Love it or hate it, hydraulic fracturing is really changing the dynamics of the world energy markets.
Producers here at home have been able to unearth a bounty not seen since the first days of hydrocarbon production back when Col. Edwin Drake drilled his first well. That’s led to an abundance of oil and gas, with supplies of the two reaching historic highs.
From chemical producers/refiners to the oil services industry, this plethora of oil and gas has meant plenty of new opportunities and growth potential for the energy sector.
However, it hasn’t been rosy for everyone.
As we have been able to produce more domestic crude oil and natural gas, imports of energy have fallen by the wayside. That drop has seriously affected the global shipping stocks that carry crude oil. Thus investors should note that even with the potential to begin exporting our bounty in later years, shipping stocks could be dead money walking for quite a bit of time.
Weakest Market in 16 Years
Estimates show that the U.S. will overtake Saudi Arabia as the top oil producer by 2020. While rising domestic energy production has been great for E&P firms like Range Resources (RRC), it has been a pretty mixed bag for those firms specializing in importing crude oil from the Middle East toward America’s shores.
That’s because the rise in fracking has allowed the U.S. to meet its energy needs domestically by the highest proportion since 1986.
According to the Department of Energy, daily domestic production soared to 7.26 million barrels for the week ending June 21 — about 2% shy of the 21-year high reached in May. That rising domestic weekly production has resulted in a decline in the amounts of imported fuel. In fact, the Energy Department estimates that the amount of fuel imported into the United States has shrunk to the lowest monthly rate since 1996 — a lowly 7.3 million barrels a day. And those numbers include what we ship via pipeline from Canada.
If you’re a producer of oil or natural gas, it’s hard to be upset with those numbers. However, if you’re an operator of tanker ships, those numbers could be your death knell.
It stands to reason that if you’re importing less fuel from other places, you’ll require less operational capacity from the shippers. That’s already happening in spades and could get worse before next year. According to leading shipbroker Clarkson PLC, sea-based imports will fall 11% throughout the year and reach just 5.4 million barrels a day. That plunge would represent the biggest slide since 1991.
And vast oversupply only adds to this headache.
Back in 2008 — before the global recession took hold — there was such under-capacity in the sector that critical day rates reached in excess of $155,000 a day for Suezmax-sized vessels. These 900-foot ships that carry around 1 million barrels of crude oil are considered the standard tanker ship in the industry. Given the surging day rates, owner/operators ordered hundreds of new ships and combined capacity of global shipping sector increased 40%.
That expansion continues, as it takes roughly three years for a tanker-ship to be constructed. The total Suezmax fleet will expand by 8.2% this year as newly constructed ships hit the seas. Meanwhile, contracts to build new vessels at shipyards equal roughly 14% of existing capacity.
For the oil shipping industry, it’s a simple case of too much supply coupled with falling demand. That discrepancy has resulted in plunging day rates to charter a crude carrier.
The average Suezmax vessel can now be chartered for just $10,652 a day — or the least amount since 1997. Meanwhile, VLCC (very large crude carrier) and ULCC (ultra large crude carrier) vessels have seen their rates plummet even more.
Running Below Profitability
With Suezmax operators saying they need between $12,000 and $23,000 a day for their operations to be profitable, the potential for even lower day rates isn’t exactly a bullish catalyst for the sector.
Many industry names already have been hurt hard since the economic downturn. For example, Teekay Tankers (TNK) stock has plunged by about 87% during the past five years, while Tsakos Energy Navigation (TNP) has dropped by a similar amount in that time frame. Both Frontline (FRO) and Nordic American Tankers Limited (NAT) — which are “pure” plays on the tanking industry and have little diversification in their fleets — have experienced similar catastrophic drops. Nordic American Tankers’ entire fleet consists of 20 double-hull Suezmax tankers, while Frontline owns 34 VLCCs and 14 Suezmax tankers.
That focus on crude oil carrying has resulted in huge cash flow declines, poor earnings and dwindling profit margins across the entire industry. For example, net operating cash flows during Nordic American’s latest quarter plummeted from $7.54 million in the year-ago period to negative $22 million.
While the stocks seem awfully cheap given their share price declines, there could more pain in store for the sector as the dynamics of shipping crude oil have changed. Investors could be catching a falling knife here.
There are plenty of ways to play growing energy production, but the shippers just aren’t one of them.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.