Tanker Market Expected to Rebound

Jim Brown
 
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The oil tanker business was a black hole for profits in 2009 as weak demand pushed rental rates below costs in some cases. Morten Amtzen, CEO of Overseas Shipholding Group, said he was celebrating that 2009 was over saying it was the most challenging in the last 30 years.

Most tanker companies lost money in 2009 but those same companies are more optimistic for 2010. They are expecting demand to increase and push rates back into the profitable range. Much has been said about the expected increase in the number of new tankers being completed after the 2007-2008 increase in oil prices caused a sharp increase in new build orders. Estimates from tanker companies show the tanker fleet grew by 6.6% in 2009.

However, fleet growth could actually be negative because of the phase out of the older single hull tankers and expected delay in the new builds. Another factor in the equation is the number of new routes opening up from Latin America and West Africa. Buyers like India and China are contracting for oil wherever they can get it at a cheap price. Venezuela is selling oil all over the world and Brazil is going to be exporting more oil as production from the Tupi area begins in late 2010. As demand increases and local inventories decline there will be an increase in traffic from all the major OPEC exporters.

After the 6.6% increase in fleet size in 2009, Norway based Frontline (FRO) sees the fleet of very large crude carriers moderating in 2010. The CFO of Frontline said some operators have deferred deliveries of new ships because of financing issues and this is complicating life for the shipyards with partially completed ships taking up space. Because of the demand for steel and the complications of trying to upgrade new ships to the latest technology the shipyards are already behind schedule. With the flurry of canceled and deferred orders the value of the ships being built has fallen. A new VLCC can cost $120-$150 million and that price has declined significantly from 2008. With an average order to deliver cycle of three years there can be a lot of changes in the economic environment from when the order was placed.

Some operators were forced to take new ships because they were too far into the construction process to defer. Those ships are now worth less than when they slid into the water because of the depressed shipping sector. Some operators were forced by failed financing to sell their new ships at a loss and that further depressed the market. Frontline said some shipyards may be stuck with newly built tankers because the operators that ordered them can't pay and those that can buy additional ships have already picked up more distressed bargains than they can use.

Frontline also said there could be some consolidation in the sector as the weaker operators recoil from the severe losses they took in 2009. Frontline's profits fell to only $3.9 million in Q4 compared to $51.6 million in 2008-Q4. Overseas Shipholding Group (OSG) lost $23.2 million in Q4 on a -41% drop in revenue.

Even though the large tanker owners like Frontline and Overseas Shipholding are positive about the prospects for 2010 I would be very cautious about investing in those stocks. Demand is recovering very slowly and it is still a shippers market not a tanker owner market. Until the excess slack is removed from the market by increased demand those operators in a cash crunch will probably quote any price just to have a load, any load, so they can pay the bills.

Jim Brown

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