If the economy gets a boost in 2016, one sector that could see a nice bump is transportation, especially if the energy sector bottoms out and starts to make a comeback. Toss in a big pot of quantitative easing in Europe, and all systems may be go for investors to see a shipping resurgence next year.

A new Deutsche Bank report features three top tanker picks for 2016, and the analysts feel like the sector, and especially the top companies, will finally see cheap equity values converge with robust fundamentals. They also think the sector will experience a historically high amount of dry bulk scrapping, which will lead to a second half 2017 recovery. Lastly, they are also very hopeful overall sentiment for the space improves next year.

Here are the three top picks in tankers for 2016 from Deutsche Bank.

Ardmore Shipping

This could be a great play for more aggressive total return accounts. Ardmore Shipping Corp. (NYSE: ASC) owns and operates a fleet of midsize product and chemical tankers ranging from approximately 17,600 to 50,000 deadweight tonnage. Ardmore provides seaborne transportation of petroleum products and chemicals worldwide to oil majors, national oil companies, oil and chemical traders and chemical companies, with its modern, fuel-efficient fleet of tankers.

The company posted very solid third-quarter results, and the Deutsche Bank team sees net debt for the company dropping to $140 million by the end of 2017. They think this implies a $5 per share creation in equity value. They also like the incentive structure created by corporate management, a move they see as well aligned with shareholders.

Ardmore Shipping shareholders are paid a rich 10.63 dividend, which was raised substantially in September, and could vary as it will consist of 60% of earnings from continuing operations. The Deutsche Bank price target for the stock is $16, and the Thomson/First Call consensus estimate is $17.40. The stock closed Tuesday at $11.54 a share.
Euronav

This is one of the world’s largest operators of very large crude carriers (VLCCs). Euronav N.V. (NYSE: EURN) is an independent tanker company engaged in the ocean transportation and storage of crude oil and petroleum products. The company’s owned and operated fleet consists of 56 double-hulled vessels being one V-Plus vessel, 28 VLCCs (of which one is 50-50 joint venture), three VLCCs under construction that were recently acquired as resales of existing newbuilding contracts, 22 Suezmaxes (of which four are owned in 50-50 joint ventures) and two floating, storage and offloading vessels (both owned in 50-50 joint ventures). Euronav’s vessels mainly fly Belgian, Greek, French and Marshall Island flags.

Deutsche Bank are very bullish on Euronav’s strong operating cash flow this year and feel it was a wise decision when Euronav opted not to exercise its option to acquire four additional VLCCs. The company reports that almost half of the VLCC days booked for this quarter are at a very rich $65,000 per day, which is up 25% sequentially. The Suezmax days are 60% booked at $35,000 per day, which is actually down 13%, but the combination should add up to another outstanding quarter.

Euronav investors are paid a very solid 6.9% dividend. Deutsche Bank has an $18 price target. The consensus target is higher at $18.89. The stock closed Tuesday at $12.78.

Teekay Tankers

This company isn’t quite the high-yield vehicle of the other two, but it also has tremendous upside potential. Teekay Tankers Ltd. (NYSE: TNK) is engaged in the marine transportation of crude oil and refined petroleum products through the operation of its oil and product tankers worldwide.

As of August 18, 2015, Teekay owned a fleet of 44 double-hull tankers, including 22 Suezmax tankers, 12 Aframax tankers, seven LR2 product tankers and three Medium-Range product tankers, as well as 11 time charter-in tankers. The company’s vessels are employed through a mix of short- or medium-term fixed-rate time charter contracts and spot tanker market trading. It also owns a VLCC through a 50%-owned joint venture.

Teekay recently adopted a policy similar to Ardmore and will pay out between 30% and 50% of quarterly net income. This translates to a dividend of $0.12 in the fourth quarter, which is four times the company’s prior quarterly dividend. The recent dividend translates to 6.5% yield on an annual basis. This is a number the analysts think can grow substantially.

Teekay investors are paid a 6.5% dividend, based on the fourth quarter distribution. The Deutsche Bank price target is $10 and the consensus is set at $10.09. Shares closed most recently at $7.27.

Given the struggles and over-capacity the sector has gone through, the last year has been a grind. But a positive outlook for the oil markets and improving overall sentiment make these potential big winners for aggressive portfolios.

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.