IN February, 2023 EU imposed sanction on Russian oil products (diesel, etc). That meant that EU will have import diesel from 3-7 times longer distances than when supplied by Russia. It means the product tanker rates will go up and therefore Product tanker equities should benefit.
This is happening with some time lag – the EU build up supplies from Russia before February. Now the inventories are steadily falling – and product tankers equities are starting to gain traction. We are long HAfnia.
The risk of the trade – if oil goes down, it would drag tankers with it, despite the profits they are making. The recent OPEC cut indicates, that OPEC cares about the oil price, which reduces risk of the oil price fall.
Summary from Pareto Research published today:
|Product Tankers: Another leg up is imminent|
|While product tanker rates in 2023 are only marginally ahead of our estimates – we remain encouraged by the longer distances for Russian cargoes. With so far still a modest order-response we continue to find the shares extremely attractive – with fleet growth going to slow down further into 2024. |
We thus raise our forecast for 2024 and are now 25 – 35% above consensus for the next two years – and expect positive revisions soon. BUY reiterated across the board – with target prices raised once again.
Strong start to the year
Though volatility remains, product tanker rates have had a strong start to 2023, following the euphoric fourth quarter of 2022. Year-to-date, LR2s and MRs have averaged USD 53,000 and USD 38,000 (both eco ships) respectively, slightly ahead of our estimates.
Russian barrels now travelling longer distances
Since the sanctions against Russian product exports came into force in early February, we have seen a sharp rise in total oil products ‘in transit’, meaning that distances are increasing. Northwest Europe has yet to fully replace the ~0.75mbd of Russian products it imported in 2022 and is now seeing inventories slowly but steadily fall.
So far only a small supply-response
While the ordering pace has picked up for LR2s and MRs, orderbooks remain at decade-low levels. Shipyard prices are elevated, and delivery dates pushed out in time – and we will next year see a 10:1 relationship between the number of vessels above 15 and the number of vessels on order.
Raising estimates and expect consensus to do the same
Encouraged by the positive start to the year, increased Russian distances – and limited supply response, we raise our 2024 TCE rate estimates by 10 – 20%. This results in EPS-changes of ~33% – and puts us ~25-35% ahead of consensus for both Scorpio and Hafnia. We find HAFNI-estimates particularly low and expect significant revisions in conjunction with the Q1 report – as Q2 guidance is going to be materially above current expectations.
Still see ~50% upside in Hafnia and Scorpio
We continue to use a 1Y-forward NAV approach, adjusting fleet values for ageing and including forecasted cashflow. Both HAFNI and TORM are trading at 20%+ yields for 2023 and 2024.
We currently have HAFNI/STNG at ~0.85x NAV and see those NAVs growing by 25 – 30% through Q2’24. Sub 4x EV/EBITDA with rapidly falling LTVs (already below 30%) we struggle to see better value elsewhere, and thus reiterate BUY across the board.
Hafnia, TP from NOK 80 to NOK 87.
I recommend to review on post on Norsk Titanium from yesterday.
Worth further analysis:
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