Welcome to the Tsakos Energy Navigation conference call on the 15th of June, 2018, first quarter 2018 financial results. We have with us Mr. Efstratios-Georgios 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. At this time, all participants are on a listen-only mode. There will be a presentation followed by a question answer session. At which time if you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded today, and I will now pass the floor to Mr. Nicolas Bornozis, President of Capital Link Investor Relations Advisor of Tsakos Energy Navigation. Please go ahead, sir.
Hello, Mr. Bornozis.
The company publicly released its financial results for the first quarter of 2018. In case you do not have a copy of today's earnings release, please call us at 212-661-7566 or email us at ten@capitallink.com and we will email a copy to you right away. Please note that parallel to today's conference call, there is 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. Please, we urge you to access our presentation on the webcast on the website. Please note that the slides of the webcast will be available as an archive on the company's website after the conference call.
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 prospects and results of operations. Such risks are more fully disclosed in TEN's filings with the Securities and Exchange Commission. Before turning over the floor to Mr. Tsakos, I would like to mention that we just came back from a very busy, productive, and successful Posidonia week where we visited the company's headquarters.
TEN is celebrating this year 25 years as a public company. 25 years of continuous growth, growing the fleet from four to 66 double hull vessels. We should also point out TEN's track record of uninterrupted dividend payments. Inclusive of the recently declared dividend, TEN will have distributed a total of $10.71 per share in uninterrupted dividends to its common shareholders since the company's listing on the New York Stock Exchange in March 2002 against an issue price at the time of $7.50. Now before turning over the floor to Mr. Tsakos, I would like also to point out how the company's prudent and balanced fleet deployment strategy has resulted in outperforming the spot market in the first quarter of 2018 by over 100%. Ladies and gentlemen, at this point, I would like to turn the call over to Mr. Nikolas Tsakos, President and CEO of Tsakos Energy Navigation.
Mr. Tsakos, please go ahead, sir.
Thank you. Good morning to everybody. Thank you from Greece. Thank you for your good comments. I hope that we will continue to many more profitable years. The first quarter of this year has not been a very positive quarter. We looked at it as the bottom of the recent market. We've been in a down cycle for, I would say, the last two years. We hope, we have the feeling that the Q1 was the bottom of the cycle. We are looking at such reminiscing if you look at the graph of 2013. The first quarter of 2013 was the weakest part. The market for different reasons started turning around. However, in TEN, we have followed a very prudent and sometimes boring model of running the commercial side of our business.
With 80% of our ships on long-term time charters, we always cover our financial and operational obligations with the 80% of that fleet. It covers the whole obligations of the fleet. That leaves us the 20%, of course, still a significant part together with another 20% of profit sharing to take advantage of a higher market. Although it has been a very difficult period, I think operationally we have again more than 96% utilization, although we took the decision to take out of service five of our vessels and take advantage of this low market and pass the special surveys which incurred of course expenses and downtime. We are very proud also of our operational record, the 97% utilization. We have moved, year to date, 600 million barrels of oil and products, including gas, which is six days of world production of energy.
All of this, and I knock on wood, with no operational issues, which is always very important. We're looking forward for a better quarter, the second quarter, which we're into this quarter. We are seeing signs of veterans from a big part of this business, and various segments of this coming mainly from the VLs and the Afras. We are seeing a big appetite of major oil companies for long-term business, not only for new buildings, but for existing tonnage, which is always a very good sign. You know that we are always looking at this. We are proud to announce another, after finishing in the fourth quarter of 2017, our 15th vessel new building program. We are proud to be back in building responsible ships with employment for major oil companies. This is something, again, which falls within the company's strategy and repeat business.
Another segment that makes us believe that the second quarter will be significantly better or better from this quarter and the remaining of the year will turn back profitable, has to do with the turnaround of the LNG market. As we see today, we have the LNG market almost double within the last year. We have renewed the Maria Energy. She went up from $33,000 to $43,000 starting in April, and we will take this positive effect within this quarter. Of course, our other vessel, the Neo Energy, has almost doubled her employment will start in the third quarter from $19,000 to $38,000. This goes straight to our bottom line as we speak. Also, there are things that are not completely on the day-to-day business that have to do with the legislations that we are seeing.
We're seeing the scrubber and the water ballast arrangements and legislation that will make a significant part of the world fleet either slow steaming or being out of service for fitting and upgrading its technical capacity. I think we are looking at better times going forward. With that, I will ask George to tell us a little bit of the first quarter and his prospects. Thank you.
Thank you, Nikos. We announced today the operating results of the first quarter of 2018. However, since 2018, this year marks the company's 25th year anniversary. Allow me to try to summarize the 25 years in one slide, which as you can understand, it's not easy. Let me put out some key figures for the first 25 years. As we know, we started with four modern vessels back in 1993, and we find ourselves today with a pro forma fleet of 66 vessels. Most of the vessels, especially after 1997, have been built with new buildings meeting clients' requirements. The total net income generated since inception is $1.25 billion, of which $565 million, a figure close to 55%, has been returned to the company's shareholders in the form of cash dividends and buybacks. Turning now to the first quarter numbers.
OPEC supply cuts and an oversupply of tonnage, together with seasonal refinery utilization, continue to weigh on the crude tanker rates during the first quarter. The environment has been weak. Thanks to TEN's proven commercial strategy of fixing most of the fleet on medium to long-term time charters, it paid dividends again as it helped the company to outperform the average spot market indices by beating them over 100% in all vessel categories that we operate. We believe that tanker rates have reached the low point of the current cycle. As we move into the second quarter, we already see signs of improvement. For those of you who are connected to the internet and our website, there is an online slide presentation which format we will follow during the call. Turning to slide number four with the key corporate highlights.
We have announced today the company's agreement with an oil major to build two new state-of-the-art Aframax tankers against long-term contracts. We have also sold our oldest vessel, the 1998-built VLCC Millennium, after 20 years of profitable trade for the company. With this order, TEN has now a pro forma fleet of 66 vessels. 25 vessels in the fleet have ice class capabilities. The average age of the fleet is 7.4 years, against 10.3 years for the world tanker fleet. We have a balanced employment strategy that takes advantage of market peaks with profit-sharing arrangements. Out of the 66 vessel pro forma fleet, 53 vessels are on secured employment contracts with an average duration of 2.5 years. The emphasis is on charters with profit-sharing arrangements that enable TEN to take advantage of spikes and stronger freight markets.
We have secured minimum contracted revenue of $1.3 billion with potential additional revenues from profit-sharing arrangements. We have a modern, diversified fleet covering client transportation requirements in crude, products, shuttle, and LNG. We have become the carrier of choice for many of the top oil majors, commodity traders, and refineries. We have continued to keep a very high utilization, with the latest figure being closest to 97%. In the next slide, we have a breakdown of the fleet, 66 vessel pro forma fleet, with 48 vessels being engaged in crude trading, 13 in products. We have three shuttle tankers and two LNG vessels. The next slide has basically the all-in blue chip clients of the company with whom we are doing repeat business over the years, thanks to the modern fleet, the safety record, and the quality of service.
These 10 names that you see represent 72% of the revenue generated for the company. Strong secured coverage with upside potential. We have so far announced during the year new charters and charter extension of a total of 15 vessels in the fleet. The charter period for these vessels ranges from six months to three years. 53 vessels out of the 66 vessel pro forma fleet are fixed under secured contracts, combination of time charters, time charters with profit sharing, and contracts of affreightment. 38 vessels are on market-related charters, including the vessels currently trading spot, securing the company's ability to immediately capture the market's upside. The revenues expected from the vessels in the fleet with secure employment cover the company's annual operating and financial obligations.
We continue to see improvements in the LNG market, with two of our vessels that we operate having secured extensions in their rates and charter periods of significantly higher levels, 30% in the case of one vessel and doubling the rate in the 2nd one. On the next slide, we present basically the break-even cost for the various vessel types that we operate, and as you can see, the cost base is very low. In addition to the low shipbuilding cost, we must highlight the purchasing power of our technical manager, Tsakos Columbia Shipmanagement, and the continuous cost control effort by management in order to maintain a low OpEx average for the fleet while keeping a very high fleet utilization rate quarter after quarter that we believe qualifies as full employment.
With 80% of the fleet on secured employment, the revenue these charters generate cover the company's operating and finance expenses, including the dividend. In addition, the combination of time charters with profit sharing, contracts of affreightment, and spot charters guarantee for them a share of the market's upside every time we have a spike or a sustained strong freight market. Based on the current number of vessels operating in the spot market and in time charter with profit sharing, for every $1,000 increase in the spot market, we have a positive $0.07 impact in annual earnings per share. The next few slides from 10 to 12 tell us what we see in the market. Despite the weakness we have experienced in the market, we are near the bottom, or we have passed the bottom of the current cycle, and we see positive signs that point to the market's recovery.
Some of these things are, first of all, the solid global economic background, which translates to strong global oil demand. The growth for global oil demand in 2018, it marks the 4th year in a row with global demand growing by at least 1.4 million barrels per day against the long-term demand growth figure of closer to 1.1 million barrels per day. This trend appears to be holding strong as the International Energy Agency, in their latest report, forecast the same demand growth number of 1.4 million barrels per day for 2019 as well.
With global oil stocks currently below the five-year average level that OPEC was targeting in order to reduce oil oversupply, the reintroduction of economic sanctions against Iran by the U.S., and with key OPEC producers suffering continuous production declines, OPEC and friends appear to be ready to increase production by a figure of up to 1.5 million barrels per day following their June 22nd meeting. Increased OPEC production historically has always been positive for tanker demand and freight rates. The U.S. continued to develop as a major crude oil exporter to the world. During 2017, the average U.S. exports were in excess of 1.4 million barrels per day. The latest Department of Energy four-week average have U.S. crude oil exports exceeding 1.9 million barrels per day. The growing U.S. exports have created new long-distance trade routes, mainly to Asian destinations, adding to ton mile growth.
High scrap prices and a weak market resulted in a significant increase in tanker scrapping, the highest that we have seen in quite some time. The average age of the scrap vessels is coming down to about 20 years. With the upcoming regulations for the water ballast in 2019 and the global sulfur cap from 2020, we believe in the company that owners of older vessels will continue to prioritize in scrapping their older tonnage rather than passing them through an expensive fourth special survey, the effect of which will be a lower net fleet growth for the next couple of years.
In view of all the above, we announce today another dividend of $0.05, to be paid on August 8th to the shareholders of record on August 2nd. In total, since 2002, TEN has paid $10.71 in cash dividends, or in excess of $466 million, and this compares with a listing price in our IPO of $7.50. The average yield since the New York Stock Exchange listing in 2002 is 5.25% per annum. We believe that we have turned the quarter, and we are going to be positive again in 2018. With that, we are turning to the numbers. Paul?
Thank you, George. As Nikos described, the tanker market in quarter one was not conducive to generating strong results by any large tanker company, although we probably fared better than most others. Our net loss was limited to $11.9 million, thanks to our time charter cover and our fleet enjoying full employment. As a result, our vessels earned significantly better than market rates, with an average daily TCE rate of nearly $18,000. We had 16 vessels on spot. Aframaxes and Suezmaxes at least comfortably covering their running costs. The spot MRs performed relatively well with an average TCE of $13,000. We had five vessels dry docked, as Nikos mentioned, four losing their time charter revenue, including Shuttle Tanker Brazil, losing $53,000 daily.
Our time charter vessels still managed again to generate enough cash to cover our operating, overhead, and finance costs, but leaving a smaller surplus than in recent quarters. Our average daily OpEx per vessel increased, but we regard this as a temporary aberration due to the five dry docks, the heavy restocking of vessels, and a weak dollar. In quarter two, we expect a reduced dry dock schedule, regular supplies to vessels, and a stronger dollar, Average daily OpEx per vessel should return to normal levels. Our daily overhead cost per vessel remains stable as there is no management award, and vessel management fees remain stable as they have been for six years. Finance costs increased by $6 million, mainly due to the loans relating to the new vessels and increased interest rates.
Unlike the prior quarter one, there was no capitalized interest and no gains from early termination of interest rate swaps in this quarter one. There were no new loans in quarter one. Repayments amounted to $42 million, bringing our outstanding balance to $1.72 billion. Net debt to capital was 51%. Our average cost of debt in quarter one was only 3.9%. In quarter two, we have successfully refinanced the debt on 11 of our vessels, extending the original life of the debt on these vessels for another five years with a reduced margin. We have also refinanced the Shuttle Brazil, providing an extra $16 million cash. Our old VLCC Millennium was sold, and $10 million worth of debt repaid from sale proceeds. We soon expect to complete negotiations to finance the two new building Aframaxes just announced at very competitive terms.
This concludes my comments. Now I'll hand the call back to Nikos.
Thank you, Paul, and thank you, George. As we said, this has been a challenging quarter, but the prospects look positive, and we hope that 2018 will be another profitable year. It is a reminiscent of the end of 2013 and when the market started turning around. We see a lot of this because of the appetite of the major oil companies for long-term business happening almost on a daily basis. Big names. All the majors are out there to take in vessels. I said again, not new buildings, just vessels out of the market. With that positive note, I would like to open the floor for any questions.
Thank you, ladies and gentlemen. We'll now begin the question and answer session. As a reminder, if you'd like to ask a question, please press *1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the # key. Once again, it's *1 for questions. Your first question comes line of Donald McLee from Berenberg. Please ask your question.
Good morning, guys.
Good morning.
Just to start with the new buildings, could you provide any details around the Aframaxes in terms of just pricing, expected delivery, contract tenure, et cetera? Just things that would be helpful from a modeling perspective.
We will tell you this in private when you are going to offer to finance the ships. No, I'm just kidding. Well, I think these are vessels capturing all the new Tier III technology which is required. It's in the low $50s, depending on the extras that the major company is going to be adding. Yes. It's very close to $50 or under, depending on the specification, on the price.
just in terms of the tenure on the contracts attached to the Aframaxes?
It's anywhere between five and seven years. I mean, five is the minimum.
Okay
there are options up to seven years.
Okay. That makes sense. just taking a step back, in the past, you've talked about taking time to digest the recent CapEx program when referencing potential LNG carrier orders. with that Aframax order on the books, could you provide an update on if you still see LNG as a near-term avenue of growth, and if there's been any change to the level of activity for your negotiations around those orders?
No, as I said, we are digesting. It took us one quarter to digest our growth program. Of course, LNGs are in the forefront of our growth program without stopping the day-to-day business, which this order has to do with.
I guess compared to three months ago or six months ago, has there been any progress in the negotiations there, or is it kind of the same?
There is a vast appetite of the companies that are involved, the end users of gas into wanting more vessels, and we're participating in this.
All right. One more on the pref before I turn it over. You have about $100 million that becomes redeemable in H2. How do you prioritize potentially paying those pref off against pursuing near-term growth opportunities?
I think our aim will be to fully repay the pref as soon as possible, or as early as 2019. I mean, our pref, the first one is due in July next year, and the other one is in October 2020. They are a year and a bit apart. I think the first one would be repaid in 2019.
Okay.
This is our priority, of course, because this is our obligation.
Just sticking with that, so I think after July 2019 and October 2019, there is an escalation in the yield. What would be the increase if it went beyond that period?
I do not know the increase because we're not planning to get into that.
October 2020 is 2019.
It's not October 2019. It's October 2020, the second one.
The Series C?
Yeah.
Okay. That's it for me. I can turn it over now. Thank you.
Thank you.
Thank you. Your next question comes the line of Jonathan Chappell from Evercore. Please ask your question.
Thank you. Good afternoon. Two quick follow-ups on the new builds. When's the delivery set for those? Is that mid to late 2020?
Perhaps, yeah. As early as the last quarter of 2019 for the first vessel.
Okay. That might slip. I mean, you probably don't want to take a December 2019 delivery, right?
Yeah. The charterers are pushing because they need the ships, but you are right. This is what we would do.
Okay. Then, Nick, you were on the record earlier this year saying that your constituents, I'm not sure if that's the right term, but your fellow owners in Intertanko would quote, unquote, "Shoot you if you ordered new builds." Can you explain with the Aframaxes that you have on your fleet today on the spot market, why those ships couldn't be used for this particular charter?
Yes, you are right, but you have missed my quotation, which is "Build responsibly, like drink responsibly." I think I've always said that we cannot stop anybody ordering ships that a client will give to somebody else, unless they are there to do it. We're not looking to build opportunistic ships because of low prices of new builds. Also, we have never, and you know this because we just took delivery of 15 ships last year, we never shy out of doing business. One of the reasons that we feel that the market will also be positive is, as you know, we have moved for environmental reasons into Tier III, and new designs of engines and more environmental, and a lot of charterers might, for specific trades, require these type of vessels instead of existing.
Our priority has been to offer them existing ships, but they need new technology.
Okay. Maybe another way to ask it then is there a two-tiered market developing for time charters? I mean, if you have a handful of 2007 to 2010 built Aframaxes in your fleet, when the customer comes to you, they specifically wanted the new technology and maybe even be involved in the oversight of the new build process rather than take existing ships?
Many of the clients that are asking for new buildings, because I said we have a lot of business for existing charters by the major oil companies. I think this is also very encouraging because we see, I would say, 75% of the business out there for existing ships, for the 2007, the 2010, the 2012 vessels. We're planning to announce some of this business, I think, later within the third quarter like this. There are some specific clients, as we had Statoil earlier, later in 2017, that need specific ships for specific ECA trades. Yes.
Equinor.
Equinor, yeah. Equinor
That leads then to my last question. You've laid out a pretty optimistic view on the bottoming of the cycle and the near to medium-term outlook, and you do have a fair amount of spot ships today, but a bunch of contracts rolling off too in the relatively near future. It sounds from that comment that you're still looking to recharter ships and maintain the current time charter coverage as opposed to maybe getting a bit more spot exposure in what you think would be a recovering market. Is that accurate?
Yes. Because, I mean, as you join us, you know that, as I said in the beginning, we are a bit of a boring company because we tend to have long-term charters. Because of the company's reputation, we tend not to have time to have a ship open for too long before the next client comes for a long-term employment. As you know, I'm here with a chartering team, and we have these type of examples on a daily basis. If you recall, I think we made an announcement back in March that already in March we had rechartered 16 vessels from the existing fleet to charter. There is appetite for that. I think you have big companies out there like the Exxon, the Shell, that are looking for coverage for existing ships.
Okay. Final thing, more of a comment rather than a question, I've spoken to some of my peers about this as well. It's June 15th. We're 15 days away from the end of the second quarter, and most of your peers have reported weeks, if not months ago. If possible, as far as staying relevant with the investor community, if you can move the timeframe up a little bit and be closer to the peers, I think that'd be helpful to the company, to us as the analysts, and to your valuation. That's just an observation. Thank you for your time, Nick.
Thank you.
Randy, your line is open. Please ask your question.
Hey, thanks, operator. A few quick questions here. On slide five, you show that your 3 LR2s and your 2 LR1s are currently operating on the crude trade. How hard or easy would it be to switch those vessels to transporting refined products? Is that something you're thinking about doing?
I think operationally, those ships have been designed, they're built at the best yards. Operationally, it's not more than one week, and perhaps, depending who pays for about a quarter of a million of expenses to turn them from dirty to cleaner trades.
Okay. Is that something you're thinking about doing or are you pretty committed to the crude trade on this?
Well, I think that the ships are on charter employment, so the owners are chartered, I mean, the charterers are working now more on the crude trades, but they can turn into clean.
Sure. Okay. Now with those two buildings basically to be delivered that were recently ordered, any other plans for fleet growth or maybe additional fleet sales, now that you've already sold the Millennium, in the coming quarters?
I think, yes. On specific segments, we are looking, as we have discussed, like gas is a growth priority for us. All of our, I would call them first-generation ships as we started with the Millennium, are held for sale. Some of them we are negotiating closely with.
Got it. Okay. Back to the market. Can you give some guidance on quarter to date or maybe current spot rates on some of your open Suezmaxes or even open Aframax crude tankers? Obviously, the headline rates according to some of the brokers are pretty low. Obviously, I would assume you're outperforming those.
Yes. I mean, I can give you the comparison in the first quarter. This has to do because we have coverage of our ships in a market that our VLCCs performed close to $27, about $27,000 in a market of $11.5. A Suezmax is $18 in a market of $5. Aframax is $18 on a market of $7, and so on and so forth. I think today some of these markets, mainly the Aframaxes, have recovered substantially. We're seeing a bit hope also on the Suezmax trades.
2Q rates higher than 1Q for the spot vessels?
Excuse me?
2Q rates higher than 1Q for the spot vessels?
Yes. Mainly VLs and Aframaxes are the ones that started reacting more positively.
Sure. Okay. Last question. Share price. Obviously, you're still trading at a pretty steep discount to NAV. Are share repurchases part of your return to capital plans this year? Or are you just focused on buying back those preferreds first?
I think buying back the preferreds is our priority and maintaining our dividend is the first priority.
Great. All right. Hey, thanks again, and good chatting with you.
Thank you.
Thank you. Next question is from the line of Ben Nolan from Stifel. Please ask your question.
Yeah. Thank you, operator. My first question relates to, I guess just the newbuild
Ultimately the returns on them, kind of backing into it sounds like your unlevered returns are the 10%, 11%, if that's correct me if I'm wrong, which is I think probably in line with where things have been historically for longer-term contracts on new buildings. As you look forward, are you seeing any changes there, any evolutions in terms of what you guys in the market will and do require in terms of a minimum level of return in order to be incentivized to build the vessels?
Paul, our equity return is closer to the mid-teens rather than 10%, 11%. We have lost a lot of business to others at 10% and 11%. There are other people that would go for that. Paul would know.
I agree. In the past, we've aimed for as much as 15%. Of course, that's been whittled down over the past few years, our target that is.
Sure.
We are very happy to get 10% or 11%. Even that these days can be a bit of a struggle. We feel that by the end of the year, we'll be up again around the 12% kind of level.
Yeah. Paul's comment has to do with the return on the fleet overall, my comments have been on the time charter market. We let other people get the 10% and 11% on long-term charters. We're looking at something with mid-teens, I think 15% is our sweet spot, and we had examples in businesses that we let it go when people undercut the market.
Thank you. Are you ready for the next question?
Yep.
Next question is from the line of Fotis Giannakoulis from Morgan Stanley. Please ask your question.
Yes. Hi, guys. Hi, Nick.
Hi, Fotis.
I also want to ask about your capital allocation, how comfortable you feel with your liquidity. I know that you want to have plenty of cash in your balance sheet for opportunistic acquisitions. Given the fact that you have to, and you plan to repay back the two prefers, which is $100 million, and you have also some equity to contribute for the new buildings. What are the sources of liquidity that you can have and if you would consider of raising any external capital?
Well, as I said, our intention is we have the two prefers. The first one will be repaid, I think, within 2019. The second is due in October 2020. We're planning to, as a priority, to repay those prefers or at least to refinance them. In the market, as you know, our prefers have performed very well, and they're performing very well because we have a very constant dividend from that side. We're looking at ship sales and to create liquidity, and we are doing that. We're enhancing the company's liquidity, which, as you said, is always on the high side for these reasons. We are securing businesses that the equity participation because of the signature of our name and the charterer's name it's not so demanding. I think the existing growth of the company will come from existing cash flow for the new ships.
Is there any minimum threshold of cash that you want to have in your balance sheet? You mentioned earlier your first priority for the repayment of the preferred will be to issue new prefers. Is this the game plan here?
Well, depends how the market conditions are going to be at the time. It's something we do not exclude.
Okay. Thank you. Nick, you are except of being the CEO of TEN, you are also the Chairman of Intertanko, the association of tanker ship owners. I want to ask your view as with both hats about the implications of the IMO 2020 and the way that your fellow ship owners are reacting to that. We heard earlier this week one of your peers in the dry bulk sector mentioning that they have already ordered a number of scrubbers for Capesize vessels, very similar size of the Suezmaxes that you own. Is this something that you expect to have a wide adaptation now that the first steps have already been done and it seems that the cost is a little bit lower than we previously thought?
Well, I think first of all, Fotis, you will have to spend here up to dinnertime New York to discuss this issue. I will try to give you a small summary of our thoughts here. I think everyone has his own right. We believe that scrubber is one of the solutions. We believe scrubber is a short-term solution. Owners are taking this stance. However, whichever way it will go, even if scrubber becomes much more acceptable day to day, the disruption and the dislocation that this will create in the market will be very positive for rates, both in tankers, dry cargos, and I'm not sure what will happen with containers because containers is where actually the majority of the CO2 comes out from.
I think any disruption of that sort, either by slow steaming, either by people going to the yards waiting for fitting scrubbers, is going to make a big change for the market starting early in 2019. That's why I say that my opinion is that scrubbers is a short-term solution that might pay to fit them. I think everybody's taking a chance on that. There are not enough scrubbers in the world to fit all the world's vessels with scrubbers. A lot of older ships will go for scrap. You mentioned that I sound optimistic. I'm not over-optimistic. I'm just looking also at the supply and demand figures, which you are much more analytical about.
There are, let's say, more than 100, 120 VLCCs in the order book, close to 200 of those ships are above 15 years old, and more than 30 of those ships are, George has all the statistics. Really, if you imagine that some, at least of the 20-year-old ships will not, for sure, as we did with the Millennium, will not go through the scrubber or the water ballast treatment scenario, then the market is much, much more balanced than we think. That was the reason that we feel optimistic. Our opinion as an association, wearing my Intertanko hat about scrubbers, it's that it's a short-term cure with no real positive long-term effect for the environment, I'm talking about. Every owner takes his own economical decision.
The truth is, whichever way it goes, it's going to be positive for the market because it will create a significant disruption.
Can you also give us your view about the level of compliance that you see after 2020? Also, if you believe that this date is set in stone or there might be some extensions similar to what happened with the water ballast treatment?
What I can tell you is that as we speak today, from now until September, a lot of very important discussions will be taking place in all the legislative fora, by September, there will be a decision. If you would ask me based on supply and demand, supply of 0.5% and demand for 0.5%, I would believe that some sort of transition time has to be given for vessels to comply. I think in September, the final decision will be taken, then we will know much more, the effect on the market, depending on that, will be significant.
Jumping to the U.S. Gulf market and the ramp-up in exports, it seems to be one of the high expectations for the tanker sector. Can you give us an idea of how many vessels they are engaged in U.S. exports right now, either VLCCs or Suezmaxes, Aframaxes for reverse lightering? How many vessels do you expect that will be engaged in the future if we have this growth in U.S. exports? People are talking about 4.5 million-5 million barrels per day growth.
As we have seen, this is a market that the stake is biting more and more into the demand for transportation business. The Aframaxes are basically used, as you rightly said, for a change, for reverse lightering, and we have the first couple of VLCC cargos that have been exported and Suezmaxes. So far, the market that has been more affected, and we see this because it's the best-performing market in 2018, is the Aframax Gulf market. Today it has gone close to $20,000 a day, which is very important.
Thank you very much, Nikos. Thank you, everybody.
Thank you.
Next question comes the line of Magnus Wahle from Seaport Global. Please ask your question.
Yes. Hi, good afternoon. Just two follow-up questions. I guess first on the scrubbers. We've seen some of the oil companies taking a bigger interest in putting these on their ships. Maybe you can tell me a little bit about on these two most recent time charters for the two Aframaxes. Was there any talks about putting scrubbers on these?
Yes, I think scrubbers is one of the options that is being discussed and evaluated with the shipyard. As you know, there are various types of scrubbers. We're learning more about scrubbers than we ever envisioned in our life when we started out. Open loop, hybrid scrubbers. Yeah, these are options that are being discussed very seriously.
All right. Thank you. Then, second question on the LNG market. I know we've set out on some goals here a few years back. We're mid-2018. We still have two LNG ships. Are the returns getting closer now? We've seen some longer-term charters being awarded that you think you could have maybe one or two ships more by 2020?
Yes, I think you are right. We went through a period that I think some owners, for their own reasons, because they had a significant amount of ships idle in the spot market. As we said, the spot market has almost doubled in some segments of that carries some weight on the long-term side of the business. I think some of the owners that had idle ships have now employed them at low respectable levels, the market is going through a period that we are approaching our returns that I mentioned earlier of the mid-teens returns that we need, at least for our equity.
Thank you. Next question comes line of James Jang from Maxim Group. Please ask your question.
Hey, good afternoon, guys. I know you mentioned that LNG is a focus for the near term, any plans on replacing the Millennium?
Yes. Big ships are always interesting, and there is a big appetite for big ships by oil companies. It is a segment that we are looking. Not as a priority, more opportunistic, and we're looking also at ships that are resales.
Okay. Nikos, since you are the chairman of Intertanko, can you give us some insight into whether Intertanko is working with someone like Alfa Laval on the scrubbers?
I think Intertanko is giving information to its members for every technology available. We have our annual meeting for five beautiful days in Rome next week, I know that the majority of those five days, we will be talking about scrubbers and water ballast treatment. We will have to bring a lot of grappa in Italy to stay and to listen to all these technical issues. Yes, we are providing a forum for suppliers to come and talk to our members. We're not influencing them, we're not a commercial organization as Intertanko. We have had in Houston in our last year annual meeting, we had a lot of the water ballast treatments with the U.S. Coast Guard approval presenting their technology. We will have Alfa Laval and others presenting their technology in our annual meeting now. We're not making a profit out of this.
We're only telling our members what is out there as an option.
Wouldn't it benefit, I guess, the industry if you guys could come to some type of consensus on a scrubber system to help with costs? Is that not part of the discussion at this point?
We have strong opinions on scrubber technology, and we have a very competent technical team in Intertanko dealing with issues like this. Our aim is not to influence one type or technology.
Got you. Okay. One last one is, you mentioned that you believe that the sector is kind of exiting the trough right now. What are you seeing to support that outlook?
You're talking about why we believe that the market has turned the corner?
Yes.
Perhaps I said before, it reminds us very much, if you look also the graphs of where we were in this same period in 2013, which was again, a very low period of time. We had a difficult summer in 2013 for those of us who have long memories to remember. Then I think October that year, the market turned the corner without specific reason. We didn't have any major wars other than the usual Iraq skirmishes at the time. The reason is now because we are seeing that Supply and ships are getting older. The supply other than the VLs, where the number sounds is a bit scary, is in balance.
The other segments that we're seeing is the dislocation that you guys are mentioning, that if people have to go and slow steam or have scrubbers fitted on their ships, they will have to have a lot of time out of service. That will create significant market disruptions, dislocations, and we expect the rates, as long as demand, as George mentioned in his presentation, stays, increases, where we expect to increase, we're going to see a positive remaining of the year. We know how many ships are coming in, and we hope we have already had, let's say, more than 70 ships since in the first six months in tankers have been scrapped, 15 VLs, 10 Suezmaxes, 20 Aframaxes, and then about 22 smaller ships. That's a good sign.
Okay. One final one is on the two new contracts. I think John touched upon this. Currently, you have the Sapporo Princess and the Uraga Princess off charter. Why were these vessels not looked at as candidates for the charter? Is it just because of the age or the technical specs?
No, actually the ships are participating in contracts of affreightment with major oil companies. Just because the ships are not on time charter does not mean that they're not operating. Actually, they're operating in the spot market. If you look our utilization of 97% is way above the industry average of 80%-85%.
Yeah. Okay.
The ships are operating, and there is a big appetite. Let's say one of the major companies is out there as of this week looking for this type of vessels for long-term employment. If they meet the rate that we believe it's appropriate, we might charter them long-term. The ships are working with 96% utilization, so they're working the majority of every single day, earning money.
Got you. All right, thank you. One quick one. The two new Aframaxes, are they coded?
Of course, yes.
Okay, great. Thank you.
Thank you.
Thank you. There are no further questions at this time.
Okay, thank you. Well, we would like to thank you very much for your interest in the company and the questions. Our team will be out in Marine Money next week so you can see and have any more clarifications with our results being out. We believe that it has been a tough start for the year, but our strategy of 80% employment and more than doubling, outperforming by double the spot market has put us in the right direction. We still had a positive cash production, a small one, but still our strategy of with 80% of the fleet of paying all our operational and financial obligations has started to operate. It's been the first real quarter that we have a full fleet working. We took the decision to take a number of our ships out of service and pass the special surveys because of the low market.
This is something we will not have, I think, in this degree at all in the second quarter. Hopefully our news will be even much better when we talk to you after the summer. With that, we would like to thank all of you very much. Thank you.
Thank you. That does conclude our conference for today. Thank you for participating. You may now all disconnect.