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A Timely Play To Capitalize On The Oil Price Drop

This week we take another look at some energy companies that could do well in a low-oil price environment. With WTI sinking to a fresh six-year low, investors should be wary of parking their money upstream at the moment.

As we discussed last week, companies with significant assets downstream are profiting from large margins these days.

Another exciting play is the oil tanker market. Upstream companies are getting their clocks cleaned with low oil prices, but the tanker market actually benefits when crude is selling on the cheap.

Why Oil Tanker Companies are Seeing The Best Market in Years

Teekay Tankers Ltd. (NYSE: TNK) is having a great year. We highlighted Teekay in an Executive Report in February 2015, and since then the stock is up 20 percent.

For the second quarter, Teekay reported earnings of $41.3 million, or $0.35 per share, compared to a loss of $4.1 million a year ago, or a loss of $0.05 per share. The company attributed the turnaround to several market factors working in its favor.

First, is the slow rate of supply expansion in the tanker market. After years of companies building too many new tankers, building has leveled off. Below is a chart from Teekay Tankers showing the slowing build out of new oil tankers. As you can see, up until just last year, the tanker fleet was growing quickly, and the expansion depressed tanker rates, pushing down revenues for all players in the sector. That drag on earnings has finally dissipated. As a result, tanker rates are at their highest level in years. 

As the chart shows, more tankers have been ordered and will be delivered in 2016 and beyond, so the tight market could be temporary.

But the slowdown in the growth of the tanker fleet came at a wonderful time for tanker operators. Oil prices collapsed, spurring demand for oil across the globe. U.S. motorists are hitting the roads at near record levels, and the same is true for drivers in other parts of the globe. Demand for oil continues to rise, which puts more tankers in demand and bids up their rates.

Moreover, tankers are in demand for oil storage. With global supplies expected to continue to exceed demand by at least 1.4 million barrels per day in the second half of 2015, according to the IEA, that will put more pressure on storage hubs around the world. As onshore storage fills up, tankers at sea are being leased for storage. Again, more demand for tankers improves cash flow.

As…




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