Sector Watch: Shipping Companies
International shipping companies are benefiting from steadily increasing global trade, rising imports/exports from China and other Asian countries, and expanding global demand for oil, coal, agricultural products and other commodities that are generally shipped via ocean tankers and container vessels.
Robust growth in shipping industry volume is evidenced by the increase in container shipments bringing products into China. More than 58 million containers passed through China’s ports in 2004. This number is forecast to more than double to 120 million containers by 2010. In addition to booming China traffic, container shipments are increasing because of above average GDP growth in the U.S. western coastal states. Industry investment in expanding U.S. terminal capacity is forecast to rise 5.1% annually between 2004 and 2010.
Accelerated offshore drilling activity is heightening demand for offshore supply vessels. These vessels transport dry and liquid cargos, including drilling equipment, pipe and drilling fluids to and from the offshore site. Day rates for these vessels have risen dramatically, from approximately $15,900 per day in 2004 to $30,400 per day in 2005 and $48,600 per day in 2006. In the first few months of 2007, day rates have averaged around $53,300.
Contract rates for the large oil tankers that move oil from one country to another also benefit from rising global oil demand and the limits of a fleet consisting of only about 6,800 vessels worldwide. Oil companies own some of these tankers but the vast majority are independently owned and operated. Charter rates for the larger tankers have risen significantly due to increased long haul trade to Asia and the United States and increased U.S. imports. One-year rates rose from $24,800 per day in 2003 to peak at $34,900 in 2005. While rates have since declined to $31,000 per day in early 2007, they remain at historically high levels.
Dry bulk shipments of iron ore and coal have increased because of rising ore imports to China and other parts of Asia. The seaborne ore trade grew 5.3% annually between 1996 and 2006. During this same period, imports of ore to China grew 22% annually. Seaborne coal shipments expanded 7% annually between 1996 and 2006. Reflecting this rising volume, one-year charter rates for dry bulk vessels have risen from $17,100 per day in 2000 to $37,300 per day in 2006. Rates averaging approximately $54,000 per day in early 2007 indicate high winter season demand and consistently high commodity trade and port congestion.
Ultrapetrol (Bahamas) Ltd.
One of the companies benefiting from shipping volume growth is Ultrapetrol (Bahamas) Ltd. (Nasdaq: ULTR). This industrial transportation company is the largest owner/operator of South American cargo barges. Its operations are well diversified, enabling the company to benefit from demand in a variety of shipping segments. In addition to cargo barges, Ultrapetrol also operates fleets of offshore supply vessels working in the North Sea and South America, ocean-traveling oil tankers and passenger-carrying cruise vessels operating primarily in the European cruise ship market.
Ultrapetrol’s revenues rose 38% in 2006 to $173.5 million as a result of additions to the offshore supply vessel and tanker fleets, higher cargo volume and rising charter rates. Earnings before interest, taxes, depreciation and amortization (EBITDA), a key profitability measure for the shipping industry, rose 46% to $62.5 million and earnings excluding gains on sales rose six-fold to $10.5 million, or $0.58 per share. This company’s strong growth momentum is continuing in 2007. Revenues rose 50% year-over-year in the March quarter, with double-digit sales gains recorded in each business segment. Analysts expect Ultrapetrol to generate 56% growth this year and 84% growth next year. The company was recently trading at a 33 P/E based on trailing twelve-month earnings but only a 10 P/E based on projected 2007 earnings. My $27 price target for these shares is 25% above the current price. Ultrapetrol closed Tuesday at $23.50, near the 52-week high of $23.84.
StealthGas, Inc.
Another shipping company benefiting from current industry trends is StealthGas, Inc. (Nasdaq: GASS). This company owns and operates a fleet of vessels used to transport liquefied petroleum gas (LPG). For transportation purposes, petroleum and petrochemical gas products are often converted to liquid form. StealthGas’ customers include industrial manufacturers, energy trades and integrated and independent energy companies.
StealthGas operated a fleet of 26 vessels last year and earned charter rates averaging $7,174 per day. Fleet additions resulted in 100% year-over-year growth in 2006 revenues to $73.3 million and 28% growth in net income to $18.5 million. EBITDA totaled $36.7 million or approximately 50% of revenues. More than 90% of its fleet is fully contracted for the remainder of 2007. StealthGas expanded its fleet to 29 vessels in the March quarter and has contracted for the purchase and delivery of nine more vessels. This will expand its fleet to 38 vessels next year and solidify StealthGas’ leadership position in the LPG transportation segment.
Charter rates increased to $7,549 per day in the March quarter and helped fuel 22.5% year-over-year revenue growth and 20.6% year-over-year EBITDA growth. Net income was higher at $6.6 million, or $0.46 per share in the March 2007 quarter, versus $6.4 million or $0.45 per share in prior year March quarter. Analysts anticipate StealthGas will produce 20% growth this year and 15% growth next year. These shares were recently trading at a 13 P/E based on trailing twelve-month earnings and a 10 forward P/E. Our $20 price target for StealthGACas is 20% higher than the current share price, which on Tuesday established a new 52-week high before settling at $17.90.
