Are Tanker Stocks Toast?

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Pretty much every factor imaginable is making life unpleasant for tanker owners these days. Let us count the ways:

Too little oil demand
The International Energy Agency pared back its global oil demand forecast this week by an additional million barrels per day. That takes expected demand levels 2.8% below those of 2008, in a drop comparable to the contraction seen in the early 1980s.

The explanation for lower oil demand is clear enough. The recession means fewer trips to Best Buy, which means fewer FedEx (NYSE: FDX  ) deliveries of inventory to that Best Buy, and so forth. Hence the barrels are just piling up. In the U.S., we saw inventories build by 5.67 million barrels last week. That takes us to the highest level of stockpiles in about 19 years.

Too little oil supply
It's not as though the market's being inundated with oil, either. While OPEC has been cautious about cutting back too hard, compliance has run fairly high, with analyst estimates pointing to north of 80% adherence to quotas. Combine these self-imposed cuts with those soon to result from both reduced investment and natural decline rates, and oil supply could soon find it hard to rebound to pre-recession levels.

Operators like General Maritime (NYSE: GMR  ) and Teekay Tankers want to see steady or growing oil supply just as much as they desire fervent demand. Unlike upstream players like Apache (NYSE: APA  ) , oil volumes are much more important than oil prices.

Too many tankers
Speaking of volume, the growing global fleet is another headwind for the industry. When thinking about the fact that nearly 1,000 oil tankers are on order, the word unbridled comes to mind. What else could you expect, though, following a situation in 2004 when OSG (NYSE: OSG  ) was talking about the industry operating at nearly 100% utilization?

Of course, there are several mitigating factors here, as I've discussed in past coverage of Frontline (NYSE: FRO  ) and Nordic American Tanker (NYSE: NAT  ) . Everything from single-hulled vessel phase-outs to port congestion to vessel conversions somewhat cushions the new-build body blow. Still, all of that isn't enough, and Frontline foresees both rising vessel scrapping and a huge wave of order cancellations to correct the imbalance. Prodding along the latter process is, of course ...

Too little credit
You certainly can't pay for a shiny new Suezmax tanker if you don't have the financing available. Tanker owners aren't just going to skip out on shipyard orders because they want to, but because they have to. These are some of the most leveraged balance sheets in the business world, after all, and borrowing capacity is just going to get that much more strained as asset values fall.

So, what's a Fool to do?
With tanker rates hitting decade lows, things look pretty bad for many public companies in this space. Of course, the analysts are now dishing out downgrades like Dodger Dogs on Opening Day. Tsakos Energy Navigation (NYSE: TNP  ) , for one, caught an ignominious "underweight" rating from JP Morgan yesterday.

You'll have to make up your own mind regarding any particular tanker outfit's merits. To get you started, though, here are a few questions to ask of any potential investment here:

  • What is the net debt level, and is it manageable? Nordic American makes answering this one easy: Zero, and yes! Other firms' finances will take hours to scrutinize.
  • What's the level of spot market exposure? Teekay Tankers, for one, has charter coverage for 62% of its operating days this year, which it claims should support a decent, though diminished, dividend.
  • Is the dividend sustainable? In most cases, the answer here is likely to be a resounding no, so don't take those eye-popping yields at face value, Fool.

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Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. The Motley Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 16, 2009, at 8:50 PM, ctangus wrote:

    I hardly ever agree with Jim Cramer, but Marketwatch had a link to him praising NAT as the only tanker stock worth buying and I heartily concur. (Disclaimer: I first bought NAT in 2001 and have been slowly buying more since.)

    They have essentially no debt on their balance sheet. When they buy new tankers they raise new capital. That does dilute shareholder value but they've been able to price it so that EPS still goes up.

    On the risk side they are highly vulnerable to spot-market prices. Demand for oil is certainly decreasing. However there are also is some demand from oil companies for tankers to just store oil, until oil prices go up.

    They pay about a 12% dividend right now. Even if profits drop 2/3 they'll still pay 4%. And they're in the best situation of any tanker company to survive.

  • Report this Comment On April 16, 2009, at 10:51 PM, towsongreat wrote:

    funny but yesterday apr 15 motley fool posted an article on frontline praising the company. fro and nat are both great companies.

  • Report this Comment On April 16, 2009, at 10:57 PM, towsongreat wrote:

    on april 9 m.f. wrote about best dividend paying stocks:

    Despite the global market downturn, which in many countries has been far worse than here in the U.S., about 40% (62 of 154) of foreign dividend-paying stocks that trade on a U.S. exchange have more than doubled in the past six years. Included in this group are Chemical & Mining Co. of Chile (NYSE: SQM) and Frontline (NYSE: FRO).

    this sounds like positive news on fro........we should continue to buy low sell high............

    fro is going up

  • Report this Comment On April 17, 2009, at 12:19 PM, poneman wrote:

    Does anyone really think the demand for oil is going to plummet? We are in the worse recession since

    (pick one: early 80s/late 20s) and oil has stablized. Companies like NAT are doing well despite the economy.

    Any uptick in the economy, even if it does not get back to "normal" in the next few years, will increase demand for oil as the world gets back on it's feet.

    Well run tanker companies (can you say "debt-free" NAT) will roll with the economic punches and come out stronger than ever.

  • Report this Comment On April 18, 2009, at 9:07 PM, SWEAT7 wrote:

    I too am a believer in Cramer's take on NAT. I have been for over two years now. I would be careful with FRO right now as they are not as free of debt and they reduced they very sweet divvy.

    With the balance sheet that NAT is carrying and oil sitting in tankers primed for the right move they are doing very well. On top of that they have leased out these tankers which fare even better for that great company.

    When these markets turn for the better, NAT will most likely increase their dividend again, and the stock will most likely come off the 30 handle.

    Economically, due diligence has paid off for Mr. Hansson and his company. By the way, have you ever listened to a conference call? He is always so ....upbeat.

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