Roller-Coaster Ride Continues For Crude-Tanker Stocks

by | Apr 14, 2020 | General | 0 comments

The following article really shows the dynamics of what is going on in the oil tanker space.

There is a lot of fear among investors. They know that the rates are high but they are afraid to hold or invest because the rates will come down. The only question is when.

An investor just told me that some hedge funds are buying physical oil tankers instead of the oil tanker stocks. I don’t have to proof for this so if you heard about it email me. It would not surprise me because when there is arbitrage/free money, there are hedge funds taking advantage of it.

They know that oil contango is very large. It is more than $10 for three months. So they know that someone can buy physical oil and sell it in the futures market for profit of $10 per barrel. A VLCC can store 2 million barrels.

$10 x 2 million = $20 million in 90 days

This is $222,222 per day of profit. This kind of economics can afford a VLCC rental of $200,000 per day.

Even though this is fantastic, the oil tanker investors are shaking with fear every time Trump tweets something about oil production cuts. A hedge fund buying a physical oil tanker is not scared.

The hedge fund knows that the ship owner is also shaking with fear counting the days when the good days will be over. So the hedge fund can buy an old vessel on the cheap, store the oil for a year, and make huge returns in the process. He doesn’t not care what Trump tweets because he can lock in a long term storage price for more than it cost to buy the vessel.

Of course, it would make more sense to buy the stocks of oil tankers because they are trading for less than NAV. I doubt that the hedge fund can buy a vessel for less than NAV. But by buying the physical oil tanker, he does not have to deal with the idiots who can’t seem to hold on to the oil tanker stocks from one tweet to the next.

Unless you show me how the oil cuts can be 30 to 40 million barrels per day, I don’t see how the high rates environment is a short term thing. In my opinion, this will last for quarters if not years. And if this happens, then your dividends payments will be more than what you paid for the stock.

For example, if you put $1,000 into Frontline in 2002, you received $7,000 in dividends from 2003 to 2008. Plus the stock price increased 50x.

Right now everybody is so scared that the music will stop that they don’t even dance.

Just dance.

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About Mariusz Skonieczny

Mariusz Skonieczny is the founder of Classic Value Investors.