Out of tankers, into bulkers and rigs

Over the past few weeks, I've sold almost all my tanker positions and moved most of the proceeds into dry bulk and offshore drilling. I still like tankers. At current prices, though, I'd rather have the money elsewhere.

Tankers: still a good market, less upside in the shares

I expect tanker earnings to remain strong over the next few quarters. Rates should settle well above the levels we became used to before this cycle, and the supply picture still looks supportive.

The shares have already moved a long way. The discounts to net asset value that originally attracted me have largely disappeared. Many names now trade around NAV, with a few approaching twice that. After the rally, there is much less room for things to go wrong.

Tankers may well be in a supercycle. There could be another leg up in both rates and equities. I'm simply less comfortable with how much of that I'm paying for today.

This is the first time I've sold out of a sector primarily because the risk and reward no longer looked attractive enough, while I still liked the underlying business. Usually, I wait for something to deteriorate. That has cost me before.

Selling while the news is good feels unfamiliar. You keep thinking about how much more you could make if you stayed. But I don't need to catch the last part of every move, particularly when I can find better value elsewhere.

I'm still following tankers closely. A meaningful correction in the shares, with the physical market remaining tight, could bring me back.

Dry bulk: room for the market to tighten

The dry bulk orderbook, at roughly a mid-teens percentage of the fleet, isn't exceptionally low. On its own, it wouldn't be enough to get me interested.

The age of the existing fleet matters more. A substantial amount of tonnage is getting old, and tighter emissions requirements could make some of those ships increasingly difficult to operate competitively. How quickly they leave the market is uncertain, but I don't think we should assume every new delivery translates into the same increase in effective capacity.

Shipyards also have limited room to respond if demand strengthens. Capacity has consolidated since the last cycle, and bulkers compete for slots with higher-margin vessels. Even if owners start ordering more aggressively, the ships will take years to arrive.

On the demand side, I keep coming back to Simandou. Exports began late last year, with production expected to ramp up through the rest of the decade. For shipping, the important part is the distance to China. A cargo from Guinea travelling around the Cape has roughly three times as far to go as one from Australia.

Even where Guinean ore replaces existing supply, the longer voyage requires more shipping capacity. We don't need an equivalent increase in Chinese iron ore consumption for that to matter.

El Niño is another factor I'm watching. Forecasts point to a high probability of a strong event through the autumn and winter. If that brings drought to Panama and renewed canal restrictions, bulkers could again face fewer transit slots and longer routes. During the last episode, in late 2023 and early 2024, bulker transits fell by roughly two thirds.

That outcome is still uncertain, but it could tighten the market further.

I also watch secondhand vessel prices and transaction activity. Owners have been paying up for ships, with some prices reaching levels last seen during the previous boom. They can get carried away too, but their willingness to commit money is useful evidence alongside the supply and demand forecasts.

What makes all of this investable for me is the valuation. There are still dry bulk companies trading at meaningful discounts to NAV while the value of their vessels is rising.

Those discounts remind me of what attracted me to tankers in the first place.

Offshore drilling: willing to wait, but watching the debt

The offshore investment is less comfortable, particularly in jackups.

The market has had a difficult two years. Saudi Aramco suspended a large number of rigs, conflict in the Middle East has delayed tenders, and competitive utilisation has fallen from above 80% into the mid-to-high 70s. Some operators have idle rigs or contracts ending without firm follow-on work. Near-term earnings will show that.

The shares reflect a lot of this weakness. My interest is in what earnings could look like as activity recovers, and whether the companies have enough financial room to get there.

There are important differences within offshore. Deepwater looks better positioned heading into next year. Jackups still face more immediate pressure. Harsh-environment drilling has its own supply dynamics, with longer contracts and, in some cases, substantial dividend yields.

I've found the more attractive opportunities in the weaker parts of the market, but that comes with more uncertainty.

My expectation is that much of the delayed work will eventually proceed, although some programmes may be cancelled or postponed again. A more stable Middle East could allow operators to resume plans that are currently on hold. Outside the Gulf, interest in Southeast Asia and West Africa has held up better.

The timing is harder to judge. Offshore spending responds slowly, and a higher oil price doesn't immediately produce a signed rig contract.

Supply is one reason I'm prepared to wait. The modern jackup fleet is limited, the industry is consolidating, and I don't expect large numbers of rigs that have spent a decade cold-stacked to return economically. Forecasts point to improving utilisation and dayrates from 2027, although those expectations can move.

Recent refinancing has also given several companies more time. That matters, but it doesn't remove the debt or make another delay harmless.

The recovery in earnings now looks more like a 2027 to 2028 story than a this-year story. I've lost money before by being right about the direction but too early. That is my main concern here.

This time, I've defined my exit in advance. I don't want confidence in an eventual recovery to become a reason to hold indefinitely.

Where this leaves the portfolio

The result is a portfolio more concentrated than I'd like, with most of the exposure in dry bulk and offshore drilling.

The industries have different supply conditions and catalysts, but both depend on the global economy. In a demand shock, I would expect both to suffer. That concentration deserves at least as much attention as the merits of any individual holding.

I'm comfortable enough with the valuations to take that risk for now. The harder part will be responding if the outlook changes, especially if the shares are already down by then.

I will report how it goes, including if it goes badly.