The coronavirus outbreak centered in China continues to worsen. Over 7,800 cases have been reported — already exceeding the 2002-03 SARS outbreak — and over 170 people have died.
Fallout for crude-tanker shipping and public equities took center stage on the quarterly conference call of tanker major Euronav (NYSE: EURN). While the comments on the call were about crude tankers, almost all of them could apply to all modes of shipping.
“This is bad news,” said Euronav CEO Hugo De Stoop. “Let’s not pretend it’s anything but bad news. The impact is definitely uncertain, but in the short term, it’s negative. In the long term, everybody is convinced it will be contained, so you want measures to be as strong as possible now so the virus is contained as quickly as possible,” he said.
As previously reported by FreightWaves, the sweeping shutdown of land and air transportation within China and to and from the country will weigh heavily on near-term oil demand given the outsize role China has in global consumption.
Another negative for tanker demand: OPEC is expected to extend production cuts in response to the coronavirus-induced plunge in oil prices.
According to De Stoop, “If we look at other terrible viruses that have spread in the past, what we know for sure is that once they are contained and things go back to normal, they don’t go back to normal. There’s huge stimulus, usually by China but also by other economies, to try to get back a bit of what has been lost during the [epidemic] period.
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“So, if you predict that it may take a few months [before the virus is contained], what you will have is a fantastic first quarter — no matter what happens for the rest of the quarter, it will be a great first quarter — then you have summer, which is never the period we count on, and then the chances are we will be back in winter with a super-strong market, so it should be a great year,” he said.
When reporting fourth-quarter results on Thursday, Jan. 30, Euronav disclosed that it had booked 60% of available days for the first quarter for its very large crude carriers (VLCCs, tankers that carry 2 million barrels of crude oil) at an extremely high rate of $89,200 per day, and 51% of available days for its Suezmaxes (tankers that carry 1 million barrels) at $57,500 per day.
In the crude-tanker business, almost all bookings for a particular quarter are done in the prior quarter or the early part of the current quarter. Tanker rates were extremely high in the fourth quarter and first few weeks of 2020.
What De Stoop is saying is that full-year 2020 results should be strong based on exceptional first and fourth quarters (the fourth assuming the virus is contained), even if the coronavirus and seasonality hit the second and third.
The coronavirus is hitting shipping stocks, including tanker stocks, even more severely than the broader market. Strong fundamentals, exceptional quarterly returns, incremental volumes driven by the new marine-fuel rules — all of those positives are now being erased in the stock market by coronavirus fears.
Euronav is a prime example. It reported net income $160.8 million for the fourth quarter of 2019, up from just $279,000 in the same period the year before. Earnings per share of $0.70 easily topped the consensus forecast for $0.63 per share. Its VLCCs averaged $61,700 per day in the spot market in the most recent quarter, and its Suezmaxes $35,700 per day. These rates, which De Stoop dubbed “remarkable,” were the highest since 2008, before the financial crisis.
And yet, Euronav’s share price was down 4% in the double the average trading volume on the day its results were announced (in mid-day trading, it was down 7%).
“In the first 10 days of January, we were finally getting our share price above NAV [net asset value], which is always our objective,” De Stoop said. “Obviously, we are not happy at all with our share price at the moment.” Investment bank Jefferies estimated that Euronav’s stock is now trading at a 24% discount to NAV.
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De Stoop argued that the share decline creates “a fantastic entry point in tanker shipping companies. With Euronav, you have a guarantee to be paid with the dividends, and if that upside [following virus containment] doesn’t come as quickly as I just expressed, you are in a company with a super-strong balance sheet that can weather any storm. So yes, this [virus] is terrible news. It’s completely unexpected. But quite frankly, if I was an investor and I was attracted by this sector, I know where I would put my money.”
Asked whether the balance could shift toward more time charters as opposed to spot voyage contracts, De Stoop again brought up the coronavirus.
“The volume of time charters in the market is very thin. There have been even fewer opportunities in the last three to four months simply because the market has been extremely volatile. It was quickly going to $100,000 a day and then suddenly there was a massive drop [to around $45,000 a day]. So, everybody is looking each other in the eyes, and thinking on one side [a proposed time-charter rate] is too high and the other side saying it’s too low.
“We need to see a little bit more stability. And I think that because of the events affecting the market at this moment — and we spoke about the virus— it’s just too unpredictable for people to start signing long-term contracts,” he said.
Discussing potential “positives” of the outbreak, De Stoop pointed to the extremely high secondhand VLCC prices recorded in early January.
He noted that secondhand VLCCs have been sold for $107 million, versus a newbuilding contract price of $90 million. “I think those prices were probably exacerbated by the excitement around the rates and quite frankly we don’t think they were justified,” he said.
He noted that $90 million newbuilding price is unlikely to appreciate further because of the low orders at the yards. Owners are unusually reluctant to order newbuilds due to ongoing uncertainty over future emissions standards. De Stoop said the newbuild price should “anchor” the secondhand values, which are at premium to newbuilding pricing in a strong market (because second-hand purchases can earn immediately; a newbuild takes 14 months to deliver).
The implication is that the newbuilding price anchor combined with weaker sentiment due to lower spot rates and the coronavirus fears should serve to either maintain or reduce secondhand values.
Euronav bought back $30 million of its own stock last year. It has targeted a return of 80% of quarterly net income to shareholders through dividends and/or buybacks. But the buyback aspect of the equation faces new uncertainty due to the coronavirus.
“The philosophy of this company has always been the same,” said the CEO. “We don’t rush to buy back our shares. If there is weakness in the share price, we want to see if it’s a temporary weakness or whether it’s more permanent. If it’s more permanent, then obviously we’d think very seriously about it [share buybacks].
“We’re disappointed about what’s going on at the moment, but we understand there are exceptional circumstances around that. Before deploying capital for share repurchases, we need to see how long and how deep it will go. Because if you buy back today, maybe tomorrow it will be weaker. If [share-price weakness] is deeper tomorrow, you’d better wait before deploying your capital.”
He continued, “Let’s see how capital markets react to this virus and the continuous flow of news we’re going to receive. Let’s see what happens to tanker markets and tanker values and where we are [in the share price] compared to NAV.”
Takeaways For Tanker Stocks
The comments on the Euronav call were negative in general for tanker stocks, which are falling across the board.
Shipping stocks are valued in relation to NAV, and the most important variable of NAV is the market value of the ships in the fleet. If the coronavirus and other factors either cap or decrease tanker asset values, it’s bad for stock prices.
Secured revenue streams via time charters at attractive rates are a positive for tanker companies. If coronavirus uncertainty reduces the ability to sign such contracts, it’s another negative.
There are also conflicts between De Stoop’s statement that the crisis creates “a fantastic entry point” and some of his other comments on the call. First, if tanker rates aren’t likely to recover until next winter, assuming virus containment, why buy shares now?
Second, if Euronav itself is openly hesitant to buy its own shares specifically because states on the record that “you’d better wait” to see how the coronavirus situation develops, why shouldn’t individual investors wait as well?