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Hafnia emerges as largest product/chemical tanker player post Chemical Tankers acquisition

On 11 November Hafnia Limited (Hafnia) announced that it will acquire Chemical Tankers Inc. (CTI) in an all-stock transaction. Hafnia will acquire all outstanding shares in CTI and in exchange CTI’s shareholders will receive shares in Hafnia representing 21.5% of the outstanding shares in the combined entity. The purchase consideration has been determined through an NAV for NAV framework, based on broker values and 1Q21 balance sheets adjusted for other assets and liabilities within each business. Following the transaction, and based on the current shareholding in CTI, Oaktree Capital Management – CTI’s major shareholder – will own 20.4% of the shares in the combined entity. The acquisition is expected to be completed by 1 February 2022.

After the acquisition, Hafnia’s owned fleet will increase to 117 product/chemical tankers (including CTI’s 32 product/chemical tankers), making Hafnia the owner of the second largest product/chemical tanker operating fleet in the world. Additionally, this acquisition paves the way for Hafnia to enter the stainless-steel chemical tanker market, which is relatively resilient to cyclicality when compared to the product tanker market.

Hafnia to become world’s largest product/chemical tanker fleet operator

The CTI fleet consists of high specification eco-design vessels and comprises eight Handy, 18 MR1 and six MR2 vessels. All vessels are IMO II coated tankers and have been constructed at leading shipyards in Korea and Japan. The Handy vessels are stainless-steel tankers capable of carrying corrosive chemicals. As of 11 November, Hafnia owned 85 vessels and is the second-largest owner of the product tanker fleet. Post the transaction, Hafnia will operate 133 vessels (including 12 time chartered and four sale and lease back vessels), making it the largest product/chemical tanker fleet operator. Since CTI’s fleet has a lower average age of 5.6 years compared to the average age of 8.1 years for the Hafnia fleet, the average age of Hafnia’s owned fleet will reduce to 7 years after the completion of the acquisition. The transaction will provide commercial and operational expertise in the chemical tanker market which will diversify Hafnia’s offerings in wet bulk cargo shipping. Additionally, a larger fleet size will offer cost advantages with economies of scale and improved trading optimisation (positioning of vessels).

Potential for increased earnings and cost savings

Hafnia indicated that it expects to add USD 1,000pd to time charter equivalent (TCE) earnings for the CTI vessels in addition to a saving of USD 100pd per vessel on general and administrative expenses which will translate into a synergy of nearly USD 16.5mn per year by 2023. As of 30 June 2021, Hafnia’s net debt stood at USD 1,157mn and will increase to USD 1,867mn following the completion of the transaction, taking the net leverage (net debt to equity) up from 102% to 131%. However, we believe the leverage should be manageable in a recovering product/chemical tanker market.

Hafnia was looking for inorganic growth opportunities since last year

Hafnia was exploring opportunities to consolidate its position in product and chemical tanker shipping through acquisitions over the past 18 months. Earlier in June 2020 Hafnia made an unsuccessful attempt to acquire Ardmore Shipping. However, the company’s bid was rejected by Ardmore stating that Hafnia’s proposal was highly opportunistic, and substantially undervalued Ardmore and its future prospects. Finally, Hafnia has made a significant move towards consolidating its position in the product/chemical tanker market. Post the transaction BW Group and Oaktree Capital Management will be the two largest shareholders in Hafnia holding 52.2% and 20.4%, respectively.

Provident move ahead of an improving product/chemical tanker market

Global vaccination drives against Covid are also facilitating the rebound in demand of petroleum products with the demand for gasoline and gasoil returning to pre-pandemic levels in several major economies. The demand for jet fuel is expected to improve with easing restriction on international travel over the next one year. According to the IEA, global oil demand is expected to surpass pre- pandemic levels by 2Q22 and would continue to grow, but the recent energy crisis could bring oil demand to pre-pandemic levels faster than expected. Product tanker freight rates are estimated to rebound in 2022 across vessel classes and will likely improve steadily thereafter.

The demand and trade of chemicals and vegoils have already returned to pre-pandemic levels and are expected to improve further on the back of resumption of commercial activities and economic growth. We expect chemical seaborne trade to grow at a CAGR of 2.4% between 2021 and 2026 whereas vegoil trade will expand at a CAGR of 2.7% over the same period implying a steady growth in demand of chemical tankers over the next five years. Global oil demand improved by 23.5% between April 2020 and September 2021 to reach 99.3mbpd primarily on account of easing mobility restriction and resumption of economic activities. Furthermore, global refinery intake increased by 17.2% during the same period.

TCE earnings of chemical tankers are more resilient compared to product tankers

Seaborne trade in chemicals is characterised by a wide range of individual cargoes and a relatively regionalised structure compared with crude and products, and therefore, the chemical tanker market is less volatile than the markets of crude and product tankers. Historical data suggests that TCE earnings of chemical takers in general and stainless-steel tankers in particular are more resilient than those of product tankers. Accordingly, the acquisition of CTI vessels capable of transporting chemicals is expected to provide a stable cash inflow for Hafnia after the completion of the proposed transaction.

Hafnia’s share price resilient compared to its peers

Prevailing vessel earnings and future market prospects have a direct impact on the stock price of product tanker shipping companies. A volatile market leads to greater variation in stock prices compared to a stable market. Drewry product tanker equity index declined by 43% between 31 December 2019 and 17 November 2021 whereas Hafnia’s stock declined by 33.6% over the same period. The standard deviation of Hafnia’s stock price stood at 9.9 whereas the index’s standard deviation was 10.8 indicating that Hafnia’s stock price is more resilient compared to its peers. A large fleet coupled with relatively greater exposure to the time charter market compared to peers provides resilience to Hafnia’s stock prices.

Our view

We view the acquisition positively as it strengthens Hafnia’s presence in the product/chemical tanker space. Post the transaction Hafnia will be the largest operator of product and chemical tankers in the world. Moreover, CTI vessels will complement Hafnia’s existing fleet and increase the resilience of Hafnia’s earnings. TCE earnings of chemical tankers in general and stainless-steel tankers in particular are less volatile compared to those of product tankers. The acquisition of CTI will enhance Hafnia’s trading flexibility, enabling it to carry both clean petroleum products and chemicals, and offer material cost synergies especially in selling and general administrative expenses. Accordingly, Hafnia is well-positioned to benefit from the ongoing recovery in product and chemical tanker markets with an expanded fleet.
Source: Drewry

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