Morgan Stanley Highlights A Cyclical Downturn In Tankers

Fotis Giannakoulis, a tanker expert that covers the sector for Morgan Stanley, isn't particularly positive on the sector and thinks a cyclical downturn could last through 2018.

Giannakoulis said in a research note on Thursday that there are four reasons to support his views of weak crude tanker fundamentals persisting through 2018:

1. A slowdown in crude production.
2. Lower refinery margins.
3. High crude stocks leading to inventory craws.
4. Rising fleet supply.

Other facts to support a poor outlook include upstream operators slashing their capital expenditure budgets by over 15 percent for two consecutive years, which have led to a decrease in drilling activity. Moreover, crude supply in Latin America and West Africa has been declining, while Middle East production is expected to see its net export growth slow from 0.8 to 0.9 million barrels per day in 2016 to just 0.1 to 0.2 million barrels per day growth in 2017–2018.

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With that said, Giannakoulis expects VLCC (very large crude carrier) rates to fall from around $40,000 in 2016 to $27,000–$30,000 in 2017 and 2018 and then rise to $36,000 in 2019 as oil production growth accelerates again.

Finally, the analyst expects most crude tanker earnings to "disappear" over the next 1.5 to two years before the market eventually rebounds in the end of 2018. As such, the analyst is also expecting "steep" dividend cuts with companies providing an average yield of just 4 percent.

Company Specific Targets

• Tsakos Energy Navigation Ltd. TNP remains Overweight rated with a price target lowered to $6.50 from a previous $8.00.
DHT Holdings Inc DHT was downgraded to Equal Weight from Overweight with a price target lowered to $5.50 from a previous $7.00.
• Ardmore Shipping Corp ASC was downgraded to Equal Weight from Overweight with a price target lowered to $8.00 from a previous $9.50.
• Euronav NV Ordinary Shares EURN was downgraded to Equal Weight from Overweight with a price target lowered to $9.50 from a previous $11.00.
• Scorpio Tankers Inc. STNG remains Equal-Weight rated with a price target lowered to $4.50 from a previous $6.00.
• Gener8 Maritime Inc GNRT remains Equal-Weight rated with a price target lowered to $5.00 from a previous $9.00.
• Nordic American Tanker Ltd NAT remains Equal-Weight rated with a price target lowered to $9.00 from a previous $12.00.
• Teekay Tankers Ltd. TNK remains Equal-Weight rated with a price target lowered to $2.50 from a previous $3.60.
• Frontline Ltd. FRO remains Equal-Weight rated with a price target lowered to $7.00 from a previous $10.00

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