Flexibility and Complexity: How to Unlock Value in Today s Shipping Markets James Frew- Maritime Strategies International (MSI) Marine Money Asia 19 th September 2018
Agenda Flexibility and Complexity 1. Demand Drivers 2. Supply Side Response 3. Earnings Context 4. What Drives Prices 5. Market Outlook 6. Where is the Best Value Maritime Strategies International 2
Flexibility and Complexity Demand Drivers Maritime Strategies International
Trade Growth Improving (bar Tankers) 40% YoY Ch 35% 30% 25% 2014-17 2018-21 Accelerating trade growth for most sectors 20% 15% 10% 5% 0% Crude Products Dry Cargo Container LNG Maritime Strategies International 4
Actual Vessel Demand is Stronger 60% YoY Ch 50% 40% Trade Vessel Demand Longer distances are driving up vessel demand even faster 30% 20% 10% 0% Crude Products Dry Cargo Container LNG Maritime Strategies International 5
Crude tug of war 3.0 2.5 Mn b/d (yoy change) OPEC Middle East Venezuela+Libya United States 2.0 1.5 1.0 0.5 0.0-0.5-1.0-1.5 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Maritime Strategies International 6
Impact of long haul crude trade 250 Mn Dwt Americas East + 'Other' Long-haul ME-West ME-East 200 150 100 50 Diversification of crude supply helping drive longer-haul distances 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Maritime Strategies International 7
Demand for hydrocarbons is evolving 3000 2500 MnT Products Crude LNG Coal % Products/Crude (RH Axis) % LNG/Coal (RH Axis) 60% 50% 2000 Crude oil and coal are losing ground to products and LNG 40% 1500 30% 1000 20% 500 10% 0 0% 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 Maritime Strategies International 8
LNG trade evolving enter the US MnT USA-PRC East Australia & PNG-PRC 160 Middle-East-Japan Middle-East-PRC East Australia & PNG-Japan Middle-East-India West Australia-PRC Middle-East-South Korea 140 West Australia-Japan SEA-Japan 120 100 80 60 40 20 0 2013 2014 PRC People s Republic of China 2015 2016 2017 Maritime Strategies International 9 2018 2019 2020 2021 2022
Dry bulk don t underestimate small ships Year-on-Year Incremental Growth in Dry Bulk Dwt Demand in 2018 Iron Ore ~14 Capesize Ships Coal ~48 Panamax Ships Total increment = 18 Mn Dwt (up 2.8% yoy) Grains ~52 Supramax Ships Minor Bulks ~230 Handysize Ships 0 2 4 6 8 10 Mn Dwt Maritime Strategies International 10
Dry bulk the different drivers Maritime Strategies International 11
Small containers the threat of cascading For containerships, it isn t just about trade but also about competition between vessel classes Maritime Strategies International 12
Panamax Market Share vs. Feeder Deployment Panamax vs Feeders, 2018 vs 2013 Time at Sea vs Size LOSS of feeder deployment as Panamax market share rises GAIN in feeder deployment as Panamax market share rises Maritime Strategies International 13
Innovation Across Offshore Development The downturn has been sufficient in length to enact structural change. Lower activity levels and a lack of pricing power has given the impetus to change how the industry works and how the supply chain is reimbursed Market 2014-17 2018-20 Innovation Impact Seismic Full Waveform Inversion Enhances seismic image clarity, particularly areas below salt structures Drilling Integrated drilling contracts Single drilling services workstream. Interfaces reduced, waste removed Subsea Production Subsea 2.0 50% reduction in size, weight and cost of parts SURF Electric Trace Heating Allows for longer-distance subsea tiebacks Integrated SURF/SPS Vertical integration Single subsea workstream. Shortens time to market and reduces capital cost Floating Production Fast4Ward Standardisation of FPSO construction and delivery process
The shape of offshore construction Yesterday Today Maritime Strategies International 15
Flexibility and complexity Supply Side Response? Maritime Strategies International
Newbuild Contracting Driven by Demand? 150% YoY Ch Contracting and demand aren t very well correlated (only 47%) 275% YoY Ch 12% 100% 8% 50% 4% 0% 0% -50% Newbuild Contracting (CGT) -4% Total Seaborne Cargo (Tonnes, RH Axis) -100% 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017-8% Maritime Strategies International 17
Tankers Contracting vs Earnings 30 Mn Dwt $ k/day 70 VLCC Ordering VLCC 1 Yr T/C Rate 25 60 20 15 Instead, in general there is a good correlation between earnings and newbuild contracting (taking a three year moving average) 50 40 10 30 5 20 0 10-5 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0 Maritime Strategies International 18
Balanced Global Fleet Dynamics at last Maritime Strategies International 19
Flexibility and complexity The Earnings Context Maritime Strategies International
Where on the Earnings Cycle Were We? Marine Money Asia 2017 Schematic for illustrative purposes only! Crude and Product Tanker OSVs LPG Carrier Maritime Strategies International Rigs LNG MPP Chemical Tanker PCTC Container Bulker RoRo
What a difference a year makes Marine Money Asia 2018 RoRo Schematic for illustrative purposes only! Crude and Product Tanker Maritime Strategies International OSVs Rigs LPG Carrier PCTC Chemical Tanker MPP Container Bulker LNG
Flexibility and complexity What Drives Asset Prices Maritime Strategies International
The Complete Pricing Jigsaw Earnings NB Price Life Expectancy Scrap Price Maritime Strategies International 24
Wrestling Price Drivers Aframax Tanker Panamax Bulker Newbuilding Price Anchor Maritime Strategies International 25
Replacement vs Return 120% VLCC %age Net Replacement Value 100% 1985 80% 2008 2015 60% 2017 40% 20% Depreciation curves are dynamic and shaped by the earnings environment 0% 0 Yr Old 5 Yr Old 10 Yr Old 15 Yr Old 20 Yr Old Maritime Strategies International 26
How the envelope has moved 160 $ Mn 140 120 VLCC 5 Yr Old Price Price assuming 1980 NB and Scrap 100 80 60 40 20 0 Newbuild prices played a key role in the superboom 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Maritime Strategies International 27
Flexibility and complexity Market Outlook Maritime Strategies International
Can we even forecast? Plans are worthless, but planning is everything Dwight Eisenhower, 1957 Maritime Strategies International 29
Shipbuilding Capacity Outlook 60 50 Mn CGT Other Europe China Continuing consolidation of capacity expected 40 Korea Japan 30 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Maritime Strategies International 30
NB Price Drivers 120 Index Yard Forward Cover (RH Axis) Yard Cost Index Yard Price Index Years 3.0 110 2.5 100 2.0 90 1.5 80 1.0 70 0.5 60 0.0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Maritime Strategies International 31
If consolidation doesn t happen 2500 $/CGT, Bulk Ships 2000 1500 1000 500 If we don t have further consolidation, newbuilding prices could weaken rather than strengthen Base Case No further consolidation 0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Maritime Strategies International 32
The impact of NB Prices 85 VLCC 5 Yr Old Price, $ Mn 80 which then undermines asset prices 75 70 65 60 55 50 Theoretical VLCC 5 Yr Old Price (NB & Scrap only) MSI Forecast VLCC 5 Yr Old Price No Consolidation Scenario 2017 2018 2019 2020 2021 2022 Maritime Strategies International 33
Flexibility and complexity Where Is the Best Value Maritime Strategies International
MSI - FMV MSI Forecast Marine evaluator (FMV) is the first web-based tool to provide forecast and historical price data covering virtually all of the deepsea shipping fleet. Data includes forecasts of newbuilding, second-hand prices, 1 year timecharter rates and operating costs for specific vessels. MSI FMV draws on MSI s proven, proprietary models and a consistent cross-sectional view across all principal shipping sectors. It puts asset values in the context of the near term market to enable reliable benchmarking with outputs based on annual averages. Coverage: Crude Oil Tanker Chemical Tanker Multi Purpose Product Oil Tanker LPG Carrier Containership Dry Bulk Carrier LNG Carrier PCC/PCTC AHTS /fmv PSV Maritime Strategies International 35
MSI projected IRR Purchase age in 2018 (sell end 2021): 0 Year old 5 Year old 10 Year old 15 Year old Maritime Strategies International 36
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