Altogether, at Value Investor’s Edge we’ve provided coverage for more than 50 firms across all major segments of maritime shipping. We’ve also shared several updated earnings reviews and commentary via our ShipBrief newsletter. Although we technically have two final earnings reports left to go, with Safe Bulkers (SB) set for Monday afternoon (8 June) and Tsakos Energy Navigation (TNP) set for Thursday morning (11 June), we’re essentially complete with what has been a very tumultuous earnings season. For more detailed commentary, I recommend reviewing our full review reports and sector commentary at either Value Investor’s Edge or ShipBrief. This overview will provide readers with a high-level review across the primary segments and won’t dive too far into the weeds.
First, please reference the average rate benchmarks across the segments, as shown below. Note that ‘Direct’ is the calendar average whereas the ‘Adj. Estimate’ includes adjustments for lagging fixtures and lower utilization and peak-rate achievements. Coming into Q1, we knew that dry bulk performance would generally be terrible, LNG would lag, while LPG and most tankers would be flattish. All earnings results should be gauged against these expectations.
Source: Value Investor’s Edge
Crude & Product Tankers
Coming into the season, both crude and product tankers were the most popular trade, and we saw a sort of self-fulfilling prophesy of weak earnings trades as a large proportion of the hot money was gambling on expanding interest post-Q1 results and Q2 guidance. There also seemed to be some wholly unrealistic expectations for earnings themselves as new money sort of set itself up for disappointment by not understanding that fixture reports in March and April won’t actually show up in reported results until Q2 earnings season in August. Additionally, higher price points are almost always thinner (i.e. less ships fixed), so a straight average of daily rates is unlikely reflect reality. Finally, the storage carry petered out fairly quickly as OPEC+ stuck to major cuts, which have now been extended for at least one additional month. All this combined into a very disappointing ‘cycle trade’ for tankers, even as long-term fundamentals and valuations are very attractive.
Expectations were quite low for dry bulk, which is generally a good thing for initiating trades (as long as prospects eventually turn upwards). There too many major surprises for earnings themselves, but rates failed to catch the typical seasonal uplift until the start of June. Most of this was due to COVID, but more specifically the lagging Chinese recovery combined with severe disruptions in Brazil have been particularly brutal. Capesize rates are now lifting with midsize still struggling near lows.
Containership firms mostly had decent results since sector contagion didn’t heavily kick-in until March; however, guidance was nonexistent, and its clear containerships will face the most near-term challenges. Most of these companies are derivative finance plays on the primary liner companies, so the fates of the leasing companies will align with the level of subsidies we see in that space. On a positive note, we’ve seen financing improvements for CMA CGM as well as Korean subsidies for HMM and positive commentary for Evergreen and Yang Ming.
Overall LNG rates and average company performance wasn’t bad for Q1-20, but we’re about to see significant challenges in the two upcoming quarters as cargo cancellations continue. Firms with charter hedges or long-term backlogs are best suited, next best is to prioritize modern tonnage. Q1 was sort of a push but stay tuned for a much more crucial 2H-2020. We could also see potential financing challenges as LNG asset values head towards record weakness.
All of the LPG sector earnings were excellent overall even as there was some clear variance among the VLGC comps (Dorian, BWLPG, and Avance in order of Q1 performance). Rates have rapidly turned back the past 3-4 weeks as the US-Asia arbitrage is closed. We need strengthening Asian markets and a return of US shale to bring this space back to life. Q2 will likely be a push, but Q3 could be brutal.
Thematic Waves Dominate Trading
Q1-20 earnings season was an interesting run with almost all companies reacting much more to broad global themes (COVID-19 peak, stabilization, & recovery points) than to any company-specific catalysts or earnings. There were some minor performance spreads in the equities, with containerships generally performing the worst while tankers were the biggest ‘let down,’ but moves seemed to match global oil markets and global sentiment moreso than earnings, valuations, or other micro-fundamentals.
The majority of the firms performed as well as could be expected and most of these companies are in good shape for the rest of the year, but this wasn’t a ‘stock-picker’ season. I’m hoping for less broad thematic waves and return to more sector and stock-specific trades as we start to navigate the post-COVID markets.