Market disruption can happen in more than one way, and it is on the minds of major shipping equity analysts as public owners prepare to move their fourth-quarter earnings reports in the coming weeks.
Political and military disruption is an obvious topic as we near the second anniversary of Russia’s invasion of Ukraine with a new crisis front-and-centre: the Houthi terror attacks on commercial shipping in the Red Sea and owners’ decisions to navigate away from Suez Canal transits.
But disruptors also appear in the form of corporate raiders and activist shareholders who brought about consolidation in 2023. Frontline’s buy of 24 Euronav VLCCs settled an acrimonious takeover battle, and then Petros Pappas’ Star Bulk Carriers tipped an all-shares acquisition of Eagle Bulk Shipping in December.
Streetwise surveyed the ranks of US shipping researchers and found all of these things high on their watch lists in terms of companies and issues as owners prepare to disclose end-of-year results.
Jonathan Chappell, Evercore ISI
Chappell is regarded as “the dean” of US shipping analysts with more than 20 years of coverage under his belt, and he is also the top shipping analyst as voted by investors in Institutional Investor magazine.
Tankers have been Chappell’s top focus since Evercore ISI dropped coverage of dry bulk stocks in July 2020, so it is no surprise he has eyes on John Fredriksen’s Frontline as it moves on from the record sale-and-purchase deal that ended its failed merger attempt with Euronav.
Company: “Frontline — how the integration of the Euronav fleet is going. Also, the capital structure outlook particularly post the sale of five [older] VLCCs, and the capital-return path forward.”
Issue: “The Red Sea impact on tanker trades and rates.”
It has been nearly 2.5 years now since Chappell’s call to clients to resume investment in the tanker sector. And while that market’s recovery came later than he expected, it kicked into gear with the supply disruptions connected with the war in Ukraine and sanctions against Russia.
The Red Sea attacks in response to Israel’s war with Hamas are the “Black Swan” of the moment.
“It has been this evolving situation, rerouted ships, skyrocketing insurance and uncertainty regarding the duration to the disruption, that has helped tanker stocks catch a bid that finally narrowed the large valuation gaps at which most equities were trading throughout 2023,” Chappell said in a recent client note.
The strife has pushed public tanker stocks up an average of 14% over the past three months and an average of 10% year-to-date.
Still, as Chappell assesses year-end net asset values for the tanker peer group, only one stock under his coverage — product tanker owner Torm of Denmark — is trading at or above NAV, and that is just barely at 102%.
Frontline is close at 95%. However, several other names still look cheap in Evercore’s overall robust outlook on the market for 2024 and 2025. Despite recent gains, Scorpio Tankers is at just 68%, Teekay Tankers at 69% and Ardmore Shipping at 76%.
Greg Lewis, BTIG
Company: “I’m interested in hearing what Frontline has to say. The stock has done well after the Euronav vessel acquisitions and the increased leverage needed to do that. The company recently sold a few ships. Could they look to sell more? And the market has been OK to start the first quarter, so what are they thinking about in terms of the dividend?”
Issue: “I’d like to get a better understanding of what is driving rates in the VLCC sector, owing to less-than-robust demand from China and the ongoing production cuts by Opec.”
Ben Nolan, Stifel
Company: “Probably Genco [Shipping & Trading] given the George Economou stuff and the similarities with what happened at Eagle.”
Nolan referred to Greek shipping magnate Economou taking a 5.4% stake in New York-based Genco and nominating two designees to stand for election to the board of directors at the next shareholders meeting. Genco has responded with an open letter touting management’s performance and adherence to high governance standards.
Issue: “I think this is going to be very heavy on Red Sea implications. That is new and what everyone is talking about. So, while I don’t know that we are going to hear much new, I think it is going to dominate the conversations.
“Something that is a little later in the year, but could be interesting is the ILA contract negotiations on the US East Coast. Given the success of the West Coast unions last year, I could see this coming to the forefront this summer.”
Liam Burke, B Riley Securities
Company: “I am interested in hearing from Nordic American Tankers to see the degree of influence, specifically on suezmax rates, that both the Red Sea turmoil and the increased crude oil production from non-Opec+ countries have caused.”
Issue: “The health of the dry bulk sector is dependent on China’s consumption of dry bulk commodities. Understanding that, with the Lunar New Year, the first quarter of 2024 will be seasonally weak, I am interested to see the bulkers’ outlook for China after 1Q24.”
Poe Fratt, Alliance Global Securities
Company: Even before earnings hit, Fratt said he was keeping an eye on Connecticut’s Eagle Bulk and a securities filing that would explain the background of its pending acquisition by Star Bulk.
TradeWinds reported on Tuesday that the filing, combined with sources familiar with the process, pointed to Greek owner Diana Shipping as the mystery bidder who tried to acquire Eagle with a mixed cash/shares offer. Diana was rebuffed before Star closed in.
Fratt has more questions, including a focus on Eagle’s shipowning shareholders — Danaos and Castor Maritime.
“Will they support the combination, or will they scale back their holdings and book profits?” Fratt asked.
Issue: “Disruptions in the two major canals [Panama and Suez] and the timing for resolving the different causes of those disruptions. Also, shareholder activism seems to be becoming a broader issue, as per the recent Genco letter.”