Why a Rebounding Market for Tankers Could Make Income Investors Very Happy

Nordic American Tankers Limited has gotten hammered over the years, but it looks like there's a turnaround in the making, which could push its dividend even higher.

Jun 27, 2014 at 10:22AM

Source: Wikimedia Commons

Similar to how Southwest Airlines flies only one type of plane to bring down its maintenance costs, Nordic American Tankers Limited (NYSE:NAT) transports crude in only only type of tanker. By only using Suezmax tankers capable of carrying 1 million barrels of oil, Nordic American Tankers has been able to keep its costs down in a very tough environment for the tanking industry.      

The strategic initiatives Nordic American Tankers put in place a few years ago, such as docking its ships when rates were low so it could complete the necessary maintenance and survey requirements for its fleet, will allow it to substantially boost its bottom line as the market improves. Instead of having to dock its fleet in a stronger market, Nordic American Tankers can instead capitalize on this promising trend of higher rates and reward investors with a larger dividend, which already yields 9.75%. 

Improving rates
Nordic American Tankers Limited operates 22 Suezmax tankers, with two of those tankers recently acquired for $36.5 million each. By August of 2014, Nordic American Tankers should receive both of those tankers, which should add nicely to its cash flow if the market continues to improve. Nordic is paid based on the spot price of tanker rates, which is great when prices are high but horrible when prices are in an unstoppable free fall. 

In the first quarter of 2014, Nordic received an average rate of $26,300 a day per vessel versus $14,100 in the fourth quarter of 2013. On an annual basis, this is a very sharp uptick from the first quarter of 2013, when the average rate Nordic received was only $12,466 a day per vessel. If this trend continues, Nordic will be able to become consistently profitable once more as its average break-even cash cost is roughly $12,000 a day per vessel.

In Nordic's latest quarter it reported a positive net income for the first time in four years, as EPS came in at $0.05 versus -$0.59 in the same quarter last year. A recent initial public offering of another high paying asset Nordic American Tankers has a stake in will further strengthen its bottom line. 

North Sea
Recently Nordic American Offshore Limited (NYSE:NAO) had its IPO, which Nordic American Tankers has a sizable stake in. When Nordic American Offshore paid out its first dividend, Nordic American Tankers netted $2 million. Nordic American Offshore owns six platform supply vessels that cater to oil and gas players in the North Sea. 

To boost its payout, Nordic American Offshore purchased two additional platform supply vessels, using the proceeds from the IPO, which should allow it to increase its dividend, benefiting both players. If Nordic American Offshore continues to see strong returns on its fleet, it can purchase three more platform supply vessels from a Norwegian shipyard.

Huge dividend
Both Nordic American Tankers and Nordic American Offshore have huge dividend yields of 9.75% and 10.9% respectively (assuming Nordic American Offshore continues to pay out 45 cents per share a quarter). While many have questioned Nordic American Tankers' ability to pay out such a large dividend in light of its years of losses, it seems that it may have finally turned a corner.

In 2013, Nordic American Tankers posted an operating cash flow of negative $11.1 million, compared to a positive operating cash flow of $27.1 million in the first quarter of this year. Tanker rates did see a very sharp increase in the first quarter, and keep in mind that before the financial crisis the average rate was north of $40,000 a day, which could imply that prices have finally bottomed out. That still remains to be seen, and investors should pay very close attention to the rates Nordic receives over the next few quarters. 

Foolish conclusion
That past few years have been brutal for the tanking industry; all one has to do is look at Nordic American Tankers' stock price over the past ten years. But with a rebound in the global economy and higher oil prices pushing up tanking rates once more, the future looks much brighter for Nordic American Tankers.

Add in that management explicitly stated that higher rates will lead to a larger dividend, and this could be a very promising income play. Nordic American Offshore could also be a great income play, but investors should wait until its first quarterly report to get a better idea of what to expect going forward.

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Callum Turcan 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers