Scorpio Tankers Inc (STNG) Q2 2019 Earnings Call Transcript

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Scorpio Tankers Inc  (NYSE: STNG)
Q2 2019 Earnings Call
Jul. 31, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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

Brian M. Lee -- Chief Financial Officer

Thank you, and thank you, everyone, for joining us today. Welcome to the Scorpio Tankers' 2019 Second Quarter Earnings Conference Call. On the call with me today are Emanuele Lauro, Chief Executive Officer; Robert Bugbee, President; Cameron MacKey, Chief Operating Officer; Lars Dencker Nielsen, Commercial Director; David Morant, Managing Director; James Doyle, Senior Financial Analyst. Earlier today, we issued our 2019 second quarter earnings press release, which is available on our website. Information discussed on this call is based on information as of today, July 31, 2019, and may contain forward-looking statements that involve risk and uncertainty.

Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statement disclosure in our press release we issued today as well as Scorpio Tankers' SEC filings, which are available at scorpiotankers.com and sec.gov. Call participants are advised that the audio of this conference call is being broadcast live in the Internet and is also being recorded for playback purposes. An archive of the webcast will be made available on the Investor Relations page of our website for approximately 14 days. Information slide on the quarter and the company are available at scorpiotankers.com on the Investor Relations page under Reports and Presentations.

If you have any specific modeling questions, you can contact me later and discuss off-line. As a reminder, in the explanation of Variances section of the press release, we gave guidance on future depreciation, G&A and interest expense. Now I'd like to introduce Emanuele Lauro.

Emanuele A. Lauro -- Founder, Chairman & Chief Executive Officer

Thank you, Brian, and thank you all for your time today. Our earnings that we missed to the unfolding recovery in the product tanker markets. We believe that the company is in an optimal position to profit from widely expected upswing in these markets. Our second quarter time charter equivalent comparison year-on-year has improved more than 30% across all the asset classes that we operate in. The third quarter time charter equivalent guidance year-over-year comparison, as of July 31, has also improved substantially, as you can see from our earnings press release.

The EBITDA, as well as the net cash flow from operations are, again, substantially better than this time last year, enabling us in the first 7 months of the year to repay close to $330 million of debt, either through planned amortizations or through senior secured -- senior unsecured notes retirements. Scorpio Tankers is the largest, most modern and most liquid product tanker company. As scrubber retrofit program is proceeding as planned. The product counter order book stands at multiyear lows. The underwater fleet continues to age, while demand normalizes back to its 20-year long GDP plus brand growth. As already mentioned in the past, the enormous dislocation of the IMO 2020 measures will provide a step change in the size of the market for seaborne-refined petroleum products, which is unique in recent memory.

It will expand physical arbitrages, which will create global distillates and balances, and it will improve refinery margins. As our Commercial Director will mention shortly, we think that after a slower second and third quarter due to refinery's maintenance and turnarounds, the market is poised for a substantial strengthening through the end of the year. With that, I would like to turn the call to our Commercial Director, Lars Dencker.

Lars Dencker Nielsen -- Commercial Director

Thank you, Emanuele. Good morning, everyone. "The trend is your friend" adage is a reminder of the current seasonality, which can come into play and affect the shipping markets. As anticipated and discussed during our Q1 2019 earnings call, the freight markets realized in the effects of a strong refinery turnaround season in Asia and the U.S. Gulf in the second quarter. These turnarounds were achieved, but also front-loaded with an additional refiner focus to help prepare the marketplace for the upcoming IMO 2020 regulations, and the incremental demand, which is anticipated to be placed on the refining and marine transportation sectors.

The lack of incremental production, due to the refinery turnarounds, contributed to an anticipated seasonal decline in waterborne arbitrage markets and led to some market backwardation in Q2. Affecting the returns is to serve with the heavily reduced Naphtha cargo flow, displaced by attractively priced LPG alternative within the petrochemical sector. The LR2 and LR1 markets showed that the brunt of the effects of the reduced Naphtha movement and thus gave back some of the gains made in Q1. The MR markets were in effect 2 tier. The Far East and transPac markets overall had a steady performance over the quarter.

And although we had a share of turnaround, was assisted by strong Chinese exports and robust ton mile demand, with a sustained transPac gen arbitrage. The Atlantic Basin in U.S. Gulf, on the other hand, encountered increased volatility with steeper backwardation. This correlates well with heavy front-loaded refinery turnarounds and upgrades in the West. The handysize market, historically, the segment most impacted by seasonal trends and felt the brunt of the decline by the refinery, enhanced maintenance narrative. And regionally, the Americas vessel, furthermore with the reduced demand, following the refinery fire at Irving Saint John and the demand effects following the Venezuelan sanctions.

We experienced the markets dropping from a very healthy Q1 into 2Q, and currently facing the after effects in the beginning of the third quarter. However, we do expect a strong rebound as we move in the back end of the third quarter as we position into a seasonally stronger quarter, enhanced by the supply requirements by IMO 2020. Just to put things in perspective here, from May to June 2019, there was an average of 6.2 million barrels per day of refinery capacity off-line versus the 5-year average of 4.9 million barrels per day. May hit a high point, were 7.9 million barrels per day of capacity was offline. In addition, this front-loaded maintenance season lasted longer and peaked later in May and June versus the historical of March and April.

Moving to the supply side. There continues to be a constructive outlook as we see a benign limited tanker order book and for some fleets, an accelerating aging fleet profile, which has previously burdened the market with substandard tonnage availability. This will accelerate further as we move into 2020 and 2021. I would also highlight the not insignificant impact of Tier 1 tonnage supply in the fourth quarter, as many scrubber filings will increase downtime for the vessel targeted for the refit. We anticipate a higher degree of unintended consequences, which will act as dislocators to market moves.

The underlying positive under term is that this season's lows are still markedly better than we saw last year, as evidenced by the LR segment seeing returns, an average of 32% higher than we realized in 2018, providing a positive indicator of the market step change, including the triangulation effect and enhanced equilibrium, which is playing out within our markets and provides a strong platform as we look down the trading curves. Q1 2019, and to a certain degree, Q2 of 2019, were fundamentally important periods in so much as they are underpinning the narrative on approaching stronger bullish story within the tanker freight markets. As we look into Q3, we anticipate continued challenges on the seasonal demand side in the front end of the quarter, but optimism holds for the turn to start in the form of incremental export demand to pick up for positioning of distillate cargo base for IMO 2020 supply around the world.

This is likely not to kick up in earnest until we get closer to the end of the third quarter, but we expect to see increased market volatility at the margin and incremental demand is nodding this market moving forward into the fourth quarter in 2020. Thank you. And with that, I'll hand the call back to Robert. Thank you.

Robert L. Bugbee -- President & Director

Thanks very much, Lars. I think the earnings release was pretty clear as the FERC. It's a very clean quarter. And we will share the view as to our customers that we're continuing to see improvement in the market without the effects of the IMO 2020. And at any moment, the IMO 2020 switch could be turned on. As I rarely, would like to see something out stand out, but just for everybody here, there's a really good piece of research on the general tanker market itself. So this is the crude and the products. And it's -- you always will have a very much stronger product market, if you have a stronger crude market. And that piece of research is in the industrial side from Fearnleys, and I would guide everybody to -- as a question of interest, just to read that.

Let's say, what I would call an exceptional piece of research that should be read. And now I just think we'll just go straight to Q&A. Thanks.

Brian M. Lee -- Chief Financial Officer

Operator?

Operator

Are we ready for questions?

Emanuele A. Lauro -- Founder, Chairman & Chief Executive Officer

Yes, please. Yes.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Jon Chappell with Evercore.

Jonathan B. Chappell -- Evercore ISI Institutional Equities -- Analyst

Thank you. Good afternoon. Lars, glad you're on the call. I want to ask about 2 specific, kind of, bigger picture things. First is opportunities. I mean, you mentioned the reason why we've had the seasonal downturn from unloading the impact into the third quarter. But now just 5 months away from the onset of this, how do you view the opportunities for your fleet? How are you positioning the ships, whether it's the MRs, all the way up to the LR2s? How are you thinking about the dislocation? And how do you plan to, kind of, maximize your advantage heading into that disruption?

Lars Dencker Nielsen -- Commercial Director

Thanks, Jon. I mean, first of all, the overriding point is that we try to balance the fleet, East and West. And then at the margin, we would trade where we believe where we can see the opportunities arising in the front end. We've been quite fortunate in having a bigger position, trading in the transPac Asian markets. And the second point here as well is that what we need to do also, with the fleet size that we have and the scrubber program, is to make sure that we position the ships as efficiently as we can. So as we have been moving in through 2019, we have been moving a lot of our bigger vessels into China, where we are doing most of our retrofits.

And these things obviously play in when you make the kind of decision. It is a good question to say, well, what's going to go first. We believe in essence, that Asia is very strong at the moment for the reasons I just mentioned, particularly with the Chinese exports. That has been -- let's say, hampered in the beginning of the year a little bit by the larger crude delivery schedule on the new buildings, on the Aframaxes mix and also, on the VLCCs. We can see that, that new building delivery schedule is going to taper off. And we will anticipate, with the large export program, that we will start seeing larger volumes increasing there.

Having said that, there's also a lot of expectations in the trans -- Atlantic Basin. As we have seen, the turnarounds coming to an end within July, and we'll see an increase of market there as well. And should we mention that with the past refinery blowing up. You can see the market spike in the front end of that as well. It was only 300,000 barrels, that they've taken out on the AC. But if you consider that the huge amount of turnaround that's been taking place, it didn't really make a big dent in the market. But as the refiners that are going to go back on stream and you have that dislocation in terms of the product supply. We also are pretty constructive in the Atlantic.

Jonathan B. Chappell -- Evercore ISI Institutional Equities -- Analyst

That's helpful. And then if I could just take the other side of it, there's like a Doomsday headline this morning saying a minute-to-midnight. So we always think about the opportunity and the dislocation but what about, kind of, managing risk? I mean, you're not going to have the fleet fully scrubber-fitted as of January 1. So how do you think about your exposure to the compliant fuel for the ships that aren't fitted yet? Hedging, just managing the risk ahead of that, just to make sure that you have full operation, full utilization of your fleet at, hopefully, the most opportune time.

Cameron Mackey -- Chief Operating Officer & Director

Jon, maybe I can -- yes, if you like. So one of the benefits we have in our position is scale. And so we've been very active over the last 3 to 5 months, and we'll continue to be active in booking volumes forward for bunkers. And we do that -- the pools do that, both for the STI ships as well as pool partners, and secure volumes based on projected trading patterns. Over the last couple of years, we have again, consistent with what Lars is saying, we have a fair bit of insight into our demands at both first tier or what we call primary bunkering ports in the second and tertiary ports. And so being active to secure volumes, we've been having some success, but we'll continue to book out our forward requirements through the third and fourth quarter.

One thing we generally are hesitant about is securing fixed pricing at the same time that we secure volumes. Fixing pricing are taking derivative positions to hedge our pricing, it's something we're a little less keen to do. Again, our view is that the spread will widen mostly by virtue of a drop in the price of heavy fuel oil as we get closer to the end of the year. And so therefore, it doesn't necessarily make sense for us to hedge our pricing risk as the scrubbers are fitted.

Jonathan B. Chappell -- Evercore ISI Institutional Equities -- Analyst

Right. That's super helpful, Cam. And then just one last quick one. I've been asking a lot of corporate system, I get everything has been higher year-over-year, quarterly, monthly, but it's not quite explosive enough to bring to sustainable profitability. At what point in the second half of the year, do you get a bit worried, that maybe this isn't going to have the biggest impact that we thought, in large, kind of said late Q3. If we're talking to you in late October, and we're still kind of in the mid-teens on MRs and mid- to high teens in LR2s, you start to get worried that it's not going to be as disruptive? Or do you think that maybe has to be into the early part of next year?

Robert L. Bugbee -- President & Director

No. I think you first have to look at the -- just the general season anyway, the products, regardless of whether we're in IMO 2020 or not. So let's sort of take IMO 2020 out to the equation. So right now, that's what we've had all year and the year so far has been much, much stronger than the year of '18. So if that were to continue, you would expect to see a rally in the product market as usual, as we approach Thanksgiving, maybe even earlier, maybe October, that's without IMO 2020. So that's a lot of where the confidence is now is that you're not even reliant on IMO 2020, you're just back to -- you're looking just normal. World economy is saying, "Okay, nothing happening in the world" should lead to an increase of rates where they were last year.

So if you added 20%, 25% on the headline rates to last year's fourth quarter, you'd be in pretty good shape anyway even without IMO 2020. So it's not -- we wouldn't expect a worry to come from the market, the worry then would have to come from some geopolitical event.

Jonathan B. Chappell -- Evercore ISI Institutional Equities -- Analyst

That makes sense. All right. Thanks Robert, thanks Lars, thanks.

Operator

Your next question comes from the line of Ken Hoexter with Bank of America.

Kenneth Scott Hoexter -- Merrill Lynch -- Analyst

Hey, great. Good morning Robert, I just want to maybe follow-up on Jon's question there, just given that you mentioned the markets still without the IMO benefit. Maybe you could just detail for us what's going on for that prep now. You talked about seeing demand. Are you seeing tanks being built or the drawdown of non compliant fuel? Just want to understand what data points you're looking for that kind of highlights, as Jon was mentioning that, hey, this wall is -- of demand is going to come.

Robert L. Bugbee -- President & Director

I mean, logic, add to this. But I mean, the first thing you should see is a tick up in actual -- in the fixes and the actual shipping of the compliant fuels itself. Right now, you're in kind of a little bit of a nowhere land, where in a way, IMO 2020 is acting as a negative despite the fact that the rates are stronger than '18. And negative being that the refineries are trying not to produce so much of the heavy fuel until they're knowing that they really can be paid. It's the gaming, everybody's trying to sort of wait to the last moment to go out and produce or buy what will become more expensive. But Lars, what would be some specific things that will signal to you that were on the way, as they were that the switch is being turned on?

Lars Dencker Nielsen -- Commercial Director

Well, I mean, the simple answer really is that, as you see the online capacity coming back on stream. You're going to start fixing a lot more. I mean, the volatility of market has profit/loss since we saw the flatlining of 2018. So it doesn't require very much for the market to respond. We see a very big jump in 2019, which tells you that the capacity utilization is at a much higher level this year. So as these refineries come back on stream after the maintenance season, we will start seeing the markets to respond very positively. I'll cover that for the larger vessels, as the Naphtha movement starts coming back on stream. And we talked a little bit about it during the first quarter earnings call as well. That would also add to the fire. So the triangulation, the ability to utilize the vessels on its back haul voyages as well still remains. And then, there is a lot of business out there.

Kenneth Scott Hoexter -- Merrill Lynch -- Analyst

So perhaps you can kind of follow that maybe at our inventory levels you're looking at to see, again, on that drawdown of the heavy or buildup of postrefinery maintenance. Is there -- are there stats that you're looking to see? "Okay, now we've inflected"?

Robert L. Bugbee -- President & Director

I think it's as simple as what Lars is saying, just simple as watching the spot market. It's a -- first of all, that type of information is in the real mirror. Secondly, the United States, which is an exporter, and this is the only one with any kind of up-to-date information on a regular basis. The whole -- most of Asia is not accurate enough. So the most prevalent piece of data is the actual fixed account that I'm guessing.

Kenneth Scott Hoexter -- Merrill Lynch -- Analyst

Okay, it's helpful. Thanks Robert. A last one for me, just a quick follow-up, maybe, Brian. There was a couple of 100-day delay in some of the docking and ballast in the second quarter and a big uptick in the third quarter. Should we read anything into that? Are there delays in either scrubber, ballast water or normal dry docking timing, in terms of what you expected from second quarter or third quarter? Or anything you can give us some color on that?

Brian M. Lee -- Chief Financial Officer

Ken, no. It's the normal activities. Might have been a slight -- there are some delays but nothing significant.

Kenneth Scott Hoexter -- Merrill Lynch -- Analyst

Yes. Okay. So a couple of 100-day delay away from 2Q, 3Q that could be timing of vessels pulling in versus trouble getting the ballast water, scrubbers or anything?

Brian M. Lee -- Chief Financial Officer

No. There's no time getting...

Cameron Mackey -- Chief Operating Officer & Director

Ken yes maybe I can help here. We don't foresee material delays in both the delivery or allocation of the equipment or its installation at the shipyards. What I would say is that you will see at some yards a fair bit of congestion. In other words, some yards, we know have overbooked their capacity, they're trying to prioritize certain customers. Again, I think we will see that our planning has paid off. But what I would say is that, again, scale is to our benefit here. A lot of smaller owners who've tried to opportunistically book the installation of scrubbers will face much more significant delays and problems as they show up at the yards because it is a constraint.

Kenneth Scott Hoexter -- Merrill Lynch -- Analyst

Great, I appreciate the time and thoughts. Thanks guys.

Operator

Your next question comes from the line of Amit Mehrotra with Deutsche Bank.

Amit Singh Mehrotra -- Deutsche Bank -- Analyst

Thanks operator. Thanks for taking my questions guys. Robert or Emanuele, I guess, from a broader perspective, just a higher level first. STNG's obviously has this massive operating levers to product anchor spot rates to IMO 2020. As you guys know, probably better than most the operating leverage can cut both ways, if the developments that you, me and everyone else seems to expect does not materialize. So you've got a lot of cash, you also have almost $3 billion of gross debt, you have high breakevens with the scrubber and lease financing. So how do you just manage the business from a risk perspective? So basically, you're not back to where you were a year ago, having to raise equity at rock bottom prices, if the inflection kind of never materializes or doesn't come to the extent that we all think it does.

Robert L. Bugbee -- President & Director

I don't think you need the inflection like we think it's going -- I don't think we need that -- we think the market can go to $50,000 a day per LR2s and $30,000 a day per MRs. We don't need that to operate. A usual -- a non-IMO or just some kind of from where the market is right now, all you need is some general seasonal improvement to go back into full cash breakeven or above. And so that would certainly -- that itself would certainly take you a long way into the process. A long way for a time.

Amit Singh Mehrotra -- Deutsche Bank -- Analyst

Well, what it really -- I mean, I guess if I could get Brian in here to talk about that because when you look at the debt paydown that's needed, the interest expense associated with the financings and also G&A, even if you adjust for stock-based compensation, your breakeven -- unless I'm totally wrong, which is possible, is in the low $20,000 a day level this year and actually steps up a little bit next year. So Brian, is that the correct bogey for where TCE rates have to do to get you to all cash-in breakeven levels? Like how should we think about that?

Brian M. Lee -- Chief Financial Officer

Amit, maybe we can go to be a breakeven later, but...

Robert L. Bugbee -- President & Director

Yes. If you weigh up, if you just give yield there as a rough guide on all-in cash breakeven.

Brian M. Lee -- Chief Financial Officer

All-in would be about $17,000. Now with some vessels being in drydock and stuff, you can go to $17,500 if you had -- if you wanted to do it that way.

Amit Singh Mehrotra -- Deutsche Bank -- Analyst

Got it. And that doesn't fluctuate because, I mean, the quarterly debt...

Robert L. Bugbee -- President & Director

That's all -- no, it doesn't fluctuate really as much at all. And I mean, that $17,000, $17,500 is fully amortizing debt repayments, too. And as you can see, we're in the dog days of summer, and the guidance we're giving right now is not that far off that position. And certainly even last year, the right environment, without any IMO effect again, and last year being weaker than what we've seen so far between sort of October and March was above the $17,000 position. As you pointed out, it starts with $300 million of cash so...

Amit Singh Mehrotra -- Deutsche Bank -- Analyst

So yes, I think if it's $17,000 all-in -- I think if it's $17,000, all-in, you're right. I mean, $15,000, you came relatively close to that the second quarter. I guess I'll just take it off-line with Brian to maybe sharpen my pencils on that a little bit.

Brian M. Lee -- Chief Financial Officer

Yes, but we're very confident for everybody else out there that the $17,000 approximately is the all-in number.

Amit Singh Mehrotra -- Deutsche Bank -- Analyst

Got it. Okay great. That is good.

Robert L. Bugbee -- President & Director

Okay, take it off-line with Brian.

Amit Singh Mehrotra -- Deutsche Bank -- Analyst

Yes, that is all I had guys. Thanks.

Operator

Your next question comes from the line of Greg Lewis with BTIG.

Gregory Robert Lewis -- BTIG, LLC -- Analyst

Hey guys and good morning everybody.

Robert L. Bugbee -- President & Director

Good morning, Greg.

Gregory Robert Lewis -- BTIG, LLC -- Analyst

I guess, since you threw out the number of $17,000 a day cash breakeven. How should we think about use, let's just say, charter rates average $20,000 a day across the fleet. How should we be thinking about what the plan is with that excess free cash flow? Is that balance sheet, I mean, shareholder return, how do I think about that?

Robert L. Bugbee -- President & Director

Okay. So we pretty well said and we repeated it again, and we'll repeat it one more time, that we would expect that the rate structure is certainly, fourth going into the first quarter is going to be significantly above that level, even that level you indicated. And we'll repeat what we said on the last conference call that the priority at the moment is to keep paying down debt to reduce the -- reduce that breakeven level. We have a number of different ways we can do that in terms of paying back leases early or taking out higher cost, baby bonds, things like this. And in either event, we will continue to do that regardless of -- even if the market is very much stronger than even what we're thinking it could be, until we get into February, March because it's after that date that our actual capex starts running down very materially. So you won't see, I don't think -- you're not going to see any increases in dividend. You won't see, etc. etc. apart from that until then.

Gregory Robert Lewis -- BTIG, LLC -- Analyst

Okay, great. And then just a couple of follow-up questions. Cam, obviously, just given your bunkering needs, you're fixing forward 3 to 5 months. And you mentioned -- you mentioned the Tier 1 ports, the second-tier ports, tertiary ports. Are you seeing any divergence in between what first tier ports are offered in terms of their full suite of offerings versus sort of the second tier and tertiary ports?

Cameron Mackey -- Chief Operating Officer & Director

Absolutely, Greg. Thanks for the question. As you get into smaller ports, bunker suppliers and the supply chain are in a very uncomfortable position because they don't know how to allocate their resources, and obviously, their capital to make the most of the future allocation or future portfolio of what they're trying to sell. So what you find is that they are quite keen to book contracts with credible counterparties, not just us, but other big, big players, just so they have some certainty in their business plan.

So this is why it's a great time to be out there trying to book-forward forward volumes, just so they have that security. And frankly, there is some discounting, obviously, discounting going on for those that act early and book those positions. But yes, it's a rather confused or anxious marketplace once you move away from the refinery or the physical supplier.

Gregory Robert Lewis -- BTIG, LLC -- Analyst

Okay, great. And then just one quick one for me following up on Ken's question. Just in looking at some of the scrubber -- the timings of some of the scrubbers. I think initially, at least I was kind of budgeting around 30 days for going in the shipyard. Are you guys still comfortable with that number of around 30 days? Or do we think that could be lower or higher?

Cameron Mackey -- Chief Operating Officer & Director

We're comfortable with the estimate of 30 days. Based on what we're seeing, you could have that number move lower. As our program progresses, there are a lot of efficiencies in repetition and booking the same shipyards for the work, etc. etc. But we're comfortable with the conservative estimate of 30 days.

Gregory Robert Lewis -- BTIG, LLC -- Analyst

Okay guys, thank you very much.

Operator

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

Randall Giveans -- Jefferies LLC -- Analyst

How are you gentlemen? How's it going?

Emanuele A. Lauro -- Founder, Chairman & Chief Executive Officer

Good.

Randall Giveans -- Jefferies LLC -- Analyst

All right, so for the scrubbers you have installed, it looks like there's been 6 thus far. Have all of those been done at the same port or shipyard? And then for those, are you able to use some of those in the ECA zones currently, getting it below 0.1%.

Cameron Mackey -- Chief Operating Officer & Director

So right now, of the scrubbers we fitted, no, they've been installed at different shipyards. And we haven't yet positioned those back to the west for use in the ECA zones, but your point is correct. They're fully commissioned, so they're available to us, and yes, we could use them in that way.

Randall Giveans -- Jefferies LLC -- Analyst

Perfect. All right. And then another one on the 1Q '19 earnings call, I think Robert mentioned that LR2s will, quoting, expand their premium over other asset classes. Currently, LR2s are earning lower rates than LR1s and even per your quarter-to-date rate even lower than MRs. So I guess, 2 questions. When do you think this premium per se will expand? And then if you can give kind of a ballpark on a full year average in 2020, do you expect this premium to be $2,000, $5,000, $10,000? Like, what's your expectation for this premium?

Emanuele A. Lauro -- Founder, Chairman & Chief Executive Officer

Lars, do you want to that?

Lars Dencker Nielsen -- Commercial Director

You're right to say that, right now, the LR2s are trading below the LR1s. The LR1s are frankly, outperforming and doing better than we anticipated. That is down to a strong degree of triangulation and arbitrage move that fits with the LR1s. The LR2s are impacted primarily by the reduction in the naptha flows that we have seen because of the substitution by the lower prices on LPG. As that changes and the refineries come back on stream, I'm quite confident to say that we will start seeing the LR2s move out again at the margin. On top of that, we also anticipate that the strong exports out of North Asia will benefit the LR2s more than the other segments as they suddenly get back their market share from a lot of the newbuildings that have been taken out on the crude side. So if you look at it year-to-date, there is still a big differential between the 2 segments. And I think that as we go into second half proper, you will start seeing that move out again.

Randall Giveans -- Jefferies LLC -- Analyst

Okay. And then for the degree of the premium in 2020?

Robert L. Bugbee -- President & Director

I think the stronger the market, the stronger the premium is going to be. So that will be a seasonal position. But if you had $30,000 a day in MRs, you're going to have probably $50,000 a day in LR2s, which was more or less the spreads that you started having toward the end of December last year. Now those spreads could be wider. If you took a non scrubber-fitted MR versus a scrubber-fitted modern LR2. Because now you've got -- now you have the fuel as well as the market position in there.

Randall Giveans -- Jefferies LLC -- Analyst

Got it. All right. Well one could only hope those rates come to fruition. Thank you for the time.

Operator

Your next question comes from the line of Erik Hovi with Clarksons.

Erik Hovi -- Clarksons Platou Securities AS -- Analyst

Hi guys. Following up on the new story on arguing that ship owners are unprepared for the fuel switch. Are you seeing that the other owners are preparing in line with you guys? And made some color on how this will impact the market in your view.

Cameron Mackey -- Chief Operating Officer & Director

I can give that a shot. We can't really give representations on what other owners are doing. Our impression, however, is that consistent with any other regulatory change, you have a wide variety of responses from owners from the serious and say, sophisticated, which are generally the larger players, both private and public, and a variety of smaller owners, who believe they can either cheat, evade or defer planning, and hope things work out and act opportunistically. This is no -- to us, this is no exception. You see the same range of behaviors. Now everything we've been given to believe is that compliance, particularly in our key markets will be strict and immediate. But like I said, the fact that others are wandering into the end of the year unprepared or thinking they can skirt these regulations or somehow evade them, I think, only works in our favor.

Erik Hovi -- Clarksons Platou Securities AS -- Analyst

Thanks, that's helpful. And also there, looking at your MR guidance, that was also pretty strong relative to the market. So any insight on what drove the beat? And how much was driven by the East Coast refinery closure?

Emanuele A. Lauro -- Founder, Chairman & Chief Executive Officer

Lars?

Lars Dencker Nielsen -- Commercial Director

Well, thanks for that comment. I think, to be honest, we've been quite fortunate as we've gone into the third quarter to have grasped the opportunities, particularly in the transpacific and Asia markets. We've been good in locking in the good voyages into Mexico, as the market has fluctuated wildly in the U.S. Gulf, also on the back of the refinery closure on the Atlantic Coast. So I think we've moved quite well on the positions that we have globally on the MRs. Consistent with the weakness that we have seen because of the off-line capacity of the refinery maintenance, it is quite tricky to make sure that you know when to pick.

Because you can see the movements of the market moving across, most markets up and down. And trying to pick the voyages which give you the demerged exposure at the market is low, just to make sure you get fixed and then hold back as you see the curves inflect. So we've been pretty fortunate, I'd say, in the way that we have just been fixing our ships on the MR side during the third quarter so far.

Erik Hovi -- Clarksons Platou Securities AS -- Analyst

Thanks. That's helpful. That's it from me.

Operator

Your next question comes from the line of Ben Nolan with Stifel.

Benjamin Joel Nolan -- Stifel -- Analyst

Hey good morning guys. So I have a couple of questions that hopefully can stay away from IMO scrubbers or anything else. Number one is, especially as it relates to the LR2s and all of the craziness that's going on in the Middle East around the Straits of Hormuz, I know that's primarily an LR trade. How do you envision that impacting supply and demand and how you're responding to what's going on over there, specifically for the LR.

Emanuele A. Lauro -- Founder, Chairman & Chief Executive Officer

Cam, Lars.

Cameron Mackey -- Chief Operating Officer & Director

I'm sorry, can you say it one more time, please?

Benjamin Joel Nolan -- Stifel -- Analyst

Yes, sure. No, basically, how is all of craziness in and around the Straits of Hormuz going to -- how would you envision that impacting supply and demand for LR2s and LR1s? And what are your -- how are you approaching doing business in that region?

Cameron Mackey -- Chief Operating Officer & Director

Thank you. Well, obviously, it is a central concern, the safety of our people, first and foremost, and then the safety of our vessels as well. We have no particular angle or insight on what's happening, other than the sort of commonly accepted narrative that this is a tit-for-tat exchange -- the most recent events, a tit-for-tat exchange with the British. Obviously, we are in contact with the -- our flag state and also the U.S. military as it comes to mapping and planning transits and the locations of our vessels. You haven't seen a lot of market reaction, apart from insurance, the insurance market.

I would think something more serious or more prolonged or sustained would be required for either the market to respond in a meaningful way or for us to take more drastic action to avoid certain trading lanes, and particularly the area generally. So it's something we're watching very closely. You can take some precautions, and we are taking those and taking it all quite seriously. But unfortunately, it's a bit of a wait-and-see game right now, and we have to wait again and wait and determine how this risk is going to develop because nobody has the answers here. Nobody knows except, perhaps, the White House and the Iranians, what's in-store in the next weeks and months. So we're watching as carefully as everybody else.

Benjamin Joel Nolan -- Stifel -- Analyst

Okay. No, that's helpful. But so far, no real market impact, I guess.

Cameron Mackey -- Chief Operating Officer & Director

No.

Benjamin Joel Nolan -- Stifel -- Analyst

Okay. I appreciate that, Cam. So my next question goes to something, Lars, that you'd mentioned and that came up in the first quarter call about naphtha being cannibalized by LPG trade. It seems as though that LPG exports out of the U.S. are still extremely high. And there's another new export terminal that's coming online in a few weeks. How -- is there a way that, that reverses or at least more naphtha begins to move? And if it doesn't, what are the implications for the LR2 market?

Lars Dencker Nielsen -- Commercial Director

It's a very, very good question, Ben. I mean, if history repeats itself, prices revert to mean in any case. And naphtha will price itself in. These things, they obviously move on a daily basis, and they are constantly in flux. So I just think it's a question of time before we start seeing large positions of naphtha moving again. I mean we dealt with a big naptha move in the back end of last year. It slowed up a little bit, as we talked about on the first quarter conference call. It has probably compounded a bit more now, and it is now a pretty big position in terms of where the LR2 incremental barrel is being moved, and that has to be seen with the backdrop of the reduction of the capacity from the refineries. As that moves back on-stream again.

And this is, by the way, the Asia refiners, the Jamnagar refinery in India, GSM coming on stream in the fourth quarter. I mean, there are so many different kind of points, which add to the whole mix of cargoes that are going to have to be shipped. So it doesn't require that much to change that whole kind of balance. So as naphtha, which will have to move at some point, reverts into a position where it prices itself back in, then you've got yourself a very strong market quickly.

Benjamin Joel Nolan -- Stifel -- Analyst

Okay. No, that's helpful. And then lastly for me, just real quick. Given all of the scrubber installations and associated drydocking that lines up late next year, maybe what -- should there be any drydocking at all in 2021? Or should we expect there to be sort of a drydocking holiday once all the scrubbers are installed?

Cameron Mackey -- Chief Operating Officer & Director

Yes, I think many, if you're referring to the market generally or us specifically. A lot of people -- no, we're not unlike many others in this position, where if you have a regularly scheduled drydock in 2021, you would logically try and bring that forward to fit the scrubber and then take advantage of the spread as soon as possible. So the whole market is acting in that logical way. So I would expect lots of yard capacity, repair facility capacity to open up in 2021. And similarly, the number of drydockings, whether it's us or anybody else to go down accordingly.

Benjamin Joel Nolan -- Stifel -- Analyst

Okay. All right, appreciate that again. Thanks.

Operator

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

Liam Dalton Burke -- B. Riley FBR -- Analyst

Thank you. Good morning. You're pretty clear in terms of your capital allocation and addressing the balance sheet and the investment you're making in the fleet. Looking at the individual vessels, do you see any opportunity to either add or subtract assets as you get closer to IMO 2020?

Brian M. Lee -- Chief Financial Officer

Emanuele, you could add? Go ahead, Emanule.

Emanuele A. Lauro -- Founder, Chairman & Chief Executive Officer

Sorry, I was saying, I do not think that we're looking -- I do not think that adding individual vessels will change the story much, nor the structure in the company from both a financial or commercial pricing perspective. So we are not looking at adding 1 or 2 ships going forward. It would need to be a phenomenal opportunity for us to move in that direction. Likewise, on divesting and eventually selling a number of vessels, we are not. We are happy with the profile of the fleet we have. We're happy with age and specification of the fleet that we are currently operating and not looking at divesting any of the current units. So I would assume that, bar phenomenal opportunities on one sense or the other, you should assume the fleet to remain as it is now.

Operator

And the final question comes from the line of Espen Landmark with Fearnley.

Espen Landmark -- Fjermestad -- Analyst

Hey, good morning. Just one question for you, Lars, around the refinery turnarounds. Are you at all worried that some of this reduced throughput just reflects the lack of demand on crude end-products? And I guess, what has been core margins for light products asked as gasoline and Naphtha for most of 2019?

Lars Dencker Nielsen -- Commercial Director

The short answer is no, I'm not worried about that. I think that most of these refineries, they are already in -- poised for what they anticipate as well to be a strong resurgence back into the market with the advent of IMO 2020. A lot of these refineries, they are ongoing refinements, and they have to refine. Most of the stuff that we've been seeing has been routine with the added element of the front loading, as we've talked about a few times. These refineries need to go back on-stream. I believe that they need to move the product as well.

If you also consider the backdrop of that, we have, from a 5-year average, probably some of the lowest stocks around the globe, in particular, in Europe and so on. It's a question of that this has to move at some point. You then add on to the fact that if the product space changes into a more of a contango market at some point. Well, then we know you start seeing storage, you start seeing all sorts of other elements, too, as well. So I would say that we are very constructive in terms of getting these refineries back online.

Espen Landmark -- Fjermestad -- Analyst

All right, fair enough. Thank you very much.

Operator

And there are no further questions in queue. I will now turn the call over -- back over to the presenters for any closing remarks.

Brian M. Lee -- Chief Financial Officer

Thank you, everyone, for joining us today, and we look forward to speaking to you soon, have a good day. Bye.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Brian M. Lee -- Chief Financial Officer

Emanuele A. Lauro -- Founder, Chairman & Chief Executive Officer

Lars Dencker Nielsen -- Commercial Director

Robert L. Bugbee -- President & Director

Jonathan B. Chappell -- Evercore ISI Institutional Equities -- Analyst

Cameron Mackey -- Chief Operating Officer & Director

Kenneth Scott Hoexter -- Merrill Lynch -- Analyst

Amit Singh Mehrotra -- Deutsche Bank -- Analyst

Gregory Robert Lewis -- BTIG, LLC -- Analyst

Randall Giveans -- Jefferies LLC -- Analyst

Erik Hovi -- Clarksons Platou Securities AS -- Analyst

Benjamin Joel Nolan -- Stifel -- Analyst

Liam Dalton Burke -- B. Riley FBR -- Analyst

Espen Landmark -- Fjermestad -- Analyst

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