Frontline (NYSE: FRO) — the final of the massive public tanker house owners to publish earnings — simply gave transport buyers extra to fret about over the vacations.
First got here the shock determination to pay no dividend. As Jefferies analyst Randy Giveans put it: “No dividend stocking stuffer” for Q3 and possibly for This autumn or Q1. Then got here speak of a very opaque outlook and even whispers of a resurgence in newbuild curiosity.
‘We determined to maintain the cash’
Frontline, which owns each crude and product tankers, reported web earnings of $57.1 million for Q3 2020 in comparison with a lack of $10 million in Q3 2019. Earnings per share of 29 cents fell in need of analyst expectations of 35 cents.
Giveans requested why Frontline was not paying a dividend regardless of optimistic web earnings within the newest interval, despite the fact that it had paid a dividend after reserving a loss prior to now.
Frontline interim CEO Lars Barstad responded, “Q3 earnings had been good however our visibility trying into This autumn does not look nice. We’re in the midst of a world pandemic. We determined to maintain the cash.”
In accordance with Clarksons Platou Securities analyst Frode Mørkedal, Frontline’s determination to forsake the dividend regardless of having $200 million in cash and no materials unfunded obligations by means of 2022 “speaks volumes concerning their concern concerning the near-term market.”
Frontline shares closed down 9% Tuesday in 2.6 occasions the common quantity.
Whereas Evercore ISI analyst Jon Chappell applauded Frontline’s prudence, he famous that Frontline’s shares have traded at a premium to web asset value “virtually completely owing to prior beneficiant dividends payouts.” Consequently, it is sensible that these share “are getting punished” by the dividend determination.
Storage destocking may speed up
The largest near-term downside for crude tankers is the huge quantity of saved oil that is but to be unloaded.
There will probably be decrease tanker transport demand till crude in floating storage is destocked. Till then, patrons can buy saved crude versus crude that have to be shipped across the globe. After storage tankers are unloaded, they return into the spot market, rising competitors and dampening charges.
“Trying on the benchmark Brent oil curve, we see a dramatic transfer from contango to a close to flattening of the curve, which alerts that stock attracts will speed up,” mentioned Barstad.
Mørkedal made an analogous level in a consumer be aware on Tuesday. He identified that the oil curve had “flirted with backwardation … which is a sign that the stock destocking interval now we have been ready for may now be about to begin.”
Accelerated destocking will carry again market normalcy sooner. However it might additionally imply heightened short-term ache for crude tankers. The saving grace, mentioned Mørkedal, is that charges are already so dangerous they cannot get a lot worse.
Frontline mentioned the operating-expense breakeven charge for its very massive crude carriers (VLCCs; tankers that carry 2 million barrels) is $11,600 per day . Clarksons estimates that VLCC charges are presently simply $10,100 per day.
Ultimately, tanker house owners incomes much less from voyage offers than they’re paying out for working bills cease the bleeding. They refuse to take cargoes, which places a ground on charges.
However destocking has lengthy method to go
How a lot crude is left to be destocked? Rather a lot. Simply how a lot relies on whose knowledge you employ. Frontline makes use of Clipper Knowledge data on tankers idle for 21 or extra days. Barstad mentioned this knowledge reveals crude floating storage peaked simply above 100 million barrels and is now all the way down to 60 million, a decline of round 40%.
One other market-intelligence supplier, Kpler, offered FreightWaves with knowledge on crude and condensate tankers idle for 12 or extra days.
The Kpler knowledge reveals that crude storage measured this manner peaked on July four at 190 million barrels and was all the way down to 111 million barrels as of Monday. That equates to a lower of 41%, the identical development proven by the Clipper Knowledge.
(Chart: FreightWaves primarily based on knowledge offered by Kpler)
A more in-depth have a look at the Kpler knowledge reveals simply how slowly the method goes. Crude floating storage has been bouncing round within the 110 million- to 120 million-barrel vary since late September. Idle volumes have been falling offshore of China however rising elsewhere. In truth, exterior of China, floating storage has been caught in the identical vary since late July.
The dreaded return of newbuildings?
Irrespective of how depressing demand appears, the retort in tanker circles is: However newbuildings are traditionally low, so the availability outlook is nice.
That offer outlook isn’t completely assured. Fears of countercyclical ordering are actually on the rise.
Barstad mentioned on the Frontline name, “There was latest hypothesis of mammoth orders in clips of 5 and 10 vessels being positioned in Asia. However these are but to be confirmed.”
A number of orders have already been confirmed, nevertheless. “Regardless of the discouraging surroundings that has been formed as of late, final week we famous a collection of recent new [tanker] orders throughout totally different measurement segments happening,” mentioned Allied Shipbroking on Monday.
On Sunday, Stifel analyst Ben Nolan reported that “16 VLCC and Suezmax [one-million-barrel capacity] crude tankers had been ordered final week totaling virtually four million DWT [deadweight tons], in comparison with simply 10.Eight million DWT of crude tankers orders by means of the primary 10 months of this 12 months. The crude tanker orderbook is now 9.1% [of the existing fleet], up from under 8% two months in the past.”
Nolan warned, “These additions needs to be comparatively manageable, however actually, the priority can be new ordering dampening the influence of an eventual restoration, as has occurred prior to now a number of cycles in each the tanker and dry bulk markets.” Click on for extra FreightWaves/American Shipper articles by Greg Miller
MORE ON TANKERS: Tanker transport susceptible to uncommon winter hibernation: see story right here. Crude vs. product tankers: benefit product tankers? see story right here. Why crude tanker collapse may very well be lengthy and painful: see story right here.