Nordic American Tankers (NYSE:NAT) is one of the few oil stocks that doesn't rise and fall along with the price of oil. As shown in the following chart, there has not been all that much correlation between Nordic American Tankers' stock price and the price of oil over the past year.
If anything, that chart suggests an almost an inverse correlation -- the worsening of oil prices over the past month has actually boosted Nordic American Tankers' stock price. In fact, in a recent letter to shareholders, company Chairman and CEO Herbjørn Hansson suggested several reasons why a low oil price is good for the tanker industry.
Lower oil prices fuel more demand
Hansson started off his letter with this statement:
Many of you have recently contacted us regarding the impact of the recent drop in the oil price on our business. Let me be very clear that the effect is positive for the world tanker business. The upswing in Suezmax tanker rates in the recent past may have to some extent to do with the decrease in the oil price. The Suezmax tanker market is strong at the time of this letter which is boding well for the 4th quarter of 2014.
In short, according to Hansson, demand for oil grows as it becomes cheaper. That's good news for Nordic American Tankers because demand for oil is much more important than the price for oil in the tanker industry, which is a volume-based business. Hansson added that "we see in the shipping market that volumes of oil being transported are increasing. This increases the worldwide demand for Suezmax tankers, which is positive for our business."
Lower oil prices lower its fuel costs
The CEO also noted that lower oil prices reduce the expense of running a tanker fleet, as the company's largest cost is the bunker fuel that ships burn in their main engines. That fuel had recently cost the company $600-$650 per ton, which quickly adds up as its 22 vessels usually burn about 40-50 tons of fuel each and every day. However, sliding oil prices drove the cost of bunker fuel down to $450 per ton. That's could cut the company's fuel cost by $3.2 million per year.
Lower costs are vitally important for Nordic American Tanker because its profits come from the difference between the tanker rates it receives on the spot market and what it costs to operate its tanker fleet. So, when tanker rates are low, its profits suffer. We saw this in the second quarter when tanker rates skidded to $12,100 per day, which wasn't all that much above the company's cash break-even costs, which in the third quarter were running at about $12,000 per day per ship. Now, with its costs running lower and tanker rates heading higher, topping $21,000 per day in the third quarter, the company can really start to make money as its operating leverage kicks into high gear.
Nordic American Tankers, and the oil tanker industry in general, is fueled by demand for oil much more than the price of oil. Falling oil prices spur demand, which could spur higher rates for the company's tankers. At the same time, those tankers cost less to run due to cheaper fuel costs. That means investors could be the big winners, as profits would be boosted by both higher revenue and lower costs, which could fuel a higher dividend from Nordic American Tankers.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.