Is Nordic American Tankers' Management Creating Value?

• Report this Comment On July 28, 2011, at 12:38 AM, Lordrobot wrote:

  Your analysis is completely flawed. Your EVA momentum does not explain the rationale for these tankers to be at seven year lows.

  Regardless you pressed the time frame of three years during which time NAT who has zero debt, has expanded the asset value of its fleet so the shares have more value and there are only about 41 million shares outstanding. The div is also part of the value as well as an utterly honest management team.

  The problem with tankers presently is quite frankly Goldman and Morgan and the very anemic US recovery which is affecting the global energy picture.

  Goldman and Morgan, banks of some sort are the largest buyers of oil futures contracts. Of course they never take delivery but each spring they run oil up to the extent that EXXON has stated that they have to buy oil futures in self-defense.

  Every recession in history has followed a big rise in oil futures. When the US started slowing in May, it was directly related and proportionate to the rise of oil and the contract purchases of goldman and Morgan.

  Oil is the king commodity and is, as goldman can tell you related to prices of many other commodities. Everything grown, grazed and harvested uses lots of diesel fuel so much so that a 10% rise in oil damages margins by roughly 9% on farm production.

  So the tankers are at the mercy of goldamn. not surprisingly, Goldman downgraded the tanker business. And why not, high oil causes a reduction in demand and for emerging markets causes them to resort to credit. Goldman is the dirtiest outfit on the street.

  For a value investor, one has to look way past the antics of goldman and buy value when its cheap.

  There is no question that the US economy will rise but not likely under Obama. Obama has no feeling for economics and has a revolving door economic team to show for it. Nevertheless, as the US stays weaker, Asia including surprisingly Japan are getting stronger.

  Asia has unlimited labor and can assert that power into any manufacturing field including shipbuilding and they can build at a bargain.

  Eventually demand for oil will begin to really rise not just be pushed up by goldman to the detriment of the US economy.

  Part of goldman's thesis is that the US will be energy independent in 2012. They said it. They believe shale oil from Canada currently being piped to US refiners, and gulf drilling will provide the US with 100% of its oil needs.

  I find that report to be far fetched. Economic health of a nation is directly related to energy consumption and cheap energy.

  Energy is cyclical. Right now the US is under an Obama malaise. Businesses are at a crossroads as to whether to stay in the USA or expand to the areas of growth. Under Obama you have the promise of more taxes, more unions, obamacare and more regulation. These are making the exodus strategy simpler.

  Watch CAT and Dow. These companies know they have to build in China. But what happens is they will need energy and infrastructure. China can provide that. Once again, the US is on the wrong path and Asia moving with a huge amount of force.

  Tankers are moving shipments away from the US and on longer routes to Asia. The more business China consumes the more oil they need.

  So from a value perspective tanks look beaten down and cheap to me. I try not to allow the malaise of the US to cloud my judgment. Bush and Obama have been one and two punches to the economy and quite frankly the way they have behaved I would have expected we would be in worse shape. But US businesses are much smarter and have many more global options today.

  Obama and Europe can blabber on about a new world order but its not going to Europe and socialism will not prevail. it is all Asian from here on out. They are eating our lunch and they will eat your kid's lunch and dinner. They will not stop at anything. The US was defeated in Vietnam. While we still pack a military punch, the Asian armies are huge by comparison. So the US is about to learn some hard lessons. The Chinese have a clear view of what they need to do and they have not missed a step. They will surpass the US as the largest economy by 2020, eight years ahead of schedule. The will become the chief importers of global oil and they have enough money to crush goldman and morgan in the futures markets.

  Tanks look dirt cheap to me.

• Report this Comment On July 28, 2011, at 4:47 AM, Luthers wrote:

  Tankers are still 30% overpriced. I feel both of you are wrong for different reasons.

  Firstly, the bit I can agree with from Lordrobot is that EVA does not address the fundamentals of the market, but rather than saying that these rates are at a seven year low, it makes more sense to suggest that the rates are returning to normal after a seven year bubble, and I can prove it.

  Taking daily earnings, going back to 1970, I have put all of these in constant, current dollars for VLCC, Suezmax and Aframax sizes. This shows that until 2004, the earnings of VLCC's tended to bounce between $20k and $30k per day, with some years much lower than $20k on average. Then, because demand from China and India started to rise, there were simply not enough assets on the water to trade and the earnings rocketed. Now, what do you think the ship owners and investors did next? Yes, you are right, as earnings were outstripping new build costs, meaning there was a premium to be had on second-hand tankers that were readily available - so much so that a 5 year old tanker that was built for c. $70m, could be sold for $140m! Rates ballooned to over $200k per day at their peak, but things were changing.

  First, a quick history lesson. In days of old there was a strong European shipbuilding industry, but the recessions of the 1980's and the ending of state sponsorship meant that these yards closed, unable to compete with the burgeoning growth of shipbuilding in Japan and South Korea in the main. China, seeing an opportunity to employ people and with a need to develop its own merchant fleet to feed its growth, entered the market and invested, in a very big way. Not only that, but as China entered with very low costs (and questionable quality), the Japanese and Korean yards began to rationalise their supply chain and began sub-contracting, developing new yards in the region, and with global trade increasing in bulkers, tankers and gas markets, the forward order books went from around 2 years to over 5 years in some cases. I have the numbers on CGT capacity added, for those that need them, by country.

  What you have now is that up to a further 50% of assets will be coming to the market in some areas. If you ever played 'the beer game', you now have a living, breathing example of it, as rates have collapsed and yet more and more tankers are coming to the market. Not only are rates low, but the chances of getting a cargo to carry are falling with each new tanker. The phase out of single-hulled tankers has happened, and operating costs continue to rise thanks to increases in insurance costs from piracy, a lack of qualified sea staff and rising costs of dry docking, stores and oils/lubricants. The rise in costs on a large tanker, a VLCC, means that you are close to around $13,000 per day for it to stand still, yet rates are hovering around this. Even taking it to around $30k per day, the upper boundary of rate normalcy, you are making $17k per day. I'm sorry, but on an asset that will currently cost $100m to replace, that's not good business, when you think that it's heading towards only 85% utilisation.

  Here's what I see happening. People will finally accept that tankers are overvalued and the price of a new build will come into line with the earnings of around $75m for a newbuild, so that suggests somewhere around a 25% fall in asset values. Let's be honest, when you don't have cash flow you need to look at break-up cost and the book value remains too high. I would also deduct some more off of a fair value because it is unlikely that a company will be able to sell at fair market value, given how few buyers there are at the moment.

  You can argue about oil demand, but each week more and more tankers come to market, relentlessly, and the big owners are running older fleets, so they will undoubtably renew these with more new buildings as the price comes off, built to their own needs and specifications. For those that have assets on water, they can't afford to scrap them, so they will be forced to trade aggressively in the spot market (at these prices, charterers are less willing to offer time cover), so the rates will remain low? How low? Well, in the same range as they did when the early 1970's tanker market broke in 1979 and led to 25 years (the lifespan of a tanker) of low rates.

  Frankly, hoping for an upturn in tanker stocks is fool's gold. It's not American demand that needs to change, it's a slashing of shipbuilding capacity and removal of ships. However, Japan buys from Japan, Korea gets state support and China backs its own yards to build its own ships on its own account. America just isn't a factor here as most of your oil comes from Canada and the Gulf.

  Tanker stocks will not recover for a generation or more.

• Report this Comment On July 28, 2011, at 11:22 AM, MattZN wrote:

  mmmm. I think you guys are talking to a computer. There have been a veritable deluge of these sorts of articles from the motley fool showing up on Yahoo for a while now. They all contain worthless, computer-generated information with virtually no real commentary or opinion.

  I liked your comment, Luthers, though I don't think it will take a generation for tanker stocks to recover. It will just take ~10-20% of the (more leveraged) tanker companies going bankrupt, which I think can happen in as little as 3 years.

  -Matt

• Report this Comment On July 28, 2011, at 2:36 PM, Lordrobot wrote:

  You are talking generic tankers one minute and including Nordic in the mix.

  The glut of tanks is 4% over scrap. This nonsense of 50% is absurd. Further, the shipbuilders have slowed but not stopped production which is good. If they stop then there is always a deep production lag. It takes years to build tankers.

  New tanks are much more efficient and safer. Nordic can break even paying its dividend with a day rate of $10K. Current day rates are about 14K. This is not optimal but NAT has no debt and so their carry costs are less. Further with the advancement of slow shipping, NAT can take advantage of the spot market whereas others that have committed their fleets to long term private contracts cannot.

  I have been to China and I can assure you, that the opposite feeling of the obama malaise exists in Asia. The place is on fire with capitalism. They have no choice but to use more energy and provide plenty of it to their expanding ag and industrial base. To even compare what goes on in a spoiled nation like the US to China is apples to oranges.

  The US oil demand is in fact the issue. US demand has dropped five years running. Yet oil is up in price. Ask Goldman. When you have banks being the largest buyers of oil contracts on earth and they never take delivery, their purpose is not simply to add liquidity to the market.

  And when you pull numbers like 30% over priced out of your azz, you lose all credibility. Show me the numbers. I am a physicist, I can handle you numbers I promise. But you have no feel for the scale of Asia or what is going on there. You need to visit.

  And when you discuss european manufacturing such as shipbuilding, that is laughable. The Brits have sacrificed their own economies to subsidize a dead shipbuilding business only to pay more for inferior ships.

  Let's understand too that whether you talk about bulk cargo, box or oil, the principles are the same. You have to know the driver. In this case it is clear... ASIA. Also Asia makes direct oil deals and does not buy on the spot markets. So the discussion of oil prices really only affects Europe and the US. In Europe they don't refine high sulfur oil; they don't have the facility. So they get stuck with Brent prices. We on the other hand process WTI and Shale with little difficulty.

  If you minds are ethnocentric or centrocentric and you think the USA is the center of the economic universe you are dead wrong. The center of the economic universe is the emerging markets which in 20 years will collectively dwarf the US economy.

  We have taken shots from two very bad administrations and that price is going to cost the US its dominance and its global reserve status.

  Trade deficits are not harmful to the US but this insane gov spending for deficits ultimately leads to inflation. The US and Europe are sinking and Asia is rising. When you use Europe or the US as a prism of value, you will lose every time.

  That is why GE and CAT and F and DOW are all building in Asia and not the USA. I would not give you a plug nickle for a company like Briggs and Stratton in the USA but in Asia, they are a rising star. For Briggs it was the difference of day and night. They suffered under their own unions in a brand new facility and then they left for Asia and made money again.

• Report this Comment On July 29, 2011, at 4:28 AM, Luthers wrote:

  My numbers are actually derived directly from Asian shipbuilders, referencing the point where it becomes uneconomic to build. A secondary set of data is done by my own calculations, based upon private data going back to 1970. This isn't something that I just pluck out of thin air, let alone any orifice.

  Respectfully, I think you are missing the point on shipbuilding. My argument is that the reason we saw a spike in the bubble of 2004-2009 was due to the collapse and resulting reduction of capacity from Europe as subsidies were removed (we could go into a long debate as to whether the Japanese and Korean shipbuilding, together with Chinese shipbuilding post-1997 benefitted from indirect subsidies, but I really can't be bothered), together with the overbuild in assets post-1970 and the collapse in rates post 1979 (they are all linked, as you can understand). With fewer tankers on the market, and little appetite to build, it was the lack of tonnage on water as demand shifted that meant that old assets could be traded at over 100% of book value. My point, therefore, is that we have just suffered another overbuild, but without the resulting collapse of capacity because of the relationships that each of these major shipbuilders have with their clients. If you want to have some fun with numbers, then construct your own data series, going back to 1970 and look at the relationship between rolling average earnings with orders and tell me whether you believe that higher earnings will not lead to increased orders. Personally, as I have said, I do not feel that tanker stocks will see any rate recoveries.

  I will ignore most of the pseudo political diatribe above, and simply point out that what you are telling me is thanks to their 100% equity model, you have a company in NAT that has an operating cost of around $11k per day. However, global asset utilisation rates are drifting continually and are falling below 90% as more tankers come to market. In this situation, the value on a DCF basis is going to be negligible (you will always get a little volatility due to the supply chain issues). Similarly, P/E will have no meaning, so all you are left with is an argument over NAV. As I have been at pains to point out, NAV at the moment is questionable, and should you sell the company it is doubtful to see who would be ready buyers. I can think of three companies who you could persuade to be interested, but I know their metrics for asset acquisition and it is in line with what I have shared. If this sounds like I am being secretive, it is, but you have to respect my confidences.

  Regardless of the above, let me ask you, then, how NAT renews its fleet with little cash flow to justify its business model? It doesn't have a sinking fund, it doesn't engage in debt and it is a price taker in an oversupplied market. Really, I may be missing the point here, but where is the value to an investor? Going back to investors to suggest that they fully fund new acquisitions to get nothing back isn't much of a value proposition!

  Finally, let me share with you some of my research. My projected daily earnings for VLCC, over the life of the assets, is $34k per day, for Suez it is $26.5k and for Afra it is $22.6k, all of which are a long way higher than today's markets. However, if you run your own models you will see that the asset values and earnings do not stack up, especially when you factor in utilisation and rising SOC's. However, the good news is that there will be some earnings growth in time, but nothing like that which too many analysts benchmark to the bubble.

  I'm not going to comment anymore. I've tried to give you an insight and to share some of my thoughts. I work with banks, brokers and owners in this field and don't need to justify myself. Hopefully what I have written has been helpful, but you're big boys and can make your own minds up. Personally, I feel that the asset market has a long way to fall and that owners and banks cannot face it at the moment, so are glossing it over. The bigger question is to how many other industries are doing the same?

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