Day Rates Headed Higher at Nordic American Tanker

Nordic American Tanker Shipping Limited (NAT) was incorporated in 1995. Over the years, they have been very ambitious with respect to acquiring ships of the double hull variety. By March 2006 they had acquired their 9th vessel. In November of 2007, they engaged in the building of two new tankers, which will be received in the fourth quarter of 2009 and April of 2010, respectively. This company does have some exposure to the spot market as one of their 12 ships has fixed charges and the other eleven are market based income.

When looking over this company's first quarter results for 2008, it seems that there is more pricing strength on-going in the oil shipping market. From the fourth quarter of 2007 to the first quarter of 2008, the spot market paid an increase from $27,000 per day versus $46,600. During that time the dividend increased 136%. They have also stated that the 2nd quarter of this year has seen rates increase from the 1st.

My bullishness in this sector has to do with the phasing out of single hull tankers. In the 1st quarter of 2008, tanker numbers decreased by 2 to 360 vessels. Of that number, 46 are single hulls and they are going to be phased out by 2010. Since NAT has no single hull tankers, they are positioned well. When they are phased out, many will be looking to replace them as fast as they can, but time frames will make it difficult to get all of those ships on line in time. Even if they do, demand for oil across the world is going to increase the need and day rates for the shippers.

NAT's chart is very bullish. They had a double top breakout pattern as of April 16th. This trend has continued and still looks to be headed upward. When looking at the chart for this time of year over the past five years, we see that this is when the stocks in this sector continue to move. Looking at the bullish pricing of oil, it looks like the same will happen again this year. If you look at the chart and their recent volume, it has been very high with respect to their five year chart.

When looking at their PE ratio, many would shy away from this company, but they are so levered to the spot market that they will do better in a strong pricing environment. This makes this particular investment very speculative, as opposed to a company like Frontline (FRO). I think this company can be bought on bullishness of pricing for the quarter. I think most companies levered to the oil market will continue to trend higher through the year as the economy does not look that great, but inflation will remain high.

Disclosure: none

Comments

[JET1C:]

I have owned NAT for about 3 years and, for the dividend investor, they are wonderful. Their policy is to pay out 90% of their earnings as dividends. Look at their historic chart, clear back to 1997 and you will see that they have a marvelous record. I wish I had found they then, I'd be sailing around on my yacht now.

Last year they spot market dropped from about $45K/day down to around $25K and their dividend dropped to around $.40 for two qtrs. Everyone got all excited and dumped them but now that the spot market is back, they are the darling that everyone has just discovered.

2008 May 21 08:28 AM

[notsosmart:]

i have owned nat &fro for quite a while.i have no connection to either one(only as a stockholder) but the dividends have been great.this investment was largely based on the fact that no one has figured out how to pave over the ocean & the phasing ut of single hull ships.look ma,no graphs,charts or numbers.

2008 May 21 09:26 AM

[Ahoy Matey!:]

The beauty of NAT is the combination of low operating costs and exposure to the most lucrative sector of the market: the spot market. The company benefits from the volatile spot market where rates over time run higher than those realized under long term lease rates. These daily rates have fluctuated between $25K and $78K in recent years for the Suezmax ships NAT operates. The rate fluctuations are driven by seasonal demand. They peak during the second quarter and then bottom in the third before cycling up again. To insulate against the wide fluctuations in spot market rates, the company maintains a strong balance sheet with little debt, so daily operating costs are around $9K per vessel. NAT's fleet generates positive cash flow in even the weakest part of the cycle and captures more of the upside than firms operating under long term leases. Time your purchases of NAT for the weak part of the seasonal cycle when investors worry about whether rates will snap back up; they always do snap back up because of seasonal demand increases from late fourth to mid second quarter. Also realize that NAT is a sort of mercenary company. With just 12 ships they can oeprate the way they do in the spot market As their fleet grows there will come a time when they will need to participate in the long term rental market too. That day is still far away.

2008 May 21 10:08 AM

[billf921:]

This company does have some exposure to the spot market as one of their 12 ships has fixed charges and the other eleven are market based income.

that is a pooly written sentance

nat has complete exposure to the spot market and pays out 100% of it cash flow. rates are now good..will they stay that way..who knows but they usually fall in the summer as we dont need as much oil to heat in the summer. Above 40 its a sell as its assets are worth only about 25 to 30 per share but alot of people chase the divident

2008 May 21 07:38 PM

[billf921:]

Michael if you like this sector, I suggest you look at TNP which trades at 38 and is worth 56. If Day Rates are Headed Higher at Nordic they also are headed higher for other tanker stocks. Tnp is the best that there is.

they have a different chartering approach, they lock in rates for 2 or 3 years and have a profit sharing if rates go up. It's less risky than nat but pays out less in dividends but stock buy backs is an indirect way of giving money back to shareholders.

The key is TNP assets are worth 56 per share and is trading at a discount at 38. It should be trading it 80 to equate to nats multiple

BUY TNP INSTEAD. Tops also should be considered but thats a story for another day

2008 May 21 07:53 PM

[legmaker:]

bilf921, analysts on Yahoo Finance have TNP's earnings decreasing year over year, do you believe this is an error and they beat come in much higher?

2008 May 22 08:54 AM

[Sweetness:]

"NAT's chart is very bullish. They had a double top breakout pattern as of April 16th."

Apparently the weekly and daily key reversals from all-time highs, overbought daily RSI, and the fact that the stock has rallied more than 60% in two months make you think there is room to the upside...

2008 May 27 11:19 PM

[legmaker:]

sweetness, you have valid points but they do not change what I said. Watch the stock, if it fails this year, talk to me then.

2008 May 30 01:19 AM