Nordic American Offshore: Creditors Demand More Dilution

About: Nordic American Offshore Ltd. (NAO)
by: Vladimir Zernov

Nordic American Offshore reports Q1 2019 results.

The company continues burning cash, but the market is improving and dayrates are on the rise.

Creditors demand a $15 million equity raise and offer a new credit facility with new covenants.

Nordic American Offshore (NAO) has recently shocked the market with a proposed offering of up to $40 million shares. Now that the company has finally issued its Q1 2019 earnings report, investors and traders have the chance to see how things are going on for the company and why an additional equity raise might be necessary.

Investors should keep in mind that all major events for Nordic American Offshore happened after Q1, so the Q1 numbers themselves are a pure rearview mirror. Thus, we'll just briefly look at them and then turn to more interesting things. In Q1 2019, Nordic American Offshore recorded $4.6 million of revenue and net loss of $7.2 million. Vessel operating costs exceeded revenues once again, while G&A costs, depreciation, and interest expense increased pain. On March 31, 2019, the company had $2.4 million of cash, down from $8.4 million at the end of the year.

However, the most interesting things started happening in April when Nordic American Offshore reached a deal with creditors. The company acquired 9 crew boats and 2 anchor handling tug supply vessels (AHTS), diluted its shareholders by selling shares at approximately $2.78 per share in exchange for vessels and also used an equity line of credit and filed Form F-1 with a proposed offering of up to $40 million of shares (I linked to this news above). Also, as it turned out later, the company assumed $9 million of debt linked to two AHTS vessels.

Here's where the company stands after all these moves. First, Nordic American Offshore will change its name and ticker on June 7. The company's name will be Hermitage Offshore Services and the new ticker is PSV. On June 5, the company had $8.2 million of cash and 18,740,671 common shares outstanding. The debt position is as follows:

Source: Nordic American Offshore Q1 press release

The Q1 report revealed that the company has received a written commitment to change the initial credit facility to a new $132.9 million term loan facility with maturity of December 6, 2023. This will depend on "certain conditions", including a raise of a minimum of an additional $15 million of equity before January 31, 2020. This condition is clearly the reason behind Nordic American Offshore intention to sell more shares. Also, the new credit facility will have covenants:

  1. Cash and cash equivalents shall at all times be equal to or greater than (I) $12,500,000 and (II) $750,000 per vessel above 2,500 DWT
  2. Current assets shall at all times exceed current liabilities less than the current portion of long-term liabilities
  3. The ratio of net debt to total capitalization shall be no greater than 0.60 to 1.00

Also, the company revealed that two AHTS vessels will have to go through a periodic survey at a cost of $1.4 million each and that the DVB credit facility related to the vessels required raising $15 million of additional equity by October 31, 2019. Put simply, investors and traders in Nordic American Offshore should expect more dilution quite soon.

The company stated that spot rates in the North Sea already exceed $20,000 and that the three remaining PSVs (platform supply vessels) were unstacked. Nordic American Offshore reported improvements in effective dayrates for PSVs and we can expect the company to move towards cash flow neutral and then cash flow positive territory. However, the company will need a healthy margin above the $12.5 million cash requirement while the periodic surveys for AHTS vessels will put its cash down to $5.4 million. Also, Nordic American Offshore is still in the cash negative territory since it raised $9 million of cash in April and $2.4 million of cash was present on the balance sheet at the end of March, and now only $8.2 million is left - a cash burn of $3.2 million. Unstacking three vessels in Q2 contributed to costs, but a cash burn is still a cash burn. In this light, it is likely that Nordic American Offshore's upcoming equity raise will exceed the required $15 million.

In my opinion, the stock is set for roller coaster trading in the wide range we have seen this year. With a material dilution of an unknown size coming soon, it will be hard to show sustainable upside. That said, a speculative buy closer to $3.00 can be interesting since the PSV market is clearly showing signs of life.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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