North American Tanker Stocks: A Taste of Peak Oil Demand and It’s Not Pleasant (NYSE: NAT)

introduction

Since the last discussion on Nordic American Tankers (NAT), they have again cut their dividends and thus reduced their yield to a low 2.50%. Even though they seem superior to other oil companies, they couldn’t defy the industry’s worst downturn in over two decades, as my previous article explained. A follow-up analysis is provided in this article which now includes their subsequently released financial results for the fourth quarter of 2020, which provide insight into their mid to long-term future.

Executive summary and ratings

Since many readers are likely short on time, the table below provides a very brief summary and scores for the main criteria assessed. This google doc provides a list of all my equivalent ratings as well as more information about my rating system. The following section provides a detailed analysis for readers wishing to delve deeper into their situation.

Image source: author.

* There are significant short to medium term uncertainties for the oil and gas industry as a whole, however, in the long term they will certainly face a decline as the world moves away from fossil fuels.

Detailed analysis

Nordic American Tankers cash flow

North American Tanker Notes 1

Image source: author.

Instead of simply assessing dividend coverage through earnings per share, I prefer to use free cash flow because it provides the strictest criteria and best reflects the true impact on their financial position. How much these two results differ will depend on the business in question and often comes down to the difference between their depreciation and their capital expenditures.

At first glance, 2020 appears to have been a successful year with operating cash flow of $111 million greatly exceeding the $53 million generated in 2019, but alas, that only tells half the story. Their period in 2020 saw two extremes, earlier in the year they generated boatloads of cash as historical oversupply of oil led to massive demand for floating storage. While later in 2020, they experienced a severe downturn due to reduced oil production and falling demand for tankers. In the first nine months of 2020, they generated $125 million in operating cash flow, which means they burned $14 million in cash just to operate in the fourth quarter of 2020.

This very difficult quarter was not just limited to their cash flow performance, as it was clearly reflected in their earnings on an accrual basis, as shown in the excerpt from the financial statements included below. . It can be seen that their operating profit for the fourth quarter of 2020 was a loss of $22 million compared to a profit of $21 million in the equivalent period of 2019.

Nordic American Tankers Fourth Quarter 2020 Results

Image Source: North American Tankers Announcement of fourth quarter 2020 results.

It’s no surprise that they cut their dividends to a bare minimum after this painful end to an otherwise profitable year. While they will one day see a recovery, unfortunately the timing is not practical to determine given the high underlying volatility in the daily tanker charter rates that underpin their industry, as has been discussed over in detail in my previously linked article.

While this slowdown is already far from ideal, it should only prove temporary as the oil market normalizes following the historically unprecedented Covid-19 inspired crash of 2020. This means that the greater implication of this slowdown is in fact to glimpse their possible way to a long-term future once the world passes the peak of oil demand and the maritime oil trade enters a terminal phase of decline. Although the exact timing of the peak in oil demand remains unknown, it is definitely happening and could easily happen this decade, according to the chart below.

Future Oil Demand BP Energy Outlook 2020

Image source: BP Energy outlook 2020.

Certainly, oil companies could be spared some of the initial pain, as higher-cost oil producers in North America face the majority of early supply cuts. Although given the terminal global decline, oil producers in the Middle East and elsewhere will still be forced to cut production and therefore reduce maritime oil trade.

There is no OPEC cartel for oil companies to coordinate the retirement of ships and so it stands to reason that the industry will fight with an “every man for himself” attitude to keep their ships in service in order to to capture more of the remaining market. . This will naturally force weaker firms to leave the market first, which is essentially the basic idea behind how market economies work.

It is also worth remembering that once it reaches that point where demand for oil has peaked, it will continuously decline and thus present a chilling reality that the oil tanker downturn will be permanent. Instead of having the occasional bad quarterbacks that they are currently facing, it would probably reverse the direction where they would have the occasional good quarterback that is separated by a lot more bad quarterbacks. The final and most important aspect to remember with any investment is that while they may survive, that does not necessarily mean that they will provide a suitable investment compared to other options.

Capital structure of Nordic American Tankers

Image source: author.

After their very difficult fourth quarter of 2020, their net debt rose to $299 million from its previous level of $272 million at the end of the third quarter. If nothing else, they have at least maintained a healthy cash balance which should help ensure that their liquidity remains strong and thus provides a buffer to help them stay a going business despite negative earnings.

While a quarter of negative operating cash flow is already undesirable, if it were to go on for an extended period of time, their net debt could easily quickly spiral out of control. If they were to continue to burn cash at the same rate as Q4 2020 at $14 million per quarter, that would equate to negative operating cash flow of $56 million per year and once expenses in Even modest capital included, this would see them burn over $75M in cash and thus increase their net debt by around 25%.

Leverage ratios of North American oil companies

North American Tanker Notes 2

Image source: author.

Their highly volatile earnings also complicate the assessment of their leverage as this also varies significantly. It’s no surprise that their financial metrics all deteriorated during the fourth quarter of 2020 following weakening earnings and increasing net debt, as evidenced primarily by the increase in their debt ratio. net/EBITDA at 2.59 compared to its previous result of only 1.32 and lower interest coverage. from 4.17 to just 2.59.

Due to the continued volatility of their earnings and therefore their financial metrics, their leverage was once again rated high as their net debt increased slightly. If this downturn continues into 2021, their leverage will almost certainly reach very high levels, which will prove dangerous if they fail to maintain strong liquidity.

Looking further into the medium to long term, once they reach the point where their demand peaks, the combination of permanently reduced income could eventually threaten their ability to remain a going business, especially when their net debt probably increases in tandem. At least for now, this slowdown should only prove temporary as it is related to the rebalancing of the oil market and not necessarily a permanent structural change.

Nordic American Tankers Liquidity Ratios

Image source: author.

Fortunately, their previously mentioned large cash balance has helped to ensure that their liquidity has remained strong with a current ratio of 2.51 and, more importantly, they have a cash ratio of 1.46. Looking further into the medium to long term, they could easily see this strong liquidity depleted once they hit the point of continued contraction in demand, as continued consumption of cash would eventually deplete their current cash balance. important. The extent to which this jeopardizes their ability to remain a going concern will not be known until that point is reached, but realistically it presents a very worrying prospect.

Conclusion

On the one hand, they have enough financial strength to get them through this current temporary downturn, but when looking at the medium to long term, that may not necessarily be the case once they see demand in continuous decline. While they may make an appropriate short-term upsetting rebound investment at the moment, given the bleak long-term outlook, I think a neutral rating is appropriate.

Notes: Unless otherwise noted, all figures in this article are taken from Nordic American Tankers’ 2020 Fourth Quarter Report (previously linked), 2019 20-F and 2017 20-F SEC Filings, all calculated figures were made by the author.


Source link

Felix J. Dixon