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Nordic American Tankers Is Heading Into A Perfect Storm

Summary

Suezmax spot rates are weak, even though significant newbuilding deliveries have just started.

The age profile of the fleet makes Nordic American Tankers (NYSE: NAT) very vulnerable in case of significant downturn in tanker rates.

Unlike before the last period of weak suezmax spot rates, when NAT was debt free, now the leverage is quite significant.

The combination of these factors may become the perfect storm for the company, when it will have to suspend the dividend.

Several months ago, I wrote an article, where I tried to explain that constant claims of the management of Nordic American Tankers (NYSE: NAT) being "very different from other tanker companies" are very misleading.

However, for a stock, like NAT, which has become a cult stock for a great number of retail investors, there has to be a very important catalyst, to bring its valuation on par with other similar companies.

In my opinion, there are several factors, which may become a perfect storm for NAT as soon as the next year. The company may have to suspend the dividend and unlike other tanker stocks, where such a move will not be a big surprise, for NAT it will be a catastrophe.

Now, I would like to describe three factors, which together may become the perfect storm for the share price of NAT.

Suezmax spot market has crashed. It is very likely that during the next several quarters, spot rates will be below the cash breakeven and NAT cash-flow will be negative.

In the last quarterly report, NAT management has disclosed:

"At the time of this report, the market is weak. We are hopeful that we may see improved rates later this year."

They did not tell how weak was the market and did not explain why it would improve later this year and for how long.

According to Clarkson Research, average Suezmax earnings are currently at about $7,000 per day, far below cash breakeven.

Source: Charles R. Weber Company, Inc.

This year, Suezmax spot rates are firmly below last year. Now, they are at the lowest level for the last several years. Partly it can be attributed to seasonal factors. However, the worst news for spot Suezmax operators like NAT is that such a dramatic fall happened right before several dozen of newly built Suezmax vessels will hit the water.

Active Suezmax newbuilding deliveries started in June this year. During the last two months, 8 new ships joined the world fleet and started offering their services. Eight additional ships does not look like a great deal for the world fleet of 441 vessels. However, I am sure that even such number of additional vessels may have played an important role for the market and it was a significant factor for the slump that started in June. As one prominent ship owner said, when there are 30 cargos and 29 ships, the market is booming. When there are 29 cargos and 30 ships, the market is crashing.

However, these 8 ships is just the beginning. According to Charles R. Weber Company, Inc., 15 additional Suezmaxes will be delivered later this year and a whopping number of 56 ships will hit the water in 2017:

Source: Charles R. Weber Company, Inc.

According to Charles R. Weber Company, Inc., current Suezmax orderbook stands at 96/449 = 21.4%. The management of NAT tries to downplay this fact, stating that in 2009, the orderbook was at over 50% of the existing fleet.

I tried to analyze the Suezmax worldwide fleet development during the last ten years. The easiest source of information are presentations of Frontline Ltd. (NYSE: FRO), which can be found here.

Based on these presentations, I have compiled a table, describing historical levels of Suezmax orderbook:

Quarter

Active fleet

Number of single-hull tankers in the active fleet

Order book

Orderbook to active fleet

Orderbook to active feet, excluding single-hull tankers

Q1/08

340

38

137

40%

29%

Q2/08

345

38

162

47%

36%

Q3/08

346

37

174

50%

40%

Q4/08

352

37

164

47%

36%

Q1/09

362

37

152

42%

32%

Q2/09

374

35

144

39%

29%

Q3/09

385

33

125

32%

24%

Q4/09

393

33

134

34%

26%

Click to enlarge

According to this data, the only time, when Suezmax orderbook reached 50% was in Q3/2008, not in 2009. I believe there is a technical mistake in press releases of NAT.

The market situation in Q3/2008 was very different from now.

First, in 2008 there was a special situation with single-hull tankers...


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