Three months ago, tanker owners hoped for a quick rebound and talked up fleet expansion via consolidation. There’s little talk of fleet growth today. And a growing number of executives and analysts fear the typically strong winter season will be a bust.
Tanker stocks were up Monday on the Moderna vaccine news, just as they were a week before on the Pfizer vaccine news. Yet beyond such sentiment bumps — which Evercore ISI analyst Jon Chappell characterized as “likely a mix of short covering and bottom-feeding buying” — near-term tanker fundamentals are grim.
“These are tough times for [tanker] shipping,” said Diamond S Shipping (NYSE: DSSI) CEO Craig Stevenson during a call with analysts on Monday. “It’s in cash-burn mode. The next quarter or two are going to be tough. We’ll just have to gut it out.”
The winter that wasn’t?
“Weak Q4 conditions may confound some views that markets would see ‘normal’ seasonal gains, but 2020 is far from normal, and seasonal patterns can be discounted,” said Maritime Strategies International (MSI) in a new outlook released Monday,
“With renewed lockdowns being enforced across many countries in Europe in Q4, oil demand is going to take a further near-term hit,” warned MSI.
According to Stevenson, “Somebody asked me today: What do you think the winter’s going to do freight-rate-wise? I don’t think anybody has a clue, quite frankly.”
“The usual seasonal backing of improving demand for oil into the key winter period has not gained traction,” conceded Euronav (NYSE: EURN) CEO Hugo de Stoop during a call on Nov. 5.
Jefferies analyst Randy Giveans told FreightWaves, “Inventory levels are currently much higher than previous winter levels. Demand for crude oil and refined products is much lower than previous winter levels. Rates would be much higher now if rates didn’t reach astronomical levels in Q2 2020. That strength was borrowed from today.”
Pulling back on growth timetable
During the Q2 2020 conference calls, shipping executives and analysts pointed to potential fleet growth opportunities ahead.
“We expect the next leg in the market to have attractive investment opportunities,” said DHT (NYSE: DHT) co-CEO Svein Moxnes Harfjeld back in August. De Stoop of Euronav said the company could do either cash or stock takeovers. Stifel analyst Ben Nolen said International Seaways (NYSE: INSW) “is probably the ideal candidate as a consolidator.”
Fast forward to Q3 2020. According to DHT co-CEO Trygve Munthe: “The next step … would typically be to expand and renew the fleet. However, at this point, we are in no rush. We’re not not there to do anything at the moment. We’re on the fence for now.” The circumstances with the pandemic are just too unusual and unprecedented, he said.
On the Euronav call, De Stoop explained why his company chartered in two tankers as opposed to buying them. “That’s outside the natural way you would find Euronav [growing] but we are living through exceptional times. We continue to be frustrated with the share [price], which explains why we have decided to take them on time charter rather than trying to buy something.”
Asked about owners’ apparent change of heart toward buying more tankers, Giveans responded, “The benefit of secondhand acquisitions is that you get the vessel immediately. In the current weak rate environment, nobody wants or needs extra vessels.
“Plus, with the market uncertainty, there are not many shipowners willing to buy additional tonnage in the near term.
“Lastly, with the pending environmental regulatory changes and technological uncertainty, shipowners remain reticent to place newbuilding orders, and even modern secondhand ships carry some obsolescence risk in a few years,” Giveans explained.
Tanker owner losses mount
Before the opening bell on Monday, crude and products tanker owner Diamond S Shipping reported a net loss of $9.7 million for Q3 2020 versus a net loss of $25.9 million in Q3 2019. The loss of 24 cents a share was slightly better than the consensus forecast for a loss of 26 cents.
According to Nolan, “Forward bookings for Q4 2020 were weaker than expected. As opposed to the eternal optimism expressed by most shipowners, Diamond S management is taking a more precautionary approach in retaining as much cash as possible and selling older assets with no immediate plans to replace them.”
Nordic American Tankers (NYSE: NAT) — a favorite among retail stock traders — also reported results on Monday. The owner of mid-sized tankers posted a net loss of $10 million for Q3 2020 versus a net loss of $13.7 million in Q3 2019. Its loss of 7 cents per share was worse than the consensus estimate for a loss of 3 cents.
According to Chappell, “Like for the rest of the industry, Q4 2020 has begun on an incredibly soft note [for NAT]. It’s difficult to see a meaningful and sustainable uplift in spot rates for the foreseeable future, meaning that NAT’s quarterly dividend is likely to decline again sequentially in Q4, unless [NAT] issues more stock … to support the payout at the current level.
“With dividends likely to be capped at low levels, at best, the legacy retail-driven valuation premium could revert meaningfully,” Chappell said. Click for more FreightWaves/American Shipper articles by Greg Miller
MORE ON TANKERS: Crude vs. product tankers: advantage product tankers? see story here. Why crude tanker collapse could be long and painful: see story here. How are tanker owners coping with the floating-storage hangover? See story here.
