Tanker Market Outlook

Tanker Market Outlook December 217 Dag Kilen Senior Shipping Analyst Fearnresearch dki@fearnleys.no/ +4791192727 IMPORTANT / DISCLAIMER: This presentation is prepared by Fearnresearch and Fearnley Consultants, companies in the Astrup Fearnley Group. Copyright protected. Any retransmission or distribution is prohibited. www.fearnleys.com An Astrup Fearnley Company

Tanker Market Outlook, December 217 1. Recent development 2

26 27 28 29 21 211 212 213 214 215 216 26 27 28 29 21 211 212 213 214 215 216 26 27 28 29 21 211 212 213 214 215 216 26 27 28 29 21 211 212 213 214 215 216 26 27 28 29 21 211 212 213 214 215 216 26 27 28 29 21 211 212 213 214 215 216 26 27 28 29 21 211 212 213 214 215 216 Tanker Market Outlook, December 217 VLCC trading, avg. liftings per month by trade 2 15 1 5 WAF-N.America 8% 6% 4% 2% % 8 6 4 2 Europe-Asia 5% 4% 3% 2% 1% % 4 MEG-West 25% 2 MEG-Asia 5% 3 2 1 2% 15% 1% 5% 15 1 5 45% 4% % 35% 3 WAF-Asia 15% 25 3 25 2 15 1 5 Americas-Asia 2% 15% 1% 5% % 2 15 1 5 1% 5% % 8 6 4 2 Other trades 15% 1% 5% % Sources: Fearnleys 3

26 27 28 29 21 211 212 213 214 215 216 26 27 28 29 21 211 212 213 214 215 216 26 27 28 29 21 211 212 213 214 215 216 26 27 28 29 21 211 212 213 214 215 216 26 27 28 29 21 211 212 213 214 215 216 26 27 28 29 21 211 212 213 214 215 216 26 27 28 29 21 211 212 213 214 215 216 Tanker Market Outlook, December 217 Suezmax trading, avg. liftings per month by trade 5 WAF-Europe 2 % 25 MEG-Europe 1 % 4 3 WAF-U.S. 2 % 15 % 4 3 2 1 15 % 1 % 5 % % 2 15 1 5 8 % 6 % 4 % 2 % % 2 1 % 1 5 % % 5 MEG-Asia 15 % 4 3 1 % 2 1 5 % % 1 Americas-Asia 12 % 1 WAF-Asia 8 % 8 6 4 2 1 % 8 % 6 % 4 % 2 % % 8 6 4 2 6 % 4 % 2 % % 3 28 26 24 22 Other trades 65 % 6 % 55 % 5 % 2 45 % Sources: Fearnleys 4

Tanker Market Outlook, December 217 USD/Day USD/Day USD/Day USD/Day VLCC, seasonal perspective 1 8 6 4 2 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avg 2-215 214 215 216 217 Aframax, 217 versus 216 Suezmax, 217 versus 216 6 216 217 5 4 3 2 1 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec MR, 217 versus 216 (Atlantic basket) 45 4 216 217 25 216 217 35 2 3 25 15 2 15 1 1 5 5 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Sources: Fearnleys 5

Tanker Market Outlook, December 217 2. Supply outlook 6

Tanker Market Outlook, December 217 LR2 1-year TC Smallest vessel size % of total fleet in dwt Correlations Supply should be reviewed combined with other segments. Although periodic differences occur, like how Suezmax earnings outperformed VLCC earnings 3 out of the past 7 years, data over the lifespan of the asset show strong correlations. Limited diversification effect from being in several segments over the life of the assets. Outlook for the biggest segments measured in transportation capacity crucial for the smaller. Periodic arbitrages may however occur and on the asset side we believe there will be an underperformance for the Suezmax segment in 217/18, hence opportunities to pick cheap assets and TCs relative to the other segments. Aframax vs LR2 correlation, monthly 26-217 Correlations, segment vs segment 6 VLCC vs Suezmax 5 Suezmax vs Aframax Aframax vs LR2 R² =,99 4 LR2 vs LR1 R² =,94 LR1 vs MR 3 R² =,98 2 R² =,88 1 R² =,98 1 2 3 4 5 6 7 8 Largest vessel size % of total transportation capacity 45 45% 41,7 % 4 4% 35 35% 3 25 2 15 1 5 - R² =,97-1 2 3 4 5 Aframax 1-year TC LR2 fleet; 314; 32 % Aframax fleet; 658; 68 % 3% 25% 2% 15% 1% 5% % 15,2 % 13,5 % 12,6 % 6,6 % 5,2 % 4,3 %,9 % VLCC Suezmax Aframax Panamax LR2 LR1 MR Handysize Sources: Fearnleys 7

Tanker Market Outlook, December 217 Million dwt 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217 218 219 22 +25 kdwt historic deliveries & orderbook, excluding shuttle & chemical tankers 45 4 35 3 25 2 15 1 5 VLCC Suezmax Afra/ LR2 Pmx/ LR1 MR Handy Sources: Fearnleys 8

Tanker Market Outlook, December 217 Million dwt Number of vessels 217 218 219 22 221 222 217 218 219 22 221 222 217 218 219 22 221 222 % of current orderbook Global Sulphur Cap 22 Four alternatives for the ship owners: Scrubber & HFO: Most vessels can retrofit, but takes space. 2-5% fuel penalty. VLCC cost ~$3-3.5 USDm all-inclusive. Chemicals for closed loop system. Future waste disposal cost? Can continue to use HFO and well proven bunkering ports. Sources: Fearnleys MGO/ new compliant fuels: Can be used for most engines. Higher fuel cost but ~6% lower fuel consumption versus HFO. Availability? European SECA implementation took longer time but still the premium spiked to $45/mt at peak. Operational issues due to low viscosity? LNG/Dual fuel: Environmental and EEDI positive. Can reach Tier III performance. High investment cost. Retrofit also possible but expensive and requires deck space. Regional variances in LNG price and availability. Scrapping: Older vessels depending on sufficient supply of compliant fuels without huge price premium to HFO. Older vessels may alternatively find life as FSO s for a HFO surplus, or to be scrapped. More scrap candidates coming up (basis 4 th SS by year) 45 4 35 3 25 2 15 1 More scrap candidates coming up (basis 4 th SS by year) 25 2 15 1 5 5 3 8 2 37 23 36 5 17 217 218 219 22 221 222 VLCC Suezmax Aframax LR2 Panamax LR1 MR/Handy % of current orderbook 7 18 VLCC Suezmax Aframax/LR2 14 24 14 27 41 2 11 35% 3% 25% 2% 15% 1% 5% % 32 9

Tanker Market Outlook, December 217 3. Demand outlook 1

Tanker Market Outlook, December 217 Mbpd global stock change Q1'9 Q2'9 Q3'9 Q4'9 Q1'1 Q2'1 Q3'1 Q4'1 Q1'11 Q2'11 Q3'11 Q4'11 Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16 Q3'16 Q4'16 Q1'17 Q2'17 Q3'17 Q4'17 Q1'18 Q2'18 Q3'18 Q4'18 USD/Day TCE, VLCC MEG-FEAST Global implied oil stock changes versus VLCC earnings 2,5 2, 1H'12; Stock building aheadof Iran 214/15; booming on low 9 sanctions, despite forward market fleet growth and high stock builds backwardation. Tanker market oversupplied 8 1,5 1,,5, -,5-1, 29-11; High fleet growth and stock draw - owners nightmare... If OPEC maintain Q3'17 output 7 6 5 4 3 2-1,5-2, 213; Tanker market suffering more from demand issue than oversupply. 1 Sources: Fearnleys, IEA, OPEC 11

Tanker Market Outlook, December 217 Million barrels Million barrels Million barrels Million barrels U.S. Comm. crude, gasoline & distillate stocks, weekly 95 U.S. Commercial crude oil stocks, weekly 55 9 85 8 75 24.6 mb 55.8 mb 5 45 4 7 65 6 55 Stocks reduced by 148.8 mb/ -15.7% since February peak Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 1-year High/Low 214 215 216 217 5-year avg U.S. Gasoline stocks, weekly 26 25 24 35 3 25 U.S. Distillate stocks, weekly 18 17 16 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 1-year High/Low 214 215 216 217 5-year avg 23 15 22 14 21 13 2 12 19 11 18 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 1 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 1-year High/Low 214 215 216 217 5-year avg 1-year High/Low 214 215 216 217 5-year avg Sources: EIA 12

Tanker Market Outlook, December 217 Billion barrels USD Billions Barrels found & FID d, by year E&P spending, basis coverage of 89 key O&G companies 25 2 15 1 5 6 5 4 3 2 1-22 % 21 % 28 % 17 % 17 % 33 % -16 % 27 % 16 % 9 % 5 % -24 % -28 % -5 % FID approved New oil findings U.S. shale oil optimism sufficient supply in the long run? Time 1 year 2 years 3 years 4 years Depletion 2,5 mbpd 5, mbpd 7,5 mbpd 1, mbpd Consumption growth? 1,3 mbpd 2,6 mbpd 3,9 mbpd 5,2 mbpd All scenario numbers are accumulated New production needed? 3,8 mbpd 7,6 mbpd 11,4 mbpd 15,2 mbpd Depletion basis estimate by the IEA Chief economist in Q3 16. Mind that offshore need 3-5 years from FID to production. Known upstream start-ups through 22 excluding U.S. shale = ~6.6 mbpd peak capacity. IEA s forecast for U.S. shale is 1.4 mbpd growth @ $6/bll, and 2.5 mbpd @ $8/bll. Sources: Fearnleys, IEA 13

Tanker Market Outlook, December 217 Million EV/Hybrid cars % of World Energy Consumption 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 # of cars in Norway New car sales market share, others Norway % of new car sales EV/Hybrid cars market share % World energy consumption by type, % of total # of cars by type in Norway 4% 35% 3 3 3 2 Norway's oil consumption meanwhile grew 2.8% over the 21-216 period... 4, % 3,5 % 3% 25% 2% 15% 1% 5% % 216 vs 29 216 vs 2 Oil 13 % 24 % Nat.gas 2 % 46 % Coal 13 % 58 % Nuclear -4 % 1 % Hydro 24 % 49 % Ren. 25 % n.a Total 17 % 43 % EV & Hybrid car sales Oil Natural Gas Coal Nuclear Energy Hydro electric Renew- ables 3 1 3, % 3 2,5 % 2 9 2, % 2 8 1,5 % 2 7 1, % 2 6,5 % 2 5, % 21 211 212 213 214 215 216 1H'17 Gasoline/Diesel EV's Hybrids EV's % of total Hybrids % of total EV s & Hybrids, % of new car sales 1,6 % 35% 2, 1,4 % 3% 1,5 1, 1,2 % 1, %,8 %,6 % 25% 2% 15%,5,4 %,2 % 1% 5%, 21 211 212 213 214 215 216 N.America Europe China Japan Others, % % 21 211 212 213 214 215 216 World USA China UK France Norway Sources: BP, SSB, EV-volumes.com 14

Tanker Market Outlook, December 217 Million barrels per day 28 29 21 211 212 213 214 215 216 217 218 219 22 221 222 223 224 225 226 227 228 229 23 231 232 233 234 235 Oil consumption about to reach 1 mb, more than 15 years earlier than one thought just few years ago. 115 11 15 1 IEA WEO NP in 211 IEA WEO NP in 213 IEA WEO NP in 215 IEA Oct'17 EIA IEO 213 EIA IEO 215 EIA IEO 217 95 9 85 8 Sources: IEA, EIA 15

Tanker Market Outlook, December 217 5. Conclusion 16

Tanker Market Outlook, December 217 Conclusion We revised our 219-221 forecast higher in Jan-17 on anticipation of a tighter market than previously expected, caused by the IMO sulfur cap implementation. Our previous forecast showed the same cyclical development but was based on a newbuilding parity coupled with supply/demand outlook approach. Our forecast for 217/18 remain firm at the levels that we have forecast since May-15. Expect Suezmax to underperform through 218 on high fleet growth relative to other segments. Expect MR to outperform through 218 due to low fleet growth relative to the other segments. We see upside risk for our 219/22 estimates, and downside risk for our 221/222 estimates. FEARNLEY Year VLCC* Suezmax Aframax LR2** LR1** MR** 213 14 1 13 4 12 5 15 7 14 7 14 214 25 3 27 5 25 3 17 1 15 7 14 5 215 61 1 45 8 39 5 26 2 22 7 16 9 216 actual 38 9 28 3 22 5 21 8 18 7 15 1 216 forecast 37 27 7 21 2 21 4 18 8 16 6 Deviation vs. forecast 5,1 % 2,2 % 6,1 % 1,9 % -,5 % -9, % Year/Year % chg -36,3 % -38,2 % -43, % -16,8 % -17,6 % -1,7 % 217 forecast 2 17 5 13 6 15 1 13 8 12 5 Jan-Nov'17 avg 18 8 15 5 12 8 15 5 13 8 13 3 218 25 2 5 15 9 17 2 15 5 13 7 219 4 29 5 22 5 23 4 2 4 17 4 22 6 41 4 31 2 31 7 27 22 1 221 45 32 5 24 7 25 5 22 1 18 6 222 2 17 5 13 6 14 5 13 8 12 5 *) Volume weigthed average **) Basis 1-year TC to better capture triangulation effects and real earnings Sources: Fearnleys 17

USD/Day, 1y T/C Aframax USD/Day, 1y T/C MR USD/Day, 1y T/C VLCC USD/Day, 1y T/C Suezmax Tanker Market Outlook, December 217 Investment Analysis VLCC 1y TC vs 5y old asset value 1 The below illustrate current value estimate of a 5-year old asset vs current 1-year TC earnings, showing its strong historic correlations. Intention is to show in an easy way and create discussions what could be fair price levels at various rate levels. Last done levels can be found on the previous page. Suezmax 1y TC vs 5y old asset value 6 8 6 «Last» in red 4 «Last» in red 4 2 R² =,82 2 R² =,85 5 5 7 9 11 13 15 17 Asset value, USDm 5y old VLCC Aframax 1y TC vs 5y old asset value 3 4 5 6 7 8 9 1 11 Asset value, USDm 5y old Suezmax MR 1y TC vs 5y old asset value 3 4 25 «Last» in red 3 2 «Last» in red R² =,86 2 15 R² =,86 1 2 3 4 5 6 7 8 Asset value, USDm 5y old Aframax 1 2 25 3 35 4 45 5 55 Asset value, USDm 5y old MR Sources: Fearnleys 18

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