Is NAT Approaching Recovery?
Nordic American Tankers (NAT) published its financial results from 4Q 2013, noting an expected increase in tanker rates that the company expects to play a role in its recovery. NAT’s results are below:
In early December 2013 the Suezmax tanker rates increased significantly compared with the average for 2013. A few weeks into 2014 the rates have weakened again. We expect improved results in 1Q 2014. The timecharter results of NAT were slightly lower in 4Q 2013 than in 3Q 2013. Short term rates in the tanker market are very volatile. There are indications that we are closer to a recovery after a weak period of about five years.
During the preceding quarters in 2012 and 2013, when the market was weak, we used the opportunity to have ships in planned drydock for maintenance to ensure continued top technical quality of the vessels. It has been very advantageous to implement the comprehensive drydocking, maintenance and improvement work for many of our ships during a period of low rates, when the cost of time is lower than in a strong market.
Since the beginning of 2012, 15 of our vessels have undergone their required special surveys, which certify their seaworthiness. The technical quality of our fleet is at the top in the industry. In 2014 NAT is planning to undertake one drydocking only. Going forward, drydocking costs and off-hire (time out of service) should be significantly reduced and the number of revenue days should increase correspondingly. Over the last five years as from 2009, our cash flow from operations has been positive except for 2013.
As communicated earlier, in November 2013, NAT established Nordic American Offshore (NAO) -- a Platform Supply Vessel (PSV) company. The dividend to NAT shareholders announced January 27, 2014 has two components:
• A share dividend of NAO shares totaling $10 million worth of NAO stock. This is equivalent to $0.13 per NAT share. Distribution will take place around the time of listing on NYSE. Further details will be announced later.
• A cash dividend of $0.12 per NAT share. The record date for the cash dividend will be February 20, 2014 and the payment will take place on about March 3, 2014.
The total dividend is $0.25 compared with $0.16 in 3Q 2013 and preceding quarters in 2013.
Since NAT commenced operations in the fall of 1997, the company has paid a dividend 66 times, with total dividend payments over the period amounting to $44.67 per share including the dividend to be paid in March 2014. In addition is the dividend in kind of $0.13 per share.
During 4Q 2013 we had positive cashflow from operations of $1.9 million, compared with $2.5 million in 3Q 2013 and -$1.1 million in 4Q 2012.
The market for our Suezmaxes was initially weaker in the fourth quarter 2013 than in the third quarter 2013. During November, 2013, the Suezmax market strengthened, and in December the market achieved its highest level since 2010. Even though the market has fallen back somewhat at the end of January 2014, the general improvement will be reflected in the results for 1Q 2014. The rate increase indicates the improved fundamentals of the tanker business.
Key points to consider:
• Results for 1Q 2014 are expected to be appreciably higher than in 4Q 2013 and the average for 2013.
• Earnings per share in 4Q 2013 was -$0.31, compared with -$0.29 in 3Q 2013 and -$0.61 in 4Q 2012.
• The undrawn part of the credit facility and net working capital stood at $292 million at the end of fourth quarter.
• The previously announced cooperation with an affiliate of ExxonMobil continues to yield benefits.
• We continue to focus on cost efficiencies - both in administration and onboard our vessels.
• Ten vessels were vetted (inspected by clients) during 4Q 2013. There were 3.6 observations on average per ship, an excellent result reflecting the quality of our fleet.
• Tanker rates achieved on average for 4Q 2013 were $14,100 per day for our trading fleet, as against $16,500 per day achieved in3Q 2013.
• "Financial Vetting", focus on the financial strength of shipowners, is relevant in the tanker industry. NAT is in good financial health, which is important for our clients.
• The company was successful in establishing Nordic American Offshore Ltd with a $65 million investment in November 2013. The private placement of shares was oversubscribed and NAO's significant contracted revenue and dividend are expected to be accretive to shareholders of NAT. NAO is expected to be listed on NYSE this spring. NAO owns at this time six platform supply vessels which are serving the offshore oil installations in the North Sea. An agreement has been reached in order for the Ulstein shipyard to build two more Platform Supply Vessels of the same type, bringing the PSV fleet of NAO to eight ships.
• Our investment in NAO was financed via a follow-on offering in November 2013.
• The company does not engage in any type of derivatives.
"The Nordic American System"
Nordic American has an operating model that is sustainable in both a weak and a strong tanker market, which we believe differentiates NAT from other publicly traded tanker companies.
NAT maximizes cash flows by employing all of its vessels in the spot market, which over time yields better earnings than the time charter market.
Growth of the fleet is a central element of Nordic American Tankers.
Nordic American has one type of vessel only - the Suezmax vessel. This type of vessel can carry one million barrels of oil. The Suezmax vessel is highly versatile, able to be utilized on most long-haul trade routes. A homogenous fleet is reducing our costs which helps to keep our cash-breakeven point low.
The valuation of NAT in the stock market should not be based upon net asset value (NAV), a measure that only is linked to the steel value of our ships and not NAT as an ongoing system.
We pay our dividend from cash on hand. NAT has a cash break-even level of about $12,000 per day per vessel which is considered low for the industry. The cash break-even rate is the amount of average daily revenue our vessels would need to earn in the spot tanker market in order to cover our vessel operating expenses, cash general and administrative expenses, interest expense and all other charges.
Nordic American Offshore (NAO) will essentially have the same effective strategy as NAT, differing primarily in that NAO will have a significant component of contracted revenue.
This time the total dividend will be appreciably above the level of the previous quarters. $0.13 will be paid in the form of shares in Nordic American Offshore Ltd. (NAO). In addition there will be a cash component of $0.12 per share, bringing the total dividend to $0.25. The cash dividend will be paid on or about March 3, 2014, and the shares will be distributed around the time of NAO's listing on the NYSE. The number of NAT shares outstanding at the time of this report is 75,382,001, of which 23,000 are shares in treasury. We believe that NAO will strengthen Nordic American Tankers. We see cost synergies for both NAT and NAO, in particular as regards general and administrative costs. Our $65 million investment in NAO has been recorded as a capital asset.
Earnings per share in 4Q 2013 was -$0.31, compared with -$0.29 in 3Q 2013 and -$0.61 in 4Q 2012.
The company's operating cash flow was $1.9 million for 4Q 2013, compared with $2.5 million for 3Q 2013 and -$1.1 million in 4Q 2012.
Since the beginning of 2012, 15 of our vessels have undergone special surveys both for the so called 10 year special survey and for the 15 year special survey. These surveys and dry docking periods have taken
place in a weak tanker market. In total we have paid about $40 million for all these dockings. Since 1Q 2012, the average offhire time (out of service) for the ships that have undergone special surveys is about 90 days per ship including positioning time to and from the yard. In 2014 one of our vessels is expected to be drydocked. In a weak tanker market time is not so costly.
We continue to concentrate on keeping our vessel operating costs low, while always maintaining our strong commitment to safe operations. We pay special attention to the cost synergies of operating a homogenous fleet that consists only of double hull Suezmax tankers. As we expand our fleet, we do not anticipate that our administrative costs will rise correspondingly. In a weak tanker market other tanker companies may have challenges in keeping up technical standards as they cannot afford to spend the required funds for operations and maintenance.
As a matter of policy, the company has always kept a strong balance sheet with low net debt and a focus on limiting the company's financial risk. This policy will continue. At the end of 4Q 2013 the net debt per NAT vessel was $7 million.
The company is very well placed to take advantage of strong shipping markets, which due to our spot strategy, can be expected to be reflected in increased dividend payouts immediately.
The establishment of our Orion Tanker Pool has resulted in a closer relationship with customers and a stronger position in the market place. The previously announced commercial frame agreement with a subsidiary of ExxonMobil was extended for two years in early June 2013. Moreover, as an indication of our quality profile we do business with some of the other largest oil companies in the world on a regular basis. They demand quality both at sea and onshore.
It is a prerequisite for any expansion of the fleet that our dividend and earnings capacity per share increase. It is our belief that our cautious approach to expansion is beneficial to shareholders.
Our primary objective is to enhance total return for our shareholders, including maximizing our quarterly dividend.
The company has in place a non-amortizing credit facility of $430 million, of which $250 million has been drawn at this time. Cash on hand is $65.7 million. Net working capital, undrawn amounts of the credit facility and cash on hand amount to $292 million.
Our credit facility matures in November 2017. The company pays interest only on drawn amounts and a commitment fee for undrawn amounts.
The tightened terms of commercial bank financing and higher margins on shipping loans are challenging for shipping companies that are highly leveraged. By having little net debt, and hence a strong balance sheet, NAT is better positioned to navigate the financial seas, and we believe this is in the best interests of our shareholders.
The company has a fleet of 20 vessels at the time of this report. By way of comparison, in the autumn of 2004, the company had three vessels. Please see the fleet list below. Our vessels are in excellent technical condition.
Vessel / Dwt
Nordic Apollo / 159,999
Nordic Aurora / 147,262
Nordic Breeze / 158,597
Nordic Cosmos / 159,998
Nordic Discovery / 153,328
Nordic Fighter / 153,328
Nordic Freedom / 163,455
Nordic Grace / 149,921
Nordic Harrier / 151,475
Nordic Hawk / 151,475
Nordic Hunter / 151,400
Nordic Jupiter / 157,411
Nordic Mistral / 164,236
Nordic Moon / 159,999
Nordic Passat / 164,274
Nordic Saturn / 157,332
Nordic Sprite / 147,188
Nordic Vega / 163,000
Nordic Voyager / 149,591
Nordic Zenith / 158,645
Total dwt: 3,121,914
The arbitration hearings involving the Suezmax vessel Gulf Scandic (now named Nordic Harrier) have finished. Gulf Navigation Holding PJSC (GulfNav) was the other party in the arbitration. The case relates to the six-year bareboat charter with GulfNav of the Gulf Scandic covering the period 2004 to 2010.
When the vessel was redelivered to NAT by the charterer in October 2010, it was in very poor technical condition. The vessel had not been operated according to sound maintenance practices by the charterer. NAT had the vessel repaired in the autumn of 2010/spring 2011, and made a claim against GulfNav for costs incurred. A London arbitration panel ruled in favor of NAT at the end of January 2014 and awarded the company $10.2 million plus direct costs and calculated interest. In the maritime press there have been reports regarding the financial position of GulfNav. The award is due to be paid in cash.
The company continues to move aggressively in reducing energy consumption on the vessels.
We focus on vettings, i.e. technical inspections conducted by our clients. Vessels are subject to strict controls from oil companies before they will charter them. At NAT we have an ongoing focus on compliance with the highest standards both with the oil companies own programs and SIRE (Ship Inspection Report Program). SIRE is an independent standard report used as a risk assessment tool for tankers. The company is of the opinion that the users of the vessels should cover the significant associated costs for these surveys which the shipping companies must cover today. We are working on this on an industry level, particularly with Intertanko -- the International Association of Independent Tanker Owners.
We are pleased to note that the company has improved its operational performance further. The chart on the right shows our development in observations per inspection for the year. 4Q 2013 inspections had an average of just 3.6 observations which is an excellent result, and can be considered industry best practice. Vetting is an inspection by a client to assess the quality of a ship.
World Economy and the Tanker Market
The outlook for the world economy is important for the tanker industry. Seaborne imports of crude oil into the U.S. have decreased over the recent past. Going forward, shale oil and tar sand oil projects are expected toaffect the U.S. and Canadian oil sector. These projects are vulnerable to reduced oil prices. In terms of transportation work (ton miles), the reduced imports to the U.S. are more than outweighed by the increased imports to the Far East. European economies continue to run significant deficits. The economies of the Far East generally show continuing growth, although at a slower pace than before.
Tanker market rates are also affected by newbuildings that enter the markets, increasing the supply of vessels. Increased scrapping impacts supply in the other direction. As a matter of policy the company does not attempt to predict future spot rates. Rates may change quickly, which can lead to increased dividends.
The graph above shows the average yearly spot rates since 2000 as reported by R.S. Platou Economic Research a.s. The daily rates as reported by shipbrokers and by Imarex may vary significantly from the actual rates we achieve in the market, but these rates are in general an indication of the level of the market and its direction. In any analysis of the tanker industry, the direction of the global economy is always the most important factor.
The Suezmax fleet (excl. shuttle tankers) counts 447 vessels at the end of 4Q 2013, an increase of 13 since the beginning of the year. No vessels were delivered during the fourth quarter.
The current orderbook stands at 42 vessels from now to late 2016. This represents less than 10% of the Suezmax fleet. In 2009, the orderbook was at over 50% of the existing fleet. At the time of this report, the orderbook for 2014.