Scorpio and Tsakos Set to Profit on Increased U.S. Production of Refined Products

World Harmony, a Tsakos Energy Navigation-owned Panamax product tanker. Image (c) E.L at MarineTraffic.com

(Bloomberg) — Record production of so-called ultra-light oil from U.S. shale deposits will spur demand for tankers hauling refined fuels because of three-decades-old laws banning most crude exports.

Earnings for Medium Range tankers carrying 315,000 barrels of gasoline and diesel will climb 11 percent to $14,375 a day in 2013, according to the average of six analyst estimates compiled by Bloomberg. Monaco-based Scorpio Tankers Inc. will advance 22 percent in 12 months in New York trading and Tsakos Energy Navigation Ltd. in Athens will gain 47 percent, the averages of 12 analyst forecasts compiled by Bloomberg show.

Production of condensate from shale will reach almost 1 million barrels a day this year, 66 percent more than in 2010 and about 14 percent of total domestic oil output, according to RBN Energy LLC, an energy consultant in Houston. Exports of most crude grades are banned under 1970s laws and Valero Energy Corp. and Kinder Morgan Energy Partners LP are building refineries to process shale into products that can be shipped.

“This is going to give a fillip to demand,” said Simon Newman, head of tanker research in London at ICAP Shipping International Ltd. “Extra supply like this is bullish for the product-tanker market.”

The U.S. will export the most refined oil on a net basis since at least 1983 this year, the Department of Energy estimates. Scorpio operates 32 product tankers while Tsakos has 26 among its fleet of 48 vessels. Their steel storage tanks are coated to allow for easier cleaning between cargoes to avoid contamination, according to Fearnley Consultants A/S, an Oslo- based shipping researcher.

Scorpio Strengthens

Shares of Scorpio jumped 30 percent in the past year, compared with a 28 percent slump in the 11-member Russell 2000 Shipping Index. The stock will reach $10.29 in 12 months, from $8.42 now, the average of eight analysts’ estimates show. The company will report net income of $14.4 million this year and $42.6 million in 2014, according to the forecasts.

Tsakos, the largest publicly traded Greek owner, will reach $5.35 in 12 months, from $3.64 now, the average of four forecasts shows. The company will narrow its loss to $1.5 million this year, from $35.2 million in 2012, according to the median of three estimates. Tsakos also owns crude-oil carriers and a vessel hauling liquefied natural gas, its website shows.

Houston Channel

Kinder Morgan is building a 50,000 barrel-a-day plant on the Houston Ship Channel that is scheduled to open in the first quarter of next year. It then plans to add the same capacity again. Valero has said it will build an extra 90,000 barrels of daily capacity by 2015. Every additional 100,000 barrels of processing increases global demand for product tankers by 0.4 percent, assuming the refined fuels are sent to Asia, according to RS Platou Markets AS, an Oslo-based investment bank.

Net U.S. exports of refined fuel will rise about 7 percent to 1.07 million barrels a day this year, the Energy Department estimated Feb. 12. The additional cargoes of refined condensate would add $500 a day to rates for Medium Range tankers and $1,000 for bigger Long-Range vessels, Platou estimated in a Feb. 28 report. The larger tankers will make $15,500 a day this year, according to estimates from five analysts compiled by Bloomberg.

“This development of ultra-light shale oil, refined for U.S. exports, is a huge positive,” Scorpio President Robert Bugbee said in an e-mail Feb. 28.

U.S. refining and exports are “a very important game- changing development going forward,” Tsakos Chief Executive Officer Nikolas Tsakos said by phone yesterday.

Crude Exports

The U.S. has had laws since the 1920s curbing crude exports and almost all overseas sales are prohibited by the laws from the 1970s. The new plants are being built because existing ones in the Gulf of Mexico, home to more than 40 percent of the nation’s processing capacity, were mostly developed to handle heavier crude grades, according to ICAP Shipping.

The additional cargoes could be curbed because the 17- nation euro region will keep contracting through at least the third quarter, according to 23 economist forecasts compiled by Bloomberg. Europe accounted for 15 percent of global consumption of refined fuels in 2011, BP Plc estimates.

Owners are still coping with a fleet that expanded faster than cargoes in seven of the past eight years, according to Clarkson Plc, the world’s largest shipbroker. The combined capacity of the vessels gained 74 percent since 2004, while seaborne trade in fuels rose 36 percent.

Price Discounts

Refineries that can process ultra-light U.S. oil are getting deeper price discounts for the feedstock. U.S. condensate sold for a record average of $26.47 a barrel less than Brent crude oil in the fourth quarter, compared with an average of $6.70 in the same quarter of 2010, according to data compiled by Bloomberg.

“The U.S. is a low-cost refined products producer as our refineries benefit from low input costs,” said David Beard, an analyst at Iberia Capital Partners LLC in New Orleans, who has covered the maritime industry for about 15 years. “Product tanker-centric companies benefit.”

Rates may keep advancing because the pace of new vessel construction is slowing. The global fleet of product tankers will expand 2.3 percent in 2013 as trade gains 4.2 percent, Clarkson estimates.

Excess vessel supply is hurting other shipping markets. The ClarkSea Index, an industry-wide measure of earnings, plunged to the lowest monthly average in February since at least 1994, according to Clarkson.

The Baltic Dry Index, a measure of the cost of hauling coal and iron ore, slumped 60 percent last year and the Baltic Dirty Tanker Index, reflecting rates for ships carrying crude oil, lost 18 percent.

Hydrocarbon Imports

Combined U.S. exports of refined fuels derived from all crude grades reached a record 2.6 million barrels a day last year, according to Energy Department data. The nation imported 12 percent less crude from the Organization of Petroleum Exporting Countries last year, compared with 2010. Its petroleum deficit, or the difference between the cost of its hydrocarbon imports and exports, fell to $18.7 billion, the lowest since 2004, according to data compiled by Bloomberg.

“The exporting of shale refined into product cargoes will get around the restrictions of crude exports,” said Jonathan Chappell, a New York-based analyst at Evercore Partners Inc. “This glut of shale spurring more refined cargoes is going to be a positive development for Medium Range tankers.”