How to Play the Shipping Stocks’ Rally
Rates for tankers—the massive ships that move crude oil and natural gas around the world’s oceans—have soared in recent months. Operators of some types are able to charge four times as much for their bookings today than they were just last August. For many, that has made the difference between unprofitability and potentially record earnings.
New International Maritime Organization rules that require ships to reduce sulfur emissions went into effect on Jan. 1 and have had a twofold impact on the industry. They have increased demand for cleaner, more refined fuels, which are produced only in some regions and need to be shipped long distances—tying up tankers for longer.
The rules, known as IMO 2020, are also taking a significant number of tankers out of the water, as owners fit them with scrubbers that reduce sulfur emitted from their exhaust. Some could scrap older ships that aren’t worth retrofitting. That means less capacity to meet global shipping needs.
Then, there’s geopolitics. Close to a third of all crude oil that travels by tanker passes through the Strait of Hormuz, which connects the Persian Gulf and its oil and gas-producing countries with the Gulf of Oman and Indian Ocean beyond. Attacks on tankers in the area and on a Saudi Arabian refinery last fall caused shipping rates to spike. And the recent U.S.-Iran tensions have made matters worse, lifting the risk premium that shippers operating in the Middle East are able to charge.
Shipping stocks have rallied, along with the soaring rates: Teekay Tankers (TNK), with a fleet of over 60 ships, saw its stock boom 180% from the end of August to Thursday’s close, while Nordic American Tankers (NAT) jumped 181%. Euronav (EURN) and Frontline (FRO) have each returned about 56%, while Scorpio Tankers (STNG) and DHT Holdings (DHT) are up 47%. The small-cap Russell 2000 index has returned 12% in the same period.
Tanker rates look to remain high in 2020, according to BofA Securities analyst Ken Hoexter, keeping shipping stocks’ rally going over the long run.
In the short term, however, investors may have gotten ahead of their skis on some of the highest-flying tanker names, according to data from Olivetree Financial, a broker that uses a variety of fundamental, technical, and other indicators to calculate sentiment scores for stocks.
Daniel Sanders, Olivetree’s head of U.S. execution services, notes that sentiment scores on Teekay and Nordic American shares in particular have reached extreme bullish territory, with the stocks trading at or above their sell-side price targets, short interest nearly entirely out, and daily relative strength indexes in overbought territory and high versus the sector average.
A short-term correction might have begun on Friday, when Nordic American and Teekay stocks fell 7% and 5%, respectively, leading shipping stocks lower. Sanders sees a greater relative opportunity in DHT shares. Olivetree’s sentiment score is neutral on the stock, which trades at half the valuation of the sector average, sports a dividend yield four times higher, and still has nearly 8% of its float sold short.
“There is a group of investors who focus on this sector, and therefore we could very well see a rotation into one stock and out of the other,” Sanders says.
For shipping-stock investors with a long horizon, the outlook remains bullish. But in the short term, it could pay to be choosy.