ASC - Ardmore Shipping: It Might Be A Good Time To Buy The Stock

2023-04-15 09:26:56 ET

Summary

• Russian refined products export volumes into Brazil, Turkey, and Saudi Arabia in the past few weeks jumped.
• The continuing change in refined product trade flows may increase MR tanker freight rates in the following months.
• Ardmore’s financial results in 2022 were strong, and the company’s margin ratios, current ratios, and liquidity ratios improved significantly.
• With the higher MR rate in the past few weeks and a better market outlook, ASC is a buy.

In my previous article on Ardmore Shipping (ASC), I explained why you shouldn't rush into buying the stock (despite the strong financial results of the company). From 15 March to 6 April, ASC's stock price decreased from $15.43 to $14.20, then increased to more than $15 on 14 April. MR tanker rates increased in the past few weeks. As the demand for MR tankers is increasing, the 1-year TCE rate for MR IMO3 vessels is getting close to the levels it was at the end of 2022. The Russian exports of products by tankers increased 17% month-over-month. It might be a good time to buy the stock, and the increasing ton-mile demand can support this upgrade.

Higher MR rates

EU's embargos on Russian products didn't cause Russian diesel export to decrease as non-EU countries are importing cheaper diesel from Russia. Brazil's imports of Russian diesel are expected to Jump in April, accounting for more than 50% of its total diesel imports. A year ago, Brazil's imports of Russian diesel accounted for less than 1% of its total diesel imports. Brazil can import Russian diesel at about $0.2 to $0.3 per gallon cheaper than imports from other countries.

Also, Turkey is importing millions of barrels of diesel from Russia. The diesel flows from Russia to Turkey are now at a 7-year high. Saudi Arabia is another country that started importing large volumes of Russian diesel in the past few weeks. Figure 1 shows that in March 2023, Russia's fuel exports soared, driven by higher exports from the Black Sea ports of Novorossiysk and Tuapse, and also higher exports from Taman and the port of Kavkaz.

Figure 1 - Russia's fuel exports

These flows mean that the product trade patterns are still changing, implying more ton-mile demand. Also, Europe is still trying to displace Russian refined products from the distant market. According to Figure 2 , European countries can import CPP from the United States, the Middle East, India, and the Asia Pacific. Thus, the trade flows can continue changing, causing more ton-mile demand in 2023 and 2024. Meanwhile, the net fleet growth is at record lows. Tankers fleet growth in 2024 can be negative. Thus, the market condition is now in favor of ASC. According to Figure 3, the company's cash breakeven level of approximately $14500/day, is significantly lower than the MR TCE rates, and with higher MR rates, Ardmore's cash generations potentials increase. Thus, according to the current market condition, the company can pay more dividends.

Figure 2 - The potential further effects of the Russian CPP embargo on trade flows

Figure 3 - ASC's cash breakeven

Figure 4 shows that the tanker rates which are now significantly higher than a year ago, increased further in the past few weeks. We can see that in the past month, TCE rates for MR and LR2 tankers increased at a faster pace than other types, driven by higher ton-mile demand for products and chemicals. ASC can benefit from this market condition more than the companies that has a more diversified class of tankers.

Figure 4 - Weekly time charter estimates

Figure 5 shows that refined product demand is expected to increase through 2023, especially in the second half, as global refined product demand continues to increase (driven by the reopening of China, improving jet fuel demand, and global low inventory levels). Higher demand for products, combined with higher ton-miles (due to the changed trade patterns), may cause TCE rates for MR and LR tankers to increase further.

Figure 5 - Refined product demand and seaborne refined product export levels

Risks

A large part of the diesel that is being exported from Russian ports is linked to the volumes accumulated in February 2023. Thus, Russian diesel exports in May and June may be lower than in April. Also, as the increasing ton-mile demand is connected to the geopolitical tensions in Europe, it is exposed to other geopolitical events that may occur in the future. Furthermore, there are some risks related to the company that should come into your consideration. In the past few years, the company has incurred significant capital expenditures to upgrade its second-hand vessels. Based on the existing and future regulatory obligations, the company is required to make substantial capital expenditures, to just maintain its current operations. Thus, to expand its fleet, Ardmore may incur additional debt that could put its financial health at risk. Also, according to the company's current dividend policy, its ability to expand its fleet and operations is limited. Finally, as the company is entering into medium and long-term charters in the near future, the vessels committed to such time charters may not be available for spot charters when spot charters are more profitable. Thus, the company may be unable to take advantage of favorable market opportunities in the spot market.

Final note

In my previous article on Ardmore Shipping, I explained that the company's return ratios, margin ratios, and liquidity ratios improved significantly in 2022. Also, I said that the market condition is not right to rush into buying the stock. However, according to the increasing ton-mile demand for product tankers, and higher MR rates, it is a good time to buy the stock.

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