Teekay Offshore Partners: Rising Above the Tsunami of Tanker Tonnage

| About: Teekay Offshore (TOO)

I first wrote about Teekay Offshore Partners (NYSE:TOO) back in January of 2010, taking the position that the firm was uniquely positioned in the tanker industry by virtue of its focus on shuttle tankers, which are smaller vessels used to shuttle oil from offshore production platforms to the nearest ports. In fact, to steal terminology from Morningstar and/or Warren Buffett, one could say that TOO has a "narrow moat."

TOO's market performance stands in marked contrast to some of the other stalwarts of the tanker industry. On May 2, TOO hit a new 52-week high of $31.14 on an intraday basis, and closed on Friday at $29.12. At that price, it still yields 6.87%. By way of comparison, Frontline Ltd. (NYSE:FRO) was trading at $32.71 on January 15, 2010, and closed on Friday at $20.74, yielding 1.93%, according to Morningstar.

The tonnage of Very Large Crude Carriers (VLCCs) will swell to 172.8M deadweight tons, up 7.4%, while demand is only expected to rise 3.2% to 128.4 tons. It appears unlikely that this imbalance between supply and demand will be worked off anytime soon.

Many income-seeking investors have been drawn to the shipping industry generally, and tankers specifically, because the firms tend to pay out a substantial portion of their cash flows. Such investors need to keep in mind the question of sustainability of these dividends, particularly those of firms whose focus is on the spot market, which tends to swing from feast to famine.

Disclosure: I am long TOO.