LTI – Energy Shipping

This is a long term investor oriented posting. There will be some trade potential in the tickers we talk about, but the focus is more on a multi year benefit.

Sometimes companies have “odd” structuring. One that is frequent. is to have a parent company, then spin out some cash cows as “limited partnerships” that have various tax advantages in different countries. (So you must check how your tax code treats them to be sure they are right for you. For example, in the USA an LP in your IRA or 401K can require that you pay income tax on any ‘unrelated income’ it generates from other businesses.)

OK, why mention that? Because TeeKay Tankers has a complex structure with some interesting parts. Here is a graph:

TK and it's partnershps: TOO, TGP, TNK vs SPY, GLD and VLCCF

TK and it's partnershps: TOO, TGP, TNK vs SPY, GLD and VLCCF

This is a static capture, so good for illustration. A live chart is down below for ongoing monitoring.

TK is the parent company. It makes all the deals happen and has some shipping of it’s own. TOO is a relatively new Limited Partnership that is in “floating oil storage”. When supplies are high, excess is put in tankers for ‘storage’ at sea. (The particular context is something called ‘contango’. When the futures on oil make oil for future delivery more expensive, then it pays to buy some now at the lower “spot” price, sell a futures contract for future delivery, and make money off the storage. Normally a market is in “contango”. So the TOO ticker makes money by providing floating oil storage to the futures markets (and others). Someone can buy oil for ‘future delivery’ at a higher price than “spot” today and have it stored until they want delivery. TOO gets some of that higher price as ‘cost to store’ premium.

When it is “backwardation” the price in the future is less than the price now, so paying even more for oil to store it to sell for less makes no sense at all. However, some producers in OPEC, for example, may choose to put excess supply into long term storage just to try to offset that ‘glut’… or folks who are dependent on OPEC may buy excess and store it as insurance against OPEC shutting in supply; and so the guys who sell the storage may still make money.

Contango vs Backwardation vs Normal futures price curves

Contango vs Backwardation vs Normal futures price curves

Original Image

More explanation here:

The “bottom line” is that there is money in floating oil storage, but it can be a volatile market some times.

TOO is presently trading with a 6.7% dividend and a PE of 27, so “priced up” a bit. The price curve has flattened with a ‘failure to advance’ as well, so probably not the best time to buy.

TK has a 4.28% dividend, so not bad, but with an n/a in the PE field and with dropping price under the SMA stack. Watch, but don’t touch…

TGP is a natural gas shipper LP. Natural Gas shipping is bid more like a pipeline. Folks tend to do things like sign 30 year contracts. IIRC, TGP has over 20 years average left on it’s contracts, so barring default by a gas shipper, they have secure income ‘for a while’. Yet the price bobs around with oil for no good reason. At any rate, the price ran up, flattened, and is now turned down. Add to the “watch list” for the future… At present, it has a 24.4 PE and a 6.77% yield. I usually start to buy it when the yield gets to 9%-11% range.

TNK is a plain old oil shipper. Goldman Sacks recently “talked dirt” about the oil shippers, so the price has plunged. When Goldman says “Sell – Don’t Buy!”, add to your watch list for buying in a ‘few months’ after they have driven the price down. At 11.4% dividend and a PE of 30, one has to wonder if the earnings are there to support the dividend, but it’s time to “watch closely”. Notice that even in a down market it’s not dropping? “Failure to advance” to the downside… The SMA lines have ‘gone sideways’ and are starting to ‘weave’. All we need now for the “all clear” is a cross of the SMA stack to the topside, then a return to touch it from above after the Dead Cat Bounce of short sellers covering their shorts. (Traders can move to a fast chart and try to play both sides of that that DCB, but it only lasts a week or two, so ‘be fast’ when it happens).

RSI has started ‘stair steps up’ from a ‘near 20’ point. Also says “bottom”. MACD is “blue on top” and above zero. Positive. The ADX line is ‘near 10’ or in ‘dead money’ land. NO trend. That’s what you want to see in a stock that was falling. As the new, ‘blue on top’ trend forms, ADX ought to start rising toward a more normal 20-30 range. Also of note, our price now is rather close to what it was at the last bottoming moment. Not much more downside before the folks buying then, buy now.

I own a ‘tiny’ in TNK, and will likely add to it over the next few months as the trend develops into a ‘trend trade’. “Scaling in” for long term investors to a modest position is reasonable starting ‘soon’ too. This is likely to be a multi year bottom / reversal as it will depend on the rate of US oil consumption growth and European oil shipping demand. There is a risk that China might buy the oil and ship it in Chinese flag vessels rather than going to the open market, so long term demand for oil shipping is ‘a risk’.

IMHO, as Brazil brings it’s fields on line and as economic recovery happens WITH depletion of North American and European fields ongoing, long term oil shipping is likely to increase. The oil is getting further from the customers as old fields deplete. To the extent that things like the Baaken play make more domestic oil, the shippers suffer. Yet they can gain from shipping oil and products to Europe (as long as Brent is priced over WTI and if / when the pipeline bottleneck gets fixed) so even that, long term, can become a shipping ‘feature’. Blending some ‘shipping’ in with some Baakan play oils (like WNR) can make a bit of a natural hedge around that north American supply vs shipping market and dampen the volatility of either by itself.

VLCCF is a competing oil transport shipper. It is fairly small, but has been around for years. Presently it has a 9% dividend. (It usually has a high dividend. I’ve seen it as high as 12% some times. A nice “cash cow” most of the time with a 14.5 PE at present). So on a ‘numbers’ basis, it’s a safer bet. Yet on the chart, it has just returned to the SMA stack from below after a roll down following a ‘failure to advance’ to the topside. Not a ‘bottom entry’ point at all…

The Goldman Cattle Prod

April 28, 2011, 12:19 p.m. EDT
Goldman sees choppy waters for tanker stocks

So it’s been about “May, June, July”… just about time for all the sheep to have been shorn… I’d expect a new announcement about “value in oil shippers” now that they have taken in all the stock being sold via their prodding… (Cynical? No. Just seen this game too many times…)

By Chris Dieterich
NEW YORK (MarketWatch) — Oil-tanker stocks look risky as the U.S. ramps up domestic crude production, analysts at Goldman Sachs Group Inc. (GS) said Thursday.

The investment bank said the industry will face a “prolonged down cycle” as the U.S. reduces oil imports from the Middle East, resulting in fewer routes for tankers.

Do they actually think we’re going to have a net increase in total production in excess of (demand growth + depletion) in the future? As the Obaminator shuts in as much offshore production as he can and sends the EPA on a business obstruction jihad against oil drilling? My, what a ‘gutsy’ call… /sarcoff>

Goldman analyst Daniel Boyd cut his stock-recommendation rating on General Maritime Corp. GMR -2.44% and Bahamas-based Teekay Tankers Ltd. TNK -1.90% to sell from neutral, and downgraded Overseas Shipholding Group Inc. OSG -0.84% to neutral from buy in a note to clients. Boyd also affirmed a “sell” recommendation for Bermuda-based Nordic American Tanker Shipping Ltd. NAT -2.96% .

Shares of General Maritime, down more than 70% over the past year, fell 5.6% to $2.20 on the New York Stock Exchange recently. Teekay Tankers’ shares fell 5.4% to $9.28 in recent trade, while Overseas Shipholding dipped 2.3% to 27.49. The stocks have tumble 25% and 42% over 12 months, respectively.

So, lots of ‘blood in the streets’ a few months back… “The time to buy is when blood is running in the streets.”… to which I’d add “and waiting until the shorts start to cover and exit and the DCB forms on a ‘failure to advance’ to the downside” ;-)

Rising U.S. crude production is “negative for the oil tankers as we expect U.S. oil production growth to satisfy all of the U.S. oil demand growth over at least the next two years,” Boyd said in the note.

Goldman also expects tanker supply growth to be greater than expected, a factor that could weigh down tanker day rates, Boyd said. Day rates, the market price to rent tankers, have been volatile in recent years and weakened significantly in the wake of Japan’s earthquake and tsunami disaster.

Goldman Sachs lowered its 2011 day-rate forecast to $28,000 from $32,500 for very large crude carriers, known as VLCCs, and to $23,000 from $24,000 for Suez-canal faring tankers.

So we’ve got about a 28/32 or 7/8 or a 1/8 reduction in day rates, but they nocked some of those stocks down over 50%… Well, sounds like time to start looking over those financials to see who’s going to survive with profit and who’s going to stay low. Or just make a ‘race’ and watch for separation off the bottom…

From this report:

TK parts live chart

TK parts live chart

And here is a race of some of those Goldman Spanked tickers:

Oil Shipping tickers vs GLD and SPY

Oil Shipping tickers vs GLD and SPY

NAT  - Nordic American Tanker
SPY  - S&P 500 Benchmark ETF
VLCCF- Knightbridge Tankers, Ltd. (Very Large Crude Carrying...)
GMR  - General Maritime
FRO  - Frontline
TNK  - TK Tanker
OSG  - Overseas Shipholding Group, Inc.

As you can see, TNK and VLCCF have held up better than the others. (That’s why I often favor them early in the turn). Longer term, the most depressed can rise the most; IFF they don’t suffer catastrophic failure… So wait longer before thinking about them. Watch for a ‘bottom formation’ before doing anything. (“failure to advance’ to the downside. SMA stack weaving. Price doing a DCB crossover to the upside, then a return to the SMA stack from above and bounce off – most of the time…; MACD ‘blue on top’ and preferably over zero. RSI ‘stair steps up’ from a ‘near 20’ moment. THEN you look at the news and financials to assure no surprise ‘restructuring’ or ‘exploring options’ news says they are ‘on the ropes’…)

We’ve got an apparent early bottom indication out of TNK, and incipient ‘failure to advance’ to the downside indicated in NAT and OSG as they have flattening decent curves. Time for the patient Long Term Investor to start doing that financial due diligence and picking the survivors for when ‘the return’ happens. Making the buy list and putting selected players onto the weekly market chart check for ‘confirmed bottoms’ buy timing.

Subscribe to feed

About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
This entry was posted in Economics - Trading - and Money and tagged , , . Bookmark the permalink.