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Oil tanker companies may be in trouble if OPEC raises cuts

BANGALORE (Reuters) - Any further output cuts by OPEC, coupled with an expected increase in vessels in 2009, may dampen the oil tanker companies’ ability to hold on to higher freight rates, denting their earnings potential in the coming quarters.

OPEC (Organization of the Petroleum Exporting Countries) oil supply fell in March, for the seventh consecutive month, but remained above its target as some members pumped more than agreed levels, a recent Reuters survey showed.

So far, OPEC has delivered roughly 80 percent of its pledge to decrease output by a record 4.2 million barrels per day from September.

But any further increase in OPEC compliance may hurt freight rates.

Mike Reardon, vice president research and marketing at International Maritime Exchange, said increasing OPEC compliance may not augur well for the freight rates.

“If they increase compliance you never really can say it will make rates go down. But further compliance certainly won’t help rates go up and that’s the better way to view it,” Reardon said.

Tanker companies that employ their ships in the short-term spot market may see their earnings fall over the next couple of quarters because of potentially low freight rates triggered by the oil production cuts.

“The OPEC cuts are having a negative effect on crude oil tanker rates and correspondingly hurting the earnings and cash flows of companies that have crude oil tankers operating in the spot market,” analyst Douglas Mavrinac of Jefferies & Co said.

SPOT PLAYERS FACE RISK

Tanker companies like Nordic American Tanker Shipping Ltd NAT.N and Teekay Corp TK.N that have a relatively high spot market exposure may see their earnings decline over the next couple of quarters, as the freight rates have plunged from their highs in December.

In contrast, those who have locked in a higher number of available days in long term time-charter contracts may be able to better weather a choppy freight rate situation. But there are only few companies that have a high contract coverage.

Mavrinac said over the last four months average very large crude carriers’ (VLCC) spot charter rates have fallen to below $30,000 per day on average. The rates had averaged about $80,000 in December.

“This is below the cash flow break-even level for some of the companies we cover,” Mavrinac said.

Mavrinac said General Maritime Corp GMR.N and Ship Finance International Ltd SFL.N are better insulated from the weak freight rate environment as they have high time-charter coverage.

Analyst Gregory Lewis of Credit Suisse said companies that have high spot exposure are susceptible to earnings risk in the second and third quarters of this year.

Lewis said Tsakos Energy Navigation Ltd TNP.N is better positioned to tackle weaker freight rates.

“Given their solid contract coverage of 70 percent for both their product and crude tankers, they are in a good position,” Lewis said.

Analyst Scott Burk of Oppenheimer & Co also agreed that those companies that have high spot exposure are more vulnerable than those which have a higher time-charter coverage.

"Our top pick is Capital Product Partners LP CPLP.O. They have 97 percent contract fixed for 2009 and 60 percent fixed for 2010," Burk said.

TIME FOR LONG-TERM CONTRACTS?

One option for spot players would be to lock-in long-term time-charter contracts, which would insulate their earnings from a volatile spot freight rate environment.

But Credit Suisse’s Lewis said changing the chartering strategy is easier said than done.

“In an environment when the market is weak, this is not the ideal time to fix your time charters. There is just not enough demand for time-charter contracts,” Lewis said.

Oppenheimer’s Burk said it is probably too late for the spot players to go for time-charter contracts.

“If people were locking coverage right now, they are going to get significantly lower rates than what they could have gotten, say, a year ago,” Burk said.

RISING VESSEL SUPPLY

Rising vessel supply in 2009 could also be a headwind for the tanker companies, as more vessels could mean a drop in freight rates.

“Vessel supply in 2009 is going to be a major challenge for the tanker sector as a whole. There are lot of ships coming online. We could see roughly 10 percent fleet growth in 2009,” Lewis said.

Jefferies’ Mavrinac said the tanker fleet growth would be about 8 percent in 2009, while Oppenheimer’s Burk estimated a net fleet growth rate of 11 percent in 2009.

Shipyards can potentially delay few vessel deliveries, which could help stabilize the vessel supply. But that may still not be enough to curtail a glut in supply.

“The ships may be scheduled to be delivered in February but then all of a sudden they come online in June, July or August.

It is still coming (irrespective of the delay) and they are definitely going to put pressure on rates,” Lewis said.

Reardon of Imarex said OPEC production cuts have run headlong into a 9 percent to 12 percent fleet growth estimate for the year.

“The only true hope at this stage is for demand to return in the near future,” he said.

Editing by Jarshad Kakkrakandy

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