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Cautiously Optimistic About Nordic American Tankers

Despite strong fundamentals, the spot market for tankers may not recover anytime soon

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Feb 08, 2017
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Investment and company overview

The crude oil tanker industry has seen significant volatility and downside in spot rates as oil trends higher and  tanker supply increases. As a result, tanker stocks have seen a sharp correction. Teekay Tankers Ltd. (

TNK, Financial) and Euronav NV (EURN, Financial) are examples of stocks that have done exceedingly well when spot rates surged and have declined sharply in the last few quarters.

Another name in the tanker industry still provides a dividend yield of 9.3%, and there are reasons to be optimistic about this stock at current levels. Gradual accumulation is advisable at deep-value levels however. I expect the stock to trend higher within a two to three-year time horizon. In the near term, concerns persist in the tanker industry. I will elaborate on the positives and concerns related to exposure to Nordic American Tankers Ltd. (

NAT, Financial).

As of early 2017, Nordic American Tankers had a fleet of 30 operating vessels. In October 2016, the company announced an agreement with Samsung to build three Suezmax vessels for delivery in 2018. With a total fleet of 33 tankers, the company is well positioned in the industry once spot rates see meaningful recovery.

Key positives

From a stock price perspective, Nordic American touched a high of $16 on June 9, 2016. From those levels, the stock is already down by 46% and currently trades at $8.60. With this deep correction, I see the stock as a value buy for several reasons:

  • Nordic American Tankers has a cash break-even rate below $11,000 per day per ship. This includes financial charges and selling, general and administrative costs. The operating expense for the company’s vessels is low at about $8,400 per vessel per day. For fourth-quarter 2016, the company reported time charter equivalents (TCE) of $21,700. Even at this level, the company is profitable and declared a quarterly dividend of 20 cents per share.
  • The company’s TCE for third-quarer 2016 slumped to $16,700 and has witnessed some improvement to $21,600. According to the company’s fourth-quarter results, it started 2017 with TCE of $25,000. Therefore, the gradual improvement in TCE leads me to believe rates bottomed out in 2016. At the same time, I do not expect rates to surge soon.
  • The company has strong fundamentals, which will support the stock in challenging times. As of December 2016, the company had $82 million in cash. While the balance sheet debt is $443 million, I do not see that as a concern considering annual EBITDA of $144 million ensures robust EBITDA interest coverage. Further, the book value of the company’s tankers is $1 billion and the loan-to-value remains attractive at 44%. In addition, the company reported operating cash flow of $128 million for fiscal 2016. While investments in vessels was $188 million, resulting in negative free cash flow, I expect free cash flow to be positive in 2017 on limited investments.

Considering these positives, it makes sense to be bullish on Nordic American Tankers after the deep correction. There are a few concerns, however, that make me cautiously optimistic.

Key concerns

In general, the oil tanker market rates are at their prime when oil prices are lower. When oil slumped in 2014 and 2015, several countries attempted to benefit from lower prices by creating strategic reserves, boosting the demand for tankers. With oil trending higher, the spot markets have weakened, which can keep tanker rates subdued.

With spot rates looking more attractive in the past several years, the order book for oil tankers swelled. In 2016 alone, the number of oil tankers increased by 6% with no scrapping. An increase in the tanker supply is another reason for the decline in spot rates. For 2017 and 2018, there is an order book for 80 crude tankers. I believe this is factored into the stock price. The bottom line, however, is that spot rate recovery will be gradual and investors should not expect peak rates anytime soon.

Conclusion

Nordic American Tankers is an interesting investment after deep correction. The company is investor friendly and has been paying quarterly dividends on a regular basis.

Further, an attractive break-even of $11,200 per day per ship will ensure the company continues to generate profits. I see the correction as a good buying opportunity, but gradual exposure is advisable.

Disclosure: No position in the stocks discussed.

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