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Friday, 04/10/2015 10:33:01 AM

Friday, April 10, 2015 10:33:01 AM

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Tanker Market Could See A 100% Jump In VLCC Rates If This Happens

•A repeal of oil sanctions against Iran could drastically change the demand side equation for tankers.
•The result, according to a report from Morgan Stanley, suggests a 100% rate increase for VLCC's.
•DHT Holdings, Frontline Ltd. and Euronav NV appear to be well positioned to capitalize on these developments if they come to fruition.

A recent report by Morgan Stanley suggests that a repeal of oil sanctions against Iran could send tanker rates soaring. It notes that VLCCs, the second largest of the crude carriers, could see their rates skyrocket to $100,000/day if an accord is reached.

The continuation of negotiations beyond the latest March 31st deadline provided some hope that talks are proceeding in a constructive manner. Any political accords reached during these talks could lay the foundation for a final solution regarding the long running nuclear dispute before the next self imposed deadline by western nations of June 30th.

They aren't the only one noting the potential behind an agreement that will allow Iran to begin crude shipments once again. A recent report from shipbroker Gibson noted "Iran is keen it resume crude oil exports as quickly as possible as the recent fall in oil price has impacted heavily on their already limited ability to export crude. The nation is desperate to get back to its pre-sanction market share. International pressure has forced several nations to cut their dependency on Iranian imports, significantly India which has not taken any NITC VLCC cargoes since November last year."

According to Gibson, an agreement "could immediately release millions of barrels of crude currently being stored on the NITC (National Iranian Tanker Company) floating VLCC flotilla anchored off the Iranian coast."

The Iranian Oil Minister believes that exports could rise from existing levels by 500,000 bbl/d within six months. However, the 37 VLCCs owned by the NITC aren't nearly enough to satisfy those potential exports.

While the prospect of more oil hitting the market is upsetting to OPEC it is exciting for crude tanker owners who will see increasing demand from another supplier looking to distribute their product, even at these depressed prices as Iran looks to recover years of lost revenue.

So what's the play?

Tanker companies already under charter contracts won't see much improvement in pricing until new charters are negotiated. Therefore we turn to companies with high spot rate exposure. Three companies immediately come to mind. DHT Holdings (NYSE:DHT), Frontline Ltd. (NYSE:FRO) and Euronav NV (NYSE:EURN).

DHT Holdings

It wasn't too long ago that tanker rates were sub-optimal to say the least. But that's when DHT made a big bet, and in September 2014 fully acquired Samco Shipholding. Samco owns and operates a fleet of seven VLCCs with an average age of 5 years. In one transaction DHT doubled its current VLCC fleet right when prices were at their lowest and just before a major upswing. Five of those ships are currently on long term charters and two are linked to the spot market. Here's how their current charter schedule breaks down according to their latest 20-F.

(click to enlarge)

Source: DHT Holdings

DHT increased spot exposure over the course of 2014, moving from 44.2% in Q1 to 62.4% in Q4. I would like to think that it was management purposely positioning themselves for a recovery in the tanker market. By shunning long term locked contracts at depressed prices DHT took a risk but it seems once again to be paying off as rates rise and they reap the rewards.


Frontline Ltd. operates several VLCC and Suezmax vessels and the vast majority of them are tied to the spot rate. Their latest 20-F shows the high degree of spot exposure, but does not include new deliveries following December 31 of 2014.

(click to enlarge)

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(click to enlarge)

Source: Frontline

It is also worth noting that Frontline's Suezmax fleet has a similar amount of spot exposure.

Frontline lists their breakeven rates for the remainder of 2015 at $26,400/day for the VLCC class and $19,400/day for the Suezmax class. If Morgan Stanley's prediction comes to fruition this could dramatically impact the bottom line.

Source: Frontline

Good news for a company that has struggled with less than optimal rates over the past few years.

Euronav NV

Euronav is a Belgium based pure play tanker company. The majority of its fleet consists of 26 VLCCs with an average age of 6 years and 23 Suezmax vessels averaging 10 years of age.

Euronav has deliberately positioned itself toward more spot exposure at this stage of the cycle.

Source: Euronav

The result of increasing rates coupled with this high degree of spot exposure is summarized below.

(click to enlarge)

Source: Euronav

This is based on current breakeven rates (including debt service) of $29,500 and $22,000 for VLCCs and Suezmax vessels, respectively.

Their recent purchase of 15 VLCCs once again demonstrated managements savvy ability to time the market.

(click to enlarge)

Source: Euronav

Time and again they have proven successful when highly accretive opportunities arise. They appear well positioned to capture the upside if Morgan Stanley's predictions come true.


There are many factors that could lead to increasing rates, the latest according to Morgan Stanley being an accord reached with Iran that would soften or even eliminate sanctions. Of course, one must understand that these are possibilities at this point. There are no guarantees that an agreement will be reached, and even if negotiations are successful there are no guarantees that VLCC rates will increase.

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