Nordic American Tankers (NAT -1.05%) has seen some choppy waters over the last few years through no fault of its own. Numerous factors have conspired against the shipping industry during that time, chief among them being an oversupply of vessels introduced into the market amid a global recession.
This caused The Baltic Dry Index (BDI), a composite of the Baltic Capesize, Panamax, Handysize, and Supramax indices, to suffer some wild swings that have left many reaching for the Dramamine.
While long-term charter shippers had some insulation against these moves, spot-rate shippers like DryShips (DRYS) and Nordic American Tankers were left exposed to these fluctuations. However, it now seems that some of the factors that led to these massive moves may now be subsiding. Below are three reasons to be hopeful about Nordic American Tankers' position in the market.
Capacity is decreasing
All 20 of Nordic American Tankers' vessels are Suezmax, which allows for specialization, resulting in greater economic efficiency. Currently there are 449 Suezmax vessels in service with a total of 30 completions expected between now and late 2016. This represents approximately 7% of the total fleet. This is significantly less than 2009 when orders totaled 50% of the total fleet.
While production has stabilized at more reasonable levels, retirements are also playing a key role in reducing capacity. Over the last three years, a total of 35 Suezmax tankers have been retired.
With 2013 being the worst year for Suezmax rates in the 21st century, there is speculation that further shipyard projects may be delayed or cancelled. Fast forward a few years and this condition could benefit those with high-quality and relatively newer fleets already in service, like Nordic American Tankers.
The Baltic Dry Index is near five-year lows
The best thing about spot-rate carriers is the transparency of pricing. Those that watch the BDI can often time investments in the industry by patiently waiting for low and unsustainable rates in the shipping market.
Nordic American Tankers, as mentioned earlier, is a specialist. This makes for some of the lowest costs in the industry, running at approximately $12,000/day to operate. As the BDI collapsed during the fourth quarter of 2013, Nordic American Tankers saw tanker rates received decline to $14,100/day on average. Other carriers that don't benefit from specialization and financial discipline like Nordic saw losses manifest on their balance sheets.
Eventually, if rates don't recover, those incurring losses will suspend operations; this will decrease the supply of vessels and raise charter prices. One way or another, these current BDI levels are unsustainable. Historically, Nordic American Tankers has made use of these low rate periods by dry docking ships for maintenance, leading to another form of supply reduction.
A former shipping titan, Frontline (FRO -0.91%), could be a casualty of these depressed rates. The company warned that restructuring could be an option following another loss (this time a $12.1 million whopper in the first quarter of 2014) if additional equity cannot be raised. This means that Frontline's management could turn to shareholder dilution, new loans, asset sales, or a combination of all three to meet the looming $190 million convertible bond loan coming to maturity in April 2015. With Frontline recently guiding down for the second quarter (leading to a 17% decline on that day alone), it looks like restructuring might be the only option as investors and creditors back away.
Timing swings in the BDI can produce some significant returns. In May 2013 I published an article noting that the BDI was at five-year lows; I believed then that current pricing at that level was unsustainable. By December, the BDI had rebounded, posting an almost 200% increase. For daily spot-rate carriers like DryShips, this translated into a 150% share price increase over that same time period.
Valuation
While it's hard to make a case that fundamentals look good, it can be said that Nordic American Tankers looks less bad compared to other shippers.
| Metirc | Nordic American Tanker | Industry Average |
|---|---|---|
| Price/Book | 0.86 | 1.57 |
| Yield | 11.20% | N/A |
| LT Debt/Equity | 0.29 | 1.28 |
| 5 Year Average Sales Growth Rate | 0.55% | -8.87% |
With analysts seeing a light at the end of the tunnel for Nordic American Tankers in 2015, this could be one of the few companies to make it through without too much long-term damage to its financials. The company's young fleet and strong position should allow it to capitalize when the shipping rates return to more sustainable levels.
The payoff
It's not easy to pull the trigger when so many factors appear to be plaguing an industry. Long-term investors who do their homework can take solace when buying good companies during hard times, however. While pricing is currently depressed, it won't remain that way for long. Capacity is leveling off, but demand for tankers continues to increase as emerging markets further develop. Nordic American Tankers looks to have the balance sheet to make it through these hard times. Taking advantage of these swings can make for some good deals as everyone else is running for the exits.
