The approach of US energy independence has becalmed an important part of the global maritime industry: the business of hauling crude oil across the oceans. What's worse for investors is that the trade winds likely won't pick up any time soon.
Here's why, and what it means for investments in the sector.
The International Energy Agency forecasts that the US will overtake Saudi Arabia and Russia as the world's top oil producer in seven years and will become a net oil exporter around 2030.
"Increasing US crude-oil production...directly limits the need for US crude-oil imports," says shipping analyst Douglas Mavrinac in a recent report from Jefferies investment bank. "Continue to expect crude-oil tanker market conditions to remain weak," he says.
The problem for the tanker sector is this: The economics rest not just on the amount of oil hauled by ship, but also the distance traveled. The longer the distances, the more tanker capacity is needed, and vice versa.
US-bound crude traditionally traveled more than 10,000 nautical miles from the Arabian Gulf. As America imports less energy the pumped oil will still go somewhere, it just won't go as far. The trip from the Gulf to China is around 6,000 nautical miles and to India it's even shorter, at less than 2,000.
How (or even if) the demand gap will be filled is a big question for the industry.
"If China sources its oil from Venezuela and West Africa that will help, " says Natasha Boyden, a New York-based independent shipping analyst. "Whether it will be enough to replace the US remains to be seen."
It's not as if the tankers can just switch cargoes. Crude tankers are specially constructed to carry unrefined oil. They would need to be converted to haul products such as gasoline or pressurized natural gas.
Over the past two years the changing tide of the industry has caused a collapse in crude freight rates. The Baltic Dirty Tanker Index, which measures the cost to move oil across the sea, has sunk to around 638 recently from 1,077 in January 2010, even as the global economy has improved.
At the same time, the global tanker fleet hasn't adjusted to the reduced haulage demand. This year, the total capacity of tankers in the global fleet is likely to grow 4.6%, and next year tanker supply is expected to rise 1.9%, according to a January-dated report from Clarkson Capital Markets. That far surpasses Clarkson's projected demand growth of 2.3% for 2013 and 1.5% for 2014.
"There is such an overhang with supply that to say that freight rates will increase in the out years is premature," says Urs Dur, a shipping analyst at Clarkson.
So what? It means a poor outlook at best for the stocks in the sector.
Jeffries says Frontline Ltd., which operates a large fleet of very large crude tankers (VLCCs), will lose $2.33/share this year in earnings and $2.09 next. Both estimates were slashed earlier this month based on the weak outlook. The firm says the stock is worth $2, a hair above the recent price of $1.93. Global Hunter has an even worse view for the stock, with the price headed to 50 cents.
Similarly, Jeffries says Nordic American Tankers Ltd., which operates a tanker fleet, is expected to lose money this year and the next. The stock was recently trading at $9.16, but Jeffries expects it to head to $7.
Dow Jones Newswires