There has been an almost continuous series of headlines recently with eulogies for the death of early generation double-hull tankers, especially VLCCs. No doubt that freight rates are low, and no doubt that asset prices have dropped by about 50% for this type of vessels in 2011. But again, not all news is bad, and shipping life can be as spicy as some of the Captain’s exotic port calls!
In 1993, the shipping company Neda Maritime of the Lykiardopulo Group received delivery of the good vessel MT ‘AROSA’, the second ever built double-hulled VLCC (291,000 DWT ordered at Hitachi Zosen in Japan.) At that time, double hull vessels were still an avant-garde in shipping, without any record of expected commercial history or technical behavior, but mandated by OPA 90 and the Exxon Valdez accident. At that time, newbuilding prices were in the low $90’s million, but the Lykiardopulo Group has had a reputation of building floating temples to the shipping gods, so the cost for this vessel was reported at the time at just below $100 million (nominal prices). Just a few weeks ago, the very same vessel under the same name and still under same ownership was sold to Thai interests at about $24 million for conversion to floating storage; similar vintage vessels had the unfortunate fate recently to face the ship breakers’ torch at a salvage price of around $20 million.
If we were to assume that the vessel at her delivery was financed with standard terms of first preferred mortgage of about 60% leverage and eight year tenor at 6% annual interest, and employed on continuous one-year time charters (average rate over the last twenty years of about $35,000 per diem) and 95% utilization rate, and all other standard industry practices, the vessel would have generated less than 15% return for her owners, until her sale. Not bad returns at all for such a shipping project, given that the vessel had to trade in the weak freight markets of late 1990’s and the first early years of this century, and of course the abysmal rates of the last couple of years.
It seems that despite the weak freight markets of recent and precipitous decline of asset prices, still long-term projects in shipping can be profitable on an operating basis if approached correctly: a good, traditional owner orders a high quality vessel from a good yard and trades the vessel through the cycles. No ambitions of a) correctly timing the market, b) investing with a three-to-five year investment horizon (unlike some financial owners), c) utilizing the best financial engineering available or d) making money by building ‘cheap’ vessels. So far, so good.
As it happens in shipping, there are often other aspects that make an interesting story even more so. The calculations above are based on the assumption that the vessel was always employed at one-year rolling timecharters at prevailing rates. In reality, there is at least one instance when this good vessel was fixed in the spot market to ExxonMobil in 2004 for a voyage from Middle East to Japan at about $230,000 per diem, or gross freight revenue of about $30 million; that’s proceeds from one trip! And, sure there were a few similar equally profitable trades during her career. Thus, the IRR numbers above are good enough for forensic analysis without providing all the excitement and profits of the actual trading.
And, to reach deeply in the spice cabinet now, there have been rumors that at the top of the market, in early 2008, the owners had received offers for the sale of the vessel at $110 million, but such offer at the time was deemed to be on the low side and was accordingly rejected. That’s true: a vessel delivered in 1993 at a cost of less than $100 million, fifteen years later, she was obtaining offers in excess of the construction cost (that’s the nature of shipping!) In retrospect, that would had been an ideal trade: cashing out on the vessel at the absolute top of the market after making a killing operating the vessel in the fertile years of the super-cycle (2004-2008) and just before the dive to the bottoms of the abyss. But again, hindsight is always perfect.
In the Captain’s judgment, the moral of the story is that asset play and timing the market is always good but cannot always be depend upon to deliver ordinary returns. But, it can deliver extra-ordinary returns! And, just because a vessel is sold in a bad market at a ‘perceived’ weak price, it doesn't mean that the owner necessarily lost money from the investment or they didn't make money! Quite the opposite!
And a question to keep one up at night, whether for philosophical or commercial reasons: imagine the poor soul who made the offer to buy the vessel at the top of the market at the now exorbitant price of $110 million and the offer was rejected! What would have happened today if they had bought the vessel? How the investment return numbers above would look like? Probably instead of profit, the very same sale price might have looked like the ‘haircut’ of the century!
Was it luck? Was it karma? Was it greed? Was it perspicacity?
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