Last year was a good year for the shipping industry. Oil shipping companies like Nordic American Tankers Limited (NAT), Frontline Ltd. (FRO) and Teekay Corporation (TK) have performed well on the stock market. In the last six months of 2013, the share price of Nordic, Frontline and Teekay has shown an impressive growth of 27%, 106%, and 20%, respectively.
Oil shipping companies were severely affected by the oversupply of oil and liquid tankers, but now the market conditions are improving. With the improving market conditions, fundamentals of oil tanker companies are also improving. Net losses reported by Frontline and Nordic in the third quarter of 2013 were $36.4 million and $19.2 million, respectively, compared with $120.3 million and $31.7 million, respectively in the preceding quarter.
Despite an increase in revenue, Teekay failed to improve its bottom line. For the third quarter of 2013, Teekay reported a net loss of $36 million, increased from a loss of $33.3 million in the second quarter of 2013. The loss occurred due to an increase in assets impairment and provision expense by $65.8 million, which is a non-cash charge and a one-time expense. Excluding this expense, the company's net loss would turn into a profit of nearly $29 million.
The shipping industry plays a vital role in the integrated oil business. Two out of every three barrels of oil are transported through ships while the remaining one-third is conveyed via pipelines. Tanker spot rates are determined by supply and demand. Demand depends on the international flow of oil across the countries. Some of the world's largest importers of oil include Japan, China, India, United States and Europe. According to an EIA estimate, global crude oil and liquid fuel consumption will grow by 1.2 million barrels per day in 2014 and 1.4 million bpd in 2015, exceeding 93 million bpd by the second half of 2015. The U.S. was the world's largest importer of oil for many years, but China surpassed the U.S. in September as the world's biggest net oil importer.
China's oil imports are expected to increase significantly in the coming years, as a result, demand for oil tankers will remain strong. China will spend $500 billion on crude oil imports by 2020. From 2005 to 2020, the country's oil imports are expected to increase from 2.5 million bpd to 9.2 million bpd.
Like China, India also depends heavily on imported crude oil, mostly from the Middle East. India is heavily dependent on coal and foreign oil imports for its energy needs. Almost 80% of the country's crude oil demand is met through imports. By 2050, India's population will reach 1.6 billion from its current level of 1.2 billion. Growth in population will increase energy demand, as a result, India will increase its oil imports.
According to the IEA, Southeast Asia will become the fourth-largest net importer of oil after China, India and the European Union. Southeast Asia's crude oil demand will increase by 50% in the next 20 years, which will result in tripling of its oil import bill to some $240 billion by 2035. U.S. oil imports will fall in the coming years due to tight oil output from shale resource. Falling U.S. oil imports will not affect oil shipping companies because oil imports from China, Southeast Asia and India will be much greater than U.S. oil imports' fall. U.S. oil imports are expected to decrease from 10.1 million bpd in 2005 to 6.8 million bpd by 2020.
Nordic, Frontline and Teekay will benefit from the increasing oil imports and provide a solid return to their investors. However, if we have to choose one among these companies, then we can rank them on the basis of dividend. Dividends are great because they provide you with certainty in an uncertain investment world.
Nordic American Tankers
Only Nordic and Teekay pay a dividend. Nordic has an impressive dividend yield of 6.70%. Nordic's financial position is also very strong, as a result, it will continue to pay dividends for the foreseeable future. On a dividend basis, I prefer Nordic over Frontline and Teekay. Along with the share price appreciation, Nordic will continue to provide a solid dividend.
Nordic has a lot of positives going for it. The company is well positioned for further strong growth and increase of its dividend capacity. Over the last few years, its dividend has shrunk quite a bit, but as the spot market is recovering, the dividend will come back in a major way. With little debt, Nordic is not nearly as risky as other tankers. It could be in a win-win long-term situation because things are now improving, its earnings and cash flows will continue to improve, as well, making the stock worth more.
Although Frontline does not pay dividends, with the improving market conditions, the company will be able to improve its top and bottom lines. Like Nordic, Frontline also has a fabulous balance sheet and solid management. Over the past few months, Frontline's consensus estimates have moved higher which suggests it could be a great choice for investors.
Teekay has been paying a constant dividend of $0.31625 per share since 2008. The company is one of the biggest in the shipping area, has several subsidiaries, and a good reputation in the shipping business. It has plenty of small efficient ships that are used to offload from deep-drilling operations. When customers want efficiency, they choose Teekay's ships. The company will continue to perform well as long as oil imports remain strong, at least another 3-4 years.
Increasing global oil demand along with increasing imports is positive for oil shipping companies like Nordic, Frontline and Teekay. Due to an improving market for oil shipping companies, I believe the companies will soon become profitable companies. However, Nordic and Teekay look more attractive for investment as compared to Frontline due to dividends.