Nordic American Tankers (NAT, Financial), which is engaged in acquiring and chartering double hull tankers, has surged by 87% in the last one year. Even after this big rally, the stock still has upside, and here are the reasons to be bullish on Nordic American Tankers.
Before a discussion on the bullish factors, Nordic American Tankers offers current dividend payout of $1.52 per share, and that translates into dividend yield of 9.95% at current market price of $15.4. This dividend payout is sustainable and high payout is another reason to stay invested in Nordic American Tankers besides the capital appreciation factor.
In a recent comment, Statoil (STO, Financial) CFO mentioned that oil prices can stay depressed and recover only in 2018. Oil will gradually trend higher instead of a robust upside. I am opening this discussion with the likely trend for oil prices as the crude oil tanker market rates (especially spot rates) are closely linked to oil prices. When oil prices are low, spot rates tend to be higher as the demand for oil tankers increases for strategic reserves storage. With oil remaining low in the last year, spot-market rates have been attractive and spot markets have been the game changer for tanker companies.
Coming to Nordic American Tankers, the first reason to be bullish on the company is robust fleet expansion and deployment of the fleet in spot markets. On Oct. 29, Nordic American Tankers took delivery of two more tankers, taking the total number of tankers in the fleet to 26. With two more tankers scheduled for delivery in 3Q16 and early 2017, Nordic Tankers will continue to witness revenue and EBITDA growth through fleet expansion.
From a tanker day rate perspective, Nordic American tankers achieved an average day rate of $37,000 per tanker in 1Q15, $38,000 per tanker in 2Q15, and the company is expecting 3Q15 average day rate to be better than the first half of 2015. With the company reporting $94 million in operating cash flow for the first half of 2015, I would not be surprised if Nordic American Tankers reports operating cash flow of approximately $200 million for 2015 as compared to $57 million for 2014.
Even for 2016, I expect cash flows to remain robust as oil is likely to remain sideways or marginally higher in the coming year. The key point here is that spot rates will continue to be robust and strong cash flow generation would imply sustained dividends as well as further stock upside from current levels.
It is also important to note that the company’s tankers have a break even of $12,000 per day per tanker. In other words, there is a significant buffer and even if day rates cool down at some point of time, Nordic American Tankers will continue to report strong EBITDA and operating cash flows. However, spot rates aren't likely to be easing out in the next 12 to 15 months.
From a balance sheet perspective, Nordic American Tankers had total debt of $250 million and cash and equivalents of $105 million as of 2Q15. The net debt is therefore $145 million and this provides high financial flexibility in addition to the fact that Nordic American Tankers has been reporting robust operating cash flows. It is important to review the financial flexibility as the market remains attractive, and it would not be surprising to see Nordic American Tankers acquire vessels at a robust pace in the next few quarters. The financial flexibility allows the company to leverage for acquisition of vessels.
From a risk perspective, spot markets tend to be volatile and a sharp decline in spot rates can impact the company’s earnings. Spot markets aren't likely to weaken in the foreseeable future.
Considering those factors, Nordic American Tankers is worth considering even after an 87% rally in the last year. The company’s dividend payout is very attractive and sustainable and tanker additions will translate into higher earnings and stock upside.
