Essential crude tanker stock trends (Part 1 of 6)
Why is orderbook important?
The tanker orderbook represents managers’ assessment of the industry’s future fundamental outlook. It reflects the number or capacity of ships that have been ordered, as well as the number of ships under construction. A rising orderbook often suggests that future supply and demand dynamics are favorable for new or existing ships to generate good returns. Conversely, a falling orderbook paints a negative picture.
Managers not optimistic
Crude tankers are used to haul crude oil (unrefined oil), particularly from the Middle East to countries in Europe, America, and Asia. Construction time can be up to five years, depending on vessel class and size, as well as how busy shipbuilders are. From October 4 to October 11, the orderbook had fallen from 9.53% to 9.35%—a reminder that the future outlook remains bleak.
The boom and bust of the orderbook
The indicator for crude tankers has remained in a downtrend since early 2011, as managers saw the dark storm ahead. Orderbook figures hit high as 47% mid-2008, when managers’ optimism about future oil trade growth was at its peak, largely driven by soaring oil prices and global economic growth throughout the early 2000s.
Unfortunately, that excitement evaporated with the eventual burst of the housing bubble (not just in the United States) and the beginning of an energy boom in the United States. As the global economy remained weak and cars became more fuel-efficient post–financial crisis, with alternative energy sources popping up here and there, oil consumption fell overall.
Percent of existing capacity
Analysts often use a percentage to reflect the changes in the number of operating ships over time. An orderbook based on the number of ships has little meaning without context: if 12 ships were on the orderbook, the interpretation could differ when existing capacity consisted of 30 versus 1,000 ships.
Impact on earnings and shares
The latest figures show that managers don’t expect fundamentals to improve in the long term, which could negatively impact short-term share prices. Investors should take the continued weakness in the orderbook as a negative for crude shipping companies such as Frontline Ltd. (FRO) and Nordic American Tanker Ltd. (NAT). This could also negatively affect Ship Finance International Ltd. (SFL) if Frontline Ltd. (FRO) can’t run its business.
While Navios Maritime Acquisition Corp. (NNA) holds some VLCCs (very large crude carriers), its contracts mostly expire in 2017 or later. So investors need not worry too much until late 2014 to 2015. The Guggenheim Shipping ETF (SEA) will also be negatively affected, but its diversification into other shipping companies has led to its outperformance.
Browse this series on Market Realist:
- Part 2 - Managers are scrapping fewer crude tankers, but caution is needed
- Part 3 - Crude tanker supply growth keeps falling, but will it be enough?
- Part 4 - Will the Baltic Dirty Tanker Index show signs of improvement?
- Investment & Company Information