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

Callum Turcan
June 27, 2014

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 ligh