Great Quarter For Tankers Coincides With Stock-Market Rout

Pity the public tanker owners. After years of suffering through terrible freight markets, they finally have a breakout quarter to boast about — and just as they do so, the broader stock market is crashing around them on coronavirus fears.

"It has actually felt like a bit of a horror movie at times, to be honest," said Frontline FRO CEO Robert Macleod during a conference call with analysts on Thursday. "It seems that the world is getting one shock after another but surely there must be some good news soon."

Two of the largest publicly listed tanker owners have just reported results for the fourth quarter of 2019 — Frontline and Teekay Tankers TNK. Frontline announced "its highest quarterly income in more than 11 years." Teekay Tankers CEO Kevin Mackay touted "one of the most profitable quarters since the end of the tanker-market super cycle in 2009."

Despite this outperformance, shares of Frontline and Teekay Tankers are down around 45% and 38%, respectively, year to date (on a positive note, shares of both companies were up at midday on Thursday, Teekay Tankers in particular on strong forward guidance).

Strong First-Quarter Performance

Even more disappointing for tanker execs amidst the stock slide is that the first quarter of 2020 looks even better than the fourth quarter of 2019. A significant portion of quarterly bookings are done in the prior quarter, thus first-quarter voyage rates are buoyed not just by early bookings in the current period, but by bookings made at the end of last year, when rates were very strong.

On the call with analysts, Macleod said the company's VLCCs (very large crude carriers, with capacity of around 300,000 deadweight tons or DWT) earned $58,000 per day in the fourth quarter and 83% of available VLCC days are booked in the first quarter at $90,000 per day. Frontline's Suezmaxes (120,000-199,999 DWT) earned $38,000 per day in the fourth quarter and 75% of available days in the first quarter have been booked at around $72,000 per day.

Teekay Tankers' has secured spot deals at an average rate of $51,700 per day for its Suezmaxes in the first quarter (77% of available days fixed), versus $39,100 per day in the fourth. Its Aframaxes (80,000-119,000 DWT) have been booked at $38,600 per day in the first quarter (63% of available days fixed), versus $33,000 per day in the fourth.

As Jefferies analyst Randy Giveans lamented during an interview with FreightWaves on Monday, "Stock prices are back to where they were during the third quarter of 2019. They're priced as if the fourth quarter didn't happen. They're priced as if the first quarter — which could be even better than the fourth quarter — didn't happen."

Positive Supply Side Factors Ahead

Macleod stressed the positives going forward, while acknowledging the current weakness. "The negative market effect created by the coronavirus is certainly strong and has hit oil demand head on, but we believe the current situation is temporary rather than permanent," he said.

"Sentiment is extremely negative now but it will turn. For now, the market headwinds are strong and we do not foresee any significant improvement until the virus has been contained. However, when the virus is contained, the tanker market could well reenter the strong earnings environment we entered in the fall of 2019."

He also highlighted positives on the vessel supply side, noting that drydockings will be required for 137 VLCCs this year, or 17% of the fleet, and 109 Suezmaxes, or over 20% of the fleet. "These cannot be postponed," he stressed, noting that "global shipyards entered 2020 with the busiest schedule since 2007 and they're even more stretched now due to coronavirus, so this is bound to have a very positive effect on supply [i.e. decreasing vessel supply to the benefit or rates] throughout 2020 and probably also into 2021."

He also said that "in the tanker sector, investors have been repeatedly disappointed in the past as over-ordering quickly destroys upcycles. But there are currently virtually no tanker orders being placed. The last time we saw the orderbook at present levels was back in 1997."

Quarterly results

Frontline reported net income of $108.8 million for the fourth quarter of 2019 compared to $25.4 million in the fourth quarter of 2018. Adjusted earnings per share of 54 cents came in below analyst expectations of 72 cents.

Teekay Tankers report net income of $63.1 million for the fourth quarter of 2019 compared to $11.5 million in the same period the prior year. Adjusted earnings per share of $2.47 came in above the consensus estimate of $2.37.

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