MARK LENNIHAN
The oil tanker stocks have been an interesting sector to watch and certainly have delivered their share of opportunity. They aren't all that difficult to understand, but there are a couple of nuances to be aware of, including the recent oil 'carry' that has affected them.
But one thing to remember is how viciously violently they can ratchet up and down. They are not for the faint of heart.
Commodity demand is most obviously number one affecting the profitability of transporting oil . If you look at any of the big shipping companies, many of the charts for their stocks will closely resemble the price chart for oil.
But not all shipping companies are created equal. Many of the shipping companies engage in very long term contracts and their revenues are not massively affected by short-term changes in oil prices, oil demand and sometimes very quick new demand for tonnage.
A company like DryShips tends to lock up their tankers without much flexibility, while someone like a Genco Shipping tends to hold some tanker inventory back, trying to take advantage of quick bumps in the day rate - the price paid for per-diem shipping of oil.
There are also shipping companies that choose to deliver a lot of their profits back to shareholders in distributions and while those dividends in good times can look mighty tasty, they can shrink quickly and massively, or go away entirely when shipping rates go south.
Witness a shipping company like Nordic American , which sported a quarterly distribution of $1.60 as recently as 2008, while its last two dividends have been 10 cents and a quarter, respectively. That's better than the previously mentioned Genco, which canceled it's close to $4 a year distribution of 2008 entirely in 2009.
Contrast that with Teekay Corp , which has tried to hold its dividend fairly steady at somewhere between 24 and 32 cents each quarter for the last four years.
So investing in this sector all depends on what kind of investor you are. Ready to roll the dice on a continuing recovery? You'd want companies that can take advantage of a quickly upticking day rate, which has been the recent trend. Rather invest in a slower recovery that doesn't ratchet around like a yo-yo? Then a company like Teekay is for you.
One last interesting influence on the day rate: the oil carry trade. Oil futures are priced in months, creating a curve of prices.
When the prices go significantly up as time passes, we call that a contango curve of prices. If the contango gets too steep, there can be a real incentive to hire tankers ; not to transport crude, but merely to STORE crude. This has happened as recently as early this year when contango was as deep as 10 dollars over a 12-month period. When tankers are being used for storage, obviously that will spike day rates in a hurry.
Since I recommended some of these tanker stocks from much lower levels in December of 2009 based on this oil carry trade, there's been an interesting couple of moves in some of these stocks. Still Nordic American, which I looked at, did raise its dividend in that time and Frontline's stock price has almost precisely correlated with the carry contango. It rallied strongly right after I pointed out the deep contango at the start of the year, contracted as the premium contracted through February but has recently rallied again through March and April as the contango has again approached $5 for 12 months.
The tanker stocks are very volatile and only for the strong of stomach. But they offer some really interesting and quickly profitable opportunities.