Nokta and Chappell in 2006

Around the Markets: Rising tide lifts stock of cargo firms
By Dune Lawrence
JULY 11, 2006
International Herald Tribune

NEW YORK: As U.S. stocks sank in May and June, shares of oil tanker companies like Teekay Shipping proved buoyant, outperforming the Standard & Poor's 500 index by 17 percentage points.

The surge reverses 18 months of underperformance and may mean further gains to come, as share prices play catch-up to profit growth, with the added luster of dividends that outstrip even high- yielding utilities. The companies themselves also consider their stock cheap, if $1.31 billion in buybacks in the past year is any indication.

"As an investor, you want to buy when things are bleak, and these things have been pretty bleak," said J.C. Waller, who manages the Icon Energy Fund. "When you find that combination of value, dividend yield and price appreciation coming from where these things have been, you can't ignore it."

The Bloomberg tanker index jumped 14 percent from the end of April through June 30, as daily rates for the largest carriers reached a four-month high in what is usually a period of price declines. The S&P 500 slipped 3.1 percent in that same period. Overseas Shipholding Group, the biggest U.S.-based owner of oil tankers, led the advance with a 21 percent gain. Teekay climbed 8.8 percent.

The tanker index touched its low point for the year in mid-April, 32 percent below its record high of November 2004. Even after rebounding, its price stands at 8.2 times earnings over the past 12 months, compared with 13.4 when the index peaked. The S&P 500 trades at 17 times earnings.

whose fund has outperformed 80 percent of similar funds over the past five years, estimates that an S&P index of tanker and pipeline stocks is 22 percent undervalued.

"They've gotten so low that there's not a whole lot of downside," said Malcolm Polley at S&T Wealth Management Group. Polley started buying Frontline and General Maritime in February.

And business is improving in the industry. Freight rates for the class of ships known as very large crude carriers, which can carry two million barrels of oil, on routes from the Gulf to the United States and to Japan have climbed 25 percent and 52 percent, respectively, since April.

Earnings have held up better than many analysts predicted this year. First-quarter profit at all six members of the tanker index exceeded the estimates of analysts.

Omar Nokta, an analyst at Dahlman Rose, an investment bank that specializes in shipping and energy companies, raised his earnings predictions for some tanker stocks twice in June. Constraints in the supply of tankers, and the need to lock in oil contracts further in advance, will support earnings growth and cash flow and justify higher share prices, he said.

Nokta raised his 2006 profit projection for Teekay, the world's largest oil tanker owner, to $4.79 a share from $3.98. He expects Overseas Shipholding Group to earn $10.24 a share, up from $8.31.

"If you buy now, you get this awesome run for the fourth quarter," said Nokta. "Most of the Street hasn't changed their estimates yet, not even for the current environment."

Some analysts say that the higher rates, and the rally, will not last. They warn that the stocks' low valuations reflect the risk of investing in an industry where rates and earnings fluctuate rapidly.

Jonathan Chappell at J.P. Morgan Chase in New York attributed the June rate surge to short-term factors including the use of some tankers as storage by Iran and Saudi Arabia.

"Everything else, from inventories to demand estimates to the number of ships that have been removed this year, points to a bearish market," Chappell said.

The share prices also reflect concern that there are too many new tankers being built as estimates for the growth in demand for oil decline. The International Energy Agency expects demand to increase 1.8 percent this year, compared with a peak of 3.8 percent in 2004.

Tanker demand will increase 3.8 percent in 2006 through 2008, compared with fleet growth of 5.4 percent, according to a June estimate by shipping analysts at Jefferies in Houston.