Imagine you’re the CEO of a company ringing the opening bell of the New York Stock Exchange. You show up at the corner of Wall Street and Broad full of excitement and anticipation on the morning of the big event. Then the entire U.S. market crashes the moment trading begins and no one pays any attention to you.
Public tanker-company executives can relate.
The top names in the space are issuing earnings releases in rapid fire this week, with Ardmore Shipping (NYSE: ASC) the first out of the gate on Tuesday morning. Rates had recently hit record highs and it seemed like the perfect setup for a victory lap — until the timing went sour.
Oil up, tanker stocks down
The price of crude oil is surging off its previous record lows, driven by optimism on demand as lockdowns end, and optimism on supply as producers turn off the spigot. U.S. WTI crude rose another 20% on Tuesday, with international Brent crude up 14%.
Prospects for floating storage have buoyed crude and product tanker freight rates as well as investor sentiment. But the higher the commodity price, the less likely oil will be stored at sea, the less confident tanker investors are on the duration of current rate strength and the jumpier they get about holding on to tanker stocks.
This week got off to a rocky start on Sunday when Evercore ISI analyst John Chappell — one of the most respected analysts in the sector — issued a client note stating, “We’ve arrived at a non-consensus conclusion: The tanker trade is effectively over. … We cannot see how floating storage can continue to outweigh demand destruction and massive oil supply cuts.”
On Tuesday, crude and product tanker stocks fell as oil and the Dow soared. By the closing bell, Nordic American Tankers (NYSE: NAT) had fallen 14%, Euronav (NYE: EURN) 12%; International Seaways (NYSE: INSW) and Teekay Tankers (NYSE: TNK) 11%; Frontline (NYSE: FRO) and Tsakos Energy Navigation (NYSE: TNP) 10%; Scorpio Tankers (NYSE: STNG) 9%; and DHT (NYSE: DHT) 8%.
Ardmore shares closed down 12% hours after it reported net income of $6.5 million for the first quarter of 2020 compared to a loss of $9.2 million in the same period last year. Earnings in the latest quarter of 20 cents per share topped the analyst consensus forecast of 17 cents per share. Ardmore’s medium-range (MR) tankers posted average rates of $19,307 per day in the first quarter, up 22% year-on-year.
Higher oil pricing isn’t the only sentiment headwind for tanker owners.
There’s also the fact that rates are still highly profitable but they’re well below records set in recent weeks. Frontline President Robert Macleod highlighted this issue during an interview on April 23 with analyst J Mintzmyer of Seeking Alpha’s Value Investor’s Edge.
“This is a very important point,” said Macleod. “The reason I don’t like these mega-spikes is that if you go from $200,000 a day to $150,000 a day it looks like the world is falling apart, but in fact, at Frontline where the cash breakeven is $22,000 a day, $150,000 a day for a long voyage is amazing.”
According to Clarksons Platou Securities, rates for very large crude carriers (VLCCs: tankers that carry 2 million barrels of crude oil) are at $63,800 per day, down 62% week-on-week and 68% month-on-month. Rates for MR product tankers are at $50,900 per day, down 33% week-on-week but up 102% month-on-month.
Another potential sentiment headwind for tanker stocks involves high expectations. Ardmore announced that it had fixed 55% of second-quarter available days for its MR tankers at $24,000 per day and reported that fixtures over the past three weeks averaged $28,000 per day.
That is “higher than anything we have achieved before,” emphasized Ardmore CEO Anthony Gurnee, who pointed to a charter booked last week for an Ardmore MR for 55 days at $72,000 per day, the equivalent of a VLCC earning over $200,000 per day.
Analysts were not particularly impressed. Clarksons Platou Securities analyst referred to “softer than expected guidance.” Fearnleys Securities called Ardmore’s second-quarter numbers “a poor read-across to the clean [tanker] space.” Jefferies analyst Randy Giveans referred to Ardmore’s quarter-to-date numbers as “light.”
Gurnee sounded exasperated during the conference call with analysts.
“I think there’s some confusion about the rates we’re mentioning. They’re not guidance. It’s what we actually booked for historical voyages [to be accounted for in the second quarter] that began as early as late February when rates were $19,000 a day. So, it’s not forward looking, it’s historical, OK? In some of the [analyst] notes I’ve seen this morning, I think people are misconstruing this.
“If the MR market is at $30,000 a day for the rest of the quarter, we’re going to earn that or a little more. Whatever level the market delivers, we’re going to earn it, right?
“My final point is that when you get into these extreme periods of volatility, the indices people are quoting and the rates shipbrokers are throwing around tend to be somewhat detached from reality. As our chartering team likes to say, it’s basically fairy dust until you actually fix it, right?
“I don’t think MRs are at $50,000 a day, which a lot of brokers suggest. But let’s face it, they are at a pretty good level and the [positive] financial implications are pretty extreme, right? So, if we have somehow disappointed people based on this quote-unquote guidance, we’ve provided estimates of what we booked so far and maybe the numbers people have been hanging onto that have been quoted by brokers and indexes aren’t quite there.”
Next in the queue: DHT
After market close on Tuesday, the next of the tanker owners in the queue released its results. VLCC owner DHT reported net income of $72.2 million for the first quarter of 2020 compared to $17.7 million in the same period last year. Adjusted earnings of 58 cents per share topped the consensus forecast for earnings of 51 cents per share.
DHT reported that it had 66% of its available VLCC spot days booked for the second quarter at an average rate of $110,400 per day.
Jefferies analyst Randy Giveans described these rates as “dizzying” and the relatively low price of DHT’s stock as “tantalizing,” adding that the second quarter is poised “to set records.” Fearnleys Securities dubbed DHT’s earnings “as good as it gets.”
But if recent stock-market moves are any indication, even six-figure rates like those reported by DHT offer no guarantee that shares will rise. More FreightWaves/American Shipper articles by Greg Miller