Smooth Sailing for Tanker Stocks

06/26/2008 12:00 am EST

Focus: COMMODITIES

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

Elliott Gue, editor of The Energy Strategist, says booming oil demand is driving shipping costs sky-high, and that’s great news for companies that run tanker fleets.

The world’s reliance on [the] oil trade is only going to increase in coming years. Oil production in key consuming nations such as the US and China is falling or, at the very least, not growing fast enough to keep pace with demand. China now imports more than four million barrels per day. That’s a more than fourfold increase in ten years.

And longer term, the world’s reliance on tankers will increase. The Energy Information Administration (EIA) sees most of the supply growth coming from the Persian Gulf. Some 90% of all oil shipped from the Middle East is shipped by tanker. Globally, roughly 40 million barrels of oil per day are shipped on tankers.

Very large crude carrier (VLCC) ships account for about 25% of the global oil tanker fleet. According to IMAREX, a tanker data firm, the current rate for shipping crude oil from the Arabian Gulf to Japan is about $157,000 per day.

Trends in tanker rates are the most important determinant in underlying tanker stocks. Tanker rates saw the largest spike in three years last winter, and we’re currently seeing a highly unusual late-spring spike in tanker rates. The futures market is looking for tanker rates to remain elevated through the summer. The current environment should be great news for tanker stocks as well.

General Maritime (NYSE: GMR) owns a fleet of 11 Suezmax and 12 Aframax carriers, with an average fleet age of 6.3 years and 12.9 years. The company employs a mixed time-charter/spot-market contracting strategy, [and it] has locked in nearly $176 million in revenues under contracts for 2008 alone.

GMR has two Suezmax ships scheduled for delivery over the next year, and the company has been expanding its fleet in other ways as well. GMR recently bought two six-year-old Aframax tankers from a Belgian shipper for $137 million. GMR pays a 7.5% dividend yield and has been buying back stock in recent quarters. Trading at a significant discount to NAV with considerable upside from the strong spot market, GMR remains a Buy. (It closed above $27 Wednesday—Editor.)

Nordic American Tanker Shipping (NYSE: NAT) owns a fleet of 12 Suezmax carriers with an average fleet age of 8.5 years. All of Nordic American's tankers are double hulls, and the company has two new Suezmax carriers on order for delivery.

The firm estimates that its breakeven cost for tankers is just $9,500 per vessel per day, compared to average rates in the first quarter of $46,600. At anything over that breakeven rate, Nordic can pay generous dividends for shareholders.

There’s absolutely nothing to fault with Nordic's fleet or strategy. The only potential knock against the firm is that it trades at the highest valuation on both a price-to-NAV and price-to-earnings basis of the tanker firms we cover. But much of that is justified by NAT's heavy spot-market exposure and pristine balance sheet. I’m adding Nordic as a buy under 42 with a stop at 31.25. (It closed above $31 Wednesday—Editor.)

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