One of the most depressed sectors in the market right now is the shipping sector. Beaten down by over capacity and falling day rates, the industry is quite literally struggling to keep its self afloat. That said, this does provide some opportunities but these come with a lot of risk. The most risky looking company right now is Nordic American Tanker Ltd (NYSE:NAT), a company that operates in the crude oil tanker market and has not been profitable since 2009.
Nordic American’s Biggest Problem
One of Nordic American Tanker Ltd (NYSE:NAT)’s biggest problems could be its management, who are well versed in the world of shipping but lack financial credibility. In particular, the management is committed to paying a dividend to shareholders every quarter. Indeed, for the last 63 quarters, Nordic has paid out a dividend, however, for the last five years, Nordic has paid the dividend from the cash in the bank and not out of cash flow.
In addition, to finance these dividends, the company has needed to issued stock to bolster is cash balance from which to pay the dividend (management are refusing to either cut the dividend completely or issue debt). For example, since 2008, the company has issued $600 million worth of stock, to pay $459 million in dividends – the number of shares in issue increased by 60% over the same period. Over the same period, Nordic American Tanker Ltd (NYSE:NAT) spent $280 million on CAPEX.
Nordic’s Shareholder Equity
At the end of the first quarter, Nordic’s shareholder equity stood at $787 million, an indicative value of $14.40 per share, and a deep discount to its current stock price. However, these values do not include the company’s recent secondary, which aimed to raise $87 million, or the issuance of an additional 10.8 million shares – this would indicate a book value of $13.4 per share.
Having said that, Nordic American Tanker Ltd (NYSE:NAT) could be turning a corner. As I have written before in the piece about Nordic’s peer, Scorpio, the tanker market is finally starting to look like it is in recovery mode. Nordic owns 20 suezmax long-range tankers, which are starting to experience more demand as the oil boom in the US, drives oil, which would usually be heading to the US, to destinations that are further away, in particular, India and China. These longer range journeys mean that the longer range suezmax vessels, which are more economical, are in demand.
In addition, the demand for medium range tankers is rising in the clean market (transportation of refined products), which is undergoing a significant change as the market consolidates. This has led to medium range tankers being ‘cleaned up’ as they move from transporting dirty crude oil to refined products – taking additional capacity out of the dirty tanker market.
The combination of rising demand for longer range tankers and the shrinking numbers of medium range tankers is starting to put a floor in the day rates demanded for tanker leasing. However, new tankers are still coming to the market and this is continuing to cap the rates. Still, the rate of tanker production is slowing and scrappage rates are rising as owners can no longer afford to service their ships.
Bullish Trend On Tanker Market
Indeed, Nordic American Tanker Ltd (NYSE:NAT)’s management is bullish on the tanker market and estimates that the company should return to profitability during the next year or to. However, recent actions tell a different story. The company’s most recent capital raising, as mentioned above, was supposed to fund the acquisition of a new ship, ‘Nordic Future’ but last month, the company canceled this order, citing that there were better ways to spend shareholder cash – it now looks as if the additional capital raised has been used to pay the dividend.
So overall, Nordic American Tanker Ltd (NYSE:NAT) presents an interesting opportunity. On one hand, the tanker market looks to be recovering and Nordic should benefit, which allows investors to buy the stock at below asset value and wait for the valuation gap to close. In addition, debt is low and the company has a very experienced management. On the other hand, the company is continually raising finance through secondaries in an attempt to finance its dividend, and growth could be a long time in coming. All in all, a value play with a very high amount of risk.