Crude Carriers Bets Big on Oil Tankers, and It May Be Right on Time
Crude Carriers (CRU) intends to use the proceeds from its recent initial public offering (IPO) to acquire oil tankers. With charter-hire rates at an eight-year low, but showing signs of firming, now may be a great time for a new oil tanker venture to set sail.
Crude Carriers is using all of its approximately $254 million in proceeds to immediately purchase one 2006-built Suezmax vessel, the Miltiadis M II, at a price of $71.25 million. This is to be followed by the acquisition of two new-built, very-large crude carriers (VLCCs) for $96.5 million each, with expected delivery dates in late March and June 2010.
Suezmax is a large crude oil tanker of approximately 120,000 to 200,000 deadweight tons and can hold up to one million barrels of crude oil. A modern VLCC has the capacity to transport about 2 million barrels of oil and is mainly used on the longest (long haul) routes from the Arabian Gulf to North America, Europe, and Asia, and from West Africa to the U.S. and Far Eastern destinations.
Crude Carriers Investment, the investment vehicle of its management team, will help with initial tanker purchases, too, by kicking in $40 million in exchange for Class B Stock (10 votes per share of common stock). Looking forward, funding for fleet expansion will depend on liquidity -- as determined by internally generated cash flow from operations and secondary (dilutive) stock offerings, supplanted by a signed commitment with Nordea Bank Finland for a $100 million revolving credit line.
Notwithstanding a year-on-year increase in shipping activity in the fourth-quarter 2009, visibility for growth opportunities in the crude oil tanker shipping market remains cloudy in first-half 2010. The last official year of single hull tanker phase-out, the slowdown in exodus of older vessel retirements combined with -- as still -- unsteady turnaround in economic activity and related energy consumption, higher net-fleet additions by long-haul operators and the release of floating storage -- all are hampering sustainable demand for new VLCC tonnage.
Nonetheless, the International Energy Agency (IEA) believes the combined effects of renewed oil-demand growth led by China -- forecasts are for daily demand worldwide to stabilize at 2008 levels of 86.3 million barrels per day -- and stable oil prices of between $70 and $80 will lead to a more profitable shifting in the seaborne transportation landscape.
Beginning of a recovery? Overseas Shipping Group (OSG), the second-largest publicly traded tanker company in the world, said on its year-ending 2009 earnings call that both spot rates for VLCC and Suezmax carriers reversed in the fourth quarter, up 3.9 percent and 116.2 percent to $23,876 and $26,274 per day.
Props to Crude Currier's management, as it intends to pursue a strategy of low leverage to maintain a strong balance sheet. The company is attempting to "time" its approach to chartering with a strategy of optimizing the selection of best available commercial opportunities -- locked-in longer-term time-charter contracts versus volatility of daily spot contract pricing.
Cycles often play out long enough that missing stage one of a recovery will not preclude capturing the bulk of demand tonnage. However, management readily admitted in its IPO prospectus filing that activity for new-build deliveries in secondary markets was at depressed levels in 2009, likely due to lingering credit problems. With charter rates at decade-lows, and cogency that new-build orders typically take 14 to 36 months to fulfill, any construction delays could leave the company grounded when market rates sprint higher.
Management believes it can operate profitably with VLCC spot rates of approximately $36,455 a day in 2010 -- and with almost no spare capacity (assumed 98 percent utilization rate). Surprisingly, one doesn't need faith that licorice sunsets and gumdrop showers truly exist to think that such an earnings performance is possible. Spot prices in transoceanic voyages are already starting to climb back above that price.