Seasonal weakness overstates concerns around VLCC order book: Gener8 Maritime
Newbuilding deliveries, along with vessels returning from dry dock, have exacerbated a seasonal downturn, but after the second-quarter 2017 peak in newbuildings, most of the order book will be absorbed, Gener8 Maritime CEO Peter Georgiopoulos said.
Elevated crude oil inventories and compressed refinery margins negatively impacted demand, Georgiopoulos said during the company's Q3 2016 earnings call.
Together with supply disruptions in Nigeria, Libya and Venezuela that had a trickle down effect in both the VLCC and the Suezmax markets, average VLCC earnings in the third quarter stood at their lowest level in the past two years, but are set to improve going into the fourth quarter, according to the Gener8 Maritime Q3 earnings presentation.
"With supply disruptions in the West, the Q3 rates came in a little bit lower than what people were expecting earlier in the year," CFO Leo Vrondissis said.
Gener8 took delivery of four ECO VLCC newbuildings during the third quarter, the Gener8 Chiotis, the Gener8 Macedon, the Gener8 Perseus, and the Gener8 Oceanus.
During the same period, the company sold the 2001-built VLCC tankers Genmar Vision and Genmar Victory for gross proceeds of $28 million and $29 million, respectively, in an effort continue its fleet renewal program.
Together with the delivery of the Gener8 Militades and Gener8 Noble in October and November, 17 units of the 21 ECO VLCCs of the company's newbuilding program have been delivered. All the newbuild vessels have been delivered and are deployed in Navig8s VL 8 Pool.
"Following the completion of our newbuilding program expected early next year, the DWT-weighted average age of our fleet will be 5.9 years, and our VLCCs will have an average age of just 3.1 years, giving us the youngest and most modern VLCC fleet among our public company peers," Georgiopoulos said.
Since one of the key advantages of ECO design vessels is increased fuel efficiency, the fleet is advantaged in view of the IMO mandated 0.5% global bunker sulfur ceiling by 2020.
"Under the IMO mandate, the expected cost savings attributable to our fuel-efficient vessels is expected to increase, furthering our competitive position in the market and increasing the premium charter rate for ECO VLCCs," Vrondissis said.
These fuel savings have also been positively influencing the time charter equivalent rates the company achieved in the third quarter in a relatively weak rate environment.
TCE is a measure of the average daily revenue performance of a vessel. With average Q3 2016 VLCC spot TCE rates falling 51% compared to the same period in 2015, from $55,847/day to $28,354/d, the new ECO VLCCs give a competitive edge in the current low-earnings environment, lifting TCEs by close to 13% during Q3 compared to non-ECO VLCCS.
OUTLOOK, FOURTH QUARTER AND BEYOND
Freight rates are set to improve going into the fourth quarter, according to Vrondissis. "I think we are in a more seasonal trend right now," he said. "Inventories are being used and that is why rates are back up. I think it is setting up to be a fairly healthy winter market."
He added that Chinese crude oil imports were up 13.6% year on year, although preliminary October import data suggested that Chinese teapot refiners could be nearing their annual quotas.
On the supply side, however, the company considered the impact of OPEC at best murky, as the proposed OPEC supply cap was based on elevated 33.5 million b/d August 2016 levels, while Nigeria, Libya and Iran were expected to be excluded from the proposed output reduction.
"[Meanwhile, OPEC output] is up 300,000 b/d in the last month and we see the levels very high. We see that continuing, and we are waiting for the outcome at the end of the month," Vrondissis said.
As to available VLCC tonnage, Gener8 Maritime pointed out that new environmental regulations might help to accelerate scrapping of older vessels in the upcoming years.
Considering that there are well over 125 VLCCs greater than 15 years of age and nearly 30 VLCCs are 20 years old or greater, this would rebalance vessel supply favorably.
"If you are looking at Atlantic Basin trading, [vessels are] usually 15 years or younger. … After 15 years, vessels go back out East," Vrondissis said. "Scrapping is good, but we like [vessels] to be over 15 years."
Gener8 Maritime has a fleet of 43 wholly-owned vessels comprised of 26 VLCCs, including five newbuildings, 11 Suezmaxes, four Aframaxes, and two Panamax tankers.
On a fully-delivered basis, Gener8 Maritime's fleet has a total carrying capacity of approximately 10.2 million DWT and an average age of less than six years on a DWT basis. Gener8 Maritime is incorporated under the laws of the Marshall Islands and headquartered in New York.