Investors are not showing any hurry to grab shipping stocks even as many players in the sector are trading at attractive discounts. Investors’ apathy is understandable as this cyclical sector is currently undergoing a downtrend.
Industry dynamics mean that these cycles are often very long, running in years. However, there are bright spots within the industry where investors can go long and make profits.
Integrated oil and gas players, especially with strong refinery operations, are natural winners from this shift but there are others down the food chain.
Monaco-based Scorpio Tankers Inc. (NYSE:STNG) is one such player which demonstrated an improvement in its operations in its latest quarterly financial performance. In the fourth quarter, Scorpio reported a 32.9 percent jump in vessel revenues to $30.1 million as a result of increase in the number of operating vessels and an increase in time charter equivalent to $13,392 per day from $11,912 per day.
The increased freight rate is a positive indication for the sector but what is also working in the company's favor is the energy revolution currently underway in the U.S. Its operating loss narrowed to $1.8 million from $70 million while its net loss dropped to $4.9 million from $71.7 million from a year ago. The company suffered a major impairment charge of $66 million last year which was absent this year.
Burgeoning production of light oil from U.S. shale deposits is making the country more and more energy reliant. In 2012, the U.S. imported nearly 12 percent less crude oil from gulf countries. Attractive rates in the global markets provided an incentive for producers to sell their product in overseas markets.
However, age-old laws mean companies cannot export most crude oil varieties. This is forcing producers to circumvent the rules by exporting refined products which do not attract such restrictions. Exports of refined products from the U.S. are expected to increase nearly 7 percent this year to 1.07 million barrels a day, according to the Department of Energy estimates.
Scorpio Tankers Inc. (NYSE:STNG) will be benefit from this boom as it operates 32 product tankers. Analysts expect substantial upside in the stock given its strong market standing and huge potential in revenue growth. Eight analysts contacted by Bloomberg have an average target of $10.29 for the stock, reflecting a 23.2 percent upside.
Dahlman Rose, which has a Buy rating on the stock, recently increased its price target to $11 after the company reported encouraging results.
Apart from Scorpio Tankers Inc. (NYSE:STNG), Tsakos Energy Navigation Ltd. (NYSE:TNP) is another potential winner which operates 26 product tankers out of its fleet of 48 vessels. The Greece based shipping company is tipped to post a 45 percent jump in stock price to $5.35 over the next 12 months.
Analysts expect higher revenues from hauling refined products will help the company in reducing the losses to $1.5 million this year. Tsakos posted a loss of $35.2 million last year at the height of the industry downturn. The declining trend in revenue also seems to be coming to an end as the company posted a flat top line of $92.4 million in the latest quarter. The stock has gained 8 percent over the last three months but still remains down 43 percent on yearly basis.
Investors can also buy shares of Teekay Corporation (NYSE:TK) to get a slice of action. The company provides crude oil and gas marine transportation services and has been the subject of favorable analyst recommendations following strong quarterly earnings.
The company reported almost flat top line at $515 million, but it was seen as a positive as analysts were expecting revenues to drop to $466 million. The company also managed to narrow its full year loss to $160 million from $358 million. Deutsche Bank AG (NYSE:DB) (ETR:DBK) has a Buy rating on the stock with a price target of $41 while analysts at Barclays PLC (NYSE:BCS) (LON:BARC) Capital have a price target of $35.
Overall, the expected growth in petroleum products from the U.S. is a shot in the arm for shipping companies which are otherwise faced with tough market conditions.
While Scorpio Tankers and Tsakos Energy Navigation Ltd. (NYSE:TNP) are near term opportunities given their relatively small size and high exposure to oil transportation, the gains in Teekay Corporation (NYSE:TK) may be lower.