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How bad was 2016?
Oil tanker owners had a rough 2016, as the tailwinds that drove the industry over the last few years reversed course and became headwinds. Nordic American Tanker Ltd (NAT -2.08%), Frontline Ltd. (FRO -4.87%), and Teekay Tankers Ltd. (TNK -3.09%) all plunged in trading last year, and the cause of the plunge may hurt them for years to come.
A decline is on the horizon for oil tankers
Falling oil prices over the last two and a half years actually created a positive market trend for tanker companies, just as they hurt most of the oil industry. Oil trade around the world picked up as prices fell and congested ports caused strong demand for tankers. Helping matters on an operational front for tankers was the fact that low oil prices meant lower operating costs to run tanker fleets.
But oil prices are now rising, meaning higher costs are ahead, and the global tanker fleet is about to explode. According to Bloomberg, 137 new oil tankers will be built this year, with another 148 due next year. The additional capacity will allow 1.5 billion more barrels to be shipped annually, but only about 445 million of new oil is expected to be produced.
The result for tanker companies is falling dayrates for their fleets and higher operating costs. Net income will more than likely fall as well, reversing a strong operating trend over the last three years, as you can see below.
NAT Net Income (TTM) data by YCharts.
The market is really looking forward right now, predicting the drop in earnings before it happens, so you don't see declining results hitting tankers yet. But the revenue pressure is on the horizon.
A high-risk oil play
One thing that's difficult to assess with tanker companies right now is where their value lies. Looking at trailing earnings, Nordic American Tanker has a P/E ratio of 12.0, Frontline trades at 7.1 times earnings, and Teekay's P/E ratio is just 2.4. All of those look like great values, but will undoubtedly appear more expensive as earnings fall in the coming year.
For that reason, this is an industry I am steering clear of. It's just too difficult for any company to predict where supply and demand will land in any given year given the rapidly changing oil market. And unless global trade of oil picks up rapidly we could be in for years of oversupply in the tanker industry.
