The oversupply of oil and oil tankers and the decrease in energy demand is leading to hard landing for oil tanker rates over the next couple of quarters. As many of the tanker stocks are rising or at least maintaining their current levels, the underlying fundamentals for the shipment of petroleum and petroleum products continue to erode.

A little background on the tanker business: Tanker companies haul petroleum or refined petroleum products around the world from sources to users.

The sector can be broken into several categories: Tanker sizes: VLCCs are the largest and primarily transport oil from the Mideast to the Far East, Suezmax and Aframax tankers are smaller and ply markets such as the Atlantic, Med and North Sea. Refined product tankers are separate from crude oil ships and companies tend to specialize in one side or the other. Finally, tanker companies can put their ships one long term contracts for steady revenue streams or charter them into the spot market for short term charters at current spot (market) rates.

When analyzing a tanker company you should know how it earns its revenues: size of tankers in fleet, product(s) transported and type(s) of charters. By comparing a company's business model against the current market rates you can get an idea how the future revenues of your selected company will hold up. Tanker stocks are often attractive to investors because of the handsome dividends they pay, but the investor must be aware of the tanker company's dividend policy before investing based on the stated yield.

Tanker companies that charter their ships primarily in the spot market will have dividends that vary greatly from quarter to quarter. These companies generally have a policy of paying out the majority of the money earned in excess of the operating expenses of the ships each quarter as dividends. If spot tanker rates fall, pay outs can disappear in a hurry. Conversely, high spot rates will reward the investor with very high dividends. You just need to remember that the dividends of these companies are not fixed and quoted yields in the stock pages are meaningless. Popular stocks whose ships primarily ply the spot market are Frontline Ltd. (NYSE:FRO) and Nordic American Tanker (NYSE:NAT).

Companies which put the majority of their fleet on long term charters will have more predictable cash flow and dividend pay outs. They will pay only a portion of their free cash flow as dividends and retain some earnings to pay down debt, grow the fleet or save cash for tougher times. Some companies with their fleets primarily on time charter are General Maritime Corp. (NYSE:GMR), Overseas Shipholding Group (NYSE:OSG) and Tsakos Energy Navigation (NYSE:TNP).

In spite of the varied differences in the individual tanker stocks the market tends to watch the fortunes of the largest tanker company, Frontline Ltd. and value the rest on how FRO is fairing and what it is able to pay out as dividends. The current spot market rates of under $15k per day for VLCC tankers and about $20k per day for Suezmax tankers are well below the breakeven points for FRO. Spot charter rates do not have any news pending that predict a revival in spot charter rates. When these companies start releasing quarterly earnings for the 1st and 2nd quarters of 2008 I think the stocks of tanker shipping companies as a group will be hit hard.

For the investor interested in tanker companies, I suggest you make sure the companies your are considering are the ones that can sustain their distributions through long term charters of their ships. If you are interested in the companies that use spot charters for their vessels I would wait for the bad news to come out and pick up shares at much lower prices.