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Tanker owners eye mergers, pools as rates bite

01 Jun 2017 17:08 (+01:00 GMT)
Tanker owners eye mergers, pools as rates bite

London, 1 June (Argus) — Two major tanker market mergers have been announced in a single week — one in the dirty tanker segment and one in the clean. Further consolidation looks likely as shipowners with deeper pockets assemble bigger, younger fleets, while trying to minimise ship oversupply.

Crude and products tanker owners [Teekay Tankers and Tanker Investments (TIL)](TIL) have agreed to form the "largest publicly-listed owner and operator of mid-size crude tankers" in an all-share merger. Upon completion of the deal, Teekay Tankers' fleet will consist of 62 vessels. The move, according to Teekay Tankers' chief executive Kevin Mackay, will ensure the company is better positioned to "take advantage of the next tanker market upturn".

On 24 May, New York-listed Scorpio Tankers entered into agreements to acquire Navig8 Product Tankers, which will make Scorpio the largest owner of product tankers listed on a US securities exchange.

Norwegian shipping firm Frontline's so-far unsuccessful attempts to take over rival DHT is another example of a shipowner seeking to expand by capitalising on an existing — and if possible young — fleet.

Frontline already owns around 16.4pc of DHT shares and has approached the DHT board twice so far in 2017. Both approaches were rejected. DHT's very large crude carriers (VLCCs) fleet has an average age of 6.5 years, including four newbuilds under construction. The merger would have made Frontline the biggest tanker company in the world, with 72 tankers and a further 10 on order, according to shipbroker Alibra Shipping.

But Frontline aims to pursue its fleet growth and renewal strategy. "We think it is a good time and cycle to grow, and are looking at opportunities," chief executive Robert Hvide Macleod said. He said that the firm's preference is for purchase of ships already on the water or acquisition of rival owners. So, Frontline may well fix it sights on another acquisition target. The firm said its core segments remain Aframaxes, Suezmaxes and VLCCs. This is not the first period of downturn in rates that it has seen as an opportunity. In 2011, the company restructured, creating Frontline 2012, an offshoot with the ambition "to grow and become the consolidator in the tanker market when the timing is right", and perhaps move into LPG shipping and dry freight.

But there are risks in growth. The benefits of a larger fleet may be outweighed by having to cover more cargoes and cope with additional asset operating costs. And shipbrokers point out that larger, consolidated fleets would not resolve the overall surplus of tonnage so owners might still be forced to agree to lower rates to secure employment for all of their vessels.

The tanker freight market remains under pressure, plagued by overcapacity. With ship supply growth set to continue to outweigh demand growth, further consolidation is likely before the end of the year.

The acquisition of younger single ships rather than whole companies is an option, but declining asset values may not generate the second-hand prices attractive to potential sellers.

According to consultancy Drewry Maritime, one way to combat overcapacity in the market would be for shipowners to opt for pooling, which "will give them some bargaining power and increase their operational efficiencies", although to what degree remains uncertain.

Tanker pools — where owners place their ships under the management of a single firm — could be a way for companies to mitigate the impact of lower freight rates in the short term. And, whereas a merger or acquisition is supposed to be for life, pooling can be a shorter-term marriage of convenience.

The outlook for dirty tanker market returns for the remainder of 2017 is sobering in a year that is seeing poorer rates than the previous two years. The average cost of freight in May between west Africa and the UK continent or Mediterranean for a Suezmax tanker, for example, is down to $8.32/t in 2017, from $9.31/t in 2016. The average rate on this route for May in 2015 was $18.21/t.

For Euronav chief executive Paddy Rodgers, pools are likely to be a significant part of the market going forward. "We believe pools are the most appropriate means to operate large fleets and allow a low risk means for commercial consolidation which can benefit all shipowners," he told Argus.

Euronav is a member of the Tankers International pool, which it says allows it to expand pooling capacity and make the most of its joint ventures. The Tankers International pool comprises 35 VLCCs and allows participants to trade their ships through the pooling scheme and, in return, receive a share of the freight returns. At the same time, Rodgers recently said his firm was well positioned to take advantage of consolidation opportunities within the tanker market and yet be protected from a lower for longer freight rate cycle.

According to shipping association Bimco, further consolidation could come on the back of the sluggish freight market, but "after solid earnings in 2014-2016, no company is faced with financial distress that makes them likely to sell a whole fleet".