Light at the end of the tunnel for tanker companies
After the 2003-08 bull run – in which tanker rates spiked to record levels in late-2004 and mid-2008 – last year's downturn pushed shares in tanker groups to a seven-year low. Yet there are signs of recovery: shares in Norwegian tanker company Frontline are trading at around $30. That is still well short of the peak in June 2008, when the shares were closer to $70, but a much healthier level than the $16 trough in March 2009, the lowest point since 2003.
Dahlman Rose, a US investment bank, is optimistic about the tanker sector's prospects this year, identifying Frontline, Overseas Shipholding Group (OSG) and Nordic American Tanker Shippings as being among the group of companies likely to perform well. That view is based on the assumption that oil demand will recover, particularly in Asia, and the prospect of Opec perhaps raising production later in the year. Reduced Opec volumes in 2009 cut demand for tankers leaving the Mideast Gulf, an important source of long-haul trade for many tanker operators.
The investment bank also sees better days ahead for the offshore sector, based on growth in upstream spending and idle rigs being brought back into service. European oilfield services group Saipem announced a clutch of new contract orders in January that will return idle rigs to active service in locations across the globe.
Some operators, such as Teekay, have aggressively diversified their tanker fleet to move into the floating storage and offloading, and floating production segment of the market, converting older vessels for oilfield use. This is a niche that is showing signs of a return to growth, according to Jefferies & Company, a securities group.
It is similarly bullish about the tanker market's prospects. "Although tanker charter rates and asset values could remain under pressure in the near term, the improving global economy is likely to cause Opec to increase production by year-end 2010, which in turn should provide a boost to tanker demand," it said in a recent research note.
Jefferies has upgraded its recommendations on Frontline, OSG and Nordic American Tankers from under-perform to buy, raising its target prices on all three. Analysts' enthusiasm for these stocks is partly attributable to their exposure to the spot market, which will enable the companies to profit from the expected rises in charter rates.
Another indicator of change is financial markets' growing willingness to lend to shipping companies. Teekay has already refinanced some of its debt obligations this year. Fleet expansion is another sign that the market has entered a recovery phase as shippers modernise their fleets. OSG, for example, has 26 newbuild and conversion projects under way in South Korea, China, Dubai and the US. However, banks are still generally reluctant to extend loans to newbuild ventures, which should restrict orderbook growth.
Looking for consistent signs
Hesitancy is not surprising. Although most shippers expect the market to strengthen this year, all would feel more comfortable if there were more consistent signs that demand for oil and gas – and demand for tanker services – is indeed returning.
"While we don't expect crude-tanker charter rates to improve sustainably until the second half – and could get weaker in the near-term as oil held on tankers is de-stocked – the shares of the most spot-market exposed tanker companies are compelling from a risk/reward standpoint at present levels," Jefferies says.