Apr 23, 2018
Executives
Hugh Baker - CFO Emanuele Lauro - Chairman and CEO Robert Bugbee - President and Director Cameron Mackey - COO
Analysts
Chris Snyder - Deutsche Bank Jonathan Chappell - Evercore Magnus Fyhr - Seaport Global Randy Giveans - Jefferies Herman Hildan - Clarksons Amit Mehrotra - Deutsche Bank
Operator
Hello, and welcome to the Scorpio Bulkers Incorporated First Quarter 2018 Conference Call. I would now like to turn the call over to Hugh Baker, Chief Financial Officer.
Please go ahead, sir.
Hugh Baker
Thank you, Operator. Thank you for joining us today.
On the call with me are Emanuele Lauro, our Chairman and Chief Executive Officer; Robert Bugbee, our President; and Cameron Mackey, our Chief Operating Officer. The information discussed on this call is based on information as of today, April 23, 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 Bulkers' SEC filings, which are available at www.scorpiobulkers.com.
Call participants are advised that the audio of this conference call is being broadcast live on the web 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.
Now, I’d like to introduce Emanuele Lauro.
Emanuele Lauro
Thank you, Hugh, and good morning, everyone. Thanks for being with us today.
I'll start with a few introductory comments and then turn the call back to Hugh who is going to go more details. First of all the market has continued where 2017 left off with good strength shown in both our Ultramax and consumer segments.
Our fleet remains predominantly on the spot market and we are pleased with the positive market momentum going into the middle of the year. Our confidence is in ongoing revenue improvement is reflected in the sudden [ph] acceleration of revenue for voyages which we fixed in the second quarter.
We have announced that today in our release. You will notice this is particularly striking in the Ultramax segment where our weighting has increased significantly from 28 to 37 vessels owned on average during this quarter compared to the same quarter last year.
Second, I'd like to mention the fact that despite the backdrop of a more inflationary environment globally, our OpEx has remained under control. As our fleet is now substantially delivered, we expect our costs to follow a downward trajectory.
With an average age of only two years, Scorpio Bulkers' fleet is one of the most modern fleets on the water and in addition, our vessels are fully treated with Ballast Water Treatment Systems eliminating the requirement for additional CapEx going forward. Higher banker [ph] fuel prices and the upcoming move to lower sulfur fuels under the IMO 2020 agreements should also provide our Eco ships with an increasing hauling cost advantage.
Thus we are pleased with our positioning to benefit from these ongoing trends within a steadily strengthening market. Lastly, I will briefly mention that we do remain focused on capital management and following the resumption of dividends at our Q3 results last year, this is the third consecutive quarter of dividend payments.
Our balance sheet remained strong and this is recognized in the access to best-in-class financing. At a time when shipping globally is challenged by retrenchment of financial capacity, SALT continues to benefit from good financial terms.
We recently announced a $90 million sale and leaseback accessing finance at levels effectively around 175 basis points over LIBOR. The company is in a good position for the next phase of a strengthening cycle in which we see the opportunity to create significant shareholder value.
With that, I will hand over to Hugh Baker, our CFO.
Hugh Baker
Thank you, Emanuele. As we have not taken delivery of any new vessels this quarter, there have been limited changes to our balance sheet and capital structure.
During the quarter we paid a $0.02 dividend announced in the fourth quarter and are pleased to announce a further $0.02 dividend for this quarter. In addition to paying $1.5 million in dividend, we purchased 1.2 million shares for $8.6 million.
We also repaid $13.4 million in debt. These three actions totaled $23.5 million of value occurring to shareholders around $0.31.
We have considerable liquidity available for future buybacks. During the quarter, we concluded a sale and leaseback in Japan.
This raised around $10 million of additional liquidity, but it is the lost cost and diversification of funding sources that is most attractive to us. A floating rate equivalent to cost to this financing is approximately LIBOR plus 1.73% which we consider attractive.
I am able to advise you that we have recently agreed terms for a second similar transaction which we hope to announce within this quarter. We have only one vessel to be delivered and we recently financed at competitive levels of LIBOR plus 2.4%.
The terms were actually agreed last year which is why the pricing is higher than we expect for future transactions. I can advise that we're not actively looking at refinancing our fleet, but we are on occasion selectively entertaining new financing transactions and we expect to close one further two ship financing during this quarter at more competitive terms.
We expect the two new financings that I've just discussed to raise an additional $14 million of liquidity. With that, I'd like to open the call to questions.
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Amit Mehrotra of Deutsche Bank.
Chris Snyder
Hi this is Chris Snyder on for Amit.
Emanuele Lauro
Hi Chris, how are you doing?
Chris Snyder
Good. So my first question is on the 16-vessel Star Bulk acquisition that was announced last week, it's a pretty substantial deal struck at NAV and my question is, what is your guys interest in a potential deal like this and do you see similar deals available in the market right now?
Robert Bugbee
There's not many. I think that was a good deal, for Star Bulk in the sense there are just not so many modern fleets lying around looking to transact.
And you know the fleet we have is a very solid fleet. So you don’t go and SALT itself from what we were indicating, we had a very balanced return of value to shareholder in this last sort of quarter between the dividend and paying off principal and buying stock.
So for us, we're not sort of going looking. You'd obviously look at something should one of those rare fleets come along and it's either at an NAV through NAV or kind of accretive to the company.
But you are not going looking. You've got to have something come to you at this stage.
Emanuele Lauro
And to echo what Robert is saying, this was the perfect fleet for Star Bulk, arguable it may have not have been the perfect fleet for ourselves try to diversified multi-segment presence with Eco and non-Eco from Capes to Kamsas, I mean it was just – the profile I think it was just as Robert said perfect for Star Bulk, so good deal for them. I mean probably not have been as good for us.
Chris Snyder
Yes, it think it makes sense.
Cameron Mackey
I think I'd also remind everybody, remind you Chris as well that, I actually can't remember how many ships be bought in total in the fourth quarter but we expanded the fleet, recently we bought 10 ships, you know, almost all of them for cash in the fourth quarter. So we've put on quite a lot of accretion in terms of operating leverage and we're looking at that balance, so that's another reason.
But you know, you wouldn’t rule out something if it made sense if somebody came and found us.
Chris Snyder
Okay and then my followup is just around your LTV. We see it to be right now in the low 50s and then just kind of given where we are in the cycle and that rates are starting to hit the point, you know whether cash flow positive and your asset values are still kind of at the low end of the historical cycle, like what's your – you know where do you see to be an optimal LTV today given where we are?
Hugh Baker
Well, I think that we've been very careful. We spoke at the beginning of the last quarter about it being a transition period where it was important to maintain the balance.
I mean, we actually, you know, we've put a lot of room on our balance sheet to when we feel it right and see the opportunities to step up returns to the shareholders. We ourselves actually see our LTV as around 48% at the moment.
So yes, we feel comfortable at this stage, we're still at the early stages of an asset recovery, so if we could afford it we wanted to increase the LTV from 48%. In either sense I don't think you would, you know at this stage I think that you wouldn’t really want to go much above 57 or 58 on our calculations of LTV.
So you got a long way that you can move either way here. But given the most important thing at the moment is to maintain balance.
Chris Snyder
Okay, that's it from me, thanks for the time.
Emanuele Lauro
Thanks.
Operator
Thank you. And next question comes from the line of Jonathan Chappell of Evercore.
Your line is open.
Jonathan Chappell
Thank you. Robert, you kind of insinuated in the answer to those previous questions, but it is just pretty noteworthy that you started the dividend again, started to be more aggressive on buybacks as you've become at least operating profitable and net income profitable hopefully with a quarter or two.
Is this kind of similar to how you were thinking in 2005, 2006 with your predecessor company and should we assume that as the cash flow continues to increase, you've done most of the heavy lifting on the fleet side and that the cash flow uses going forward will be skewed toward the shareholders rather than continuing to expand the fleet?
Robert Bugbee
Well, I think there's no reason to shake the fleet. I'd argue it this way, arguably Scorpio Bulkers is in much better position than OMI was in 2004.
OMI was still in 2004 coming out in a situation where it still had ships at the shipyard and number of ships were still at the shipyard for that company in 2004. I think that SALT is literally unique in my career.
You are early in the recovery. You have a very modern fleet, extremely modern compared to the peer group.
You have as we've just discussed leverage, after you've had everything delivered under 50% at this stage in the cycle and your CapEx out-compared to your peer group, whether it is as virtue of your fleet being newer or the fact that all of your ships I think we're the only public company where the entire fleet is already fitted the rules related to water ballast treatments. So we have to see, everything is dependent on the stock price.
I mean arguably we know we understand the rules of the SEC. We're - it's a shame a few days over the last week where we were actually unable due to being close to the earnings and the deals we were doing and the finance to be shut out.
But I think that we want to maintain that balance. I mean everything is up to price and positions.
I think as Emanuele alluded, as I alluded, whether it comes to practicing people, ships, or fleet, the heavy work has been done for us. So for us it's going to be related to opportunity.
We actually see one of the highest risks and opportunities being volatility there in the prime and the stock market itself because you know there being times when we watch SALT trade totally kind of removed from the reality of what's going on in the company and what's great is the company is strong enough to take advantage of that and I think that it's under no pressure to act quickly, to select the goodies come. It's really unique in my career to have a company this strong finished and upright this early in market recovery.
Jonathan Chappell
So to the answer being balanced and maybe cash return to shareholders and market leverage not being mutually…?
Robert Bugbee
You mean, it is so many different things, say what the stock price is right? You know, it's an easy calculation if you are under NAV.
It is a little bit high if you are 20% below NAV it's pretty easy or great risk pretty to determine where you are going to return value to the shareholders if you trade at parity or above NAV, you would find a different way to return to the shareholders. But overall it does not matter you are creating value to the shareholder.
What we did in the first quarter was accruing 30 odd cents of value to the shareholders, this stage of the cycle is great.
Jonathan Chappell
I agree. I was just going to ask you've been a bit more aggressive on time charter at Scorpio Tankers and kind of slowed that down here with just one vessel at Scorpio Bulkers.
Would that be another may be less capital intensive way to add mark leverage?
Robert Bugbee
It might be, but again people with modern tonnage in the face of an improving market and the fact that the modern vessel with all of its benefits of fuel efficiency et cetera, faced with steepening fuel prices, just because of oil price recovery and then very shortly probably faced with steepening prices relating to the changes related to the regulations and the increase in pricing of burning low sulfur, and I don’t know many people who are throwing bargains away on very modern dry type of tonnage right now.
Jonathan Chappell
Okay, last one really quick for you, obviously the G&A stepped up pretty large in the first quarter, just trying to think about run rate, was there a yearend bonus, accrual or something in the first quarter, should we use that run rate, something in between fourth quarter and first quarter, how should think about that?
Hugh Baker
I think, you should look at slightly lower OpEx and G&A in the second quarter as longer occurring items are not going to be repeated. So, I would look at slightly, I'd guide you towards both lower G&A and OpEx in Q2.
Jonathan Chappell
Okay, but it was up say $2.3 million sequentially, you're talking about like half million or may be cutting it down the middle million lower on the G&A front?
Hugh Baker
Probably below 2.
Jonathan Chappell
Okay, thank you.
Operator
Thank you, and next question comes from the line of Magnus Fyhr of Seaport Global. Your question please?
Magnus Fyhr
Yes, good Morning. Just one question on the average rate for the quarter, it looked like the Ultramaxes were down a little bit.
Was there anything in particular there? I know they have been coming back here and look very strong in the second quarter, but anything unusual there for the Ultramaxes during the first quarter?
Hugh Baker
I think it was unusual for us in the sense that and I think that this is showing the improvement or probably improvement in the second and going forward the fourth is that almost all those ships that we acquired in fourth quarter were delivering into positions in Asia which weren’t beneficial. So those vessels themselves because the delivery related to the acquisition would have dragged down the average on the Ultramaxes quite a lot.
So, out of the existing fleet of 30, 35 you are having 10 on top of the hopefully the 25 being delivered in not so good places. And at the same time, the first quarter is generally, you know generally there is some safety and no weakness coming out of the fourth quarter.
But I think in terms of the market itself, so one thing is positionings relate to specifically to our acquisitions which we believe going forward we are going to improve our chartering results against competition as a result of having got through that period one, and the fuel efficiency and specifications about that float [ph] too and then the other part is the market where you could look at it a different way and that is that the Ultramax market had a very short dip, very, very short dip for a few weeks in that beginning is that first quarter with a very strong rebound out and it dipped that rebound out. Something else that's extraordinarily significant here is it did it all by itself against a headline of the Capes sized market going down during that period.
So what we are seeing right now is the Ultramax held its position, now the Capes sizes are active as a lift and in the last few days, the Ultramax rates out of the time details you need to strike them, so what could first be perceived as a little bit weakened at first quarter I think also rule is really encouraging going forward.
Magnus Fyhr
Hi, thank you, and how do you view the market going forward, when does it start getting interesting to lock in higher rates? I mean the one year time charter rates are not that much above spot, but what kind of increases do you need to see in that market?
Robert Bugbee
It’s certainly not, it’s certainly not interesting now. I mean it's, yeah, we're only really begun to think of that one, and the whole idea is to create a situation where the company can keep its fleet you know on the spot market.
I mean, every now and again we'll fix for three, four, five months, but that’s more tactical than market call, and we'll remain very focused on yes, keeping a measured balance sheet, keeping as much of this fleet open in the spot market and I think that you know that there could be some really significant moves here, you know in these industrial type markets like drybulk, like product as we start approaching the 2020 regulations move to the upside. So I don’t think, we definitely don’t want to fix a way, we don’t want to fix and take ourselves away from that return.
Magnus Fyhr
Very good, that’s it from me. Thank you, Robert.
Robert Bugbee
Thanks.
Operator
Thank you. Our next question comes from the line of Randy Giveans of Jefferies.
Your line is open.
Randy Giveans
Thanks so much. Few quick questions from me for the reason for the delay in the delivery of the Lynx [ph] and then what should we model, a July delivery, a September delivery, I don’t know when from 2Q to 3Q?
Hugh Baker
Well Randy, its Hugh, I will answer the second question which is modeled the ship delivering later in July.
Randy Giveans
Okay.
Emanuele Lauro
And for the first part of the question is just modifications, as you know this was a resale which we have purchased in Q4 last year and then as we got to the yard it seems the ship was in the process of being built. We just decided to let’s say make build the vessel as homogenous to the existing fleet as possible.
Sometimes when the ship is still being built at the yard you can make modifications which are not necessarily costly, but just more homogenous with the existing fleet. So, we opted for that choice rather than getting the ship delivered as quickly as possible in a rush for no particular reason, so that’s the answer.
Randy Giveans
Okay, that’s fair, thanks for the color. And then for a market question, any expectations for U.S.
China trade or impact from the dry bulk shipping market and have you seen any of these kind of market changes yet?
Emanuele Lauro
I was just saying that the short answer is on the later part of your question is no, we have not seen direct impact or experienced direct impact as yet on the market; however, I doubt we would be able to depict whether the market dropping by 10 points or 5 points going forward could be really motivated by tariffs or the geopolitical decisions or interventions. So I think that what plays the biggest role here is perception and the psychological effect of the U.S.
and China deciding what to do with their strategies. So this is more of a Wall Street or could be more of Wall Street impact on the stock, depending on what is said and which positions are taken rather than any media impact on the freight or the specific markets, that’s at least my point of view, you know we have not experienced or perceived.
Cameron Mackey
And I would agree with Emanuele, conclusion from that then is some, is to go back to that, one of the biggest, if not the biggest risk we are seeing is that sort of U.S. market environment for one to better price, where we are not really sure what we are going to wake up the next day to in terms of the steps shown Wall Street to whatever is enacted.
And I think that’s another reason why we want to keep a balanced position so that we can take advantage of you know the fear that is out there and positions. But what we are seeing on the physical market regardless of the day-to-day gyrations of Wall Street and Washington is a very robust world economy, you know a fantastically strong underlying movement the commodities we ship and remember the commodities we ship are very diverse in dry cargo between you know the soft and the hard commodities in many areas of the world, Europe, South America, and it is not just China trade.
And you know, that’s the contents where this is all working it, and I don’t think that we can get ourselves all twisted and crazed over individual announcements from one side of the world or another a moment. I think we just have to put ourselves in a position where we can take advantage of what’s going on the best we can.
Randy Giveans
Okay, I concur, lastly, for Robert, so you gave us $0.60 NAV range for your other company a few months ago, do you have a similar range for this company?
Robert Bugbee
We do, but we are not going to give it. And that was a math that was likely I think a 27-year exception in dealing with public companies than from a whole year free of exception.
Randy Giveans
I was saying it will be a trend going forward, okay, all right.
Robert Bugbee
I am not very trendy, just look at the way I am dressed.
Randy Giveans
Fair enough, fair enough, thanks again.
Operator
Thank you. Our next question comes from the line of [indiscernible] of Morgan Stanley.
Your line is open.
Unidentified Analyst
Hey, guys thank you for taking the call.
Robert Bugbee
Sure.
Unidentified Analyst
If we can stick to geopolitics, I know it might not be the favorite subject, but kind of what do you see from resolve sanctions and implications on your fleet may be and how do you weigh that against increasing iron ore flows from Brazil?
Robert Bugbee
We don’t know what the sanctions have been, we are not really sort of involved in that, and it is not that much of the trade itself. I mean, the actual stats of the iron ore position and the steel thing, China to the United States on steel is not really that significant to the overall trade.
Unidentified Analyst
Right, okay, okay, I guess it’s fair. On interest rate risk, are you guys hedging against rising interest rates or how do you view that?
Hugh Baker
Yes, we have a couple of fixed interest leases, which I think we've discussed and in addition to that the company bought some Capes in November last year, and I can tell you that they are 3.5% LIBOR Capes until December 31, 2020. So we have about $300 million of our debt capped until 2020, 3.5% which you know is again makes us sleep well at night.
It’s obviously, it’s not the same as swapping, but it certainly gives us the comfort that we need and indeed those Capes are actually relatively helpfully earning the money at the moment.
Unidentified Analyst
Okay, that’s helpful. That’s all I have.
Thank you, guys.
Robert Bugbee
Thanks.
Operator
Thank you. Our next question comes from the line of Herman Hildan of Clarksons.
Your line is open.
Herman Hildan
Hello, everyone, thank you for taking my question. My question, I was a bit curious about the comment you made Robert on kind of your view that the optimal leverage is somewhere just to 57% to 58% this…
Robert Bugbee
Yes, I didn’t say the optimal leverage the 57% or 58%, that's not what I said. I said I don't think we will be taking, if we look at the overall environment in the short-term at the moment and the volatility that is out there and by definition we said the volatility we're not afraid of volatility.
Volatility provides opportunity for us and you don't have to max your positions out on a technical basis, you don't have to sit there. This is the same as if you were trading a portfolio at the moment, the volatility is so high that there is value at being able to take advantage of volatility.
So in order to do that, you have to leave yourself room, you can't sit there and say oh, we're at the early stages of dry cargo recovery, so we can and we feel really bold and we've got great ships and so we're going to take the leverage to 70%, which probably mathematically you could take. You've got to say okay, where is the point your maximum you can take, which still gives you a high degree of flexibility and it's still safe, given opportunities and that’s around 57%, 58%.
Herman Hildan
I think the kind of the point is, so the question is about the significant flexibility you have in your capital structure today to continue buyback share or…?
Cameron Mackey
And I think that’s an amazing observation and I think that the other thing that's incredible is that there is off in finance debt at the moment and it's very, very clear that you're having very good quality Asian and European lease finance that is willing to step up in partnership long term structures to companies that they trust, that have very modern fleet versus and almost across the board with few exceptions. There are a few banks in Sweden and Holland that fundamentally the lending banks to shipping are even sort of tightening their positions related to just tightening their relation positions across the market.
So the funding available to older fleets, I mean the spread is getting wider almost every day and so, yes I mean, it’s a great observation as we haven’t even, we haven't even begun to explore the real tuning or the real opportunity there is on SALT's balance sheet. And if you remember two years ago, we were still effectively saving and recapitalizing the company and we put ourselves in two short years being able to give value and return to the shareholder in three ways last quarter.
Well, now we're starting, if we starting to do the work on how to look at that balance sheet how to tune it and how to optimize it and that's what we talked about at last quarter where we're going into a transition period. And that's hopefully, what the rest of this year will be about studying, how to release that value that is there, et cetera.
Herman Hildan
You kind of did answer one my question earlier on in terms of obviously the actions they you take depends on how the world looks, how you are priced, I mean what's happening and so forth, but obviously I mean you have about 31 ships that are built 2015 and 2016, so doing what you just did with one ship where you released $10.3 million is there a clear path for meaningful liquidity quality improvement…?
Emanuele Lauro
Yes, as Hugh as indicated there are another two vessels in the pipeline similar.
Herman Hildan
Yes exactly, so kind of when taking the - call it already conservatively leveraged balance sheet and obviously it was very different just a few years ago, but anyway prices are on the rise. If you look through the guidance for the second quarter it's - the operating cash flow less that repayment, less the churn dividend level gives and that you're starting to become into territory rates and dividends.
And has there's been any discussion about that on the Board meeting whether it's time to slowly up the dividend or…?
Hugh Baker
No, I think you'll be very wrong to discuss the Board meeting sessions to this. I mean we indicated we're going to, last quarter going through a transition.
I think you worked out that if you’ve now got rising rates which were, and stable costs, we would expect to be generating probably more cash flow going forward. That’s what the math would tell you and then if you're doing some tuning on the balance sheet then yes you are creating a lot more cash and liquidity which allows you to do a number of things.
I think it’s fair that we say we’re going through a transition period that we expect and hope that the future is different to the present and I think we want to leave it at that at the moment.
Herman Hildan
Fair enough. That’s also end of my questions.
Thank you.
Operator
Thank you. We have a followup question from Amit Mehrotra of Deutsche Bank.
Your line is open.
Amit Mehrotra
Thank you, Operator. Hey thanks for taking the followup.
I was a little bit late to hop on. So I appreciate it.
So from my perspective just following on my question, I could argue that maybe given the risk profile of the company that has evolved over the last five years I would say, you could argue that the pendulum has swung to the very conservative side because it’s not necessarily just a capital structure sitting at 48% LTV, it’s also a capital structure that’s on a fleet profile that is in fact less volatile. And so I guess when you think about all the capital deployment actions, I mean you’re buying back stock on the margin probably dividend rate doesn’t increase doesn’t make sense because you were more focused on sustainability of that dividend as opposed to just rising it.
So when you think about sort of the evolution of your risk profile and the market may be getting a little bit better on exiting this transitioning period, could you actually move incrementally towards the more volatile asset classes of the market or are you kind of sticking to this like niche like mid-sized segment which is less volatile historically?
Hugh Baker
I don’t believe that we, Emanuele why don’t you take this question?
Emanuele Lauro
Sure. I don’t think Amit that we would actually look at entering segments which are more volatile like the Capes at a time where the sustainability of the market would show improvement et cetera, I am more prone to think that we would be looking at opportunities.
As we discussed in the past, we’ve exited the Capes sized markets because we needed to sell vessels two and a half years ago and the bids came on the bigger ships. And it is not that we de-slide the market per se or have anything against it, we were conscious of what we were doing and decided that it would have been the right thing at that time.
We haven’t seen the opportunity last year when we were looking at expanding and we purchased 10 vessels, nine on the water and one resale, we haven’t seen opportunities which were attractive or as attractive as the one we have executed on, on the bigger ships. So I wouldn’t rule out looking at other segments, but as Robert has said earlier on the call, I don’t remember answering whose question, but we are not actually out there actively looking at expanding.
We are more on the look, if the opportunity comes to us great, otherwise we are happy with what we have. So we’re not linking the market improvement with segment differentiation if that answers the question.
Amit Mehrotra
Yes. No that is fair and then maybe Robert, I hadn’t asked you this question before, but the sulfur cap regulation, I’m not really asking about scrubbers or anything like that, but more focus, if you think about sulfur cap regulation and what that does to the global fleet from a speed standpoint, I mean by our estimate I mean, by our estimate it would lead to basically a pretty significant I guess synthetic reduction in capacity because the global fleet or your tanker drybulk whatever, I mean you’re going to have to run slower I would imagine.
Can you – have you guys thought about that and we’re not that far away in terms of any help that you can provide us in terms of what you think the impact is from a speed dynamic standpoint from the drybulk fleet or just the global fleet in general because it seems like it could be just a transformational positive thing for the shipping industry?
Emanuele Lauro
So Amit, remember - if we go back to 2011 and 2012, the Scorpio Group was amongst the first people ordering ecotype ships and everybody was saying these engines are longer stroke engines et cetera, I'm not going to be able to do the speed and you’re going to have serious trouble in maintaining the speed that the charters are going to require whether we're talking tankers or bulkers or any other actually asset class. So now, it’s easy to say that we had planned all along, we knew the time of 2020 was coming and whoever had the concerns of speed, now we have addressed it for them right?
Even though it was a nonissue at that time, but whatever. Apart from joke, sorry go ahead Robert it’s fine.
Robert Bugbee
No that’s what I say look, I think it’s transformational in many ways what is happening let’s say before and I think in terms of the work and where we’re focusing it through, I mean Cameron do you want to take this question?
Cameron Mackey
Sure. Amit, there is no question to the customer they’re facing a rather hefty tax, you have to look at it as a tax on commerce and in that scenario or in the environment we’re in where in dry cargo, the value of the freight is very high compared to the value of the underlying commodity.
I tend to agree with you as the response we would likely see is a reduction in charter party speeds in order to save on the marginal expense due to fuel, also given the fact that very few of the ships on the water will have time or capital or the risk appetite to install scrubbers in advance of 2020. So yes, we agree that likely, the likely scenario is reduction in speeds and therefore a synthetic tightening of market conditions.
And by the way, having a modern very fuel efficient fleet as I think Emanuele was saying puts us whether it was intended historically or not puts us in a great position to face those rising fuel costs.
Amit Mehrotra
Right. And then Cameron just on that point and this will be my last question, but if you look at the company’s capital structure, their financial wherewithal, the quality of the assets, why doesn’t it make sense to invest in scrubber technology and then shift the way you charter your vessels in 2020 towards more voyage charters where you can actually capture the arbitrage between the middle distillates and the low sulfur fuel and the high sulfur fuel.
I mean why isn’t that like an exponential return and why wouldn’t you think about doing that?
Cameron Mackey
Well, we haven’t disclosed what we think about. So you can rest assured that we think about a lot of things that don’t show up in press release or conference calls.
I think one of the questions that vexes a lot of companies, lot of ship owners is what the difference between what the forward curve tells you today and the scenario we could actually be facing in 2021 or 2022. If you look at the experience of the ship owner over the last 10 years with regards to Ballast Water Treatment for example, well that convention was actually adopted by the IMO in 2006 and here we are in 2019 only now starting to actually face the ratification implementation of that standard.
So it’s quite reasonable for ship owners like ourselves to be a bit jaded and cynical when it comes to these new conventions and they’re supposed to drop dead gaze, there is still room for regulatory or pen stroke risk, there is still a lot of change coming with regards to the technology and the solutions around scrubbers. They’re still evolving quite a bit and most importantly, the response of the refiners and what that forward curve looks like when we get out another 12, 24, 36 months can change drastically.
So while we are taking this quite seriously and looking very, very, very closely at installing scrubbers, it is not a black and white project.
Amit Mehrotra
Yes, that is fair enough. Is there any debate, is there any debate that the IMO 2020 Regulations, I mean if I understand the Ballast Water convention, I mean it took a long time to get ratified because it was a tax on the industry borne by the ship owner, but I mean the IMO regulation is a tax like you said to your customers or that's when consumers and potentially leading to a global slow steaming of the fleet which is actually very beneficial for the owners you're not seeing as much backlash and so the likelihood of that going through in 2020 that's a quite high, is that a fair assessment or no do you think?
Hugh Baker
I think it is fair. At the same time I might qualify that and say look there are other concerns which might drastically change the cost to ship owners.
For instance if the IMO now turns its attention to the effluent, scrubber effluent that gets pumped into the sea and starts to care about where all these emissions, the pollutants and the sulfur is actually going, yes on an addendum to mandate close look scrubbers could actually have as much if not more in of an impact on owner-operators simply because of the cost of retaining that water and the infrastructure regarding sending it ashore would bring to the industry. So I agree with you, but of course there are other nuances which we're all sort of girding for and not quite sure where the future is going to take this regulation.
Distillate - a refinery or a desulfurization plant doesn't naturally belong on a ship. So just to conclude, there are a lot of ancillary benefits to going to distill it both operationally, logistically and if you have fuel efficient assets it really is a pretty nice position to be in facing different uncertainties in the next couple years.
Amit Mehrotra
Right, okay that makes sense. Thank you very much everybody for answering my questions.
Have a [indiscernible].
Emanuele Lauro
Amit, I would add I’m sure there are few [indiscernible] along the way dragged into some speculative order ships to space them having scrubber though, [indiscernible].
Amit Mehrotra
Right, when do you guys think you’ll have a decision on it finally in terms of where you're, I'm sure you're deliberating it now, but any expectation from our side in terms of when you'll have more clarity in terms of what your strategy is going forward?
Hugh Baker
Well, let me put it to you this way Amit. There is an argument that if you're using a sort of real option framework to value what investment work CapEx decision you should make in this regard, the optimal time to make that is actually 2021 or 2022 and not 2019.
I think what you would see from us is not any sort of blanket statement of go no go but more nuanced as time goes by as opportunities presented itself we may look at installing scrubbers, but it really is let’s say to borrow terms from someone else data dependent.
Amit Mehrotra
Yes, okay that's it from me. Thank you very much.
Hugh Baker
Thanks.
Operator
Thank you. At this time I'd like to turn the call back over to Mr.
Baker for any closing remarks, sir?
Hugh Baker
We have no closing remarks. Thank you very much operator.
Thank you very much everyone for calling in. Goodbye.
Operator
Thank you, sir. Ladies and gentlemen, this concludes today's conference.
Thank you for your participation and have a wonderful day.