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Teekay Tankers Ltd  (NYSE:TNK)
Q4 2018 Earnings Conference Call
Feb. 21, 2019, 1:00 p.m. ET

Contents:

Prepared Remarks:

Operator

Welcome to Teekay Tankers Limited Fourth Quarter and Fiscal 2018 Earnings Results Conference Call. During the call all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question-and-answer session. (Operator Instructions) As a reminder, this call is being recorded.

Now for opening remarks and introductions, I would like to turn the call over to Mr. Kevin Mackay, Teekay Tankers Limited's Chief Executive Officer. Please go ahead, sir.

Lee Edwards -- Investor Relations

Before Kevin begins, I'd like to direct all participants to our website at www.teekaytankers.com where you will find a copy of the fourth quarter 2018 earnings presentation. Kevin will review this presentation during today's conference call.

Please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from results projected by those forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the fourth quarter 2018 earnings release and earnings presentation available on our website.

I'll now turn the call over to Kevin to begin.

Kevin J. Mackay -- President and Chief Executive Officer

Thank you, Lee. Hello, everyone, and thank you very much for joining us today for Teekay Tankers fourth quarter 2018 earnings conference call. With me here in Vancouver, I have Stewart Andrade, Teekay Tanker's Chief Financial Officer; and Christian Waldegrave, Director of Research at Teekay Tankers.

Beginning with our recent highlights on slide three of the presentation. Teekay Tankers generated total cash flow from vessel operations of $62 million during the fourth quarter compared to $28 million in the previous quarter. We reported adjusted net income $14 million or $0.05 per share in the fourth quarter compared to an adjusted net loss of $18 million or $0.07 per share in the prior quarter. Crude tankers spot rates improved significantly during the fourth quarter spurred by both winter market seasonality and positive underlying supply and demand fundamentals.

Although rates since declined from the highs reached at the end of 2018, our crude spot tanker rates booked in the first quarter of 2019 to date are higher than the fourth quarter of 2018. I will touch on the market in more detail later in the presentation. While the tanker market has seen increased volatility and stronger rates, we continue to focus on strengthening our financial position.

In the fourth quarter, we completed the previously announced sale-leaseback transaction relating to four vessels and a loan to finance working capital in the company's RSA pool management operations. These financing's are expected to provide approximately $40 million of additional liquidity. Having completed these initiatives we drew on our working capital facility for the first time in February and our liquidity is now approximately $115 million.

In addition, we recently signed a term sheet for additional sale-leaseback transaction of two vessels which upon expected completion in the first quarter of 2019 is expected to increase liquidity by approximately $25 million and extend our debt maturity profile.

Lastly, we continue to position Teekay Tankers to best capture value and maximize cash flow from improving spot tanker market. Recently, we have increased our in-charter exposure by 2.5 Aframax vessel equivalents for periods ranging from one to two years with options to extend.

At the same time we secured short-term Suezmax fixed revenue cover for the first half of 2019 at a very attractive rate. As we protect against some near term weakness during this period, which I'll discuss over the next few slides.

Turning to slide four, we look at recent developments in the tanker spot market. Having been in a cyclical lows for much of the year tanker spot rates increased significantly during the fourth quarter of 2018 to reach the highest level seen in three years.

This increase can partly be explained by the return of normal fourth quarter seasonality. There is also a reflection of improved tanker market fundamentals, it starts to make an impact in the middle of 2018 onwards. The fourth quarter saw OPEC crude oil production increased to 32 million barrels per day, while Russian oil production hit a record high 11.5 million barrels per day at the end of the year, which combined increased tanker demand significantly.

An increase in US crude oil exports was also positive with exports reaching 2.5 million barrels per day adding tanker ton-mile demand as well as Aframax lightering specific demand in the US Gulf. These positive demand developments were set against the backdrop of very low fleet growth in 2018 with high scrapping activity keeping fleet growth to just 1% for the year.

The combination of additional cargo supply at a time of low fleet growth was the catalyst for a strong recovery toward the end of 2018. Looking at the charts in the slide you can see that rates have come off from the fourth quarter highs at the start of 2019. However, rates are still higher year-on-year and are largely tracking the five-year average. We are therefore entering 2019 on a much more positive note than we did last year.

Turning to slide five, we look at the impact of recent OPEC supply cuts, which will be a near-term headwind from tankers in the first half of 2019. As shown by the top chart on the slide, OPEC has moved aggressively to cut production in the early part of this year with a 1.6 million barrel per day reduction in output since November 2018.

In fact, OPEC production is now below the production target agreed at the Vienna meeting last December. This is due to steep cuts from Saudi Arabia coupled with unplanned outages in Libya and production uncertainty in Venezuela and Iran. Venezuelan crude oil production could decline further in the coming months due to the effects of US sanctions.

Though its impact on tanker demand may be offset by longer voyage distances as Venezuela looks to sell these displaced barrels into other markets such as Asia. This steep decline in OPEC production, which comes at a time when refineries are heading into seasonal maintenance creates a headwind for tanker demand in the near-term.

However, it is important to recognize the situation is very different at the beginning of 2017 when OPEC last cut supply. Prior to the 2017 cut, global oil inventories stood at more than 300 million barrels above the five-year average and OPEC needs to implement the steep and sustained cut to bring surplus inventories down and give support oil prices.

Today, global oil inventories are much more balanced and are currently below five-year average levels when measured in both total barrels and in days of forward cover. Looking ahead, we expect that a pickup in oil demand coupled with an influx of new refining capacity coming online this year and the need to build fuel inventories ahead of IMO 2020, will require OPEC to reintroduce barrels into the market during the second half of the year leading to a more positive outlook for tanker demand compared to the first half.

On slide six, we look at US crude oil production and exports. US crude oil production has undergone a radical transformation over the past decade due to the development of shale oil. This production rising from a low of 5 million barrels per day in 2008 to a record high of 11 million barrels per day last year with the IEA forecasting production to reach 13.2 million barrels per day by 2020.

Following the repeal of the US crude oil export ban at the beginning of 2016. This excess production has driven export growth at a similar pace. By the end of last year, US crude oil exports were averaging 2.5 million barrels per day, approximately 50% of these exports currently head to Asia and 25% to Europe, which has been very beneficial for tanker demand and it's one of the key reasons that spot tanker rates recovered in the second half of last year.

While infrastructure constraints are currently limiting continued growth in exports, we estimate that by the end of this year de-bottlenecking projects should allow return to growth and the potential for exports to reach as high as 4 million barrels per day.

For Teekay Tankers this will be a positive development on two fronts. First, the growth in exports to Europe will benefit the Aframax and to a lesser extent Suezmax sectors. Secondly, the growth in exports to Asia on VLCCs will benefit our US Gulf Aframax lightering business.

Turning to slide seven, we look at our tanker fleet utilization forecast out for 2020 based on our view of tanker supply and demand fundamentals. We expect the tanker fleet to grow by approximately 3.5% in 2019. This is an increase from the 1% fleet growth seen last year, but it is still below long-term average fleet growth levels of around 4% to 5%.

Most of the fleet growth is concentrated in the first half of the year and is weighted toward the VLCC segment. However, we expect this growth to be partly offset by increased off hire time as the number of vessels will go out of service for the installation of scrubbers during the course of the year.

In 2020, we are confident fleet growth will fall below 2% again as the order book is somewhat set with shipyards largely full through the first half of 2021. As mentioned earlier in the presentation, we anticipate some headwinds in the first half of this year from OPEC supply cuts, seasonal refinery maintenance, and continued newbuilding deliveries.

However, we believe tanker demand should increase significantly starting mid-year driven by an increase in US crude oil exports. The return of OPEC barrels to the market and increasing global refining capacity and the positive impacts of the IMO 2020 regulation. Tanker fleet utilization is anticipated to rebound significantly from the low to mid 80 percentile range up to the upper 80s or 90 percentile level as we move through this year and into 2020, which should translate into increased volatility, which historically has driven tanker rates higher.

Turning to slide eight. As mentioned in my opening remarks although rates have declined from the highs reached at the end of 2018 our crude spot tanker rates in the first quarter of 2019 to date are higher than the fourth quarter of 2018 based on approximately 70% and 68% spot revenue days booked.

Teekay Tankers fourth quarter to date Suezmax and Aframax bookings have averaged approximately $26,000 and $28,500 per day respectively. For our LR2 segment with approximately 51% of spot revenue days booked first quarter to date bookings have averaged approximately $24,500 per day.

With that, operator, we are now available to take questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) We'll take our first question from Jon Chappell with Evercore.

Jonathan Chappell -- Evercore ISI -- Analyst

Thank you. Good morning, everybody.

Kevin J. Mackay -- President and Chief Executive Officer

Good morning.

Jonathan Chappell -- Evercore ISI -- Analyst

Kevin, my first question is on the dividend. Yeah, I think, completely prudent to not pay a penny or two this quarter just based off your formula and given the headwinds that you just described for the first half of the year. Obviously, with your 1Q date bookings significantly stronger, it could be more meaningful, if you use the same formula for the first quarter. So, do you view this as kind of a temporary one-off suspension or do you think that maybe dividends will put on hold until there's a more sustainable non-seasonal recovery maybe starting later this year?

Kevin J. Mackay -- President and Chief Executive Officer

I think it's important that our investors recognized the challenges that we went through over the last 18 months with rates being as low as they were. And as you've seen us do repeatedly throughout last year taking on more debt in the form of our sale-leasebacks.

I think it is prudent that we look at our balance sheet not just quarter-by-quarter, but out further in the longer term. And it's important that we build balance sheet and financial capacity to give us different capital allocation opportunities and decisions that we can provide value to our shareholders. So, obviously it's a decision that gets looked at quarterly, but I think given our position in our balance sheet. Even though we do think that 2019 will be a better year than 2018. There is some shocks that we expect in the first half of the year, and I think it's important that we continue to be prudent in the way we allocate capital.

And as you've seen in the fourth quarter the Board has taken reserves. I think it's highly likely that you'll probably see that continue until we're a lot more comfortable about our financial position and the flexibility that we want to build into the company.

Jonathan Chappell -- Evercore ISI -- Analyst

That makes sense.

Stewart Andrade -- Chief Financial Officer

Maybe just add, John, maybe just adding one thing quickly to that as well and you look at our -- where our share price is trading right now, and what's the best avenue for returning value to shareholders. And I think that paying down -- we think that paying down debt is likely to accrue more benefit to our shareholders over the next little while then paying a relatively small dividend. So, we would hope that as we reduce debt in the company, the leverage levels come back that has a positive impact on the share price.

Jonathan Chappell -- Evercore ISI -- Analyst

And to that point the sale-leasebacks you know obviously coming out of position of where you really wanted to create a buffer with liquidity. But do you feel like with these last two Suezmaxes that you just announced this morning brought across the finished line probably by the end of the quarter. Are you done in that front given your somewhat optimistic view on starting the second half of this year into 2018 or do you think there's still more liquidity raising avenues that you would want to pursue?

Stewart Andrade -- Chief Financial Officer

Yeah, I guess, ultimately it's a question of risk, and I think given our current liquidity position that Kevin mentioned in the prepared remarks of $115 million plus the additional approximately $25 million that we expect to come in from this latest announced sale-leaseback. I think, overall, we feel good about our liquidity position, with the headwinds we are expecting to face through Q2, and that's something that we'll continue to keep our eye on and make a call about whether any incremental deals would give us a little bit more buffer that we think to make us a little bit more comfortable and depending on how the market unfolds, but we do think our current levels are good and so we haven't taken additional sale-leasebacks off the table, but I wouldn't expect to see significantly more certainly from this point.

Jonathan Chappell -- Evercore ISI -- Analyst

Okay. Final one, just quickly, you mentioned a couple of times non-recurring in the G&A for the fourth quarter. Can you explain what that was and the magnitude of it, so we can determine just on non-recurring it was and kind of the run rate going forward?

Stewart Andrade -- Chief Financial Officer

Yes. So I think looking forward into 2019 run rate G&A is likely to be in the low 10s. Typically our Q1 G&A rate is a little bit higher as we have some additional equity comp that is expensed in Q1. So, we might see a little bit higher in Q1, but our run rate probably in the low 10s going forward. So, the magnitude of the one-time G&A or the non-recurring G&A is in the $2 million range.

Jonathan Chappell -- Evercore ISI -- Analyst

Okay. And what was the issue in the fourth quarter that brought up to 11?

Stewart Andrade -- Chief Financial Officer

Just some strategic initiatives that we were undergoing and taking a look at, but we don't expect those to continue, those are behind us, we don't expect them to continue into 2019.

Jonathan Chappell -- Evercore ISI -- Analyst

Okay. I appreciate it. Thanks for your help.

Operator

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

Noah R. Parquette -- J.P. Morgan Securities -- Analyst

Thanks. Just a follow-up on Jon's question on the dividend and potential deleveraging. Are you guys when you look at that are you kind of comfortable with just the regular amortization schedule that you have or if you would consider prepayments, I mean, is it safe to assume at this point the capital leases or the sale-leasebacks are more attractive of your -- within your capital structure versus the difficult term loans? And then just finally, remind me, did the sale-leasebacks have any restrictions on dividend payments?

Stewart Andrade -- Chief Financial Officer

So, I'll take the last question first. The sale-leasebacks don't have any restrictions on dividend payments. And if you look at slide 10 in our deck in the appendix you'll see that we have the ability to generate a significant amount of cash flows as the market comes back given our Q1 '19 to date bookings.

We're talking about $0.80 per year in cash flow. That amount of cash flow will allow us to retire debt ahead of our scheduled repayments. So, in terms of our focus being on debt repayment, not just on making the scheduled repayments.

But a concerted effort to bring down the, our debt, as Kevin said to put us in a position to have more financial flexibility for taking advantage of opportunities including the charters that you saw us take toward the end of last year and early this year that we think will add an incremental value.

Noah R. Parquette -- J.P. Morgan Securities -- Analyst

Okay. And then I wanted to ask about your LR2. If I remember correctly a lot of them are trading dirty now. Is that still the case and do you have any chance -- plans to change that strategy ahead of IMO 2020?

Kevin J. Mackay -- President and Chief Executive Officer

Yeah, we have predominantly moved our LR2 fleet into crude trading given the differentials in earnings. And I think you've seen in our performance that has paid off waiting more of our fleet toward the Aframax segment and in the clean segment, but it is as I've said on this call many times before it's one of the benefits of the LR2. They are fungible. You can trade clean or dirty. And it's something that our commercial guys look at day in and day out in terms of our forward view of both markets.

I think the IMO 2020 regulation implementation really brings a good opportunity for volatility to come back into both markets. So, it's something that we're keeping an eye on very closely, and I would assume that given our view of the distillate requirements that the world is going to need the demand for the LR2s will pick up. So, as we move through 2019, you might see us move some of the Aframax fleet across into the LR2 space.

Noah R. Parquette -- J.P. Morgan Securities -- Analyst

Okay. That makes sense. Thanks.

Kevin J. Mackay -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Michael Webber with Wells Fargo.

Michael Webber -- Wells Fargo Securities -- Analyst

Hey, good morning, guys. How are you?

Kevin J. Mackay -- President and Chief Executive Officer

Good Mike.

Michael Webber -- Wells Fargo Securities -- Analyst

So, I wanted to move back on couple of Jon's question. So, on the dividend first and you got to tackle that a couple of times now, but I just want to be clear on this. So, did you actually suspended the policy of the 30% to 50% of adjusted net income at this point. Is that a formal suspension or is that just something where you are going to, I guess, play it by that the intent of the policy, I guess, to provide a degree of predictability. So, if it's just -- if it's not suspended the predictability kind of goes away.

Kevin J. Mackay -- President and Chief Executive Officer

Right. So, hi, Mike. So, the policy has not been changed. So, we still have the same policy as you know the policies for 30% to 50% of adjusted net income with reserves that the Board may determine are prudent given the amount of initiative that we completed over the last 18 months to increase liquidity in the incremental debt that we've taken on.

We just don't think it's prudent at the moment to be doing sale-leasebacks and increasing liquidity and taking on additional debt at the same time that we are -- that we're paying dividends. So, given that increased debt load we see it is prudent currently to focus on paying back some of those debt levels with increased cash flow from operations, and it's something that we'll continue to assess going forward to determine when that capital allocation should shift.

We are definitely focused on returning value to shareholders. But as I mentioned earlier, one of the view that paying down debt is probably more valuable in terms of returning value to an increased share price.

Michael Webber -- Wells Fargo Securities -- Analyst

I understand that, but I'm just trying to -- so how would you articulate your current dividend policy then at this point? Is it --

Kevin J. Mackay -- President and Chief Executive Officer

I would articulate it as the same as we said it in early 2018, which is the 30% to 50% with reserves, if we feel are prudent and we're giving the signal here that we think that dividend reserves are likely to be prudent over the next few quarters, certainly, as we look to reduce our debt levels from the extra debt we've taken on to raise liquidity.

Michael Webber -- Wells Fargo Securities -- Analyst

Okay. Was there any thought?

Kevin J. Mackay -- President and Chief Executive Officer

So, I would expect to see reserves continue.

Michael Webber -- Wells Fargo Securities -- Analyst

Okay. I appreciate that. Was there any thought to messaging that after the quarter adjusted in the context of you mentioned how weak the market have been for several quarters. If you have investors they've kind of stuck with you through that to get the surprise on the first quarter where they would expect positive earnings. So, was there any thoughts of maybe delaying that maybe articulating it or messaging that this quarter on a go-forward basis?

Stewart Andrade -- Chief Financial Officer

Sorry, just to be clear, on your question. Are you asking if it would have made sense to pay Q4 dividend and then message this after Q1. Is that your question, I'm not clear?

Michael Webber -- Wells Fargo Securities -- Analyst

Yeah. Was there any thought around that around messaging to investors that way?

Stewart Andrade -- Chief Financial Officer

Well, I think , that in terms of the messaging. So, going back to our earnings call from last quarter. When asked about our capital allocation focus. I think, we tried to be clear that our capital allocation focus was going to be on paying down debt for 2019. And so we're trying to be consistent with that.

Our first priority of course is getting the capital allocation policy correct in order to try and build equity value and return value to shareholders, and then the messaging comes after that, and we've messaged it in line with the decisions that have been reached between management and the Board.

Michael Webber -- Wells Fargo Securities -- Analyst

Okay. And then along the lines of the G&A bump. So, I think, that the low '10s being the run rate on G&A is about 8.7 in Q3 of '18. So is there, was there a sustained some modest of your sustained increase that kind of came out of Q4 -- 13% to 15% more kind of a bump from the Q3 level?

Stewart Andrade -- Chief Financial Officer

Yeah, I think, the Q3 G&A of 8.7 was a little bit lower than our typical run rate. There were some things and flow through G&A in Q3 that maybe the little lower through. Most of 2018 our run rate G&A was in the 9s. and as I said we're expecting it to be in the, for the most part, in the low '10s in 2019 although Q1 is typically a little -- is a little bit higher. So there are -- there is an increase in run rate between the majority of 2018 and 2019 that's just a result of our priorities moving into 2019 across both our tanker business and also our services businesses and what we think the G&A is going to need to be to support our business plans.

Michael Webber -- Wells Fargo Securities -- Analyst

Okay. And then I guess within the bump for the quarter and I think Jon followed up on this. And maybe if you could get a bit more specifics of $2 million on the quarter for, I guess, strategic initiatives. Just considering the fact that's about half of what you guys would have paid out under a 30% payout of your adjusted net income. It's a material amount and can you get more specific around what that was specifically?

Stewart Andrade -- Chief Financial Officer

Yeah. So, I mean, we're always looking at different options and different strategic initiatives which obviously won't come as a surprise to anyone. This is something we're evaluating during Q4 and unfortunately not something that we can't disclose publicly exactly what that was. But, as I said, it is behind us and we don't expect to see that to see those amounts flowing through going forward, but unfortunately not -- the details of that are not something that I can speak to.

Michael Webber -- Wells Fargo Securities -- Analyst

So, the new dividend policy is 30% to 50% common maybe and there is a $2 million bump one-time bump in G&A that you can't disclose what it was, but it is just not going to happen again.

Kevin J. Mackay -- President and Chief Executive Officer

That's correct.

Michael Webber -- Wells Fargo Securities -- Analyst

Okay. All right. Thanks for the time guys.

Stewart Andrade -- Chief Financial Officer

Thanks.

Operator

We'll take our next question from Randy Giveans with Jefferies.

Randy Giveans -- Jefferies -- Analyst

Hey, gentlemen, how are you?

Kevin J. Mackay -- President and Chief Executive Officer

Very well.

Stewart Andrade -- Chief Financial Officer

Good. Thanks, Randy. How are you ?

Randy Giveans -- Jefferies -- Analyst

All right. Good, good. A few quick follow-up questions. I think first to know is so you are saying your -- the majority of your LR2s are trading dirty. What is the time and the cost to switching the LR2s from crude back to trading clean?

Kevin J. Mackay -- President and Chief Executive Officer

A lot depends on the position of the vessel. What cargo you pick on your first run, where that cargo positions you. So, there isn't a hard and fast number or formula you can follow. It can take anywhere from eight weeks to four months. It depends on how you triangulate your voyages and how you do your cleaning. I think in terms of caustic it can vary again because of that whether you use additives or facilitators within your cargo mix to clean your tanks or whether you just use the cargo nature -- the nature of the cargo itself to help do your cleaning. So, that cost can range up to $350,000 on any given changeover. So, really it's depending on a lot of different factors.

Randy Giveans -- Jefferies -- Analyst

Good. Okay, perfect. And then you mentioned that the share price and how kind of debt repayments to likely support the share price and that's kind of how you did that as supposed to maybe a dividend. What about share repurchases? Is there a possibility in the near-term?

Kevin J. Mackay -- President and Chief Executive Officer

I think it's, as I mentioned, in answer to Jon's question. I think what management is trying to get to is a position where we have financial flexibility. We do have a desire to return value to shareholders and that comes in the form of a variety of levers that we'd like to pull.

Appreciation of share price dividends, share buybacks. They're all components of our capital allocation that we discussed with the Board and that we're trying to manage, but we want to build the balance sheet that gives us that flexibility that we can look at different options.

And having gone through 18 months of a severe downturn in rates. We've done sale-leasebacks that helped improve our liquidity runway, but it has added to our debt levels, and I think it's prudent for us to repair the balance sheet or to fortify the balance sheet to give us that financial flexibility to look at things like share buybacks and dividends and things like that.

Randy Giveans -- Jefferies -- Analyst

Okay. And are there any benchmarks on that and net debt to cap ratio, leverage ratio, cash balance that you would satisfy as balance sheet stability or strength?

Stewart Andrade -- Chief Financial Officer

I would say in terms of our net debt to cap, I think, we would feel comfortable ultimately in the 30% to 35% range now. Of course, we have a forward view on the market and we have a forward view on cash generation and what our runway looks like.

So, it doesn't mean that you need to be a 30% to 35% before you pay dividend, but it means that you need to have a view on where you're going in terms of leverage and your outlook to make sure that you get the balance sheet into the place that ultimately into the place that it needs to be and that's part of our scenario planning around capital allocation.

So, ultimately where we would like to be 30% to 35% and that gets factored in, in terms of our targets and our decisions on buybacks or dividends going forward.

Randy Giveans -- Jefferies -- Analyst

Excellent. Thank you for the guidance there. And I'll turn it over.

Kevin J. Mackay -- President and Chief Executive Officer

Thanks, Randy.

Operator

Our next question comes from Ariel Rosa with Bank of America Merrill Lynch.

Ariel Rosa -- Bank of America Merrill Lynch -- Analyst

Hey, good morning. So, first I wanted to touch a little bit on the macro environment. I hear you are setting pretty optimistic tone. It sounds like for second half '19. One of the themes that we've heard a lot from some of the companies in our coverage has been some economic uncertainty or a little bit of softness in playing out in China and in parts of Europe. I'm wondering if you see that impacting that outlook at all or if you are seeing that having any impact particularly as we've seen this pretty sharp downturn in rates through the start of 2019. Just your thoughts on that would be appreciated?

Kevin J. Mackay -- President and Chief Executive Officer

Okay. I thinking speaking to your last point, I think, the downturn in rates that we've seen over the last couple of weeks is really to my mind both seasonal as well as the impact of OPEC or specifically the Saudi is cutting quite dramatically in December and January.

Having said that although there is softness across the market in some areas of the world are obviously weaker than others. We are sitting here in the middle of February, which is typically or probably our worst month of the year and Aframax in the US Gulf are earnings $30,000 a day and in the Baltic they are earning $28,000. So, there is pockets of strength across the market and I think we're seeing an unseasonal bounce in the VLCCs.

So, I think, the spot market environment is separate from the larger macro picture in this instance and to me it speaks to some of the underlying fundamentals are tightening the supply demand balance in the sectors. In terms of the macro picture, yes, obviously the news out of China seems to be slowing.

But if you look at their month-on-month and year-on-year crude oil imports they continue to grow. There's two large refineries coming online in China both over 400,000 barrels a day that should drive continued growth in imports into China.

So, I think, our overall view is that, yes, there will be -- it might be pockets of weakness or areas where things come off a little bit, but generally the forecast that we look at, the IEA projections are still looking at oil demand growth of about 1.4 million barrels a day, which is still relatively robust.

Ariel Rosa -- Bank of America Merrill Lynch -- Analyst

Okay, great. I appreciate that detailed answer. And then second I wanted to touch on your thinking in terms of locking in long-term contracts and maybe your ability to do that. Obviously, there were some strength in the fourth quarter in terms of where the rates were relative to what we've seen over the last couple of years. Maybe you could address to what extent you had conversations with customers about locking in long-term rates. Was there an appetite from that? Was there an appetite for that from either party from you guys or from some of your customers and is that something that you would be looking to do going forward if we saw strengthening in rates?

Kevin J. Mackay -- President and Chief Executive Officer

Yeah, I think, obviously as the market picked up in the fourth quarter, customers realized that the fundamentals of the market had shifted, and 2019 and 2020 we're certainly in their mind as well not going to look anything like 2017 or 2018.

So, we did see an increase in inquiry from customers to lock away ships on a range of periods from one year out to three years. But in our view it was or is a little bit early to start locking in based on a one quarter increase in rates. Our forward view of the market is much better than what we experienced in the fourth quarter.

And I think from a hedging strategy, I don't think we're there to put away a large portion of our fleet on time charter at this point, I think, the spot market has a lot of runway ahead of it. Having said that, we did put away a Suezmax for half of 2019.

The first half where we do see a little bit of choppiness as I mentioned in my prepared remarks, and we thought it was prudent to lock in a sort of a fourth quarter number for the first six months of 2019 and put that money in the bank.

So, we took the opportunity to put it away, but to book out ships longer than that to do a three-year time charter at this point in time we don't think it is prudent quite to the contrary, we were actually as you've seen us do on the Aframax LR2 site.

We're actually looking at opportunistic deals to try and increase our in-charter program where we think we can bring in ships at a relatively lower levels than where we think the market is going to take us over the next 18 months.

Ariel Rosa -- Bank of America Merrill Lynch -- Analyst

Okay, great. That's terrific. And then just on the last question from me in terms of the impact of IMO 2020. Maybe you could get your thoughts on when you expect to see that really flowing in because it seems like right now it doesn't seem to be top of mind at least as reflected in the spot market. I understand some of that probably reflects seasonality, but I know at one point people were thinking that would already be reflected in higher rates at this point. So, maybe I could get your thoughts on just kind of when you expect to see that reflected in the market or maybe you're already seeing it as part of customer discussions and how big of an uplift that could eventually have?

Kevin J. Mackay -- President and Chief Executive Officer

Yeah, I think, that probably answer that in two segments really. I think, first of all, in terms of the timing of when the impact is really going to start to kick in. I think you've got to work back from when the regulation is actually comes into full implementation on January 1st 2020.

Obviously, you can't on a ship switch bunkers overnight. So, owners are going to have to start buying low sulfur fuels and MGO three to four months prior to that January deadline. You can't change bunkers overnight. So, I think, depending on the size of the ship and the length of your voyages, you're going to have to start seeing owners pickup some of these new bunkers starting in the back end of Q3, which then if you look down the logistics chains, refiners have to start preparing the tankage, the pipelines, the bunker barges, all of that to meet that new market demand. That's going to have to start happening sort of Q2, Q3.

In advance of that refinery is going to have to start looking at what kind of crude oil types they bring in to be able to produce the run rates they want to maximize their display or their low-sulfur fuel production. So, it's a knock-on effect and our view is we'll probably start seeing that toward the start of the second half. So, from June, July onwards that incremental oil demand because of IMO 2020 will start to filter into the system around then.

Having seen what the second part of that. The answer is really around what we're seeing from customers and really that started at the back end of last year when more and more customers were starting to ask us about crude oil movements from load ports to discharge ports and trade routes that we had never actually seen before.

So, looking at different crude types moving into different refining regions. And I think that was a function of refiners starting to look at the economics and the trade dynamics around changing their blends and preparation for the IMO preparations, but that has been sporadic and it's not really been a driver in the market as of yet, but the inquiry has started.

Ariel Rosa -- Bank of America Merrill Lynch -- Analyst

Got it. Understood. Thanks for the time.

Kevin J. Mackay -- President and Chief Executive Officer

Thank you.

Operator

And it appears there are no further questions at this time. I'd like to turn the conference back to Kevin Mackay for any additional or closing remarks.

Kevin J. Mackay -- President and Chief Executive Officer

Thank you for joining us today and we look forward to speaking to you next quarter.

Operator

And that does conclude today's conference. We thank you for your participation. You may now disconnect.

Duration: 41 minutes

Call participants:

Lee Edwards -- Investor Relations

Kevin J. Mackay -- President and Chief Executive Officer

Jonathan Chappell -- Evercore ISI -- Analyst

Stewart Andrade -- Chief Financial Officer

Noah R. Parquette -- J.P. Morgan Securities -- Analyst

Michael Webber -- Wells Fargo Securities -- Analyst

Randy Giveans -- Jefferies -- Analyst

Ariel Rosa -- Bank of America Merrill Lynch -- Analyst

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