On November 13, 1997, the Company's subsidiary Buckingham Shipping Plc entered into a 20 year bareboat charter with BP Shipping Limited ("BP") for the VLCC British Pioneer. The fixed charter period with a bareboat rate of $24,895 ended on January 2, 2009 and was followed by four one year extensions at market related charter rates. During the market related period, the Company's ship owning subsidiary will receive the greater of a Base Daily Rate of $20,000 per day or a spot market rate. After inclusion of a daily component for operating expenses (shortly to be agreed by the parties), the spot market rate must exceed the Base Daily Rate and the agreed operating expenses, in order for the Company's subsidiary to receive any additional hire. The spot market rate will be quoted by the London Tanker Broker Panel on a quarterly basis. The additional hire calculation, while calculated quarterly, is cumulative on a four year basis or shorter if BP terminates the charter earlier. BP has extended the vessel until January 2011, and has two annual options to extend this market related charter.
On February 2, 2009, BP extended the charter for the VLCC British Progress for one year after the fixed period ends in February 2010. The vessel will continue on a bareboat rate of $24,895 per day until the fixed period is finished in February 2010, followed by the same rate structure as for British Pioneer until February 2011.
The two other VLCCs, British Purpose and British Pride are on bareboat contracts to BP at a fixed rate of $24,895 per day until the fixed periods end in July 2010 and July 2011, respectively. BP is required to notify the Company 12 months in advance of the fixed period ending if they intend to terminate the charter.
As a consequence of the charter extensions, the charter coverage with BP is 100 percent in 2009 and 88 percent in 2010 for the four VLCCs.
On January 2, 2009 the UK tax lease arrangement between Buckingham Shipping Plc and Dresdner Kleinwort Leasing relating to the VLCC British Pioneer was terminated and the outstanding lease obligation was settled in full using restricted cash. At December 31, 2008 the lease obligation was $69.3 million and the termination was cash neutral for the Company. The vessel was sold to Buckingham Petro Limited, a previously dormant subsidiary of Independent Tankers, which simultaneously entered into a lease with Buckingham Shipping Plc.
74,825,166 ordinary shares were outstanding as of December 31, 2008 and the weighted average number of shares outstanding for the fourth quarter was also 74,825,166.
The average market rate for VLCCs from MEG to Japan in the fourth quarter was approximately WS 84 ($61,500 per day) compared to approximately WS 148 ($96,500 per day) in the third quarter of 2008. The average rate for Suezmax tankers from WAF to USAC in the fourth quarter was approximately WS 145 ($56,000 per day), compared to approximately WS 204 ($69,500 per day) in the third quarter of 2008.
Bunkers at Fujairah averaged $290/mt in the fourth quarter with a low of approximately $206/mt and a high of approximately $552/mt. Bunkers prices were quoted in Fujairah on the 24th of February at $240/mt.
The International Energy Agency ("IEA") reported in January 2009 an average OPEC oil production, including Iraq, of 31.4 million barrels per day during the fourth quarter, a decrease of about 1 million barrels per day from the third quarter. The next OPEC meeting is scheduled to take place on March 15, 2009.
IEA further estimates that world oil demand averaged 85.3 million barrels per day in the fourth quarter of 2008, status quo more or less from the third quarter. IEA predicts that the average demand for 2009 in total will be 84.7 million barrels per day, hence a 1.1 percent decline from 2008.
According to Fearnleys, the VLCC fleet totalled 501 vessels at the end of the fourth quarter with eleven deliveries during the quarter. There are six additional deliveries expected to take place in the first quarter of 2009. The total order book amounted to 227 vessels at the end of the fourth quarter, down from 238 vessels after the third quarter of 2008. The current orderbook represents approximately 45 percent of the VLCC fleet. Two VLCC's were deleted from the trading fleet and no VLCCs were ordered during the quarter. The single hull fleet amounted to 110 vessels at the end of the fourth quarter. Finally, a further six VLCC newbuilding contracts were cancelled during the quarter and additional amendments to the orderbook is expected.
The Suezmax fleet totalled 348 vessels at the end of the quarter, up from 346 vessels after the third quarter of 2008, a 0.5 percent fleet increase over the quarter. No Suezmax tankers were ordered and two deliveries took place in the quarter. The total orderbook amounted to 172 vessels at the end of the quarter, a decrease of two from the end of the third quarter. There are 73 deliveries expected in 2009 according to Fearnleys and the orderbook represents approximately 50 percent of the current Suezmax fleet. However, it must be stressed that significant delays to the 2009 delivery schedule is expected. Finally, the single hull fleet amounted to 37 vessels at the end of the fourth quarter.
Strategy and Outlook
The Company's strategy will mainly be concentrated around long term charters to reputable companies and for the time being BP Shipping Limited, Chevron Transport Corporation and Frontline Ltd.
The main focus is to find solutions to get access to the locked up future cash flows in the Company, however in the current financial markets it is a challenge to pursue any alternatives.
Based on the new charter structure described above for the VLCC British Pioneer in 2009, the Board anticipates improved results as a consequence of the market related exposure and is satisfied with the downside protection with the Base Daily Rate of $20,000 per day.
The Company's charter coverage for its six double hull VLCCs is 100 percent in 2009 and 96 percent 2010. For the three double hull Suezmax tankers, the charter coverage is 100 percent in 2009 and 75 percent in 2010. Our strategy has been to focus on long term charters to reputable companies and we are very satisfied in today's challenging credit and shipping markets that BP and Chevron are our main counterparties.
The Company has low cash breakeven rates and the vessels are financed through the US bond market with maturity from 2015 to 2021. The Company's focus at the moment is related to the refinancing of the short term bank facilities of $40.6 million that mature in June and August 2009. The latter was drawn in connection with the repurchase of our own Windsor term notes in 2008.
The combination of fixed bareboat and market rates for the six VLCCs in the years ahead and the fact that all the vessels are financed creates a solid platform for the Company going forward.
My comment: A company that is earning .21 cents per annum in a fairly stable enterprise should be worth more than .25 cents a share.