Investing in FAANG stocks is all fine and good, but true contrarians and value seekers should look elsewhere for stocks with the potential to double, triple or even more. For this purpose I like gold and silver stocks as well as cannabis stocks, but there’s another sector that’s worth your attention.
I’m referring to tanker stocks, which represent companies that maintain the ships that move barrels of oil from one place to another. Interestingly, the tanker sector has been beaten down and should now be of great interest to the true contrarians out there.
The way I envision it, a tanker stock is different from an oil stock like Marathon or Occidental Petroleum. Oil companies will come and go, but all of them will need tanker companies to store and ship the petroleum.
Chances are pretty good that you haven’t spent a lot of time thinking about oil tankers. Don’t worry, as I’ll give you a quick rundown on the basics right now. The first thing to know is that there are different tanker sizes. This is important because different tanker companies use different types of tankers, based on size.
The most commonly used tanker sizes are the Suez-Max, which is an average-sized tanker at around 285 meters in length, and the VLCC, which stands for Very Large Crude Carrier and is around 330 meters long. There are other sizes as well, but those are the ones you’ll see the most often.
VLCC tankers can take up to 2 million barrels of crude oil per shipment, while the Suez-Max tankers only take around half of that amount. The name “Suez-Max” comes from the fact that it’s the largest-sized ship that can sail through the Suez Canal fully loaded. Sometimes you’ll also see tanker companies using Aframax tankers, but these only carry around 600,000 barrels of oil.
One thing you’ll want to investigate as a tanker investor is the number of tankers a company has, what types of tankers they are, and perhaps most importantly, how old those tankers are. Modern tankers last around 20 years, and it takes at least two full years for a new tanker to be built after it’s been ordered.
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In other words, don’t just jump at a tanker company because it has more tankers than the other companies. If those tankers are all close to 20 years old, it will be an expensive proposition for that company to replace them: over the past decade, the cost of a new VLCC tanker has ranged from around $80 million to $160 million.
Another thing to consider is that tanker stocks aren’t entirely connected to the spot oil price. As you might recall, in April the near-term oil futures contracts sank to a mind-boggling -$37. Yet, even with the oil futures trading at a deeply negative number, tanker stocks surged because oil companies were scrambling to hire tankers to carry their oversupply of oil.
Now, I’ll offer you a few well-known names in the tanker space so that you can conduct your due diligence on them. One thing you’ll immediately notice is that these stocks offer terrific dividend yields and they also have ultra-low price-to-earnings ratios – features that income-seeking value hunters should appreciate.
EURN Price Chart. Courtesy: Yahoo Finance
The chart above shows the five-year price history of Euronav (EURN) stock. This company is the leader in the industry with the world’s largest independent crude tanker platform. As you can see in the chart, the EURN stock price recently bounced off of the long-standing $7 support level.
If you’re going to dip into the tanker market, you’d might as well start with EURN stock. Euronav currently has an extensive fleet of 74 vessels, and the vast majority of them are VLCC and Suez-Max ships. Moreover, EURN stock has a P/E ratio of 2.56 and a forward annual dividend yield of 20.67%.
My next pick would be Frontline (FRO), a Bermuda-based company with a pretty even three-way mix of VLCC, Suez-Max, and Aframax vessels. At the end of Q2 2020, Frontline had $462 million in cash and cash equivalents, which is respectable. Plus, the P/E ratio of 2.81 and the forward annual dividend yield of 31.75% are impressive stats.
Finally, I’ll give you one more tanker stock, though there certainly are more of them to choose from. If you like to collect big dividend payments, then check out DHT Holdings (DHT), which sports a jaw-dropping forward annual dividend yield of 36.29% along with a P/E ratio of 2.94. However, be aware that DHT’s tanker fleet is less than half the size of Euronav’s or Frontline’s.
Take a look at any of these, or the fleet of other tanker stocks out there, for potentially superior yield in a sector that might be due for a rebound in 2021.
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