Tony Daltorio, The Investment U Research Team
One sector that is extremely sensitive to global economic activity is the international shipping industry.
As the financial crisis turned into a category 5 hurricane last year, it blew the entire global economy off course –and along with it, the shipping industry. The sudden drying up of credit, finance institutions and collapsing trade volumes led to a sharp drop in shipping rates.
Fast forward to today, and we’re now seeing ships being backed-up in Chinese and Australian ports: demand is rising.
If these are indeed signs of a bottom, then we need to look for companies positioned correctly in the right shipping sector. And this is important, because each sector in the shipping industry – container, dry bulk, and oil – is fundamentally different from the others.
While they may all be shipping, the profitability varies greatly from line to line. It’s exactly why we like to focus on the sector with the best fundamentals – oil tankers.
Unlike some other sectors where demand for services has fallen off a cliff, global oil demand and, more importantly, the demand for oil tankers, has been relatively unfazed – it’s down less than 2%.
As far as the supply/demand situation for ships is concerned, the oil tanker market is more seaworthy than other sectors of the shipping industry, and more profitable. Here’s one company that’s positioned to profit from the potential bottom of global shipping and the strong fundamentals in the oil tanker market.
Nordic American Tanker
Bermuda-based Nordic American Tanker Shipping Ltd. (NYSE: NAT) is engaged in the global transportation of oil products. To give you an idea on its growth, in less than 4 years the company’s fleet has grown from 3 to 16 Suezmax oil tankers, which each carry about 1 million barrels of oil.
Nordic American was exposed to the recent falls in shipping rates because it operates all of its ships on the short-term spot market instead of leasing them with longer-term contracts. While this may hurt them in a declining environment, it also means that they can take advantage of a rising price climate best.
One of the biggest reasons why Nordic American is on the top of our short list is because the company has NO net debt. During this age of over-indebted and over-leveraged companies, it is rare to see companies that have no debt like Nordic American Tanker.
While the absence of debt on their balance sheet gives them the ability to weather many pressing market environments, it also lowers the breakeven point on their vessels.
