Norwegian Cruise Line to Keep Fuel Prices at Bay With Hedges

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July 5, 2016

Norwegian Escape. Photo: Meyer Werft

By Robert Tuttle

(Bloomberg) — When ship fuel prices sank to the lowest depths on record in January, Norwegian Cruise Line Holdings Ltd. was mindful not to miss the boat.

The company used swaps on fuel oil and marine diesel to hedge, or lock in the price, for nearly all of its 2016 demands. The cruise ship operator had hedged 92 percent of its fuel purchases for this year as of the end of March, up from 60 percent at the end of last year, according to company financial statements.

“The prices we were locking in were much better than what we have seen,” Andrea Demarco, senior director of investor relations at the Miami-based cruise ship operator, said in a June 14 phone interview.

The price of ship fuel in New York plunged to $126 a metric ton on Jan. 21, the lowest in data stretching back to 2002. It has since rebounded more than 90 percent as crude prices rise from a 12-year low as global oil supplies start to come into balance.

Paying More

The company, for which fuel accounts for about 15 percent of its total expenses, is paying to lock in lower prices after spending almost twice as much for fuel as competitor Carnival Corp. in the first quarter. Norwegian paid $438 per metric ton, net of hedges, in the three months ended March 31, down from $526 a year earlier, according to financials. Carnival paid $229 per metric ton in the three months ended Feb. 29, down from $406 a year earlier.

Norwegian paid more because it used swaps, which locked in the price when fuel costs were higher, Demarco said. Carnival, by contrast, used what are known as zero-cost collars, its financial documents show. Between June 2012 and April 2013, Carnival hedged 6.5 million barrels for this year based off a floor price for Brent crude of as low as $75 a barrel and a ceiling of as high as $120 a barrel.

Carnival’s Strategy

Carnival entered into its last hedging position in October 2014, just before the oil rout took hold, sending crude as low as $26 a barrel in New York earlier this year. About 50 percent of Carnival’s fuel purchases are hedged for this year, Roger Frizzell, a company spokesman, said in an e-mail June 29.

“We feel comfortable with our past hedges since it helped remove some of the volatility related to fuel prices,” he said. “We continue to review our hedging strategy on a regular basis.”

Royal Caribbean Cruises Ltd. also didn’t enter into new fuel hedges in the first quarter when prices bottomed. The cruise operator was 65 percent hedged for 2016 fuel at the end of March, unchanged from the portion hedged for this year as of the end of December, first-quarter financials show. Royal Caribbean didn’t respond to an e-mail seeking comment.

Norwegian’s Hedges

As of March 31, Norwegian has locked in 92 percent of its fuel for 2016 at $380 a ton, 82 percent of next year’s at $361 a ton, 55 percent of 2018 fuel at $356 a ton and 50 percent of 2019 fuel at $309 a ton.

The company said in its first-quarter earnings call in May that being hedged at higher prices leading into this year negatively impacted results, and that it’s optimistic these new hedges will help with earnings going forward.

“Had we not entered into a majority of our hedges prior to the steep decline in fuel prices, expected adjusted net income for the year would have been approximately $120 million higher, adding an additional $0.52 to earnings per share,” Norwegian’s chief financial officer Wendy A. Beck said on the call.

“We opportunistically layered on incremental hedges throughout the first quarter including new hedges, from marine gas oil, or MGO, which we had not previously hedged,” she said at the time.

Norwegian expects adjusted earnings per share for the full-year in the range of $3.65 to $3.85, up from $2.88 in fiscal 2015, Beck said.

“Fuel prices were at all-time lows so we took advantage of that opportunity to secure that pricing for the next number of years out,” Demarco said.

© 2016 Bloomberg L.P

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