JP Morgan Upgrades DHT Holdings, Scorpio Tankers: 'Tanker Cycle Has Legs'

In a report published Monday, JP Morgan analyst Noah R. Parquette mentioned that the tanker freight market had not shown signs of regular seasonality in 2Q, with some vessel classes reporting sequentially higher earnings. So far in 3Q, there had been "no real sign" of weakness, the analyst said, while adding, "This is just one reason why we believe this tanker cycle has legs." A repeal of the US export ban could be the next catalyst that "shifts the market," Parquette said. In the report JP Morgan noted, "Six months ago, a repeal was generally seen as highly unlikely anytime soon. However, there has been growing discussions as to the economic benefits of lifting this ban...On top of the economic rationale, the repeal is also being sold on providing energy security to our allies." A repeal would "undoubtedly" be positive for crude tankers, particularly for smaller vessels, "while it could be modestly negative for product tankers depending on how trade flows change," Parquette added. Analyst Noah Parquette upgraded the rating on DHT Holdings Inc DHT from Neutral to Overweight, while raising the price target from $9 to $10. "After undergoing a major growth initiative in the past couple years, the company now has significant exposure to the VLCC segment of oil tankers, which is currently enjoying significant strength," the JP Morgan report stated, while adding, "…we believe the general underperformance of the stock and discount valuation is unwarranted." The EPS estimates for 2Q, 2015 and 2016 have been raised from $0.15 to $0.19, from $0.80 to $0.93 and from $0.75 to $0.86, respectively. Parquette upgraded the rating on Scorpio Tankers Inc. STNG from Neutral to Overweight, while raising the price target from $11 to $13. "Scorpio Tankers is now the world's largest owner of product tankers as it nears the end of a monumental new-build program…As it shifts gears from growth mode into a more mature stage of cash flow generation, we would expect the company to continue to increase its dividend or buy back shares if the stock is viewed as undervalued by management," Parquette wrote. The report added further that the company had "significant operating leverage" to the "currently strong market." The EPS estimates for 2Q, 2015 and 2016 have been raised from $0.28 to $0.29, from $1.17 to $1.34 and from $1.09 to $1.14, respectively.