BMI does not believe that the Bloomberg Tanker Index is the indicator for the fortunes of dirty tanker operating companies that it once was. From a formerly fairly even split between six liquid-bulk tanker operators listed on the New York Stock Exchange (NYSE), the bulk of which were heavily involved in crude oil shipping, over three quarters of the index's weighting now comes from Teekay Corp, a company that is increasingly reliant on offshore and LNG shipping for its profits. With one former member already delisted, and two having declared themselves bankrupt, this dynamic is likely to continue. Despite our slightly more sanguine outlook for crude oil shipping in 2013, we do not believe that the index will see any significant resurgence over the coming year.
The dirty tanker market continues to suffer in 2013. The sector, just like container shipping and dry bulk shipping, is afflicted by a glut of ships which have come online having been ordered prior to the downturn. The growth of the global fleet has far outweighed growth in demand for seaborne oil in the years since; rates have been continuously pushed lower. The Baltic Dirty Tanker Index (BDTI), made up of a number of global crude oil shipping routes for a variety of different vessel classes, stood at 658 on February 19, a far cry from its five-year peak of 2,347, recorded in July 2008.
|Far From Five-Year Highs|
|Baltic Dirty Tanker Index, 2008-2013|
The vessel class perhaps most affected by the overcapacity curse has been very large crude carriers (VLCCs), the supertankers capable of carrying as much as 2mn barrels of crude. These vessels earned daily returns in excess of US$200,000 in the pre-downturn boon years, yet are currently struggling to break even. The VLCCs operating on the class's benchmark Saudi Arabia to Japan route endured almost constant negative returns in the third quarter of last year, and with the recent drop in production by OPEC member states, the situation is once again dire. Chartering vessels from the Middle East Gulf has all but collapsed, with the benchmark route generating daily losses of around US$6,500 in the past week; the journey to the Gulf of Mexico has been generating even greater losses of over US$30,000, according to the Baltic Exchange.
Our outlook for crude oil shipping is more sanguine than it was in 2012; the global economy is picking up, with BMI forecasting a return to growth in the eurozone, and growth of 2.3% and 7.5% in the US and China, the world's two largest economies. Equally, the orderbook for new tankers is at a more manageable level - at the start of 2013 it stood at 11.8% of the total, down from 34.3% three years earlier. However, the effect of the recent reduction in output by OPEC demonstrates how vulnerable the tanker companies remain to this uneven supply/demand dynamic.
Shipbroker Clarksons forecasts that the global supertanker fleet will grow by 5.3% over the year, compared to a 6.3% increase in demand, and this will go some way towards rectifying the imbalance. Nevertheless, the outlook for the Bloomberg Tanker Index, and the shipping companies that make up its weighting, remains poor indeed.
|Bloomberg Tanker Index, 2008-2013|
Dirty tanker operators have been fighting a war of attrition with falling rates and mounting debts since the global economic crisis first occurred, and this has been reflected in their falling share prices, and the plummeting Bloomberg Tanker Index. From its five-year peak of 912.07, recorded in June 2008, the index has fallen 80.3% to its current 179.72. Years of negative quarterly earnings announcements and costly debt restructurings have taken their toll. One former member of the index, General Maritime Corp, which filed for bankruptcy in November 2011, has since been delisted from the NYSE, and so no longer makes up part of the index's weighting. Another US-based tanker company, Overseas Shipholding Group, which now makes up just 1.01% of the index's weighting, has also declared itself bankrupt, and owes US$463mn in US taxes and interest.
The index is becoming increasingly reliant on the relative outperformance of Teekay Corp to support it. The company has been faring considerably better than any of the other four remaining companies in the index, and its weighting has risen considerably as a result. In February 2010 Teekay Corp made up 24.1%; at present the US company makes up a massive 78.3% of the index. It is followed by Nordic American Tankers (10.1%), Frontline (6.2%), Tsakos Energy Navigation (4.4%) and Overseas Shipholding Group.
|Teekay Comes To Dominate|
|Company Weightings In The Bloomberg Tanker Index, 2010 & 2013|
From looking at the weighting as a pie chart we can see that in 2010 the companies had a much more even market capitalisation, with Teekay, Frontline and Overseas Shipholding Group accounting for roughly a quarter of the weighting each. The bulk of the index was at that time driven by crude oil shipping, with some of the operators also with a substantial exposure to product tankers. On February 22 2010, Frontline, involved primarily in VLCC operations on the spot market, had the largest market capitalisation of the six tanker operators at US$2.23bn, giving it 25.2% of the weighting. Teekay Corp was next in size with a market capitalisation of US$1.75bn. By contrast, today Frontline's market capitalisation is just US$239.03mn, compared to Teekay Corp's US$2.55bn; the two firms now account for 6.2% and 78.3% of the index respectively.
However, we note that Teekay's growing predominance in the index is not being driven by its dirty tankers. Rather, it is the parent company's diversified sections, active in the more-profitable LNG shipping and offshore shipping which are driving its success. According to Teekay Corporation's earnings results for the third quarter of 2012 (last available at time of writing), the company's cash flow from vessel operations (CFVO) of US$191.56mn was driven by its Teekay Offshore Partners and Teekay LNG Partners subsidiaries. At CFVO of US$95.53mn and US$111.73mn respectively they made up the bulk of the company profits, helping absorb the loss made by Teekay Parent. In the same period in 2011 a similar story played out. Teekay Tankers, concerned primarily with crude oil shipping, made CFVO of just US$16.25 in Q312.
|Pure-Play Tankers Underperforming|
|Teekay Corp Cash Flow From Vessel Operations (CFVO), US$mn, By Subsidiary, Q312|
BMI notes that the growing predominance of Teekay Corp in the Bloomberg Tanker Index, and the growing reliance on offshore and LNG shipping that Teekay has to ensure its profits, means that the index is not the indicator for dirty tanker shipping that it once was, save perhaps to illustrate just how poorly the sector is doing. Even with our more sanguine outlook for the coming years, the more pure-play crude oil shipping companies represented in the index will have considerable debt issues for some time to come, and it may be some time before it is as equally split as it was in 2010. Further, even Teekay Corp's relatively profitable business has not yet been sufficient to elevate the index above the 200 mark.