Fearnley Securities is backing tanker shares to take off again after a sell-off caused by the coronavirus.

Analysts Espen Landmark Fjermestad and Peder Nicolai Jarlsby called the Chinese outbreak a "black swan", referring to an unexpected event that causes a major impact in markets.

Stocks have fallen 30% so far this year, but the analysts said: "With rates seemingly finding a floor and first quarter results representing another bumper quarter earnings-wise we see the potential for a sharp repricing."

They have a buy rating on the whole sector. Tanker equities had doubled over 2019.

Referring to the virus, the analysts said: "We are likely to see significant demand implications for another two to three months."

The company views tanker stocks, and crude vessel companies in particular, as offering "very attractive yields" of about 10% on fourth and first quarter earnings.

"Post sell-off, we find an average upside of 75% on our tanker universe. With the potential for some clarity on the outbreak in the coming weeks and rates already flooring out we see the potential for a strong rebound in [the second and third quarters]," the analysts said.

From hero to zero

Fearnley Securities said the tanker market had gone from "hero to zero in no time."

Sentiment turned bearish mid-month, with earnings trending down from $140,000 per day for VLCCs, to the mid-$40,000s per day by the end of the month, which was also partly due to news that the 26 sanctioned Cosco VLCCs would be allowed back into the market.

"Although rates now seems to be stabilising, we see limited room for improvements short term," the investment banking division of shipbroker Fearnleys said, citing 10 newbuildings delivered during past month, Cosco vessels returning to the market after sanctions easing, the upcoming refinery maintenance season, weak refinery margins and the coronavirus outbreak.

"On the latter though, there could be a significant pent-up demand wave from China as the country recovers."

Tanker rates and tanker stocks edged up on Monday, but Evercore analyst Jon Chappell was not quite as positive as Fearnley Securities.

"The market's supposed to be forward looking, and tankers have taken a beating. Today there's some hope that the news flow is going to stop getting worse and start getting better," he said.

"Let's see what happens."

The Baltic Dirty Tanker Index rose from 803 points on 7 February to 816 on Monday, after hitting a 2020 low of 796 on 6 February.

China to rebound

In the oil market, Fearnley Securities said that "guesstimates" are ranging between 1m and 5m barrels per day in terms of the hit on demand.

"We can agree that the outbreak will have an unprecedented impact on energy demand and overall economic activity in China," the analysts added.

"Frankly, the only thing that can be said with a good degree of certainty at the moment is that there is a lot of uncertainty."

But the Fearnley Securities analysts expect a significant rebound effect once the virus comes under control, and the Chinese return to work and start restocking.

"Few countries have a stronger tradition of catching up quickly than China,"th e analysts said.

And they added: "So far, the industry has showed a remarkable discipline by not running to the yards to pen massive orders, leaving us increasingly constructive on 2021.

"The longer the owners hold back, the more comfortable we become on our 2021 estimates as the huge phase-out potential will help make a floor for earnings once the market tips lower."