Super Tankers Deliver

By Gregory S. Davis | March 09, 2006 AAA

Super-sized oil tanker companies, whose vessels cut through oceans to deliver oil to energy-hungry nations, have made a habit out of paying large dividends to shareholders. In 2005, General Maritime Corporation (GMR) and Nordic American Tanker (NAT) paid huge dividends of $4.86 and $4.21 per share respectively. Investors searching for hefty dividends maybe able find their meal ticket here, but we must remain aware of the external energy-hungry climate and industry factors that are driving these companies forward.

The Environment
Oil demand in developing countries like China has increased consistently over the past 10 years as reported by the Energy Information Administration (EIA). As China's demand for oil continues to grow, its list of suitable suppliers has also expanded to include oil rich nations including Sudan, Nigeria, Venezuela and potentially Canada. Growth in China can also been scene in its fledging auto industry, accented by the entrance of Japanese and U.S. auto manufactures. Herbjorn Hansson, Chairman and CEO of Nordic, notes that, "once you start driving a car you don't go back to riding a bicycle".

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The Players
General Maritime Corporation and Nordic American Tanker focus on the mid-size tanker market. Aframax and Suezmax are both considered mid-size tankers since capacity for these tankers tops out at 200,000 dwt (deadweight tons). Modern Aframax ships are capable of supporting up to 180,000 dwt, equal to 800,000 barrels of crude oil. Modern and larger Suezmax ships offer greater protection from oil spills with their double hull design along with the capacity to support 200,000 dwt, equal to 1 million barrels or crude oil. Oil tanker companies can either set their prices on individual contracts or they can enter into agreements based on spot market rates.

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Nordic is the largest independent super oil tanker company in the world. Herbjorn Hansson grew Nordic from 3 tankers to 8 tankers in 14 months through acquisitions. Nordic transports oil from West Africa to the Gulf of Mexico and from the Middle East to China utilizing a fleet of 8 Suezmax double hulled tankers. Nordic's 2005 4th quarter Net Income increased 180% over the previous year to $25 million as it participated in the spot market where prices for transporting oil soared up to $64,002 per day during the quarter. For the year, Net Income increased 15% to $46 million. Spot prices for oil transportation can be seen on Imarex, the central exchange for maritime derivatives. The scarcity of tankers also played a roll in helping to drive profits. The Suezmax spot rates averaged $47,269 per day for January 2006. Nordic's stock is currently trading just below $30.

General Maritime's 2005 4th quarter results were not as rosy, as Net Income decreased 34% from the previous year to $104.6 million as a result of lower spot rates and a smaller fleet. On March 1, 2006 General Maritime Corporation announced the addition of a new Suezmax vessel to its fleet along with 3 additional new buildings to follow over the next two years. General Maritime stock is currently trading right around $35.

There are other larger players who merit attention in the energy shipping industry, including Overseas Shipping (OSG) and Frontline LTD (FRO). Overseas Shipping and Frontline LTD operate very large crude carriers (VLCCs) with capacity between 200,000 and 320,000 dwt along with other vessels utilized specifically for product transportation shipments.


Market Capacity

The fundamental principles of supply and demand are at work in the super tanker market. Limited supplies of Suezmax tankers are available while demand in the U.S. and Far East nations is steadily increasing. At the end of 2005 the Suezmax world fleet stood at 324 vessels, with 77 of those being single hulled vessels that will be phased out by 2010. Even with a reported 67 Suezmax vessels on order at the end of 2005, it takes approximately 24 to 36 months before a new tanker can be delivered as shipyards are already working at full capacity.

Conclusion
As Beijing prepares to host the upcoming Olympics in 2008 investors should investigate the shipping companies that stand to benefit from the energy demands of the world. While oil prices are volatile in the short run, the long run trend suggests that energy consumption will continue to drive the demand for Nordic American Tanker and General Maritime transportation services.

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