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Nordic American Tankers: Dividend Maintained Despite a Weak Market in 4Q2011

Tuesday, 14 February 2012 | 00:00
Nordic American Tankers Limited yesterday announced that it has declared a dividend of $0.30 per share for 4Q2011. The non-GAAP measure, operating cashflow[1] was at cash break-even for 4Q2011 - an improvement from 3Q2011. This cash flow from marine operations of our vessels for the year 2011 was positive with $12.7m. The shareholders are our partners. NAT believes that paying a dividend is in the best interest of the Company and its shareholders despite the weak market in 4Q2011. The Company can indeed afford to pay a dividend even in this environment. The dividend of $0.30 per share to be paid in the first quarter of 2012 is the same as for the last three quarters of 2011. The dividend paid in 1Q2011 was $0.25 per share.
The Company is in a strong financial position and should be differentiated from shipping companies with weak balance sheets. The tanker market in 4Q2011 was stronger than in 3Q2011. Going into January and February 2012, the market has improved and at this time it seems that 1Q2012 will show an improvement on 4Q2011. Nevertheless, the spot market for tankers is always unpredictable and volatile.
The Company will pay the dividend on or about March 2nd, 2012 to shareholders of record as of February 23rd, 2012. Starting in the fall of 1997, when NAT began its operations, the company has paid a quarterly dividend for 58 consecutive quarters. Including the dividend for 4Q2011, the total dividend payments over this period amount to $43.04 per share.
The Company closed a stock offering January 24th, 2012, which strengthened the capital base with $75.9 million. The previous offering of the Company was more than two years ago, in January 2010. In combination with further acquisitions of vessels we expect that the offering will be accretive. Growth is a central element of the strategy of the Company. Our desire to maintain a strong balance sheet in the further expansion process is the main rationale of the offering. Over time it is essential that the transportation capacity - the number of ships - increases more than the share count.
During the fourth quarter of 2010 our operating fleet stood at 15 vessels. During the fourth quarter of 2011, the Company had 20 trading vessels after our second Samsung newbuilding was delivered to us in early November 2011. Our fleet has increased by 33% in a year and has substantially bolstered our earnings and dividend capacity going forward.
The Company remains committed to its strategy of accretive growth combined with a strong balance sheet.
Key points to consider:
• Earnings per share in 4Q2011 were -$0.37 compared with -$0.27 in 4Q2010.
• In 4Q2011 the total off hire was 58 days for the entire fleet of which 46 days were planned.
• In November we established the Orion tanker pool on a 50/50 basis with Frontline Ltd.
• The first of the two newbuildings from Samsung, the Nordic Breeze, was delivered to us in August 2011 and the second vessel, the Nordic Zenith, was delivered to us in November 2011.
• We continue to focus on cost efficiency - both in administration and onboard our vessels. The average daily operating costs per vessel were lower in 4Q2011 than the average in 2010.
• The spot market rates achieved in the fourth quarter 2011 were about $12,000 per day per ship gross to us. In 3Q2011 our gross spot market rate was equivalent to $8,000 per day per ship.
• Economic development in Asia remains strong while Europe is down and the growth in the US is still sluggish.
• On January 24th, 2012 the Company closed an offering of shares, strengthening the capital with $75.9 million.
• The Company does not engage in any type of derivatives.
Financial Information
The Board has declared a dividend of $0.30 per share for 4Q2011 to shareholders of record as of February 23rd, 2012 which is the same as for the three first quarters of 2011. At the end of 2011 the share count stood at 47,303,394. As of the time of this report, after the offering that was closed January 24, 2012 the total number of shares outstanding is 52,915,639.
Earnings per share in 4Q2011 were -$0.37 per share compared to -$0.80 per share in 3Q2011 which includes elements associated with the Nordic Galaxy arbitration. The Company's operating cash flow was $0.0m for 4Q2011, compared with -$5.5m for 3Q2011.
The major points of the arbitration process involving the Nordic Galaxy have been settled. The remaining item still not finally decided is related to the level of legal fees to be paid by us to the seller. We have charged the G&A account for the 4Q2011 with $1.6m being estimated legal fees incurred in the arbitration. This is offset by interest income of $1.2m received in 4Q2011 from the seller in connection with the outstanding loan balance. The loan that we extended to the seller has been repaid, including an offset of $16.2m being compensation to the seller. In connection with the follow-on offering that was closed January 24, 2012 we were required to file with SEC an Interim Financial Statement as per September 30, 2011 where this item was recognized as a subsequent event and is therefore not reflected in the 4Q2011 accounts. In economic terms, from our perspective this can be seen as a "cancellation" of a $90m vessel with a cancellation fee of about $16.2m except for those costs that we have charged to our profit & loss account earlier. It is to our advantage that the ship will not enter our fleet.
We continue to concentrate on keeping our vessel operating costs low, while always maintaining our strong commitment to safe vessel operations. We pay special attention to the cost synergies of operating a homogenous fleet that consists of double hull suezmaxes only. As we expand our fleet, we do not anticipate our administrative costs to rise at the same rate as our expansion. In a weak tanker market other tanker companies may have challenges in keeping up technical standards as they cannot afford to spend the required funds for operations and maintenance.
As a general guideline, we cover the dividend from cash on hand. NAT has a low cash break-even level of about $11,000 per day per vessel. The cash break-even rate is the amount of average daily revenue our vessels would need to earn in the spot tanker market in order to cover our vessel operating expenses, general and administrative expenses, interest expense and other financial charges.
As a matter of policy, the Company continues to keep a strong balance sheet with little net debt and a strong focus on the financial risk of the Company, an essential dimension of the strategy of the Company.
The Company is also in a good position to take advantage of prospective strong shipping markets, which will quickly translate into increased dividend payouts. The table indicates the annual dividend per share in various market scenarios, based on a fleet of 23 vessels.
R.S. Platou Economic Research a.s. reports that during seven of the last 12 years, up to the end of 4Q2011, tanker rates have averaged about $40,000 per day per vessel or more. This is reflected in the graph shown later in this report. As a matter of policy the Company does not attempt to predict future spot rates.
Prices for second hand tankers have softened as indicated by our last acquisition in September 2011. Should this trend continue, we will following our recent offering be in an excellent position to buy additional vessels at advantageous prices when the time is right. Such acquisitions would increase the dividend capacity of the Company. It is a prerequisite for any expansion of the fleet that the dividend and earnings capacity per share increase.
Our primary objective is to enhance total return[2] for our shareholders, including maximizing our quarterly dividend.
At the time of this report, the Company has net debt of $79.3m for the whole fleet (about $4.0m per vessel). In addition the Company has in place a revolving credit facility of $500m, of which $250m have been drawn at this time. Cash on hand at the time of this report is about $100m.
The $500m credit facility, which matures in September 2013, is not subject to reduction by the lenders and there is no obligation to repay principal during the term of the facility. The Company pays interest only on drawn amounts and a commitment fee for undrawn amounts. We believe the Company is an attractive borrower in the eyes of the banks.
The tightened terms of commercial bank financing and higher margins on shipping loans are challenging for shipping companies that are highly leveraged. By having little net debt, NAT is better positioned to navigate the financial seas, and we believe this is in the best interests of our shareholders.
During 2011 the spot tanker market was weak. However, the financial position of NAT gives us strong confidence going forward.
For further details on our financial position for 4Q2011, 3Q2011 and 4Q2010, please see later in this release.
The Fleet
The Company has a fleet of 20 vessels. By way of comparison, in the autumn of 2004, the Company had three vessels; at the end of 2005 the Company had eight vessels; and at the end of 2006 the Company had 12 vessels. At the end of 2009 and 2010 we had 15 vessels in operation. Please see the fleet list below. We expect that the expansion process will continue over time and that more vessels will be added to our fleet. Our vessels are employed in the spot market.
On a 50/50 basis together with Frontline we have established the Orion tanker pool, a co-op that is operational at the time of this report. We get earnings on 20 vessels out of the 30 vessels in the pool. This specialist suezmax pool with 30 double hull suezmax tankers is at the outset expected to enhance customer service further and to reduce costs. During the fourth quarter of 2011 NAT left the Gemini pool. This changeover is bringing us closer to the commercial operations. Orion Tankers is our chartering department, finding employment for the ships.
The Nordic Harrier (previously named Gulf Scandic) was redelivered to the Company in October 2010 from its charterer, Gulf Navigation, and went directly into drydock for repairs. The ship had been operated by the charterers since the autumn of 2004. The drydock period lasted until the end of April 2011. Thereafter, the vessel is trading in the spot tanker market. The vessel had not been technically operated according to sound maintenance practices by the charterer, and its condition on redelivery to us was far below the contractual obligation of the charterer. Therefore, NAT has a claim against the charterer for drydocking and other costs that the charterer is obligated to cover under the bareboat charter. We have not been able to reach an agreement with Gulf Navigation and the matter is now in arbitration.
We continue to keep up the high technical quality of our fleet, a requirement in tanker operations. Total off hire (out of service) for 4Q2011 was 58 days for our fleet of which 46 days were planned off hire. For the year 2011, total off hire was about 1.8% for the whole fleet, resulting in a utilization of 98.2%.
An attempt was made to hijack one of our vessels during its passage through the Gulf of Aden this past December. The attack was fended off by the US Navy. The U.S. Naval Force Central Command/5th Fleet is responsible for patrolling about 2.5 million square miles of water, which includes the Arabian Gulf, Red Sea, Gulf of Oman and parts of the Indian Ocean. The fleet's presence is vitally important to all maritime activity in these areas and the USA is to be commended for placing its forces there.
World Economy and the Tanker Market
The outlook for the world economy is uncertain. Seaborne imports of crude oil into the US are still at a low level. Unemployment is a worry in the USA but there are positive signs. The European economies are struggling with problems in the banking sector. Several countries are also burdened with debt. The economies of the Far East generally show continuing growth and are playing a key role in the development of the world economy. Chinese crude oil imports increased 6% in 2011 compared with 2010. At the current pace, annual crude imports into China will total a new record high in 2012. Tanker market rates are also affected by newbuildings that enter the markets, increasing the supply of vessels. As a matter of policy the Company does not attempt to predict future spot rates.
The average daily gross rate for our spot vessels was about $12,000 per day during 4Q2011 compared with a gross rate of $8,000 per day during 3Q2011. In a low spot market vessels may be waiting to get a cargo, while in a more robust market environment waiting days are minimized.
In a weak tanker market the speed of our vessels is much lower on the ballast voyages than in a stronger market. To save bunkers some vessels go as low as about 8 knots in ballast depending upon the technical features of the vessels. We have installed fuel saving equipment on our vessels.
Corporate Governance/Conflict of Interests
In the fall of 2010 the New York Stock Exchange Commission presented its final report on corporate governance. The Commission achieved consensus on 10 core principles. These principles include a) building long-term sustainable growth in shareholder value for the corporation as the board's fundamental objective, b) the critical role of management in establishing proper corporate governance, c) good corporate governance should be integrated with the company's business strategy and objectives and d) transparency for corporations and investors, sound disclosure policies and communication beyond disclosure. We believe the principles presented are essential elements of good corporate governance and the Company is in compliance with these principles.
It is vital for NAT to ensure that there is no conflict of interests among shareholders, management, affiliates and related parties. Interests must be aligned. We will work to ensure that transactions with affiliates and/or related parties are transparent.
Strategy going forward
Our objective is to have a strategy that is flexible and has benefits in both a strong tanker market and a weak one. If the market improves, higher earnings and dividends can be expected. However, if rates remain low, the Company is in a position to buy vessels inexpensively by historical standards. Therefore, the company is able to improve its relative position in a weak market and is able to reap the benefits of a stronger environment thereafter.
After an acquisition of vessels or other forms of expansion, the Company should be able to pay a higher dividend per share and produce higher earnings per share than had such an acquisition not taken place.
Our full dividend payout policy will continue to enable us to achieve a competitive, risk adjusted cash yield over time compared with that of other tanker companies.
NAT is firmly committed to protecting its underlying earnings and dividend potential.
Our Company is well positioned in this marketplace. We shall endeavor to safeguard and further strengthen this position for our shareholders in a deliberate, predictable and transparent way.
We encourage investors who seek exposure to the tanker sector and who value dividends to review our company and its performance.
Source: Nordic American Tanker Shipping
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