Oil Tanker Winners: Teekay, Frontline Scott Eden 01/11/10 - 04:32 PM EST NEW YORK (TheStreet) -- Oil tanker stocks set a raft of new 52-week highs Monday as investors continued to pour into the sector on optimism about economic recovery and the resulting need for OPEC to hike crude production. Those ideas were reinforced by Jeffries & Co. analyst Douglas Mavrinac, who upgraded the tanker sector of the shipping industry to buy from hold on Monday -- his first sector-wide buy rating since 2006. The upgrade follows a similar call last week by Omar Nokta, an analyst at Dahlman Rose in New York.
Over the last month, a shift in sentiment on tanker stocks appears to have overtaken the market. One hedge fund trader who had been short tanker shares as late as December had gradually shifted his position until he went maximum long only a week ago. The northward trend in tanker stocks has probably also caused a fair amount of short covering: as of Dec. 15, almost 25% of Overseas Shipholding's(OSG Quote) float was in the hands of short sellers, for example.
Even as Mavrinac made his call, spot rates for Arabian Gulf Very Large Crude Carriers, or VLCCs, shot as high as $70,000 a day, almost twice as much as a week ago.
Mavrinac was a bit more discerning than his general bullish call would otherwise imply. He favors the shares of tanker companies with more than 50% of their fleets on the spot market. Those companies with fewer ships tied up in long-term charter contracts will benefit that much more from the rising rates expected by Mavrinac over the next 12 months.
"This is a longer term call," Mavrinac said in a phone conversation. "This is for guys that can afford to look through that trough." He noted that tanker rates (and tanker share prices) will likely remain choppy over the next few months as the Northern Hemisphere's uncommonly frigid winter eases into spring and as ongoing contango trades eventually unwind, turning loose onto the market those ships that traders had used as floating storage for their crude-oil positions. Both circumstances would lead to weaker rates over the short term.
But the longer-term fundamentals look strong, with global economic recovery leading to decreased crude inventories, leading to an OPEC decision to open the spigots, leading to increased demand for tanker transport, leading to climbing tanker shipping rates.
"The sell side still hates" tanker stocks, Mavrinac said. "But when OPEC increases production, people are gonna herd up to buy them."
He foresees a series of "outsized gains" as tanker companies post strong quarterly profits. "It'll be a beat-and-raise type of environment."
For the analyst, three names stood out among those companies highly leveraged to the spot market : Nordic American Tanker(NAT Quote), Overseas Shipholding and Frontline(FRO Quote), all of which he upgraded to buy from underperform. Nordic, for example, has 12 of its 13 vessels on the spot market. Overseas Shipholding and Frontline have two-thirds of their fleets on the spot market.
Shares of Teekay Corp.(TK Quote) led the advancers Monday, gaining 7.7% to $26.87. The stock touched a new 52-week high of $27.14 intraday.
Frontline rose 5.6% to $33.98 late in the session, Overseas Shipholding was up 5.5% to $51.39, and Ship Financial(SFL Quote) was adding 3.5% to $15.48. All three stocks set fresh 52-week highs intraday Monday.
Elsewhere, Nordic American rose 4% to $33.98; General Maritime(GMR Quote) gained 2.7% to $8.41, and Tsakos Energy(TNP Quote) jumped 6.3% to $17.62.