A disruptive start to the year
The first quarter of 2022 has been dominated by the Russian invasion of Ukraine and its effects on energy prices and commodity flows around the world – a development we have yet to see the end result of. For the tanker market, the war has meant a trend break, with several segments seeing sharply rising market rates. At the same time, increasing fuel prices have led to significant differences in earnings between different segments and vessel types.
The three irst months of 2022 show a large difference in market rates before and after the invasion began on 24 February. The replacement of Russian oil with products from the US and Asia has resulted in more long-distance shipments, which increases the capacity utilization of the tanker fleet.. For the MR segment, average earnings at the beginning of the year were approximately USD 8,000 per day1), rising to approximately USD 19,000 per day1) by 1 April. At the same time, there are large differences between different geographical areas. In the Caribbean and US Gulf, for example, freight rates have exceeded USD 70,000 per day in some periods. A similar trend can be seen in the crude oil segments. The Suezmax segment2) started the year at approximately USD 5,000 per day, rising to just over USD 45,000 per day by the beginning of April.
Sharply rising oil prices
The price of crude oil also rose sharply during the quarter, from an average of USD 74 per barrel in December 2021 to an average of USD 117 per barrel in March 2022. This has driven up bunker prices so that vessels in the same market and the same segment now have a greater difference in earnings than was previously the case, due to differences in bunker consumption. The trend is particularly evident in the VLCC segment, where shipbroking firm Clarkson reported minus USD 2,738 per day for a standard vessel, USD 9,140 per day for a vessel with ECO design and USD 15,410 per day for an ECO vessel with scrubber3) on 1 April.
Active work on the fleet
Result before tax for the quarter amounted to SEK –30.4 (–120.2) million. EBITDA was SEK 29.7 (–45.7) million, corresponding to USD 3.2 (–5.4) million. The result improvement compared with the same quarter in the previous year is mainly a consequence of the majority of P-MAX fleet now being chartered out on long-term contracts with an agreed base rate of USD 15,500 per day and vessel. There is also the possibility of profit-sharing for amounts exceeding the base rate, calculated on the basis of average earnings per vessel per half-year. Overall, average earnings for the seven P-MAX vessels on time charters were USD 15,500 per day during the quarter.
During the quarter, four of the P-MAX vessels were employed by Stena Bulk in the spot market or on shorter contracts, while the other three were on longer contracts over one year.
The sold vessels Stena Perros and Stena President were delivered to their new owners during the quarter. The vessels, both built in 2007, had periodic maintenance dockings scheduled for 2022, including installation of ballast water management systems. The sales had a positive liquidity effect of approximately USD 2 million. The surplus has been used for accelerated loan amortisation.
In addition, Stena Polaris was delivered on a bareboat charter to the American shipping company Crowley Government Services Inc. (Crowley) for a minimum period of 12 months with options up to 5 years. In turn, Crowley has leased the vessel with an American crew and flag to the the US Military Sealift Command.
The Suezmax vessel Stena Supreme remained employed in the spot market and had average earnings of USD 14,600 per day (USD 13,100 per day).
The recent weakness of the yen and stronger valuations for the Suezmax vessel have prompted us to put the vessel on the market for sale. The vessel has been on a bareboat charter from a Japanese shipowner since 2016 under a contract with annual purchase options priced in yen.
The break-even level was too high to provide positive cash flow in the weak market we saw in 2021. A sale is expected to generate a positive cash flow and also save on the docking that was scheduled for the vessel in 2022.
Launch of technical design study on vessel conversion
A technical design study with Stena Teknik and the German company Neptun Ship Design GmbH was launched during the quarter. The aim is to investigate the feasibility of converting P-MAX vessels to 2,100 TEU container ships. It is already clear that this is technically possible. The commercial viability is now being investigated.
No serious incidents or accidents
No oil spills or lost-time incidents occurred during the quarter. However, an outbreak of Covid on board Stena President resulted in 10 days offhire.
Three vessels were inspected under OCIMF’s SIRE inspection programme with an average of 2 observations per vessel, which is positive.
Response to stricter environmental requirements
The rules on maximum greenhouse gas emissions from shipping have been tightened in recent years – and are expected to be even stricter in the future. The IMO’s short term measures4) to reduce emissions enter into force on 1 January 2023 and an evaluation of effective technical and operational initiatives required to ensure compliance is in progress. A plan for EEXI compliance has been developed, based on adjusting the engine power of vessels through EPL (Engine Power Limitation), which should not result in any operational restrictions. The regulatory framework related to CII will be finalised in June 2022, after which a plan will be developed.
Outlook
The tragic situation in Ukraine is likely to continue to dominate the market picture and contribute to increased uncertainty, with political decisions affecting cargo flows and earnings levels. Depending on how cargo flows “stabilise” in the new reality that we foresee, this could have a continued positive effect on the tanker market. Stock levels remain low and the predicted net growth in the product tanker fleet is also low. We therefore expect high volatility in 2022. For 2023–2024, we then anticipate a generally stronger market, although we do so with great humility in the face of considerable uncertainty.
Looking at our own operations, the focus remains on ensuring financial stability while maximising the value of the P-MAX fleet. New opportunities are continously being evaluated in a dynamic and cyclical market.
Gothenburg, May 2022
Erik Lewenhaupt, CEO
1) Clarkson Clean MR Avg. Earnings.
2) Clarkson Suezmax Avg. Earnings.
3) Exhaust gas cleaning system enabling operation with cheaper fuel (HFO).
4) Energy Efficiency Existing Ship Index (EEXI) and the Carbon Intensity Indicator (CII).
