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Summary

  • Nordic is issuing stock to pay dividends.
  • Nordic is expected to report a loss in the next two years.
  • A deteriorating financial position could result in suspension of dividends.

Over the last three years, Nordic American Tankers (NYSE:NAT) has shown a significant hike in its top line. Despite this, its loss figure has expanded. Between 2010 and 2013, the company's voyage revenue has increased from nearly $126.4 million to $243.6 million. During the same period, its net loss increased from $0.81 million to $105.4 million.

Nordic's net loss is increasing because of the increase in voyage expenses. In 2009, when the company reported a profit of $1 million, voyage expenses accounted for only 7.2% of the total revenues. This percentage jumped to 70% last year. Nordic needs to control these voyage expenses. Otherwise, It will be difficult for the company to report a profit or a reduction in loss.

Growth of Nordic is dependent on the flow of oil across the globe. U.S. oil imports play an important role in the global maritime industry. Due to increasing crude oil production, U.S crude oil imports are decreasing. According to a forecast, U.S. crude oil production will increase 13.9% this year, as a result, its crude oil imports will decrease 13% to 6.6 million b/d this year.

Decreasing U.S. oil imports will have a significant impact on tanker spot rates. However, Chinese oil consumption is increasing, and its crude oil imports are expected to grow this year. But this increase will not be considerably helpful to offset the U.S. decline. China's oil demand is expected to grow 4% this year, while its crude oil imports are forecasted to rise 7.1% to 5.96 million barrels a day. Tanker rates are not just determined by the amount of oil hauled, but also by the distance traveled. U.S.-bound crude traditionally traveled more than 10,000 nautical miles from the Arabian Gulf. The trip from the Gulf to China is around 6,000 nautical miles, and to India, it's even shorter, at less than 2,000.

Over the past three years, the changing tide of the industry has caused a collapse in crude freight rates. The Baltic Dirty Tanker Index, which measures the cost to move oil across the sea, has sunk to around 690 recently from 1,077 in January 2010, even as the global economy has improved.

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Source: Nordic Annual report 2013

Nordic's financial position is also deteriorating, and as a result, its dividend may not be sustainable for very long. Currently, the company has a dividend yield of 10.60%. In 2009, it had paid $95.4 million in dividends; this figure was reduced to $41.8 million in 2013.

Nordic hasn't been cash flow positive since 2010. Even worse, when it did have cash flow from operations, it hasn't been enough to cover the dividend since 2004. For the year ended December 2013, the company reported net operating cash flow of -$47.2 million, increased from -$6.7 million a year earlier. Its debt-to-equity ratio has also increased from zero in 2010 to 29.2x.

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Source: Ycharts

Over the past few years, Nordic is selling stock to pay dividends and fund its operations. By issuing stock, the company is hiding its liquidity problems. Nordic's outstanding shares have been continuously increasing over the past few years. In 2010, its total outstanding shares were almost 42.20 million, which increased to 53 million in 2013. Now this figure has jumped to 75.38 million.

The outlook for tankers is not strong going forward, so I expect Nordic to continue to issue shares in order to fund its operations and pay dividends. The company is projected to lose $0.33 per share this year and $0.11 next year. Nordic may need to raise its debt to continue its operations.

Bottom Line

Due to decreasing U.S. oil imports, demand for tankers will remain weak in the coming years. So, it seems difficult for Nordic to be able to make profit in the next few years. The financial position of the company is deteriorating, and as a result, its dividend may not be sustainable in the future. Currently, the company is paying its dividends by issuing stock. In my opinion, Nordic will remain in a loss. I recommend investors to avoid this sinking ship.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: A Few Reasons To Sell Nordic American Tankers