Odfjell adopts an active approach to manage risk in the financial markets. This is achieved through funding from diversified sources, maintaining high liquidity or credit reserves, and through systematic monitoring and management of financial risks related to currencies, interest rates and bunkers.
Hedging instruments are used to reduce the Company’s exposure to fluctuations in the above mentioned financial risks. At the same time, it may limit Odfjell’s upside potential from favourable movements in these risk factors. We also closely monitor the risk related to market valuation of the hedging instruments, and the effect this has on the equity ratio.
EARNINGS
Earnings within the chemical tanker markets are less volatile than in many other shipping segments, since we transport a more diversified mix.
The diversity of trade lanes and the products we transport have historically provided a partial hedge against the negative impact of a general slowdown in demand. Our time-charter earnings are influenced by external factors such as global economic growth, the general ship-freight market, bunker prices and factors such as cargo type and cargo volume, trading pattern required by our customers, contract and spot rates, and operational efficiency. Time is of the essence, and optimal utilisation of the fleet and an expedient composition of cargoes, with minimal time in port, are of vital importance in order to maximise time-charter earnings.
The largest single cost component affecting time-charter earnings is bunkers. In 2016, this amounted to more than USD 102 million, equivalent to 37% of voyage costs, ignoring the effect of any bunker adjustment clauses and bunkers hedging in place. A change in the average bunker price of USD 50 per tonne equals about USD 19.8 million per year (or USD 909 per day) change in time-charter earnings.
A certain portion of our bunker exposure is hedged through bunker adjustment clauses in the Contracts of Affreightment (CoAs). By 31 December 2016, Odfjell hedged about 7% of its 2017 bunker exposure, through swaps at an average price of about USD 224 per tonne. In addition, bunker clauses in CoAs covered above 50% of the exposure.
Sensitivity analyses show that a change in time-charter earnings of USD 1,000 per day for our chemical tankers (a roughly 4.6% change in freight rates after voyage costs) will impact the pre-tax net result by approximately USD 22 million. Odfjell is not currently engaged in the derivative market for forward freight agreements.
Our tank terminal activities have historically shown more stable earnings than our shipping activities. A substantial part of the tank terminal costs are fixed, and the main drivers for earnings within a tank terminal are the occupancy rate, the volume of cargoes handled through, and by the terminal and operational efficiency. Our terminal in Rotterdam has also a petrochemical industrial distillation (PID), providing independent toll distillation services to the petrochemical industry and contributing to positive earnings.
INTEREST RATES
All interest-bearing debt, except bonds in the Norwegian bond market and debt borne by tank terminals outside the USA, is denominated in USD. Interest rates are generally based on USD LIBOR rates. With our current interest rate hedging in place, about 19% of our loans were at fixed interest rates at year end. Total interest-bearing debt on 31 December 2016 was USD 1,042 million, while liquid assets amounted to USD 174 million, both figures excluding joint venture companies (equity method).
CURRENCY
The Group’s revenues are primarily denominated in USD. Our currency exposure relates to the net result and cash flow from voyage-related expenses, ship-operating expenses and general and administrative expenses denominated in non-USD currencies, primarily NOK. We have estimated that a 10% decrease of the USD against the NOK would reduce the pre-tax 2016 result by around USD 6 million, ignoring the effect of any currency hedging in place. Tank terminals outside USA and our regional European shipping trade generate income in non-USD currencies.
Our currency hedging at the end of 2016, under which we sold USD and purchased NOK, covered about 52% of Odfjell’s 2016 NOK exposure. Future hedging periods may vary depending on changes in market conditions. The average USD/NOK exchange rate for open hedging positions on 31 December 2016 for 2017 was 8.51.
FINANCING AND LIQUIDITY
Odfjell has a stable debt structure, and borrows from major international shipping banks with which the Company enjoys long-standing relationships. The Company has a diversified debt portfolio comprising a combination of secured loans, export credit finance, finance leases and unsecured bonds. Although our experience is that funding is available to Odfjell from various sources, including the banks and the bond market, the general trend in the financial market is towards medium-term loans with a moderate leverage ratio. As a consequence, we continuously pay attention to the timely refinancing of maturing debt. The average maturity of the Group’s interest bearing debt, excluding finance leases and bonds, is about four years.
TAX
The Odfjell Group operates within a number of jurisdictions and tax regimes, including the Norwegian tonnage tax system and the Approved International Shipping system in Singapore. In addition we operate under local tax systems in Chile, Brazil and Bermuda. Our tank terminal activities are generally subject to the ordinary corporate tax rates within the country in which the activity is located.
