Canadian exports to the US have had a considerable impact on the global supply chain and we project that this phenomenon will escalate through 2019. Canada is a net exporter of crude oil and as productivity from their oil sands increases, Canadian exports to the US will expand as well. Due to inter-modal transportation constraints, Canadian crudes are currently not reaching coastal ports to load tankers for more distant export markets in any significant volumes. The US is the main beneficiary of Canada’s growing export trade, absorbing approximately 97% of its international crude sales.
Investors looking for returns in the tanker markets can invest their capital in a variety of ways. Should an owner invest in a VLCC or an Aframax? How about an LR2 or an MR2? What is the historical rate of return for these tankers? Which tanker class is the riskiest? These questions face owners and investors in each investment decision. In order to compare the different tanker classes on a total-return basis, we developed a return-on-shipping index that calculates a monthly return by assessing the earnings for a given month (TCE less OPEX) and the gain/loss on the asset value of the specific tanker for that month.
Both Brent and WTI have continued to weaken since September as a result of the global oversupply of crude oil. On November 27, 2014, the Organization of Petroleum Exporting Countries (OPEC) members met to debate whether to cut production to steady prices or to maintain production output to marginalize US shale production. OPEC decided to maintain its production ceiling for 2015 forcing Brent and WTI to the lowest price levels since July 2009. Both Brent and WTI are now in contango and, if history repeats itself, traders will be looking for storage opportunities. By applying the lessons learned from the September contango, we evaluate the current contangos to determine if floating storage plays make sense under current market conditions.
In the first part of our two part series on asset forecasting, we discussed how regression analysis may be helpful in predicting tanker values. In this note, we present another valuation methodology commonly referred to as discounted cash flow (DCF). This methodology uses a discount rate (cost of capital) to determine the present value of future cash flows. The future cash flows are calculated on an unlevered basis using EBITDA due to its capital structure neutrality. Our methodology assumes a hold-to-maturity approach (sold for recycling) which increases our final cash flow by the historical, long-term average residual value. The results of this DCF analysis indicates an attractive implied valuation for second-hand Suezmax, Aframax and Panamax crude tankers as well as LR2 and LR1 product vessels. VLCCs appear to be fairly valued at today’s prices while MR2 tankers may be overvalued based on our analysis. The following discusses how we reach this conclusion.
After the collapse of the global financial system in 2008, crude oil forward curves moved into steep contango. Fortunes were made in storage asset plays in 2009-2010, which is likely the reason that so much attention is being devoted to the topic today; however, the contango is inherently different today than it was after The Great Recession.
Although the Ebola epidemic has remained predominantly in West Africa, fears about the virus have spread globally and it is becoming a cause for concern in the transportation industry. From air to sea, companies are beginning to take precautionary measures including suspending flights to various airports in West Africa and refusing to call at specific West African ports. In response to the outbreak, several countries like Brazil and Argentina, have issued guidelines for owners to abide by when calling at their ports, while some countries have suspended activity all together. Port authorities in West and Central Africa are also taking measures at ports in the affected countries. Click the PDF button above to read the full article
Regression analysis is a helpful tool which may be used to predict a continuous dependent variable (ex: asset values) from one or more independent variables. In our analysis, we use regression models as one component in our asset forecasting process in addition to an income based valuation and input from our sale and purchase desk. When conducting regression analysis, the objective is to identify a strong correlation between a dependent and independent variable using historical data. Using a scale of 0.0 – 1.0, a strong, positive correlation is typically defined as being above 0.7. If the analysis indicates a strong correlation, the corresponding regression equation may be used to help predict the value of the dependent variable; however, it may be prudent to amalgamate regression analysis with one or more forecasting processes to determine a final outcome.
Much has been said about the concerns of a tonnage surplus developing across several sectors in the shipping industry. The growing trading inventory of tankers, bulkers and containerships is a topic of spirited discussion in the market today. Thinking optimistically, 90% of world trade is carried on ships, and the existence of a modern, abundant merchant fleet will underpin growing world trade with an ample supply of vessels as the global economy gains momentum and sustains a trajectory of sustained growth.
Contrary to popular opinion, nothing has materially changed in the US crude export policy after the recent Commerce Department ruling granting Enterprise Product Partners and Pioneer Natural Resources licenses to export a refined condensate. However, the ruling may be the beginning of a process to do just that. The US shale oil revolution has been made possible by rising crude prices making it economical to extract unconventional oil using fracking technologies. The increased production; however, has been unable to reach domestic or in some cases, Canadian refiners without the steep discount required to mitigate the mismatch in refinery configurations (PADD III) and transportation costs (PADD I and PADD V). In this note, we take the opportunity to summarize the historical and current developments surrounding the US ban on crude exports and share some thoughts about a relaxation of the policy going forward.
Much has been said about the product tanker market recently, mainly about tonnage supply. More industry voices are speaking about their concern of over-ordering and too many ships. However, the number of vessels on order and planned for delivery is really only half the story. As long as there is enough demand, any number of ships on order may be acceptable. Concern about oversupply only occurs when there are too many ships relative to demand. In this note we look at product tanker demand to try to quantify the other half of the story.
Since the beginning of the global economic crisis in 2009, the average age of VLCC tankers sent to the breakers has been reduced to approximately 22 years of age. Despite the ongoing economic recovery, earnings for VLCCs have remained pressured, disconnecting from a historical correlation to scrap prices. Scrap prices closely follow the pace of economic activity measured by world steel production. In this note, we analyze the divergence in this historical correlation (scrap prices, VLCC earnings) by focusing on the impact of US Shale oil production.
There’s no denying that the wave owners rode into 2014 on was a welcome way to start the new year (at least from their perspective). Earnings in the large crude tanker segment reached levels that hadn’t been obtained in three years and in the smaller dirty segment, in five or more years. But, with all things in life, “what goes up must come down,” a famous quote by physicist and mathematician Sir Isaac Newton, that quickly became the mantra for the first quarter of 2014. To continue reading, download the full report.
In this note, we discuss observations, current and historical, for the clean tanker market, specifically MR tankers.
In this note, we discuss observations of an asset contango market for VLCC assets. A contango market implies that prices of an asset will be higher in the future than today.
On the outset, one might not directly see a similarity between Valentine’s Day and the tanker market; however, both can sometimes require serendipitous timing in order for desired outcomes to transpire. Furthermore, just like the dating world, the tanker market is full of volatility. Industry participants have been reminded of these market swings thus far in 2014 as the market witnessed its biggest spike in the last five years before losing steam at the beginning of this month. This volatility has been particularly prevalent in the VLCC and Suezmax tanker classes, but also visible in the Aframax and Panamax segments.
Following our recent series of Industry Notes discussing our forecasting methodologies, this note touches on the foundation on which 2014 starts. Looking at the global economy, although markets seemingly having a hard time digesting recent moves by the US Fed to scale back its bond purchasing program, a recovery appears to be on the horizon. One notable difference when compared to recent years has been that OECD economies, in particular the US, comprises a larger contribution to this development. Click the PDF icon to download the full report.
This note discusses an important element of McQuilling’s forecasting process, the development of tanker demand. At a global level, marine transportation demand is related to world trade, which is directly related to the state of the world economy. This means that demand for crude oil and petroleum products grows with an expanding global economy. Marine transportation demand for tankers is a derived demand. It arises from the energy consumption requirements of regional economies. Petroleum product marine transportation demand arises from matching consumption with refined product production in refining regions. Integrated with the supply logistics chain for petroleum, crude oil marine transportation demand for tankers arises from matching refinery raw materials requirements with crude oil production.
This note discusses an important element of McQuilling’s forecasting process, the development of tanker supply. Tonnage supply in the tanker shipping market today must be viewed in the context of the last 45 years of marine crude oil and petroleum transportation activity. There has been a massive shift of tonnage and cargo carrying capacity away from the larger tanker sectors and towards the smaller tanker sectors over the last generation of 25-30 years.
The marine transportation system described by the global carriage of crude oil and petroleum products is by nature imperfect and highly inefficient. If it were perfectly efficient, tankers would be able to load their next cargoes in the same location that they discharged their last cargoes and sail loaded at full capacity on all voyages. However, in reality, tankers spend a significant portion of their trading lives sailing empty or otherwise inefficiently deployed.
Forecasts are estimations of future activities based on models designed to mimic reality. As such they are abstractions that are highly dependent on data, analytical methodologies and specific assumptions. Whether complex mathematical formulations or simple projections based on experience and observation are used, forecasting the future in most industries is an imprecise and inaccurate activity. The spot market for tanker freight rates is no exception; however, our methodology has steadily yielded results within 10% of market actuals. This note discusses an important element of McQuilling’s forecasting process: the development of the final forecast.
As a supplement to this year's 2014-2018 Tanker Market Outlook, we've developed an "Outlook Scorecard," which provides a snapshot of previous market behavior as well as 2014 forecasts. The one-page format makes it a perfect desk reference that can be used throughout the year.
New tanker contracting in 2013 rose to 392, which was the highest level since 2007. This was led by a wide margin for MR2 vessel orders (223 orders), which continues to cement our belief that clean tanker rates are in store for a supply driven contraction. This reality will gradually emerge as previous years’ orders deliver from yards, especially in 2015 and 2016. Our concerns are also supported by our finding that the average age of the MR2 trading fleet, omitting IMO 1 and 2 classifications, is approximately 10 years old. As these new tankers are added to the trading fleet, rate pressure could be exerted across the spectrum.
Asset prices appear to have reached some equilibrium in 2013 after enduring a continuous downturn since 2009. Average annual composite tanker prices were down 0.42% year-on-year with mixed performances on a sector by sector basis. End of the year momentum could have set the stage for what may be the first positive year since 2008 registering a current 5% return based on January 2014 levels over 2013 averages.