All Tanked Up
09/01/2006 12:00 am EST
Energy expert Elliott Gue knows the oil industry. Here he gives investors a behind-the-scenes look at the tanker industry, with an eye to adding shares in a company that is poised to benefit from the tight supply market…
“Tanker stocks have surged sharply higher during the past few months, because day-rates are running significantly higher than they were at the same time last year. Oil producers lease out tankers from third-party operators for a fee known as a day-rate. Tanker rates tend to be at their highest during the first and fourth quarters of every year and usually, day-rates top out around December. Rates have risen to 1,594 already, nearly 50% higher than last year at this time. The bottom in day-rates came much earlier than normal this year. And we're not even yet in the seasonally strong fourth quarter. It looks likely that the normal seasonal spike will come from higher levels than normal.
“A couple of trends are driving this action. Chinese oil demand grew by 2.6% in 2005 and will grow by 6.1 % in 2006 and 5.5% in 2007, according to the International Energy Agency (IEA. This is bullish for tanker stocks; China is a huge oil importer, and hauling all that oil from the Middle East means hiring out more tankers.
“Then there's supply. Older tankers are being scrapped and retired; all single-hull tankers are being phased out. Moreover, tankers have been pressed into other duties, with some refitted as floating production platforms, and others used as temporary storage facilities in the Middle East and Asia where storage capacity is lacking. Bottom line: I’m looking for another 2004-like spike in day-rates this winter as we move into the seasonally strong period. And I’m looking for some big dividend checks out of these companies during the next few quarters. The tight supply/demand market for tankers also merits a trade recommendation for Frontline (FRO NYSE), a major operator of Very Large Crude Carrier (VLCC) tanker ships. Buy under 45 with a stop at 36.75.
“VLCC ships are used most often to carry oil from the Middle East; VLCC day-rates tend to be the most volatile of all. While the stock might seem a little overextended here, consider that, in 2004, it ran up from under 20 to more than 35 during the seasonally strong period for tanker stocks. If we get another tight tanker market, a similar move isn't out of the question. Please note that this is an aggressive play and isn’t for the faint of heart. I’m giving Frontline a wide stop (15% below current prices). You should consider adjusting your position size to reflect that increased risk.”