Norwegian-born oil tanker and shipping magnate John Fredriksen voiced his worries over the impact the turmoil spreading from China could have on the shipping industry.
“It seems there are big problems in China,” Fredriksen said in an interview with Bloomberg in Oslo on Monday. “That’s at least not good for the shipping market.”
China’s stocks took a major tumble on Monday and Tuesday, resulting in a total of 15% losses. The downturn in China saw a plunge in US-listed shipping equity values that dropped across the board.
According to Morgan Stanley, shipping stocks lost on average 8.3% last week as falling oil prices, concerns over the Chinese economy and widening credit spreads have led the sector into the doldrums.
“Out of the 28 stocks for which we track the NAV, 16 now trade below their liquidation value despite the fact that asset values are already heavily discounted and many of them earn highly profitable rates and may have their vessels employed under firm period charters,” comments Morgan Stanley’s analyst Fotis Giannakoulis.
“The latest pressure appears more technical rather than fundamental as shipping stocks are widely owned by energy focused hedge funds that have been lately forced to liquidate non-core holdings and stocks with limited trading liquidity which is predominately the case in this sector,” he adds.
As explained, even companies in the product tankers such as Ardmore Shipping Corporation (ASC), Scorpio Tankers (STNG), and Tsakos Energy Navigation (TNP) that are among the direct beneficiaries of the lower oil price were among the largest losers of the week.
Despite the favorable fundamentals and the fact that both TNP and ASC have already guided dividend increases for the next two months, their stocks are trading at 66% and 83% of their respective NAVs, making them among the most undervalued stocks in the shipping sector, notes Giannakoulis.
“The decline of the pure crude tanker stocks may look more justified as it coincides with the fall in VLCC rates and the seasonal slowdown in chartering activity, however it also seems well overdone given the fact that rates remain at profitable levels and prospects for a strong 4Q rebound remain intact,” Giannakoulis adds.
In addition, the LNG shipping stocks came under the double pressure of the soft spot market and the energy sell-off, despite the fact that their earnings outlook remains unchanged as most of the companies have their fleets locked in multiyear contracts, Morgan Stanley’s analysis shows.
Companies without any or very limited exposure to the spot market like GasLog Ltd, GasLog Partners, Dynagas LNG Partners LP and Teekay LNG Partners L.P.
Giannakoulis added that dry bulk shipping is probably the single most exposed sector to the weakening Chinese economy and the recent retreat in rates could threaten again many companies with new round of debt restructurings and/or rights issuances, Safe Bulkers being the only exception.