U.S. Markets closed

Edited Transcript of STNG earnings conference call or presentation 31-Jul-18 12:00pm GMT

Q2 2018 Scorpio Tankers Inc Earnings Call

Jul 31, 2018 (Thomson StreetEvents) -- Edited Transcript of Scorpio Tankers Inc earnings conference call or presentation Tuesday, July 31, 2018 at 12:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Brian M. Lee

Scorpio Tankers Inc. - CFO

* Cameron L. MacKey

Scorpio Tankers Inc. - COO & Director

* Emanuele A. Lauro

Scorpio Tankers Inc. - Founder, Chairman & CEO

* Robert L. Bugbee

Scorpio Tankers Inc. - President & Director

================================================================================

Conference Call Participants

================================================================================

* Amit Singh Mehrotra

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

* Fotis Giannakoulis

Morgan Stanley, Research Division - VP, Research

* 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

* Magnus Sven Fyhr

Seaport Global Securities LLC, Research Division - MD & Senior Shipping Analyst

* Noah Robert Parquette

JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst

* Randall Giveans

Jefferies LLC, Research Division - Equity Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Hello, and welcome to the Scorpio Tankers, Inc. Second Quarter 2018 Conference Call. I would now like to turn the call over to Brian Lee, Chief Financial Officer. Please go ahead, sir.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, and thank you, everyone, for joining us today. On the call with me are Emanuele Lauro, our Chief Executive Officer; Robert Bugbee, President; Cameron MacKey, Chief Operating Officer; and James Doyle, Senior Financial Analyst.

The information discussed on this call is based on information as of today, July 31, 2018, 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 statements disclosure in the earnings press release that we issued today as well as Scorpio Tankers' SEC filings, which are available at scorpiotankers.com and sec.gov.

Call participants are advised that the audio of this conference 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.

If you have any specific financial modeling questions, you can contact me later and discuss off-line.

Now I'd like to introduce Emanuele Lauro.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Brian. Welcome to all, and thank you for being with us today. Our results this morning were testament to the ongoing difficult markets in product tankers.

The market remains soft. All that I can say is that, in similarity with many of you, we remain focused on the significant secular shift that the IMO 2020 legislations will provide. Much remains unclear. However, this is undeniably an exciting backdrop for the world's largest provider of seaborne ton mile to refined product markets.

And in the meantime, our chartering group continues to work hard with the fleet to deliver value with our modern tonnage and spot market exposure. This quarter has also seen important developments on the financing side. We discussed this in depth at our last quarterly earnings call. And we have delivered on new bank and sale lease debt financings. This has greatly improved our liquidity and gives us confidence we can weather the storm.

As well as positive support from important long-term banking partners, we have welcomed new lenders and sale and leaseback providers to our capital structure. We were also able to swap a significant portion of our 2019 convertible bond into a 2022 maturity through a voluntary exchange offer.

Taken together, these measures have raised over $0.5 billion in liquidity. Extrapolating the current market softness, this provides enough of cushion of liquidity. Put differently as management, we are most excited about the evolution of the market towards January 2020. The financing initiatives undertaken in this quarter mean that we know we will get there.

My remarks are over. Operator, we can turn the call to questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Jon Chappell of Evercore.

--------------------------------------------------------------------------------

Jonathan B. Chappell, Evercore ISI Institutional Equities, Research Division - Senior MD [2]

--------------------------------------------------------------------------------

Brian, first question for you. You dropped $320 million in new liquidity as stated for August $334 million, which all favors the soft -- a fair amount of it, 19 converts, so is $320 million there is done? Are you still able to the $334 million? Or I guess, you've been going further given the success of what you've been able to achieve in the last 3 months, is it possible that you will even better -- exceed the $334 million?

--------------------------------------------------------------------------------

Brian M. Lee, Scorpio Tankers Inc. - CFO [3]

--------------------------------------------------------------------------------

All right. Thanks, Jon. Your line is not very clear, but I know you're asking about the difference between the actual amount we raised so far and the amount we said before. So $334 million versus the $319 million, $320 million that we disclosed today. No, we're not done. We have other things out there. Liquidity is very important to us, and we have other means to going forward with that.

--------------------------------------------------------------------------------

Jonathan B. Chappell, Evercore ISI Institutional Equities, Research Division - Senior MD [4]

--------------------------------------------------------------------------------

Okay. I'll try to speak louder. I know liquidity is important and that was the first part of this next question. You've done a heck of a lot in the last 3 months instead of the swaps given the better runway for the next 18 to 24 months. But you do have that securities you purchased now outstanding. Have you thought about buying back some of the 19 converts or 300 given the volatility in the stock? Is there stock buyback on the table right now? Or is it just building the balance?

--------------------------------------------------------------------------------

Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [5]

--------------------------------------------------------------------------------

We focused, obviously, on building the balance sheet. And that hasn't -- that's -- it's only -- stock, obviously, is pretty volatile. And it's only really been in the last 2, 3 weeks that the 19s have come down. Prior to that, they really -- they were pretty high, too close to part B remotely interesting. But obviously, we will take that as we go. That's more mathematical calculation now. As especially, the money comes in and the liquidity increases because, obviously, we know that's a commitment going forward anyway. But it's achieved. The borrowing isn't -- there isn't really an intention every day to buy that. So if I will -- so I wouldn't look for the company to be propping it up for offering you a sweet way out.

--------------------------------------------------------------------------------

Jonathan B. Chappell, Evercore ISI Institutional Equities, Research Division - Senior MD [6]

--------------------------------------------------------------------------------

No. I mean, I wouldn't say it was propping it up. It's just an NAV opportunity, but I think it's a point. Final question, just on the chartering in. I mean, I get an annual following the regulatory 2020 opportunity, we're getting very much closer to that. But chartering in a hour or 2 for 6 months, your products sort of the 2020 opportunity, and it's got a raise that's quite frankly hasn't been achieved for some time in the spot market. So can you just explain a little bit of the chartering strategy? I know it's only one ship. You're still (inaudible)?

--------------------------------------------------------------------------------

Emanuele A. Lauro, Scorpio Tankers Inc. - Founder, Chairman & CEO [7]

--------------------------------------------------------------------------------

I'll take that Jon, and then my colleagues can chip in as they please. The ship got delivered to us in a favorable position. The rate is 14 actually for the second half of the year looked to be below the expectation that we had. And the ship being in a favorable position, we actually had the first prompt over the vessel, particularly has made money. So we look at opportunities. And then, of course, we cannot be as detailed as we would like to be in terms of showing that the vessel was a good take for the period. But -- because trading in pools, you have to good and the bad. And sometimes, you diluted the good. But this is contributed to the average of the fleet. And looking at results, actually, our LR2 results has been quite promising given the market situations and benchmarking with the -- with other LR2 operators.

--------------------------------------------------------------------------------

Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [8]

--------------------------------------------------------------------------------

Yes, I would also add to that, that the -- you're seeing averages that were set with dominantly fixtures that were made in June and early July. And they don't necessarily represent what is out there in the LR2 market at the moment. I know you still don't have a sufficiently good enough index to see that, but we agree with -- agree totally with Emanuele on that.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

Our next question comes from Noah Parquette of JPMorgan.

--------------------------------------------------------------------------------

Noah Robert Parquette, JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst [10]

--------------------------------------------------------------------------------

I want to ask about a year ago, call it, we were looking at this year as kind of an improving environment for product tankers given the low fleet growth. That's been, obviously, a little bit disappointing. Can you talk about if you expect the market to firm before 2020? And what did we potentially get wrong? And what's dragging down the rates right now?

--------------------------------------------------------------------------------

Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [11]

--------------------------------------------------------------------------------

Well, I think it's not a question that potentially you got wrong. I mean, I think we -- all of us did not expect. I don't think this demand side deepening. This constant deepening in terms of the inventory draws and then you had -- it's difficult to say, maybe you had things flushed in this last 6, 7 weeks because you had such volatility, especially around the Atlantic that the Asian markets suddenly started to -- not suddenly, but it started to improve as you would expect. And the Asian market is -- east of Suez is much stronger than the West. That sort of shows really the industrial growth, the demand that has to come all the time and that's happening. And the West is, we know it has been still under pressure with tremendous volatility and local differences, whether it's Brazil strikes or whether it's simply the pricing volatility around the oil price and products itself in what is a seasonal period and traders don't seem to be wanting to get ahead and take risks with headlines out there changing every day regarding economic -- the general picture of economics related to various government potential policies or not. So I think as we turn towards winter, the market will have to start to adjust -- they can't carry on tracking the inventory growth forever. As I said, the Asia is already positive. As you turn to winter, you will have to do something ahead of 2020. You're going to have to get some of this ultra-low sulfur in place. That dislocation is going to help. It's going to be a boon from 2020 tremendously to the demand for products. And it's reasonable to think that a lot of -- you're going to have move product around the world increasingly into '20 to build the stores and build the access without low sulfur when January 1 comes around. And that is coming on low inventories. So it's very, very reasonable to think that the market is ready, poised for recovery, but it's all -- it's like never dark as before the dawn. We may have just seen that. We've seen Asia start to click up. We've seen the big ships starting to improve on counter-seasonal basis. We've seen a related markets. The LPG market has being getting stronger, as -- again, in a counter-seasonal move. That's a reasonable sign. The VLCC market is at least stabilized out. So that's what I would say at the moment.

--------------------------------------------------------------------------------

Noah Robert Parquette, JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst [12]

--------------------------------------------------------------------------------

Okay. And then I just want to ask about the ballast water order, last week. Just wondering, I mean, is that those 55 ships, is that complete. Will your fleet be total recovered by then? And why was -- what was the decision to become a minority investor?

--------------------------------------------------------------------------------

Cameron L. MacKey, Scorpio Tankers Inc. - COO & Director [13]

--------------------------------------------------------------------------------

The answer to your first question is yes that will complete our commitment to outset our fleet. The second part of your question, the priority for us is to procure a large order on time, on budget with low risk of logistical bottlenecks. The way we felt we could do that given our scale is to be aligned with our supplier. And so really it came about is the best way to ensure the execution of our order through alignment of interest. Notwithstanding it, I'd just add that we're big believers in their product, in their technology. So ballast water is still as a number of players, number of technologies, which are more or less effective than this was the right choice for us.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

Our next question comes from Amit Mehrotra of Deutsche Bank.

--------------------------------------------------------------------------------

Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [15]

--------------------------------------------------------------------------------

So first one is, obviously, there's been a lot of moving parts with respect to the capital structure. I just want to understand when you talk about ample cushion -- excuse me, for liquidity, I understand it's obviously a delicate balance in terms of extending the liquidity runway and as well not diluting existing shareholders at current valuations, which were obviously quite low. But it seems like the equity value of the company is pricing in the need of some form of equity offering. And I just wanted to get your thoughts. It doesn't seem, obviously, given where your breakeven levels are and your liquidity is today that, that is something you would entertain at these prices, but I just wanted to understand your thinking in terms of how you think about that vis-à-vis the runway, where the market is today? And what point would you entertain a straight equity offering?

--------------------------------------------------------------------------------

Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [16]

--------------------------------------------------------------------------------

Well, I think that you've seen now, 2 quarters consistent. As you pointed out, the consistent effort to find ways to get ourselves to create a bridge to an improving market. Without raising equity, I mean, we started up back in March, April saying, look, we would be raising $330 million of liquidity, the market responded very favorably thinking that was great. We then started swapping our bonds, I think $180 million bonds. In addition to that, because we continue to see the market weakness, and we wanted to, as Brian said, just take more liquidity, since that time, as we've said to the previous caller, we didn't expect this June period to be in -- and July period to be quite so slow. We maintained the liquidity position there, balance that out by swapping out another $20 million worth of bonds. Brian has indicated that what you see today is not necessarily where we're going to stop. So the company actions strongly supporting these words and wish to avoid having to dilute shareholders at these distressed prices. And -- right?

--------------------------------------------------------------------------------

Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [17]

--------------------------------------------------------------------------------

I'm sorry to cut you off, Robert. We...

--------------------------------------------------------------------------------

Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [18]

--------------------------------------------------------------------------------

No. It's okay, it's okay. It's fine.

--------------------------------------------------------------------------------

Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [19]

--------------------------------------------------------------------------------

Okay. So I just wanted to get into specific details here because we are talking about a big fleet and a relatively large breakeven and some cash breakeven. So I just want to make sure that all our numbers are correct. So if I look at your cash, your first breakeven is, Brian is, like $16,100 kind of the right all-in cash breakeven number. I guess you have $40 million a quarter over the next couple of quarters at least of debt and amortization. Is that the right bogey in terms of how we should gauge the runway relative to the costs on a daily basis?

--------------------------------------------------------------------------------

Brian M. Lee, Scorpio Tankers Inc. - CFO [20]

--------------------------------------------------------------------------------

Amit, yes, that's -- you're right in there -- the area there, yes. Of course, the additional $300 million of liquidity is borrowed money. You have to pay that back. So just alone that's $600 a day that you have to pay back. So it's the price you pay for borrowing, so it's a nice insurance policy though.

--------------------------------------------------------------------------------

Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [21]

--------------------------------------------------------------------------------

Right. Okay. And then, but the amortization, I guess, really starts to step up in the second quarter of 2019 related to the unsecured bonds. And so I would imagine that, typically, the market does seasonally, notice like this Thanksgiving period that's really, hopefully, an inflection point in the market. But if the market stays weak for the next -- through kind of first quarter of '19 or even earlier than that, is that kind of the bogey that we need to think about from a timing standpoint before you guys make more of a decision on equity?

--------------------------------------------------------------------------------

Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [22]

--------------------------------------------------------------------------------

You could think about way you want where it's a different dynamic. Right? I mean, Brian has said he isn't stopping where he is stopping. So it is the dynamic structure and that we were able to raise enough liquidity to in effect get ahead of the mathematical situation. So we haven't -- we're stronger today despite the weakness of the second and the third quarters than we were at the end of the first quarter. We may well be stronger at the end of this quarter than we were. And we are -- than we are right now on this conference call. And we may be stronger, again, at the end of December 31 than we are now. So the object, we'll see the -- this 2020 position. And as I said to the previous caller, we also think that the market will -- there's no industry better than the product market that will gain in terms of demand from 2020 that we see not just 2020, but we see that you have to move cargo around even prior to that position in the '19 position. So you can well have a weak third quarter. You could have a weak fourth quarter and still the balance sheet itself in terms of liquidity may even be stronger than where it is today.

--------------------------------------------------------------------------------

Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [23]

--------------------------------------------------------------------------------

Right. No that make sense. Yes. Now I agree with that. One last one for me, if I could. And Brian, I just -- a little bit of a mechanical question. I guess, when you're doing all these sale leasebacks when the banks look at the leverage or the value alone ratio for the fleets, do they include the obligations associated with that leases? Or is that separated out? I just don't know how it works mechanically.

--------------------------------------------------------------------------------

Brian M. Lee, Scorpio Tankers Inc. - CFO [24]

--------------------------------------------------------------------------------

No. The debt is included in a leverage debt-to-cap ratio.

--------------------------------------------------------------------------------

Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [25]

--------------------------------------------------------------------------------

Got it. Okay. Okay. One last one on the investment in the scrubbers -- so nice scrubbers, but the ballast water treatments, I have been talking about scrubbers too much lately. I just wanted to put some numbers around that given we're focused so much on liquidity. By my math, it's like $40 million over 4 years. So looks like $10 million a year. Is that in the ballpark? Or any other kind of thoughts there in terms of what the actual cash costs associated with those acquisitions are? Investments rather?

--------------------------------------------------------------------------------

Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [26]

--------------------------------------------------------------------------------

Cameron?

--------------------------------------------------------------------------------

Cameron L. MacKey, Scorpio Tankers Inc. - COO & Director [27]

--------------------------------------------------------------------------------

There will be aligned or baked into the dry docking numbers because all the installation and consequently, the lion share of the payment for the equipment will be lined up with the dry dockings. So I'd say it -- less 40x or 10x 4 and more back-end weighted.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

Our next question comes from Magnus Fyhr of Seaport Global.

--------------------------------------------------------------------------------

Magnus Sven Fyhr, Seaport Global Securities LLC, Research Division - MD & Senior Shipping Analyst [29]

--------------------------------------------------------------------------------

Just one question on the IMO 2020. I mean, there's a lot of numbers out there with the new requirements starting January 1, 2020. But Wood Mackenzie, I think, has incremental demand for the high-sulfur or low-sulfur fuel about 1.5 million barrels. What's the implications there? Is that just -- is that pure incremental demand on product tankers? Or I guess the current bunker fuel is carried on some dirty product tankers. What do you see there as the primary beneficiaries within the product tanker fleet?

--------------------------------------------------------------------------------

Cameron L. MacKey, Scorpio Tankers Inc. - COO & Director [30]

--------------------------------------------------------------------------------

Magnus, I'll take a shot at that. Number one is, that's a lighter number from Wood Mackenzie that we've seen from others, but we'll take that as it is.

--------------------------------------------------------------------------------

Magnus Sven Fyhr, Seaport Global Securities LLC, Research Division - MD & Senior Shipping Analyst [31]

--------------------------------------------------------------------------------

That assumes some noncompliance. I think about 1.4 million of noncompliance.

--------------------------------------------------------------------------------

Cameron L. MacKey, Scorpio Tankers Inc. - COO & Director [32]

--------------------------------------------------------------------------------

Okay. That explains it then. As the supply chain starts to switch over from its current ratio of heavy to light, let's call that 80:20 to the opposite 20:80, you'll see a fair bit of disruption, not just in terms of storage facilities, bunker barges, but also in deep sea transportation of course. We've said it in the past in a different context, but vessels which are trading dirty for a long period of time cannot simply switch back to trading clean products. And there's a lot of technical reasons for that. A lot of the bunkering business in the supply chain is very old vessels, which don't logically have another trade to switch into. So the answer to your question is, we see it almost entirely as incremental demand. And that's what makes us so excited.

--------------------------------------------------------------------------------

Magnus Sven Fyhr, Seaport Global Securities LLC, Research Division - MD & Senior Shipping Analyst [33]

--------------------------------------------------------------------------------

So I mean, using that 1.4, I mean, that's about 22 million barrels of -- per day that's being transported now. I mean, that's a 6% increase. And you think that's on the low side given the high noncompliance number that I just quoted?

--------------------------------------------------------------------------------

Cameron L. MacKey, Scorpio Tankers Inc. - COO & Director [34]

--------------------------------------------------------------------------------

It's on the low side for -- well, I would just throw out there and then maybe Robert can add. I consider them on the low side for 2 reasons. One is the amounts of noncompliance that we're expecting may defer. But the other reason is just bear in mind that products don't move simply from A to B from refinery to source of consumption. They move around in a rather networked and trading pattern. So things can go back and forth, may seem nonsensical, but that's our experience as surplus and deficits are balanced. So the effect on ton miles is more than a 1 for 1 relationship in this regard.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I would concur with Cameron with this for the thing that you. Again, you don't just turn a lights on or off on January 20 in 2020. You have to get stuff into those positions and some of this dislocation and change will happen earlier than that. So it's -- so we can't find anything that it is low as Wood Mackenzie, but you're correct that even if you took Wood Mackenzie's low case position, which we really disagree with and everyone else seems to disagree with the publicity on this stuff. You still get 6%, but that 6% is not going to suddenly go up in January 20. It will stop happening beforehand. And as Cameron says in terms of actual ton miles and utilization that figure will end up being larger.

--------------------------------------------------------------------------------

Magnus Sven Fyhr, Seaport Global Securities LLC, Research Division - MD & Senior Shipping Analyst [36]

--------------------------------------------------------------------------------

Right. And when you guys talk to the layers of the world, what's their position currently? Do they think -- I mean, there's a lot of different types of marine gas oil that's getting export now, but will the refining industry be ready? I mean, what's their take on that when you talk to your clients?

--------------------------------------------------------------------------------

Cameron L. MacKey, Scorpio Tankers Inc. - COO & Director [37]

--------------------------------------------------------------------------------

I can add to it, Magnus. It depends I'd say from a marketing standpoint, they're incredibly exciting -- excited. From a refining standpoint, they're somewhat worried. And from a shipping standpoint, they're scared. And the reason they're scared is because they recognized Robert's point that, they're very, very short freight heading into the end of next year. And they themselves are predicting rapid tightening of the market. From the refining point of view, I say worried because, obviously, there's adjustments to not only their slate but also their infrastructure. And capital allocations that we required to maximize the opportunity. And I think they're going to take several years to fully adjust to this. But of course, marketing wise and the expansion of margins looks great to them from a commercial side.

--------------------------------------------------------------------------------

Magnus Sven Fyhr, Seaport Global Securities LLC, Research Division - MD & Senior Shipping Analyst [38]

--------------------------------------------------------------------------------

So I mean, if you think the industrials, they think the industry is going to be short shipping. I mean, you've seen the traffic grew and the Glencores, I think they're at little bit earlier this year, but you would think that some of the smarter players would come in here and secure tonnage. Have you seen those big trading companies out in the market? I mean, it seem like an ideal time here with rates being low that you can lock up some ships here on longer term?

--------------------------------------------------------------------------------

Cameron L. MacKey, Scorpio Tankers Inc. - COO & Director [39]

--------------------------------------------------------------------------------

Again, others can add here, Magnus, but agree entirely with your observation, was continue to see inquiry to chartering tonnage, which is probably why the TCE rates haven't fully declined to the level of the stock market because there is that contango in the TCE curve expecting rises into next year. So we continue to see them active in taking in tonnage. But I think part of it is by definition for some of the larger charters going to be reactionary rather than proactive.

--------------------------------------------------------------------------------

Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [40]

--------------------------------------------------------------------------------

Yes. As Cameron said, in recent times, if you see that they've taken these ships on charter, the market really is where that spot market has been in the last 2 months, you really have got a pretty steep contango now. So there is every sign that not just what they're talking about on their own conference call, but what Cameron's view to their position as he said is, is correct. And that's what's being shown in the math of the actual forward time charter rates. It's also, I would add being shown by, we've just seen our first, what I would call a private industrial player, a person who has great experience in their organization of shipping, has a private commitment in shipping and the product market in BW tankers look to acquire and actually acquire a reasonable chunk of Hafnia. We would expect that they will merge. That is not other people's money. That is that person's own commitment of their experience going long in the market. So that's a very healthy sign. Again, you're seeing disinterested financial sellers being bought out by a consolidating very experienced, very good committed industrial player for consolidation to.

--------------------------------------------------------------------------------

Operator [41]

--------------------------------------------------------------------------------

Our next question comes from Randy Giveans of Jefferies.

--------------------------------------------------------------------------------

Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [42]

--------------------------------------------------------------------------------

Two quick questions for me. So first, you've completed the sale and leaseback transactions for, I guess, those 32 tankers. You can correct me if I'm wrong on that. Do you expect this number to grow by the end of this year?

--------------------------------------------------------------------------------

Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [43]

--------------------------------------------------------------------------------

I think that the best thing is there are various reasons with whether the commercial ROIs or balance that -- with this stage, we don't want to go into any further detail other than restate what Brian, the CFO had said earlier is that we continue to find ways to raise and increase liquidity. And we'll do that until we see the recovery in the market as they were that we expect.

--------------------------------------------------------------------------------

Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [44]

--------------------------------------------------------------------------------

All right. And then one more question. What is the reason for reopenings converts exchange a few weeks ago? What -- I guess, the new total is now 203 million this year or 2022 that has been exchanged? And then secondly, could this reopen again?

--------------------------------------------------------------------------------

Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [45]

--------------------------------------------------------------------------------

Well, there are specifics to the original exchange that meant that they were a group of important bondholders that we were unable to their important and they own bonds and some of them being there from the beginning, where we were unable by the rules of the previous exchange to not to reach to them. And when they saw the transaction originally happened, they inquired this if, at a future date, they would be happy to look at us doing it again. And we found the opportunity to do that. Obviously, we worked on the margin slightly to be able to get better positioned. And I think it worked out well for all parties. Whether you'd be able to do it again, again depends on the mathematical alignment to the situation.

--------------------------------------------------------------------------------

Operator [46]

--------------------------------------------------------------------------------

Our next question comes from Ken Hoexter of Merrill Lynch.

--------------------------------------------------------------------------------

Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [47]

--------------------------------------------------------------------------------

Robert, you mentioned darkest before dawn. Yet, the third quarter rates so far are well below second quarters, but the LR1s down 28% and Handy is down 25%. What are your thoughts on -- you keep mentioning kind of toward 2020? Why you have not seen any inflection at this point yet?

--------------------------------------------------------------------------------

Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [48]

--------------------------------------------------------------------------------

Well, I've explained what you got particular in terms of the Asia you have seen steady strengthening. In the Atlantic, it's more arbitrage and you too see the chaotic trading environment with oil moving up and down in crazy proportions. So people are unlikely to sort of dive in and take that risk. But also you have to remember that the guidance we've given is predominantly for fixtures that were done in June. And most of the early part of July, the market now and for the last 2 weeks has been stronger than that average. So that's why I say we may well have seen the darker side before a dawn that very often happens in shipping as you just likely saw in the dry cargo 1.5 years, 2 years ago. And historically, anyway, the product market will follow the dry cargo by 1, 1.5 years. You suddenly sort of woke up 3 or 4 months later to, oh my God, I'm in the middle of a recovery. And that normally happens anyway in shipping in my experience, is that none of us can pick this spot, and even though we're living it, the bottom just happened. And you wake up and all of a sudden, all these worries that you guys are showing on the telephone calls to disappear. And if you take dry bulk, look at the tender of the calls it was only a year, it was only 9 months ago. The dry bulk companies were asked by the analysts quite directly, why is it too early for you guys to go back on to normal moratoriums with your lenders. Is it too early for you to reinstate dividend? Why are the private owners? Why are the industrials buying ships when rates are so weak? And all of a sudden, 9 months later, it's only 9 months later that company's on conference calls are being asked well, why aren't you buying back more stock? Why you aren't you increasing dividends? So that's why I say what I -- in my comments that I make this happened, this can happen pretty fast. The inventories now are low. And if the world holds together, you are turning to a stronger season. And you are turning to a clear defined increase in incremental demand as a result of 2020. And even if you use the low-case scenario of Wood MacKenzie, you get a dramatic shift in utilization. And you have already seen in the middle of summer, a counter-seasonal increase in rates in these last 2 weeks. And it is very difficult, as I've said before, for you guys to see this because you don't have an index out there for the LR2s. Hopefully that will come in September.

--------------------------------------------------------------------------------

Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [49]

--------------------------------------------------------------------------------

So just a follow-up on that, Robert, maybe just a follow-up on Noah's question earlier. If you can just dig into kind of what did happen during the quarter? Was it -- you kept saying inventory draws. Was there anything else aside from that? Whether it was plain accounts...

--------------------------------------------------------------------------------

Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [50]

--------------------------------------------------------------------------------

Yes. You had Brazil -- you had a Brazilian strike and you had a total lack of arbitrage trading. People continue to drill because there was tremendous price uncertainty in the Atlantic basin, which wasn't a very good environment to create trading or storage. So people held on and drew down what they were using themselves. You had a lack of -- you had reduction in demand into South America as parts of this.

--------------------------------------------------------------------------------

Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [51]

--------------------------------------------------------------------------------

And then let me follow-up with Brian, I guess, for a question that you got to hit on a lot on the targeted raise versus the $320 million. But seem like you were confident on the last quarter of such a specific number that you provided...

--------------------------------------------------------------------------------

Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [52]

--------------------------------------------------------------------------------

Wait, wait, wait. Brian didn't -- wait, we said we were doing $334 million and [additions]. So first of all, we said in March, $334 million, then we did an additional (technical difficulty) with the convertible exchange and Brian has said and stated, we have not yet finished.

--------------------------------------------------------------------------------

Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [53]

--------------------------------------------------------------------------------

Okay. So if I can just finish the question. But -- so I just wanted to understand at the time, it seemed pretty specific right to give such an extent. I understand you're not done. Yet, the pieces arrived in piecemeal fashion over time. I just want to get maybe your thoughts on the process of when you have such an exact number of fund and then it, obviously, happens over time, maybe just expand on the process a little bit of was it -- it's just working with the different banks that took longer? Was it different deal sell through given rates, maybe just talk a little bit through that?

--------------------------------------------------------------------------------

Brian M. Lee, Scorpio Tankers Inc. - CFO [54]

--------------------------------------------------------------------------------

That was the number we had at the time. And we're -- as Robert said, we're not done. So we will see when we're all finished what the number will turn out to be. But as time goes by, something could change in the deal value, it could go up, could go down. We'll see.

--------------------------------------------------------------------------------

Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [55]

--------------------------------------------------------------------------------

Yes. And more importantly, the total is way in excess of that. You've already done $319 million out of $334 million, plus the $200 million. So the way you should look at it against liquidity, which is what the announcement was, you're already at $519 million against $334 million. We give statement that you're not finished yet.

--------------------------------------------------------------------------------

Operator [56]

--------------------------------------------------------------------------------

Our next question comes from Fotis Giannakoulis of Morgan Stanley.

--------------------------------------------------------------------------------

Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [57]

--------------------------------------------------------------------------------

It seems that you're positioning your company as you're trying to create a bridge to 2020 when the new regulations are coming into effect and by building a lot of liquidity up front, I'm trying to understand how much cash do you need for working capital? How much of this liquidity is truly available? And if you decide to build up additional liquidity, is the sale and leaseback path the main tool that you will continue to use? Would you consider of disposing some of the assets or even refinancing the baby born with a new baby born? I'm trying to see what is the priority apart from the sale and leaseback? And how many sale and leasebacks?

--------------------------------------------------------------------------------

Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [58]

--------------------------------------------------------------------------------

Yes. I understand that. And as we stated before, we're not ready to go into details on that for reasons other than to say that we will continue to look to raise that liquidity.

--------------------------------------------------------------------------------

Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [59]

--------------------------------------------------------------------------------

And can you give us an estimate of how much of your liquidity is needed for working capital?

--------------------------------------------------------------------------------

Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [60]

--------------------------------------------------------------------------------

Brian?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

It's -- probably need $50 million, $60 million working capital.

--------------------------------------------------------------------------------

Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [62]

--------------------------------------------------------------------------------

Okay. And one more question about IMO 2020. I was wondering if you would also consider putting some scrubbers in some of your fleets. I see some of your peers, TORM has communicated a plan to install scrubbers. And it seems that there is plenty of financing from charters, traders to fund the scrubbers in exchange for some time charter. Is the something that you would consider?

--------------------------------------------------------------------------------

Cameron L. MacKey, Scorpio Tankers Inc. - COO & Director [63]

--------------------------------------------------------------------------------

Thanks, Fotis. We've said in the past that we continue to evaluate scrubbers and other alternatives. There are a number of risks and challenges that scrubbers represent that we're continuing to evaluate. Obviously, the larger ship sizes have easier or more compelling case to scrubbers. It's not to say the smaller ships do not, But obviously, you'd see them probably lead the way because it's a clear path and payback profile. As we've shown with ballast water treatment, we shoot when we see the whites of the eyes and scrubbers are no exception. So we'll update you and the market as and when we get closer to decisions regarding scrubbers, but we haven't discounted the possibility at all.

--------------------------------------------------------------------------------

Operator [64]

--------------------------------------------------------------------------------

There are no further questions. Like to turn the call back over to Brian Lee for any closing remarks.

--------------------------------------------------------------------------------

Brian M. Lee, Scorpio Tankers Inc. - CFO [65]

--------------------------------------------------------------------------------

Like to thank, everyone, for joining us today, and we will speak to you soon. Thank you. Bye.

--------------------------------------------------------------------------------

Operator [66]

--------------------------------------------------------------------------------

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