Oil Tanker Stocks Are Key Beneficiaries Of Tension In The Middle East
The CEO of Nordic American Tankers Ltd., Herbjorn Hansson, is no shrinking violet when it comes to trumpeting good news in the tanker market. In a stock market that is dominated by tech titans, the ridiculous amount of operating leverage that can be generated by oil tankers in time of political turmoil can be overlooked. Mr. Hansson’s press release this morning succinctly summed up the situation. Here is its text:
The good market for all our tankers is continuing.
We started the New Year and the new quarter with booking one of our 23 Suezmax tankers for a Time Charter Equivalent (TCE) in excess of $100,000/day. Although this type of rates cannot be expected for all our vessels in all areas, it is another confirmation of the strength of the market. Our operating costs are $8,000/day for each vessel.
During the last few days, we have seen political uncertainty in the Middle East, a center for seaborne oil transportation.
As we have repeatedly stated in our reports, political uncertainty is often positive for the tanker market. Dislocation of oil production now leads to longer transportation distances.
With or without political uncertainty, the tanker market is strong. On that note, we would like to wish everyone a good tanker year!
Nordic American Tankers Ltd.
Chairman & CEO
I have written about shipping stocks many times for Forbes. Of course, I have noted the industry’s extreme cyclicality (and seasonality) in each of those columns. These stocks are for traders and those with sharp reflexes, but the risk premium reflected in the valuations in no way reflects how good things can be in markets in which demand outstrips supply. I started playing shipping stocks in 2004, and the last 15 years have taught me that the market always underestimates the true earnings potential of these companies on the way up. Always.
In case your calculator is off, Mr. Hansson was noting that NAT will book a 92% operating margin on its latest suezmax voyage. That’s bananas.
So, if you believe that tensions in the Middle East—sparked by the killing of a U.S. contractor in Iraq by militia forces controlled by Iran and the U.S.’ retaliatory killing of Iran’s Quds force commander General Soleimani among others—will continue or even intensify, you should be invested in oil tanker stocks.
Oil is a globally-traded commodity, and for the first time in 70 years, we actually produce more of it in the U.S. than we import. Thus, crude oil futures have had decent move in the past 4 trading sessions, but nothing resembling a price shock. That oil still has to go somewhere, though, and with Chinese oil imports on an inevitable, inexorable rise—China’s imports totaled 11.18 mmbd in November, according to Bloomberg, a 15.8% year-on-year increase—the conveyors for that crude become incrementally more valuable.
Bloomberg also noted that China’s November import total easily outstripped the U.S.’ single-month crude imports record of 10.77 mmbd set in June 2005. The leaders in Beijing are obviously keenly aware of developments in the Middle East, and if that means that China is “over-ordering” oil to prepare for a possible supply shock, that is just that much more incremental demand for oil tankers.
Exacerbating this demand-push is the maritime regulation known as IMO 2020. This regulation calls for a decrease in sulfur concentrations in marine fuel from the previously-allowed limit of 3.5% to 0.5%. That can be achieved by new, modern eco-ships, retrofitting older ships with scrubbers or using ultra low sulfur diesel fuel—which has been in short supply in recent months—to run scrubber-free ships. So, again, incremental ships—the old warhorses of the tanker fleet—are either not available or not economic to run in 2020. More pressure on the supply side.
So, just when the world needs oil tankers more than at anytime in the past 5 years, environmental regulations and tight credit markets have robbed the market of incremental supply. That’s what causes a cargo rate spike, and that’s exactly what we are seeing in the market for oil tankers now.
The benefits to the tanker operators are myriad. Companies can use those windfall profits to pay down debt, buy back stock, or, as is the preferred method of Mr. Hansson at NAT, increase dividend payouts.
The good times are rolling for oil shippers. There are only a few publicly-traded oil tanker stocks, and they are not huge in terms of market capitalization. The table below lists them, but don’t be fooled by the proximity of these boom-bust names to their 52-week highs. There is more upside.
Stock Symbol Mkt cap ($mm) Price 1/7 52-wk. hi
Nordic American Tankers NAT 715 $5.02 $5.17
Euronav EURN 2,800 $12.92 $13.10
Scorpio Tankers STNG 2,250 $38.66 $40.45
Teekay Tankers TNK 878 $24.61 $25.64