Monday, June 28, 2010

Sail The Oil Tanker Industry To Solid Profits

By Tony Daltorio, Investment U Research

Just a few years ago, the oil tanker industry was booming. Rates on the benchmark Saudi Arabia-to-Japan route rose as high as $177,000 a day for supertankers. They had easy money.

The financial crisis ended all of that though. As oil prices fell from $147.27 a barrel to a mere $32.40 in December 2008, supertanker rates fell too. And they didn’t hit a bottom until September 2009 at $1,246 a day.

Today though, those rates are on the rise again. Last week they hit above $70,000. And they could climb above $100,000 soon enough, a level last seen in July 2008.

Savvy investors should get in while they still can…

Why the Oil Tanker Industry Love China

The longer the voyage, the more profitable it is for the oil tanker industry. So, it’s pretty obvious why they love China.

Since China can’t sustain its appetite all on its own, it has to look elsewhere. That has meant relying heavily on countries such as Saudi Arabia – a 21-day trip away – and even Angola, which takes 33 days.

China imports an annual 4.29 million metric tons of oil from Angola, about 70% more than it did just two years ago and notably more than the 3.09 million it gets from Saudi Arabia. So as its oil imports rose 31% in April, supertankers’ return journeys increased to about 1.13 million miles.

Those increases look set to continue too. The International Energy Agency (IEA) estimates that China will need an extra 669,000 barrels of oil a day in order to sustain its economic growth through the year. That’s the equivalent of more than two additional supertanker cargoes every week.

And Charlie Fowle, chairman of London-based shipbroker Galbraith’s Limited, sees another reason for profit…

“China is the U.S. of the 1960s and Japan of the 1970s as its thirst for oil grows. As China strengthens ties with countries such as Angola and Venezuela, in addition to Middle Eastern suppliers, it increasingly means tighter supply in the tanker market.”

Say “Thanks!” to BP and President Obama

The fallout from the BP ADR (NYSE: BP) oil disaster certainly doesn’t hurt the shipping industry either. It usually benefits from bad news: storms, wars, black swans, oil spills.

And Obama’s 6-month drilling ban just helps it out even more. Should he continue to extend it further, that would make the supertanker businesses that much more happy.

The parts of the Gulf of Mexico affected by the moratorium account for up to 150,000 barrels a day. With all of that production shut down so close to home, the U.S. has had to seek oil elsewhere, particularly in Nigeria and Angola.

And in order to transport it most efficiently, the companies involved are relying mainly on the biggest ships available: very large, crude carriers (VLCC) carrying 2 million barrels, and Suezmax ships carrying 1 million barrels.

A Few Ways into the Oil Tanker Industry

Currently, according to Lloyd’s Register-Fairplay, about 11% of the global supertanker fleet is fitted with a single hull. But due to environmental concerns, the International Maritime Organization has imposed a ban on such vessels that takes full effect in 2015.

Because of that, a large amount of additional ships are currently on order to be built. So many bears expect a 50% drop in spot tanker rates over the next year. But they forget about the delays and cancellations that plague the ship-making industry.

The tanker fleet may actually even shrink this year.

The best way to invest in that possibility is to target companies that own numerous large, oil supertankers. That includes Frontline Ltd. (NYSE: FRO), the biggest supertanker operator.

* Controlled by Norwegian shipping magnate and entrepreneur, John Fredriksen, the company’s fleet consisted of 76 vessels as of the end of 2009. That included 41 VLCCs and 27 Suezmax carriers.
* 45% of its fleet traded in the spot market last year, with the rest on long-term charters.
* Just last month, Frontline said it needs only $31,000 a day to break even on its VLCCs. With rates currently well above that level, it can easily do that and more.

Additionally, the current consensus earnings estimate for Frontline of just over $3 a share could be too low. The shares have already surged 43% this year and could climb further.

Overseas Shipholding Group (NYSE: OSG), the biggest, US-based, tanker owner, also looks good. It did hit five losing quarters in a row. But it should return to profit in the upcoming quarter. That’s in large part thanks to a move it made in February, when it stated its plan to put over 80% of its fleet into the spot market… a brilliant move in hindsight.

Investing in the oil tanker industry will likely prove the same. The last tanker cycle bottomed in late 2009, and it appears is in the up-leg of a new one cycle. That means there’s no time like the present.

Good investing,

Tony Daltorio

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