The Tanker Industry: Q4 2015 Comparison Of Expenses

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Includes: ASC, DHT, EURN, FRO, NAT, NNA, TNK, TNP
by: MTF Investing

Summary

Expenses in the Tanker Shipping business are directly tied to the charter strategy of the owners.

Bunker prices have fallen dramatically over the past year, reducing one of the major expenses for companies that operate Voyage Charters.

Comparing expenses on a per Ship and per DWT basis helps to identify strategies compare companies.

This is the second in a series of articles looking at the companies that operate in the Tanker industry and their recent quarterly earnings. The first article looked strictly at Revenue while this article will focus on Expenses. A third will follow comparing balance sheets.

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When earnings are released, the numbers can seem arbitrary unless there is a way to compare them to other companies. I have found that breaking the numbers down on a per ship and per DWT basis helps to put those numbers in perspective, but they must be taken with a grain of salt, understanding the strategy the company is using in chartering their ships and what types of ships they are using.

The companies looked at are Ardmore Shipping (NYSE:ASC), DHT Holdings (NYSE:DHT), EuroNav (NYSE:EURN), Frontline Ltd (NYSE:FRO), Navios Maritime Acquisition (NYSE:NNA), Nordic American Tankers (NYSE:NAT), Teekay Tankers (NYSE:TNK), and Taskos Energy Navigation (NYSE:TNP).

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(Source: data compiled from Nasdaq.com and company websites on 28 March 2016)

Operating Expenses

The tightening of the belt is a good measure of efficiencies companies have been able to achieve. While there can be multiple expenses that are registered each quarter the main expenses investors can expect to see are:

Voyage expenses

Vessel Operating expenses

Depreciation

General and Administrative expenses

Dry docking

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In order to focus on the operating expenses that are directly tied to the actual daily operations of the fleet, this article will focus on Voyage expenses, Vessel Operating Expenses, and General, Administrative, and Technical Management Fees. While depreciation is recorded as an expense, it is typically used to reduce the tax burden of the company and no cash is expended. Dry docking is required in the industry, and each ship will go through it, but the timing will change from quarter to quarter.

The data used to compile the charts comes from the most recent Quarter, and only looks at that quarter. While some of the expenses will fluctuate from quarter to quarter, all shippers will be subject to bunker fuel rates, weather delays, and repairs needed that will affect expenses. A look at yearly expenses is also helpful, as is multi-year comparisons.

The fees the companies will log are also tied to how the fleet is managed. The two means most companies use are either Voyage Charter or Time Charter.

Voyage Charter: In a Voyage Charter a company hires a shipper to move its product from one location to another. The charterer pays the shipper on a per-ton basis and the shipper pays the port costs, fuel costs and crew costs. Most of the voyages are typically one way with a shipper moving a load of oil from the Middle East (or another Oil producing country) but have to return empty on their dime.

Time Charter: In a time charter the ship is chartered for a specific period of time and the charterer will decide the ports and routes. The charterer will pay for all fuel, port charges, commissions, and a daily hire to the owner of the vessel.

Voyage expenses: Voyage expenses are all expenses unique to a particular voyage, including bunker fuel expenses, port fees, cargo loading and unloading expenses, canal tolls, agency fees and commissions. When a company operates their ships in the voyage charter spot market, the company is responsible for all voyage expenses as opposed to spot market-related time charters in which a company is not responsible for voyage expenses.

Vessel operating expenses: Vessel operating expenses includes crew costs, provisions, deck and engine stores, lubricating oil, insurance, maintenance and repairs and management fees. Under both types of charters the company will be responsible for these costs.

General and Administrative Expenses: General and administrative expenses include onshore vessel administration related expenses such as legal and professional expenses and administrative and other expenses including payroll, office rent and expenses, directors' fees, and directors and officers insurance. General and administrative expenses also include non-cash compensation expenses.

Comparison

When comparing expenses, investors need to keep in mind the chartering strategy of the company. Low expenses may seem good, but may in fact indicate the company is operating under a Time Charter. Depending Time Charter rates and Voyage rates, it may be more profitable for an owner to accept the higher expenses associated with a Voyage Charter.

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One of the first things to pop out is the higher Voyage Expenses from FRO, NAT, and DHT. These companies have obviously taken the gamble to accept the Voyage Rate strategy over the Time Charter strategy.

Operating Expenses came in high on a per Ship basis for DHT, FRO, NAT, and TNK, all of which have fleets with the larger VLCCs. On a per DWT basis DHT, EURN, and FRO all came in on the low end due to the larger ships.

While General and Admin Expenses vary on a per Ship basis, when compared on a per DWT basis, they all orbit around $1 per DWT except for NNA and ASC which came in over $3 per DWT.

The fall in oil has helped drive down the price of bunker fuels for the companies. And while it has bounced up slightly, it is still at historic lows and helped the companies save on one of the largest expenses of the companies.

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(source: shipandbunker.com)

Conclusion

The strategy of each company directly influences what expenses the company will bear. While FRO, NAT, and DHT all came in on the high end of expenses on a per Ship basis, they also have larger ships to operate. On a per DWT basis, ASC and its product tankers came in on the high side, but has those costs offset by the revenue it generates. NAT, TNP and TNK all came in above average on a per DWT basis. Investors should compare Expenses and Revenues to have a better picture of operations, but the final piece they should look at is the Balance Sheet.

Disclosure: I am/we are long FRO.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.