Stock Review: Petroleum Shipping Companies
I have been an admirer of tanker stocks for a couple of years. I have taken a look a couple of time and held some for a while. I wanted to review these 5 stocks and add one or two to my 20 Stock Portfolio.
Tanker companies have two ways to put their ships to work: Long term contracts with a specified rate usually tied to expenses plus a fixed profit margin or on the spot market. When these companies rent on the spot market they get the daily spot rate for the use of their tankers. The rate varies with supply of available tankers, oil prices and tanker size. Over the last 5 years the spot price has ranged from under $20,000 per day to over $100,000 per day. Recent quarters have had the spot rate in the $35,000 to $50,000 per day range. Obviously oil tankers on the spot market will have their profitability fluctuate dramatically at times.
These tanker stocks generally pay good dividends and have moderate to high yields due to the markets lack of comfort with the predictability of company earnings. These high yields are what appeal to me with these stocks. When the companies have a banner quarter, so do the stockholders. Now a look at the companies and their stocks:
First up (in no apparent order) is Nordic American Tanker (NAT: 35.56 -2.51 -6.59%). This is a $1 billion market cap, Bermuda based company that acquired their first 3 tankers in 1997, and currently own 12 double hulled Suezmax tankers, 11 of which are on the spot market. For comparison the world Suezmax fleet totals about 340 ships.
The company’s policy is to pay out all cash flow above expenses as dividends. The dividends vary quarterly with the spot market rate changes. This variability has caused the market to price NAT to a very high yield currently over 12%. The company has paid $4.73 in dividends over the last 4 quarters and current share price is around $38. The good news is that the company has been consistently profitable and has paid a dividend rate above 10% for 9 consecutive years. Nordic American Tanker also has a low estimated break-even of $9,000 per day per tanker. The company has plans to continue to grow the fleet, so profitability should grow over time.
Next up is the world’s largest tanker company: Frontline Ltd.(FRO: 63.83 -0.51 -0.79%) They own 41 Suezmax tankers and 42 VLCC tankers (out of a world fleet of 495). All tankers are double hulled. They own some and lease some of their tanker fleet.
FRO has a break-even of $22,000 per day on the Suezmax size tankers and $30,000 on the VLCC size. The VLCC spot rates are typically $30,000+ per day higher than the Suezmax rates. The company has a policy of paying high dividends when profitable and has done well. In 2002 only $.20 was paid out when spot rates dropped into the $20,000 per day range. The last 4 quarters FRO has paid $7.55 in dividends for a 12% yield on the current stock price. Of course, past dividends are no predictor of the future for these companies.
The company is active in growing its tanker fleet. It also owns 28% of Sea Production Ltd. an FPSO contractor (whatever that is) and 33% of Sealift Ltd. a cargo ship company.
Back to a small tanker company: Knightsbridge Tankers Ltd. (VLCCF: 32.34 -0.04 -0.12%) This company owns 7 tankers, 5 on time charter and 2 on the spot market. Currently all of its fleet in managed by Frontline Ltd. (FRO: 63.83 -0.51 -0.79%) and it has no dedicated managers or employees. The company has paid $3.00 in dividends over the last 4 quarters, its $.60 dividend for the last 2 quarters give a 9% yield on the current share price.
Another Frontline related company is Ship Finance International Ltd. (SFL: 27.88 -0.38 -1.34%) Spun off by Frontline in 2004 (FRO retains 1% ownership) SFL owns 71 vessels of various uses, including 37 tankers. 42 vessels of the fleet are leased to Frontline.
Ship Finance has their ships on long term charter or lease, which leads to a more stable cash flow. Their contracts do give them a 20% share on the profits of the vessels, so earnings will get an extra pop when the spot rates are higher. SFL has paid a consistent and increasing dividend. Current annual dividend is $2.20 per share for 7.5% yield on the current share price.
After my research on these companies I believe that Nordic American Tanker (NAT: 35.56 -2.51 -6.59%) and Ship Finance International Ltd (SFL: 27.88 -0.38 -1.34%) are the best options here. I like NAT for their low operating expenses, giving the opportunity for out-sized dividend payouts. SFL is picked because of a steady cash flow and consistent dividends. These two securities with be added to the 20 Stock Portfolio on my blog. This is a paper portfolio of stocks I have reviewed as good investments. The portfolio will now have 5 securities, working towards 20.
I currently do not own any of the securities reviewed here.
Filed Under 20 Stocks, InternationalComments
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