Odfjell’s financial results for 2018 reveal the impact of IFRS 16 on tanker operators and the company’s expectations of the post-IMO 2020 global marine fuel sulphur cap environment.
IFRS 16 requires lessees to capitalise all leases (except for a few exemptions), especially ones where the lessees have specific control, such as a charter which states the charterer has the right to direct operations of the asset.
According to PwC Global Lease, “Almost all leases will be recognised on the balance sheet for a lessee, with a right-of-use asset and a lease liability which will result in more expenses in profit or loss during the earlier life of a lease.”
In a 2015 study, PwC found there would be a “median debt increase of 24% and a 20% median increase in EBITDA for the transport and infrastructure industry".
In the case of shipping, the definition of control would cover most aspects of a bareboat charter, time charters, and pool arrangements (where the pool is the lease) effectively putting that charter onto the balance sheet of the charterer*.
This is likely to change the behaviour of charterers. They will have to recognise a long term charter under IFRS 16 or find a way to adapt to IFRS 16 that is compatible with their business model.
The new lease accounting standard IFRS 16 came into force on 1 January 2019 and would be generally first reported in accounts for 2019 announced in 2020, but companies can choose to introduce the standard early to give shareholders an early indication of the impact of IFRS 16 on the bottom line.
Odfjell chose to do this when presenting its 2018 accounts which show that Odfjell’s equity ratio will reduce by 3% to 30% due to more debt appearing on the balance sheet.
However, ratios using EBITDA such as enterprise value/EBITDA will improve as in the case of Odfjell where the ratio changed from 11.5 to 6.6 post-IFRS 16.
Odfjell has also analysed the impact of IMO 2020 on its bunker expenses. In 2018 the company spent an average of US$42M per quarter on bunkers.
As the slide above shows, Odfjell has chosen the compliant fuel route and feels its analysis of the average fuel price spread of US$130/tonne is manageable for itself and for its customers.
*Tanker Shipping & Trade hastens to add it is not giving legal or financial advice on IFRS 16. Those concerned about IFRS 16 should seek the advice of a qualified shipping accountancy firm such as Moore Stephens.
What will be the fuel price spread in 2020? Find out what the experts think at the Americas Sulphur Cap 2020 conference in Houston on 5 and 6 March 2019.