Product tankers on course to a winter wonderland?

On social media platform X (formerly known as Twitter) investor/ analyst Ed Finley-Richardson highlighted good results in the sector, and quoting the analysts at Pareto, wrote: “product tanker names in general are outperforming expectations and Q4 estimates are pushed higher”. This was certainly the case with International Seaways (NYSE – INSW) which continues to benefit from its now prescient acquisition of Diamond S, which itself had acquired a fleet of product tankers from Capital Product Partners.

Scorpio Tankers (NYSE - STNG) has also turned in better than expected Q3 2023 results, and attracted “Buy” ratings from the equity analysts. With its stock priced at just below $60 per share, in line with a recent high in early 2023, Deutsche Bank has put a target of $70 on STNG shares, with Stifel pegging its target at $73 per share. Jefferies was targeting $74 per share, while BTIG was looking for $80 per share.

The optimism on pricing stems from underlying market conditions, but (similarly to INSW) also to a financial strategy of undoing expensive leverage, with STNG, in the form of replacing expensive vessel lease finance with less onerous bank debt. BTIG’s Greg Lewis highlighted this, writing: “During Q3 STNG began replacing sale leaseback financing with conventional bank debt, drawing down $472 million since the start of the quarter under a new $1 billion term loan and revolver to finance 34 unencumbered tankers. Management expects to fully draw down the new facility by the end of 1Q24, financing 45 tankers.”

STNG has also been using its strong cash flows to buy back shares (around $490 million of such buybacks so far in 2023); in its conference call with investors, the company announced that up to $250 million would be available for further share repurchases. Shareholders were also rewarded with an increased dividend, bumped up to $0.35 per share.

Of course, the tanker market is what is driving the boat. On the conference call, tanker veteran Robert Bugbee, STNG’s President, said “It’s been a fantastic start to the [4^th] quarter, and we are really happy with the way that the market is shaping up.” Noting the chillier temperatures, he added: “It’s really a fantastic springboard for the potential substantial rate improvement when the winter season kicks off in three to four weeks-time, and that’s exactly what we expect.”

Analyst Ben Nolan, at Stifel, told clients: “Earnings were driven by strong spot rates of $29,181 from the MRs which was higher than both our expectations and the street.” BTIG’s Greg Lewis had intimated at even stronger results in Q4, telling investors that STNG had “already fixed 50% of its Q4 LR2 days at $40k ($29k in Q3) and 48% of its Q4 MR days at $31k ($29k in Q3)”. BTIG took the view that Operating Cash Flows (OCF) for Q4 is on track to be stronger than that reported in the just finished Q3.

While STNG has grabbed considerable attention, analysts looking at Torm (NasdaqGS - TRMD) are also expressing both surprise at Q3 and Q4 products market strength and optimism at prospects for piercing the share price highs set earlier this year.

Jonathan Chappell, from Evercore ISI, has put a target of $38 on the shares- up from its present price around $31 per share. Chappell, in a report to investors- emphasized the ability to funnel cash flow into dividends, saying: “TRMD may not retain the same EPS torque as some other tanker companies, but its dividend policy enables investors to benefit immediately from the seasonal, cyclical, and (even) secular strength in the product tanker market. Indeed, we conservatively forecast full-year 2023 and 2024 dividends of $5.86 per share and $5.70 per share, respectively, with the latter representing a forward estimated yield of 18.7%.”

Add Seatrade Maritime News to your Google News feed.