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Sep 06, 2010

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TALES OF THE TAPE: Stormy Waters Still For Oil Tanker Stocks

Feb 05, 2010

By Claire Rangel
Of DOW JONES NEWSWIRES


NEW YORK (Dow Jones)--Oil tanker stocks had a buoyant start to 2010 as tanker freight rates spiked to 15-month highs, but recent share declines are reflective of the challenges this sector still faces.

The group's fortunes are linked with a recovery in oil and economic demand, which so far remains uneven, while there has been a flood of new tanker deliveries and more to come. But the mandatory scrapping of older, single-hull tankers plus an anticipated rise in oil consumption may offer a brighter end to the year.

Tanker stocks, including Overseas Shipholding Group Inc. (OSG), Frontline Ltd. (FRO) and Tsakos Energy Navigation Ltd. (TNP), posted double-digit gains in early January in response to firmer spot market conditions. Shipping demand rose as the frigid northern hemisphere winter bolstered heating demand and bad weather caused disruptions on key shipping routes.

This lifted the sector out of one of its most difficult years in decades with companies reporting losses after the global recession caused oil consumption to slump and pared trade flows just as a record volume of new tankers entered the shipping fleet.

But the next couple of quarters are likely to prove difficult as energy demand typically wanes as winter ends, amid an oversupply of vessels, potentially lowering revenues for tanker companies.

Yet companies with a significant proportion of their fleets chartered out on a time-charter basis--whereby a vessel is hired for a fixed period of time and the owner or operator receives a fixed daily revenue--may be better positioned to ride out near-term challenges.

Jonathan Chappell, an equity analyst with J.P. Morgan in New York, tagged stocks Knightsbridge Tankers Ltd. (VLCCF) and Teekay Tankers Ltd. (TNK) as overweights, as these companies are not as highly exposed to the spot market, which can cause volatility in earnings.

He said Teekay has good time-charter coverage, which would help it sustain an attractive dividend yield, while he expects Knightsbridge could reinstate a dividend that it had suspended last year. Teekay Tankers gave guidance this week that it expected to increase its fourth-quarter dividend to between $0.24-$0.27 per share, compared with $0.15 a share in the third quarter. The company said in a press release that this was due to the high rates earned by vessels on fixed-rate charters rather than from the spot-traded fleet where rates were weak.

Looking ahead to this year, Teekay Chief Executive Officer Bjorn Moller said in the release that he anticipated another year of significant volatility for the tanker market.

"Spot rates will be positively influenced by growing demand for tankers due to a strengthening global economy and the scrapping of older tankers." But he added this would be "countered by the negative influence of a relatively high amount of new tanker capacity entering the fleet."

If forecasts for rising energy, and thus shipping, demand by the end of the year are proved right, then tanker trading conditions could improve from 2009.

Omar Nokta, an analyst with Dahlman Rose in New York, says tanker stocks should gradually trend higher, anticipating that once oil demand steps up and as hefty oil inventories are run down, this will lead to a rise in oil supply from the Organization of Petroleum Exporting Countries. The very large crude carrier, or VLCC, sector would benefit the most from this as they typically ship the majority of cargoes from OPEC producers.

Frontline and Overseas Shipholding Group, two of the largest tanker owners and operators, would be ideally positioned for such a rise in freight rates as they have exposure to the spot market and the most VLCCs in their fleets, said Nokta.

Nordic American Tankers (NAT), a company with no debt on its balance sheet and thus requires a lower break-even return on daily earnings than most other tanker companies, is also seen as a good pick by Nokta.

Jefferies and Co. recently reiterated a buy rating for NAT, saying "NAT shares remain one of our favorite ways to take advantage of an anticipated improvement in crude oil tanker market fundamentals given the company's significant upside potential through its spot market exposure...and its debt-free balance sheet."

Rising fleet supply, though, still offers some limitations to the sector. But shipowners could pin their hopes that growth should moderate by the end of the year, as those single-hull tankers aged 25 years or older will have left the fleet, as ruled by the International Maritime Organization.

"We will continue to closely watch the tanker group as we believe it remains an attractive recovery play at the right valuation levels or on visibility to more sustainable demand momentum," Deutsche Bank said recently in a note.

(Claire Rangel covers the oil market for Dow Jones Newswires in New York and can be reached at 212-416-2846, or claire.rangel@dowjones.com)