Nordic American Tanker Shipping's Q3 Report
Nordic American Tanker Shipping Ltd. (NYSE: NAT) announced that the dividend for 3Q10 was $0.25 per share compared with $0.10 per share for 3Q09. The full pay out dividend policy will continue. The dividend essentially follows the spot tanker market. The company has a very strong balance sheet.
We expect that the fleet of NAT will reach a minimum of 20 vessels by the end of 2011. We have no plans to tap the equity markets to fund this expansion, since the company has ample financial resources. The company will pay the dividend on or about December 3, 2010, to shareholders of record as of November 22, 2010. Since the autumn of 1997, when the company's first three vessels were delivered, NAT has always paid a quarterly dividend; the total dividends paid through the third quarter of 2010 amount to $41.59 per share.
Going forward the company retains focus on accretive growth through acquisitions and on keeping the average age of the fleet low. The company has acquisitions under active review.
The Key points:
• We will continue our full dividend payout policy. The Board has declared a dividend of $0.25 per share for 3Q10. The operating cash flow was $11.2m in 3Q10 compared with $3.8m in 3Q09.
• Earnings per share in 3Q10 were -$0.12 as compared with -$0.28 in 3Q09.
• In August 2010, NAT did not accept delivery of a newbuilding from Bohai Shipyard because the vessel had major deficiencies and thus was not in a deliverable condition as stipulated under our contract. The seller does not agree with the Company and arbitration is under way.
• Our 16 trading vessels are now in the Gemini suezmax cooperative arrangement. We are pleased with this cooperation which provides for efficiency in our commercial operations.
• The Gulf Scandic -- now Nordic Harrier -- has been on a fixed contract for 6 years. The vessel was redelivered to us in October and is now in drydock.
• The Company does not engage in any type of derivatives.
• So far in 4Q10, the spot suezmax tanker market rates have decreased. It is expected that the volatility in the tanker spot rates will continue and rates may change quickly and unexpectedly.
Fleet Expansion and Accretion
There are now indications in the market that prices for second hand vessels have softened. Should this development continue, we shall be in a position to acquire further vessels inexpensively compared to historical levels. Such acquisitions would increase the dividend capacity of the Company. It is a prerequisite for any expansion of the fleet of the Company that the dividend and earnings capacity per share shall increase.
The company is also in a good position to take advantage of strong shipping markets, which will mean increased dividend payouts.
At present vessel values, the Company has ample financial capacity to increase its fleet by several more vessels without tapping the equity market.
The company will continue to keep a strong balance sheet with no or little net debt. However, in a weaker market environment the company is prepared to add some debt to the balance sheet, assuming a slightly higher financial risk. This does not imply any change in the strategy of the Company and non-retiring debt continues to be an integral part of the business model of Nordic American.
With all vessels operating in the spot market, the company is in a position to reap the benefits of a potential upswing in the tanker market. When the market is down we do not "cut" the dividend, we adjust it, depending upon the spot market freight level.
The above is based on 355 income days per vessel per year. The net debt is about $7m per vessel with a cash break-even level of $11,300 per day per vessel for a 20 vessel fleet. The same numbers for a 24 vessel fleet are $16m per vessel and $12,300 per day per vessel. The numbers show the substantial dividend capacity of NAT.
When the freight market is above the cash break-even level, the company can be expected to pay a dividend. The breakeven rate is the amount of average daily revenues our vessels would need to earn in the spot market in order to cover our vessel operating expenses, voyage expenses, if any, cash general and administrative expenses, interest expense and other financial charges.
The annual spot rates as reported by R.S. Platou Economic Research a.s. show that during the last 10 years up to the end of 2009, 7 years have produced about $40,000 on average per day per vessel or more. This is reflected in the graph later in this report.
Typically, our dividend correlates with the suezmax spot freight rates. Going forward, we can expect that spot suezmax freight rates may fluctuate in an unpredictable manner.
The lack of commercial bank financing and higher margins on shipping loans are challenging for debt-laden shipping companies. By having no or little net debt, NAT is better positioned to navigate the financial seas, as we believe that is in the best interests of our shareholders.
Our primary objective is to maximize total return(1) to our shareholders, including maximizing our quarterly cash dividend.
The company has further acquisitions under evaluation and will work to continue to strengthen its position compared with that of its competitors.
The board has declared a dividend of $0.25 per share in respect of 3Q10 to shareholders of record as of November 22, 2010 compared with $0.10 per share for 3Q09. The average number of shares outstanding for the third quarter of 2010 was 46,898,782 -- the same as at the end of 2Q10. The market capitalization of the Company stood at $1.3 billion as of November 5, 2010.
The company's operating cash flow(2) was $11.2m for 3Q10, compared to $3.8m for 3Q09.
We consider our general and administrative costs per day per vessel to be at a low level. We also continue to concentrate on keeping our vessel operating costs low, while always maintaining our commitment to safe vessel operations. We focus on cost advantages of operating a homogenous fleet.
At the time of this report, the company has no net debt and has a revolving credit facility of $500m. The credit facility, which matures in September 2013, is not subject to reduction by the lenders and there is no obligation to repay principal during the term of the facility. The Company pays interest only on drawn amounts and a commitment fee for undrawn amounts.
Several publicly traded tanker companies have significant net debt, which could make it difficult for them to buy vessels in a weak market.
The company previously had a stock option plan for its directors, officers and employees which was terminated in August 2009. The company established that stock option plan in 2004, when the company had a fleet of only three vessels and the vessels were just coming off their original bareboat charters with BP (BP). By contrast, the Company today has a fleet of 19 suezmax tankers, and is one of the world's largest listed independent tanker owners. Accordingly, our Board of Directors is evaluating modest equity incentive programs which would provide appropriate incentives and be in the best interests of the company and our shareholders.
As reported, the company refused to take delivery of a newbuilding for reasons given in the section below. $1.3m has been incurred and has been capitalized pending outcome of the ongoing arbitration which is expected to go on well into 2011. The parent company (First Olsen Ltd.) of the seller has not repaid an amount under an on demand guarantee that the parent company of the seller has provided in favour of our company. The guarantee covers a loan our company has extended to the seller. This amount of $26.8m is included in current assets pending the outcome of the arbitration.
We are entitled to 9% p.a. interest of the outstanding amount pending the outcome of the arbitration.
The company has 16 trading vessels.
By way of comparison, in the autumn of 2004, the company had three vessels; at the end of 2005 the company had eight vessels; and at the end of 2006 the company had 12 vessels. At the end of 2009 we had 15 vessels in operation. At the end of September 30, 2010 we have 16 vessels in operation. The company is expected to have a fleet of minimum 20 vessels by the end of 2011. Please see the fleet list below. We expect that the expansion process will continue and that further vessels will be added to our fleet.
In early August we did not accept delivery of the newbuilding Nordic Galaxy, because the vessel had not been demonstrated to comply with the specifications and the contract. Accordingly, NAT did not take delivery because the vessel was affected by major deficiencies and was not in a deliverable condition under the contract. This vessel will not join our fleet. The seller declined several requests from us to rectify the deficiencies, and elected to cancel the contract with us. NAT will seek to recover in full all payments made to the seller under the contract and any losses which NAT may incur as a consequence of the seller's failure to deliver the vessel according to the contract.
The Nordic Harrier (ex Gulf Scandic) was redelivered to the company in October this year and went directly into dry dock for overhaul after a 6 year bareboat charter to Middle East interests. The drydock period could last up to December 2010 after which the vessel will be employed in the Gemini suezmax cooperation.
Total offhire for 3Q10 was 14 days for our fleet.
World Economy and the Tanker Market
In our quarterly reports to shareholders we have often stressed the significance of the development of the world economy for the tanker industry. The outlook for the world economy is presently uncertain. The tanker markets rates are also affected by newbuildings which have entered the markets. As a matter of policy the Company does not attempt to predict future spot rates.
The average daily rate for our spot vessels was $17,525 per day net to us during 3Q10 compared with $28,800 per day for 2Q10.
The graph above shows the average yearly spot rates since 2000 and the rates for 1Q10, 2Q10 and 3Q10 as reported by R.S. Platou Economic Research a.s. The rates as reported by shipbrokers and by Imarex may vary from the actual rates we achieve in the market, but these rates are in general a good indication of the company's earnings.
On September 23, 2010 the New York Stock Exchange Commission presented its final report on Corporate Governance. The Commission achieved consensus on 10 core principles. These principles include a) building long-term sustainable growth in shareholder value for the corporation as the board`s fundamental objective, b) the critical role of management in establishing proper corporate governance, c) good corporate governance should be integrated with the company`s business strategy and objectives and d) transparency for corporations and investors, sound disclosure policies and communication beyond disclosure. We believe the principles presented are key elements of good corporate governance and we believe that the company is in compliance with these principles.
Strategy going forward
We believe that the operating model of the company is working to the benefit of our shareholders. Financial turmoil and depressed shipping markets may represent attractive opportunities for expansion.
Our objective is to have a strategy that is flexible for both a strong market and a weak market. If the market is strong, good results and dividends can be expected. If the market is weaker, dividends will be lower. However, if rates remain low, the company is in a position to buy vessels inexpensively by historical standards, paving the way for even higher dividends when the market strengthens again. In this way, the company has covered both scenarios.
Our policy is to grow when it is profitable and accretive to do so; that is, after an acquisition of vessels or other forms of expansion, the company should be able pay a higher dividend per share and produce higher earnings per share than had such an acquisition not taken place.
We believe that our full dividend payout policy will continue to enable us to achieve a competitive risk adjusted cash yield compared with that of other tanker companies.
We encourage investors wishing to receive dividends and to have exposure to the tanker sector to assess our model and invest in our company. Our company is well positioned. To the best of our ability we shall endeavor to safeguard and further strengthen this position for our shareholders in a deliberate and transparent way.