Friday, March 6, 2009

Will NAT be able to keep its dividend pledge?

Herbjorn Hansson’s Nordic American Tanker Shipping (NAT) has vowed to keep coughing up dividends in the face of the economic downturn and widespread expectation that tanker spot rates will retreat. US investment bank Dahlman Rose recently cut its recommendations for Nordic American Tanker shares in view of longer-term tanker prospects. Looking at the earnings obtained at the start of 2009, it seems as if the combined impact of OPEC crude output cuts and newbuild deliveries is to some extent starting to hurt the market balance. There is a big risk that tanker rates will soften as the year progresses. NAT may face difficulties in maintaining their dividends.

NAT has the advantage of being free of term debt and good liquidity but most of its fleet is trading on the spot market.

Last month the shipowner posted a fourth quarter bottom line of US $17.20 mio compared with the US $1.68 mio it recorded a year ago. The $0.50 per share profit was just shy of the $0.54 forecast by analysts. NAT paid out $5.26 per share in dividends during 2008.

The collapse in the world economy has had detrimental impact on global oil demand. With the IEA and other analysts ' estimates having been consistently downgraded through 2008, crude requirements contracted by about 0.3% last year. This was the first negative number seen for about 15 years. For 2009, the oil demand is likely to fall close to 1.2% as a result of the weak economic developments. Subdued crude needs are also anticipated next year, with a modest 1% increase expected.

Although downward revisions in oil demand for non-OECD economies have clearly affected overall growth figures, petroleum demand from such regions is projected to mitigate the effect of negative petroleum needs from Western countries. This contributed substantially to a revival of the tanker markets in 2008. This notion is based on continued expansion in countries such as China and India. This year with the collapse in export markets but the possibility of government stimulus plans, this is much harder to assess.

One interesting factor is the effect of new refinery projects on crude oil trade patterns as they come on stream. The Jamnagar II refinery, for example, in India after a series of delays is to start up in the second quarter of this year. Its impact will likely be negative for the crude trades but positive for products. Crude tankers will be diverted from the long-haul Middle East to US and Europe trades and instead head for a short-haul trip to the more competitive Jamnagar II refinery in north-west India. Refined products from Jamnagar II will then be transported to the US and Far East, extending ton miles. NAT's fleet is smaller Suezmax tonnage and this change in trade pattern - if it develops - may have more direct impact on VLCC's.

Net increases in the world tanker fleet are more subdued than other shipping sectors. There has been less aggressive ordering and due 'phase-out' regulations for single-hull tankers, there are more stringent pressures that compel scrapping of older tonnage. A large proportion of the crude tanker orderbook is moreover being built at either newly established or greenfield shipyards. As a result of capacity constraints (equipment, labor) and (in some instances) uncertain financials, delays (if not cancelations) could be seen. This more likely to impact deliveries from 2010 and onwards.

NAT CEO Hansson estimates that cash break-even for their trading fleet of 13 vessels is below US$10,000 per day per vessel. When the spot Suezmax tanker rates are above this level, the company can be expected to pay a dividend. Latest Suezmax rates are in excess of US$ 30,000 per day and 12-months time charter rates are at similar levels. NAT still has plenty of margin for further rate erosion.

Possible stabilization of earnings in 2010 depends on significant scrapping and increased macroeconomic activity. The jury is still out thereon whether this will materialize.

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