Evercore ISI analyst calls a bottom to the tanker trade based on rising NAVs and upgrades all names
Just three weeks after sounding caution, Chappell turns tanker bull
Well, he did say "just a little further."
Only three weeks after issuing a sobering note counseling caution over the pace of a tanker-market recovery, veteran Evercore ISI analyst Jonathan Chappell has upgraded the entire sector on the strength of rising net asset values (NAVs). Just as his previous tanker outlook had proclaimed "Are we there yet? Just a little further,” the title of Chappell's new take embodies the changed outlook: "Risk of being late now (exceeds) risk of being early."
And just like that, an analyst who admits thinking an upgrade might not come until September is turning more bullish right now. That means every crude and product tanker company under Evercore's coverage has been elevated to buy from hold with the exception of Herbjorn Hansson's Nordic American Tankers, which gets upgraded to hold from sell. Among those elevated and seeing frothier price targets are Euronav, Frontline, DHT Holdings, Teekay Tankers, Scorpio Tankers, Torm and Ardmore Shipping. "At the time, we weren’t sure if we’d upgrade the sector post Memorial Day, in our July report, or after Labor Day, yet it now appears that we only needed to wait 9-10 days as most stocks found support on May 12-13," Chappell wrote, referencing his earlier report on 3 May.
"We want to be clear up front: we are not altering our spot rate or EPS estimates in this report as our fleet utilization projections are unchanged. "However, with sentiment now set to fully shift and asset values on the rise, owing to both robust steel prices and owner optimism in the sale & purchase market, we are making a 15% favorable adjustment to our pro forma NAV estimates, with balance sheet leverage driving much more material upside to NAVs and, thus, our 12-month price targets." In a section of his report headed: "What's changed in the last three weeks? Quite a lot actually," Chappell lays out the influence of factors including vaccine-influenced economic recovery, increases in global oil production and refinery throughput, declining oil inventories, a mooted lifting of US sanctions on Iran and Chinese taxation of light-cycle oil and aromatics.
"Another favorable market data point from the last month has been asset value trends, with consistent step-ups seen across all segments and age ranges...parabolic steel prices are playing a large role in rising newbuild, and by association, second-hand values," Chappell wrote. Chappell, who has two decades of experience in covering market cycles, also notes the recent splash of John Fredriksen's Frontline on six VLCCs for $565m as "an important inflection point." "When legacy asset-play mavens make a big splash, owner attention and optimism begins to perk up," Chappell wrote. For instruction on what might happen now for tanker equities, Chappell takes a look at the track record for dry-bulk stocks, which are up 129% to 239% to date and 258% to 435% off their 52-week lows. "Every stock has done well, but some have clearly done better," he noted.
In contrast, tanker equities are up between 19% and 102% on the year, but only 19% to 49% when excluding outperformer Scorpio Tankers. They have surged 30% to 173% from 52-week lows, but only 30% to 87% excluding Scorpio. Some of the biggest increases in target price go to Scorpio Tankers, to $33 from $23, Teekay Tankers to $27 from $20 and Frontline to $11 from $7. Chappell's note after the close of market on Monday drew a quick reaction from Scorpio president Robert Bugbee, who had had a gentle debate with the analyst on the owner's last earnings call, insisting that the recovery was around the corner, not a distant event.
"Jon is a good and caring analyst, always fair and always thorough," Bugbee said in a message on Monday. "The fact that he has waited to get the data before upgrading the tanker space should provide us all with greater confirmation and confidence in the coming bull market."