Crude-tanker rates made headlines around the world in early October for briefly shooting into the stratosphere, reportedly topping $300,000 per day. What’s happening now is not garnering the same press, but it could be even more bullish for tanker companies: Rates have persistently stayed above $60,000 a day through most of the fourth quarter and are back above the $100,000-a-day mark.
The attention-grabbing rate pinnacle on Oct. 11 wasn’t entirely real. Rates reported that day were agreed “on subjects,” referring to an approval process before a final deal is struck. Sanity prevailed and those $300,000-a-day contracts evaporated; the highest rates actually achieved were closer to $200,000 a day.
Just a handful of very large crude carriers (VLCCs, tankers that carry 2 million barrels of crude oil each) were actually in position to take advantage of the early October run-up, which had been sparked by charterer fears in the wake of the Saudi oil-facility attacks, the security threat to tankers in the Middle East and U.S. sanctions targeting Chinese ship owner COSCO.
What has transpired since then is more real. Sustained strength at high levels well above breakeven is more a function of basic supply and demand than geopolitical fireworks and a momentary lapse of reason among charterers.
Public tanker owners will not capture all of this upside in their fourth-quarter reporting because a significant number of fourth-quarter bookings were inked when rates were much lower in the third quarter. Today’s rate strength will flow through to financial reports in earnest in the first quarter of 2020.
Tanker execs are ecstatic. During a conference call with analysts on Nov. 26, Nikolas Tsakos, CEO of Tsakos Energy Navigation or TEN (NYSE: TNP), described fourth-quarter rates as “an eruption that is going from strength to strength, day to day.”
“The second half of 2019 represents completely different fundamentals and earnings than the first half,” said Robert Hvide Macleod, CEO of Frontline (NYSE: FRO), during his company’s conference call with analysts on Nov. 27.
The “short-lived” rate spike in early October was driven by “panic,” he explained. In contrast, activity in recent weeks reveals “a market firming in a more sustainable way,” he said, adding that “fundamentals are highly supportive” of continued strength.
As industry veterans well know, when rates are persistently high, newbuilding orders follow. This time, however, orders aren’t coming. Owners and their capital providers are unsure of which new vessel designs will meet future carbon-emission regulations — which have yet to be promulgated. Fear of premature obsolescence has stymied newbuild contracting.
“We just love the fact that the orderbook in not increasing,” Macleod said. “Normally, when rates are turning like they are and when you have the outlook you have at the moment — which is the strongest we’ve seen in a long, long time — the orderbook would surge. We’re not seeing that. And for every week that remains the case, the length of the next cycle increases.
“I don’t think we’ve got much to worry about on the supply side for the next 18 months,” he said, pointing out that it takes around a year and a half between placing an order and a new ship hitting the water.
Assuming rates remain very strong next year, Frontline’s next strategic move will be to place a portion of the spot fleet on time charters.
Macleod said it makes no sense to do 12- to 18-month time charters because of the visibility on newbuilding supply. What will make sense is three-year time charters, which allow owners “to cover some of the period that’s not visible” — i.e., lock in rates beyond the 18-month ordering cycle. This allows owners to take at least some of their chips off the table in a strong market, adding future downside protection while keeping a portion of the fleet on spot to capture upside.
Time-charter activity has been muted in 2019 due to uncertainty over the fallout from the IMO 2020 rule. This regulation, which comes into effect Jan. 1, requires vessels without exhaust gas-scrubbers to switch from cheaper 3.5% sulfur heavy fuel oil (HFO) to more expensive 0.5% sulfur low sulfur fuel oil (LSFO) or 0.1% sulfur marine gas oil (MGO). Under a time charter, the charterer pays for the fuel, not the vessel interest. Uncertainty over the post-IMO 2020 spreads between HSFO and LSFO and MGO raises the risk that time charters will be mispriced — until next year, when spreads should become clearer.
“I am absolutely convinced that we’ll see more time-charter market activity next year. It’s a tool that will be much easier to use in 2020 than in 2019,” Macleod said.
Earnings roundup: Frontline and TEN
Frontline reported a net loss of $10 million for the third quarter of 2019 versus net income of $2.3 million in the same period last year. It posted an adjusted loss of $0.07 per share, considerably worse than the analyst consensus forecast for a profit of $0.03 per share.
The company reported an average daily rate for its VLCCs of $22,900 per day in the most recent quarter. Rates for its Suezmaxes (tankers that carry 1 million barrels of crude each) averaged $16,200 per day. It has 78% of available days for its VLCCs contracted for the fourth quarter at an average rate of $64,800 per day and 71% of available days for its Suezmaxes booked at $49,400 per day.
As with other shipping companies, the dividend is back. Frontline reinstated its dividend after a two-year hiatus. It is paying out $0.10 per share for the third quarter despite recording a loss and affirmed that the fourth-quarter dividend should be “well in excess” of that.
Another common theme among public shipping companies is post-quarterly-report investor disappointment. Investors appear to be projecting currently high “last done” spot rates onto quarterly averages and not taking into account the pronounced lag effect that pushes out the earnings impact of today’s spot rates until the following quarter.
Despite highly positive commentary in terms of future rates, Frontline’s shares came under pressure immediately following the quarterly report due to disappointment with reported rates.
TEN reported a net loss of $9.5 million for the third quarter of 2019 versus a net loss of $14.6 million in the same period last year. Net losses of $0.22 per share were worse than analyst consensus expectations for a loss of $0.13 per share.
Rates for the company’s tanker fleet averaged $18,837 per day in the third quarter on 2019, up 14% from $16,547 per day in the third quarter of 2018.
“It has been a long period — 10 years — without a lot of significant positive news,” said CEO Tsakos. “That seems to have turned and we are looking for a much more exciting 2020. We’re ready to take advantage of it.” More FreightWaves/American Shipper articles by Greg Miller