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Edited Transcript of STNG earnings conference call or presentation 7-Nov-19 1:30pm GMT

Q3 2019 Scorpio Tankers Inc Earnings Call

Nov 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Scorpio Tankers Inc earnings conference call or presentation Thursday, November 7, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian M. Lee

Scorpio Tankers Inc. - CFO

* Cameron Mackey

Scorpio Tankers Inc. - COO & Director

* Emanuele A. Lauro

Scorpio Tankers Inc. - Founder, Chairman & CEO

* Lars Dencker Nielsen

Scorpio Tankers Inc. - Commercial Director

* Robert L. Bugbee

Scorpio Tankers Inc. - President & Director

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Conference Call Participants

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* Amit Singh Mehrotra

Deutsche Bank AG, Research Division - Director and Senior Research Analyst

* Espen Landmark Fjermestad

Fearnley Securities AS, Research Division - Equity Analyst

* Gregory Robert Lewis

BTIG, LLC, Research Division - MD and Energy & Shipping Analyst

* Jonathan B. Chappell

Evercore ISI Institutional Equities, Research Division - Senior MD

* Kenneth Scott Hoexter

BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials

* Liam Dalton Burke

B. Riley FBR, Inc., Research Division - Analyst

* Omar Mostafa Nokta

Clarksons Platou Securities, Inc., Research Division - Head of Shipping Research & Analyst

* Randall Giveans

Jefferies LLC, Research Division - VP,Senior Analyst & Group Head of Energy Maritime Shipping

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Presentation

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Operator [1]

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Hello, and welcome to the Scorpio Tankers Inc. Third Quarter 2019 Conference Call.

I would now like to turn the call over to Brian Lee, Chief Financial Officer. Please go ahead, sir.

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Brian M. Lee, Scorpio Tankers Inc. - CFO [2]

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Thank you, and thank you, operator. I want to thank everyone for joining us today, and welcome to the Scorpio Tankers 2019 Third Quarter Earnings Conference Call.

On the call with me are Emanuele Lauro, Chief Executive Officer; Robert Bugbee, President; Cameron Mackey, Chief Operating Officer; Lars Dencker Nielsen, Commercial Director; David Morant, Managing Director; James Doyle, Senior Financial Analyst.

Earlier today, we issued our 2019 third quarter earnings press release, which is available on our website. The information discussed on this call is based on the information as of today, November 7, 2019, and may contain forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statement disclosure in the earnings press release that we issued today as well as Scorpio Tankers' SEC filings, which are available on scorpiotankers.com and sec.gov.

Call participants are advised that the audio of this conference call is being broadcast live on the internet and is also being recorded for playback purposes. An archive of the webcast will be made available on the Investor Relations page of our website for approximately 14 days. There are some slides available for this call. They are at scorpiotankers.com on the Investor Relations page under Reports and Presentations.

Just as a reminder, if you have specific modeling questions, you can contact me later and discuss offline. And in our press release, we did have an explanation of variances that give guidance on future depreciation, G&A, charter hire expense and interest expense.

Now I'd like to introduce Emanuele Lauro.

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Emanuele A. Lauro, Scorpio Tankers Inc. - Founder, Chairman & CEO [3]

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Thank you, Brian, and thank you all for attending today's call. In many ways, Q3 marked the calm before the storm. I have rarely felt that a quarterly earnings call referred so much to the past rather than to the present. Even for those of us with many years of experience in this industry, this serves as a timely reminder for the rapidity with which the shipping markets can inflect as the markets in the third quarter bear little resemblance to the strength we anticipate.

Despite the rearview mirror, I'm pleased with the way the company performed in the third quarter. This period also marked an important milestone for our company in that we concluded a transaction with Trafigura to further extend our market leadership position in the product tanker market.

Today, we have announced the technical details of the ATM program we announced 5 weeks ago at the time of the Trafigura transaction announcement. We have been in no rush to use it though. In our view, we now stand in the foothills of a powerful inflection driven by the confluence of seasonal, cyclical and structural changes, substantially, the impact of IMO 2020. We are satisfied to have brought the company to this point with the largest, the most modern, most efficient, scrubber equipped, spot market exposed fleet.

Our financial gearing, operational gearing and market liquidity allows us and our equity holders optimal position for the upswing. It has been a long time coming, longer than we may have expected, but the waiting may now be over. And the best is to come.

With this, I'd like to turn the call to Robert Bugbee.

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Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [4]

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Good morning, and good afternoon to everyone overseas. We are very excited. It's really hard not to be like really very, very bullish. And after 10 years or so of bad market, we've got a lot to look forward to.

Our markets are at very strong levels right now pre our season. As you can see from the slides we sent out, this strength has been slowly developing quarter-over-quarter now for well over 15 months, and so it's pretty well set in. And this has happened before any IMO regulation has happened during a fleet -- a period of fleet growth. Both -- and we'll talk a little bit that -- about what will happen in the future.

MR today are in the low 20s, and our LR2 -- so modern LR2s are fixing on a triangulating basis around $30,000 a day. That's just a fantastic level right before the season starts in a couple of weeks around Thanksgiving. Traditionally, our markets start that strong winter season. So we can be confident that our remaining bookings will be substantially above where they are today.

The fundamental -- and that's not what we've just released, that's above the actual earnings that we are at this point at the moment. We can be -- the fundamentals as the [manifests] continue to improve. I'd just like to highlight that we've got through another quarter with very few orders. Companies and capital markets are unwilling to make or fund speculative new orders. We expect that to continue.

We -- and finally, next year, the fleet will start to age, and it's actually possible that we could have small or 0 effective fleet growth in the clean petroleum product market for the next couple of years. And this optimism is already starting to be reflected in higher values and higher time charter rates.

And on that, I'd just like to pass it over to Lars Dencker.

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Lars Dencker Nielsen, Scorpio Tankers Inc. - Commercial Director [5]

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Thanks, Robert, and good morning, and good afternoon, everybody. During the second quarter earnings call, I made a reference to the front-loaded refinery maintenance season, which was underway in August, reducing the tonnage demand. However, I also remained optimistic at the time that we would start to see a firm market in the back end of the third quarter.

The market certainly came. And in mid-October, MR rates began to approach $20,000 a day and LR2s at $40,000 per day. These are highest rates for the month of October since 2004 to 2008 period. And all of this, despite September and October having the highest level of offline refining capacity in several years.

Taking a step back into the last 2 quarters during the immense refinery turnarounds, we have focused Scorpio on to positioning, the dry-docking and scrubber retrofitting of a substantial number of vessels in preparation of the regulatory changes in January. This has been a substantial operational and logistical undertaking, which in size and number of retrofits have -- has few, if any, comparators in the product tanker segment.

Enter the fourth quarter, and the market volatility and utilization levels increased dramatically. As I mentioned earlier, the rates we experienced for the month of October have not been seen since the 2004 to 2008 period. The [arbs] are now opening, volumes are moving and refining capacity is coming back online. Our forecast for the fourth quarter and 2020 is certainly constructive, and we're seeing a robust and healthy stock to the quarter. We're also now seeing the benefits of IMO 2020. And in November and December, owners will start in a big way, the changeover moving towards consuming compliant fuels. And the freight markets will be reacting positively to these disruptors.

Apart from normal seasonal change, we anticipate a further tightening from the actual fuel changeover as the incremental product demand accelerates in the logistical physical supply preparation during December. Most refineries previously in turnaround are back online in November, which will act as a catalyst for additional product tanker demand.

Amidst these turnarounds and the talk of IMO 2020 preparation, geopolitical tensions and asymmetrical market reactions provide further impetus to the upside. The strong step change and extreme rate volatility experienced beginning of the Q4 has underpinned the future market outlook.

Interestingly, the massive crude freight spike in early October, influenced in part by the Saudi attacks and the sanctioning of the COSCO fleet had 13 LR2s move into the dirty trade, further tightening the supply on the large product carriers.

This emerging reality, along with historically low order book, the downtime of tonnage for scrubber fittings, the strong crude tanker fundamentals, increased tonne to mile demand are very positive market indicators. They provide a solid foundation for more sustainable and firm product tanker market than we are experiencing even today.

Thank you. And operator, we'll now take questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question is from the line of Omar Nokta from Clarksons Platou Securities.

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Omar Mostafa Nokta, Clarksons Platou Securities, Inc., Research Division - Head of Shipping Research & Analyst [2]

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Obviously, some really positive commentary in the release and in the call, thus far. With the Saudi Aramco IPO underway, they've been publicly discussing making investments increasingly more downstream and then refining. To us, this obviously creates what we think is a positive backdrop for the product sector. Just curious, do you guys see it that way? And also do you see opportunities to work with Aramco on any projects in the future? I know if I recall, maybe several years ago, you've done business with them via, I think, either sale of assets or long-term contracts. But just wanted to just double check kind of your thought process on how you're seeing the Aramco discussion.

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Emanuele A. Lauro, Scorpio Tankers Inc. - Founder, Chairman & CEO [3]

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Yes. I think that, first of all, we put Saudi Aramco in the context of the product market and the growth that refined -- or the expected growth and continued growth of refinery capacity for export in the Middle East in total. So we've seen the first stage of the Saudi refinery expansion. And as soon as mid-January, February, we're going to see a pretty huge refinery come up with Kuwait. And all of this is obviously helping us, this change or change in the ratio. In other words, they're starting to look to export more of a higher ratio. The value-added product, as opposed to the crude, is naturally a big benefit to the product market going forward. And we see that as -- and it's not short term. It's long term. It's really part of the investment thesis. As to the specifics, Cam, would you like to add?

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Cameron Mackey, Scorpio Tankers Inc. - COO & Director [4]

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We're not able to disclose or discuss our particular relationship with customers. But what I would say, Omar, is that it stands to reason that exports and trading go hand in hand. So you're not only looking at a dominant regional player, but actually someone who has global aspirations around trading of refined products. And naturally, you'd expect us to be very keen on maintaining and developing a relationship with them.

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Omar Mostafa Nokta, Clarksons Platou Securities, Inc., Research Division - Head of Shipping Research & Analyst [5]

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Got it. Yes. So that clearly, not just the Middle East market, but more of a global trading opportunities.

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Cameron Mackey, Scorpio Tankers Inc. - COO & Director [6]

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Exactly right.

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Omar Mostafa Nokta, Clarksons Platou Securities, Inc., Research Division - Head of Shipping Research & Analyst [7]

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Okay. Just -- and just a follow-up, maybe kind of bigger picture in thinking about how things are today for Scorpio. Obviously, you timed the Trafigura acquisition, we think, very well ahead of the market spike. How do you feel about Scorpio's fleet today? You have scale in the LR2s and the MRs being the biggest player on both of those segments. Do feel like you've reached a good scale overall for the company? And is it about generating cash from here? Or do you think there's a need to expand the scale within the LR1s and the Handys?

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Emanuele A. Lauro, Scorpio Tankers Inc. - Founder, Chairman & CEO [8]

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Well, I think that we've clearly got scale. We've got the scale that's proven in many ways, whether it's the -- our contractual relationships with customers, the actual size or the fact that we could attract a company or trade it with the quality of Trafigura to want to do the deal that they did and structure the deal that they did with us. We have a great Handy fleet. It's an ice class fleet, very modern. That's a small fleet in that area. That itself is a small fleet with almost nothing on order. And we have a significant enough position in that market itself.

The LR1s, we don't feel we have to grow that at all for the sake of growing it because we get all the market information we need through the MRs and the LR2s as sort of a market that's sort of a size range that sort of somewhere in between. We are really excited about the investments we've made in the last 2, 2.5 years to expand the LR2 market because that LR2 market, as markets get stronger, we would expect the highest economy of scale vessel to outperform in earnings to -- and cash flow to value vessel, the rest of the size group, rather like a VLCC does that in crude or Cape does that in dry cargo when those markets are strong. And obviously, we think that the next 3, 4 years are going to be strong market, so we would expect to see LR2s widen over MRs or any other category. And the first signs of that is really in what we've just announced now in terms of guidance. So we're pretty happy with the age profile of the fleet, that's important, and the size of the fleet. So we have no reason to chase anything, do anything. We can focus on cash flow.

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Operator [9]

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Your next question is from the line of Ken Hoexter from Bank of America.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [10]

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Maybe either Lars or Robert, it seems to be a sizable delay on the schedule for dry docking, scrubbers. Ballast water treatment seemed to be a lot pushed out. Maybe talk about the impact we should expect in the near term? I don't know whether it's more vessels out. And so therefore, maybe not as big of a ramp. Or alternatively, maybe even a bigger spike on rates given more capacity is being held up in the yards. Maybe just talk a little bit about from both sides.

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Lars Dencker Nielsen, Scorpio Tankers Inc. - Commercial Director [11]

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Sure. I can take that, Ken. So there's a few things going on. Number one is, as we've said previously, there are some modest delays that we're experiencing, the shipyard themselves, somewhere between 5 and 15 days, which has the off-hire time. We haven't yet experienced, say, more significant delays on any sort of continuous basis. But that adds up over time. Number two is in the early part of our program, we have about 100 days that are due to a typhoon in China in the middle of August with about 10 of our vessels affected. So that in and of itself was a very, very large event with a big disruption associated with it. And then the third and probably most important thing to bear in mind is a vessel isn't pulling into a gas station. You're trying to hit a very specific window. And when you're fixing vessels on the spot market and trying to position them globally to a specific shipyard at a specific time, it's a bit of an art as well as a science. So while we aren't experiencing significant delays in the yard, there is a very complex -- there's a process of optimizing vessel positioning and trades to get them in the right place at the right time. When the market improves or spikes materially, obviously, we rejigger things to make the most of the potential trades for that vessel. So that's why our schedule will continue to be updated and modified depending on both market conditions where specific vessels are and where we're trying to get them.

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Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [12]

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I think I should also add that we've also been able to create flexibility in the actual acquisition of the Trafigura fleet itself because they were already all in the water, all scrubber fitted. So that made them very advantageous in this environment, too.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [13]

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So actually, Robert, that leads me into my next question, which kind of on the Trafigura. You kind of have been focused on solely paying down debt as prices ramped up and using that free cash flow to kind of reset the balance sheet. Maybe kind of, I guess, step back, I don't know whether Emanuele or yourself, just kind of talk about why you decided to kind of change that path, I get the opportunity to scale up, but there's always the opportunity, but you've been so religiously focused. It seems like I'm saying we're going to focus on debt pay down as rates finally step up.

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Emanuele A. Lauro, Scorpio Tankers Inc. - Founder, Chairman & CEO [14]

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Sure, sure, sure. Yes, sure. First of all, they are a construct of the deal. We weren't really increasing the net debt to equity very much in doing that deal because the deal came with a -- an equity component, and we issued further equity in the transaction. So the deal wasn't really a leverage position. And the other side of it, of course, is we instantly took over the SPVs and the cash flow of the vessels. So on a market that was that strong, after a month, ironically -- well, I mean, certainly, after 2 months, we're nearly there. In 2 weeks' time, that actual transaction would have itself been deleveraging because it created -- there was so much equity that came in the transaction combined with the cash flow at high positive cash flow numbers instantly deleveraging. So we didn't see that as a conflict to our stated strategy that we had, and we still have. And the actual deal itself wasn't just to add scale. You're quite right, we didn't need it. This is quite a unique deal in shipping where you have a major, major customer who -- and user of product tankers with incredible information and market knowledge and expertise actually wanting you to do well, not just wanting you to do well, benefiting for us to do well, being a major shareholder of the company. And that, just the information synergy itself and the -- what we can learn and bring that relationship closer and having a customer with great knowledge, validating the business concept that Scorpio Tankers is fantastic.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [15]

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That's helpful. Just one quick one. I mean it is a phenomenal time and finally seeing the rates rebound. Just a quick one because you put out a couple of releases on your option buys. I don't think I can recall in all my years covering transport seeing President putting out option buys. But do you have to do the same thing when you release or when exercising those options put on in a release since I don't think you have to do a 13D? Just want to understand how we should expect over the next few months.

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Emanuele A. Lauro, Scorpio Tankers Inc. - Founder, Chairman & CEO [16]

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I haven't asked yet. I didn't -- I asked the question related to what we had to do to -- that I had to do personally to buy. And whatever the rules are, then I'm sure myself will have to -- will follow the rules. But there are various different things you can do with options. And certainly, it's not something I intend to deal with right now. We might find more, you never know.

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Operator [17]

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Your next question is from the line of Amit Mehrotra from Deutsche Bank.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [18]

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It's Amit Mehrotra, by the way, not Mate. Thank God. So I wanted to start with a couple of financing questions, if it's okay. First, on the $100 million ATM facility, I know you finalized the terms today with respect to the program, but I just wanted -- I just -- I don't think that means that you actually expect to have to use it. So just hoping you could tell us what the intentions are with respect to that $100 million program. And under what circumstances would you actually utilize it?

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Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [19]

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Well, first of all, you're correct. It's a largely administrative thing consistent with the announcement we made on the Trafigura transaction. The company was preparing at that time for a couple of things. First of all, you are putting in the prudent position if we wind back 6, 7 weeks ago as to how long the market would take to recover where it would be, et cetera. Clearly, 6 weeks on from that, the market has performed absolutely to the upside of what we could have expected. And as we've said earlier, it's set for -- the company is set for some very superior cash flows going forward into this winter.

The second aspect is that you would expect us to -- as Brian has indicated in the announcement, that we've announced various financings relating to scrubbers. We've also been very consistent in the last 3 conference calls saying that as we take down the debt at some point, we would want to refinance some of the more expensive debt in the company, whether it's the leases, for example, on some of those. And you would expect us to be negotiating or discussing various credit lines with lenders to do that. And I think it's fair to say that lender these days, the best way you can have ticks in a lending package is not just the basic P&L or balance sheet of the company, but the other boxes you're ticking are the quality of the fleet, which is a great tick; the liquidity. And this thing itself has a very good box that can be ticked, and few companies can tick this box, which is, in the bank's minds, great access to the capital markets. And putting in the ATM is just the further ticking of that box.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [20]

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Right. Right. So I guess it's safe to say that when your TCE rates are in the high teens or low 20s or higher, maybe it's probably not going to be a source of capital for you.

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Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [21]

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I think the best thing I can do is to reiterate what Emanuele said was, like, we haven't been in a rush to use it. And you're correct, the company is creating positive cash flow and has a very, very positive outlook to the share price at the moment, as do the executive -- as what the previous caller brought up.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [22]

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Okay. Let me just ask a couple of quick market questions, if I could. The time charter equivalent rate in the fourth quarter was, I think, a little bit lower than what I would have expected. Now I know it's going to be impacted by positioning and which vessels are open for trading. And you do still have the majority of days left to book for the fourth quarter. So I'm just trying to understand, do you think when it's all said and done, the fourth quarter TCE is going to be significantly higher than the $19,000-plus that you guys disclosed today? I'm just -- I'm trying to think about what the impact of the fourth quarter TCE could be given what Emanuele said in terms of the release being backward looking relative to what the market [has been today]?

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Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [23]

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Sure, sure. And I think, also, it's backward looking during that period. I mean it's very hard in these sort of white statistics. But also included was a very -- for example, in the LR2, there's a very, very weak period related to when you had the Saudi -- beginning with the Saudi bombing of their oil installation. You had exports shut down. You had a very, very weak period at that point in the market. So as we go through, we're already stating this present fixtures more like 20 and 30. So they're already above what we have guided. And we stated right at the beginning, we would expect the markets to firm substantially in a couple of weeks' time as we -- if not before, as we turn towards our traditional winter season and you get that real full biting of what's happening with IMO in combination. So yes, we would expect to not only be above the 17 and whatever it was, the 26, but above the 20 and the 30.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [24]

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Great. Okay. That's -- yes, that's helpful. One very last quick one for me, if I could. Maybe this one is for Lars, I don't know. But one of the benefits to the product tanker market from what happened to the crude tanker market not that long ago was that you had some LR2s that were switching from trading clean to trading dirty. And so could you just help us think about how much capacity -- obviously, it's hard to go back. And so how much capacity do you think has maybe structurally come out of the LR2 market because of that? And what are the -- are there any other lingering effect from the surge and maybe uplift in the crude tanker market that we can read through to the product market?

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Emanuele A. Lauro, Scorpio Tankers Inc. - Founder, Chairman & CEO [25]

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Lars?

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Lars Dencker Nielsen, Scorpio Tankers Inc. - Commercial Director [26]

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Yes. Thanks, Amit. I mean, as I mentioned, in September and October, I mean just within the last 6, 7 weeks, 13 LR2s moved from the clean to the dirty. And as you know, the difficulty of switching back is quite profound. In terms of the tightening on the LR2 fleet, the modern LR2 fleet is not a very big fleet. I think we're trading around 210 vessels or something like that. So it's actually quite a substantial number of vessels that left the product tanker pool on the LR2 market. There's a little bit of tint to what happened also like about a year ago when we had the crude spike in the fourth quarter, where suddenly the run-up on the crude, I mean, it could be felt quite quickly into the product market and it stayed longer in the product market than it did in the crude market. And I anticipate that where we saw this as a more of a seasonal move last year, this is a lot more significant. There's various reasons why people move LR2s into crude. One is because of the inefficiency of that particular unit because of Asia being non-ECO, and there could be other elements to that. It could also be that the vessels are controlled by some of the end users that can see that the crude market is so strong that they simply need to move the vessels into the other markets. Irrespective of it's one or the other, it's extremely positive for the LR2 market as a whole, and we can see that tightening quite considerably.

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Emanuele A. Lauro, Scorpio Tankers Inc. - Founder, Chairman & CEO [27]

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I'd just like to add before we go to the next question that the supply thing in general is going to start really mattering on the product side for the first time. And that you just don't have a low -- it's not just the low order book. It's that -- it's not just that you had switching of products from clean into dirty. Is that actually starting next year there are a number of product tanker ships that turn -- clean petroleum ships that turn 15 years old, which starts to make it much harder to trade in the clean petroleum market. And that hasn't shown up yet because it doesn't matter. And traditionally, in dry cargo or crude, 15-year-old ships don't matter, right? But here, it matters, and it's going to matter a lot.

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Operator [28]

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Next question is from the line of Randy Giveans from Jefferies.

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Randall Giveans, Jefferies LLC, Research Division - VP,Senior Analyst & Group Head of Energy Maritime Shipping [29]

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Couple questions for me. One, you're starting to see some IMO prep happening, more flows of MGO, VLSFO. So I guess 2-part question. One, have you all seen more -- moving more MGO for blending purposes? And then secondly, once it's blended into the VLSFO, is that moved on your refined product tankers or those kind of dirty cargoes?

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Emanuele A. Lauro, Scorpio Tankers Inc. - Founder, Chairman & CEO [30]

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I can try this, Randy. Yes, we've seen a lot of distillate flows and gas oil flows recently in anticipation of the 2020 implementation. So the answer to your first question is yes. And I can elaborate or Lars can elaborate if you wish. The second part of your question is yes, once it's blended, then it turns to sort of a conventional bunker distribution vessels that goes on with -- usually in older barge or dirty vessel.

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Randall Giveans, Jefferies LLC, Research Division - VP,Senior Analyst & Group Head of Energy Maritime Shipping [31]

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All right. And then, I guess, following up on the earlier question about the ATM. You also have $122 million in share repurchase authorization. So kind of how do you balance those 2? Obviously, your share price now is, I don't know, $32, well below NAV. In our estimate, $36. Feel free to correct me, if you want, Robert, on that. So with that, an attractive outlook for rates, kind of how do you implement the ATM versus share repurchases if the share price stays at, let's say, $34, $35 for the next 2 months?

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Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [32]

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We might do neither. Now as we've been doing neither for the last 3 quarters, I mean it's a -- we made it fairly clear, I think, that we are going to focus on a delayed gratification to improve the quality of the investment prospect. We have been very consistent saying that we -- until we get to the first quarter earnings cycle or the Board meetings around there, we're not even going to consider things like increases of dividends, et cetera, et cetera, or other ways such as buying stock, et cetera, et cetera, because we want to take the leverage of the company down and improve the investment.

We also believe that we're going to make substantial cash over the next 3, 4 months. That's great. And we will then be playing from where we want to play, which is a position of overwhelming strength. Then we can -- we're into a position where we can really do what we want and pull any levers that we need to, to create value for all of us shareholders here. And obviously, we stand by with that if there's some crazy aberration that happens in the market along the way, something that we've never been afraid in the past of going in and creating some form of order of the buyback that way. So we put in the ATM, as we described, as part of a ticking of boxes as a strategy, et cetera. Emanuele and I have said, and we haven't -- we didn't rush to put it in. We could have put that thing in 6, 7 weeks ago. It's just a process of doing it. So I think you can do neither. You can neither buy back stock and you could neither use the ATM for a few months.

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Operator [33]

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Next question is from the line of Jonathan Chappell from Evercore ISI.

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Jonathan B. Chappell, Evercore ISI Institutional Equities, Research Division - Senior MD [34]

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I was going to start with Lars. But Robert, I was going to ask about capital return and then you just said in a few quarters' time with the cash flow that you think you're going to generate, you can do what you want. What is the strategic plan for 6 to 9 months down the road? What is it that you aspire to achieve? And should we also read that, though, to mean that even if we have a really robust winter 4Q and Q1 that any meaningful capital return, whether it be dividends or whatnot, it's probably 6 to 9 months in the future as you kind of, I don't know, maybe get the balance sheet in order? How should we think about that timing?

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Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [35]

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First of all, we'll restate this that we're not going to think about to -- we will take the cash in first and take that position. I don't think that a lot can happen. I mean even at the present run rate, 30 and 20, the company is creating -- I can't remember exactly where it is, but it's got to be something in the region of $50 million, $60 million of cash a month. So you can do a lot of damage just of these positions. And if the market goes up $10,000 from here in those positions then -- which I would take as a base case, then that's something in the region of an additional $50 -- $50 million a month. And if you actually get a month or 2 or 3 where you have some really good earnings, if you start getting those LR2s to -- back up into the 50s, 60s and 70s, by the time you get to March, you can have a huge amount of capital. So that's why it's so important to delay this type of the -- there would be other -- the first part of your answer, what are we going to do, when are we exactly going to do it, until we ourselves can see better the curve of where we are.

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Jonathan B. Chappell, Evercore ISI Institutional Equities, Research Division - Senior MD [36]

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Okay. That makes sense. And then, Lars, tying a couple of comments earlier together with maybe some bigger macro headlines that we've seen recently. I mean you guys have said that the rates are setting right now higher than what you booked so far, you're expecting November and December to be stronger. I'm sure there's a seasonal element to that. But OPEC had said earlier this week that they didn't think IMO 2020 would be as meaningful as they once thought. I think people read that to me. This is going to come and go with no impact on the market, which, in our view, was a misinterpretation. Just because the refiners are prepared doesn't necessarily mean there's going to be disruption to the shipping supply and demand dynamics. So long way of introducing, can you just tell us what you've seen so far, both from vessel supply being removed and demand dynamic, whether it be new trading routes, extended trading routes, ships being hired in advance? And where we kind of are -- I hate to use a baseball analogy, well, you're over there, but where we kind of are in the innings of the IMO impact? Are we kind of middle of the game here? Are we still just kind of at the top, the second top or the third inning?

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Lars Dencker Nielsen, Scorpio Tankers Inc. - Commercial Director [37]

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Okay. I mean let's start with the last part of your question. It is quite clear to us that we can see a lot of shipowners are now starting to get their bunker tanks cleaning up for the IMO 2020. There is disruptions already now in terms of availability of different types of products when you want to go and have bunkers on -- in the prompt without contracts. So there's no doubt that we see, during the changeover, that there will be disruptors in play.

We also see that there is a huge amount of volumes moving in different parts of the world in terms of the refining capacity coming on stream, huge amount of distillate moving West. The big discussion, of course, is the pricing structure between high sulfur and low sulfur fuel oils, which is also now starting to blow out. There was an Argus article about that today, which is of great interest, whereas now [I'd say that] twice, but was anticipated. So if you just look at the forward curves here, Jon, then you can see that the market is pricing in that particular kind of difference. So people can do the high-sulfur scrubber fitted vessel will benefit in the (inaudible) and past 2020 January, and we see that right away.

I think the other part of your question was do you see kind of demand increasing in terms of volumes and so on. Well, to be honest, it is quite interesting to see that as the refineries have come back on stream, the U.S. Gulf is starting to pop. North Asia and the Transpacific routes are popping as well. There have been a huge amount of volumes coming out of the AG and the Red Sea moving all over the place on the larger units, where, of course, on the back of the extreme volatility after the crude spike, they suddenly were -- let's say, taking one breather and say, "Well, we have never seen a market increase. 200 world-scale points on an LR2 within 10 days." Now I've been in the business for 25 years or even more, unfortunately maybe, and I have not seen an LR2 market move 200 points in such a short space of time. It tells you few different things as far as I'm concerned. One is that the capacity utilization in the different fleet segments has come to a place where these type of events, some are smaller and that could be seasonal as we talk about or they can also be the different ones that we talked about previously, they have a much greater impact in the market to the upside. And this is what we're experiencing right now. The questions that we see from our customers, the type of voyages that we're doing on our vessels across all 4 segments or, primarily, the [minimized] LR1s and the LR2s in particular, we're seeing wonderful new types of businesses that are taking place. This is doing business out of the U.S. Gulf now with NAFTA, with the [op open], with the bigger units going to Japan through the canal. We're doing big units into Brazil. We're doing big units into West Africa. We're reloading out of West Africa. We're doing stuff where the ton mile is interesting, but also the efficiency by which you could trade the vessel with say a higher, let's say, ratio of laden to ballast. So these things are all playing in, and I think we're in for a very interesting time.

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Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [38]

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And Jon, I just -- with regard to -- I'm over here in the States, so I understand this innings thing. I would say that we're literally at the -- what you would get -- the bottom on the first. And the reason why is because almost 0 of our nonscrubber fitted vessels, either in Scorpio Tankers or Scorpio Bulkers or our pool ships. So we got like an awful lot of ships involved, if you total those, have any -- have very low sulfur fuel yet on them, except to the extent that there's required for the shorter ECA tradings. So you just -- so you haven't really -- that's where it is. You haven't even completed the first innings yet, as they're getting the stuff onto the ships.

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Operator [39]

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Your next question is from the line of Greg Lewis from BTIG.

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Gregory Robert Lewis, BTIG, LLC, Research Division - MD and Energy & Shipping Analyst [40]

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Brian, just kind of looking for some more color around some of Robert's comments earlier about the deleveraging. As you look out -- realizing that it's a diverse capital structure, but as you look out over 2020 and you think about maybe doing some of the refinancings, knowing -- assuming that we were bringing or swapping more expensive debt for cheaper debt, is there any way to quantify or think about the potential interest expense savings from maybe some of the refinancings that we might see over the next, I don't know, year?

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Brian M. Lee, Scorpio Tankers Inc. - CFO [41]

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Yes. So we have about 84% of our debt right now is floating. So as you have pointed out, there is potential savings as interest rate will go down, and now margin will go down when we refinance. But as you say, it's 2020. So first, as Robert said, we're going to wait for the cash to come in, right, because, as you know, rates just increased a few weeks ago. And some of our ships are still on some voyages at lower rates, that's why the rates that we put in there, some of you are not -- thought it would be a little bit higher. But voyages just don't finish overnight and start again with -- at the new higher rates. For example, the LR2s and the LR1s had an average of about 47 days on a voyage in Q3. And the MRs, about 34 days and 18 for the Handys. So we get the cash in at that point. And second, as time goes along, as you have seen out there, market values go up, so that should help us -- that makes financing easier. And then third, we have to talk with our current lenders and our potential lenders, which we are engaging and getting offers here. But it's -- I think, in 2020, we will do that. And the savings will come along, as you pointed out, with the margins going down.

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Emanuele A. Lauro, Scorpio Tankers Inc. - Founder, Chairman & CEO [42]

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And obviously, it would take out the low-hanging fruit trade away, which is the baby bond.

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Gregory Robert Lewis, BTIG, LLC, Research Division - MD and Energy & Shipping Analyst [43]

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Okay. Great. And then just one more for me, shifting gears. It was definitely more highlighted in the crude market around some Chinese vessels being sanctioned. Did those sanctions have any type -- what type of impact, if any, that any Chinese product tanker vessels just being discriminated against have on the market? And is that something that is still kind of impacting the market as we sit here today?

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Cameron Mackey, Scorpio Tankers Inc. - COO & Director [44]

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Greg, it's Cam. The COSCO issue, I wouldn't describe as material to the product market. Our -- what we're seeing is -- more has to do with fundamentals than that, which really put us in the short term and not very large impact. There is some impact around our customers being more responsive and sensitive to sanction. So there is some impact on the Venezuelan sanctions and the customer response to that. But again, I'd say, by and large, what we're really seeing has to do with IMO 2020 and, say, positive fundamentals than any short-term catalyst like that. There may be some impact on volatility. But over the medium and longer term, it's not really going to have a huge consequence for us.

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Operator [45]

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Your next question is from the line of Espen Landmark from Fearnley.

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Espen Landmark Fjermestad, Fearnley Securities AS, Research Division - Equity Analyst [46]

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It's been a long call, so I'll try to be brief. Just in terms of having a lot of ships in the Pacific in terms of the relative PC performance in 4Q, are you able to quantify how much of an impact that had on your bookings versus peers and maybe if there's a similar amount of off-hire days in the first half of 2020, whether that kind of impact will continue?

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Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [47]

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Well, the off-hire time, we will look and we will review. So we'll look at it in relative to the positions. And obviously, that's a toss up. Maybe you delay some ships into 2Q if you're getting great fixtures.

And as to the peers, we've -- I mean it's not really -- we don't really have -- the closest peer we have in the LR2 is Frontline. And otherwise, I don't think there are really many companies who hold any ships than that. And the MRs are -- if you take the dry docks, the positionings, all -- this is all pretty much of a muchness between all the different players for the moment that have reported.

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Espen Landmark Fjermestad, Fearnley Securities AS, Research Division - Equity Analyst [48]

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All right. And maybe rephrase for your LRs, for instance. I mean if you're able to trade them freely, would you have 10% better bookings for 4Q? Or wouldn't that matter?

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Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [49]

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It's hard -- It's really hard to do what its [analysis] as if we didn't have to position vessels for dry docking or scrubbers. So unfortunately, we don't have a very crisp answer for you there. Just to say that, yes, of course, they'd be higher because you're absolutely right. The whole business model of being a spot player with high-quality assets is delivering optionality to your customers. So naturally, as you limit that optionality, you're going to take some discount on your earnings. How much, it's really difficult for us to say.

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Espen Landmark Fjermestad, Fearnley Securities AS, Research Division - Equity Analyst [50]

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All right. Fair enough. And then finally, in November, and I appreciate all your market comments, it still feels like we have a lot of unanswered questions as to next year would pan out. So on a yes or no basis, are you guys surprised that we aren't smarter than all this yet, seeing -- I guess we've been speaking about this now since 2015, 2016?

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Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [51]

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Sorry, I didn't understand the question.

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Espen Landmark Fjermestad, Fearnley Securities AS, Research Division - Equity Analyst [52]

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I guess just shortly, are you guys surprised that we don't have the full answers as to how next year will pan out yet, seeing we're now in November?

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Unidentified Company Representative, [53]

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We're in shipping. We would never have the full answers as to how our following year would pan out yet. I mean what we have got is some incredibly strong levels without yet having any IMO effect. It's literally -- as I said, it's just in the first innings. It's just come in the last week where MRs are starting to move the extra capacity around and doing it. I think that we have got some terrific answers in this last year without IMO. Despite newbuildings being delivered in the last 2 years, the rates of every single quarter, as is on our slides, are significantly better this year than the previous 2 years. And that, therefore, gives you -- doesn't give you the answers for 2020, but it gives you a great degree of confidence that 2020 is set up to be a great year. In -- and that is supported also by the behavior of your customers and their willingness to -- and their desire to continue to go along the market through time charters. It wouldn't be fun if we actually all knew what 2020 was really going to be.

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Operator [54]

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Your next question is from the line of Liam Burke from B. Riley FBR.

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Liam Dalton Burke, B. Riley FBR, Inc., Research Division - Analyst [55]

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Robert, I wanted to go back and talk about the demand side. Again, you've termed, as we got closer to the end of the year, more and more chaos is coming into the market. As we get closer, are you looking at more or less chaos? Or is there any more orderliness in the market for you?

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Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [56]

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No. I think we'll continue to have some chaos, right? We've had chaos. We've had massive spikes. We've had weak markets just preceding that with things that we didn't even expect could be chaos, like oil installations in Saudi Arabia getting blown up. So there's no reason to think that this chaos aspect isn't going to continue. And as Lars was pointing out, the great thing now is that most of the things that -- with the market tight, chaos can lead to positive rate environment positions. The next thing that could create more chaos could be if we have actually a proper Northern Hemisphere winter, which we haven't had one of those for a few years either. That could get interesting.

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Operator [57]

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Your next question is from Amit Mehrotra from Deutsche Bank.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [58]

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I just wanted to follow up on Brian's comment about the voyage days on the different vessel classes. I thought that was interesting and helpful. So one, I guess, Lars, maybe can you just talk to -- has the voyage -- the average voyage days for the LR2 ones and MRs evolved or changed a lot in the last 6 months? Or do you expect them to change over the next 6 months? And then I think that also helps us understand that any given time, how much -- what percentage of your fleet is actually open for fixtures. And one of the problems we have looking from the outside is translating a big spike in rate to your TCEs. And so is it safe to say that 10% or 15% of your fleet is available at any given time? Is that the right number? So if you could just address those 2 points.

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Lars Dencker Nielsen, Scorpio Tankers Inc. - Commercial Director [59]

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Let me start at the voyage duration part first. I mean the LR2 business is, by definition, because of the size, is a long-haul business, right? And the voyage durations on the different types of businesses that these type of vessels do has been pretty much the same. What we have seen that is different is that there are new kind of voyages that are coming in, which also tend to be long haul. It's very seldom that we see LR2s doing short-haul business, apart from when [suddenly] that there is a big difference between a MR Handy to an LR2 price point in the Baltic, so they can take and substitute 3 Handys to 1 LR2, and they will suddenly do a short haul. And that's just a time fill. It tends to be very long haul business.

To the second part of your question, in terms of percentages available for business, we operate, including with the ships that we operate in the pools, over 180 vessels. So we have, as a matter, of course, a vessel in any loading area during any week, any part of the world, which is part of our kind of offer to our clients that they can pretty much choose any segment they want, and we will have a ship that is of high quality that can provide in their logistical solution. So the trick really is to make sure that we position the ships in the right areas at the right time where we see the markets move and where the markets kind of change in terms of the disruptions between East and West and North and South and so on. We also tend sometimes to make sure that we understand where we are on the curve to go short or long where it's possible for us. So to put a percentage on in terms of what is available at any given time is very difficult. It's a very fluid type of business and it also changes depending on what segment and what area we're trading in.

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Operator [60]

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There are no further questions. I turn the call back over to the presenters.

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Brian M. Lee, Scorpio Tankers Inc. - CFO [61]

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Okay. Thank you, everyone, for joining us today, and we look forward to speaking to you soon.

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Operator [62]

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Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and have a wonderful day. You may all disconnect.