The Jones Act Market is characterized by its very high barriers to entry in terms of capital requirements, citizenship requirements, high operational costs, etc. As such, the majority of the market has been mostly focused on the inland, the offshore trade in the US Gulf (read oil drilling and offshore platforms), the coastal trade of petroleum products and chemicals from the US Gulf Coast to Florida, along the Atlantic Coast / East Coast, and to the West Coast via the Panama Canal. There is of course the crude oil trade from Alaska’s North Slope to the West Coast of the USA, run by the Alaska Tanker Company (ATC.)

Last time the Jones Act tanker market made front-page news was when ExxonMobil ordered in 2011 two 115,000 dwt aframax tankers at Aker Philadelphia at the announced price of US$ 200 million each. It has been reported that the vessels are ‘full redundancy’ specification with two (fuel efficient) engines, two propellers and two rudders, and off course equipped to the latest standards of technology and navigation; the transaction had made news for the high construction cost of the vessels, when mainstream tankers from top-quality foreign shipbuilders could be had at the time at US$ 50 million per vessel, possibly for well below US$ 100 million per copy fully spec’ed to ExxonMobil’s standards for the sensitive Price Williams to California trade.

The other time in recent memory the Jones Act tanker market had been in the news was in 2006, when the now defunct Overseas Shipholding Group (OSG) agreed in 2006 to take on bareboat charter ten product tankers built at Aker Philadelphia, crew and manage them and offer them on timecharter to strategic clients like refineries, traders, and oil companies. The transaction was newsworthy for its size (ten-vessel newbuilding order is a wave-making deal in the Jones Act market; also, the total cost of the transaction was newsworthy at about US$ 930 million.)

However, ever since the exploitation of hydraulic fracturing technology (‘fracking’) and huge discoveries of shale oil in the US in the last four years, the Jones Act tanker market has been a major beneficiary of the structural changes for the crude oil and petroleum products trade. The market was caught off-guard and undersupplied, with reports that at least in one instance, a Jones Act product tanker trading crude oil managed a one-year fixture at US$ 100,000 per diem.

According to data tabulated by Karatzas Marine Advisors & Co. (please see table below), there are presently 28 ‘MR sized’ Jones Act tankers, 24 of which may be considered ‘modern’ with an average age of less than seven years.

In 2013 year-to-date, American Petroleum Tankers (a Blackstone sponsored company) andCrowley Maritime have announced newbuilding orders (including options) of sixteen more vessels to be delivered by 2016; twelve of these sixteen orders seem to be ‘firm’. If so, the firm orders represent 50% of the present Jones Act existing fleet.

No doubt that the economics of the Jones Act tanker market seem fabulous at present (US$ 100,000 pd gross freight revenue, less approximately US$ 22,000 pd vessel operating expenses, US$ 120 million cost basis but with overall cost of capital well into single-digit territory and long asset economic life); but 50% outstanding orderbook of the existing fleet isn’t like moving into ‘dangerous’ (oversupplied) territory? After all, we all in shipping know what happened when the orderbook for foreign-flag vessels reached historically high levels… unless of course it turns out that we are experiencing an once-in-a-lifetime ‘game changer’ event and the Jones Act tankers market turns out to be fully insulated from international shipping economics.

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Friday, August 9, 2013

Valuing Vessels, for the Long Term

In a previous posting, we briefly discussed the three main valuation methods, namely the market comparable approach, the replacement cost approach and the income approach.

Given the illiquidity of and the dislocations in the shipping markets since 2008, there is no wonder that some people may think that the present market is just too ‘depressed’ to be considered an active market. Vessel valuations is not just a ‘theoretical exercise’, one of the many boxes to be checked in a loan agreement; they can have severe implications for the shipowners and their lenders themselves, given the banking crises post-Lehman-Bros-collapse. Under that prism, the Hamburg Shipbrokers Association (HVSS) suggested a formula to be utilized for valuations (Financial Times article, October 25, 2009); it’s based on the income approach, and it presumes that vessels – read modern vessels owned by KG funds and financed by German banks – have value in the long-term, no matter how inefficient or dislocated the present market is. The so-called ‘Long Term Asset Value’ model (LTAV), also known as the ‘Hamburg Ship Valuation Standard’ (HSVS), or in short the ‘Hamburg Rules Method’, looks at the earning potential of the vessel over their remaining economic life, no matter how bleak the present situation is.

In short, the ‘Hamburg Rules’ presume that vessels are getting scrapped at the end of their design life (usually twenty-five years) and that have the same earnings potential throughout their design life; as a rule of thumb, estimates for future earnings can accurately be reflected by the average earnings of the last ten years. As far as the discount rate is concerned, it’s only a few short hundred basis points above LIBOR, especially for containerships that are chartered under long-term charters.

From data provided by Karatzas Marine Advisors & Co., a Manhattan-based shipping finance advisory, vessel valuations and ship brokerage firm, the following table was prepared for mainstream asset classes in the crude oil and petroleum product tanker markets, dry bulk markets, and small containership vessels market. The calculations are based on 5% discount rate (in line with the HVSS suggested rate – no debate on the accuracy of the rate from us), and future earnings for the vessels over the fifteen remaining years of their economic life are based on the average earnings of the last ten years (again, in line with the suggested HVSS suggested rate – but, one has to consider that the last ten years do incorporate an once-if-a-life time supercycle of earnings).

It’s clear that the Hamburg Ship Valuation Standard provides for ‘generous’ valuations, at least for now and at least for ten-year old vessels. The least ‘generous’ valuation is for MR2 product tankers with a 60% premium over the market comparable approach (the result of the product tanker market being ‘hot’ over the last few years), while the most ‘generous’ valuation has been for capesize dry bulk vessels (a premium of almost 1100%, no doubt due to the ‘red hot’ freight market for capes prior to 2008; again, ‘Hamburg Rules’ presume that the past is sufficient to predict the future, or, at very least, the most recent ten past years).

Germany’s investment code (Kapitalanlagegesetzbuch or KAGB) has recently been amended to allow for vessel valuations based on the ‘Hamburg Rules’. The accounting firm PriceWaterhouseCoopers (PwC) has attested that the ‘HSVS method is in full compliance with auditing standards for the valuation of an ongoing concern.’ The Verband Deutscher Reeder (VDR) – the German Shipowners Association, and the Zentralverband Deutscher Schiffsmakler (ZDS) – the German Shipbrokers Association, have welcomed the news of incorporating the HSVS methodology to KAGB.

It has been said before that accountants know ‘the price of everything but the value of nothing.’ It’s a very tough judgment, but again, it’s a very tough market …