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Edited Transcript of STNG earnings conference call or presentation 14-Feb-18 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2017 Scorpio Tankers Inc Earnings Call

Mar 27, 2018 (Thomson StreetEvents) -- Edited Transcript of Scorpio Tankers Inc earnings conference call or presentation Wednesday, February 14, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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

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Conference Call Participants

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* Fotis Giannakoulis

Morgan Stanley, Research Division - VP, Research

* Gregory Robert Lewis

Crédit Suisse AG, Research Division - Former Senior Research Analyst

* Jonathan B. Chappell

Evercore ISI, Research Division - Senior MD & Fundamental Research Analyst

* Randall Giveans

Jefferies LLC, Research Division - Equity Analyst

* Spiro M. Dounis

UBS Investment Bank, Research Division - Director and Equity Research Analyst of Shipping

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Presentation

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Operator [1]

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Hello, and welcome to the Scorpio Tankers, Inc. Fourth Quarter 2017 Conference Call. The earnings presentation is available on the website under Investors Reports and Presentations. I would now like to turn the call over to Brian Lee, Chief Financial Officer. Please go ahead.

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

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Thank you, and thank everyone for joining us today. On the call with me are Emanuele Lauro, Chief Executive Officer; Robert Bugbee, President; and Cameron MacKey, Chief Operating Officer. The information discussed on the call is based on information as of today, February 14, 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 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. All 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.

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

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

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Thank you, Brian. Good morning, good afternoon to all. Before I start my opening remarks I'd like to inform you that management has an impediment in 45 minutes time. However (inaudible) question that we may not be exceeding covering during the call we'll remain available of course to all from [noon time New York] today onwards.

2017, including its fourth quarter, has been a much tougher period in product tankers than any market participant predicted. But as tough as it is, it only serves to reinforce our conviction in the magnitude and the duration of the up cycle when it comes, particularly with an aging industry fleet and the order book at multiyear lows.

Amidst this ministry downturn at Scorpio Tankers we have been concentrating on what we can control whilst performing successfully the major technical challenge of integrating the fleet of Navig8 product acquired in 2017. So G&A expenses have been kept in check and have been reducing during this period both on a quarter-on-quarter and year-on-year basis. Operational expenses have also been kept in check, again with a marginal reduction on the year-over-year figure, which if we consider the takeover of the 27 vessels we have acquired during the second half of 2017 is by itself a good result.

Our average fleet daily OpEx number in 2017 was $6559 per day. The disappointing figure comes from the market. Our average TCE for the fleet in 2017 was $13,150 per day, which is around $2600 per day lower than the 2016 figure. Q4 17 was the quarter in which we took delivery of most of the fleet which we have acquired from Navig8. By December 31st we had 21 out of the 27 vessels under our technical management, 27 out of 27 under our commercial management. In addition, we have incurred cleaning costs for the five LR2 vessels that were delivered to us with a crude cargo history. This has further negatively impacted our TCE.

As of the end of January '18 I am able to say for the first time on these calls that we have a fully delivered fleet of 109 modern product tankers on the water. When we set out in 2010 many people doubted this was possible. And I think it is a testament to the quality of the more than 7000 Scorpio employees around the world who have managed to defy the skeptics. This now leaves us watching and waiting for the inevitable improvement in rates. From our recent industry presentations you will see our operational gearing means that each thousand dollars per day improvement in time charter equivalents equates to nearly $40 million in EBITDA and net income. This operational upside is especially evident in our larger LR fleet where the cyclical downturn has been particularly keen. That said, we believe we are now on the threshold of a sustained secular growth story in (inaudible) as [Middle East and new] refineries finally come into line.

Even though the fourth quarter reflects continued low freight rates, a closer examination of the market reveals sequential quarterly improvement. It's too early to call this a trend, but we remain expectant that the recovery will become established through 2018. As new vessel deliveries subside, ton mile demand growth returns to its 20-year trend, the order book remains at multiyear lows and shipyards increase their pricing of new vessels to reflect their own cost pressures. As such, we are looking forward rather than in the rearview mirror. We are excited about the future for clean product tankers and our fleet specifically. With this I'd like to turn the call to Robert.

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

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Hi. Thank you, Emanuele. Good morning, everybody. Look, obviously it's been a very rough couple of weeks for the stock, and there have been various different things going around, obviously concerns related to balance sheet, valuation, liquidity, et cetera, et cetera. and hopefully the results put a lot of that to rest. And I'd just like to remind everybody of a couple of things here is that we raised equity back in the end of November with the explicit reason to have that as some form of insurance or flu jab against a continued media market so that we would allow ourselves perfect time, ample liquidity, and the basis then was that we would have enough liquidity and resources to get through the whole of 2018, you know, should the market of 2017 be repeated.

You can see from our guidance today that so far 2018 is starting off stronger than 2017, that the cash burn is probably less than many people have rumored or thought. In fact, the cash on the balance sheet today is higher than it was at the end of the year. The next thing we're going to do is quite an unusual step here, but I think it warrants it because of the pretty sort of dire place where the stock is, and it's not reflecting things. But as Emanuele pointed out and other speakers have pointed out, we concur with Ardmore's conference call related to values and many of the other dry cargo owners that values have gone up. So it's pretty obvious, therefore, that if values have gone up since our offering at the end of November, and we have made positive cash flow above interest in operating costs, that the asset value have gone up. And we're going to make an unusual step in that we're not -- this is going to be one-off. We're not going to give a specific position, but what I'm prepared to do is say that if any of you have a net asset value presently of the company anywhere outside of the range of $3.70 to $4.30, we would advise you and hope that you would contact the company, and we would be happy to look at your model and see if we can help correct whatever you've put.

Now having that, I'd just like to go through a couple of slides. And by the way, that actual, you know, what we're using here is the Clarksons ship brokers valuations, not necessarily research, but ship broking because they're more up-to-date, and at the same time I would say that Clarksons ship broking is on the conservative side of the ship brokers valuation to this particular point in time.

Okay, now I'd just like to go through the slides. So Slide number 3, Scorpio is really well-positioned for what's going to come down here in terms of regulation, whether it's low sulfur, whether it's the 2020 time period, too. We're the largest and the youngest product tanker fleet, and age really does matter. So I'd like you to take a look at this sort of column and our age fleet down at 2.5. Yes, we have some competitors, but you know, TORM is sitting there at 11.7. I'd like to help you investors and analysts analyze the fleet. It is not even the average age of a fleet that matters. What matters is more how many vessels you have that are approaching 15 years old in the product market. So you can order a couple of ships, for example, to lower your corporate average. But if you've got 40% of your fleet that's 12, 13, 14 years old, approaching 15, you're in a lot of trouble. You're in trouble because you're not going to achieve the same type of revenue or premium cargo, and probably you are going to have to spend a considerable amount of money in terms of CapEx, whether it's maintenance or replacement.

Scorpio Tankers, right now people buying the stock and investors in Scorpio Tankers that have benefited from all the investments that have gone before you in the sense that Scorpio Tankers, as Emanuele points out, is fully delivered. We're done on the CapEx. It's a pretty simple company to analyze right now. It has pretty low operating total CapEx going forward. There's very little dry docking CapEx in terms of real maintenance costs on a fleet this young. We have no newbuildings. We do not intend to go and order newbuildings either. So in that sense every [side] of the improvement in cash flow goes straight to the bottom line to us all in terms of shareholders.

Slide number 4, if we just look at MRs for a moment, and this is pretty interesting, is that you are coming to a point where you're having more MRs turning 15 years old than you actually have newbuildings delivered. So this is an indication that the actual supply that you're reading at the moment, the future supply, may not be as much as you may first perceive without fully understanding why 15 years matters. And it matters because certain customers will only employ product tankers that are 15 years or younger in the product trade. This obviously limits your trading opportunity for older tonnage and creates a two-tiered market. And it's not -- therefore this hits you on the revenue line. It just doesn't hit you just on the cost of fuel or the cost of maintenance. It hits you because simply you cannot turn up and load the very cargo that you could load if the vessel is less than 15 years.

We turn to Page 5. We can see that in our pools there's partly a benefit of the quality and the newness of our fleet and the [homogeneity] they're giving to the customers and the fact that we can get contracts where others can't. We've continuously outperformed the market in all the classes of our vessels.

We're actually not satisfied with our own performance. We believe we've got something in the product market that no one else has had, and we have a market that no one -- that hasn't occurred in history. We have a fleet that is a very large fleet. We have the right critical mass in any single category to win contracts, et cetera. Also with our pools we add to that other vessels as well. Now what we haven't done yet is we haven't shown you what we can do with this fleet because primarily it's just delivered in the last sort of year and a half, combined with a market that is now much more articulated, diverse, and creates much more opportunity to outperform in terms of triangulation and backhauls.

One of the things that we've done recently is really strengthen our ability to do that, not just in terms of delivering assets, but in people. We have strengthened our bench. We have hired a very, very senior person to head up our Commercial, strengthened our Chartering Division and our Operations Division, and we're only just now -- we are just starting to see this in the MRs. This was only put together right at the end of last year. But you're already seeing in the MRs some of the benefit of that part of the equation. So we're not just sitting here satisfied that the fleet will do the job.

Other highlights here, Slide 6. We're seeing that inventories across the globe are generally declining. This is a good thing. We've pointed to every phone call and conference call that the [headline] demand for products around the world is extremely healthy, but that we're hindered. The spot market cannot lift until we've stopped this inventory draw. But we've got to be fairly close now. Asset values, as we've indicated, as we concur with Ardmore, Ardmore another company with a modern fleet, a good fleet, we concur that [asset] values have increased year-over-year.

Also the spot rates right now are higher. They're higher year-over-year. This is a very good indication. If we remember the dry cargo market, it wasn't so long ago where people, analysts were starting talking about runways, runway to survival liquidity. That's a telltale sign that you should be buying the market. Normally when the analysts turn to that like they did in dry cover we're really reaching a bottom. The telltale sign for the -- in hindsight for the dry bulk market recovery, as was the same as the container market recovery last year, was the first sequential quarters of gain in revenue as a year-over-year and/or quarter-to-quarter.

Going forward we expect the refining capacity additions in 2018 to double over '17 and to increase from there into '19 and '20. And as Emanuele said, Scorpio has significant operating leverage to market recovery. Another thing, Slide 7. I read after the Ardmore call a couple of people writing notes that oh well, you know, how can the product market recover when the crude oil market is in a mess? Well yes, historically, you know a few years ago there was almost a 0.9 correlation between products and crew. That was for good reason. But that correlation is slowly, slowly disappearing as the world's proportion or ratio of refined products is getting greater over crude and we're developing more refineries and the crude market has its own related issues. And this is a very brutal graph. This is a very brutal slide. We're seeing here that product rates have moved up from the 13th of February to the 13th of February 2018. They're higher on the products. They're significantly higher in the Atlantic, which is, you know, is a major market. On a blended position here they're probably 30%, 35% higher than where they were a year ago. And if we look at the right-hand side we see the two crude groups, Suezmaxes and VLCCs. So in the same sense that not all product tanker fleets are the same, age matters. Not all tankers are the same. It matters which one you're in at the moment.

Then next is a simple slide illustrating the refinery growth, and then finally -- we'll try and keep this short -- number 9 is just this little table here showing the operating leverage to the market recoveries that the company has. And on the basis of time to allow as much as we can for questions, we'd love to open up the -- oh, one more thing. Just quickly, I'd just like Cameron to describe to you how we view what's coming down in '19 and '18, '19, 2020 with regard to the low sulfur and scrubbers, et cetera, et cetera.

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Cameron L. MacKey, Scorpio Tankers Inc. - COO & Director [5]

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Thanks, Robert. I think lost in the conversation about scrubbers in 2020, people overlook that by almost every estimate there's going to be very little uptake of scrubber technology in the fleet on the water. So what this creates at the time of the regulations, new regulations come into effect, is a tremendous shock and positive catalyst to demand for product tankers because at that time you'll have 2.5 million to 3 million incremental barrels per day of diesel required by ships, which will either mean bunkers on the water finding ships or ships diverting to find compliant fuels. So the first thing I would say is the short-term catalyst and longer-term step change in demand is going to be extremely positive for product tankers generally and our fleet specifically.

The second point I'd make is, again, bearing in mind that there's going to be very little uptake of scrubber technology and investment in ships, that the higher the price of fuel we get back to what we've said for years, which is the more efficient ship will win, and that price differential or higher price of fuel will benefit the most efficient and best designed vessels, again playing to our existing fleet.

And the final point I'd make is not all ships benefit the same from the determination or evaluation of scrubbers. In our models, in our option models, we look at the benefits to long haul, very, very large, inefficient vessels such as VLOCs, VLCCs, capesize vessels with very long ocean passages as perhaps much greater beneficiaries to scrubbers than smaller ships like product tankers, or chemical tankers, or small container ships. So again, in our estimate this is much more about a demand transformation or a demand benefit than it really is about the pros and cons of incremental CapEx. With that I think we're going to open it up to questions, operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jon Chappelle of Evercore. Your line is now open.

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Jonathan B. Chappell, Evercore ISI, Research Division - Senior MD & Fundamental Research Analyst [2]

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Thank you. Good morning. I'll just keep it to two quick ones given the time restrictions. First of all I think in retrospect it was probably foolish of me and other people to assume that you can integrate a fleet like 27 vessels on September 1 and have everything run smoothly in the fourth quarter, so I understand the costs and the off-hire days associated with that. But as we think about going forward has everything been integrated into the pools, tanks cleaned, et cetera, et cetera. as of January 1 so we start this year off with the full integrated 109 vessel fleet?

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

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I'll take this, Jon, and then Cameron can intervene. As I stated in my opening remarks, 21 out of the 27 vessels are now under our technical management, so we still have 6 to go, and we actually have less now. But in the first quarter you will see that 6 vessels will enter into technical management. Having said that on the cleaning costs, et cetera. there were only 5 LR2s which had a crude or a dirty background cargo history, and those have been cleaned up. At this stage all 5 are operating clean.

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Jonathan B. Chappell, Evercore ISI, Research Division - Senior MD & Fundamental Research Analyst [4]

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As of January 1st?

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Emanuele A. Lauro, Scorpio Tankers Inc. - Founder, Chairman & CEO [5]

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As of January 1st one was still in the middle of our cleaning process. Four were [operating] clean. So you will see some cleaning in January for one ship.

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Jonathan B. Chappell, Evercore ISI, Research Division - Senior MD & Fundamental Research Analyst [6]

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Great. Second question is -- I agree with a lot of Robert's comments. Obviously it's public what we've been writing, but the set up to date for product tankers looks a lot like exactly when we were in the depths of the doldrums in dry bulk two years ago, and I'd say the asset values moving in the order book, et cetera, et cetera. all kind of point to positive momentum. The one kind of vote of confidence that we got at that time in Scorpio Bulkers was pretty persistent buying by the private management company or the family. Can we expect to see the same thing, especially given the discount of the stock price to that range of NAV that Robert just mentioned from the family and STNG?

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Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [7]

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I think you would say -- I think you have to do a couple things. First of all, we have been buying. We invested a further $20 million in December. Obviously we've been unable to, you know, we've had to frustratingly sit on the sidelines not just in terms of being able to say what was going on, but being able to act on anything quite rightly because we've been locked out because we have materially, you know, material information. We make no secret that, you know, that we believe in the future of the product market, and we absolutely think that this is a fantastic opportunity right now in terms of STNG, et cetera. And yes, it's setting up nicely in terms of like the dry cargo market with the following exceptions, is that unlike in the dry cargo market it took about a year before companies in dry cargo, including SALT, could get out of their own way and start to make operating breakeven. What I think is amazing for STNG is that despite the fact that obviously the market is weak, and we think it's starting the edge of recovery, every day the company has earned enough money above operating and interest to contribute to us all as shareholders. And STNG, unlike SALT in dry cargo, is virtually unique up there in terms of its liquidity, size, et cetera, et cetera. And there's only sort of one other public company in Ardmore, which is pretty complementary in terms of age profile, et cetera, et cetera. So yes, we think it's setting up nicely, and same sort of panic now and rumors and everything like that. The difference is, is that -- and I think I'll be pretty open with you -- is that there are different reporting positions for the private side in STNG at this point than there was for SALT. So whereas in SALT the market saw every day when we bought because we were filing -- we were a [D filer]. So that has a very different hurdle. STNG, the SSH and STNG, fortunately for us as buyers of the stock in STNG, we don't have to sort of announce every day whenever we would be buying and sort of work against ourselves in that way.

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Operator [8]

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Thank you. And our next question comes from Fotis Giannakoulis with Morgan Stanley. Your line is now open.

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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [9]

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Yes, hi gentlemen and thank you. Robert, you talked about the several concerns about your liquidity and the balance sheet and as the main reason why your stock has underperformed lately. Can you give us some comfort about this liquidity and what the people talk about runway? You have a lot of cash in the balance sheet. If the market stays as it is, how long is this liquidity sufficient? And what other options and alternatives the company has to generate liquidity? You know, talk about if you can, about your debt, amortization or your vessels that they are unsecured or they have a low leverage.

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

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Sure. So I think the first part is that it's been [pretty] known to us, been advised to us. We've even had unsolicited offers that, you know, a bunch of people and rumors. And you know we've even had banks offering us unsolicited [that]. Obviously they thought that maybe we were earning 10 a day or 11 a day or looking at indexes and the cash bleed was higher, et cetera. In effect -- and I think partly there was a bear raid on behalf of a couple of potential converts to basically we'll be forced right now to go do a capital raise to deal with converts. And the reality now you can see is that our cash burn is much less than people could have anticipated of market indexes that they were using, that the company has already said the reason we did that raise was to give ourselves time to look and watch. Emanuele said that we're focusing on that. We're not naïve to the overall situation. But at the same time we do have time. By definition with the asset values going up -- and this comes to your second part of the question -- that itself creates more, a stronger balance sheet. You have a greater spread here between, for example, between not just the NAV goes up. The net debt to equity based off loan to values goes up. So that gives you more of a optionality. You have more optionality in terms of the values in the ships themselves to create liquidity. The company is a good behavior company. It's not on, you know, remission or, you know, in remand somewhere from lenders. This is the same management that guided and husbanded a dry cargo company with exactly the same lending group through a 50-year low in dry cargo where it was nowhere. So one of the resources, which we're not there at that position. We're there. One of the resources, obviously you talk within your own positions. You talk whether there's any flexibility in your own loan structures as a shipping company. You look as to all the different angles to sell ships or to do things. But right now we're making our lenders very aware of the situations. We always do. We're very communicative to them. But I think everybody is very nicely comforted on the physical side of the company with this expansion in our net asset value and the fact that we've been earning enough money to pay down debt in the meantime. So apart from that I don't think we have any more comments to that particular subject at this time.

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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [11]

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Thank you, Robert. That's very helpful. Is it possible to comment, give us your thoughts about the refinancing of the convert? What is the timing that you will start looking something like that, and what kind of alternatives do you think that you can have to give more comfort to investors?

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

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Well we're certainly not looking at it right now. I mean it's not even -- you know we had a board meeting on earnings earlier in the week, and it wasn't on that agenda. And we have a board meeting next week, and it's not on that agenda. There's a lot of interest. I mean we've had, as I said, unsolicited offers from various people. We've had people in the convert market saying, you know, trying to say well, you know reversed inquiry. But this is not the time to look to refinance the convert. You know you may never refinance the convert. You may end up paying the convert down in cash. This is the whole thing of, the whole idea of why we took equity back in December. And everything is quite logical from what we said. I mean we were criticized in December for doing an equity transaction below the net asset value in December at $3.00, but we did it in order to create time and stability in the company. And as I've said, since that point the values have gone up, and we've made positive cash flow. So right now, as I say, it is not on the agenda. So without it being on the agenda, that's it. There's no time (inaudible).

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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [13]

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Thank you, Robert. That's very helpful. One last question about the market. We've seen that certain parts of the market that are doing okay, like the [planting] market, actually they are better than most people expected. Certain parts of the world are quite weak. There are a lot of discrepancies. Can you give us some color why these discrepancies? And also if you can explain a little bit more in detail what is going on with LR vessels, the LR2s are earning, you show in the first quarter $15,000. The LR1s, which they usually trade at very close margin with LR2s. They are doing much lower. Why is these kind of discrepancies around the world?

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Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [14]

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I think part of the LR -- for us particularly in the LR1s we haven't yet integrated the LR2s -- the LR1s properly into our commercial system and our contracts. That's something we have to work on. You're right; there are a lot of discrepancies. I mean two markets, the East Mediterranean and AG to East Africa are actually 20,000-plus in terms of MRs. So those are strong markets. And you know, but this is typical of a market that's trying to find its feet. And I think that a supportive thing to why the market is actually getting better, and it's turned -- it's already made that turn from the bottom -- is this volatility, this volatility and discrepancy between markets. So a market that has bottomed out is a market where there is really nothing. It's just everything is in a mess. There's just too much supply for every single region in the world. There's no arbitrage going on in demand. It's a mess. A market that is recovering and is recovering and potential -- and it is starting to [soon] and is starting to spike and is creating some sort of excitement for the owning side and for the charterers -- charterers are starting to take in more tonnage and go longer the market. The customers are seeing this well before we are seeing this. And with time charter activity the rate going forward is even higher than where it is today, and the frequency by the charterers is even higher. It's because we're seeing this volatility in different areas. It's simply because we're seeing one area up and another area down. The one moment there is a (inaudible) opening that is creating trade, and immediately that rate goes upwards. But the fact that all the markets, even the worst markets, are trading above operating cost and interest and some are actually starting to become okay, is a positive sign. It's a positive sign that that volatility is there and the market is starting to bubble.

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Operator [15]

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Thank you. And our next question comes from Spiro Dounis with UBS Securities.

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Spiro M. Dounis, UBS Investment Bank, Research Division - Director and Equity Research Analyst of Shipping [16]

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Good morning. Thanks for taking the question. Wanted to come back to asset values, Robert. I think we've seen a lot of the pressure points of the cycle unwind a bit here. We've seen steel values come up. We've seen foreign exchange pressure ease a bit. So just curious what you think it's going to take to move asset values up another leg here, and do you think that that happens ahead of product rates, or is it the other way around?

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Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [17]

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Well I think we've already seen asset values tick up ahead of rates. But more importantly, your rates are disguised a little bit to you guys because we've also seen time charter rates go up. So we've seen the one year time charter rates go upwards from the bottom and the activity from customers go. And we've seen asset prices move up. Asset prices have moved up more because they have some special elements. You've got obviously the weaker dollar. You've got input costs into shipyards. And you've got this discounting mechanism going on in the sense that Wall Street is not discounting at the moment. It's acting out of a bit of past fear, but the actual shipping markets are starting to discount. It's unarguable to the shipping community that a new ship is going to be better than an older ship in the product market, in the container market, the dry market, the crude market. That's unarguable amongst us all sitting around the [bar]. We don't fool each other. The second aspect of it is, is that it is unarguable that yard input costs, that yard tensions are going up. There are certain sectors such as dry cargo are already getting orders. Containers are getting orders. [Gas] are getting orders. So shipyard supply is starting to tighten up, and we can see, all of us can see, the demand side getting tighter. And we're being pulled along by the forward curve which is getting tighter. So that's what's taking prices up ahead of spot rates.

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Spiro M. Dounis, UBS Investment Bank, Research Division - Director and Equity Research Analyst of Shipping [18]

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Got it, got it. Second one, just on the election of chartering some vessels here. Can you talk about the motivation there? You're obviously still constructive on the market, so that makes sense, but why not just wait it out at this point? You've got significant leverage to upside here if rates recover. Why charter in more?

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

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Because we can make money on it.

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Emanuele A. Lauro, Scorpio Tankers Inc. - Founder, Chairman & CEO [20]

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Most of the charters have -- most of the charters you will have seen, Spiro, were extension of current charters, and the view is that the rates, the delivery positions and the rates were actually advantageous to the company, and we just decided to stay with the ships.

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Operator [21]

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Thank you. And our next question comes from Randy Giveans with Jefferies. Your line is now open.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [22]

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Hey, thanks, guys and good morning. So long-time listener, first-time caller here. Just a few quick questions. I know there's been some concern about the cash burn. We talked about it earlier in the call. Looks like you had basically positive operating cash in 4Q '17 so what are your cash breakeven rates for LR2s and MRs?

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

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Hey, Randy. So if you -- yeah, obviously the operating expenses that we need to cover, right? And then interest for the LR2s, you're looking probably around -- where are we here -- you're looking around $4000 a day, and principal, around $5500 to $6000 a day.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [24]

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Okay, so about $16,000. What about the MRs?

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Cameron L. MacKey, Scorpio Tankers Inc. - COO & Director [25]

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MRs are just going to be a few thousand dollars less than that, so about $2500 less than that.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [26]

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Perfect. All right, and then one more. Dividend sustainability or growth plans? It seems like share repurchases or convert buybacks would be more accretive at this point, so should we expect a kind of $0.01 dividend maintained?

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Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [27]

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That's up to the board, but at the moment yeah, there's no plans to cut the dividend. We just announced the dividend.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [28]

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Sure, meaning if it's going to be growing or if you're going to use that cash for other more accretive purposes?

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Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [29]

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There a lot more accretive purposes right now than using surplus cash (inaudible) increasing the dividend.

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Operator [30]

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Thank you, and our next question comes from Greg Lewis with Credit Suisse. Your line is now open.

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Gregory Robert Lewis, Crédit Suisse AG, Research Division - Former Senior Research Analyst [31]

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Yes, thank you, and good morning. Clearly there's been a lot of conversation about asset values on today's call. Could you talk a little bit about the S&P market and sort of, you know, asset prices are going higher and sort of is there a lot of volume in the S&P market? What types of vessels are being transacted in that market? Any kind of color around what's going on in the S&P would be pretty helpful.

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

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There's not a high amount of volume because there is not a, you know, there is more volume in the older vessels. We've seen International Seaways let go of some of their vessels as they approach 15 years old and after they've, you know, obviously acquired newer VLCCs. And in that mid- 2009 to older, yes, those have sort of transacted. But there is not much volume in the newer vessels because there's no willing sellers, and none of the sellers need to sell. I mean if you -- the majority of the new vessels now are held in reasonably strong hands. I didn't hear any stress from Anthony Gurnee on the Ardmore call. I don't see any stress. I don't see that Valero need to sell their new ships, or Vito need to sell theirs, or Shell. And that I think is [rather] a unique thing in the product market is most of these new ships are really held between a few owners and oil companies and traders.

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Gregory Robert Lewis, Crédit Suisse AG, Research Division - Former Senior Research Analyst [33]

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Okay, great. And then Emanuele, in sort of your prepared remarks you mentioned your expectation that ton miles were going to expand later this year. Could you just sort of provide any color around your thoughts around why we should be thinking ton miles will go higher later this year?

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Emanuele A. Lauro, Scorpio Tankers Inc. - Founder, Chairman & CEO [34]

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Sure. You see also on the slides, Greg, that on Slide 8 we have the refining capacity additions, and clearly there is nearly double of the additions that there are in 2017, that there were in 2017. And looking at the geographical location of this addition, it just points into the direction of increasing ton mile demand. So that's where we -- that's what we expect, at least.

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

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Okay, like Emanuele had previously said, we're really sorry. I know there's five or six questions. As Emanuele said, we're really happy to take those off-line directly to management, but we have to finish this conference call now. Thank you so much for your time, attention and support. Thank you very much, everybody.

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Operator [36]

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