Ship Ship Hooray!

August 01, 2008

Shipping companies that specialize in petroleum may represent opportunities for investors.
  • Supertankers ship more than one-fifth of the world's oil
  • Falling tanker rates, a slowdown in oil usage and too many tankers are risks
  • Four petroleum shipping companies are
    worth more than $1 billion

 

It's easy to forget in this day of digital commerce, fiber optics and the Internet, much of the world's commerce is still moved from one place to the other by planes, trains, trucks and automobiles. Perhaps the most critical link in an era of international commerce is the sea. Cargo ships and tankers transport massive quantities of manufactured products, like cars and toys, as well as the “hard assets” that our factories depend upon, like copper, aluminum, steel and other natural resources.

Lots of products get shipped by boat, but the reason shipping companies have gained greater visibility as an investment is because of their role in transporting one of the world's most valuable commodities: petroleum. Supertankers ship more than one-fifth of the world's oil. Given oil's critical role in the global economy, shipping companies that specialize in transporting oil will continue to experience steady demand for their services.

Investment Risks

However, there are risks to investing in petroleum shipping companies, namely a sustained decline in global consumption of oil, the very commodity that fuels their growth. Other risks to the earnings of shipping companies are overexpansion of fleets, a decline in cargoes and a global economic slowdown that reduces oil consumption—all of which drive tanker rates down.

Tanker rates are largely dependent on the supply of ships available to carry crude oil and the demand for their services. An economic slowdown could weaken demand, while a deluge of ships expected to flood the market over the next few years could also push rates lower. Standard & Poor's expects the global tanker market to suffer overcapacity in 2008 and 2009. Based on information from industry research group Bassoe, daily charter rates for very large crude carriers (VLCC) were $79,672 in the fourth quarter of 2007, up sharply from $25,486 in the 2007 third quarter. So far in 2008, VLCC rates have declined more than 40% from the highs seen in late 2007.

With the macro scenario in mind, let's take a closer look at the major players in the petroleum shipping business. There are four major publicly traded petroleum shipping companies with market caps north of $1 billion: 
 

  • Nordic American Tanker (NAT)
  • Teekay Tankers (TNK)
  • Frontline (FRO)
  • Overseas Shipholding Group (OSG)

 

Frontline Ltd. (NYSE: FRO) operates about 75 tankers, under primarily short-term contracts, with a total capacity of more than 18.5 million tons. Frontline's tankers are designed to transport oil, and do so all over the world, from the Persian Gulf to the Far East, Northern Europe, the Caribbean and offshore Louisiana. The company also transports coal and iron ore. One of the major benefits to owning the shares of shipping companies are their very generous dividends, and Frontline is no exception, paying $2.75 a share, for a whopping 16.6% yield.

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