Remain Bullish on Nordic American Tankers

Low break-even helps in robust EBITDA even after marginally moderating spot rates

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May 25, 2016
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The crude oil tanker industry had a strong 2015, but the initial few months of 2016 have been challenging for the industry with spot rates softening as compared to 2015. All oil tanker stocks have declined year to date, but there are a few names that have outperformed.

Nordic American Tankers (NAT, Financial) has declined by 7% year to date, and the stock performance has been strong considering that companies like Teekay Tankers (TNK, Financial) have declined by 52% for the same period. Nordic American Tankers also gives investors a healthy dividend payout of $1.72 per share.

The decline in day rates in the tanker market for the first quarter has impacted all tanker stocks. For Nordic American Tankers, day rate for the first quarter was $36,000 as compared to day rate of $39,800 in the fourth quarter. While day rates have not crashed, the markets might continue to discount supply of new tankers in the second half of 2016. However, day rates will remain robust through 2016 even if lower as compared to 2015. Further, as oil prices remain largely sideways after trending higher, the demand for oil tankers will continue.

The reason I am bullish on Nordic American Tankers even after believing that day rates can decline by another 5% to 10% is the fact that the company’s fleet has a break-even rate below $12,000 per day per ship. This gives the company healthy EBITDA margin and cash flow even at $36,000 per day rates. With sufficient headroom on break-even rates, I see Nordic American Tankers trending higher after consolidation and mild correction.

Another stock upside trigger is that Nordic American Tankers announced on May 2 that the company will be acquiring four existing Suezmax vessels that will be delivered in May, June and July. While these are oil tankers the company opines that ship building technology has not changed in the last two decades, and these tankers will find the same level of demand in the market.

The key point here is that as these oil tankers are deployed in the spot markets in the coming months, the company’s revenue and EBITDA will witness growth from the second half of 2016. The growth is unlikely to be meaningful but will offset (to some extent) the decline in revenue due to lower spot rates.

The company's dividend is another big reason to consider exposure to Nordic American Tankers. The company currently offers a dividend payout of $1.72 per share that translates into dividend yield of 12.3% at current market price. This dividend payout is sustainable through 2016 even if there is another 5% to 10% moderation in day rates. Therefore, the stock is worth holding for dividend investors seeking regular cash flows.

From a fundamental perspective, I rate Nordic American Tankers as positive considering low debt and good liquidity cushion. As of the first quarter, the company has net debt of $8.9 per vessel, and this is not a concern with robust spot rates. Further, the company had liquidity of $282 million that includes credit facility plus net working capital. This liquidity buffer will help in funding the delivery of two new tankers scheduled for the third quarter of this year and the first quarter of 2017.

With good financial flexibility, Nordic American Tankers is well positioned to acquire more tankers in the coming quarters. While a lot will depend of how spot rates trend, good times should continue for the industry.

Disclosure: No positions in the stock.

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