Lacklustre returns for product tankers despite record earnings
Robust earnings in 1H20
Following the losses since 2015, the surge in net income of product tanker companies in 1H20 was a welcome sign for investors. Major product tanker companies reported high profits, with Ardmore Shipping and Scorpio Tankers gaining the most. High spot rates due to strong demand for floating storage supported the earnings of these companies.
Companies with spot exposure record maximum margin
The difference in operating margins of the companies can be attributed to their chartering strategies and different vessel mix. For example, Scorpio deployed almost all its vessels in the spot market in 1H20 while D’Amico employed majority of its vessels on fixed charter (63.7% of its total vessel days of 1H20) at USD 16,042pd during the same period. Scorpio vessels are also part of different pools which Scorpio operates.
Scorpio Tankers has a sizable number of LR vessels compared to D’Amico. As TCE earnings on LR vessels were higher, Scorpio’s earnings were sizably more than those of D’Amico and Ardmore which have predominantly MR product tankers in their fleet.
Is dividend a priority for product tanker companies?
The dividend payout for each company varies because of different capital allocation policies. For instance, Hafnia has a stated policy of declaring 50% of its net profit (adjusted for extraordinary items) as dividend in a year. Meanwhile, Ardmore changed its capital allocation policy in March 2020 and has prioritised maintaining the fleet, reducing debt to total capital ratio to 40% and accretive growth over dividends and share repurchase. Previously, Ardmore had a policy of declaring 60% of earnings from continuing operations as dividend.
Will floating storage demand steal the show for product tankers as well?
According to recent reports, traders have started looking for offshore storage again after the crash in oil prices that led to contango. Chartering activity has picked up for crude tankers in the week ending 11 September. However, we have not seen such activity in product tankers yet. Demand for oil products continues to be weak and we do not expect any significant deepening in the contango and a rise in floating storage for oil products.
But why are the stock returns negative YTD?
Although product tanker companies posted record earnings in 1H20, stock returns for the key product tanker companies have been negative YTD. Major product tanker companies have declined 45% on an average compared to a 52% decline in Baltic Clean Tanker Index, while the broader S&P 500 Index strengthened 4.7% during the same period. We believe share prices of product tanker companies plummeted due to a fall in oil demand, weaker refinery throughput and feeble freight rates. Going forward, low oil demand and decreased refinery throughput will weigh on product tanker earnings. We believe an increase in BCTI in April 2020 was a blip and weak product tanker prospects continue to weigh on product tanker share prices.