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Lambros Weighs in on NAT - and Disclosure

Yesterday Lambros Papaeconomou at Lloyds List wrote a follow up note to his readers pertaining to an earlier article and a subsequent NAT rebuttal.  Yesterday’s write up is here - and the links to the prior articles are embedded within.


August 23rd

I recently published an article on Lloyd’s List regarding public disclosure standards on company insider trades by Nordic American Tankers.

The articled focused on the fact that NAT publicly discloses share purchases by the CEO, but is does disclose any share disposals.

NAT has been in full compliance with SEC reporting requirements regarding insider sales.  NAT has filed a form 144F prior to any intended sale by the CEO.  It must be noted that these forms are almost exclusively filed on paper form (as is the case here) and therefore are not made available on the SEC’s online database. 

Any interested party who follows the company but has no access to these paper forms would not know that the company’s CEO has also sold a substantial number of shares.  In fact he has sold more shares than he has bought back.

The bigger issue however is public disclosure.  We believe that public disclosure is not the same as compliance with SEC rules.   

NAT regularly issues press releases when the CEO is buying shares, although it is not required by SEC rules.  On the other hand it has not issued a press release when the CEO sold shares in the past.  Press releases regarding insider trades are at the full discretion of the company. NAT chooses to issue press releases only about share purchases and not about share disposals.

Today we received and published the company’s official rebuttal.  The link to our article is here and the link to NAT’s rebuttal is here.  



More on Shipping Markets

Two quick points - to hopefully be followed by more in depth commentary - at some time in the future - 

1) From the Clarkson article the other day - they mention that shipping markets tend to turn north about 12-18 months after a Clarksea index bottom

2) A quick calc on seaborne tons, ton miles and average haul since 2000 show that these numbers are still strong - at least as of Jan 1 this year.  With rates soft just about everywhere - it implies a) demand has changed since Jan 1 b) the ordering surge in 2013 may have been based on false premises, creating an orderbook that shouldn’t have risen to such levels c) both.

If the answer is ‘C’ - we are in a lot of trouble.


US Shale Oil

Decent article here on US shale production continuing to decline.

The key sentence for those familiar with Econ 101 as follows:

The fall is “mainly attributed to low oil prices and the resulting cuts in investment. However, production declines will continue to be mitigated by reductions in cost and improvements in drilling techniques,” the report reads. (Emphsis mine).

So - there is a case to made that any entity that may have pumped to their fullest limit to drop oil prices and “wipe out” shale producers - may indeed have the tiger by the tail. Seems that the Shale types are indeed finding ways to stay competetive - BECAUSE THEY HAVE NO OTHER CHOICE - and are outmaneuvering those who pump no matter what the price.

I haven’t read this book in many years - Milton Friedman’s Free to Choose, but I know in many of his writings he emphasizes the role of “prices” in free markets versus their distorted cousin in non-free markets.



Shipping Markets

Has anyone else noticed the broader all encompassing “shipping market” of the world is not doing well?  I noticed that chemical rates for Houston exports have dropped noticeably the last few months - which tends to fit well with dry bulk, LPG - and even the larger tanker segment recently.  I need to do some more homework before suggesting this is a macro trend - but it is plain for the eye to see that currently - things suck.

The recent Clarkson’s Shipping Weekly discusses this same topic - citing it’s Clarksea Index.  Off to a meeting - but more to follow on this topic.


Dry Bulk and Tankers

Dry bulk physical is flat today - all the indices within a hundo of Friday’s numbers.

Tanker rates remain soft and softer.  Clean markets remain depressed -  with TCE levels in the Atlantic basin at about $6,500/day - roughly OPEX.  For the large majority of Owners that took on debt to pay for these ships - they are losing money. V rates that showed signs of life last week in the AG have reversed course - and have lost a few points over the weekend - with FFAs reflecting the new demeanor.


The Suezmax market is so ugly...

…when it watches TV, the channels change themselves.

With benchmark TCE levels showing below $5k/day (Source: Clarksons) - the channels are indeed changing themselves. Keep in mind - OPEX on an SM is roughly $10k/day. So you are losing $5k/day - if, and only if, you own the vessel outright.  If, like most Owners, you financed the ship with anything resembling an 80% debt deal, you likely owe much more in financing costs - maybe $10-15k/day, we’ll say.  Under any circumstances - this is not pretty.

Two items:

1) the primary cuplrit is production “outages” in Nigeria - and maintenance in Angola.  Ton Mile Nation should be aware that West Africa is the bread and butter of the Suezmax world - so, lessened output here hurts the SM fleet more than others.  I am told that lost Nigerian production equals about 700kbpd at moment (while Angolan maintenance is responsible for maybe 200-300k bpod). Speaking soley to the Nigeran issue, this equates to demand for roughly 24 Suezmaxes. With the V market softening and Afra markets already soft - the impact is amplified. (* Math on the equation at bottom).

2) speaking to NAT and it’s low debt structure - they can outlast most, since they currently only lose $5k/day, while others are losing $10-15-20k/day.  the problem for NAT, however, remains fleet replenishment.  The average age of their 30 ship fleet is about 13 years. 63% of their fleet is older than 10 years. All told - they need to replenish.  While Herbjorn has done a good job of keeping NAT running and making cash in most all markets - the biggest concern “on the street” is that he needs to replenish and bring in some younger tonnage. We may see some decent deals start to appear with asset prices approaching historic lows - and it will be either Tier 1 names, or those with cash - who will be able to go shopping in today’s market.

Ton Mile Teaching Moment

Round voyage Nigeria/Rotterdam at 13 knots is about 34 days - which includes 5 days of cargo ops and waiting time. Assume an average lift of 1m bbls on a Suezmax, meaning, a Suezmax can lift 29,500 barrels per day. With production down 700k bbls, that implies 23.7 Suexamxes are NOT needed (700,000/29,500).

In summary, on the math, figure out how much a ship class can “handle” on a per day basis - which takes into account voyage length - and divide that into the amount of production - in barrels per day - you are dealing with.

Viewed another way - let’s say OPEC changes production 1m bpd.  Assume all the cargo stems from the AG and goes to China on VLCCs.  Assumptions vary, but for sake of math - assume a 50 day round trip voyage. Also assume a V can lift 2m bbls.  So - on this voyage, a V can “handle” 40k bpd (2 million divded by 50 day voyage). Thus, a 1m bpd change by OPEC - amounts to roughly 25 VLCCs (1m bpd / 40,000). This is a very rough sensitivity - but explains the math.

The key point is to understand that the ships are assumed to return to load another cargo.  So in the Nigerian example - the first Suezmax to load is back and load ready 34 days later.  In the OPEC example, the first VLCC to load is back in the AG and load ready 50 days later.


Dry Bulk

Capes drift lower by about 100 to the $5,800 range. Worth noting is that Capes are currently on par with the Pmax class - also at $5,800 - and  - they are BELOW both Supra ($7,200) and Handy ($5,900).

In crap markets - this tends to happen - but let’s not forget the Cape orderbook reaching the 100% level in the 2007/2008 era.  Ton Mile students of the game are aware the historical average for dry and tankers is about 20-25%.  When an orderbook reaches 100% levels - bad things eventually happen.


Dry Bulk

Though Capes lost another 250 on the 5 t/c index to below $6,000, FFA found some support and hovered close to yesterday’s closing prices..  Q4 is priced 8200.

Panamax physical was flat at 5800, but we did see Q4 add 150 to 6750.


Dry Bulk

While the smaller assets have moved to the upside for the smaller classes, Capes took a $300 kick to the shins - and now sit at $6,200.  Cape FFAs trade down $300 in q4 to $8,200.


Dry Bulk

All dry assets are up betwen 50 and 100 today - though light volume on FFAs shows lower forward prices for Capes and Pmax.

Cape:  spot 6500, Cal 17 7400, Cal 18 9000, Cal 19 10500
Pmax: spot 5700, Cal 17 5700, Cal 18 6650, Cal 19 7300

Keep in mind - my spot number for Capes is the 5 ship t/c average - not the usual 4 ship t/c average. Currently the 4 ship estimate sits at 5100 - less than the 5 ship number. At low rate levels - it makes a difference - but should Capes return to 15-20-25k or so, a difference of 1500/day makes only a minor difference.

That said - things are still pretty bleak.  The above figures, even for 2019 imply that earnings will cover opex - but only a portion of financing costs - meaning Owners are still below break even.