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Listed tanker companies: Undervalued or valued using the wrong metric?

Listed tanker companies: Undervalued or valued using the wrong metric?
“Shifting Global Tides” was the theme for the 2016 joint shipping conference of the Greek- American and the Norwegian American Chambers of Commerce, this year a unique constellation of shipping and equity market developments have caused an outward tide, or so it seems to many of the attendees at the event.

Luncheon speaker Robert Bugbee described his version of the malaise. The stock price of his drybulk company Scorpio Bulkers is down because of vessel oversupply and anemic hires; but the tanker company Scorpio Tankers, seeing a booming market with high cashflows, is also being poorly valued.

Indicative of the worrisome backdrop throughout the markets, consider that Bugbee, was actually a Plan B guy at the luncheon. The original speaker, a top drybulk executive from a listed company headquartered two blocks from the Waldorf, where the event was held, had to bow out as he negotiated with creditor banks.

A nice contretemps occurred through the day concerning the proper valuation of listed shipping companies, reflecting the tensions between dispassionate financial types versus long-term denizens of the shipping business. Investors in listed companies, it was explained on multiple panels, are analytical and therefore less sentimental, while the latter group will stick with it through good and bad, as noted by dry bulk panelists Nicholas K Notias and George D. Gourdomachalis.

Besides Bugbee’s lunchtime lamentations, long-time shipping analyst Omar Nokta, from Clarksons Platou giving the mornig keynote, offered a view on shipping company valuations that was challenged by Deutsche Bank’s Amit Mehotra, on the dry bulk panel, a relative newbie - covering the sector for only two years.

Notka’s analysis puts a great deal of emphasis on the “free cash flow yield” or “FCF yield”, telling the group that a quartet of listed tanker stocks – Gener8, Eurnov, DHT and Frontline - would calculate back to a very attractive FCF yield, with debt considered, of 40%, based on the implied VLCC hire of $60,000 per day over the next year. Nokta , who is bullish on the sector, said that “the companies are not seeing credit for [these high yields],” and emphasized the climate of investor fear that’s weighing down any energy-related equities, in spite of the historically firm tanker hires, which are being ignored.

Vasilis Bacolitsis, on the tanker panel, emphasized another visage of this same phenomenon. He suggested that “the investment bankers need to retrained” after pointing out the bankers advocated for pure play companies, which ought to be benefitting from the present run of strong tanker hires, during the 2004- 2006 tanker IPO phase. Investors ought to be clamoring to buy tanker only companies shares given today’s strong market, in the views of this owner (albeit of a smallish private company, Sea Pioneer).

The contrary view came from MMehotra, who has a career background following non-shipping equities. In his view, shipping’s large amounts of depreciation expense tied to asset ownership lead to prodigious amounts of cash low. As comparison, he said that the best managed non-shipping industrial companies, with less depreciation, could attain FCF yields of 30%. His explanation for the discount put on tanker shares was tied to the disappointing results of owners deploying capital, “the track record of management teams in deploying excess cash [cash flow above net earnings] is horrendously poor.” He asked why then shouldn’t investors value the shipping companies based on earnings, which would give a lower price than a cash flow metric given shipping’s poor capital returns when managements invest excess cash back into their businesses.