Long-time readers of this site know that I have a sweet spot for tankers. This is because I know from experience just how volatile they can be to the upside. Meanwhile, with a few exceptions, they trade at the largest discounts to NAV that I can remember, giving you an incredible margin of safety—especially with repaired balance sheets and charter rates spiking to all-time highs.
Lost in the shuffle during this week’s market crash, is the news that the Saudis are going for the kill-shot against US shale. It looks like multiple members of the cartel, formerly known as OPEC+, are going to also join in. They’re going to pump all they can and crash oil prices. While this is bad for shale, it’s positively phenomenal for tankers. To start with, someone has to transport all this increased crude production. Just as importantly, someone has to store it and the first choice for immediate storage is often floating storage. Even better, the crude oil contango is blowing out—increasing demand for contango storage trades which absorb tanker supply. Add it all up and a VLCC which was fetching about $35,000 a day last week, is now chartering for north of $200,000 a day today.
Everyone is worried that the Saudis will change their minds, but I don’t think that will happen too quickly. The Saudis just spent the past few days liquidating their above-ground inventory for a $20/bbl loss. Do you think they did this only to turn around and let prices rise? Nope, they’re going for the kill-shot and they need oil lower for long enough to finally kill off shale. Could they do this for more than a year? Why not?
What does this mean for tankers? At current rates, many of them will earn their market caps this year, some will earn their market caps each quarter and a few can earn their market caps each month. Yes, tankers have massive operating leverage on top of financial leverage. When rates are going your way, there is no other asset class that has as much upside potential. (Click here if you want to understand the magnitude of the earnings at these rates)
In a normal market, most of my tanker names would be up massively on this news. Instead, with the stock market melting down, they’re mostly flat on the week. Investors are focused on triaging their portfolios—not adding exposure. They may be missing the greatest trade I’ve ever seen in my entire investing career. Unless you think the Saudis stop flooding the market sometime soon, these tanker stocks are about to go parabolic.
Tanker are my largest exposure. I just added a whole lot more. After having round-tripped this one, I think I’m about go get paid.
Disclosure: Funds that I control are long DHT, EURN, LPG, STNG, TNK