Nordic American Tankers: Strong Growth and a 10.3% Dividend Yield

Nordic American Tankers reported a positive net income for the first time in four years. This article discusses why the turnaround isn't over and what makes the company attractive relative to peers.

Jun 18, 2014 at 10:12AM

Nordic American Tankers (NYSE:NAT) reported strong turnaround results for the first quarter of 2014 with the net income being positive for the first time in four years. This article discusses the reason for the turnaround and the factors that will help the reversal continue.

The company's first quarter revenue surged by 161% to $45 million compared to $17 million in 1Q 2013. Further, Nordic American Tankers reported a positive EBITDA of $26 million as compared to a negative EBITDA of $6 million in 1Q 2013. The strong turnaround was primarily due to an average tanker rate of $26,300 per day per vessel in the first quarter of this year as compared to $12,400 per day per vessel in 1Q 2013.

The most important reason for the turnaround to sustain is the current Suezmax tanker rate. The average tanker rate so far in 2014 is $21,700 as compared to $12,300 for 2013.

Tanker rates are likely to remain at higher levels on increasing demand and relatively low supply of tankers after three years of low rates. The current order book for Suezmax tankers stands at 30 vessels from now to late 2016. This represents less than 7% of the Suezmax fleet. In 2009, the order book was over 50% of the existing fleet.

As per the company's first quarter report, the second reason the turnaround will continue is a relatively low cash-breakeven point of $12,000 per vessel per day. A homogenous fleet of 20 Suezmax tankers is the reason for a low breakeven point. Current day rates are substantially above the breakeven and this implies that profitability is sustainable in the coming quarters.

Nordic American Tankers also has two Suezmax vessels for delivery in August 2014. As these vessels commence operations, there will be strong revenue growth in the last two quarters of 2014 as compared to 2013.

Teekay Tankers (NYSE:TNK) is also a turnaround stock, and the company reported revenue and EBITDA growth of 37% and 138% respectively for the first quarter as compared to 1Q 2013. One of the key differentiating factors here is the dividend or distribution yield offered by the two companies. Nordic American Tankers offers a dividend yield of 10.3% while Teekay Tankers offers a distribution yield of 3.2%.

Even in terms of leverage, Nordic American Tankers trades at a debt-to-EBITDA ratio of 2.4 as compared to 5.8 for Teekay Tankers. This gives Nordic American greater financial flexibility in relatively good times. Therefore, on a relative basis, Nordic American Tankers looks attractive.

Scorpio Tankers (NYSE:STNG) is also on an expansion spree to capitalize on an improving tanker market. As of January 2014, the company had a newbuilds program of 63 vessels to be delivered by November 2016. However, in the near term, the company's outlook remains bleak with the company expecting a second quarter 2014 loss per share to be within a range of $0.00 to $0.04. I believe a good time to look at Scorpio Tankers would be 2015 when significant newbuilds are operational.

In conclusion, Nordic American Tankers, with its homogenous fleet of 22 Suezmax tankers, is a good investment option. The turnaround story, new vessels scheduled to be delivered in August 2014, and a healthy dividend yield of 10.3% makes the company attractive relative to peers. A high financial flexibility coupled with cash inflow from the recent IPO ensures continued investments for future growth. Nordic American Tankers is therefore a buy and hold in my opinion.

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Faisal Humayun 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.

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