In shipping, hope always springs eternal

Since late spring, freight rates especially in the dry bulk market have improved, and with them, the market mood for the industry has managed to find some much needed buoyancy, at least in the short term. There has been also the completion of the IPO for Ardmore Shipping (ticker: ASC) in the product tanker market, the first shipping IPO in the US markets since Scorpio Tankers (ticker: STNG) went public in March 2010, again in the product tanker market. So far, so good (as long as one ignores the existing product tanker orderbook and the additional orders that have been placed with the proceeds of this IPO.)

At least, in the product tanker market, freight rates have been respectable and have been above cash breakeven levels for most of the time in the last three years. What has been amazing though, it’s the rumor mill that Peter Georgiopoulos and General Maritime Corp. may be chasing a fleet of VLCC tankers, possibly the A.P. Møller Maersk VLCC fleet of about twenty supertankers. Maybe also the highflying Navios Group have their sights on these vessels or on another package of the same asset class, but there is at least an official denial by the company in this case. Møller has announced in the recent past that they are interested in divesting of assets and lines of business that do not fit their competitive advantage in the market place (read anything but containerships, terminals and their related businesses), so there might be some truth to the rumor that a quality, modern fleet of supertankers may be up for sale.  There has been some activity in the VLCC market recently, after a long permafrost season in this market. Recently, Sinochem purchased four VLCCs from the Clipper Group (all vessels were already on long-term charters to Sinochem), HOSCO divested of two very young VLCCs to European buyers and Mitsui OSK Lines have sold four VLCCs in the spring this year; with the exception of the MOSK Lines fleet that were slightly older than ten years of age, the rest of the tonnage sold so far has been younger than three years of age. Last time such a modern VLCC was sold was in January 2011 when Daewoo sold a (resale) VLCC with her contract in default at about $79 million to Sinokor; as a matter of comparison, HOSCO’s comparable tonnage (at least in age) were transacted at $54 million, a meaningful drop in pricing.

The Møller VLCC fleet is about four years old on average, and, individually priced, the vessels should fetch less than $50 million each (at least if recent transactions offer any type of guidance in an admittedly very illiquid market with known problems of ‘price discovery’); so this is a one-billion-dollar deal. Again, so far, so good; one billion dollars would get excited any self respecting investment banker, institutional investor, market consolidator, highflying maritime executive or any executive trying to find his way to the top (again).

As life would have it, today John Fredriksen’s flagship company Frontline (ticker: FRO) reported 2013 Q2 earnings.   This is a company that routinely posts the best performance in the VLCC market sector, and rightly considered the ‘bell cow’ of the segment. Their earnings report reflected just a very lousy and oversupplied market: while their estimated cash break even is $25,000 per diem, their Q2 earnings averaged just above $14,000 per diem. They also took an asset impairment charge of about $81 million. More importantly, the forward guidance has been bleak based on unfavorable market dynamics and an oversupplied market going forward. For starters, the USA is not anymore a great market for the VLCCs with the shale oil discoveries, and the Chinese prefer their own tonnage for the import needs. And, by the way, while the world VLCC fleet stands at 639 vessels (624 of them are double hull with more than one-third of the world fleet newer than four years old), there are still 57 vessels under contact to be built (just about 9% of the world fleet). Not a bright picture, any way one sees it.

Vessel prices have come down a long way; it was reported at the time that the Møller four VLCCs ordered in August 2008 at STX Shipbuilding had a contract price in excess of $140 million each, thus the $50 million estimated present price per vessel now looks like walking out of the Louvre with a boatload of Monet masterpieces in your backpack.  And possibly a van Gogh, too. But again, these vessels were making $14,000 per diem in 2013 Q2 with a top operator and their cash breakeven has been at (more than) $25,000 per diem. Just because asset prices have dropped precipitously, it doesn’t mean that a buyer / investor at these levels still cannot lose money. But the fact that there are rumors and even appetite to talk about such projects in the present market environment, it’s at least entertaining. Probably the next step would be an IPO…

© 2013 Basil M Karatzas & Karatzas Marine Advisors & Co.

No part of this blog can be reproduced by any means or under any circumstances, in whole or in part, without proper attribution or the consent of the copyright and trademark holders.

One thought on “In shipping, hope always springs eternal

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