“I’ve been telling investors lately that this is a once-in-a-decade situation. I’m about to claim that this is actually a once-in-a-generation situation,” said Robert Hvide Macleod, CEO of crude-tanker owner Frontline (NYSE: FRO).
“This year is looking incredibly strong,” he told viewers of the Capital Link International Forum, which was held virtually.
Cratering global demand due to the coronavirus is proving disastrous for many transport companies, but not for crude tankers, which are now “in a parallel universe,” said Peter Sand, chief analyst of shipping association BIMCO. “The market is on fire.”
“I’m just sitting here thinking how odd it is that we’re all benefiting from a demand-destruction scenario,” Ridgebury Tankers CEO Bob Burke told Capital Link forum-watchers. “I never would have thought this could happen, but it’s the extremes that drive the equation and what we have now is really extreme.”
“It’s a very weird experience running a tanker company today,” said Hugo De Stoop, CEO of Euronav (NYSE: EURN). “We must be the only ones enjoying this market. The rest of the world is melting down.”
The tanker party
Rates for very large crude carriers (VLCCs, tankers that carry 2 million barrels of crude oil) rose to $239,400 a day on Tuesday, up 151% week-on-week and 623% month-on-month, according to Clarksons Platou Securities, which urged investors to “enjoy the tanker party.”
The collapse in the price of crude oil to around $20 per barrel and the surge in new production from Saudi Arabia have spurred refiners, governments and traders around the globe to stock up. This has created demand for VLCCs to move the cargo to land-based storage facilities, as well as demand for VLCCs to be used for floating storage, all of which inflates spot rates (editor’s note: Following publication of this article, the price of crude surged, floating-storage economics declined, and tanker stocks fell. Click here for update.).
According to the analyst team at Fearnleys Securities led by Espen Fjermestad, “Owners are able to put vessels away for 6-12 months at very attractive rates, supported by extreme floating-storage economics. We wouldn’t overrule seeing 100-200 VLCCs taken off the market for the next 6-12 months.”
“What we’re seeing now is a complete destruction of oil demand in the world,” said Macleod, who estimated that global oversupply has reached 20 million barrels per day. “We don’t think there is more than 300 million barrels of [commercial land-based] storage in the world, so we’re going to have storage on ships at levels more extreme than we saw in 2015.”
“One thing is certain: The supply of ships is being strangled,” Macleod said. “Whether we have 10 million or 20 million extra [barrels a day], it’s building at a pace we have never seen before. The demand destruction is unheard of, and people are continuing to pump. Turning off production is not something you can do instantly — it’s not a garden hose. And for shipowners, what’s important is not demand, it’s oil production.”
De Stoop told the Capital Link audience that land-based crude storage “will be filled up very soon — in the next 30-60 days.” Moves to secure storage on ships are already in full swing. “We’ve been approached for contracts for six to eight months at rates between $70,000 and $90,000 a day,” De Stoop said. “These are very serious rates and it [floating storage] will also be beneficial for all the companies with exposure to the spot market, because it will restrict vessel supply.”
The hangover after the tanker party
It’s a certainty that private owners of VLCCs are raking in huge sums. It’s also virtually guaranteed that public investors will receive very large dividend payouts for the first and second quarters. What’s not guaranteed is that crude-tanker stock prices will follow the upward trend line of spot rates.
Crude-tanker stocks face two formidable headwinds. First, the coronavirus is putting massive pressure on the broader stock market due to fears over falling GDP. Tanker stocks have been championed as a safe haven amid the chaos, yet they are not always bucking the trend.
On Monday, the stock market rose and several tanker stocks surged by double digits in extremely heavy trading. But on Tuesday, when the broader market fell, so too did tanker stocks. Frontline dropped 9% in double the average trading volume.
Despite gains this month, Frontline was still down 26% year-to-date as of Tuesday, International Seaways (NYSE: INSW) was down by 20%, Euronav by 12% and DHT (NYSE: DHT) by 9%.
The stocks are still trading at a discount to their net asset value (market-adjusted value of assets minus liabilities). According to Jefferies analyst Randy Giveans, INSW is at a 20% discount to NAV, Euronav is at a 14% discount, Euronav 11% and DHT is the best performer at an 8% discount.
The other potential headwind for equities involves the rate hangover to inevitably follow the “tanker party.” According to De Stoop, “We all know that when oil is stored, at some point it will be consumed, and when it is, demand for transportation will be reduced and oil production will be reduced.”
Nicolas Duran, a director and partner at Fearnleys Securities, said during the Capital Link event, “Tankers are essentially just borrowing from the future. Whatever benefit you’re seeing now, you’re going to have to pay for down the line and it’s going to take longer before we get back to a natural recovery.”
Mike Webber, founder of Webber Research and Advisory, said in a new research note that his team is “long the [tanker] group as the market searches for just how deep the storage trade could get” in the near term, but cautioned, “We’d remain nimble with the group as we think the market will be relatively quick to start pricing in an unwind of that storage trade for tanker equities.”
During the Capital Link event, he warned, “It’s difficult to think that the equities would somehow look past rates going down to $20,000-$30,000 per day [after the storage play ends] and just rely on the cash flow that’s in the rearview mirror.
“These [equities] are going to be forward-looking mechanisms. Tankers are minting money, but it would run counter to about 15 years of data to suggest that the stocks will hold on while rates go to $20,000 per day and investors will just be happy with the cash flows from the first half of the year.” Click for more FreightWaves/American Shipper articles by Greg Miller