Covet a life at sea? Not if you're a crude oil tanker operator with rates and confidence at historic lows. Oil shippers would rather send ships out at money-losing rates than pay more to keep them fueled-up and tapping their decks in port.
They call this industry cyclical for a reason. Someday supply and demand will balance, rates will jump as they have in the past, and crews will dress in Prada. But that make take a few years.
Which companies can investors buy, confident that they can survive the wait for calm seas and smooth sailing?
Only the Strong Stay Afloat
For a crude oil tanker company to survive until the seas calm, it must be able to cover its debt interest for a number of years with cash and operating cash flow. That means not casting out too much of its cash life preserver as dividends, too. Let's take a look.
Total Debt (TTM Interest)
Cash and Equivalents (MRQ)
Operating Cash Flow (TTM)*
TTM Common Dividends % of OCF
General Maritime (GMR)
Knightsbridge Tankers (VLCCF)
Nordic American Tankers (NAT)
Negative. Paid $66MM on $26MM OCF
Sources: Company reports, Capital IQ (a Standard & Poor's company). All dollar figures in millions. All figures are using June 30, 2011 (except Frontline -- March 31, 2011) and Aug. 19, 2011 close where appropriate. Total debt = short and long term debt plus preferred shares.
Those capex numbers may scare you, but they are mostly for new tankers. Any of these companies could cut it to improve their cash position, and General Maritime's creditors have required it to. No worries there, mate.
For the lowest risk while you wait, Knightsbridge is the tops. Both Teekay and Frontline appear to have no trouble making the debt interest payments and have acceptably low dividend payout ratios. It is probably best to avoid Nordic American because it makes no economic sense to pay out more in dividends than your operating cash flow. You'll walk the plank eventually.
The worst, or is it?
But if you like higher risk and higher reward, look no further than the ugliest of the bunch, General Maritime, which I own even though it's scarier than Merkel or Berlusconi in a sailor suit.
The numbers don't tell the whole story here. Distressed debt investor legend Howard Marks' Oaktree Capital led a recapitalization in March that threw General Maritime a two-year lifeline on interest and debt.
Are two years enough? Frontline CEO John Fredriksen says it's one to two years before the crude oil tanker biz hits bottom. That just might be enough for General Maritime, which says the numbers favor better rates in the latter half of 2012.
I like to have a few of these high-risk, high-return situations in my own portfolio -- but no more than that. They are better than lottery tickets where the odds are estimable with a straight face, but the waves are high and investors could be pitched overboard. We may calculate probabilities are favorable for red skies at night, sailor's delight, but it could well be red skies at morning, sailors take warning. Take this risk for reward only with eyes wide open.
Tom Jacobs is the advisor for Motley Fool Special Ops, a special situations and opportunistic value service. You can follow him on Twitter @TomJacobsInvest. He owns shares of General Maritime. The Motley Fool owns shares of General Maritime.
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