SHIPPING: Impact of phase one trade deal

In a 23 August update, we pointed out that the US-China trade war had hurt crude, LNG and LPG, and that a further escalation was likely. While the full extent is yet to be known, the “phase one” deal would positively impact dry bulk trade, and could see positive effects for container trade. Energy-related products would be positively affected if part of the USD200bn of purchases from the US that China has pledged to make, and is likely to be rewarded in further phases.

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Epic Gas (No_rec, TP: NOK) - Discontinuing coverage

Discontinuing coverage We have discontinued coverage of Epic Gas. Our last published recommendation, target price and estimates should no longer be relied upon.

Scrubber count above 3,700

Scrubber uptake suggests more than 3,700 units on the water by end-2020, but leaves considerable room for more orders in 2020 if 2019 installations of c2,250 are any indication. We estimate 23% of HFO would be preserved with the current scrubber uptake in 2020e.

LPG likely hit more than crude

We believe the volume of LPG production outages in Saudi Arabia following this past weekend’s attacks could weigh on the VLGC market as the US struggles to fill demand due to capacity issues, despite soaring oil prices which could widen the US-Asia arbitrage. For crude tankers, the available inventories in Saudi Arabia should be an adequate buffer for a production shortfall near-term, while potential US volumes could be a positive if outages are not repaired in 2–3 weeks’ time and be a pos...

Update on US-China tariffs

The US-China trade war has hurt US exports of crude, LNG, and LPG to China. In H1 2018 China imported 25% of all US crude exports, 14% of LNG, and 9% of LPG, while in H1 2019, China imported only 4% of US crude exports, 2% of LNG, and 1% of LPG. Accordingly, new tariffs on oil would have less impact as the trade has already been affected. We believe there will be a further escalation in the trade war in the next 12 months (in line with DNB Market’s macro view), hence the trade war should conti...

Potential impact of Paris Accord

We analysed the potential impact by 2040 on shipping of the IEA’s three energy mix scenarios, with 5-year intervals. If contracting stays low (2019 YTD), we see the global order book falling 35% by 2020 from already 15-year lows, but if ordering picks up, asset lifecycles will being cut by 25% to meet the Paris Agreement goals.

2020 installations up 50%

The latest data from DNV GL indicates an interest to book scrubbers for installation also beyond 2019, as June additions added 50% to 2020 installations and brought the end-2020 total to above 3,500 units. Orders are closing in on our estimates for tankers and dry bulk, but the uptake in containers since our November forecasts has been more than twice our expectations, leading to 23% of HFO demand currently being covered after IMO 2020.

No agreement in sight

After positive signals since February, last week was a big step back for those who believed US–China trade relations were improving. Tariffs remain at 25% for LPG, were lifted to 25% for LNG, and remain at zero for crude. We estimate a -1.8% tonne-mile impact for LPG and -0.4% for LNG and crude; we see limited downside, and significant upside should an agreement be reached.

2019e installations now at 2,000+

According to the latest DNV GL data, end-2020 scrubber uptake will be 3,169 (we forecast c3,700). We see room for more in tankers and bulkers, while container has already exceeded our estimate. Some 2018 installations have slipped into 2019, which now looks set for more than 2,000 installations.

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Epic Gas (Buy, TP: NOK20.00) - Offer from BW Group

BW Group today bought 55% of the shares in EPIC Gas, and offered to buy the rest at NOK13.6–14.5/each. While markets and profitability are improving, and despite our target price of NOK20, we believe the offer represents a decent exit opportunity for owners.

20% of HFO demand scrubbed

The latest data on scrubber uptake showed an acceleration in uptake after two slower months. The main reason was a few large producers updating their reported numbers, but an all-time high uptake for 2020 installations shows scrubbers are still in demand. Current uptake implies c20% of HFO demand is set to stick, as numbers are closing in on our estimates.

Recovery story continues

Shipping (, ) - Recovery story continues (2 pages)

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Epic Gas (Buy, TP: NOK20.00) - Second profitable quarter

Q4 marked Epic Gas’s second consecutive profitable quarter. An old bareboat charter out and a 2011-built TC vessel in mean unchanged 2019e EBITDA but 3% lower 2020e EBITDA. Global growth in seaborne LPG trade should benefit freight rates for 11k and 7.5k cbm vessels, which have been flat for two years. Following a change of analyst, we reiterate our BUY and have raised our target price to NOK20 (18.5).

Smallest scrubber revision to date

We previously highlighted capacity limitations for further 2019 installations, and another month of decelerating scrubber additions supports this view. However, the few additions for 2020 indicate that shipowners are hesitant to jump on the scrubber train at the last minute and risk missing out on wide fuel spreads in the first months of 2020, as Q4 saw 2020 fuel spreads cut by USD50/tonne.

2019 could be nearing the brim

DNV GL’s latest data shows 2019 scrubber additions are slowing, while additions to 2020 are accelerating. To us this signals: 1) 2019 capacity constraints with just 12 months remaining, and 2) most 2019 orders not yet in the statistics have been accounted for. Continued interest for 2020 installation is as anticipated on the current forward spreads and there remain c1,000 scrubbers to reach our end-2020 forecast of 3,500.

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Epic Gas (Buy, TP: NOK18.50) - Slow train coming

We have cut our 2018e EBITDA by 27% as freight rates YTD have been on the soft side versus our expectations. We expect 2019 to show an improvement, partly driven by the larger segments, and we estimate an 8% increase in freight rates. We reiterate our BUY recommendation, but we have lowered our target price to NOK18.5 (NOK19.4).