Description
Summary:
NAT shares should fall 40% as its financials are highly levered to tanker rates, which are set to fall in 2009.
Business Overview:
Nordic American Tanker Shipping owns and operates oil tankers. The company has a fleet of 12 Suezmax vessels (1m barrel oil capacity) which it operates under bareboat charter in the spot market. The business model is very simple – collect rents on vessels at the spot market and distribute all income to shareholders as dividends. The company has a clean balance sheet with no debt. The company is owned primarily by retail investors attracted to an indicated dividend yield of 20%.
Thesis:
Tanker rates are set to fall significantly in the next few months, dramatically lowering earnings and dividends and forcing retail investors to seek other income sources.
Tanker rates will fall due to simple supply/demand dynamics. Supply will increase as the fleet of Suezmax tankers is set to increase 15% in 2009. Other tanker fleets, including much larger VLCCs will also grow, so total industry floating supply is set to increase. Demand is falling due to slowing economic activity globally. In addition, OPEC has announced output cuts of which could lower vessel demand by as much as 9%. Other factors could make the supply/demand imbalance larger including more economic weakness (less oil demand) than currently expected and more available supply as storage vessels (part of the contango trade) re-enter the market.
Suezmax rates will reach approximately $55k/day in 2008. Rates were $35k/day in 2007. I will use this as a baseline for the analysis below, but rates below $35k are highly likely (analysts have recently begun reducing estimates below $35k).
Financials:
I am making the following assuming the following for 2009:
- Suezmax daily charter rates of $35,000 (which is the high end of industry and analyst estimates)
- Daily operating rates of $9,000
- 100% utilization
- 12 vessels
|
|
2004
|
2005
|
2006
|
2007
|
2008E
|
2009E
|
| |
|
|
|
|
|
|
| Suezmax rates |
66,321 |
41,721 |
43,175 |
35,314 |
55,000 |
35,000 |
| |
|
|
|
|
|
|
| Revenue |
62,675 |
86,129 |
135,348 |
139,865 |
220,000 |
150,591 |
| Operating expenses |
2,077 |
11,152 |
21,102 |
32,113 |
35,500 |
37,504 |
| Admin expenses |
298 |
8,561 |
9,451 |
12,143 |
15,829 |
16,000 |
| EBITDA |
60,299 |
66,416 |
104,795 |
95,609 |
168,671 |
97,087 |
| |
|
|
|
|
|
|
| D&A |
6,918
|
17,528 |
29,254 |
42,364 |
48,000 |
50,000 |
| Operating income |
53,381 |
48,888 |
75,541 |
53,245 |
120,671 |
47,087 |
| |
|
|
|
|
|
|
| Interest expense, net |
1,964
|
2,191 |
4,848 |
9,039 |
2,048 |
(300) |
| Net income |
55,345 |
51,079 |
80,389 |
62,284 |
122,719 |
46,787 |
| Net income + D&A |
62,263 |
68,607 |
109,643 |
104,648 |
170,719 |
96,787 |
| |
|
|
|
|
|
|
| Shares outstanding |
10,076
|
15,989 |
21,560 |
28,252 |
32,700 |
34,400 |
| |
|
|
|
|
|
|
| EPS |
$5.49 |
$3.19 |
$3.73 |
$2.20 |
$3.75 |
$1.36 |
| DPS |
$6.18 |
$4.29 |
$5.09 |
$3.70 |
$5.22 |
$2.81 |
Clearly, the financial results are very sensitive to charter rates given the nature of this business, but a move to $30k/day results in an 80% loss of EPS and dividends.
Sensitivity:
The table below shows the sensitivity to charter rates.
|
Charter
|
|
|
EPS
|
DPS
|
|
day rates
|
EPS
|
DPS
|
YOY %
|
YOY %
|
| 25,000 |
$0.15 |
$1.60 |
-96% |
-69% |
| 30,000 |
$0.75 |
$2.21 |
-80% |
-58% |
| 35,000 |
$1.36 |
$2.81 |
-64% |
-46% |
| 40,000 |
$1.97 |
$3.42 |
-48% |
-35% |
Valuation:
NAT is overvalued using a variety of measures.
Historical value metrics
The company has traded historically in the range of 10-20% dividend yield. Today it trades at approximately 20% yield. Assuming 15% dividend yield puts the share price at $13 to $23 per share.
Historical p/e has ranged from 10x-20x with current p/e at 15x. This yields a price target of $11 to $30/share. These values assume $30-40k rates.
Relative value metrics
Comps trade at 8-14x 2009E p/e and 2009E EV/EBITDA of 5-9x. At the current share price, assuming $35k rates, NAT trades at 25x 2009E p/e and 12x EBITDA, representing 75% and 33% premiums to the top end of the comp range. Assuming the high end of the comp range and $35k rates, implies the shares should trade at $19-$23/share.
Based on these numbers, I use a target price of $20, representing 40% downside from the current price. Given the earnings leverage to rates, a decline below $35k would imply significantly lower value for the shares.
Catalysts:
Tanker rates fall.
Dividends reduced beginning in Q1 2009.
Catalyst
Tanker rates fall.
Dividends reduced beginning in Q1 2009.