2 Major Reasons Why Natural Gas Could Save Shipping

Rising natural gas production in the United States could be the life preserver that the floundering global shipping industry needs. Due to the Great Recession, shippers are suffering from declining demand, falling charter rates, and higher prices for fuel oil. Here are two reasons why the fracking that is leading to greater natural gas production in the United States could save fleets around the globe from going under.

Increasing demand for shipping
The more natural gas produced, the cheaper it becomes. That basic truth of supply and demand makes natural gas much more attractive for countries around the world that must import fossil fuels to meet energy needs, such as Japan.

As part of this trade, for the first time, a tanker carrying liquefied natural gas is traversing the Arctic in a route from Norway to Japan. There will also be a greater demand for imported natural gas to produce electricity in Japan and Germany due to each country's commitment to do away with nuclear power.

A boost for the global economy
Declining economic activity around the world due to the Great Recession reduced the demand for shipping. That naturally resulted in charter rates falling to 10-year lows. The overbuilding that took place before the onslaught of the recession exacerbated the situation. These factors have contributed to collapsing sales and earnings per share, and accordingly bearish stock price performances for individual shipping companies, as shown in the table below:

Metric

Frontline (NYSE: FRO  )

DryShips (NASDAQ: DRYS  )

Nordic American Tankers (NYSE: NAT  )

Teekay Tankers (NYSE: TNK  )

Ship Finance International (NYSE: SFL  ) *

5-Year EPS Growth Rate

(43.83%)

(64.46%)

(73.04%)

(55.61%)

(7.70%)

5-Year Sales Growth Rate

(12.26%)

34.11%

(11.59%)

(4.60%)

(7.02%)

Year-to-Date Stock Price Performance

(16.78%)

(12.00%)

(16.54%)

(0.94%)

92.00%

Source: Finviz; *Ship Finance International charters vessels so it has avoided much of the carnage inflicted upon ship owners

There are great expectations that fracking will change this course and revitalize economic growth. In an article by Motley Fool contributor Morgan Housel, "The Coming Boom," he describes how the increased production of natural gas has already lowered by $175 billion the amount the United States has spent to import oil, extra capital that now can produce more economic growth in the U.S. Fracking could also create an estimated 1.3 million energy-related jobs in the next seven years, according to the article.

The increase in natural gas production, along with the lower prices, could generate a significant amount of new economic activity around the world, increasing the demand for vessels of all types to haul goods, which is exactly what the shipping industry needs. As the chart below shows, the exchange traded fund for shipping has more than doubled from the bottom of recession in early 2009, although it has fallen due to the recent faltering economic growth in China and India:

SEA Chart

SEA data by YCharts

By contrast, more economic growth should result in a need for more shipping, which will lift the charter rates.

A Fool sets sail for higher gains
Foolish investors should follow United States Oil (NYSEMKT: USO  ) , which tracks the price of U.S. oil, since shipping fortunes follow the price of fuel. If fracking results in the price of oil falling due to a greater demand for natural gas, then shippers will benefit.  

As detailed in a previous Motley Fool article, Ship Finance International, which charters vessels, is one company in the shipping industry that is attractive. Chartering allows for Ship Finance International to shift the risks of the vagaries of the shipping industry to its clients while still benefiting from better conditions in the sector, such as the a lower cost of fuel. If natural gas drives down the price of oil, Ship Finance will benefit without the same risks as shipping companies that operate fleets.

Shipping stocks will not be the place to be if oil rises to $100 a barrel. In case that happens, check out The Motley Fool's "3 Stocks for $100 Oil." You can get free access to this special report by clicking here.


Read/Post Comments (7) | Recommend This Article (3)

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 December 28, 2012, at 11:38 PM, Straightener wrote:

    " If fracking results in the price of oil falling due to a greater demand for natural gas, then shippers will benefit. "

    How would greater demand for nat gas and less demand for oil benefit tanker companies like Teekay and NAT? Can they convert their suezmax oil tankers to transport natural gas?

  • Report this Comment On December 29, 2012, at 9:48 AM, jonathanyates13 wrote:

    The price for oil will fall. As that is the biggest expense for a shipper, they will benefit tremendously.

  • Report this Comment On December 29, 2012, at 10:21 AM, Straightener wrote:

    OK, I get it now. I must not have read your article closely enough the first time. Thanks for answering.

  • Report this Comment On December 31, 2012, at 1:22 PM, psl8er wrote:

    This article is abject nonsense. The availability of cheaper natural gas in the US will have no effect on shipping charter rates.

    The companies listed in your article do not even own Liquid Natural Gas ships.

    Dream on if you think that gas will stimulate growth in the global economies which are the lifeblood of shipping

    The is already an abundant supply of gas and a large fleet of ships carrying it around the world

  • Report this Comment On December 31, 2012, at 2:27 PM, imacg5 wrote:

    The author has made some wild assumptions.

    While it's true that a lowering of bunker fuel prices by $100 per ton will save the shippers $5000 per day in expenses, the assumption that oil prices will result in a drop in the heavy residual oil or bunker fuel, does not take into consideration the real refinery processes for shale oil.

    You say:

    "" since shipping fortunes follow the price of fuel"

    Really?

    Because the price of oil, and the BDI both plummeted in 2008-09. That isn't the correlation you were looking for is it?

    The overwhelming reason these shipping companies are losing money is because of the massive fleet build out, and the debt taken on to build those ships. Followed by ship values crashing.

    And there was a small reduction in the seaborne transport of goods in the recession. Since then the world has set new records in transport. But it pales in comparison to the growth of the fleet.

    All the doom and gloom you hear about the economy is not reflected in the global trade of bulk goods or oil. So don't expect the gradual increase in the economy to compensate for the double digit increase in ships. Again in 2013.

    The $175 billion in "savings" that we didn't spend importing oil went to Domestic and Canadian shale oil companies. And it's not all going back into the economy, especially since it didn't do much to lower gas prices for most of the country.

    And there has been a decline in US oil usage in that equation.

    The natural gas was used mostly to replace coal for producing electricity.

    None of this will reduce bunker fuel prices in China. or in the developing nations where most of the ships will be refueling.

    So the point is moot.

  • Report this Comment On January 10, 2013, at 10:11 AM, jyates13 wrote:

    John Fredriksen, who manages the world's largest fleet of supertankers, has committed billions to building a fleet with streamlined hulls and clearner burning engines in an effort to reduce fuel costs, which are more than half of the expense of a tanker. Each tanker is reported to operate cheaper by $7000 a day. Lower fuel costs will aid the shipping sector. A reduced price for a barrel of oil will bring down the price of all fuels for those that use some form of it.

  • Report this Comment On January 31, 2013, at 9:02 PM, imacg5 wrote:

    Yes, the fact that cheaper fuel is a tremendous plus for shippers is not in dispute here.

    What you have failed to prove is your theory that an increase in natural gas production and usage will lower the price of bunkers.

    Any increase in economic activity, and any increase in seaborne trade of all types will result in an increase in the price of bunker fuel.

    The elephant in the room for shipping, and especially dry bulk , remains the fact that the net increase in the size of the dry bulk fleet is higher than all optimistic estimates for worldwide economic growth and trade expectations.

    I see no logical reason to assume that the production of natural gas in the US is going to somehow make the price of bunkers in China lower.

    And these ships are refueling in China, Rotterdam, Indonesia, South Africa, Australia and Brazil.

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