I held this stock briefly. Obviously not a great stock to buy & hold. I digress. With the bankruptcy, there may start to be opportunity in the space.
An over-supply of product leading to a steep drop in price has claimed another victim. No, this is not a story about a solar PV maker, but about shipping, where ships that were ordered in 2007 and 2008 have been hitting the water in big numbers this year at the same time that the global economy continues to get weaker.
General Maritime Corp. (NYSE: GMR) filed for bankruptcy protection yesterday citing low shipping rates for its fleet of 33 crude oil carriers and the company’s inability to comply with its debt covenants. Shipper Omega Navigation Enterprises Inc. (OTC: ONAVQ) filed for bankruptcy in July, and there is good reason to be concerned about other shippers like Teekay Tankers Ltd. (NYSE: TNK), Overseas Shipholding Group Inc. (NYSE: OSG), Nordic American Tanker Shipping Ltd. (NYSE: NAT), and Frontline Ltd. (NYSE: FRO).
Tanker rates are far below break-even rates and could stay there throughout 2012. The day rate for a very-large crude carrier (VLCC) is currently around $7,800, far below a break-even rate of around $30,000. To combat the low rates, some ship owners are considering selling their ships for scrap value. According to a report at Bloomberg, the cost to buy a 15-year old tanker is currently $23.5 million, while the scrap value of such a vessel is $17.25 million. That’s the narrowest difference in at least five years.
As much as 5% of the world’s oil tanker fleet could be scrapped in the next 18 months, but that would only raise rates to an estimated $12,817 by 2013, still less than half what is needed to hit a break-even rate. When profitability will return is anyone’s guess.
General Maritime and Omega Navigation depended heavily on the spot market for cargoes, which is a good position when prices are high, but a bad position when prices are low. Teekay has said that it has half its fleet booked through next summer, and could cover its costs even if the rest of the fleet remain idle. But in its third quarter earnings report, the company said it lost $291.2 million on fewer shipments and lower day rates. If there was any good news there, it was that Teekay didn’t lose as much as analysts had expected.
Tanker owners aren’t the only ones now struggling. Dry bulk shipper DryShips Inc. (NASDAQ: DRYS) actually beat estimates in its third quarter, primarily on the strength of the company’s move into offshore drilling vessels, not its shipping business. The company’s posted EPS loss of -$0.58 was better than the consensus estimate of -$0.61.
And then from the Value Major
DSX is a dry bulk shipping company. Unlike most of its competitors it is carrying a relatively small amount of low interest rate debt, and normally I wouldn’t care about this fact… But the shipping industry is presently in a multi-year slump and while a recovery in shipping prices is nearly guaranteed as ships are retired and the supply of ships contracts I have no confidence that this won’t happen to deeply indebted shipping companies scrambling for credit.
DSX runs all of its ships on long term charters. This has had the nice effect that they have been greatly cushioned from the huge drop in rates from 2008 to present. As a result of this they have a rather significant amount of cash, very little debt, and a fleet that under cost accounting rules is worth ~1B. While other shippers are losing money after interest payments DSX has been hoarding cash for the last 3 years in preparation for next year when a significant number of its charters expire and face being renewed at the new lower rates. According to Zach’s this year’s 1.31 per share net profit is supposed to turn into .83 next year. It’s important to note that the strategy that has served them so well up to this point could very easily backfire if shipping prices remain extremely low next year.
And right on time the BDI went from 1250 at the beginning of September to 2018 now. This represents a significant shift in the price of shipping—and has held in the ~1700-~2200 range since September 1st. It’s important to note that this is still quite a bit lower than the levels that DSX was getting on previous charters—but it does render the analysts’ earnings expectations fairly inaccurate.
DSX is ungodly cheap. It’s in the shipping sector so it’s been pretty badly bludgeoned over the last couple of years—and other peoples pain is our gain. With that in mind let’s do the numbers.
DSX is going to see very minor changes in income over the next 2 quarters as most of their current charters will survive at least that long. To simulate this I gave them 2 quarters at last quarters net income number of 27.68M. Then I ran a 9.5 year DCF using a 66.56M starting point (Zach’s estimate just to be safe) 0% growth and a 12% discount. This spat out a 421.2M number for the value of DSX’s income over the next ten years.
DSX has 387M in mostly cash and other assorted short term assets, 1157M in long term assets (basically 100% ships), and 384.81 in long term debt at very attractive interest rates (from the cash flow statement it looks to be about 4% APR). In the interests of producing a low valuation I decided to give DSX just 60% of the cost-depreciation on their ships. This brought the value of the balance sheet to 696.39M.