Tanks for Nothin'

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We already know that the crude oil carriers' hire rates weren't higher in the third quarter. In fact, they tanked. Overseas Shipholding Group (NYSE: OSG) managed to hold on to a fraction of its prior earnings, which was cause for celebration. No such luck for Nordic American Tanker (NYSE: NAT), however. The firm reported a small loss after Monday's close.

Industrywide, average spot tanker rates were nearly cut in half from the prior quarter, to less than $18,000 per day. Once again, Nordic American pulled down above-average rates in this declining market, thanks to both its fleet quality and its practice of securing work a few weeks in advance. That said, Nordic American netted rates more than 150% above its breakeven level, so it's far from "broke down."

Revenue and earnings were also hit by a large amount of offhire days, during which vessels went in for steel improvement and other maintenance work. Because Nordic American completely countenances the capricious swings of the spot market, it's sensible for the company to time its tanker tinkering. It's an interesting contrast to a company like XTO Energy (NYSE: XTO), which hedges exactly so it doesn't have to time the commodity cycle.

One of the factors weighing on the outlook for tanker operators like Nordic American, Frontline (NYSE: FRO), and Tsakos Energy Navigation (NYSE: TNP) is the brisk buildout of fleets worldwide. With crude oil back in backwardation, tankers are no longer being used to simply sit on oil cargoes. But there are other factors mitigating any pending tanker glut. For one, tankers are being converted into both dry bulk carriers and offshore production platforms. In a single quarter, the 2006/2007 conversion schedule has increased 33% to 10 million deadweight tons. That's bigger than Nordic American's entire fleet, including two future deliveries.

This management team is comfortable expanding its fleet at this stage, but it makes no claim to see the future more clearly than anyone else. If you find the unpredictable unappealing, Nordic American might not be for you. Then again, 10 consecutive years of double-digit dividend yields aren't all that unpredictable, are they?