While I have been following the tanker markets for many years now, Suezmax pure play Nordic American Tankers (NYSE:NAT) or “NAT” never came to my mind as a potential value investment as the shares basically always seemed to change hands at a significant premium to net asset value (“NAV”) despite the often shaky fundamentals of the company.
But with recent geopolitical events having altered the tanker markets in favor of shipowners and second-hand vessel values near decade-highs, NAT has become an interesting bet for a number of reasons:
1. Sky-High Prices for Vintage Tankers
Even after some recent disposals, the company still owns seven fairly old Suezmax tankers that were built between 2003 and 2005 at reputable shipyards in Japan and Korea:
With Russia still in the process of growing its so-called “Shadow Fleet”, prices for older tonnage have skyrocketed over the past couple of months and remained at decent levels even with charter rates weakening in recent weeks.
In the recent Q3 report, NAT disclosed net debt of $224 million per November 30, 2022. Selling all seven vessels would result in the company moving to a net cash position while reducing 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.
2. Shares finally trade at a Discount to NAV
Granted, an approximately 12% discount to estimated net asset value isn’t exactly earth-shattering but please note that my estimate does not account for cash generated in the fourth quarter:
3. Dividend set to double quarter-over-quarter
Based on expectations stated in the company’s third quarter report on November 30, the Q4 cash dividend could double sequentially to $0.10 per common share. Given the fact that December has been a rather strong month for Suezmax charter rates, the quarterly dividend might end up being even higher.
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.
Recent geopolitical events have propelled NAT into the sweet spot of the current tanker market with decent charter rates and even better second hand prices for Suezmax tankers.
As the company owns seven older tankers perfectly suited for joining the Russian Shadow Fleet, news of vessel sales anywhere close to the above-listed prices would likely be cheered by market participants.
In addition, while shares are down by more than 20% from their November highs on the heels of weaker charter rates, second hand vessel values actually increased by more than 20% over the same time frame thus resulting in NAT finally trading at a discount to net asset value.
Lastly, investors should reasonably expect a Q4 cash dividend of at least $0.10 being paid in March.
With order book levels at 40-year lows, new environmental regulations coming into play and Chinese demand returning, speculative investors with some faith in market leader Euronav’s (EURN) expectations for a sustained period of profitable charter rates should consider taking a position in NAT.