NAT! That has been my rallying cry -- I bet the future of my firm on a large stake in the stock -- and today it is all coming to fruition. The Nordic American Tankers (NAT) story really can be distilled into one word: scarcity.
At this point commodities markets are attempting to price in a lack of storage for crude oil. Think of it as a scarcity in the commodity which is needed to combat an overabundance of a commodity.
Mind-bending or no, it is a simple fact that it is much easier for consumers to stop buying gasoline and other products refined from crude than it is for producers to lower current production. There will be more draconian measures from swing producers -- like Harold Hamm's decision last week to shut-in Continental Resources (CLR) production in the Bakken -- but those only impact the marginal flow of oil. Saudi Aramco and other state-controlled oil producers -- and even non-state controlled oil giants like Exxon Mobil XOM, Chevron (XOM) , Royal Dutch (RDS.B) , BP (BP) and Total (TOT) -- can bleed off their current production more slowly, and that is what has the world's nerds gleefully watching storage tanks.
Of course, you could rent an oil tanker and store oil there. Has anyone figured that out? Yes, they have. The U.S. Coast Guard last week posted an image of a fleet of "parked" oil tankers near the port of Long Beach in San Pedro, CA, and the internet is full of pictures of parked tankers in Singapore and other places as well.
So, the normal ebb and flow of tanker rates has been de-ebbed, and those ships are not flowing. If you were an oil trader looking to play the contango in the oil markets, you might try to book a tanker in the three large sizes --VLCC, Suezmax, Aframax -- that carry dirty (unrefined) cargoes. Good luck with that. If you were an oil buyer for a refiner in a net-energy-importing country like China, India or Japan, you might want to pre-buy your normal allotment of oil cargoes to lock in these low prices. That oil has to get from the Arabian Gulf or the U.S. Gulf Coast to the Far East and Subcontinent...and there's only one way. By oil tanker.
So, as NAT's CEO, Herbjorn Hansson told Jim Cramer on CNBC's Mad Money Friday, "We are making a lot of money at this time." His reserve needs a little hard financial math to back it up. Here goes. Hansson noted a current rate of $70,000/day for his tankers. That's for a time charter. Spot (single-voyage) rates are actually much higher. Hansson also noted an $8,000/day operating expense for NAT's fleet of homogeneous Suezmaxes.
That's an implied annual revenue run rate for NAT of $580 million versus 2019's actual figure of $317.2 million. Those higher revenues have zero impact on costs for depreciation ($64 million for full year 2019), interest expense ($38.4 million) and G&A ($13.5 million) so I will use last year's figures again. That gets you to pre-tax earnings power for NAT of $464 million. NAT has recorded a tax benefit in each of the past five years but, for this example, let's conservatively assume NAT would pay a 20% tax rate on such windfall profits.
On that basis, NAT's earnings power is $2.50 per share. As of this writing, NAT is trading at $6.94. So, with the shares on a tear, having risen 19% today and nearly 40% in the past four trading days, NAT is still trading at less than 3x P/E. How can that be? Because the earnings power I derived represents NAT's peak earnings power, not a typical annual estimate. Analysts take such a figure and try to normalize it over an economic cycle by discounting the peak figure heavily. But this is a cycle like no other. Covid-19 and the oil market gyrations (aided and abetted by the collapse of the Ponzi-like U.S. States Oil Fund ETF, (USO) ) are truly unique. So, I think NAT's "real" 2020 earnings will fulfill its peak earnings potential, and that's how we create a final scarcity: NAT shares.
With an average trading volume of 4.4 million shares and a market capitalization of $750 million, NAT shares were clearly misvalued last week. With 50 million shares traded as of 2:00 pm and a current market cap of $1.1 billion, the market is telling you that there is indeed a scarcity of NAT out there today. As portfolio managers and hedge fund traders realize the simple facts that I delineated above, that scarcity can only lead to one thing: a higher price for NAT shares.
It's a beautiful thing when it works.
