Nordic American Tankers has a fleet of 33 Suezmaxes (incl. three newbuldings) and a 23% ownership in Nordic American Offshore worth USD 15m (USD 0.15/sh). The company is currently priced at a P/NAV of 1.8 (peer avg of 0.9) and a dividend yield of 11% (peer avg 2%), which we see as challenging amidst continued falling asset prices and earnings as the cyclical trough develops. We initiate coverage with a SELL recommendation and target price of USD 4.8/sh (-32%).
In our view, the financial strategy and market pricing of NAT is rare and intriguing in the world of commodity shipping. The company has paid dividends for 79 consecutive quarters, and have achieved an impressive dividend pricing usually only found amongst Master Limited Partnerships (MLPs). The company has on average paid USD 23m above net profit in dividends since 1Q10, leading to a cumulative equity deficit of USD -674m as of 1Q17. In the same period, NAT has issued USD 618m in new equity, taking the share count from 47m to 102m. In order to maintain a steady dividend per share and a fleet of similar earnings capacity, the company will have to continue issuing an exponential number shares through the cycles. If the premium pricing to NAV was to diminish, the share growth needed to maintain the dividend would have to increase, making the exponential function even steeper.
Valuation: We calculate a current NAV of USD 4.0/sh, but see downside due to continued falling asset prices. Our target price of USD 4.8/sh is based on a weighted average of current/future NAV and mid-cycle multiples in 2019E with the added value of a high dividend yield.
Market overview: After enjoying a brief peak in 2015, oil tanker earnings were soon subdued again as overly eager owners contracted too many ships in the cyclical expansion, resulting in a rapidly increasing net fleet growth from 1Q16. The elevated supply growth persists, with a net fleet growth of 2.0% in 1Q17 alone. We forecast net fleet growth of 7% in 2017E, 4% in ‘18E and 2% in ‘19E. Although supply growth in 2019E implies a pivotal point in the cycle, recent increase in contracting (annualized YTD 5% of the fleet, 336% above same period 2016) could hamper a potential recovery in 2019.
We forecast a low but steady demand growth of 3% in 2017E, 4% in ‘18E and 5% in ‘19E. Although implied demand growth in 2016E was negative, US crude oil imports on a tonne-mile basis increased some 18% and has continued the trend YTD. However, we expect the tonne-mile growth to abate or even reverse going forward as consumption growth is muted while recent increase in the rig count will likely increase domestic production (see graphs below). Looking to China, crude oil imports on a tonne-mile basis increased around 14% in 2016E, but we expect the growth to subside somewhat as leading indicators point to a cooling of the Chinese economy.
In sum, we expect utilization to fall 3%p to 82% in 2017E, down another 1%p in ‘18E before the recovery starts in ‘19E with utilization rising 2%p to 83%. Given the forward-looking nature of share and asset prices, and the historical significant relationship between the two; we forecast 3Q17E-2Q18E to represent the share price trough. More specifically, we expect that increasing earnings will lead to rising asset and share prices from 2H18E, and believe just prior or just after the next winter season (circa Oct’17-Feb’18) to be an opportune moment to BUY, all else equal.