Q2 2017 Tsakos Energy Navigation Ltd Earnings Call

Sep 15, 2017 AM CEST
TNP - Tsakos Energy Navigation Ltd
Q2 2017 Tsakos Energy Navigation Ltd Earnings Call
Sep 15, 2017 / 02:00PM GMT 

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Corporate Participants
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   *  Efstratios-Georgios A. Arapoglou
      Tsakos Energy Navigation Limited - Chairman of the Board
   *  George V. Saroglou
      Tsakos Energy Navigation Limited - COO, VP & Executive Director
   *  Nicolas Bornozis
      Capital Link Inc. - President
   *  Nikolas P. Tsakos
      Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director
   *  Paul Durham
      Tsakos Energy Navigation Limited - CFO & CAO

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Conference Call Participants
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   *  Benjamin J. Nolan
      Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Senior Analyst
   *  Fotis Giannakoulis
      Morgan Stanley, Research Division - VP, Research
   *  Gregory Robert Lewis
      Crédit Suisse AG, Research Division - Senior Research Analyst
   *  Han Jang
      Maxim Group LLC, Research Division - VP & Senior Equity Analyst
   *  Jonathan B. Chappell
      Evercore ISI, Research Division - Senior MD and Fundamental Research Analyst
   *  Magnus Sven Fyhr
      Seaport Global Securities LLC, Research Division - MD & Senior Shipping Analyst
   *  Noah Robert Parquette
      JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst 

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Presentation
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Operator   [1]
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 Thank you for standing by, ladies and gentlemen, and welcome to Tsakos Energy Navigation conference call on the first half and second quarter 2017 financial results. We have with us Mr. Takis Arapoglou,, Chairman of the Board; Mr. Nikolas Tsakos, President and CEO; Mr. Paul Durham, Chief Financial Officer; and Mr. George Saroglou, Chief Operating Officer of the company. (Operator Instructions) I must advise you that this conference call is being recorded today.

 I now will pass the floor to Mr. Nicolas Bornozis, President of Capital Link, Investor Relations adviser of Tsakos Energy Navigation. Please go ahead, sir. Mr. Bornozis, please go ahead.

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 George V. Saroglou,  Tsakos Energy Navigation Limited - COO, VP & Executive Director   [2]
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 Is he on mute?

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 Nicolas Bornozis,  Capital Link Inc. - President   [3]
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 By the way, please note that parallel to today's conference, there's also a live audio and slide webcast, which can be accessed on the company's website on the front page at www.tenn.gr. The conference call will follow the presentation slides, so please, we urge you to access our presentation and webcast. Please note that the slides of the webcast will be available as an archive on the company's website after the conference call. Also, please note that the slides of the webcast presentation are user controlled, and that means that by clicking on the proper button, you can move to the next or to the previous slide on your own.

 At this time, I would like to read the safe harbor statement. This conference call and slide presentation of the webcast contain certain forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties, which may affect TEN's business profits and results of operation. Such risks are more fully disclosed in TEN's filings with the Securities and Exchange Commission.

 Ladies and gentlemen, at this point, I would like to turn over the call to Mr. Takis Arapoglou, the Chairman of the Board of Tsakos Energy Navigation. Mr. Arapoglou, please go ahead, sir.

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 Efstratios-Georgios A. Arapoglou,  Tsakos Energy Navigation Limited - Chairman of the Board   [4]
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 Thank you, Nicolas. Hello, and good morning to everyone. TEN continued its steady and profitable path through challenging markets. Our strategy for nearly 2 years now to gradually lock in the majority of our fleet into accretive time charters, together with profit-sharing arrangements, is protecting us against weaker markets and will allow us to benefit from any potential recovery.

 In addition, with the largest ever fleet expansion program for TEN now virtually complete, we're in a superior position to capture a much larger size of any recovery. In this environment, we continue to focus on efficiencies, resulting in further reducing operating expenses, increasing fleet utilization and continue to increase our list of blue chip customers.

 Once again, congratulations to management for navigating TEN so successfully in challenging times, ready to capture opportunities going forward.

 Thank you. That's it for me, and over to you, George.

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 George V. Saroglou,  Tsakos Energy Navigation Limited - COO, VP & Executive Director   [5]
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 Thank you very much, Mr. Chairman. The company reported today another profitable quarter and half year results. TEN embarked, since last year, in the biggest fleet expansion program of its history with 15 newbuilding vessels in total. 8 vessels were delivered last year. Since the start of 2017, TEN took delivery of 6 vessels with 1 more expected in the last quarter of this year. All 15 ordered vessels had a medium to long-term employment attached to first-class charterers, ranging from minimum 2 to maximum 12 years. For those of you who are connected to the Internet in our website, there is an online slide presentation, whose format we will follow during the call.

 Let's turn to Slide #3, with the key corporate facts and highlights. We have a fleet of 65 vessels pro forma, 64 currently in operation and 25 vessels have ice-class capability. The average age of the fleet is 7.6 years versus 10.1 years for the world tanker fleet. We have -- the company with a balanced fleet employment strategy that takes advantage of market peaks with profit-sharing arrangements.

 We initiated another strategic relationship with a major end user for the employment of crewed tankers. We have placed 22 new long-time charters since the start of the year and currently have 48 vessels in a 64-vessel operating fleet, or 49 if we take the [indiscernible] the full pro forma fleet, on secured employment with an average time charter tenure of 2.5 years. We have minimum contracted secured revenue of $1.4 billion with potential additional revenues from profit-sharing arrangements. We have built a modern, diversified fleet covering clients' transportation requirements in crude products, shuttles and LNG, and we have become the carrier of choice of the top oil majors, commodity traders and refineries.

 We have very high efficiency with consistent very high fleet utilization, approximately 97% for the first half of 2017. We have been through the years a strong operating tanker company with a very healthy financial position, excellent banking relationships and we have performed extremely well, as far as the debt service is concerned, in good and in bad markets.

 The next slide has the main financial highlights of our press release, which Paul will present in more details. I would like to just highlight the profitability, the company's strong financial position and continued cost control and reduction in daily operating expenses, with the help of the company's technical manager.

 The next slide has a snapshot of the pro forma fleet of 65 vessels. At the moment, we operate 64 in 4 market sectors: crude, product, shuttle tankers and LNG. During the first half of the year, we took delivery of 4 Aframax tankers, 1 VLCC and the company's third Suezmax tanker. We expect 1 Aframax tanker to be delivered in the next quarter, also fully financed and fixed on long-term time charter. The last vessel delivery will complete the company's current newbuilding program. The new additions in the fleet are already making an impact to the company's financial performance.

 Slide 6 lists the clients of TEN, all blue chip names, with whom the company is doing repeat business over the year, thanks to the quality of service, fleet modernity and the safety record of the enterprise fleet.

 We have strong secured coverage with upside potential as Slide 7 presents. 49 vessels out of the 65 pro forma fleet are fixed under secured revenue contracts with a combination of fixed time charters, time charter with profit-sharing and contract of [operations]. 34 vessels are market-related charters, including spot, which at the end of the day secures the company ability to immediately capture the market's upside. The revenues expected from the fleet, which includes employment, is expected to cover the company's annual obligations.

 We initiated a strategic relationships with a major U.S. oil company for the employment of crude tankers, and we have currently 5 Suezmax tankers fixed with them for approximately 3 years and 1 VLCC for approximately 2 years, all on profit-sharing arrangements.

 Next slide shows the all-in breakeven of the fleet for the various vessel types that we operate in TEN. As you can see, the cost base is low. In addition to the low shipbuilding costs, we must highlight the purchasing power of our technical manager, Tsakos Colombia Shipmanagement, and the stringent control by management in order to maintain a lower average for the fleet, while keeping a very high fleet utilization quarter after quarter. We can call it almost full employment. 75% of the fleet is on secured revenue contracts and these revenues are expected, as we said, to cover all the company's annual obligation.

 Plus, with those vessels that have the profit-sharing arrangements, we can also always capture the market's upside every time it happens. Since the beginning of September, we are seeing life back into the freight market as we gradually move our way from the summer months and approach the winter period, which is typically the strongest period of tanker demand. We are also seeing charters to continue having a strong appetite to fix vessels forwards for the reasons we explained above. In the company, we expect to have a strong fourth quarter.

 The next slide shows a little bit about the market. Global oil demand continues to grow above the past trend levels. The average oil demand growth since the early '90s has been around 1.1 million barrels per day. The current forecast for oil demand growth in 2017, which has recently been revised, has recently been revised from 1.3 million barrels per day to 1.6 million barrels per day, a strong growth number above trend line. We are seeing improvement in economic conditions in OECD countries, and the low oil price environment continues to support stronger demand, especially in the United States, consumer demand in Europe and in China, consumer demand in stockpiling and strategic reserves, as well as India.

 The tanker order book is coming down. We should also note that a big part of the existing tanker fleet is over 15 years. The implementation of new environmental regulations with high compliance costs and charterers discrimination against older tonnage could lead to an increase in scrapping.

 Today, we have announced another dividend payment of $0.05 per share to be paid on November 15 to shareholders of record on November 9. In total, since 2002, TEN has paid $10.56 in cash dividends or approximately $453 million, and this compares with a listing price in our IPO of $7.50. The average yield since the IPO is $5.25 per annum.

 That concludes the operational part of our presentation. Paul will walk you through the financial highlights for the first half of the year. Paul?

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 Paul Durham,  Tsakos Energy Navigation Limited - CFO & CAO   [6]
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 Thank you, George. The first half of 2017 started well, but became more challenging as the months passed. Nevertheless, the half year ended with net income of $21 million or $0.13 EPS after preferred dividends. Quarter 2 was affected by a number of factors, which impacted all the industry. Besides reduced seasonal demand, it was hit by high crude inventories, oil supply cuts, and access -- excess vessel capacity. Nevertheless, we had a positive bottom line of $3.6 million in quarter 2. We increased preferred dividends to $6.5 million resulted in an EPS of minus $0.03.

 Quarter 3 faces similar challenges, made more difficult by extended refinery maintenance in China. However, we expect a favorable turn in Quarter 4, as George has mentioned, as refineries come online again. Inventory's decline and winter factors start to generate increased revenue.

 In quarter 2, our vessels on time charter secured a steady cash flow covering all of their fleet costs. The fleet effectively enjoyed full employment in quarter 2 despite 6 scheduled dry dockings. However, those vessels on spot in quarter 2 could not achieve the rates secured in the prior year period. Nevertheless, overall rates achieved by the fleet were respectable given the challenges. For the most part, they were above breakeven with the overall average daily rounded TCE rate at over $19,000, now $20,000 in the 6 months.

 TEN's daily average OpEx per vessel fell 2% to $7,866 due to the efforts of our technical managers. For the 6 months, average OpEx was 3% down at $7,729. Daily vessel overhead costs, that's management fees and G&A, fell to about $1,200 from $1,600 in quarter 2 2016 as the fleet grew, but fees still remain fixed after 5 years and office costs fell.

 Finance costs rose to $15.9 million due to new vessel debt, reduced capitalized interest, higher interest rates and lower swap valuations, offset by lower shrinkage. 6-month finance costs similarly rose. EBITDA amounted to nearly $54 million in quarter 2, higher than the prior quarter 2, while 6-month EBITDA was $115 million, also higher. All but 2 vessels generated positive EBITDA in the half year.

 Overall debt was $1.84 billion at 30th of June and net debt to capital was 51%. The net increase in quarter 2 was $17 million due to the loans for 2 new Aframaxes, offset by scheduled repayments. With only one more Aframax to be delivered in the fourth quarter, only 1/3 or $23 million debt will be drawn and $10 million contributed from our own cash.

 Our balance sheet remains strong with ample cash, with asset value stabilizing and with secure cash flow generated by our time charters, we believe we are in a good position to meet any further challenges and to consider any opportunities that may arise.

 And now I'll return the call to Nikolas.

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 Nikolas P. Tsakos,  Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director   [7]
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 Thank you, Paul, and good morning to all of you. As my colleagues have already reported, the first 6 months have been a very productive period for TEN. Although it has been a challenging period for the market as a whole, we used this period to complete or almost complete our newbuilding program. And on top of this, we'll have extended 22 new contracts with first-class charters on our vessels, reaching our goal or even exceeding our goal of 75% of long-term utilization for the vessels, and I think our record in utilization is always steady.

 If you follow the company for the last 10 years, we're always way above 95%, and that also takes that we had 9 or 10 special surveys and dry docks undertaken in the first 6 months because we wanted to be ready for all the challenges of the dirty water ballast that was supposed to be implemented on September 8, last Friday. However, with the efforts of the industry, this legislation now has been postponed at least according to the IMO for 2 more years. So that was one of the reasons that the third quarter -- the second and third quarter, has been used for taking advantage of the lower market and taking the ships out of service.

 However, as we came back from the August lull, the market started showing signs of -- the spot market, signs of significant life. And this way, we are seeing the rates in all segments, Aframaxes and the product carriers, and the likes of -- Suezmaxes and VLCCs. The spot rates have increased and that one of the reasons has been the unfortunate events of -- and the results of the storm season in the United States and storm Harvey.

 However, also, we have seen significant increases in the Mediterranean, where we had a tripling in the rates in the last 2 weeks. So the signs say we are getting out of a much slower period and the policies back in the market. What is also interesting is we see this across the board. It's not only geographically across the board, so we can see the far east market on the spot increasing together with the Mediterranean, and of course, the U.S. Gulf, where a lot of damage has been done and there were quite a lot of delays in (inaudible) our vessels as they come out of the storm season.

 So what we are looking for TEN, the way we have structured the company with 75% of the fleet on -- more than 75% of the fleet on long-term employments out of -- and 25% of the fleet with profit-sharing arrangement. What that means is every $1,000 increase in the spot market equates to USD 10 million straight to our bottom line or $0.12 [per share]. I mean, this is the model we're working from today's low spot rates, every $1,000 increase in any of the segments we participate has a very substantial result to our bottom line.

 On the other hand, we are also looking what we call the parallel market, the dry cargo market, going -- finally going from strength to strength, and both markets traditionally have a 6-month lag between them. And we have a strong feeling that we are, today, 6 months -- we're behind where the dry cargo was sometime in the beginning of the year, which were all very low.

 So with that in mind, we are optimistic. We have set the company to be able to sustain the storms, but also take advantage of the upside. The company is producing significant cash as we are going forward, and so we're looking forward to the remaining of the third and the majority of the fourth quarter. And going forward, as George said also for 2018, to be a very productive and profitable period. And that's why the company continues with our dividend payments and looking very positively into the future.

 And with that, I would like to open the floor to any questions.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions) The first question is from the line of Noah Parquette from JPMorgan.

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 Noah Robert Parquette,  JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst    [2]
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 I just wanted to get a sense, I mean you guys are sitting pretty with all these situation, in terms of new orders or new vessel deliveries that you would look at, would you consider vessels on spec? Or are you kind of focused still on this industrial model where you're going to meet your customers' needs?

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 Nikolas P. Tsakos,  Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director   [3]
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 I think, it is clearly that unless we have a segment of our business which is underrepresented, like idle ship, we would only look on non-speculative ordering. And I think the market has been damaged significantly by a lot of speculation, and we will not want to be ones participating in that. So -- and I think the short answer is we will only look at the industrial model as we've done in the last 33 months by taking delivery of 15 vessels, all of them with long-term employment.

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 Noah Robert Parquette,  JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst    [4]
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 Okay. And then I just -- a follow-up. Some of your peers suggest that the recent uptick in orders has been from shipyards approaching their best customers with good offers. Have you -- I assume you're one of those customers. Have you seen any reduction in that kind of, pace of newbuilding orders? Or is -- there's nothing changed there?

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 Nikolas P. Tsakos,  Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director   [5]
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 Well, I think you are right. When the prices are -- or when the crisis is there, I think you'll always go to your best customers, and the shipyards are under pressure so they're approaching a lot of their owners. Some of them, for their own internal reasons and for renewing the fleet, they have taken into the challenge of at least assigning LOIs. Of course, what we're seeing now there is we see a lot of letters of intent being signed, but I would believe that not more than 50% of those letters of intent are going to materialize in orders. So it does not really cost you that much if you're a good client to sign a couple of letters of intent with options. It will become actually a very, very profitable transaction if the market goes your way. So I think there's a 50% chance that -- overall, I believe that 50% of the LOIs we've seen will not materialize as orders.

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Operator   [6]
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 The next question is from Gregory Lewis from Crédit Suisse.

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 Gregory Robert Lewis,  Crédit Suisse AG, Research Division - Senior Research Analyst   [7]
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 Nik, could you talk a little bit about the strategy? I mean, clearly, the company has done a great job of taking delivery of its newbuilds and putting those vessels on long-term contract. And you kind of alluded to the fact that you're looking to focus more on the industrial side of shipping. As we think about it on -- in the go forward and the near and the medium term, is there something where Tsakos is actually out in the market looking to really drive incremental industrial-type projects at the company? Or are we at the point now, as we're looking ahead to 2018 and maybe even '19, the company is just in kind of a cash harvest mode?

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 Nikolas P. Tsakos,  Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director   [8]
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 Well, thank you, Greg. Clearly, we are being approached by first-class clients. But we'd like to, I think, continue business long term. So we are looking at these transactions. Our whole objective has been to be able to secure, I would say, our base, as you call in the United States, we secured our base by having the 2/3 of the fleet plus the profit sharing paying for all the expenses and then the 25% remaining together with the profit shares paying for our dividend and our shareholders reward. So as long as the projects that fit within -- in this philosophy are coming out, we are looking at them. So we will be spending some of our cash, I think, in the next 6 months for similar projects if they appear.

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 Gregory Robert Lewis,  Crédit Suisse AG, Research Division - Senior Research Analyst   [9]
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 Okay. Okay. Great. And then just one more for me. You mentioned, obviously, the issues that have impacted the Gulf of Mexico. But just if we move a little bit west from there into Mexico and the earthquake, clearly, they've had some refining issues. You guys have that business where you're actually trading on that side of North America. What has been the impact over there? What's going -- any sort of color or insight you could provide into that market in and out of Mexico along that?

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 Nikolas P. Tsakos,  Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director   [10]
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 Yes. I think -- that's a very valid point because, I think, the first thing we have to say as an industry and wearing my INTERTANKO hat in this case is that there were thousands, not only of tankers, but there were a couple of hundred tankers and thousands of ships in that area. And we were able, with the correct warnings and the correct navigational skills, to avoid any catastrophe on any of the tankers or other vessels. So I think this service speaks a lot about the operational capacity of the industry. It's not easy. As you know, land mass is a much smaller part, the sea mass is a much bigger part that will affect that period. So I think this is important that there were not any casualties and we were all -- spend day and night in our operating departments, making sure that we will be able to reap even a few hours at night. So that is the one thing. Of course, disruptions have happened in a lot of our ships that are contacts there. And I mean, that's the silver lining of this market, have enjoyed quite hefty demurrages because of we were not able -- because of the problems of the refiners and the ports we're not able to -- that we had to wait on demurrage, which I think it will be positively portrayed on our third quarter results. And the disruptions now have increased the market, increased very sharply. And this week is normalizing, but it's still very, very strong. So yes, it affected the rates. And I would say, it will take a couple of months to settle to bring the market back to where it was.

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Operator   [11]
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 The next question is from Jon Chappell from Evercore.

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 Jonathan B. Chappell,  Evercore ISI, Research Division - Senior MD and Fundamental Research Analyst   [12]
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 Just a couple of follow-up to -- just following up to both Noah and Greg's questions regarding both the strategy and speculative orders. I read in a presentation earlier this week, I think, Paul had made some comments about potentially increasing your share in the LNG market. Now the LNG market seems to be shifting a little bit more to spot from long-term time charter, and the 15-plus year charters of yesteryears seemed to be gone. How do you think about how you would approach that market? Two ships today, obviously far short of scale, those haven't worked out fantastically. If you were to get an LNG, would it have to be on the back of a charter? Or is this kind of a bigger theme that you think that gas is going to continue to take market share from oil and you need to be diversified with your fleet?

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 Nikolas P. Tsakos,  Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director   [13]
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 Thank you. Well, I think -- Paul is going to have to answer this. But from my side, we will not change the industrial model of building ships against contracts because of the LNG. So we will not be doing a speculative ordering on the LNGs. But there is enough business out there and it's creeping out. I mean, it's not the wave of business that we see in the tankers, but there is long-term business creeping out and we will be looking at it. As far as our 2 ships, I think the first vessel, the Neo Energy, after she worked for 8 years, after she was built on a very long, very profitable charter, she has -- she's then become a floating storage unit. Aegeas and Arion, she's a turbine ship, and I think she has been a very successful cash cow for the company. Our recent acquisition of the Maria has also gone on a 4-year time charter with options to one of the major companies, but not at that level we were envisioning when we ordered her, but getting there. So I would say that we are not totally disappointed from our LNG participation. I think the Neo Energy has been the profitable ship in the history of TEN so far. And hopefully, the new vessel will also be as profitable going forward. Paul, what would...

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 Paul Durham,  Tsakos Energy Navigation Limited - CFO & CAO   [14]
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 Yes. I think, my comments were made in context of a question put that if oil demand peaks in 10 years' time, what action are we prepared to take now? And my response was, we're not going to take any action now. But clearly, a positive response to oil demand peaking is for us to diversify further, and we've already put one step in that direction with our 2 LNG carriers. And I mentioned that, look, who knows within a year or 2, we may well have 6 pro forma LNGs, i.e. including orders. It's something that we will not rule out and we are looking into.

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 Jonathan B. Chappell,  Evercore ISI, Research Division - Senior MD and Fundamental Research Analyst   [15]
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 That makes absolute sense, and that's why I asked at the end if it was kind of a longer term diversification. And not surprising that the media took that out of context, so thanks for that clarification. Paul, since I have you, now with the CapEx basically de minimis, just $10 million more of cash by the end of the year and a pretty heavy debt load, can you just remind us what the debt amortization schedule looks like? And then also, Nikos had mentioned the pretty strong cash flow to the fleet. Will the primary use of cash in the foreseeable future be used to delever the balance sheet?

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 Paul Durham,  Tsakos Energy Navigation Limited - CFO & CAO   [16]
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 It could play an important role, yes. If we assume that our balloons, which are coming up, are going to be refinanced, then the ordinary scheduled repayments amount to about $100 million in the remaining part of this year, about $170 million in 2018 and $140 million in 2019, and then starts to come down faster to about $220 million. But bear in mind that we do have major refinancings to do over the next couple of years, so the actual real pattern hasn't been clearly defined yet over the next few year.

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 Jonathan B. Chappell,  Evercore ISI, Research Division - Senior MD and Fundamental Research Analyst   [17]
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 Okay. And then just a quick follow-up with that.

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 Nikolas P. Tsakos,  Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director   [18]
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 The refinance are going through.

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 Paul Durham,  Tsakos Energy Navigation Limited - CFO & CAO   [19]
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 The refinancings are happening, yes.

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 Jonathan B. Chappell,  Evercore ISI, Research Division - Senior MD and Fundamental Research Analyst   [20]
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 Right, and I just wanted to ask about that, too. We've heard a lot of commentary about difficult financing in the industry. It certainly hadn't seem to stop a lot of players from ordering VLCCs. Is it a 2-tiered market right now where given, one, your history and relationships in the industry? And two, the charter coverage and visible cash flows from your feet that your conversations with the banks are no different than they were maybe 4 or 5 years ago?

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 Nikolas P. Tsakos,  Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director   [21]
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 Well, I would say that, now, they are better than 4 or 5 years ago and cheaper. Because as you remember, 4, 5 years ago, we were just getting out of the crisis, of the Lehman crisis, and that's when the banks were really much more, I would say, closed for business. I would say it's a 3-tier market. So you have the companies like ourselves that I think there's a big competition of -- and very attractive terms for doing business. You have owners that the -- there is some lending available for them, but at a very high cost. And then of course, you have clients that the doors are -- other owners that cannot, so I would say it's a 3-tier system. So you have competitive, the expensive and the not happening sort of thing.

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Operator   [22]
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 Your next question today is from the line of Ben Nolan from Stifel.

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 Benjamin J. Nolan,  Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Senior Analyst   [23]
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 So I had a question for you, Nik, that in response to Noah's question, you said that, one of the areas that you might -- would focus on are things that are underrepresented in the current fleet. Obviously, there's only 2 LNG, and you guys have already talked a little bit about having the interest in expanding there. But what else would you categorize as underrepresented in your fleet as it stands today?

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 Nikolas P. Tsakos,  Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director   [24]
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 Well, as it stands today, if you look at our fleet list, I think, LNGs, so you're very correct on that, shuttle tankers and VLCCs, vis-à-vis the 3 them, I think, we have a -- we are -- I would say very well represented so far. On the other categories of ships, which is the Suezmaxes, the Aframaxes, the Panamax and the products. And however, we are looking -- I think as it was put in the press release, we are looking to divest some of our first-generation vessels. So I think we have -- out of all these vessels, which is a VLCC, the Millennium, I think this is one of the ships that we are looking to divest. So it's -- this is coming to the end of your oil time span before his special surveys. But we will further reduce our VLCCs to 2, so that's something we are looking and we are discussing with our charters.

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 Benjamin J. Nolan,  Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Senior Analyst   [25]
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 Okay. That's helpful. And then sort of related to Greg's question, although I guess on the other side of the Gulf of Mexico, it sounds like, now, the Port of Corpus Christi is going to be dredging to enable VLCCs to call on there. Obviously, the Gulf Coast has historically been a very prime trading area for Aframaxes in particular but also Suezmaxes. Are you seeing any changes sort of in the strategic landscape for sort of what ships make sense in various places? And is there anything more larger scale going on that impacts what people need?

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 Nikolas P. Tsakos,  Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director   [26]
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 Well, as -- I think these infrastructure projects, unfortunately, take quite some time to finally be completed. But I think it is a positive thing in a sense. But although, right now, there's a lot of -- there are a lot of VLCCs and there are a lot of lightering going on. And of course, lightering is something that we support because it takes tonnage out of the market, mainly on the Aframax [indiscernible] side. We cannot turn a blind eye to the United States that is really increasing its exports. And I think one of the reasons to allow VLCCs in the United States on land, but really -- I mean, alongside rather than through a lighting process, it is a positive thing and it shows that the United States is going to be a major exporter. I mean we started with 1 million barrels now and then a day, and it's going to become a much more powerful exporter, which is very, very good for the long-term business. So I mean, we look at it as a positive sign going forward.

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 Benjamin J. Nolan,  Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Senior Analyst   [27]
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 Okay. And would you just -- in those specific opinions as to sort of the types of ships that might benefit versus those that would not?

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 Nikolas P. Tsakos,  Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director   [28]
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 Well, again, as I said, you have -- VLCCs are the ones that will benefit because you have never had real VLCCs pulling alongside in the United States. I mean, they will be in SPMs or in lightering service. So if you are able to get VLCC in Corpus Christi, and I hope we're all alive and well to see this happen, it will be really a very positive development for the VLCCs.

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Operator   [29]
------------------------------
 (Operator Instructions) The next one is from Fotis Giannakoulis from Morgan Stanley.

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 Fotis Giannakoulis,  Morgan Stanley, Research Division - VP, Research   [30]
------------------------------
 Nik, you made an interesting comment about the fact that the dry bulk market and the tanker market they move close to each other with a time lag of around 6 months. Can you substantiate that and how does this work? And also, if you can give us your outlook about the supply/demand balance for the crude tanker market? We see around 98 VLCCs on order. How many of them -- how many VLCCs do you think that they will be scrapped in the next 3 years? And what is going to be the change in the oil flows?

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 Nikolas P. Tsakos,  Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director   [31]
------------------------------
 Well, thank you. Well, as I said, the -- if you look at the -- if you are the analyst so I think you should do -- help us with this. But if you -- look, there has always been a rule of thumb with the dry cargo market because it usually carries the infrastructure and goods. It's the one that starts first and then the energy market, in order to put all these things to work, follows the lag of 6 to 9 months. And I think -- I mean, we have seen this in the past and we hope that this is the case. If you remember just back in December or December to March last year, we had seen the lowest dry cargo market for a very, very, very long time and both in values. And then in the after March and April, the market started going from strength to strength. It has -- there's more hiccups, because of the dry cargo market, and it's going back from strength to strength as we speak. So we could be in the similar scenario with the tankers. As you -- like you said, the truth of the market is that right now on the VLCC side, a lot of people bit the bullet and they got very excited by ordering a significant amount of vessels. However, we are seeing in these vessels getting delivered, and that's why we're seeing a weak market today. I think we still have close to 15 VLCCs to absorb within this year and then we'll have another 50 for 2018, and I think much less in 2019. So it is getting -- it has been normalized. And we have a significant amount, I would say, of vessels. I would -- close to 150 from what -- 150 VLCCs have been -- are the ones that are approaching the 15 years -- or will be 15 years, I would say. So there is heavy order book, but in today's market, a lot of owners, including ourselves, cannot trade the older -- it's not economical to trade ships -- for sure, ships that are going to be 20 years. No one in his right mind will pass a special survey for a 20-year-old ship today -- VLCC, I mean.

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 Fotis Giannakoulis,  Morgan Stanley, Research Division - VP, Research   [32]
------------------------------
 How important it is for the health of the tanker market, the return of the OPEC production? All these owners that they have been ordering speculatively VLCCs, and I'm not talking about, obviously, about your company. Have they been counting on the return of the OPEC production next year? Is this an important factor for the market for 2018?

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 Nikolas P. Tsakos,  Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director   [33]
------------------------------
 Yes. I think that this is an important factor, you're very correct. I mean, as you have seen, the crude, the surplus globally has shrunk significantly because of the output cuts. And the growth forecast has been raised from 1.5 million to 1.6 million barrels a day, which is not -- it is something. So we expect to have some loosening on that side and more cargoes to be in the market. But I think that will take another -- at least 6 months.

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 Fotis Giannakoulis,  Morgan Stanley, Research Division - VP, Research   [34]
------------------------------
 One more question about the shuttle tanker market. How do you view the opportunity there? We saw Teekay ordering some LNG-fueled shuttle tankers very recently. Are there a lot of opportunities for additional new buildings with long-term contracts? And what is the competition out there? How many players they can compete for these projects?

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 Nikolas P. Tsakos,  Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director   [35]
------------------------------
 Well, I think it is a market for companies that have put the effort and the investment into human resources. And still, to do this, we are one of these companies. I think there are a handful of companies that are doing the same business. It is operationally a very difficult business. I mean, it has cost us a significant amount of money just to bring up the crew. The crews for this trades. And when the business is very -- usually, it is an attractive long-term business, but it is high risk, operational-wise.

------------------------------
 Fotis Giannakoulis,  Morgan Stanley, Research Division - VP, Research   [36]
------------------------------
 Are we talking for a couple of vessels the next couple of years? Or 10 vessels? Do you have any sense of how big this opportunity is in this market?

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 Nikolas P. Tsakos,  Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director   [37]
------------------------------
 We -- as a company, we're looking for a couple of those ships in the next couple of years.

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 Fotis Giannakoulis,  Morgan Stanley, Research Division - VP, Research   [38]
------------------------------
 And for the entire market, how many ships do you think that the -- how many of these kind of projects they are going to be required or they will be tenders?

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 Nikolas P. Tsakos,  Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director   [39]
------------------------------
 From -- I mean, it is -- the tender is a slow process, usually, but I believe that there will be at least one dozen ships for this type of projects.

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Operator   [40]
------------------------------
 (Operator Instructions) The next question is from the line of Magnus Fyhr from Seaport Global.

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 Magnus Sven Fyhr,  Seaport Global Securities LLC, Research Division - MD & Senior Shipping Analyst   [41]
------------------------------
 Just one follow-up question on the LNG. A lot of focus there. You've mentioned that you would not do any speculative newbuilding. Can you kind of elaborate a little bit what you define as speculative? And what kind of returns would you require for long-term contracts?

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 Nikolas P. Tsakos,  Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director   [42]
------------------------------
 You want us to give all our secrets out. I mean, this is a -- well, speculative...

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 Magnus Sven Fyhr,  Seaport Global Securities LLC, Research Division - MD & Senior Shipping Analyst   [43]
------------------------------
 You're a public company now, Nik.

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 Nikolas P. Tsakos,  Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director   [44]
------------------------------
 Well, I mean, what we've done with the LNG so far has been speculative ordering, which means that when we ordered our first LNG back in 2004, and we were one of the few companies at that time. And we felt that this market is a market that we have to have a footprint in and we ordered the vessel, on the way, we chartered her out, as I said to -- for many, many years. The same happened with our newest acquisition. As technology changes, we again felt that we cannot be left behind and we wanted the youngest technology, the best design of ship, again, without employment. Now I think with technology having stabilized, we will be looking to -- we'd repeat our orders, but again, a specific project.

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 Magnus Sven Fyhr,  Seaport Global Securities LLC, Research Division - MD & Senior Shipping Analyst   [45]
------------------------------
 And I mean, there is definitely competition for some of these projects. I mean, you have more traditional players out there. They are focusing entirely on the LNG. I mean, could you make the numbers work maybe at a rate that it's a little bit below and what kind of leverage would you be comfortable with? When I say below, you [commented] that 75,000 to 85,000 rate?

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 Paul Durham,  Tsakos Energy Navigation Limited - CFO & CAO   [46]
------------------------------
 Yes, for sure. I think the --

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 Nikolas P. Tsakos,  Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director   [47]
------------------------------
 I mean, we never used all the leverages that we offered because we like to keep our leverage, as Paul said, around 50% -- now 51% for the year, this quarter. So we would not like to overextend the leverage. But some of these projects other companies could leverage them up to 80%. This is not our strategy.

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 Magnus Sven Fyhr,  Seaport Global Securities LLC, Research Division - MD & Senior Shipping Analyst   [48]
------------------------------
 Right. And I mean, in the past, you mentioned that you have -- like to have about 5 ships by 2020. I know you're signing up to order them pretty soon if you're going to be there. What's your current view with the market maybe a little bit slower to recover than we had expected?

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 Nikolas P. Tsakos,  Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director   [49]
------------------------------
 The LNG market is -- we are always chasing. It was supposed to turn around 2010, '11, '12, '13. Now it used to be 2018. I think now there is some hope that 2018 will be stabilizing here for the LNGs. So I think 2020 looks to be now the next milestone year for the market to turn.

------------------------------
Operator   [50]
------------------------------
 (Operator Instructions) We have a question from the line of James Jang from Maxim Group.

------------------------------
 Han Jang,  Maxim Group LLC, Research Division - VP & Senior Equity Analyst   [51]
------------------------------
 I just had 2 quick ones. One is, if you view the market to start an upturn, and I guess the tail end of '18 going to '19, would you look at any distressed assets without charters just to take advantage of the arbitrage in pricing right now?

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 Nikolas P. Tsakos,  Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director   [52]
------------------------------
 Which market are you referring to?

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 Han Jang,  Maxim Group LLC, Research Division - VP & Senior Equity Analyst   [53]
------------------------------
 The crude tanker market.

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 Nikolas P. Tsakos,  Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director   [54]
------------------------------
 Yes. We went all the way to LNGs for a long time. It's good to be back to crude, thanks. Yes, I think as long as the ships are in the water, this is something that we are continuously looking for. But for ships that are in the water or -- will not add more overcapacity.

------------------------------
 Han Jang,  Maxim Group LLC, Research Division - VP & Senior Equity Analyst   [55]
------------------------------
 Okay. And the announcement with the strategic alliance with the U.S. oil major, is there any other further opportunities there to, I guess, charter and other types of vessels besides crude, like on the Handys perhaps or any of the other product tankers?

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 Nikolas P. Tsakos,  Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director   [56]
------------------------------
 The answer is yes. There are a lot of opportunities with -- not the same companies, but similar companies or other strategic alliances also on other types of ships, as you mentioned. There is a lot of this going around for the owners that had the appetite for long-term employment, of course.

------------------------------
 Han Jang,  Maxim Group LLC, Research Division - VP & Senior Equity Analyst   [57]
------------------------------
 Yes. And so, I mean, where would you be comfortable in terms of charter cover? Do you want to maintain this type, this similar level? Or are you looking to kind of having more cover to just get through the volatility on rates that we're going probably see until '18, '19?

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 Nikolas P. Tsakos,  Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director   [58]
------------------------------
 Chairman? I have to refer you to our Chairman here.

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 Efstratios-Georgios A. Arapoglou,  Tsakos Energy Navigation Limited - Chairman of the Board   [59]
------------------------------
 It's no rocket science. I guess, it's case-by-case. It depends on the opportunity, on the needs of the customer, on the vessels that are available. So there is no hard and fast rule in what you're going to do.

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 Nikolas P. Tsakos,  Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director   [60]
------------------------------
 I think we have approach -- I mean, we have surpassed our goal that was over 75%. But if you have clients that are there to provide good look at the business...

------------------------------
 Efstratios-Georgios A. Arapoglou,  Tsakos Energy Navigation Limited - Chairman of the Board   [61]
------------------------------
 It's case-by-case.

------------------------------
 Nikolas P. Tsakos,  Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director   [62]
------------------------------
 It's case-by-case. So as the Chairman said, this is -- when we go to the board, they're not going to stop us because we have surpassed our 75%. It is -- and as long as we keep this profit-sharing arrangement, that allows us to participate on the upside. I think we're satisfied with that.

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Operator   [63]
------------------------------
 There are no further questions. I shall hand the call back over to you, sir.

------------------------------
 Nikolas P. Tsakos,  Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director   [64]
------------------------------
 Well, thank you very much for your interest in our company. As I said, it has been a very exciting year, so far, by completing this -- the Herculean task of taking delivery and chartering long term and of course competitively financing 15 vessels -- 14 vessels, one more to go in the fourth quarter. And we hope that 2018 -- well, the remaining of this year, but again 2018, the company will be at where exactly we had planned it to be, fully operational with 100% of the new vessels in the water and it will significantly increase our returns. In the meantime, we will be -- we have ships held for sale, our older vessels, and we will be also renewing the fleet by selling some of those vessels. And our aim is to sell all of our older vessels so now after [at the] end of the year so we can start afresh as we go forward. So this is where we are, and thank you very much. I'm looking forward to see you in New York in the beginning of October, where the company will be doing a roadshow.

------------------------------
Operator   [65]
------------------------------
 Thank you very much, sir. That concludes the conference for today. You may now all disconnect your lines.




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