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Tickers in this Article: TK, FRO, OSG
One would think the oil tanker business would be a good business to be in right now - given the amount of crude oil that North America and Europe import.

Demand and supply are the primary drivers in any commodity-based business. Certainly, there is great demand for oil, however, there is an even greater supply of tankers ready to ship that oil. We are going to examine three of the biggest oil haulers and note some marked differences in how they operate. Given the risky nature of this enterprise, you may want to steer clear.

The Biggest and Thinnest
Teekay Corporation (NYSE: TK) is the world's largest tanker ship company with a market capitalization of almost $4.3 billion and revenue of just over $2 billion. The company has a fleet of vessels that include everything from local shuttle tankers to the world's largest fleet of Aframax vessels and lately even LNG carriers. You can think of TK as vertically integrated. It handles everything from maintenance, crew, tech support, insurance and financial management.

The firm's financial results have been very volatile. Its five-year average growth in sales has been about 14%, but the past three years have been 8% and last year's growth in sales was 3%. TK's net margin has averaged more than 25% for the three years, but last year came in at just over 13%. Its return on equity, while over 25% average for the prior three years, scored scarcely more than 11% last year.

There are two problem areas: overcapacity and liquidity.

Overcapacity - These tanker concerns have built and acquired so many vessels that there appears to be an over abundance of ships and both contract and spot rate prices have plummeted.

Liquidity - During the past year TK's shares have appreciated roughly 40%, which brings us to the second problem. TK has 32 stockholders. That's thirty-two and that brings new meaning to "thin". On top of this, institutional investors own 49% of the company. The crux of all this is that liquidity might be a problem and retail investors should be very careful how and when they place orders, perhaps using techniques such as limit orders and placing them during the most active part of the day. (To learn more, see Understanding Order Execution.)

Big Yield
Frontline Ltd. (NYSE: FRO), with a market capitalization of $3.4 billion and sales of $1.6 billion, is a study in contrasts. While its growth in sales has averaged 54% for the past three years it was -18.44% last year. Frontline's growth in net income has gone from averaging almost 34% over the past five years to -34% last year. Given these problem areas, Frontline's net margin continues to hover around 40% and its return on equity last year was a whopping 73%. Its dividend yield is more than 14%. The shares have appreciated about 24% during the past year, but they are extremely volatile, having a beta above two.

The company also suffers from the same systemic problem of overcapacity. Frontline however has decided to forgo the more meager but dependable contract market and instead has opted to participate by dedicating two-thirds of its fleet to the volatile, but more lucrative, spot market.

Frontline has a "double" problem. It has 25 single-hull ships that will have to be phased out or made into double-hull vessels by 2010. This is an expensive proposition. It remains to be seen what company will do.


Another Overcapacity Victim

With a market capitalization of $2.7 billion and revenue of slightly more than $1 billion, Overseas Shipholding Group, Inc. (NYSE: OSG) is the most widely held of this group of three, with 384 shareholders. OSG is one of the largest carriers in the world with an operating fleet of 104 international and U.S. flagged vessels. OSG has been victimized by the overcapacity of the global oil tanker fleet as well.

OSG's shares have appreciated roughly 45% over the past year, perhaps benefiting from the company's incrementally more stable financial results. The shipper's revenue, while averaging a growth rate of more than 31% for the past three years, trickled in at 4.71% last year. Its net income growth has gone from averaging more than 44% for the prior years to -15.5 % last year. Finally, the company's operating margin, averaging more than 40% for the past three years, hung in there during the past year at 33.5%. Its return on equity last year was 16.4%.

Reacting to this phenomenon, OSG has reduced its share buyback program from $300 million to $200 million, but it continues to pay a modest dividend.

Staying Afloat
The name of the game for all of these firms is stay afloat during this over-capacity crunch and hope that rates go back from the 40% decline they have seen in recent history. Many of the risks to those rates, be they longer term contract rates or spot, are out of these firms control and include geopolitical turmoil, weather and general economic conditions.

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