Nordic American Tankers ($NAT) stock has fallen with weaker demand. Down 34% over 12 months, the stock has reflected the challenging operating environment, with Q4 basic and diluted earnings per share (EPS) coming in at just $0.01, representing a $0.03 miss. Revenue, which came in at $46.4mm was also lighter than expected by $5mm that's considerable in percentage terms.

• Warning! GuruFocus has detected 5 Warning Signs with NAT.

These results also point to the end of an abnormal period of particularly strong earnings and day charter rates within the sector. In late 2023, ??spot TCE (Time Charter Equivalent) rates surged partially due to conflict in the Eastern Mediterranean and Houthi activity in the Bab al Mandeb. With Suezmax tankers the largest vessels that can safely fit through the Suez Canal rerouting around southern Africa, supply grew tighter, and prices surged. However, the current environment, as Q4 earnings suggested, has normalized somewhat.

I'm starting coverage on this Suezmax operator with a Hold. The new U.S. administration and its protectionist policy may create additional volatility which could be exacerbated by Nordic American's spot market orientation and debt position. What's more, the current macroeconomic environment, as evidenced by recent results and spot TCE, isn't particularly conducive to a Buy thesis. However, there are clear supply side trends that point to stronger future earnings even if peers have more compelling valuations.

Analysts Were Overconfident

The Q4 earnings report, delivered on February 28, was disappointing. Operating expenses rose $1.8mm QoQ and $3mm YoY to $37.6mm, as net voyage revenue slumped to $46.4mm from $52mm in Q3, before rebounding to $59.3mm in Q4. The immediate impact was a drastic YoY fall in net operating income, falling from $24.6mm in Q4, to $8.8m. The rise in operating expenses were largely driven by a 56.9% increase in general and administrative expenses. Meanwhile, non-operating expenses increased by $370k or 5.2% over the period.

However, key to the equation is the average TCE for the fleet. During the fourth quarter, the TCE came in at $26,416 per day on a discharge to discharge basis. This compares with $39,170 per ship per day in Q4 of 2023, or $41,580 excluding vessels on term contracts. Understandably, this 32.5% fall in daily revenue is crucial and is key to understanding why Nordic American Tankers reported a 87.5% drop in earnings per share for the period.

Interestingly, while management notes running costs of around $9,000 per day a certain level of efficiency is gained by operating a fleet consisting of just Suezmax tankers interest expenses are quite high. In fact, with interest expenses hitting $30.7m in 2024, that equates to around $4,200 per day per vessel (based on a 20-vessel fleet as was the case in 2024). The below GF chart highlights the additional impact of this leveraged position on pretax income.

High Spot Exposure Boosts Upside But at What Risk?

In Q4, Nordic American Tankers had 14 of its 20 vessels in the spot market. This means the business is heavily exposed to market prices and market forces. It goes without saying that this can be a good thing, and it can be a bad thing. This spot market focus also compounds the company's leveraged position.

Following a new deal and improved financing agreement, seven of Nordic American's vessels are now unencumbered and are debt free. This provides the firm with more financial flexibility, but suggests that 66% of the fleet is encumbered, a factor that can contribute to volatility in an industry where revenues can be unpredictable.

Net debt stood at $210m as of Q4 ending December 31, 2024. This equated to $10.5m per vessel. However, this equation will have changed slightly with the sale of a 2003-made tanker for $23m, and the purchase of two additional tankers taking the overall fleet size to 21. The additional vessels, both of which were built in South Korea, are being delivered in March and April this year. The second vessel, built in 2016, costs around $64-69m, according to data shared by Nordic American. Both tankers are fully financed.

An Expanding Fleet in a Tight Market

The net addition of one new vessel effectively and crudely, reflects a 5% increase in capacity. This is nothing to be sniffed at, and aligns with management's aims to grow the fleet size at opportune moments. However, some investors may ask why Nordic American is expanding its fleet at a time when spot prices are clearly being pushed downwards. What's more, some may argue that President Donald Trump's tariffs will be bad for global economic growth and therefore place downward pressure on demand for oil.

Well, the answer likely lies in the increasingly tight supply of tanker vessels within the sector. Tankers, notably Suezmax tankers and especially those that are younger than 15 years and eligible for prime contracts, are in short supply. The average age of a tanker globally was 13.2 years in 2024, the oldest since 2004, according to shipping company Teekay Tankers (TNK). The average age of Nordic American's fleet will be around 12.3 years, taking into account the recent acquisitions.

Replacement is an issue. The number of vessels over 20 years old has increased by 70% since 2022, according to Riviera Maritime. Many of these older vessels have joined the ranks of Russia's shadow fleet. Typically poorly maintained, these tankers would struggle to meet the regulatory requirements and environmental standards reflected outside of the shadowy world of Russian oil.

According to Nordic American, 26 new Suezmax tankers will enter the world fleet in 2025. That's complemented by 34 in 2026, 33 in 2027 and only 4 ships have been booked for 2028. In turn, this order book of 97 vessels (current as of December 31, 2024) is equivalent to just 17% of the world's conventional Suezmax fleet, spread over the next four years. The historic average for the orderbook as a percent of the existing fleet is 20%. This should also mean that 27% of the global Suezmax fleet will be over 20 years of age by the end of 2027.

What's more, near-term supply is made more inelastic by the lack of capacity within shipyards. Many shipyards closed down during the pandemic, and activity was slow to pick up at first. This contributed to the current aged fleet, but also now contributes to a lack of new build capacity in 2025.

Nordic American also points to geopolitical tailwinds and logistical inefficiencies. This could include the impact of more protectionist U.S. trade policy, which may cause a rerouting of global supply chains. I'd also propose one contrarian view that the potential normalization of relations with Russia, while likely releasing supply chain inefficiency, would also see tens, if not hundreds, of vessels from the shadow fleet scrapped. That's simply because they're unlikely to comply with international standards and regulations.

Collectively, all of these factors point to a long-term tightness of supply. And while demand may be harder to forecast in the current economic and political environment, these supply concerns could result in longer term higher spot prices.

Insider Buying: A Vote of Confidence or Misplaced Optimism?

Insider buying is normally a good sign for investors, but there's been little share price reaction to two recent purchases by Non-Executive Vice Chairman, Alexander Hansson. Hansson bought 100,000 on both March 14 and March 18, taking his total family holding to 8.85m shares. A vote of confidence or misplaced optimism? Time will tell.

Valuation metrics provide some support for a bull thesis. The stock is currently trading at 1.07 price/book (TTM), representing a 6% discount to the company's five-year average. Likewise, while current projections indicate that the stock is trading at 13.5x forward earnings, this figure falls to 6x in 2026 and 4.6x in 2027. This long-term earnings progression is favorable versus the forward P/E five-year average of 10.1x. However, peer comparisons reveal that Nordic is trading at a modest premium. One explanation would be the company's generous dividend policy. Despite a challenging environment, the consensus dividend forecast is also very attractive. Analysts covering the stock expect dividend payments to fall in 2025 given lower earnings with a projected forward yield of 9.4%. However, an expanding dividend payment in FY2 and FY3 lead to forward yield of 14.7% and 17.2%, respectively. On paper this provides some protection against negative total returns. This premium should also be questioned in that a proportion of Nordic American's fleet five of 21 are older than 15 years. These vessels are too old to secure prime contracts and top rate TCE.

What's more, Nordic American Tankers appears to be trading in line with book value. Historic price vs book data demonstrates a 26% correlation, and investors who bought at a discount typically saw their investments perform well, while investors who bought at a premium typically saw their investments perform poorly.

Long-term trends in book value, coupled with sizable dividend payments, suggest the company's management appears to be prioritizing shareholder returns rather than long-term re-investment and growth. This is reflected by the company's declining book value, falling from $22 in 2009 to just $2.5 in 2025. During the period, Nordic American paid out $15 in dividends. While Nordic American occasionally sells older vessels to enhance financial flexibility, the pace of fleet renewal is slow and does not fully offset this decline. This indicates that a long-term buy and hold investor would have lost money over the past 15 year period.

Data also tells us that net equity value has been declining over time. In 2009 and 2010, the debt to equity ratio peaked at 0.2 and hit a nadir of 0.01. However, this figure now stands at 0.53. Investors should be wary that a slow increase in debt-to-equity could signal inefficient capital allocation or poor capital management.

It's also worth noting that around 38% of shares are owned by institutional investors, and one of the most interesting investors is quant hedge fund Renaissance Technologies (Trades, Portfolio). The Long Island-based hedge fund increased its holdings in the tanker firm by 68% in the fourth quarter, taking its total holding to around $2.5 million. This is interesting as the hugely successful and secretive firm is known for its strict adherence to its mathematical and scientific models. While I may be making an assumption here, I wonder if RenTech's models may be pointing towards long-term market tightness given the current valuation metrics don't scream Buy'. This is broadly supported by the fact that RenTech also has holdings in Scorpio Tankers ($STNG), Teekay Tankers (TNK) International Seaways ($INSW) and Pyxis Tankers ($PXS). Texas investment firm Dimensional Fund Advisors opened a significant stake in the tanker company in Q4, becoming the largest institutional investor. The shares were acquired at a price of $3.67 each, suggesting a notable unrealized loss in the months until the time of writing. The investment firm is known for its academic research-based approach.

A Value Play or Value Trap

There are several things to like about Nordic American Tankers, including its homogenous fleet and its generous dividend offering. However, higher interest expenses potentially make the stock more vulnerable to volatility and downward pressure in spot rates. This volatility seems hard to avoid with Trump in the White House. As such, this could make it hard to invest with real conviction.

Nonetheless, I'm buoyed by longer term trends in the supply of tanker vessels. With a modestly expanding fleet, Nordic American stands to benefit from a shortage of Suezmax vessels. Data suggests this could become particularly acute towards the end of the decade. For now, however, my position remains a Hold, given short-term volatility, relative valuation uncertainty, and the potential impact of Trump's policy agenda.

My Hold thesis is also broadly supported by GF value data, which points to a modest undervaluation.

This article first appeared on GuruFocus.