It might be hard to believe, but there are actually a few companies that are profiting handsomely from the dramatic decline in oil prices. Some of the biggest beneficiaries are the owners and operators of oil tankers.
Tanker fleet operator Tsakos Energy Navigation (NYSE: TNP) saw its revenues increase by $113.47 million (€104.2 million) between September 2014 and September 2015. Tsakos reported revenues of $468.6 million (€429.57 million) for third quarter 2014 and $582.07 million (€533.59 million) for third quarter 2015.
More importantly, Tsakos’ income grew by $147.30 million (€135.03 million)—nearly 150%—during the same period. Tsakos reported a negative net income of -$15.16 million (-€13.9 million) for the third quarter of 2014 and a positive net income of $132.12 million (€121.12) for the third quarter of 2015.
Some of Tsakos’ other financial numbers were impressive:
- A profit margin of 28.32%
- A diluted earnings per share number of 1.425
- $212.66 million (€194.95 million) in cash from operations during the third quarter of 2015, an increase of $138.17 million (€126.66 million) over the same period in 2014, when the company’s operations generated $74.49 million (€68.29 million) in cash.
The largest tanker operator, Euronav NV, saw its revenues more than double. Euronav reported revenues of $352.97 million (€323.57 million) for third quarter 2014 that increased to $758.8 million (€695.6 million) in third quarter 2015. That makes for a $405.83 million (€372.03 million) increase in revenue in just a year.
Income also grew dramatically at Euronav, rising from -$65.13 million (€59.71 million) to $241.5 million (€221.39 million) between September 2014 and September 2015—an increase of $306.63 million (€278.34 million) in just one year. Like Tsakos, Euronav is certainly making a lot of money right now as these financial numbers for Third Quarter 2015 indicate:
- A profit margin of 34.99%
- Diluted earnings per share of 1.537
- $368.5 million (€337.81 million) in cash from operations, an increase of $353.63 million over December 2014, when it reported $14.78 million (€13.55 million) in cash from operations. December was the earliest date for that number for Euronav that I could locate.
These numbers certainly justify Bloomberg’s thesis that low prices are very good for tanker operators. Yet they seem to defy conventional wisdom, which dictates that companies in the oil business lose money when prices are low.
Why Tanker Operators Make Money from Cheap Oil
Actually, tanker operators are making money because they are not in the oil business; instead, they are in the shipping business. Cheap oil equals profits for tanker operators for two reasons:
- Lower prices create more demand, which means more oil gets shipped. Shippers do not make their money by selling oil; instead, they make their money by shipping oil. The more oil that gets shipped, the more money ship owners make.
- Oil (or diesel fuel made from it) is what oil tankers run on. Lower oil prices equals lower fuel prices, which means lower operating costs and higher profits for tanker operators.
Tanker operators are now in the enviable position of seeing business increase while operating costs are falling. Naturally, some people might be wondering if these companies are classic value investments.
In Tsakos’ case, the answer seems to be yes; Tsakos’ shares were trading at $7.25 (€6.65) on December 30, 2015. That gave it market capitalization of $633.21 million (€580.47 million) on an enterprise valuation of $1.744 billion (€1.60 billion), meaning it is underpriced. Yet investors were sharing in the profits with a dividend yield of 3.31% and a return on equity of 10.7% for the third quarter of 2014.
Although Euronav’s performance was impressive, it wasn’t as good to investors as Tsakos. It returned no dividend for third quarter 2014, but investors did reap a 14.08% return on equity. Euronav was still very cheap; it was trading at $13.54 (€12.41) a share on December 30, 2015. It was also undervalued with a market capitalization of $2.156 billion (€1.98 billion) and an enterprise value of $3.188 billion (€2.92 billion).
This also justifies one of Warren Buffett’s classic value investment strategies—that of buying the transportation systems that move commodities rather than the commodity producers. Berkshire Hathaway (NYSE: BRK.B) famously owns a number of pipelines through Berkshire Hathaway Energy and the Burlington Northern Santa Fe, or BNSF, railway system, which moves coal and oil in the United States.
Can the Tanker Companies’ Windfall Last?
The important question that investors need to ask here is how long can cheap oil and the tanker companies’ windfall last? This question is critical because even though Euronav and Tsakos are making a lot of money now, their resources are very limited.
Euronav reported a free cash flow of just $64.56 million (€64.56 million) and cash and short-term investments of $173.44 million (€159 million) for the third quarter of 2015. Tsakos reported a free cash flow of $68.25 million (€62.57 million) and cash and short-term investments of $281.79 million (€258.05 million) for the same periods. This means all it would take is a sudden slump in oil shipments for these companies to start losing money.
Such a slump seems unlikely because the largest oil exporter, Saudi Arabia, now has an official policy of pumping as much oil as possible. The Saudis pumped 10.13 million barrels a day in November 2015, a 9.584 million increase over the same month in 2014, according to The Wall Street Journal. The Saudis need to keep oil exports high in order to cover their growing national debt and budget deficit.
Saudi Arabia reported a record budget deficit of $98 billion (€89.84 billion) for 2015, which is the highest in its history, AFP reported. The International Monetary Fund, or IMF, reported that the real Saudi deficit could much higher, as much as $130 billion (€119.17 billion).
The Saudis will keep exports high next year because their Finance Ministry projects spending of $224 billion (€205.34 billion) and oil revenues of $137 billion (€125.59 billion) for 2016. Since around 90% of the kingdom’s revenue comes from oil, you can see the predicament the country is in. It has to sell more oil to pay its bills, yet pumping more oil drives down prices, lowering prices and revenues, which drives more production.
The lower the prices, the more oil Saudi Arabia and other producers like Russia have to sell just to keep their economies running. That means more business and profits for tanker operators.
This situation could soon get even better because the U.S. Congress has voted to abolish America’s oil export ban. That action could greatly alter the oil market because the USA is now the world’s largest oil producer, pumping 14,021 barrels a day in 2014, according to the Energy Information Agency. In contrast, Russia pumped 10,847 barrels a day, and Saudi Arabia pumped 11,624 barrels a day in 2014.
This means that the total volume of oil shipped and tanker operators’ profits should increase dramatically for the next year, barring some sort of Black Swan scenario. Such scenarios could include all-out war in the Middle East, for example, ISIS torching oil fields, the United States, Russia or other major powers bombing oil fields (something that is already happening in Syria) widespread adoption of alternative energy sources for vehicles such as electricity and hydrogen fuel cells or depletion of oil—the old Peak Oil scenario.
Since these developments are unlikely or years away, oil production and tanker companies’ profits should continue to go up for the next few years. That means shippers such as Euronav and Tsakos will make money and remain good value investments. One has to wonder if Berkshire Hathaway will soon start shopping for tanker companies.
