This is the third installment of “How to trade the Russian war”
We have been bullish on Product tankers since the war started. The idea is that EU will seek to limit its supplies from Russia. Russia is the main supplier of diesel for the EU. As the dependance on Russia is decreasing, EU will have to ship Diesel from longer distances and Russia will ship its Diesel also much further. Product tankers should benefit. And they already are. The current daily rates imply sub 4x P/E and +20% ROE for Hafnia.
Pareto just revised its price targets and see 35-40% upside from current levels. If the EU embargo on Russian diesel is enacted, product tankers should see much higher upsides.
We are long Scorpio and plan to buy Hafnia on weakness.
Pareto Research Summary
|Product Tankers: True inflation for the first time in 15 years|
|Driven by both higher input costs and booming order intake for container vessels and gas carriers – newbuild prices are (almost) back at 2008-peaks. This is pushing return requirements upwards – at a point in time where we should be starting to replace the ageing vessels that do not fit well in an EEXI/CII world from 2023. The stage is set for 2023 – and with the tragic invasion of Ukraine we see an additional demand increase of 5 – 10% for product tankers. We raise our estimates and see 35 – 40% upside for Hafnia and Scorpio Tankers. BUY ahead of Q1 reports next month. |
Ship value inflation for the first time since 2007
For the first time in 15 years, we have seen a consistent increase in newbuild prices. Shipyard orderbooks are filled up with container and gas carriers, while rising input costs and reduced yard capacity also push prices higher. As a consequence, MRs are now quoted above USD 40m for the first time since 2009 – and some 15% above the last 10Y average. This is pushing return requirements upwards, with the 10%-return rate now closing in on USD 19,000/day – a level which would imply sub 4x P/E and +20% ROE for incumbent Hafnia.
…and spot rates are surging – ahead of schedule
Meanwhile, product tanker spot rates have had an encouraging start to 2022. LRs saw early Q1 tightness, with several regions experiencing strong demand and vessel shortness. MRs have since stolen the show, and again it is encouraging to see strong demand and vessel tightness in both the Atlantic and Pacific at the same time. Seaborne transportation demand should be back to pre-COVID levels imminently, and with a ~5% orderbook and rapidly ageing fleet scrapping activity will remain high – and net fleet growth low.
Altered Russian product exports could mean 200x new MRs
The tragic invasion of Ukraine is putting ~1.2mbd of Russian product exports to NW Europe under pressure. A likely new destination is South America, and in turn this will push more US volumes to Europe. This would mean a big boost to tonne-miles, with 1.2mbd ~4% of total volumes – and the new distance about five times as great. While still early it could require as many as 200x incremental MR tankers – or roughly 10% of the total MR/Handy fleet (6% of total product tankers). This is most likely one reason for the MR strength we now see, and we have raised our 2022 estimates 5 – 15%, seeing double digit demand growth this year.
HAFNI: Just getting started – TP up to NOK 36 (29)
With the rare combination of decent leverage and low cash break-evens Hafnia is now in a very comfortable situation. We could see dividends return after Q1, with Q2 guidance set to be solid. Current NAV of NOK 29 will become 36 by YE’22, and we see no reason for any discount here. TP up to NOK 36 (29), and we reiterate our BUY / top tanker pick rating.
STNG: Now leverage is working with them – TP up to USD 30 (22) We raise our TP to USD 30 (22) ahead of the Q1 release early next month. Scorpio’s heavy debt burden should now be working in their favor, and we expect firm Q2 guidance from the eco-fleet with (mostly) scrubbers to give an initial taste of the potential. Reiterate BUY.
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