An overview of crude tanker industry (Part 7 of 10)
Changes to world trade and demand for tankers are key drivers that affect shipping rates. But how do companies like Frontline Ltd. (FRO), Tsakos Energy Navigation Ltd. (TNP), Teekay Tankers Ltd. (TNK) and Nordic American Tanker Ltd. (NAT) make money? The crude tanker business is like car rental business. In the crude tanker business, there are two main market (contracts) that companies can choose from: spot (voyage) and time (period) charters.
For spot (voyage) charters, shipping companies typically charge customers a rate to transport a specified amount of goods for one voyage, which could last a few weeks. In this type of contract, the owners of crude tankers pay the port fees, fuel costs and crew costs. In a time (period) charter, vessels are hired for a specific period at a negotiated daily rate. The owner will provide crews and expenses to keep the ships in shape and to run, but the charterer (customer) chooses the ports and trips, and pays for fuel, port fees and commissions. Companies will often provide information on charters in their filings–either quarterly or annually (see above as example).
Time Charter Equivalent
Companies will often report numbers based on “time charter equivalent.” This is an important metric because it converts voyage contract revenues into a time charter basis, so investors can better compare performance.
Tactics and differences
Depending on the company and management’s preference, time charter contracts could be as short as six months to a few years. Management may decide to employ vessels more on spot charters when shipping rates are expected to rise, and would use long-dated time charters when rates are expected to decline–an important concept. Investors can think of time charters as a method of hedging. Because there is no guarantee of employment in the spot market, risk is higher. However, this also means rates are typically higher in voyage charters, while time charters will provide investors with more predictable cash flows.
Investors could get an assessment of where managers expect rates to go in the future by listening to earnings calls, reading earnings transcript and viewing earnings presentations. Companies with more exposure to spot market are likely to outperform those with more time charter exposures, all else equal. Contract maturities can affect performance as well.
Browse this series on Market Realist:
- Part 1 - Overview and cheat sheet of investing in crude oil shipping industry
- Part 2 - Why is OPEC important to crude tanker’s business
- Part 3 - 3 major groups of importers key to OPEC oil and tanker demand
- Personal Investing Ideas & Strategies
- Commodity Markets
- Frontline Ltd.