NAT - Nordic American Tankers: Seasonality Likely To Result In Lower Q3 Dividend - Hold

2023-09-18 10:28:19 ET

Summary

• Suezmax pure play Nordic American Tankers, or "NAT," reported decent, albeit seasonally weaker Q2 earnings with an impressive $48.0 million in cash provided by operating activities.
• The company declared a cash dividend of $0.13 per common share payable on October 5 to shareholders of record as of September 14.
• NAT's average spot daily time charter equivalent rate continues to trail larger peers, likely due to a lack of scrubber-fitted vessels and higher average fleet age.
• Based on the company's preliminary Q3 TCE rate, investors will have to prepare for a potentially substantial dividend reduction.
• While the odds remain in favor of a sustained period of profitable charter rates for tanker operators, I am keeping my "Hold" rating on Nordic American Tankers based on seasonally weaker Q3 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 articles on the company.

Three weeks ago, Suezmax pure play Nordic American Tankers, or "NAT," reported decent, albeit seasonally weaker second quarter earnings with an impressive $48.0 million in cash provided by operating activities.

The company also declared a cash dividend of $0.13 per common share, which is payable on October 5 to shareholders of record as of September 14.

NAT's average spot daily time charter equivalent ("TCE") rate came in at $43,200. Including vessels on long-term charters, the company's average daily TCE rate came calculated to $39,300.

While down meaningfully from Q1, the number was up by more than 100% on a year-over-year basis.

Seasonality will also impact the current quarter. At the time of the Q2 report, the company had fixed 57% of spot voyage days for Q3 an average TCE of $34,800.

While still highly profitable, these rates are trailing much larger peers Frontline ( FRO ) and Euronav ( EURN ) by a wide margin:

To be fair, Frontline's Suezmax spot fleet is of younger average age and mostly equipped with scrubbers, but Euronav only owns a small number of scrubber-fitted Suezmaxes with the average age of its spot Suezmax fleet being closer to NAT's vessels (albeit still younger by almost two years on average).

However, with seven out of NAT's fifteen spot vessels already between 18 and 20 years old and considering the lack of scrubbers, some of the ongoing underperformance might be explained by this.

Considering the fact that second hand tanker market values are still hovering near record-highs, I would like to see the company taking advantage of the current environment by selling some or even all of its older vessels.

Disposing of all seven tankers could result in gross proceeds of approximately $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.

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.

Valuation-wise, NAT currently trades at a slight discount to estimated net asset value ("NAV"):

Last month, the company made a $17.3 million down payment under its credit facility with Beal Bank, likely due to the 50% excess cash flow sweep provision governing the loan.

Looking at the current quarter, assuming an average daily TCE rate of $32,500 (including contributions from vessels on long-term time charters at less-than-stellar terms) for the second quarter, I would expect both net income and the quarterly dividend declining to $0.07 per share.

Bottom Line

Despite charter rates being impacted by seasonally weaker demand, Nordic American Tankers should continue to generate substantial free cash flow thus resulting in net debt decreasing and asset value per share increasing further.

While odds remain in favor of a sustained period of profitable charter rates for tanker operators, I am keeping my " Hold " rating on the shares based on expectations for a substantial sequential decline in the company's quarterly dividend.

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