U.S. Merchant Shipping Stocks Predicted to Soar

, an ATB built by Signal International

By Jack Kaskey and Naomi Christie

Oct. 24 (Bloomberg) — U.S. marine shipping stocks are poised to see their shares climb 59 percent in the next 12 months, outshining the 35 percent gain on the first day of Alibaba Group Holdings Ltd.’s initial public offering last month.

The gain for shippers that ferry crude between U.S. ports and carry liquefied natural gas and dry goods such as coal around the world would be the most of any sub sector in the Russell 3000 Index, according to estimate data compiled by Bloomberg. The analysis screened for companies with a market value of at least $500 million and 10 analyst ratings.

Marine shipping stands to benefit from a world economy forecast to expand about 3 percent in 2015, the fastest annual pace in five years, the strongest dollar since 2010, and declining oil and commodity costs which boost demand and reduce input costs. At the same time, the pace of vessel construction has slowed, so fewer ships compete for cargoes, creating room to raise freight rates.

“Lower commodity prices are stimulative to the economy and good for seaborne demand,” Nigel Prentis, the head of consultancy at Hartland Shipping Services Ltd. in London, who’s worked in the maritime industry for 33 years, said by phone yesterday. “It could be a rather perfect combination of better- than-expected demand and weaker fleet expansion.”

Brent crude has dropped more than 20 percent from this year’s peak in June, meeting a common definition of a bear market, on concern global supply is outpacing demand. The plunge in oil and other commodities prompted Citigroup Inc. to estimate savings to the global economy equivalent to stimulus of $1.1 trillion a year.

Price Risk

Falling energy and commodity prices are also a risk for shippers because price declines can curb the incentive to arbitrage cargoes by taking advantage of cost discrepancies between regions, Erik Nikolai Stavseth, an analyst at Arctic Securities ASA in Oslo, said by phone yesterday.

Shipping investments vary depending on the type of vessel because each has its own forces of supply and demand, he said. The best segments are for ships hauling crude oil and liquefied gases, said Stavseth, whose estimates on shipping companies returned 13 percent in the past year.

A stronger dollar supports imports into the U.S. by making foreign goods cheaper in the world’s biggest economy. The Bloomberg Dollar Spot Index, which tracks the currency against 10 others, has advanced 4.8 percent this year, the most since 2008. That also makes American goods more expensive for consumers in other countries, weighing on exports.

Freight Rates

Rates for transporting crude oil are higher this year, while prices for cargoes such as iron ore and coal are lower, according to the Baltic Exchange in London.

Shares of Frontline Ltd., an owner of tankers led by billionaire John Fredriksen, have slumped by more than 50 percent this year.

“Share prices are lagging and you should see a catch up really for these stocks,” Eirik Haavaldsen, an analyst at Pareto Securities AS in Oslo, said by phone yesterday, in reference to shares of tanker companies.

Groupon Inc., which debuted at $20 a share in November 2011, fell 36 percent in the last 12 months to close at $6.19 a share yesterday. Apple Inc.’s share price rose 40 percent over the past year, while the Standard & Poor’s 500 Information Technology index has gained 20 percent.

The fleet of crude oil tankers is on course to contract this year for the first time in at least nine years, according to data from IHS Fairplay compiled by Bloomberg. Vessels with a transportation capacity of about 374 million deadweight tons are on the water, 0.2 percent less than last year. Deadweight tons are a measure of transportation capacity.

Shares Drop

Shares of Houston-based Kirby Corp., the largest U.S. tank barge operator, have dropped 10 percent since a Sept. 11 peak. While a small portion of the company’s business entails hauling oil between U.S. ports, it receives most of its revenue from shipping chemicals.

Chemical shipping may benefit as the industry invests $124 billion in new U.S. capacity to take advantage of natural gas that has become abundant and cheap with increased production in shale formations, said Kevin Sterling, an analyst at BB&T Capital Markets who recommends buying Kirby shares. Dow Chemical Co., Kirby’s biggest customer, announced record plastics earnings Oct. 20 and is investing $4 billion to expand gas-based production on the U.S. Gulf Coast.

“Why you want to own Kirby is this growth from the petrochemical build out,” Sterling said by phone Oct. 22. “Kirby is a direct play on that.”

Oil Demand

Some investors are concerned that a prolonged drop in oil will reduce demand for shipping crude, flooding the chemical shipping market with barges that would increase competition and cut prices, he said.

LNG shippers have declined far more than Kirby since oil began its plunge. Golar LNG Ltd., based in Hamilton, Bermuda, and the second largest marine shipper in the Russell index behind Kirby, has dropped more than 25 percent since its September peak. That leaves the shares poised to return about 70 percent over the next year, Michael Webber, an analyst at Wells Fargo Securities LLC, said in an Oct. 15 note.

“This kind of pull-back is what many investors have been waiting for,” Webber said in the note.

LNG contracts are indexed to Brent crude, so a drop in long-dated futures could hurt pricing and lead to marginal projects being canceled, Webber said. That hasn’t happened yet and the LNG shipping market is already undersupplied for late in the decade, he said.

Brent for December settlement decreased as much as $1.21 cents, or 1.4 percent, to $85.62 a barrel on the London-based ICE Futures Europe exchange today. Front-month prices are down 22 percent this year.

Dry Bulk

Dry bulk shippers, which depend on Chinese demand for coal, iron ore and grains, are the “softest” marine shipping sector, even after companies such as Safe Bulkers Inc. fell 33 percent from their September highs, Webber said. Capacity of those ships swelled by 4.8 percent in the past year to 654 million tons.

Excess capacity has helped cut the average share price of dry bulk shippers to less than book value. The excess could be absorbed by rising iron ore exports to China from Australia and Brazil, according to Bloomberg Intelligence.

“Across most segments there has been severe oversupply since 2008 and the demand crush we saw at that time,” equities analyst Bjoern Kristian Roed from Danske Bank A/S said by telephone on October 23.

“2014 could be viewed as the first year where tonne-mile demand exceeds vessel supply growth within the conventional shipping segments (dry bulk and crude oil) and I expect this trend to continue into next year, which will be positive for the shipping segment,” he said by e-mail.

(c) 2014 Bloomberg.