Evercore ISI analyst Jonathan Chappell told investors last January that it was time to buy into tanker stocks.
Boy was he right, as equities generally doubled to quadrupled over the course of the year, making the tanker sector one of the star performers of the entire stock market.
A second chance
Listen up investors: he’s telling you again.
Chappell’s new client note is called, “Tankers: Is It Done? No, It’s Only Just Begun,” and he has 10 pages of support for the notion that there is a second bite at the apple for investors who missed the first run-up, or exited when rates came off the boil in recent weeks.
“After a month of meaningful pullbacks, vast relative underperformance, and questions about whether the peak has already passed, where do we go from here on tanker stocks? The answer is: you buy the weakness,” Chappell told clients.
“The crude and product tanker markets have some of the strongest multi-year set-ups in nearly 20 years. The supply side indicates the slowest two-to-three -year period of net capacity adds since the turn of the millennium, and there is very little opportunity to change that outlook (try as some speculators might).”
Chappell concedes that the demand side is “questionable at best,” but he posits that with the longer tonne-miles associated with cargo disruptions from Russia’s war on Ukraine, “there is likely to be substantially stronger demand growth for crude and product tankers than any oil demand projection would indicate”.
The recent selloff of tanker stocks means not a single listing under Evercore’s coverage is trading within 14% of its estimated net asset value, giving buyers an opportune time to jump in before a round of robust fourth-quarter 2022 earnings are reported.
“We closed that January 2022 note’s introduction by writing, ‘but if you want to wait until rates are already off to the races, we don’t blame you.’” Chappell wrote.
“We wouldn’t advise waiting again this time. The pullback has created an immense opportunity. Exploit it.”
Evercore has raised price targets on five of the eight tanker stocks under its coverage, with Frontline seeing the biggest jump in percentage terms: a 16% gain to $22 from $19.
Chappell is also upgrading 2023 forecasts for company earnings per share across the board, with one of his least-favourite stocks historically — Herbjorn Hansson’s suezmax specialist Nordic American Tankers — enjoying the biggest boost: a 74% upgrade to $0.66 per share from $0.38.
Q4 earnings preview
The veteran shipping analyst is expecting big things when the tanker peers report their fourth-quarter 2022 results in the coming weeks.
“Not all the EPS outcomes will represent quarterly records, but many will, and even those that fall just short, will still be strong by any historical standard. Should be a fun earnings season…for once,” he wrote.
Chappell has hiked earnings estimates on six of the eight, with Teekay Tankers seeing an 82% jump to $3.94 per share from his previous $2.17 estimate.
