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2011 In Review – Shipping Hit The Iceberg
What more is there to say about the state of the shipping industry for 2011 beyond words like "yuck," "blech", and "please make it stop"? Rates for all manner of ships plunged throughout the year, sometimes sinking below the daily operating costs of even the efficient operators. Clearly, an industry in which companies can't even charge enough to pay their operating costs is one that's in difficult shape, so the stock market carnage seen in this sector during the year is not exactly surprising.
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Shipping was not actually the worst-performing sector this year (thanks solar, coal and banks), but a worse-than 20% drop for the sector is certainly bad enough. (For related reading, see Warning Signs Of A Company In Trouble.)
Yes Virginia, There Were Some Winners
Against a terrible backdrop, there actually were some notable winners this year - proof positive yet again that a lotus can still bloom in even the funkiest pit.
Containership traffic has been marginally OK this year and skirted some of the disastrous conditions in tankers and dry bulk. To that end, both Seaspan (NYSE:SSW) and SeaCube (NYSE:BOX) look poised to eek out minor gains for the year. What's more, containerships look like they may be among the first major categories to rebound in a meaningful way.
One of the stand-out stories in shipping has to be Golar LNG (Nasdaq:GLNG), a specialist in shipping liquefied natural gas and operating floating storage regasification units (FSRUs). Demand for LNG has actually been fairly strong this year, as countries in Asia and Latin America use this energy source but don't have adequate local supplies. Golar LNG is up more than 190% as of this writing, a performance that likely cannot be repeated next year, but is certainly a welcome antidote this year. (For related reading on natural gas, see Natural Gas Industry: An Investment Guide.)
Last and not least among the notable winners is Kirby (NYSE:KEX). Admittedly, Kirby's domestic barge operations are not the sort of shipping that most investors think about with this sector, but I would argue that it still involves moving goods on a boat in exchange for money. Kirby has jumped about 40% this year, helped by strong results in its inland barge business, as well as growing revenue from its engine services unit.
A Sea of Red
Apart from this short list of winners, performance in the shipping sector was varying shades of terrible. It doesn't really matter if investors focus on tankers (which carry crude oil and occasionally refined products) or dry bulk (which typically carry ores, grains and the like), there was carnage across the board. As for the "why," it's pretty basic - too many ships available for hire, iffy demand from countries like China and India, and rising operating costs.
In the tankers, Teekay (NYSE:TK) got off easy with a year-to-date loss of about 20%, while Knightbridge (Nasdaq:VLCCF) was a little worse off. Nordic American (NYSE:NAT), Overseas Shipholding (NYSE:OSG), and Frontline (NYSE:FRO) had miserable years, though, with year-to-date negative returns of roughly 50%, 70%, and 86%, respectively. Things have gotten so bad, in fact, that Frontline has had to launch a significant restructuring, while some rivals have had to declare bankruptcy.
Turning to dry bulk, the story is very similar. Navios Maritime (NYSE:NMM) lost less than 20% so far, but Knightbridge (which also has dry bulk operations), Diana Shipping (NYSE:DSX), DryShips (Nasdaq:DRYS), and Eagle Shipping (Nasdaq:EGLE) saw losses in excess of 25%, 30%, 60%, and 80% for the year.
The Bottom Line
When you see a sector where several participants have dropped 60% or more in a year, it seems as though the next year almost has to be better. Still, a rebound in shipping is no short-term sure thing. Demand for ships to India and China may take a while to recover and there just doesn't seem to be a large move towards scrapping old and inefficient ships, despite the terrible charter rates out in the market today.
Eventually, though, rates will recover. Shipping is a cyclical market and terrible markets like 2011 have come and gone before. Containerships may be among the first to recover, while tankers and dry bulk could follow but may not really get healthy until 2013. In the meantime, investors who want to shop among the fallen angels would at least do well to focus on those operators with clean balance sheets, efficient operations, and less risky operating philosophies (including less reliance on the spot markets). (For more, see Cyclical Versus Non-Cyclical Stocks.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.
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Shipping was not actually the worst-performing sector this year (thanks solar, coal and banks), but a worse-than 20% drop for the sector is certainly bad enough. (For related reading, see Warning Signs Of A Company In Trouble.)
Yes Virginia, There Were Some Winners
Against a terrible backdrop, there actually were some notable winners this year - proof positive yet again that a lotus can still bloom in even the funkiest pit.
Containership traffic has been marginally OK this year and skirted some of the disastrous conditions in tankers and dry bulk. To that end, both Seaspan (NYSE:SSW) and SeaCube (NYSE:BOX) look poised to eek out minor gains for the year. What's more, containerships look like they may be among the first major categories to rebound in a meaningful way.
One of the stand-out stories in shipping has to be Golar LNG (Nasdaq:GLNG), a specialist in shipping liquefied natural gas and operating floating storage regasification units (FSRUs). Demand for LNG has actually been fairly strong this year, as countries in Asia and Latin America use this energy source but don't have adequate local supplies. Golar LNG is up more than 190% as of this writing, a performance that likely cannot be repeated next year, but is certainly a welcome antidote this year. (For related reading on natural gas, see Natural Gas Industry: An Investment Guide.)
Last and not least among the notable winners is Kirby (NYSE:KEX). Admittedly, Kirby's domestic barge operations are not the sort of shipping that most investors think about with this sector, but I would argue that it still involves moving goods on a boat in exchange for money. Kirby has jumped about 40% this year, helped by strong results in its inland barge business, as well as growing revenue from its engine services unit.
Apart from this short list of winners, performance in the shipping sector was varying shades of terrible. It doesn't really matter if investors focus on tankers (which carry crude oil and occasionally refined products) or dry bulk (which typically carry ores, grains and the like), there was carnage across the board. As for the "why," it's pretty basic - too many ships available for hire, iffy demand from countries like China and India, and rising operating costs.
In the tankers, Teekay (NYSE:TK) got off easy with a year-to-date loss of about 20%, while Knightbridge (Nasdaq:VLCCF) was a little worse off. Nordic American (NYSE:NAT), Overseas Shipholding (NYSE:OSG), and Frontline (NYSE:FRO) had miserable years, though, with year-to-date negative returns of roughly 50%, 70%, and 86%, respectively. Things have gotten so bad, in fact, that Frontline has had to launch a significant restructuring, while some rivals have had to declare bankruptcy.
Turning to dry bulk, the story is very similar. Navios Maritime (NYSE:NMM) lost less than 20% so far, but Knightbridge (which also has dry bulk operations), Diana Shipping (NYSE:DSX), DryShips (Nasdaq:DRYS), and Eagle Shipping (Nasdaq:EGLE) saw losses in excess of 25%, 30%, 60%, and 80% for the year.
The Bottom Line
When you see a sector where several participants have dropped 60% or more in a year, it seems as though the next year almost has to be better. Still, a rebound in shipping is no short-term sure thing. Demand for ships to India and China may take a while to recover and there just doesn't seem to be a large move towards scrapping old and inefficient ships, despite the terrible charter rates out in the market today.
Eventually, though, rates will recover. Shipping is a cyclical market and terrible markets like 2011 have come and gone before. Containerships may be among the first to recover, while tankers and dry bulk could follow but may not really get healthy until 2013. In the meantime, investors who want to shop among the fallen angels would at least do well to focus on those operators with clean balance sheets, efficient operations, and less risky operating philosophies (including less reliance on the spot markets). (For more, see Cyclical Versus Non-Cyclical Stocks.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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