Firms are rushing to secure supertankers in order to profit from growing contango spreads as crude oil prices continue to fall compared to futures prices (see Times Online article). Frontline estimates that about 80 million barrels of crude oil are currently being stored in tankers (see Bloomberg article), with 30-35 very large crude carrier storing 2 million barrels of crude each. Not surprisingly, a rush into the contango trade is causing tanker rates to increase about $75,000 a day. In some cases, shipping rates have fallen over 90 percent within the last year, with crude oil storage rates falling nearly 80 percent. Teekay (TK) is now trading about $19 a share after coming off its recent low of just below $11, Frontline (FRO) is trading near $31 a share, after coming off a low of $25 a share, and Overseas Shipping Group (OSG) is trading around $41 a share after a recently low of just over $28 a share in late November. Drybulk shippers have also seen rates rise recently, as much as 20 percent (see Yahoo!Finance article). DryShips (DRYS) fell to below $4 a share, after reaching $116.43 back in May. The company is currently trading over $15 per share. Diana Shipping (DSX) has come off its low of $6.85 to trade over $12 per share. Nonetheless, although there are some signs of improvement (see SeekingAlpha article), the contango spread and potential increased demand may not be enough to turn-around the industry, not just yet anyway. Exports from Asia have fallen off a cliff, and will no doubt continue to put pressure on cargo rates, leaving numerous companies at risk of failing. Until global demand begins to increase, or capacity begins to decrease, it may be a little longer before any rally can be trusted with confidence and expected to continue, the contango trade notwithstanding.

Barron's this week has a nice story about DryShips, the chartered cargo ship company. The company has 39 vessels that haul iron ore, coal, and grains by sea. The stock is down over 50%, but the fundamentals are starting to look nice. At $64 a share, the stock is trading with an estimated P/E ratio of 3.5 if earnings come in at over $18 per share, as expected. The stock is trading down compared to its peers, who typically have longer, and less volatile contracts. Barron's estimates that even if profits fall 50%, the P/E will still only be around 7. Charter rates have dropped significantly over the last 6 months, but have recently been moving back up. Given higher rates, some worry about new ships coming on line, but barriers to entry are high, given the initial cost and current credit issues in the market. It is expected that delays and retirements will also prevent new ships from outstripping demand. Other actively traded stock in the industry include Diana Shipping (DSX) and Kirby Corporation (KEX), both mainly in the petroleum transportation business. Kirby recently gave a bullish earnings forecast, and Dryships reported in February higher profit, with revenue tripling.

Ticker: DRYS, DSX, KEX