Natural Gas Demand, Asia Drive Shipping Stocks Higher

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Two segments of maritime shipping stocks tracked by IBD collectively pushed to their highest point in nearly six years this month.

But investors aren't necessarily rewarding the industry and its stocks for what's happening now, analysts say.

Instead, they're betting that a combination of current trends -- ranging from a recovering global economy to increased natural gas production in the U.S. to political unrest in Russia -- will produce a robust market on the high seas a few years down the line.

Those bets have helped a number of shipping firms reach record highs in recent weeks.

The list includes liquid natural gas ( LNG ) carriers likeGasLog ( GLOG ),Golar LNG ( GLNG ) andTeekay LNG Partners ( TGP ) .

It also includesKirby ( KEX ), which provides a variety of domestic maritime services; andCostamare (CMRE), which specializes in containerships.

Shipping Stocks Are Sailing

IBD's Transportation-Ship group set a 5-1/2-year high on July 1 and is up about 12% since the beginning of 2014.

The Oil & Gas-Transportation/Pipeline group, which includes 24 maritime companies that specialize in moving petroleum products, hit an all-time high on July 1 and is up 20% since the beginning of the year.

The rising tide buoying the energy side of that picture comes largely in the form of liquefied natural gas. Awareness of the fuel and of its potential is ratcheting higher in many global markets because it is usually cheaper and cleaner than oil or coal. Asia has become a particularly strong market for LNG.

"When Japan was hit by its tsunami in 2011, it shut down its nuclear plants, so they had to generate electricity from other sources like natural gas," said Jonathan Chappell, analyst at Evercore Partners.

China has also become a growth market for the energy source as the country tries to contain its pollution problem, Chappell said.

Meanwhile, countries in Europe are looking for alternative suppliers as the conflict in Ukraine underscores the region's dependence on Russia as its main supplier.

There's a large supply of natural gas, thanks in part to improved production techniques in the U.S. and Australia. The challenge is getting the gas converted to LNG so it can be shipped overseas.

For now, the U.S. doesn't export a lot of LNG, outside of a little from Alaska, says Benjamin Nolan, analyst at Stifel Nicolaus. That should change in a few years as more LNG liquefication and export facilities get built near shipping ports.

The facilities chill dry natural gas, which is primarily methane, to around minus 260 degrees Fahrenheit. This turns it into liquid form, converting it from gas so that it takes up 1/600th as much space.

This allows vast amounts of gas to be transported in ships called LNG carriers. The highly specialized carriers are refrigerated and require specialized regasification facilities in order to offload their cargo.

The complexity of these facilities can make permitting and construction time consuming and costly.

"These LNG projects take a long time to complete -- at least five years from start to finish," Nolan said. "But there are a lot of projects in the works in the U.S., and there will be a greater incentive on the part of more European companies to build import facilities to reduce their dependence on Russian gas."

Shipping stocks are doing well, even though the current market for LNG is "really poor," Nolan says. "The current market for ships hasn't changed," he said. "But the outlook for its long-term prospects is better."

Shipping stocks also have gotten a boost from the crude oil market, Chappell says.

"The outlook for crude has gotten better this year, which has caused rates to start to rise," he said. "We should see a recovery in the crude oil (tanker) market later this year and in 2015 and 2016, but off a very low base."

The story for dry-bulk shipping is similar to that of crude oil, though dry bulk is more robust right now, thanks to heavy demand for iron ore from China.

"Iron ore makers in Australia and Brazil are ramping up production pretty significantly, and they need to send that iron ore to demand centers in China and Southeast Asia," Chappell said. "We are optimistic for dry bulk in 2015, but a little more worried after that because it's a very China-centric market."

The Rise of Specialty Fleets

Shipping companies obviously transport goods over water.

But the types of goods, the markets served and the types of ships used vary widely.

Because demand and rates paid for particular types of ships often hinge on an industry's need for particular commodities or consumer goods, ship fleets have largely broken out to specialize according to cargo type. GasLog,Navigator Holdings (NVGS), Golar and Teekay move gas and petroleum products.

Knightsbridge Tankers (VLCCF) owns ships built to haul iron ore and other dry-bulk goods.

The biggest of the big ships are ultra-large crude carriers.

The largest of these ships are nearly four football fields long, 30% longer than the largest aircraft carriers, and can handle over 320,000 deadweight tons (DWT).

DWT measures the weight of the ship -- including cargo, crew and provisions -- minus the weight of the ship if it were empty.

Other classes include very large crude carriers (VLCCs), which can handle up to 320,000 DWT, scaling down to Suezmax, Aframax and Panamax ships.

"Larger dry-bulk ships have done better than smaller dry-bulk ships (recently) because large ships can move more iron ore," Nolan said. "There is a stronger bid for Capesize vessels to move iron ore specifically relative to smaller Panamax class assets."

Capesize tank-barge vessels, the kind Knightsbridge operates, are the largest in dry bulk and mainly haul iron ore and coal.

Kirby, the biggest shipping company by market cap, is a tank-barge operator. It generally operates port to port and over inland waterways in the U.S., transporting petrochemicals, oil, refined petroleum products and agricultural chemicals.

Navigator specializes in semi- or fully refrigerated handysize ships. These measure 15,000 to 20,000 cubic meters and are designed to get into smaller ports.

Its fleet transports liquefied petroleum gases (LPG) such as propane and butane as well as ammonia and petrochemical gases like ethylene and propylene.

Of the 28 companies in IBD's Transportation-Shipping group, all but six are headquartered outside the U.S.

Of the foreign entities, most are based in Greece.

These include three of the five biggest stocks by market cap: Costamare,Navios Maritime Partners (NMM) andDryShips (DRYS).

LNG Vs. LPG

Alongside the longer-term excitement over LNG, one of the main growth drivers in the shipping trade is demand for liquified petroleum gases.

LPG provides fuel for residential and commercial heating, transportation and as a feedstock for the production of petrochemicals.

Again, much of the demand comes from Asia.

"We believe this LPG demand growth from Asian countries will help support robust, fundamental tonne-mile growth for LPG shipping in the near term," Natasha Boyden, senior analyst at MLV & Co., noted in a recent report.

A majority of LPG supply currently ship out of the Middle East and, to a lesser extent, from West Africa.

The combination of those sources and customers in Asia "will also result in rising demand for very large gas carriers, which operate primarily on longer-haul routes," Boyden wrote.

Another growth area for shippers -- particulary in the U.S. -- has been the export of refined petroleum products such as gasoline, diesel and jet fuel.

"Over the past five years we have nearly quadrupled our exports of refined products, from about 1 million barrels a day to about 4 million barrels a day of refined product," Nolan said.

Outlook

Shipping companies rely heavily on the movement of commodities like oil, gas and iron ore, so they are particularly susceptible to the economic factors driving demand and prices for these goods.

On the positive side, demand for natural gas should only increase as more markets use it in lieu of oil and coal.

The market for dry-bulk goods, especially iron ore, is a little trickier because so much of it depends on China.

Australia, the world's second largest iron ore producer next to China, slashed its official price forecasts by 16% for this year.

The reason: increasing competition to sell ore into a still sluggish Chinese economy.

"If China's economy were to slow significantly, then dry bulk would be hurt," Chappell said.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: LNG , GLOG , GLNG , TGP , KEX

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