Sometimes, it pays to re-visit a trade that did not work out as expected. In last month’s newsletter, I mentioned that it might be time to look at tankers again. I did, and I think it’s time to take another whack at it.
I gave a presentation on the Oil Tanker industry at the TDV conference last July. I have uploaded my presentation here
And the voice recording here
To sum up the trade thesis:
Fleet size growth will soon turn negative as newbuilds aren’t replacing older vessels being sent to the scrap heap.
Oil demand is going to pick up as the covid hysteria passes and governments find it difficult to impose draconian lockdowns.
Refinery utilization rates will rise; demand for transporting crude to refineries and end products to consumer markets increases.
Demand for tankers increase => excess returns earned by the current fleet increases => tanker companies return capital to shareholders through buybacks and dividends.
As a nice bonus, rising steel prices keeps supply down by making newbuilds more expensive and increasing the incentive to scrap older vessels. This means the next rally in TCE rates can last a lot longer than last year’s spike.
The Fundamentals
I performed a simple valuation exercise. I valued the companies’ fleet using the latest prices for vessels from Fearnleys, adding working capital, newbuilds and other non-current assets, and netting out long term debt. The data is presented below.
Euronav (EURN) is the market leader, with an owned fleet of 45 VLCCs and 24 Suezmax. Frontline (FRO) comes next, with a fleet of 17 VLCCs, 29 Suezmax and 22 Aframax. The company tends to trade at a premium, in both good times and bad, because investors accord a premium for its management group.
DHT Holdings (DHT) is exclusively into the VLCC segment, with a fleet of 27 owned VLCCs. Nordic American Tankers (NAT) is a retail favourite and is exclusively into the Suezmax segment, with a fleet of 23 Suezmax. The trouble with NAT is that its fleet is ageing. The average age of its vessels is 13.2 years.
My top picks would be Euronav and DHT Holdings since I see both value and growth in these names. If the market really heats up, I'd buy into all four and ride the uptrend.
Good Trading!
Kashyap