As promised in yesterday's alert, today I'm giving you my third and final portfolio choice in this week's "batch" of 25% Cash Machine buy list recommendations.
The stock we're adding is Double Hull Tankers (DHT), and it has a name that couldn't be more fitting to describe what the company does. This Channel Islands-based operator of all double hull tankers is a pure play on the global demand for crude oil, and a fine complement to our other crude-oil carrier Nordic American Tanker (NAT).
Double Hull Tankers has seven ships that cover all the world's oceans. The fleet has an overall carrying capacity of more than 1.3 million deadweight tons (DWT). It includes three very large crude carriers (VLCCs) -- ships of 100,000 and 500,000 DWT capacity -- and four Aframax tankers -- used in the basins of the Black, North, Caribbean, China and Mediterranean seas -- all, of course, double hull. Double hull tankers have become the industry standard because they are less spill-prone than their single-hull counterparts.
DHT was formed in 2005 as a subsidiary of Overseas Shipholding Group (OSG) -- a bulk shipping company that owns 103 vessels -- and acquired its fleet from OSG that year in conjunction with DHT's initial public offering. Because of this connection, the company's fleet is chartered to entities owned and operated by OSG.
All of Double Hull Tankers' vessels are locked into long-term contracts with various energy companies. But if the demand for oil surges -- and, in parts of the world such as China, it has done so during the past three years -- DHT also gets a portion of the profits its customers reap on those shipments, which in turn can easily spike DHT's earnings and profits.
Speaking of profits, total revenues for the first quarter were $20.2 million, consisting of $17.1 million in base charter hire revenue and $3.1 million in additional hire under the company's profit-sharing arrangements with Overseas Shipholding Group.
In the quarter ended March 31, 2007, DHT's three VLCCs achieved average time charter equivalent earnings in the commercial pool (a group of vessels of similar size belonging to different shipowners that are placed under one manager) of $46,700 per day compared with $52,900 in the fourth quarter of 2006. The Aframax tankers achieved $38,300 per day compared with $34,100 in the fourth quarter of 2006, also according to data from the commercial pools.
Like every shipping operator, DHT's business conditions are directly affected by the price of the underlying commodities they carry. Even though DHT's revenues have grown by one-third since 2003 -- to $87 million last year -- the company's earnings varied widely during that time because of the wild fluctuations in oil prices. Even with that kind of volatility, prices are trending higher and that's why the company can support the current dividend yield of 10.15%.
The stock price is down from its recent high of $16.75 to near $15, where it currently trades after recently paying a dividend and handing up 5 million shares in a secondary offering.
Overseas Shipping, a company five times the size of DHT, reduced its stake in Double Hull Tankers from 12.5% to 10% as a result of the offering, while the underwriters -- Merrill Lynch and UBS Investment Bank -- exercised their option to purchase 750,000 shares of DHT as part of the deal. Folks, that's a major vote of confidence by some savvy investment companies!
Take a full 3% position in Double Hull Tankers (DHT) at the $15 level and lock in that 10%-plus yield. My one-year price target for shares of DHT is $18, which will provide us with a potential 20% upside, not including dividends.
Current price: $15
52-week range: $12.25 - $16.75
Target price: $18
Dividend yield: 10.15%
Dividend Payout (Annual): $1.52
Payout Frequency: Quarterly
Ex-dividend Date: est. Aug. 24
Dividend Payment Date: est. Sept. 12
Market Cap: $450 million
I'll see you Friday with the Weekly Update, and have some more information for you about the three new securities we've added to our model portfolio this week.
Bryan Perry
Editor The 25% Cash Machine