World Fuel’s Shares Seen Riding Shipping Bankruptcies to 12% Gain: Freight

At a time when the biggest-ever fleet of merchant vessels means losses and bankruptcy for ship owners, the company providing about 12 percent of their fuel is poised to make record profit.

World Fuel Services Corp. will report a 31 percent gain in net income this year, the mean of five analyst estimates compiled by Bloomberg show. All of them recommend buying shares (INT) of the Miami-based company and on average anticipate a price of $47.40 in 12 months, or 12 percent more than at 11 a.m. in New York yesterday.

The combined carrying capacity of oil tankers, dry-bulk carriers and container ships more than doubled over the past 15 years to 1.3 billion deadweight tons, according to London-based Clarkson Plc, the world’s biggest shipbroker. While that caused charter rates to collapse below breakeven for most vessels this year as supply outpaced cargoes, it also drove annual fuel sales to a record $130 billion, data compiled by Bloomberg show.

“What’s causing shipping rates to fall is more ships on the water, but that means more fuel to burn,” said Kevin Sterling, an analyst at BB&T Capital Markets in Richmond, Virginia, whose recommendations on the shares of World Fuel Services returned 31 percent in the past year. “When everyone is worried about ship owners and rates, World Fuel can cherry- pick who they want to deal with.”

Other providers of so-called bunkers tend to be smaller, regional companies or state-owned entities, and oil companies also sell directly to ship owners, Sterling said. The fuel is usually not traded by investors. Shares of World Fuel Services rose 17 percent this year in New York and are at 15.6 times expected earnings, down from as much as 16.7 in February.

Tanker Index

The six-member Bloomberg Tanker Index (TANKER) fell 54 percent this year, the Bloomberg Pure Play Dry Bulk Shipping Index of 14 companies 42 percent and the 50-member Lloyds List-Bloomberg Container Index 38 percent. The MSCI All-Country World Index of equities declined 10 percent and Treasuries returned 8.9 percent, a Bank of America Corp. index shows.

Bunkers are a type of residual fuel oil, accounting for about 20 percent of the average barrel of processed crude, data compiled by Bloomberg show. It yields products that are used in everything from ships to power plants to road surfacing.

Fuel oil costs about $6.27 a barrel less than crude in Singapore, compared with an average discount of about $9.03 in the past five years, according to PVM Oil Associates, a London- based energy broker. Refiners typically make their profit from products such as jet fuel and gasoline. In Asia, their margin on a barrel of crude averaged $5.28 this year, heading for the highest annual average since 2007, data compiled by Bloomberg show.

Maritime Council

Marine fuel averaged $637.26 a metric ton this year, 38 percent more than in 2010, data compiled by Bloomberg from 25 ports shows. Prices are linked to crude costs and local supply and demand, said David Wech, head of research at JBC Energy GmbH, a consultant based in Vienna. Fuel accounts for 70 percent of ship owners’ expenses on average, according to the Baltic and International Maritime Council, the largest trade group.

Demand from ship owners will rise 1.4 percent to a record 3.8 million barrels a day next year, compared with 3.75 million barrels in 2011, JBC Energy estimates.

World Fuel Services is an intermediary between shipping companies and oil refiners, which sometimes prefer not to sell directly to vessel owners, Chief Financial Officer Ira Birns said by e-mail. He declined to be interviewed for this article.

International Recovery Corp., founded in 1984 and listed in New York in 1986, bought Trans-Tec Services Inc. in 1995 and changed its name to World Fuel Services. The company now operates in more than 1,000 ports and also provides fuel for planes and trucks, businesses that accounted for 52 percent of sales last year, data compiled by Bloomberg show.

Merchant Fleet

While the global merchant fleet is expanding, vessels are slowing down to cut fuel consumption as charter rates tumble, potentially crimping sales for World Fuel Services. Oil tankers sailed at an average of 8.6 knots last month, compared with 10.6 knots three years earlier, ship-tracking data compiled by Bloomberg show. The average speed of a container ship was 11 knots in November, down from 12.9 knots in 2008.

There are also signs global economic growth is slowing, curbing gains in demand for everything from oil to iron ore to consumer goods transported in steel boxes. The shipping industry handles about 90 percent of world trade, according to the Round Table of Shipping Associations.

World trade in goods and services will grow 5.8 percent next year, compared with 7.5 percent this year and 12.8 percent in 2010, the International Monetary Fund estimates. The global fleet will expand 6.4 percent next year, extending a 31 percent advance since the end of 2007, Clarkson data show.

Container Industry

Analysts don’t expect that to translate into less profit for World Fuel Services. The company’s net income will reach $193 million in 2011 and $214.8 million in 2012, compared with $146.9 million last year, the mean of the estimates compiled by Bloomberg show.

The container industry will probably lose a combined $5 billion this year, London-based Drewry Shipping Consultants Ltd. estimates. The members of the Bloomberg Tanker Index will report losses of $1.1 billion, based on analyst estimates compiled by Bloomberg. The members of the Bloomberg Pure Play Dry Bulk Shipping Index will report a combined profit of $293.7 million, down from $1.48 billion in 2010, the estimates show.

Frontline Ltd., based in Hamilton, Bermuda, said Dec. 6 it would split the company, the world’s biggest operator of supertankers, to avoid running out of cash. New York-based General Maritime Corp., the second-biggest U.S. tanker owner, filed for bankruptcy protection from creditors on Nov. 17.

Baltic Exchange

Earnings for the largest oil tankers fell 20 percent this year, according to Clarkson. Daily costs to hire capesizes, the biggest ore carriers, averaged $15,065, the lowest since 2002, according to data from the London-based Baltic Exchange, which publishes freight rates along more than 50 maritime routes. Rates for box cargo shipments from Asia to the U.S. West Coast fell 28 percent this year, Clarkson estimates.

“Volumes for shipping are up,” said Greg Lewis, an analyst at Credit Suisse in New York whose recommendations on the shares of transport companies returned 28 percent in the past three years. “As long as cargoes are moving, World Fuel is selling fuel.”

To contact the reporter on this story: Isaac Arnsdorf in London at iarnsdorf@bloomberg.net

To contact the editor responsible for this story: Alaric Nightingale at anightingal1@bloomberg.net

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