Earnings Call Transcript - NAT Q3 2022

Operator, Operator

Good day, my name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Nordic American Tankers Limited Conference Call. Thank you, Herbjorn Hansson, Founder, Chairman and CEO, you may begin your conference.

Herbjørn Hansson, Founder, Chairman and CEO

Thank you very much, sir, and thank you also to all our friends listening in and prepared to take the floor and ask questions. I will, as an introduction, make a few observations on Nordic American Tankers Limited. I will mention them briefly at the start of this conference. The first question I want to raise is about what is happening in the marketplace. We are very focused in our group on so-called ton miles, which reflect transportation work. We see that transportation work is increasing all the time, and we analyze this from various angles, including Japan, China, Korea, and India. As you know, we operate globally. Recently, we've also begun lifting oil from Guyana in South America. Our focus remains on transportation work. We have significant business in the Middle East, particularly in Saudi Arabia and Oman. The next question I would raise is, what will happen after December 5? We have new rules coming in that pertain to Russian oil. I want to emphasize that uncertainty has always been beneficial for our business. When uncertainty arises, we have the notion of hoarding, and we need to have reserve capacity to meet future demands. At this moment, we observe a significant imbalance between the supply and demand for tonnage, as there is simply not enough tonnage available. I'm often asked why the investor market is nervous. However, I cannot respond to that because we in the market are not nervous at all. Being in the tanker business requires confidence and composure, something we have gained from many years of experience since the early '70s. Another point I wish to raise is our collaboration with Beal Bank in Dallas, which has been excellent for us. They are our main creditor, and we have paid back a significant amount of debt over the last two years. We also aim to be debt-free within a year or slightly more. I should mention that we prioritize dividends; dividends are our main focus, and we will never abandon that policy. There are many parties interested in doing business with us, which may stem from multiple reasons. We at NAT are highly transparent. Since the mid-'90s, we have been listed in America and have operated here before that. Everything about our company is out in the open; there is nothing hidden. I would also note that major oil companies, like ExxonMobil, Shell, Total, and British Petroleum, are our main customers. Before concluding my brief introduction, I want to mention our commitment to reducing emissions from our ships through active speed management. When we enter a loading area without cargo, we operate at a slow speed, consuming around 20 tonnes of bunker oil. When we do have a cargo, speed increases, and consumption can reach about 50 tonnes. This demonstrates a significant difference in fuel consumption. In the past, we operated at much higher speeds, but that's not the case anymore. Now, I will conclude my introduction here and we are ready to respond to any questions from our friends on this line. Thank you.

Operator, Operator

Your first question comes from the line of Omar Nokta from Jefferies.

Omar Nokta, Analyst

Thank you. Herbjorn, good afternoon. Thanks for the update today. It's very nice to see NAT in such a strong position with the tanker market really behind it here. I wanted to ask about the dividend. You mentioned that as being an integral piece of the NAT story. As we look ahead, what can we expect in terms of that dividend? Do you see that growing here over the next several quarters based on what we're seeing in the market? Also, is there a certain ratio of earnings that you're looking to pay out going forward?

Herbjørn Hansson, Founder, Chairman and CEO

Let me respond to that precisely. In these rather difficult times, we have maintained a good position. We have paid $0.01 in dividend, $0.03 in dividend, and now we have paid $0.05. The next dividend for the fourth quarter will be announced in February and is expected to be paid in March. We anticipate that it will be $0.10, effectively doubling the dividend from $0.05 to $0.10. Previously, during stronger periods, we had dividends reaching up to $1 per year, and that remains our objective. I will always explain in detail what we are doing because that is our obligation, after being in America for such a long time, while emphasizing our support for Ukraine.

Omar Nokta, Analyst

Just another one about the Beal Bank facility. You mentioned that in your comments, that's obviously provided you with a lot of flexibility over the past several years, especially when the market was soft. You've talked about getting your debt down to zero. How do you think about the facility in general? Do you look to just pay that down aggressively as quickly as possible over the next few quarters, if feasible? Or would you consider refinancing that in the coming months to enhance the free cash flow profile?

Herbjørn Hansson, Founder, Chairman and CEO

We prioritize dividends and ensure that shareholders receive a check every quarter. We have been doing that for 101 quarters. Regarding the Beal facility, it has served us well, and we have an excellent relationship with Beal Bank. I expect that relationship will continue, regardless of the conditions ahead of us, as Andy Beal, the head of Beal Bank, is a solid friend of Nordic American, and vice versa. I would like to turn it over to our CFO, Bjorn Giaever, to discuss the main numbers regarding debt reduction and our dividend going forward.

Bjørn Giaever, CFO

Yes, Herbjorn. As you know, the initial loan amount was $306 million back in 2019, and we added another $30 million. Since 2019, we have paid down $205 million, so today it stands at $130 million. In a $50,000 per day market, we could potentially follow our agreement to pay down close to $25 million per quarter while also paying in excess of $0.10 in dividends per quarter. Regarding refinancing, we have several proposals on the table and are contemplating our next steps. We aspire to be debt-free and even increase our dividends further, but no decisions have been made, and we are not in a hurry.

Herbjørn Hansson, Founder, Chairman and CEO

I would like to add, Omar, that we are now one of the strongest companies in the shipping sector on Wall Street. That is how we currently view our position. I hope that our cooperation with Beal will continue in the future, regardless of whether we pay down all the debt or not. However, I want to re-emphasize that we will never give up our commitment to dividends.

Omar Nokta, Analyst

Now that's clear. Based on your comments, we can assume about $25 million of debt reduction while simultaneously paying out $0.10 in dividends each quarter?

Herbjørn Hansson, Founder, Chairman and CEO

Absolutely.

Operator, Operator

Your next question comes from the line of Liam Burke from B. Riley.

Liam Burke, Analyst

You often discuss your fleet management, where you're selling your older vessels, but you also want to grow your current fleet to 30 Suezmaxes. How are you managing that? Do you see acquisition opportunities out there? How do you balance that against your commitment to dividends and debt reduction?

Herbjørn Hansson, Founder, Chairman and CEO

The head of all this is capital allocation. It is about a capital allocation program that involves several elements. We wish to expand without compromising our ability to pay dividends. However, managing all these elements requires careful consideration. One key element is the dividend payment, and how we navigate this challenging environment is complex. It would take time to explain all our strategic thinking regarding this matter.

Liam Burke, Analyst

Just a quick follow-up on that, Herbjorn. Do you see any opportunities to add new assets?

Herbjørn Hansson, Founder, Chairman and CEO

People are pursuing us all the time. I feel like I am at a dance where everyone wants to partner with us because they understand our transparency and that all details are known about us from being stock-listed in America. We have no hidden agendas, and transparency is essential for us.

Operator, Operator

Your next question comes from the line of Turner Holm from Clarksons. Your line is open.

Turner Holm, Analyst

Herbjorn, I wanted to ask about your chartering strategy. NAT has historically focused on the spot market, but we've seen one-year time charter rates increase significantly, about 50% in the last couple of months and doubled since the summer. How do you think about managing the fleet from a commercial aspect as you move into next year?

Herbjørn Hansson, Founder, Chairman and CEO

I will respond in two ways. First, dividends shall remain a priority; that is non-negotiable. Secondly, we aim to operate primarily in the spot market as our main principle. We will never take on substantial debts that could jeopardize our position. Our strategy is to remain in the spot market because it typically yields higher profits than other policies. Nonetheless, we are balancing these considerations, making it challenging to give a straightforward answer to your question. We have sold a few vessels in the past months, which is part of our normal renewal process. Currently, we are in a secure position, which is advantageous. We are conducting substantial business in the U.S., the Middle East, and the Far East, but generally, we do not pursue time charters unless they are exceptionally appealing, opting for short-term voyages instead since those generate significant cash flow.

Turner Holm, Analyst

I appreciate that, Herbjorn. Given your long experience in this industry, how long do you think the strength in the tanker market can last? How are you planning for that from a financial perspective?

Herbjørn Hansson, Founder, Chairman and CEO

As you mentioned, I have a wealth of experience since I first studied economics in 1974. If we knew the future, life would be much simpler. However, it is my duty to maintain a prospective view on the market because, with approximately 80,000 shareholders, I cannot simply say I don't know when asked about future projections. It is essential for me as the leader of this group to have a perspective. My family and I are the largest private shareholders of this company, supported by substantial shareholders, such as BlackRock. We must operate in the best interest of our shareholders, and while I hope that the stock price increases significantly, I cannot assure you of anything. As the leader, it is my role to maintain a vision for the future.

Operator, Operator

Your next question comes from the line of Craig Rose from Axiom Act Management.

Craig Rose, Analyst

Hello, everyone. I'll remind everyone that rates have fluctuated during the war in Ukraine. I am curious about the implications for the spot market – is there an equity percentage that you could use to buy new vessels without requiring a time charter for those new vessels?

Herbjørn Hansson, Founder, Chairman and CEO

Absolutely. The answer is yes.

Craig Rose, Analyst

What is that level?

Herbjørn Hansson, Founder, Chairman and CEO

I cannot directly respond to your question as it pertains to managing capital allocation. I would be happy to discuss this in more detail if you could send me a specific inquiry. However, I am cautious about sharing internal information prematurely, as we wish to maintain transparency while acting appropriately. Therefore, I cannot provide detailed responses on this matter during this session.

Craig Rose, Analyst

So, the most conservative approach is if you managed to pay down debt within a year at current rates, you could theoretically purchase a new vessel each year if rates remain at $50,000 a day?

Herbjørn Hansson, Founder, Chairman and CEO

I believe you are absolutely correct.

Operator, Operator

Your next question comes from the line of Michael Masco from MRM Capital.

Unknown Analyst, Analyst

Regarding your ATM, it appears you issued another 6 million shares. With business being strong, why do you continue to use the ATM and dilute shareholders?

Herbjørn Hansson, Founder, Chairman and CEO

We have not utilized it for a long time, but Bjorn Giaever may elucidate pertinent aspects related to this. Bjorn, could you comment?

Bjørn Giaever, CFO

Yes. We used it briefly in the early part of the quarter because we faced an extremely low market for the last eight quarters. When the market turns, it takes time for freight earnings to reflect in our bank accounts, which affects our working capital. Thus, we wanted to manage through that uncertainty.

Unknown Analyst, Analyst

I would assume that with the business being so strong now, you won't need to rely on it moving forward as you did in the latter part of the quarter, correct?

Herbjørn Hansson, Founder, Chairman and CEO

Yes, that would be my view; it is correct. When the market is as strong as it is now, we can essentially do whatever we want. But Bjorn, would you like to add anything?

Bjørn Giaever, CFO

No, I totally agree with you.

Unknown Analyst, Analyst

Do you have any perspective like the previous questioner about how the end of the war might affect the tanker market?

Herbjørn Hansson, Founder, Chairman and CEO

I can comment on that. The most straightforward response is, I don't know. However, I can say that historically some of you may have heard about George Soros, who commented that we are now in World War III. Many years ago, I collaborated with him on a project in New York and London. Given that premise, this is one potential scenario. I do not wish to delve into international politics, but it has been said that many in Russia oppose Putin. Presently, we do not transport Russian oil anymore; we previously carried oil from the port of Primorsk in the Baltic Sea but declined their invitation to operate there. Today, we do not handle any cargo from that port and are not involved with Russian oil anymore. We have worked in 'dangerous areas' like the Black Sea in the past, but we primarily conduct business with ExxonMobil and Chevron. Based on your question, I believe the end of the war would likely not dramatically impact us. I genuinely hope the war will end, and while it may have some positive effects, we are quick to adjust to changing circumstances.

Erik Hovi, Chartering Manager

Can I just add a brief comment regarding the market?

Herbjørn Hansson, Founder, Chairman and CEO

Is this Mike?

Erik Hovi, Chartering Manager

It's Eric. I would like to state that several factors suggest we may be on the verge of a super cycle in the tanker market, regardless of the ongoing war. We are facing a historically low order book, around 2% of the fleet is on order, which is exceptionally low. New trading patterns are emerging, likely as a result of the war, but these changes may very well be permanent, at least for the foreseeable future. It is difficult to envision Europe relying on Russian oil in the long term. Overall, the outlook for the tanker market appears quite positive in the longer term.

Herbjørn Hansson, Founder, Chairman and CEO

I would like to add to what you said, Eric. The major oil companies, which make up about 50% of our business, including ExxonMobil, prefer to work with reputable operators who have good fleets. We have both good people and a strong fleet, and we have access to capital via the American markets. If you have a solid project, everyone here knows that our reputation is critical. Fortunately, we have built a strong reputation over the years by acting with integrity and honesty.

Operator, Operator

Your next question comes from Nick Lanham from Sefton.

Unknown Analyst, Analyst

I had a couple of questions if that's okay. Could you tell us currently how many time charters you have and when they end? Can you also share what the rates on those time charters are?

Herbjørn Hansson, Founder, Chairman and CEO

Yes, we can provide that information. Bjorn will have those details.

Bjørn Giaever, CFO

Yes, we have four ships on time charter, out of a total fleet of 19 ships. We have two ships going to Oman, committed for six years, which started earlier this year. We also have one ship, the Nordic Signet from 2018, chartered to Equinor for another year, with an option for an additional year. Lastly, we have Nordic Vega, built in 2011, chartered to Unipec for a year.

Herbjørn Hansson, Founder, Chairman and CEO

Equinor is one of the largest companies in Europe.

Unknown Analyst, Analyst

One more question, if I can ask. You had a vintage 2003 Suezmax left in the fleet. Would you expect to be selling those in the next year, or do you think in the current market, you can continue to operate them for a few more years?

Herbjørn Hansson, Founder, Chairman and CEO

The response is that in this market, we do not wish to sell anything. When people inquire about buying ships from us now, I usually respond with two letters: N O. However, the advantage of our organization is that we can change our minds quickly. We are not a large company toting numerous committees; we operate efficiently and execute decisions smartly.

Unknown Analyst, Analyst

What portion of your current debt is at fixed rates versus floating?

Herbjørn Hansson, Founder, Chairman and CEO

On the debt? Can you provide details regarding the debt tax rate? We don't have any fixed-rate debt, do we?

Bjørn Giaever, CFO

No.

Herbjørn Hansson, Founder, Chairman and CEO

No, we don't have any fixed-rate debt.

Operator, Operator

And there are no further questions at this time. Mr. Herbjorn Hansson, I turn it back over to you for some closing remarks.

Herbjørn Hansson, Founder, Chairman and CEO

I would like to thank you all for taking the time to listen to this conference. My colleagues have advised me to remain modest in my judgments. However, I cannot deny that I find this journey exciting. I assure you that we will continue, and this is neither a threat nor a promise; it is a fact that we enjoy every day we have. I genuinely appreciate the opportunity to hold this conference, and you are all welcome to reach out to my colleagues and me whenever you wish. We are keen to avoid disclosing any non-circulated information. It goes back to my earlier comment: nobody knows what the future has in store, but in this business, there is nowhere to hide.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may all disconnect.