Increasing a company’s share count dilutes existing earnings: if a company were making some $100 million in profits and nothing changed, a higher share count would mean fewer profits per share. However, raising capital can be positive if the capital raised will add earnings that more than offset dilution. But to derive some estimates, we have to estimate how many vessels Nordic American Taker Ltd. (NAT) might purchase.
According to Nordic American Tanker Ltd.’s (NAT) prospectus, the company will acquire two to four vessels from net proceeds on 10,000,000 share issuance, which is now raised to 12,000,000 shares. The underwriters will have the option to purchase additional shares of up to 15% of the 12,000,000. The latest data on secondhand vessel prices provided by R.S. Platou shows five-year-old Suezmax vessels were valued at ~$50 million, while a ten-year-old vessel averaged ~$35 million.
Three newer vessels
Based on the assumption that the company will purchase three or four vessels, NAT will require to pay $100 million to $200 million—a wide range. But given that Nordic American Tanker Ltd. has used lower leverage than its peers such as Frontline Ltd. (FRO), Tsakos Energy Navigation Ltd. (TNP), and Teekay Tankers Ltd. (TNK) in the past, it’s unlikely to purchase four vessels that have price tags close to $50 million per five-year-old vessel.
Four five-year-old vessels will cost about $200 million. Using estimated proceeds of just $120 million from the current follow-on offerings, Nordic will have to use some of its existing credit capacity to fund these vessels. But since that will increase the company’s debt-to-equity ratio (0.68x for the four vessels as compared to just 0.30x for the overall company), Nordic might end up just buying three.
Four older vessels
To maintain the current leverage ratio, Nordic could buy four vessels of older vessels. For example, the total funds used to purchase four approximately eight-year-old-vessels will likely have a debt-to-asset ratio of ~0.27x.
Note: Buying individual companies comes with risks unrelated to industry fundamentals. Investors who don’t understand such risks might want to consider the Guggenheim Shipping ETF (SEA), which invests in large shipping companies worldwide.
© 2013 Market Realist, Inc.
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