We’ve all seen the headlines – tensions are high between the US and Iran, and that means world oil traders are getting nervous. Iran itself is no longer a major oil exporter – the result of sanctions, but also years of neglect of oil field maintenance – but the country borders the Persian Gulf and the Strait of Hormuz, major pathways in the global network of water-borne oil transport.
The current news, however, comes after a period of sustained gains for oil tankers companies. Since October, stocks in oil tanker companies have been on the rise, held up by a combination of excess demand for services and consequent high rates. The current political instability shows promise of helping the tanker industry. Oil transportation routes tend to lengthen, as operators travel longer distances to avoid potential conflict zones.
But the Middle East, while impacting the oil markets and tanker industries, is only one factor to consider – and possibly, not even the most important. Import-export patterns are also changing. In recent months, the US has become a net exporter of crude oil, while China is increasing imports. The result is bound to be good for tanker companies.
Wall Street’s analysts are taking note of the potential in oil tankers. Investment firm B. Riley FBR has released a report on tanker stocks, outlining the sector’s likely trajectory and highlighting several stocks that are on track to benefit. 4-star analyst Liam Burke, who compiled the report, is an expert on the energy industry, especially the oil sector.
In this article, we look at two Strong Buy tanker stocks that Burke notes in his report. We used the Stock Comparison tool to look at them side-by-side. Here are the results.
Scorpio Tanker (STNG)
First on our list is Scorpio, a mid-cap operator with a fleet of 124 owned or financed vessels along with 10 chartered carriers. The fleet includes both tankers and Handymax container ships. The bulk of the fleet – 110 vessels – is made up of tankers. STNG showed a pattern similar to INSW above – cyclical losses in recent quarterly reports, coinciding with a 31% gain in the second half of 2019.
The recent quarterly losses were steep, but not as bad as in previous year. The 92 cent EPS loss was worse than the 89 cents predicted; but one year earlier, STNG lost $2.10 in Q3. Revenues also missed the forecast, by 3.36%, and came in at $134.01 million. This compared favorably to Q3 2018, however, rising by $14.73 million.
The gain in revenues mitigated the seasonal loss, and STNG used higher revenues to maintain its dividend payment, including a fifth ‘special’ payout during 2019. The current regular dividend, 10 cents per share, annualizes to 40 cents and shows a yield of 1%. While this in only half the yield found on average in the broader markets, a reliable dividend payment helps keep a stock attractive despite inconsistent earnings.
Liam Burke was not disturbed by the Q3 loss. In fact, he raised his price target on the stock by 37%, to $55 while maintaining his Buy rating. In his comments, Burke wrote, “The company grew its efficient, modern fleet with the acquisition of 19 additional product tanker vessels during 3Q19 and improves its global positioning in a favorable macro environment. Scorpio’s investment in scrubbers provides a further cost advantage… to meet environmental standards and should further increase the intrinsic value of its product tanker assets.”
Burke’s new price target implies room for an impressive 43% growth to the upside. (To watch Burke’s track record, click here)
Scorpio holds a Strong Buy from the analyst consensus, with just a single Hold overbalanced by 4 Buys. Shares are selling for $38.38, and the average price target of $43.40 suggests room for 13% upside growth over the coming year. (See Scorpio’s stock analysis at TipRanks)
Nordic American Tanker (NAT)
The second stock on our list is Nordic American, a Bermuda-based company operating 23 Suezmax tankers. The fleet averages 11.2 years in age. Nordic showed strong share gains in the last quarter of 2019, getting support from increases in the daily market rates for tanker operations. With rates climbing over $70,000 per day for Suezmax ships, the tanker industry is experiencing a true boom. NAT shares gained 110% in 2H19, and have started 2020 with a 1.22% gain to date.
Once again, the gains came while the company experienced cyclical losses. Q3 2019, the most recent reported, showed an EPS loss for NAT of 10 cents per share, worse than the 6 cents expected. Once again, revenues showed a significant gain year-over-year. The $32.35 million reported was 39% higher than the $23.19 million reported one year earlier.
Normal industry cyclicity, along with continued high tanker rates, bode well for the tanker industry going forward. Capacity is tight, and combined with geopolitical tensions are holding rates at the high levels they reached last fall. The largest crude carriers can charge rates of $78,000 or more, while smaller Aframax ships charge rates starting at $80,000. Break-even rates in the industry range between $10,000 and $20,000 per day.
Riley’s Burke sees Nordic as well positioned to take advantage of the high rates in today’s tanker environment. He writes of the company, “The nature of NAT’s homogeneous Suezmax fleet helps increase fleet utilization and maximize the upside leverage in a rising rate environment. In addition, the operating flexibility of a homogeneous fleet provides high service levels and improves relationships with its existing oil company customers.”
Burke raised his price target on NAT from $4.75 to $7.50, and gave the stock a Buy rating. His new target suggests a strong 50% upside from current levels. (To watch Burke’s track record, click here)
Nordic’s Moderate Buy consensus rating is based on three reviews, 2 Buys and 1 Hold. The stock has a low cost of entry, especially considering the high upside potential; shares are priced at $4.98 and the $6.63 average target implies a 33% upside. (See Nordic American’s stock analysis at TipRanks)