Crude Tankers See Smooth Sailing Ahead As Market Strengthens

|
Includes: CPLP, DHT
by: James Catlin
Summary

Companies are offering an optimistic outlook following a stronger Q4.

Several factors appear to be working together to bring tanker rates higher.

This strength should continue well into 2015.

The final quarter of 2014 saw tankers regain favor with the market. Several companies, like DHT Holdings (NYSE:DHT) and Capital Product Partners L.P. (NASDAQ:CPLP), indicated in their most recent quarterly reports that there has been significant strengthening in the tanker market.

DHT Holdings saw Q4 revenue jump to $72.9 million compared to just $30.9 million one year ago in Q4 of 2013. Management cited "an increase in the fleet as well as a stronger tanker market."

Capital Products Partners also noted that "product tanker spot rates registered strong gains in the fourth quarter of 2014, rising to the highest level since the third quarter of 2008."

Several factors are at work to buoy this market.

Even though there was an oversupply of vessels in this segment, 2014 saw a wave of consolidation in the tanker market. With the same number of ships being controlled by fewer entities prices adjusted as competition waned.

Adding to that was the fall in oil prices in the last half of 2014 reducing overall bunker costs and increasing owners' profits.

The fall in oil prices has been a contributor in other ways. The lower cost of oil could bring about increasing trade in the sector as entities take advantage of depressed prices. It could also lead to tankers increasingly being used as storage much like in 2008-09 when the global economy collapsed and oil was trading in the unsustainable $30 range.

On a side note, dry bulk and container shippers are also hopeful that a reduction in oil prices could leave consumers with more money in their pockets and thus consuming more.

The strengthening market has resulted in asset appreciation. As rates rise older vessels, typically around the 5-10 year age, face lower acquisition costs but similar operating costs resulting in increased cash flow and thus a greater rate of return.

As a result of the improvement in the tanker markets and the increase in vessel values, DHT Holdings adjusted the carrying value of its fleet through a reversal of previously recognized impairment charges totaling $31.9 million.

Higher rates and appreciating vessel values have led to low levels of scrapping in the sector. In fact, tankers sold for scrap reached a 5 year low in 2014. Owners may be trying to squeeze out the last bit of profit from their fleet and many that are not fit for sail and being used as offshore crude storage.

Many might recall that back in 2008-09 tankers were used as offshore storage for crude when oil prices collapsed. Storage in tankers typically runs about double the price of onshore storage.

Now many crude carriers that were destined for scrapping due to age, operational costs, high maintenance schedules, or environmental concerns, have found a temporary second home as floating crude storage. This allows many operators to still secure cash flow from vessels while dodging many of the previous concerns.

But it's not all about crude. The specialized tanker markets have seen an upswing as well lately. Delays in deliveries combined with increased demand for palm, vegetable, and soya bean oil have contributed to the strengthening market. Of course, lower bunker rates also factor into the equation.

Finally, while imports of crude have decreased into the USA, and 2014 crude trade was actually 3% below 2005 levels, total tonne-miles increased. In fact, in 2014 total tonne miles were up approximately 6% compared to 2005 numbers. This condition is due to the long haul of crude to India and China. In 2014 crude imports into China averaged 50% higher than the global average obviously boosting tonne-miles traveled.

Conclusion

While dry bulk shipping has struggled with the lowest rates in almost three decades, the tanker market seems to be making significant gains. Owners are capitalizing on improving rates and increasing asset values. Tonne-miles traveled is increasing. The specialty tanker market is seeing increased demand. Finally, owners might be able to profit on offshore crude storage by using tankers once destined for the scrap heap.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.