Oil tanker companies may be in trouble if OPEC raises cuts

By Sakthi Prasad - Analysis

BANGALORE (Reuters) - Any further output cuts by OPEC, coupled with an expected increase in vessels in 2009, may dampen the oil tanker companies' ability to hold on to higher freight rates, denting their earnings potential in the coming quarters.

OPEC (Organization of the Petroleum Exporting Countries) oil supply fell in March, for the seventh consecutive month, but remained above its target as some members pumped more than agreed levels, a recent Reuters survey showed.

So far, OPEC has delivered roughly 80 percent of its pledge to decrease output by a record 4.2 million barrels per day from September.

But any further increase in OPEC compliance may hurt freight rates.

Mike Reardon, vice president research and marketing at International Maritime Exchange, said increasing OPEC compliance may not augur well for the freight rates.

"If they increase compliance you never really can say it will make rates go down. But further compliance certainly won't help rates go up and that's the better way to view it," Reardon said.

Tanker companies that employ their ships in the short-term spot market may see their earnings fall over the next couple of quarters because of potentially low freight rates triggered by the oil production cuts.

"The OPEC cuts are having a negative effect on crude oil tanker rates and correspondingly hurting the earnings and cash flows of companies that have crude oil tankers operating in the spot market," analyst Douglas Mavrinac of Jefferies & Co said.

SPOT PLAYERS FACE RISK

Tanker companies like Nordic American Tanker Shipping Ltd (NAT.N) and Teekay Corp (TK.N) that have a relatively high spot market exposure may see their earnings decline over the next couple of quarters, as the freight rates have plunged from their highs in December.

In contrast, those who have locked in a higher number of available days in long term time-charter contracts may be able to better weather a choppy freight rate situation. But there are only few companies that have a high contract coverage.

Mavrinac said over the last four months average very large crude carriers' (VLCC) spot charter rates have fallen to below $30,000 per day on average. The rates had averaged about $80,000 in December.

"This is below the cash flow break-even level for some of the companies we cover," Mavrinac said.

Mavrinac said General Maritime Corp (GMR.N) and Ship Finance International Ltd (SFL.N) are better insulated from the weak freight rate environment as they have high time-charter coverage.

Analyst Gregory Lewis of Credit Suisse said companies that have high spot exposure are susceptible to earnings risk in the second and third quarters of this year.