The great late comic Rodney Dangerfield was haunted by an existential dilemma. No matter what he did, right or wrong, he “got no respect”. If there is a publicly listed company that seems to share a fate with the perennially unlucky and underappreciated Rodney Dangerfield, that would be Nordic American Tankers Limited (NAT).
No matter what the management of NAT does to lift up the company’s stock price, no matter the surrounding circumstances, it always seems to end up with a fizzle. Despite the company hauling in record amounts of cash, management can barely get the company’s stock price to firm up. And this is not for a lack of trying.
Recently, management has being issuing press release after press release, all with bullish news. The company has announced a share repurchase program, multiple insiders are buying large amounts of stock, the company will double its dividend, its ships are fetching obscenely high rates, the lightly leveraged company is continuously deleveraging further… and yet the company’s stock remains stuck somewhere between neutral and reverse.
The price action is illustrated below.
Despite looking so good on paper, why does NAT get “no respect”? Of course, the market is highly unsettled right now. Volatility is through the roof. Investors are spooked by the coronavirus pandemic, and the human and economic toll it has inflicted and will continue to inflict at least for the next few months.
Perhaps investors also do not believe that the current historically high tanker rates are sustainable. Surely, crude oil tanker rates must descend from their stratospheric heights? Investors also could be soured on tanker stocks, a segment that has not fared well for at least a decade.
And yet… the company’s suezmax tankers are hauling in astounding amounts of cash. Is the market’s lack of respect for NAT stock well-deserved? Or is it more of a reflection of its own neuroticism, given these troubling times?
The Geopolitical Context
The crude tanker market is currently in the midst of a confluence of extraordinary events. The coronavirus pandemic has turned almost half of humanity into home-bound hermits, as governments across the globe impose lockdowns and quarantines in a desperate attempt to limit infections. Airplane fleets are grounded. Streets and highways are eerily empty. Transport hubs are devoid of all but essential transport. The demand for oil has collapsed.
At the same time, Saudi Arabia and Russia are locked in a brutal price war and are dumping immense volumes of crude into the market. This price war implicitly targets the U.S. shale fields, which in recent years have been lifting large volumes of uneconomic or marginally economic crude production.
Russia is also retaliating, in a brutal and scorched earth manner at a moment when it knows the U.S. economy to be particularly vulnerable, against the U.S. energy lobby and its free-wheeling recourse to sanctions to achieve economic advantage. The shale industry, led by Ted Cruz, recently sought to ram through expanded U.S. LNG exports into Europe by hamstringing Russia’s crown jewel energy infrastructure project, Nord Stream 2, through the use of sanctions. The efforts by the Texas Senator to haul in a just a few extra dollars for his oil patch constituents instead blew open the gates of hell for them, to the point that their economic survival is now in question. An epic case of overplaying one’s hand.
For the Saudis, it may simply be a matter of preserving their market share for oil. Or, as the Russians have suggested about the nominal U.S. ally, just finally killing shale. Whatever the case, two powerful state actors are at loggerheads, nominally with each other, but implicitly also with the U.S. And noone seems to want to budge.
With the U.S. shale industry facing widespread bankruptcies, the Trump administration has called for a truce of some sort. If a truce does happen, and output is reduced, tanker rates may climb down from today’s abnormal heights. A truce however is unlikely to happen, at least in the short term.
The Russians are flexing their muscles, and are fed up by U.S. intransigence and what they regard as foul play against their legitimate economic interests. First, there is the issue of Nord Stream 2. Sanctions against Russian energy must be dropped, as Putin has repeatedly requested.
Second, the U.S. would be required to reduce output in tandem with everyone else, instead of free riding production cuts that take place elsewhere. In essence, the U.S. would be required to join OPEC into an OPEC++. This would be contrary to U.S. tradition and current antitrust law. If the U.S. legislative branch so readily convened to act against the Russian position with regards to Nord Stream 2, it can just as readily (if so motivated, the Russian thinking goes) put pen to paper and scrap the Sherman Act.
Unless that happens, Russia has indicated that it is prepared to “eat cabbage” for the long haul, or at least – that is – until the U.S. shale fields wilt and go away of their own accord. Only then the Saudis and Russians, the world’s low cost oil producers, may finally cast all pretense aside, shrug and make peace with each other.
This is a recipe for a dispute that, if anything, will not be immediately resolved.
The result of all this geopolitical drama, coupled with the coronavirus pandemic, has been a “super contango” environment for crude. The spread between future contracts depending on expiry has never been as wide as it is now. Front-month prices for crude are much lower than prices in future months, making storing oil for future sales highly profitable. As the diagram below illustrates, the May futures of Brent to the November futures contract currently exhibits its widest contango ever – $13.95, higher even than the contango at the peak of the 2008-2009 financial crisis.
Oil may be extremely cheap right now, but when circumstances return to normal, the market expects that its price similarly will return to less aberrant levels.
The result of super contango has been a mad rush to store oil. The world is in fact running out of places to store so much crude. Much crude is simply going into seaborne vessels, particularly “very large crude carrier” (VLCC) type vessels.
It is extremely expensive to charter such a vessel right now, and very profitable to own one. On April 1, 2020, daily charter rates for a benchmark Middle East-to-China rates were at WS 212.71, equating to daily earnings of $241,000. To break even, a VLCC vessel owner only needs approximately $20,000 per day. At approximately $30,000, an owner is already achieving a 10% rate of return.
The almost perpendicular surge in crude oil tanker rates can be seen in the diagram below.
Eventually, oil production will be shut in. The Saudis and the Russians may heed the exhortations by the U.S., resolve their differences with each other and with the U.S., and cut production. The U.S. may look the other way while Nord Stream 2 goes online. By then, shale may be much or somewhat diminished, with a slashed rig count. With less crude being traded and produced, the boom days for crude oil shipping may be over.
But, that is not where we are at right now.
NAT’s Workhorse Fleet of 23 Suezmax Tankers
NAT maintains a fleet of 23 substantially identical suezmax crude oil tankers, one of the largest such fleets in the world. These vessels have a lifting capacity of approximately 1 million of barrels each, or about half the lifting capacity of a VLCC vessel.
Charter rates for suezmax vessels move more or less in tandem with those of VLCC vessels and have also recently witnessed an almost vertical surge, as can be seen from the diagram below.
NAT is a well managed company that has been around for a long time (since 1995). Its vessels are not as modern as some of its competitors. The average age of the company’s fleet is 11 years. However, they are sufficiently modern and well maintained, subject to rigorous ongoing customer inspections. Ten units were built from 2010 onwards, and thirteen units were built between 2000 and 2009.
NAT’s vessels are almost entirely on the spot market. Therefore, the company is able to fully capture the upsurge in charter rates under the current operating environment.
One million barrels a day extra from Saudi Arabia to the Far East create demand for about 45 suezmaxes. Saudi Arabia has lifted its production from 9.8 million barrels per day to up to 13 million barrels per day. There is currently a lot of demand for NAT’s tankers, and they are freely available for charter. In the last few days, the company has entered into charters of between $65,000 per day to more than $100,000 per day per vessel.
In a press release, management disclosed recent charter rates on 12 of its vessels, as follows. The average per day charter is $68500. The break even charter rate for each vessel is only approximately $8000 per day.
As can be seen from the table, the operating profits from just these 12 recent vessel charters is $30,047,000. This compares to a total operating profit for the entire company (23 vessels) for the fourth quarter of 2019 of $21.456 million – a quarter during which the company’s vessels achieved a daily average charter rate of $31,700.
It should be kept in mind that the fourth quarter of 2019 was an excellent quarter for the company. During that quarter, crude oil carrier charter rates also reached historical highs, driven by multiple factors, including U.S. sanctions on Chinese crude carriers, dry dockings for IMO compliance, coupled with an already tight vessel supply.
In the fourth quarter of 2019, the company achieved a net quarterly income of $12.7 million. The company however pointed out in the press release accompanying its quarterly report that the first quarter of 2020 should be even better. The rate improvements that were seen in the last quarter of 2019 materialized for the company mostly into the beginning of 2020. As of February 18, 2020, about 70% of the trading days of the company’s 23 suezmax vessels had been booked at an average time charter equivalent rate of $53,000.
If the first quarter of 2020 is going to be very good for the company, the second quarter is shaping up to be even better. It will be a blowout quarter.
Increased Dividend, Share Repurchases, and Deleveraging
NAT is deploying the largesse from its ships in ways that normally would make investors very happy.
First of all, the company is doubling its quarterly dividend, to 14 cents per share from 7 cents per share for the fourth quarter of 2019. At current share prices, this is a forward yield of 16.14%.
The company also announced that it would buy back up to 4.5 million NAT shares. This will bring down the company’s issued and outstanding share count by approximately 3.13%. The company is thus mopping up some of the extra shares that it had issued in the course of prior “at the market” (ATM) offerings.
In addition, the company has an aggressive posture towards paying down debt. Historically, NAT has been debt averse and its balance sheet has carried little to negligible debt. This balance sheet strength has ensured the company’s survival for so many years in a volatile industry characterized by high debt levels and punctuated by recurring bankruptcies.
The company’s long-term debt, as of the company’s issuance of its last quarterly report, was $376.3 million, representing a long-term debt to total assets ratio of about 37%. This is among the lowest levels in the industry.
This debt was assumed by the company in the course of more difficult operating periods, when financing was tough to come by for tanker companies. The company has made it clear that it is intent on paying it down. Between the third and fourth quarters of 2019, the company paid down $20 million in long-term debt.
In 2020, it can be expected that this small debt pile will come down substantially.
NAT’s insiders have recently been busy purchasing company shares. Between March 25 and March 30, 2020, insiders have purchased a total of 566,760 shares, at prices ranging from $2.92 to $4.725. Purchasers include the company’s Chief Financial Officer, the Finance Manager, Executive Vice President & Head of Chartering, and a Director and son of the company’s Chief Executive Officer.
Insiders see value in the company and its prospects. This love however has not been reciprocated by outside investors, and the company’s stock price remains in the doldrums.
The common shares of NAT remain unloved and underappreciated by the market. This, despite the fact that everything is going well for the company – better, in fact than at any time in the company’s history.
State actors are flooding the market with oil right now, and this oil needs to be either shipped or stored. Charter rates for crude carriers are astoundingly high, at levels never seen before. The circumstances giving rise to such rates may start slowly to unwind, and the company’s suezmax may begin to fetch more “customary” rates. But that is unlikely to happen immediately, and even if it did, the stock is priced as if the massive run up in rates never happened.
NAT is paying a decent dividend, repurchasing shares, and further deleveraging a lightly levered balance sheet! What is not to love about this company?
Investors should give NAT a chance, if anything for no better reason than that the company is making a lot of money these days.
Oddly enough, a lowly crude oil tanker company could be among the safest bets for investors seeking to navigate their portfolios through the coronavirus pandemic.
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.