By SIMON CONSTABLE
The North American energy boom should help power up an industry that's been stuck in the doldrums: marine transportation.
Shipping, the ugly stepsister of commodities, has been unappealing over the past few years. A massive shipbuilding boom created overcapacity, sending shipping fees into free fall. The Baltic Dry Index, a key benchmark for waterborne transportation fees, peaked at 11,793 in May 2008 before plunging to 663 in December that year, according to FactSet. By Friday it crept back to 933.
However, it's the shipping of certain petroleum products that should power the sector over the next few years. The transportation of refined products—including gasoline and other liquids distilled from crude oil—is set to rev up.
"We believe that supply/demand dynamics will drive a secular improvement in product tanker-freight rates over the coming years," writes Urs Dur, a maritime analyst with asset manager Clarkson Capital Markets in New York. The sector isn't just benefiting from an improvement in the business cycle, but from a more fundamental change. Dur and his team see demand for "clean tankers"—the ones used to transport refined products—jumping 4.8% this year and 4% next year. That increase in demand easily outpaces the anticipated increase in tanker inventory of 1.8% this year and 2.3% next year.
THE SHUTTERING OF OIL refineries in North America and Europe—and the corresponding opening of such facilities in Asia—is behind the surge in this sector, according to Douglas Mavrinac, shipping analyst at the investment bank Jefferies in Houston.
Although other shipping companies own clean tankers, Scorpio Tankers (ticker: STNG) is the only publicly traded pure-play in this subsector, explains Mavrinac. Jeffries (with a Buy) and Clarkson (Outperform) both rate Scorpio positively, and both give it a target price of $11, a premium to Friday's closing price of $8.47.
Liquid petroleum gas, such as propane and butane, is a byproduct of oil and gas drilling, and is also expected to see increased shipping.
Betting on LPG shipping makes sense for two reasons. First, it's uneconomical to store it in large quantities, writes Natasha Boyden, a New York-based shipping analyst at Global Hunter Securities, in a recent report. If you've got LPG, your either consume it locally, burn it, or get it "shipped immediately," Boyden adds. Second, the U.S. is going to produce a lot of LPGs, thanks to the shale revolution. The ramping up in U.S. crude and natural-gas production due to shale drilling has produced a rise in LPG production.
"U.S. LPG exports are expected to increase with shale oil/gas development," writes Clarkson's Dur in a report from earlier this month.
Growth in the overall fleet of LPG vessels will be substantial. Global Hunter's Boyden projects it to rise 4.8% this year and 4.1% next. But she sees that growth in the fleet balanced by "robust demand growth." Shipping rates should "strengthen somewhat into 2014." She pegs the stock of shipping company StealthGas (GASS) to outperform in this sector with a target price of $12; it closed Friday at $11.66. Clarkson rates the shares of rivals Golar LNG (GLNG) and Golar LNG Partners (GMLP) as Outperform, with target prices of $49 and $36, respectively. They settled Friday at $34.87 and $31.99.
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