Business Context and Reporting Period
Company: Nordic American Tanker Shipping Limited (NAT)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2010
Business Overview: NAT is a Bermuda-based international tanker company owning and operating a fleet of modern double-hull Suezmax crude oil tankers. As of December 31, 2010, the fleet consisted of 17 operating vessels and 2 newbuildings under construction. The company primarily operates its vessels in the spot market, often through cooperative arrangements managed by Gemini Tankers LLC.
Key Financial Metrics
| Metric (USD '000) | 2010 | 2009 |
|---|---|---|
| Voyage Revenues | 126,416 | 124,370 |
| Net Operating Income | 778 | 2,418 |
| Net Income (Loss) | (809) | 1,012 |
| Net Cash from Operating Activities | 57,752 | 63,195 |
| Total Assets | 1,083,083 | 946,578 |
| Total Long-Term Debt | 75,000 | - |
| Cash and Cash Equivalents | 17,221 | 30,496 |
| Dividends Paid | 79,728 | 95,431 |
Per Share Data (2010):
- Basic/Diluted Earnings Per Share: $(0.02)
- Dividends Declared Per Share: $1.70
- Shares Outstanding: 46,898,782
Material Changes vs. Prior Period
- Profitability Decline: The company reported a net loss of $0.8 million in 2010, compared to a net income of $1.0 million in 2009. Net operating income decreased by 67.8% to $0.8 million.
- Revenue Growth: Voyage revenues increased slightly by 1.6% to $126.4 million, driven by an increase in revenue days due to fleet expansion (one new vessel delivered in 2010 and full-year operation of 2009 deliveries). This offset a decrease in average spot market rates ($22,800/day in 2010 vs. $24,600/day in 2009).
- Expense Increases:
- Vessel Operating Expenses: Increased 9.2% to $47.1 million due to fleet expansion, though average daily costs per vessel decreased.
- Depreciation: Increased 13.6% to $62.5 million due to the larger fleet.
- General & Administrative (G&A): Increased 7.8% to $16.0 million. This included a one-time charge of $1.5 million related to the Nordic Galaxy newbuilding dispute and a one-time employee bonus of $0.9 million.
- Debt Position: The company drew down $75.0 million on its $500 million revolving credit facility in 2010, resulting in long-term debt of $75.0 million at year-end, compared to zero in 2009.
- Cash Flow: Net cash provided by operating activities decreased 8.5% to $57.8 million. Investing cash outflows increased to $202.8 million due to vessel acquisitions and deposits for newbuildings.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Management Commentary:
Management does not predict future spot rates. The tanker market is described as cyclical and volatile. The company expects moderate growth in global oil demand in 2011 but notes that freight rates remain subject to volatility. The company intends to operate its two newbuildings (expected delivery in late 2011) in the spot market.
Unusual Items and Contingencies:
- Nordic Galaxy Dispute: The company did not take delivery of the Nordic Galaxy newbuilding in August 2010 due to non-compliance with specifications. A $1.5 million one-time charge was recorded in 2010. The company is pursuing arbitration against the seller (First Olsen Ltd.) for a total claim of $26.8 million (including a loan to the seller). This amount is currently recorded as a prepaid asset pending the arbitration outcome expected in September 2011.
Key Risks:
- Spot Market Dependence: 16 of 17 operating vessels are in the spot market, exposing the company to significant volatility in charter rates.
- Regulatory and Environmental: Compliance with IMO regulations (MARPOL Annex VI) regarding sulfur emissions and potential future greenhouse gas regulations could increase operating costs.
- Geopolitical: Risks include piracy (Gulf of Aden), political instability, and sanctions (e.g., Iran).
- Financing: The company relies on a $500 million credit facility. Covenants require maintaining book equity of at least $150 million and restrict dividend payments if in default.
Investor Verification Checklist
- Arbitration Outcome: Verify the status and potential resolution of the $26.8 million claim against First Olsen Ltd. regarding the Nordic Galaxy vessel.
- Spot Rate Sensitivity: Assess the impact of current and projected spot market rates on the company's ability to cover operating costs and service debt, given the high exposure to spot charters.
- Dividend Sustainability: Confirm that the company's cash flow from operations remains sufficient to support its dividend policy, especially given the net loss in 2010 and the drawdown of credit facilities.
- Newbuilding Deliveries: Monitor the delivery schedule and condition of the two newbuildings from Samsung Heavy Industries expected in late 2011.
- Debt Covenants: Verify continued compliance with the $150 million book equity covenant and loan-to-value ratios under the credit facility.