After a successful 2014, the shipping industry is set to experience another good year. The sector suffered during the financial crisis of 2008, but affected a partial recovery from 2010. With sector specific risks projected to decline and new investment slated to flow in, shipping companies are poised to make gains.
Cheaper Oil to Deliver Boost
Cheaper fuel will be a major positive for shipping companies this year. The slump in crude is expected to significantly reduce costs of bunker fuel prices this year. Despite a rally last week, the specter of a worldwide glut has kept prices nearly 50% lower than the highs achieved in mid-2014.
Tankers will benefit even more from this development. By the end of last year, very large crude carriers (VLCC) were close to a level of $100,000 a day. Their average rates through 2014 were also the best in nearly four years. Low oil prices will increase demand for tankers and could result in higher rates for shipping companies this year.
Larger Vessels, Mergers Dominate
Last month witnessed the launch of the MSC Oscar, the world’s largest container vessel, which can carry in excess of 19,000 containers. However, it may soon be eclipsed by the Barzan which is being built by Hyundai Heavy Industries for United Arab Shipping Co. In fact, vessel sizes are expected to increase further.
Meanwhile, large alliances have begun to dominate trade lines. Earlier this month witnessed the official rollout of the new 2M Alliance. The event was marked by the commencement of a vessel sharing agreement between Maersk Line, the global container unit of the A.P. Moller – Maersk Group, and Mediterranean Shipping Company.
Opinion is divided about whether these developments will increase profitability or lead to a reduction in rates across the industry. However, even though smaller ships will be replaced by larger ones, the total number of ships will come down because of the alliances. This could lead to capacity remaining unchanged or even declining, which could subsequently push up rates.
Regulatory Concerns
Ultimately, how the shipping business copes with new regulatory standards could determine its success this year. Conventionally, shipping fuel had 3.5% sulfur content worldwide. This was reduced to 1% in 2012 and has been cut to 0.1% starting this year in the Baltic, North Europe and North American Emissions Control Areas following the approval of the International Maritime Organization.
This has led to an increase in the cost of fuel due to higher refining costs of fuel with low sulfur content. One estimate puts this at an additional $300-$400 per ton in Vancouver and $80-$100 in Asia. Ultimately, the fate of rates will result in whether the advantage gained from cheaper fuel can offset the increase in costs imposed by stricter regulatory standards.
Our Choices
Below we present three stocks which will gain from these trends, each of which also has a good Zacks Rank.
Aegean Marine Petroleum Network Inc. (ANW) is a marketer and supplier of refined and marine fuel and lubricants to ships. These ships may be at sea, in port and on rivers across the world. Aegean Marine Petroleum also has a range of marine lubricants named Alfa Marine. This marine fuel logistics company also offers a variety of shipping services including handling and technical support.
Aegean Marine Petroleum holds a Zacks Rank #2 (Buy) and has expected earnings growth of 40.7%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 12.56.
DHT Holdings, Inc. (DHT) independently operates crude oil tankers. DHT Holdings’ fleet consists of 18 tankers in the Suezmax, Aframax and VLCC segments. The company operates via its integrated management companies located in Norway, Singapore and Oslo.
Apart from a Zacks Rank #2 (Buy), DHT Holdings has expected earnings growth of 48.3%. It has a P/E (F1) of 10.30x.
StealthGas, Inc. (GASS) and its subsidiaries offer transportation services to producers and users of liquefied petroleum gas (LPG) across the world. StealthGas also transports crude oil as well as a variety of petroleum products such as butane. It is also a carrier of edible oils and chemicals.
StealthGas holds a Zacks Rank #2 (Buy) and has expected earnings growth of 16.6%. It has a P/E (F1) of 5.66x.
Despite challenges, the shipping industry will possibly enjoy another successful year. Lower fuel prices and new mega alliances are among those factors which could work in its favor. This is why you should add these stocks to your portfolio.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment