Navios Maritime Acquisition (NNA) is the tanker arm of the Navios Group, which controls ~200 vessels, of which 46 are controlled by NNA (13 VLCCs, 10 LR1s, 18 MR2s, 3 MR1s and 2 Chemical Tankers). These include the five vessels added to NNA's Fleet in December 2019 following the liquidation of Navios Europe I and the three newbuild VLCCs on bareboat charter expected to be delivered in Q3 2020, Q4 2020 and Q3 2021. All newbuilds come with attractive long-term charters attached, as illustrated in the VLCC fleet list below:
NNA also owns a stake in Navios Europe 2 (14 vessel fleet, $51.6M receivables as of December 31, 2019), which is also planned to be liquidated. The diagram below summarizes NNA's position within the Navios Group.
Source: NNA Q4 2019 Presentation, slide 3
Perhaps rebranding NNA into something like "Navios Tankers" makes more sense in order to raise awareness.
The energy space is under unprecedented turmoil, on the verge of collapse due to the coronavirus, which has caused a global crude glut. So far, the OPEC+ agreement has failed to provide stability (demand recovery is required as well) and the great oil collapse continues, with oil crashing to the lowest level in more than two decades. We even experienced negative oil prices one day before the May '20 contract expired. In short, oil demand is weak (due to lockdowns worldwide, etc.), supply does not adjust efficiently, the world is flooded with excess oil and we are running out of storage space. Oil tankers have come to the rescue, but at a hefty price for charterers. They are being used to hold record amounts of crude at sea, often referred to as "floating storage". This benefits my investments in Teekay Corporation (TK), which owns tankers via its daughter Teekay Tankers (TNK), Euronav (EURN) and DHT Holdings (DHT). Recently, I also invested in Tsakos Energy Navigation (TNP).
The aforementioned companies have been the main way for me to take advantage of the tanker market. TK is a more of medium-term holding (as it also owns a large stake in Teekay LNG Partners (TGP), which I believe is substantially undervalued (I shared my TGP thesis in November 2019), EURN and DHT have strong balance sheets with lots of VLCC exposure, and TNP is the most risky of the three, but has been on deleveraging mode (well before the virus hit) and has a good 20+ year track record as a public company (note before listing in the US, TNP was listed in Norway). In the current market, all companies have one thing in common: they are making a lot of money. For example, based on current market rates, TNK could produce ~$750M in free cash flow (on an annualized basis) versus net debt of around $850M and a market cap of ~$700M. This was explained by TK's CEO on CNBC a few days ago. It is very positive that the tanker market is gaining some publicity on the mainstream media. Another major publicity boost was the appearance of Nordic American Tankers (NAT) CEO on Jim Cramer's Mad Money on CNBC. This had a huge impact on NAT and also on the tanker space overall.
In the past, investors have been accustomed to tanker companies just covering operating and finance costs. Now, they are generating tremendous amounts of free cash flow. I believe this will lead to a massive transformation for tanker equities, potentially with long-lasting effects, depending on how long the strong market lasts. IHS Markit says that floating storage could keep the crude tanker supply tight for months:
It's not just crude tankers that are used for floating storage. This phenomenon has also spilled over to product tankers, with over 240 product tankers in floating storage, according to Braemar:
At the moment, the ongoing strength is noticed across all tanker segments, from the very largest crude carriers (VLCCs) to the smallest Handysize product tankers. Importantly, there is appetite for time charters, with shipowners locking in TCE rates far above mid-cycle norms. For example, DHT Holdings entered into time charter contracts for six of its VLCCs, all with firm periods of 12 months at an average fixed daily hire of $67,300 per day with prompt delivery.
Source: DHT Website, Press Releases
Let's do the math. This equates to annual revenue of almost $150M and free cash flow well in excess of $100M. This is for just 6 out of the DHT's 27 VLCC vessels (note DHT only owns VLCCs). Other companies, like Zodiac Maritime, are also locking in term charters in the six digits:
Imagine what could happen if rates go higher! For example, Bjarne Schieldrop, chief analyst, commodities, SEB Merchant Banking, believes VLCC rates of $2M per day are possible! Crazy? Most probably. That said, anything could happen in the short term, especially if reopening the economy, by lifting lockdown measures, backfires.
As discussed above, shipowners are capitalizing on the floating storage tailwind with 12-month term deals at TCE rates far above mid-cycle norms. For example, VLCCs at $80,000+ per day (versus mid-cycle of $40,000 per day) and LR2s at $40,000+ per day (versus mid-cycle of $24,000/day). It goes without saying that current rates are unsustainably high and will fall hard once the oil markets normalize. But it might take a bit more time to deal with the excess oil supply than most think. For example, the CEO of Frontline (FRO) anticipates that the oil price plunge will extend the tanker storage bonanza, a steep contango in Brent crude will incentivize oil firms to take longer charters to store cargoes at sea for even more time.
One thing is for sure, many tanker owners will come out of this much stronger, with much higher cash positions. For example, net debt to book capitalization can fall by 20 to 30 percentage points, and some companies might even turn out being debt free. Asset values are holding firm, even for old vessels. For example, a 20-year old VLCC owned by Eastmed fetched $30M.
The booming market will substantially boost NAVs of public tanker companies. Deutsche Bank shipping analyst Amit Mehrotra sees significantly increased valuations and tanker NAVs could double by the end of 2020.
Let's go back to NNA, which has substantial multi-bagger upside potential given its very small market cap (below $90M at the time of writing this article based on a share price of $5.48). I build my position at an average price well below $5, being mindful of the very high risk due to the very high debt load. Relative to its market cap, NNA has a fairly large fleet size of 46 tankers, of which 13 are VLCCs (many with floating rates and profit sharing arrangements). If NNA manages to work out its debt problems, I can see the market cap skyrocketing. To this end, the first main obstacle in my view is the 2021 senior notes:
Cash as of December 31, 2019, was $45M. As mentioned in the beginning of the article, NNA also owns a stake in Navios Europe 2, with $51.6M in receivables due to NNA as of December 31, 2019. What's more, NNA recently provided the updated collateral list for Senior Ship mortgage Notes due 2021:
Source: NNA Website
As things stand, I believe NNA will be able to refinance the 2021 Notes, but it might be a stressful exercise. The refinancing terms (magnitude of interest rate, duration, etc.) arguably also depend on how long this strong tanker market lasts. In terms of what NNA can fetch in 2020, important points to consider are the following:
- 68.8% of available days fixed in 2020 will produce revenue of $179.2M
- 41.4% of 2020 available days open or fixed on floating rate
- 87.5% of VLCC days fixed on base rate have profit-sharing arrangements
The second and third points will make or break NNA. Below is what the company projects:
Source: NNA Q4 2019 Presentation, slide 6
Note, in the footnote NNA provides information on the assumptions. Specifically, days contracted on floating rates are based on one-year TC rates as per Clarksons on January 2020:
- $48,500 for VLCCs
- $19,125 for LR1 products tankers
- $16,750 for MR2 product tankers
- $14,750 for MR1 product tankers
- $11,500 for chemical tankers
Regarding the 6,561 open + days contracted on floating rates, the breakdown is as follows:
Source: NNA Q4 2019 Presentation, slide 8
As discussed above, the market for both VLCCs and product tankers is on fire right now, higher than aforementioned the one-year TC rates as per Clarksons on January 2020. Of course, the end result on NNA's 2020 operating cash flow will depend on how long the strong market will last and whether NNA will be able to fix some vessels on lucrative time charter contracts. That said, as shipping executives state, "one spot voyage makes the whole year in red hot market".
In closing, despite the strong market, NNA is down ~35% on YTD basis. NNA is in a way racing against time. How much operating cash flow can it generate to address the senior notes due 2021 at decent terms. It seems NNA has the collateral value, but generating lots of cash flow today can be a game changer for the company given that Net Debt to Book Capitalization is very high, around 76%. Let's hope for the best.