Tuesday, February 18, 2020

Tanker Tuesday

It's Tanker Tuesday.

It's no secret that tankers are collapsing, and I've never felt more alive - though that could change in a jiffy depending on how the coronavirus plays out. I would love to tell you why tanker stocks are crashing, but to be honest, I have no idea.

Maybe it's that charter rates have collapsed over the past few weeks. December has been the strongest month for tankers every year on this side of the 21st century, and 2020 is no different. Despite rates holding up longer and stronger than in the same period last year, we're supposed to believe that tankers are headed for the rocks.

I'm taking the other side of that bet. Running a shipping company is simple. If there are 100 cargoes and 99 tankers, it's a boom. If there's demand for 99 voyages and there are 100 tankers, it's a depression. In the 2000's, there were nowhere near enough tankers, and the guys who owned tankers made a lot of money. Naturally, they spent all of these profits on building new boats. After all, when you own a floating ATM, what could be smarter than building more? Trouble is, a shortage is only a shortage when there's not enough to go around, and they built so many tankers that they were back to losing money. An understandable mistake, but that didn't make them any less broke. Fast forward to today, and they've gotten so disciplined about ordering that the shipyards have gone broke too. Tanker stocks are trading near all time lows. We've had too many tankers for a decade, and everyone who's ordered a ship in the past decade is either shell shocked or bankrupt. But things are getting better.

All of those boats built in the 2000's are getting older, and tankers don't last forever. IMO 2020 is increasing fuel costs, and environmental regulations are forcing shipowners to install expensive ballast water treatment systems. No one wants to invest millions of dollars to upgrade a ship that only has a few wheezes left. This means increased scrapping of older vessels.

Look at the shift that's taking place with product tankers. Oil majors hate chartering product tankers older than about 15 years, creating a two tier market that results with substantially lower charter rates for older vessels. Many product tankers this age leave the clean market and trade as crude tankers - reducing the supply of clean tankers. Take MRs, for instance. The number of MR product tankers turning 15 started to exceed deliveries a couple of years ago. This trend accelerates dramatically starting in 2020.

On the other side of the equation, oil demand grows at a few percent a year. In addition, IMO 2020 is replacing high sulfur bunker fuels with low sulfur fuels, disrupting supply chains and increasing the demand for tankers to move everything around. If that weren't enough, China just announced that it had agreed to import enough extra oil from the US to give full time jobs to every single VLCC supertanker scheduled for delivery this year.

Despite growing demand, the supply of new vessels is extremely limited. Deliveries (as a % of the fleet) will run at well under half of the 10 year average, and ordering remains muted. Drydocking from scrubber retrofits is pulling ships off the water, reducing supply. Vessel quarantines and floating storage of bunker fuels are reducing supply still further.

Supply is shrinking and demand is growing. Financing for new ships is restricted, and a lot of these tankers are getting pretty rickety, just as new regulations are pushing obsolete tankers to the scrapyards like old ladies off cliffs. Tankers make the world go round, and when there's a shortage of something the world can't do without, it's usually fun for whoever owns it.

A month ago, I was up 50% on my tanker stocks. I held all the way up and all the way down, and now I'm buying more. Product tankers are especially well positioned. Saudi Arabia will finish a large refinery this year, which will produce refined products for export on clean tankers. Most importantly, we need product tankers to move marine gasoil and components for low sulfur fuel blends, which are in demand as a result of the IMO's new 0.5% sulfur cap. I'm buying.

As always, shoot me an email if I'm missing something obvious. Remember, if I lose all of my money making obvious mistakes, the bank will kick me out of my house, and if I get kicked out of my house, I won't have time to write this neat blog. Before firing away, check the FAQ below to see if someone else has already deployed your email's evil twin.

Disclosure: I own shares of STNG, DSSI, EURN, and TNK.

FAQ:

Isn't the party over with COSCO ships returning?

COSCO sanctions only added fuel to the fire. COSCO sanctions started in October, but supply had already been tight for a year. Every month in 2019 averaged higher charter rates than in the same month in 2018. This trend has continued so far in 2020, despite COSCO ships coming back.

But wait, what about the coronavirus?

The CCP, a noted beacon of truth, says everything's under control. On the other hand, maybe this is the next Black Death and we all end up as coronacorpses. I've never taken a course in predictive pandemic modeling, so I wouldn't know.

Either way, the Chinese are too busy hiding from the coronavirus to burn oil. It doesn't take a genius to figure out that this decreases tanker demand. But unless China goes back to rickshaws, that demand is coming back. In the meantime, who orders a ship when shareholders are panicking and a coronavirus is set to kill them anyway? Isn't this the impetus for obsolete vessels to finally get scrapped? When demand does come back, I want to be around. Besides, you know those pesky Chinese shipyards that are always building too many ships? Well, the workers aren't showing up. They don't want to catch the coronavirus any more than we do.

I'm taking advantage of the coronacrash to buy any tanker stock I can lay my hands on. STNG is deep in bargain bin territory, despite a fleet comprised entirely of clean tankers, which are experiencing an unseasonal lift in rates even with the coronacrash. Despite a strong balance sheet and a straight shooter at the helm, DSSI trades at half of liquidation value - cheaper even than some of the Greek FraudCorps.

As for Navios, I'm out. I think tankers will do well given a bit of time, but Navios doesn't have time. It's leveraged 10 to 1 and has multiples of its market cap in impending debt maturities. Angeliki has designed the most efficient financial bonfire on the NYSE. My motto from now on: Never Navios...