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Why DHT Holdings, Frontline, and Teekay Tankers Stocks Are Up 10% Today

By Rich Smith - Apr 20, 2020 at 6:58PM

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Oil prices sink, and oil tanker stocks rise? What gives?

What happened

Oil prices went haywire today, plummeting far below the lowest prices on record, and actually ending at negative levels. By close of trading Monday, the futures contract price for WTI crude to be delivered in May was negative $18.15 per barrel.  

And yet, oil tanker stocks soared. By the closing bell, crude oil shipper DHT Holdings (DHT 0.45%) had risen 7.5% (after being up more than 12% earlier in the day), and the stock of Frontline (FRO -0.39%) was up 12.7%. Topping them both was Teekay Tankers (TNK 0.24%), up 20.6%.

Oil tanker foredeck

Image source: Getty Images.

So what

Economics 101 dictates that as the price of something (oil, for example) falls, demand for that something rises.

Thus, cheaper oil begets more demand for oil. Maybe not right away. That's why oil prices are falling after all: no demand for gasoline to fuel up our cars while we're sheltering in place, and no demand for jet fuel when no one is taking vacations. But eventually, folks are going to realize that oil and gasoline have become ultra-cheap and, just as soon as we are free to get out and about again, we're going to do just that.

In order to be ready to meet this anticipated increased demand, more oil is going to need to be shipped, and investors today are looking ahead to that day, and investing in oil shipping stocks in anticipation of a boom in demand for their services.

Now what

Oil producers realize this, too. They understand that, as painful as today's oil glut and resulting price crash is, it's a temporary phenomenon. Ideally, they'd therefore like to put their oil in storage now, when prices are low, and refine and sell it later, when prices rise again.

Oil tankers serve this purpose, too. They're literally gigantic floating tanks of oil that can be filled now, and drained later. And this adds even more demand to the surge in the market for oil transport services. Thus, there are at least two good reasons oil tankers, and oil tanker stocks, look particularly attractive today.

And here's a third: DHT shares, at 14.4 times earnings, and Frontline at 11.3 times earnings, aren't particularly expensive. Meanwhile, unprofitable Teekay is much less likely to go bankrupt if there's a surge in demand for its services, good reason to expect its share price to rise as bankruptcy risk recedes.

The very real possibility that all three stocks will turn out to be underpriced at today's levels is yet another reason we're seeing them rise.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Frontline Ltd. Stock Quote
Frontline Ltd.
FRO
$11.40 (-0.39%) $0.04
Teekay Tankers Ltd. Stock Quote
Teekay Tankers Ltd.
TNK
$25.24 (0.24%) $0.06
DHT Holdings, Inc. Stock Quote
DHT Holdings, Inc.
DHT
$7.78 (0.45%) $0.04

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

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