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Edited Transcript of STNG earnings conference call or presentation 2-May-19 12:30pm GMT

Q1 2019 Scorpio Tankers Inc Earnings Call

May 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Scorpio Tankers Inc earnings conference call or presentation Thursday, May 2, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian M. Lee

Scorpio Tankers Inc. - CFO

* Emanuele A. Lauro

Scorpio Tankers Inc. - Founder, Chairman & CEO

* Lars Dencker Nielsen

Scorpio Tankers Inc. - Commercial Director

* Robert L. Bugbee

Scorpio Tankers Inc. - President & Director

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Conference Call Participants

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* Christopher M. Snyder

Deutsche Bank AG, Research Division - Research Associate

* Christopher Warren Robertson

Jefferies LLC, Research Division - Equity Associate

* Liam Dalton Burke

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

* Max Perri Yaras

Morgan Stanley, Research Division - Research Associate

* Noah Robert Parquette

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

* Sean Edmund Morgan

Evercore ISI Institutional Equities, Research Division - Analyst

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Presentation

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Operator [1]

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Hello, and welcome to Scorpio Tankers Inc. First Quarter 2019 Conference Call. I would now like to turn the call over to Brian Lee, Chief Financial Officer. Please go ahead, sir.

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

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Thank you, and thank everyone for joining us today. Welcome to the Scorpio Tankers 2019 First Quarter Earnings Conference Call. On the call with me are: Emanuele Lauro, Chief Executive Officer; Robert Bugbee, President; Lars Dencker Nielsen, Commercial Director; and David Morant, Managing Director; James Doyle, Senior Financial Analyst.

Earlier today, we issued our 2019 first quarter earnings press release, which is available on our website. Information discussed on this call is based on the information as of today, May 2, 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 recorded live on the internet, and it is also being recorded for playback purposes. An archive of the webcast will be made available on the Investor Relations page of our website for approximately 14 days.

If you have specific modeling questions, you can contact me later and discuss it 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, and thanks, everybody, for your time today. I'm pleased to report our first quarter 2019 earnings, which bear witness to the strong recovery in the product tanker markets. We have now put the company in the optimal position to profit from the upswing in these markets. It is pleasing to see the results of the hard work is returning the expectations in what are our first quarter numbers.

As those who have followed our commentary will know, the upswing has not surprised us. Nonetheless, it is satisfying to see Scorpio Tankers capturing this opportunity as the largest, most modern, and most liquid product tanker company. We are close to be perfectly positioned to benefit from the unique market development we believe is now upon us.

On this call, you will hear from Brian Lee regarding the ongoing work to position the balance sheet optimally. Our technical departments are engaged in one of the largest dry docking and scrubber retrofit programs in the industry. Lars Dencker, our commercial director, will also take us through the first quarter and the current quarter-to-date trends.

Before that, I wanted to take a step back and summarize why we believe the unique confluence of factors now play in our favor. Firstly, cyclically, the product tanker order book stands at multi-year lows, a factor which is almost unique amongst the shipping sub segment. In coming quarters, the underwater fleet continues to age, whilst demand at least normalizes back to its 20-year-long GDP-plus trend growth.

Structurally, new routes and arbitrages are opening. This much anticipated shift further enhances our ton-mile growth into the upswing of this cycle. Many of the biggest factors, such as Middle Eastern refinery capacity additions, have yet to bear fruit but are now imminent.

Lastly, secular growth; this is assured from the enormous dislocations that the IMO 2020 measures are providing. This one-time expansion in the size of the market for sea-bound refinery product is unique in recent memory. Furthermore, it comes with enduring positive secondary effects, such as expanded physical arbitrage, global distillate imbalances, and improved refinery margins.

In short, our first quarter numbers demonstrate that we have started to see the much anticipated acceleration of product tanker rates and markets. We think that after a slower second quarter, due to refineries' maintenance and turnarounds, the best is yet to come.

With that, I would like to hand the call to Lars Dencker, our commercial director.

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Lars Dencker Nielsen, Scorpio Tankers Inc. - Commercial Director [4]

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Thanks, Emanuele. Good morning, everyone. I would like to take a moment and reflect on the first quarter clean tanker markets, which demonstrated a strong recovery in the product market segment. In Q1, freight rates in all of the four product segments, LR2, LR1, MR, and Handymax, were at levels not seen since 2015. We anticipated this market move back in October and November of 2018, and the market continued with some strength into January, February, and to a large extent, into March. The tightness in capacity for quality units was apparent, and the product shipping markets enjoyed a robust trading quarter. The rise in rates was not formed by extenuating factors, like harsher winters, geopolitical shifts, or a sustained (inaudible) in product markets. In shipping terms, we had an uneventful fourth quarter of 2018 and first quarter of '19, but still experienced a remarkable rate recovery. More so, we are witnessing a fundamental change in market dynamics.

Going forward, we anticipated a weaker second quarter, influenced by greater refinery turnaround activity in Asia and the U.S. Gulf, and in Europe. Refineries in various regions have been offline, providing routine maintenance, and frontloading refinery work in preparation for IMO 2020. We do expect refiners to maximize product of middle distillates in the second half of the year, and many will prepare to run flat out in anticipation of IMO 2020. Enhanced dry docking and scrubbing installation will impact tonnage availability during the second half, introducing the potential of further market tightness during the third quarter.

We are currently in the tail end of this large refinery turnaround. Nevertheless, we are already seeing signs of an earlier-than-expected rebound in LR2 markets. In the last 10 days, LR2 rates have moved up 25 points on the benchmark TC1 route from the Arabian Gulf to Japan, increasing triangulated earnings with the North Asia backhaul by U.S. $5,000 per day, seeing time charter equivalent returns moving back to $22,000 per day. For comparative purposes, the markets in 2017 and the first 3 quarters of '18 didn't experience proportional rate values as seen in the last two quarters. This is arguably a clear indicator of underlying market resilience and reduced tonnage capacity, negating protracted flat-lining of rates.

Products, including [ULSD] are still moving long haul, and we're expecting that to move to provide further market stimulus, following a quiet period in exports. LR1 has seen turbulence with this refinery turnaround period, but this market is also seeing similar signs of an uptick in the second quarter of '19.

On MRs, the first quarter was solid in all main trading regions, the Atlantic Basin, TC2, TC14 combos, and Asian markets, including the transpacific runs, showed TCE returns in the mid- to high teens. In the West, this was realized on the back of increased Mexican and West African imports. The declining U.S. inventory, widened U.S. gasoline [cracks] supporting increased 1Q imports. And for the East, Chinese exports underlying healthy tonnage demand.

As we look to the second quarter of '19, the MR sector has seen limited impact in utilization by the turnarounds, as efficient triangulation has provided sustainable returns during this lower maintenance season. We do expect some turbulence in rate levels through the second quarter in MR rates, and in the short term, in the smaller Handy segment.

Overall, market volatility has been elevated, indicating higher levels of utilization, impacting true supply/demand economics. We should not discount a shift in general market sentiment, providing markets' participants the impetus to push for market elasticity earlier than had been experienced in prior time periods. Cargo backhauls, (inaudible) triangulation, reducing ballast (inaudible), and the increase in ton-mile issues are playing an important part in the mix for the market to extract the marginal freight dollar. In the past, the smaller MRs and LR1s were considered the (inaudible) workhorse, enjoying a higher utilization level and superior (inaudible) to ballast ratios. Today, on the heel of expansion of the global refinery and terminal footprints, LR2s as well are experiencing new arbitrages and backhaul routes increasing utilization. In essence, LR2s will likely outperform at the margin, as economies of scale, with the advent of increased triangulation, will magnify the earning upside.

Exports from the U.S., the U.K. continent, the Baltic and Black Sea areas are now finding homes in Australia and North Asia, West African product exports going to Asia or the U.S. And conversely, (inaudible), we see North Asian [molecules] going long-haul west. We can anticipate an increase in incremental tonnage demand, as product flows at the margin again move in new directions, adding the benefit of triangulation and important backhauls of new loading areas to the increased ton-mile demand.

So to conclude, four points: we are pleased with our first-quarter performance, where we have seen the strength we anticipate across all vessel segments. Secondly, Q2's seasonal weakness has been, as expected, more pronounced than normal, with refinery outages front loaded. This effect is increasingly behind us, reinforcing our expectation for a strong second half. Thirdly, new routes and physical [arbs] are now coming online, increasing ton-mile utilization, particularly in our LR2 segment. Lastly, with the Q2 lull now largely behind us, we can now look forward to the unique opportunities of IMO 2020, with our large, modern, best-in-class, scrubber-equipped fleet.

Thank you, and with that, I'll hand the call back to Robert.

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

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Thank you very much, Lars. Just a couple of things. First, we'd like to apologize to everybody who has incurred some waiting this morning. Simply, there's been a lot of activity and the system's had some queuing, so our apologies for that.

Secondly, Cameron won't be able to join us today, so we would prefer, if possible, that analysts don't really ask too many questions on scrubbers. You know, we've published a lot on scrubbers. There's something in the earnings about our budget and on the slides on what we think. But by all means, after today, please take direct contract with Cameron if you have any questions on those scrubbers.

And thirdly, you know, the main takeaway that I would sort of take from Lars's introduction is that, you know, we're really happy with the way this product tanker market is developing. It continues to show year-over-year strength on the fundamental demand in the product tanker market, and that's without any effect yet on IMO 2020. And I think that the, you know, what the market (inaudible) to the second quarter should be understood that we have some really deep refinery turn-arounds around the world. So for the fact that the market is stronger than where it was this time last year, despite the really deep refinery turn-around, gives us really great confidence that as soon as these refineries start coming back on, that the market's going to move higher. And then, as we move into the IMO position, they're going to move significantly higher. And as Lars says, we would expect that the LR2s are really going to expand their differential over the MRs and the rest of the fleet as that demand comes in.

And with that, let's like to open it up to everybody for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Amit Mehrotra with Deutsche Bank.

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [2]

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This is Chris Snyder on for Amit. First, on the market, so rates have certainly held in better than expected, especially when considering front loading refinery maintenance. It does seem like underlying demand has been strong with, you know, reduced global inventory levels, and we're seeing refinery capacity additions. But I was wondering, has there been any sort of IMO tailwind creep into the market earlier than expected, whether it be from some storage opportunities pulling capacity out or just product testing?

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Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [3]

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I'll be happy to have Lars or Emanuele add to it, but you know, no. I mean, it's a -- you know, you might have some very small testing that's not really affecting the market. I mean, without -- I don't know how open we can be, Lars, but we've done one or two ship-to-ship transfers in preparation for later, but nothing that's really helped the market much.

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Lars Dencker Nielsen, Scorpio Tankers Inc. - Commercial Director [4]

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Yes, the short answer is no, it hasn't. There's not tail to it yet in the product market. We're still -- this is still a very normal market.

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [5]

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Okay, well that's good to hear. Then just kind of following up on rates, I think most kind of suspected that MRs would be the primary IMO beneficiaries, with just increased oil volatility driving demand from traders. But lately, oil traders have been more active on the LR side, and you guys seem pretty bullish on the LRs in the prepared remarks. So I'd just be interested to hear what segment you guys think is better positioned for IMO.

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

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Well, it's again, (inaudible). I mean, they're all going to benefit from IMO. There's no question. You would expect anyway in a strong market for the highest vessel, you know, in the food chain, the one with the most economies of scale, to do great in a strong market. That would be what you would expect in, you know, VLCCs to outperform, you know, Aframaxes in the same sense as you expect very large gas carriers to outperform medium ones. So, first of all, we're going into a strong environment, so LR2s should expand and start to trade at a multiple. We saw that this winter. I mean, this winter we had fixtures on the MRs in the 30s and the LR2s, you know, a couple of voyages hit the 60s.

The second thing is, historically, that is what happened. That's what happened in the last cycle, that at the beginning, the differentials aren't very high. And then, as you got into the upswing of a bull market, you know, LR2s were performing 50%, 60% more in earnings than MRs. Now as to this cycle, and Lars can go into detail here, where LR2s are becoming a trading vehicle, too, in the sense that we used to 10 years ago just take LR2s from the Arabian Gulf and discharge in Japan and come back to the Arabian Gulf. Now they're part of the arbitrage itself and are triangulating in a big way.

The last point is the LR2 market is probably, in bulk shipping, the most consolidated asset class. There are very few owners who have LR2s. And a lot of the vessels are taken by traders, and the owners who have LR2s are pretty strong owners who are working in a consolidated market, so that gives them certain advantages, too, over MRs that have a, you know, more disparate and fragmented ownership. Lars, would you like to add to that?

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Lars Dencker Nielsen, Scorpio Tankers Inc. - Commercial Director [7]

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Well, I mean, I think you touched very correctly on the different points. You know, the economies of scale obviously are very apparent. In the past, you know, the LR2s were more constrained by terminal restrictions and other limitations around that. As the world has developed and the expansion has taken place, there's a lot more places where the traders can point the LR2s at, giving them the flexibility that they need to trade the position. You know, we are seeing today ships that we are fixing out of the Arabian Gulf during the standard voyages into Japan, reloading the vessel out of Korea, taking that cargo into the Arabian Gulf, reloading in the Arabian Gulf or in the Red Sea, taking that to the continent, and then reloading that vessel out of Norway and taking it to Australia. You know, that's obviously a beautiful example. It's a true example, but this is where were going.

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

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Yes, and for this call we haven't really done it, but later in the year when we can get more descriptive and everything, we'll -- you know, I think you'd be shocked to see the utilization on LR2s is going to be as strong as on MRs. And we'll start putting some statistics up later in the year on that.

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [9]

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Thank you for that, and then just lastly, you guys generated pretty meaningful free cash in Q1, and if rates inflect the way most suspect over the next 12 months, I think the next leg of the story will around break-even levels. I know it's kind of early, but can you maybe talk about the company's ability to bring that down over the next couple of years, whether it's just through naturally deleveraging or, you know, the opportunity to refinance maybe some of the sale and leasebacks? I think most of them have purchase options kicking in after the third year, if I remember correctly.

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

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Some of them come -- kick in after the second year, and some of them kick in as early as the first quarter of next year. So, you know, we could immediately start to, you know, from next year, start to move to creating less costly finance positions. And, you know, and yes, just on the projections that are generally out there from the analysts, that could be fairly meaningful. And if we get into, you know, generally markets are going to move at some stage to where they earlier spiked, so it is not unreasonable to expect LR2s, in reasonably short order here, to hit $50,000 a day, MRs to hit $30,000. You know, we'd be generating, even without any scrubber differentials, at about $25 a share in cash and maybe up to $28 or so if you added the scrubber. You know, that supported in the last cycle, you still wouldn't be at the top of that last cycle.

So, yes, what happens in shipping is, when you turn from a deep, cyclical bear market we've had for 10 years, and you move into a bull market, where you've clearly got a demand-side catalyst in IMO 2020, then your cash flow and cash -- it's transforming, and the first thing it's going to transform is the cash break-evens.

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Operator [11]

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Your next question comes from Fotis Giannakoulis with Morgan Stanley.

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Max Perri Yaras, Morgan Stanley, Research Division - Research Associate [12]

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Hi, guys, this is Max Yaras on for Fotis. Just wondering if you could give us some color on the time charter market, maybe 1 to 3 year rates, and scrubber versus non-scrubber fitted, kind of what you're seeing out there in the market, and maybe what levels you'd be willing to put away ships at.

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Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [13]

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I'll answer the last question for Lars. We haven't even considered putting the ships away. I mean, you're nowhere near what you can potentially earn in this market. But, Lars, happy for you to answer the first two.

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Lars Dencker Nielsen, Scorpio Tankers Inc. - Commercial Director [14]

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Yes, I mean, as an overview, the time charter market in all product segments, primarily probably in the bigger ones have started to move quite considerably, as the end users and traders have started taking positions in the same anticipation as we just went through. So, you know, there's no doubt that time charter rates have moved up to $15,000, $16,000 a day on MRs and non-eco, non-scrubbered, and LR2s are up in the 20s and high 20s if you go into an eco-scrubber fitted. There is a differential that is being discussed, depending on who the end user is, what that differential will be. Some are willing to put dollars down to it, up to $7,000, $8,000 a day on the bigger units. And obviously, as you progressively go down the size, that delta creeps in.

It is very difficult today to find high quality super eco scrubber-fitted MRs willing to do time charter. It's impossible, pretty much, to find in size any LR2s willing to do it. So we are today in a market situation where you are going to struggle finding ships if you have a big position to cover on time charter.

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Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [15]

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I think this is probably the hardest thing for you guys to actually see out there, is to see that the traders and the end users are really extending and wanting to extend the length of their books, and this has been going on now for 3, 4 months, and what is left. If you imagine all the weaker fish and the prize takers have, you know, given up early, and as you get deeper and deeper into what's left, you're left with stronger and stronger owners. And I think, you know, Emanuele, it will be great for you to comment on our attitude, but if anything, right now we'd be inclined to charter in good quality tonnage. There's no way we'd charter out, but we'd still be happy, I think, to add length to our book at these rates.

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Max Perri Yaras, Morgan Stanley, Research Division - Research Associate [16]

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Okay, yes, that's helpful. And then, kind of following up on Chris's last question on capital allocation, you know, expecting to generate a lot of cash here. You've obviously strengthened your liquidity position. How do you weigh dividends, buybacks, maybe growing the fleet here? What are your top priorities?

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

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Well, I think the top priority right now is to continue what we've been doing. We saw in Q1 that we were [doing] the baby bond very shortly. We've already started to buy back the '19 convert. We will finish acquiring the '19 convert by I think the end of June, right, Brian?

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Brian M. Lee, Scorpio Tankers Inc. - CFO [18]

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Beginning of July.

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

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Beginning of July, end of June, early July. And we will, you know, continue to take down debt on the margin and strengthen the balance sheet, because really, from about the first quarter 2020, we've got extremely little CapEx going out. As Emanuele has indicated, the fleet's very new. Then we can really play everything from a position of strength, and I think the first thing to do is to take down that leverage and to take down our, you know, expensive capital.

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Max Perri Yaras, Morgan Stanley, Research Division - Research Associate [20]

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Okay, and then just one final question, the release states that you're in discussions for about $120 million of liquidity boost for scrubber financing. Just any details you could provide on that. Should we expect maybe something similar to SALT, where there's more range in your current facilities, or is it a new facility?

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

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Brian?

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Brian M. Lee, Scorpio Tankers Inc. - CFO [22]

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The scrubber will be multiple facilities, including ones that we are expanding and then some new ones.

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

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I'd say the testament here is -- the simple thing here is that, you know, this is pretty efficient financing. It's adding to our additional ones, especially our bank finance. And you know, that just -- the banks are happy to lend on the additional flexibility that gives the company, and you know, they immediately see it accretive to the value of the vessel.

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

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With the collateral going up, it's very easy for them to do the loan.

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

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Yes. And you know, that's another thing you'll see. In the future, you're going to start seeing differences in valuation between scrubber-fitted vessels across shipping and non-scrubber-fitted vessels.

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Operator [26]

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Your next question comes from the line of Randy Giveans with Jefferies.

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Christopher Warren Robertson, Jefferies LLC, Research Division - Equity Associate [27]

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This is Chris Robertson on for Randy. Thanks for the time. So with regards to the refinery maintenance season, you gave a lot of commentary around that, but can you quantify that a little bit in terms of how much throughput on a percentage basis are you seeing kind of impacted by the maintenance this season versus last year?

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

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Well, it's difficult to really quantify it, but I mean, you know, it's there, it's real. You know, every single, you know, refiner has been reporting in its results and giving guidance that it's having extended refinery maintenance in order to prepare for the increased demand in IMO 2020. It's difficult to translate accurately into ton miles. But I mean, this is the deepest turnaround I think any of us have ever seen, so that is tremendously bullish for us, you know, really as soon as it stops.

And the other thing is that, you know, what people have to understand is that there's not that much time left. I mean, Ardmore have already said on their conference call, quite accurately, that they're going to start putting low-sulfur fuel on their ships starting the end of October. You know, where we haven't got vessels scrubber fitted, we're going to do exactly the same, and so are a bunch of others. And we already have delivery windows of end May, early, mid-June on what we're delivering now.

So I think that we would not be surprised if the product market starts to move upwards much earlier than September, October. It could move back instantly, the refineries come back online. And the LR2 market, in the last 2, 3 days, has shown some indication of that already, as you can see in the market reports.

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Christopher Warren Robertson, Jefferies LLC, Research Division - Equity Associate [29]

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Thanks for that, Robert, and a follow-up question from me on your comments around the use of free cash moving forward. So you talked about strengthening the balance sheet and operating from a position of strength, so I'm just curious, after that, would you give priority more to looking at returning capital through the share repurchase program, or perhaps looking at the dividend, or a combination of both.

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

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I think we have to get there, you know, when we get there. The first thing is to, you know, fully stabilize and increase the (inaudible) the company. And if you then move to a dividend, you know that it's repayable and it's steady, and then we'll see. You know, the share plans and things are dependent largely what happens with your stock price at the time. But, you know, for the foreseeable future, and we've already indicated certainly through the end of this year, you know, the priority is going to be on really paying down debt and really making sure we have a rock solid balance sheet.

I mean, I think that's the only thing that's missing in the Scorpio Tanker story. I mean, as Emanuele pointed out, the fleet's great. The fleet's in the water. It's modern, and it's going to be flexible to fix in the market. You've got liquidity in the stock price. You're highest in market cap. Let's just have a knock-out balance sheet. I think in the history of shipping, there's never been a shipping company that's had too much liquidity, never. I've never seen one. So let's get to the point where we've got too much liquidity, and then we'll take it from there.

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Christopher Warren Robertson, Jefferies LLC, Research Division - Equity Associate [31]

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Got you. And then, following up on your comment, Robert, about potentially chartering in some vessels, what's the opportunity like out in the market in terms of finding modern vessels that would fit into your fleet? Who'd be willing to do that right now?

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

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[It's] really, really hard, really hard. There's not a day that goes by that I sort of dial into Lars and hope he has a nice ship for us to do. Emanuele, are you seeing the same?

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Emanuele A. Lauro, Scorpio Tankers Inc. - Founder, Chairman & CEO [33]

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Yes, absolutely. I think consistent with what you were saying, Robert, it's there, it's apparent we should -- we're excited about it. We are monitoring the opportunities. We will take some more (inaudible). We are not desperate for it. We have a presence which allows us to be selective, but you know, the dynamics are unprecedented, that's for sure.

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Operator [34]

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Your next question comes from the line of Noah Parquette with JPMorgan.

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Noah Robert Parquette, JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst [35]

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I wanted to ask about, obviously, the LR2 market's been pretty good the last couple quarters, especially relative to Aframaxes. What are you guys seeing in terms of how much of the fleet is trading dirty versus clean? I just want to get a sense of, you know, how much of the strength has also been at the same time as there's been a supply increase, too. I imagine there has been a switch, so some color there would be great.

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Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [36]

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I don't think that -- we haven't had -- I mean, I don't see any switching of Aframaxes into clean, because it's pretty hard to do that. And most of those Aframaxes that are trading dirty, you know, are much older than the LR2 clean fleet, so you'd really need to have a really significant, sustained spread even for some of them to come over. And the vast, vast majority I don't think could come over anyway, just simply because of their condition and age for doing it.

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Emanuele A. Lauro, Scorpio Tankers Inc. - Founder, Chairman & CEO [37]

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Adding to what Robert is saying, I think that the way for us to answer the question is, whilst last year a lot of LR2 owners have chosen to dirty up their vessels, we were consciously keeping the fleet trading clean. Maybe even actually the last 24 months, there has been a substantial number of LR2 vessels trading, or switching to dirty. We were consciously keeping the whole fleet trading clean, and we're very happy about our decision.

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Noah Robert Parquette, JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst [38]

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Yes, I guess what I'm saying, though, is those other owners, are they kind of switching as well, now that they're seeing that strength? Because if that's happened already, it's certainly a bullish sign, but if it's yet to happen, then it's a different story. So I just want to understand.

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Emanuele A. Lauro, Scorpio Tankers Inc. - Founder, Chairman & CEO [39]

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It's not as easy as taking a decision and switching from one to the other. You need to go through a process which may take anywhere -- I mean, technically, it's not impossible. It' can take as little as 90 days to clean up a ship. However, you need to have the right cargo to put on that ship, and you know, it's not unprecedented that it takes a month -- a year to do that, to find the last three cargos that allow you to actually be classified as a clean trading vessel.

So, you know, it's not impossible, but people are always looking for opportunities. However, the traders which are historically the ones that have those cargos that allow you to clean the ship up are not that willing to give it away, because they know what's coming, and they are looking for, as Robert was saying in his earlier comments, they are looking for tonnage themselves. So they try and retain their optionality for themselves, and you know, don't give it away to the open market.

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

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I think we're also, if you're sitting there as a dirty Aframax owner, you know, you've had a fairly good winter. Things have been fine. The forward position looks good for you, too. Your oil demand is going up. You're going to come -- the crude oil market should move up higher, too, as soon as these refinery positions are over. And think what's going to happen in the world for crude oil, too. It's a really -- could be a perfect storm here because, you know, so much of the U.S. crude excess that's being produced is going to have to be shipped out of the United States in order to refine it in the more modern refineries around the world that are better suited to refine the products that are required for the future. That's one of the tremendous, you know, great ironies here, is that the U.S. is finally an exporter, but they haven't got the refinery complex to deal with some of it. So the crude oil market should do very well, too.

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

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It's also reflected, if I may say so, in the time charter rates of Aframaxes, which are still pretty strong.

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Noah Robert Parquette, JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst [42]

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Okay, thanks. I just had a question about the SALT investment (inaudible). You know, it made sense. We guess we understand why it happened at the time, but it gives your stock a bit of exposure to dry bulking. Since (inaudible) dry bulk's weak, we were concerned about an overhang. You know, fast-forward a year, you guys should be in pretty good shape financially. Is that an option in terms -- if you look at stock buybacks, is that an option versus open market purchases, or you would rather just not touch that?

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

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No, I think it's a -- I don't think that's really the way you would do that. You're going to do things in an efficient basis, which would -- if you ever did stock buybacks, you'd do it in the open market. That's the most efficient to do it. Especially as I just cannot imagine, knowing the management of Scorpio Bulkers and who own Scorpio Bulkers, I can't imagine they're exactly going to sell their Scorpio Tanker shares on block at a discount. So, you know, I think it is neutral. I think it's a great thing that Scorpio Tankers has its number one shareholder so committed to the future of Scorpio Tankers. I think that's a really good thing.

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Noah Robert Parquette, JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst [44]

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You guys probably have the inside track on what Scorpio Bulkers is thinking, too. So, thanks.

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Operator [45]

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Your next question comes from John Chappell from Evercore.

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Sean Edmund Morgan, Evercore ISI Institutional Equities, Research Division - Analyst [46]

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This is Sean Morgan. I'm on for John this morning. So you guys talked pretty glowingly about LR2s, and as we kind of are coming into this expected upturn, is there any thought about possibly getting more aggressive and either buying existing secondhand tonnage or new orders? And would that be weighted towards the LR2, given what you've kind of said about increased arbitrage opportunities, consolidated ownership, and the other attributes of LR2s versus, say, MRs?

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

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I don't think right now we need to buy anything. We have the largest fleet. Any addition of tonnage would be marginal at best on the acquisition side. You know, we've already pointed out where we think the rates could easily go. We're going to be throwing off nearly $30 a share in cash flow. That's pretty good on a stock that's at $25. That's a pretty good up side. And we think that the right and correct thing to do at the moment is to deleverage the balance sheet. So there is nobody in our group that is looking at secondhand tonnage. We're not looking at any companies to buy. We have bought the fleet that was the best fleet, the most modern fleet for this company to buy, and nobody is visiting shipyards that can build (inaudible) tankers.

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Sean Edmund Morgan, Evercore ISI Institutional Equities, Research Division - Analyst [48]

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Okay.

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

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That's one of the beauties of Scorpio Tankers is that the assets are in the water. They're fully financed. The age profile is fantastic. It's the most modern fleet. There's no requirement for Scorpio Tankers to go out and purchase fleets to create operating leverage, to create market share, to be relevant, or to renew its fleet because it's got vessels that are approaching 15 years of age.

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Sean Edmund Morgan, Evercore ISI Institutional Equities, Research Division - Analyst [50]

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Understood. And then, so you said that you're not interested in chartering out at this point, and you said if anything, you'd favor chartering in of additional tonnage. I think the 7 bareboat charters that you have extended, that makes a lot of sense. But is there any change operationally, from your perspective, from the new IFRS rule changes regarding bareboat charters, and does that impact what your strategy is at all, or is it just accounting semantics?

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

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It's just accounting semantics. At the end of the day, this is a cash-on-cash business. You know, we don't pay taxes. Those changes are something that Brian has to deal with, something that you have to deal with in your models. But in terms of your business decisions, your capital allocation decisions, they don't matter to us.

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Operator [52]

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Your next question comes from the line of Eric [Hovey] with Clarksons.

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Unidentified Analyst, [53]

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So with LR1 having completed (inaudible) and scrubber installation, is everything progressing as scheduled, or do you perhaps see some additions to the expectations? And secondly, about the fleet I guess already being the most fuel efficient power fleet, and on top of that, you [already have] scrubbers, so making this supercharged fleet. So in practice, how you think about this positioning amongst your peers and customer interests, can you talk about this position you have in the run-up to IMO 2020?

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Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [54]

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Okay, so first of all, we've included in the earnings release a fairly detailed time table for the scrubbers. That's the latest timetable. We haven't really seen any changes or delays in that over the last weeks and we will continue to update the market regularly on that.

First thing, with regard to competitors and inverted commerce, we strongly believe that the whole scrubber story is really a little shiny toy that's a distraction. We think it's better to have scrubbers than not, but the most overwhelming thing here is that the actual supply and demand in the product market is improving already. Prices are moving up on a seasonally adjusted basis, and we expect the demand side to get a tremendous catalyst very, very shortly that is going to create a rate inflection and a potentially large expansion of earnings and cash flows to any product tanker that is a clean tanker that's under 15 years old.

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Operator [55]

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

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Liam Dalton Burke, B. Riley FBR, Inc., Research Division - Analyst [56]

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You talked a lot about the order book early on in your prepared remarks. How much are you factoring in on the back end of the year any additional scrapping, as the inefficiencies of some of the older vessels become apparent and less economical?

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

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Not much. You know, we're also saying that, you know, we expect the general markets to be strong. You know, we even expect the dirty market to be reasonably strong. So I guess as some vessels come into 20 years' time, you might have some scrapping on their full special surveys, et cetera, et cetera. But the biggest thing that you are going to have in the product market every year now, and it's going to increase quite substantially, is basically effective removal from the premium trades of vessels that are over 15 years old. And that's not a scrapping; they'll just move from the premium trades to the dirty trades.

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Liam Dalton Burke, B. Riley FBR, Inc., Research Division - Analyst [58]

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Now with that movement, I mean, how long would it take the order book to begin to build again from what you mentioned earlier as being at record lows?

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Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [59]

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Well, it's going to take a while because to -- you know, you may get the odd one or two vessels that you could deliver in 2020, but not many. The other thing is that the shipyards themselves have consolidated. Some of the yards have closed down. Some of them have been paved over into commercial or residential real estate. And not all yards, it isn't like a [dry-docked] ship. There are only a select few yards in China that can build product tankers, and they're mainly confined to Korea. So I think that that's a good opportunity, and this is what potentially can set up a multiyear good position.

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Operator [60]

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Your next question comes from the line of  (inaudible) with (inaudible).

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Unidentified Analyst, [61]

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Just a question on the trade dynamics on the LRs. I mean, it's obviously not all easy to grasp, but I guess if the refineries are running kind of full throttle from second half of this year, there's going to be a lot of Naphtha and gasoline, especially in the Atlantic Basin. I mean, in the crude market, we're talking about potential floating storage scenarios next year. Could we see something similar happening on the product side?

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Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [62]

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Lars?

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Lars Dencker Nielsen, Scorpio Tankers Inc. - Commercial Director [63]

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Most certainly. You know, the oil markets have generally, over the last period, the time period, they've been in some parts of (inaudible), and if we start seeing, you know, structural contango as well, we will start seeing a lot of vessels moving into storage plays as well. But that aside, you know, I think where we're starting is that as we logistically need to prepare ourselves for IMO 2020, a lot of the product needs to move into areas where tankers might not be that easily accessible and you will have to use floating storage as your logistical solution. So, you know, there's all reason to believe that we'll see floating storage moving around in different parts of the world.

I know that some of the oil traders are using very large vessels now, testing out the floating storage in Singapore and so on for some of the products for low-sulfur. How that means for the product trade in terms of moving middle distillate in particular, that will be very interesting to follow. But all the way through, it's going to be positive.

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Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [64]

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And if we start seeing storage, you know, obviously any rate potentials that we've talked about so far will become low because storage will create a whole different view because you're restricting supply. But, you know, we're not counting on storage. It would be great to have it.

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Unidentified Analyst, [65]

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And then maybe as a follow-up, I mean, the U.S. refineries, they report to be pretty much in full distillate mode already. Is there a scenario where those refineries will be cutting runs due to poor gasoline use, or I guess, you know, will they continue regardless, just on the basis of the anticipation of strong distillate margins?

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Brian M. Lee, Scorpio Tankers Inc. - CFO [66]

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Well gasoline margins have actually gotten a little bit better, and there's been some discussions that they can pull some of the inputs going into gasoline and put them into diesel and the FCC. So I think what you'll see is actually better gasoline margins, based on reductions in production.

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Operator [67]

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We have no further questions at this time. Presenters, please continue.

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Robert L. Bugbee, Scorpio Tankers Inc. - President & Director [68]

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We'd like to thank everybody for joining us, and we will talk to you shortly. Thank you. Have a good day.

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Operator [69]

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Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.