Medium-range product tankers are still being overvalued says analysis
Saturday, 19 May 2012 | 00:00
A recent climb of newbuilding orders for Medium-Range product tankers (MR2) are beginning to alter market fundamentals, rendering such investments less attractive said the latest report from Mcquilling Services, which raises doubt on the argument of those investing in the sector that the new and fuel efficient vessels will be justified in the long run.First of all, as Mcquilling noted, “there is no doubt the more recent MR tanker orders will further impact the supply overhang of this vessel class. The move by several key players including Kingfish Tankers, Frontline and Alterna Tanker Pacific JV during the first four months of 2012 is seemingly premature. It does, however, provide a platform for the discussion of acquiring fuel-efficient tankers during weak market fundamentals” it mentioned.
Moving further on, Mcquilling Services stated that “MR tanker contracting saw a sharp hike from just 2 deals for 4 vessels during the first four months of 2011 to a whopping 13 deals for 42 ships in the same period in 2012. The majority of these were MR2 vessels, ranging from US $30 to US $36.4 million. The largest contract to date was placed by Kingfish Tankers with OSX Construcao for a reported sum of US $732 million, backed by charters to Petrobras. The deal included 11 x 46,000 dwt vessels which are scheduled to deliver between 2014 and 2017. Trailing slightly behind is Frontline who ordered 6 x 50,000 dwt ships (with an option for an additional 4 ships) at STX Dalian in China for a reported US $35 million per vessel. These are slated for delivery in 2013-2014” the report said.
Furthermore, it added that “investigating hypothesis: New MR vessels with significant fuel savings justify recent acquisition moves – One of the key rationales behind these acquisitions was to capitalize on the relatively low asset prices while benefitting from a more efficient design. It was reported that the new MR2 vessels can each help owners and/or charterers save up to US $3,000 - US $3,500/day in fuel costs. In this exercise, we use an acquisition economics model that is based on our latest assessment of the 5-year time charter rate (High Case) for a MR2 vessel, as well as assuming an average spot rate (Low Case) since 1997 for non-time charter hire periods. We use a 7-year tenor for financing a purchase price of US $37 million (including initial outfitting) at 60% loan-to-value ratio and annual interest rate of 7%, together with a terminal scrap value of US $380/ldt after 20 years of trading” it mentioned.
Following is the US-based analyst’s exercise in full detail:
CHARTERER’S PERSPECTIVE: The results of the acquisition analysis from the charterer’s perspective yield a US $11.99/MT delivered cost assuming spot freight ratios and a US $14.29/MT delivered cost assuming a 5-year period charter on an average existing MR2 vessel. To produce these same delivered cost economics, after factoring in the fuel savings for the new generational MR2 vessels, a charter could tentatively pay between US $15,400/day and US $20,900/day OWNER’S PERSPECTIVE: Net present value of the project in a weak market High Case: If a charterer pays US $20,900/day of 5-year time charter hire to an owner throughout a 20-year lifecycle of a new MR2, the net present value of the acquisition to the owner is approximately US $3.8 million. Low Case: If a charterer pays US $15,400/day of spot time charter earnings equivalent to an owner throughout 20 useful years of a new MR2, the net present value of the acquisition to the owner is estimated to be negative US $13.4 million. That is to say, unless the owner is able to secure an average of US $20,900/day of time charter hire throughout the operating life of the new MR2, the acquisition model does not support purchase of the vessel for US $37 million based on the assumed financing available in the market.
OWNER’S PERSPECTIVE: Maximum acquisition price to maintain equity return of 10% for 20 useful years of New MR2 Low Case: Assuming the owner is likely to receive an average hire revenue of US $15,400/day throughout 20 operating years of the new MR2, the project yields zero net present value or breakeven only if acquisition price was reduced to US $22.8 million. Or alternatively, the owner must be able to pay at least 63% in equity for each MR2 purchased at US $37 million, since a cap of only US $13.7 million is to be financed to ensure 10% annual return to equity for a 20-year project.
As a conclusion, the above model “suggests that asset prices are still overvalued based on our market outlook, even with fuel-efficient designs considered. Unless the owner is willing to accept a return on equity lower than 10%, the asset will most likely not be an attractive option. An average reduction of 39% in current acquisition price to US$22.8 million is required to make at least 10% annual return on equity, or the owner must be prepared to put in 63% equity upfront for each purchase at current price level. This uptick in newbuilding contracting, together with the recent revival of several Atlantic Basin refineries could pressure regional product imbalances and tonnage availability could rise. We foresee that asset prices could correct further downwards correspondingly” concluded the report.
Nikos Roussanoglou, Hellenic Shipping News Worldwide