China, a ‘Death Cross’, and shipping shares

By Barry Parker from New York

With Chinese growth slowing, a “Death Cross” – a chart formation portending downward movements for major stock averages – appearing, and oil prices plunging: what are investors in shipping shares to do?

As major stock indices were erasing their gains of the past year, pundits and analysts were using the “C”-word, for “correction”, meaning that the equity markets were off more than 10% from their highs.

Wilbur Ross, a celebrated investor in distressed assets, well known to Seatrade Maritime News readers because of his investments in the product and crude oil tanker sectors, used a sports metaphor to offer his view. In a media interview, on the day following a 500 + point drop in the Dow Jones Industrial index, he said that “we are in the 6^th inning” of a correction. A translation for non baseball enthusiasts- this means that most of the action has already occurred.

Ross explained to a CNBC audience: “I don’t think it’s going to have a very serious downward direction from here,” and was quick to add: “But I think there will be lots and lots of volatility around whatever is the midpoint.”

For investors in shipping equities, analysts were pointing to opportunities to acquire shares cheaply. Shipping shares had already begun to sell off prior to the major down days of Friday (24^th) and Monday (27^th), as talk of a weakening China, and softening of commodity prices was already spooking investors. Morgan Stanley shipping analyst Fotis Giannakoulis told investors, in a report to clients, to be “Looking for bargain stocks with solid balance sheets and high profits.”

In a buying opportunity heavily tinged with irony, tanker shares were battered along with the rest of the market. As pointed out by Giannakoulis in his report, “Even companies in the product tankers such as ASC (Ardmore), STNG (Scorpio Tankers), and TNP (Tsakos Energy) that are among the direct beneficiaries of the lower oil price environment due to the boost in refinery margins and stimulus on oil demand were among the largest losers of the week.”

Crude oil tanker stocks, where investors had noted a softening in hires throughout August, will also benefit from the plunge in the nearby oil prices. Though not specifically referring to what another analyst famously called “The Contango thing” (where low oil prices encourage storage of oil on tankers) commentators on CNBC and other networks were opining that excess amounts of oil being produced presently will need to be stored.

In the crude tankers group, the newest member, Gener8 (GNRT)- which had IPO’d in late June at just above $13 per share and then rallied up above $14 on July’s VLCC market strength, gave back some ground in the stock sell-off, though it remained above $12.00 per share. Euronav (EURN), something of a darling among tanker investors through late July, as it reached above $16 per share – well above its IPO price around $12/share in late January – had slumped back during the stock market’s turmoil to levels at or slightly above its IPO price. Even in late August, investment bank Wells Fargo initiated coverage on the shares, with a “Outperform” rating.

Double Hull Tankers (DHT), which had reached $9.00 per share in July’s VLCC fervour, had backed down to just below $7.00 a share. And Teekay Tankers (TNK), which had reached $7.62 a share five weeks earlier, had dropped to an important support level around $5.50/share as the overall market “corrected”.

But the latter has been a standout in the sector. The shares of TNK, in spite of being wrongly included in the “commodities” basket, have performed far better than the broader equity indices during the year. Where the S & P 500 Index was down approximately 6% during the past 12 months, TNK which made news with its announcement of a 12 vessel purchase from PE backed Principal Maritime (sponsored by Apollo), was up 44% during the same period.