Nordic American Tankers Review
Board: Value Hounds
After thinking about it, I decided on Nordic American Tankers (NAT) as the second tanker idea for review in 2012.
In a previous thread, I had suggested 2012 was going to be trickier reviewing some of the tanker ideas. I should clarify. Reviewing them was probably a reasonable activity. The tricky part was going to be figuring out a value for a specific company's fleet. In the tanker sector, establishing a fleet value is important because it tells me how long a company can manage through a down market. Of course, cash and debt load are also important factors.
Although NAT has a larger fleet, it does have some attributes that make analysis slightly easier. NAT has a fleet of 20 vessels, but they are all the same category- the company only owns Suezmax vessels. I've mentioned this before, NAT used to be a company that hated debt. The company has access to huge (for NAT's size) credit facilities of $500M. This credit facility would allow NAT to easily pay for a fleet addition. But NAT would not let that debt build up on the credit facility. The company would quickly have a secondary offering, raise capital/cash and quickly pay the debt down on the credit facility. The company started 2011 with $75M of debt on its credit facilities. The year ended up being a rough one for the tanker market and for NAT, so the company needed to tap those facilities for operational needs. By year-end, the debt was at $230M.
To be fair to NAT, the company does prepay some expenses, about $40M on the Balance Sheet at the end of 2011. There's also an arbitration settlement of $16M that offsets some debt. So the net debt on the credit facility would be less. Still, the company having around $150M of debt on its books is a major change from prior years.
But $150M across 20 vessels works out to $7.5M per vessel. That's actually quite low if one realizes that $7.5M per vessel is less than the scrap value per vessel.
NAT operates all its vessels in the spot market. All the company vessels were part of a tanker pool called Gemini tanker pool, whose other vessels included some from Teekay (TK) - the pool organizer, and some from Frontline (FRO). Details are scant, but both NAT and FRO pulled their vessels out of the Gemini pool in Q4 2011. FRO established a new Suezmax pool called Orion, with NAT as the only invited partner.
So where does NAT go in 2012?
Well, the company had another share offering in Feb 2012 and raised about $76M. At this time, I don't know whether that money goes to pay down the credit facility, or will be used on a new vessel acquisition. The company paid a 30c/sh dividend in all four quarters of 2011. Actually, it isn't really a dividend. In 2011, all of the dividends were a return-of-capital. That might partly explain the issue I used to have tracking NAT's capital.
Spot tanker rates had been trending slightly lower across most vessel categories in Q1 until the second week of March. Rates suddenly jumped (for at least VLCCs and Suezmaxes) and have stayed strong for the VLCC category. The Suezmax rate jumped to around $30k/day, but has since tailed off to around $18.5K daily. To put that into perspective, NAT claims it only needs about $11K daily per vessel for cash break-even. So even $18.5K daily would work for NAT. But that is making two big assumptions
1. One buys the $11K daily figure. Personally, I don't buy it- not with the way debt jumped in NAT's financial statements.
2. One would have to feel comfortable with NAT's spot earnings for more than just the last three weeks. Then factor that confidence across all 20 spot operating vessels.
I had a small NAT position until last week. With the recent share offering, NAT can tweak the dividend to make things look appealing for investors. Then just make most, or all, of the annual dividend a return-of-capital.
I will take the pocket change and the Q4 "dividend" here, and wait on the sidelines for a better opportunity. Maybe NAT, maybe not.