Investing in Tankers: Ship, Ship, Hooray? 20 comments
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By Eli Neusner
It's easy to forget in this day of digital commerce, fiber optics, and the Internet, much of the world's commerce is still moved from one place to the other by planes, trains, trucks and automobiles. Perhaps the most critical link in an era of international commerce is the sea. Cargo ships and tankers transport massive quantities of manufactured products, like cars and toys, as well as the “hard assets” that our factories depend upon, like copper, aluminum, steel and other natural resources.
Lots of products get shipped by boat, but the reason shipping companies have gained greater visibility as an investment is because of their role in transporting one of the world's most valuable commodities: petroleum. Supertankers ship more than one-fifth of the world's oil. Given oil's critical role in the global economy, shipping companies that specialize in transporting oil will continue to experience steady demand for their services.
However, there are risks to investing in petroleum shipping companies, namely a sustained decline in global consumption of oil, the very commodity that fuels their growth. Other risks to the earnings of shipping companies are overexpansion of fleets, a decline in cargoes, and a global economic slowdown that reduces oil consumption—all of which drive tanker rates down.
Tanker rates are largely dependent on the supply of ships available to carry crude oil and the demand for their services. An economic slowdown could weaken demand, while a deluge of ships expected to flood the market over the next few years could also push rates lower. Standard & Poor's expects the global tanker market to suffer overcapacity in 2008 and 2009. Based on information from industry research group Bassoe, daily charter rates for very large crude carriers [VLCC] were $79,672 in the fourth quarter of 2007, up sharply from $25,486 in the 2007 third quarter. So far in 2008, VLCC rates have declined more than 40% from the highs seen in late 2007.
With the macro scenario in mind, let's take a closer look at the major players in the petroleum shipping business. There are four major publicly traded petroleum shipping companies with market caps north of $1 billion:
Frontline Ltd. (NYSE: FRO) operates about 75 tankers, under primarily short-term contracts, with a total capacity of more than 18.5 million tons. Frontline's tankers are designed to transport oil, and do so all over the world, from the Persian Gulf to the Far East, Northern Europe, the Caribbean, and offshore Louisiana. The company also transports coal and iron ore. One of the major benefits to owning the shares of shipping companies are their very generous dividends, and Frontline is no exception, paying $2.75 a share, for a whopping 16.6% yield.
Frontline has a symbiotic relationship with the next shipping company on our list—rival Overseas Shipholding Group (OSG). Frontline reported in a recent SEC filing that it has entered a forward contract to buy 4.4% stake in OSG, to add to the 5.6% that it already owns. But there's at least one barrier to Frontline's acquisition dreams. The Jones Act requires all commercial vessels operating in the U.S. to be built, owned, operated, and manned by U.S. citizens and be registered under the U.S. flag. Frontline, which is based in Bermuda, cannot own more than 20% of the shares of a U.S. shipping company.
Yet if Frontline does manage to buy OSG it will gain the second-biggest publicly traded oil tanker company with a relatively conservative debt-to-capital ratio of 47.0%. With over 110 ships, OSG is one of the largest marine transportation companies in the world. The majority of what OSG ships is oil or petroleum-related. What it does not have, based on its recent share price, is a dividend yield that's competitive with other shipping companies. OSG is paying just 2.1% per share.
Nordic American Tanker Shipping (NYSE: NAT) is another specialist in shipping crude oil, which it does for companies such as Petrobras (PBR), Marathon Oil (MRO) and Valero (VLO). Nordic American had a tremendous first half of the year, logging tanker rates more than 7% above the average. It has also managed to keep its voyage expenses lower than the industry. For investors, NAT offers a very generous dividend of 11.7%, and with a four million-share offering completed just last month, the company has plenty of cash to weather the long haul. The fact that NAT exclusively owns double-hulled tankers (which are more secure and will be required by international law by 2010) gives the firm a leg up on the competition.
Finally, there's the delightful onomatopoeia that is Teekay Tankers (NYSE: TNK), owner of nine double-hull oil tankers, which it charters for customers such as Shell (RDS.A) and Valero. Teekay's fleet has an overall capacity of about 2 million tons. Like the other oil transport shippers, Teekay is a good play on the volatility of the oil trade, while also providing a sizable dividend (12.7%). Teekay Tankers recently went public, as a spinout from parent company Teekay Corporation. Teekay Tankers has Aframax-class tankers, which are used for spot charters and short- or medium-term fixed-rate, time-charter contracts. The ships are smaller than the oil supertankers that cannot make it into some harbors and canals, and are worth about $275 million.
Investors might be extremely tempted by the sizable dividends that the petroleum shippers pay, and ignore the fact that this will be a volatile industry over the coming months. To be sure, OPEC is pumping more oil than ever before, because of Asia's rising demand, and that's good for the tankers. But vessel oversupply, lower tanker rates, and a global economic slowdown brought on by record oil prices are going to curb growth. It's wickedly ironic that petroleum, the fuel that drives profits in the tanker business, has risen so high in price that it is also the industry's most fundamental threat.
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This article has 20 comments:
Technicals look like a possible head and shoulders pattern (bearish) is forming on FRO, neckline at $60. I don't own the name, but would be wary of starting a position here until the pattern is broken. If it is a true H&S, we can expect a breakdown past $60, a retrace to the neckline, followed by a larger dip. Higher volume on the dips, lower on the retrace. What do you think?
BD
Thanks.
old trader
SFL is a great choice if you think tanker rates will drop. They lease FRO about 1/2 their fleet and have first call on revenues plus profit participation. Dividend is steady here and growing, yield just under 8%.
I own both SFL and NAT to participate in both hot and cooler tanker markets. Dividends are reinvested in the most attractive at the time.
Keep your eye on this one
Euroseas (ESEA)
52 week high -$21.52
52 week low -$12.32
NOW $12.37
tHIS IS A GOOD BUY AS ALL THEIR SHIPS ARE UNDER CINTRACT
TKSK53
Look at www.ft.com/cms/s/0/ce1... to read more about John Fredriksen and his philosophy. NOTE: JF may be CEO of these companies, but he doesn't pull a salary. He is a shareholder, and treats the other shareholders as he treats himself...when he profits, we profit.
A point to illustrate that my concerns are justified. for the last 13 years i have been navigating all the seven seas. you would sh*t your pants if you knew the percentage of the time that the watch on the bridge was not only not watching - but not there. even if a particular company has a very dedicated bridge crew, a tanker is very close to the least maneuverable ship on the seas (in other words it cannot maneuver its way out of trouble).
good luck with your investments.
Rich...
Scoutcar 42
On Aug 03 10:26 PM the hand wrote:
> why would i want to buy stock in a company where the liability loss
> caused by one collision will wipe the company off of the face of
> the world? when i was building nuke power plants in the early 70's,
> the industry kept saying that nukes were statistically safer than
> the odds of two 747's colliding on the runway. unfortunately, that
> very thing happened in Tenerife.
>
> A point to illustrate that my concerns are justified. for the last
> 13 years i have been navigating all the seven seas. you would sh*t
> your pants if you knew the percentage of the time that the watch
> on the bridge was not only not watching - but not there. even if
> a particular company has a very dedicated bridge crew, a tanker is
> very close to the least maneuverable ship on the seas (in other words
> it cannot maneuver its way out of trouble).
>
> good luck with your investments.
>
in shipping rates for TNK vessels.
2. Q4 and Q1 are typically the strongest months due to heating oil
usage increases in N.America.
3. TNK has a profit with only 6 time charters operating. The 5 extra
spot ships are all profit.
4. None of the time charters expire within the next year.
5. TNK has no debt with American banks and no debt that is due within
the next several years.
6. All of the debt is hedged to create fixed interest rates.
7. TNK is currently selling at a 23% yld due to general market fear
and small company size.
What does this mean.
If you want income and someplace safe to wait out this economic storm
then you have found it here. TNK is at a bottom in terms of price due
to being lumped in with dry shippers and other shippers with uncertain
income streams.
Best Regards,