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Why Shares of Nordic American Tankers Popped Another 20.1% Today

By Travis Hoium - Oct 8, 2019 at 4:23PM

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Tanker stocks are hot, but will the rise last?

What happened

Shares of Nordic American Tankers Limited (NAT 1.61%) continued their sharp rise in trading Tuesday, climbing as much as 21.1% in late trading. At market close, shares were near their daily highs, up 20.5% on the day.

So what

BTIG analyst Gregory Lewis upgraded Nordic American Tanker's stock to a buy rating and put a $4 price target on the stock. Shares are within shouting distance of that level, so investors shouldn't put too much weight on the price target today.

Oil tanker sailing on open water.

Image source: Getty Images.

What's better for shareholders over the long term is a sharp rise in tanker rates on the open market, which is what's driving upgrades and share jumps. Nordic American Tanker's management released a statement just yesterday that reiterated the thesis that tanker demand would return, saying: "Seeing is believing and if anyone had doubts, last week, the international shipbroking firm of Clarkson Platou Research reported the largest week-on-week increase in the history of their freight index. From Thursday to Friday last week, reported Suezmax rates jumped 60% on the day and 400% on the month!"

A number of factors, ranging from the supply disruptions in Saudi Arabia to the switch to low-sulfur fuels at the beginning of next year, are driving increased tanker demand.

Now what

The big question for investors is how long the boom times will last. Dayrates of $70,000 per day for Suezmax tankers are so high they'll lead to either an increase in shipbuilding or producers looking for alternatives like pipelines to get their product to market. There's also the risk that higher prices (partly from higher shipping costs) will lead consumers to shift to more efficient vehicles or electric alternatives.

Tanker stocks have been on a roll over the past week, and that can't be denied, but I would be wary of buying the jump in case dayrates fall suddenly and shares follow suit. The shipping business hasn't been a good way to generate long-term returns over the past decade, and I don't think a week of high dayrates will change that trend.

Travis Hoium has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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