Oil Tankers: Short on Supply, Long on Profits

They earn that much cash because there just aren't enough boats to meet the requirements of the world's energy needs, even though new tankers are finally being built. It takes a long time to construct enough ships to meet spikes in interest, and at today's steel prices, many potential builders continue to hold off.

The name of the game these days, therefore, is for fleet owners to buy used ships at good prices from less successful operators, refurbish them quickly and put them on long-term charters at today's high prices. It takes a certain amount of savvy to find the right ships and make those deals, and that is what distinguishes the better tanker companies from competitors.

Top Tanker shares have outpaced most of their oil-tanker cohorts, not to mention the broad market, since coming public in August last year, up 62% with dividends. The Standard & Poor's 500 Index is up 6% in that span, while even mighty Exxon Mobil is up just 29%. In the most recent 12 months, Top Tanker earned $32.7 million on $93.8 million in revenue. That is a pretty amazing net margin of 34.9%. And yet the forward price/earnings multiple is just 5.4 for 2005 and 7.6 for 2006, which probably means that the market doesn't think that the good times will continue.

Pistiolis disagrees. He says the company can remain handsomely profitable even at significantly lower levels of crude-oil demand and prices. His company has all of its nine Suezmax (sized to the Suez Canal's maximum dimensions) and 11 more maneuverable Handymax tankers out on multiyear charters. And it plans to do the same with the next three new Handymaxes Top Tankers is due to receive in the next month. All told, the company claims to be third-largest in the world in both double-hulled Handymaxes and double-hulled Suezmaxes; by concentrating on a size, it gets economies of scale. (Double-hulled carriers are supposed to be able to withstand accidents like the one that caused the Exxon Valdez spill in 1989.)