McQuilling Services, LLC

Marine Transport Advisors

Tankers
ASSET PRICES
No. 26 ~ 22 August 2007
VLCC sector (AG/West) since 2004 whereas asset prices have continued to rise at great rates. The average price of a VLCC newbuilding (contract price) in 2006 was US $127 million compared to an average price in 2003 of $77 million; a price increase of 65%. Asset prices have continued to rise in 2007, at around 8% across all tanker sectors over the first half of the year. However over the first seven months of 2007, VLCC freight rates AG / East and AG / West averaged 16% lower than over the same period in 2006 (adjusted to WS 2007). As asset prices continue to rise against falling freight rates and higher bunker prices (note the increasing gap between freight rates and TCE in Figure 1 after 2004; average annual bunker prices in Fujairah increased by 46% in 2005 and 20% in 2006) the investment attractiveness in tanker newbuildings, especially in the VLCC sector, is diminishing. Using average VLCC newbuilding asset prices for 2007 we have estimated financing costs assuming that 60% of the acquisition or delivered price of the vessel is financed over 10 years. The interest rate is assumed to average 6.5% per annum, a conservative estimate based on 1 year LIBOR over the last several years and we incorporate a bullet payment of 30% of the loan amount which is left unamortized until the end of the financing period.
Table 1: Excess cash flow basis 10 year market average

Historically asset prices and average freight rates have been clearly related in the tanker market. In our forecasting of freight rates we are of the opinion that spot and period freight market levels are the drivers of price levels in the asset markets, rather than the other way around.
Figure 1: TCE / Freight Rates (AG / West) and Asset Prices - VLCC Sector

TCE (US $000 / day) 140 120 100 80 60 40 20 0 1997 1998 TCE 1999 2000 2001 2002 2003 2004

Asset Price (US $million) 140 120 100 80 60 40 20 0 2005 2006 2007 YTD

Freight Rate (WS 2007)

N/B Price

5 Year Old Price

Source: McQuilling

If shipowners are bullish they will be motivated to place orders or to buy second-hand tonnage at prices, that when combined with expected freight rates, produce acceptable investment returns. Prices paid for tonnage will therefore be influenced by the prevailing freight market levels and expectations of future freight market levels. The situation is not quite as simple as this however - fleet renewal requirements may drive owners to commit to tonnage at rates higher than the economics support based on current and expected freight rates. Shipyard raw material costs may limit the price at which yards are willing to contract new tonnage. A relationship between current freight rates and asset prices is normally visible but Figure 1 shows that after 2004 there is a disconnect between freight rates and asset prices. The figure shows that average freight rates and time charter equivalent earnings (TCE) have fallen in the

US $ 000 / Day 97-06 Ave TCE Finance Cost Operating Cost Total TCE Cost (WS breakeven)* Excess Cash Flow

VLCC 40.5 25.7 10.5 36.2 63 4.3

Suezmax 33.8 17.1 8.5 25.6 87 8.2

Aframax 27.6 13.5 7.5 21.0 121 6.6

Panamax 22.5 10.8 6.5 17.3 157 5.2

MR 18.7 9.5 6.5 16.0 165 2.7

Source: McQuilling

*WS breakeven rates are based on: VLCC: AG/ East; Suezmax: West Africa / USAC; Aframax: Caribbean / USG; Panamax: Caribbean / USAC; MR: Caribbean / USAC

Ocean House ~ 1035 Stewart Avenue ~ Garden City, New York 11530 Tel: +1.516.227.5700 ~ Fax: +1.516.745.6198 ~ Email: services@mcquilling.com

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While McQuilling Services has used reasonable efforts to include accurate and up-to-date information in this report, McQuilling Services makes no warranties or representations as to the accuracy of any information contained herein or accuracy or reasonableness of conclusions drawn there from. McQuilling Services assumes no liability or responsibility for any errors or omissions in the content of this report. This report is copyrighted by McQuilling Services and no part may be copied or reproduced for commercial purposes without the express written permission of McQuilling Services

McQuilling Services, LLC

Marine Transport Advisors

Tankers
ASSET PRICES
No. 26 ~ 22 August 2007
Table 2: Project rate of return on equity comparison (%)
N/B VLCC Suezmax Aframax Panamax MR Source: McQuilling 5.8 11.3 11.3 11.3 8.6 5 Year 5.7 10.7 11.7 10.7 7.4 10 Year 7.5 14.3 14.3 13.6 8.3

Table 1 shows that based on 10 year average TCE revenues (1997-2006) excess cash flow would be achieved in each tanker sector based on average 2007 asset prices. These results are conservative given our assumed US $320 / MT bunker price for this analysis. The historical average TCE in the VLCC sector which we use in the calculation is US $40,500 / day. The 2007 average TCE for a VLCC trading AG / East however is US $31,500 / day which would generate negative cash flows based on this conservative financing structure. We expect average annual freight rates and TCEs in all sectors to trend downwards through 2009. The bullet payment assumed at the end of the financing period of 30% of the loan amount helps to reduce the upfront financing structure. To properly examine all cash flows it is necessary to carry out a discounted cash flow analysis for each acquisition case. We have also done this for a 10 and 5 year old vessel assuming the same financing but reduced asset life (Table 2). All asset prices are based on current 2007 averages. Based on historical average market returns and current newbuilding asset prices VLCC tankers present the least attractive investment opportunity of the five tanker sectors with a 5.8% return on equity invested. In 2006, return on equity in this sector based on the same financing structure and identical market returns was 6.5%; a higher rate due to lower asset prices at that time.

Suezmax, Aframax and Panamax tankers present the most attractive investment opportunity with an 11.3% return on equity invested. With the exception of the MR sector, 10 year old tonnage produces superior returns and is preferred over newbuilding investment projects. As freight rates continue to fall we expect that diminishing investment attractiveness will put pressure on asset pricing going forward, especially newbuilding contracts.

Ocean House ~ 1035 Stewart Avenue ~ Garden City, New York 11530 Tel: +1.516.227.5700 ~ Fax: +1.516.745.6198 ~ Email: services@mcquilling.com

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While McQuilling Services has used reasonable efforts to include accurate and up-to-date information in this report, McQuilling Services makes no warranties or representations as to the accuracy of any information contained herein or accuracy or reasonableness of conclusions drawn there from. McQuilling Services assumes no liability or responsibility for any errors or omissions in the content of this report. This report is copyrighted by McQuilling Services and no part may be copied or reproduced for commercial purposes without the express written permission of McQuilling Services