Capital Product Partners' earnings call offers some insight (Part 4 of 4)
Given that Capital Product Partners LP (CPLP) also owns more than three Suezmax vessels, management also gave some color on the crude tanker sub-industry. This is relevant to Nordic American Tanker Ltd. (NAT), Frontline Ltd. (FRO), and Teekay Tankers Ltd. (TNK), which also operate in the tanker business.
Lowest supply growth
According to management, supply for Suezmax, the second largest tanker class used to transport crude oil across water, is expected to reach its lowest in 2014, hitting just 2.3%. Orderbook for Suezmax, which can give investors insight into how fast supply will grow, now stands at 11.3%—its lowest in percentage terms since 1997.
Demand will outpace supply
Demand for Suezmax is expected to grow by 4.1% for the full year of 2014. This is in stark contrast to what we’ve seen for ship orders on MarketRealist.com—for those who have been following our weekly series. Turns out, the increase in demand is driven by higher use of Suezmax on traditional Aframax—a smaller class of tanker than Suezmax—routes and increased Indian refinery crude oil imports on the back of higher refining capacity. Investors can take this information two ways.
First, rates for Suezmax could fall further and take make share from Aframax vessels, and Suezmax vessels could become more competitive.
Second, rates for Aframax could rise and make Suezmaxes more competitive too.
The likely scenario is a combination of the two. Because the different classes of ships are pretty much substitutes for each other, investors would benefit from following the overall rates for tankers like the Baltic Dirty Tanker Index that are released on MarketRealist.com a few times a month. If the index does turn around, you can expect the Guggenheim Shipping ETF (SEA) and the companies we’ve disucssed to benefit.
A safe way to play containers
When analysts asked management whether it has a preference between product and container markets, management noted the importance of distribution coverage—essentially, the ability for the company to provide a nice stream of dividends to shareholders as attractive returns. With a few container ships in CPLP’s sponsor’s, Capital Maritime’s, books, investors looking to invest in container ships safely may consider CPLP as a solution. Investors looking to invest in container ships may want to look at Diana Containership (DCIX), Bos Ships Inc. (TEU), and Danaos Corporation (DAC).
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