Please ensure Javascript is enabled for purposes of website accessibility

Why These 4 Oil Tanker Stocks Jumped and 1 Tumbled Double Digits in March

By Neha Chamaria - Apr 6, 2017 at 11:11AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Stay cautious. There's more to the double-digit movements in these oil tanker stocks than meets the eye.

What happened

Oil tanker stocks had a smooth sailing in March, with many surging by double digits. Notable tanker stocks that gained at least 10% in March include Gener8 Maritime Inc. (NYSE: GNRT)Scorpio Tankers Inc. (NYSE: STNG)Navios Maritime Partners (NYSE: NMM), and Navios Maritime Midstream Partners (NYSE: NAP). Teekay Tankers (TNK 2.53%) was an outlier, as its stock continued to move lower to give up almost 12% of its value last month.

Much of the sharp movements in these stocks had to do with oil prices, as you shall soon see why. The question is: Where are these stocks headed?

So what

Low oil prices might hurt the oil industry in general, but they usually bode well for oil tanker operators as low oil prices support demand from importing countries, especially the U.S., China, and India, which in turn means more business for transporters of oil and oil products. Supertanker operators, for example, made a killing on international haul rates in 2015 when oil prices slumped. With positive numbers like 3.5% year-over-year growth in China's February crude oil imports coming in last month, investors had valid reasons to bid tanker shares up.

An oil tanker with a rig in the background.

Image source: Getty Images.

Even within the industry, global trade for oil products was relatively stronger, as evidenced by the rally in the Baltic Clean Tanker Index, which measures average shipping rates for transporting "clean" products like refined petroleum products as opposed to crude oil, in March. That's one reason why shares of Scorpio jumped last month. Likewise, the Baltic Dry Index surged in March, fueling investors' optimism in dry cargo movers like Navios Maritime Partners.

Conversely, freight rates for crude oil carriers have come under pressure lately, especially after OPEC's oil production cuts, which dampened cross-market oil movement. Not surprisingly, the Baltic Dirty Tanker Index edged lower in March, pulling crude carrier stocks like Teekay and Frontline Ltd. (FRO 4.18%) down.

GNRT Chart

GNRT data by YCharts.

The problem is that oil is just one of the factors that affect the tanker industry, and there are too many variables at play that affect shipping rates and earnings, depending on the kind of products and markets transported to. But for most tanker operators like Teekay, Gener8, and Navios Midstream, all you have to do is check the industry tanker orderbook to gauge their prospects going forward. To put it simply, a rise in the number of ships ordered and under construction could portend oversupply concerns if demand isn't stable or rising.

Now what

Industry experts project tanker supply to outpace demand this year, with Clarksons Research calling for 5.6% and 4.3% growth in crude and product tanker fleets, respectively, in 2017. But you know there's a real reason for concern when words of caution come from the horse's mouth. Frontline – the world's largest oil tanker company – ruled out the possibility of a recovery in the tanker markets until 2018 during its recent earnings call. To know why, just check research and consultancy firm Fearnleys' orderbook projections for the two primary types of oil tankers -- VLCCs (very large crude carriers) and Suezmax – as highlighted by Frontline in its fourth-quarter earnings presentation.

Charts showing crude tanker orderbook for VLCC and Suezmax.

Data source: Fearnleys. Image source: Frontline's Q4 2016 earnings presentation.

As you can see, newbuilding deliveries accelerated for both types of tankers in 2016, putting tanker rates under pressure for the better part of the year. What's worrisome is that deliveries for both are expected to rise further this year, with Suezmax deliveries projected to more than double. Not surprisingly, Frontline expects tanker rates to remain low this year, which is terrible news as freight rates is the primary source of revenue for oil tanker operators.

Given the backdrop, stocks like Gener8 and Navios Midstream may have a hard time maintaining momentum. In Gener8's case, part of the market's optimism can be linked to the company's Q4 and 2016 numbers that it reported mid-March -- though profits were substantially lower year over year, they beat analysts' estimates. More importantly, Gener8's vessel operating days improved substantially as it deployed 15 VLCC newbuilds in December. This also makes Gener8's VLCC fleet among the youngest in the industry.

Comparatively, things have been relatively quiet on Navios Midstream's side after the company last reported earnings in January, but as a master limited partnership, Navios' fat payouts and a dividend yield of nearly 14.7% continue to remain major attractions for investors. Navios' strong financial standing though might also be keeping investors optimistic: Its revenue, for instance, looks fairly secure as it has already fixed 100% of its available fleet days through 2018, and its balance sheet is also pretty strong, with no debt due for maturity before 2020.

Foolish takeaway

The oil tanker industry is one of the most complicated within the shipping sector, and it's nearly impossible to predict where it could head given the dynamics of the oil industry. Say, while OPEC production cuts and fleet oversupply are negative for the industry, long hauls as more oil moves from the Atlantic to the Pacific in the wake of cuts from OPEC countries could limit the fall in tanker rates. Meanwhile, more vessels could be scrapped to meet the ballast water treatment new regulations, which could temporarily easy supply concerns.

However, all this could be temporary, and investors might have to wait until at least next year before the industry gets back on the growth track. Until then, I expect pockets of volatility in the industry to be reflected in stock prices.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Frontline Ltd. Stock Quote
Frontline Ltd.
$8.98 (4.18%) $0.36
Teekay Tankers Ltd. Stock Quote
Teekay Tankers Ltd.
$17.41 (2.53%) $0.43

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.