Why Nordic American Tankers Still Has Plenty Of Room To Run

Summary

• 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.

Intro

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 27^th, 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 28^th, to $6.00 as of the morning of April 29^th, investors now have an incredible opportunity to add to their position prior to their May 18^th 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 24^th. 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.

Source: NAT

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 29^th, 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.

Source: EIA

Conclusion

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”.

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.

Comments

[IMHYEO]

Dr. Helmut Moss, who most of you know from YouTube, says we are going into the high $3s and that we might even go lower!
https://youtu.be/-O1zfA-u7oc

[KWSB]

NAT PRICE TARGET $18, HT.

[arok79]

@KWSB that's rose colored glasses price target. highly unlikely it hits it.

[jb0ii]

Are people still buying or selling?

[Adamsjk]

I see the dividend at 4.50%, not 9%. Am I seeing this wrong?

[Krisie300]

Just waiting for the Q2 numbers, the dividend and after that selling it all. The numbers we be amazing. stock is undervalued, waiting for the 10 to 14 dollar range. No greater time for oil tankers than right now! (according to the CEO). Hold for 6 months and sell after that!

[arok79]

@Krisie300 after Q3 earnings is when you should sell it. next couple quarters earnings should be stellar. look for a decent dip here. these tanker stocks did have a solid runup past couple weeks. NAT should drop to about $4

[canyonwlf7]

I sold at 7, glad I did, it’s over

[gios95]

lmao it just started, these are just people who bought at 3/4 taking profits after a 100%

[sgtgibby]

Numerous great comments pro and con on NAT. Question to all:

I remember that NAT has paid a huge Special Dividend about seven or ten years ago. I cannot find this information on NAT's website or other financial website. Does anyone remember the Special Div?

[Gregory Holter]

@sgtgibby You can check out their dividend history here:
seekingalpha.com/...

[Joeri van der Sman]

Note that there are many more shares outstanding now, and the fleet is smaller and older.

[stwoman]

They have debt covenants now related to their refinance last year. 50% of FCF services debt. Special div unlikely.

[Phil Anthropy]

Let us not forget that the NAT CEO has been beating the same drum ever since NAT was in the high 20s many years ago. When the profits start to gain traction, he may decide to issue a secondary and buy some more/newer ships. Note also the downgrade.

[inq]

Interesting comment. Do you have a link or a reference? I would be curious to compare his past drum beating to the current drum beating. Thanks.

[HariSeldon522]

Thx for the article!!!

[stwoman]

Evercore downgrade this morning. $4 target.

[Rico Sid]

Evercore also mentioned that the company name was “North” American tankers. If they don’t even know the name of the company they’re covering, how worthy is their research ? It’s a joke tbh.

[stephen satkowski]

Avoid!

[Sikhurity Alpha]

This is a short term play and probably has around $2 more in it and it it can squeeze another $1 after that depending on if we see Oil go negative again. QuickMoney

[arok79]

better play is to sit back and watch this whole movie play out. tankers are the best shorts during these runups when we have had oil gluts in the past. 2003, 2010, 2016, all excellent short opportunities on tankers. i am waiting for my 4th opportunity to make money shorting tankers.

[adam22164]

NAT is overbought based on one interview. The real value in this space is in the VLCC segment, bigger ships hold more oil. The better plays in my opinion are: Euronav, Frontline, and DHT. Long all three.

[Shipping-enthusiast]

For what it's worth, many of the smaller ships (Suezmaxes which hold 1 MM barrels) go for the same daily rates as VLCC's (2 MM) so presumably margins are better

[Joeri van der Sman]

@2-contango That's not true at all.

[1Horse]

Of the three, it looks like Euronav has a 30% witholding tax on dividends? Kinda important in a segment where its all about the dividends?

[tothemoon!]

The opportunity thesis seems on point, yet the stock has been turbulent and is trending down, is there something we’re missing as to WHY the stock/tanker is choppy of late, and not on a continued upwards trajectory?

[Eric51]

"After a nearly 75% increase in the past three weeks"
Yup up nearly 75% from basically nothing to more then nothing...

[tankumo]

I sold my NAT at over 7 3/4, bought it at 3 1/2. I am looking to buy it again if it gets lower. I don't see too much problem in this company though there are better ones out there. The debt of $400 million should be manageable at current spot rate. I now own DHT and FRO, also looking at STNG.

Fact is, no one knows for sure how quickly the economy will kick start again, but Q2 and Q3 should bring lots of revenue for tanker companies, including NAT, I would not rule out NAT going back below 5, or going up above 10. If you feel like NAT is a bargain at a specific price, then invest it, if not you should find better companies, simply as that.

There is one analyst from one big firm (I cannot name it here), it has NAT first quarter 2020 earning estimate of 0.15 per share. At 30k spot rate for Suezmax, the earning is 0.08, at 40k earning is 0.20, at 50k = 0.32 eps, at 60k = 0.44 eps, at 70k = 0.56 eps. So using this as a guide, perhaps one can find the 'bargain' price for NAT. I would not use 70k for the whole year.

I welcome all comments.

[Win or Learn]

BTW, NAT is paying off its entire debt. I got in at 4.75 and the upswing went to fast. If you look at whose buying NAT on bloomberg, around 40% are retail investors during the press coverage of NAT. Its still pretty good, but I think EURO, FRO, and INSW does everything better than NAT. They havent shot up because CNBC didnt interview them.

[Richard Lejeune]

Thanks for the article, although I prefer other tanker plays such as TNP.PE, TNP.PF, the NNA 2020 bonds and writing covered calls on EURN. The author makes some good points. Tanker rates appear likely to remain elevated for some time. There are also some problems with this article. For example, the author says:

"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."

The super-contango on WTI oil (the price of oil at Cushing which is located inland and has limited pipeline capacity to seaborne oil tankers) helps a company like BKEP that owns storage terminals at Cushing. I'm long BKEP and the BKEPP preferred for that reason. Brent Oil is also in super contango, but not as extreme as for WTI oil. Brent oil is the correct oil price to look at for calculating implied tanker rates from contango. Brent oil has not traded negative.

Disc: I am long TNP.PE, TNP. PF, EURN, NNA, the NNA bonds, BKEPP and BKEPP. Those are among the high yield issues that I cover for the Panick High Yield Report (seeking alpha marketplace).

[Greenie54543]

You think the earnings report will be good this week? Did the glut impact the first quarter that much? I would think Q2 would be impacted more.

[Richard Lejeune]

@Greenie54543

Q2 will probably be better for the tanker plays than Q1, but Q1 had plenty of high rates and will be a great quarter for most tanker plays. Q4 had lots of high rates and many leases were signed in Q4 and active in Q1.

[WhateverWorks]

Q2 will be impacted more but they will give updated guidance for Q2 in this report, presumably, so there could be a catalyst there.

[WhateverWorks]

Forgot to say that, despite my comment, post Cramer pump there is better value to be found in other tanker stocks in my opinion.

[devlau20]

Herbjorn Hannsen has always been a farcical cheerleader.