Business Context and Reporting Period
Company: Nordic American Tanker Shipping Limited (NAT)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Fourth Quarter ended December 31, 2010 (Announced February 14, 2011)
Business Overview: NAT operates a fleet of Suezmax tankers. As of the report date, the fleet consisted of 19 vessels (17 trading, 2 newbuildings expected in 2011). The company emphasizes a strategy of dividend accretive growth, maintaining a strong balance sheet with minimal net debt, and operating a homogenous fleet to maximize cost synergies.
Key Financial Metrics
| Metric | Q4 2010 | Q4 2009 | Full Year 2010 | Full Year 2009 |
|---|---|---|---|---|
| Net Voyage Revenue | $20.5 million | $23.6 million | $126.4 million | $115.4 million |
| Net Operating Income (Loss) | ($12.5 million) | ($3.8 million) | $0.8 million | $2.4 million |
| Net Income (Loss) | ($12.8 million) | ($4.3 million) | ($0.8 million) | $1.0 million |
| Basic EPS | ($0.27) | ($0.10) | ($0.02) | $0.03 |
| Operating Cash Flow (Non-GAAP) | $5.2 million | $10.5 million | $51.0 million | $63.2 million |
| Cash and Equivalents | $17.2 million | $30.5 million | $17.2 million | $30.5 million |
| Long-term Debt | $75.0 million | $0 | $75.0 million | $0 |
| Dividend Per Share | $0.25 | $0.25 | $1.70 (Annual) | $2.35 (Annual) |
Note: Operating Cash Flow is a non-GAAP measure defined as income from vessel operations before depreciation and non-cash administrative charges.
Material Changes vs. Prior Period
- Profitability Decline: Q4 2010 reported a net loss of $12.8 million compared to a loss of $4.3 million in Q4 2009. This was driven by lower average daily spot rates ($14,400 in Q4 2010 vs. $17,525 in Q3 2010) and increased General & Administrative (G&A) expenses.
- One-Time Charges: Q4 2010 G&A included a $1.5 million one-time charge related to direct costs for the "Nordic Galaxy" newbuilding, which was not delivered due to non-compliance. Additionally, $1.9 million in non-cash share-based compensation and pension costs were recorded.
- Debt Position: The company drew $75 million on its $500 million revolving credit facility during 2010 to fund newbuilding deposits, resulting in a shift from zero long-term debt in 2009 to $75 million in 2010. Management states the company maintains "no or little net debt" overall.
- Fleet Expansion: The fleet grew from 15 vessels in late 2009 to 19 vessels (including 2 newbuildings) by the end of 2010. The "Nordic Vega" was delivered in December 2010.
Guidance, Outlook, and Risks
- Dividend Policy: NAT declared a $0.25 per share dividend for Q4 2010, maintaining the same level as Q4 2009 and Q3 2010. The company remains committed to a full dividend payout policy, adjusting amounts based on spot market freight levels rather than cutting dividends entirely in soft markets.
- Market Outlook: Management notes the spot market was weak in early 2011 after a modest improvement late in 2010. The company does not predict future spot rates but expects to capitalize on low second-hand vessel prices to acquire assets inexpensively if the market remains soft.
- Arbitration Contingency: A significant contingency exists regarding the undelivered "Nordic Galaxy." NAT has a claim of $26.8 million (plus 9% interest) against the seller. This amount is recorded in current assets. Management believes they have a strong case, but a total loss could impact earnings by approximately $0.60 per share. Management asserts this will not impact the dividend going forward.
- Operational Risks: Piracy in the Gulf of Aden and Indian Ocean remains a concern. The vessel "Nordic Harrier" is in drydock until late March 2011 following a long-term contract expiration and redelivery issues.
- Equity Incentives: A new restricted share plan was established in 2011, allocating 326,000 shares (0.7% of outstanding) to management and the board with a 4-year cliff vesting period.
Investor Verification Checklist
- Arbitration Outcome: Verify the status of the $26.8 million claim against the seller of the "Nordic Galaxy" and the likelihood of recovery.
- Debt Utilization: Confirm the current drawdown on the $500 million credit facility and interest expense trends as the company moves from a cash-heavy to a leveraged balance sheet.
- Spot Rate Sensitivity: Assess the impact of current spot rates (approx. $14,400/day) against the company's stated cash break-even level of $11,300/day per vessel.
- Dividend Sustainability: Review the reconciliation of Operating Cash Flow to Net Income to ensure the $0.25 dividend is fully covered by cash generation in a low-rate environment.
- Newbuilding Deliveries: Monitor the delivery schedule and condition of the two newbuildings ("Nordic Breeze" and "Nordic Zenith") expected in 2011.