Many of you probably recall the articles I wrote for Seeking Alpha (Article 1, Article 2, Article 3) a few months ago. Since then, the company's share price has declined by a more than 30%, but we'll get to this later on. Before reading, I recommend that you read the 3 articles above.
As some of the sharper eyes have noticed, the last article is titled "part 1 of 2" but there is no part two. I'd like to shed some light on this issue and then explain how this may relate to the current situation.
Over a year ago I had a large position with NAT. The company's share price appreciated handsomely and I enjoyed the dividends. Then came a share offering that sent the price down by 8%. I knew about those offerings and I knew that this is how the company operates, but still I threw some heavier research into it, and the results were bothering.
I then wrote the CEO, Herbjorn Hansson, many of you probably saw him or heard about him (unfortunately) through Jim Cramer's show. It was the end of February 2010. I wrote him several emails questioning the company's strategy and how it is implemented. At first, there was a very laconic answer about yields the company had achieved in the past and later there was no response. After continuous harassment, he sent me to speak with his CFO, Rolf Amudnsen, who gave me even more laconic answers, in the spirit of "since year X the company had Y yield in capital appreciation and dividends" although I never asked about the company's yield, I have an old calculator at home that I use for years, and although it is very old, it can do these calculations for me. Soon after this incident I sold my entire holding in the company, one that was a very substantial in my portfolio.
Back then, I understood that management will probably not answer my questions as they treated me as a pest and not as a partner shareholder, or as one of the owners. One should be careful when dealing with such companies, as management interests can differ greatly from shareholders interests, as I demonstrated in the articles above.
I decided to "go public" and "tell the world" by writing on Seeking Alpha.
Surprisingly, After writing article number 2, I got an email from Herbjorn Hansson himself as a reply to an email I sent 7 months ago – suddenly my emails were located and answered. The answer was more detailed this time but I have already started writing in S.A. so I went on to write part one of article 3. Shortly after publishing it, I got a very unpleasant email from Herbjorn Hansson that was so cynical and personal that I was sure I hit a soft spot, I guess truth is sometimes painful. I then decided not to continue writing on this matter and did not publish part 2 of the third article. To keep my dignity and Herbjorn's, I would not publish any of these emails although many people already requested me to do so. In hebrew we have a saying: "אָמַר רַבָּא: מִכָּאן, שֶׁאֵין אָדָם נִתְפַּס בִּשְׁעַת צַעֲרוֹ" or you should not judge a person while he is very angry or loses face. Those emails will remain between me, my partners and Herbjorn.
Up to now it seems like a company you would not touch, right?
It turns out that after this long saga, management did change it ways. It became more transparent and in the following quarterly letters to shareholders, for first time, Herbjorn introduced the cap I was talking about when purchasing a vessel, the share count / vessel ratio and the willingness to use debt to finance the time between vessel purchase and equity offering to eliminate the "Ponzi Effect" as I called it in Article #2. The company started using graphs that illustrate the share/vessel ratio and its importance and implications. Moreover, the company hadn't offered any shares since then, over a year and a half (last offering was in the end of January 2010), since our correspondence has started. To me it seems more than just a co-incidence.
I remember I called my partners and I was very glad that although we did not get management to answer us an official answer regarding strategy, we did manage to influence on management to act more prudently, a fact that won us and the other shareholders a small victory. Nevertheless, I decided not to reinvest in the stock and be a bystander for time being.
This decision has paid off handsomely. Since I sold my shares the company started a secular decline of 37.5% caused primarily by a declining pricing environment in the Suezmax tanker spot price. As you can see, last week's prices are Negative in some routes. As you recall from the articles, NAT's break-even operating cost is around 10K-11K dollars per day, probably more close to 11K per day due to weaker dollar and inflation, while prices are lately are well below this threshold. NAT is the lowest cost operator in the industry.
Now a few facts on shipping spot prices:
As I previously mentioned, shipping prices are very volatile. Prices can go from zero to 100K per day in no-time. The multi-year average is 40K per day. Bear in mind that when prices are so low, banks are not allowing new loans to purchase vessels, vessel orders are cancelled, vessels in construction are converted to other types of vessels while from the other hand vessel scrapping continues at an accelerated pace. This means that at current prices, if lasts long enough, it is likely that world fleet will shrink.
Supply and demand in the shipping industry is very interesting. On the demand side we have world economy's need for oil. It is very flexible and can change rapidly – suddenly there can be a shortage of oil in a certain place in China that will divert some traffic there, suddenly the shortage can appear in Iran that needs to transport a larger oil quantity to another country. Shifts in demand are quick and can happen in days. On the supply side, we have a finite number of ships that can carry oil. If in time world fleet shrinks, and demand suddenly arrives, replenishing the fleet with new ships can take anywhere between 2-5 years (A ships building time is 2-3 years). At this small gap of a few years, prices can skyrocket to over 100K$ per day, as happened in 2008 when Suezmax spot prices soared to 225K$ per day (!!!). In economics, we call this a flexible demand and a hard supply.
Let's assume that since world fleet has increased substantially, the new price average will be 25K$ per day. It may be worth mentioning that for most operators this is very close to break-even levels, which means world fleet will not be expanding at these prices. At 25K per day, NAT's operating cash-flow will be 102 million dollars (based on 19 ships at this October and 358 ownership days per ship, a conservative assumption). As NAT distributes 100% of its operating cash-flow, this will translate in turn to a ripe dividend of 2.16$ per share, almost 11% dividend yield, without counting any capital appreciation.
This may be the lowest point of the cycle. I believe that NAT's dividend will be small in the second quarter (we shall see soon) and I think current price may represent a nice opportunity to invest in a company which its management had changed its bad ways and share price is depressed. One must remember that most shipping companies are debt burdened and this low prices environment, if prolonged enough, can likely kill the weaker ones and eliminate players from the market. If shipping industry will evaporate, NAT will be the last one standing (because it has no debt), so this is a relatively safe investment. In the worst case, they can just let their ships sit idly in the (safe) harbor and watch their competitors default.
The risk is that a daemon will be awakened and the company will revert to its bad ways and issue shares that will increase the number of shares per ship ratio. Another risk is China's coming meltdown, that will probably slow world growth and with it the demand for oil, that can affect shipping prices. I stressed "can" in the last sentence since the two are not directly linked, there can be a slow-down in world growth but still rising spot prices, as occurred in 2008.
DISCLOSURE: Not holding NAT, does not plan to hold in the next 3 days.