Inside Opinion: Euronav, Maersk Tankers, and the VLCC Long Game

So Euronav bought the Maersk Tankers VLCCs. Interesting stuff.

The markets at the moment for these huge tankers has resembled the bit before a horse race when the horses line up in the stalls. Some refuse to go, others need a little coaxing, whilst others are chomping at the bit to get going.

It is no secret that the big tankers have had a terrible last few years, literally taking a bath in red ink as supply has exceeded demand and daily spot rates have struggled to get anywhere near the substantial daily opex costs these grand ladies incur save for spikes such as we saw at the end of 2013. We've seen a lot of trading of VLs alongside their slightly smaller Suexmax fleetmates as some owners have not been able to rid themselves of them fast enough, whilst others seemingly cannot get enough of them.

It is hard to fathom isn't it? Economic realities make them uneconomic for some owners, yet hugely desirable for others.

Time Charters

One idea may be that the oil majors and major oil traders with time charter requirements are taking their business to the market and owners are taking advantage of the uncertainty in the S&P markets to secure tonnage quickly and cleanly to tie to TC agreements with these partners.

Conversely when their TC deals end some owners faced with the possibility of placing their VLs on the spot market decide to get rid because they just cannot project what the spot market is going to do. 2013 ended very well for VLCCs but they have been up and down like the Beechers Brook.

Many may still be paying ship mortgages on their big ladies and in these cases where spot rates are not guaranteed to cover opex, layups are not very appealing either.

So could a reshuffle of TC contracts be responsible for the shifting of the VLs? In part certainly (in my view) but it cannot possibly be the defining reason.

So what else is there?

Well, evidently there is a split in the room, as alluded to earlier. Some owners are bullish on the markets moving forward, and others are not. Things are ok right now but what will happen in the future? Even in the next couple of months?

There appears to be some money being placed on this horse race. You'll forgive the clumsy analogy, but the fact of it is that it is a punt.

The Horses

I'll tell you a story. I used to know a guy at college. He was a mate of mine, and we used to go drinking a lot. Whereas I was into football and girls and drinking and all that stuff, he had a very big interest in "the horses". He used to buy The Racing Post every day, and would often slip into lectures late having been "down the bookies".

He was obsessed with it. He used try to explain the principles to me, usually over a few beers. The form. The going. The ground. The backing. The jockey. The stable. The early odds, and all that stuff. For those of you who don't know, it is a game of pure chance masquerading as scientific process. I told him this, and he scoffed at me.

Yet I placed precisely four bets while at college, two of them on the Grand National and two on the Cheltenham Gold Cup both years and in all four races my horses came in. In all four races my friend's horses never got close.

Does that make me more knowledgeable about horse racing than my mate? Of course not. I pick my horses because I like the name, and sometimes because they run in a colour I like. I didn't pick the right horses because I'm some sort of betting genius, I was just lucky.

Betting

So to re-apply the metaphor to the VLCC issue, it seems clear to me that for all the analysis and number crunching you can do, ultimately you are betting.

You look at the oil price, knowing that typically higher oil prices can push dirty tanker rates higher, thus boosting the earning forecast for your VLs. You see how much it has fluctuated up and down in recent years and you look at wider geopolitical issues that may or may not become a factor. You look at Iran.

You look at OPEC production levels. You even look at R&D spend for the oil majors for 2013. You then go macro and look at scrapping numbers, and the age of the vessels going up the beach right now. You look at current rates versus historical rates, and the Worldscale. You look at the world orderbook for VLCCs and you formate an idea of what the world fleet is going to do in 2014.

It will likely increase in net terms (again, my opinion) but will project oil price rises (if any) offset the increase and allow earnings to rise? And if they rise will they move above your nominal daily opex costs? Can you embark on another opex reduction programme to push these two numbers closer together?

You look at all those things is the same way my old mate Tim used to look at the course, the going, the form and the backing and all that stuff. And you bet. You bet big, because this is a big stakes race. This is big big big money.

The Long Race

My personal view on all this is that – if you'll allow me to flog the horse racing metaphor to death – is that you have to base your betting on the length of the race as well. If you are betting for a short term, then the VLCC segment is no place for you. If you are betting on a long race, stretching out to the long-term and those magic words "strategic investment", then your chances of coming out on top are much enhanced.

I believe the VLCCs changing hands at the moment are being acquired in the accepted knowledge that they will continue to bleed for the next couple of years at least, but that high-spec, well-managed and well-looked after modern tonnage will always win out eventually, and when they do the returns will be as large as the huge tankers themselves.

Like the Grand National - It's a long run.