Thursday, August 21, 2014

Reversal in Tanker Markets with Crude trades more robust than Clean

Although tanker rates are hardly booming after being the wall flower last year in the shipping markets, this sector has been consistently outperforming the dry bulk sector this year. This contrast is more due to weakness in dry bulk rates and somewhat better tanker rates than last year. The crude sector is showing signs of strength over the popular clean sector. At the heart of these developments are changes in energy sources and trade flows. 

Not surprisingly, the clean tanker sector has an order book that is nearly twice as big on a relative basis. Asset values were broadly higher in the tanker markets in the first half of 2014, but current values do not support the expected earnings environment The vast majority of tanker demand originates from the movement of crude and residual fuels.

Crude oil marine transportation demand for tankers arises from matching refinery raw materials needs with crude oil production. Petroleum product marine transportation demand arises from matching consumption with refined product production in refining regions. More than 50% of projected growth in demand is forecast from China and India. Energy use in the US and EU has been fairly stagnant for many years. Oil market fundamentals suggest a moderation of crude price increases in the near future in the absence of geopolitical influences. Natural gas is the fastest growing fossil fuel, supported by increasing supplies of shale gas, particularly in the US. 

US domestic oil production forecasted in 2015 to rise to the highest level since 1972. Most of this domestic production is light sweet crudes. A steadily increasing proportion of heavy crudes are being imported to the US driven by growing abundance of domestic light sweet grades. The US is likely to restart export of crude oil, but not for several years ahead. This will be light sweet crude. It will be highly dependent on the prevailing level of oil prices and US domestic politics. Meanwhile, the US Gulf has become a major clean product export hub providing robust volumes of gas oil and gasoline to Atlantic Basin. 

Tanker ton-mile demand is likely be modest over the next few years. Ton-mile demand has been falling in the MR sector. Currently LR freight rates are higher for trading dirty cargoes than clean. Further the MR sector is being cannibalized on longer haul routes by larger LR units. The clean sectors are burdened by heavy supply outlook against only moderate demand growth. The MR’s are under the most pressure with the poorest fundamentals. 

The dirty sector tonnage supply is moderate and demand positive. The VLCC sector faces a large number of deliveries in 2015 and 2016, which creates a neutral freight outlook until the 2018 when some increase is anticipated, assuming new contracting is controlled. Suezmax demand growth is somewhat more positive but dependent on continuing demand for this size in longer haul trades. The Aframax sector has been subject lately to high geopolitical volatility especially with the chaos in Libya but order book situation is more favorable. than the larger sizes, opening more opportunity for rate increases. 

Critical to any meaningful improvement in the tanker markets is a global economy gaining traction to approximately 4% growth needed to underpin the necessary expansion in oil demand and trade. This year, growth projections have been reduced due the poor performance of the European Union with its deflationary policies and China rebalancing with a slowing in infrastructure projects and sorting out losses in the domestic banking system. 

This remains a prerequisite for the freight market to make a return to a moderate level of profitability. Given the number of high profile publicly listed tanker company bankruptcies, the fate of the reorganized companies like Genmar and OSG will turn on when and how soon there will be recovery in the tanker freight markets. 

Earnings margins are likely to remain tight. Trading life of tanker fleets is likely to become shorter. Competitive advantage will come from modern fuel efficient tonnage, good commercial management, and moderate financial expense.

Monday, August 18, 2014

Suspense in the OSG Chapter 11 resolved with remarkable recoveries for both debt and equity holders.

OSG has scrapped the original reorganization plan with its lenders for an enhanced plan from its equity holders that involves a larger rights offering, increased from US$ 430 million to an incredible US$ 1,5 billion for institutional investors and a much larger refinancing of US$ 1,35 billion by a record breaking deal from Jefferies in the ‘term loan b’ market as opposed to the US$ 935 million financing from Goldman Sachs. This increased minimum recovery for equity holders from US$ 2 per share to US$ 3 per share whilst repaying debt holders at par. The outcome sets a very high industry bar in Chapter 11 reorganization. 

Both OSG debt and equity holders are large institutional investors and hedge funds. 

Leading the equity group is the Boston-based Brown Rudnick. Among others signing on behalf of the group: Alden Global Capital, BHR Capital, Blue Mountain Capital, Brownstone Investment Group, Caxton International Ltd, Cerberus Capital Management, Cyrus Capital Partners, Luxor Capital Group, Paulson & Co and Silver Point Capital. 

The rights offering is divided into Class A and Class B stock. Any holder than is deemed an accredited investor or qualified institutional buyer is eligible to purchase 11.5 Class A shares or warrants for $3 per security. Each holder that does not fall into one of those categories or choose not to support the plan is to receive one Class B share or warrant per existing share held. 

Jefferies underwrote the ‘term loan b’ facility in four separate facilities and syndicated it to more than 100 institutional investors. Terms on amortization and covenants are said to be liberal, but finance costs are considerably higher than bank finance with spreads of 425 and 475 basis points respectively for its domestic and international fleet. Minimum LIBOR is 1% per annum. Some recent conventional loans have been in the order of 250 basis points over Libor, but these are not companies coming out of Chapter 11 reorganization. Helping to drive the ‘B’ market is a revival of collateralized debt and loan obligations (CDO’s and CLO’s) popular before the 2008 global financial crisis. 

Demand is so strong currently in this market that OceanRig originally planning a ‘term B’ worth US$ 800 million plus a bond issue of US$ 500 million to meet liquidity needs, simply upsized the ‘term B’ facility to US 1,3 billion and scrapped the bond issue. 

Consequently Jefferies may be setting a new trend for shipping companies looking for secured debt that replaces traditional bank finance. 

Where OSG goes after coming out of Chapter 11 is still an intriguing issue. Whilst its US flag fleet is profitable, the international tanker fleet is still losing money. Indeed, OSG recorded a hefty loss of US$ 204.11 for the first three months to the end of June up from a loss of US$ 24,15 million in 2013. Total losses in bankruptcy have been US$ 959 million. The lengthy Chapter 11 proceedings have been very costly. 

Erik Nikolai Stavseth of Arctic Securities seems to share my original views that there remains the likelihood of a separation of OSG’s domestic and international assets at a later stage. Stavseth feels that a pure Jones Act focused company should attract significant investor interest and also put AMSC in play should OSG wish to acquire the 10 MRs in order to obtain control over the vessels. 

It is also possible that the international assets (47 vessels ranging from VLCC to Handysize) will also evolve as a candidate for either splitting up through sales or creating a separate listed entity offering cross-class exposure to both crude and products. These are decisions for the present investors and new management team ahead.