Wells sees tanker demand risk in 'noise'

Wells Fargo Securities trimmed its outlook for tanker owner earnings and share valuations on warnings that the uncertainties presented by global news flow may have a greater-than-expected impact on the market.

Analyst Michael Webber, who covers shipping stocks for the bank, said that the combination of the rise of Donald Trump as the Republican nominee to the White House, the Brexit vote, uncertainty around Italy's banks and the coup attempt in Turkey could create "meaningful tail risk" for crude demand expectations in the second half of the year.

The analyst said oil market forecasters generally predict between 1.3 million and 1.8 million barrels of oil per day (bod) of oil demand growth next year. But the International Energy Agency is on the conservative end, predicting demand growth of 1.3 million bod next year.

Wells Fargo stock price valuations

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"It's much easier for me to see a scenario where global demand expectations need to get trimmed a bit then a scenario in which we think [there’s upside] to the 1.3 to 1.8 million barrels per day demand growth that everybody’s baking in," Webber told TradeWinds.

Webber reiterated a belief that an entry point for investors my be emerging, pointing to a deal by John Fredriksen's Frontline to buy two VLCCs resales from Metrostar Management last month.

But he said the macroeconomic "noise" gives him pause about calling a bottom to the market now.

Wells Fargo's earnings per share estimates

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"We think there’s a realistic chance that Fredriksen bottom-ticked the tanker market in June with his $84m VLCC purchase, which tempts us to get long the group," Webber wrote. "But .whether or not the 'bottom is in' depends almost entirely on whether the market can remain optimistic around forward oil demand."

Wells Fargo cut its valuation of six tanker stocks: Euronav, Ardmore Shipping, Frontline, Navios Maritime Acquisition, Teekay Tankers and Tsakos Energy Navigation.

And the bank reduced day rate expectations and earnings per share estimates across all sectors, with VLCCs expected to earn an average of $41,500 per day this year, down from a prior forecast of $44,000 per day.

Wells Fargo also reduced valuations for five LPG carrier owners.

Wells Fargo LPG stock price valuations

^{Source: Wells Fargo Securities/Google Finance/Bloomberg}