- Lots of media attention has created increased volatility, but the fundamental thesis remains intact.
- The oil glut is here to stay.
- Short-term spot rates averaged $112k/day for the week of April 24th showing a continued increase in demand.
After a nearly 75% increase in the past three weeks, Nordic American Tankers (NYSE:NAT) has become one of the most talked-about stocks in the oil tanker industry. Benefiting from recent national attention of CNBC’s Mad Money, NAT has seen an increase in price but also volatility as retail investors begin to enter this space. Even with this increased volatility, I believe that NAT still has plenty of room to grow as the oil glut is here to stay, short-term spot rates remain lucrative, and the potential for an unprecedented earnings report is right around the corner.
Introduction into the national spotlight
On April 27th, Herbjorn Hansson, the CEO and chairman of Nordic American Tankers, had a featured interview with Mad Money host, Jim Cramer. Through this interview, Hansson detailed how NAT was making "a lot of money." Obviously, this is good news for the future of NAT and flocked investors into this oil tanker play but also brought with it increased volatility.
Falling from $9 on the morning of April 28th, to $6.00 as of the morning of April 29th, investors now have an incredible opportunity to add to their position prior to their May 18th earnings.
Get ready for incredible earnings
NAT currently operates in the Suezmax market with 21/23 ships available on the spot market. In Q4 2019, the Suezmax spot market increased 76.9% from $17,300/day in 2018 to $30,600/day in 2019. To put this in perspective, these tankers are averaging $62,600/day in 2020, and $112,800/day for the week of April 24th. These earnings as of last week are 6.52x their Q4 2018 report and 3.69x their Q4 2019 report. As seen in the image below, rates have gone completely parabolic since February, and I believe they should level off relatively soon close to the $80k/day rate, given the current super contango situation. If oil drops into negative rates again, the spreads between the spot price and forward contracts could push daily spot rates to astronomical levels.
For example, if the June contract trades at $-10 and the July contract trades at $20, an investor could spend $1,000,000/day on storage and break even. Of course, this assumes they buy the June contract, sell the July contract, and have a tanker ready to store the oil.
This may be an extreme example, but the point stands. NAT and any oil tanker company that can take advantage of the increased spot rates will see unprecedented earnings. I believe NAT could see an average daily rate of $80,000/day based on current rates and the unsolved oil glut situation. These rates would mean in one quarter of work, NAT would earn as much as they did in all of 2019. The best part about the increased rates is that NAT’s costs do not increase and stay steady at around $8,000/day/ship, allowing every extra penny earned to go directly to the bottom line.
Now, these rates will not continue forever and the contango situation will resolve with an eventual increase in demand. With this said, I believe that for the next few months NAT will be able to take advantage of this situation and has even recently increased its dividend to entice investors to hold for the long term.
Over the past two years, NAT has increased its dividend 700% from $0.08 to $0.56, giving NAT a current dividend yield of 9.3%. Obviously, spot rates will not stay in the six figures forever, so management believes that a generous dividend should be enough to keep investors happy and hold a long position in their company.
Why the oil glut will continue
Although oil surged on recent news stating that the oil glut was not as bad as expected, I believe that any positive news is enough to serve as a relief rally. On April 29th, gasoline had the biggest percentage jump in gas consumption in the past year. This caused a 36% rally in WTI which served as a catalyst for pushing NAT lower as investors had concerns that the oil glut may be reducing.
Fortunately for everyone who would like an opportunity to enter NAT or continue to add to their position, there is strong evidence pointing towards supply shortages due to the continued increase in oil production. In Cushing, Oklahoma, the location CME futures are delivered, there are only 23 million barrels of storage remaining. Although this could sound positive, all of this storage is under contract for future holdings.
According to the EIA, oil is not expected to return to normal until at least Q3 2020 oil. Pairing this with the storage issues seen in Cushing, this means that oil companies and investors will have nowhere to place the oil. Negative oil prices and an increasing spread between monthly crude oil future contracts is entirely possible. Keep in mind this information is coming from a US governmental website, an institution that has a history of grossly underestimating the effects of the coronavirus.
Between a pump in oil based on news that things aren’t as bad as they seem and Mad Money exposing NAT to the general public, I believe these recent price swings are here to stay but also leave investors with a second chance for a good entrance point. The oil glut is here to stay and as NAT CEO Herbjorn Hansson said, they are about to “make a lot of money”.
This article was written by
Analyst’s Disclosure: I am/we are long NAT. 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.
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