The industry's order book fell sharply from 50% of the fleet size in the fourth quarter of 2008 to a first quarter 2011 rate of 26%. Michael Webber expects this trend to continue to diminish. "Tanker rates and equity prices have been in a protracted down trend," says Webber, and he thinks we're near the trough. Believing the supply and demand dynamics could turn positive as soon as the third quarter, Webber believes the industry is poised for a multiyear rally.
He sees upside driven by expanding crude demand from China and developed economies as they continue to recover. He believes shares of Frontline (FRO) and Overseas Shipholding Group (OSG) are well positioned to capture this improvement, with a substantial portion of total returns coming from attractive yields: 7.68% from FRO and 5.57% from OSG. These shares are also on Mavrinac's recommended list. However, after having significantly sold off during the recession, these shares have realized only modest gains over the past two years.
Container Ships
Most analysts believe container ships are the healthiest segment of the shipping sector.
FBR's Doug Garber observed that the industry was hit by a slowdown in demand due to the recession. But demand has since recovered, absorbing excess capacity and reactivating laid-up vessels. This is setting the stage for the industry's next growth phase.
With worldwide container ship trade at record levels, Garber expects the market to continue to tighten this year and next. He in fact suspects the market could find itself undersupplied in late 2012 and 2013. Accordingly, he anticipates a 30% year-over-year increase in day rates for feeder and intermediate-size container vessels in 2011.
Michael Webber sees the bull market in container shipping that started in 2010 continuing into 2011 driven by revitalized developed market demand, which fell 10% in 2009 but rose 9% last year.
Container shippers are also demonstrating better supply control. "We've seen order books drop by more than half from their peak of 60% in 2008 to 27% in early 2011," observes Webber. And capacity has been further reduced by slowing ship speeds.
Among the most compelling shares in the container industry-as well as in the entire sector-are those of Hong Kong-based Seaspan (SSW). The firm is a leading independent ship owner and lessor, operating a container fleet of 57 vessels with another 12 scheduled for delivery within the next year. It is sheltered from the volatility of spot rates through leases to operators that average ten years.
But since their inception in mid-2005, shares of Seaspan have seen rough seas. They soared nearly 70% over their first two years of trading, peaking at $37. They then collapsed to the mid-single digits at the bottom of the financial crisis, but have since quintupled in value.
According to Lazard Capital Markets' maritime analyst Urs Dür, the availability of the larger container ship market, in which Seaspan serves, is limited and fully contracted, with rates and asset values likely to continue to improve.
Wells Fargo's Webber believes that revenue and profit are poised to grow by 25%-30% per year for the next two years. Seaspan, he says, "will have the capacity to materially increase its dividend [which it recently boosted from $0.50 to $0.75], fund additional growth and pay down debt." However, long-term debt of $2.6 billion, which hasn't started to amortize due to favorable borrowing terms, and a long-term debt to total capital ratio of nearly 64% are material concerns to Webber. But these figures aren't extraordinary for this highly capital-intensive sector.