Our third interview in this “Opportunities In Tankers” series is with J Mintzmyer. J has been following the industry for nearly 12 years and has hosted exclusive research on Value Investor’s Edge for five years. He is a well-known voice in the shipping industry, often cited in trade publications and industry interviews.
J has more than 13K followers on Seeking Alpha and more than 500 research subscribers on his Value Investor’s Edge platform.
I encourage you to read the first two interviews in the series here:
We have one additional “Opportunities In Tankers” interview lined up. Follow Arquitos Capital to be notified when those interviews go live.
Following is our interview with J:
SK: You follow the earnings reports in the industry closely. What has stood out for you during this earnings season?
JM: Earnings have been outstanding across the board for Q1 2020, but the market doesn’t seem to care. Everyone is focused on “what happens in 2021+” and has completely disregarded the front 3-6 months of epic cash flows. Q2 2020 guidance was strong across the board, but of course it didn’t match some of the recent eye-popping broker reports because there’s a lag between fixed rates and revenue recognition, plus some of the highest rates (i.e. $250k/day for a VLCC or $170k/day for an LR2 product tanker) were only achieved by a handful of ships.
SK: Which companies are most interesting to you right now?
JM: I believe there are good value opportunities across the gamut of shipping sectors, but it all depends on your investing and trading style. There’s no shortage of ‘cheap’ names, but different challenges exist. For instance, with containerships you’re betting on a rapid global recovery whereas with dry bulk you’re squaring your entire bet on China’s infrastructure programs and Brazil’s iron export levels. The most popular current theme has been crude tankers (and to a lesser extent, product tankers), especially surrounding the ‘floating storage trade.’
SK: Can you expand on some of the differences in these companies?
JM: The shipping industry is actually 7-8 diverse sub-segments, each of which has its own totally separate supply and demand levels and drivers. These segments include containerships (mostly retail goods), dry bulk (iron ore, coal, grains, etc), crude tankers, product tankers (gasoline, diesel, jet fuel, etc), LNG (natural gas), LPG (propane), and then you have varying types of offshore support as well as the niche Jones Act. I love tracking and investing/trading in maritime shipping because there’s always something that looks interesting and usually something we can avoid or hedge against as well.
SK: What are investors missing?
JM: Investors broadly don’t seem to understand the long-term valuations of these companies and the underlying earnings potential in strong markets. They look at a stock chart for instance and see a lot of carnage in some segments for several years and say “this industry stinks,” but that’s grossly simplistic and ignores the massive overbuilding we had to work through. There’s also a lot of misunderstanding of what NAV (Net Asset Value) means and why that is relevant to valuations and earnings potential. The vast majority of stocks trade wildly below NAV, lower than we’ve ever seen before, even as NAV already reflects the real-time market valuations of these ships/assets.
SK: You’ve interviewed Frontline’s CEO several times. What are your takeaways from the most recent interview you did a few weeks ago?
JM: Robert MacLeod and his team are very competent and have been steering Frontline (FRO) in the right direction. I’ve never seen him (and most of his fellow tanker owning peers) as optimistic about the near-term earnings potential, which of course doesn’t mean rates will stay high forever, but Robert and others are simply counting the cash flows as they come in, and they are very happy to be operating in these conditions. Frontline has higher leverage than some of its peers, so I expect they will allocate a good portion of their cash flows to fortifying the balance sheet, but I also expect some big dividends for Q1 and Q2.
On a humorous note, Robert has responded to some of the recent pessimism by promising to walk across the entire country of Norway if rates dip back to February-lows (under $30k/day) during any period in Q2 or Q3. He’s just having some fun, but using a clear case to illustrate his confidence in the market. Hopefully Robert won’t need to dust off his walking shoes!
SK: You also recently spoke with Ardmore’s senior management recently. What were their thoughts on today’s market?
JM: Ardmore (ASC) is in a completely different sector (MR, medium-range, product tankers) as compared to the crude tanker sector, but they are doing quite well. Ardmore is very conservative and they are focusing on deleveraging and want to achieve their target of <40% D/A by the end of the year. We’ll have to see where rates pan out for MRs, but they could hit that goal as soon as the end of Q3 if the current levels persist. They are optimistic on the market and expect port congestion and other terminal logistics issue to persist for much of 2020.
SK: Which companies in the industry would you avoid?
JM: There’s a right price for anything, so give me a cheap enough stock and I’ll buy, but the two worst sectors, by far, are containerships and dry bulk. Containerships are getting slammed by the drop in global trade and major liner companies are facing lots of financial stress and with major bailouts, we could have another ripple of bankruptcies across the industry. Dry bulk, on the other hand, is a total bet on a firm Chinese recovery and lots of domestic infrastructure spending. Dry bulk is primarily iron ore and coal and coal markets are getting choked out by super cheap LNG prices as well. There’s just no economic argument left to consume coal anymore in this market, so I’m not too optimistic there.
SK: Clearly oil supply is significantly higher than demand right now. How long does this last and do these high day rates continue?
JM: That’s the magic question. Nobody really knows, but analysts don’t like to admit they haven’t a clue. So you have dozens of broken-clock oil permabulls who’ve been wrong about almost everything for a decade saying that the oil market will re-balance within weeks and you have some hyper-enthusiastic ‘tanker bros’ on Twitter who believe we’ll see high rates forever on the other end. I generally believe things will last longer than most expect, especially looking across the dire COVID-19 statistics in Europe and the US that seem to be suggesting a 2nd wave oncoming (or more accurately a resurge of a 1st wave we never got past), but that’s admittedly a guess as well. What we do is model all companies for a variety of scenarios, ranging from worst-case for tankers (i.e. oil already balanced, rates about to collapse) to best case (rates strong all 2020 into 2021), and then pick the firms with the best weighted valuation cases.
Three firms distinctly outperform the rest on a weighted stress test: Diamond S (DSSI), Euronav (EURN), and International Seaways (INSW). All three are so cheap that even in a worst case scenario, investors probably make money on these over the coming year or two. In a best case scenario these are multi-baggers. That’s where we like to be in these unprecedented times!
SK: Do you think this trade can act as a hedge against the global economy?
JM: To some extent, yes, but I think what I affectionately call the ‘doom-corr’ has gotten a bit extreme at points. This isn’t so much a hedge against the global economy as it is a bet that oil storage and transportation demand will exceed available tonnage. Yes, that happens faster in a plunging demand environment, but supply/demand was already tight to begin with and the supply picture is beautiful (oldest fleet on record, lowest orderbook in nearly 30-years). I believe there are multiple scenarios where the global economy can do alright and investors can still make a lot of money with selective tanker stocks.
SK: Can you talk about the long-term impact of IMO 2020?
JM: IMO 2020 refers to the ban on high sulfur fuel oil (“HSFO”) unless a ship has installed a special exhaust cleaning device (“scrubber”). This drives up the cost of fuel for the shipping industry and it widens the spread between operating costs between modern tonnage and older vintage vessels. Additionally, it ratchets up the cost of special surveys and drydockings of older tonnage which are required once every 5 years until 15, then every 2.5 years thereafter (i.e. 15-year, 17.5-year, 20-year, 22.5-year, etc). If rates are challenging at all and/or fuel costs start running back up (i.e. if oil markets recover), then older vessels will become obsolete overnight and we’re prone to see all-time records in fleet demolition. Remember we said the average crude tanker fleet is the oldest in the modern era?
So to sum it up, IMO 2020 drives out marginal older tonnage and helps modern ships earn higher profits. We have primarily invested in the modern tonnage.
SK: What is the bear case for the industry?
JM: The worst-case bear situation is that oil markets become balanced within weeks, floating storage inquiries plunge, and OPEC keeps up their cuts for several years while the global oil inventories destock. Add a half-hearted global recession into things (enough to make the destocking last for 5+ years, but not enough to spike floating storage), expect an irrational tanker market (i.e. older ships aren’t scrapped for some reason), and bank on a weak Chinese pull of crude oil from the US Gulf (“USG”) and Middle East Gulf (“MEG”) and crude tankers are gonna be an ugly place to be for several years.
This is a pretty extreme bear case, but it could happen, and that’s why we prioritize the best weighted firms like DSSI, EURN, and INSW as we just covered above. This sort of extreme outcome could happen and EURN probably still ends up generating a positive total return over the next couple years.
SK: What are your favorite resources to follow in the industry?
JM: I highly recommend the top industry news sources including TradeWinds and Splash 24/7. We utilize VesselsValue for their exceptional fleet valuation and market data and we also utilize Clarkson’s Shipping Intelligence for market rates and data. Furthermore, there are lots of great broker reports available on sites such as Hellenic Shipping News or via mailing lists. I’ve been following the industry for 12 years and highly active on the research side for 5 years, so I maintain close contact with hundreds of industry insiders, ranging from company executives to brokers to long-term investors.
Disclosure: I am/we are long INSW, EURN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.