Nordic American Tankers Limited — FY2016 Form 20-F
Reporting period: Year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing. Figures are in U.S. dollars unless stated otherwise. Financial statements were prepared under U.S. GAAP and received an unqualified audit opinion.
Business context
NAT owns and operates Suezmax crude-oil tankers, principally in the spot market, and reported 29 operating vessels at year-end, plus vessels under construction. Its fleet expansion included four secondhand vessel deliveries and one newbuilding delivery during 2016. The company’s results are therefore highly exposed to spot charter rates, voyage costs, and tanker-market conditions.
Financial results and position
| Metric | FY2016 | FY2015 |
|---|---|---|
| Voyage revenue | $357.5 million | $445.7 million |
| Net voyage revenue | $231.5 million | $287.1 million |
| TCE rate per day | $25,029 | $37,230 |
| Net operating income | $53.3 million | $128.1 million |
| Net income (loss) | $(4.5) million | $114.6 million |
| Basic and diluted EPS | $(0.05) | $1.29 |
| Cash from operating activities | $127.8 million | $174.4 million |
| Cash and cash equivalents at year-end | $82.2 million | $29.9 million |
| Credit-facility borrowings at year-end | $447.0 million | $330.0 million |
Voyage revenue fell 19.8%, while TCE declined 32.8%; increased vessel days from fleet growth partly offset the lower rate. Voyage expenses decreased 20.6%, largely due to lower bunker costs. Vessel operating expenses rose 20.5% and general and administrative expenses rose 25.6%, in part reflecting the larger fleet and higher non-cash compensation costs. Depreciation increased 10.0%.
The company recorded a $46.6 million equity-method loss relating to Nordic American Offshore (NAO), including a $37.3 million non-cash impairment that reduced NAT’s investment carrying value to $16.6 million. A $5.3 million settlement gain from the Gulf Navigation arbitration partly offset operating weakness. No vessel impairment was recorded, despite management estimating that broker-indicated aggregate vessel market values were about $373.9 million below carrying value.
Investing cash outflow was $186.8 million, mainly for vessel investment and deposits. Financing cash inflow was $111.3 million, including $120.1 million of net proceeds from the 2016 share offering and $117.0 million of additional credit-facility borrowings, offset in part by $125.7 million of dividends. Shareholders’ equity was $871.0 million and total assets were $1.35 billion at year-end.
Material changes and capital allocation
- Market conditions weakened after a strong 2015: reported average Suezmax earnings were $28,300 per day in 2016, down 38% from $45,800 in 2015. The second-half 2016 average was 35% below the first half.
- NAT issued 12.65 million common shares at $10 each in September 2016, raising approximately $119.9 million net. Year-end common shares outstanding were 101.97 million.
- Dividends paid in 2016 totaled $125.7 million, or $1.37 per share, slightly below 2015’s $1.38 per share. The fourth-quarter 2016 dividend was $0.20 per share and was paid in February 2017.
- Three Samsung Suezmax newbuildings, each approximately 157,000 dwt and costing about $56 million, were contracted for expected delivery in the second half of 2018. Total newbuilding obligations in the contractual-obligations table were $149.0 million.
Liquidity, outlook, risks, and unusual matters
- Debt covenant default and waiver: NAT was in default of the Credit Facility’s vessel-value security-ratio covenant at December 31, 2016. Lenders waived the default through May 31, 2018 and reset the required ratio to 150% at March 31, 2017 and 140% thereafter during the waiver. NAT cannot draw further on the facility, its margin increases by 2 percentage points, and dividends are capped at 85% of Adjusted Net Operating Earnings for first-quarter 2017 and 75% thereafter until compliance with the original terms. The facility’s stated maturity is December 2020; vessels secure the borrowing.
- Management said working capital was sufficient for present requirements. However, cash dividends and substantial vessel commitments compete with liquidity needs, and covenant restrictions may constrain distributions and financing flexibility.
- The filing cites market expectations of continued near-term pressure from tanker fleet growth and softer demand. Fearnleys forecast weaker rates in 2017, while describing the medium-term supply outlook as more favorable. This is third-party market commentary, not company earnings guidance. NAT reported first-quarter 2017 average Suezmax earnings of $20,039 per day, below the 2016 average.
- Management identified a material weakness in controls over the going-concern assessment required by ASU 2014-15. The company said it corrected related disclosure deficiencies before issuing the financial statements and was developing remediation procedures. Management concluded disclosure controls were ineffective at year-end, and the auditor issued an adverse opinion on internal control over financial reporting, while expressing an unqualified opinion on the financial statements.
- Other key exposures include spot-rate and vessel-value volatility, variable-rate debt (a 100-basis-point LIBOR increase was estimated to add about $3.9 million to 2016 interest expense), customer concentration (one customer accounted for 32% of 2016 revenue), environmental and operational liabilities, and reliance on continued access to financing. Three charterers represented 44% of year-end accounts receivable.
- NAO’s challenging offshore market and losses may continue to affect NAT’s equity-method results. In March 2017, NAT invested $10 million in NAO’s share offering; its ownership fell to 22.6% after that issuance. The filing notes an expected approximately $2.6 million dilution loss in first-quarter 2017.
Important facts for investors to verify
- Whether NAT meets the amended security-ratio requirements and the exact duration and conditions of the lender waiver; confirm whether dividends remain within the covenant limits.
- Current available cash, undrawn liquidity, debt margin and any additional funding needs for newbuildings and vessel operations.
- Actual spot TCE rates, fleet utilization, and the pace of tanker deliveries and scrapping relative to demand.
- Assumptions supporting vessel recoverability, given the disclosed broker-based market-value shortfall and the absence of vessel impairment charges.
- Progress remediating the material weakness in going-concern controls and whether the auditor’s internal-control conclusion changes.
- NAO’s financial condition, share value, and the implications of NAT’s post-year-end investment and reduced ownership percentage.