PT Buana Lintas Lautan Tbk (“BULL”) continues to execute on its well-balanced strategy of combining stable time-charter contract revenues with high-profit margin pool employment, supported by strong market rates in the second quarter of 2020. This has resulted in the Company’s performance accelerating substantially further from the strong first quarter of 2020, resulting in significantly higher EBITDA and Net Profit compared to the corresponding quarters in 2019, achieving a new high. As such, EBITDA in 2020 is expected to exceed 2.5x of 2019 and correspondingly net income should be more than 3.5x of 2019.
Given the expected strong performance, our current market valuation still underestimates our performance as our PER remains as low as 3.0 – 3.5x and EV/EBITDA as low as 3.5x – 4.0x. These stronger results are due to the continuing growth of the fleet in the second quarter of 2020 where BULL took delivery of another 3 large vessels, expanding the fleet to 33 vessels with a total of 2.3 million DWT. Another factor which has boosted BULL’s performance is the positive impact from the COVID-19 pandemic. The COVID-19 pandemic has resulted in a significant jump in additional demand for oil tankers for floating storage of oil and reached as high as more than 400 tankers being used for storage at its peak, representing around 10% of the global fleet. This has compensated more than the decline in oil consumption and production from the shutdown economies and lockdowns.
This dynamic is reflected in the TCE rates which jumped from the already very strong average of the first quarter of 2020 into the second quarter of 2020. Average TCE for Long Range 2 (LR2) tankers (which are each around 110,000 DWT) increased by 74.8% while the average TCE for Handy-sized tankers (which are each around 30,000 – 40,000 DWT) declined to 11.6%, in line with the trend for most of storage demand being concentrated in the larger tanker segments.
However, the impact of COVID-19 is even more widespread than just on oil consumption and production. Since most of the world’s economies went into lockdown and ports were closed, including all of the major builders and repairers of ships, such as China, Korea, Japan, Singapore, this has delayed the deliveries of new ships under construction as well as the required statutory maintenance dockings. This created a huge backlog of ships which must be docked and taken out of service for as much as 30 days in the next few months, equivalent to as much as 5% of the global tanker fleet. In fact, June has seen 84% more tonnage in dock than in May. As many as six VLCCs were in dock in June compared to only one in May.
The COVID-19 lockdowns also shutdown ship demolition yards, thus keeping ships in the trading fleet, which would have been otherwise scrapped. As the South Asian demolition yards start to open, this will allow as much as 3.1 million DWT of older and inefficient ships to be taken out of the trading fleet and scrapped according to an estimate by Braemar ACM.
China’s rapid oil demand recovery which has seen oil demand jump to 13 million bpd by the second quarter and is expected to be higher YoY from 3Q 2020 onwards compared to 2019, according to Wood Mackenzie, has caused severe port congestions with the number of ships waiting to discharge their cargoes rising from less than 10 ships in April to over 70 ships by June. This situation is expected to last for two to three months as China’s imports continue to remain strong. As other economies reopen and join China in importing more oil, oil demand is expected to jump and port congestions around the world will rise. India’s fuel demand which had crashed by 60% is forecasted to return to pre-pandemic levels by September, according to the Indian oil minister. Even the U.S. has seen a quick recovery in gasoline demand which has returned to pre-coronavirus levels by July. Port congestion reduces the effective supply of tankers.
Even more importantly, the world’s oil producers are set to increase their production substantially in August. The IEA forecasts production from OPEC+ will rise by 2 million bpd in August and 2.7 million bpd from Q3 2020 into Q4 2020. The U.S. shale producers are also expected to boost their production by 1.5 million bpd in August. Together with the expected restarting of Libyan oil production totalling 0.9 million bpd, this is a combined 4.4 – 5.1 million bpd of new production which will take up a huge portion of the tanker fleet.
Given the significant return of demand for tankers from increased oil production and tanker supply constraints due to severe port congestions as a result of rapid oil demand recovery, return of ship demolition and the huge backlog of tankers which will be taken out of operations for mandatory maintenance dockings, the international tanker rates are expected to remain robust into the end of 2020 and continuing into 2021.
Source: PT Buana Lintas Lautan Tbk