Betting on a Chinese stock rebound? Crude tankers might be better (Part 12 of 13)
In addition to vessel values (see the previous article in this series), another indicator that investors should regularly follow is orderbook. The orderbook measures the capacity or number of newbuild vessels that are currently undergoing construction, or have been slated for construction. To put it another way, it reflects the amount of backlog construction that shipyards have.
Expectation and orders
Generally, managers place orders when they expect shipping rates to rise or stay high, and when they can get an economical return if they put an order out for constructing a new ship at current prices. So if orderbook is rising, you could infer that the overall expectation regarding the industry’s outlook is favorable. This is positive for crude tanker stocks such as Teekay Tanker Ltd. (TNK), Nordic American Tanker Ltd. (NAT), Tsakos Energy Navigation Ltd. (TNP), Frontline Ltd. (FRO), and Guggenheim Shipping ETF (SEA).
Investors can also gauge the extent of optimism from how fast the orderbook is rising, whereas how fast the orderbook is falling reflects a degree of absence in orders, or how much new capacity is being delivered—both of which are negative.
Falling orderbook is now positive
At the beginning of the year, DryShips Inc. (DRYS) showed that orderbooks for tankers such as Suezmax and Aframax were near historical lows. The same can be said for VLCCs (very large crude carriers), the largest ship size of all three. Although orders have risen a bit from there, we haven’t heard many companies set orders for new vessels since late February, likely because the Baltic Dirty Tanker Index has recently fallen, and managers are waiting to see how things go before committing more.
This situation is normal in an industry recovery and turnaround, because it reduces the risk that managers will overpurchase, setting the industry up for a more long-term sustainable recovery. Scorpio Tanker Ltd. (STNG), which recently sold its newbuilds under construction for $50 million in profits, also said in its last earnings calls that current placed orders will only be delivered in 2017 and beyond. That leaves a window of opportunity for the industry to recover.
Is Scorpio Tanker Ltd. seeing weak fundamentals ahead for VLCCs? Not really, the company just didn’t think it could build a scale with only seven VLCCs, and it only wants to take eco-tankers, which would take three years. Plus, the company hasn’t raised additional funding to finance the entire purchase, so management thought they would add more value if they had just flipped it for $50 million in profits, with just $90 million in down payment.
Browse this series on Market Realist:
- Part 1 - Betting on a Chinese stock rebound? Crude tankers might be better
- Part 2 - Why China’s initial March PMI could be bad for oil tankers
- Part 3 - China’s relatively stable post-2013 loan growth helps oil tankers
- Investment & Company Information