Nordic American Tankers: Thoughts On The Past, Present And Future
Summary
- Nordic American Tankers owns a fleet of Suezmax vessels.
- The current environment for Suezmax tankers is less than ideal.
- How Nordic handled the previous downturn could be an indication of actions it might take in the future.
Note: This article was originally published June 27th on Value Investor's Edge, a Seeking Alpha subscription service.
Overview
Nordic American Tankers (NYSE:NYSE:NAT) is a crude shipping company with a fleet of 30 Suezmax tankers in operation with an additional 3 on order. In its latest quarterly, NAT reported a cash break-even rate at about $11,500 per day per ship, including financial charges and G&A costs.
The 30 vessels that NAT currently operates are primarily employed in the spot market. They are therefore highly dependent on spot market charter rates.
NAT prides itself on the fact that it has paid quarterly dividends 79 times of $48.31 in aggregate per share during the period since 1997.
Current Market
The Suezmax market has entered a tumultuous period brought on by an oversupply of vessels. With the thickest orderbook of any class, this situation looks to deteriorate further over the coming quarters.
Source: Weber Week 24, 2017 Report
Allied Shipping Research noted in week 24 that an "excess of (Suezmax) tonnage continued to push for slightly softer rates."
The following week Allied stated that "things seemed to be heading towards further downward corrections for Suezmaxes."
Weber confirmed that sentiment in week 24 reporting "a long list of uncovered June units" resulting in a "sour near-term outlook."
In week 25 Weber stated that "rates remain soft in all (Suezmax) markets with participants questioning where the effective floor will be."
As noted in the chart above 2017 and 2018 will see the potential addition of 70 units with scrapping limited to just 42 units. The net gain of 28 units over that time represents a nearly 6% net increase in the present fleet. These additions are more than will be needed given future market projections, further exacerbating the oversupply problem in the segment.
However, those scrapping projections may be a bit optimistic. According to Allied Shipping's latest SnP report for week 24, only three Suezmax tankers have been scrapped so far this year. It is worth noting that 2016 only saw a total of three Suezmax tankers scrapped as well.
Second hand sales appear to confirm a bearish outlook. In 2016, a total of 19 transactions were reported in the Suezmax segment with an average age of 13 years, compared to a total of 60 in the Aframax segment and 37 VLCCs. 2017 has already seen a total of 16 in the segment but the average age has dropped to 6 years indicating a willingness on the part of owners to part with younger tonnage. These sales come as the average price of a 5-year-old Suezmax has fallen from $60m at the end of 2015 to $42.5m according to Athenian Shipbrokers May report.
Asset prices typically have a direct correlation to rates being earned and prospects for future rates.
Rates
While the entire crude tanker segment has entered a bear market, something that has been projected in my macro outlooks since 2015, the Suezmax segment has been hit the hardest, which was also expected.
First, let's take a look at Nordic's preferred source of market information, Intertnako.
Source: Intertanko April 10th, 2017
Notice that the Suezmax segment comes in at $10,329, which is below NAT's reported cash break-even rate of about $11,500 per day.
However, that information is a bit old so let's turn to some more recent reports, which reflect a variety of routes.
Source: Weber Week 25, 2017 Tanker Report
Notice the recent drop in rates has led to average earnings of just $4,650. To put this into a bit more context, let's take a look at another report showing how current rates compare to those in 2016 and 2015.
Source: Intermodal's Week 25, 2017 Market Report
For benchmark routes, Suezmax rates are significantly below that of 2016 and 2015 illustrating the severity of this decline.
As noted earlier, the oversupply problem, which is the main contributor to this rate collapse, will only intensify, further compounding this situation.
As most experienced shipping investors know, shipping is a highly cyclical business, which means this isn't the first time Nordic has experienced a tumultuous market. So let's take a look at what happened last time.
Nordic And The Previous Downturn
The last bear market started in late 2010 and lasted through part of 2014, with 2011-2013 being significantly tough years.
Source: Nordic
As mentioned earlier, Nordic prides itself on paying a dividend in order to appease its significantly large retail base. During the downturn in 2010-2013, NAT continued to pay out a dividend that wasn't supported by earnings.
Herbjørn Hansson, Chairman & CEO, championed this maverick strategy with dilution (four separate times) meaning investors weren't getting so much a return on capital as they were a return of capital.
Looking back at the 2014 20-F gives a good snapshot of this move.
Source: Nordic 2014 20-F
Notice that as losses mounted, the dividends kept coming, but so did share dilution. Over that period 38,849,615 new shares were issued representing an 83.45% increase.
The press releases for these equity offerings often cited vessel acquisitions and investments, such as Nordic American Offshore, as the main reason for the offerings. But also cited was a "strengthened capital base" out of which dividends were paid.
Of course, this move was not without its critics.
But there were some who understood as Joe Brady of Tradewinds notes:
Among those seeing the logic, however, is Wiley Griffiths, the Morgan Stanley investment banker who has guided NAT in multiple equity issues.
"What he did in hindsight was he maintained his following of yield-oriented or income-oriented investors," Griffiths says. "He said, 'I will continue to provide you with yield or return while I can'."
"He thought the cost of disenfranchising NAT from its core shareholders was more important than adhering to corporate finance logic."
Could This Happen Again?
First, let's once again put things into context using NAT's own Q1 2017 report:
The average daily time charter equivalents (“TCE”) earned for the first quarter were $22,700 per day per vessel as against the previous quarter of $21,600 per day per vessel.
The reported results were as follows:
On April 19, 2017, NAT declared a cash dividend of $0.20 per share. The dividend is expected to be paid on or about June 8, 2017 to shareholders of record as of May 22, 2017. The number of NAT shares outstanding at the time of this report is 101,969,666.
Earnings per share ("EPS") in 1Q2017 were -$0.03. In 4Q2016 and 1Q2016 the EPS were -$0.38 and $0.33, respectively. EPS does not take account of financial risk. Included in the EPS for 1Q2017 is a noncash dilution charge of -$0.02 per share related to NATs reduced holdings in NAO.
The Company's Adjusted Net Operating Earnings in 1Q2017 were $30.5m. In 4Q2016 and 1Q2016 Adjusted Net Operating Earnings were $28.2m and $55.9m, respectively.
Now let's remember that recent Suezmax spot rates are significantly below the rates reported in Q1 of 2017 and Q4 of 2016.
Finally, it is worth pointing out that on June 23rd, NAT issued the following press release:
Nordic American Tankers Limited yesterday renewed and filed a Shelf Registration Statement with the Security and Exchange Commission. Such a Shelf Registration Statement has been in place since 2004 and is renewed regularly. The Company has currently no plans to do a follow-on offering.
Ownership
However, the question then arises as to why insiders would be purchasing shares ahead of a share offering?
On June 1st, Nordic issued a press release noting that "NAT Chairman & CEO, Herbjorn Hansson and his son, Alexander, today bought 100,000 shares in NAT at an average price of $6.36 per share. In addition to the holdings of the past, following today’s transaction, the immediate Hansson family holds shares equivalent to 3.3% of NAT."
But a May 10th article from Lloyd's List struck an accusatory tone when it suggested that Mr. Hansson was engaging in "selective disclosure," which would be a disservice to those investors monitoring insider transactions for clues into the company's direction.
The article states:
It is unfortunate that Herbjorn Hansson of Nordic American Tankers likes to publicly tout his share purchases but exhibits radio silence about his share disposals. Two years ago, Mr Hansson owned 4.3% of the company's stock. Today he owns only 2.93%. Part of the reduction was due to an equity offering in September 2016. The rest was due to Mr Hansson's stock sales. The sales should have been communicated to shareholders.
This radio silence is possible since for a foreign-based company like NAT, there is no filing requirement for a shareholder owning less than 5% of shares, including company insiders.
Looking at a two-year chart of NAT shows that Mr. Hansson was correct to dispose of those shares.
Source: Google Finance
As noted above the recent purchases brought that percentage of immediate family ownership up to 3.3%. But the more suspicious investors may believe these purchases are simply a way to keep insider purchases in the public eye as more shares are unloaded without public knowledge.
Solid Financial Position?
On May 29th, Nordic issued the following press release:
NORDIC AMERICAN TANKERS LIMITED (NAT) – STRONG CASHFLOW AND SOLID FINANCIAL POSITION.
Hamilton, Bermuda, May 29, 2017
DEAR SHAREHOLDER/INVESTOR:
IN ITS MAY 8 REPORT FOR THE FIRST QUARTER OF 2017, THE NAT BOARD STRESSED THAT NAT IS IN A SOLID FINANCIAL POSITION WITH A STRONG CASHFLOW.
No, it's not a misprint. Nordic posted this PR in all caps.
Perhaps that is due to a recent admission found in the latest 20-F released on May 2nd, 2017. Here we find this tidbit.
Source: Nordic 20-F
In the latest quarterly report, NAT stated that "Net Asset Value ("NAV"), or the steel value of a vessel, is irrelevant when valuing NAT as a going concern."
However, it is apparently relevant concerning the credit facility. Remember, asset values are typically tied to rates received for those vessels.
Newbuilds
Finally, let's not forget that NAT has three new vessels scheduled for delivery in the second half of 2018. NAT states in the most recent quarterly that "30% of the total purchase price was paid up front in cash. We expect to finance the remaining 70%, which is due upon delivery of the ships, from cash on hand and increased debt."
But is more debt really a good idea here?
J. Mintzmyer of Value Investor's Edge, which for the sake of disclosure has been negative on NAT since late 2015 just below the $15 range (see link which shows a chart with buy/sell ratings), recently provided these calculations:
As of the Q4-16 financial report, NAT had net debt of $315M and remaining installment payments of just over $150M. This means NAT’s pro forma net debt is approximately 61%, which is just beyond the maximum leverage of 60% typically allowed by most secured facilities. The NAT balance sheet isn’t exactly in full-blown crisis, but it is nowhere near the super conservative image that Mr. Hansson likes to portray for NAT.
Perhaps there are two concerns for dilution going forward? The first to continue paying a dividend. The second to finance these newbuilds.
The Bottom Line
The obvious question now becomes just how much will the decreased spot rates impact revenue?
For that we'll again turn to NAT's own 20-F, which states:
"We estimate that during 2016, a $1,000 per day per vessel decrease in the spot market rate would have decreased our voyage revenue by approximately $9.2 million."
To put that into context, NAT posted revenue in 2016 of $357,451,000. This was done through a trailing average rate achieved by NAT for 2016 of $25,796 per day.
Finally, some might wonder if this downturn is temporary (only lasting a month or two), will ships already chartered out at higher rates possibly escape this low rate environment?
For that let's turn to the benchmark routes, or most popular. As noted in the three reports above from Intertanko, Weber, and Intermodal, the benchmark routes include voyages originating in West Africa and trading in the Mediterranean and Baltic regions. So let's take the longest route from West Africa to the U.S. Gulf for example. At 12.2 knots, which is the slowest expected speed for a Suezmax, the voyage would take approximately 21-23 days depending on the point of origin. But let's suppose that a cargo originates out of Angola and heads to East Asia. That journey would take approximately 33 days at the same speed.
Once again, turning to NAT's own 20-F we find this:
Voyage revenues and voyage expenses are recognized ratably over the estimated length of each voyage and, therefore, are allocated between reporting periods based on the relative transit time in each period. The impact of recognizing voyage expenses ratably over the length of each voyage is not materially different on a quarterly and annual basis from a method of recognizing such costs when incurred. Probable losses on voyages are provided for in full at the time such losses can be estimated. Based on the terms of the customer agreement, a voyage is deemed to commence upon the completion of discharge of the vessel's previous cargo and is deemed to end upon the completion of discharge of the current cargo.
As this low rate environment persists, even the longest voyages won't be long enough to insulate NAT from being exposed to significantly lower rates.
Conclusion
The popular disclaimer of "past performance is not indicative of future results" should be mentioned here. Just because massive dilution happened during the last downturn doesn't ensure it will be the case this time around. But as we all know, history is often a guide.
I have said many times before that shipping companies do not exist in a vacuum. They are subject to the macro environment in which they operate. The degree of which depends on their charter structure. Spot or short-term charters are subjected to the cyclical nature of this industry far more than owners with long-term time charters. Going forward the macro environment for the Suezmax segment looks increasingly tough and those with heavy spot exposure will feel the pinch.
Herb is a very smart man with an impressive history that started with an MBA from the Norwegian School of Economics and Business Administration and Harvard Business School. With over 40 years in the shipping business, he knows how to navigate rough seas. But, even the most seasoned CEOs can find themselves in a tough position when markets begin to turn against them.
Well the market is turning, and now the question becomes how will Mr. Hansson navigate this downturn?
Thank you for reading, and I welcome all questions/comments.
If you would like to stay up to date on my latest analysis, I invite you to follow me on Seeking Alpha (click the "Follow" button next to my profile picture at the top) as I continue to cover all aspects of maritime trade.
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Comments (35)
"As of December 31, 2016, the Company was in default with one of its debt covenants; (v) required security ratio of vessel value clause. A waiver was obtained lowering the required ratio to a level where the Company is in compliance. This waiver is effective until May 31, 2018. Under the terms of the waiver obtained, we are unable to draw further on the Credit Facility, our margin is increased by 2.0% for the period of the waiver and we cannot distribute dividends exceeding 85% of our "Adjusted Net Operating Earnings" with respect to the first quarter of 2017, and 75% of Adjusted Net Operating Earnings as from the second quarter 2017 until we are in compliance with the terms of the original Credit Facility. The Adjusted Net Operating Earnings figure is income from vessel operations before depreciation, any impairment losses, non-cash administrative charges and net financing costs.
"
Since disclosing this; 2nd hand Suezmax vessel valuations for new vessels have increased a bit, but old tankers have continued to be valued lower and lower. Recently Scrap steel prices have been spiralling down, taking 20 year old Suezmax tankers down with it. Since December 2016, NAT has also paid a big dividend in Q1 and is burning cash since early June and the fleet aged another 5 months. Long story short, in my mind the D/A of the fleet only deteriorated since the debt covenant breach. If this drags on a bit more, NAT will be vulnerable to even more debt covenant breaches and maybe that time banks will totally restrict paying dividends.Last week NAT hold an investor call. I was listening live on that call and it was a disaster. Analysts and callers were fed up with Herbjorns PR mantra's and pressed on with critical questions. Herbjorn refused to answer these questions. I think it is rather telling that there still isn't a written transcript of this call. There was one when NAT did a call half a year ago, but I guess Mr Hansson didn't want this call to get out too much.Couple of very negative NAT pieces on tradewinds last week too.
http://tinyurl.com/ybf...
http://tinyurl.com/y9d...I expect the next dividend announcement in about 2 weeks. Probably will be a cut to a 0.05-0.10$ range. With the above covenant in place and Q3 very likely ending cash flow negative, they will have to cut again to 0 in Q3. If Herbjorn will play his usual trick and do a share issue (smart if the stock trades 2-2.5x NAV) they should announce one before the next dividend cut. But maybe it is hard to find underwriters for another of NAT's share issues.
ZZ