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Lehman Bros. cuts tanker charter hire rate forecasts and earnings estimates

By the OGJ Online Staff

HOUSTON, Mar. 11 -- Lehman Bros. Inc. has reduced its tanker charter hire rate forecasts and slashed its earnings estimates for the group of shipping companies it tracks by 60-75% in 2002 and 33-55% in 2003, based upon a relatively flat oil demand outlook.

"We are reducing our 2002 VLCC [very large crude carrier], Suezmax, and Aframax charter hire rate estimates to $26,000, $20,500, and $19,000/ship/day, respectively. This represents a 10-20% reduction from previous forecasts. [Charter hire rate estimates in 2003] are also being reduced, by 15-25%," said analyst Daniel Barcelo of Lehman Bros. in New York.
Meanwhile, year to date, oil tanker equities have modestly outperformed the broader market, rising 5% vs. a rise of 1.3% for the S&P 500.

Although a global economic recovery is anticipated in the second half, Lehman Bros. estimates that recovery will add only 350,000 b/d of new oil consumption globally, noting that even an annual oil demand growth rate of 1.25 million b/d probably would not be sufficient to sustain a strong charter hire rate rally in the near term.
"Although scrapping has been robust and is expected to remain so, a corresponding number of new vessels are expected to be delivered by yearend, resulting in a slightly larger fleet," Barcelo said. "Our view is tempered by the continuing weakness in oil demand. We are therefore reducing our rate forecast over the next few years."

OPEC vs. non-OPEC production
As the economy slowed following the Sept. 11, 2001, terrorist attacks on the US, the OPEC 10 nations (excluding Iraq) cut production to a reported 23 million b/d in January.
"We continue to forecast that OPEC will find it difficult to curb production much closer to its quota of 21.7 million b/d. We are forecasting flat production of 23 million b/d for the first half of the year and then an increase of 1 million b/d to 24 million b/d for the second half of the year," Barcelo said.

The main driver for tanker charter hire rates in a stable fleet environment is change in oil production and volume shipped, he said.
If global oil demand remains weak and OPEC continues to reduce production closer to quota levels, then tanker rates will remain pressured throughout the year, Barcelo said.
Should oil volume return to the market faster than anticipated, due either to a market share war or to increasing oil demand, then most of the additional oil would be exported from the Middle East.

If a war breaks out in Iraq or another major oil producing country, the disruption in oil volume will likely be short-lived, as Saudi Arabia and other OPEC members will likely increase production to replace any lost Iraqi oil volume, Barcelo said. "Current spare capacity within OPEC is close to 6 million b/d, or 25% of capacity, more than offsetting the 2.5 million b/d that Iraq exported for the week ended Mar. 1. However, VLCCs will likely be removed from the market and used for storage, reducing the size of the fleet, increasing utilization, and raising tanker rates," he said.


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