Are there people on the forum who are more deeply familiar with the industry or who have jumped on the hype train? Which companies in the sector are favorites and least favorites?
I believe that in the best-case scenario, oil tankers can generate a fortune for their owners, meaning an increase in invested capital by tens of times within a 1-3 year timeframe. Below, I will try to explain why.
Oil tankers have been the worst-performing asset class of the previous decade, including dividends. The image shows the stock chart of the largest company in the sector since 2000.
The industry is what is called super-cyclical (compare mining companies), where profits are purely driven by the law of supply and demand. Within the industry, it is also very difficult to create a moat relative to peers.
At the peak of the cycle, too many new vessels are ordered for long-term demand, and when demand decreases, the oversupply of vessels in the market ruins the profits generated from transporting oil. (This has plagued the sector for the past 10 years.) Conversely, when enough vessels have been retired, the rates paid for transporting oil increase. The lifespan of vessels is approximately 10-20 years.
Companies’ profits are simply generated from rates exceeding vessel costs, i.e., compensation paid for transporting or storing oil. Costs are relatively fixed, so an increase in rates can significantly leverage profits when the return relative to costs improves. (For example, if a vessel’s costs are €20,000/day and the rate is €60,000, a profit of €40,000 is generated. Currently (5.5.2020), rates are approximately €160,000 per day for a large VLCC tanker, so in this example scenario, a profit of €140,000 per vessel per day is generated.)
The last cycle peak was around 2008, as can be seen from the stock chart above. Now enough time has passed for natural attrition to begin. Combined with the IMO2020 decision to reduce sulfur emissions from vessels by requiring the installation of “scrubbers” on vessels, this further promotes the retirement of older vessels, as it would not be economically viable for vessels with a short remaining lifespan.
The effects of IMO2020 began to be seen in tanker prices last year, with rising stock prices towards the end of the year.
However, tankers also took a hit from the coronavirus, bringing stock prices back to all-time lows.
Now tankers have made headlines due to their excellent situation related to oil contango. That is, when land-based storage facilities are full of oil, oil has had to be stored in tankers. This has pushed rates to historical highs, and tanker companies are making more money than ever.
The possible and even probable cycle turnaround initiated by IMO2020 is therefore still an ongoing scenario, and in addition, companies are more profitable than ever, but stock prices are still well below YTD highs. From the beginning of the previous cycle to its peak, stock prices rose by thousands of percent. Market psychology naturally strongly influences this. Super-cyclical industries tend to rise very quickly, which, once the rise begins, attracts interest from other investors. The peaks of these industries’ cycles typically involve strong bubble formation.
How could the masses be so wrong about tanker pricing? There are many possible answers:
- The industry is small, with the largest companies having market caps of approximately 2 billion.
- The industry is followed by very few analysts due to its hated nature and the worst returns of the decade.
- The industry is considered dying, often justified by glancing at the stock chart without understanding the cyclical nature of the industry.
- Currently, bear arguments are largely based on a rapid decline in current high rates, which may be possible, but this overlooks the natural increase in rates due to the underlying cycle turnaround.
- The industry couldn’t be less sexy when asked by anyone other than ship enthusiasts (they exist, I have worked in ship-related jobs).
Itsellä on DHT, FRO ja NNA salkussa.
