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TORM plc (NASDAQ:TRMD)
Q1 2020 Earnings Call
May 14, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the TORM's Q1 2020 Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I must advice you that this conference is being recorded today, Thursday, May 14, 2020.

I'd now like to hand the conference over to first speaker today, Mr. Morten Agdrup. Thank you. Please go ahead.

Morten Agdrup -- Head of Corporate Finance & Strategy

Thank you, and thank you for dialing in. And welcome to TORM's conference call regarding the results for the first quarter of 2020. My name is, Morten Agdrup, and I'm Head of Corporate Finance and Strategy in TORM.

As usual, we will refer to the slides as we speak, and at the end of the presentation, we will open up for questions.

Slide 2. Before commencing, I would like to draw your attention to our safe harbor statement.

Slide 3, please. With me today, I have Executive Director, Jacob Meldgaard; and Chief Financial Officer, Kim Balle.

I will now hand the call over to Jacob.

Jacob Meldgaard -- Chief Executive Officer / Executive Director

Okay. Slide 4, please. And thank you, Morten, and good afternoon all. Before we turn to the financial results and also the market, I'd like to take a short moment here to focus on safety. And safety is obviously top priority for TORM. It has had an even greater focus here during the COVID-19 pandemic. So as an integrated part of our culture, it has been relatively natural and easy for us to execute the precautionary measures such as, work-from-home policies at early stages during this pandemic. I'm really pleased to note that our One TORM platform has secured the safe operations of our vessels without any major operational issues in this period.

Please turn to Slide 5. So not unknown have we navigated successfully on safety, we also navigated the volatile product tanker market here in the first quarter of 2020, that was especially impacted by COVID-19, and also the OPEC decisions. Our results for the quarter were enhanced by the strong operational focus and our focus on maintaining efficient operations, despite the challenges that has stemmed from COVID-19. The product tanker market has experienced a stronger start to the year in more than a decade, and is retaining the strength experienced that we -- in the last quarter of '19. So in the first quarter of 2020, it has also been very volatile influenced not only by the COVID-19 situation, the OPEC+ events and the related oil price development, but also by logistical inefficiencies and refinery maintenance. So far here in the second quarter, the market strengthened further. It was supported by increased interest for the floating storage, both on crude and on products, due to the contango in the oil price. We'll go into the details on the market shortly.

Zooming in on the first quarter, our product tanker fleet realized an average TCE rate of $23,643 per day. And here in the largest segment, the MR, we realized an average TCE rate of $22,461 per day. In the first quarter of 2020, we realized a positive EBITDA of $102 million, and a profit before of $57 million or $0.76 per share. This is a higher figure than our adjusted full-year result for 2019. The return on invested capital was positive at 15.4% for the first quarter of the year, which I consider a really attractive level. Also here in the first quarter of 2020, we placed orders for two LR2 newbuilds that would be delivered in the fourth quarter of 2021. We, so far, here in 2020 taking delivery of four newbuilds and delivered one older Handysize vessel to a new owner. We've been committing ourselves and have been installing scrubbers, where we will have a total of 49 vessels, including newbuilds. As of today, we have installed 37 scrubbers. The remaining scrubbers will be installed throughout 2020, except for the previous mentioned two LR2 newbuilds, which is next year. Our approach has been balanced, with just about half of the fleet having scrubbers installed.

Finally, in January 2020, a significant event for us, was that we refinanced debt for a total of $496 million from leading ship lending banks for two separate term loan facilities, and a revolving credit facility. These facilities replace existing facilities, and extended the majority of TORM's debt maturities until 2026. I can see that our actions have really provided TORM with a solid foundation to prosper under both continued market -- positive market conditions and also on the potentially less favorable conditions.

Slide 6, please. To set the scene ahead of the walk through of the market in the first quarter of 2020, I'd like to highlight the fact that the current situation is highly unprecedented. And throughout my more than 25 years in shipping, I've not experienced so many major drivers affecting the market at the same time.

Slide 7, please. Now I will turn to some of these drivers of the product tanker market. As mentioned, TORM's product tanker fleet realized an average TCE rate of $23,643 per day. In the LR segment, we achieved LR2 rates of $29,108 per day, and LR1 rates of $24,329 per day. In the largest segment, the MR, the achieved rate was $22,461 per day, and in the Handysize segment, we have received -- achieved rates of $20,649 per day. As already highlighted, the product tanker market saw quite some volatility here in the first quarter of 2020, with large differences in rates per segment and per geographical area. While the MR rates in the West were supported by weather-related delays, and delays at the Panama Canal, LR1 rates in the East were affected by maintenance at several of the export-oriented refineries in the Middle East. Then the outbreak of the COVID-19 in China, and the corresponding decline in the countries, oil demand boosted product exports from China in the second half of the quarter. In early March, the collapse of the OPEC+ negotiations and the resulting price war boosted crude tanker earnings, which spread to the product tanker market at a time when more than 50% of the LR2 tonnage was trading in dirty.

As the virus spread to the rest of the world, impact of the COVID-19 and the measures taken to contain the virus, considerably gained momentum in the second quarter. Especially three drivers have played a significant role here, sending the product tanker rates to all-time highs. Firstly, the unprecedented declines in oil demand have resulted in temporary trade boost from several export regions, most recently from China -- sorry from India, and the Middle East region. And as the local demand has been affected, cargo has needed to find a home further away, thereby impacting the ton-mile positively.

Secondly, as refinery runs have been slower to adjust to changes in the oil demand, this has resulted in unprecedented product inventory buildup, bringing the onshore storage capacity to its limits and increasing the interest for fixing floating storage. At the same time, the unprecedented declines in oil product demand have resulted in ullage issues at ports and terminals, which in turn have resulted in a spate of short-term logistical floating storage. Especially the latter type of floating storage has tied of a large share of product tanker tonnage, accounting for around 90% of the total floating storage, which is currently estimated at 14% of the global fleet.

Thirdly, the current situation has given rise to increasing inefficiencies in trading patterns, such as vessels sailing around the Cape of Good Hope, in order to take advantage often contango or cargo in the merge, trying to find new buyers further away. Just to give an example on the latter one, we have recently deviated vessels that has loaded on the US West Coast, and was initially to discharge on the West Coast of Mexico. And this vessel was deviated to as far away as Australia. Another example, we had a vessels that loaded in the US Gulf, waited to discharge on the East Coast of Mexico, but after eight days of waiting in Mexico, the vessel was sent to the Mediterranean instead. I'm sure, we're not the only vessel owner experiencing this type of inefficiencies. At the same time, crude tanker market was similarly supported by strong crude inventory builds as OPEC+ cut agreement, which was reached in April, and it came too late to avoid massive crude oversupply.

Finally, it must also be mentioned that with product tanker rates climbing to a record high, we also really -- recently seen a number of LR2 vessels cleaning up or intending to do that at least. Nevertheless, the number of vessels that have switched back to clean is smaller than the net change to the dirty market that we saw during the fourth quarter of 2019, and the beginning of 2020. Hence, the tonnage supply side has remained favorable.

Obviously, uncertainties around the COVID-19 impact on the global economy and the oil demand remains, with especially the timing and speed of oil demand recovery being a key factor for the product tanker market. However, while some of the COVID-19-related effects could peak soon, we believe that it will take some time before the inefficiency in the market will be cleared. The above-mentioned developments are also reflected in our bookings. And here, as of the beginning of this week, the total coverage for the second quarter of 2020 was 69% at $29,188, and in the largest segment, the MR segment, our coverage was 65% at $26,511 per day.

Slide 8, please. In our opinion, it is clear that it is too early to predict the full impact of the COVID-19 on the global economic growth and many uncertainties remain. As already mentioned before, the COVID-19 pandemic has tightened tonnage supply considerably, and introduced increased inefficiency to trading patterns, which has resulted in the record-high product tanker rates. In fact, should our MR Q2 to-date rate continue throughout the quarter, we will obtain the highest MR rates, since the third quarter of 2008. The main trigger for these developments has been the unprecedented decline in oil demand, and the resulting oversupply of products. While estimates for demand destruction is still vary widely, the consensus points toward peak decline of almost 30% year-on-year in April.

Refineries have reacted to declines in oil demand by run cuts and short shutdowns. But demand has fallen even faster and more sharply than refiners have been able to scale down their production, and this has led to record-high product oversupply. Fast inventory buildup and the need for floating storage. From the tonnage supply side, the situation will also have a positive medium and long-term impact. As operations at shipyards in China have been interrupted by lockdowns, this has resulted in delays with respect to newbuilding deliveries, scrubber retrofits, and scheduled drydockings. Thanks to careful planning, and the fact that most shipyards used by TORM have only been affected to a minor degree, our scrubber retrofits will only experience minor delays. In the longer term, the uncertainties due to the COVID-19, have generally led to lower interest for newbuilding ordering, which ensures a modest fee growth in the coming years, at a time when the order book is already low in historical terms.

Slide 9, please. Now let me come back to the developments in product inventories. And this slide here illustrates the dynamics of the COVID-19 impact on oil demand, refinery runs and changes in product stockpiles. As I already mentioned, the fact that refiners have not scaled down their production as fast and sharply as demand has declined, has led to unprecedented inventory buildup, which has first filled most of the onshore space and subsequently required storage of products on-board of vessels. Several countries have started to ease these lockdown measures, and we have, therefore, seen some early signs of demand recovery. And the pace of the inventory buildup has likely topped here in April.

However, demand is expected to remain subdued for some time yet, and the inventories continue to build, although at a slower pace. At one point, demand recovery reaches a point where stock building stops and product stops will start to drop. There's still too many uncertainties to know when exactly this will happen, but when it happens it will release vessels in floating storage to the market, and stock draws will lessen the need for transportation of products. And this will, of course, not be a positive factor for the product tanker market, but again the extent and timing of this will depend also on the speed of demand recovery.

Slide 10, please. Another way to look at the current oil supply situation is to look at the recent developments in the oil price structure in a historical context. This slide shows both crude and product price structures as the current oversupply is prevailing on both product and crude markets. The OPEC+ coalition reached an agreement in April to cut its crude production by an unprecedented 9.7 million barrels per day in May and June. And earlier this week, Saudi Arabia even announced that they would cut crude output more than they had already agreed. And this, together with market-driven cost by non-OPEC countries, such as US, Canada, Norway others as however not been enough to avoid onshore storage filling up fast and coming close to its limit. This situation led to contango in the oil price, with levels similar to the ones last seen in 2008, and triggered a flurry of tankers being fixed on time charter for floating storage of crude and also products. Since then, contango has declined with the first signs of improvements in oil demand and subsequently in market balances, and also the number of stores fixed has come down significantly. Nevertheless, if we look at product tankers, it is actually not the committed storage deals that are the main factors for keeping tonnage supply tight. In fact, this is logistical challenges that have had the strongest impact on the product tanker supply.

Slide 11, please. Let me elaborate on this a floating storage situation. We estimate that currently 14% of clean-trading tonnage is tied up in floating storage, which has built over the past month. Here, we are defining floating storage as vessels with cargo onboard and idle for at least seven days. In terms of capacity, the current level of tonnage tied up in floating storage is four times higher than what we consider a normal level. And around 90% to 95% of this of vessels in so-called logistical floating storage, which means vessels not able to discharge because of storage tanks being full at terminals and refineries. The bulk of these vessels facing difficulties with discharging are actually MR vessels. And this leaves 5% to 10% of vessels in committed storage yields, and nevertheless, we expect this figure to increase somewhat in the near future, as it takes time before a vessel is fixed, load the cargo, and enter into the floating storage statistics. So we estimate that vessels fixed for floating storage and not yet in the statistics could add another 1 percentage point to 2 percentage points to the share of tonnage in floating storage over the coming weeks. It is also important to mention that while contango-driven floating storage is set to unwind once the contango fails, the logistical inefficiencies could potentially last stronger, supporting the market.

Slide 12, please. Along with the strong crude tanker market, a total of 40 LR2 vessels have switched from clean to dirty trades in the past six months, leaving less than 50% of the vessels to trade in the key market. With the clean tanker rates reaching the record high levels in April, we've seen a number of vessels switching back to clean. However, this number is much smaller than the net switch to dirty that we saw in the past six months. Our current estimate show that around 10 vessels have cleaned up, and another 10 or so are intending to do that, compared to 40 vessels that moved to dirty during the fourth quarter of last year. Clearly, switching back from 32 clean is not a positive item for product tankers, but this year our LR2s in the dirty market is still at around 50% despite the reaching switching. And the fact that it is more costly to switch from dirty to clean and the other way around, should award that too many vessels go back to clean.

Slide 13, please. Now, we turn to the longer-term supply side market factors. The product tanker order book to fleet ratio currently stands at 8%, which is very low in a historical context. This reflects low ordering activity we've seen most of last year, and which has carried over into this year, as COVID-19-related uncertainty has kept most owners away from the newbuilding market. Also we do not expect a quick run-off of the order book, given the uncertainty around new potential regulation on vessel propulsion in connection with IMO's 2030 and 2050 CO2 targets. A lot of talk in the market has been on dual fuel vessels. But so far, in the product tanker space, dual fuel orders have been very limited. So due to that, we estimate that the product tanker fleet growth to be on average of 3% per year over the next three years, compared to a fleet growth of almost 5% in 2019, and an average of 6% during the previous three years. This slowing fleet growth rate is a key point to the fundamental positive development that we still expect for the product tanker industry.

Slide 14, please. To conclude my remarks on the product tanker market, TORM expects to see volatility in the market in the short to medium-term related to COVID-19, and its impact on global oil markets and economic activity. Aside the COVID-19 effects, we see a number of key market drivers for the next three years, five years to remain positive, such as the low order book, refinery dislocation, which will provide support to product tankers over the longer term.

Slide 15, please. Looking at TORM's commercial performance. We have, again, in the first quarter of 2020 in our largest segment, MR, outperformed the peer group average. In the first quarter of 2020, we achieved rates of $22,461 per day, compared to a peer average of $18,821 per day. This alone translate into additional earnings of $19 million in the first quarter alone. So obviously, in general, I'm really satisfied that our operational platform continue to deliver these very competitive TCE unit.

Slide 16. please. The key deciding factor for delivering above average TCE earnings is driven by our continued focus on positioning our vessels in the basins with the highest earning potential. We have a balanced strategy, where we generally do not position all our vessels in one basin, but instead have some overweight in either East or West, depending on our expectations for the future market. In a scenario, where the market is strengthening in the West relatively compared to the East, we want to increase our exposure to the West. And to illustrate our strategy and choices, we've shown our share of MR vessels positioned west of the Suez Canal, together with a measure of the premium, the West market has realized over the East market. Over the last quarters, the market West of Suez has been strongest, and especially so far in 2020. The West market has been trading at a premium to the East, which measured using benchmark routes has been around $8,000 per day. So far in the second quarter, we have had around 70% of our MR earning days West of Suez, providing us with a significant advantage, compared to owners with a higher exposure to the East market.

With that, let me hand it over to you Kim, for further elaboration of the cost structure, the operating leverage, and obviously, the balance sheet.

Kim Balle -- Chief Financial Officer

Thank you, Jacob. Please turn to Slide 17. With our spot-based profile, TORM has significant leverage to increase in the underlying product tanker rates. As of March 31, 2020 every $1,000 increase in the average daily TCE rate achieved translate into an increase in EBITDA of around $19 million in 2020. The corresponding figure increased to $28 million in 2021 and 2022. As of the levels May 2020, the coverage for the second quarter of 2020 was 69% at $29,188 per day. For the individual segments, the coverage ranges from around $19,000 per day for the smaller Handysize vessels, and up to around $36,000 per day for the larger LR vessels.

Slide 18, please. As Jacob mentioned, TORM achieved a profit before tax of $57 million in the first quarter of 2020. This is higher than the adjusted full-year results in 2019 of $47 million. The result, corresponds to a quarterly -- to quarterly earnings per share of $0.76, which on an annualized basis is $3 per share or around $20 -- DKK20. Similar, if the first quarter result would continue throughout 2020, the profit before tax for 2020 would be above $200 million. We do, obviously, not know the exact development of the market at our earnings over the coming quarters, but for Q2 coverage until May 11, 2020, it provide us with a buffer to that number so far of approximately $25 million. As illustrated, TORM's financial results is very sensitive to changes in freight rates.

Slide 19, please. Before discussing our cost structure, I would like to remind you of TORM's operating model. We have a fully integrated commercial and technical platform, including all support functions, such as an internal sales and purchase team, which we believe is a significant competitive advantage for TORM. Importantly, it also provides a transparent cost structure for our shareholders and eliminates related party transactions. Naturally, we are focused on maintaining efficient operations and providing high-quality service to our customers. Despite this trade off, we have seen gradual decreases of 20% in our opex per day over the last six years, which translates into a total decrease of around $44 million on an annual basis. Opex was below $6,100 per day in the first quarter of 2020, which we find competitive in light of our fleet composition. We believe that the EBITDA breakeven rate of $8,800 per day achieved in the first quarter of 2020 reflects the efficiency of the One TORM platform, and is highly competitive, compared to other owners in the product tanker segment.

Slide 20. I would now like to discuss our financial position in terms of key metrics, such as net asset value and loan-to-value. Vessel values have decreased by around 4% during the first quarter of 2020, and the value of TORM's vessels, including newbuildings, was just about $1.8 billion as of March 31, 2020. Outstanding gross debt amounted to $923 million, as of March 31, 2020. Finally, we had outstanding committed capex of $112 million, relating to our newbuilding program, and cash of $129 million as of March 31, 2020. This gives TORM a net loan-to-value of 49% at the end of the first quarter, which we consider a conservative level. The net asset value is estimated at $993 million as per March 31, 2020. And this corresponds to $13.3 or DKK90.5 per share. And just before commencing this call, TORM's shares were trading at DKK54. In short, we have a balance sheet that provide -- provides us with strategic and financial flexibility. And on the following slides, I will give you some more insights into our liquidity position, capex commitments, and our debt profile.

Slide 21, please. As of March 31, 2020, TORM had available liquidity of $273 million, cash totaled $129 million, and we had undrawn credit facilities of $144 million. Our total capex commitments relating to our newbuildings were $112 million, as of March 31, 2020. In addition to the capex related to the LR2 newbuildings, we also expect to pay $21 million in 2020 for retrofit scrubber installations on vessels on the water. With TORM's strong liquidity profile, the capex commitment are fully funded and very manageable.

Slide 22, please. After having finalized the refinancing in the beginning of 2020, we have eliminated all major refinancing until 2026, which provides TORM with financial and strategic flexibility to pursue value enhancing opportunities in the market. As of March 31, 2020, our outstanding debt stood at $918 million.

With that, I will let the operator open up for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Jon Chappell from Evercore. Please, ask your question.

Jon Chappell -- Evercore -- Analyst

Thank you. Good afternoon, everybody. Hope you're doing well.

Jacob Meldgaard -- Chief Executive Officer / Executive Director

Good morning, Jon. Hope you're safe.

Jon Chappell -- Evercore -- Analyst

Thank you. Jacob, first question is on duration of contract coverage. So the 89% for the second quarter, obviously, makes sense given we're in mid-May. But if we look to 2021 in your presentation, it's only 2% of the LR2s, and then 0% across the rest of the fleet. So what's your desire to lock-in more than anything, sort of the elevated structure today, and sort of curious [Phonetic] about the medium-term with the inventory destocking? And is that a strategic decision by TORM's to not take [Indecipherable] beyond six months? Or is it just a function of, there is no liquidity in the markets there?

Jacob Meldgaard -- Chief Executive Officer / Executive Director

Yeah, absolute -- good question, Jon, as usual. So I think it's fair to say that the liquidity as we see it in the longer-term deals has really been subdued. I think, as I see the economic uncertainty, which is hitting all of us due to COVID-19, it has also hit, in my opinion, the shipping market. In respect of that, most access in these market have been really reluctant to go long on the curve, even at discounted rates to the current elevated. So we've seen very few transactions that have been meaningful for longer-term profit. But we would, obviously, also engage in that type of dialog with the right partners. I think one of the thing that we also, of course, have to evaluate is that the risk on counterparty, we have not had any issues, but we do need to evaluate in the current environment, where are you really in the value chain, compared to operating ships. And so I think the liquidity is down, and also our awareness around counterparty risk longer on the curve is, of course, increased in this situation.

Jon Chappell -- Evercore -- Analyst

Okay. That makes sense. And then turning a couple of things together, when we think about capital allocation given the uncertainty that you just mentioned, given Kim's presentation about no debt maturities, well into the -- into this decade, you only have two more ships to take delivery in the three months [Phonetic] with scrubbers. But given, like I said before, the uncertainty, how do you think about your dividend policy? Do you still maintain the 25% to 50%, and then use the excess cash from the mountain [Phonetic] that you're probably building in the first half of this year to liquid [Phonetic] assets? Or you maybe scale that back or go to the lower end, because you're not sure how the market plays out over the next 12 months to 18 months?

Jacob Meldgaard -- Chief Executive Officer / Executive Director

It's a very relevant question, but you are three months ahead of the curve to be honest, Jon. So we will be evaluating that together with the Board at our meeting in August, once we have the full first half result. And currently, I think it's simply too early for us to speculate on how the world will look in August. So I think we reserve that, we will do what is right. Obviously, currently, our distribution policy is very clear, 25% to 50% of the net profit. Obviously, would we be in a world that it dramatically different than the one we anticipate, we need to evaluate that. But I think it's too early.

Jon Chappell -- Evercore -- Analyst

Well, then I'll ask it again in August, and then the meantime, let me just -- let me ask you, you're generating so much cash in the first half of the year. So dividend or even buybacks aside, do you look to rapidly delever the balance sheet in this type of environment? Or do you still think that asset values don't appropriately reflect the positive medium and long-term supply demand outlook laid out in the presentation?

Jacob Meldgaard -- Chief Executive Officer / Executive Director

I think the same goes for this. I think we need to get a little more clarity and transparency around both the market development and also where asset prices are really clearing to give you the exact answer. So, that's -- I think we are really flexible around this. Personally, I would like to see some of these events that has been unfolding, which relates, of course, to the buildup of floating storage, the dent in demand and the slide that we discussed around economic recovery, and therefore also recovery in demand. How is that actually going to play out? What are the positive factors and what of the negatives? I've just seen a number of report discussing, for instance, the gasoline consumption in the US rebounding from the bottoms -- from the lows in April already now before you have a real reopening of the economy. And everything else being equal out of all global consumption of clean petroleum products, 10% is gasoline in the US. So that is a key fundamental driver to also understand what will happen, let's say, over the coming months. You will have an unwinding, everything else being equal of the operational inefficiencies hopefully, with global economy come back. And you could say that that would lead to a subdued rate environment. However, there are also indicators of that some of the consumer behavior will actually be to the benefit of us around separating yourself from other people in the society more than what we've been used to, i.e., take your own call, if that is a viable option for you.

Jon Chappell -- Evercore -- Analyst

All right. Thank you for [Speech Overlap].

Jacob Meldgaard -- Chief Executive Officer / Executive Director

And I think we need to have more clarity, Jon, to be honest, before we make these calls. And I think we are a bit early to do that.

Jon Chappell -- Evercore -- Analyst

Yeah, completely [Speech Overlap].

Jacob Meldgaard -- Chief Executive Officer / Executive Director

But it will be very interesting to follow it. Yeah.

Jon Chappell -- Evercore -- Analyst

All right. Thank you.

Jacob Meldgaard -- Chief Executive Officer / Executive Director

Thanks, Jon.

Operator

Thank you. Your next question comes from the line of Anders Wennberg. Please ask your question.

Anders Wennberg -- Catella -- Analyst

Hello, Anders Wennberg, here from Catella. I just want a little bit about this level of fixings for Q2. Seems fairly low compared to the extremely high growth rates we've seen in the market. I realize there is a delay effect, and also the -- it could be an effect of demurrage of the ships may be signed up in March, have them uploaded yet, and are running on the old deals made up in March at lower levels. Can you elaborate a little bit on the delay versus the spot market and what you are realizing, so we better understand how this is being captured on this kind of time line. Thanks.

Jacob Meldgaard -- Chief Executive Officer / Executive Director

I think you're pointing exactly to it that there's two elements to -- We've -- I have to say we are really very excited about the rates that we have on average, because as you can imagine Q2 starts in March for us, but that's when you start booking the rates. So you will have March, the bookings that will be realized in April and May. So that's number one, exactly the way you described it. And then there is also the fact that given that about 20% of our fleet is currently in, what we would call, operational storage all of those vessels are engaged in earnings as you described, a lower than the spot market, because they are entering into the demurrage rate. So those two components together blended within bookings in the current rate environment gives exactly the sort of the blended rate that we have here. And I'm truly excited about that level to be honest. I can understand that if you apply a snapshot of a spot market, let's say, of x and you say that is what is attributable to the full fleet for the full quarter, then you will be -- then it will be a lower number that we realize. But that is a fact. These are the numbers, and I think we are doing well. When I compared to peers in our largest segment, I've not seen anybody realized higher numbers.

Anders Wennberg -- Catella -- Analyst

So to turn the argument around, it's -- spot market would come down in the third quarter and the fourth quarter. There's probably going to be a similar delay going the other direction. Some ships not being able to offload the cargo and running on old rates tied up in April, May, at very, very high level, way above [Indecipherable] Is that kind of a fair assumption that we can get catch-up from this in Q3 and Q4?

Jacob Meldgaard -- Chief Executive Officer / Executive Director

I think it is a bit early to say that. You could say the economic incentive for the people who would have had your vessel on at low rates to still utilize you sort of as a floating storage is obviously higher. And somebody who has contracted you at a high rate in a low freight environment because there they will have an uncertainty to substitute you for alternative floating storage capacity. So I'm not sure it works the way you described it. I can hope, but I'm not sure that that would be the dynamic because there's fundamentally a different incentive for the charterer to actually offload your vessel and take another vessel as an alternative in this scenario you're describing. Whereas, that is obviously not the case, if the alternative rate is higher.

Anders Wennberg -- Catella -- Analyst

Okay. The cargo owners have a bit of optionality basically.

Jacob Meldgaard -- Chief Executive Officer / Executive Director

You can say that, because they can make a ship-to-ship transfer of the cargo that you have right now sitting, let's say, that you contracted a rate x already in March. And that rate x is lower than the current market, you would try to hold on to that. If it's the other way around, that you contracted in, let's say, in May at a very high number and you are sitting waiting, you would have an incentive, if the market falls down to actually do a ship-to-ship transfer, rent another vessel from another ship owner at a lower rate, and take the saving.

Anders Wennberg -- Catella -- Analyst

Okay, thanks.

Operator

All right. Thank you. The next question comes from the line of Ulrik Bak from SEB. Please ask your question.

Ulrik Bak -- SEB -- Analyst

Yes, good afternoon. And also a couple of questions from my side. So you state that have fixed 69% of your Q2 vessel days at just above $29,000 per day. So based on the current spot rates, do you expect this average rate to increase or decrease as we approach the end of Q2? And also if you can talk about what the spot rates you're fixing to, right now, for each segment. That would be appreciated.

Jacob Meldgaard -- Chief Executive Officer / Executive Director

Yeah. So, if we take the bookings that we sort of entered into last week, so that would be the latest data points that I have. I can give you the exact sort of level that we have there, just one second. Let me take it out here on my computer. So we booked MRs on average around $40,000 last week.

Ulrik Bak -- SEB -- Analyst

Okay. And for LR2, LR1?

Jacob Meldgaard -- Chief Executive Officer / Executive Director

We didn't have any bookings.

Ulrik Bak -- SEB -- Analyst

Okay. Okay. But obviously higher...

Jacob Meldgaard -- Chief Executive Officer / Executive Director

I think what we are experiencing, if you also see is that you have a falling tendency in the freight rate environment currently, and very low liquidity. So I estimate that the current market on MRs sort of at a global level is probably sub $30,000 now.

Ulrik Bak -- SEB -- Analyst

Okay.

Jacob Meldgaard -- Chief Executive Officer / Executive Director

Let's say, high $20,000 would be the current market today.

Ulrik Bak -- SEB -- Analyst

Okay. And then a follow-up question. So there's a lot of talk about the oil market dynamics, and you alluded to it in your presentation as well will be supply and demand being out of sync. And while some sources indicate that the supply and demand balance will be reached in August, September, others indicated it will be reached as early as June. So what are your expectations and what you see as a floor for the MR rates once inventories begin to unwind, given the, yeah, the tanker dynamics?

Jacob Meldgaard -- Chief Executive Officer / Executive Director

I simply think it's too early to come up with the precise data points on that. If I consider how many events that have been taking place over the last two months and take that out on -- up until, let's say, the rest of this year, we will have a lot of volatility. And I expect more volatility due to oil price still potentially being, I would say, up against an environment that is unknown, unchartered for all traders where oil price on a day-to-day basis can move in and out of contango easily. I also expect that the closure and then reopening of economies will not be just a stable ride. We've seen these tendency especially in Southeast Asia. If you look at South Korea, you look at Singapore as examples of economies where you step up and you step out of the lockdown and into something more normal, but where you have to reset and go back into lockdown. So I think now expect that this will be just a smooth ride, with rates going in one particular direction is not the way I look upon this. I think it's too early for that type of environment, and we are not planning in accordance to that. We are planning much more to that it is a very unknown environment over the coming months, and we are ready for that.

Ulrik Bak -- SEB -- Analyst

Okay. Got it. And then also a question to this delay effect that was asked about previously. And so what are the average journeys for each segment. Just to get an idea. So how long is this time lag between for voyage. So for the LR2s, I suppose voyages are longer than the MR. So -- and also in the current environment, where you say, there are a lot of inefficiencies going on, ships sailing all the routes than usual. So perhaps have these voyages, have they increased significantly compared to what they usually are?

Jacob Meldgaard -- Chief Executive Officer / Executive Director

Yeah. So every voyage, every cargo that you have currently on average is longer, whether it is in the largest segment, where you have longer trade routes, let's say, on LR2s, where you have generally voyages 40 days 50 days, or whether it is in MRs, where generally you have shorter, let's say 25 days to 30 days. Then in both cases, the average duration of a voyage is longer to carry the same amount of cargo, because either of the destination being further away, as I described also, or in the case where you have operational inefficiencies and you arrive at [Indecipherable] port and you simply sit and wait for the terminal and the infrastructure to be ready. So yes, in general terms, on average, every cargo movement is longer and that is of course taken out capacity on top of the other inefficiencies.

Ulrik Bak -- SEB -- Analyst

Okay. Thank you. No further questions from my side. Thank you.

Operator

Thank you. The next question comes from the line of Anders Karlsen from Danske Bank. Please ask your question.

Anders Karlsen -- Danske Bank -- Analyst

Yes, good afternoon. I was wondering a little bit about the logistical issues that you're facing. Can you say anything about -- is that increasing now that you see that the line up in ports is actually growing? Or are you seeing signs that it's easing off? And a little bit follow-up to that. What kind of demurrage rates are you seeing in the various segments these days? I guess that's a -- that'll be a reflection of waiting time going forward?

Jacob Meldgaard -- Chief Executive Officer / Executive Director

Thank you, Anders. I think it is eased a little off as of late, but not something dramatic as you can also see from the figures that we have 14%. That is relatively high figure, as we mentioned four times what we would expect as a normal trend. Obviously, some vessels they opt out of this line up and others come in. But in aggregate, it's about 14%. I think this is around the level that we currently expect sort of the system to have. And that from there, you would expect that at a certain time when economies, they come back that it will ease off from this level. It's probably been the highest that we have observed was 15%. The demurrage rates are in line with the market. So over the last couple of weeks, you would have if you book a cargo, where the TCE equivalent, let's say, is $50,000 as an example, then you would have to demurrage rates that are very much in line with that. So they basically -- they are a bit lower, when the market is high. And when the market is lower, let's say, that the market was $15,000 then you would probably achieve a demurrage rate that was slightly higher. So that's the dynamic in that. But demurrage rate tends to follow closely with the development in the freight rates, and with freight rates are very high, demurrage rates are slightly lower. When freight rates are in the lower rates, demurrage rates are slightly higher.

Anders Karlsen -- Danske Bank -- Analyst

Okay. Thank you. Are you seeing any particular regions where delays are higher than others? And are there regions where there is absolutely full stop and others, where you have some kind of the movement in the line-ups and others, where there isn't any at all?

Jacob Meldgaard -- Chief Executive Officer / Executive Director

Yes, we do see that you have more of the capacity in the West, that is stuck into these logistical issues, rather than what has been the case in the East. But it is within a number of percentage points. But mostly West where the percentage is 3 percentage points, 4 percentage points higher than the average of the fleet that is in the East.

Anders Karlsen -- Danske Bank -- Analyst

Okay. Thank you. That's all from me.

Jacob Meldgaard -- Chief Executive Officer / Executive Director

[Speech Overlap] worldwide. Thank you.

Operator

All right. Thank you. And the next question comes from the line of George Berman from CL Securities [Phonetic]. Please ask your question.

George Berman -- CL Securities -- Analyst

Good morning, gentlemen. Thanks for taking -- good morning. Thanks for taking my call. Congratulations on a great quarter.

Jacob Meldgaard -- Chief Executive Officer / Executive Director

Thank you very much, George. Happy to have you on.

George Berman -- CL Securities -- Analyst

Yeah. I've got a quick question. You mentioned the switching of LR1s, LR2s from clean to dirty. And you mentioned the number of 50%. It may be as many as 40 or 50 actual tankers. How much of a aggravation is it for these, once they go to dirty to move back to clean product tankers?

Jacob Meldgaard -- Chief Executive Officer / Executive Director

Yeah. So, very good question, George. So as you point to -- when you move from clean to dirty, that is actually just the decision and the vessel will be ready to go into that cargo program with the charterer. When you want to move back then, generally the requirement from charters to have a vessel in the clean petroleum trade is that cargo background, the last three cargoes that you have traded should be clean. And obviously, by definition, if your large cargo is crude, you have not had last three clean cargoes. So you need to find a way to come back and have a cargo background, where the charterer that you're engaging with is willing to utilize your dirty cargo background, even though they are now going to be carrying a clean cargo. And the charterer normally takes the advantage of that to have a discount for that particular type of business. And here, how that will evolve for the ship owner will, of course, depend on the negotiation power at that day between the owner and the charterer. How much of a discount from the general market, are you willing to get to the charterer to induce them to use your vessels as number one, and what is the duration of that cargo transfer. So it really depends, I think, normally the rule of thumb in the marketplace has been $1 million sort of that you can apply of switching cost. But obviously in the higher rate environment, it could be a higher contribution margin that you have given up potentially. But it is around that range in a normalized market.

George Berman -- CL Securities -- Analyst

Yeah. So there is no actual cleaning of the dirty vessel involved? You just kind of diluted with three different voyages, and hope that everything is clean then?

Jacob Meldgaard -- Chief Executive Officer / Executive Director

No. You do clean the vessel also the crew, and the vessel will clean it's tanks, and the tanks will be inspected after carrying the crude. But the cargo background on paper, which last three cargoes cleaned and obviously you have cleaned the tanks, but you have not lost the cargo background on the last three cargoes.

George Berman -- CL Securities -- Analyst

I see. I see. So with major delays in various ports, various other things, I also noticed that your weights are far from what we are reading as being spot rates in the LR market, for example, of over $100,000, $150,000, that is just the fact that some of yours were on voyages engaged already, will finish over the next few days or weeks, and then hopefully get the advantage of the newer rates?

Jacob Meldgaard -- Chief Executive Officer / Executive Director

Yeah. You can see that we've also engaged in the charters that are slightly longer, let's say up to six months, where we have then engaged in freight rates for a longer period, which is not in the $100,000 but it is probably only $50,000. But then we have it on the fourth quarter.

George Berman -- CL Securities -- Analyst

All right. I noticed that you had repurchased some common shares in the open market. Is there any way for you to buy additional chunks of stock back maybe from one of your larger shareholders at the current depressed prices?

Kim Balle -- Chief Financial Officer

If you are asking, if there's a possibility as such, it is. But as Jacob, alluded to earlier or described earlier, we have this -- the dividend policy, where we decided on the dividend distribution every six months. So that is basically our policy. And that is how we operate.

George Berman -- CL Securities -- Analyst

So you don't generally buyback shares in the open market then?

Kim Balle -- Chief Financial Officer

No, not generally. We did -- after the Annual Report 2019, we did buy some back, bringing us up to distribution of 50% of our net earnings. So that was the idea. But we are not doing it on a day-to-day basis, if that's your question. We do it, when we evaluate our distribution policies.

George Berman -- CL Securities -- Analyst

Okay. Because basically what I'm alluding to is, if your stock price obviously does not reflect the realities of the current market or even of a future market one might argue here, it might behoove you or be more advantageous for shareholders, for you to buy back and retire x amount of shares, leaving more for the rest of us, and maybe if your largest shareholder has an appetite to sell shares, or whoever has appetite of selling shares the Company might buy those back rather than paying out the dividend. In turn, you obviously saved a dividend on the shares that you bought back.

Jacob Meldgaard -- Chief Executive Officer / Executive Director

Yeah. That's absolutely correct analysis. We are evaluating, as Kim mentioned on a semi-annual basis, our distribution policy, and at that time we will evaluate, whether it -- distribution should be, in terms of dividend or share buyback or a combination.

Kim Balle -- Chief Financial Officer

I think there was a question on -- written question also asking about, we have previously said that share buybacks is a second priority. And of course, there is I just want to, into -- of course there is also a free float issue. I know you're addressing something else. But of course, liquidity is very important also. So that is a consideration, also.

George Berman -- CL Securities -- Analyst

Okay. We'll be watching for the future. Thanks very much, and good luck to you all.

Jacob Meldgaard -- Chief Executive Officer / Executive Director

Thanks, George.

Kim Balle -- Chief Financial Officer

Thank you.

Operator

Thank you. There are no further question at this time. Please continue.

Jacob Meldgaard -- Chief Executive Officer / Executive Director

[Indecipherable]

Operator

All right. We do have one question. The operator is still getting the first and last name. Thank you.

Jacob Meldgaard -- Chief Executive Officer / Executive Director

Okay. Thank you.

Operator

Our next question comes from the line of from Cory Nelson [Phonetic] from Danske Bank. Please ask your question.

Cory Nelson -- Danske Bank -- Analyst

Yes. Hi, Jacob and Kim. Just a follow-up question on the question just before about the capital distribution. Of course you're generating a lot of cash at the moment as we can see, maybe up to 20% of market cap in the first two quarters this year. And two days ago, you said now that stock announcement saying that you're moving $900 million from -- to your free accounts, and directly saying that this could be used for buybacks or dividends. And maybe you can shed some more light on this announcement?

Kim Balle -- Chief Financial Officer

Yeah. There was a -- perhaps an over interpretation in the short run, at least. But it is more of technical reasons to be able to distribute dividends from our plc. So we are basically using the capital and allocated them to the free reserves to be able to distribute dividends and creating the flexibility we need. So that's the idea that there were historically not enough distributable dividends. That is the case now going forward.

Cory Nelson -- Danske Bank -- Analyst

Okay. I think maybe last question is, so in looking at your NAV in this quarter, I was a bit surprised to see ship values decreasing from last year. I would have thought that in the best market in a decade, so we see ship value is actually increasing. Is nothing going on in the second-hand market?

Jacob Meldgaard -- Chief Executive Officer / Executive Director

I think things are going on in the second-hand market. But I think, in this instance, vessel valuations at the end of last year were little ahead of the curve, anticipating a stronger rate environment. And in a way, sort of, you had the peak of vessel valuations, at least in this curve toward the valuations, end of Q4. And therefore you've seen this slight decrease in vessel valuations going into the year, even though we obviously have a very strong freight rate environment. There are transactions taking place also in the secondary market at around the prices, which is reflected in our NAV.

Cory Nelson -- Danske Bank -- Analyst

Okay. Thank you very much.

Operator

Thank you. There are no further question at this time. Please continue.

Jacob Meldgaard -- Chief Executive Officer / Executive Director

Okay. So thank you very much for all the input. There is one question on the webcast, which has to do with, whether our crews are increasingly stuck at sea, due to COVID-19, and whether we foresee that it will be necessary to divert or have out of service to relieve our crews?

And here, I think it's an important question about having the safety and the -- our crews at the forefront of our operation. And what we have experienced, so far, is obviously that there are delays in having the crew changes that we normally have. So a number of our seafarers have been out longer than what we had expected and that they had anticipated. We have been able to relieve some of them when we've been in the jurisdictions where that it has been possible. However, not to the same degree, as we would normally. So we are in a very close dialog with our crews on a daily basis around this. And at the same time, we are pushing in international forum via ICS, the agenda around that internationally, you have 1.2 million seafarers that more or less need to have crude change over time and that the current situation, where you have lockdowns, and that you are restricted from doing normal crew changes is not sustainable. So I think it's fair to say that we are pushing through their organizations, and toward politicians and the individual nations to open up, and so we have a gradual normality for the good of our seafarers. We have had the crude changes and we do not anticipate that it will be necessary to take our vessels out of service to relieve our crews.

Morten Agdrup -- Head of Corporate Finance & Strategy

Okay. With that I think we conclude the earnings call for the first quarter of 2021 -- 2020. Thank you very much for dialing in.

Operator

[Operator Closing Remarks]

Duration: 65 minutes

Call participants:

Morten Agdrup -- Head of Corporate Finance & Strategy

Jacob Meldgaard -- Chief Executive Officer / Executive Director

Kim Balle -- Chief Financial Officer

Jon Chappell -- Evercore -- Analyst

Anders Wennberg -- Catella -- Analyst

Ulrik Bak -- SEB -- Analyst

Anders Karlsen -- Danske Bank -- Analyst

George Berman -- CL Securities -- Analyst

Cory Nelson -- Danske Bank -- Analyst

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