Stay In Nordic American Tankers For Its Dividend And Technical Setup

Summary

• A dedicated focus on NAT's dividend should attract passive income investors.
• Contango spreads will increase as oil storage remains an issue.
• NAT is set up for a nice technical bounce.

Intro

In previous articles on Nordic American Tankers (NYSE:NAT), I have detailed how I believe it is well-positioned to take advantage of the historically high spot rates for Suezmax tankers. Unfortunately, in the past few weeks, NAT has been "pumped" by CNBC and YouTube influencers who have introduced this stock to the masses of retail investors. With oil surging and spot rates declining, early investors have begun to take profits while retail investors have scrambled to cash out in hopes to mitigate their losses. This has led to a 44% decrease from the $9.00 high seen briefly on the morning of April 28th.

While the almost 3.5x explosion from the March 2020 lows may have been a bit much, the long-term potential for NAT remains lucrative as the company is focused on increasing its dividend and is set up remarkably well for a technical bounce.

Oil

Since NAT is overwhelmingly reliant on the spot market (21/23 ships), tightening spreads between contract months has significantly lowered spot rates, which in turn has adversely impacted NAT. As detailed in all of my articles currently published, I believe that spreads will increase as storage concerns persist. Although demand may increase with many state economies reopening and supply decreasing with OPEC+ cuts, there will still be a daily surplus of oil around 2-4 million barrels per day. In turn, facilities such as Cushing, where the WTI futures contracts are delivered, have no remaining storage available to lease.

To put further pressure on oil, Iraq has yet to decrease its oil production citing not knowing how to divide the cuts between oil fields. According to the latest OPEC+ meeting, it has agreed to cut 1mb/day, reducing its output from 4.585 MB/day to 3.585mb/day. This additional supply will not get used as oil consumption is expected to not bottom until Q2 2020. These additional barrels will add to storage and further raise concerns about where major producers can put their excess products. NAT can take advantage of this situation and should continue to benefit from historically high average spot rates as storage issues become increasingly relevant and contango widens.

Focus on the dividend

With a promising year ahead for oil tanker companies, NAT has made a dedicated approach to increase its dividend and return cash back to shareholders. In a statement made on May 3rd, management made this clear conveying that it is "prioritizing the dividend".

Now being in such a variable industry, oil tankers typically cannot sustain double-digit yields, but when spot rates are high and record rates of revenue are expected to come in, they handsomely reward investors. Below is a chart showing the variable dividend yields throughout the past 20 years.

Source: YCharts

NAT currently has a record low dividend yield which can be explained by an increase in its stock price paired with a low Q4 2019 dividend. For Q1 2020, NAT announced it will provide a $0.07 dividend and $0.14 for Q2.

Back in 2008, when tanker rates were comparable to the current year-to-date rates of 2020, NAT was able to return a dividend yield of almost 24% in 2009. This gave investors plenty of cushion while spot rates decreased and NAT's stock price subsequently decreased in value. Seen below is the tanker index, and it displays how tanker companies can be expected to see returns similar to 2008.

Source: NAT

NAV

Referencing back to 2008, NAT traded at a 64% premium to its net asset value and had a dividend yield of about 13%. Currently, it trades at a 23% premium to its NAV and has a yield of 2.3%. Applying a 64% premium to its NAV and a yield of 13%, we get a price of $6.60 and a yearly dividend of $0.86. Now, of course, these numbers are not set in stone, but rather serve as an example for how the company reacted to similar tanker rates seen in 2008.

When we compare NAT's NAV to other tanker companies, it conveys that it is expensive relative to its competitors, but still undervalued considering current spot rates.

Source: Author using quarterly reports

NAT is the only company trading at a premium to its NAV, but this can be attributed to two main points. First, NAT has been the first tanker company heavily introduced into the retail investor sphere which has pushed its price to extreme levels and back down to earth. This could be seen as negative, but the power of the first-mover advantage (being introduced to the general public first) is substantial and retail investors could push this stock into valuations much higher than peers.

Second, NAT is highly exposed to the spot markets. If investors believe that contango will last and high spot rates continue, NAT serves to be one of the biggest benefactors. This leaves more variability in its revenues but also exposes investors to an increased upside compared to other tanker companies.

So, although NAT does trade at a premium to its competitors, I believe that there is still room for growth. In the next section, I will convey how the company is set up for a nice technical bounce and could quickly return to the mid $5.50 range.

Technical Analysis

Source: Author, ThinkorSwim

When looking at its current 1-hour chart, almost every indicator is pointing towards a strong bounce up. First, NAT is sitting right on the 38.2% Fib line, which has served as support multiple times before the run-up to $9. Just today, NAT bounced off this line three times conveying the importance of this level.

Next, the volume has nearly dissipated compared to April 27th, 28th, and 29th. Low volume indicates that the move can easily be reversed and heavy volume on a green day would be a clear indicator that a reverse is about to happen.

Below the volume is the RSI which has been trading in oversold territory for the past two days. Continuing the stochastics and MACD, they both convey that NAT is incredibly oversold and the worst of the sell-off is most likely behind us.

I believe the combination of support on the 38.2% fib line, low volume, oversold reading on the RSI and stochastics, and the MACD crossing over all convey that NAT is poised for a bounce.

Conclusion

Although NAT may be trading at a premium compared to competitors, a likely increase in spot rates, increased dividend, and "first-mover" advantage should all act as catalysts to propel NAT's price much higher. Pair this with a gorgeous technical setup and I believe that NAT is ready to continue its uptrend.

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.