Having it Both Ways

Can you have your cake and eat it too? Sometimes you can.

Tanker at berth

Published Apr 30, 2023 8:54 PM by Jack O'Connell

(Article originally published in Mar/Apr 2023 edition.)

Forget the ESG wars. Savvy investors like the long-time readers of this column can benefit from playing both sides of the issue. Same goes for the transition to clean energy. Doesn’t matter which side of the debate you’re on. Just pick winners on both sides.

Easier said than done, we know. But fun to think about. And as the rhetoric over ESG investing heats up in state capitals and boardrooms across America, level-headed investors forge on, choosing companies and stocks based on sound investing principles and strong balance sheets. Don’t believe in companies that traffic in gambling or tobacco or alcohol? Fine. Don’t buy them. Lots of other choices available. How about Big Pharma? Miracle drugs and cancer breakthroughs and the like? Sounds good to me, but maybe I’m missing something.

And as the global economy – and shipping, in particular – makes the long and painful transition from fossil to clean fuels, there are opportunities galore for investors of all persuasions. Right now, for example, fossil fuels seem to have the upper hand as offshore wind stumbles amid rising costs and unrealistic performance goals (see Paul Benecki’s fine article, “Window of Opportunity,” in this edition). Last year, a down year for stocks overall, oil and gas company stocks gained a whopping 59 percent, the only sector of the S&P 500 to turn a profit.   

Will they do that again this year? Anybody’s guess, but so far so good. Exxon (XOM) and Shell (SHEL), in particular, have gained, and all the Big Oil stocks pay handsome dividends and continue to rack up record profits. And if they falter and the pendulum swings back to clean energy plays like GE (GE) and NextEra (NEE), go for it! In fact, GE (amazingly enough for this long-time investor) is up nearly 50 percent since January alone.

Crystal Ball

For the record, stocks in the first quarter of 2023 performed surprisingly well, despite “higher for longer” interest rates, the collapse of two major banks (and Credit Suisse’s near-miss) and continued inflationary pressures. Nasdaq led the way with a 17 percent gain as tech darlings like Nvidia (NVDA), Meta Platforms (META) and Tesla (TSLA) rebounded after a disastrous 2022. The benchmark S&P 500 gained seven percent (I’ll take it), and the Dow was flat.

Actually, the big winner in Q1 was bitcoin, up a hefty 71 percent to around $28,000. But that’s where the volatile crypto was three years ago and still well below its all-time high of roughly $70,000 in late 2021.

What the rest of the year holds is anybody’s guess, and in past years this columnist was known to be brave (foolish?) enough to look into his crystal ball and plunge right in. No more. With age comes wisdom, or so we hope, and wisdom dictates prudence and caution, especially when it comes to investment decisions. “Discretion is the better part of valor” quoth jolly Falstaff in Shakespeare’s Henry IV, Part I, and truer words were seldom spoken.

And after a disastrous 2022 for both stocks and bonds along with continued inflationary pressures, most pundits are urging caution and a defensive posture, hoping for a better second half of the year but mindful of a long-anticipated recession possibility.

Year of the Tanker?

Meanwhile, certain sectors of the maritime business continue to prosper, especially those connected to the energy business. Tankers, in particular, stand out, and since this is our energy exploration, production and transportation issue, let’s take a closer look at what’s happening in the world of crude and product carriers.

After a tough 2021 in which most tanker companies lost money, 2022 was a breakout year for the sector with many companies posting record earnings. In a recent report titled “Crude Tanker 2022 Results Snapshot,” maritime research company Drewry explained it this way:

“2022 proved to be a great year for crude tanker companies on account of the spike in demand and earnings of vessels. Healthy growth in oil demand and a shift in trade patterns led to a jump in demand and TCE [time charter equivalent] rates of crude carriers. Consequentially, many crude tanker companies reported results that were among the best in their history.”

Contributing to the earnings surge were a number of factors, says Drewry, but mainly the war in Ukraine: “Europe’s attempt to reduce dependence on Russia in the aftermath of the conflict in Ukraine proved to be a boon for crude tanker companies as the changes in trade patterns boosted demand for oil tankers in general and mid-size vessels in particular. Europe increased its imports from the U.S., Middle East and Latin America whereas the Russian barrels were directed to Asian markets, which resulted in surging vessel earnings. ... the demand and earnings of VLCCs also picked up in the latter part of the year due to firm seasonal demand and recovery in Chinese demand.”

Among the companies cited by Drewry in its report are Frontline, which posted earnings of  $425 million last year, International Seaways with net income of $388 million, Teekay Tankers at $229  million and Euronav at $203 million.

Respected maritime reporter and editor Greg Miller confirms the rosy view and sees more of the same in 2023. In a recent article for FreightWaves, he notes that “Spot rates for very large crude carriers (VLCCs) – tankers that carry 2 million barrels of oil – just breached the $100,000-per-day threshold. It could be a taste of things to come. Analysts and investors are increasingly confident that the tanker business is headed into a long, sustained upcycle.”

Like Drewry, Miller cites the full reopening of China as a big boost for VLCCs as well as the historically low orderbook for new tonnage, not to mention the Russia-Ukraine war, which “fundamentally altered tanker trades, leading to longer voyage distances for both crude and product tankers. These changes look like they’ll stick.”

The altered dynamics have paid big dividends for investors. “Most product tanker and crude tanker stocks have risen by triple digits over the past year,” Miller adds. “Supply-demand fundamentals appear very positive for tankers in the medium term.”

On the product tanker side – vessels that carry refined products like gasoline, diesel and aviation fuel, so-called “clean products” – there are also lots of good choices, among them Scorpio (STNG) and Torm (TRMD). Scorpio, with a fleet of over 100 vessels and a market cap of over $3 billion (making it larger than most shipping plays) has been buying back its stock and adding new vessels and is a relatively safe bet. Trading at around $55, its stock has more than doubled over the past year and looks poised for further gains. J.P. Morgan recently initiated coverage with a Buy rating and a price target of $87.

Denmark-based Torm is another winner with a history dating back more than 125 years. With a market cap of $2.5 billion and a fleet of 80 wholly-owned vessels, it’s widely recognized for its operational and environmental efficiency and – even better – its stock has tripled over the last year and it pays an out-of-this-world dividend.

In its fourth quarter earnings call a few weeks ago, CEO Jacob Meldgaard emphasized the company’s historically strong performance with average TCEs across the fleet of $47,520 (anything over $40,000 is considered exceptional) and pre-tax profits of $222 million: “The headline of today’s call is that the very strong product tanker markets have continued here into the fourth quarter of 2022 and that the underlying factors have also continued into 2023” – with no visible signs of when the market might turn.

As a result, the company is busy buying up high-quality vessels on the secondary market and, more importantly for investors, boosting its dividend. Torm, like a number of other shipping companies,  has a policy of paying out most of its earnings in dividends, and the announced dividend for the fourth quarter was a whopping $2.59/share. At a recent share price of around $30, do the math and you can see that the stock is worth buying for the dividend alone.

And if crude and product tankers are still too “dirty” for you or against your ESG principles, how about LNG carriers? Are they clean enough? U.S. exports of LNG to Europe more than doubled last year and will continue to grow to offset the cutoff of Russian gas. Companies like GasLog (GLOG) and Cheniere (LNG) are positioned to prosper. A long-time favorite of this writer, Cheniere is the world’s leading exporter of LNG and is building more capacity at its facilities along the Texas and Louisiana coasts.

Best of Both Worlds

So let others worry about the ethics of investing in things like tobacco, gaming stocks and fossil fuels. Everyone knows by now that fossil fuels still have a major role to play in the world economy and will be around for decades to come. It’s okay to buy them, and right now there’s lots of money to be made in anything associated with oil and gas and the service companies that deliver their products around the world.

Best of both worlds? You betcha! Dive in! 

Jack O'Connell is the magazine's Senior Editor. 

The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.