U.S. Markets open in 7 hrs 49 mins

Edited Transcript of STNG earnings conference call or presentation 14-Feb-19 1:30pm GMT

Q4 2018 Scorpio Tankers Inc Earnings Call

Feb 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Scorpio Tankers Inc earnings conference call or presentation Thursday, February 14, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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

Corporate Participants

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

* Brian M. Lee

Scorpio Tankers Inc. - CFO

* Cameron Mackey

Scorpio Tankers Inc. - COO & Director

* Emanuele A. Lauro

Scorpio Tankers Inc. - Founder, Chairman & CEO

* James Doyle

* Robert L. Bugbee

Scorpio Tankers Inc. - President & Director

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

Conference Call Participants

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

* Amit Singh Mehrotra

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

* Benjamin Joel Nolan

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

* Frode Morkedal

Clarksons Platou Securities AS, Research Division - MD

* Gregory Robert Lewis

BTIG, LLC, Research Division - MD

* 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

* Magnus Sven Fyhr

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

* Max Perri Yaras

Morgan Stanley, Research Division - Research Associate

* 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 Scorpio Tankers Inc. Fourth 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. Welcome to the Scorpio Tankers Fourth Quarter Earnings Conference Call. 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.

Earlier today, we issued our fourth quarter earnings press release, which is available on our website. The information discussed on this call is based on the information as of today, February 14, 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 at scorpiotankers.com and SEC.gov.

Call participants are advised that the audio of this conference call is being played live on the internet and is also being recorded for playback purposes. An archive of the webcast will remain available on the Investor Relations page of our website for approximately 14 days. On the call, there will be a short presentation with slides. The slides are available at scorpiotankers.com on the Investor Relations page, under Reports and Presentations.

If you have specific modeling questions, you can contact me later and discuss it off-line. Now I'd like to introduce Emanuele Lauro.

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

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

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

Thank you, Brian. Good morning or afternoon, everybody. Thanks for being with us today. I am pleased to report the strong performance of Scorpio Tankers in the fourth quarter. This trend has persisted into the first quarter of 2019, and it shows signs of enduring through the year.

In short, the positive evolution of the product tanker market is now fully underway, and our conviction has further strengthened from the picture we were able to share with you during our Investor Day in mid-December in New York.

We start 2019 already engaged with a significant and important drydocking and scrubber retrofit program. This will ensure our fleet remains the best equipped. We firmly believe in the sustained commercial advantage from our spaces as the most modern and efficient fleet on the water.

This investment is well timed for the significant secular demand as we expect from implementation of the regulations of IMO 2020.

Furthermore, there is increasing depth in our commercial relationships, which continues to deliver market-bearing results on the time charter equivalent fronts. New vessel supply remains benign, and increasing demand has created a higher price environment across all our vessel categories.

This has manifested itself in higher spot rates, time charter rates and vessel values as well. We remain very respectful of the macroeconomic and geopolitical uncertainty, which has created so much equity market volatility over the last month. Despite this, our underlying business performance and visibility has continued to improve day-to-day.

We believe the best is yet to come. With this, I'd like to turn the call to Robert Bugbee.

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

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

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

Thanks, Emanuele. If everyone could turn to Page 4 of the short presentation, please. So these are really just some of the highlights. I mean, we have really significant operating leverage; we have the world's largest and youngest product fleet; and also, the vast majority of that fleet is employed on the spot market. And we intend to keep it that way because, as Emanuele pointed out, we believe that the market is going to continue to strengthen.

We're also really well placed for this increase in fuel expenses environment that we're likely to face going forward. We already have, by definition, a very fuel-efficient fleet, being the most modern there is in the world of product tankers. And as we like to point out, we're getting it scrubber-ready as well. And we have great liquidity, which will allow us flexibility to do things as cash flow continues to improve. And we'll be able to, amongst other things, lower our cost of debt along the way.

And in summary, we just simply think that -- believe that Scorpio Tankers is the best investment expression there is, like in any company, refiners or anything of this value related to the IMO 2020 theme.

On top of that, the actual recovery of the product market cycle itself. We go to Slide 5. This is really kind of my -- my personal favorite slide. And the reason for it is it shows that we've already got this market improving, it's turned from the bottom cycle, and it's starting to move upwards. And you've got a pretty big difference between the first quarter this year and the first quarter last year. And that's not the IMO 2020 effective. This has got nothing to do with IMO 2020. That's going to come later in the year and from about the second quarter. This is simply the supply-and-demand balance sheet to the product market itself, showing the growth in demand in general and the supply that Emanuele was talking about where the growth is fairly benign.

And I'd like to hand it over to James now to go through the scrubber slide.

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

James Doyle, [5]

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

Thanks, Robert. On this slide, we've shown that consumption figures provided are the actual average consumption figures of our vessels in 2018. This only includes consumption outside of emission controlled areas. So the scrubber does not operate during port activities, loading and discharging. And also, to be conservative, we assume that every loaded discharge port is an ECA area. Thus, the scrubber does not operate in the 200 nautical miles when entering and leaving the port.

Today, the average spread of the MGO HSFO forward curve in Rotterdam from 2020 to 2022 is $289 per metric ton. However, using a $200 spread, this would equate to the following daily TCE savings on an MRO, roughly 2,500; on an LR1, roughly 2,800; and on an LR2, roughly 3,300.

Every $100 change in this spread reached a daily savings of roughly $1,200 on the MRs, $1,400 on the LR1s and $1,700 on the LR2s. With that, I'll turn it back to Robert.

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

Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [6]

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

Thanks. We don't have anything else other than just to -- just like to give apologies for Lars Dencker who won't be on the call with us today. But he will be -- he's our head of trading. He'll be joining us on our non-deal the road shows to Boston and New York next week. Thanks. Just on that, we'd like to open it up for questions.

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

Questions and Answers

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

Operator [1]

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

(Operator Instructions) And our first question comes from Amit Mehrotra with Deutsche Bank.

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

Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [2]

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

So you obviously have a lot of cash on hand, over $600 million. I think, that maybe -- I joined a little bit late so I'm not sure if you covered this, but I think it maybe understates it just given the surge in bookings in recent weeks. And I guess when the fund -- the pool funds are distributed, can you just talk about maybe how much additional inflows you expect over the next month or so which I guess may be a better way of looking at it versus the cash calls you've outlined in the release.

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

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

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

Amit, it's Brian. You're exactly right, but it takes a while for orders to be completed and for cash flows to come through. For example, if you look at the accounts receivable balance between September 30 and December 31, there's about -- there's over $12 million, that number went up. So the money came in, but there is still $12 million more. And as you said, a lot of the voyages that have the highest rates were post that, that's why we have a very good so far Q1 result. So it's going to take a while, money comes in, but it's definitely a positive, things are looking better.

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

Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [4]

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

Okay. And then you're obviously retiring debt a little bit early, which saves some, I guess, interest costs or service costs. I mean, are you guys -- Brian, are you guys basically happy now in terms of where the capital structure and liquidity is? I mean, you've obviously done a lot of liquidity and capital structure gymnastics, so to speak, over the last year. Are you guys happy with where it is today? Or is there something more we can expect that may impact the breakeven positions over the next few months? And also, just related to that, Brian, any help on when you do kind of address some of these cash calls, now with all of the liquidity that you have, where the breakevens can go over the course of the year?

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

Brian M. Lee, Scorpio Tankers Inc. - CFO [5]

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

Okay. So breakeven on a fleet basis is about $17,000 day. It will go down with the interest, but it will take some time. So in addition to the $57.5 million of the baby bonds that we're retiring, on an annualized basis, we have amortization payments of about $220 million. So that's obviously significant, and we also have the convertible due on July 1 of $145 million. So we have some additional work to do paying down the debt. And I think those are all positives. And I think one of our goals is to reduce our leverage here going forward. And as you said, a very good point, it will bring down the breakevens as the interest comes down.

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

Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [6]

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

As we go through the next, obviously, 15, 18 months, you have other opportunities on other baby bonds, and then ultimately -- and then along that way, you would also have opportunities to -- as your balance sheet is -- then would really start to improve. From a lending point of view, you would have opportunities to do refinancing in a more traditional way. And perhaps substitute certain things with normal commercial bank debt at less cost, [which is like the rolling price system].

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

Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [7]

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

Yes, that makes sense. I mean, if the market continues how we and you and seems like everybody kind of expects it to progress over the course of the year, can you just talk about, I guess, the balance sheet arguably will continue to be deleveraged. Is there -- will you just allow that to deleveraged continuously? Or are you kind of targeting the 60% -- 50%, 60% leverage target and the excess cash flow over and above that will be used to grow the fleet further? Or maybe return more cash to shareholders? How do you guys think about that philosophically?

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

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

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

I don't think that we really -- we have the world's biggest fleet already. We have a lot of operating leverage. I mean, every $1,000 that they increase is approximately $45 million improvement in cash flow. And as you degear the fleet, too, then obviously, your general cash flow gets higher. I don't think on a strong market this company is lacking in firepower or opportunity to generate cash flow. I think the first thing to -- but I do think that you shouldn't be returning every dollar there is to shareholders right now. We should be mindful that the company has a high debt profile, so we should take that debt down, too. And as we discussed before, that improves the cash flow. We haven't, at this point, yet got around to determining actual targets of whether it's 50%, 60% or 40%. I think that we will watch general interest curves and financing and just take that as it is. And I think that would be a discussion perhaps, hopefully, we could have in 6 months, 9 months, 12 months' time with this specific target.

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

Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [9]

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

And then just the last question for me. If you were in that advantageous position where you kind of have -- the options would be cash flow. Would you -- is there a likelihood that you may buy back the stock that is held by Scorpio Bulkers? Is that a potential use of cash flow if you have the excess liquidity down the road?

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

Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [10]

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

We'll probably be fairly -- finish it in the sense that Scorpio Tanker Bulkers would properly demand a premium for being the largest shareholder in Scorpio Tankers. I mean, there is -- we know the Scorpio Bulkers fairly well. We know their board and the management very well. And we, as insiders, own 27%, 28% of that company. And we're highly confident of that investment. That is an investment. We think that the price of Scorpio Tankers, the product market itself will go up and go up significantly. And we have read various things maybe Scorpio Bulkers would sell the stock. We've even had banks ring us up and ask us if we'd do that. But Scorpio Bulkers thinks that Scorpio Tankers has a tremendous way to run in terms of its stock price and its investment, and is not going to be a seller at market. And one of the great things at Scorpio Tankers is it's a liquid stock. So Scorpio Tankers is thus far being able to -- obviously, we've been blacked out since December 31, but thus far, we would expect that Scorpio Tankers, should it wish to acquire stock and do so most efficiently from the actual daily market itself.

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

Operator [11]

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

Our next question comes from Randy Giveans with Jefferies.

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

Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [12]

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

A few quick questions. So on Slide 5, as you mentioned, quite attractive here at these levels. Just to put this into context, that's all the refinancings, the sale-leasebacks, what have you. What are your kind of current cash back breakeven rates for the LRs and MRs?

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

Brian M. Lee, Scorpio Tankers Inc. - CFO [13]

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

Randy, so to clarify, we said before, the overall fleet which, I think, is easier to deal with is around 17, but if you want to look at it on a segment basis for the MRs, you're getting into about 16,000. And then for EORs, you're -- because of the sale leasebacks that we inherited them from a Navig8, you're looking at just under 18 -- sorry, just under 19.

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

Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [14]

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

Okay, perfect. And then turning the page to Slide 6. Great detail here. Is the scrubber strategy driven more by economics, because of the likely rate premiums as you kind of layout here, or more of an operational decision because of maybe the fuel compatibility concerns for some blends? Specifically do you think there'll be more HSFO or VOSFO available in ports next year? And with that, have you been able to purchase in advance some of your HSFO fuel needs for next year?

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

Cameron Mackey, Scorpio Tankers Inc. - COO & Director [15]

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

Randy, it's Cam. The answer to your question is yes, in other words, both play the part. As we review what we've said on previous calls, we spent a great deal of time looking at various risks to adopting scrubbers, which include the technology and CapEx required, the regulatory and political risks and also the economic risks and what our future projections are for the spread between gas oil or complaint distillates and HSFO. So in there, of course, the economic returns played a big role, but not without careful understanding of the risks. So to your -- the latter part of your question, yes, we're in the process of contracting and securing volumes for the next 18 to 24 months of HSFO and gas oil in strategic bunk room ports for us, which not only include primary bunkering hubs, but also secondary and tertiary bunkering ports. As an aside, we don't think that enough attention has been given to the surplus of heavy fuel oil that the market would have to absorb post-2020. So apart from, say, the supply chain, we do believe globally, HSFO will be widely available.

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

Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [16]

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

Okay. Great. And then one quick question. So you have about 1,300 off-hire days in the back half of 2019, another 1,000 off-hire in 2020. Do you expect to charter in some vessels to offset these days? Or just kind of use your current fleet as is?

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

Cameron Mackey, Scorpio Tankers Inc. - COO & Director [17]

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

It's a great question. I don't think we will charter in vessels on that -- say, on that kind of short-term trading mentality. Our charters in historically have been more strategic in nature based on our view of the market. To the extent vessels are available to charter that don't reflect our forward view of the strength of the coming 1 to 2 to 3 years, we'll be there to charter in vessels opportunistically.

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

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

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

I'd also like to add to that, something to that, Randy, is that, it sounds dramatic when you say 1,000 off-hire days and this period, a 1,000 off-hire days in that period. But -- like it's only 5% or less than 5% of the total fleet. We have 20,000 on-hire days. Actually 40,000 on-hire days.

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

Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [19]

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

The level -- the degree is not huge, just to question it.

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

Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [20]

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

The off-hire days is pretty irrelevant, if you think about it.

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

Operator [21]

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

And our next question comes from Greg Lewis with BTIG.

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

Gregory Robert Lewis, BTIG, LLC, Research Division - MD [22]

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

I just wanted to touch a little bit on the scrubber strategy. I mean, clearly, you guys are committed to it. You've laid it out in detail. But I guess, what I'm wondering is just given that there is still some -- there is -- it's still a fluid situation. How much flexibility is there with the company and what is scheduled at shipyards and capital outlays? How much flexibility is there? Should there potentially be a change -- a potential reason to change that strategy?

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

Cameron Mackey, Scorpio Tankers Inc. - COO & Director [23]

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

Thanks, Greg. Well, first of all, we think that the market is overplaying or quite skewed in its interpretation of various political and social voices on the risks of scrubbers. So the first comment to make is, we don't see a great deal of risk in slippage in the implementation date of IMO 2020, and there's a lot of color we can add to that comment. However, be that as it may, should there be some unforeseen change to the regulation. We still hold some significant amount of optionality in our program. I can't go into details, but obviously, as we've done in the past, we will adjust.

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

Gregory Robert Lewis, BTIG, LLC, Research Division - MD [24]

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

Okay, great. And then just one question. It looks like there was a nice -- it looks like there has been a nice surge in MR rates in the Atlantic Basin really just this week. Could you just talk a little bit about that? And maybe what's driving that?

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

Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [25]

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

I think, that -- I don't -- I think we wanted to stay off of the week-to-week split and the month-to-month split at the moment. And we sort of said on the investors called that as you see a market tightening, which is what we're doing. And it's a multiregional, multi-size. So what we've seen is literally 1 week the LR2s do great in the east, the next week, hand these in, Northern Europe doing great. Now the next week, MR is doing -- is being the best in the U.S. Gulf. But generally, what we've seen as we've gone through is that on a year-on-year comp basis, all of these areas and all of these markets have improved significantly. And if you go back to the statement we've made on the investor thing, at each point we're aware that -- yes, you can have refinery turnarounds. We expect the markets to go up and down in regions and sizes as we just move remorselessly towards the third, fourth quarter this year. But at each point, as we said back in November, the risk is to the upside is what we're finding. We continue to underestimate every time we think the market is going to slide, like the reason we're hedged in here is 2 or 3 weeks ago, most commentators were expecting that the MR market in the U.S. Gulf would actually go downwards and continue to go downwards. And it's gone the other way. It's gone upward. So we just want to back of this week-to-week thing. It's really not going to matter in 9 months, 12 months. I mean, the company at the moment is focusing on -- commercial guys are focusing on the utilization, better choices in their trade, better choices in positioning, getting ready for the changing world coming in the next 6 months or so, increasing customer contact and et cetera, that way. And the rest of the company is just trying to control what it can control and the operating terms. And it will come. So we prefer not to comment anymore on week-to-week questions.

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

Operator [26]

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

And our next question comes from Jon Chappell with Evercore.

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

Jonathan B. Chappell, Evercore ISI Institutional Equities, Research Division - Senior MD [27]

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

Robert, you mentioned you guys kind of operationally trying to position, and it's unfortunate that Lars isn't on the call. But when you think about the timing of starting to see the impact mostly on the demand side from January 1, 2020, regulations. When do you think that really starts to hit the market? Is that kind of soon out of refinery maintenance in August? Or has that been so accelerated in the first half of the year that you can potentially see it even sooner? And then a third part to question, are you expecting that to hit the bigger asset CLR2s before the MRs? Or is it going to be just kind of product tanker industry-wide?

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

Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [28]

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

Well, first of all, Cameron goes on this. This is like literally potluck because do the refineries come up in Asia first, the new ones come. Do they prime those first? Does China continue to export first, which is all related to these LR2s. Do we have an extended cold period in Northern Europe, which will keep those ice class Handy's ripping forward. I mean, I think in the results now, most people should be fairly surprised that the Handy is running over $18,000, $19,000 a day or so. And as to the very complicated question as to exactly what the refineries will do with timing or how they will start to switch to produce more low sulfur, that's super hard to predict. What is easier to predict is the actual off-hire time that people have when the of -- the fleets of ships, crude oil tankers, product tankers, when they're removing them from the market for scrubber installations. The curve itself, the decision-making, I mean, as oil prices firm, the premium to heavy fuel, the spread has increased quite dramatically. And all these things will feed into the customers. So I don't know, Cameron, you got any better?

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

Cameron Mackey, Scorpio Tankers Inc. - COO & Director [29]

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

The only thing I would add to that, Jon, is it's a bit early for a distillate production to be reading through to the end of the year in IMO 2020. But what we are, say, pleasantly surprised by, and you can get this just by reading through the results of some of the independent refiners in the oil majors, is the healthy distillate spreads that they're enjoying and the utilization that comes with that. So our big ships or small ships are all moving a lot of distillate around right now and through the year, particularly when we get into the third quarter. After the summer, we expect that to accelerate because that's the natural time when they will be worried about January 1 and March 30 next year, respectively.

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

Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [30]

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

I mean, again -- it's like a lot of people, I guess, in last weeks have been hurt one way or other in trying to gain what the actual spot market has been doing or what the first quarter is doing in terms of products by looking at the stock prices. I see various things about people, well, we better hold off to do things until the end of the second quarter because there's going to be a fleet refinery turnaround. All of these are -- if we go back in November, it was, well, we better not buy now because the market is bound to go down in January. These short-term things are just -- we just don't want to be part of this anymore. I mean, we're running it for the long term. We've invested for the long term, whether it's with our shareholders' money or our own money in this. And it will -- the one thing that we are sure of is the cycle has turned. The next thing we're sure of is that the demand, already increasing demand against a flat supply line, will be further stimulated by IMO 2020, which is coming soon. And that's pretty much all we know. The rest of it day-to-day, who knows.

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

Jonathan B. Chappell, Evercore ISI Institutional Equities, Research Division - Senior MD [31]

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

All right. Balancing that short term and that long term, it's been reported in the trade press from sources that you may be chartering some ships with some of the major traders. Now the sources are typically pretty well-placed, but let me ask a couple of questions on that. First of all, are traders coming to you already for the scrubber-fitter ships looking for charters 6 months out? And if so, how are you structuring or how are you thinking about structuring any profit share payment terms around? And then the second part of that, which kind of goes with the first part as well is, how much, roughly speaking, would you be looking to kind of walk away to kind of absorb the arbitrage economics of the scrubber versus kind of just remaining -- keeping all of your ships in the spot market based on cyclical turn that you already talked about?

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

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

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

We are very confident of the improvement in the market. So we want to charter out as absolutely little as we possibly can. But the company has, in the past, and will continue to do in the future, take 1 or 2 vessels to the extent that they could be helpful to perform. For example, strategic partnerships are beneficial to the actual trading efficiency and flow of trading information to the broader fleet as opposed to doing it for an economic decision.

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

Operator [33]

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

And our next question comes from Ben Nolan with Stifel.

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

Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [34]

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

So obviously, you guys are going to be buying in the one baby bond. I'm just curious if as you look out to what's left of the convert a little bit later in the year, if the plan is to take a similar approach there and just retire that as part of the debt repayment process that you outlined a little bit earlier?

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

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

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

I mean, that -- we look at that all the time. It's like -- it's when you go to buy something, suddenly the seller wants more money. And it's going to come to us anyway in June.

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

Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [36]

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

So whether it's now or later?

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

Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [37]

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

So the wonderful thing with the baby bond is it -- even though it's trading above par at the moment, we have the call option at par. We can force the seller to sell to us. With the June convertible, it simply -- look, if someone rang up and said, here's $50 million, $40 million, $20 million and made it worth our mathematical while, we'll openly say we're there to buy it. But whenever we've put a bid into the market, suddenly what was one number suddenly moves to another number. So we've kind of given up. So all potential sellers out there, please ring up and make you offers.

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

Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [38]

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

Yes. So those convert holders, they're sneaky. But one way or the other.

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

Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [39]

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

And they have a company. It's pretty clear that we're going to pay them anyway in June.

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

Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [40]

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

Right. All right. And that, I guess, is my point is that at this point, you're not looking to refinance the debt and note in any way. What's left of it, the intent is to simply take it of the market, whether it's now or later. Is that the idea?

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

Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [41]

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

Right. Yes, absolutely.

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

Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [42]

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

Yes. And so -- and then I wanted to touch on something, Robert, that you mentioned on the ice class, Handy, which -- at least from our seat, it's a little harder to get visibility in. Could you maybe -- obviously, you're doing pretty well on those at the moment. Is there pretty substantial -- is there currently a pretty substantial ice premium that you're able to get in the market?

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

Cameron Mackey, Scorpio Tankers Inc. - COO & Director [43]

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

So yes and no. In other words, yes, there is a premium, but don't understate that we invested into Handys because the general age profile and composition of that sector is heavily skewed towards older vessels that are just not acceptable to major customers around Europe and the Baltic. So we're enjoying the fruits of a decision we made several years ago to invest in that space knowing that flows and customer demands would continue to evolve and grow. Now the ice class specifically, it's a great option to have, and it's a great option not just for ice but for the fear of or expectation of ice. So even in relatively mild winters, you can still enjoy an appreciable premium simply for the -- to hedge against a weather event that may present ice accretion.

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

Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [44]

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

To highlight one of Cam's point, the Handy side is really the first class in the product that is showing the effect of age, showing the impact of what happens when product tankers start to turn 15 years plus. And as we go through the others that will affect there.

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

Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [45]

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

Okay. No, that's helpful. And a last for me. It does seem like with respect to -- well, both of what you did, were able to do in the fourth quarter and then also, what you've been able to book thus far in the first quarter. It seems like those rates are better with respect to the spot market than what we've seen in other places. And I'm just curious, why you would -- or what you would attribute that to. Do you think it's a function, as you say, of having newer modern ships that are more efficient and more desirable. Is it the pools? What do you think is the most important secret sauce there?

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

Cameron Mackey, Scorpio Tankers Inc. - COO & Director [46]

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

I think, that -- look, we've got a great fleet. We've got a great product itself. We've got very good captains, crew, the operations people. And then you've got a chartering desk and you -- Lars isn't on the call so he can't blow his team's trumpet, so I'll do it. They come in. They've spent now since last February, well, March last year getting together, getting used to this fleet, changing things, adapting things, testing things, putting models, putting trading programs in. And I think finally, we've seen this first period where that hard work is starting to really pay off. And then the second thing is that -- when the market is like 8,000, 9,000, 10,000, 11,000, 12,000 a day, it really -- the difference between a great trading team and an average trading team doesn't really show up because everything is a mess. And as soon as you start getting an expansion and trading opportunity and rate, that's when -- that's what separates the great teams from the average teams.

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

Operator [47]

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

And our next question comes from Noah Parquette with JPMorgan.

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

Noah Robert Parquette, JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst [48]

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

I wanted to ask about kind of the growing environmental pushback, I think, on scrubbers. You started an EU commission or the commission with the IMO report last week. How do you guys think about that risk, I mean, in terms of maybe a strategy to push back on it? Or the time frame of open-loop scrubbers, their ability to operate profitably? Has that changed at all in your mind?

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

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

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

Yes. So I'll let -- we'll get Cameron to answer that question. But as an introduction to that, we're sort of in this unique position in Scorpio Tankers is that despite investing in scrubbers and having the option to have scrubbers, we don't think it will happen. But the best thing of all for us now would be to have scrubbers banned entirely in shipping. If you think that one through, the benefit to Scorpio Tankers in terms of further increased demand for what it ships would far outweigh any advantage we could have in the market in terms of scrubbers. So I think, when you listen to Cameron now, you should sit there and think that we're able to take, what I would take a nonextreme position, we're neither sitting there colored by the idea that, oh, we have to have scrubbers work or, oh, my god, like some companies and some people's view of scrubbers can never work. So Cameron?

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

Cameron Mackey, Scorpio Tankers Inc. - COO & Director [50]

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

Sure. No, I think the media and probably the analyst community as well has been dominated recently by extreme views here. One extreme is that scrubbers are a long-term, almost a permanent solution and business model adjacent to our industry. And the other extreme view is that they will never be. We will refer you back to what we've said previously is that the industry is in transition. We've maintained that scrubbers represent an opportunity for us with an anticipated lifespan, regulatory lifespan of 5 to 10 years. We're maintaining that position. If you look at the EU sort of position, recent position, it refers to a couple of interesting things. Number one is it relies on a German study from 2014 that put scrubbers in the context of other forms of potential harm to marine environments like runoff from farms, tourism, extraction of minerals. And so we acknowledge that there are potential harms from scrubbers alongside those other sources. The other thing, I think, that you'll find is that, the EU, while it is free to act unilaterally, will have a great deal of difficulty making a sudden and significant reversal or change of course at the IMO. The topic of whether environmental limitations to scrubber wash water are appropriate or not, will require many more months, if not years of study. And that's why we're not here to take an ethical or scientific view, we're just complying with regulations. But we do think that the timeline for a scrubber in the broad context of the political sort of environment we live in is 5 to 10 years.

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

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

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

And I'd just like to remind you regarding the calculations that we've given in our websites and today is the actual -- they're based on the actual consumptions, patents that we've had on the fleet in 2018. They're based on the same information that is presented to our boards. And as Cameron says, they're sort of in the middle. They're not -- they're neither done with 2 extremes or less extremes.

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

Cameron Mackey, Scorpio Tankers Inc. - COO & Director [52]

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

And the final point I'd make, Noah, is that even in the next few years, there isn't enough attention being paid to what the world does with all this residual fuel. So IMO 2020 is an exciting topic for shipping, but it is an existential topic for refiners. And when you look at winners and losers in refiners, the pricing risk for residual fuel or HSFO is very, very far down to the downside, something along the lines of where coal is priced, which is about half the current price per ton of HSFO.

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

Noah Robert Parquette, JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst [53]

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

Yes. No, that's really helpful. And the details on the scrubber economics are great. Just a follow-up on that. In terms of uses of HSFO in the future, I mean, do you have any kind of thoughts on what that could be? And whether the product tanker market will capture any of that new trade or will that be more of a dirty trade?

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

Cameron Mackey, Scorpio Tankers Inc. - COO & Director [54]

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

Thanks for the question. Well, as we've mentioned, maybe not directly enough, obviously, where we're predominantly focused is on incremental demand of distillate from IMO 2020. And it's something that we haven't seen yet. We don't think the recent strength really is caused by that, but it's something we're looking forward to say, starting in the third quarter. So there'll be a lot of incremental ton miles from distillate moving around. When it comes to HSFO, it's a great question. There'll be some barrels -- it'll be a dirty trade. They'll be quite a few barrels moving from, say, locations of surplus, which is largely where simple refineries currently exist, the Middle East, parts of Asia, Russia, et cetera, to areas where it's in deficit like the centers of more complex refining. But like I said, we won't be engaged too much in that. That will be a trade largely for the crude tanker space.

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

Operator [55]

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

And our next question comes from Magnus Fyhr with Seaport Global.

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

Magnus Sven Fyhr, Seaport Global Securities LLC, Research Division - MD & Senior Shipping Analyst [56]

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

I guess, as long as you guys report quarterly earnings, we analysts have to come up with some estimates for quarters. So I was just curious if you can maybe provide some color on, with all the cyclical recovery in the way, on your thoughts about seasonality this year. That'd be very helpful.

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

Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [57]

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

Not really. As I said before, this is very, very difficult one to gain here. And -- simply because we've got these set of calculations related, you'd have to work out what's going to happen with these new refineries that are coming up in the East. And how the actual refiners and the traders are going to place themselves going forward for the low sulfur that's coming later. So we're just not confident that normal process in earnings of the first quarter would be, let's say, first quarter, strong. Second quarter is also fairly strong. Fourth quarter is strong and the weakest quarter is the third quarter. You don't really know. Some people are calling that there'll be extended refinery turnarounds in the second quarter. But if you take the United States right now, people -- I see reports of people getting stressed out about the increase in gasoline inventories in the United States. Well, this is crazy because the United States is an exporter of products. We would want to see the United States build -- have good inventories if we're a product tanker owner so that they can export it. So it's just too hard to calculate. That's why we're trying to say here that if you're trying to invest or not invest because you think something is going to happen in the next 4 weeks or 6 weeks, good luck to you.

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

Operator [58]

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

And our next question comes from (inaudible) with Bank of America Merrill Lynch.

Okay. And our next question comes from Liam Burke with B. Riley FBR.

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

Liam Dalton Burke, B. Riley FBR, Inc., Research Division - Analyst [59]

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

You mentioned several times during the call, a benign supply, a vessel supply environment. Is that something that can continue as sustainable? And what's causing that low supply? Is it financing restrictions or just general rationality in the market?

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

Cameron Mackey, Scorpio Tankers Inc. - COO & Director [60]

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

Thanks. I think it's a combination of both. You have to remember that the last 12 months were an extremely weak period for tankers. And when you look at the broader context of our industry, most of which is held in private hands that are diversified across different asset classes. You have people that have come straight out of a very weak dry bulk market if they happen to own both types of assets, and into a weak tanker market. So there isn't a lot of spare equity capital around. There's certainly not a lot of cheap debt around when you look at the condition of the traditional lenders to our industry, particularly for private players. And then you add, say, the icing on the cake, which is some, let's call it, disarray or maybe disruption in the traditional shipbuilders. So Korean yards going through a difficult time. Japan continuing to consolidate and China continuing to consolidate. Can it continue forever? Of course not. We're realistic, but what we do think is that it will take a much higher and sustained market to really bring out additional capital to hit shipbuilders.

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

Operator [61]

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

And our next question comes from Frode Morkedal with Clarksons Securities.

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

Frode Morkedal, Clarksons Platou Securities AS, Research Division - MD [62]

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

I guess, if you look at the peer group that's trading (inaudible), the question is what does that tell you on the market? I mean, 2020 is almost here. People are generally bullish on the market and the rates you see are good. So why is the evaluation so low in your mind?

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

Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [63]

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

I think, 2 things. I think that, firstly, it's very difficult for people to adapt to any of these changes when -- if you take our company at 10% increase in ship values, the NAV goes up $8 and you're seeing a rapid shift in cash flow. So I would say that around about October, our NAV would have been somewhere around $240, $250. And now, our NAV is $325, $330, going fast. And that's based off December 31 cash, going fast towards 4. That's that. So it's a question of information and speed that has come out. And secondly, look, I think we have to be honest with each is that companies like Scorpio Tankers have been nothing but disappointing to investors for a long time. So just because we suddenly have a market that rapidly changes in 4 months doesn't necessarily mean, and especially all the analysts now, every single analyst, we've beat every analyst's expectation in earnings and guidance. So we can't blame investors for not valuing the company for that improvement or forward expectation when no one else has. And we can't blame investors for being a little bit gun shy when there's been such terrible disappointment for such a long time. I think those are the reasons. But that will come as we consistently do well in cash flow, as information gets out to the market where NAVs really are, and that the cycle has changed. I'm confident that that spread will start now and NAVs will continue to move upwards.

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

Brian M. Lee, Scorpio Tankers Inc. - CFO [64]

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

And just to reiterate that, that was the old share values he was talking about. There was $2 up to $40 in the new share count.

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

Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [65]

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

Yes. And the 2 big cycles have been before in 1945, in 2002, '03. At this point, the stocks generally trade well below their NAV. It's really ironic, but that's what happened. They make the turn in their fundamentals. They start to generate cash flows. Their values start to move up and they trade below NAV. And then whatever magic things happen, the shareholders start to go from fear to, wow, this is actually happening. And then it's valued at a NAV matrix. And then it starts to get valued even higher than NAV on a cash flow and a return to shareholder matrix. So nothing is abnormal right now either. We're not complaining about it. We've taken advantage of that situation and may continue to do so. It's a good offer for people right now.

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

Operator [66]

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

And our next question comes from Max Yaras with Morgan Stanley.

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

Max Perri Yaras, Morgan Stanley, Research Division - Research Associate [67]

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

Definitely appreciate the Slide 6 and the detail you provide here. Just digging in a little bit deeper. If we look at this estimated scrubber TCE savings, is this what you expect to charter your vessels at, let's say, like a premium to normal rates? And how do you expect this capture of this savings to develop over time?

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

Cameron Mackey, Scorpio Tankers Inc. - COO & Director [68]

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

So as you know, being largely engaged in spot trading, we fix on what's called world scale. So basically a flat price for freight. So really, this is a comp to what's a non-scrubber fitted vessel or whatever our own vessels without a scrubber would earn. And then as it comes to -- over time, we expect a few things. One is that depending on the spread we experience, that number will move up or down. That over time, say, the next 3, 5 years, those comps may change depending on whether the rest of the industry continues to invest in scrubbers or not. So that's really it.

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

Max Perri Yaras, Morgan Stanley, Research Division - Research Associate [69]

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

Okay. And then any other color you guys could provide on the expected financing rates? And then the likeliness of you exercising the additional options for scrubbers. I believe it was 18 vessels?

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

Brian M. Lee, Scorpio Tankers Inc. - CFO [70]

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

As far as the financing, we're looking into that but we have many options. So we'll just keep going with that. When we have news, we'll bring it out to you.

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

Cameron Mackey, Scorpio Tankers Inc. - COO & Director [71]

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

The cash returns are so compelling it really is something of a luxury question for us. As far as the options go, I'd say at this point, we fully expect to declare the options, but being an option, we don't have to declare them today.

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

Operator [72]

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

And we do have a follow-up with (inaudible) with Bank of America Merrill Lynch.

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

Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [73]

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

It's Ken Hoexter. Just, Robert, on the -- I know you chatted a lot on rates earlier and a lot of head shakes in the past and the bounce in rates and your confidence in the structural bounce in the past. Is there any difference in what makes you confident that you're going to see this structural bounce versus those head shakes you've seen? Or I guess is there anything that could go the other way, where the refiners are better prepared and the distribution network is ready -- more ready than we expect for the upcoming switch into 2020?

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

Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [74]

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

Well, first of all, supply is low. So we've actually had supply constrained itself. And the future new buildings are low. The ordering is at multi-year low and the ordering, as Cameron pointed out recently in the last year or 2, is there's been no money and the product industry is low itself. So supply is very constrained from the order book point of view and will be further constrained in the sense that vessels are going to -- product tankers will turn 15 years old and move away from the clean petroleum trade. So your supply side is very, very constrained here. We -- in either event, we're seeing an improvement in the product market with nothing to do with IMO 2020, as we started with. This is simply old-fashioned increase in demand as a result of the fact that we've work through an inventory overhang in the world of product tankers and we just have a continued growing demand for products in the world itself. So I guess, the -- what could derail it is if we had a complete world slump, a 2002 or 2009 event or something like that. As to the refiners' preparedness for IMO 2020, the refiners, the traders are trying to charter in a lot of product tonnage. So that tells us that they are prepared for a very steep increase in rates and demand for product tankers.

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

Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [75]

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

That's helpful. I want to come back, I know you guys gave great detail on -- into Noah's questions before on the scrubbers. But given the port span of the use of open-loop scrubbers in some regions, any thoughts on a change in payback period for your investment?

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

Cameron Mackey, Scorpio Tankers Inc. - COO & Director [76]

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

Sure. Let me help you with that. So the slide that James prepared reflected what we had said previously on the last call, I believe, which was we don't doubt that port states, which essentially is from 12 miles out in may, and many cases will, prevent the discharge of scrubber wash water. It is entirely consistent with existing limitations they have for over-port discharges from ships today. So no -- this is not at all a surprise to us. So baked into the calculations on that slide is an outrageously conservative assumption, which is every port in the world acts like Europe, which is the entire region bans the use of scrubbers. And only in the open ocean can you use an open-loop scrubber. And as you know, that still is a small fraction of the overall utilization period of a scrubber on one of our vessels. So we've taken the most conservative assumptions we could to just reassure our audience here that the payback is still compelling.

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

Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [77]

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

And if you wanted to change them to closed loop, did you highlight how much that would -- time to do so and cost associate it?

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

Cameron Mackey, Scorpio Tankers Inc. - COO & Director [78]

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

No, we haven't. We're taking the view that that's something we may look at down the road. Again, our estimated view of the scrubbers' useful life from a regulatory point of view is 5 to 10 years. So something we're factoring in for later on.

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

Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [79]

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

And then just lastly, the -- your cost per scrubber increased, did I catch that right, from $1.5 million to $2.2 million, up to $2 million to $2.5 million? Is there anything that's driving that?

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

Cameron Mackey, Scorpio Tankers Inc. - COO & Director [80]

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

No. I think, again, it may have been a miscommunication on our part. The cost of the scrubber itself is about $1.5 million, the actual unit. And then on to that, you have to add some installation and commissioning costs. So that's how you get to about $2.2 million.

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

Operator [81]

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

And that does conclude today's question-and-answer session. I would now like to turn the call back to Brian Lee, Chief Financial Officer, for any further remarks.

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

Brian M. Lee, Scorpio Tankers Inc. - CFO [82]

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

I'd like to thank everyone for joining us together, and we look forward to speaking to you soon. Take care. Bye.

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

Operator [83]

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

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