Brian Lee - CFO Emanuele Lauro - CEO Robert Bugbee - President Cameron Mackey - COO.

Jon Chappell - Evercore ISI Doug Mavrinac - Jefferies Noah Parquette - JPMorgan Ben Nolan - Stifel Spiro Dounis - UBS Fotis Giannakoulis - Morgan Stanley Eirik Haavaldsen - Pareto Securities Shawn Collins - Bank of America.

Good day and welcome to the Scorpio Tankers Inc. Second Quarter 2015 Conference Call. This call is being recorded. At this time I'd like to turn it over to Brian Lee, Chief Financial Officer. Please go ahead..

Thank you. Thank everyone for joining us today. On the call with me are Emanuele Lauro, Chief Executive Officer; Robert Bugbee, President; and Cameron Mackey, Chief Operating Officer. The information discussed in this call is based on information as of today, July 29, 2015, and may contain forward-looking statements that involve risk and uncertainty.

Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statement disclosure in the earnings press release that we issued today, as well as Scorpio Tankers' SEC filings, which are available at scorpiotankers.com.

All participants are advised that the audio of this conference call is being broadcast live on the Web and is also being recorded for playback purposes. An archive of the webcast will be made available on the investor relations page of our website for approximately 14 days. Now I would like to introduce Emanuele Lauro..

Thank you, Brian. Thanks everybody for joining us. We appreciate your time. The first thing which I'd like to say today is that we do not have the desire nor the need to raise equity at this point. We're obviously pleased about the quarter. 2015 has proven to be a very good year so far with solid rates across the asset classes which we own and operate.

We have invested in these thesis for a while and it is nice to see it come to fruition. The good news from here is that there are signs of a multi-year good market, and we have all the ingredients to really capture that with our strong 76 vessel underwater fleet. Another four ships are delivering in Q3 of this year.

The remainder of the order book will deliver between 2016 and 2017. Having said that, we certainly have, you know, to work hard. We have to be creative and make sure that we benefit from this market cycle to the fullest. And we're focusing on making sure that we're able to do that. I don't have anything more to add.

I, I -- Robert, I think you have something to say, and then we're happy to open the Q&A session..

Thanks, Emanuele. I just want to restress that, you know, we really do not have a desire nor a need to raise equity. And I think that all the analysts out there and investors once you see the guidance we are seeing from the third quarter you're simply going to work out very quickly that we're producing a prodigious amount of cash flow at the moment.

And that in addition to that we have cash on our balance sheet and that, combined with you know, we've heard today from, you know, one of our top customers, total that they're just continuing to see increases in product tanker demand.

The fleet supply is running down and in later years you have a lot of stress in the fleet related to 15-year rules and obsolescence. Now for us here, we -- you know, we aim to continue to provide our shareholders with asymmetric earnings leverage in future years by capitalizing on these opportunities that the market's providing us.

The present strategy is simply continuation of investing your money, your shareholder capital, at high rates of return to the extent the markets all continue to supply to the outside and where we think there's significant value arbitrage.

We're maintaining a maximum optionality in what we've announced today, without putting significant capital at risk. I would question whether of your funds have the risk/reward and optionality profile that our recent this morning's announced new building program provides.

I think it is any fund, any investor would love to have a situation where they can acquire a quarter of the shares that they want to at 5% down for six months, and then have independent options to add a third of those shares at fixed prices. That is an incredible investment.

If any of the funds out there do have that, I'm very, very willing to invest in that fund personally. We're maintaining as the market conditions merit.

We're going to evaluate whether to commit the cash from the cash flow or continue with continued demonstration of track record of returning capital to shareholders through either dividends and share repurchases. All of our options are on the table here.

You can see that the -- simply out of present cash flow, we have the ability to take down these options if the market remains good and they go into the money, which we expect. The front of the curve is rising every day. Even ourselves had to pay up about 5% up on our recent MR that we've bought, compared to what we were paying three or four weeks ago.

And we expect the front of the curve to go higher, especially as the weak sellers who were looking to liquidate assets have now virtually gone in the product market and you're just left with stronger players. And as always, any decision that we make with your capital is purely a function of maximizing the long-term value in the Company.

And, with that, I think we'll just open it up to questions..

Thank you. [Operator Instructions]. We will take our first from Jon Chappell with Evercore ISI. .

Thank you. I just have two questions and they're both about the new builds, but they're both multi-parts.

So first, can you just provide a little bit more detail about the structure works with exercising the options? Is it six for zero? Are they independently two at a time? What are the milestones or I guess the dates where you need to exercise these options by? And also the payment terms?.

Okay. I'll quickly say something straight off the bat here is that a lot of time sensitivity related to the option we consider as commercially sensitive. But each of the options are independent in series of two to each other. Meaning that if you pass on the first two, you still retain the back four and so on..

And they're staggered, though, too, correct? You don't have to tell me six months or three months, but there are -- they're staggered..

They're, they're, they're staggered. They're, they're -- you have X months to declare the first two, then behind that you have a later period, behind that you have a later period beyond that. I mean they are really -- they create a pretty amazing opportunity for the Company here..

All right. So the second thing you kind of addressed to some extent, but let me go through this. So when we saw the rumors late last week, I started to think about potential pushback. You have a huge second quarter. Even better looking third quarter. Stocks down 2% today. So here's some of the pushback that I'm guessing is out there already.

You've already addressed the equity thing. You're not going to issue equity. I think there may be some concerns about the whole cash harvest increase of the dividend strategy. If you could talk about that. Also, you'd said in the past, time and time again, you didn't want deliveries past early '16. Now you have deliveries well into '17.

And then I think there just could be some concern about the order book ramping overall. So, if you could just address those, I'd appreciate it..

Sure I think that's fair enough. I think that you, you know, have a very significant opportunity in value creation related to a couple of factors in tier three positions where now is the right -- you know, now you are getting ahead of a significant price increase as it changed to regular traded positions.

Secondly, as you can see, this is -- you normally do not have this optionality that you have at this -- you know, in this contract. Third, it is pretty clear that the product market itself is developing. Demand is growing strongly and the -- you know, you're very quickly turning to the potential if this continues of there just not being enough ships.

Fourthly is that we are very confident that already you can see there is an arbitrage. In the front of the curve. You know, we now by our [last print] is something like 38, 38.5, soon moving to probably into 40 with where time charter rates are.

And you can already see, even at today's prices, when you're -- you know, you're ordering four at 34 and a half, with not much equity carried because of the payment structure. Against the present price of 38 and a half, there is a great arbitrage.

And, most importantly, you're seeing the opportunity in the market, whether it's one-year charters, three-year charters, whereby you're -- you're extending the runway quite significantly potentially in the product market to be a good market..

I lied about that being my last question because you just brought up another point on the time charter market. So we have seen these huge gap ups in one and three-year rates.

First of all, what's the real liquidity, especially when you get kind of two, two and three year durations? And then, second of all, should we expect to see as you get closer to, you know, full delivery or at least pre-today full delivery, would we expect to see Scorpio to balance the operating strategy a little bit?.

Well, I think that [plus] liquidity, the liquidity is getting, you know, greater and greater every day.

And as the market itself and customer themselves create more confidence and the forward curves rise and the discount between time charter rates and the stock markets have been widened, I think that, you know, we're never going to parade in public our positions.

But I'll tell you this opportunity, our new building opportunity, does is that it's really opened up another arbitrage which is huge and you can use. It's the front of the curve, either through time charters or asset values is increasing. You can lock out and securitize your front of the curve whilst holding options in the back.

I mean, think of it as a security. I mean it's fantastic to, you know, if you have a security that you're buying that's priced at $50, you're getting options at $40 forward. And all of a sudden you can sell you security at the front at $60 and exercise options at the back at $40. That is an [up] in itself.

That would also be great to value as we're, you know, as we're sizing the Company and we focus on the, you know, what we call a --let's say a through the cycle dividend, like a dividend that we, you know, don't expect to cut -- that when you have the opportunity of a balance sheet that is, you know, what's happening in this thing is that unique situation where the balance sheet is deleveraging, you've actually got growth as well in assets.

And security as revenue in there, you just securitize that dividend and raise the floor at which you can pay your, you know, in inverted commas, permanent dividend up..

We'll take our next question from Gregory Lewis with Credit Suisse..

Robert, clearly everyone's looking and asset prices have risen somewhat. You know, clearly there -- it still looks like, based on where rates are, there's room to go. But I think, you know, we're clearly off the trough in asset prices.

And just as we think about the appropriate leverage on a vessel, at trough if it's 60% where we are today, what is more -- what is -- what would you kind of view as an appropriate leverage rein on a new build, if we were to go out -- if you were -- if Sting is to go out and continue to buy vessels, should we still be thinking about a 60% debt equity, 60/40 debt equity, on that? Or do you think that'll come down?.

I think, you know, it's a great question. I think that, you know, we are financing now on new vessels on much better terms than what's in our existing borrowing facilities.

So you are likely to finance, you know, new purchases at 60%, but you are taking your leverage, which is more important, of your broad net debt equity, you know, down, you know, rapidly. We crossed that high point in May. You know, it's coming down and we want to take that overall total book -- net debt to book equity down below the 50% range.

And again that just creates much more flexibility, ultimately you'll be borrowing at lowest spreads and margins as your older lines roll out or they're refinanced and, you know, they're replaced with, with newer lines, then maybe it's 60% on a distinct vessel, but your broad company's below the 50% level.

When it comes to asset prices, I'm not saying that the product market and even, you know, the crude markets faces a gap up in prices soon.

I mean we've been very fortunate in these last four, five weeks that we've been able to buy assets, great quality assets, promptly at the front of the curve, frankly from, you know, companies that are being sponsored or SDVs that are being sponsored from, you know, private equity distress funds that were just looking to liquidate without really that much reference to the value.

I mean if you see what we've done on our [LR2s], we were acquiring those vessels and you're putting them in the water and they're making over a 30% return on equity in the, you know, straightaway on the, you know, 38 that we've announced. And you have to bear in mind the spot market itself is about 38,000 for LR2s.

So our real returns are even higher than that. So that tells me we have exhausted -- we're fairly confident the MRs and LR2s, -- that we have exhausted the private equity liquidation trade at the moment. And the next trades that will happen in the product market will be done between, you know, private individuals and solid operators.

And there's really not much there. So our anticipation will be the very next trade is going be [gap 5%], 10%. And you're going to see the same in the crude oil market too. You're at the end of the, the -- you know, whatever, the capital markets capitulation trade at the moment..

We'll take our next question from Doug Mavrinac with Jefferies..

Thanks, operator. And I just have a couple follow ups. Because actually you just answered, Robert, one of my questions about how many of those low-hanging fruits types of assets sales are out there. So that's taken care of.

I just want to -- only a couple of other follow ups but first, when you look at the order book itself, you know, it's actually shrinking, right? So charter rates are strengthening, the outlook is fantastic, but over the last six quarters there's been hardly new building orders placed.

My question is do you have idea kind of what's responsible for that because obviously if that continues it bodes very well for the market, but can you talk to why the lack of new building orders over the last six quarters?.

Sure, because it's a, you know, there isn't what you'd call speculative equity out there to fund, you know, speculative new building orders, you know, across this space. The second thing is, you know, it's only recently that companies have created positive cash flow, and some of those companies are still working their way out of difficult positions.

The third reason is that frankly the entire order book for tankers has been slipping back daily. I mean still what read in terms of the supply or the deliveries of MRs even for this year is way in excess of what we think is actually really going to be delivered.

Because you can see on the news today the yards are in trouble, so what manufacturers do is they spread out their known order books and slow down the actual, you know, production lines. That's continuing across the tanker space. So your order book is actually even weaker than what you're seeing.

And this is also helping tremendously those spot rates and helping those time charter rates. And then the product market itself has this sort of really great feature that it really matters when a ship gets to 15 years old. When a ship gets to 15 years old, you can't go to a lot of those oil major terminals.

So it's -- and there was a huge amount of tonnage, I mean hundreds of product tankers ordered a year. In the year the 2012, 2013, 2014..

So whenever you talk about -- and then ever I guess [indiscernible] I talk to the very top about, you know, being greedy and place for multi-year move, does this contribute to that in terms of, you know, maybe having you guys think about the cycle could last longer than you maybe thought two years ago? Just kind of what's -- how the order book is just going to be evolving?.

Sure, because we've had this tremendous benefit on the supply side. That because of the weakness and the weakness in the capital markets and the kind of the false conclusion that people had last fall -- oh, my God, falling oil price equals bad for price makers. You put that stall into the new building book.

The second thing, and at the same time, the shipyards are under stress so therefore they were moving out. The third thing that happened is ancillary markets where you do order. You take a yard like Hiendye, you know, like Hiendye, well they had orders in the gas market, in LPG market, in the chemical market, and in the container market.

But it's all elongated the positions. I think the people should really look that our first deliveries -- where our first deliveries on that announcement are.

So you have got the strongest product tanker company with the greatest relationship to the yard with the greatest capacity of building MRs in the world, and we could only get deliveries in that time period. The next aspect is to look at the demand side.

And we're no longer questioning whether refineries are going to come up or whether there's broad demand for product in the world. There's a lot of demand for product. Think of the absorption that we dealt with in the last 12 months to 24 months.

The amount of supply coming on in the forward position is way less than what's coming to this market in the last 12 months, 24 months. That makes things exciting..

And then, Robert, you did touch on a topic....

And then this, this is in a period where the world is -- everything we read about is the world is meant to be slow. I mean, God knows what'll happen in, you know, 2017, 2018, if the world actually gets better with low interest rates and low commodity rates and government stimulation..

That's exactly right. That's just exactly right. All right. That's fantastic. And just a final question before I turn it over to someone else.

On the topic of time charter rates -- I mean obviously we've seen them move higher and what the brokers are reporting but, there's still a huge gap that exists between, these numbers versus where the spot market is.

When you're having conversations with charterers, would you characterize those conversations as being at levels that are higher than what the brokers are reporting right now, even though they've moved them up? Because, you know, there's still a pretty healthy gap that exist between, you know, the pay-per term market versus a -- say versus a physical spot..

Of course, because what you're -- what you're reading from the brokers' reports is what has been done, not right - is in the Gulf being negotiated. It's the same as you're reading in values what has been done, not what negotiated..

Right..

And, you know, if you look at Sting and see that there's a great thing -- you're even seeing today is that, you know, this is much more an issue of the funds and the energy and there's this lack of capital. Because the transportation index is down, energy is getting hammered. Hedge funds are finding it tough out there.

All these things may be detrimental to Sting's stock price this second, but they are tremendously beneficial to Sting's earnings going forward because it shuts down the ability to compete.

And you know I would describe Sting frankly now as, you know, this is the -- this is the kid that was, it was a turbulent infant, it was a petulant teenager that one day behaved well, next day disappointed.

And then suddenly it's gone away to a great college, graduated with fantastic grades at the top of its class, and it's come home to mom and dad and said, you know what, I've got this fantastic job where I'm getting paid really well.

And you know what, I'm moving out of the home, I'm getting my own apartment, and I no longer need the parental support, i.e., we have no desire and no need to raise equity..

But we have no other company with an EBITDA going up six-fold from last year to this year conservatively. So I'd agree..

Yes, you know, I'm happy, all of management's happy to have invested in Sting. Not - in other stuff that is out there right now..

We'll take our next question from Noah Parquette with JPMorgan..

Thanks. My question is going back to asset values. You know, it's an interesting situation where the rates are so strong cash returns are great, and you expect that the values to move higher. But on a new build side you get pressure from lower inputs and a stronger dollar.

I mean how do you see that playing out? Is that a factor? And obviously those great prices you got, does it hold back assets value? I mean can you talk a little bit about that?.

[Indiscernible].

Sure, Noah. I think the situation you have across the new building market is, you know, playing out with a lot of yards in tremendous difficulty digesting the orders they've placed over the last number of years. You're seeing signs of consolidation and, as Robert mentioned before, reduced capacity.

So you have the potential here for a short period where, you know, new building prices are relatively good value but, if you have constraints on physical capacity at new building facilities playing out as we're seeing, you can get a tremendous slingshot effect where private capital then enters the market against the constrained -- constrained source of new tonnage driving up the entire curve, i.e., both the vessels on the water and new building positions together.

We don't expect for a number of reasons, again, given the actions of many of the larger shipyards -- we don't expect new building prices to stay where they are.

That's between regulation, between say some distressed situations among larger shipyards, so we're really acting on an opportunistic base here, tying up a lot of optionality at one of the best yards out there..

Okay. And then for -- you know, we're hearing that some of the newer designs are still more fuel efficient than even the ships you ordered a few years ago.

I mean, can you talk about the numbers? I mean, are their differences there? Or can we expect the same level of fuel efficiency?.

I think you can largely expect the same number -- the same level of fuel efficiency. There's, there's constant, you know, changes and marginal improvements in design but, by and large, not a step function.

We're seeing largely the same range of fuel efficiency improvement over our new building program that we've spoken about in many calls and meetings in the past..

Okay, and then just finally my last question is on, you know, a charter ends so you extended a couple of the ships. How do you see this as another tool in your tool box? Isn't it a way to increase operating leverage or do you still expect to kind of wind that down as more ships are delivered? And you just talk a little bit about that..

Well, it's been winding down through the count. You know, but it would be -- you know, in those cases you're given opportunities where, you know, one was an exercise the option where the spread is just so wide to what you're making that you just do it because your first job as management is to make money for your shareholders..

Can't argue with that. All right, that's all I have. Thanks..

We'll take our next question from Ben Nolan with Stifel..

Hey, guys. So I have a few questions. Number one, sort of getting back to the new building and specifically the options, clearly you guys have locked in a decent of the Hyundai Mipo production capacity for 2017, at least through the options.

How much of, or if any at all, how much of the thinking behind this is to do that specifically? To lock in the capacity and maybe even scare off other people from ordering?.

Ben, you know, it's naive and I think history has shown it's very short-sighted to order ships and think that you're blocking other competitors from gaining access to ships. I mean there's lots of shipyards out there, some better than others, some more healthy than others, some with better track records and balance sheets than others.

But it would be naive in the extreme for us to go or to ship simply to try and prevent others from ordering at the same shipyard. What we can say is that it is true that at Hyundai Mipo, because of their product mix and their track record, that we have a significant portion of their free capacity locked up.

But it was never the intention to do that simply to -- simply to prevent competitors from entering. It was simply a calculation of a value proposition, the optionality and, you know, good value on the new buildings vis a vis whatever shipyards or the coming regulations would otherwise present to us..

Okay, that's helpful. Thanks. And glad I'm on for more than one question this time. But the -- my next question actually it's for you, Cam, I'm just trying to process where we are in the cycle seasonally. Obviously we've seen a pretty good buildup of refined product inventories around the world.

How does that normally play out with respect to the product tanker market? I mean, clearly at some point we'll probably drawn down on those inventories, but how rapidly does it normally happen? Does it usually have much of an impact depending on the day rates when it does happen?.

Well, I'll start. One thing that, you know, we have an awful lot of our tankers in the water, in our pools, as well as Sting. And not a single one of them is on any form of a storage contract. So that's not happening. Yes, you've got inventory in the US, but the US is -- that's beneficial to the exports.

You -- we keep waiting for there to be some seasonal weakening. Maybe you'll get some seasonal weakness in, you know, refinery turnarounds between now and the end of September and the MRs in the Atlantic. But Asia is really, really rocking in this. And the LR2s have just begun their strongest part of the season.

And I think that, you know, traditionally the third quarter is, you know, the weakest part of the year for MRs. When we come to winter supply side shrinks. You have dislocations, you have, you know, more demand that is, that is there. So and if we -- yes, you know.

But I think that that sort of just being passed by the by, this is extraordinary what is, what is happening, the demand that we're facing. Especially how much supply that we've absorbed in the last 12, 18 months in the product market and the fact that the supply going forward is slowing and slowing fast..

Okay. Yes, I guess I would tend to agree. The -- you mentioned the LR2s specifically how they've strengthened quite a bit. In the first half of the year I think we saw something like -- I don't know -- it was about a dozen LR2s move from clean to dirty. I haven't seen any -- anything in the last month or so as the LR2s have been outperforming Afra.

But curious as to, you know, your guys' thoughts on if that is still taking place at all? If at this point people would considering reverting back to the clean trade or do you think those are permanently, permanently dirty?.

Ben, I think this is something we've said on calls in the past. But just to clarify, it is extremely difficult and expensive to move a ship that's been trading dirty back into a clean, a clean position. Not impossible, but it's a significant investment of time and money to do it.

You have to take discounted voyages, assuming you can find customers to accept your ship. Discounted voyages for up to six months or more to get back from dirty into a clean trade. Now that being said, I think it's obviously quite helpful for us to have the crude market firing on, if not all cylinders, many, many cylinders.

And even though you see some momentary weakness in the say Aframax market today, there still is a healthy trickle of ships dirtying up simply because owners see a longer term prospect in crude than product, which is absolutely fine for us..

Okay, that's helpful. And then my last question relates I guess to -- to the dividend policy and the return of capital. And obviously you guys kept the dividend flat quarter over quarter here, although you did at this point sell the Dorian stake and have -- looks to be reinvesting some of that capital.

But have you -- Robert, you mentioned earlier getting to a point where you had a sustainable dividend. Do you think this is that or have you....

I think the, you know, the honest, honest truth in the position is that, when you're looking at a dividend that may paid through the cycle, you know, you have to be, you know, you have to properly sit down when you're doing that and go through face to face meetings with the board.

And you can see by the activity that we've had in Sting, you know, that the Company is being, you know, executing and executing and executing, and doing different deals, deal positions. It's only been in the last 10 days or so, 12, 14 days, that we had this opportunity to, you know, put the Dorian cash down on the balance sheet.

You know, the new buildings matter a bit because, you know, those are options and that there. And, you know, the board will sit and, you know, when we come -- when we get to the autumn and before the third quarter properly -- you know, properly go through those calculations..

Okay. A few of your competitors have linked their dividends to their net income....

I doubt, I doubt we will ever do that. That's not a -- that's not a dividend that gets paid through the cycle. That's a moving, floating dividend. We fundamentally believe that depreciation is real in shipping, and we also fundamentally know what to have our cake and eat it. We want to have the ability to buy back stock.

We want to have the ability to grow. And we want to deleverage at the same time. And, you know, created company that has not got a fantastic new asset and a -- you know, and a great operating platform, but one that has a genuinely, you know, solid balance sheet.

And we, you know, we not arguing that sometimes it helps short term value to have floating dividend policies, but there's another side to the coin. There's what happens in the first quarter when you actually go down in earnings? Will your dividends go down? We can always, if we have surplus capital, we can always pay an extraordinary dividend.

But we will categorize it as an extraordinary. It should be -- there's really no problem having too much cash and we realize that right now we're well ahead of what we need. Well, well ahead. And appreciate that question.

We just simply haven't yet had time to go through the position and we're giving ourselves the free go to be building more cash at the moment. That's Okay..

I completely understand that. But -- well, I guess I would just say that, you know, I think that your strategy makes some sense although at some point, you know, people also think that it's good to be paying ....

No, no, no, it's not good. For us it's simple. You either secure -- until you've sold the Company, you have not securitized the shareholders' capital. And then until that time you must work on more than just whatever looks good for the stock price and the hedge fund that quarter. You must work on continued long-term strength and value of the Company.

Just like you have in other industries outside shipping..

I certainly agree with that.

And, lastly, are those handy's ice class, just out of curiosity, similar to the others?.

Ben, it's not confirmed yet but, yes, that's our intention..

We'll take our next question from Spiro Dounis with UBS..

I just wanted to get back to the theme of maybe all options being on the table. So something we've seen in the crude tanker market is I guess purchasing vessels made a little -- in the older end of the age profile. And I guess the thinking there is a lot of these vessels can still earn just about or close to as much as a new vessel.

And of course you're buying it at a much lower price so your multiple's even better and your residual risk is also less too.

So anyway would that be something? Maybe not a 15 year old, but 8 year to 10 year old, would that be something that you'd be willing to do?.

No..

No?.

No. And the product tanker market has different requirements than the crude oil market. I don't have a problem in, you know, investor in Euronav and DHM. No problem in the crude oil market someone buying 10 year, 15-year-old vessels. There is no problem in doing that. In the product market it's different.

There is a tremendous benefit in having uniformity of the same engines, the same pump systems, the same bridges. There's a tremendous benefit to us being able to show a customer a uniform quality fleet because the cargo, like jet fuel, is so much more sensitive and valuable in the product than it is in crude.

And frankly, you know, the returns when you put the leverage that you can, you know, put on the vessels, it's not as if the returns are that poor in the product market. Also your customer is going to for time charter products much prefer to have the newer vessels than the old vessels..

That makes sense. And then maybe just one quick one back again on the new builders order.

So I guess just a few months ago, I guess Scorpio elected not to exercise the LR2 options with bulkers and I guess it's part of the reason I thought maybe at the time was that, you know, maybe the option value of something glaring so much later was not as attractive..

I got that. So they are both LR2s. First of all they were -- they hadn't -- there were no options with them. Right. They were -- it was just that -- and you actually to exercise those options it was under a novation contract and you had to put up something like $20 million per ship, in cash equity, for each of those, those two ships.

Whereas in this trade, you have far less down payment so your delivered cost accounting for value on your equity when you pay down is much less relative, plus you have all those string of options. They're completely different deals on a return, risk and return profile..

OK, that's -- that makes a lot of sense actually. I appreciate the caller there. And maybe just one last quick one. In terms of MRs versus LRs, obviously this new build fleet is largely geared to its smaller size. I just wonder what the thinking was behind that..

Well, the -- you know, as we have alluded to the MRs have a -- you know, we think that, you know, that it's a supply position there. And then secondly those bigger top quality yards are -- you wouldn't have gotten the same trade because the Aframax and the crude oil market and the large container market is more buoyant.

You would face greater competition from alternative vessels and you would not have been able to get that same optionality in the LR2..

We'll take our next question from Fotis Giannakoulis with Morgan Stanley..

Robert, I would like to ask you what do you see in the market right now. What do you position your vessels? And what kind of movement are you observing? There are reports about very large surpluses of products that they are developing and expect to grow even further towards the end of the quarter.

What type of products are these surpluses and where they are and where do you think that they will go?.

Well, I think on the -- you know, it's moving all over the place. Yes, obviously very strong listings out of the US Gulf to Europe to South America to West Africa. On the -- in the East you've got -- and the same out of Europe to the United States. The US East Coast, TC14 is being -- TC2 has been doing very well.

Especially given the seasonal side of things. So that's sort of Europe looking to the United States with, you know, gasoline, etc. Then in Asia tremendous, just raw growth in countries like Australia that have decided to import product as opposed to refined crude. A lot of inter-Asia trade. A lot of inter-Arab Arabia trade.

And on the LR2s, I think we're OK on a public conference call, but I mean we fixed four LR2s in the last few days, loading, you know, South Korea, discharging UK [count]. And, you know, that obviously is fantastic voyage because you're taking it straight into Rotterdam to load [naptha] for the -- you know, for the heat season.

So it's just moving everywhere, Fotis..

But, Robert, have you seen any movements out of China? There are also a lot of discussions about the Chinese being having large surpluses.

If yes, where do these surpluses go?.

Well we're seeing a steady sort of beginning movement. It's still sort of fluttering and very much in its infant stages of taking in gasoline related products into China, and taking out diesel and a little bit of jet.

It's very much -- I don't want people getting too excited because obviously it would be fantastic if you get products opening and trade to China. But, you know, it's in its very infant stage. That's what you're seeing..

Can you also comment about how the oil prices have impacted the train -- the trade. There are a lot discussions about what see because of the low oil prices, the very attractive refinery margins.

Are there any reasons next year, if oil prices move higher, we might see part of the trade being taken away? How the higher oil prices are going to play out with increase in refinery capacity in Asia and Middle East?.

Sure, sure, sure. Yes, yes. So if -- we have to work out why do we get high oil -- higher oil prices. If we get higher oil prices as the result of greater demand and, you know, growing demand for the product, then that's going to be likely it's been in every cycle where you've had that, whether that's the 80s or the 2000s.

That's going to be beneficial to the product market, it's going to be beneficial to the crude market. You know, it's going to be very [professional] to the first stage because, you know, we haven't really had many, you know, carry trades that I alluded to earlier that are not products ships that we have on any form of storage trades.

So, if we see what happened in the 80s after the first OPEC, you know, flooded in the mid-80s and later oil price recovered as a part of demand, or in the 2000s, it's actually very beneficial to the crude and the products trade.

If it's as a result of, you know, a suddenly back [place] by, you know, OPEC goes to the Saudis and they just decide to cut production by four million barrels or something, then, you know, that's not a good thing. .

Thank you, Robert. One last question and…...

I think I know where you're -- I mean, look, refinery margins are extraordinary. But the product still functions if the refinery market does just good or acceptable. It's much more about demand for the base product itself..

That's very clear. So, so can you make also the case between -- for product tankers vis a vis the crude tankers. We've seen the rally of the last few months has coincided with the crude tankers.

How do you view the market going forward? Is this correlation going to stay enough or you might see at some point a diverging and one sector doing differently than the other?.

Well, we're -- as Cameron alluded to earlier, we're actually very constructed generally on the crude side. You know, in a funny way we're already starting to see that divergence. You know, the rates that we reported this quarter on MRs and LR2s, you know, a lot of this fixing was done weeks.

The, you know, the present market on LR2s is, you know, is on relative basis stronger than the L16 market, stronger than the Aframax market, and stronger than the Suezmax market on a return basis. It's the same for MRs. So, yes, we can make the case because it's already happening that you're having some form of, you know, some form of ratio changing.

The same as what we're seeing in the physical. There's a greater proportion, there's a greater ratio now of product to crude than has been carried before. The other aspect to it is that the product market is much more consolidated than perhaps the normal person perceives. There aren't many LR2 owners.

There has been a significant growth in the pools over the last three or four months, the top pools in the MRs. Such as [Nord Orient], which is run by [Nordan], the [Molapol]. You know our Scorpio pool itself has added over 22 ships to, you know, its handys and its MRs just in the last two, two and a half months.

The traders are far more owned tonnage and product and far more time chartered tonnage too. So, yes, there isn't a -- there is what is going on now the potential for the product market to be great, even if the crude oil market is good. Or the product market to be good, even if the crude oil market is Okay.

And I think you'll see, look, what's happening in the product market isn't defined just to Scorpio tankers. When you see the results coming from, you know, Ardmore or [Tom] or any of these others, they could -- they're going to be reporting exactly the same type of strength there is in this market..

We'll take our next question from Eirik Haavaldsen with Pareto Securities. .

Hi, Robert. You mentioned the Asian refining margins being very high. But in Asia they're actually falling backward a bit over the past month or so.

Is that merely a reflection of kind of the things resulted in the Middle East and as such very positive for fuel tankers? Or is it more complicated than that?.

I'm sure it's way more complicated, and it's so complicated that probably no one can honestly understand it. But what has happened in the last month is very clearly -- and you can see it -- the Asian product demand for tankers increased steadily in the last weeks..

So nothing to be worried about..

Don't think so. I think we, you know, as I said before, you might see some MR weakness as a result of the normal refinery turnaround that happens between now and the end of September, but you know, it's strong out there in the market..

We'll take our next question from Shawn Collins with Bank of America..

Great, thanks. Good morning and good afternoon, guys..

Shawn, you have the last question. Congratulations..

Perfect. That is perfect timing. Obviously the product market is very healthy. Can you touch upon what trends you are observing in the US Gulf and what trade activity? Whether it's an increase in exports or arbitrage-related activity? Especially given in the last 30 days the price of crude oil has moved from above 60 to below 50..

I think we're just seeing, you know, strong -- you know, we've seen it for a long time. It isn't a new thing. I think that, you know, that they correlate pretty well. You know strong demand for products world-wide through changes, through economic activity as well as, you know, secular change in refining capacity.

And it's an immediate response on that demand for shipping. The refineries went up in the Middle East, you know, last June, July. Well immediately LR2 markets started moving higher and the Asian product market went up. US Gulf refineries running at, you know, full out on, you know, high utilization. South America demanding more, Africa demanding more.

Europe, you know, taking, taking more. Yes, the number of fixed account goes higher..

Okay. Understand. Thanks, Robert. And just my last question here. Final I think on the call The shipyards are in a challenging business environment. Some are experiencing significant financial losses, as you know. I know you have a lot of experience doing this and have longstanding relationships with the yards.

Is there anything different this time in this cycle, given the adverse state of the shipyards in your dealings with the shipyards?.

Shawn, it's Cam. I think if I could say the difference this time is the amount of involvement of creditors and the amount of leverage that these yards have on them.

You have a conversation between the sovereigns and the creditors and the yards which is, we think, creating a more structured and logical conversation about consolidation and reduced yard capacity.

Because what's happened over the last five years, six years since '08, '09 is that yards as say the first iteration of lower demand booked a lot of orders that were loss-making.

And now they are reaping the bitter harvest of all those loss-making orders, whether they're in conventional ships or in more sophisticated off-shore or drilling-related structures. And so they are not going to have a second bite at the apple and able to just mark down their pricing to build an order book.

They've run that course and now we think the creditors and the sovereigns are stepping in to say we're going to mandate greater price discipline, greater production discipline, and we're going to mandate greater efficiency through yard consolidation and cost cuts.

We see that there's a theme across both Korea and China at the moment and we think that's good to constrain capacity and, like we said, also to -- or we expect part of the consequence to be greater price discipline among the shipyards..

I would just add the one last thing is terms of these new building situations is that, if you go back in the last 50 years of shipping -- of course nothing in the past guarantees the future -- it has never at any of those points where shipyards are announcing losses and wreckages been a wrong thing to engage with them where you're getting optional value..

Thank you. Thanks very much, everybody. Appreciate it and we'll chat again in the autumn. Thank you..

That concludes today's conference. We thank you for your participation..