Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
Shares of Nordic American Tanker (NAT -2.41%) exploded 10% higher yesterday in response to an ebullient shareholder letter from company management. And there's even better news:
Not only is Nordic American holding onto those gains Tuesday, but the crude oil shipper's stock is up another 4% in response to an analyst note echoing energy investors' enthusiasm -- and building on it.
Here's what you need to know.
What Nordic American said
Nordic American operates a fleet of 23 hulking Suezmax oil tankers, each big enough to carry between 800,000 and 1 million barrels of Persian Gulf oil, but svelte enough to carry it through the Suez Canal to customers in Europe.
Now why is this important? In an open letter addressed to its "Shareholders & Investors," Nordic American announced that "[f]rom Thursday to Friday last week, reported Suezmax rates jumped 60%." Indeed, rates are up 400% from last month, and as a result, the spot market for chartering these vessels now permits the company to charge rates as high as $68,000 per day -- versus an operating cost of just $8,000 per day.
That can only mean good things for Nordic American's profitability.
What's causing this?
As Nordic American explained, there are several factors contributing to the incredible rise in profitability of its business.
First and foremost, the drone and missile attacks that temporarily crippled Saudi Arabia's oil industry last month have spurred fears of supply interruptions around the globe, incentivizing oil consumers to stock up on oil now, in order to better ride out supply disruptions in the future. But this isn't the only reason customers are clamoring for oil tankers to haul cargo.
Next year, the shipping industry is expected to switch to use of low-sulfur fuels, and leading up to this event, "refineries around the world [are] ramping up their production to supply low sulphur fuels." This, too, requires more crude to ship to those refineries. And given a "reduced supply of new vessels" to serve this demand, companies like Nordic American that already have a large fleet available are commanding higher prices.
Finally, all of the above is coming on top of what Nordic American says was a "seasonal upturn" in demand for its services already underway -- thus turbocharging the trend.
Suffice it to say that these factors have management thinking that the market for oil carriage finally "bottomed out during 2018," has now improved, and is likely to show "further improvement going forward."
Which means even more good news for Nordic American Tankers' profits -- and its stock.
What Wall Street has to say about all of that -- and what it means to you
And Nordic American isn't the only one to think so. In today's note from equity research firm BTIG (summarized on StreetInsider.com), we learn that the 30-year average rate for chartering a Suezmax oil tanker has been roughly $30,000 per day, but "[f]rom the start of 2017 through the first half of 2019, Suezmax rates averaged just $16k/d" -- a trend that BTIG describes as a "nuclear winter for tanker rates over the last 2+ years."
Now, as recently as mid-September, rates had climbed back above $30,000 per day, returning to historical norms and confirming what management said about the "seasonal upturn" in demand for oil shipping. But lately, rates have really taken off. In a near-echo of what Nordic American management said, BTIG puts the average spot rate for chartering at "over $70k" per day, which should be more than enough to put Nordic's profits back in the black.
How long will this happy scenario continue?
It's true, says BTIG, that "the spike in rates has largely been driven by the disruptions from the attacks on Saudi Arabia combined with the sanctioning of vessels controlled by some Chinese shipping entities," as well as the other factors Nordic American mentioned. But whatever the reasons, "the cash NAT is generating is real," and will pile up on the company's balance sheet so long as these conditions persist -- and help to create "a bridge to the seasonally stronger months of the year (November-February) and next year."
Once (if) things settle down in the Persian Gulf, shipping rates should moderate. But even then, things should look pretty good for Nordic American. BTIG predicts that Suezmax rates will average $35,000 per day next year, making 2020 "an above mid-cycle year." And if the analyst is right about that, Nordic American could well generate enough earnings before interest, taxes, depreciation, and amortization (EBITDA) to equal "roughly 45% of the stock's current market cap next year" -- about $195 million, or nearly three times the company's trailing EBITDA of $71 million.
All told, Nordic American stock already looks pretty cheap at a price-to-EBITDA ratio of 6. Drop that valuation to just 2 next year, though, and Nordic American shares could be a screaming buy.