The oil tanker market has been depressed since 2008. A combination of oversupply within the industry as well as slumping daily spot rates has thrown almost all tanker companies into a loss making position and this pressure on the industry is unlikely to disappear anytime soon. Indeed, according to some sources, it is now cheaper to buy a new tanker rather than a secondhand one, as shipyards are slashing prices in order to attract customers.
That said, shipyards are still working off the huge order backlog that was built up pre-2008, and during the first half of 2013, 14.6 million deadweight tonnes of tankers were delivered into the world tanker fleet. Although this was the lowest volume of tankers delivered since 2006, only 4.1 million deadweight tonnes of capacity was removed from the fleet. This resulted in a net fleet growth of 2.1%, not good when the market is still in oversupply.
New fleet additions did nothing to help crude tanker spot rates, which declined slightly during the second quarter. Obviously, this is all bad news for Nordic American Tanker Ltd (NYSE:NAT), which has been struggling to return to profit since 2008.
Nordic is a value trap and should be avoided
However, at its current share price of around $8.16, the company trades at a P/B ratio of 0.6. Book value per share is $12.83, so for value investors the company could be attractive. Having said that, considering the supply/cost pressures that are currently being forced upon the industry, along with the amount of cash that the company is currently burning through, I believe that Nordic American Tanker Ltd (NYSE:NAT) is a value trap and should be avoided.
In addition, there is a serious threat of shareholder dilution as the company has a history of issuing stock rather than accruing debt to bolster its cash balance. In particular, management has previously stated that they would rather issue stock over debt. It is unclear why they would do this with interest rates being what they are and the negative dilution effects associated with stock issuance.
Nordic was running low on cash
Still, earlier this year the company issued stock to the value of $102 million. Initially this was earmarked for the purchase of a new ship. However, by the time this cash hit the company’s bank account, Nordic American Tanker Ltd (NYSE:NAT) was running low on cash to support day-to-day activities and had to cancel the new ship order. The new cash was used to finance everyday operations, which burnt through $27 million during the first half of 2013, and this is excluding dividends (currently Nordic yields 7.8% a completely unsustainable payout) which cost the company $19.3 million.
All in all, Nordic burnt through $46.3 million during the first half of this year. If we assume that a similar cash burn will be reported for the second half of the year, Nordic will have burnt through nearly $93 million during the year, nearly all of the money raised from its offering earlier in the year and paving the way for further dilution sometime at the beginning of next year.
Unless there is a significant improvement in tanker spot rates within the next few months, Nordic is likely to continue hemorrhaging cash at this rate for the foreseeable future.
Taking all of this into account, Nordic American Tanker Ltd (NYSE:NAT) could be considered to be an attractive short as well as a value trap.