Jones Act Market the Talk of Marine Money Week
The Jones Act Market featured as a central topic of conversation on the first day of our parent company's 26th Annual Marine Money Week. In the edition of Marine Money's Freshly Minted immediately following the event, Erik Nikolai Stavseth of Arctic Securities shared his thoughts on the Jones Act sessions. His commentary is as follows:
What a Difference a Year Makes – “The Jones Act Market is HOT”
Impressions from Marine Money Day 1: Jones Act tanker market is in a ‘sweet spot’, but LPG represents an ‘undiscovered gem’ of exposure towards U.S. Shale boom
Summary: The room was filled during the Jones Act sessions today and with good reason. The market for product tankers has attractive demand fundamentals driven predominantly by the increase in U.S. crude oil production from Eagle Ford and a limited number of shipyards able to construct vessels as well as competition from a container vessel fleet in dire need of renewal. Relet rates have hit the six-digit mark and five-year deals are quoted at USD 75,000/day, but valuation of illiquid segments always represents challenges and willing seller/willing buyer is an important factor for Jones Act investors. Lastly, we highlight SEACORs comments on alternative ways to play the U.S. Shale boom; a lot of upside has already been priced into the Jones Act Product tanker market, but LPG remains an “undiscovered gem” with plenty of upside on higher U.S. exports destined for Far East (adding ton-miles) and only 14% of the fleet currently in the orderbook (limited supply). What would we buy? Both.
Fifty Shades of Ship Finance or The United States Tanker Trade, the latter is the sexy one. The first day of Marine Money 2013 had two separate tracks – the United States Tanker Trade and Fifty Shades of Ship Finance. Choosing to leave the juicy details from what we expected to be of Fifty Shades of Limited Insight (assigning ‘an efficient well-priced source of capital to the Norwegian KS Market is a bit of a stretch in our view), we focused our efforts on the U.S. Tanker Trade – better known as the Jones Act Market. The market encompasses some 32 vessels (ironically enough the same number as the number of teams in the NFL), but the number of listeners in the audience will probably not be exceeded during any of the other presentations during Marine Money 2013 – the Jones Act market is HOT with investors turning every stone to find investable ideas – and they may be closer than they may think.
The legal aspects of Jones Act are important, but not a hindrance to most investors. The Jones Act market is a market solely concerning cabotage trade (trade between ports in the same country) within the U.S. (including Alaska and Hawaii). Due to the restrictions on trade, there are naturally a set of political and legal issues that have to be complied with. Mr. Tony Salgado of Blank Rome took us through the main considerations investors should keep in mind and although numerous and detailed, we were left with the impression that the issues applied more to the companies than the investors. That said, a fun fact (with a strand of seriousness) is that a cruise vessel breaking Jones Act regulations will be fined USD 300/passenger. Imagine ‘Allure of the Seas’ with its 6,300 passenger capacity being fined USD 1.89m for breaking the rules, it doesn’t really dent RCLs EPS. However, for commodity vessels, the fines could exceed the value of the cargo – not so pleasant if you’re carrying 330,000 barrels of gasoline on top of a 10,000-15,000/day operating violations fine from U.S. Coast Guard.
MJLF – the Main Event of the Jones Act sessions. The ‘Main Event’ of the Jones Act track was shipbroker MJLF's market view. MJLF highlighted the fact that the Jones Act fleet consists of some 40,000 vessels, although the focus was on the 85 vessels and ATBs trading in crude/products. In explaining the higher rates, MLJF pointed to the fact that an Aframax constructed in the U.S. for the Jones Act market would cost around USD 200m while a similar vessel for international trade would cost a “mere” USD 45-46m in Asia. For an MR the comparable numbers were USD 125m and USD 35m. Despite higher costs justifying a higher freight rate, the recent relet levels of USD 100,000/day are clearly a situation that puts Jones Act “under the microscope” as ship owners chase the next six-digit charter. However, even five year deals were according to MJLF suggested at USD 75,000/day – a positive data point in our view.
MJLF decodes the market; bullish without a freight rate forecast. MJLF (perhaps wisely given the number of hungry investors in the audience) did not put up a freight rate forecast for product tankers and ATBs in the Jones Act market. However, they did show the historical levels over the past years with the historical spread between ATBs and product tankers being ~USD 10,000/day versus the current spread of USD 30,000/day – underlining the market tightness. Supply of vessels is the main constraint in the Jones Act market and although one might argue that product tankers are the flavor of the month, the U.S. container fleet requires replacements and could constrain the number of product tankers constructed over the next years – another positive point in our view as tonnage deficit will last for longer. Despite a lack of firm freight rate forecasts, MJLF indirectly alluded to a stronger market as they showed graphs of U.S. Gulf Cast imports declining from 6MBBLSPD in 2005 to a current 4MBBLSPD in 2012 and an estimated 3.2MBBLSPD in 2015 – a consequence of increased domestic production. In addition, shale oil production is expected to be increasing to 3.25MBBLSPD in 2015 and 4.75MBBLSPD in 2020 – in line with our estimates based on Rystad Energy’s UCube. While part of our thesis has been increased crude volumes out of Corpus Christi to other Gulf Coast destinations, MJLF said that we might see crude from USGC flowing all the way up to U.S. Atlantic Coast – now that is a highly positive development for the vessel demand should it materialize. We think the Jones Act market will remain firm in the years to come and find that reading between the lines – MJLF supports that view.
Valuation of Jones Act Assets, no magic recipe – back to DCFs. Matt Thompson of BofA ML presented perspectives on valuation of Jones Act Assets, relevant in times when AMSC has shot up by 2,000% over three months and the vessels has gone from being implicitly valued at ~USD 85, to ~USD 105m today. Going through the market and valuation alternatives touching both upon various depreciation profiles and selling assets vs. selling businesses, Mr. Thompson ended up with DCFs being the most reasonable valuation approach compared to acquisition comparables and public comparables. At this point, Mr. Thompson raised an important issue – the willing seller/willing buyer issue of illiquid markets. Despite the underlying freight rate market is a driver for both stock prices and asset values, the number of real buyers is probably relatively limited which to a certain extent constrains investors opportunities to a select few “liquid” vehicles. Mr. Thompson ended his presentation by comparing transactions in the Jones Act market to sales of U.S. sports franchises – the number of buyers is limited, but at the right price there is a willing buyer.
Panel on U.S. Energy Independence – Jones Act product tankers is not the sole way to play the US Shale boom. Jones Act product tankers is not the sole way to play the U.S. Shale boom. The panel included representatives from OSG (in Chapter 11, but with a substantial presence in the Jones Act market with 12 vessels and a number of ATBs), SEACOR (with three vessels and a bigger number of barges), Platinum Equity (having invested in the segment) and Wärtsilä (marketing their new LNG powered engines). Platinum suggested that the trapped crude in Canada, Bakken and Eagle Ford will be the main drivers of the Jones Act Tanker market, but said that there are still a “disagreement” on which transportation mode will ‘prevail’ as the preferred one (with a direct reference to pipelines as the biggest competitor). The panel also highlighted the fact that while Title XI (the financial support system for Jones Act tonnage) is virtually non-existent, international shipping is experiencing a large-scale support from local governments (China, Japan and South Korea are all doing it) – this being a positive for the market balance as it would constrain the number of vessels being built. A very interesting point in our view was SEACOR's comment on alternative ways of playing the U.S. Shale boom – underlining their recent investment in VLGCs to benefit from the rapidly increasing volumes emerging in the U.S. Gulf Coast and set to head for Far East buyers - providing substantial ton-mile growth in the coming years. We have previously pointed to the attractiveness of both VLGCs and MGCs and see these segments performing well on the back of U.S. exports surging over the nest years.
Links to audio and visual materials from the conference sessions, as well as the original edition of Freshly Minted in which Stavseth's article appeared, are available through the Marine Money website.
