2Q is no longer impacted by severe winter, which brought 1Q numbers down. We follow the guided improvement QoQ and project the breakeven bottom line. Meantime, Odfjell is very much focusing on the long-term future, namely, the zero emission goals by 2050 and during the CMD the fuel alternatives were presented. Although this does not translate into monetary figures, such steps are more than needed. We reiterate Buy towards the stock at an unchanged NOK 40/sh TP.
Improvement in 2Q guided
There is extremely little movement in Chemical Tanker rates from what we know, however, 2Q21 results should be stronger compared to 1Q21 due to seasonality, less off-hire days and less operational disturbances related to extraordinary weather. The long-term fundamentals remain strong with favourable supply/demand expectations of 1%/4% annual growth during the next few years.
Searching for alternative fuel
Odfjell communicated much about the green fuel alternatives during the company’s CMD. Although the EU introduced the limits on greenhouse gas intensity in shipping sector for the first time in its “Fit for 55” programme, shippers already had their internal IMO 2050 goals of reaching basically zero emission by then. The options for zero emission to be used as fuel are: Liquid ammonia, Compressed ammonia, Liquid Hydrogen, Compressed Hydrogen, Battery and Thorium. Liquid Hydrogen is extremely difficult to handle due to -250 Celsius temperature needed. Compressed hydrogen in long distance trips increases the tank volume requirements ten times, therefore is not a first option either. Battery for long distance shipping uses so much space that it would mean 4 vessels with batteries following the cargo vessel. This leaves the best option for either liquid or compressed ammonia. What Odfjell is currently doing is testing the Solid Oxide Fuel Cell engine, which would be able to use almost every fuel. In the transition period, Gas Injection HP Diesel Cycle engine would be used and LNG, but this is company specific. However, even putting the best engine would mean nothing if the infrastructure were like today. This means that if e.g. ammonia is selected, Odfjell would need ammonia infrastructure in major ports in Houston, Singapore, Europe, South America, ME and Korea. Earliest period to construct this is only 2035-2040.
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Buy recommendation stays
It has never been an easy journey in the chemical tanker space. Still, we stick to our view that the future holds significant rewards for companies like Odfjell. The company has always been in some improvement programmes, starting with the USD 100m cost-cutting in 2015, followed by Odfjell Compass and now joining some other companies in the innovative search for the best fuel type. This is yet to be put into figures, but it just supports our positive stance. With little share price movement since our last update, Buy recommendation stays as we still see the upside for the stock.
Source: Norne Research