Nordic American Tanker: A Ship that Won't Sink

 |  Includes: DRYS, NAT
by: David Zanoni

Back in April 2009, I became interested in Nordic American Tanker Shipping LTD. (NYSE:NAT) due to their potential to ship and store crude oil on their tankers. One main factor that caught my eye was their dividend that previously yielded over 10%. That was a factor that didn't last, however, since they lowered the divy to .40 a share. Although I was disappointed that the hefty dividend of over $1 per share wouldn't last, I knew in the back of my mind that it was eventually going to be lowered. The reason why I wasn't alarmed by the lowering of the dividend was because I knew this small cap company of 1.13 billion in market cap was just realigning its funds for growth. By keeping more of their cash, NAT will be better positioned to add more tankers to their fleet and maintain the existing ones.

With zero debt and 88 million in cash on their balance sheet, NAT is in a good position to benefit from the contango in the oil market. In the current environment, the oil futures prices are continually higher than the spot price (or closest available expiration month). Therefore, investors who are able to buy the physical crude at the current spot price of $71 and store it until Jan 2011's price of $83 can make a nice 17% profit by buying the crude now and storing it for a year. NAT will benefit from this situation as investors look to tankers to store the oil inventory. The increased demand for tanker storage will result in higher storage prices and higher revenue for the tanker companies. So, those of us who cannot afford to take delivery of the physical crude would still be able to benefit by buying a tanker company such as Nordic.

Disclosure: Long NAT