Tankers: Moving From OPEC Trade, To Global COVID Relapse Hedge

Tanker Q120 Preview & Storage Update

• Thesis (EURN, DHT, FRO, ASC, etc) …………………Pages 1-2
• Floating Storage Scenario Analysis………………….Pages 2-5
• Tanker Rates Reactions & Implications ……………..Page 5
• Multi-Factor Supply/Demand Model……………….. Pages 6-7
• Crude Inventory & Production Cuts………………….Pages 7-9
• Valuations……………………………………………….. Pages 10-11
• Earnings Estimates……………………………………..Page 12

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Contango, COVID, & Floating Storage To Dominate Q1 Earnings: As with our Barge Preview from last week, we expect the majority of this earnings season to revolve around the simultaneous COVID+OPEC supply & demand shocks to global energy markets, which have driven down global oil demand by ~15-30mbd, introduced negative crude pricing for certain landlocked geographies, and reinforced the notion of systemic, structural and economically driven floating storage. The result: our tanker rate charts look more like seismograph readings (page 5) and our tanker group is poised to throw off record cash flow in Q2 & Q3 (and potentially longer). We believe the long tanker trade is gradually transitioning from a shorter-term OPEC trade, into a longer-term COVID-19 global relapse hedge. We believe tanker dynamics from the remainder of 2020 and 2021 will be defined by the depth and duration of the floating storage dynamics – which we believe will be increasingly driven by the shape and pace of a global economic reopening vs any remaining OPEC/policy maneuvers. Now that crisis level production levels are now more defined, we believe tanker rates and equities will have a strong negative correlation to the success of any semi-synchronized economic reopening. Hence, Long Tankers = Long An Extended And Asymmetrical Global Reopening.

Tankers: Floating Storage Scenario Analysis & Utilization Impact

Our 3-Stage Approach To Tankers For the Remainder Of 2020

• Our 3-Stage Approach To The Remainder Of 2020                            Pages 1-2
• Floating Storage Scenario Analysis – Impact On Utilization             Pages 2-3
• Storage Arbitrage, Inventories, & Rate Reactions                               Pages 4-7
• Multi-Factor Crude Tanker Utilization Model                                       Pages 8-9
• Updated Tanker NAVs, Valuation Metrics, & Estimates                     Pages 9-10

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Depth Of Floating Storage Build Key For Tanker Equities In Q220. Amid the double black swan start to the year (OPEC supply shock/pricing war coupled with demand destruction from the COVID-19 response), tanker equities have (generally) acted as a hedge against the rest of the energy tape, as the prospect of significant structural and arb-driven floating storage has supported tanker earnings well above seasonal trends (page 4). While increasing OPEC & Russian crude production battle to replace US exports (the degree to which remains in question) – the market mechanism for finding that new global production balance should ultimately result in saturated land based storage and a ramp in floating storage (already ~100mb), and narrower tanker capacity, providing a significant tailwind for tanker cash flows. From an equity perspective, we think about Tanker stocks (FRO, EURN, DHT, ASC, etc.) in 3 stages….(Pages 1-2)

What Would Robust Floating Storage Mean For Tanker Rates & Utilization In Q2/Q3? We ran a multi-factor scenario analysis based on our updated crude tanker utilization model, flexed for different levels of incremental daily crude production moving into floating storage over the next 2-3 quarters. At the low end of the range…(Pages 2-8)

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Tankers Reset As OPEC War Changes Economics

• Market Updates & Thoughts………………..Pages 1-3
• Tanker Trade Dynamics………………………Page 4
• Fuel Spreads, Economics……………………Page 5
• Crude/Product/LPG Rate Changes…………Pages 6-9
• LNG Arb, Freight Dynamics…………………Pages 10-11
• Container Fundamentals……………………Page 12
• Relative Valuations…………………………..Pages 13-19

Tanker Spot Rates Soften Off Of Peak Levels As Saudi Reign In Freight Rebates: Spot rates weakened on slow fixture activity, crude prices bounding from under $25/barrel to ~$30/barrel (Brent), and Saudi Arabia announced limiting freight compensation to 10% of crude’s official selling price. According to TradeWinds, at least 10 VLCC & Suezmax spot fixtures loading Saudi crude had failed last week. VLCC spot rates (TCEs) led the decline with rates falling to $135.3K/day (-52% w/w and +408% m/m), Suezmax TCEs at $70.0K/day (-42% w/w and +166% m/m), and Aframax TCEs firming to $59.5K/day (+39% w/w and +120% m/m). We note rates remain well above consensus.

Roughly Half Of Bahri’s VLCC On Subject Destined For USG: Last week, Saudi Arabia’s Bahri put 25 VLCCs on subject after their announcement to flood the oil market (by increasing its production and lowering its oil price) in response to OPEC+ disbandment (see our OPEC+ Fallout note). VLCC rates had spiked as Saudi Arabia was said to provide freight rebates to some customers for crude transports between Saudi Arabia and Egypt. Bahri owns 41 VLCCs and rarely enters the spot market to charter third party tonnage. In addition to the large number of subjects, the intended destination for these vessels are telling of Saudi’s intent: 10 of the 25 VLCCs are destinated for the U.S. Gulf, 4 are likely going to Europe, 10 are fixed to discharge at the entry point of the Sumed pipeline (Ain Sokhna) which transports crude oil through Egypt to the Mediterranean (likely to end up in Europe). None of the spot VLCCs are fixed to Eastern destinations.

Scrubber Payback Period Upended Following Crash In Crude Prices: The spread between HSFO and LSFO has narrowed to $87/mt in Singapore and $47/mt in Rotterdam (Figures 2 & 3), extending the payback period to ~4 years. A VLCC fitted with a scrubber is able to command a spot earnings premium of ~$4.5K/day, down from nearly $20K/day at the start of the year.

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OPEC+ Fallout: Contagion Everywhere From Looming Price War…

***From Sunday 3/8***

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Tankers Among Few Eventual Beneficiaries

• Impact On Tankers:                                                                                     Page 1, 3-5
• The 2015 Tanker Comp, Similarities, Implied Upside                         Pages 3-4
• Impact On LNG Developers (LNG, TELL, NEXT, GLNG, NFE)            Pages 2-3
• Historical & Implied Equity Correlations To Crude Vol                       Page 3
• NAVs: Current, Mid-Cycle to Trough Range                                          Page 3
• OPEC+ Background                                                                                   Page 3, 6

This Is Going To Hurt: On Friday (3/6) talks between OPEC and its OPEC+ allies (Russia) over a corona-related production cut collapsed, sending oil prices down with it (Brent and WTI down 9% and 10%, respectively on Friday). While the lack of OPEC+ support for crude prices was enough to rattle markets, what’s transpired since – the relationship between the Saudis and the Russians rapidly devolving into what looks like an all-out pricing war – has the potential to reshape energy markets for years to come, and will likely take the mantle as the most value-destructive policy shift in decades.

Exogenous Demand Shock, Meet Exogenous Supply Shock. As noted below, Aramco has already come out with discounted crude prices (OSPs) on the back of the meeting, and is reportedly speaking to a potential production ramp from its current 9.7mbd, to well above 10mbd, and could even reach a record of 12mbd. Again – that would be additional supply into a market that’s already oversupplied amid global efforts to contain the Coronavirus (nCoV) weighing on demand. While the Russians have less available swing production, what they do have will be moving in the wrong direction as well, as they look to grab share from U.S. Shale producers.

How Does This Impact Our Universe:
Tankers: We’ll Call It Mixed… (And That’s One Of The Few Bright Spots). Once the dust settles the tanker group, including FRO, DHT, EURN, ASC, etc, should be one of the few actual overproduction beneficiaries as: 1) tanker activity and rates are generally positively levered to production volumes (including overproduction), and 2) we expect to see floating storage, both economic (as the front end of the crude forward curve collapses (already in progress) and…….continued on Pages 3-5

Most Relevant Tanker Comp: 2015, after OPEC failed to respond to falling crude prices. While overcapacity and falling crude prices ravaged the rest of the energy markets, Crude Tanker rates (VLCCs) averaged $65K/day (Figure 4) – a level not reached since 2008, up 116% y/y and the firmest level in nearly a decade. What would 2015 day rates mean for current tanker stocks? If we replaced our current 2020 rate decks with the 2015 average rates….continued on page Pages 2-3

Everything Stops. If nCoV brought the near-term prospects of new LNG business to a particularly slow crawl, we believe the OPEC+ blow up will bring it to a full stop, at least until the dust settles. For companies in the process of restructuring (like TELL).….continued on Pages 2-3

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It’s Barge Week At Webber R|A!

KEX: Previewing Q419 Earnings & 2020 Guidance

• Inland & Coastal Color:                                                                  Page 3-4
• Inland Spot & Term Pricing Data (Current/Historical):            Page 5
• Inland Barge Orderbook & Delivery Schedule:                        Page 6

Heading into KEX’s Q4 earnings call (1/30) we expect a focus on: (more…)

Webber Research: Global Shipping Weekly

Russia May Delay IMO 2020 Compliance:

Russia, a large producer and exporter of high sulfur fuel oil, intends to delay full implementation of IMO 2020 regulations until 2024. This will only be in effect within local waters (including Belarus, Kazakhstan, Armenia and Kyrgyzstan). Despite investments in Russian refineries, only one Russian oil producer (Lukoil), has the ability to produce fuel that complies with IMO 2020 standards. It’s worth noting that, IMO regulation enforcement falls on Russia, not the IMO itself. While there are audit mechanisms for corrective action plans, there are no punitive measures for violations. Earlier this year, Indonesia also flirted with the idea of not enforcing IMO requirements, but later backtracked and pledged commitment to the IMO 2020 standards.

Tanker Spot Rates Continue To Slide:

VLCC spot rates (TCEs) down last week with rates ending at $54.8k/day (-23% w/w and -81% m/m). Suezmax TCEs ended the week at $39.0k/day (-28% w/w and -76% m/m) while Aframax rates ended the week at $21.5k/day (-23% w/w and -63% m/m). As the market digested the chaotic past few weeks, owners are starting to temper expectations with freight rates and have been giving up gains. We note rates remain well-above mid-cycle levels.

IMO 2020 Update:

Earlier this week EURN signed a partnership with T.A.G. Marine, operator of Kuala Linggi International Port (KLIP), that will allow EURN’s ULCC Oceania to float and

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