Tanker stocks: Where from here?

Posted by Tim

November 8, 2007

This week I have been taking a closer look at what is going on with tanker stocks. This site’s 20 Stock Portfolio has two members in this class: Nordic American Tanker (NAT: 35.78 +0.74 +2.11%) and Ship Finance Ltd. (SFL: 28.46 +0.84 +3.04%). To me the appeal of the tanker stocks is the opportunity for out-sized dividend payments. Since the dividends of these stocks can fluctuate tremendously, the market tends to price them a very attractive yield.

NAT released their 3rd quarter earnings on Monday, reporting a small loss. This was not too unexpected because of previously reported very low charter rates and a letter from the CEO giving a head’s up. They did declare a 40 cent dividend, I think to keep their record of 10% plus annual yields intact.

Ship Finance has had little news outside of a share buy back program, but the stock has been flat and down quite a bit this week. It popped up today (11/8) over 6% with an strong upgrade from Citibank. I like SFL due to the steady dividend and having first call on the revenue of its leased ships. An 8%+ dividend that should grow makes a lot of sense to me.

From what I read there is slight over supply in the tanker business. High oil prices may get producing countries shipping more oil, a slowdown is the U.S. could reduce oil demand. Spot rates for oil tankers remain flat into the 4th quarter, so I am not looking for strong dividends in NAT for a couple of quarters. SFL has a more stable business model and I expect them do maybe have a few surprises over the next couple of quarters.

Unless some really good news comes across (isn’t that what we all are waiting for?) I expect some dips in the prices of (NAT: 35.78 +0.74 +2.11%) and (SFL: 28.46 +0.84 +3.04%). I think in the longer term (1 to 3 years) prospects are excellent. Here is a chart of the companies and Frontline (FRO: 60.02 +0.02 +0.03%), the largest tanker company.

Note: I own shares in SFL.

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