Product Tankers Hitting It Out of the Park

By Barry Parker (gCaptain) –

February 5^th, when the price caps on Russian refined products kicked in, was a pivotal day for the MR and LR1 tanker segments. Observers, noting that crude tanker hires had eased two months earlier in December 2022, when the caps on crude pricing had begun, had been cautiously watching the product sector.

In the first half of February, indicators were that product rates had been strengthening with shifting trade patterns bringing about longer voyages (effectively increasing ton-mile demand). Brokers SS&Y, in a mid February 2023 market report discussing MR tankers in the Atlantic, described an early February situation where daily hire equivalents were “surging back to $41,200/day (W285 ($4.02/t))…amid an injection of cargoes,” after a lull at the turn of the year that stretched into the beginning of February.

The optimism about the sector, which has been an off-the-charts winner, is still abounding as earnings releases regarding Q4 2022 (which also hinted at prospects for Q1 2023 and beyond) were delivered. Two companies, the behemoth Scorpio Tankers (NYSE: STNG) and rising star Ardmore Shipping (NYSE: ASC) were stealing the spotlight.

For perspective, STNG has risen 60% (from $40/share up to around $62/share) in the past six months, while ASC has doubled (from $10/share up to around $20/share) during the same timeframe. Looking back further, STNG was under $20/share when the fighting broke out in Ukraine and ASC was treading water at $4/share. Investors’ baseball metaphors of “three bagger and four bagger” don’t apply—these companies have both hit it “out of the park.”

Analysts following these names are brimming with optimism. In a write-up of ASC along with a “Buy” recommendation, Stifel analyst Ben Nolan (perhaps a concert goer when the home teams are out of town), described ASC as “Good Rockin’ Tonight”. He said that “After years of a challenging market, everything is going Ardmore’s way. The company’s significant operating leverage means that the current strength in product tanker spot rates (which we expect to continue as demand exceeds supply) should keep earnings, cash flows, and dividends healthy. Ultimately, we see little that could disrupt the strength of the product tanker market for at least the next several years.” 

Jon Chappell, from Evercore ISI, described ASC in terms of “A V-Day Investor Day with a Fat Payday”. Noting that ASC will now be paying a dividend, he wrote: “Like other tanker companies that have begun to pivot to capital returns after a prolonged downturn shifted to a cyclical upturn (and a multi-year period of balance sheet de-leveraging), ASC’s shares are being immediately rewarded by the generous capital allocation.”

He added that: “These early-cycle dividends are just starting to screen and entice the incremental investor to a group that had been largely out of favor for much of the half decade before mid-2022. Moreover, based on our supply/demand outlook and the early stages of the redrawing of the global commodity trade map, we believe the strong spot rate tail can be extended this cycle.”

STNG was also seeing “Buy” recommendations. At Jefferies, veteran analyst Omar Nokta wrote: “Scorpio delivered one of its best results as a public company, as its large product tanker platform continues to benefit from a strong underlying market. Its cash position has risen noticeably while its debt level continues to come down quickly.”

STNG, which had sold vessels and then leased them back during the weaker markets, has now been buying vessels out of lease arrangements. It has also been aggressively buying back shares (which increases the earnings/share number). Greg Lewis, Energy Analyst at BTIG, was also positive on STNG, telling investors: “the embargo on Russian refined products looks to have quickly tightened the market, with MR rates in the Atlantic currently in the ~$55k range, which is up from ~$10k in early February (the Russian products embargo went into effect February 5th). While it’s rarely just one thing driving rates (a lack of new supply was always going to be supportive of product rates this year), with more Russian cargoes heading to Asia and South America, ton-mile expansion also looks to be supporting rates.”

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