It hasn’t only been a rough fall for land-based resource plays, whether in the oil patch or the mining business.

The same growing economic pessimism that has by now thoroughly trashed commodities resulted in stormy market action for shippers of drybulk, liquefied natural gas and refined petroleum products.

In truth, the China slowdown story driving these fears isn’t exactly new and may have already peaked as a market factor. In China credit has been loosened, savings rates increased and the stock market’s animal spirits stirred to cushion the pain of past overinvestment.

Meanwhile, sharply lower oil prices will provide powerful consumer stimulus for the US and industrial cost relief in Japan, China, South Korea, India and elsewhere.

Cheap oil prices are a good thing for the oil shipping trade, a counter-intuitive fact that investors may only just be starting to accept.

None of the shipping sectors has truly recovered from the crash that followed the global financial crisis six years ago, when faltering demand crushed charter rates already pressured by a glut of ships.

But now enough time has passed for that glut to dissipate and for some of the deep-pocketed investors who jumped in too early, like noted distressed-sector vulture Wilbur Ross, to have already tasted disappointment.

The oil and refined product tanker markets appear to be in the early stages of a secular upswing, though they remain notoriously volatile and cyclical, with significant seasonality. The LNG trade is gearing up to transport gas from the US and Australia to Europe and Asia. And while the bulk and container sectors remain depressed, at least they’re not tempting anyone to order too many new ships, yet again, just now.

After the volatility of recent months, several shipping plays are finally looking like attractive trades. Just don’t confuse them with long-term stores of value.

As rates for products tankers move up, new orders are already choking the system. Eventually, shipping capacity will overshoot demand and tanker stocks will once again submerge. But there are fundamental reasons to believe the current upswing could last a relatively long time and peak significantly above current asset values. And this is an industry so miserable when it’s going bad that good times tend to produce rapid appreciation.

Scorpio’s Signs

Let’s start with petroleum products shipping, which is benefiting from increased exports by new refineries in the Middle East and the Far East. The efficient, modernized US refineries have also ramped up exports, capitalizing on their access to cheap natural gas and discounted feedstocks.

Source: Scorpio Tankers presentation

Scorpio Tankers (NYSE: STNG) seems to have caught this wave of new demand  just right with a huge order splurge two years ago near the sector’s lowest ebb since 2009. And it’s now reaping the rewards of that gamble with a dramatically enlarged fleet, running 51 vessels as of a month ago with 10 more expected to be delivered before the end of the year and another 16 in 2015.

Scorpio is run from Monaco by the scion of an Italian shipping fortune with the involvement of his private company. The operator of fuel tankers reported a 43% year-over-year revenue surge in the third quarter as 21 new ships hit the water. It also benefited from a 5% year-over-year increase in charter rates even as operating costs per ship per day dipped 2%.

Adjusted EBITDA was up 77% from a year ago even after adding back in the rising cost of what is now $1.25 billion in debt. On that basis, cash earnings totaled $18.4 million in the quarter, or $1.2 million less than Scorpio spent on the 12-cents-per-share dividend it subsequently declared.

That represented a 20% increase from the second-quarter payout, and translates into a 5.8% annualized yield at the $8.32 share price.  

Scorpio’s profitability should continue to improve as the fleet grows by another 50% by the end of 2015, provided product tanker charter rates don’t drop.

Company president Robert Bugbee told analysts on the late October conference call that “what we’re seeing in oil…is very positive for crude and product” shipping. He drew a parallel to 1985, when an oil price correction triggered by extra supply from the Saudis quickly pumped up demand and  tanker charter rates.

Bugbee is an industry veteran known for engineering the sale of tankers owned by his former employer, OMI Corp., near the peak of the last shipping boom in 2007. Scorpio shareholders have to hope his tanker buys on their behalf will prove as timely, because for now the stock is down 36% from its initial public offering price nearly five years ago.

That’s despite the $241 million spent on repurchasing shares over the last nine months, with approximately $82 million remaining on the current repurchase authorization.

Bugbee has also spoken in the past about the potential launch of an MLP offshoot, and the company was reportedly seriously exploring that possibility earlier this year.

An MLP would require an initial fleet with an attractive multi-year portfolio of charters. But for now the company has kept most of its vessels on short-term charters at spot rates in hopes of cashing in on the improving fundamentals.

We’re adding STNG to the Aggressive Portfolio with a $9.50 Buy limit.

Note, though, that the company ran up $22 million in non-cash charges for the amortization of restricted stock grants to executives during the first nine months of the year. It’s a reminder that even listed shipping ventures take care of corporate insiders first and foremost.

The Harder They Fall

It says something about the risks in the tanker industry that while Scorpio was growing from three ships to 51 and counting in five years while delivering a negative return, an older and more established tanker operator was completing an even sadder odyssey from a $91 share price during its heyday in 2007 to a bankruptcy filing by late 2012. Overseas Shipholding Group (NYSE: OSGB) emerged from Chapter 11 earlier this year with 66 ships including 29 crude tankers and 19 product tankers. But its financials and operations remain too tenuous for our purposes.

I also considered and rejected another large shipping concern, Ship Finance International (NYSE: SFL), despite an 11.8% yield roughly in line with cash flow from operations during the last quarter. Ship Finance has suffered from its association with, and reliance on lease revenue from, Seadrill (NYSE: SDRL), the offshore rig supplier also controlled by the Norwegian tycoon John Fredriksen. With Seadrill suspending its own high-yielding dividend, it hasn’t mattered much that it remains capable and willing to continue leasing three Ship Finance deepwater rigs, two of which are under lucrative long-term subcharters to oil majors.

SFL is down 30% since Labor Day and 19% since Seadrill ditched the dividend three weeks ago.

With the offshore segment accounting for more than half of recent revenue and most of its vessels under long-term charter, the company is not as exposed as one might hope to the improving crude and fuel shipping fundamentals. If sentiment toward energy and Seadrill were to improve from funereal to merely bad, it would be safer to speculate on a Ship Finance rebound.

A Capital Idea

If current income from refined products shipping is the  goal, Capital Products Partners (NASDAQ: CPLP) is the ticket. CPLP is an MLP that’s chosen like many of the other shipping partnerships to pay qualifying dividends reported on form 1099. Its third-quarter payout works out to a 13.1% current annualized yield, and distribution coverage was 1.1x for the quarter and 1.15x for the last nine months.

CPLP owns 18 medium-range product tankers, four Suezmax crude carriers, seven containerships and the odd bulker.

Management has already committed to hiking the per-unit payout, which has been flat since 2010, by an unspecified amount early next year. The per unit distribution needs to rise 9% to trigger the general partner’s incentive distribution rights (IDRs) and 26% for maximum IDR accretion.

Like many other players in the industry, CPLP is responding to improved demand by seeking to increase its exposure to spot rates. All four of its crude tankers and most of the product haulers come off charter sometime next year.

The unit price is down 32% since CPLP wisely sold 17.3 million units at $10.53 in early September. The money was used to buy back some units from the sponsor and partially fund the three new containerships and two product tankers set to be delivered next year.

CPLP and its sponsor are presided over by a Greek shipping heir. On the Nov. 2 conference call, the CEO noted that spot rates have improved in both products and crude shipping during the fourth quarter.

Source: Capital Products Partners presentation

And while the there was  a flurry of orders for new products tankers at the first hint of an improvement following the lows of 2012-13, the shipyards are now sold out for the next two years with global orders still down from their levels in 2006-08, even as demand continues to improve.

Meanwhile, the sudden drop in crude prices and the resulting surge on crude tanker rates has taken the industry by surprise, with virtually no net new capacity scheduled to be added over the next year.

CPLP’s juicy yield and plenty of near-term exposure to rising rates make it a worthy addition to the Aggressive Portfolio below $9.

Shifting trade patterns and growing products demand are all well and good, but the flow of crude oil around the work is experiencing a more profound dislocation. Rising U.S. shale production has sent Nigerian, Angolan and Venezuelan crude that U.S. refiners no longer want in search of customers in the far-off Far East, increasing crude tanker demand.

At the same time, the heavy discounting of crude has China stockpiling it for its strategic and commercial reserves. Cheap oil could also end up getting stored at sea again if land-based storage capacity runs out by speculators hoping to profit from higher prices in the future.

Rates have nearly doubled year-over-year yet remain far below their old highs. A prolonged capacity shortage could lift them much higher next year.

Source: Teekay Tankers presentation

Crude tanker operators reap yet another significant benefit from lower prices, according to Teekay Tankers (NYSE: TNK), which owns 22 crude carriers alongside seven product tankers. A $10 drop in the price of an oil barrel saves a tanker owner $2,400 a day on fuel, according to Teekay. That’s a big deal considering how far crude has dropped and Teekay’s projection that its tankers will earn spot rates of $25,000 or so a day in the fourth quarter.

In the third quarter, the company reported cash available for distribution of 19 cents a share but kept its quarterly dividend at 3 cents a share. The current payout yields a modest 2.1%, but had TNK paid out everything it earned the yield would have shot up to 13%.

But the company is in no hurry to raise its payout, opting to pay down debt and reinvest in the business. The stock has certainly responded, rallying 68% since mid-October and 29% over the last six trading sessions. But if the recent trends prove sustainable, the stock’s still too cheap at 7.5x its estimated earnings next year. You’d ideally want to wait for a decent pullback, but the stock’s ability to run in a market this poor is certainly impressive. We’re adding TNK to the Aggressive Portfolio bellow $6.

Note that this trio of tanker stocks is deservedly going into our riskiest basket. Recall how the market has treated speculative commodity-linked investments of late. And if you can’t stand volatility and the chance of heavy losses, seek out alternatives.

As Wilbur Ross told Bloomberg recently, “being involved with either crude oil or crude tankers means you will occasionally eat well, but probably not sleep well.”