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The
tanker sector was the last of the three major
shipping sectors -containers, dry bulk and
tanker - to be hit hard by the crisis. Because
of the strict vetting system and pollution laws,
it has the highest operating standards.
There
is specific legislation that compels removal of
older tonnage from the fleet. The companies are
generally older and more mature with stronger
balance sheets and reserves than listed
companies in the other sectors.
Most
tanker companies have been less aggressive in
expansion than their counterparts the other two
sectors. The order book is large, but smaller
comparatively with the other two sectors and
there is compulsory phase out of older single
hull tonnage and stricter age limitations for
trading. There is definitely an over capacity
problem that needs to be worked out and some
over extended companies.
Tanker companies have generally been pioneers in
shipping. They developed the concept of very
large vessels. They made great strides in hull
design with double bottoms, segregated ballast
and double hull. They developed innovative cargo
system designs to carry specialty cargoes like
LNG, LPG, chemicals and clean petroleum
products.
They were also innovative financially. Companies
like OSG were among the first to go to public
markets. In the latest upturn, they were among
the first to expand. Genmar did an early block
vessel acquisition from Metrostar. OSG bought
out Stelmar. These were timely acquisitions,
taking advantage of the upward market cycle.
Ironically, Top Ships - a laggard,
under-performer in the sector- was one the first
listed companies to restructure with its
lenders, selling off a large part of its fleet
in 2008 to de-leverage and improve liquidity. It
was a timely move.
The tanker sector was not as hard hit in the
fall of 2008 as its counterparts in other
sectors. Rates were down, but not
catastrophically low. For a time, the sector
benefited from extreme contango, where there was
an increased demand for storage and the winter
season. Perhaps, however, this storage demand
contributed in part to the current market
conditions where the fall in activity and
freight levels has really begun to bite hard.
The clean product market has been dismal lately
and the fallout is impacting negatively also the
chemical trades.
Since most tanker companies have stronger
balance sheets than their shipowner brethren in
the other two sectors, they in a better position
to weather the storm. The extreme case is
Nordic-American (NAT), which is entirely free of
senior debt and carries only market risk. Others
like OSG have over US$ 1 billion in liquidity.
So far there have not been dilutive new capital
raises to pay down down debt and cover losses as
has been endemic in the dry bulk sector.
With major oil companies as customers, their
counter party default risks are smaller that the
dry bulk sector, although there are some
disturbing rumors about charter payment delays
lately. They also are generally less exposed to
massive asset impairment from large block vessel
acquisition and M&A deals late in the cycle,
where many dry bulk owners have taken big
losses. Tanker values, however, are beginning to
fall at a faster pace than previously.
BLT is a notable exception buying out Chembulk
(former MTM) at a mark up price from AMA with
heavy debt finance very late in the cycle.
Eitzen has been struggling from overexpansion.
The Arlington merger with Genmar was a timely
sellout, but it is relatively small deal for
Georgiopoulos Group done on a conservative
basis. Frontline may have some problems with
their block acquisition of the TOPS Suezmax
fleet. The vessels are older and said to be
without center bulkheads, not the most desirable
tonnage to have in this market.
We can only hope that the current low oil prices
will lead to new demand soon and the needs for
crude oil prove more inelastic than other
sectors. Emerging economies like China and India
are more oil intensive than Western developed
countries. A growing number of oil producers
will be in need to export more for their growing
domestic needs. Seaborne transportation
distances for crude oil are likely to remain
large.
Some economists are predicting a pick up in
economic activity by the end of 2009, but others
feel than 2010 will be a lackluster year. In the
meantime, there is certainly going to be some
restructuring and consolidation in this sector.
Source: Gerson Lehman Group
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