A “black swan” event shuts down your most important demand driver, China, and rattles your investors’ confidence. Your stock plunges, and then, just when everything is really hitting the fan, you have to do that quarterly conference call with analysts you scheduled a few weeks ago, back when the world was a different place and you were planning on talking about something else. Such is the current fate of U.S.-listed ocean shipping company CEOs.
There were two calls on Tuesday for larger public players in entirely different sectors – product-tanker owner Ardmore Shipping (NYSE: ASC) and container-ship lessor Danaos Corporation (NYSE: DAC). Coronavirus was highlighted on both calls.
The theme being espoused by ocean-shipping executives is: This will pass, and when it does, the market is going overshoot to the upside.
Product-tanker consequences
“We don’t usually comment on share price, but today, we’re going to make an exception,” said Ardmore CEO Anthony Gurnee on his company’s call with analysts. He pointed out that tanker-company values are based on hard assets (ships) with easily assessible prices and 20-year lifespans. “In that context, the across-the-board 40% drop in tanker stocks [due to the coronavirus] is, in our opinion, overdone to say the least,” said Gurnee.
He acknowledged that “the tanker market has hit a major air pocket in the form of the coronavirus outbreak, which is reducing China oil consumption and tanker demand.”
Yet he noted that there are some product-tanker upsides. For example, surplus Asian jet fuel is already being transported toward the Western Hemisphere.
He also stressed that “whether you call it an air pocket, a speed bump, a temporary decline or whatever, we do think the impact of the coronavirus is finite. And when that’s over, we’ve got very strong underlying fundamentals … one thing we believe is being overlooked is that product-tanker supply-demand fundamentals continue to be strong, which will drive the continued upturn once we get past the coronavirus outbreak.”
Ardmore reported net income of $1.9 million for the fourth quarter of 2019 versus a net loss of $17 million in the fourth quarter of 2018. Adjusted earnings of $0.08 per share came in just below the consensus forecast for $0.10 per share.
Box-ship lessor consequences
Executives of Danaos Corporation commented on the container-shipping fallout. In one company-specific example, Danaos had been planning to consider reinstating a dividend payment, but due to the outbreak, it did not. This mirrors the capital-allocation conservatism cited on the calls of Scorpio Bulkers (NYSE: SALT) and Euronav (NYSE: EURN).
According to Danaos CEO John Coustas, the dividend “was on the board agenda to be discussed, however, we deferred any kind of decision due to the uncertainty created by the coronavirus. It is a completely uncalculated event.”
In terms of broader container-shipping market impact, he reported, “The current dropping demand is being addressed by canceled sailings by liner companies. However, we expect this dynamic to be short term in nature and result in a demand surge when supply chains resume.”
For container-ship leasing companies like Danaos, Seaspan (NYSE: SSW), Costamare (NYSE: CMRE) and Global Ship Lease (NYSE: GSL), the question is whether coronavirus-induced weakness lingers long enough to pressure rechartering rates after current leases expire.
Danaos itself is relatively unexposed; it has 86% time-charter coverage for full-year 2020. According to Coustas, there is no clear evidence yet of how rechartering markets will be affected.
“We have seen weakness, but there haven’t been fixtures [charters] representative [enough] to show a definitive trend. Everyone is just in a wait-and-see attitude because China will not shut down. There are problems with the transportation to and from ports and that is going to lead to a backlog, which at some point will need to clear – and that’s actually going to create a peak in demand post-virus. But the situation is still pretty vague. No one is prepared to make long-term decisions [on charters].”
Danaos reported net income of $33.8 million for the fourth quarter of 2019 versus a net loss of $181 million in the same period the year before. Adjusted net income of $2.01 per share was well above the analyst forecast for $1.67 per share. More FreightWaves/American Shipper articles by Greg Miller
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