An update on the tanker sector
Firms have been printing cash recently, outside normal seasonality. What has changed and will it continue? Does the sector still represent decent value?
Many of you may remember me pounding the table after Q3 reports to buy depressed oil tanker shares. Those of you who subscribe to my service, Marhelm, may also remember me warning that I believed there would be a sell off of tanker shares based on Q3 results, and that the dip should be bought.
My rosy outlook was primarily based on a couple of factors:
Depressed valuations (many were trading as low as 0.3x NAV)
Increasing asset values (scrap value of a ship had doubled in a year)
Increased global oil demand from pre-pandemic levels despite covid
More mild, more contagious covid variant (Omicron)
Decreasing (and at a staggering pace) global oil and fuel inventories, below pre pandemic levels
At the time, many people scoffed at this call, one commenter in SeekingAlpha I recall saying that “Herb’s nuts should be cut off”, others continued to call for chasing the container and dry bulk rallies.
I feel that last year, my forecasting on tanker shares improved a lot from 2020 (when I infamously stayed long as the contango unwound), due to a more impartial focus on data. Shipping is about waiting for the stars to line up in a special way - poor sentiment, decent/favorable supply demand balance going forward, and cheap historical valuations. With tankers, we got a situation where a lot more scrapping had occurred than people realized, order books reached historical lows, and shipping volumes had been suppressed despite a normalization in demand. To me, this meant buy. Now, shares have strengthened across the board, rates are at their highest levels since contango, and people are asking whether or not they should chase or sell. While I’m not going to tell you what to do, I will tell you where we’re at now and at least what I’m doing.