8-10% Dividends For Oil Shippers

If a slumping stock market and disappointing money market yields have you scrambling to find a half decent return, an 8-10% dividend yield sounds pretty good right now.

That's basically the range that is reasonably expected to be paid out this year by global oil tanker stocks such as Frontline (NYSE:FRO), Ship Finance International (NYSE:SFL), Double Hull Tankers (NYSE:DHT) and Knightsbridge (Nasdaq:VLCCF). But before you get too excited about these above-average yields, there are a couple of things to take onboard.

Rocky Shipping Rates Hurt Payouts
For starters, it's not exactly smooth sailing for the oil shippers. They have to contend with one of the most volatile markets in the world. And that's prevented most of them from committing to a fixed quarterly dividend. Payments vary depending on the income and cash flow in each quarter, which in turn is driven by charter rates.

These charter rates have fluctuated wildly over the last few years, ranging between $20,000 to $250,000 per-ship per-day. The top end of this range was hit last December when a late scramble by charterers sent rates into an unsustainable parabolic spike. A lot of this volatility is because about half of the global demand for tankers is connected with the Middle East-to-Asia shipping route, another consequence of the China growth story.

Rates have now settled back to a level of $60,000 per-ship per-day, but there's no assurance that they won't fall further should a global economic setback hurt oil demand and, in turn, tanker demand. Prior to the year-end spike, rates had been trending lower during most of 2007.

New Boats and Lower Demand a Bad Combo
Another factor that is expected to have a depressing effect on charter rates is a huge increase in the global fleet over the next couple of years. New tankers on order currently represent about 40% of the existing fleet. According to statistics compiled by analysts at Deutsche Bank, the fleet should grow by 10% this year, 15% in 2009 and by nearly 17% in 2010. That will significantly outpace the projected rate of tanker demand, which is likely to be only 4-5% in each of those years. Crude oil demand, which the International Energy Agency is now projecting will increase by only 1.9% in 2008 and 2% in 2009, is the key factor limiting the growth in tanker demand for the next few years.

The Bottom Line
With oil prices now above $100 a barrel, I'd be very surprised if we didn't get some sort of global consumption slowdown over the next year. Combined with the impact of the pending tanker glut, the net result should be much lower charter rates. All this suggests that near-term dividend expectations for this group are vulnerable to some serious downside revisions.

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berto said...
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