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IMO 2020
Makes Tankers
Investable Again
Frode Mørkedal
Managing Director Equity Research
Clarksons Platou Securities AS
Monday 17 June, 2019
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After several weak years, most investors are off to other hunting grounds
Source: Bloomberg, Clarksons Platou Securities AS
Shipping Equity Performance
2
10
18
39
-29
-10
18
-67
-38
23
-6
19
-40
-35
2
17
38
-11
-16
-51
20
43
-22 -17
61
-26
-2 4
8
-3 0
43
31
-5
-57
-6
-22
-55
-22
40
-25
4
-38
-16
-41
13
-80
-60
-40
-20
0
20
40
60
80
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 TD
Media
n T
ota
l re
turn
(%
)
Crude Chemical Product
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Crude at 0.8x, Product at 0.85x and Chemical at 0.6x
Crude Tankers Product Tankers Chemical Tankers
Source: Bloomberg, Clarksons Platou Securities AS
Equity Valuation (P/NAV)
3
0.0x
0.5x
1.0x
1.5x
2.0x
2.5x
09 10 11 12 13 14 15 16 17 18
Price t
o N
AV
Average Crude tankers Baseline
0.0x
0.5x
1.0x
1.5x
2.0x
2.5x
09 10 11 12 13 14 15 16 17 18
Price t
o N
AV
Average Product tankers Baseline
0.0x
0.5x
1.0x
1.5x
2.0x
2.5x
09 10 11 12 13 14 15 16 17 18
Price t
o N
AV
Average Chemical tankers Baseline
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Orderbooks lowest in at least two decades
Crude Tanker orderbook % of fleet
Product Tanker orderbook % of fleet Chemical Tanker orderbook % of fleet
Source: Clarksons Research, Clarksons Platou Securities AS
…but supply-side fundamentals are now very different
4
Weak equity performance is a result of the overcapacity built up last decade, now much improved starting point
0
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%
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Bunker Prices as of 13th of June 2019
IMO 2020: Fuel costs going up ~40% to $500/ton
5
Source: Clarksons Platou Futures Ltd.
0
100
200
300
400
500
600
700
800
900
1000
1100
1200
1300
1400
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
$/t
on
ne
MGO bunker prices, Singapore
380cst bunker prices, Singapore
Differential
0
100
200
300
400
500
600
700
800
Jun19
Aug19
Oct19
Dec19
Feb20
Apr20
Jun20
Aug20
Oct20
Dec20
Feb21
Apr21
Jun21
Aug21
Oct21
Dec21
0.50% Sulphur Fuel Oil
Differential 10 ppm Gasoil vs 380 cst
Differential 0.50% Sulphur vs 380 cst
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Rest of 2019: Average 1.8% of Crude, 0.7% of Product and 0.4% of Chemical fleet ‘Out-of-Service’
Crude Tankers Product Tankers Chemical Tankers
Source: Clarksons Research as of 3 June 2019 (merchant vessels above 10,000 dwt)
Scrubber Retrofit Schedule
6
20
110
44
5
10
77
29
6
8
42
30
0
2.2 %
14.8 %
20.2 % 20.8 %
0%
5%
10%
15%
20%
25%
0
50
100
150
200
250
Fitted 2019 2020 2021
Num
ber
of
ship
s
VLCC Suezmax
Aframax % of fleet (dwt)
5
39 32
0 1
4 12
1
16
74
22
0
0.8 %
5.7 %
9.0 % 9.0 %
0%
5%
10%
15%
20%
25%
0
50
100
150
200
250
Fitted 2019 2020 2021N
um
ber
of
ship
s
LR2 LR1 MR/SR % of fleet (dwt)
20 39
26 4
1.3 % 3.8 %
6.0 % 6.5 %
0%
5%
10%
15%
20%
25%
0
50
100
150
200
250
Fitted 2019 2020 2021
Num
ber
of
ship
s
Chemical % of fleet (dwt)
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Current sailing speeds at 11.5-12 knots
VLCC average speed MR average speed Chemical tanker average speed
Source: Clarksons Research, Clarksons Platou Securities AS
Speed overview
7
Still slow steaming potential
10.0
10.5
11.0
11.5
12.0
12.5
13.0
13.5
14.0
Feb
11
Sep 1
1
Apr
12
No
v 1
2
Jun 1
3
Jan 1
4
Aug 1
4
Ma
r 15
Oct 15
Ma
y 1
6
De
c 1
6
Jul 17
Feb
18
Sep 1
8
Apr
19
knots
10.0
10.5
11.0
11.5
12.0
12.5
13.0
13.5
14.0
Feb
11
Sep 1
1
Apr
12
No
v 1
2
Jun 1
3
Jan 1
4
Aug 1
4
Ma
r 15
Oct 15
Ma
y 1
6
De
c 1
6
Jul 17
Feb
18
Sep 1
8
Apr
19
knots
10.0
10.5
11.0
11.5
12.0
12.5
13.0
13.5
14.0
Feb
11
Sep 1
1
Apr
12
No
v 1
2
Jun 1
3
Jan 1
4
Aug 1
4
Ma
r 15
Oct 15
Ma
y 1
6
De
c 1
6
Jul 17
Feb
18
Sep 1
8
Apr
19
knots
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Even with improvement in rates, expect 1% reduction to average speed
VLCC speed (2014-2019) vs. bunker price VLCC speed (2014-2019) vs. freight rates Speed vs. bunker and freight rates
11.99
11.66
11.74
11.87
11.3
11.4
11.5
11.6
11.7
11.8
11.9
12.0
12.1
12.2
12.3
400 600
knots
Bunker price $/ton
25000
40000
65000
-1%
Source: Clarksons SeaNet, Clarksons Platou Securities AS
Slow steaming: Actual behavior last 5 years
8
11.4
11.6
11.8
12.0
12.2
12.4
12.6
12.8
0 200 400 600 800
knots
Average bunker price $/ton
+50%
-2.3%
11.4
11.6
11.8
12.0
12.2
12.4
12.6
12.8
0 20 40 60 80 100
knots
VLCC $000/day
Speed = 12.5 – 0.0016 * Bunker ($/ton)
+ 0.0051 * Rate(‘000/day)
R-Sq 80%
50% increase in bunker price would isolated
support 2.3% reduction to speed…
…although higher spot rates will isolated
incentivize higher speed… …but net effect is still a speed reduction of
1%. VLCC rates would need to go to
$90,000/day before speed is increased
VLCC ‘000/day
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…which greatly reduces risk of weaker economic growth
Source: Clarksons Platou Securities AS
Commercial effect of IMO 2020
9
IMO 2020 disruption could shift capacity utilization up by ~3% points
− Scrubber installations removing ~1% of fleet in 2019
− Scrubber installations removing ~0.4% of fleet in 2020
− Tank cleaning (2-3 days = 0.5-0.8%)
− Reduction of speed due to higher bunker cost (~1% in 2020)
− Increased long-haul trade of crude and oil products + floating storage (extra demand specific for tankers)
~3% supply adjustment
impacting most shipping sectors
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2005
2006
2007
2008
2009
2010 2011
2012
2013
2014
2015
2016 2017
0
5
10
15
20
25
30
35
40
82 83 84 85 86 87 88 89 90 91 92 93 94
US
D ‘000/d
ay
Product Tanker utilization (%)
~3% on utilization lifts VLCCs to $40,000/day and MRs to $19,000/day
VLCC rates and capacity utilization MR rates and capacity utilization
Source: Clarksons Platou Securities AS
IMO 2020 impact is meaningful
10
~3%point jump in utilization could lift earnings to healthy levels before normal supply-demand considerations
2005
2006
2007
2008
2009 2010
2011 2012
2013
2014
2015
2016
2017
0
10
20
30
40
50
60
70
80
90
100
82 83 84 85 86 87 88 89 90 91 92
‘000 U
SD
/day
Tanker utilization (%)
IMO “supply effects”
could jump-start VLCC
rates from $25k to $40k/day
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Crude Tankers Net Fleet Growth Product Tanker Net Fleet Growth Chemical Tanker Net Fleet Growth
Source: Clarksons Research, Clarksons Platou Securities AS
Net Fleet Growth at Benign Levels
11
7.8 7.3
2.3
0.1
1.6
-4
-2
0
2
4
6
8
10
2017 2018 2019 2020 2021
Perc
ent
gro
wth
y-y
Net fleet Swing MR tonnage
Retrofit Slow steaming
Net Fleet Growth
4.0
6.6
1.8 1.2
2.0
2.7
-4
-2
0
2
4
6
8
10
2016 2017 2018 2019 2020 2021
Perc
ent
gro
wth
y-y
Net fleet Retrofit
Slow steaming Net Fleet Growth
5.9 5.5
2.5
1.8 1.6 2.0
-4
-2
0
2
4
6
8
10
2016 2017 2018 2019 2020 2021
Perc
ent
gro
wth
y-y
Net fleet Retrofit
Slow steaming Net Fleet Growth
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2 mb/d decline in HFO shifts more of seaborne trade into clean products
Bunker consumption by product today and next year Implications: Trade volumes and pattern + Floating storage
Source: IEA Oil 2019, Clarksons Platou Securities AS
Tankers: Key sector to benefit from IMO 2020
12
Big change in both trade patterns, stockbuilding and volume increase possible to add tanker support
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2018 2020
Mill
ion b
arr
els
per
day
HFO (3.5%) 0.5% fuel MGO (0.1%)• High Sulphur Fuel Oil (HFO) to decline 2 mb/d
• Marine Gasoil (MGO, 0.1% Sulphur) demand +1 mb/d
• New 0.5% Sulphur fuel demand +1 mb/d
• Non-compliance expected by IEA at 0.7 mb/d
• If non-compliance were zero, MGO price could double rather
than increase 20% in base case (IEA estimate)
• Increased MGO trade positive for product tankers
• Refinery runs expected to increase in order to produce enough
low sulphur fuel oil
• 1.8 crude barrels needed to produce 1 barrel of distillate
=> both crude and product volumes expected to improve
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Both Crude and Product Tankers could gain
Strong refinery demand on the horizon Product trade could grow 5% in 2H19
Source: IEA, Clarksons Platou, Clarksons Platou Securities AS
Record refinery runs spell improving times ahead
13
There is demand for higher crude production and this could lead to a change in OPEC output, eventually
80.6 80.6
82.0
83.3
81.7
80.9
81.5
82.6
81.4 81.6
83.4
82.2
81.8 81.5
84.0
83.1
78.0
79.0
80.0
81.0
82.0
83.0
84.0
85.0
Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019
mill
ion b
arr
els
per
day
Global Crude Production Global Refinery Runs
Steady OPEC at 30 mb/d
68
70
72
74
76
78
80
82
84
86
15
16
17
18
19
20
21
22
2013 2014 2015 2016 2017 2018 2019
Glo
bal re
finery
runs m
b/d
Deep s
ea P
roduct
trade m
b/d
Product Trade (lhs)
Refinery runs (rhs)
IEA forecast ref.
runs 2019
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Trading distances expected to grow, giving ton-mile growth about 1% above volume growth
Source: Clarksons Platou Securities AS
Structural trend: US exports driving up average hauls
14
MEG-East
6,600 n. miles
ca 5,000 n. miles
World average distance
US Gulf-China
10,000 n. miles
Oil
LNG
LPG
Chemicals
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Export bottleneck alleviated by year-end 2019, all production growth could head for exports
Status Developer Project 2019 2020 2021
Construction EPIC Pipeline EPIC Crude Pipeline 600,000
Plains All American Cactus II Pipeline 670,000
Andeavor; Phillips 66 Gray Oak Pipeline 900,000
Announced Wolf Midstream Gray Wolf Crude Connector 120,000
Wolf Midstream Red Wolf Crude Connector 120,000
Phillips 66 Red Oak Pipeline 400,000
Harvest Midstream; PBF Logistics; Phillips 66
Ace Pipeline System 400,000
Jupiter Jupiter Pipeline 1,000,000
Magellan; Navigator Energy Services
Voyager Pipeline 300,000
Marathon Pipeline Capline reversal 300,000
Marathon Pipeline; Crimson Midstream
Swordfish Pipeline 170,000
Tallgrass Energy Seahorse Pipeline 800,000
ExxonMobil, Lotus Midstream, Plains All American
Wink-to-Webster Pipeline 1,000,000
Grand Total 2,410,000 2,570,000 1,800,000
US Pipeline Developments into Gulf area US Crude Production (mb/d) Added pipeline export capacity (mb/d)
7
8
9
10
11
12
13
14
Jan
17
Ap
r 17
Jul 17
Oct
17
Jan
18
Ap
r 18
Jul 18
Oct
18
Jan
19
Ap
r 19
Jul 19
Oct
19
Jan
20
Ap
r 20
Jul 20
Oct
20
mb/d
Source: EIA Liquids Pipeline Projects May 2019, Clarksons Platou Securities AS
US Crude Export Capacity
15
2.7
9.5
2.2
0.2
2.6
1.8
0
1
2
3
4
5
6
7
8
9
10
2019 2020 2021 Total
mb/d
Exported YTD Construction Announced
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Burgeoning US exports driving longer average hauls & with growing volumes
Source: Clarksons Seanet, Clarksons Platou Securities AS
Short Haul Nature of Chemical Trade to Change
16
36 38 42 44 44 46
0
10
20
30
40
50
2017
2018
2019
2020
2021
2022
24 25 28 33
39 41
0
10
20
30
40
50
2017
2018
2019
2020
2021
2022
Global Fleet Average Haul = 3,909 N. Miles
US
USG-FEAST
10k nm/34 days MEG-FEAST
6k nm/19 days
ME
US
ME Middle East Gulf Projected Exports
US Exports 25% of Production Scenario
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VLCC vs. 2-year TC VLCC vs. 2-year TC
Source: Clarksons Platou Securities AS
Ship Values: Upside potential based on recent TC-deals
17
VLCC resale values could improve to $100m
0
10 000
20 000
30 000
40 000
50 000
60 000
70 000
80 000
90 000
40
60
80
100
120
140
160
180
200
2006 2008 2010 2012 2014 2016 2018
US
D p
er
day
US
Dm
Prompt resale
Newbuild
2-year TC
y = 0.0018x + 40.424 R² = 0.8529
0
50
100
150
200
250
0 10 000 20 000 30 000 40 000 50 000 60 000 70 000 80 000 90 000
VLC
C p
rom
pt re
sale
US
Dm
VLCC 2-year TC
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Disclaimer
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This presentation is provided by Clarksons Platou Securities AS and has been prepared for information purposes only. This presentation is not a solicitation of any offer to buy or sell any security, commodity or instrument or related derivative or to participate in any trading strategy. Any such offer would be made only after a prospective participant had completed its own independent investigation of the instrument or trading strategy and received all information it required to make its own investment decision, including, where applicable, a review of any prospectus, prospectus supplement, offering circular or memorandum describing such instrument or trading strategy (where such information would supersede this presentation, and to which prospective participants are referred). This presentation is confidential, and may not be reproduced or distributed, in whole or in part, without the prior written consent of Clarksons Platou Securities AS. This presentation is based on information obtained from sources which Clarksons Platou Securities AS believes to be reliable but Clarksons Platou Securities AS does not represent or warrant its accuracy or completeness and disclaims any and all liability related thereto. Please note that all prices and special levels are indicative, and may not be up to the date specified in this presentation, while the opinions and estimates contained herein represent the view as of the date of the presentation and may be subject to change without any prior notice. Please note that past performance of a company or financial instrument is not necessarily a guide to future performance. Estimates provided in this presentation are prepared by the equity research department in Clarksons Platou Securities AS. Clarksons Platou Securities AS expressively disclaim any and all liabilities for any and all losses related to investments caused by or motivated by this presentation. Any person receiving this presentation is deemed to have accepted this disclaimer that shall apply even if the estimates or opinions shown turn out to be to erroneous or incomplete or is based upon incorrect or incomplete facts, interpretations or assessments or assumptions by Clarksons Platou Securities AS, and irrespective of whether Clarksons Platou Securities AS or any person related to Clarksons Platou Securities AS can be blamed for the incident. For further disclosures on relevant definitions, methods, risks, potential conflicts of interests etc. and disclaimers please see http://securities.clarksons.com/Investment-Banking/Research/Disclaimers-and-Disclosures. All estimates and opinions expressed should be reviewed in conjunction with the information therein.
Clarksons Platou Securities AS and/or its employees may have investments in companies/financial instruments featured in this presentation, and may elect to sell or buy additional financial instruments at any time. Clarksons Platou Securities AS may also have other financial interests in transactions involving these companies/financial instruments. Clarksons Platou Securities AS may have or has acted as manager for a number companies mentioned in this presentation. For an overview of Clarksons Platou Securities AS‘ and/or its employees’ positions in financial instruments in addition to an overview of the companies to whom Clarksons Platou Securities AS has provided investment banking services to over the latest 12 months, please see http://securities.clarksons.com/Investment-Banking/Research/Disclaimers-and-Disclosures . This presentation does not provide individually tailored investment advice or offer tax, regulatory, accounting or legal advice. The securities, commodities or other instruments (or related derivatives) discussed in this presentation may not be suitable for all investors. This presentation has been prepared and issued for distribution to professional investors only and all recipients should seek independent investment advice prior to making any investment decision based on any information contained in this presentation. Prior to entering into any proposed transaction, recipients should determine, in consultation with their own investment, legal, tax, regulatory and accounting advisors, the economic risks and merits, as well as the legal, tax, regulatory and accounting characteristics and consequences, of the transaction. The analysts whose names appear in this presentation certify that (i) all of the views expressed in this research report accurately reflect their personal views about the subject securities or issuers and (ii) that no part of their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this presentation. The research analysts whose names appear in this presentation are not registered/qualified as research analysts with FINRA and may not be associated persons of Clarksons Platou Securities, Inc. and, therefore, may not be subject to the FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Distribution in the United States
This presentation was prepared for information purposes only by Clarksons Platou Securities AS, a foreign broker-dealer that is not registered in the United States. Clarksons Platou Securities AS‘ presentations are intended for distribution in the
United States solely to "major U.S. institutional investors" in reliance on the exemption from broker-dealer registration provided by Rule 15a-6 of the United States Securities Exchange Act of 1934, as amended and may not be furnished to any other
person in the United States. Each major U.S. institutional investor that receives a copy of a Clarksons Platou Securities AS presentation by its acceptance thereof represents and agrees that it shall not distribute or provide copies to any other
person. Any U.S. recipient of presentation that desires to effect transactions in any securities discussed within this presentation should do so through Clarksons Platou Securities, Inc., a U.S. registered broker-dealer and an affiliate of Clarksons
Platou Securities AS. All such transactions will be effected pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 and related interpretations. Financial statements included in the presentation, if any, may have been prepared in accordance
with non-U.S. accounting standards that may not be comparable to the financial statements of United States companies. It may be difficult to compel a non-U.S. company and its affiliates to subject themselves to U.S. laws or the jurisdiction of U.S.
courts.
This presentation is issued by Clarksons Platou Securities AS. Clarksons Platou Securities AS is a company established under the laws of Norway being licensed and supervised by Norwegian regulators, and all matters relating to this presentation shall be governed by the laws of Norway.
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