Supertankers Take on Water

Companies that operated supertankers certainly had a rough day yesterday as management at Frontline (NYSE: FRO  ) said they would need cash to stay in operation through next year. The company swung to a $136 million third-quarter loss, from $48.4 million in profit last year -- the market took that news and ran with it.

Ship Finance International (NYSE: SFL  ) , Overseas Shipholding Group (NYSE: OSG  ) , and Nordic American Tankers (NYSE: NAT  ) all fell yesterday, compounding big losses for the year. In the short term, pressure is being put on these companies because day rates aren't paying enough for them to break even on their vessels. Heavy debt burdens at these companies make short-term problems worse. With stocks falling, borrowing costs will rise, and the companies could become insolvent.

The big picture doesn't get better
Financial problems may look bad now, but there doesn't appear to be any light at the end of the tunnel for tanker owners. The biggest oil market in the world, the U.S., is finding more and more of its oil domestically, reducing the need for oil tankers to ship it from the Middle East.

There's also the problem of a growing supply of tankers coming onto the market. The overall oil tanker fleet is expected to grow 11.2% in 2011 and 8.7% more in 2012, according to Fernresearch.

Foolish bottom line
Yesterday, fellow Fool David Williamson said he thought Frontline could survive mostly because John Fredricksen owns a large stake in the company and wouldn't let it sink. But I think the problems in the tanker market are too big for Fredricksen to fix himself, and investors should run as fast as they can from these stocks.

I'm backing it up and putting my 96.6 CAPS rating by giving Frontline, Ship Finance International, and Overseas Shipholding Group the red thumb on My CAPS page. You can check out my progress here.

Interested in reading more about oil shippers? Add them to My Watchlist, which will find all of our Foolish analysis on these stocks.

Fool contributor Travis Hoium does not own shares of the companies mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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