Tanker Segment: Looking For The Strongest Stock

Includes: FRO, TNK, TNP
by: Julian Speck

In the long-run, I must have at least one tanker stock in my personal portfolio. I’m currently looking for the largest potential price rebound if and when the tanker market turns. The tanker segment's fundamentals will influence the timing of my investment.

On the demand side, the importance of Chinese imports – and Chinese economic growth – cannot be overstated. The IAE estimates that China’s share of oil imports could reach 15% by 2030. In the short-run, I assume that the catastrophic earthquake will reduce Japan’s 2011 crude imports by up to 5% while uncertainty around Middle East security of supply will continue into 2012. (Japan currently accounts for just under 10% of global oil imports).

On the supply side, crude oil and oil products tankers are facing a period of enormous fleet growth. The research reports that I’ve read tell me that the global crude and product fleet will grow by 6% per year for the next three years. Net fleet growth in 2011 is expected to be higher than in 2010 because scrapping, single-hull phase-outs and conversions are delayed. Long-term demand exists, but the tanker segment is plagued by a short-term over-supply of vessels which will reduce employment utilisation, and therefore vessel revenues.

I’m following three tanker owners: Frontline (NYSE:FRO), Teekay Tankers (NYSE:TNK) and Tsakos Energy (NYSE:TNP). For me the key question is: When do I buy and which of these three should I avoid buying, if any? Specifically, which of these three stocks will generate the largest Total Shareholder Return (TSR)? TSR is the total return of a stock to an investor (capital gain plus dividends). The historical relative share price performance of these three stocks makes me wonder how low they can still fall.

I’m looking for the bottom because that’s the time for me to buy – provided I’m convinced the share price will rebound quickly and projected cash flows will cover expected future dividends.


Mkt. Cap.





$504 mil





$370 mil





$285 mil









By my reckoning, FRO has suffered the most because a large proportion of FRO’s fleet transports oil under voyage contracts where vessel revenues are determined on the spot market. About 70% of FRO’s fleet is traded on the spot market, whereas for TNK and TNP this metric is somewhere in the region of 45-55%. The spot market is currently a cruel place if you own VLCCs, SMAXs and AMAXs.

In the last year, spot rates have on average been a depressing fraction of time charter rates at about 40%, 70% and 50% for these three ship types, respectively. VLCC spot rates in terms of Time Charter Equivalent rate (TCE), actually fell below zero in July 2011. TCE rates include the cost of bunker fuel, and bunker costs have increased by about 40% in the last 12 months.

So my gut tells me to avoid FRO.

Slow steaming has become a popular operational tactic for tankers on voyage charters, dropping vessel speeds to as low as 10 knots, thereby potentially reducing fuel consumption by about 30 tonnes per day for a VLCC. (This is a substantial saving in heavy fuel oil which may cost $650 per tonne - up to $19,500 per day). But the sector fundamentals mean spot rates are hovering around operating costs (excluding bunkers) and time charter rates have dropped to levels last seen during 2009 (in the middle of financial crisis).

If you’re a keen follower of tanker investments you know that in chartering, timing decisions throughout market cycles are a critical success factor. Owners need to consider when to get in and when to get out and whether or not to go long or short in the market cycle. In summary, it’s critical to be in the spot market (voyage charter contracts) when the market is going up and then fix the fleet on long-term contracts (time charters, bare-boat charters or contracts of affreightment) when the market is high.

Conversely, in a falling market, the smartest owners hold long-time contracts. But the smarter owners subsequently face re-chartering risks – if they cannot renew long-term contracts at good rates in a falling market. A staggered expiration of time charters is the only way to reduce re-chartering risk and maintain stable and predictable revenues throughout the market cycle.

So I should not avoid FRO…quite the opposite! FRO stands to benefit the most from rapidly rising rates on the spot market.

So my initial conclusion is that I will continue to watch TNK and TNP and I will be focusing on FRO. But I must perform a little cash flow analysis to gain deeper insights into the timing of any tanker investment. I will save this and an appraisal of dividend cover for my next article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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