Tanker Talk: Ship Shape
03/05/2004 12:00 am EST
"If you’re looking to make money in the energy sector but want to avoid seeing your investment sunk in the stormy market, think tankers," says Jim Jubak, columnist forCNBC on MSN Money, who views the supply and demand situation for oil tankers as a win-win situation.
"Shipping companies that own oil tankers thrive when demand for crude soars. And thanks to new regulations calling for safer tankers, the global supply of these ships is growing more slowly than demand. The International Maritime Organization has written new rules that accelerate the mandatory phase-out of single-hulled oil tankers and require stricter inspections of older tankers. The IMO estimates that about 12% of the current global tanker fleet, the oldest single-hulled tankers now in operation, would be banned from service by the end of 2005. All single-hulled tankers would be banned by 2010. This demand/supply mismatch will make money for those tanker companies with the newest fleets, with the most tankers in the spot market versus those whose ships are tied up with long-term fixed contracts, the most new ships due for delivery soon, and the balance-sheet strength and cash flow to pay for new ships. All of that ends up as a win/win situation for the sector overall.
"Teekay Shipping(TK NYSE), headquartered in the Bahamas and in Vancouver, BC, is the largest owner of medium-sized spot tankers in the world. (The company is also the largest owner of shuttle tankers, which move oil from deep-water tankers to shore facilities such as refineries.) About 80 of its 137 ships operate in the spot market. The company’s fleet averages 8.2 years in age. And about 76% of the fleet is double-hulled. The company has 14 tankers and one shuttle tanker scheduled for delivery in the next three years. By my calculations, the company will generate about $800 million in free cash flow, even after paying for new tankers, in 2004. And Teekay has reduced its net debt to about 42% of total capitalization from 47% in 1998. (The company’s debt to equity ratio is 1.03.)
"Tsakos Energy Navigation(TNP NYSE), headquartered in Athens, Greece, is a small capitalization version of Teekay Shipping. Tsakos operates a fleet of just 28 vessels. About 35% of its ships operate in the pure spot market. Another 32% operate in the longer-charter market. Since the long-charter vessels operate at variable rates, about 70% of the company’s tankers effectively operate in the spot market. The Tsakos tankers average just 6.8 years of age, and about 90% are double-hulled. Tsakos has nine new tankers on order, a huge number given the relatively small size of the company’s fleet. Tsakos has been on a heavy expansion program that started with just seven ships in 1997. That’s driven debt to $537 million, or about 61% of total capital. (The debt-to-equity ratio stands at 1.56). That’s high, but the company will generate about $120 million in cash flow in 2004 by my calculations. Cash flows should be strong enough to pay down debt once the current build-out is completed.
"Stelmar Shipping(SJH NYSE), also headquartered in Athens, concentrates in the small-tanker market. Thus, it has relatively little exposure to shifts in the volume of oil shipped on long ocean routes from the ports of OPEC producers. The company should complete an aggressive shipbuilding program by mid-2004 that will add 11 ships and bring its total tanker fleet to 41. That will give Stelmar about 20% more operating days to sell in 2004. Tankers are typically chartered on a per-day basis. The fleet will be six years old on average when the build-out ends. Stelmar has the lowest exposure to the spot market of the three stocks in this group at just 50%. That limits the company’s upside if tanker rates climb as I project, but it also gives the company more revenue and earnings stability. The debt-to-equity ratio, at 1.29, is in the middle for this three-stock group. Cash flow will come in about $110 million in 2004 by my calculations.
"Which of these should you buy if you have to pick just one? Stelmar is attractive because of its incredible downside protection: On the downside, this is the most thinly traded stock in the group, with average daily volume of just 60,000 shares. That can bring unwanted volatility. Tsakos has exactly the kind of fleet an investor wants to own in this tanker market: young and double-hulled. And the company’s aggressive shipbuilding program gives the shares solid long-term upside, but the stock has been on a tear, so I’d like to get this one at a price that gave the stock more room to move higher. Teekay has added a fleet of lighters (smaller, flat-bottomed vessels used to move oil on and off tankers), floating storage platforms and a new logistics service business to its core tanker fleet. I calculate a $77 target price of Teekay. So Teekay is my pick of the three, and I’m adding the stock to Jubak’s Picks with a target price of $77 by December 2004."