Without getting into the minutiae of oil inventories in Cushing, OK, floating storage, OPEC, APEC and Boone Pickens' Twitter chats, one fact is indisputable. Oil prices are low. By any standard. I called the bottom in energy common and preferred stocks in my column Monday and I stand by that call.
The fact is that the market has underestimated energy companies' creditworthiness and energy company managements' ability to creatively finance operations, build solid hedge books and squeeze service companies to protect their margins.
So, it's not as bad as the market has priced in, especially in preferreds, where creditworthiness is key, but it's not exactly good, either. I am guessing that a quick walk through the Petroleum Club in Midland, TX, would yield no takers to the query "are any of you guys happy about commodity prices?" Of course they aren't.
But there are companies that benefit from an extended period of low oil prices (if that is indeed what we are experiencing) that are not among the usual suspects of transportation and consumer goods.
At these price levels (remember it is the market's perception of over-supply that has driven the oil price crash) demand for oil is only going in one direction. Companies that move that oil are benefiting from China's huge appetite for oil tankers.
There's also the possibility of using any excess tankers as floating storage to take advantage of the steeply-sloped oil futures curve. Not to mention the fact that the largest single expense item per voyage (it varies widely based on ship-type, but 30% is a good rule of thumb) is bunker fuel, which is derived from crude oil.
I like the oil tankers as a way to play lower oil prices. I have a lot of experience in shipping stocks. Many of these entities have carved out different investment vehicles to allow investors to participate in certain segments of their fleet, so a little due diligence is required.
One should look for companies that are shipping crude, as opposed to crude products. China is importing crude, but, owing to strong investments in refinery capacity over the last few years, they are actually a net exporter of crude products. So, I favor companies that are -- in industry parlance -- in the "dirty" tanker market.
Dirty tankers carry crude in classes like Very Large Crude Carriers (VLCCs), Suezmax and Aframax tankers -- as opposed to those on the "clean" side that that trade refined products like gasoline in categories like LR2 and MR2.
I also am not bullish on the seaborne market for liquefied gases (LNG and LPG) as China is clearly moving to pipeline delivery (China's piped-in gas supply, mainly from Turkmenistan, rose 33% in December) and away from LNG imports (which fell 17% in December.)
My favorite in the seaborne tanker market is Tsakos Energy Navigation (TNP.) Of TNP's 64 tankers, 44 of them trade in crude, with the rest consisting mainly of product tankers with a couple LNG tankers. TNP's mix is heavily weighted toward the dirty side, and, as of the end of the third quarter, 62% of TNP's fleet was trading in the spot market.
Clearly, Tsakos is well positioned for a demand-driven bounce in the tanker market. Tsakos also has two preferred series, offering strong yields -- the Series B sports a coupon of 8% and is currently trading just below par. The Series C has a coupon of 8.875% and is trading at a slight premium to par.
