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Product tanker owners savour heady mix of geopolitics, strong demand and shrinking debt

Scorpio and Ardmore top earnings expectations and spy more bounty ahead

Earnings of product tanker owners have been juiced by trade disruptions from the Russia-Ukraine war and the Houthi attacks in the Red Sea. With lower debt and rising customer interest in long-term charters, owners are looking to ride the upcycle for longer

GEOPOLITICAL chaos has been a boon for product tanker owners. The takeaway from the past few days’ earnings calls: Geopolitical disruptions will last longer than first expected, commodity shippers are signing more long-term contracts to hedge their risk, and underlying fundamentals should support strong rates even if world peace were to suddenly break out.

“There is a kind of fear out there,” said Scorpio Tankers president Robert Bugbee during an earnings call on Thursday. “All the tanker stocks trade down whenever there’s a mention of a ceasefire. But a ceasefire in Gaza doesn’t necessarily mean you open up the Red Sea straight away.”

Furthermore, product tankers “had an outstanding year in 2023” prior to Red Sea disruptions, “so it’s not really something we should be afraid of”, said Bugbee. “The market now is fundamentally stronger than it was in 2023, so the fear out there is overblown.”

The product tanker market was supported last year by another geopolitical event — Russia’s invasion of Ukraine and the EU ban on Russian refined products.

But the market effect of the Russia-Ukraine war has a longer expected shelf life than fallout from the Israel-Hamas war. Even with a ceasefire in Ukraine, the EU would have to turn back to Russia for its energy supplies for product tanker trades to normalise.

Ardmore Shipping CEO Anthony Gurnee highlighted the disparate market impacts of the two wars during a conference call on Wednesday.

“For product tankers, the Red Sea is largely a long range story. Prior to the Red Sea disruption, 20% of the LR fleet transited the Suez Canal in contrast to just 5% of the MR fleet.”

The Red Sea crisis “is not the driver for MRs — Russia-Ukraine is”, said Gurnee.

Lower break-evens reduce downside risk

Product tanker execs maintained that core fundamentals will support rates even without support from Ukraine-Russia war and Red Sea crisis. Refined-product import demand is rising, refineries are farther away from end consumers to the benefit of tonne-miles, and near-term newbuilding deliveries are low.

There’s another factor, as well. Product tanker owners have slashed their debt levels over the past decade, lowering their cash break-evens and allowing them to more easily weather downcycles.

As Deutsche Bank shipping analyst Chris Robertson explained in an interview with Lloyd’s List in March, shipowners in general took on too much debt for newbuildings in the early 2010s. That over-leveraging led to “total cash break-evens that exceeded the long-term median trend”, meaning listed shipowners could only return capital to investors “at very peak points in the market”.

Leverage is now much lower, “which translates into lower total cash break-evens”.

Scorpio Tankers is a poster child of this dynamic. It has been intensely focused on deleveraging and announced Thursday that it had finally reached its net-debt target — and was about to bring net debt even lower.

Its net debt has fallen to $811m and it is in discussions to prepay $233m in long-term debt on one of its credit facilities. This will bring its fleet’s cash break-even down to $12,500 per day, from around $19,000 per day in Q323 and around $16,000 per day currently.

“At $12,500 per day, that’s really low. That’s like trough earnings,” said Bugbee. “That would even withstand the terrible six months during the worst period of Covid.”

Lower break-evens also make it more attractive for Scorpio to take advantage of rising demand among refined-products shippers for multi-year charters.

Greater interest in three-year charters was cited by Torm CEO Jacob Meldgaard during his company’s call on Wednesday. “Recent events have shown that the disruptions in the product market can be longer-lived than initially thought,” he explained.

“There are starting to be signs that some of our clients are thinking they should hedge themselves against a continued very, very strong market.”

Torm booked a 2012-built MR on a three-year charter for $30,000 per day in April. Dialogue with customers on long-term charters has intensified over the past two quarters, Meldgaard confirmed.

“More people are looking at whether it makes sense now to de-risk if they are long on freight and not long on ships.”

According to Scorpio Tankers chief commercial officer Lars Dencker Nielsen, “These deals are being concluded quite regularly at the moment, at levels that are gainful for both LR2s and MRs. There are quite a few customers out there who are consistently looking for longer-term charters of between two and five years. It’s national oil companies, it’s traders, it’s end users — and it spans the globe.”

According to Bugbee, “You are seeing these two-year and three-year rates moving up quite strongly, and one thing that our reduction in debt and interest costs does is that it makes some of these charter levels super-compelling.”

As an example: A multi-year charter at $40,000 per day equates to free cash flow of $21,000 per day at Scorpio’s Q323 break-even level, but $27,500 per day at the break-even level to be obtained after the pending debt prepayment.

“That delta is huge,” said Bugbee, although he added that Scorpio Tankers is “in no rush to go out and pile up on time charters because we’re very confident on the spot market”.

Drivers of near-term spot rates

Debt reduction and lower cash break-evens mean Scorpio and its investors will net more in the spot market in the near term should positive market drivers persist.

“I do not see a seasonal pullback. I see a seasonal ramp-up,” affirmed Nielsen. “We are probably going to see a stronger summer than we anticipated. When I look at it holistically, the market is close to firing on all cylinders, notwithstanding what goes on with the Bab el Mandeb.

“We still have a lot of refining output that is going to increase over the next several months, through June and July, as we get out of the big turnaround season that took place in the first quarter.”

Another big driver: products exports out of China. “The second quota has been issued and it’s higher than it was last year,” said Nielsen.

He pointed out that there will be less cannibalisation of LR2 cargoes loadings in Asia this year by very large crude carriers and suezmax newbuildings on their maiden voyages after leaving the yards.

“Before, we were being cannibalised somewhat by the [crude tanker] newbuildings, but I see only one VLCC due for delivery for the rest of 2024 and only seven suezmaxes, so there’s limited competition for this China long-haul stuff.”

Meanwhile, product tanker fleet utilisation is now very high, so sentiment and spot rates jump more quickly.

“The underlying utilisation level across the product tanker fleets is at a much higher level than we’ve seen before, so it doesn’t take very much to turn the market into a bull,” said Nielsen. “We don’t have to go back that many years to when it was flatlining and sentiment took a much longer time to react to fundamental prompt market dynamics.”

Q124 earnings top expectations

Recent earnings releases by product tanker owners have consistently topped analyst consensus.

Product tanker stocks are soaring. On Thursday, Scorpio Tankers’ share price hit its highest level since December 2015. On Wednesday, Ardmore’s stock reached its highest price since the company went public in July 2013.

Scorpio Tankers reported net income of $214.2m for Q124 versus $193.2m the year before. Adjusted earnings per share came in at $3.97, handily beating the consensus forecast for $3.68.

Ardmore Shipping reported net income of $38.4m for Q124 versus $43.3m in Q123, with adjusted earnings per share of $0.92 in the latest period, above the consensus of $0.86.

Commenting on Ardmore’s results, Stifel analyst Ben Nolan said, “While we believe the product tanker market is at a cyclical high, we do not see that changing soon, and expect equity value to grow in step with the cashflow that is generated.”

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