My first article on this topic in March 2017, “Is A Turnaround In The Cards For Mid-Size Crude Tanker Stocks?” I projected the following cycle to bottom by the end of 2017 and turn up in 2018. This was based in part on global oil demand growth and global fleet growth or capacity growth. The data predicted the cycle going forward from 2017 based on actual data from 2011:
The graph confirmed a past trough and peak in 2012 and 2015 and predicted 2017 as the bottom. Obviously this prediction was too early however the cycle would resume at some point.
Fast forward two years with data through October 2019 the cycle looks like this:
The same question can be asked. Could this be early and the recent spike temporary? I’ve looked at other data to confirm we are past or close to a cycle bottom and into the recovery and found a correlation to cycle tops and bottoms using industry scrapping data. The following uses TNK, NAT and NNA year-end stock prices as it relates to scrapping and past cycle high and lows:
The highs and lows for stocks are inversely proportional to scrapping. Tanker company managements are saying they see good or bad times ahead based on the industry scrapping decisions. Had I looked at this in 2017 would it have changed my projection? Probably not at the time, here’s why. The following is my recent data on scrapping through November 2019:
Source: data compiled from years of reports from Allied shipping research obtained here.
Back in 2017 scrapping spiked which could have been read as a possible peak at the time. Fast forward to today and we see 2018 demo skyrocketed signaling a bottom or maybe maximum pain is a better phrase. 2019 is now a confirmation that 2018 was the peak for demo signaling the beginning of an up cycle.
Bottom line it appears profits will be very healthy for the industry over the next few years with added tailwinds from sanctions and IMO 2020.
I got the bottom wrong in 2017 but continued to build a position since the start of an up cycle was just a question of when. I am long TNK and think it is one of the most undervalued tanker stocks today. TNK does not pay a dividend and do not plan to pay one in 2020. Hopefully we are at the beginning of a super cycle which could change their mind, but I speculate at this point. I’ll continue to track scrapping, but I don’t see a return to high scrapping any time soon.
Going forward the focus is now looking for signs of a top since these stocks are not buy and holds forever. Based on history we could be looking at getting out by 2022, possibly earlier, but it’s far too early to know with any certainty. We’ll see what the data shows going forward.
