{"id":1116290,"date":"2019-05-14T15:20:15","date_gmt":"2019-05-14T15:20:15","guid":{"rendered":"https:\/\/oilandgas-investments.com\/?p=31398"},"modified":"2019-05-14T15:20:15","modified_gmt":"2019-05-14T15:20:15","slug":"are-shipping-tanker-stocks-finally-worth-owning-a-3-year-check-in","status":"publish","type":"post","link":"https:\/\/juniorminingnews.com\/?p=1116290","title":{"rendered":"Are Shipping\/Tanker Stocks Finally Worth Owning? A 3 year check-in"},"content":{"rendered":"

Shipping has not been a great industry–for management teams or investors–for several years now.<\/p>\n

I warned readers to avoid the sector like the plague back in 2016 with this story here: http:\/\/bit.ly\/tankersoversupplied<\/a><\/strong><\/p>\n

The sector is capital-intensive, has no product differentiation (ie. one ship is the same as the next), and frankly, my experience has been that management teams are not very good.\u00a0 They’re willing to drive shareholder value into the ground (like American natgas producers!) to grow.<\/p>\n

All this and years of cheap credit have led to overcapacity for 10+ years.\u00a0 Here’s two charts that show the growth in the global fleet:<\/p>\n

\"1\"<\/a><\/p>\n

 <\/p>\n

 <\/p>\n

\"2\"<\/a><\/p>\n

Those are not bullish charts.\u00a0 And of all the segments of the shipping business, the clean tankers have been one of the worst.<\/p>\n

Clean tankers carry refined products like gasoline, diesel, distillates as well as chemicals.\u00a0 This contrasts with dirty tankers, which carry crude.<\/p>\n

\"3\"<\/a><\/p>\n

Source: Scorpio Tankers Stifel Conference Presentation<\/em><\/p>\n

The misery in the sector reached its peak in 2018 when rates for MR (mid-range) tankers collapsed to below $5,000 per day last summer.<\/p>\n

\"4\"<\/a><\/p>\n

It has been bad for so long.\u00a0 So when someone starts talking bullish, and I mean REALLY bullish, I take notice.<\/p>\n

Last Thursday Scorpio Tankers President Robert Bugbee was answering a question on their conference call when he said it would not be unreasonable to see cash flow of $25\/share at some stage in this cycle.
\nWait, what was that?<\/p>\n

Scorpio Tankers is a $28 stock.\u00a0 Only a few weeks ago, it was an $18 stock.<\/p>\n

$25 per share of cash flow? Now that’s bullish!<\/p>\n

What\u2019s Going On Here?\u00a0 <\/strong><\/p>\n

It seems too good to be true, so I dug in.<\/p>\n

There are a couple of things at play.<\/p>\n

First, we have a 20 year low in shipbuilding orders.\u00a0 The product tanker order book stands at multi-year lows.<\/p>\n

It has gotten so bad that shipyards are being paved over for commercial real estate.\u00a0 Those that remain have consolidated.<\/p>\n

The order book today stands at 134 ships.\u00a0 That is 6.2% of the fleet delivering over the next 3 years.<\/p>\n

\"5\"<\/a><\/p>\n

Source: Ardmore Shipping December Presentation<\/em><\/p>\n

Here’s a Bloomberg chart that shows somewhat the same thing:<\/p>\n

\"6\"<\/a><\/p>\n

With so few new ships on the horizon, net fleet growth over the next few years is expected to be below 2%.<\/p>\n

On top of that you have healthy scrapping.\u00a0 There were 49 MR tankers scrapped last year. \u00a0Expectations are for similar numbers going forward.<\/p>\n

The only thing that will slow down scrapping are higher rates.<\/p>\n

Summary: the supply side will remain very constrained<\/span> in the near term.<\/p>\n

The Demand Side: Refinery Starts and IMO 2020<\/strong><\/p>\n

Demand hasn\u2019t been a problem for clean tankers.\u00a0 MR tanker demand has been growing close to 4% for the last 18 years.\u00a0 That is expected to continue going forward.<\/p>\n

\"7\"<\/a><\/p>\n

Beyond the long-term trend, there are reasons that demand could accelerate even more in the short-term.<\/p>\n

First, the new refining capacity the Middle East has been building for the last few years is coming online now.\u00a0 Governments there want to diversify their economies away from upstream production.\u00a0 That means refineries are producing fuels for export.<\/p>\n

That means new MR and LR trade routes and more product being shipped.<\/p>\n

Second, IMO 2020.\u00a0 While the ban on high-sulphur fuel oil (HSFO) in ships is likely to disrupt the entire industry, the biggest disruption will be on the product tanker sector.<\/p>\n

Why? Because all that replacement low-sulphur fuel needs to be shipped on clean tankers \u2013 MR\u2019s and LR\u2019s.<\/p>\n

IMO-2020 is like a one-time step-change for shipping refined product.<\/p>\n

IMO-2020 is also expected to improve refinery margins.\u00a0 This will provide incentive for refiners to produce more product IN GENERAL. Gasoline, diesel, and distillates will all see increases.<\/p>\n

In fact, on the Scorpio earnings calls there was even a question about the potential need for floating storage next year–but for gasoline, not oil.<\/p>\n

It is hard to believe but stranger things have happened.\u00a0 \u00a0That the question is even asked tells you something about the changes on the horizon.<\/p>\n

End Game<\/strong><\/p>\n

Here\u2019s the next big question \u2013 does this all end badly?<\/p>\n

At the 13th<\/sup> annual Capital Link Shipping forum, Bugbee put it like this:<\/p>\n

\u201cOf course, we won\u2019t change as an industry\u201d.\u00a0 \u201cOf course, we will shoot ourselves in the foot in the future.\u00a0 But right now, after 11 years of a terrible market the gun has been taken away from us.\u201d<\/p>\n

\u201cWe\u2019re little children.\u00a0 We\u2019ll never grow up and if you keep feeding us candy, we are going to be sick and you guys will have to clean the mess up \u2013 that will happen again.\u00a0 Its just not going to happen for a little while.\u201d<\/p>\n

Like I said, that sounds like it could have come from US natgas producers.\u00a0 But it speaks to my comments about management in the industry.\u00a0 Ironically, the most bullish thing about the tanker business is that even the executives have no faith in it.\u00a0<\/em> It has been so bad for so long \u2013 shipping companies have worn out their welcome.<\/p>\n

Even their own executives refer to themselves and their peers as children!<\/p>\n

It will take more than a few months of blow-out earnings to earn the trust of the capital markets back.<\/p>\n

Where Are We In The Cycle?<\/strong><\/p>\n

If it really is going to get good, it should start this fall.<\/p>\n

The Market is going through a period of lots of refinery maintenance in the US Gulf Coast (USGC). \u00a0That means reduced supply of refined product.<\/p>\n

Thanks to IMO 2020 this year\u2019s maintenance is particularly heavy.\u00a0 Every single refinery is giving guidance that their maintenance schedule is longer than expected.<\/p>\n

They are doing the maintenance now to make sure they can run hard and fast in the fall and next year to fully benefit from IMO 2020.<\/p>\n

Yet in spite of that we are not seeing a weak rate environment.<\/em>\u00a0 Even the companies themselves have been surprised at the strength.<\/p>\n

In the first quarter freight rates for all the clean-tanker classes (LR2, LR1, MR and Handymax) were at their highest level since 2015.\u00a0 They were strong through January, February, March, and now April.<\/p>\n

The storm of refinery maintenance is almost behind us and rates haven\u2019t given an inch.<\/p>\n

This bodes well for the market in the fall.\u00a0 That is when the demand from IMO 2020 will begin to ramp.\u00a0 It is also a seasonally strong period for tanker rates.<\/p>\n

Throughput is expected to ramp through the summer, climbing towards a seasonal peak in August.\u00a0 Product supply is expected to increase 4.6 million barrels a day from March levels.<\/p>\n

Both the end users and charterers see what\u2019s coming.\u00a0 Lot\u2019s of talk on the calls about customers wanting to extend their books.<\/p>\n

But apart from the weakest hands, the tanker owners are balking at chartering their vessels on period rates.\u00a0 This is their change to capitalize \u2013 finally!<\/p>\n

Super Cycle?<\/strong><\/p>\n

The million-dollar question is \u2013 how long will this last?<\/p>\n

Here are a few points to consider:<\/p>\n