Problematic outlook for National Shipping

Shares of National Shipping Company of Saudi Arabia (NSCSA) are sputtering, and analysts see choppy waters ahead as well. At first glance, prospects for the owner and operator of ships used in the petroleum trade appear to be bright, as EFG-Hermes expects second-quarter earnings of about 125 million riyals compared with 108m riyals in the same period last year. But the increase is less impressive in light of the fact that the company added four vessels to its fleet since last year.

The stock has been essentially flat since January. It closed at 17.9 riyals on Wednesday, the last trading day of the week for the Tadawul All-Share Index. Redwan Ahmed, an analyst with EFG-Hermes, maintains a sell rating on NSCSA with a target price of 15 riyals. NSCSA owns 17very large crude carriers (VLCCs), 13 petrochemical tankers and four general-cargo vessels. The company is primarily geared towards the VLCC market, which has seen weak growth amid a softening of demand for oil and, consequently, oil shipments.

NSCSA, like many of its peers, saw an increase in business as the price of oil reached a peak of US$147 in the summer of 2008. As demand for transport grew, shipping companies bought more carriers. But there is significantly less demand today - Brent crude futures were trading at $78.12 in London yesterday. NSCSA announced a 33 per cent cut in its dividends in January, from 1.50 riyals to 1 riyal, as management made it clear it did not expect to generate the high returns of 2008.

Most of NSCSA's contracts are short-term - profitable when oil demand is high and shipping rates are increasing but unprofitable when oil prices and demand sink or remain level. Six of the company's VLCCs are on five-year contracts, while the remaining 11 are on even shorter contracts. Several of the company's top competitors have vessels on 25-year contracts. [e-mail]