However, there are risks to investing in petroleum shipping companies, namely a sustained decline in global consumption of oil, the very commodity that fuels their growth. Other risks to the earnings of shipping companies are overexpansion of fleets, a decline in cargoes, and a global economic slowdown that reduces oil consumption—all of which drive tanker rates down. Tanker rates are largely dependent on the supply of ships available to carry crude oil and the demand for their services. An economic slowdown could weaken demand, while a deluge of ships expected to flood the market over the next few years could also push rates lower. Standard & Poor's expects the global tanker market to suffer overcapacity in 2008 and 2009. Based on information from industry research group Bassoe, daily charter rates for very large crude carriers [VLCC] were $79,672 in the fourth quarter of 2007, up sharply from $25,486 in the 2007 third quarter. So far in 2008, VLCC rates have declined more than 40% from the highs seen in late 2007.With the macro scenario in mind, let's take a closer look at the major players in the petroleum shipping business. Frontline's tankers are designed to transport oil, and do so all over the world, from the Persian Gulf to the Far East, Northern Europe, the Caribbean, and offshore Louisiana. The company also transports coal and iron ore. One of the major benefits to owning the shares of shipping companies are their very generous dividends, and Frontline is no exception, paying $2.75 a share, for a whopping 16.6% yield.
Frontline has a symbiotic relationship with the next shipping company on our list—rival Overseas Shipholding Group (OSG). Frontline reported in a recent SEC filing that it has entered a forward contract to buy 4.4% stake in OSG, to add to the 5.6% that it already owns. But there's at least one barrier to Frontline's acquisition dreams. The Jones Act requires all commercial vessels operating in the U.S. to be built, owned, operated, and manned by U.S. citizens and be registered under the U.S. flag. Frontline, which is based in Bermuda, cannot own more than 20% of the shares of a U.S. shipping company.
Yet if Frontline does manage to buy OSG it will gain the second-biggest publicly traded oil tanker company with a relatively conservative debt-to-capital ratio of 47.0%. With over 110 ships, OSG is one of the largest marine transportation companies in the world. The majority of what OSG ships is oil or petroleum-related. What it does not have, based on its recent share price, is a dividend yield that's competitive with other shipping companies. OSG is paying just 2.1% per share.
. Teekay's fleet has an overall capacity of about 2 million tons. Like the other oil transport shippers, Teekay is a good play on the volatility of the oil trade, while also providing a sizable dividend (12.7%). Teekay Tankers recently went public, as a spinout from parent company Teekay Corporation. Teekay Tankers has Aframax-class tankers, which are used for spot charters and short- or medium-term fixed-rate, time-charter contracts. The ships are smaller than the oil supertankers that cannot make it into some harbors and canals, and are worth about $275 million.
Investors might be extremely tempted by the sizable dividends that the petroleum shippers pay, and ignore the fact that this will be a volatile industry over the coming months. To be sure, OPEC is pumping more oil than ever before, because of Asia's rising demand, and that's good for the tankers. But vessel oversupply, lower tanker rates, and a global economic slowdown brought on by record oil prices are going to curb growth. It's wickedly ironic that petroleum, the fuel that drives profits in the tanker business, has risen so high in price that it is also the industry's most fundamental threat.
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