Since 2006 the oil tanker market has been a brutal place for investors. Cheap credit and record high tanker day rates (as high as $155,000/day) resulted in a massive oversupply problem. For example, in 2009 the amount of Suezmax tankers under construction was over 50% of the current global fleet.
The global financial crisis, which dried up the credit that is the lifeblood of this capital-intensive industry, combined with plunging of oil prices and a staggering oversupply of tankers, resulted in charter day rates dropping for six years, before finally reaching a bottom of $5,000/day in August of 2012.
Given that most Suezmax tankers cost around $12,000/day to operate, these prices were not sustainable and resorted in horrific losses for the industry as a whole. However, now, record oil imports from China (6.6 million barrels/day, in January 2014) coupled with both China and India working to build out strategic oil reserves, as well as a only a 9% new build rate, means that the spot charter rate for Suezmax tankers has recovered recently to a high of $82,000/day and an average of $26,300/day for the entire quarter.
With the International Monetary Fund (IMF) predicting that global economic growth will accelerate from 3% in 2013 to 3.6% in 2014 and 3.9% in 2015, global oil demand is expected to increase in 2014 by 1.2 million barrels/day (mbd), up from the 1.1 mbd increase in 2013. Teekay Tankers, one of the largest tanker companies in the world, is estimating that 2014 capacity will increase by just 1.2%, the lowest increase since 2001 and 1.8% in 2015.
This should mean a stabilization and gradual increase in tanker day rates, which represents a potential buying opportunity for income investors eager to cash in on the high dividend yields shippers are known for. This article will examine two of the higher yielding companies -- Nordic American Tankers (NAT 1.85%) and Ship Finance International (SFL 0.84%) to see if investors should consider owning either one of these high-yielding plays on the important global oil transport industry.
Nordic American Tankers: speculative dirty value
Nordic American Tankers has three arguments in its favor, including fleet growth potential, strengthening charter day rates, and its upcoming IPO of Nordic American Offshore.
In the last eight years Nordic American Tankers has increased its fleet size from three tankers to 22. Thanks to a 87% increase in charter rates in the last quarter, the company announced a 160% increase in revenue and posted a $4 million profit vs last year's $32.4 million loss.
Another growth driver is the upcoming IPO of Nordic American Offshore. Nordic American Tankers will retain 26% of the shares, and the recently announced $0.45/share Nordic American Offshore dividend (10%-11.25% forward yield) will add $2 million quarterly to Nordic American's bottom line, a 50% increase from this quarter's results.
However, investors should consider two things before buying shares of Nordic American.
First, the company has a terrible history of diluting shareholders and destroying value:
Since 2005 Nordic American Tankers has diluted shareholders by 26% CAGR and has a track record of using equity issuances to keep the company afloat and pay the dividend.
As seen in the two charts above, despite Nordic American Tankers' generous yield (management boasts of 67 consecutive quarters of dividends), total returns, including dividend reinvestments, have been negative, while competitor Ship Finance International has returned 13.3% CAGR total returns over the last 12 years vs 7.6% for the S&P 500.
And its recent IPO? Nordic American Offshore recorded just $1 million in revenue in Q4 (began operating in October) and yet plans on paying out $8 million in dividends per quarter. With seemingly unsustainable dividends, Nordic American Offshore is likely to resort to keeping itself afloat (and paying dividends) through equity issuances, just like its parent company.
Ship Finance International, part of the John Fredriksen high-yielding empire, is a more diversified and better alternative to Nordic American Tankers. With a fleet of 77 vessels diversified into offshore drilling rigs, rig supply vessles, oil tankers, chemical carriers, dry bulk carriers, container ships, and car carriers, Ship Finance has a proven track record of not just growing its fleet, but dividends and share price as well.
Analysts at S&P Capital IQ are expecting 24% CAGR EPS growth over the next 10 years and dividend growth of 15%, results that I believe Ship Finance will be able to deliver and that will, over the long term, result in market-crushing total returns.
Foolish takeaway
Nordic American Tankers, as a pure play Suezmax tanker company, certainly has room for growth, due to a growing fleet, a strong recovery in spot charter rates, and solid global economic tailwinds. However, given the company's history of dividend cuts and heavy dilution, I would recommend income investors stay away and choose the more diversified, better managed Ship Finance International. With a yield nearly as high but a track record of positive shareholder wealth creation (and dividend growth), this Fredriksen shipper is a very dividend-friendly way to play not only oil tankers but the entire shipping industry and offshore oil drilling to boot.
