Pretty much every factor imaginable is making life unpleasant for tanker owners these days. Let us count the ways:
Too little oil demand
The International Energy Agency pared back its global oil demand forecast this week by an additional million barrels per day. That takes expected demand levels 2.8% below those of 2008, in a drop comparable to the contraction seen in the early 1980s.
The explanation for lower oil demand is clear enough. The recession means fewer trips to Best Buy, which means fewer FedEx
Too little oil supply
It's not as though the market's being inundated with oil, either. While OPEC has been cautious about cutting back too hard, compliance has run fairly high, with analyst estimates pointing to north of 80% adherence to quotas. Combine these self-imposed cuts with those soon to result from both reduced investment and natural decline rates, and oil supply could soon find it hard to rebound to pre-recession levels.
Operators like General Maritime
Too many tankers
Speaking of volume, the growing global fleet is another headwind for the industry. When thinking about the fact that nearly 1,000 oil tankers are on order, the word unbridled comes to mind. What else could you expect, though, following a situation in 2004 when OSG
Of course, there are several mitigating factors here, as I've discussed in past coverage of Frontline
Too little credit
You certainly can't pay for a shiny new Suezmax tanker if you don't have the financing available. Tanker owners aren't just going to skip out on shipyard orders because they want to, but because they have to. These are some of the most leveraged balance sheets in the business world, after all, and borrowing capacity is just going to get that much more strained as asset values fall.
So, what's a Fool to do?
With tanker rates hitting decade lows, things look pretty bad for many public companies in this space. Of course, the analysts are now dishing out downgrades like Dodger Dogs on Opening Day. Tsakos Energy Navigation
You'll have to make up your own mind regarding any particular tanker outfit's merits. To get you started, though, here are a few questions to ask of any potential investment here:
- What is the net debt level, and is it manageable? Nordic American makes answering this one easy: Zero, and yes! Other firms' finances will take hours to scrutinize.
- What's the level of spot market exposure? Teekay Tankers, for one, has charter coverage for 62% of its operating days this year, which it claims should support a decent, though diminished, dividend.
- Is the dividend sustainable? In most cases, the answer here is likely to be a resounding no, so don't take those eye-popping yields at face value, Fool.