Tanker stocks – take a breather first

Investors in the tanker market have been closely following the recent batch of earnings reports, conference calls and analyst recommendation as the market eased since the boom times of 2022.

The turn of the year brought new challenges including the impact of “price caps” on crude and products, but most observers see it as healthy with a low order backlog, although more are now being reported.

The VLCC sector has been exceptionally volatile – see around $100,000 a day from TCE in the Middle East at the end of March and rivals late 2022 highs which have now fallen to less than half of scrubber equipped vessel levels – which gives investors something to think about. The overall stock markets, which provide the backdrop to trading in shipping stocks, which represent only a tiny fraction of total stock capitalization, have also seen sharp swings.

Last week, investors kept a close eye on the release of New York-based tanker owner International Seaways (NYSE – INSW)’s first quarter 2023 results, with the reported results providing a nice “beat,” meaning they matched shipping analysts’ predictions exceeded. The stock, which was trading above $50 per share in late March, which wasn’t entirely coincidental when VLCCs were at that $100,000 level, has retreated in recent weeks, particularly after OPEC+ production cuts with prices below 40 US dollars per share had just announced.

Equity analysts like INSW, which has been strategic with its investments and has also returned cash to shareholders through its dividend mechanisms. Its fleet is spread across several tanker market segments.

BTIG analyst Greg Lewis, a big fan of INSW, told investors: “While longer-term we remain constructive on tankers given the favorable supply-side dynamics and our Buy rating given INSW’s strong balance sheet and ability to send cash to shareholders repay, maintain (Total dividends for Q1 were $1.62, representing a ~4% dividend yield for Q1 only.) We are lowering our price target on our expectation of continued near-term interest rate weakness.”

Noting that “rates are lagging in the summer months,” Lewis said, “INSW locked approximately 46% of its sales days in Q2 at $44,000, which equates to $44,000 realized across the fleet in Q1 indicates another quarter of solid cash flows.”

Stifel analyst Ben Nolan was looking for similar price momentum; He wrote to customers, “We expect the next quarter to deliver significantly higher profits as approximately a third of the fleet is tied up at better rates than our Q2 estimates.”

At Jefferies, Omar Nokta was positive on geopolitics, telling clients, “This is the third consecutive significant payout after $1.00 per share in 3Q22 and $1.88 per share in 4Q22. We remain optimistic about the company’s prospects, although we see risks to earnings potential in the coming months due to planned OPEC cuts.”

The shift in oil flow, always a market feature, could also benefit ISNW. BTIG’s Mr. Lewis pointed to INSW’s US golf lighter business, which would continue to benefit from growth in US crude oil exports (currently around 4.8 million barrels per day, up 20% from the same point in 2022). Analyzing recent INSW results, he pointed to a solid $5m EBITDA (similar to cash flow) generated from such a slowdown in Q1 results.

Investors can take a different route than trading individual stocks. A new vehicle, the BWET exchange-traded fund (ETF), was recently launched by Breakwave Advisors, the same team behind the highly successful BDRY investment vehicle for those who like dry bulk. The ETFs, listed on the New York Stock Exchange, reflect a bundling of futures contracts in their respective sectors that span six months. When the contracts are settled (in cash), the positions are then rolled over to the next expiration.

The ETF’s pricing is very specific to the prospects of the tanker market on certain routes – tied to the values ​​that traders put on the tanker futures contracts. This is in contrast to equity markets, which are influenced by a variety of exogenous and macroeconomic factors that go well beyond oil market dynamics – think Federal Reserve, job reports and regional bank woes, among others. Initially, the BWET instrument will consist of components primarily tied to VLCC trades, with a rebalancing planned for December.

Source: News Network