Analysts Trash Tanker Stocks

Frontline, Teekay Crash Nears Amid Tanker Glut, Crude
By Alaric Nightingale and Todd Zeranski
Oct. 22 (Bloomberg)

The record increase in oil prices and the unprecedented number of new tankers transporting crude is a stock market crash waiting to happen.

That, at least, is the growing consensus among analysts who say the widening gap between West Texas Intermediate crude and the rate for supertankers shipping Middle East oil to Asia means industry titans Frontline Ltd., Overseas Shipholding Group Inc. and Teekay Corp. have unsustainable valuations.

The Bloomberg Tanker Index has risen 44 percent in the past two years, even as freight rates sank 49 percent. The price of marine fuel, the biggest cost for shipowners, has advanced 44 percent in that time, reaching a record $446.50 a metric ton on Oct. 17. The number of ships available is close to a record.

``It doesn't look good at all,'' said Andreas Vergottis, who helps manage $1.2 billion at Isle of Man-based Tufton Oceanic Ltd., the world's biggest hedge fund dedicated to shipping. ``We've got a wall of worry and a wall of new buildings flooding the market ahead of us.'' He said the stocks are 30 percent overvalued.

Frontline, the world's biggest operator of supertankers, reached a record low of 3.80 kroner in December 1998. The stock this year has gained 30 percent and was trading 2.1 percent lower at 233 kroner as of 12:03 p.m. in Oslo. The gain has helped make Chairman John Fredriksen into Norway's richest man, with a fortune that Forbes magazine estimates at $7 billion.

Too Many Ships

The looming decline for tanker stocks is a legacy of the biggest tanker construction program in history. Teekay, Frontline and Overseas Shipholding in 2004 earned a combined $2.2 billion, triple the level of a year earlier, because of a jump in world oil demand. They used that profit to help order 522 tankers from builders including Hyundai Heavy Industries Co. and Samsung Heavy Industries Co.

The size of the oil tanker fleet expanded 3.8 percent this year, overwhelming the 1.7 percent increase in crude oil demand estimated by the International Energy Agency. The fleet will increase by as much as 32 percent during the next five years, estimates Lloyd's Register-Fairplay, the company that assigns ship registration numbers.

Tankers are being built at the fastest rate ever, according to Clarkson Plc, the world's largest shipbroker, which began collecting industry data in 1852.

Tankers capable of hauling 1.2 billion barrels of crude, equal to about two weeks of global oil consumption, will enter service in the six years that end in 2009, according to Clarkson. The total is 1 percent higher than the previous record, from the 1970s.

Straight to Scrapyards

Ship demand at that time slowed, and newly built tankers were sent straight to demolition, said Per Mansson, a shipbroker for Nor Ocean Stockholm AB, a former second mate and executive at Frontline before Fredriksen bought the company. Some tankers hauled one cargo from Asian shipyards to northwest Europe, only to be laid up in the fjords of Norway, he said.

``It got so bad that, on one voyage from Sweden to Venezuela, we turned the engine off and went with the current down to the Caribbean because fuel was so expensive,'' said Mansson, 55. ``We got a telegram from Exxon to go at 7 knots, so we just floated down.''

The Bloomberg Tanker Index has gained 32 percent this year, outpacing a 5.8 percent increase in the Standard & Poor's 500 Index, and a 6.4 percent drop in U.S. government 10-year bonds. Oil is up 41 percent and reached a record $90.07 a barrel in New York Mercantile Exchange trading on Oct. 19.

Teekay has appreciated 32 percent this year to $57.72 on the New York Stock Exchange, valuing the Bahamas-based company at $4.3 billion. Overseas Shipholding, based in New York, has advanced 27 percent to $71.56.

Demolitions

Shares of Frontline are heading for an 11 percent decline, according to Henrik With, the DnB Nor Markets analyst whose advice on Frontline gave clients a 91 percent gain in the past year. Teekay may decline 26 percent, he forecasts. Among all analysts tracked by Bloomberg, at least 70 percent say the two stocks aren't worth buying.

Frontline Chief Executive Officer Bjoern Sjaastad in an interview said oil carriers will be sold and converted to haul bulk commodities, easing the ship surplus. Also, the speed of demolitions ``will go a lot faster than many people think,'' bolstering freight rates, he said.

Teekay spokeswoman Alana Duffy said the company can't comment before an earnings release at the end of the month. Overseas Shipholding spokeswoman Jen Schlueter said CEO Morten Arntzen wasn't immediately available for an interview.

Time Charters

Shipowners can protect against a drop in the single-voyage market by leasing vessels on so-called time charter contracts that can last months or years, while paying a fixed amount.

About 40 percent of Frontline's ships had such protection for 2007 and 2008, according to an Aug. 22 statement. Seventeen percent of Teekay's 111 carriers had such contracts, while none of Overseas Shipholding Group's biggest carriers had such deals.

Teekay protects itself against increases in the cost of marine fuel. Frontline and Overseas Shipholding don't. The industry's pricing mechanism, known as Worldscale, is updated once a year to reflect changing fuel prices.

Demand for single-voyage charters is ``stuck in a rut'' because the soaring price of oil is squeezing refiners and discouraging purchases, said Omar Nokta, an analyst at Dahlman Rose & Co. in New York. He advises investors hold their Frontline shares.

Losing Money

Refineries are losing 63 cents on each barrel they process in Europe, compared with a profit of $7.86 in May, because crude costs are rising faster than prices for gasoline and diesel, according to data compiled by Bloomberg.

``All this weakness is stemming from refineries not being in the market,'' said Nokta, whose call on Frontline during the past year led to a 35 percent profit for investors.

Analysts value shipping stocks in relation to the cost of second-hand tankers. From December 2003 through July 2007, those ship values more than doubled, according to data from the London- based Baltic Exchange. Since then, ship prices have dipped, exchange data show.

``Asset values will fall and dividend payments must be cut,'' said DnB Nor Markets' With. ``Too much fleet capacity coming on stream will put pressure on earnings from 2008 to 2010.''

Freight Rates

Falling freight rates and record fuel costs have given shipowners their longest string of losses in five years, according to Citigroup Inc., the third-largest lender to the shipping industry. So-called very large crude carriers, which transport about 2 million barrels, are losing more than $13,000 a day in the market for day-to-day charters. Shipowners are spending more on fuel and debt payments than they collect in rent.

Suezmax vessels, the biggest tankers that can navigate Egypt's Suez canal while full, are losing more than $10,000 a day. Owners of aframaxes, 600,000-barrel carriers that usually haul crude within the same continent, are losing about $13,000 a day, Citigroup estimates.

Thirty of the largest tankers may be sold and converted into carriers for grain, coal and iron ore, markets where freight rates are at a record high, Frontline's Sjaastad said.

``For the next 15 months, there isn't going to be substantial additions to the fleet, you'll have depletions going to dry bulk,'' said Dahlman Rose's Nokta. ``If you have the demand push, then they'll be able to absorb the vessels. Demand would keep a natural floor.''

China's economy is growing at almost 12 percent a year and India's by 9.3 percent, spurring demand for oil, steel, iron ore and coal.

No Cargoes

Some 50 supertankers have failed to find cargoes in the past month, and vessels will compete for consignments in November, extending declines for owners, forecasts Paris-based shipbroker Barry Rogliano Salles.

Relief may not come until 2010, when the United Nations' shipping agency, the International Maritime Organization, adopts a ban on single-hull tankers, those at greatest risk of spilling oil in the event of an accident. Once the policy takes full force five years later, the only tankers plying the oceans must have two steel hulls.

``Everything now is about what happens between today and 2010,'' says Ole Stenhagen, an analyst at SEB Enskilda in Oslo. ``We are in for a real dip in rates and a rough environment.''

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