Analysis by Poten & Partners
Cash Break Even Rates Versus 5-Year Charter Rates
A few days ago, Poten & Partners talked to an investor who faces a dilemma. He owns several 10-year-old Medium Range (MR) product tankers, which were acquired several years ago for competitive prices at the time of purchase. All vessels are on period charter to oil companies for respectable rates. His question: Should he keep these vessels for the foreseeable future? Or is it time to trade them in for a pair of new ECO models?
To start addressing this question,Poten & Partnerscompare the two investment cases based on a few (simple) assumptions:
- The price of a 10-year old MR is currently assessed at $17.5 million and the Operating Expenses are $7,000 per day. If the Owner can finance 50% of the acquisition price for 5 years at an all-in cost of 6.5%, the cash breakeven rate for this vessel is approximately $12,950 per day. The 5-year timecharter (TC) rate for a non-ECO MR is assessed at $14,750 per day and gives the Owner an equity contribution of some $1,800 per day or a cash-on-cash return of 7.5%
- A resale (new) MR is assessed at approximately $35 million and we assume the same $7,000 per day costs to operate this vessel. The Owner can also finance 50% of the purchase price at 6.5%, but will be allowed to pay the loan back over 10 years. The cash breakeven rate for this vessel is approximately $13,860 per day. The 5 year TC rate for an ECO MR is currently assessed at $16,500 per day, giving the owner an equity contribution of approximately $2,640 per day or a cash-on-cash return of 5.5%
Based on this comparison, in the current rate environment, the investor appears to be better off continuing to trade the older vessel, rather than buying a new one. However, there are other factors to consider: perhaps the operating expenses on the older vessel are slightly higher than on the newbuilding (especially during the first years of the vessels operating life). Also, financing for older vessels could prove to be harder to come by and thus be more expensive. Small variations in these assumptions change the relative economics of these investments. Another consideration is market liquidity: at the moment, it may be easier to purchase an older vessel than a newbuilding resale as the latter vessel may command a premium in the secondhand market.
More important however, is the expectation of what happens at the end of the charter. The non-ECO vessel will be 15 years old and may have a more difficult time finding employment in a market where ECO tonnage will have become the standard. This will have an impact on the residual value of the older non-ECO ships.
Ultimately, the key to investing in the tanker market is, and always will be, timing. When you time your entry and exit right, it almost does not matter whether you buy a modern or an older vessel, as long as you acquire it at the beginning of the cycle.
Source and Image Credit: Poten & Partners
