Have you written anything lately? That question from Drew Barrymore sets off Adam Sandler's character, Robbie Hart, in the Wedding Singer, and, for better or worse, it describes my daily existence. Writing at least 15 columns each month on the markets gives me one advantage over that monolithic, omniscient market source of information, Alphabet (GOOGL) , though. My stuff is always fresh.
Don't get me wrong, I use Google at least 50 times a day as a conduit to get information Especially on smaller stocks, though, there is just a trove of useless information out there. I actually just shook my head -- SMH for you millennial readers -- at an article in Motley Fool that purported to explain why DHT (DHT) , Frontline (FRO) and Teekay (TNK) tankers shares all rose sharply in trading last week. The article did nothing of the sort.
So, as I process the extraordinary move in Nordic American Tankers (NAT) this week, hitting a 52-week high of $9/share Monday, falling back to $6/share yesterday and trading an astonishing 233 million shares (there are about 147 million outstanding) in a three-day trading period, I have to try and keep it fresh. With my columns and NAT's CEO/founder Herbjorn Hansson's appearance on Jim Cramer's Mad Money Friday, I believe investors have been given a crash course in the fundamental virtues of NAT's fleet of 23 Suezmax tankers.
There's simply much more demand for oil storage than capacity at the present time. NAT's tankers are one means to not only transfer that oil, but to hold it and wait for a better price. The price improvement is implied by the heavy contango in the oil futures curve. It's a great place to be right now.
But, if everyone knows about NAT now -- the distribution of the hard work of my colleagues at Real Money benefits greatly from a famous presence at the top of the company (Jim was in Ironman, if you didn't know) -- what's the next NAT?
Today I have been buying shares in DHT Holdings to pair with NAT, which is still the largest holding of my firm. To put it simply, DHT is the next NAT.
Like NAT, DHT has a market capitalization of just over $1 billion and pays a strong dividend -- DHT's last payment, on February 25th, of $0.32 implies an annualized yield of 17.1% at DHT's current share price of $7.46. While both companies are run by Norwegian citizens and headquartered in Hamilton, Bermuda, DHT's fleet is quite different from NAT's
DHT's fleet consists only of the largest class of oil tankers, VLCCs, 27 of them in fact. Going into 2020 there was quite a bit of concern about the ability of shipowners to conform their fleets to the new IMO 2020 maritime regulation, which mandates a much lower sulfur content for the bunker fuel burned by ships that are, tautologically, often carrying hydrocarbons as cargoes. Not to be flip, but on April 30th nobody cares about fuel quality. They just want to find ships to hold oil.
DHT has that capacity and, as most of its ships (currently 17 out of the total fleet of 27 ships) are trading in the spot market as opposed to on long-term charters. DHT is an excellent way to play the extraordinary demand for floating oil storage caused by the Covid-19 lockdowns. With the extraordinary uplift in VLCC rates--$209,000/day last week versus an average of $24,900 for the first four months of 2019, according to Clarksons Platou -- DHT's profitability must be skyrocketing. The company estimates its operating expenses at $8,800/day and G&A expenses at $1,400/day, so we are in this extraordinarily virtuous station where DHT is making as much as $200,000/day on the majority of its fleet.
DHT's Adjusted EBITDA for Q42019 -- $116.3 million -- almost matched its total for the entire year of 2018. The first quarter will be much higher, and earnings for the second quarter (the current quarter) could easily be double that with tanker spot rates still levitating. So, a company with an equity value of $1.0 billion and net debt (as of 12/31) of about $700 million could be generating EBITDA on an annual rate of $1 billion ($250 million/quarter) in the current markets? Oh, yeah, that's how shipping economics work. I have followed this sector for decades and investors always underestimate the magnitude of the windfall profits that accrue to shipowners when rates skyrocket. Always.
DHT reports earnings after the close next Tuesday, May 5th. I am long DHT shares going into that report. As the market realizes how profitable DHT's current fleet setup is, I am hoping the market has a eureka moment with DHT shares next week just as it did this week with shares of NAT.
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