The continued plunge in oil prices has left a lot of collateral damage in its wake. From oil service firms to shale drillers, basically anything that is related to energy has seen its share price dwindle over the last six months or so.
That’s left some value hounds to begin sniffing around the energy patch.
While you can make the case for snagging up shares of still-profitable exploration and production firms or the latest oilfield technology providers, some subsectors of the energy market are best left untouched.
And one of the biggest could be the tanker stocks.
As tempting as it may be, there are still too many warts covering the faces of tanker stocks. For investors, the tanker stocks may be a “value” best left alone.
Oil Prices Are Killing Tanker Stocks
Life for the operators of Suezmax, VLCC (very large crude carrier) and ULCC (ultra large crude carrier) vessels that ship and move crude oil hasn’t really been so sweet since about 2007. That was when the world’s thirst for crude oil had day rates for ships hitting record highs as capacity was insanely tight. Profits and dividends for the tanker stocks were huge and share prices continued to move up.
What a difference a few years makes.
After crude oil prices imploded and fracking took hold, the crude oil tanker stocks followed suit and for the most part, never really recovered to their former glory days. In fact, the situation actually got worse — which is why the latest downtrend in oil could be a death knell.
First, there’s sort of a supply glut of new tankers on the market. During the boom days of 2007-2008, tanker owners commissioned tons of new supply to take advantage of day rates for Suezmax carriers north of $150,000 per day.
Now there’s a lot of extra tanker supply on the market. And with oil import demand down in the United States, day rates are pushed down for carriers.
Those lower day rates have actually provided sort of a second wind for the tanker stocks in recent months. That is, until it the wind stopped blowing.
The lower day rates meant that hedge funds, oil traders and other investors could charter a tanker ship and use it as floating oil storage — profiting from a commodity quirk called contango. A commodity is said to be in a contango situation when the near dated futures contract is selling for less than the future delivery contract.
In a normal and stable oil market, there’s usually some of this quirk because it costs money to store crude oil. However, for the offshore tanker storage to work, the contango — or difference in prices — must exceed storage costs.
And for the start of the year it had, as day rates were low.
Unfortunately, the contango has narrowed and it’s not so profitable for oil traders to store crude in chartered out tanker ships. In fact, some traders have already begun unloading their stored crude on the market and taking advantage of their paper profits. That’s not going to be great for future earnings from the tanker stocks.
And the downgrades have already started. Oslo-based investment bank and shipping specialists RS Platou Markets A/S, recently reduced its average day rate estimate for VLCC carriers by $10,000 per day to just $35,000. The reduced amount takes into account that RS Platou predicted that at least 1% of the global fleet would be used to store crude. That prediction hasn’t panned out.
Adding salt to the shippers’ wounds is that any massive build-ups to land storage in the U.S. should only be temporary. Typically, refineries ramp up their output between March and May as scheduled maintenance programs wind down before the summer driving season. Additionally, lower rig counts should help dwindle supplies by summer.
Neither of which makes floating oil storage a great play.
Just Say No to Tanker Stocks
While crude oil storage provided a nice bump for the oil tanker stocks during the last few months, the truth is that play may have finally run its course. The contango isn’t necessarily profitable at these levels. Adding in rising supplies of tankers as well as the potential for even lower day rates and we aren’t looking at exactly bullish catalysts for the sector.
And despite how cheap some of the tanker stocks are — Teekay Tankers Ltd. (NYSE:TNK) can be had for a price-to-earnings ratio of 8.5, Knightsbridge Shipping Ltd (NASDAQ:VLCCF) for a P/E ratio of 15.6 — those profits haven’t exactly been that stellar or really that strong.
Shipping can turn on a dime and the profitable ones have just as much of chance of becoming unprofitable once again when the overcapacity and lower demand works its way back into the forefront of the market.
And as for the unprofitable ones — Tsakos Energy Navigation Ltd. (NYSE:TNP), Frontline Ltd.(NYSE:FRO) and Nordic American Tankers Ltd (NYSE:NAT) — we’re looking at some real struggles going forward, especially considering some of their huge debt loads.
Just say no to the tanker stocks. There are better prospects for value in the oil patch.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
