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Why 15-year-old ship prices remain negative for crude shippers

Xun Yao Chen

Key crude tanker stocks updates, September 20–27 (Part 10 of 10)

(Continued from Part 9)

The importance of 15-year-old vessel price

In addition to new build prices, it’s also important for investors to follow 15-year-old vessel prices. Similar to new build prices, the 15-year vessel price reflects the fundamental outlook for the shipping industry. When prices are rising, they generally portray a favorable outlook for rates. When rates are stable, you can expect the outlook to be dim. And when rates are falling, you can expect the outlook to be negative and share prices to fall.

15-year-old vessel price remains in downtrend

For the month of August, 15-year-old vessel prices for VLCCs (very large crude carriers, used to primarily haul crude oil from Africa and the Arabian Gulf to the rest of the world) have remained unchanged, at $20 million from July. The price of a 15-year-old Suezmax vessel had averaged $10.5 million, after falling from $11 million in June. Suezmax is a ship class that’s smaller than VLCCs and generally employed on VLCC routes with particular emphasis on West Africa to the United States.

The difference between 15-year-old and new build prices

Unlike the new build price, the 15-year-old price reflects more of a short-to-medium-term outlook for the shipping industry. This is because these vessels are sold and bought in the secondary market, and there isn’t a significant lag time between the point of time a buyer signs a contract to purchase a vessel and the time of delivery as compared to new build prices.

Near-term outlook remains negative for crude shippers

Investors should use changes in the 15-year-old vessel price with caution, however. It has historically thrown investors, analysts, and traders off from the long-term trend. In 2010 and the second half of 2012, for example, VLCC prices rose despite poor performance among several crude tanker companies—on an absolute and comparative basis. For most of the same period, new build prices continued to fall.

What we’re seeing now is an increase in new build price and a falling 15-year-old vessel price. If construction time for these large ships were as short as construction time for dry bulk vessels, then this indicator wouldn’t be as important. But since crude tankers take longer to construct than dry bulk vessels, it may be a little longer until fundamentals and share prices recover for companies like Teekay Tankers Ltd. (TNK), Ship Finance International Ltd. (SFL), Frontline Ltd. (FRO), and Nordic American Tanker Ltd. (NAT). Companies with poor balance sheets are still at risk of defaulting. Investors trying to take advantage of improving long-term outlook for the crude tanker industry but wishing to minimize risk can use the Guggenheim Shipping ETF (SEA), which invests in large shipping companies with strong financials.

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