SHORT Nordic American Tanker Shipping (NAT)

A) Negative macro picture.  The economic news released overnight in Asia was horrendous. The bourses closed positively across the board probably only due to the spectacular rise in the U.S. earlier. 

China’s 4Q08 GDP was reported to be 6.8% (consensus estimate: 6.9%), and substantially below 9% recorded for 3Q08. Clearly, achieving 8% (the rate the government believes is required to mitigate civil strife) for 2009 will be a serious challenge. We think the observed rate of deceleration makes the feat impossible. The structure of the economy is too heavily geared toward exports to allow the announced stimulus to cover the deficiency by encouraging domestic spending. To wit, 2007 GDP was revised upward on 1/13/09 to 13% from 11.9%. That makes the current 2008 figure of 9% an even more precipitous decline. Meanwhile, 4Q GDP reading in Korea was even worse: -3.4% (-3% expectation); and a strong yen continues to be a headwind for Japanese exports: -35% in December.

B) Crowded Super-contango Trade.  Demand for oil tankers is artificially supported by the super-contango in crude oil. It is currently profitable to pay for storage by selling forward later month oil contract as cheaper storage on land is at capacity. However, the above news suggests that a recovery in oil prices is less likely despite stimulus spending planned around the world thus compromising the level of contango. We also expect OPEC to continue announcing production cuts at it next meeting on March 15, to add upward pressure to the front month contract relative to later months.

According to Frontline (FRO), as of 1/14/09, there were approximately 40 VLCCs currently being used for storage up from 6-10 last summer when the contango condition arose. 

On 1/19/09 it was reported that Morgan Stanley busted a trade to charter a VLCC for storage.

C) Supply growth overhang.  A big factor in supporting the oil tanker market in 2008 was mildly negative tonnage growth due to vessel conversions. This factor will definitely reverse this year. Conversion activty to dry bulk vessels are dead along with the dry bulk market collapse, and FPSO/FSO conversions require commitment to expensive offshore drilling projects, which obviously is also punk. Scrapping of single-hull vessels will be a factor during the seasonally slow spring/summer period ahead of the 2010 IMO mandate, but will probably continue being a nuisance for at least a couple of months.

D) Unfavorable product mix: VLCC vs. Suezmax.  NAT only owns Suezmax tankers (1 million barrel capacity) that primarily operate on the spot market, which don’t benefit directly from “contango storage.” Further, the Suezmax tanker orderbook is considerably larger. The credit crisis may considerably be slowing the activity in the shipyards, but is unlikely to reverse the scheduled delivery of vessels over the near-term (1H09). 

E) Industry facing tough y/y comps.  The 1H08 was a very strong period of tanker rates (data presented along with orderbook above). As an illustration, 1Q08 daily market rates for VLCCs began at $200,000 and was between $60-100K on balance. 2Q08 was also very strong in what’s supposed to be a seasonally weak quarter.  According to Euronav (1/20) 4Q EPS report, VLCCs in the Tankers International pool are only earning ~$70,000 1Q09 with the material benefit of storage demand described earlier. The suezmax market normally lags the VLCC market whenever supply considtion are not constrained.

F) 1/22/09 Crude inventory report expected to be very bearish.

G) Recent Negative Industry News: 1/21/09 

• Daewoo shipyard sale scrapped
• S&P cuts Overseas Shipholding Group (OSG) ratings outlook. Affirmed "BB" long-term corporate credit and senior unsecured debt ratings. 

H) Valuation.  The tanker industry's high volatility means historically CF or earnings metrics are often ignored in favor of NAV and/or dividend yield. NAV metrics of assets in current credit market conditions is unreliable, so this analysis reflects an event-driven thesis.

Risks: The conclusion of super-contango dynamics is difficult to predict, as are the benefits of the various stimulus plans announced or being contemplated around the globe. 

Disclosure: No positions. 

PALM update: Closed full position on 1/20/09 @ $7.9725. After threatening prior trading day's intraday high from a poor open, the stock fell toward $8 psychic stop more rapidly than comfort. Interpreted as indication that short squeeze/momentum trade was over; bad market day backdrop, too. +32.5% from 1/9/09 before commissions.