Management update: VLCC for it
Oslo, 5 February 2024
Tanker rates in most segments are currently at or near all-time high. The exception is the Very Large Crude Carrier ("VLCC") segment, which has not yet experienced the same increase in rates as other vessel segments. We believe it is only a matter of time before VLCC rates will advance as well, initiating what we believe to be a multiyear bull-cycle.
Supply: A VLCC orderbook at its lowest level since the 1980s combined with little or no available yard capacity should lead to very limited fleet growth. Globally, the VLCC fleet consists of more than 850 vessels. On average 39 new vessels have been delivered annually over the past 20 years. However, in 2024, only one more vessel is scheduled for delivery. For 2025 and 2026, the numbers are just five and eleven, respectively. With shipyards fully booked, and focusing on higher margin segments, new VLCC orders are unlikely to be delivered before 2027. The fact that more than 80 vessels will turn twenty years old or more in 2024, which is historically the average retirement age for VLCCs, is further strengthening the case for a more limited supply side going forward.
Demand: Demand for VLCCs is expected to grow as global oil demand is increasing. This is further magnified by increasing geographical distances between oil production and consumption growth. Leading forecasters anticipate global oil demand to rise by 1-2 million barrels per day annually for the next few years, primarily driven by Asia. The majority of oil production growth is expected in regions far away from Asian markets, notably the U.S., Brazil and Guyana. With more ships tied up on longer voyages, the crude tanker fleet will effectively be reduced.
In conclusion, a significant imbalance between demand for and supply of crude oil tankers looks increasingly likely. This has led analysts to predict that scrubber-fitted eco VLCCs could earn an average of around USD 85,000 per day over the next three years, more than 50% above the 20-year average. Share prices and asset values have reflected this supply/demand imbalance for some time, making it challenging for investors and shipowners to obtain reasonably priced exposure to the crude tanker market. Currently, a newbuild scrubber-fitted VLCC is priced at around USD 130 million, 26% above the historical average. To achieve a 10% return on invested capital, this newbuild would require day-rates of around USD 56,000 per day on average for the lifetime of the vessel (20 years). By comparison, Hunter Group invested in similar vessels in 2018 at an average cost of approx. USD 85 million per ship. However, the three-year time-charter ("TC") market has not experienced a similar price increase and is currently 11% below the 20-year historical spot average. We believe this combination represents a unique opportunity, with a risk/reward profile rarely seen in the shipping markets.
To capitalize on this opportunity, the Company has recently secured two three-year back-to-back TC contracts for scrubber-fitted eco VLCCs. These vessels are chartered in at an average fixed rate of USD 51,750 per day, compared to the 20-year average rate of USD 58,240, and analyst expectations of around USD 85,000 per day for the next three years.
The vessels are chartered out for the same period on a floating spot index-linked TC. This structure, based on the recognized VLCC benchmark TD3C, enables the Company to capture every daily VLCC spot market movement with maximum utilization.
We believe these transactions, and potential upcoming transactions like this, will provide significant cashflow and value creation for the Company and its shareholders over the coming years.
Forward looking statements: This announcement includes forward-looking statements. These forward-looking statements are subject to numerous risks, uncertainties and assumptions, changes in market conditions and other risks. Forward-looking statements reflect knowledge and information available at, and speak only as of, the date they are made. Except as required by law, the Company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date hereof or to reflect the occurrence of unanticipated events. Readers are cautioned not to place undue reliance on such forward-looking statements.