Business Context and Reporting Period
Company: Nordic American Tankers Limited (NAT)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Nine months ended September 30, 2011
Filing Date: January 18, 2012
NAT is an international tanker company incorporated in Bermuda, owning and operating a fleet of 20 Suezmax double-hull tankers. The company operates its vessels primarily in the spot market through cooperative arrangements. In November 2011, the company transitioned its vessels from the Gemini Tankers LLC arrangement to a new pool managed by Orion Tankers Ltd., a joint venture with Frontline Ltd.
Key Financial Metrics
| Metric (USD '000) | 9 Months Ended Sept 30, 2011 | 9 Months Ended Sept 30, 2010 |
|---|---|---|
| Voyage Revenue | 70,158 | 105,951 |
| Net Voyage Revenue | 60,610 | 105,951 |
| Net Operating Income (Loss) | (53,251) | 13,230 |
| Net Income (Loss) | (54,645) | 12,031 |
| Time Charter Equivalent (TCE) Rate | $13,400/day | $25,900/day |
| Cash and Cash Equivalents | 10,404 | 17,221 |
| Long-Term Debt (Credit Facility) | 170,000 | 75,000 |
| Undrawn Credit Facility | 330,000 | 425,000 |
Liquidity: The company maintains a $500 million revolving credit facility. As of September 30, 2011, $170 million was drawn, leaving $330 million undrawn. Management believes working capital is sufficient for present requirements.
Material Changes vs. Prior Period
- Revenue Decline: Voyage revenue decreased 33.8% to $70.2 million, and Net Voyage Revenue decreased 42.8% to $60.6 million. This was primarily driven by a 48.2% drop in the average TCE rate to $13,400 per day, reflecting a weak global tanker market.
- Operating Loss: The company reported a net operating loss of $53.3 million compared to a net operating income of $13.2 million in the prior period. This shift was significantly impacted by a one-time Loss on Contract of $16.2 million related to an arbitration award regarding a newbuilding vessel (Nordic Galaxy).
- Expense Increases: Vessel operating expenses rose 11.9% to $39.5 million due to fleet expansion (addition of two newbuildings and redelivery of bareboat chartered vessels). Voyage expenses increased to $9.5 million (from $0) due to a change in accounting presentation for four vessels operated outside cooperative arrangements.
- Debt Utilization: Borrowings under the credit facility increased from $75 million to $170 million to fund vessel acquisitions and drydocking costs.
Guidance, Outlook, and Risks
Market Outlook: Management notes that 2011 was the worst year for freight markets in almost a decade. While Suezmax earnings remained positive, they were significantly lower than 2010. The outlook for 2012 remains uncertain due to global economic conditions, particularly in Europe and China, though the International Energy Agency expects global oil demand to increase by 1.5%.
Contingencies and Legal Proceedings:
- Nordic Galaxy Arbitration: A partial arbitration award in November 2011 required NAT to pay $16.2 million in compensation to the seller of a newbuilding vessel. A final award in January 2012 made NAT responsible for approximately $1.2 million of the seller's legal costs. The seller repaid a $19.3 million loan to NAT.
- Nordic Harrier Dispute: NAT is seeking compensation from Gulf Navigation Company LLC for drydock expenses incurred after the vessel was redelivered in poor condition. Arbitration is ongoing and expected to finalize in 2012.
Capital Expenditures: The company expects to incur approximately $16.0 million in drydocking costs for eight vessels in 2012. The company also took delivery of the Nordic Zenith in November 2011, financed by company resources.
Dividends: A dividend of $0.30 per share was declared for the third quarter of 2011 and paid in December 2011.
Investor Verification Checklist
- Arbitration Finality: Verify the final financial impact of the Nordic Galaxy arbitration, specifically the $1.2 million legal fee liability and the status of the $19.3 million loan repayment.
- Market Rates: Monitor spot market TCE rates for Suezmax tankers, as the company's profitability is highly sensitive to these fluctuations.
- Credit Facility Covenants: Confirm continued compliance with loan-to-vessel value ratios and the $150 million book equity covenant under the $500 million credit facility.
- Drydocking Schedule: Track the execution and cost of the planned 2012 drydocking for eight vessels, estimated at $16 million.
- Cooperative Arrangement Transition: Assess the performance of the new Orion Tankers pool arrangement compared to the previous Gemini Tankers LLC setup.