Why Are You So Fearful

by | May 9, 2020 | General | 0 comments

When it comes to the oil tankers, there is a lot of fear. Just a few weeks ago, there was no fear and people were buying because they did not want to miss out. Now, it is fear, uncertainty, and concern.

“Be fearful when others are greedy and greedy only when others are fearful.” Warren Buffett

I should have followed this advice. I should have been fearful when others were piling in. Now, they are piling out because of fear. I am definitely not going to be fearful with them.

What are you so fearful?

Here are some good arguments. Oil demand is recovering. Supply and demand are coming back to balance faster than anticipated. Storage is not filling up as fast as anticipated. The oil draw down will be fast. This is all bad for vessel rates.

The fear is that the rates will collapse. Fine. Let’s meet that fear head on. Imagine that rates already collapsed. What happens next?

Vessels get scrapped because they are old. There was massive scrapping during 2018 when the rates were low. Now, we have about 25 percent of the fleet that is old.

Here is what Euronav CEO said during Q1 conference call.

“On average, for every quarter between now and the end of 2021, there were 27 VLCC equivalents due for special survey on vessels aged over 15 years of age. Why does this matter? The surveys will require several million dollars worth of investment to be spent in order to give your ship certification for the following 30 months. Owners will have to have confidence and visibility that they’ll be able to make a return in this time frame, which, with low freight rates, is going to be harder to justify.”

When rates are low, the investment thesis on oil tankers will be as follows:

Buy the tankers because earnings look bad. They will not stay bad because low rates will cause vessel scrapping. This will decrease the fleet tremendously. The fact that the order book is a historic lows, this should help. Rates will go up and stay there for years. This is the beginning of a new supercycle. Buy the tankers.

So right now, I am supposed to be fearful because the rates that are high will collapse. This collapse will make the tankers attractive again. You see, right now, I like the tankers because the rate are super high. I will probably get 30 to 40 percent of my capital back through dividends, buybacks, and debt reduction. I will enjoy this period for as long as it lasts. Then, when the rates pull back or collapse, this will be the medicine for resumption or restart of the new supercycle.

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About Mariusz Skonieczny

Mariusz Skonieczny is the founder of Classic Value Investors.