Tuesday, October 19, 2010

Tough times for the tanker sector

Despite some rate improvement earlier this year and some speculative new IPO's like Crude and Scorpio as well as a large Genmar block acquisition deal; the markets have not met expectations, suffering from low rates and over capacity. Futures and inventories do not support any storage to soak up excess tonnage supply. Scrapping of single hull tonnage has been high. Even bullish analysts like Platou have revised downward forecasts. The future depends on renewed FE emerging market demand.

Recently Oppenheimer's Scott Burk and Cantor's Natasha Boyden have been downgrading major listed companies and slicing rate forecasts into 2011. Boyden reduced next year's VLCC rates to US$ 40,000 daily, some US$ 5,000 a day lower than she had previously expected. She chopped her fourth quarter Suezmax forecast from US$ 37,500 daily to US$ 22,000 daily, with projections for 2011 down from US$ 35,000 to US$ 30,000. For 2011, Burk dropped his rate assumptions to US$ 36,000 daily for VLCCs and just US$ 27,500 per day for Suezmaxes.

Whilst demand from the East has remained strong, it has not compensated for drop in demand from the major oil consumers in the west, which remains weak. The onslaught of tonnage supply has further pressured rates, with the pace of newbuilding deliveries accelerating and floating storage counts coming down. This year there has even been some resumption of ordering. The prospects of a significant rebound in 4Q look bleaker by the day.

Natasha Boyden recently bumped down Overseas Shipholding Group, General Maritime and Tsakos Energy Navigation from 'buy' to 'hold'. Share prices have taken a beating. Peter G's General Maritime, which was a star in the spring with its massive Metrostar deal raising over US$ 200 mio from the market with little or no discount to complete the deal, is currently trading at US$ 4.03 today down from a peak of US$ 8.80 at the time of the deal frenzy. Such is the fate of investors in current markets who trust their underwriters, albeit perhaps the longer-term will eventually bring expected appreciation.

Genmar recently sold two of its VLCC to Pareto. Although claiming other reasons, this may have been a financial move to get the units off their balance sheet. Their US$ 620 mio block deal was financed with a US$ 372 mio loan facility from DnB NOR bank.  At the time of the share offering, the company leverage was approximately 70%; so if market conditions continue soft in 2011 with declining vessel values, they could have loan coverage covenant problems.

Crude and Scorpio have held their share value more successfully than Genmar despite the weak spot freight rate environment. Their business model is based on less debt but Crude has substantial spot market exposure and limited operating history. Scorpio has a very strong chartering and management team providing more more inherent value than Crude, but the clean sector in which they focus has been a market laggard for some time.

Clean products have much better forward growth demand projections than the crude sector. The long term OECD trends are negative for crude oil and the only growth comes from Far East emerging markets, whereas new refinery projects in the ME will lead to structural market changes with more production at source and less export of crude oil. Unfortunately, however, the clean tanker sector order book has overshot realized demand growth and created currently a nasty over supply situation.

Scorpio's CEO Robert Bugbee, ex-OMI CFO, was one of the first major tanker executives to warn investors of coming market turbulence.

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