November 10, 2011 at 07:00 AM EST
4 Reasons Tanker Stocks Are Hitting a Reef
Sinking charter rates, flat oil demand, a tanker glut and a weak economy create rough water for shipping companies.

“Admire a small ship, but put your freight in a large one,” the Greek poet Hesiod wrote. “For the greater the lading, the greater will be your piled gain — if only the winds will keep back their harmful gales.” Shipping companies have followed that sage advice in recent years, investing heavily in — and profiting from — the largest oil tankers. Now they’re being buffeted by those harmful gales.

In a perfect storm of too many ships, a collapse in charter rates and looming global economic clouds, tanker stocks are foundering. The Baltic Dirty Tanker Index, which measures charter rates on international oil routes, has sunk from 1,055 to 762 over the past eight months.

And while that’s better than the index’s low point of 657 back in January, bunker (or ship) fuel prices for Very Large Crude Carriers (VLCCs) have increased by one-third. With daily charter rates that low and substantially higher fuel prices, many shippers are losing up to $1,800 a day after they pay bunker fuel and other costs.

As evidence of tough times in the shipping sector, Danish shipping company A.P. Moller-Maersk, on Wednesday reported a 79% drop in net earnings, attributing its $297 million quarterly loss to turmoil in its container shipping and tanker units.

While tanker stocks are showing minor improvement since the sector’s low-water mark in October, there are solid reasons why tanker stocks are hitting a reef right now. Here are four:

  1. Sinking Charter Rates. The drop in daily charter rates has hit tanker stocks hard. Bankruptcy rumors abound at General Maritime (NYSE:GMR), which, at 18 cents, has lost nearly 96% of its value since this time last year. General Maritime’s current market cap of less than $21 million would barely cover the cost of a single 16-year-old secondhand tanker. And it won’t cover the nearly $25 million GMR lost in the third quarter. In addition, Overseas Shipholding Group’s (NYSE:OSG) third-quarter loss more than doubled to $71.1 million due primarily to lower rates.
  2. Tanker Glut. During the boom market, from 2000 to 2007, shipping companies invested heavily in the largest tankers. But now the mammoth VLCCs are coming into a market that’s vastly different than it was back when the vessels were ordered. The glut is so severe that selling some older VLCCs for scrap makes more sense — and money. Between now and the middle of next year, 50 more VLCCs are scheduled to be delivered.
  3. Weak Economic Growth. Just when we thought we’d put the worst of the debt crisis in Greece behind us, along comes a far more dangerous threat in Italy. That’s bound to further imperil the prospects for the already sputtering global economic recovery. Tanker companies like Maersk and Nordic American Tanker (NYSE:NAT) are trying to minimize the impact with cost-cutting measures like reducing tanker speed by 30%-40% to save fuel.
  4. Flat Growth in Oil Demand. While the global dirty tanker fleet is expected to grow by more than 9% this year, OPEC is forecasting flat oil-demand growth in industrialized nations — particularly in the European Union. Even with seasonally higher demand for heating fuel, oil demand is still projected to be negative for the rest of the year. OPEC will meet again in December to decide whether to adjust production levels. If it doesn’t cut production, things could get even tougher for the shippers above, as well as Teekay Tankers (NYSE:TNK), Aegean Marine Petroleum (NYSE:ANW) and Scorpio Tankers (NYSE:STNG).

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.


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