China Shipping Development: Floating Storage For Cheap Oil, HSBC Upgrades To Buy
Time：2015-01-08
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Accounting for almost half of China Shipping Development‘s (1138.HK) revenue, the crude oil tanker business has been bleeding cash over 2011-2013, particularly on the international routes where gross margins have fallen to as low as negative 20%’s. But the margins seem to have stabilized a bit in the first half of 2014.
There are two catalysts – or assumptions? – that could boost China Shipping Development’s crude tanker business.
First, shale gas production in North America is torpedoed by a flood of cheap crude imports from the Middle East. In a battle for global market share, Saudi Arabia this week lowered its February selling price to the US. In this case, Americans will have to import oil again and crude oil shipping companies can gain.
Second and more importantly, cheap oil is only temporary. The Chinese may want to buy oil now, use China Shipping Development’s floating units for “speculative storage.” More than half of the company’s crude tankers are from the Middle East to China. Here are analysts Shishir Singh and Mark Webb:
The recent rally in tanker rates has happened alongside a simultaneous sell-off in crude oil. It’s difficult to argue that tanker demand has increased solely due to a demand response to lower prices since such an event would probably take some time to happen than occur almost concurrently with the steep fall in crude prices. A more plausible explanation for higher rates could be the increase of tankers for offshore or floating storage of crude oil.
As such, the analysts revised up their earnings forecast for the tanker business for 2015 and 2016 by 60% and 32% respectively and now have a 6.59 Hong Kong dollars price target for China Shipping Development. The price target implies 0.8 times HSBC’s 2015 book estimate, a peak valuation since 2011.
In the last three months, this stock has risen 14.5% as the Brent crude fell by almost half. China Shipping Development closed at HK$5.61 on Tuesday. HSBC’s price target implies a 17% upside.
Checking in on prices, Brent crude fell again to $50.90 per barrel. WTI slumped to $47.37. Overnight in New York, CNOOC (0883.HK/CEO) fell 2.3%, PetroChina (0857.HK/PTR) dropped 1.9%, Sinopec (386.HK/SNP) was down 1.6%.