In this installment of The NYFEX Report (a newsletter aiming to provide expert equity research analysis and commentary on the shipping industry), I will look into publicly trading companies that have material ownership interests in suezmax vessels.
Suezmax tankers are crude oil tankers that have the capacity to carry one million barrels of oil. Suezmaxes are the largest tanker size that can transit the Suez Canal in fully laden condition, hence the term suezmax. The largest size tankers commonly used in the shipping industry are VLCCs (Very Large Crude Carriers) that have the capacity to carry two million barrels of oil.
VLCCs are used primarily in long-haul trades originating in the Middle East or West Africa with destination to North America or Asia. They have been designed to primarily capitalize on economies of scale due to their larger carrying capacity. Suezmaxes may not offer the same economies of scale but are more versatile and can be employed in a variety of medium-range trading routes. Historically, suezmaxes had been employed in the Atlantic basin, primarily hauling oil from West Africa to refineries in North America. With the advent of hydraulic fracturing in the U.S. that led to record levels of domestic production, this particular trade has been diminished.
Instead of becoming obsolete, suezmaxes managed to re-invent themselves and capture an increasing share of oil demand from Asia. Their versatility has allowed them to develop new trading routes and even compete in long-haul trades. A recent Wall Street Journal article underscored such transformation when it made reference to suezmax tanker Maran Penelope carrying a cargo of Mexican crude to South Korea for the first time in two decades.
The tanker industry is highly fragmented and ownership of suezmax tankers is no exception to this rule. To illustrate how fragmented the industry is, consider the following fact: Based on recent data supplied by Drewry Shipping Consultants, the size of the suezmax fleet as of the end of February stood at 437 vessels. The two largest fleets in our survey each has 22 vessels or about 5% market share.
The recent collapse in oil prices may have been bad news for oil producers but not so much for ship-owners. Tanker shipping companies have been the beneficiaries of increased demand for oil transportation to take advantage of low prices. Arbitrageurs have even chartered VLCCs as temporary oil storage to profit from the contango effect in the oil futures curve. Underscoring the positive shift in suezmax earnings is the one-year charter of DHT Target at $30,000 per day.
Another positive factor working in ship-owners' favor is the moderate order book for new-building deliveries. Based on Drewry, the suezmax order book as of the end of February stood at 45 vessels or 10.3% of the existing fleet, with only three (!) vessels scheduled for delivery in the remainder of this year. This stands in sharp contrast to the dry cargo industry, which has been plagued by a chronic tonnage over-supply and still has a significant order book to digest.
Whether the increased demand for oil transportation is just temporary to replenish inventories at low prices or the beginning of a secular up-cycle remains to be seen. Until then, tanker ship-owners can put a long-overdue smile in their faces and enjoy the ride. This article will provide a survey of publicly traded companies that own large suezmax fleets and can offer investors exposure to that particular market.
There are currently four such companies: Euronav (EURN), Nordic American Tankers (NYSE:NAT), Frontline (FRO), and Tsakos Energy Navigation (TNP). I have also included in the survey privately held Principal Maritime (PMAR). Please note I have excluded from the survey Ship Finance International (SFL), because most of its suezmaxes are leased out on fixed rate terms to Frontline and therefore have no exposure to spot market.
Euronav had its IPO in New York last January. It raised $230 million offering a total of 18,699,000 shares at $12.25 per share. The company primarily owns two major types of crude oil tankers, VLCCs and suezmaxes. Even though it is not a pure suezmax play, it offers substantial exposure to the suezmax spot market owning 22 such vessels.
Nordic American Tankers is the oldest publicly traded company in the above sample. NAT had its IPO in 1997 as a finance vehicle for three suezmaxes on charter to British Petroleum. Since 2004, when current management took over, it has been transformed into a full dividend-payout suezmax play. I had the opportunity to analyze NAT's long-term dividend sustainability in my recent SA article. I would also like to recommend the recent valuation thesis on NAT written by fellow contributor J Mintzmyer.
Tsakos Energy Navigation had its IPO in New York in 2002. It is a horizontally integrated company owning all sizes of crude oil & petroleum product carriers. Still, its 12-vessel strong suezmax fleet is TNP's largest segment.
Frontline listed its shares on NASDAQ in 1998 following a reverse merger with London & Overseas Freighters. Like Euronav, it owns two types of crude oil carriers, VLCCs and suezmaxes. Frontline owns or leases a total of nine suezmax vessels. Frontline is currently in the midst of an ATM (at the market) equity offering. So far in 2015 it has raised $37.2 million and has the authorization to raise an additional $52 million.
Last but not least, Principal Maritime owns a fleet of 12 modern suezmax vessels, and like NAT, is a pure suezmax owning company. Principal Maritime is based in Connecticut, and is sponsored by Apollo Global Management. Principal Maritime has filed a registration statement with the SEC for a pending IPO on the New York Stock Exchange.
A full valuation of the above-mentioned companies would be out of scope of this article. I would like, however, to focus on one critical aspect, namely each fleet's age profile. I believe that a close examination of age profile is important for the several reasons.
First, modern tankers (generally those that are younger than 15 years) have lower operating costs, particularly when it comes to dry-dock and maintenance work. Second, modern tankers have lower fuel consumption, a significant component of voyage costs. Lower fuel consumption allows for a higher net daily revenue (known in the industry as TCE or Time Charter Equivalent rate) for a given voyage rate. Third, modern tankers are more likely to comply with various regulations without the need of costly retrofitting. They are also easier to pass the vetting inspections by Oil Majors and Classification Societies. Last but not least, since tankers have a limited economic life of approximately 25 years, modern tankers have a larger life span to generate income prior to their replacement.
Ultimately, the age profile of each fleet translates into higher or lower revenue (vis-à-vis the spot market), and higher or lower operating costs. The age profile of each fleet also dictates the timing and size of capital spending to renew such fleet.
Of the companies in the survey, Principal Maritime & Tsakos Energy Navigation have the most modern fleets. Nordic American Tankers and Frontline have the oldest fleets. In addition, NAT & FRO have the highest number of vessels that are older than 15 years.
To summarize, the recent drop in oil prices has increased demand for oil transportation. Coupled with a balanced supply-demand tonnage curve, it has led to firm spot markets for oil tankers including suezmaxes. Suezmaxes have adapted to new trading routes primarily in Asia and have proved to be extremely versatile vessels. The order book is currently moderate unlike the order book in the dry cargo industry. Four publicly traded companies, plus a pending IPO, offer several opportunities for investors seeking exposure to this type of vessel.
