Just as the oil tanker and dry bulk markets have suffered from an oversupply of capacity during the past five years, the LNG tanker market is rapidly moving into a position of oversupply.
Indeed, during the first quarter of this year, the average day rate of LNG vessels halved, to around $70,000 per day, leaving only a thin profit margin for many operators. Deliveries of new tankers have sent the market into a state of oversupply, and with the fleet set to expand by a further 30% between now and 2017, this weakness looks set to continue.
There are 63 new LNG vessels set to join the fleet over the next two years, adding to the 32 vessels delivered over the twelve months to march. What's more, compounding the problem is the fact that vessels are not leaving the fleet and LNG supply is not rising.
Hopefully, these two factors will work themselves through over the next few years. There are currently 42 vessels in the global fleet that are over 30 years of age set for retirement, and a number of LNG projects are set to come onstream next year. These include Chevron's delayed Gorgon project.
Golar LNG's (NASDAQ: GLNG ) management has gone so far as to say that it "remains concerned" by the state of the LNG carrier market. Nevertheless, the company expects to report second quarter operating results in line to "slightly better" than those reported for the three months to March.
However, alongside this cautiously optimistic statement, Golar's management issue a warning. According to management:
As this weak market looks set to prevail at least for the remaining part of 2014, the Board believes that the current spot fleet will continue to operate with a negative cash contribution...
So, it would seem as if the portion of Golar's fleet trading on spot rates is losing cash for the company. Still, the portion of the company's fleet operating on fixed contracts is helping to keep Golar profitable. Unless the market improves, however, these vessels will roll off contract into a weak market.
Teekay LNG Partners (NYSE: TGP ) is not worried about falling tanker spot rates. The partnership reported a strong first quarter this year, with operating vessel expenses and depreciation costs of around $33 million, compared to vessel revenues of $74 million.
What's more, Teekay has been trying to navigate around the supply glut by buying partnership interests in long-term contracts. The partnership has announced, within the past few days, that it acquired from BG Group ownership interests in four LNG carrier newbuildings.
Scheduled to deliver between September 2017 and January 2019, the vessels will each operate under 20-year time-charter contracts, for a wholly owned subsidiary of BG. This deal should be extremely beneficial for Teekay as the company has been able to acquire assets with a long-term contract in place.
Teekay will own a 30% in the first two newbuilds and 20% in the second two, with the balance of ownership held by an affiliate of China National Offshore Oil Corporation and China LNG Shipping Limited. The transaction with BG follows a 50/50 joint venture signed this year with a China-based liquefied natural gas shipping company to provide six internationally flagged icebreaker LNG carriers.
The bottom line
The bottom line is that the LNG spot tanker market is in trouble. Falling day rates caused by oversupply are pressuring operators, and Golar is now claiming that its ships on spot contracts are losing cash.
Teekay is getting around the issue of falling day rates by investing in partnership interests, coupled with long-term contracts; these investments should pay off for the partnership. If structured correctly, these deals should allow Teekay to avoid much of the LNG tanker market downturn, ensuring that partner distributions are kept intact.
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