Why Nordic’s fleet expansion will offset its new share offerings



EBITDA growth

Given that Nordic American Tanker Ltd. (NAT) currently employs 20 vessels in the spot market, where shipping companies are hired to transport cargoes on a one-time basis, an increase of three to four vessels represents a 15% to 20% increase in fleet size and profits such as EBITDA.

New Shares Offerings

Offsetting dilution

At the end of 2013, Nordic had 75.4 million shares. With the latest follow-on offerings, the total share count would increase to ~89.2 million shares. Suppose Nordic makes $100 million in EBITDA (earnings before interest, tax, depreciation, and amortization) a year without additional fleets. Using the old share count will give us EBITDA per share of $1.33. Using the new share count, the EBITDA per share would be $1.12—basically a 16% decline. Since Nordic will use the net proceeds to primarily fund vessel purchases, the company’s EBITDA will rise ~17.5% and offset the increased share count. Although interest expense will affect profits, we assume the increase in interest expense, due to vessel acquisitions, is insignificant on a per-share basis.

Funding alternatives

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The analysis above is based on the case that Nordic will be able to maintain and pay dividends using operating cash flows as the industry cycle turns up. If the industry doesn’t turn around, these proceeds might be used to pay dividends. This happened in the past, when capital was raised to fund dividends that were larger than the company’s operating cash flows—several times, actually.

Perhaps Nordic maintains a policy to support dividends. Compared to its peers such as Teekay Tankers Ltd. (TNK), Frontline Ltd. (FRO), and Tsakos Energy Navigation Ltd. (TNP), Nordic has the highest dividend yield of 10.82%. But while raising debt to pay dividends and return capital to shareholders makes sense if a company is under-leveraged and the cost of debt is lower than equity, raising equity to pay dividends to existing investors can result in substantial financing fees and dilute the company’s future earnings as money isn’t used to fund growth if used over and over again.

Maintaining dividends can be positive, because it attracts dividend investors. As long as there are people willing to supply Nordic with capital, which appears to be the case so far, as the company raised share offerings from 10 million to 12 million, things will be alright. But this can be problematic a few years down the road, when Nordic has to offer new shares at low prices to attract new investors and perhaps to replace old vessels.

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.


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