The investor spotlight has turned toward owners of very large crude carriers (VLCCs), tankers that carry 2 million barrels of crude oil. VLCC spot deals out of the Middle East Gulf have topped $300,000 per day — in one case exceeding $350,000 per day.
The bullish case is that demand for transport from Saudi Arabian shipping company Bahri will keep rates elevated, ultimately flowing through to the financial results and dividends of listed VLCC owners such as Euronav (NYSE: EURN), DHT (NYSE: DHT), Frontline (NYSE: FRO) and International Seaways (NYSE: INSW).
But it’s not so simple. Shipping stocks don’t necessarily trade in line with fundamentals, particularly in times of heightened stress on the broader equity markets.
“Few people are trading on company specifics at the moment. Clearly, macro is driving the bus,” said Michael Webber, founder of Webber Research & Advisory, speaking on Tuesday during the Virtual Investor Forum hosted by J Mintzmyer on Value Investor’s Edge via Seeking Alpha.
Webber, the former head shipping analyst of Wells Fargo, has won the Institutional Investor award for best shipping coverage for the past five consecutive years.
“I would say the overall theme for the next few weeks is: Don’t be a hero. There will be an opportunity eventually, but there’s nothing that says any name I’m talking about couldn’t be 15 points lower in the next week or two,” he said of shipping stocks in general.
“We’re in the vortex now. It’s tough to come up with fundamental floors on these equities as it stands today.”
Tanker stocks are often traded as part of the energy portfolios of larger institutional investors. Consequently, Webber strongly recommended that individual investors “keep the OVX on your screen.” The OVX is the Chicago Board Options Exchange crude volatility index.
“Obviously it has been spiking in the past two weeks. Anytime it’s over 35 or 40 [it traded around 130 on Tuesday] you typically see widespread weakness around most of the commodity shipping names, because that [level] is a pretty good pain threshold for most institutional energy books. When it gets to that level, [stocks owned by these investors] have all traded off in tandem as books are liquidated.”
On a positive note, Webber does see some larger investors reacting to positive tanker fundamentals amid the chaos. “What’s refreshing, at least to a degree, is that the tanker names have outperformed despite the OVX climbing to near record levels,” he said. “What that tells me is that there is a bid in the market from people who still have capital to deploy in a positive way who want to go long on guys exposed to floating storage.”
When the amount of oil shipped exceeds the amount that can be stored on land, it is either intentionally or unintentionally stored on tankers, reducing vessel supply and putting upward pressure on spot freight rates. “If you have a number of nation-states that are outproducing versus pre-coronavirus demand levels, we’re going to saturate land-based inventory pretty quickly and you’ll see that [crude] go on the water, which will help underpin cash flows,” Webber said.
Even so, he acknowledged that “whether the market ends up recognizing this [floating storage scenario] is still to be determined.”
Speaking in general of the broader shipping sector, he said he is focused “more along the lines of capital preservation than on finding the next 10-bagger [a stock that increases in value tenfold]. That could change in a few weeks, but for now, you want to look at balance sheets, and then go backwards from there to [company] valuations.
“Don’t get enamored with valuations. It’s not as if they’re meaningless, but if you can’t establish the baseline of what the next 12-18 months are going to look like from a demand perspective and revenue perspective, it’s very hard to rely on some sort of cash-flow or earnings-based multiple.
“I do think crude-tanker names should benefit [from current market dynamics],” he said, but added that in general, “I don’t think you should rush in at the moment.” More FreightWaves/American Shipper articles by Greg Miller