On 16 June 2015, Euronav announced the acquisition through resale of newbuilding contracts of four VLCCs – currently completing construction at Hyundai Heavy Industries for an aggregate purchase price of USD 384 million. The vessels are due for prompt delivery starting September 2015. In addition and against the payment of an option fee of an aggregate amount of USD 8 million, the seller has also agreed to grant Euronav an option to acquire up to a further 4 VLCCs sisters of the ones acquired at a price of USD 98 million each.
This transaction is consistent with three core company principles:
Firstly, these vessels are ex-yard resales, which do not add supply to the market and therefore meet our stated aim to only add existing vessels to our fleet and not to order new ships.
Secondly, the time lag between the purchase and the deliveries to the company will be very similar to buying a fleet on the water, therefore allowing the capital deployed to be rewarded by the freight market imminently.
Last, Euronav actively looks to regularly rejuvenate its fleet and enhance its operational strength. This will be achieved as these four vessels are of the latest design and similar or better to the ones acquired in July 2014.
THE TANKER MARKET
The key feature of the tanker market during Q2 was its stability. Freight rates throughout the three months to the end of June were consistently strong in both the VLCC and Suezmax categories. Tanker owners exhibited resolute discipline during the period which continues to be encouraging since it has been applied throughout 2015 so far.
Global oil demand projections were consistently upgraded during Q2 with the IEA, OPEC and EIA all raising forecasts to arrive at a consensus of 1.34m bpd growth in both 2015 and 2016 – up from 1.15m bpd at the end of Q1. The lower oil price – as we intimated at the end of Q1 – has stimulated and continues to boost demand.
The orderbook of tanker vessels has increased during Q2 2015 with further orders at the shipyards but this order flow has remained modest by historical standards – especially given the positive freight rate background. The impact on the global fleet in both VLCC and Suezmax will not be seen until the second half of 2016. Euronav remains of the view that the current schedule of vessel supply is manageable given the robust fundamentals of the tanker sector but as it has been the case in the past, additional orders may result in overcapacity and lead to destruction of the market.
The supply of crude oil is continuing to be driven higher with record output witnessed during Q2 in a number of key territories most notably Saudi Arabia, Iraq and Russia.
An important and growing theme is port congestion. This is taking capacity out of the market and is being driven by excess supply of crude unable to find storage on shore. The congestion seen currently is being treated as normal commercial delay but this de facto storage may soon become recognized storage under normal storage terms.
This is only likely to be resolved in three ways: (1) reduced production – which looks as unlikely given OPEC production plans and the potential return of Iranian output (2) increased demand utilizing this supply – this would be positive for tankers as it would increase the demand for shipping or (3) potentially increase the contango spread on oil prices – this in turn would increase the demand for additional storage and part of that storage is likely to be done offshore onboard tanker vessels.
The current quarter has started positively with freight rates rising in what is usually a seasonally weak period. Industry fundamentals remain healthy with limited vessel supply, growing demand stimulated by a lower oil price, increased supply of oil from record production and the continuing theme of ton mile expansion of Atlantic Basin Oil heading East.