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Oil & Energy insider Premium
August 14th 22015

Why Oil Tanker Companies are Seeing The Best Market in Years

Teekay Tankers Ltd. (NYSE: TNK) is having a great year. We highlighted Teekay in an Executive Report in February 2015, and since then the stock is up 20 percent.

For the second quarter, Teekay reported earnings of $41.3 million, or $0.35 per share, compared to a loss of $4.1 million a year ago, or a loss of $0.05 per share. The company attributed the turnaround to several market factors working in its favor.

First, is the slow rate of supply expansion in the tanker market. After years of companies building too many new tankers, building has leveled off. Below is a chart from Teekay Tankers showing the slowing build out of new oil tankers. As you can see, up until just last year, the tanker fleet was growing quickly, and the expansion depressed tanker rates, pushing down revenues for all players in the sector. That drag on earnings has finally dissipated. As a result, tanker rates are at their highest level in years.

Teekay’s competitors are doing well too. Euronav (NYSE: EURN), a Belgian-based oil tanker company, has seen its share price hit multiyear highs in July. Euronav reported second quarter earnings of $92.4 million, or $0.58 per share, up dramatically from a loss of $22 million the year before.

Other companies to take a lookat include DHT Holdings (NYSE: DHT), a smaller company that offers investors more exposure. DHT has a market cap of just $680 million, one-fourth that of Euronav. There is also Nordic American Tanker Ltd. (NYSE: NAT), a $1.27 billion company that also offers a nice dividend of 40 cents, or a 10.6 percent yield.

Temporary Play

In the same way that the oil sector sees booms and busts as projects ramp up and down in response to prices, the oil tanker market is an even more extreme example of that. For years the tanker market suffered from low rates due to oversupply. Now that the market is doing great, there have recently been more and more orders for more ships. That means that the bull market should continue for the rest of this year, but could start to sour a bit in the latter half of 2016 as more ships are delivered and push down rates. To be sure, the order book is nowhere near the levels of just a few years ago, but still, more supply is coming.

Investors should keep this in mind and consider investments to be a short-term hedge against any upstream positions.