Do current tanker vessel prices present value investments?

The fact that tanker freight rates have been below cash break-even for several quarters so far, it has significantly contributed to the decline of tanker asset prices.  Nominally, there has been an approximate 15% drop in tanker prices for very modern vessels (less than three years old) in the last twelve months, with the stated proviso that it has been a thin secondhand market for such vessels and each transaction seems to have its own idiosyncrasies based on the specific buyer, the specific seller and the specific circumstances of each transaction.  

However, prices for older tanker vessels have fallen precipitously in the same timeframe.  In general, double-hull tanker vessels 19+ years old, especially for those with imminent survey position, are valued more or less at salvage value, a drop of more than 50% within a year.  Two quick explanations for such a dramatic drop can be pointed to the facts that a) there is complete lack of debt financing for older tonnage, especially for tankers in a weak freight market when shipping lenders only pursue strategic clients and assets, and b) charterers discriminate against older tanker tonnage since they can charter modern, high quality vessels still at extremely competitive prices.  In general, tanker vessels have a design life of twenty-five years, so, theoretically at least, a twenty-year-old double-hull tanker has five years of economic life remaining.

While a prospective investor evaluating shipping projects may opt to reject an investment of a modern tanker vessel as still too expensive, by historical standards, or an investment in a ‘vintage’ tanker vessel due to perceived unfavorable risk-to-reward ratio, how about investment projects of tanker vessels between 12-15 year of age?  Recent transactions of such vessels substantiate a drop of asset pricing of more than 100% in the last twelve months, and such vessels are still modern enough to be competitively considered by the charterers and also acceptable by the lenders as sufficient loan collateral. 

Consider the following (theoretical) example:  the 1999-built VLCC MT TAKASE (314,000 dwt) was sold in early October 2011 for $28 million, a purchase price that implies $8 million premium over salvage value (40% premium, in percentage terms) given that the vessel has about $20 million scrap value at today’s market levels.  Based on thirteen years of remaining economic life for the vessel, it requires less than $2,000 per diem to amortize the purchase price; assuming 10% overall cost of capital and approximately $9,000 pd for vessel daily operating expenses (VDOE), then the break-even point stands at approximately $18,000 pd.  Even at today’s abysmal freight market when spot rates for VLCCs are less than $15,000 pd, a straight three-year charter can nominally be secured at approximately $28,000 pd.  A strategy of securing a three-year charter will ensure that the vessel operates on a cash flow positive basis while the owner is biding their time out of the downcycle, when they can expect a return to normalized freight rates that have averaged more than $40,000 pd over the last decade.  

On to a more practical illustration, Nordic American Tankers (NAT), publicly traded on the NYSE, recently acquired a 1999-built Suezmax tanker at $25 million, a price implying $9 million (or 36%) premium over salvage value.  Based on twenty-five years of total economic life, the vessel still has thirteen years remaining life, thus price amortization equals to less than $2,000 pd; based on 10% weight cost of capital and $8,000 pd vessel daily operating expense assumption, it will take on average $17,000 pd for this project to break even.  At present, a one-year charter for such vessel is $18,000 pd while nominally a three-year charter stands at $22,000 pd.  

No-one claims that these last two examples dictate sure-thing investment opportunities in shipping.  There are risks involved with such strategy, but no less navigable than that in other investment projects in shipping.  Based on peer group analysis, it seems that NAT’s strategy of distinguishing between vessel prices and values is getting recognized.

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