-refrigerated vessels to do the cabotage business. What they -- as I stressed before, what they do is a humanitarian business at the moment. And that was our application, was for humanitarian need. They provide the basic cooking oil and other heating, cooling and whatever so that -- mostly for households. They're cut off of that now. So to cook, I'm not sure how they're doing it. Wood is not a substitute on a long-term basis. Electricity doesn't exist, and they weren't equipped to handle it. It was propane, which is a fundamental cooking, heating component of that country. And they don't have it today because no one can move it around. And without that movement, without these vessels, they're just shut off. It's a huge pressure point that the U.S. government was putting on. And unfortunately, they were putting it on the common person, the individuals, the working class individuals. So look, I have -- we haven't heard anything, don't expect. I'm -- it's sad that we can't do that. But diplomacy rules, sanctions and tariffs are the way we're going. And there won't be any change anytime soon.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [24]

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Okay. And I have one more. Hopefully, I'm not overstaying my welcome, but I don't know that there's quite as many of us with questions anymore. But the -- and so my question relates to it. At this point, I'm sure you're having conversations with some of the off-takers from your terminal and likely others, whether it's the Pembina or the Repauno terminal or wherever. I'm curious -- and I know that those are sensitive, but I'm curious about the structure. Are these the kind of things that really make sense to do contracts of affreightment? You can utilize your large fleet to sort of guarantee cargoes rather than committing individual ships. Are there a lot of people looking to do long-term multiyear contracts on specific ships at fixed rates? How is that process evolving, do you think?

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David J. Butters, Navigator Holdings Ltd. - Chairman, CEO & President [25]

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Yes. I think that's a good topic, and the one who's going to answer it is Oeyvind.

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Oeyvind Lindeman, Navigator Holdings Ltd. - Chief Commercial Officer [26]

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It depends a lot. I mean it's a mixed bag. So if we take West Coast Canada, it is not a natural home for any ships really, and it's not gas ship. So they don't hang around. They don't go there [invalid]. So in order for any off-take or anybody moving product out of there, they are more likely to do a term charter because the ship will remain as extension of the pipeline from Alberta on the rail terminal ship to the various consumers. So because of the location, it's more a time charter. But in the Gulf, it is more an active market. It's more liquid, if we can use that word in our segment with 118 ships. So there is a bit more mix of some prefer contract of affreightments. We always believe we have a strong hand because we have a lot of both. So we can offer that. That's kind of our [UFP]. Whilst others are more keen to do time charters, particularly on the larger ships whereby it's -- again, it is not shipping as a pipeline service to a consumer going back and forth. On the East Coast, again, the Atlantic is quite active. Probably you're looking at some sort of structure of contracts of affreightment with LPG. It's not unheard of; it's quite common in that area. So again, it's a little bit of mixed bag.

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Operator [27]

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Your next question comes from the line of Jon Chappell from Evercore.

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Jonathan B. Chappell, Evercore ISI Institutional Equities, Research Division - Senior MD [28]

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So this is kind of interesting. You laid out a path to a market that you said could provide record earnings in 12 months' time coming right off a quarter, which is, I think, probably the worst quarter since you've been public or [for quite a duration]. So can you just kind of walk us through -- Oeyvind laid out the numbers on the different terminals. Number one, what can go wrong between now and then other than just terminal delays? And then number two, if you are so fortunate to have that supertight market in 12 months' time, what's the next strategic step for Navigator? Do you start ordering ships to plug that shortage? Do you just rig the cash flow? What's going to happen in the competitive landscape if you are on a record territory in 12 months?

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David J. Butters, Navigator Holdings Ltd. - Chairman, CEO & President [29]

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Appropriate question, Jonathan. Shipping, I've learned, anything can go wrong. And it's -- if there is something to go wrong, it will happen. As I look at the landscape and what do I worry about? I worry about, first and foremost, price of oil. And the price of oil is not in itself an absolute, but why is that price either weak or strong? A weak price is not helpful. But if a weak price is just temporary, I'm fine with that. If a weak price of oil is a reflection of the global meltdown in the world economy, that worries me a lot. So global economic activity and its impact on the pricing of oil is important and something that I get concerned about. Oil is needed -- a strength in oil is needed because where I see our future -- and what is happening is the exports are driven out of the North America, Canada and the United States, are driven by the differential in pricing on U.S. hydrocarbons and international pricing. And international pricing of hydrocarbons really evolves around oil pricing. Natural gas and liquids come off pricing from Brent or whatever benchmark they're using. So a lower price of oil gives less of a compelling arbitrage issue for export.

So that's probably the one concern that I have, the global economic activity and the price of oil. No way I can predict it, but it's obviously threatened today by this battle of wills between the United States and China in developing an intelligent trade agreement. But hopefully, we can get through this and trade doesn't deteriorate and economic -- global economic activity is good. Okay. I think any kind of moderate economic expansion will be the environment that will be very good for us. This current environment generally is very good for us. A deterioration in global economic would not be helpful, and a collection price of oil down to $35 would not be good.

So if all goes well or reasonably well, we will be generating substantial amount of cash and visible earnings. So the question is, what do we do? I've always felt that my role here was get us to this level, get to stage 1, as I always refer [it to] internally here at our company. Get to stage 1 where we have created a long-term visible pipeline of cash, underpinned by long-term contracts with strategic assets that give us a distinct advantage, such as the Enterprise joint venture. And with that and recognizing that the United States is on the verge of transitioning from a exporter of raw materials, propane, butane, oil, that there will be growing interest in exporting value-added products, and that's the ethylene, the propylene, the butadienes of the world, we're going to be awash with those liquids and those value-added products. The infrastructure, however, doesn't exist to make the maximum use of those exports to get them into the markets that need them. They're global markets. They're Far East, Asian markets or European markets. They're Latin American markets, all desiring to get hold of these very cheap hydrocarbon-based petrochemical gases and products.

The midstream companies, the Enterprises of the world, Energy Transfer, they've built a base of logistics that can move these around and get them to the terminal site, but they lacked the infrastructure, the logistics, the transport to move them in and to access the international markets. That transition from these companies, particularly midstream companies, into the international arena, and they will become international companies eventually, they need a Navigator to make that all happen. We have the expertise. We have the equipment, the technical knowledge, the contacts. We're going to assist that transition to take place. These companies have always built their huge companies very provincially because they were MLPs and they were -- had enough growth in the United States. I think if you took a look at one very small little incident that took place recently, and that is Energy Transfer. For the first time, I don't know if any other midstream company that has opened an international office in China, and they hired a Senior Vice President of Corporate Development in Energy Transfer. That's a flag. It's a good flag for us. It means one of the largest midstream companies is targeting the international markets and they're starting to build the infrastructure to be a direct access to those markets. I think you're going to see a lot more of that. So what is Navigator going to do with that cash flow? We're going to try to build around that development that's going to take place. We have the infrastructure, we have the team, and we have the equipment. We want to be part of that growth, that development into the international markets. And the reason we have hired a very capable, senior, experienced petrochemical man in the name of Harry Deans to join us is his background. He's precisely in this game. He knows the players. INEOS is one of the bigger international petrochemical companies. He knows what it takes to get us there. He can negotiate with the joint ventures, similar to ones we had with Enterprise.

So our future is there. It's not going to be just add on a couple of vessels. I want to be an integrated logistics provider moving the pipeline from the localized domestic business into the extension of the international markets. Connect them, make it all happen, make it happen smoothly and effortlessly.

Okay. I've taken a lot of time to answer what seemingly is a simple question, but it is...

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Jonathan B. Chappell, Evercore ISI Institutional Equities, Research Division - Senior MD [30]

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No topical at all, it was more long-term strategic. So yes, it's a very thorough answer and actually addressed most of my follow-ups in your comments. So I look forward to the stage 2 and working with Harry on that.

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Operator [31]

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And your final question comes from -- sorry?

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David J. Butters, Navigator Holdings Ltd. - Chairman, CEO & President [32]

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No. I think there -- if there are any other -- I don't think there are any other analysts on. Is there someone else?

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Operator [33]

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We have another question from the line of Randy Giveans from Jefferies.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [34]

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One more question is, you mentioned in the press release the contracted amounts or the operational amount will be 60% to 75% in 2020. Is that based on what amount gets contracted? Or is that range based on maybe some construction timing uncertainty? Like what will make it 60% and what will make it 75%?

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Oeyvind Lindeman, Navigator Holdings Ltd. - Chief Commercial Officer [35]

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Yes. So we're talking about the physical capacity of the -- the export capacity when the chiller unit is operational end of the year until the storage tank is constructed and completed, which is later in 2020. So that's -- call it, is the space between chiller operational and tank operational in that period is up to 75% physical capability for exports of the 1 million ton nameplate.

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David J. Butters, Navigator Holdings Ltd. - Chairman, CEO & President [36]

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During the first stage, we have to pump from the chiller with the holes directly into the vessel. And that limits the capacity to 75%. Once the storage is completed, Randy, the chiller can pump directly into that storage tank. And then from the storage tank, we pump directly into the ships. And that is very quick and very efficient. But until that -- those tanks get completed -- and the reason they take so long is they're all hand-welded, and that's -- labor is slow. And that's why we have almost 400 workers down there 12 -- 24 hours a day, 7 days a week to get that thing welded and done. But soon as the chiller is done, we're in business at around 75%.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [37]

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Got it. I guess my question is, you're saying in the press release that there's a chance that it will be maybe 60% operational in the first year. So 600,000 tons, right?

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David J. Butters, Navigator Holdings Ltd. - Chairman, CEO & President [38]

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Well, it is whatever we -- the demand is there. Randy, if it were 1 million tons today, we'd be shipping 1 million tons because that's where the demand is. So it's only a physical constraint, whether it's 60% or 75% during the opening up of the chiller. The storage is not going to be until later in the year in 2020. But the physical capacity and the teething and whatever have you of the chiller is what will dictate the capacity output during the break-in period, stage 1 of -- if you will.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [39]

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Correct. So could you sell more than 60%? If you're not sure, you might even only be able to make the 60%.

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David J. Butters, Navigator Holdings Ltd. - Chairman, CEO & President [40]

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As I say, if we were open today, we could sell 100% of it. So it's whatever we can get into and out of that chiller, we will be selling because that's the demand. Again, what -- the first question the customers have for us is, how quickly can we get that ethylene. So it's not a question of when, it is a question of physical capacity and constraints that we have on that. And that will -- certainly by the end of next year, when the storage tanks are up and running, we will at -- we will be at 100%. Period.

Okay. Joanne, I think we can wrap things up.

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Operator [41]

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That does conclude our conference for today. I will now hand it back for closing remarks.

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David J. Butters, Navigator Holdings Ltd. - Chairman, CEO & President [42]

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No closing remarks and we look forward to our next call. Thank you very much for being patient with us today.

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Operator [43]

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Thank you all for participating. You may now disconnect.