Get Paid for Being a Masochist: Concordia Maritime (Oil Tankers)

The product tankers are bleeding and have been since the end of 2015 due to oversupply from the good years when too much capacity was ordered. Some are even reporting negative cash flows. So what is changing now?

• The supply/demand balance is improving, especially when accounting for increased scrapping of older vessels ahead of 2020 regulations and demand growth of 4%. (2017 was a big scrapping year and 2018 will top that as 66% of 2017 numbers was reached already in April). 
• Global Clean Petroleum Products inventories are coming down to below average levels. This may the most important chart short term indicating the wait for the turnaround could be a short one:
• As are crude oil inventories (the green line has fallen below the 5-year average in 2018)
• Prices have been significantly below 5-year averages for almost three years
• The price of vessels are stabilizing (new builds increasing slightly) 
• Shipyard capacity is stretched. Scorpio Tankers 10K: “Shipyard capacity has rapidly and dramatically declined”. I have not been able to find numbers on that though.
• New financing methods in the shipping sector will lead to increased discipline.

We all know what tends to happen in cyclical industries when these dynamics are at play, right?

Concordia Maritime, Torm, Ardmore Shipping and Scorpio Tankers, to name a few in the product tanker space, are all struggling, naturally. Torm and Scorpio both took in new capital in recent months. But despite being the cheapest of the bunch on a Price-to-Book level, Concordia Maritime (Swedish) is in a very comfortable position when it comes to the cash position, meaning they can weather the storm for longer than their competitors before needing addittional capital. On top of that they are achieving market beating pricing rates quarter after quarter.

On a peer-to-peer basis the stock has underperformed peers in the last three months despite a similar environment, and despite the Swedish currency performing terribly. (STNG = Scorpio Tankers. ASC = Ardmore Shipping. TRMD = Torm)

The price is currently 10,40 SEK and the market cap 450 MSEK. It currently trades at 0,4 to NAV, which is lower than peers… A major impairment was taken six months ago when the pricing environment was at the bottom. I believe there is potential for a multiplying effect here: 1) The discount to NAV narrows, and 2) Vessel pricing rise = higher book value = potentially creating a nice multiplying effect on the share price.

Added to this the Swedish currency has been absolutely demolished the last three months. It is down 8-12% against the USD, EUR, NOK and DKK, to name a few related currencies. This means an added cheapness (the price of the stock + some of their costs are in SEK).

Patience and the importance of cultivating a tolerance for pain

The question, as is often the case with these deep value cyclical situations where future demand is certain is not if the market comes back, but when…

This is why patience is the mother of all edges in cyclical industries. A curious Chinese proverb states that patience is only possible from a place of strength, which from an investor’s point of view can be interpreted as not depending on near-term gains and refraining from using leverage in cyclical stocks. There is a tremendous advantage to be had in never being forced to sell.

The second magic ingredient is cultivating a tolerance for pain. This is essential because the troughs are often outdrawn and longer than expected and the upturn often short and violent, so while the net result may be overperformance in the end deep value investors experience more defeats on a daily basis than momentum investors, which is why it is harder. This is also why the opportunity exists: One gets paid for being a masochist 😉

And just to be clear: In my opinion this is not a “buy and hold forever” type of stock. Instead it is a “get in when the market is depressed and get out when normalization has occured”. If you are a splendid market timer you may even want to wait till euphoria has been reached. Personally, I am usually off to other hunting grounds before that happens.

Concordia Maritime is controlled by a major shareholder, Stena Sphere, which holds 52%. Some have pointed to corporate governance issues with a majority shareholder being in control while at the same time providing customers to Concordia Maritime for a fee. I personally am undecided whether this is a good or a bad thing for Concordia Maritime’s shareholders. Better debt terms are possible when you have a financially strong player backing you. On the other hand there is the possibility of overcharging for their services. But if that were the case, EBITDA-margins would be worse than competitors and that isn’t the case. Either way, this is more of an issue if you hold for the long haul, rather than taking an opportunistic approach to cyclicality, which is the game that I would recommend playing in this particular case.

Disclaimer: I do not accept responsibility for losses that are a result of buy/sell recommendations I make. I encourage you to do your own reserarch before making an investment decision.