Are Shipping Stocks Sinking?

Since the rates charged for shipping vessels tanked by over 20 percent recently, the companies in the oil tanker business have taken a beating. A popping of a bubble has been predicted for this industry for a long time. Is this just a temporary sell-off creating a buying opportunity or is it the beginning of a long term decline?

This is one industry where the yields have been extremely high, with some topping out above 30% in the past year. However, yields have been dropping, and are probably not sustainable, even at these levels. The shipping industry may end up replacing the subprime industry as the new ‘bad boy’ sector.

The highest yielding stock is Frontline Ltd. (FRO), which currently yields 11.8%. This Bermuda-based company owns, and operates oil tankers for transporting crude oil, coal and iron ore. The company has been paying dividends on a regular basis [March, June, August or September, and December), along with special dividends. But if you look at the trend of what they have been paying each year, you will see what I am talking about:

In 2004 it paid $22.14 per share in dividends

In 2005 it paid $15.96 per share in dividends.

In 2006 it paid $7.00 per share in dividends.

That trend does not look good. When you add that to the fact that the quarterly revenues and the quarterly earnings were down by 25%, it doesn’t look good. The stock has a forward P/E of 14.15, and the company was recently downgraded by UBS.

The second highest yielding stock is Nordic American Tanker Shipping Ltd. (NAT). It is another oil tanker company that is headquartered in Bermuda. It yields 11.6%, with a P/E of 13.85, and a high P/S of 7.95. Its earnings for the latest quarter were up 19.5% on a 27.6% revenue increase.

Some of the other high yielding shipping stocks are:

U.S. Shipping Partners (USS) 8.7%
Double Hull Tankers (DHT) 8.5%
Omega Navigation (ONAV) 8.3%
Arlington Tankers (ATB) 8.1%
Knightsbridge Tankers Ltd. (VLCCF) 7.9%
Eagle Bulk Shipping (EGLE)7.4%
Ship Finance International Ltd. (SFL) 7.2%
General Maritime (GMR) 7.0%

If you want to download an Excel database with all the shipping stocks and their yields and other financial data, go to Wall Street News Network.

Disclosure: The author does not own any of the above.

Comments

[glenwpeterson]

You can't simply lump all these companies together and paint them over with a broad brush....

USS is a shuttle tanker company that's had it's problems for years....

Eagle is a dry bulk shipper with long term contracts and the potential to increase the divy next year to an exit rate of $2.50 according to the Jeffries analyst who has been spot on in this sector.

ONAV is a pure play product tanker company with three year committments and 100% booked through 2008 and 63% booked through 2009.....It's got more ships coming on-line and solid charterer committments.

SFL isn't really a tanker company, it's like a tanker finance company that buys the assets and leases them back. SFL has very long term committments and the ability to organically grow at 10% per year, whilst paying down debt and increasing it's cash flow. It's branching out after complete divestiture from Frontline and is getting into financing FPSO's and Bulk Tankers.

Not a big fan of spot market oil tankers like FRO, NAT, et. al., but we're coming into the strong quarters and the history of FRO has been nothing but phenomenal with respect to creating shareholder value.
And the long term growth in oil requirements from the developing world will increase ton miles and by 2010, we should be back to a pretty tight market as single hulls get completely phased out due to international maritime regulations.

Frankly, I don't think the author has done a lot of research on any of these companies.

GWP

[Lisa]

I tend to agree that these articles are too "broad brush" and lack critical detail. But they're a good starting point for research, particularly with the addition of comments like yours, Glen.

[Bingo 2]

Question- do the impending restrictions requiring double hull tankers only, apply to ships which carry petroleum products only or will all ships be forced into double hull status regardless of cargo. PS When in heaven are we going to repeal the Jones Act?

[yourfilled]

Gee, I hate to add fuel to the fire, but I have to agree with the last comment. My stocks like NAT are fine.
Maybe we should comment more on specifics in the future.

[e-mail]

[r.benari]

I urge a bit more care. It's true that tanker rates have corrected sharply, largely in response to increasing supply of tonnage. But there's no correlation to the drybulk side of the shipping business; the orderbook for newbuildings close out, in the majority, between 2010 and 2012. Even with scrapping being low as it is, the drybulk half of the market, as analyst after analyst and booking agent after booking agent have been writing in research notes and comment, looks to benefit from higher rates.

Sure, the BDI will reflect down turns due to things like weather, growing security costs, labor disputes at key ports. But so long as steel is being milled out, there'll be a stiff need for coked coal, and so long as China remains a net importer of which, routes will remain long and rates (relatively) high. (Never mind that lots of Eastern Europe lost its grain crops during the current heat wave and cereal imports are expected to be high.)

Last: With respect, to compare shipping stocks as a homogeneous group, then to compare the industry as a whole to the highly speculative CDO business, is to compare apples to oranges to trout. When things get desperate for a shipping company, the first place to look for hope is the fleet replacement value. Also re rates: There's no speculation in shipping rates. No one books a boat on an "as if" basis. And re dividends: it's not earnings that's the measure, it's free cash flow. A good place to begin this part of the discussion is at James Altucher's post here (click.

[ElliotMiller]

I was about to make the very same points as Messrs. Peterson and Benari, but they beat me to it. Besides all of the differences between tankers on the one hand and dry bulk carriers on the other (and container ships on the third) there is also the difference between business models (EGLE is based on charters up to 3 years, whereas FRO is largely spot). In all candor the analysis ranges between not very useful and plain wrong.
Elliot Miller

[mike212]

Comparing FRO to its past years dividends shows the lack of understanding of the stock. I suspect the author of this piece doesn't even know that those high dividends paid in prior year were SFL spin offs. I will take my tanker stocks any day to the crap the brokers keep pushing. The other family stocks under the control of our fine Noreigeian Captain, Seadrill and Golden Ocean are doing quite quiet nicely also.
Capt. Mike

[EverydayFinance]

Without passing judgement on the research, I noticed that SeaSpan (SSW) was omitted. It's yield is a paltry 5%, namely because it's up 60% YTD, which I'd take over the yield any time. It breached a new high today, the trend is still up for those considering. Disclosure: I own SFL only in this class, but wanted to highlight SSW since I watch the sector.

Dan at Everydayfinance