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Frontline (NYSE: FRO) — the last of the big public tanker owners to post earnings — just gave shipping investors more to worry about over the holidays.
First came the surprise decision to pay no dividend. As Jefferies analyst Randy Giveans put it: "No dividend stocking stuffer" for Q3 and probably for Q4 or Q1. Then came talk of a particularly opaque outlook and even whispers of a resurgence in newbuild interest.
‘We decided to keep the cash'
Frontline, which owns both crude and product tankers, reported net income of $57.1 million for Q3 2020 compared to a loss of $10 million in Q3 2019. Earnings per share of 29 cents fell short of analyst expectations of 35 cents.
Giveans asked why Frontline was not paying a dividend despite positive net income in the latest period, even though it had paid a dividend after booking a loss in the past.
Frontline interim CEO Lars Barstad responded, "Q3 earnings were good but our visibility looking into Q4 doesn't look great. We are in the middle of a global pandemic. We decided to keep the cash."
According to Clarksons Platou Securities analyst Frode Mørkedal, Frontline's decision to forsake the dividend despite having $200 million in cash and no material unfunded obligations through 2022 "speaks volumes regarding their concern about the near-term market."
Frontline shares closed down 9% Tuesday in 2.6 times the average volume.
While Evercore ISI analyst Jon Chappell applauded Frontline's prudence, he noted that Frontline's shares have traded at a premium to net asset value "almost exclusively owing to prior generous dividends payouts." Consequently, it makes sense that those share "are getting punished" by the dividend decision.
Storage destocking could accelerate
The biggest near-term problem for crude tankers is the massive volume of stored oil that's yet to be unloaded.
There will be lower tanker transport demand until crude in floating storage is destocked. Until then, buyers can purchase stored crude versus crude that must be shipped around the globe. After storage tankers are unloaded, they go back into the spot market, increasing competition and dampening rates.
"Looking at the benchmark Brent oil curve, we see a dramatic move from contango to a near flattening of the curve, which signals that inventory draws will accelerate," said Barstad.
Mørkedal made a similar point in a client note on Tuesday. He pointed out that the oil curve had "flirted with backwardation ... which is an indication that the inventory destocking period we have been waiting for could now be about to start."
Accelerated destocking will bring back market normalcy sooner. But it would also mean heightened short-term pain for crude tankers. The saving grace, said Mørkedal, is that rates are already so bad they can't get much worse.
Frontline said the operating-expense breakeven rate for its very large crude carriers (VLCCs; tankers that carry 2 million barrels) is $11,600 per day . Clarksons estimates that VLCC rates are currently just $10,100 per day.
Eventually, tanker owners earning less from voyage deals than they're paying out for operating expenses stop the bleeding. They refuse to take cargoes, which puts a floor on rates.
But destocking has long way to go
How much crude is left to be destocked? A lot. Just how much depends on whose data you use. Frontline uses Clipper Data information on tankers idle for 21 or more days. Barstad said this data shows crude floating storage peaked just above 100 million barrels and is now down to 60 million, a decline of around 40%.
Another market-intelligence provider, Kpler, provided FreightWaves with data on crude and condensate tankers idle for 12 or more days.
The Kpler data shows that crude storage measured this way peaked on July 4 at 190 million barrels and was down to 111 million barrels as of Monday. That equates to a decrease of 41%, the same trend shown by the Clipper Data.
(Chart: FreightWaves based on data provided by Kpler)
A closer look at the Kpler data shows just how slowly the process is going. Crude floating storage has been bouncing around in the 110 million- to 120 million-barrel range since late September. Idle volumes have been falling offshore of China but increasing elsewhere. In fact, outside of China, floating storage has been stuck in the same range since late July.
The dreaded return of newbuildings?
No matter how miserable demand looks, the retort in tanker circles is: But newbuildings are historically low, so the supply outlook is great.
That supply outlook is not entirely guaranteed. Fears of countercyclical ordering are now on the rise.
Barstad said on the Frontline call, "There has been recent speculation of mammoth orders in clips of five and 10 vessels being placed in Asia. But these are yet to be confirmed."
Several orders have already been confirmed, however. "Despite the discouraging environment that has been shaped as of late, last week we noted a series of fresh new [tanker] orders across different size segments taking place," said Allied Shipbroking on Monday.
On Sunday, Stifel analyst Ben Nolan reported that "16 VLCC and Suezmax [one-million-barrel capacity] crude tankers were ordered last week totaling almost 4 million DWT [deadweight tons], compared to just 10.8 million DWT of crude tankers orders through the first 10 months of this year. The crude tanker orderbook is now 9.1% [of the existing fleet], up from below 8% two months ago."
Nolan warned, "These additions should be relatively manageable, but certainly, the concern would be new ordering dampening the impact of an eventual recovery, as has happened in the past several cycles in both the tanker and dry bulk markets." Click for more FreightWaves/American Shipper articles by Greg Miller
MORE ON TANKERS: Tanker shipping at risk of rare winter hibernation: see story here. Crude vs. product tankers: advantage product tankers? see story here. Why crude tanker collapse could be long and painful: see story here.
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