Shipping fund Tufton Oceanic Assets (SHIP ) has said it’s positioned for an improving product tanker market this year, despite net asset value falling last quarter. 

The £290m trust’s NAV sank 3.8% in the last three months of 2022 because negative charter values on its product tankers, which make up almost half the portfolio, ‘increased substantially’ as its market continued to strengthen.

Negative charter value is the difference in earnings between the agreed charter rate when a ship is leased and the rates that could be charged at the date of valuation. 

The portfolio’s fair value has to take negative charter value into account given the product tanker average expected charter length is 3.5 years, a large enough time frame to see charter value change, manager Paolo Almeida said.

‘If the market stays where it is, we have approximately $40m of negative charter value. That negative charter value by definition 3.5 years from now must go to zero because the charters will be extinguished by then. If everything else stays the same, we have a tailwind of 10% net asset value (NAV) over the next four years or so from those charters being amortised,’ he said.

The product tanker market has strengthened because sanctions against Russia resulted in ‘significant market dislocation’ and very few new ships being delivered last year.

There is more product to move because storage inventories across the globe are low and there continues to be a shift towards refinery capacity expanding in the Middle East and Asia as it decreases in Europe, which used to produce a lot of its own fuel, Almeida said.  

The sale of its last remaining containership earlier this month for $13m  subtracted 2% from NAV because it was below its carrying value. The divestment brought an investment return of just over 12%, but if the pair had exited it several months earlier, they could have netted investment returns of over 20%.

‘We sold it for less that it had been valued for at the end of the third quarter. We would have liked to have sold it earlier,’ Almeida said.

For them to buy containerships again, value would have to rise in the wake of rising consumer demand, which the pair believe will happen in the next 18 months. 

The portfolio now consists of 13 tankers (product, chemical and gas) which make up 58% of assets and nine bulkers at 38% of asset value.   

The 7.4%-yielder saw net asset value (NAV) after debts grow 7.7% last year, as falling asset values in the bulker and containership segments of the shipping market were buoyed by rising values in the product and chemical tanker fleet, where charter rates have increased to their highest levels since 2005. Over five years it has delivered a 73% total return to shareholders, including dividends.

The pair said asset values should rise as confidence builds in the duration of the market strength, particularly since the reopening of China, according to the December factsheet.

The 7%-yielder declared a fourth quarter dividend of $0.021 per share, payable on 10 February, and targets a total annual dividend of $0.085 per share. It is forecast to have a dividend cover of 1.8 times over the next 18 months after reinvesting the Riposte sale proceeds.

The shares currently trade at an 17% discount to NAV, which offers good value, Numis analyst Priyesh Parmar believes. Peel Hunt analyst Thomas Pocock reiterated his ‘outperform’ recommendation.