Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Frontline Ltd. (FRO), Nordic American Tanker Ltd (NAT), Teekay Corporation (TK): The Tanker Business is Sunk

When an executive goes out of their way to suggest competitors should shut down capacity you know there are issues in an industry. That’s exactly what Frontline Ltd. (NYSE:FRO)’s John Fredriksen did last week after the company reported another terrible quarter. Fredriksen said companies owning tankers older than 15 years should scrap them to reduce supply in a vastly oversupplied industry.

He might be right that dumping supply is the best option but usually bankruptcy sorts out these kinds of things and by the look of how things are going in the tanker business that’s what I see on the horizon.

Frontline Ltd (NYSE:FRO)

Demand is gone and never coming back
When very large crude carriers, or VLCC, rates were commanding over $200,000 per day in 2007 the industry relied on massive U.S. oil imports and growing imports in China. Since then, U.S. oil production has jumped dramatically, reducing the need for imports, and China has built pipelines to replace some of its shipping needs.

U.S. imports from the Persian Gulf are down 28% since 2004, requiring 691,000 fewer barrels of oil.

Asian demand is still rising but even those imports are coming from shorter distances. Shipbroker Clarkson Plc says Asian demand from the Middle East will grow 7% this year to 8.1 million barrels per day but West African Crude demand, which takes 14 days longer to travel to Asia than the Middle East, will fall 28% to 703,000 barrels per day.

Combine falling shipping demand from the U.S. with shorter distances traveled to Asia with an oversupply of tankers and you have terrible operating conditions for tanker owners. Estimates put the overcapacity at 75 VLCCs, or 13% of the entire fleet.

Trouble across the industry
The companies with the most exposure to oil shipping are feeling the most pain right now. Frontline Ltd. (NYSE:FRO)Nordic American Tanker Ltd (NYSE:NAT), and Teekay Corporation (NYSE:TK) have all been reporting losses since 2011 and given the average dayrate of $7,397 this year for VLCCs and a breakeven cost of about $25,000 there’s a lot of room for improvement.

FRO Net Income TTM Chart

FRO Net Income TTM data by YCharts

Some are predicting an improvement as the economy improves but the long-term trends are working against oil tankers. Oil consumption is falling in developed countries as costs rise and alternatives become attractive, trends that I don’t see changing. These companies are in such a deep hole that some won’t dig out, which is the only way supply will be reduced as John Fredriksen wants.

The article The Tanker Business is Sunk originally appeared on and is written by Travis Hoium.

Fool contributor Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.