Tanker Carries a Boatload of Dividends
06/21/2007 12:00 am EST
Bryan Perry, editor of the 25% Cash Machine, says oil tanker provider Nordic American is earning big profits and paying a hefty dividend.
The oil tanker business is very attractive, and one of the leading names is paying out a dividend yield that’s currently pushing 13%. The spot market for day rates is healthy and Nordic American Tanker Shipping (NYSE: NAT) is tied to spot-market prices, more than other tanker stocks which have multi-month contracts at fixed pricing.
Nordic American’s board of directors just raised the quarterly dividend from $1.00 to $1.24, thanks to a banner [first quarter]. Operating cash flow was $36.1 million or $1.34 per share, fully supporting the $1.24 dividend.
NAT’s management estimates the average cash breakeven for the 12-vessel fleet is about $9,500 per day per vessel. The average spot market rate, according to the Imarex Tanker Index, was $41,877 per day for [the first quarter], compared with $39,727 per day for modern Suezmax tankers during the fourth quarter. The market was strong in the first quarter, with healthy rates now continuing into [the second quarter].
You can see that Nordic American is making a huge spread on the cost of operating its fleet, versus the spot market charge for its services. Such healthy profit margins bode well for a continued high-dividend payout.
Tanker companies are facing challenges in the marketplace as customers prioritize double-hulled tonnage. Nordic American believes that this development is good for the company, because NAT owns only double-hulled tankers.
Going forward during the next few years, deliveries of new tankers from shipyards can be estimated with a high degree of certainty. Shipyards are expected to operate at essentially full capacity based on their present order books, with new orders placed for Suezmax tankers typically expected for delivery in 2010 or later.
Above all, the level of the tanker market in the future is dependent on the development of the world economy—in other words, that insatiable demand for oil we see in China, Japan, Europe, India, and the United States.
Buy NAT up to $40 per share. The stock hit $41, following the announced hike in the dividend. The stock found strong support at $38. (It closed Tuesday above $39.60—Editor.) Should NAT have another dip to the low-$38 level that would be very welcome, and would constitute a great entry point.
[One caveat:] Aside from flare-ups in Nigeria, there appears to be some unspoken code of conduct between the often-contentious Middle East interest groups that there’s no messing with the oil fields and water supplies.
While it’s in no one’s interest, except maybe Al-Qaeda’s, to disrupt the oil flow, we do have three [US] carrier groups positioned in the Persian Gulf, right now, to “insure” that the movement of tanker traffic in the Strait of Hormuz is protected. You need to bear all this in mind if you decide to add this oil tanker stock to your portfolio.