Nordic American Tankers: Remain Constructive On Shares
Summary
- NAT owns a fleet of 19 Suezmax tankers.
- NAT's fleet continues to benefit from Russian oil disruptions and low global fleet growth, which has allowed tanker rates to stay 'higher for longer'.
- NAT is scheduled to pay $0.15 / share in dividends for Q4/2022. With strong profitability expected in 2023, NAT could continue to pay elevated dividends for many quarters.
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I recently wrote a positive update on Teekay Tankers Ltd. (TNK), as Russian oil disruptions have caused tanker rates to stay elevated while full shipyards mean the situation can extend for years. The same fundamental drivers for Teekay also drive Nordic American Tankers (NYSE:NAT), as they both primarily operate in the spot tanker market.
If tanker rates can maintain at Q4 levels for the rest of 2023, I believe we could see $0.79 / share in EPS for NAT, the best performance in almost a decade. I remain constructive on shares trading at less than 6x P/E.
Brief Overview Of Nordic American
Nordic American Tankers own a fleet of 19 fairly interchangeable Suezmax oil tankers that are mostly chartered in the spot market. NAT's business model is simple: it tries to keep operating costs low, with 2022 vessel operating expenses ~$8k / day. When tanker markets tighten, NAT can earn large windfall profits.
Great End To 2022
On February 27th, 2023, Nordic American reported their fiscal fourth quarter results, showing a sharp improvement in financial performance. For the 3 months ended December 31, 2022, NAT recorded revenues of $71.1 million (+215% YoY) and diluted EPS of $0.17 (vs. $0.41 loss in Q4/21) (Figure 1).
Figure 1 - NAT Q4/2022 financial summary (NAT Q4/2022 press release)
Q4 results were a large improvement against Q3, as NAT saw time charter equivalent ("TCE") rates of $57k / day for spot vessels and $49k / day for the fleet versus $28k / day in Q3. In fact, Q4 results for NAT actually missed analyst estimates, which called for $83.5 million in revenue and $0.21 in earnings.
This miss was mostly because the bulk of Nordic American's 2022 drydockings (maintenance work on vessels) occurred in the fourth quarter and negatively affected revenues. With voyage revenues of $71.1 million and total TCE (including chartered vessels) of $49k / day, I estimate NAT's fleet only operated ~85% of the available days in the fourth quarter versus normal operating rates of ~90-95%.
Tanker Rates Remain High Into 2023
Revisiting my bullish thesis on NAT, it appears tanker rates are set to stay higher for longer, as I laid out in my prior article. While NAT's Q4 spot rates of $57k were fantastic, the company is seeing even strong rates so far in 2023, with 72% of spot voyages having been booked at an average TCE of $61k / day.
This is consistent with the trend seen from the market data that Teekay Tankers graciously provides for free on a weekly basis (Figure 2).
Figure 2 - Suezmax tanker rates remain elevated (Teekay Market Insights)
Financial Forecast Robust For 2023
In fact, if we model $50k / day TCE for NAT's fleet, similar to Q4/2022 levels, we can see NAT generating $329 million in net voyage revenues and $165 million in net income for 2023, or $0.79 / share in EPS (Figure 3).
Figure 3 - NAT financial forecast for 2023 (Author created)
This level of profitability will be the highest in years and would surpass the windfall profits that NAT earned in 2020 due to oil falling into negative territory.
Trading at only $4.43 / share as of February 28, NAT appears to be valued at sub 6x P/E on my 2023 earnings estimates.
Are Tanker Rates Sustainable?
The key question for investors is whether the current level of windfall profits is sustainable. In the past, high tanker rates incentivized shipowners to place lots of newbuild orders, which would swamp the market all at once and crash the tanker rate. However, the current tanker cycle appears to be fundamentally different. According to Nordic American, there were only 14 vessels (2% of worldwide fleet of 573 vessels) in the order books, with 6 scheduled for delivery in 2023 and 5 deliveries in 2024.
Global fleet growth is expected to be muted for the next 2-3 years because shipyards are currently full building containerships and LNG carriers that were ordered in response to extraordinary rates in those markets.
Therefore, with the Russian oil ban potentially lasting for many years and tight supply growth, we could see a multi-year period of elevated tanker rates.
Insiders Continue To Buy
It is no surprise then that insiders continue to buy shares of Nordic American, seemingly at every opportunity they can. On February 28th, 2023, NAT reported that board member Alexander Hansson bought an additional 75,000 shares, bringing his total to 2.08 million shares.
A few months ago, Chairman and CEO Herbjorn Hansson bought 100,000 shares. Since the beginning of 2022, the father and son duo have bought close to 1 million shares on the open markets. This is about as strong a vote of confidence as one can see in the investment business.
Rewarding Investors With Dividend Increase
Concurrent with the fourth quarter report, NAT also announced a $0.15 / share quarterly dividend to be paid to investors as of March 14. This is an increase from $0.05 / share paid last quarter.
As a reminder, during windfall years like 2020, NAT rewards investors with very high dividend payments (Figure 4).
Figure 4 - NAT reward investors with windfall dividends (NAT Q2/2020 report)
Risks To Bullish View
While 'higher for longer' tanker rates remain my base case, investors need to keep in mind that high inflation may push the global economy into recession in 2023, which could dent crude oil demand. If OPEC+ responds to weak oil demand with production cuts, then tanker demand and rates could be negatively affected.
There is also a risk that flush with cash, Nordic American management could do foolish things such as order multiple newbuilds at the top of the cycle. For now, NAT has been prudent and have used the high tanker rates to offload some of its older vessels, reducing its fleet to 19 ships from 23 ships last year. However, we have also seen NAT take delivery of 2 new vessels in 2022 and management have said publicly they plan to order more. When NAT decides to order more ships will be something investors need to watch for.
Investors need to remember that the tanker business is highly cyclical, so sometime in the next year or two, investors will need to sell when the future looks impossibly bright and NAT may be gushing cash. Fortunately, I think we still have a few good quarters left.
Conclusion
My 'higher for longer' tanker rate thesis continues to play out and NAT is a prime beneficiary as most of its vessels are chartered on the spot market. If tanker rates can maintain at Q4 levels for the rest of 2023, I believe we could see $0.79 / share in EPS for NAT. I remain constructive on shares trading at less than 6x P/E.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of NAT, TNK either through stock ownership, options, or other derivatives. 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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Comments (12)
Nordic Pollux 2003
Nordic Castor 2004
Nordic Luna 2004
Nordic Freedom 2004
Nordic Skier 2005
Nordic Sprinter 2005We hope you are in the process of considering selling some of the older ships as the Russian -Ukraine conflict has made such ships more valuable to be disposed on the secondary market instead of scrapping them. We understand you might think that by taking this new strategy of reducing debt and ordering some new boats without long term leased back terms might not be appreciated by the market. However, I believe the market place would view this positively as it would demonstrate NAT management is willing to right the business strategy and put the company in a better long term footing. This new strategy might in the future help NAT avoid purchasing ships on very long term leased back terms which has then forced NAT to earn substantially lower charter rates as with your (5) newest NAT ships. We have noticed on Ocean Yield's website. They list ownership of five (5) of NAT newest Suezmaxes. All the new ships listed by NAT are actually owned by Ocean Yield and leased back to NAT at fixed terms. 4x time charter
Oman Trading ==> Nordic Harrier and Nordic Hunter committed for almost six years ==> below $25,000
Equinor ==> Nordic Cygnus comitted until the end of Q2 with a 12 month option for the charterer on top ==> $20,000
Unipec ==> Nordic Vega committed until the end of Q3 ==> $30,000We hope you and your board will consider:A) Lowering NAT overstretched dividend payout strategy to build up substantial cashB) Opportunistically selling on the secondary market some of the older ships C) Order new ships (2) without being forced into poor long term leased back termsI look forward to your feedback.
NAT might be able to pay off the Beal Bank debt in the next year or so. But it will likely come at the cost of fleet shrinkage. That would impact dividend capacity.
