Five years on Wall Street: Shipping’s exits, arrivals, whales and minnows

The latest shipping company poised to delist has a market cap of $3.9 billion. The latest new entrant’s market cap is under $20 million.

photo of NASDAQ, where more shipping stocks are listing

There were high hopes in the 2000s and even the 2010s that ocean shipping would evolve into something more than a niche trading and investing space on Wall Street.

The hope was that consolidation would whittle down the crowded field to a few large-cap whales with business models that worked across cycles and garnered the respect of larger investment funds. The reality over the past half-decade: Consolidation is coinciding with larger-cap shipping stocks going private. And the field of shipping minnows — including penny stocks — keeps growing.

Another one bites the dust …

The latest expected departure: Atlas Corp. (NYSE: ATCO), owner of Seaspan, the world’s largest container-ship lessor. It has 127 vessels on the water with total capacity of 1.16 million twenty-foot equivalent units and an additional 67 on order with total capacity of 793,800 TEUs. Atlas has a market cap of $3.9 billion.

Atlas received a take-private proposal on Aug. 4 from holders of 68% of its stock, as well as ocean carrier ONE. The stated rationale for the plan is that “the shipping industry will go through significant changes over the next several years … and it will be essential for the company to make timely decisions, many of which could impact short-term results … decisions [that] cannot be made as efficiently as a public company.”

That sounds like an argument that shipping companies shouldn’t be public in the first place. The industry has always faced significant changes in its markets — many unforeseen. They have always required management to weigh short-term stock effects versus long-term returns.

Loss of shipping stocks due to privatizations

The public liquefied natural gas (LNG) shipping sector, in particular, has been gutted by privatizations and fleet sales in recent years. “Unfortunately, there are very few ways to play LNG shipping with the public equities,” noted Stifel analyst Ben Nolan in May.

Teekay LNG was acquired by private equity company Stonepeak in January. GasLog Ltd. was bought by BlackRock in June 2021.

Outside of the LNG space, container-equipment lessor CAI was bought by Japan’s Mitsubishi Capital in November. Seacor, which owned U.S.-flag vessels, was taken private by American Industrial Partners in April 2021.

Mixed-fleet owner DryShips was taken private by its controversial Greek sponsor George Economou in August 2019.

“You can’t paint all of the privatizations below with a broad brush,” a shipping finance source who declined to be identified told American Shipper. “DryShips had become uninvestable and would never get anything near NAV [net asset value] valuation. Seacor was a conglomerate that frankly didn’t act as a public company.

“The one thematic you could arrive at is that LNG shipping is long-term-contract-based, but because of the pool it swam in — shipping — it was never going to get the infrastructure-like valuations it truly deserved. So, private equity and others were attracted to the cash flows and low entry points and took them private.”

Loss of stocks due to sales

Beyond privatizations, the field of U.S.-listed shipping stocks has been pared by sales to other public companies that are not predominantly in shipping, or are outside U.S. equity markets.

In January, Golar LNG Ltd. (NYSE: GLNG) exited shipping with the sale of its LNG carrier fleet to a new entity, The Cool Co. (The Cool Co. is listed in Oslo.)

Golar LNG Partners was sold to New Fortress Energy (NYSE: NFE) in April 2021.

The company formerly known as Scorpio Bulkers announced its partial exit from bulk shipping in August 2020. It confirmed a full exit that December. It sold its last bulker in Q2 2021. The renamed company, Eneti (NYSE: NETI), is now focused on offshore wind-farm installations.

Loss of stocks due to consolidation

A further reduction in shipping names is coming through consolidation by larger U.S.-listed players.

Navios Holdings (NYSE: NM) announced the sale of its entire drybulk fleet to daughter company Navios Partners (NYSE: NMM) on July 27. Previously, Navios Acquisition bought Navios Midstream in December 2018, and Navios Partners bought Navios Acquisition and Navios Containers last year. There’s now one Navios stock covering containers, dry bulk and tankers — Navios Partners — down from five.

In the tanker space, Frontline (NYSE: FRO) plans to acquire Euronav (NYSE: EURN) and create a combined entity with a market cap of $4.2 billion. Euronav CEO Hugo De Stoop would lead the combined entity and current Euronav shareholders would own 55%.

That megadeal is contingent on more than 50% of Euronav shareholders tendering stock to Frontline in Q4 2022 — a tender that may come up short given opposition by the Saverys family, which owns 20% of Euronav’s shares.

Other consolidations in the U.S. public market over the past-half decade included the acquisition of Diamond S Shipping by International Seaways (NYSE: INSW) in July 2021, the merger of Global Ship Lease (NYSE: GSL) and private box-ship owner Poseidon Containers in November 2018, the sale of the Gener8 Maritime fleet to Euronav and International Seaways in June 2018, and the sale of Navig8 Product Tankers’ fleet to Scorpio Tankers (NYSE: STNG) and the BW Group’s supertanker fleet to DHT (NYSE: DHT) in 2017.

Additions from spinoffs, IPOs and direct listings

The loss of aggregate market cap in the U.S.-listed shipping space due to privatizations and fleet sales would have been severe save for one big arrival: Israeli container liner operator Zim (NYSE: ZIM), which conducted an initial public offering in January 2021. Zim currently has a market cap of $6 billion and is by far the largest U.S. listed shipping stock.

There were three other sizeable Wall Street newcomers in recent years: LNG carrier owner Flex LNG (NYSE: FLNG) debuted via a direct listing in June 2019. Product tanker owner Torm (NASDAQ: TRMD), dual-listed on Nasdaq in January 2018. And dry bulk owner Grindrod (NASDAQ: GRIN), dual-listed on Nasdaq in June 2018.

Beyond that, newcomers have been dominated by Nasdaq-listed microcaps that frequently dip in and out of penny-stock territory and have extremely low market caps. Pricing of these names, sponsored by Greek shipowners, is highly volatile, assumedly appealing to retail traders who buy stocks as if placing bets at a casino.

The latest entrant is bulker owner United Maritime (NASDAQ: USEA), a spinoff of Seanergy (NASDAQ: SHIP). United’s shares have lost 73% of their value since listing on July 6. Its current market cap is under $20 million.

Shares of tanker owner Imperial Petroleum (NASDAQ: IMPP) — a spinoff of StealthGas (NASDAQ: GASS) — were listed on Dec. 3. Its shares traded at 37 cents on Monday, down 95% from its public debut.

Shares of OceanPal (NASDAQ: OP) — a spinoff of Diana Shipping (NYSE: DSX) — commenced trading on Nov. 30. The stock was at 46 cents on Monday, down 90% from its first day of trading.

Mixed fleet owner Castor Maritime (NASDAQ: CTRM) began trading on the Nasdaq in early 2019. Its share price is down 91% since then.

More microcaps to come

United, Imperial Petroleum, OceanPal and Castor have all done equity offerings handled by the Maxim Group. During the Marine Money conference in New York on June 23, Lawrence Glassberg, executive managing director, predicted more entrants to come.

“You will see smaller companies coming public. One of the big things you’re seeing: new companies going public through spinouts. I would venture to say you’ll probably see another three to five by the end of this year — new public companies coming out.

“From our perspective on the Maxim side, we do have at least one company on file for an IPO that’s on the smaller side and we’re transitioning with another company to a public transaction. There is appetite. It’s all about volatility, volatility, volatility. There is the ability to sell equity to investors,” said Glassberg.

Threats to future scale

Thanks to Zim, the combined current market cap of the new shipping names that debuted over the past five years is roughly in line with the preannouncement market caps of shipping names that privatized or sold out.

The big difference is in the scale of the companies. Median market cap of the new entrants is about half that of the median for departures.

Will more privatization plans follow the latest proposal for Atlas, leading to the loss of more big names?

What the LNG companies had in common with Atlas was a preponderance of multiyear contracts. Public dry bulk and tanker owners don’t have that long-term coverage. Even in booms, public dry bulk and tanker owners maintain significant spot exposure, and time-charter durations are shorter than in LNG or container shipping.

Because of this, the financial source speaking to American Shipper said, “I don’t believe it’s the privatization angle that threatens the future scale of the public shipping space.”

He does see two other threats to scale, however. First, the “hyper-cyclical volatility amid the microcaps.” And second, the very nature of tankers and bulkers, which is to carry fossil-fuel cargoes. Assuming global decarbonization efforts move forward, then “over time there will be less oil and coal to move. Not immediately, obviously, but over the next 10 to 15 years.”

War effect on crude trade: Long-lasting and just beginning

It appears increasingly likely that war-driven changes to global crude flows will persist — and grow — through 2023.

photo of a crude oil tanker

Is the shift in global crude flows due to the Ukraine-Russia war a fleeting event or a more lasting, structural change?

At first, many market watchers and investors viewed it as short-lived. It now seems like something to count on for at least the medium term. More Russian crude will likely head to India and China for a longer period of time, and more Atlantic Basin and Middle East crude will head to Europe to replace Russian barrels.

“Oil supply chain disruptions related to Russia’s invasion of Ukraine are proving to be durable and marked by significantly longer average voyages,” said Steward Andrade, CFO of Teekay Tankers (NYSE: TNK), during Thursday’s quarterly conference call. “These trade pattern changes are likely to be long-lasting.”

Executives of Euronav (NYSE: EURN) highlighted the same point on their quarterly call on Thursday. According to Brian Gallagher, Euronav’s head of investor relations, “This isn’t some event that happens over a few weeks. There’s a longevity to the structural change.”

Only the beginning

The EU ban on crude oil and petroleum product imports doesn’t take effect until Dec. 5 for seaborne shipments and Feb. 5, 2023, for pipeline imports.

As of now, Europe is still importing large quantities of Russian crude. Pre-invasion, volumes were around 4 million barrels per day (b/d). Various estimates put the reduction to date at around 700,000 to 1 million b/d. Tanker effects are already significant despite the transition being just one-quarter complete.

“We are only seeing the beginning of a story that will have a long tail,” said Euronav CEO Hugo De Stoop.

Upside for smaller and midsize tankers

War-driven trade changes have mainly impacted smaller tankers known as Aframaxes (with capacity of 750,000 barrels) and midsize Suezmaxes (1 million barrels). Larger tankers known as very large crude carriers (VLCCs, with capacity of 2 million barrels) are too big to call at Russian terminals.

Andrade explained, “Short-haul exports of Russian crude oil to Europe have fallen by around 700,000 b/d compared to pre-invasion levels, with Russian crude oil increasingly being diverted to destinations east of Suez, particularly to India and China.

“Europe is having to replace short-haul Russian barrels with imports from other regions, most notably from the U.S. Gulf, Latin America, West Africa and the Middle East. These changes are primarily benefiting Aframax and Suezmax tankers due to the load and discharge regions involved.”

Compares average seaborne crude oil flows in three months prior to invasion versus three months after (Chart: Teekay Tankers earnings presentation based on data from Kpler)

“When oil imported into Europe previously came five days from the Baltic and now comes approximately 20 days from the Middle East on a Suezmax or approximately 20 days from the U.S. Gulf on an Aframax, that is obviously helpful for ton-mile demand.”

Tanker demand is measured in ton-miles: volume multiplied by distance. The longer the average distance, the more tankers you need to carry the same volume.

“When China imports oil from the Baltic on Aframaxes — which we’ve seen recently — it’s another example of increased ton-mile demand due to changing trade patterns,” added Andrade.

More ship-to-ship transfers to VLCCs?

Euronav expects the war effect to benefit VLCCs as well, for two reasons: because of ship-to-ship transfers in the Russia-to-Asia trade and because of the strong interconnection between Suezmax and VLCC markets.

“The most efficient way to transport crude oil over long distances is obviously on a VLCC. So ideally, they would do transshipment,” said De Stoop, referring to Aframaxes or Suezmaxes loading in Russia and transferring cargo to VLCCs. 

“We’ve already seen a few of those, largely off Africa. We’ve also seen cargo being discharged in Libya and Egypt for relatively short periods then lifted again on bigger ships. The part of the industry that can do that [carry Russian oil] is trying to find the most efficient way to carry that oil to the Far East.”

Suezmax-VLCC connection

Meanwhile, if Suezmax rates rise too high versus VLCC rates, oil shippers traditionally combine two Suezmax cargoes into one lot and use a VLCC instead.

“There are a lot of markets where two Suezmax cargoes can go into one VLCC, so you have this push-pull effect,” said De Stoop. “When the Suezmax market is doing very well, and is seeing many more cargoes, that would naturally have a knock-on effect on the VLCC market. Those two markets are really, really interconnected.

“When we speak to the chartering desks of our clients, it’s usually the same people [booking Suezmaxes and VLCCs] and they monitor the price of one versus the other. In the last two or three weeks, we have seen a lot of cargoes that were shown to our Suezmax desk and then they disappeared and popped up in the [VLCC] pool. Two cargoes were being combined in order to be carried by a VLCC.

“Normally, it’s the VLCC segment that is doing the heavy lifting for all the other segments. This time around — because the disruption is coming from Russia and Russia is not a VLCC market — the pushing is coming from the smaller sizes.

“The Aframaxes are pushing the Suezmaxes and the Suezmaxes are now pushing the VLCCs. Simply because when you compare rates of Suezmaxes to VLCCs, it’s a lot cheaper to use VLCCs. [According to Clarksons, Suezmax rates are currently 30% higher.] 

“And that’s what we have seen in recent weeks. That’s the main reason why we believe the VLCC market improved after the Suezmax had already improved.”

Tanker earnings roundup

The VLCC market may be improving, but it was extremely weak in the second quarter and the early part of the third quarter.

Euronav, which owns VLCCs and Suezmaxes, reported a net loss of $4.9 million for Q2 2022 compared to a net loss of $89.7 million in Q2 2021. Its adjusted loss of 12 cents per share was just shy of the consensus outlook for a loss of 11 cents.

Euronav’s VLCCs earned an average of $17,000 per day in Q2 2022. So far in the third quarter, the company has 47% of available VLCC days booked at a significantly lower rate: only $12,700 per day. De Stoop attributed this to longer-haul voyages booked during a period of weak rates and VLCCs employed on lower-earning repositioning voyages.

Teekay Tankers — which owns a fleet of Suezmaxes, Aframaxes and product tankers — reported net income of $28.5 million for Q2 2022 versus a net loss of $129.1 million in Q2 2021. Adjusted earnings per share of 76 cents topped the consensus forecast for 61 cents.

Teekay’s spot-trading Suezmaxes earned $25,310 per day in Q2 2022. So far in the third quarter, the company has 43% of its available Suezmax days booked at an even higher average rate: $29,600 per day.

Click for more articles by Greg Miller 

Frontline and Euronav Sign Definitive Merger Agreement Backed by John Fredriksen

Euronav and Frontline on Tuesday announced a definitive agreement to combine the two companies, potentially creating a leading independent crude tanker operator with a market capitilization anticipated at more than…

Euronav and Frontline on Tuesday announced a definitive agreement to combine the two companies, potentially creating a leading independent crude tanker operator with a market capitilization anticipated at more than...

How new EU sanctions on Russia will shake up global energy trade

Russian sanctions: Map of Russia and Russian currencyEU sanctions on Russian petroleum exports could have much more serious repercussions than earlier U.S. moves.

Russian sanctions: Map of Russia and Russian currency

The Ukraine-Russia war has already shaken up global energy markets. Sanctions finalized Friday by the EU will shake them up a lot more — not only for the tanker industry but also for American diesel and gasoline consumers.

The EU is a vastly larger buyer of Russian petroleum than the U.S., which banned imports from Russia in early March. The new EU sanctions will end Europe’s imports of Russian seaborne crude by Dec. 5 and refined products by Feb. 3, 2023.

Chart: Frontline Q1 2022 conference call presentation

Perhaps even more importantly, the EU will phase in bans on EU insurance, reinsurance, technical services or any financial services for tankers carrying Russian crude and products to any country, including current buyers in India and China, over the same time frames.

The U.K. is also set to ban insurance and reinsurance for such tankers.

Over 90% of the world’s ships are insured in Europe and the U.K. The insurance ban could have “a dramatic impact on seaborne trade of Russian oil and oil products,” said brokerage and consultancy Poten & Partners. “The potential implications cannot be overstated.”

Russia crude exports

What does the new EU import ban have to do with U.S. fuel buyers? And how could tanker owners be affected?

Since the war began, Russia has been able to keep its crude exports flowing. It is replacing lost sales to the West with sales to India and, to a smaller extent, China.

Even before the ban, the EU has replaced 1 million barrels/day (b/d) in crude purchases from Russia, according to a Morgan Stanley report on Monday. But “there are limitations to the degree this ‘swap’ can extend further,” it said. As a result of those limitations, as well as supply contracts due to expire, it expects Russian crude production to decline by 1 million b/d between now and year-end.

Lower crude production in Russia — to the extent it’s not replaced by OPEC, the U.S. and others — is a tailwind for oil prices.

In tanker trades, the longer distance traveled by post-invasion Russian cargoes has boosted spot freight rates for Aframaxes (tankers with capacity of 750,000 barrels) and Suezmaxes (1-million-barrel capacity). These small and mid-sized tankers can be accommodated at Russian terminals.

To the extent Russian cargoes are eventually replaced by Middle East exports, tanker demand would shift toward higher-capacity VLCCs (very large crude carriers; tankers with 2-million-barrel capacity), according to Evercore ISI analyst Jon Chappell.

Yet there are a lot of moving pieces. Ship brokerage BRS made the counterargument Tuesday that the EU would source more crude from the U.S. — cargoes largely carried on Suezmaxes — leaving less U.S. crude to be exported to Asia, cargoes that move aboard VLCCs.

Russia diesel exports

The Russian export situation is much different in the product sector, particularly for diesel, than for crude, according to Morgan Stanley.

With the EU ban on top of the U.S. ban, Morgan Stanley believes Russian petroleum products will have a much harder time finding sufficient alternate buyers.

“If [Russian] refineries indeed struggle to find alternative buyers, it is likely that their own production would need to decrease. It seems likely that both crude oil production and refinery runs will decline over time, reducing supplies of both crude [and products] — especially diesel — to the rest of the world.”

To the extent lost Russian flows can’t be replaced by new refinery output elsewhere, that’s more bad news for diesel buyers. The average retail price of diesel in the U.S. hit a new record high of $5.703 per gallon this week.

Chart: FreightWaves SONAR (To learn more about FreightWaves SONAR, click here.)

EU restrictions on shipping insurance

Those outside of shipping circles may not yet grasp the significance of the EU (and expected U.K.) ban on insurance for ships with Russian crude and products cargoes bound for non-EU destinations.

“This is a critical measure” that will affect “a significant portion of the global tanker fleet,” emphasized Poten & Partners.

“This will likely prevent many mainstream owners from lifting Russian cargoes,” said BRS.

When the U.S. levied sanctions on tankers carrying Iranian and Venezuelan crude, exports ultimately kept flowing. Cargoes were loaded aboard older tankers with obscured ownership and no Western insurance and finance ties. Transactions were not conducted in U.S. dollars.

Tanker owner Euronav (NYSE: EURN) frequently highlights this issue on conference calls, referring to it as the “illicit trade.” At last count, Euronav estimated that this fleet had stabilized at around 55-60 elderly VLCCs, plus around 30 Suezmaxes.

‘Illicit’ trade to surge?

In order to maintain export flows after EU sanctions kick in, Russia and/or its cargo buyers would have to find enough replacement tankers, either by using already sanctioned Russian vessels or tapping the “illicit” fleet.

According to BRS, “Although [the insurance ban] will discourage mainstream tanker owners from lifting cargoes, it will not likely discourage niche tanker owners whose vessels are already involved in the transport of illicit Iranian and Venezuelan oil.”

The question is: Are there enough crude and product tankers available to enter this legally grey trade by the time EU sanctions kick in, beyond those already serving Venezuela and Iran? Poten estimated that “if the insurance ban takes most of the international fleet out of the equation,” Russia would need to secure services of 20 Aframaxes (for ship-to-ship transfer), 51 Suezmaxes and 43-48 VLCCs.

“Finding these vessels and arranging insurance could be very challenging,” warned Poten. “It may also make it difficult for these vessels to get employed in regular international oil trades.”

Click for more articles by Greg Miller 

Shipping Magnate John Fredriksen Fights to Create World’s Largest Oil Tanker Company

By Alex Longley and John Martens (Bloomberg) — Two shipping magnates are battling over the creation of the world’s largest publicly listed oil tanker company.  On Friday, Belgium’s Euronav NV said…

By Alex Longley and John Martens (Bloomberg) — Two shipping magnates are battling over the creation of the world’s largest publicly listed oil tanker company.  On Friday, Belgium’s Euronav NV said...

$4.2B shipping ‘mega-merger’ would create ‘supersized tanker behemoth’

tanker shipping merger Euronav FrontlineThe biggest deal in tanker shipping history would merge Euronav and Frontline, but consolidation is no panacea.

tanker shipping merger Euronav Frontline

Analysts broke out the superlatives after a blockbuster plan to merge of Euronav and Frontline was announced Thursday.

Evercore ISI’s Jon Chappell called it a “mega-merger” that would create a “supersized tanker behemoth.” “A crude tanker powerhouse,” wrote Clarksons Platou Securities’ Frode Mørkedal. Stifel’s Ben Nolan hailed the rise of a “tanker super major,” Deutsche Bank’s Amit Mehrotra, a “tanker juggernaut.”

The stock-for-stock transaction would produce the world’s largest tanker player. It would own or operate 146 crude and product carriers and boast a market capitalization of $4.2 billion.

It would be the highest-value consolidation deal in the history of the tanker industry, and the largest in ocean shipping overall since Cosco’s acquisition of container line OOCL in 2018.

The combined entity would retain the Frontline (NYSE: FRO) name, but Euronav (NYSE: EURN) would hold more of the cards.

Euronav would own 59% and Euronav’s CEO Hugo De Stoop would take the helm. Euronav would get three of the seven seats. Hemen Holdings — controlled by shipping tycoon John Fredriksen, Frontline’s founder — would get two (the final two would be neutral).

Euronav’s shares rose 6.8% in triple average volume on the merger announcement. Frontline’s shares fell 7.7%.

World-leading market share

Clarksons estimated that the combined entity would control 5% of global tanker capacity. That includes 8.1% of the world’s VLCCs (very large crude carriers; tankers that carry 2 million barrels), 9.3% of Suezmaxes (crude tankers carrying 1 million barrels) and 4.9% of coated LR2 product tankers.

U.K.-based VesselsValue provided American Shipper with its latest data on the top tanker owners. The Euronav-Frontline combo would top the world rankings with 26.8 million deadweight tons (DWT) in owned capacity.

No other top-10 tanker owner is listed in the U.S. The other nine are either private or Asian-listed. In second is China’s Cosco Shipping Energy Transportation with 20.5 million DWT. Third is China VLCC (16.1 million DWT). In fourth is Greece’s Maran Tankers (15.2 million DWT) and in fifth is Saudi Arabia’s Bahri (13.9 million DWT).

Chart: VesselsValue, April 2022. Includes all crude and product tankers

Tanker market to remain highly fragmented

Container shipping is vastly more consolidated than tanker shipping. Analysts and consultants generally agree that container liner companies gained pricing power as a result of consolidation. Tanker owners have no pricing power — nor would the Euronav-Frontline entity.

“The spot tanker market is hugely competitive. It is hard to argue for any market power with 8% ownership of the [VLCC] fleet,” said Mørkedal.

The top 10 tanker players own about 27% of global capacity. In sharp contrast, the top 10 container liner groups own or operate 85% of global capacity, according to Alphaliner statistics.

Spot tanker rates are driven lower by smaller owners, not those at the top of the rankings, De Stoop said during Euronav’s Q3 2021 conference call. (At the time of that call in early November, Fredriksen had recently acquired a 9.8% stake in Euronav, prompting consolidation chatter that turned out to be correct.)

According to De Stoop, “We were on a panel with Frontline the other night and we both said that what needs to be considered a priority is [consolidating] the smaller players. Those are really the people that are hurting the market. Simply because they don’t have the capacity to gather the information that we do by being present in the market all of the time.

“We think the market will consolidate further. We would like to be a participant. And the priority would be to consolidate the smaller players.”

The proposed mega-merger of Euronav and Frontline — two larger owners that already have high information-gathering abilities — doesn’t do anything to solve the problem of the smaller players. Tanker shipping “will remain fragmented as this merger will not offer material consolidation given the litany of smaller private and public competitors,” said Chappell.

Positives of Euronav-Frontline merger

Nevertheless, analysts highlighted several positives from the proposed mega-deal.

“For tanker investors and for the general investor base globally, the potential combination would create a truly investible tanker company with a meaningful and liquid market cap,” affirmed Chappell. He believes the company “would effectively become a bellwether for not just tanker equities, but maritime transportation as a whole, due to its enhanced scale.”

According to Nolan, “While a combined market capitalization north of $4 billion is still not large, it does help out.” The consolidated entity “will likely have the best share liquidity in the tanker space.”

Mørkedal said that “a larger size should attract larger, long-only funds” and that “larger market capitalization and trading liquidity should improve the cost of equity. But probably more important is improved cost of debt.” Frontline gets loan margins of around 170 basis points over Libor, Euronav 220. “The combined company should likely be able to improve these numbers further.”

Yet despite such “bigger is better” advantages, tanker performance always comes back to how supply and demand affect rates. In tanker shipping — highly fragmented, exceptionally commoditized, heavily reliant on spot business — profits and losses are primarily driven by the vagaries of global market forces outside of management’s control.

“The most important factor, of course, still remains market rates,” said Nolan. 

Click for more articles by Greg Miller 

War and shipping stocks: Containers, dry bulk, product tankers up

shipping stocksSome shipping shares are rising because of war tailwinds. Others are rising despite war headwinds.

shipping stocks

The Russia-Ukraine war is the kind of geopolitics-altering event that should shake up trade flows for years to come, promising big repercussions for shipping shares.

A month into the conflict, American Shipper spoke with Randy Giveans, shipping analyst at Jefferies, about how the war is affecting — or not yet affecting — the stocks in different vessel segments.

There have been some big stock moves already, outperforming the broader stock market. But it’s still too early to see the full impact. “Part of the reason is that we’re in a stalemate,” said Giveans. “For questions like ‘What are the new trade routes going to look like?’ and ‘Will reduced flows be offset by ton-miles [longer distances]?’ it’s very hard to tell after just a month.”

Container shares

Sentiment headwinds are growing for the container sector, both related to the war and unrelated. Inflation accelerated by the war. Potential recession in Europe. Consumer confidence issues in the U.S. The possibility of future sanctions targeting China. A moderate decline in spot rates.

And yet, container shipping stocks continue to strengthen. Container stocks have risen despite the war, not because of it.

According to Giveans, container-ship lessors “just keep signing charters for higher rates, locking in cash flows for three, four, five years. They’re less exposed to near-term headlines.”

Ship lessor Danaos (NYSE: DAC) is up 11% since the start of the war a month ago and 37% year to date (YTD). Costamare (NYSE: CMRE) is up 23% month on month (m/m) and 35% YTD, Global Ship Lease (NYSE: GSL) 13% m/m and 24% YTD.

shipping shares
All charts: Koyfin

Container liner operators are more exposed to indirect fallout from the war, Giveans acknowledged. Even so, Matson (NYSE: MATX) is up 15% since the war began and 34% YTD. Shares of Zim (NYSE: ZIM) — based on adjusted closing prices that account for Tuesday’s dividend — are up 33% m/m and 51% YTD.

In Zim’s case, there have been company-specific drivers moving the stock up. “A lot has happened since the war that is very Zim specific,” said Giveans. “It reported earnings, very strong projections and a dividend that was well above what anyone expected.”

Liner stocks are also being buoyed by investor belief that “port congestion will be persistent,” Giveans added.

Dry bulk stocks

In the dry bulk sector, the war has the potential to shut in a large volume of agribulk exports from both Ukraine and Russia.

That volume may not be fully replaceable, potentially reducing demand for dry bulk carriers in the Panamax (65,000-99,999 deadweight ton or DTW) and Supramax (50,000-59,999 DWT) categories.

Europe’s need to replace Russian coal with coal from other sources such as Asia is a positive for larger Capesizes (180,000 DWT). But Capes separately face negative pressure from COVID lockdowns in China and losses in the Chinese housing market (Capes carry coal and iron ore used by China to produce steel).

Rates for Panamaxes and Supramaxes are up year on year, whereas Cape rates are down. Amid a mixed bag of indicators, several dry bulk stocks are up double digits. 

Genco Shipping & Trading (NYSE: GNK) is up 19% m/m and 45% YTD. Eagle Bulk (NASDAQ: EGLE) is up 15% m/m and 41% YTD. Star Bulk (NASDAQ: SBLK) is down 2% since the start of the war but still up 30% YTD.

shipping shares

“If you look at the dry bulk FFA [freight futures] curve over the last six weeks, it’s only going up for the rest of the year,” said Giveans. “When it comes to Russia-Ukraine, will all of the volume be replaced? I don’t know. But the new trade of coal going from Australia to Europe is extremely long-haul and positive for ton-miles.” (Demand is measured in ton-miles: volume multiplied by distance.)

“The balance sheets of Genco, Star Bulk and Eagle are extremely strong. All three also have extensive scrubber exposure — and not only are day rates great, but scrubber premiums are great too,” said Giveans.

Ships with exhaust-gas scrubbers can burn cheaper 3.5% sulfur fuel as opposed to 0.5% sulfur fuel. The war has pushed up oil prices and widened the spread between the two fuel types, increasing savings for shipowners with scrubbers.

Tanker shares

Tanker stock performance has been mixed over the past month, with several equities jumping initially after the invasion then given back gains.

Listed companies owning very large crude carriers (VLCCs, tankers that carry 2 million barrels of crude) have underperformed. 

Euronav (NYSE: EURN) is down 3% since the war began, although still up 13% YTD. DHT (NYSE: DHT) is down 3% m/m and up 5% YTD, with Frontline (NYSE: FRO) down 3% since the war began and up 17% YTD.

shipping shares

“You need to separate crude and products,” said Giveans. “On the crude side there has been no impact yet [from the war]. The rates yesterday [Wednesday] were the worst they’ve ever been for a non-scrubber, non-eco VLCC. There could be some dislocation, with more Russian crude to China and India and Western Europe importing more from the U.S., Latin America and the Middle East. But it will take time. I’m pretty optimistic about 2023, but the next few months could see some headwinds.”

Product tanker stocks have fared much better. 

Scorpio Tankers (NYSE: STNG) is up 26% since the war began and 56% YTD. Ardmore Shipping (NYSE: ASC) is up 6% m/m and 31% YTD. Oslo-listed Hafnia is up 13% m/m and 21% YTD.

“On the product side, the effect is more immediate [than for crude],” said Giveans. 

“You’re seeing more robust diesel flows to Western Europe [from farther afield, replacing] a lot that had been coming from Russia. Product tankers are certainly benefiting more and are being more positively disrupted than crude tankers, so they should be outperforming crude stocks from an equity perspective over the past month.”

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Tanker shares jump as war rages; other shipping shares mixed

containers shipping tankers dry bulk stocksTanker stocks favored by retail traders post big gains, while most container and dry bulk stocks hold steady.

containers shipping tankers dry bulk stocks

One of the axioms of shipping is that war can boost freight rates and share prices, particularly for tankers.

Since Russia invaded Ukraine last week, tanker shares have indeed outperformed, but upside is not evenly spread and gains have eased.  

Container and dry bulk stocks have been largely treading water, with multiple names underperforming the S&P 500, particularly on the dry bulk side.

Retail traders fueling tanker stocks

“There are always winners and losers and shipping markets have proven to be direct beneficiaries in a major way of events that are typically not good for the broader market,” said Evercore ISI shipping analyst Jon Chappell.

“It’s not necessarily a long-term investible thesis that if the S&P goes down 20% you want to be max long speculative tanker stocks, but they are a hedge in a lot of these situations,” he told American Shipper. “It has been proven time and time again that when there’s a geopolitical event involving this type of aggression, tanker and defense companies tend to be big winners.”

Since market close on Feb. 22, share of two owners — Nordic American Tankers (NYSE: NAT) and Teekay Tankers (NYSE: TNK) — are up 46% and 24%, respectively.

All charts by American Shipper

Recent trading moves “feel retail-driven if you look at the relative performance,” said Chappell. NAT, the perennial darling among retail traders, “was the biggest winner,” he pointed out. “The second biggest winner was TNK, and that’s a sub-$500 million [market cap]. That’s a retail-type stock.”

In contrast, the larger crude tanker names more favored by institutional buyers “have been some of the biggest laggards,” said Chappell. 

“I think the key is that these tend to be anomalous events and institutions tend to stay away from anomalous events, but if it proves to be a bridge to a more sustainable cycle, that’s where you’ll get more institutional interest.”

There is at least some additional institutional interest in tankers since the invasion, he said. “But the bar was really low, so any [interest] is more, and yeah, there has been some. But it’s still nothing like it was in the Cosco days [when sanctions on Cosco pushed up tanker rates in September 2019], when it was super-hot. Now, we’re coming from a place where some people were kicking the tires a bit, but nobody was there in a major way.”

From the Feb. 22 close to Wednesday’s close, shares of DHT (NYSE: DHT) and Scorpio Tankers (NYSE: STNG) rose 9%, and shares of Frontline (NYSE: FRO) and International Seaways (NYSE: INSW) gained 8%. Shares of Euronav (NYSE: EURN) — the largest U.S.-listed owner by market cap and one that’s marketed to institutional investors — were up only 1.5%, underperforming the S&P 500 over the same period.  

Dry bulk and container stocks

Dry bulk and container stocks rose on Wednesday with the overall stock market and numerous equities posted mid-single-digit gains. These stocks are “plays on the broader economy,” and with the Dow up over 600 points, it’s “not surprising to see them ripping as well,” said Chappell.

However, looking over the past six trading sessions combined, most dry bulk stocks have made little gains or losses. The big exception is Diana Shipping (NYSE: DSX), up 17% since Feb. 22, but for reasons unrelated to geopolitical unrest: It doubled its dividend on Feb. 25. “The surprising dividend increase was a big catalyst,” said Jefferies analyst Randy Giveans.

Among the other dry bulk names, Genco (NYSE: GNK) closed up 5% on Wednesday versus its Feb. 22 close and Star Bulk (NASDAQ: SBLK) was up 2%, while Safe Bulkers (NYSE: SB) was flat, Seanergy (NASDAQ: SHIP) was down 1%, Eagle Bulk (NASDAQ: EGLE) was down 2% and Golden Ocean (NASDAQ: GOGL) was down 6%.

Container stocks have performed better than dry bulk stocks since the Russian invasion began, but not by much.

Among the container-ship lessors, Euroseas (NASDAQ: ESEA) was up 6.5% since Feb. 22; Global Ship Lease (NYSE: GSL) — which reported better than expected quarterly results on Wednesday — was up 5%; Costamare (NYSE: CMRE) — which also owns a large dry bulk fleet — was up 1%; and Danaos (NYSE: DAC) was down 3%.

Among the ocean carriers, Matson (NYSE: MATX) was up 6% and Zim (NYSE: ZIM) 2%. But Copenhagen-listed shares of Maersk, a company with heavy exposure to European container trades, have dropped 5% over the past six trading sessions .

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Q3 stock recap: Ocean shipping’s winners and losers

stock marketContainer shipping stocks are back to pre-COVID levels whereas many tanker and bulker stocks are down by double-digits year-to-date.

stock market

You don’t need to know the latest quarterly results to know how shipping stocks are doing. It’s all about the present and future demand for cargo, not what happened a few months ago. And when it comes to cargo demand, container-ship owners are on a roll. Tanker and dry bulk owners are still doing poorly.

Stifel analyst Ben Nolan estimated that as of Friday’s close, container liner stocks were up 53% year-to-date and container-ship owners were up 16%, whereas crude tanker equities were down 39%, product tanker equities 53% and dry bulk equities 32%.

“This should not be surprising given the strength in consumer spending and e-commerce,” Nolan wrote in a new research note. “Similarly, it should not come as a shock that tanker and dry bulk [stocks] are down, given that demand for the products they carry is down and consequently so are freight rates.”

More to the story?

“However, there could be more to the story,” Nolan continued. Earlier in 2020, “liner companies were making strong returns and the equities were moving. But ship utilization had not yet recovered enough to cause [charter] rate pressure. So, the equities of container-ship owners lagged temporarily.”

This same lag effect may be brewing in other sectors now.

In dry bulk, “shipping equities are universally lower, [but] iron-ore mining companies are up 42% year-to-date and the S&P materials index is up 16%.” This, he said, implies that equity investors are anticipating a recovery in commodities demand, which should ultimately translate into dry bulk shipping demand.

“Should demand for iron ore and other bulk commodities continue to rise, it should push dry bulk utilization up and with it the equities,” he affirmed. Nolan added that “tankers could be more tricky.” While the broader energy index is on the rise, refinery stocks are still down 53% year-to-date.

Container shipping stocks on the ascent

Two main factors drive the stocks of container-ship owners that rent vessels to liners: counterparty risk and charter rates. With the trans-Pacific and other trade lanes booming, the counterparty risk that spiked back in March is now completely off the table. Meanwhile, charter rates are at decade highs and still rising.

Among the larger ship lessors, Atlas (owner of Seaspan, NYSE: ATCO) reported Q3 2020 net income of $84.1 million, Danaos (NYSE: DAC) $42.8 million, Costamare (NYSE: CMRE) $25.2 million and Global Ship Lease (NYSE: GSL) $13.6 million.

As existing charter deals expire, these owners are rebooking vessels at much higher rates. Their stocks are now back to pre-COVID levels or better. Danaos’ stock is back to levels last seen in March 2019. GSL is back up to levels last seen in August 2018.

Container liners are doing even better than ship lessors. The only U.S.-listed liner, Matson (NYSE: MATX), is by far the biggest winner in America’s public shipping arena. It posted Q3 2020 net income of $70.9 million. Its stock is up 50% year-to-date, to the highest level since the company was spun off from Alexander & Baldwin back in 2011.

Among the non-U.S.-listed liners, Denmark’s Maersk, Germany’s Hapag-Lloyd and France’s CMA CGM all posted big third-quarter numbers. But the most important revelation by liners during Q3 calls was not about profits. It was about forward container-transport demand.

Importantly, Matson, Maersk, Hapag-Lloyd and CMA CGM all cited continued demand strength through Q4.

Tanker shipping stocks languish

Among the largest crude, products and mixed-fleet tanker owners, Frontline (NYSE: FRO) posted Q3 2020 net income of $57.1 million, DHT (NYSE: DHT) $50.7 million, and Euronav (NYSE: EURN) $46.2 million.

Not everyone was in the black, however. Scorpio Tankers (NYSE: STNG) reported a net loss of $20 million, Nordic American Tankers (NYSE: NAT) $10 million and Diamond S (NYSE: DSSI) $9.7 million.

Even stocks of tanker companies that reported big profits aren’t faring well. Tanker equities are down significantly year-to-date. Investors are focused on forward rates — which are very low —  not the prior quarter’s earnings.

The most valuable comments from tanker owners’ Q3 2020 conference calls related to forward demand and the fate of the floating storage overhang. Until floating storage is drawn down, demand for transport will be muted. The reason: foating cargoes are already in position. Executive commentary was generally not positive. Hopes for the traditional winter demand boost are low. Executives expect the floating-storage overhang to be lengthy.

Dividends are another key quarterly-results focus of investors. NAT reduced its dividend to 4 cents a share from 20 cents the previous quarter. Navios Acquisition (NASDAQ: NNA) slashed its dividend to 5 cents a share from 30 cents the previous quarter. On the day of the dividend announcement, Navios Acquisition’s share price plunged 15%.

In general, the big 2020 loser among tanker names with larger market caps is Scorpio Tankers, led by the management team of CEO Emanuele Lauro and President Robert Bugbee. Scorpio Tankers’ stock price is down 68% year-to-date.

Seasonally weak Q1 ahead

For dry bulk shipping stocks, 2020 has been yet another year to forget. Rates have been generally weak, with little in the way of material upside catalysts.

Among the larger bulk-fleet owners, Golden Ocean (NASDAQ: GOGL) reported Q2 2020 net income of $39.1 million, Star Bulk (NYSE: SBLK) $23.3 million and Safe Bulkers (NYSE: SB) $3.3 million.

On the red side of the ledger, Genco Shipping & Trading (NYSE: GNK) reported a loss of $21.1 million, Diana Shipping (NYSE: DSX) $13.2 million and Eagle Bulk (NASDAQ: EGLE) $11.2 million. A formerly major player, Scorpio Bulkers (NYSE: SALT), is in the process of divesting its entire dry-cargo fleet and refocusing on wind-farm equipment carriers. It posted a net loss of $36.6 million in the third quarter.

For owners of larger Capesize-class bulkers, a big drag this year has been tepid iron-ore volumes from Brazil to China. Weak output of Brazilian miner Vale (NYSE: VALE) is to blame. Vale disappointed the marketplace once more last week when it lowered its full-year 2020 production forecast yet again.

The first quarter of each year is traditionally the weakest period for dry bulk demand, so there’s little in the coming months to energize the U.S.-listed dry bulk shipping stocks, all of which are down substantially this year.

The biggest loser by far in the sector is Scorpio Bulkers. Its stock is down 74% year-to-date — even more than the Lauro-Bugbee management team’s loss on the product-tanker front. Click for more FreightWaves/American Shipper articles by Greg Miller 

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