Tanker trading – a novel business proposition

Tankers traded like stocks and shares; that is the thinking behind Tanker Investments Ltd, a novel business established by Teekay Tankers and Teekay Corporation. In a move designed to take advantage of the cyclical slump in the tanker market the new company will purchase vessels at what are considered to be a low prices and, hopefully, sell them on later once the tanker market has recovered and the value of the vessels rises again. In the meantime the company will operate the tankers as normal.

Tanker Investments has completed a $250m private equity offering which has supplied it with the funds necessary to operate. All but $50m worth of the equity was purchased by investors based in Norway, the US and the UK, with Teekay Tankers and Teekay Corporation acquiring a $25m interest each. These funds have already been used to purchase four 2009- and 2010-built Aframax crude oil tankers for $116m and provisions have been made to spend a further $163m on four 2009-built Suezmax crude oil tankers. The remaining proceeds from the offering will be used to purchase more vessels in the future.

While the timeframe for the programme of purchases and equity offerings has been made quite clear by Teekay, no indication of a date for a return on this not inconsiderable investment has been given. This is most likely because the business move is, in essence, a gamble and there is no way of knowing exactly when it will pay off.

While I find the notion of buying colossal crude oil tankers at supposed bargain prices and selling them on again when the market tops out to be jolly exciting, of perhaps greater interest are the market conditions which have made this a viable business opportunity.

For those of you not familiar with the current condition of the shipping market I’ll offer a brief outline. Back in the heady days before the global economic crisis struck in 2008 the shipping industry was riding high on a wave of confidence; the big shipping companies were posturing for precedence, ordering more and more vessels of ever increasing size to meet surging demand. Unfortunately, crisis took hold and in 2008 shipping volumes plummeted, causing huge overcapacity and a massive fall in the demand for container vessels. What compounded the problem for the industry was that, for years after the financial meltdown, all those pre-crash orders were still being launched out of shipyards at an alarming rate, meaning that while volumes were falling capacity was increasing, rapidly. This resulted in a considerable decline in the value of both container vessels and tankers.

Fast forward to 2014 and we live in a world moving steadily towards growth again and the probability that, over the next few years, the tanker market will overhaul overcapacity and that the demand for more vessels will push prices back up again. At least that is what Teekay is banking on.

Teekay Corporation itself has described the move as ‘opportunistic’ and that it certainly is. The Tanker Investments Ltd scheme is at the mercy of the market, just like trading shares in an attempt to play the stock market it has the potential to go horribly wrong if predictions and trends fail to come to fruition. However, as there is very little room for the tankers to lose their value in the medium term and the risk is minimised by the operational use of the vessels, in this case, I expect the gamble will pay off. Just how much profit there is to be made from a scheme such as this remains to be seen.

In order to raise further funds to enlarge the scale of this operation Tanker Investments intends to conduct an initial public offering at the end of March, will you be investing?

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