I am going to write about the oil tanker shippers today. The stocks in that sector are going bananas today, and that not only helps my firm, but it gives me a reason to write about companies that actually create profits and do so by deploying capital at a level that ensures they earn returns on that capital above its cost.
That's not limited to the tanker shippers. Apple (AAPL) and Microsoft (MSFT) create economic value, too. The issue is that in today's tech-crazy market, investors have fallen in love with companies that do not create economic value --Tesla's 9m2020 ROE was 2.3%, well below its cost of capital -- or don't even have a meaningful path toward creating real returns (Airbnb (ABNB), for example, if its offering documents are to be believed.)
Commodity companies have the ability to create economic value from just "doing their job," if prices for those commodity goods or services rise. The Big Kahuna of all commodities is of course crude oil, and with Brent Crude hitting $50/barrel today, it is time to talk about oil again. OPEC+ will be increasing production by 500,000 barrels per day each month through April 2021. On the surface that should be a negative for crude prices, but the market is reacting positively on the feeling that it could have been worse - with OPEC it always can be - and renewed optimism for a global economic pickup now that Covid-19 vaccinations have begun.
Higher oil prices generally mean improving demand, and that leads to more cargoes for the oil tanker shippers, helping margins. But the biggest factor in favor of the oil tanker sector is not rising energy prices, but a large shift in the market share of oil consumption in the world. The West is still restrained but China is importing oil like there is no tomorrow. China imported 11.08 million barrels per day of oil in November, a 10.8% gain from October's figure.
The Chinese economy has shown remarkable resilience during the Covid Crash, and that almost makes one want to believe in conspiracy theories about the virus' origins, still believed to be in Wuhan. But I don't do conspiracies, I do stocks. China buys its oil from Saud Arabia on pre-agreed, fixed-price contracts, and Saudi recently increased that price for January shipments by 80 cents/barrel, so clearly the pressure is on the demand side.
How does that change the business model of the oil tanker shippers? If you are transfixed on the phrase "business model" you should stop reading this column and switch to the DoorDash (DASH) S-1. The oil tanker shoppers have a fixed amount of capital invested in their ships, the "maintenance capex" is incredibly low for shipping companies, and the returns on that capital vary based on the prices they can charge for those voyages. It's that simple.
As in so many other markets, 2020, has been a boom-bust year for oil shippers, with an incredible rise in March as commodity traders hired oil tankers for floating storage and then a brutal reversal beginning in May as that demand waned. After a slow summer, rates for the largest oil tankers (VLCCs) have begun to slowly rebound, and the stock market is telling you that the rebound will continue.
I believe it will. DHT Holdings (DHT) is still the largest holding in the portfolio of my firm, and I also am involved in Euronav (EURN) , Navios Maritime Acquisition (NNA) , and Nordic American Tankers (NAT) . These companies all pay healthy dividends, if somewhat lowered by the bust part of the boom-bust in freight rates in 2020, and that has made owning them less painful. As their implied returns on capital are being bolstered by China's unrelenting need for imported oil, I see upside in the common stocks of oil tanker shippers as we move into 2021 as well.