Q2 Earnings: Pivotal Moment for Tankers and Bulk

It’s time again for the next series of earnings reports and coverage! We’ve just kicked off our official coverage of the Q2-20 earnings season at Value Investor’s Edge, where we will be covering a total of 48 firms this quarter, including full-length preview coverage with company specific questions and commentary.  James Catlin and myself will also be providing coverage for our readers at ShipBrief. Additionally, we wanted to share some broad overview notes for the industry with our friends here at Capital Link, and we’ll make sure to check in throughout the Q2 results to see how specific firms are doing.

Brief Review of Recent Market Rates

For Q2-20, we’re looking for super strong rates across most of the tanker segments as well as in the VLGC sector. LNG rates are significantly weaker q/q, but are flattish on a y/y basis, so we’ll see stability there as well as for most containership firms. Despite the improving headlines, dry bulk results for Q2-20 will be horrendous both on a y/y and q/q basis, rather it is Q3-20 results (reported during October and November) which will show all of the meaningful rate improvements. Despite the weak performance in crude tanker stocks, the average rates and earnings for Q2-20 will be very strong, with VLCC averages up an eye-popping 369% y/y and Suezmax up 249% according to our estimates at Value Investor’s Edge, which and backed by industry data from a variety of sources including Clarksons, VesselsValue, Harper Petersen, and Poten & Partners. 

Q3-20 is continually developing, but so far the strongest q/q trends are from the dry bulk sector, particularly in the Capesize subsegment; however, rates have not yet been strong enough to produce positive y/y comps.  Most tanker rates are still flattish on a y/y basis with VLCC still sharply up y/y even including the weaker turn the past month. Tanker rates have collapsed q/q, which is what the myopic market has been focusing on, not taking proper account for seasonality plus unprecedented OPEC cuts from May through July. These OPEC cuts will begin easing on 1 August, so the worst might already be behind us. With crude tanker stocks trading around record low valuations, it seems like an attractive time to be a contrarian investor.

Diana Shipping Set to Report First

We are still very premature in the cycle, but thus far Diana Shipping (DSX) will be the first company to report for the Q2-20 cycle with their earnings currently set for Monday, 27 July with a call at 0900 EST. Euronav (EURN) will kick off the tanker sector earnings on 6 August with DHT Holdings (DHT) and Okeanis Eco Tankers (OET) set to follow up the next week. We will be covering all of these firms and their specific results at Value Investor’s Edge and ShipBrief.  

Positive Run of Tanker Company News

Okeanis shocked the market with a fantastic rate update last week, posting Q2-20 VLCC spot rates of about $98k/day and Q3-20 spot guidance of 62% days fixed at $51k/day. This guidance completely blows apart bearish estimates we’ve seen floating in the markets and further underscores the wild disconnect for these stocks. DHT Holdings (DHT) announced they will be redeeming all of their convertible bonds in August and Euronav (EURN) has completed a significant share repurchase. Additionally, Tsakos Energy Navigation (TNP) appeared on a live Capital Link webinar with Jefferies analyst Randy Giveans to update on the market. Nikolas Tskaos expects the tanker market to improve into the second half of 2020; I’ll leave the rate prognostication to him, but I certainly agree on sector valuations- they are shockingly cheap and we believe now is the time to buy.

Pivotal Earnings Season for both Tankers & Dry Bulk

We are looking forward to a strong earnings season for all tanker firms, but the market understandably is forward looking, so developing Q3-20 guidance will also be key. In this regard, the recent Okeanis update was particularly encouraging and OPEC turning the taps back on could lead to another jump in rates.  Expect crucial commentary and updates coming soon, thus far EURN will be the first to report on 6 August.

Dry bulk has also been recovering as strong seasonality is bolstered by iron ore catch-up demand from China. If Brazil can stabilize and China spends significant funds on domestic infrastructure stimulus, then the dry bulk rate rally could have more legs. A warning that dry bulk results for Q2-20 will be horrendous, but Q3-20 and beyond offers significant promise. We’ll learn more about the dry bulk markets and current progress as we review results from bellwethers such as Star Bulk Carriers (SBLK).  

James Catlin and I look forward to covering the earnings sector with you and we appreciate your readership.