09.11.18
SECTOR REVIEW AND OUTLOOK
ENERGY
Performance Review
In 2018, exploration and production companies and the big integrated oil companies were able to capitalise on the continued recovery of the oil price. In addition, European oil services companies have shown positive returns throughout the year.
Infrastructure bottlenecks have dampened shale growth, which was widely expected to keep a cap on global oil prices. This is why exploration and production in the US has significantly under-performed in the current calendar year.
Source: Bloomberg 09.11.2018
Outlook
After the big oil price correction in 2014, large oil companies have become more cautious in their capital expenditures. This period of austerity is expected to end in 2019 giving way to a return of investments in both resource acquisition and development albeit not at the same scale as previously seen.
Under the assumption that the US and China end their tariff dispute, crude oil trade could increase to USD 14 bn. by 2021 according to Bloomberg estimates. Chinese oil imports may rise at a compounded annual rate of 5.7% from 2019 to 2021 as refineries may increase capacities.
In the US shale industry smaller producers will face increasing competition as big oil companies are expanding using their economies of scale and cost advantages. Funding resources of larger oil companies may lead to increased M&A activity.
Deepwater investments were characterized by years of underinvestment. Lower break-even levels will now help fill the supply gap of crude.
Replacing coal, diesel and bunker fuel with liquefied natural gas (LNG) will help provide the quickest results in improving air quality in 3,000 cities according to the World Health Organisation.
China has agreed to comply with the IMO (International Maritime Organization) 2020 regulations. At the same time China is focused on reducing pollutants. Therefore, China as the second largest LNG importer in the world will further stimulate demand in 2019.
Source: Bloomberg 09.11.2018
SHIPPING
Performance Review
As the performance laggards of 2017 the tanker segments crude tankers and gas have performed well throughout 2018 and specifically in Q4 2018 where most equity markets have fallen. Improving market fundamentals such as OPEC boosting output and high scrapping activity have driven VLCC (Very Large Crude Carriers) rates to two-year highs.
On the other hand, the stronger performance segments of 2017, namely container and bulk shipping have experienced a correction. Higher bunker prices have affected profitability and trade tensions have re-emerged throughout the year putting a particularly negative sentiment on container operators.
Source: Bloomberg 09.11.2018
Outlook
According to a recent analyst survey conducted by Bloomberg crude tanker rates may increase 61% on average in 2019 from depressed levels in 2018. According to the study, gains will be fuelled primarily by very large crude carrier rates, which could jump about 68% to US$ 28,200 a day amid improving fundamentals. In addition, VLCC demolitions this year were at the highest level since 2002, which coupled with restored OPEC oil production, Iran sanctions and expanding tonne-miles, are helping rebalance supply and demand into 2019.
Clean tanker rates are also expected to rise in 2019, just not as sharply as dirty tankers. Subdued fleet growth, refinery capacity expansion and incremental demand stemming from IMO 2020 may send rates 31% higher.
After two years of robust growth, time-charter rates in the dry bulk market may increase more moderately in 2019 according to the survey, reflecting a more balanced supply and demand. Capesize rates are expected to climb the most on solid iron-ore and coal demand, coupled with a shift to longer voyages. Key risks may be a prolonged US China trade war and a rash of new orders to capitalise on higher rates.
Source: Bloomberg 09.11.2018
Containership hire rates are expected to remain supported as supply growth is expected to slow. IMO 2020 will drive a scrapping surge over the next three years.
Aviation and other Transportation
Performance Review
Global air-traffic grew at a rate of 7.6% in the 2017 (Source: IATA). Airline supply was high, with too many seats being offered. With a large supply increase, airlines haven’t been able to raise fares enough to compensate for the higher fuel prices in 2018, thereby putting margins under pressure. As a result of this airlines have underperformed the general market in 2018 after strong returns 2017.
Source: Bloomberg 09.11.2018
Outlook
The aviation industry has reached its maximum growth rates. As an example, in Europe airline capacity has grown by 6 % p.a. since 2016 exceeding the industry’s broad guide for sustainable growth. However, airline capacity is still rising at present. European Capacity is expected to grow by another 9% in winter 2018 and 2019.
On the other hand, the continued increase in oil price in 2018 raises the risk of lower air-travel demand. More carriers will try to raise airfares to protect their margins, though there is little pricing power at airlines as they cannot increase fares enough to compensate for rising fuel prices. After very strong capacity additions in 2017, supply must ultimately be cut to achieve market balance, though airlines continue to generate cash and are resistant.
Weaker carriers are starting to show stress, which will lead to failures or fleet parking, increasing aircraft availability. Airline margins have gradually decreased over the last two and a half years on a world-wide basis.
Source: Bloomberg 09.11.2018
At present the weakness in the market is expected to continue for the months to come.
Sincerely,
Hubertus Clausius, MBA, CFA
Portfolio Manager
Seahawk Investment GmbH
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Author/Issuer: Hubertus Clausius, Seahawk Investments GmbH, Mergenthaler Allee 73-75, 65760 Eschborn acting as a tied agent (§ 2 section 10 German Banking Act) in the order, in the name, for account and under the liability of the responsible liability holder BN & Partners Capital AG, Steinstraße 33, 50374 Erftstadt. BN & Partners Capital AG has a authorization from the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) pursuant to § 32 German Banking Act for the provision of investment advisory service pursuant to § 1 section 1a no. 1a Banking Act and the investment brokerage pursuant to §1 section 1a no. 1 German Banking Act.
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