NORDIC AMERICAN TANKERS Ltd annual report, Q4 FY2017

Business context and reporting period

Nordic American Tankers Limited filed this Form 20-F for the fiscal year ended December 31, 2017; it is an annual report, not a standalone 2017 Q4 report. The filing does not provide a clear set of quarterly Q4 financial results. NAT operates a fleet of Suezmax crude-oil tankers, primarily in the spot market. At year-end it operated 30 vessels and had three newbuildings under construction, with delivery expected in July, August and October 2018.

Key financial metrics

Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.

2017 included a $110.5 million vessel impairment and a $19.0 million goodwill impairment. Interest expense rose 83.2% to $20.5 million. The company recorded an $8.4 million equity-method loss from Nordic American Offshore (NAO). Dividends declared per share were $0.53 for 2017, compared with $1.37 in 2016; cash dividends paid were $54.2 million.

Material changes versus the prior comparable period

• Voyage revenue fell 16.9%; net voyage revenue declined 33.2%, and TCE rates fell 38.4%. Management attributed the weaker results to lower tanker rates, higher bunker costs and more off-hire days, including planned drydockings.
• Operating cash flow decreased by $96.0 million to $31.7 million, principally reflecting lower market rates.
• Despite a $103.7 million net equity offering, cash fell to $58.4 million. NAT repaid $55.4 million on its credit facility and had $391.6 million drawn at year-end.
• NAT issued 40 million shares at $2.75 per share in December 2017. Common shares outstanding increased from 102.0 million at 2016 year-end to 142.0 million at 2017 year-end.
• The company’s stated cash break-even rate was approximately $12,200 per vessel per day. Its estimate of fleet fair value from broker assessments was $623.0 million, versus vessel carrying value of $935.8 million; these estimates are subject to uncertainty.

Outlook, management commentary, risks and unusual items

• The tanker market downturn that began in 2016 continued through 2017. Management reported that average Suezmax earnings declined 45% year over year. First-quarter 2018 was weaker than fourth-quarter 2017: reported indicative average Suezmax earnings fell from $17,054 to $7,651 per day.
• Management said cash, expected operating cash generation and planned financing measures were expected to cover working-capital and other liquidity needs for the 12 months following the report. This assessment depends on market, operating and financing assumptions.
• The $500 million revolving credit facility was amended; NAT could not draw further, the margin increased to 6.0% from January 1, 2018, and dividends were capped at $0.03 per share per quarter, subject to corresponding debt repayment. Half of certain equity proceeds, up to $75 million, was required to repay the facility.
• A $375 million secured backstop facility was available from July 1, 2018, with a maximum interest margin of 10.5%. NAT was pursuing alternative recapitalization financing and expected to complete it by the end of Q2 2018; the filing does not establish that this financing was completed. The Board authorized the sale of two vessels in May 2018 and could authorize further fleet reductions. In a prolonged downturn, management said up to ten vessels might need to be sold to meet covenant requirements.
• Three newbuildings carried remaining commitments of $117.0 million. Ocean Yield financing was expected to fund 77.5% of each vessel’s purchase price, followed by ten-year bareboat charters and purchase obligations, with options to buy earlier.
• Management identified a material weakness in controls over the going-concern assessment; the auditor issued an adverse opinion on internal control over financial reporting. Management said remediation was ongoing and not yet fully tested. The auditor issued an unqualified opinion on the financial statements.
• Other risks include volatile spot rates, vessel values and fuel costs; debt and covenant constraints; customer and counterparty exposure; and regulatory compliance costs. NAT said 28 vessels did not meet updated ballast-water treatment guidelines, with compliance generally due from September 2019. The company also disclosed six port calls to North Sudan by four vessels during 2017 and described related sanctions-compliance risks.
• NAT expected to adopt ASC 606 on January 1, 2018. Management estimated an opening equity reduction of $5.3 million, with revenue recognition shifting from discharge-to-discharge to load-to-discharge for spot voyages; prior-year figures would not be restated.

Important facts for investors to verify

• Whether NAT completed the planned recapitalization, repaid or refinanced the existing credit facility, and complied with all amended covenants and liquidity requirements.
• Actual Q4 2017 and subsequent quarterly vessel utilization, TCE rates, off-hire days, operating cash flow and dividend coverage; the annual filing does not provide clear standalone Q4 results.
• Whether planned vessel sales occurred, how many vessels were sold, and the resulting cash proceeds, debt repayments and fleet capacity.
• Delivery, financing and charter terms for the three newbuildings, including the related purchase options and obligations.
• Progress in remediating and testing the going-concern control weakness, and the company’s updated liquidity and going-concern assessments.
• Actual vessel impairment exposure, broker valuation assumptions, and the effect of market rates and vessel values on covenants and potential further asset write-downs.
• Future dividend declarations and restrictions, including required matching debt repayments and the Board’s discretion under Bermuda law.