Happy Hour “Shipping” – Charles from Marhlem

We want to thank Charles from Marhlem for hopping on Friday’s Happy Hour for a tour de force of the shipping industry. We bounced around the entire shipping industry from RoRos to tankers. We even pulled a few tickers out of him that are worth exploring. As always, we jotted down some high level Kliff Notes from the call below as we wait for the video replay to be posted early next week. Stay tuned.

Marhelm

Before we jump into the Happy Hour notes, it’s worth mentioning that as part of our 2024 Resolutions to improve KEDM (see here) we are going to be making some improvements to Discord. It has been untouched since we first launched it and its time to organize it, clean it up and help foster more conversation. Be on the lookout, and if you have any thoughts or recommendations for the chatroom please shoot us an email at in**@**DM.com.

Turning to the Happy Hour, we bounced around a ton making note taking a bit difficult. We urge you to watch the replay later this week for anything we missed…

• Charles Bio – Long career in shipping, starting out at the Merchant Marine Academy at 18 years old where you have to spend a year at sea at learn the hands-on aspects of the shipping industry. Since then, he’s done everything from the investment side of shipping at Goldman to the commercial side and now research over at Marhelm.
• Houthi Happy Hour/Red Sea Crisis –
  • Comments on the timeliness of the Happy Hour given the Houthis were back at it again, this time attacking a JPM Morgan owned and Trafigura leased vessel with rockets. Also, it was rumored to have been carrying Russian cargo for an extra layer of sanction evasion intrigue.
  • He highlights that Russian sanctions were already making the market tight as more cargo was going from Russia through the Red Sea to Asia instead of through the Baltic to Western Europe. The Houthi disruption is just the cherry on top which has pushed rates from the Middle East to Europe from 50,000-60,000 a day to 150,000 a day.
  • He believes there is a strong outlook for the sector even if the Red Sea situation eases but cautions that you are chasing higher prices (20-30% higher than pre-crisis) so would expect some pull back should it be resolved.
  • He gives a brief overview of the timeline of the crisis. All started with a RoRo carrier being taken on Nov 19 which ended up becoming a Yemeni “tourist attraction” with Houthis giving tours to locals. From there we’ve seen Maersk try to declare the whole crisis over around Christmas only to subsequently be attacked by rockets and indefinitely suspend transit through the region. He also highlights local support and continued bombing from US led coalition forces as reasons there is no indication it will end soon.
  • LR2 market has benefited the most thus far with certain shippers like ZIM which have more exposure to the spot market being intriguing from a crisis play perspective.
• Order Book
  • The order book for container ships has boomed since the crisis and they have 30% of the global fleet on order with 4 million teu of tonnage delivered this year alone with a heavy skew towards larger vessels. “Feeders” have a much lower order book.
  • Cape size dry bulk carriers have the most attractive order book. Himalaya Shipping (HSHP), 2020 Bulkers (2020.OL traded in Oslo) have about a 5% order book with a lot of aging vessels.
  • For product tankers he says you can expect negative fleet growth out to 25-26. Order book has picked up recently with a skew toward product tankers and LR2 vessels (coded aframax). He says the crude side is also attractive. The only VLCC set to be delivered in 2024 has already been delivered with no more new supply until 25. All new orders are for 2026 onward.
  • Car carriers (RoRos) have a about a 30% order book but this making up for a dearth of orders from the past with demand outpacing.
• Navigator Gas (NVGS) – Has mid-size gas carriers (very different than the very large gas carriers). He says they have a 4% order book with 20% of the fleet over 20 years old. He’s bullish on ethanol exports which should benefit the stock. He does say that it isn’t “high flying” but a slow and steady growth play. They also own 50% of Morgan’s Point export facility in Houston which they are expanding to over 1.5m tons of export capacity. This is a 40-50 year asset that he thinks can make $40m a year. Which he believes should help with the valuation multiple compared to 56 the vessels which although aging are in a strong earnings environment. He likes the operational leverage with every $1000/day increase in TCE they get an additional $18m-$20m in EBITDA.
• Paulo Macro chimed in with a question about how new order books were being priced into NAVs. Are these higher prices for new builds playing through to the market’s valuation of shipping companies yet?
  • Charles says costs for new builds have gone up 20-30% recently with commodity and labor inflation as well as financing costs as rates have blown out.
  • He says in spite of that some subsectors like tankers in particular are actually trading at premiums to NAV in the best names. There are exceptions like Tsakos Energy Navigation (TNP) which trades at a 30% discount to NAV but mostly for good reason as management has not been returning capital to shareholders. But companies like Frontline (FRO) and Okeanis Eco Tankers (ECO) are trading at 10-20% premiums to NAV.
  • Dry bulkers have been in a bull market and so also trading closer to NAVs but still likely at a discount.
  • We still are not close to the peak pricing of prior cycle ($150m for a VLCC in 2008) compared to $100-$120m today (not adjusted for inflation) so there is still room for NAVs to run. And with the leverage these companies have a 10% increase in asset values can be huge for the company NAV.
  • Charles cites Himalaya (HSHP). Their cape size new builds being delivered right now cost $71m with duel fuel LNG capability (approximately $10-$15m premium)
  • There is uncertainty around ESG and new regulations for 2030. Nobody knows what type of engine to buy as none of the existing tech gets you to the goals being set. The technology simply doesn’t exist and that uncertainty is hurting order books across the board
• Capital return – We have seen a couple spikes in rates which has allowed companies to de-lever and focus on capital return. DHT, for example, has taken leverage down from around 50-60% to 13-15% and are returning a lot of capital
• Kuppy asks a follow up question on the uncertainty around future approved fuels. There just isn’t enough space in the ports to have 10 different types of fueling stations. What fuel wins?
  • Charles says there is no clear winner especially because of the variety within the sector. Different types of ships have very different routes and variety in ports, so it is extremely fragmented. There are some more obvious losers. Methanol, LPG, Ammonia are unlikely to gain major traction. Overall, they have no clue how they are going to power these ships. We’ve even go full circle and are now putting sails back on to ships and debating if batteries are the answer. But batteries currently need 70% of cargo capacity reserved for batteries to power a ship. Even Hydrogen fuel wouldn’t necessarily qualify for the climate goals being floated, nor is the technology there yet.
  • The climate goals have moved so much faster than the technology that in some older ships the only way they can hit the goals is just to run slower. Yet another inflationary pressure.
• Houthi play – ZIM is one of Charles favorite high-risk plays on the Houthi crisis. IF (big if), we stay at current rates he think ZIM will generate $21 in EPS because they are 87% spot. When there is a shorter-term crisis like this the companies with the biggest spot exposure have the most upside. It was left for dead after losing $500m last year and has 20% shares sold short so he thinks the massive swing still hasn’t played out.

Link

I am sure we missed a ton so, again, we’d recommend watching the replay when available. And as we’ve mentioned in past KEDM’s, given shipping’s numerous sub-sets and cyclical nature, there is always something inflecting. “Floating steel” will always be a theme near and dear to KEDM.

OK, enough shipping, let’s dive into the events…