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Buy These Oil Tanker Stocks to Play the Production Surge

Nilanjan Choudhury
People's United Financial (PBCT) Q2 results reflect higher revenues, lower provisions and well controlled expenses. Further, loan growth continued.

The U.S. Energy Information Administration said on Tuesday that total domestic crude oil production will average 10.79 million barrels per day (bpd) for 2018 and 11.80 million bpd in 2019, which would mark the highest annual average production in the history of United States, surpassing the previous record of 9.6 million bpd set in 1970.

In its monthly Short-Term Energy Outlook, the agency forecast that U.S. crude oil output will rise by 1.44 million bpd this year and more than one million bpd in 2019. The forecast for stronger output comes as oil prices trade near three-and-a-half year highs, driven by worries about tightening global supplies in the midst of strong demand.

An industry that is uniquely positioned to capitalize on this burgeoning trend is the one containing companies engaged in the ownership of oil tankers. Let’s dwell into the factors that make the outlook for crude tanker market attractive in the coming months/quarters.

Crude Tankers to Benefit from Favorable Export Trends

Large supplies of crude in the United States have enabled companies to increasingly ship more of those volumes to foreign markets. Following the lifting of the four-decade long ban on oil exports at the end of 2015, the country witnessed a substantial increase in demand for its oil. While exports ticked up only modestly in 2016, it was last year when the floodgates really opened. By the end of 2017, exports started hitting the 2 million bpd mark, which soared to an all-time high of 3 million bpd in June this year.

We expect export levels to remain elevated throughout this year. With U.S. crude trading at a fair discount to international benchmark Brent, American oil remains attractive to foreign buyers. While more shipments might narrow the discount between WTI and Brent, surging U.S. shale output will keep WTI prices in check. Overall, we are unlikely to see the boom in U.S. seaborne export of crude oil recede anytime soon.

Strong Demand from Import-Dependent Nations

The EIA forecasts 2018 crude demand growth to come in at around 1.72 million bpd – much of it from countries like China and India that are heavily import dependent. Both nations have seen their oil demand jump significantly in the face of stagnant or falling domestic production. In fact, China is set to meet some 70% of its 2018 crude demand with imports, while Indian oil import reliance is still higher at more than 80%. Importantly, bulk of that will be coming in by seaway.

Apart from higher volumes, exports to Asia from the United States also translate into long sailing distances. Therefore, more and more very large crude carriers (‘VLCC’) are now tied up on long-haul trades to Asia, providing a major tailwind to crude tanker trade. 

OPEC Production Gap Filled by U.S. Exports

In June, OPEC agreed to stabilize the market by making modest increase in crude output. At the Vienna meeting, top producers came together and decided to raise volumes by about 1 million barrels per day from July to make up for falling production in Venezuela. The consensus figure was well below some of the numbers that had been floated ahead of the meeting, while the actual addition is expected to be even lesser – at around 700,000 barrels a day – due to several member countries’ inability to boost exports.  

This is likely to expose the market to increased oil volumes from the United States – another positive shift for the crude tanker market.

Domestic Refineries’ Inability to Process Light Crude

While the shale revolution led to a massive increase in domestic production, the nation’s refiners are not configured to process the type of ‘light sweet’ oil that comes out of the American fields. With most of their capacity tailor-made for heavy crude, the refineries are unable to process the lighter variant.

On the other hand, U.S. crude is appropriate with the configuration of Asian refineries. These refineries process high quality so-called light, sweet crude that produce petroleum products such as gasoline and diesel. Consequently, U.S. crude is increasingly exported to overseas market.

How to Identify the Outperformers?

The strong industry outlook does not necessarily indicate that all oil tanker scrips would be wise picks. Moreover, with a wide range of crude shipping firms thronging the investment space, it is by no means an easy task for investors to arrive at stocks that have the potential to deliver attractive returns. While it is impossible to be sure about such outperformers, this is where the Zacks Rank, which justifies a company’s strong fundamentals, can come in really handy.

In particular, we have shortlistedfive companies that have a Zacks Rank of #1 (Strong Buy) or #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Our Choices

Ship Finance International Limited SFL is one of the largest shipowners having a fleet of more than 80 vessels, including 10 crude oil tankers. The stock currently has a Zacks Rank #1. In the last 60 days, two earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has risen 19.1% in the same period.

Nordic American Tankers Limited NAT is an international tanker company operating vessels and transporting crude and petroleum product. The stock currently has a Zacks Rank #2. In the last 60 days, four earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has risen 34.4% in the same period.

Kirby Corporation KEX is the largest domestic tank barge operator, transporting bulk liquid products (including petrochemicals, black oil and refined products) along the nation's inland waterway as well as coastal barges. The stock currently has a Zacks Rank #2. In the last 60 days, one earnings estimate moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has risen 1% in the same period.

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