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Tanker Segment: One-year on and CPLP may be my value stock?

I wrote an article about three tanker owners / shipping operators in September 2011: Frontline (NYSE:FRO), Teekay Tankers (NYSE:TNK) and Tsakos Energy (NYSE:TNP). At the time, my investment preference was for FRO because of its exposure to the spot market, rather than long-term time charter contracts. Should I be pleased that I did not invest in the tanker segment towards the end of 2011? And is now the right time to find abnormal returns in this shipping segment? I have since expanded my screening to 12 pure tanker, or oil tanker-related stocks. But I may have missed the bottom of the market! Half of these 12 hit their lows in the last quarter of 2011.

Name

Code

Close
$

Price %
change
1 year

Price
low
$

Low
date

Days
since
low

Increase %
from
low

Capital Product Partners

CPLP

8.15

42

5.71

Nov 2011

321

43

Frontline

FRO

3.60

-18

2.69

Nov 2011

315

34

Scorpio Tankers

STNG

5.94

16

4.46

Dec 2011

299

33

Teekay Corp

TK

31.95

49

24.3

Oct 2011

362

31

Navios Maritime Acquisition

NNA

2.72

-20

2.26

Jun 2012

104

20

Overseas Shipholding Group

OSG

6.31

-49

5.55

Aug 2012

68

14

DHT Maritime

DHT

6.06

-70

5.38

Aug 2012

40

13

Teekay Offshore Partners

TOO

27.59

18

25.25

Oct 2011

362

9

Teekay Tankers

TNK

3.61

-13

3.42

Dec 2011

293

6

TOP Ships

TOPS

1.12

6

1.11

Oct 2012

1

1

Nordic American Tanker

NAT

9.35

-26

9.35

Oct 2012

0

-

Tsakos Energy

TNP

4.73

-13

4.73

Oct 2012

0

-

FRO's stock price is up 34% since November 2011, while TNK and TNP did not float my boat last year. Does this stock performance prove me right? These headline returns need a little more fundamental appraisal. Frankly, based on the negative financials below, I struggle to understand the price rebound except for Capital Product Partners.

Code

Beta

EPS
2011

EPS
2010

EPS
2009

EPS
2008

Yield
%

DPS
2011

DPS
2010

DPS
2009

DPS
2008

CPLP

1.33

178

54

115

154

11

93

91.5

164

227

FRO

1.32

-680

201

132

914

3

12

185

90

650

STNG

0.97

-288

-18

61

218

-

0

0

0

0

TK

1.24

-525

-367

176

-648

4

127

127

127

90.8

NNA

0.24

-8

-43

-2

6

7

20

10

0

0

OSG

1.18

-639

-455

261

1065

17

109

175

175

163

DHT

1.18

-768

156

432

1404

51

312

480

300

1260

TOO

1.06

-174

122

184

-76

7

200

190

180

170

TNK

1.64

-15

37

128

203

20

72

124

140

339

TOPS

0.97

-318

-299

-1780

970

-

0

0

0

0

TNP

0.89

-194

50

77

533

13

60

75

115

180

NAT

0.81

-153

-2

3

362

13

120

170

173

516

Capital Product Partners is the only stock to have maintained positive EPS throughout the last four years and the stock has a steady double-digit dividend yield. In fact, the company's balance sheet was helped by a private placement of $140m in early-2012. This will enable it to continue paying dividends in the near future and also to defer debt repayments for at least three years. Is this enough time to weather the storm of vessel over-supply and relatively low tonne-mile transportation demand in the wet shipping markets?

Capital Product Partners' next interim report is due the end of October and I will be watching the news about the earnings outlook for its product tanker fleet. Two-thirds (DWT-basis) of the company's total fleet is for transporting crude oil, while three-quarters (ie. vessel count-basis) of the fleet is for transporting refined products. I'm particularly concerned about weakening demand for refined products in the U.S. and EU. Fundamentally, in the medium to long-run, demand for product tankers should increase as refining capacity expands in Asia and declines in the U.S. and the EU. The newbuild order-book for medium-range product tankers is reportedly at an all-time low and shipyard deliveries continue to slip due to a general lack of demand from limited ship debt finance. But that is not the whole story for Capital Product Partners.

Capital Product Partners acquired Crude Carriers in 2011. Its fleet comprises six crude tankers (2 VLCCs, 4 Suezmaxes) and 18 MR product tankers (and one Capesize bulker), and it last reported charter coverage of 80% of operating days for the remainder of 2012. I need to know if the company's expected spot and time-charter earnings for its crude tankers are better than its respective benchmarks? Unfortunately, the latest IMF global outlook is all doom and gloom. And we all know the basic correlation between OECD and non-OECD GDP growth and the demand for liquid fuels. So I need to know if Capital Product Partners can hold VLCC, SMAX and MR earnings in line with the benchmarks! The general outlook for VLCCs is not positive if you believe the rumors of a Chinese binge: a Beijing-backed series of orders for up to 80 VLCCs, starting with COSCO.

In summary, here's my trading strategy over the next 2-4 weeks. If Capital Product Partners' October news is positive, I am probably too late because my technical analysis tells me that CPLP is over-bought at a stock price of about 800. I think the current stock price already incorporates the negative consensus outlook for EPS. If the company's news is neutral or worse, I hope to see the stock price fall to below 700. In this event, I will be long CPLP until further notice. I'm a value investor, so I am really aiming to hold some tanker stocks for 2-4 years.

Read more about the health of CPLP on the company's website in the September 2012 conference presentation.

Source: Tanker Segment: One Year On And Capital Product Partners May Be My Value Stock