How to Successfully Invest in Oil Tankers, Part II

GRANITE FALLS, MINNESOTA – Tesla’s shares passed $1,400 yesterday for the first time.

Its market cap stands at around $250 billion, making it the world’s largest automaker by market value. Tesla’s shares are up 225% year-to-date.

Meanwhile, Teekay Tankers is an oil shipping company, one of the largest. It’s a pure play, meaning it doesn’t do anything other than ship oil.

Teekay’s stock trades at $12.7, at writing, giving it a market cap of almost $450 million. That’s about 1/600th of Tesla’s market cap.

Teekay’s shares are down 47% this year.

Why am I telling you this? More below. But first…

American Road Trip

Greetings from the Great Plains…

My family and I are on a road trip around America. We’ve been on the road for two months now.

We started in Florida. We drove north through the Deep South and the Midwest until we hit the Canadian border (at Sault Saint Marie in Michigan). Now we’re heading west.

In a few weeks, we’ll be in the Rocky Mountains. Then we head for Canada…

After that, we don’t know. We had planned to drive to Alaska this year, but now I don’t think we’ll make it there before winter.

Perhaps we’ll hole up in some mountain town for the winter and continue our drive to Alaska next year?

We’ll see…

Next Stop: Unknown

We spent the last week in Ottertail, Minnesota, camping at a cabin in the woods there. Today we packed up and hit the road again.

Here we are earlier today between two endless cornfields…

We’ve been driving all day on back roads through cornfields, and now I’m writing to you from a little town called Granite Falls.

We stopped here in Granite Falls a few minutes ago to visit the Fagan Fighters World War II Museum. It’s closed due to COVID.

Oh well, we can use the break anyway. The kids are stretching their legs, and I get a chance to send this to you…

It’s getting late. Soon we’ll need to find somewhere to camp.

If we can’t find a campground, we’ll just camp in a Walmart parking lot. There’s one about 30 miles from here.

Here we are at the museum… (It’s a municipal airfield. We’re on the landing strip.)

How to Play the “Feast or Famine” Game

I’ve been writing about the oil tanker business this week…

On Monday, I explained that it’s a “feast or famine” industry. On Tuesday, I hypothesized that we’ve just entered a “feast” period. And yesterday, I showed you why we’re now in a temporary lull between surges.

Now let’s talk about the stock prices of tankers.

The stock prices are the entry price to play this “feast or famine” game.

The average tanker stock is down anywhere from 5% to 20% in the last month. Year-to-date, some are down more than 50%.

As I said on Tuesday, too many ships were built between 2006 and 2008. So the last 11 years have been a terrible time for ship owners. Probably the worst in history.

Tankers are pretty much the most beaten down, unpopular, unloved sector in the entire stock market.

In the stock market, tanker stocks trade anywhere from about 20% to 50% discounts to what they’re worth in the real world.

(In the real world, a tanker company is worth the sum of all its ships, its inventory of fuel and other port equipment, plus cash, minus debt. In the business, they call this Net Asset Value, or NAV. It’s the most important metric in shipping valuation.)

That brings us back to Teekay Tankers, the tanker company I mentioned above…

Incredible Windfall

Teekay Tankers is one of my favorites. It has a NAV of $23 per share. You can buy it today in the stock market for $12.7.

As I mentioned earlier this week, since the fall of 2019, there have two stratospheric spikes in lease rates. Some rates went over $300,000 a day. They’re normally around $20,000.

Thanks to this, tanker companies have made an absolute fortune.

Teekay has probably made nearly $9 a share in profits. (I’ll be able to confirm the exact number when Teekay publishes its second-quarter results next month.)

With this money, Teekay has been able to refinance vessels… push out the maturity of its debt repayments by years… and pay off almost $4 per share of debt since October 2019.

It has used this bonanza to completely de-risk its balance sheet.

It’s been an incredible windfall.

Another major tanker company that I recommended to Tom’s Portfolio subscribers doesn’t have much debt, so it’s paying dividends instead.

[Editor’s Note: If you’re not a paid-up Tom’s Portfolio subscriber yet, find out how to get access to Tom’s full list of oil tanker stocks, right here.]

For the first quarter of 2020, it paid a 10% dividend. They’re about to pay an even bigger dividend for the second quarter.

Lull Between Surges

Anyway, these last nine months have totally rejuvenated the tanker industry’s finances. Some of the companies were on the brink of bankruptcy. They’re not anymore.

Yet, their stock prices are still at multi-month lows.

And that’s where we are today… holding the very hated, cheap, unpopular stocks that are flush with cash and healthy financially, in a temporary lull between surges.

If we have to wait another 10 years for a surge in prices, these stocks will really struggle. Some of them will go bankrupt.

But I’m betting that’s not the case… and that the next surge is right around the corner.

As I wrote on Tuesday, the oil tanker fleet is going to be shrinking fast over the next few years. And, as I mentioned yesterday, there are many potential surge drivers.

It’s only a matter of time.

I’m waiting three years. If there haven’t been enough rate surges in that time, I’ll sell.

Otherwise, nothing will dissuade me from holding tanker stocks… not even a 30% drawdown.

– Tom Dyson

P.S. I’m not recommending you buy tanker stocks. I’m just telling you what I’m doing with my family’s savings. But if you do decide to invest in tanker stocks, you need to know that tanker stocks are the most volatile stocks you will have ever owned. They’re more like options than stocks. And therefore, you should only buy them in small quantities. (A 30% decline is pedestrian in tanker land.)

P.P.S. This was sunrise this morning as we left the cabin in the woods…

Like what you’re reading? Send your thoughts to [email protected].

A word of advice for Tom…

Reader comment: A friendly word of advice, lay off all the fast food or you’ll look like the Pillsbury doughboy and won’t have the energy to do all that you must do. Stay safe and well.

Tom’s response: I can’t. I’ve tried but I can’t. I have these terrible cravings for it… and I think they’re getting worse. Soon I may only eat fast food…

Meanwhile, others ask travel questions… raise concerns of “fake” gold… inquire about a gold-buying timeline… and gold’s seasonality…

Reader question: Tom, you have stated that your family will soon be going to Canada. My understanding is that the Canadian border is closed, and non-essential visitors will have to quarantine for 14 days before entering. How will this affect you and your family?

Tom’s response: Thanks for the info. We’ll deal with this when we get there. (Kate and I never plan ahead. We prefer to operate “on the fly.” For example, as I’m writing this, it’s 3 p.m. and I have no idea where we’ll be sleeping tonight.)

Reader question: In view of the breaking counterfeit gold scandal in China, does this raise any concerns for individuals potentially buying “fake” gold? I have noticed that many gold bullion dealers sell coins and bars that come in nice plastic packaging. That is great for storage but there is no way to verify the gold content without removing the packaging.

Tom’s response: Counterfeit gold coins exist. Several of them are really well done. They are from China. And they have a small amount of gold but they’re not pure gold. You can buy PCGS or NGC packaged coins and not have any fear of counterfeits. Main thing is, just deal with the dealer who you know is reputable. You can’t go to the swap meet or online and just buy stuff from people you don’t know.

Reader question: Hello Dyson Family Ramblers! Tom, I’ll be brief. I wonder about the timing of gold buys from here because gold tends to correct in the summer. Do you think the current extreme economic climate will affect gold’s normal seasonality? Love the sweet pictures and videos of your family’s rambling throughout the country.

Tom’s response: Thanks for the kind words. I have never studied gold’s seasonality, so I don’t have any thoughts on that. But I wouldn’t mess around with timing. Just buy gold and hold it for 10 years, and you won’t care about your entry price.

Reader comment: Greetings, Tom et al. I won’t gush on about how lucky you are, but you guys look like a family should. I’ve been a serious gold investor for the last 10 years and I’m not at all surprised to see the rise in prices. But, in all the time I’ve been reading about gold and its likely future, I’ve never read any opinions as to what could cause gold to significantly retreat. Any thoughts? Stay safe. Keep loving each other.

Tom’s response: A hard dollar and higher real interest rates. (Real interest rates are interest rates net of the rate of inflation.) But this is about as likely right now as the Pope rejecting Catholicism.

Reader comment: Greetings, Tom, Kate, Miles, Dusty, and of, course Penny! The Postcards are great and the videos are very funny. A great addition. I have been reading your postcards since you started them, and I’ve also been reading Bill Bonner’s Diary for a couple of years now. I have been a fan ever since I found Bill’s book, Hormegeddon, and loved it.

Reader comment: Like practically everybody who writes to you, I love your Postcards. A great mixture of fun reading and economic education.

Tom’s note: As always, please keep writing us at [email protected]. We read every note you send us.