Should Investors Own Either of These High-Yielding Oil Tanker Stocks?

The oil tanker market has been through a disastrous long-term decline but all indications are that the market has bottomed. This article examines the fundamentals of the industry and whether or not income investors should consider owning two of the highest yielding stocks in the industry.

Jun 15, 2014 at 1:24PM

Since 2006 the oil tanker market has been a brutal place for investors. Cheap credit and record high tanker day rates (as high as $155,000/day) resulted in a massive oversupply problem. For example, in 2009 the amount of Suezmax tankers under construction was over 50% of the current global fleet. 

The global financial crisis, which dried up the credit that is the lifeblood of this capital-intensive industry, combined with plunging of oil prices and a staggering oversupply of tankers, resulted in charter day rates dropping for six years, before finally reaching a bottom of $5,000/day in August of 2012. 

Given that most Suezmax tankers cost around $12,000/day to operate, these prices were not sustainable and resorted in horrific losses for the industry as a whole. However, now, record oil imports from China (6.6 million barrels/day, in January 2014) coupled with both China and India working to build out strategic oil reserves, as well as a only a 9% new build rate, means that the spot charter rate for Suezmax tankers has recovered recently to a high of $82,000/day and an average of $26,300/day for the entire quarter.  

With the International Monetary Fund (IMF) predicting that global economic growth will accelerate from 3% in 2013 to 3.6% in 2014 and 3.9% in 2015, global oil demand is expected to increase in 2014 by 1.2 million barrels/day (mbd), up from the 1.1 mbd increase in 2013. Teekay Tankers, one of the largest tanker companies in the world, is estimating that 2014 capacity will increase by just 1.2%, the lowest increase since 2001 and 1.8% in 2015. 

This should mean a stabilization and gradual increase in tanker day rates, which represents a potential buying opportunity for income investors eager to cash in on the high dividend yields shippers are known for. This article will examine two of the higher yielding companies -- Nordic American Tankers (NYSE:NAT) and Ship Finance International (NYSE:SFL) to see if investors should consider owning either one of these high-yielding plays on the important global oil transport industry.

Nordic American Tankers: speculative dirty value
Nordic American Tankers has three arguments in its favor, including fleet growth potential, strengthening charter day rates, and its upcoming IPO of Nordic American Offshore. 

In the last eight years Nordic American Tankers has increased its fleet size from three tankers to 22. Thanks to a 87% increase in charter rates in the last quarter, the company announced a 160% increase in revenue and posted a $4 million profit vs last year's $32.4 million loss. 

Another growth driver is the upcoming IPO of Nordic American Offshore. Nordic American Tankers will retain 26% of the shares, and the recently announced $0.45/share Nordic American Offshore dividend (10%-11.25% forward yield) will add $2 million quarterly to Nordic American's bottom line, a 50% increase from this quarter's results. 

However, investors should consider two things before buying shares of Nordic American.

First, the company has a terrible history of diluting shareholders and destroying value:

NAT Chart

NAT data by YCharts

Since 2005 Nordic American Tankers has diluted shareholders by 26% CAGR and has a track record of using equity issuances to keep the company afloat and pay the dividend.

As seen in the two charts above, despite Nordic American Tankers' generous yield (management boasts of 67 consecutive quarters of dividends), total returns, including dividend reinvestments, have been negative, while competitor Ship Finance International has returned 13.3% CAGR total returns over the last 12 years vs 7.6% for the S&P 500. 

And its recent IPO? Nordic American Offshore recorded just $1 million in revenue in Q4 (began operating in October) and yet plans on paying out $8 million in dividends per quarter. With seemingly unsustainable dividends, Nordic American Offshore is likely to resort to keeping itself afloat (and paying dividends) through equity issuances, just like its parent company.

Ship Finance International, part of the John Fredriksen high-yielding empire, is a more diversified and better alternative to Nordic American Tankers. With a fleet of 77 vessels diversified into offshore drilling rigs, rig supply vessles, oil tankers, chemical carriers, dry bulk carriers, container ships, and car carriers, Ship Finance has a proven track record of not just growing its fleet, but dividends and share price as well. 

Analysts at S&P Capital IQ are expecting 24% CAGR EPS growth over the next 10 years and dividend growth of 15%, results that I believe Ship Finance will be able to deliver and that will, over the long term, result in market-crushing total returns.

Foolish takeaway
Nordic American Tankers, as a pure play Suezmax tanker company, certainly has room for growth, due to a growing fleet, a strong recovery in spot charter rates, and solid global economic tailwinds. However, given the company's history of dividend cuts and heavy dilution, I would recommend income investors stay away and choose the more diversified, better managed Ship Finance International. With a yield nearly as high but a track record of positive shareholder wealth creation (and dividend growth), this Fredriksen shipper is a very dividend-friendly way to play not only oil tankers but the entire shipping industry and offshore oil drilling to boot. 

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.


Adam Galas has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information

Compare Brokers