Own or Charter A Suggested Method of Analysis for Oil Companies

Abstract

This paper describes a method whereby the economic advantages of ownership and period charters of oil tankers may be compared. It is hoped that this subject will be of interest to designers, engineers, and persons not directly engaged in operational matters. To this end, brief discussions of charter types, advantages of ownership or charters, operational equivalency and other factors are included. Normal economic analysis is shown to be misleading because it does not recognize the financing element inherent in the charter alternative. Because long-term charters involve a fixed series of noncancellable obligations on the company's earnings it is argued that they are equivalent to debt as far as the oil company's management is concerned. The company could promise the same payments to a creditor and receive lump-sum proceeds to finance ownership. Financing charges are removed from charters by capitalizing them at the oil company's cost of debt. The debt or purchase equivalent of the charter is thus determined and an equitable comparison with ownership can be made. The effect of charter length and type are examined by illustrative cases. The relevancy of the method to short-term charters is discussed and left as a matter of individual corporate policy.