NAT - Nordic American Tankers: Downgrading On Valuation Despite Decent Q1 Results

2023-05-22 19:37:10 ET

Summary

• This Suezmax pure play reported strong first quarter results, with Nordic American Tankers Limited's average spot daily time charter equivalent ("TCE") rate eclipsing $60,000 for the first time in many years.
• Net income increased to $0.22 per share and cash provided by operating activities was an impressive $51.1 million.
• The company declared a cash dividend of $0.15 per share, unchanged from Q4/2022, which will be payable on July 6 to shareholders of record as of June 15.
• Investors need to prepare for seasonally weaker, but still decent, second quarter earnings and a resulting lower dividend of approximately $0.10 per share.
• While the odds remain in favor of a sustained period of profitable charter rates for tanker operators, I am lowering my rating on Nordic American Tankers shares to "Hold" from "Buy" based on valuation concerns and seasonally weaker near-term earnings and dividend prospects.

Note:

I have covered Nordic American Tankers Limited ( NAT ) previously, so investors should view this as an update to my earlier article on the company.

On Monday, Suezmax pure play Nordic American Tankers, or "NAT," reported strong first quarter earnings. The company's average spot daily time charter equivalent ("TCE") rate eclipsed $60,000 for the first time in many years.

Including vessels on long-term charters, NAT's average daily TCE rate came in at $51,902.

Net income increased to $0.22 per common share, and cash provided by operating activities was an impressive $51.1 million:

Despite sequentially improved results and cash flow generation, the company decided to keep the quarterly dividend at $0.15 per share. This was likely as a result of the substantial excess cash sweep provision governing the company's secured credit facility with Beal Bank and in preparation for seasonally weaker second quarter results. The dividend will be payable on July 6 to shareholders on record as of June 15.

So far in Q2, 65% of the company's available spot days have been booked at an average daily TCE rate of $42,111 mostly as a result of the rate lull witnessed in late April and early May.

Not surprisingly, management remained optimistic on the company's outlook:

The seasonal slowdown seen so far in 2Q 2023 has already bottomed, at levels that in previous years would have been perceived as peak season earnings. This goes to illustrate that the scarcity of Suezmax tankers should secure a very interesting market for NAT going forward. Seasonal variations will occur, but we expect earnings to be at higher levels than in the past due to the low orderbook of new ships.

On the demand side, last year was focused on Europe's energy challenge following the Russian invasion in Ukraine. This year will see the populations in China and other nations returning to mobility and travel in a big way. We expect the re-emergence of India and the Far East after the pandemic to have a significant effect on oil markets. This should add to an already tight market for NAT.

NAT in particular stands to benefit from the fact that the supply of Suezmax tankers will remain at historic low levels for at least the next two or three years with only 19 new ships in the world’s orderbook for Suezmax tankers. Environmental regulations, increased steel and production costs, and higher interest rates make investing in new ships quite challenging.

Assuming an average daily TCE rate of $38,000 (including contributions from vessels on long-term time charters at less-than-stellar terms) for the second quarter, I would expect net income per share to decline to approximately $0.12 and the dividend to be reduced to an estimated $0.10 per share.

With second hand tanker market values still hovering near record-highs, I would like to see the company taking advantage of the current environment. Remember, NAT still owns seven, fairly old Suezmax tankers that were built between 2003 and 2005 at reputable shipyards in Japan and Korea:

Selling all seven vessels could result in gross proceeds of close to $250 million and a reduction in the average vessel age from approximately 12 years to below 8 years.

NAT would also avoid investing in the vessels' upcoming 20-year special surveys.

On the flip side, the company's earnings power would suffer materially, but the current second hand tanker market bonanza is unlikely to go on forever.

As a result, I would expect any news of an old Suezmax tanker being sold at a price well north of $30 million to be cheered by market participants.

Please keep in mind that the company does pay a variable dividend based on net operating cash flow, which means that potential vessel sales proceeds are unlikely to be distributed to shareholders.

The most recent rally has resulted in shares trading at an approximately 10% premium to estimated net asset value ("NAV"), which isn't exactly a surprise when considering NAT's generous payouts:

To be fair, a number of peers with decent payout ratios are trading at even higher premiums, as shares continue to be chased by income investors.

Bottom Line:

Nordic American Tankers Limited reported decent fourth quarter results and kept its quarterly dividend at $0.15 per share. While investors should prepare for seasonally lower Q2 earnings and a resulting dividend reduction, odds remain in favor of a sustained period of profitable charter rates for tanker operators.

That said, with Nordic American Tankers Limited shares now trading at premium to NAV, I am lowering my rating to "Hold" from "Buy."

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