Nordic American Tankers Q2: Good quarter but little cause for excitement, hold (NAT)

Note:

I’ve got you covered Nordic American Tankers Limited (NYSE: NAT) previously, so investors should see this as an update to mine previous articles on the company.

Last week Suezmax pure play Nordic American Tankers Limited or “NAT” reported Q2/2024 results before expectations of consensus and declared an unchanged quarterly cash dividend of $0.12 per common share:

The company generated $32.8 million in cash flow from operations and ended the quarter with unrestricted cash of $40.8 million and debt of $288.5 million.

As a result of NAT’s generous quarterly dividend payments, net debt is slowly falling, but with the company’s liabilities representing only 20% of its assets, there is no reason for investors to be concerned.

While the results came in ahead of expectations, the average daily charter equivalent (“TCE”) rate underperformed. colleagues by a wide margin again:

However, it is important to note that with 20% of the company’s fleet currently working on lower margin time charters, NAT does not disclose average spot and time charter rates.

Additionally, the average age of the company’s fleet, at 12.8 years, is older than most of the company. Furthermore, the NAT fleet is not equipped with exhaust gas cleaning systems or “scrubbers”.

But even taking these factors into account, the company should be able to achieve average TCE rates much closer to its peers.

Since the company does not hold quarterly conference calls, the level of NAT’s underperformance is likely to remain a mystery for now.

At least in my opinion, the problem is probably the main reason behind the stock’s visible underperformance to date:

While Nordic American Tankers’ operational performance leaves much to be desired, the company remains committed to shareholder return. Since early 2023, NAT has declared nearly $150 million in quarterly cash dividends.

At prevailing share prices, the annualized dividend yield is calculated at 13%.

That said, tanker charter rates have shown some weakness in recent weeks, which I would attribute largely to seasonal patterns.

If the company’s average daily TCE rate continues to underperform peers by a wide margin, investors would be well served to prepare for a sequential quarterly dividend cut.

However, rates remain at healthy levels compared to last year and especially to historical patterns:

From a valuation perspective, Nordic American Tankers currently trades at a discount of approximately 18% to estimated net asset value (“NAV”).

However, with more diversified peer International Seaways ( INSW ) offering a similar dividend yield and trading at an even greater discount, it’s hard to make a case for Nordic American Tankers stock.

At least in my opinion, the company should consider divesting some or even all of its older ships for estimated revenue of up to $250 million:

A sale of all vessels built between 2003 and 2005 would move North American Tankers from a net debt to a net cash position.

In addition, the company would save a decent amount of cash from periodic short-term special surveys.

However, with daily operating expenses of around $9,000 per vessel, even these old Suezmax tankers are still generating healthy cash flows for NAT.

Conclusion

While Nordic American Tankers modestly beat expectations in the second quarter, the company continued to underperform peers by a wide margin.

With Q3 likely to be a seasonally weaker quarter, investors should brace for a sequential cut in the quarterly cash dividend.

While poor share price performance since the start of the year has seen the company trade at a significant discount to net asset value, the larger and more diversified International Seaways is trading at an even greater discount despite an operating performance considerably better.

With Nordic American Tankers’ operating performance unlikely to reverse anytime soon and a sequential dividend cut, I continue to see little reason to open or add to existing positions.

However, the company’s generous approach to return on equity still makes the stock a “keep“.