Opportunities in the Midst of the Shipping Glut
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The shipping industry offers high yields to help compensate investors for the great volatility in earnings. When the shipping industry sees a lack ships the amount of time required to produce new vessels creates years of lag time. This disconnect between supply and demand means that when demand is high supply is relatively constrained. Companies receive new vessels with little respect to the current market conditions. With the current downturn in Europe and China many of these shippers are under pressure from the demand side while at the same time have to deal with increased supply of ships which were ordered years earlier. High yields mean that some companies may be a good investment but it also means that investors must tread carefully.
Overseas Shipholding Group (NASDAQOTH: OSGIQ) is a shipping company that owns a 49.9% interest in 4 LNG vessels. This is a relatively small portion of the company's fleet of 111 double-hulled vessels. Over the past 5 years the debt load continues to increase. The company continues to show an operating loss while EBITDA is positive when one factors in depreciation. The company uses an estimated useful life of 25 years for most of its vessels. 30 years is the expected lifetime of FSO service vessels and the newer ATBs. The LNG carriers have a useful life of 35 years. The scrap value of the vessels is placed at $300 per ton while the scrap values in 2011 ranged from $400 to $500 per ton. It is important to remember that in in the early part of 2012 and late 2011 a series of downgrades were placed on the company’s debt. Moody's downgraded the senior unsecured debt from B1 to B3 while Standard and Poor changed the long-term corporate credit rating from B to B- with a negative outlook.
Golar Limited (USA) (NASDAQ: GLNG) has a much smaller fleet with only 12 vessels on the balance sheet at the end of 2011. This company is provides a more focused play on LNG shipping as they only own LNG carriers and floating storage and re-gasification units (FSRUs). Between 2013 and 2015 the company expects to pay $2.4 billion to cover the cost of construction for 13 new vessels. For depreciation purposes the company uses usable life estimates of 40 to 50 years for vessels. Operating income before depreciation has not been consistently positive over the past 5 years though. Still, the company has a better track record than Overseas Shipholding Group. Over the past 5 years the debt to asset ratio has decreased and in 2011 earnings returned to pre-recession levels while margins remained compressed.
Tsakos Energy Navigation (NYSE: TNP) is another shipping company which focuses on crude oil and LNG vessels. This company currently owns 51 ships. Of the past 5 years 4 of those years produced an operating profit. In 2011 they showed a loss as the oversupply of ships continues to push down rates. Their depreciation schedule estimates a lifetime of 25 years for crude and product oil carries but 40 years for LNG carriers. Their debt to asset ratio has consistently stated around 60%. The stock price has faced a steep decline since 2009 as the problems in the EU continue to grow and their yearly earnings severely decreased.
At the end of December 2011 Teekay Corp (NYSE: TK) had a fleet of 36 tankers and 7 floating production storage and offloading (FPSO) vessels. Over the past 5 years profit margins have decreased although they have managed to turn an operating profit. At the same time net income has been negative for 3 of the past 5 years. The debt to assets ratio has stayed around 60%. This company's deprecation schedule appears to be more conservative as they estimate a life span of 25 years for conventional tankers, 20 to 25 years for FPSO vessels, 20 to 35 years for FSO units, 30 years for liquefied petroleum gas (LPG) vessels, and 35 years for LNG carriers.
Out of all of the above companies Golar Limited (USA) (NASDAQ: GLNG) looks like the best investment. On an operating income basis the company has consistently posted a profit though on an EPS basis the company did post a loss in 2008. The company has consistently paid down their debt over the past couple years and decreases the debt to assets ratio to be close to 50% by the end of 2011. One aspect to pay attention to is the fact that they estimate the usable life span of their LNG tankers to be 40 to 50 years which is rather liberal. Relative to these other public shipping companies the average estimated life span is about 35 to 40 years. They will need sustained strength in the LNG market as they will take ownership of more ships from 2013 to 2015. The company currently pays a dividend of 4.1% and given the large price difference of natural gas between Europe, Asia, and the United States it appears that this company may be a bright spot for the shipping industry.
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