The tanker takeover wave
Ownership consolidation within the tanker sector is creating stronger counterparties for oil shippers
The tanker business, with its legacy of family ownership and outsized egos, used to be notoriously averse to consolidation. No more. M&A activity in the tanker space is surging, a trend with significant consequences for oil exporters, refiners and traders.
The list of deals is long and getting longer. Last year, Capital Product Partners agreed to merge its tanker fleet with Diamond S Shipping, Navios Midstream was folded into Navios Acquisition, Euronav took over Gener8 Maritime, and BW Tankers announced plans to explore a merger with Hafnia Tankers. The year before, Scorpio Tankers bought Navig8 Product Tankers, DHT acquired the very large crude carrier (VLCC) fleet of BW Group, and Teekay Tankers bought TIL. In 2013-16, M&A deals were done by COSCO, Ardmore, Teekay, Frontline, General Maritime, Euronav, DHT and Kinder Morgan.
The most important result of tanker consolidation for petroleum shippers is that their counterparties are healthier. Larger ship owners are generally stronger financially, more transparent, and less likely to default without warning.
"The bigger companies tend to be public, so you know their financial position and you have more of an idea of when they are in financial trouble versus a small private ship owner," Basil Karatzas, founder of consultancy Karatzas Marine Advisors, tells Petroleum Economist. "Bigger tanker owners should be a safer bet, all else being equal."
According to a manager at a major US refining company, who could not speak for attribution due to his corporate policy: "We want the tanker owners that we do business with to be making money and having better tonnage." He believes the recent wave of tanker consolidation has created stronger owners, adding: "It's also better for there to be a merger before there's a situation of total distress where an owner is not keeping up with maintenance and just selling off the ships.
The bigger the better
"We have a symbiotic relationship with ship owners, even though we are negotiating against each other [for voyage or time-charter pricing] on any given day. We don't want to see any of these guys go out of business, and the last thing we want is for a tanker to get arrested for an unpaid bunker bill with our cargo aboard-that's a nightmare." The bigger the tanker company, the better for the oil shipper, he maintains.
The counterargument is that if tanker owners get too big, they could wield too much pricing power in charter negotiations, and could bully oil shippers on transport costs. The more tanker ownership is consolidated, the fewer tanker bidders are in position to make competing transport offers for each individual oil cargo.
A voyage rate negotiation is an auction in which the tanker interest making the lowest bid generally wins the cargo. Oil shippers "only need one weak owner to keep the price down, and the less you can play tanker owners against each other, the more the odds are in their favor", says Karatzas.
"In the short term, the tanker market is still too fragmented" for tanker owners to materially push up pricing, he says. "But if this trend continues and you end up with five or 10 owners, each with over 100 vessels in certain markets, then tanker owners would have much better control of pricing."
According to the refining manager, "Today, the tanker market is still way too fragmented for tanker owners to have real pricing power in charter-rate negotiations. No individual owner has more than 5-7%. This is not like Coke and Pepsi, or McDonald's and Burger King. This is still hundreds of 'mom and pop' tanker owners, hundreds of medium-sized owners, a few sovereigns, and several tanker majors like Frontline and Scorpio."
“The tanker market is still too fragmented for tanker owners to materially push up pricing” – Karatzas
Nevertheless, he acknowledges that tanker consolidation and the use of pooling arrangements "does increase the odds of there being, for example, three cargoes available and three ships available and one larger owner controlling two of those ships"—a scenario that could require a petroleum shipper to pay a higher price to move its cargo than if there were more bidders.
"We are focused on getting crude into our refineries and getting gasoline out, so we are fine with a higher shipping rate, as long as we're paying the same or slightly less than competing refiners," he explains, adding that "for oil traders, it might be different. Traders might need to squeeze that last quarter or dime out of the transport cost to make their deals go through."
Yet another impact of tanker M&A emerges when a buyer changes the technical management (crewing, operations, and equipment oversight) of the seller's fleet, creating practical implications for charterers. Karatzas notes that the charterer must re-obtain safety certificates for all vessels undergoing a technical-management change. "All the vettings are lost. The ships must be revetted in a timely manner, and that is an added cost to the charterer," he says.
Sudden technical-management transitions may also add to the risk of a voyage disruption. At a shipping conference in New York last year, Euronav CEO Paddy Rodgers contrasted operational issues following the purchase of the Maersk VLCC fleet in 2014 with those after the Gener8 Maritime acquisition in 2018. "With Maersk, we had to integrate 15 VLCCs overnight in full management," he says. "We had to suddenly find experienced, quality crew for ships we didn't know—ships that had been for sale for 18 months and that had very little repair done." In the Gener8 deal, Euronav kept the existing third-party technical management in place, so there were no transitional complications.
5–7% - tanker firms’ maximum market share
With all three consequences of tanker M&A—stronger counterparties, changes in charter-negotiation pricing power, and technical-management complications—oil shippers should expect more to come. The consolidation push shows no signs of abating; the motivation for these transaction remains fully in place.
Tanker takeovers are being largely driven by a desire for improved access to equity and debt markets, more so than a hunt for cost synergies and pricing power over charterers. The deal flow is being accelerated by the heightened role of private-equity players who, unlike family owners, have no qualms about selling off their ships and walking away.
'IPO via M&A'
Private-equity groups that invested heavily in tanker assets in 2011-15, betting erroneously on a quick post-financial-crisis rebound, have been unable to cash out by bringing their own fleets public. There have been no successful shipping IPOs in New York since June 2015.
Consequently, private-equity groups have turned to a backup plan colloquially known as 'IPO via M&A', wherein they sell their fleet to a large, already listed company in return for the buyer's shares, allowing them to exit their positions by selling that stock.
Consolidation is simultaneously being driven by long-time tanker owners like Navios, Teekay and Frontline that had gone public with multiple, smaller companies, and are opting to merge them into larger listed entities that are more attractive to Wall Street investors and commercial bank lenders.
"Consolidation is not about capturing more market share, it's about capturing more market capitalisation, liquidity and [public equity] float," said Mark Friedman, senior managing director of investment bank Evercore, at a recent maritime-finance forum in New York. "I think we will see an increasing number of mergers. M&A is alive and well."