What's Next for the Tanker Industry?

by: Sairsint

Bloomberg reported June 14:

“Supertanker rates are poised to surge to a two-year high by December as China’s demand for oil sends ships the equivalent of 11 extra times around the globe in a month. The 31% jump in China’s imports increased return journeys for supertankers to about 1.13 million miles in April, or 284,000 miles more than a year ago, based on customs data and voyage lengths. Daily rates may reach $100,000 by December, said Rikard Vabo, an analyst at Fearnley Fonds ASA, whose November recommendation to buy shares of Frontline Ltd., the biggest supertanker operator, earned 49%. His prediction for freight is 43% higher than the June 11 price of $70,025.”

On the down side, interesting legislation may be in the mix. The International Chamber of Shipping (ICS) has expressed concern about a US proposal to remove the present limitation of liability system for vessels. This is one of the various proposals put forward to amend OPA 90 in the wake of the "Deepwater Horizon" oil pollution incident in the Gulf of Mexico in April 2010. According to this proposal, the limitation of liability system would be replaced by a system, which would be similar to that being applied to the oil offshore/extraction industry. The ICS said that the OPA 90 regime has functioned well for two decades and the limits have been reviewed and updated as recently as 2006. They were also increased further in 2009. These limits have proved to be adequate and workable. Every incident of pollution from a vessel has fallen within the limits of liability of OPA 90 and the Oil Spill Liability Trust Fund (OSLTF). Unlimited liability is uninsurable and the providers of the Certificates of Financial Responsibility (COFR) would not be able to provide certificates for such liability. This would lead to an inability on the part of the majority of vessel operators trading to the US to continue to do so, ICS warned.

Overseas Shipholding Group (NYSE:OSG) , the biggest U.S.-based tanker owner, said in February that it was putting more than 80% of its fleet in the spot market. The New York-based company will return to profit in the third quarter, ending five consecutive quarterly losses, analyst estimates compiled by Bloomberg show. The shares fell 7.8% this year in New York trading.

Eleven percent of the global supertanker fleet is fitted with a single hull, according to Lloyd’s Register-Fairplay. A global phase-out started this year and the International Maritime Organization ban takes full effect in 2015. “Utilization rates are getting to a point where a lot of these ships are effectively out of the market,” said Jeff McGee, an analyst at London-based Simpson, Spence & Young Ltd., the world’s second-largest shipbroker. Fewer single-hulled ships competing for business will offset deliveries of new vessels and the fleet may even shrink this year, he said.

Investors looking for high yield stocks can find them in names like Nordic American Tanker (NYSE:NAT) and Teekay LNG Partners (NYSE:TGP). Both pay their shareholders 8% annually. Oil-tanker firm Frontline (NYSE:FRO) yields over 8%, but it was removed from the Conviction Buy List at Goldman Sachs. The shipping space has caught interest from the Pros' as well. A look at the latest SEC filings shows that 9 13F-filing asset managers counted Aegean Petroleum (NYSE:ANW) in their top-15 U.S.-listed equity positions at the end of Q1. Though the stock does not offer investors high yields, it may have some earnings momentum as it reported better than expected numbers during last month's earnings report.

Elsewhere in the sector, shares of Navios Maritime Partners (NYSE:NMM) are slipping fractionally. The Greek dry bulk shipper currently sports a generous 10% dividend. Meanwhile Teekay LNG Partners, Teekay Offshore Partners (NYSE:TOO) and Teekay Tankers (NYSE:TNK), are paying their shareholders 8%, 9% and 10% respectively. Those companies are some of the several business units that are part of shipping giant Teekay (NYSE:TK).

Not all of those mentioned above deal solely with the Oil tanker industry. Below are the top five most-efficient companies in the Oil & Gas Storage & Transportation industry as ranked by Revenue Per Employee (RPE) according to smart trend. Smart Trend Analysts use RPE as a measure to compare the productivity of companies in the same industry.

TOP Ships (NASDAQ:TOPS) ranks first with an RPE of $107.98M
Nordic American Tanker Shipping ranks second with an RPE of $56.44M;
Ship Finance International (NYSE:SFL) ranks third with an RPE of $43.15M.
DHT Maritime (NYSE:DHT) follows with an RPE of $34.19M
Global Partners (NYSE:GLP) rounds out the top five with an RPE of $26.73M

In one of the stranger stories in the ETF world, Claymore has re-launched its global shipping ETF. Trading as the Claymore / Delta Global Shipping ETF (NYSEARCA:SEA), this ETF is one of the only options available to retail investors looking for a one-stop shop for shipping stocks.

Smooth sailing may be ahead for the industry, but it is highly susceptible to the every changes tides.

Disclosure: Long DHT