Ardmore Shipping sees IMO 2020 effect ‘kicking into full gear’ in September

Ardmore Shipping (NYSE: ASC), a company that provides ocean transport of refined petroleum products and chemicals, reported widening quarterly losses but believes underlying fundamentals are better than rates suggest.

The company reported a net loss of $9.2 million for the first quarter of 2019, compared with a net loss of $5.2 million in the same quarter of 2018. Excluding losses from a vessel sale, net income from continuing operations improved, to a loss of $2.6 million in 2019 compared with a loss of $5.2 million last year.

The net loss from continuing operations of $0.08 per share was better than Wall Street analysts’ expectations of a loss of $0.11 per share.

Ardmore’s fleet of 27 tankers, which totals 1.2 million deadweight tons (DWT), is concentrated in the ‘workhorse’ medium-range or ‘MR’ (25,000-54,999 DWT) category. Its MR fleet obtained average spot rates of $15,856 per day in the most recent quarter, up from $12,721 per day in the same period of 2018, and also above the $12,475 per day average in the fourth quarter of 2018.

MR voyages booked so far in the second quarter of 2019 (representing just under half of available revenue days) are averaging around $16,000 per day, implying an upward trend during what had been expected to be a slower period.

Ardmore Shipping chief executive officer Anthony Gurnee asserted that underlying market conditions are being distorted by preparations for IMO 2020, the 0.5 percent cap on bunker fuel sulfur, which takes effect on January 1, 2020.

Currently, the effect is negative, but that tide should turn. Gurnee cited “heavy refinery maintenance and upgrade downtime as the global refinery complex prepares for the IMO 2020 marine fuel transitions,” which he believes is “partially masking the extent of the underlying strength” in supply-demand fundamentals.

“We see strong evidence of extended refinery turnarounds,” he added, with that downtime driven by increases of conversion capacity, adjustments to product yields toward middle distillates, and full-year maintenance being “front-loaded” given expectations for higher second-half demand.

According to Ardmore chief financial officer Paul Tivnan, “Refinery throughput is expected to ramp back up this summer towards a seasonal peak in August, increasing by 4.6 million barrels per day from March.”

Gurnee predicted that the effect of the IMO 2020 rule on product tanker demand would begin in the third quarter. “Our assessment is that we will start seeing some signs in July and August and it will kick into full gear by the end of September, when we will start to see some full bunkering of compliant fuel,” he explained. “The really big ships with the really long voyages are going to have to load earlier [to be IMO 2020-compliant as of January 1, 2020].

“As refineries return to full operation and anticipated heightened levels of throughput in the second half, we expect that product tankers will experience a meaningful increase in demand,” he continued, affirming that the “transformation of global energy supply chains in response to IMO 2020 has the potential to be a major cyclical catalyst for product tankers.”

He estimated that the higher demand for low-sulfur fuels could create an additional 5 percent in incremental MR demand starting in the second half of 2019, and projected that this added layer of demand could persist through 2021.

Vessel demand should also be increased as a result of the need to move refined products around the world to where they’re required for bunkering.

According to Gurnee, “We expect that on balance, more gasoil and blended components are going to be moving east to west, which should generate quite a bit of ton-mile demand. In addition, you’ve got areas like Europe that are structurally short on middle distillates already and they’re going to be even more so once the switchover takes place.”

The IMO 2020 effect on demand will come at an opportune time for vessel owners in light of ship supply. Gurnee said that the orderbook-to-fleet ratio for product tankers is down to just 6.2 percent, one of its lowest levels since the turn of the century, and he foresees net fleet growth of 1.5 percent in 2019 and even lower growth in 2020.

Asked on the company’s call with analysts what would could derail the seemingly bright outlook, Gurnee replied, “Two things. One is a global recession. The other is if we had a remarkably smooth and effortless transition to the new fuels, which would mean there’d be less incremental demand, although in that case, we’re not talking about downside, we’re talking about degrees of upside.

“In general, the orderbook is what it is, fleet growth isn’t going to change, oil consumption is reasonably solid – so there’s not a lot to be negative about.”