Ship owners invest heavily in VLCC sector at the start of 2014
“However, this week there was a high profile deal in the large crude tanker segment, the acquisition of the Maersk’s VLCC fleet by Euronav. The crude tanker sectors had been attracting less attention from investors in 2013, but this deal highlights the willingness of private equity firms to provide large crude tanker owners access to financing. The sale was agreed to for a price of $980 million US dollars and includes the transfer of 15 VLCCs with an average age of four years. Delivery of 14 of the tankers to Euronav will occur from January to June, with one scheduled for later delivery. This purchase will more than double Euronav’s VLCC market share, as the company has a current VLCC trading fleet of 11 vessels”, Poten noted.
It added that “the purchase of secondhand tonnage by Euronav is in line with the company’s core belief that new build eco tonnage is not necessary in the VLCC sector. Euronav has not been a strong believer in eco ships. They have repeatedly stated in quarterly reports that all existing modern VLCCs could be easily retrofitted for eco improvements. For example, it currently costs approximately $150,000 to retro fit a VLCC main engine for super-slow steaming, which results in the largest fuel savings for an eco-class ship”.
According to a recent report from Mcquilling Services, VLCCs saw mixed results across newbuilds and second-hand tonnage year-on-year. Overall, the segment trended slightly downwards by 0.2% year-on-year using average annual prices. The end of the year saw increased spot market activity and renewed optimism, which has supported asset prices heading into 2014. “Current asset prices represent a 6% increase over 2013 average levels with newbuilds and 10-year secondhand tonnage increasing 6% and 16% respectively. In contrast, asset prices for five-year secondhand tonnage are down 4% from 2013 levels. Our proprietary seasonal ratios show the experiential adjustments in rates over the course of the year. Using a basis of one, we record the observed premium or discount on a monthly basis by using a multiplier factor. For example, a 30% increase in December rates from the annual average rates will indicate a 1.3 seasonal factor for December. As indicated in our previous industry note, a seasonal uptick and securing of tonnage ahead of the holidays traditionally helps to push up both spot rates and subsequently asset values in the latter half of the year”, Mcquilling noted.
VLCC fleet will see slow to flat growth through 2016
According to Poten’s analysis, “overall the VLCC fleet is forecast to remain fairly stable in size through 2016, given the relatively small orderbook compared to the number of ships over 15 years of age. The Chinese government has recently offered a subsidy to scrap existing tonnage, provided a new order is placed in a Chinese shipyard. This could result in temporary tight VLCC supply as ships may be scrapped before their replacements are delivered. These two factors may contribute to rate volatility in the VLCC segment.
“A significant wildcard in the VLCC sector, as well as the dirty tanker market overall, is the recent decision by OSG to effectively exit the commercial management of its vessels. There is no indication of what will ultimately become of the tonnage, but for the time being the shipss will be operated as part of a third party vessel pool. OSG currently owns ten VLCCs, one Suezmax, and nine Aframaxes. It’s difficult to say if these tankers will be available for sale while the company is still in bankruptcy. If they are put up for sale it would appear that there would be interest from ship owners, most likely with private equity backing. As Genmar’s exit from bankruptcy has shown, OSG could be well positioned for private equity backing itself”, Poten noted.
It concluded its analysis by noting that the “acquisition of the Maersk fleet by Euronav is a considerably bold move by the publically traded company. VLCC spot rates have staged a comeback in mid-January following softer rates immediately after the holiday season. With a larger market share, Euronav will be better positioned to take advantage of rate volatility that seems to be returning to the markets. The flat vessel supply chart will leave the VLCC market sensitive to rising demand. One can be sure that market watchers will be eagerly tracking the quarterly results of Euronav to see the results of the high profile acquisition”, Poten concluded.