What happened
Shares of oil shipper Nordic American Tankers (NAT 0.80%) fell nearly 12% by around 10:30 a.m. on May 5 before gaining back some lost ground. By mid-afternoon, the stock was down in the high single-digits.
The Suezmax owner reported a doubling of the dividend over the previous quarter after the market closed on May 4, so the sell-off might seem out of place. But when looked at within the larger oil market environment, the dividend hike actually helps explain why investors might be concerned.
So what
Nordic American Tankers's fleet of around 20 ships normally ferries oil around the world. However, the global effort to slow the spread of COVID-19, which essentially shuttered economies across the planet, has led to a swift and material drop in demand. Oil supply was already fairly high, so the energy industry has quickly found itself in a severe oversupply situation. The extra oil has filled most available storage, leading industry participants to call on Suezmax ships to jump in and become seaborne storage containers.
Image source: Getty Images
That's excellent news for Nordic American Tankers, which is able to charge extremely high rates for its ships when storage issues such as this emerge. In fact, the current market backdrop is why the company was able to double its dividend from $0.07 per share in the first quarter of 2020 to $0.14 in the second. It's also worth noting that the second-quarter dividend was more than the company's full-year dividend of $0.10 per share in 2019.
This is great news for investors, but the opportunity here is time limited. Eventually, the extra supply will be worked off, and demand for Nordic American Tankers' Suezmax fleet will return to more normal levels (and prices).
Today, investors have been taking an upbeat view of the future for supply and demand in the energy market. As economies around the world reopen, the hope is that demand will quickly return and eat away at the excess supply. Producer cutbacks, meanwhile, are expected to help the process along.
In a best-case scenario for the supply/demand equation, Nordic American Tankers' ability to charge premium prices will rapidly fade, and big dividend increases would then turn into dividend cuts. Eyeing that possibility, some investors may be choosing to capture some gains while the getting is still good, noting that the stock is up nearly 60% over the past month.
Now what
Nordic American Tankers is not a suitable choice for risk-averse investors. In fact, the current run-rate yield (annualizing the new dividend) of over 9% isn't likely to last for long. If you are a dividend-focused investor, you're probably better off avoiding this shipper. At the moment, it's really just a way to speculate on a temporary event in the oil sector.
