Hamilton, Bermuda, August 28, 2013
In my letter to you this past June, I discussed how an excess supply of tonnage hurt the tanker market during the second quarter of 2013. The daily IMAREX index, which is a good measure of the level of the market, was on average $11,500 during the second quarter. June, in particular, was weak, with a time charter equivalent for suezmaxes of $7,500 per day.
The company is in a solid financial condition. This is demonstrated by the fact that as of June 30, 2013 our net debt is about $4.4 million per ship. In comparison, at the end of June 2004, at the time when the company turned into and operating unit, the net debt was about $8 million per ship. Cash on hand, net working capital and undrawn portion of our credit facility is $330 million, representing our financial liquidity reserves June 30, 2013. This allows us to plan for further growth.
In July and August the situation has improved, signaling that results for the third quarter should be better than those for the second quarter. Since July 1st, the IMAREX rates have been above the second quarter level. Towards the end of August weakness is again seen. The actual results for a fleet may differ from the quotations of IMAREX. In an improving market there is a time-lag of two to three weeks before we can benefit from the higher rates.
Crude shipments to the Far East are a driving force in the tanker market. Stable suezmax shipments have been undertaken from the Middle East region and West Africa. Recently, the differential between the Brent oil price and the WTI (West Texas Intermediate) oil price has narrowed, which impacts seaborne imports of crude oil into the US positively from our perspective. This is because transportation costs on our tankers are significantly lower than shipments by rail or pipeline, so a tight spread in prices makes the delivered price of an imported barrel of oil cheaper for the refineries. Typically, geopolitical tensions, as for instance in Syria, Egypt and Libya, tend to create uncertainty which may cause unpredictable volatility including spikes in the tanker market. The order book for new crude oil vessels is decreasing sharply and starting in 2014 we expect only a handful of newbuildings to enter the suezmax market. In the near future it is a question whether we shall see an improved market this autumn and the traditionally stronger winter market.
We have had several vessels in drydock this year because it is mandatory to go through the special surveys when ships are ten years old and again when they turn fifteen. For a 10-year special survey the costs are about $2.5 million per ship; a 15-year special survey could cost between $2.5 million and $3.0 million. In the short term, drydockings hurt us since those ships are temporarily out of service, but in the long term keeping our ships in top technical condition pays off. We do a lot of work for major oil companies, and they are among the most demanding players in the tanker industry. Our work to improve technical standards and enhance safety never stops.
In addition, our ships are becoming greener and greener. We have installed devices on our ships that are aimed at reducing the consumption of costly bunker oil for the main engines. Our program to reduce emissions and save costs continues unabated.
NAT is now assessing various investments that would allow us to expand profitably. As always, our primary objective is to maximize total return to our shareholders. Over time we have produced a competitive total return for our shareholders and we believe that we are in an excellent position to achieve such results in the future.
When the tanker market has softened in recent quarters, NAT has paid modest quarterly dividends. When the markets tighten again, funds for payment of dividends can be expected to increase sharply. As our cash breakeven is among the lowest in the industry, we will be able to capitalize on an improving market and return to profitability sooner than others.
From time to time it has been suggested that Nordic American should repurchase shares. This is an option that we always have under review and which can be implemented quickly. So far we have prioritized direct dividend to shareholders.
My family and I have continued to increase our ownership of shares in NAT this year, evidencing our bedrock confidence in the future of Nordic American. In the offering of April we bought $1.5 million worth of shares for cash and have made additional cash purchases since then. We now have about 5.5% of the shares in NAT and are proud to be the company’s largest shareholder.
Based on our business model, growth, strong balance sheet and available financial resources, we believe that Nordic American has a significant upside potential and a limited downside. If you have any questions, please do not hesitate to contact me.
All the best!
Chairman & CEO
Nordic American Tankers Limited