VLCCs have become the ultimate cash cows during what the IMF has termed ’the Great Lockdown’. At spot rates of US$200,000/day, a VLCC will throw off as much free cash in one quarter as in the previous three years
The already firm demand for VLCCs is set to reach even greater heights after the unprecedented negative pricing for WTI crude oil futures. While this was largely a technical situation, the link to Brent crude oil pricing saw June oil deliveries fall to US$25/bbl. This is producing even more attractive economics for oil traders. Spot rates will respond to even higher levels as traders search for available tonnage for shipment to customers still requiring crude oil.
According to Jefferies Research Services analyst Randy Giveans, the economics of VLCC operations in this market are producing quarterly profits that are equal or higher than those produced in the last three years. He notes that the all-cash breakeven of a VLCC is around US$25,000/day. With the spot market situation of circa US$200,000/day, this is producing epic profits of around US$16M free cash flow per quarter, matching three years of free cash flow earned at US$40,000/day.
This cyclicality of earnings is often noted in public tanker company annual reports. In the financial annual report for 2019, Euronav notes that an increase of US$1,000/day on the spot tanker freight market (VLCC and Suezmax) would have increased company profit by US$22.6M. Conversely, a decrease in the spot market by US$1,000/day would have decreased the company’s 2019 profit by US$22.5M. This was for a year when the company’s average time charter equivalent earnings (TCE) stood at US$35,900/day for VLCCs and US$26,000/day for Suezmax tankers (2019 figures). According to Clarkson Research Services, the current average TCE earnings for VLCCs was US$165,221/day and US$77,000/day for Suezmax tankers.
The circumstances on the land will continue to be beneficial for the tankers at sea. The land-based tank farms are not as flexible a storage option as tankers. Most tank farms hold long-term contracts with customers and the business does not rely or respond quickly to a spot storage model.
Another benefit for the earnings of the tanker companies is that oil production is not as flexible. As the Great Lockdown spreads across the USA it is opening up the divisions between the federal government and state bodies. US oil production is now estimated to be 2M b/d in excess of demand during the Great Lockdown, but oil production limits in the highly fragmented US oil industry are governed by a range of bodies, not the Federal Government. For instance, in Texas, the body with authority to impose a state-wide reduction in oil production is the Texas Railroad Commission (TRC). A 10-hour virtual meeting between the TRC and oil executives to reduce Texas crude oil production by 1M b/d ended in deadlock.
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