The Last Piece of the Oil Puzzle
Oil up? Oil down? No matter, says our roving reporter. Investors in the shipping tanker industry are about to reap massive profits either way…
I recently researched a business that has already made several generations of entrepreneurs rich beyond their wildest dreams – including the late billionaire tycoon Aristotle Onassis.
His heiress, 19-year-old Athina Onassis, is now the world’s richest teenager, with an estimated $2.7 billion fortune…and another $2 billion awaiting her on her 21st birthday.
It’s a business the world economy couldn’t do without, yet you hardly ever read about it in the financial papers. Families and entrepreneurs with an interest in this business simply prefer to keep their matters private, not least because they were earning such high returns that outside investors simply weren’t needed.
It’s the business of running oil tanker fleets. Approximately 46% of the world’s oil production is seaborne. And today, most new oil finds occur offshore rather than onshore. As a result, a staggering 80% of all new oil production capacity coming on-stream worldwide relies on oil tankers. By 2011, it is estimated that 95% of all new oil production capacity will use oil tankers.
Without the world’s oil tanker fleet, the global economy would come to a standstill. And for the first time, the stock market is about to take notice.
Oil Tanker Fleets: Close to 100% capacity
Jeffrey Goetz, CEO of tanker broker Poten & Partners in New York, recently stated that the oil tanker business is running at close to 100% capacity. And Magnus Fyhr, a Houston-based shipping analyst, predicts that by the fourth quarter of 2004, demand will be higher than capacity.
Charter rates for tankers are already exorbitant. They’ve rocketed more than fivefold during the last two years…but now they’re likely to go even higher.
In China and India, energy demand is soaring. Just as everywhere else in the world, "energy" primarily means "oil." You can’t build a pipeline from the Middle East to China or India – which is why demand for oil tankers is on the up.
At the same time, it can be said with great certainty that supply is not going to keep up, thanks to a little-noticed change in regulations. In December 2003, the International Maritime Organization, an arm of the United Nations, agreed to eliminate single-hull tankers by 2010 and to accelerate the timetable to phase out certain single-hull vessels by May 2005.
The following is hardly known by the public…but this agreement means that 13% of the world’s tanker fleet will have to be scrapped by April 2005. By 2010, a staggering 40% of the world’s oil tanker fleet needs to be replaced.
Remember the oil tanker Prestige that sank off the coast of Spain in 2002? Due to that incident, regulators decided to tighten the screws. In the future, oil tankers need to have a double-hull to avoid accidents like that of the Prestige (or, of course, the Exxon Valdez in Alaska in 1989).
The scrapping of a considerable part of the fleet comes at a time when every single tanker in existence is in operation 24/7 – the 100% capacity utilization mentioned above.
Oil Tanker Fleets: Taking Publicity into Consideration
About 80% of the world’s tanker fleet is owned by independent operators, with a vast chunk of that owned by Greek shipping tycoons – many of whom have bases in the City of London or in Monaco. It’s a fragmented business with little transparency and few publicly listed companies. But that’s about to change, too.
Nowadays, customers chartering oil tankers are asking for much more than a ship to transport oil. Most oil tankers are chartered by mega-size oil corporations, many of which are public or at least in the public’s eye. There are important issues to take into consideration, such as the quality of the ships and their crews. The safety record of a tanker fleet operator is also crucial. And customers have caught on to this, asking oil tanker operators to prove that they have an organizational structure that supports compliance with environmental and safety regulations.
This means the end of the cozy world of chartering oil tankers by shaking hands over a glass of ouzo. As a result, the world will see the emergence of the publicly listed oil tanker company. This would have been an abomination to the likes of Onassis, who had little time for transparency or accountability and instead chose to spend his days (and nights) with film stars and models.
It won’t come as a surprise that a number of other Greek shipping operators are already investigating a listing on the New York Stock Exchange. In the past, the few oil tanker operators listed on the stock market usually traded around the company’s estimated net tangible asset value. If the typical oil tanker owner managed the company from his local coffee house, there wasn’t much point in attributing any value to the company’s organization, its brand name or its track record.
The lack of transparency within the industry led to valuations hardly ever venturing into double-digit P/E territory. By and large, oil tanker shares traded at P/Es of 5 to 8, which is low compared to the general stock market.
Oil Tanker Fleets: Net Asset Value
The more oil tanker companies are listed on the stock market, the more visible the industry becomes. What’s more, oil tanker companies will be rewarded with a valuation premium for their corporate structure. After all, the more professionally a company is set up and managed, the easier it will be to gain and retain customers – which in turn makes earnings easier to sustain and grow.
The net asset value of the ships will remain a factor when valuing oil tanker companies, but factors such as earnings and cash flow should soon take over as the prime factor. Indeed, the sector has three factors weighing massively in its favor right now – a low stock market valuation, at least two more years of high charter fees, plus the increase in the sector’s visibility and, therefore, valuation. What’s more, the sector could also serve as an insurance against oil-related acts of terrorism.
Of course, there is hardly an investment analyst not peddling oil investments at the moment. Having analyzed the sector myself, I believe that oil is going to rise a lot more. But even if OPEC found a congenial way to pump a lot more oil all of a sudden, and the price of crude oil plummeted, it would merely increase the need for oil tankers further.
The oil tanker industry is the one missing piece of the oil puzzle yet to be discovered by investors and analysts. But it shouldn’t be long before they catch on.
for The Daily Reckoning
September 21, 2004
What is happening in the world of money?
Let’s see…gold is still where we left it, a little over $400. Stocks are where they’ve been for a very long time, too – a bit over 10,000. The dollar? No change there either.
Only bonds have moved – opposite to what everyone expected. It was a cinch that bonds would fall when Alan Greenspan began his tightening campaign. Grant’s Interest Rate Observer, a publication that has been observing interest rates for more than 10 years, thought it observed a major top in bonds this past June. Interest rates have been falling (and bonds rising) for the past two decades. On June 9, if we recall correctly, Grant’s thought it observed the end of the trend. From here on out, said the interest rate observers, bonds were expected to go down and inflation rates to rise.
But it looks to us as though the trend towards lower yields and higher bond prices is still going on. The everyday low prices at Wal-Mart get lower every day. And now come reports that consumers are slacking off. Lower demand means still lower prices…and fewer jobs…a real estate bust…and lower bond yields. It means a long, soft, slow slump.
Japan passed an important milestone recently; the number of Japanese over 65 rose to more than 25 million. The same trend is under way throughout the developed world…and in China, too. Older people do not spend as much money. They do not innovate. They do not borrow. As people grow older and slow down, so does the economy in which they live.
Of course, we could be wrong about this, as we are about so many other things. But that’s been our guess for the last four years; we’ll stick with it, at least until people start laughing at us.
If we’re right, what will it mean for stock prices, gold and the dollar?
Stocks will go down, just as they did in Japan. The bear market in stocks began in early 2000. Most likely, it will continue until stocks are once again selling at 5-8 times earnings, that is, when the Dow falls below 5,000.
It is harder to say what will happen to gold and the dollar. We buy gold as insurance. In a sharp bust, people will seek safety by buying gold and the price will go up. But in the long, soft, slow slump we imagine, gold could barely move for many years. The same is true for the dollar. The greenback could even go up. The United States has $33 trillion in debt; people will need dollars to pay them off.
More news from Eric Fry:
Eric Fry, from the center of the financial universe…
– Afghanistan…then Iraq…then…Canada?
– OK, so maybe the Great White North isn’t the next country in line to feel the shock and awe of U.S. military might. But our neighbors above the 49th parallel have more than their share of natural resources…and it’s just not fair.
– Maybe God made a mistake. Shouldn’t we Americans have more of those natural resources up north? Maybe we should simply skooch the U.S. border with Western Canada over from the 49th parallel to the 51st. Even that one little "adjustment" would add a few billion barrels of crude oil – or its natural gas equivalent – to our national reserves. And if we pushed the border up to the 52nd parallel, America could pick up even more energy supplies and, as an added bonus, host the Calgary Stampede forever after.
– Annexing portions of Canada wouldn’t be entirely bad for the annexed Canadians. The lucky residents of Winnipeg, for example, would each receive a U.S. passport, while escaping the tyranny of Canada’s high income tax rates and socialized medical care.
– Admittedly, expropriating a few hundred thousand square miles of Canadian real estate would not be a politically popular means of replenishing our energy supplies. But without a dramatic increase in supplies from somewhere, or a drastic reduction in consumption, the price of crude oil and natural gas will continue moving higher, maybe much higher. Indeed, many commodities are likely to command higher prices as the decade progresses.
– Simply put, insatiable demand is colliding with finite supply.
– We’ve seen this picture before. We Americans have compiled a lengthy history of "reaping where we do not sow" and consuming natural resources to the point of depletion…or extinction.
– "When Europeans first settled along the Chesapeake Bay in 1607, its waters teemed with whales, manatees and five different species of sea turtle," observes U.S.News & World Report. "Most of those animals are gone now, hooked, hunted and dredged to extinction or ecological irrelevance."
– The Chesapeake also teemed with sturgeon, according to reports from the early Jamestown settlers. By the late 19th century, Atlantic sturgeon had become an important commercial fishery, with a catch of nearly 7 million pounds in 1890. The fish were harvested for their meat, and the roe were sent to Russia for processing as caviar. The lucrative enterprise thrived until the fish disappeared, forcing the sturgeon industry throughout the Chesapeake Bay to shut down shortly after the turn of the 20th century.
– But did we learn from our mistake? The short answer would be, "No." Between the late 1800s and the late 1900s, America embarked on a serial depletion of its coastal commercial fisheries. During the peak years of the late 1930s, for example, the canneries in Monterey Bay, Calif., packed about 250 million tons of sardines per year. Then, in the late 1940s, the fish – and the canneries – began to disappear. The 1957-1958 catch was only 17 tons. The final cannery closed in 1973.
– Overfishing also decimated the once-plentiful populations of humpback whales, Maryland crabs and California abalone, to name a few of the most prominent examples. Swordfish in the Atlantic have declined by almost 70% over the last three decades. The average size of fish landed has declined to 90 pounds, compared with 266 pounds thirty years ago. Bluefin tuna – a favorite of the sushi cognoscenti – are also becoming scarce.
– In other words, it’s a very bad bet to wager against America’s unbridled consumption. One century after depleting our domestic sturgeon populations, American demand for caviar is helping to drive Caspian sturgeon into near-extinction. The population of beluga sturgeon is so depleted that the legendary fish may no longer be reproducing at all. No doubt, the price of beluga caviar, already $1,000 a pound, will continue climbing higher until, ultimately, Christie’s will auction the final existing beluga egg for $1,000,000.
– What’s true of caviar, dear reader, is also true of commodities. As supplies drop, prices rise…precipitously.
Bill Bonner, back in Paris…
*** Britain’s ambassador to Italy called President Bush "the best recruiting sergeant" for al Qaeda. "If anyone is ready to celebrate the eventual re-election of Bush, it’s al Qaeda," he explained.
Our American president does seem to have done wonders for the al Qaeda brand. Only a few years ago, it had only a few fanatical members armed with box cutters, hiding out in caves in Afghanistan. Now it is known around the world…and is picking up rocket launchers and automatic weapons, as well as thousands of new recruits, in the deserts of Iraq, a country where it previously had no presence at all.
*** "Lying rides upon debt’s back," said Ben Franklin. The higher the debt level, the more people seem to want to believe what isn’t true.
We noted on Friday that a "gay" marriage was not the same as a "traditional" marriage. They may have many things in common; they differ only in the essentials. But the point was not widely appreciated among readers. Our little essay must have drawn blood. We spent much of yesterday wiping it off the carpet.
Of course, the complainers may be right. We may be heartless and hopelessly old-fashioned. But on the other hand, neither are we ready to pretend that a monkey with a blue derriere is the same as a blue dolphin just to avoid offending the apes. That doesn’t mean we have anything against monkeys. Nor does it have anything to do with the monkeys’ rights to enter the fish market.
Gays may call their unions whatever they like. For all we know, their partnerships may be more divine in some way that those between men and women. God does not clue us in on every detail of His Own Plan.
‘Twas not us who made them, nor us who judge them; we just can’t help but notice the difference.
*** "It is only because of your diatribe against gay marriages that I would seek to contradict and to counsel you. If the institution of marriage serves its purpose in the promulgation of family life, then that means that every union of a man and woman without children is null and void.
"And that means the union of my two male friends Jim and Sai (who is from Laos), who have adopted three brothers that no one else in Las Vegas would adopt because they had attention deficit disorder, is valid because it nurtures a family.
"It means that Jay and Jayson, who have adopted a child born to a mother who was using crack cocaine, and who are raising this child, have a valid union.
"It means that Lisa and Ann, who adopted children from a substance-abusing mother who had children who are HIV positive and who were abandoned until they found a home with two loving mothers, have a valid marriage.
"I am sure that there are intellectual arguments that you can use that denigrate the validity of what gay people offer the world, but the truth is that there are wonderful gay people in this world who are rearing children with chronic illnesses that their biological (and heterosexual) parents are not capable of raising. And the world is a blessed place for this, because the union of Jim and Sai and of Jay and Jayson was not about benefits, but to be afforded recognition for their commitment and respect for each other.
"That sounds like the institution of marriage is strengthened by having such men and women of virtue partaking in it.
"So I disagree with your diatribe on gays and marriage. If it were so anathema to society, Jesus might have said something about it, but you know, the more I read his book, the more I see that he saved his criticism for hypocrites, and not for those who lived his message and attended to the needs of children."
*** "In response to the article about gay marriage…What rock did you crawl from under in France? Have you not heard of Canada? It is a country in North America, on Earth and yes, they DO have gay marriage! So do a couple other countries. "Oxymoron…look in the mirror. Who are you to judge of someone’s love? When did you become God? Think about that, you little human, that apparently has limited awareness toward others. I remember hearing many years ago and believe it today – God does not make junk. "No matter what you think, feel or say – we queers/gays/homosexuals are here to stay; get over yourself! Bankrupt pensions? Have you heard of Enron by chance? How about United Airlines? It is NOT about money, you ignorant human. It is about equality. Why do you think you are better than me with the rhetoric you write? "Why don’t you evolve to an enlightened state of humanity that God wants for all of us – to love." *** "You make such sense in every other particular that I was staggered by your daft remarks on gay marriage. As the mother of a wonderful gay son – at whose wedding, like any parent, I would love to dance – and as the close friend of many gay couples (including a pair who’ve celebrated 30 years together), I ask you what possible harm can it do to us straight people for gay people to have the same rights and responsibilities we enjoy? If we’d care to distinguish between civil ceremonies and marriages conducted under the auspices of some church or other, I have no problem with that, but it should apply equally to both straight and gay couples. You want to be married by a justice of the peace, fine, call it a civil union. You want to be married by a minister or rabbi, call it marriage. But the discrimination is dead wrong."
*** "Thank you for your column, which covers many topics and human endeavors, but most of all thank you for upholding the uniqueness, the divinity and the sacredness of marriage between a man and a woman, a sacrament celebrated by the greatest of legends, plays, poetry and art; the sacrament which gives divine sanction to existence. As I once replied to a ‘gay’ acquaintance who averred that homosexuality was the perfect ‘method of birth control’:
"’Yes. So perfect that had your mother and father been of your persuasion, you would not even be here having this conversation with me.’ "Of course, in this age of in vitro fertilization, ‘gay’ couples can convince themselves they, too, have the right to be parents. And since the law has acquiesced to that, why not demand to be married as well? Why not? Because nature has decreed otherwise.
"But as you said, this era insists on standing natural law and common sense on their heads. And so it will continue until the House of Usher falls under the weight of its own corruption and greed."