Why Teekay Tankers sees improving rates in 2014 and 2015

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Teekay Tankers sees higher rates in 2014 and 2015 (Part 3 of 3)

(Continued from Part 2)

Limited growth in 2014 and 2015

Going into 2014 and 2015, Teekay Tankers Ltd. (TNK) expects limited growth as a lower orderbook continues to translate into lower deliveries and scrapping older vessels picks up. Currently, 120 Aframax vessels are older than 15 years and another 50 ships are expected to hit 15 by the end of 2015.

Aframax and Suezmax Fleet Growth (TNK 3Q 2013 Earnings)

Delays, cancelations, and scrapping

Factors like high dry-docking expenses—particularly for older vessels—and a high cost of operations relative to returns have encouraged many owners to scrap vessels earlier than their useful life, given such a depressed market, according to management. Despite a larger orderbook, TNK expects significant delays or possible cancelations because shipyards in China and Brazil are having problems. In total, Teekay expects fleet growth to shrink by approximately 2% in 2014 and Suezmax to grow by just 1%.

Demand to outpace supply?

Growth of just 1% is lower than Capital Product Partners LP’s suggested 2.3% growth. If it does realize, shipping rates would likely continue, as demand for oil is expected to grow by 1.1 million barrels a day in 2014. This is an increase of approximately 1.2% from the current consumption of nearly 90 million barrels of oil a day.

The longer traveling distance from the Middle East and Africa to China is expected to add additional demand growth, particularly benefiting VLCCs (very large crude carriers), which could carry over to Suezmax and Aframax vessels. Capital Product Partners was looking at a 4.10% increase in demand for Suezmax vessels as customers upsize from Aframax vessels.

Cautiously optimistic

TNK currently expects higher utilization for crude tankers in 2014, which would result in a gradual improvement in rates. If it’s right, then companies and ETFs like Frontline Ltd. (FRO), Nordic American Tanker Ltd. (NAT), Tsakos Energy Navigation Ltd. (TNP), and the Guggenheim Shipping ETF (SEA) should benefit as well.

On a side note, Teekay Tankers casually mentioned the possibility of an increase in crude oil exports from the United States in the future, which will further drive demand for tankers. Currently, U.S. law prohibits oil companies from exporting crude oil. This was set up a few decades ago by politicians to preserve natural resources and keep them within the country. But as more and more oil is produced in the United States, this law may have to be removed. As oil companies are already coming together to lobby this change, it may not be too long before the U.S. exports oil to distant countries like China.

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