How much can the ships generate in earnings?
Most product tankers these days generate about $15,000 in TCE (time charter equivalent) for the first half of this year. Time charter equivalent is a measure of revenue that shipping companies receive after adjusting for any voyage expenses.
Voyage expenses are expenses incurred due to a vessel’s traveling from a loading port to a discharging port, such as fuel (bunker) cost, port expenses, agents’ fees, canal dues, and extra war risk insurance, as well as commissions, while “voyage operating expense” refers to crewing, repairs and maintenance, insurance, stores, lube oils, communication expenses, and technical management fees. Shipping companies often report figures in TCE so that investors can compare performance of ships operating in the spot and time-charter markets.
You’ll notice that although costs for L2 ships are ~$10 million higher than the M2 ships, it’s not always the case that shipping companies can earn higher revenues from larger ships due to differences in supply and demand. It’s also important to note that Eco class vessels earn higher TCE revenues from customers. This is because fuel cost is a factor that affects customers’ cost. So any advanced technologies or designs that can help customers save fuel cost, an estimated amount of at least $3,000 per day (which could be more depending on oil prices), is additional revenue to the shipping companies.
Voyage operating expense
Voyage operating expense for different types of vessels is also similar, at approximately $6,000 per day for the two companies compared to $8,000 for the industry average. Operating expenses of Eco tankers are lower by approximately $500 to $750 per day on lower crew and lubrication oil expenses, according to Scorpio Tankers Ltd. (STNG).
High return on investment
Based on the two graphs above, and using the price of ships and ships under construction in Part 5, Navios Maritime Acquisition Corp. (NNA) and Scorpio Tankers Ltd. (STNG) can expect to generate roughly 25.5 million and 127 million more in annual EBIT (earnings before interest and tax) with all the new ships that are to be delivered by 2014. That would give us an average return of 7.41% in pre-interest and tax earnings for each vessel for Scorpio and 13.37% for Navios Maritime Acquisition Corp. (NNA).
Navios’s returns are higher because the company is buying older vessels from the secondary market, which are at a historically cheap level compared to new builds, and a large part of Scorpio’s new deliveries is LR2 ships, which are generating lower returns at the moment. These returns are much higher than what the companies are making currently and have yet taken into account financial leverage.
- Part 1 - Why Navios and Scorpio have rallied more than 40%
- Part 2 - Supply and demand dynamics of crude tankers remain negative
- Part 3 - Why product tankers are performing better than crude tankers
- Part 4 - Why product tanker dynamics rebounded earlier than crude tankers
- Part 5 - Navios and Scorpio have been aggressive with new ship purchases
- Part 6 - Why new tanker deliveries add significant returns to earnings
- Part 7 - How financial leverage boosts returns from new ships
- Part 8 - Why Scorpio and Navios may not be that undervalued anymore
© 2013 Market Realist, Inc.