Oil

[old nutter]

There has been a lot of talk in the news about the drop in the price of oil and the effects it will have on various parts of the economy. Those businesses that use a lot of oil will see the most benefits. The most obvious candidates to benefit are airlines and cruise companies. Without anything official to go on, I have been doing a few back of the napkin calculations to see what these price changes might mean to NCL.

 

At a first guess, I think that on average the NCL ships probably use something like 150 tons of fuel per day per ship. At $635 (the 2014 price to NCL) a tonne, that costs around $95K per day. There are 14 ships in the fleet and taking those average figures it looks like the fuel bill for a day will be about £1.3m making an annual bill of around $475M. Like most of the cruise companies, NCL hedge their oil ahead and during 2014 they apparenly paid around £635 per tonne. The price has apparently dropped by upwards of 50% and allowing for some hedging, that could well mean an average cost this year of more like a bit over $350 per tonne giving an annual bill of about $268M, a saving of a bit over $200M.

 

Across the fleet, it looks like there are a little over 2M passengers a year and that $200M and that would mean an average reduction per passenger of around $100.

 

Last year, Kevin Sheehan apparently said that the company would use the small drop in oil prices last year (a bit less than 4% by all accounts let's say £10M) to pay for the Norwegian NEXT improvements and some marketing intiatives.

 

Clearly the above figures are little more than educated estimates, but I would doubt if they are far away from the truth (unless my maths has gone the way of my memory!)

 

Having already seen cost increases this and next year at more than 30% in some cases. is there any chance that some "marketting initiatives" will result in more realistic costs coming through in the next months as the fuel savings cut in, or will they go into shareholder's pockets?;)

[cliffd64]

There has been a lot of talk in the news about the drop in the price of oil and the effects it will have on various parts of the economy. Those businesses that use a lot of oil will see the most benefits. The most obvious candidates to benefit are airlines and cruise companies. Without anything official to go on, I have been doing a few back of the napkin calculations to see what these price changes might mean to NCL.

 

At a first guess, I think that on average the NCL ships probably use something like 150 tons of fuel per day per ship. At $635 (the 2014 price to NCL) a tonne, that costs around $95K per day. There are 14 ships in the fleet and taking those average figures it looks like the fuel bill for a day will be about £1.3m making an annual bill of around $475M. Like most of the cruise companies, NCL hedge their oil ahead and during 2014 they apparenly paid around £635 per tonne. The price has apparently dropped by upwards of 50% and allowing for some hedging, that could well mean an average cost this year of more like a bit over $350 per tonne giving an annual bill of about $268M, a saving of a bit over $200M.

 

Across the fleet, it looks like there are a little over 2M passengers a year and that $200M and that would mean an average reduction per passenger of around $100.

 

Last year, Kevin Sheehan apparently said that the company would use the small drop in oil prices last year (a bit less than 4% by all accounts let's say £10M) to pay for the Norwegian NEXT improvements and some marketing intiatives.

 

Clearly the above figures are little more than educated estimates, but I would doubt if they are far away from the truth (unless my maths has gone the way of my memory!)

 

Having already seen cost increases this and next year at more than 30% in some cases. is there any chance that some "marketting initiatives" will result in more realistic costs coming through in the next months as the fuel savings cut in, or will they go into shareholder's pockets?;)

 

 

Would you accept an answer of all of the above?

 

The drop in oil prices may give a short term boost to shareholders, as well as allowing the company to pay down some debt (also good for the bottom line), and ultimately give NCL some flexibility if they need to adjust prices to encourage business. Of course all this can change in the reverse directions just as fast as it did coming down. My guess is you'll probably see a lot of behind the scenes accounting and finances being applied where they are needed most. If prices are too high and bookings are down, you can rest assured that there will be deals to increase bookings... An empty ship makes no money.

[Sauer-kraut]

Since as far as I'm aware, the cruise lines haven't implimented the fuel surcharge fee on fares when oil was way over the $70 minimum mandated. So, we got off quite nicely. With the drop in oil I doubt there will be any compensation to the passenger fares, now that NCL is a public company those savings will go back into the corporate kitty.

[luddite]

This is way more obsessing than I can imagine myself worrying about.

[roger001]

The oil surcharge was never imposed when it was above $65 a barrel (for a long time) . So I can't see a refund when it goes below that price.

[jd1966]

It also depends on how much fuel hedging they do. They may be paying a much higher rate than the open market.

[sfaaa]

Every time NCL is having a cruise sale or freebie promo, that's your price break. Can't double dip.

Edited January 8, 2015 by sfaaa

[Da-Painter]

There has been a lot of talk in the news about the drop in the price of oil and the effects it will have on various parts of the economy. Those businesses that use a lot of oil will see the most benefits. The most obvious candidates to benefit are airlines and cruise companies. Without anything official to go on, I have been doing a few back of the napkin calculations to see what these price changes might mean to NCL.

 

At a first guess, I think that on average the NCL ships probably use something like 150 tons of fuel per day per ship. At $635 (the 2014 price to NCL) a tonne, that costs around $95K per day. There are 14 ships in the fleet and taking those average figures it looks like the fuel bill for a day will be about £1.3m making an annual bill of around $475M. Like most of the cruise companies, NCL hedge their oil ahead and during 2014 they apparenly paid around £635 per tonne. The price has apparently dropped by upwards of 50% and allowing for some hedging, that could well mean an average cost this year of more like a bit over $350 per tonne giving an annual bill of about $268M, a saving of a bit over $200M.

 

Across the fleet, it looks like there are a little over 2M passengers a year and that $200M and that would mean an average reduction per passenger of around $100.

 

Last year, Kevin Sheehan apparently said that the company would use the small drop in oil prices last year (a bit less than 4% by all accounts let's say £10M) to pay for the Norwegian NEXT improvements and some marketing intiatives.

 

Clearly the above figures are little more than educated estimates, but I would doubt if they are far away from the truth (unless my maths has gone the way of my memory!)

 

Having already seen cost increases this and next year at more than 30% in some cases. is there any chance that some "marketting initiatives" will result in more realistic costs coming through in the next months as the fuel savings cut in, or will they go into shareholder's pockets?;)

 

We do not know how far out they hedge the oil prices, for the next 6 months, 1-2-3-4-5 years, or one can hedge all the way out to 2023. We do not know if they hedged 100% of their anticipated demand, or 10%. And what price levels they locked into for what time periods. All of this is a factor in what they are paying for fuel.

 

Current prices for Crude Oil WTI today closed at $48.70.

If you hedge out for Jan 2016, the price you would lock into today is $55.66.

If you hedge out for Jan 2017, the price you would lock into today is $60.79.

If you hedge out for Dec 2023, the price you would lock into today is $67.38.

 

The longer out in the future out you hedge/lock into a price, the higher the price.

 

So, we do not know if NCL locked into prices in the $600/tonnes range, and for what time period.

 

So it would be tough to guess how the drop in oil prices are effecting their financials today.

And like the airlines, and other industries, all of their hedges are going to be kept confidential. They do not want to let the other cruise lines know what they are doing, etc.

Or did they see the drop coming in oil prices, and close out their hedges, benefiting from the drop in oil prices.

 

Its fun to speculate that they are, or may not be benefitting, and how much, from the current drop in oil prices.

 

Its a lot more complicated then what appears to be obvious, thanks for bringing up the issue, I wonder just like everyone else.

 

Like the folks who ask today: "Should I book a cruise at todays prices, or wait".

NCL is pondering, should they lock in oil prices today, or wait, they may be lower next week/month......or the low may be today, and the prices start moving back up.

What would you do if you were in NCL position today? :confused:

[old nutter]

You are right Da-Painter, it is complicated. It appears that oil costs are the single biggest variable on the cost side of the bottom line. so big reductions in that cost are very significant factors on the pricing side.

 

I used public data for pricing fuel oil rather than crude to avoid any oil company issues and it has been published that NCL used around three quarters hedge in 2014 and expected a year average of $635 per tonne on their costs with that hedge/spot mix for last year. I also rounded reductions down.

 

From what the market says, the 12 month hedge for fuel oil for this year is around the $320 per tonne at present, so there will be a big windfall either way, or else they should sack their buyers!

 

To be fair to NCL, they have had to pay a fair wedge to install the scrubbers in their ships so they could meet the new emission regulations, although that has already been factored into budgets, so either way, there will be a big windfall somewhere.

[CruisinMaterial]

Any savings from the price of crude being lower will probably go to pay off debt. NCL has built lots of new ships lately and those are all paid for by generating debt. They’ve also acquired the Sky from Genting Hong Kong, no longer leasing it. The Norwegian Epic was financed on a lot of junk loans with high interest rates. I believe by NCL going public it allowed them to re-work some of those loans to get better interest rates.

 

As for the marketing initiatives, it’s already started. NCL released a new TV ad a few days back on their website and followed it by airing in several media markets including here in Boston where the local traffic report has been sponsored by Norwegian Cruise Line in the morning. It’s nice to hear the jingle the way it was originally designed, not the other one which was created for the Norwegian Getaway. This time the marketing also seems to be better geared as the ads are actually not saying Norwegian sails to the Caribbean from Boston as last year’s TV blitz did which was misleading. Maybe they hired a better advertising agency with the extra money?? :D:D

[Seanote]

It also depends on how much fuel hedging they do. They may be paying a much higher rate than the open market.

 

This may give you some info:

 

 

"Our exposure to market risk for changes in fuel prices relates to the forecasted purchases of fuel on our ships. Fuel expense, as a percentage of our total cruise operating expense, was 15.6% and 16.9% for the three months ended September 30, 2014 and 2013 and 16.6% and 18.2% for the nine months ended September 30, 2014 and 2013, respectively. From time to time, we use fuel derivative agreements to mitigate the financial impact of fluctuations in fuel prices. As of September 30, 2014, we had hedged approximately 91%, 59%, 50% and 10% of its remaining 2014, 2015, 2016 and 2017 projected metric tons of fuel purchases, respectively. We estimate that a 10% increase in our weighted-average fuel price would increase our anticipated 2014 fuel expense by $7.2 million. This increase would be partially offset by an increase in the fair value of our fuel swap agreements and fuel collars and options of $5.2 million. Fair value of our derivative contracts is derived using valuation models that utilize the income valuation approach. These valuation models take into account the contract terms such as maturity, as well as other inputs such as fuel types, fuel curves, creditworthiness of the counterparty and the Company, as well as other data points."

From EDGAR:

https://www.sec.gov/Archives/edgar/data/1513761/000157104914005621/t1402007_10q.htm

[Da-Painter]

This may give you some info:

 

 

"Our exposure to market risk for changes in fuel prices relates to the forecasted purchases of fuel on our ships. Fuel expense, as a percentage of our total cruise operating expense, was 15.6% and 16.9% for the three months ended September 30, 2014 and 2013 and 16.6% and 18.2% for the nine months ended September 30, 2014 and 2013, respectively. From time to time, we use fuel derivative agreements to mitigate the financial impact of fluctuations in fuel prices. As of September 30, 2014, we had hedged approximately 91%, 59%, 50% and 10% of its remaining 2014, 2015, 2016 and 2017 projected metric tons of fuel purchases, respectively. We estimate that a 10% increase in our weighted-average fuel price would increase our anticipated 2014 fuel expense by $7.2 million. This increase would be partially offset by an increase in the fair value of our fuel swap agreements and fuel collars and options of $5.2 million. Fair value of our derivative contracts is derived using valuation models that utilize the income valuation approach. These valuation models take into account the contract terms such as maturity, as well as other inputs such as fuel types, fuel curves, creditworthiness of the counterparty and the Company, as well as other data points."

From EDGAR:

https://www.sec.gov/Archives/edgar/data/1513761/000157104914005621/t1402007_10q.htm

 

Very interesting, thanks for posting that. The folks in these industries are aware of when prices get cheap enough to buy, its like when stock prices get so cheap, you just buy and hold. It can represent a lot of money to their bottom lines.

I look at the commodity futures prices, as a barometer, I do not look at the prices for the exact product they purchase. I do not know what they buy, nor where the prices are quoted.

 

There can be great profit opportunities when prices collapse like they have for the oil products, the question is when is the time to buy. :eek:

[old nutter]

Yes, thanks Seanote. There was a lot of interesting stuff in the balance sheet report. The risks part is particularly interesting. They are hedging and it looks as though either or both major elements of the merger may have been doing it on margin trading. If the oil price stays down they will make some gains, but as it says in the document, there are potentially serious liquidity issues caused by margin calls that will have to be solved and the gains on lower prices on other oil purchases will probably be swallowed up by the costs of maintaining trading liquidity. Such are the oddities of forward trading in the hedge funds.

[BILLP1]

They own the business to make money...