Product Tanker Markets Are Humming: This Time It Could Be Different
By Barry Parker (gCaptain) –
“All of these markets are humming” was the report from Lars Dencker Nielsen, the Commercial Director of Scorpio Tankers (NYSE: STNG) on an investment bank hosted conference call on the day following the company’s update on developments.
STNG’s share price, now around $44/share, has more than doubled in the past six months at a time that product tanker hires are typically at seasonal lows. Not this year, in the words of company President Robert Bugbee, also on the call, who suggested that even after a brief “summer lull” for MR tankers (typically around 50,000 dwt) around the U.S. Gulf, the timecharter equivalents (TCEs) had fallen to levels that were in line with highs over the past 15 years. Bugbee suggested that TCE’s were moving back up. “A bullish sign,” he said.
The economic recovery, along with trade patterns which have shifted because of the Ukraine war, has brought about a tremendous growth in the refined products trades, with Dencker Nielsen saying that inventories are at multi-year lows, with “distillates going farther afield.” He said, “This will strengthen the ton mile story for MR and LR tankers- with the LR2 tankers (typically 110-115 kdwt) earning $70,000 – $90,000/day in some trades, particularly east of Suez. After saying that STNG had made efforts earlier in the summer to position more vessels in that region, he said: “This proved to be the right call.”
Across the shipping sector, when participants see ongoing strength, charterers will commit to multi-year deals. On the investor call, Dencker Nielsen said that timecharters of three to five years duration were now “easily obtainable” in the products trades (with STNG controlling 131 vessels- variously owned, leased or chartered in). Analysts covering the company were quick to point to important items in STNG’s update: a charter on STI Lombard (an LR2 product carrier) for three years at $32,750/day, with optional years at $34,750/day, and $36,750/day.
At Jefferies, shipping specialist Omar Nokta wrote that: “Liquidity in the time charter market has remained elevated for the past 3-4 months, and rates are pushing higher. We would not be surprised if Scorpio’s next agreed time charter is at an even higher rate. It should be noted that the latest agreed-upon term rate of $32,750/day is above any annual spot market LR2 average since 2008.”
Analyst Jon Chappell, from Evercore ISI wrote, following STNG’s communication- which detailed the hefty timecharter hires that STNG has locked in, that: “… we are raising our 3Q22, full-year 2022, and full-year 2023 EPS estimates to $4.35 (from $3.64), to $9.73 (from $8.89), and to $6.86 (from $6.39), respectively.”
STNG also announced its exercise of purchase options, where STNG bought vessels that had been leased in during a much weaker pricing environment. Jefferies’ analyst Nokta explained that: “Management announced it is exercising options on eight more ships (two LR2s, four MRs, and two Handys) financed via sale/leaseback for $133 million which will reduce its breakeven by $665/day. These ships are valued at $304 million in today’s market, affording management plenty of flexibility.”
One transport equity analyst who has changed his tune about prospects for STNG is Deutsche Bank’s Amit Mehrotra, who had previously expressed skepticism about the staying power of the market’s runup. In a report issued just prior to STNG’s update, he wrote: “There have been several periods over the last two decades where refined product tanker rates spiked for several weeks, followed by a quick rebound back to lower rates. Given the current favorable demand dynamics as well as expected low fleet growth in coming years, this time could be different and be the beginning of a sustained upcycle in rates as underlying supply and demand dynamics have never been so favorable.”
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