Oil Tankers Aren't Sinking Anymore

Oil tankers have experienced a rough five-year voyage since the financial collapse right on through the "Great Recession". Leading up to the collapse, oil prices were peaking, so oil tanker executives figured it wise to flood the market with new capacity to take advantage of the booming energy market. Unfortunately for them, the wave of seaborne trade dried up as quickly as oil prices fell. Most have yet to recover. Lately, however, the industry looks to be tacking back toward growth.

In May, the Financial Times reported that oil tonne-miles rose close to 10%, leading to a record 7.8 million tonne-miles in total. Much of the credit is given to the fact that the U.S. has begun exporting far less oil due to the current shale boom. Thanks to this, exporting nations must ship their product to new markets which have tended to be much further away. 

After falling over 87% in the past five years, Teekay Tankers  (NYSE: TNK  ) believes that the supply of carrying capacity is finally aligning itself with demand again. For 2014, the company expects the lowest fleet growth since 2002. If this is the case, management believes fleet utilization will have reached a trough and could possibly begin its ascent to levels north of 84%. Tankers haven't enjoyed this level of utilization since the industry sank below this depth in 2010. 

Financially, the company remains treading water as cash flow from operations finally grew in 2012 after sliding since the 2008 fiscal year. As one might expect, this has led to a drastic reduction in the company's dividend payment on a per-share basis. From 2008 to 2012, investors have seen their annual payment drop 91%. That being said, the current yield does rest at 4.4% given that the dividend has fallen nearly in lockstep with the share price. 

Source: Teekay Tankers

As for the competition, not many companies have fared much better. For example, another Bermuda-based oil carrier, Nordic American Tankers (NYSE: NAT  ) , has seen its cash from operations fall below sea level the past two years. In Nordic's case, its fleet size of 20 double-hull Suezmax tankers isn't nearly as diverse as Teekay's, but Suezmax tankers are capable of toting up to 1 million barrels of oil per voyage.

While Suezmax ships tend to rely on business in the Atlantic basin for the most part, the addition of a third lane to the Panama Canal -- completion scheduled for 2015 -- should open up many more lines of trade for Suezmax tankers. Most don't believe this will have a significant impact, but there are a few scenarios in which it could. These scenarios largely depend on oil prices and the availability of different ship classes.

One segment of energy transportation on the high seas that has shown investors that tankers can still deliver on Wall Street has been liquefied natural gas, LNG, tankers. Teekay LNG Partners (NYSE: TGP  ) and Golar LNG Partners (NASDAQ: GMLP  ) have both churned out returns north of 15% in the past year along with paying investors more than 6% in distributions just for owning shares. As LNG exporting becomes a bigger part of global energy trade both of these companies stand to benefit. While there has only been approval for two LNG exporting facilities in the U.S., there are many others with applications submitted. Combined with countless other plans around the world, the prospects look rather bright.

Prepared to ship 18 million tons per year of LNG once its first four trains are on line, Cheniere Energy will begin utilizing LNG tankers like those from Teekay LNG and Golar LNG in 2015. It is the first U.S.-based LNG exporter approved to ship to high-margin countries that are not members of a free trade agreement. With natural gas prices expected to rest in the $4-$5 range per MMbtu, Cheniere is primed for solid gains once the initial LNG trains start chugging in the first half of 2015. Don't wait until then – this 2013 darling continues to outperform the broad markets. Be sure to read all the details in this premium research report


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