Which Way Are Shipping Stocks Headed?

Yesterday was a very mixed news day for shipping companies, both tanker and dry bulk. I thought it would be interesting to put up a synopsis of the various events.

• The biggest piece of news affecting stock values is the announcement that DryShips, Inc. (DRYS) is suspending its dividend, canceling orders for a bunch of Capesize bulk carriers and will report a loss.
• In contrast to the news from DryShips, the Baltic Dry Index and Baltic Capesize Index posted nice gains, up 5% and 7.7% respectively. Although these indexes are still way below the levels of last spring, The BDI is up 42% from its recent low and the BCI has tacked on 130% since bottoming.
• There is a weird divergence in the dry bulk rates. A Capesize vessel can carry twice the cargo of a Panamax dry bulk ship, yet the spot rates for the Capesizers is over 4 times the $4,000 per day the Panamaxes are getting. Panamax rates have been very soft compared to other drybulk sizes. Even smaller ship classes are earning more than the Panamaxes.

• On the tanker front, the VLCC size ships have being doing well as a good chunk of the supply is being used for floating storage to take advantage of the oil price contango. VLCCs are used mainly to haul oil from the Middle East to Asia. As the contango fades and OPEC production cuts kick in the near term outlook for VLCC rates is soft. Frontline, Ltd. (FRO) is the most visible company in the VLCC spot market.
• Suezmax rates, on the other hand, are doing a little better. Over the last few days the WS rate for VLCCs had dropped from 67 to 57.5. During the same period the WS rate for Suezmaxes has gone from 80 to 82.5 on strong demand. Nordic American Tankers, (NAT) is all Suezmax vessels.

The point of this discussion is to make you aware that the revenues of shipping companies can be going in different directions based on the size and type of ships they own. Also, remember these rate only apply to vessels being chartered today on the spot market. Spot charters generally last 30 to 60 days so what a ship is currently earning may be quite different than today’s rates. Companies who place their vessels on long term charters are a completely different animal. The BDI and BCI rates are only important, revenue wise, if these companies have a ship coming off charter or buying a new vessel.

At this point the stock market treats all shipping companies pretty much the same. If DryShips, for example, has bad news they are all hammered. I believe in the long run there will be a great differentiation between the earnings of the various companies depending on their ships, types of contracts, borrowings and expense management.

Disclosure: In the shipping sector I currently own positions in (SFL) and (NAT).

Comments

[Tim Plaehn:]

Thanks for the comments. I have been thinking seriously about starting a blog/website just about shipping stocks. Research into these companies is sometimes hard to dig out and I believe many analysts do not understand what they are reporting on. Let me know if a site like that would be of interest.

Jan 23 09:42 AM

[Mark Anthony:]

It is without question that shipping stocks are moving in the direction of higher, MUCH higher, driven by the inherit fundamentals which were temporary masked by the credit freeze up. Read the analysis:

stockology.blogspot.co...

I prefer EXM than DRYS at this point, even after DRYS's recent fall makes it cheaper. EXM is still a better valuation than DRYS here.

Jan 23 10:32 AM

[oilsands:]

Tim, I really hope you will do a shipping blog. While the overall market impacts everything, as Rolex18k indicated, shipping will be one of the strong sectors, relatively speaking. I believe you are correct, many analysts lack the depth of understanding needed to cover this complex sector. So money is likely to be spread across the board in the sector.
DRYS suspended its dividend, following similar actions by DSX, SBLK and FRO. Expect more of the same for the next year of two.
Hope to see your comments on the current state of PRGN, TNK, EXM, SBLK, VLCCF.
Rolex18K, the real impact of the BDI is on the fund managers, whose perceptions of the market are easily swayed.

Jan 23 10:58 AM

[Tim Plaehn:]

Followup: BDI up 3.7% and BCI gains 4.8% again today (1/23).

Jan 23 11:10 AM

[Itsonlymoney:]

I take the suspension of the dividend, meager as it was, as a positive sign in that DRYS is getting its financial house in order. Same for the cancellations of new ship builds. They are a little late, however, in addressing issues other shippers(DSX for example)) have already moved on.

Jan 23 12:18 PM

[Ecomike:]

I think the bears just got a big piece of DRYS (and me in the process) today (down 28%, from early news of a huge 4th quarter loss of about $7 a share in one quarter, OUCH!

By by dividend. Won't be surprised to see it hit 3.50 or less again, in the very near future. Already got down to $10 today from $14.5.

It's a shame too as the BDI has turned up sharply, and is up to a new 3 month high today and climbing fast, also sad that EXM, PRGN and SB are being draged south by the DRYS bad news and the stock market in general while the BDI was up nearly 5% today alone to a new 3 month high of 945, up 45 points today.

I still think EXM, PRGN and SB (some of the few who have not cancelled their dividends, and PRGN anounced a $20 million dollar stock buy back Nov 20th, 2008. EXM just took delivery of a new Capex ship recently (anounced a few days ago) and signed a deal at nearly 3 times the recent BCI rate for the new ship for a 3 year contract.

I have serious doubts about DRYS now as it may have issues with the drill rig company it bought with the collapse of the oil prices. I fear it has more bad news to come.
I too would like to see a regular blog discussion on these shipping stocks.
I still own EXM, PRGN and SB based on their stability and dividends.

Jan 23 01:05 PM

[Universal H...:]

Tim, a shipping blog would be fantastic, particularly since you'd be the one doing it. I appreciate the "nuts-n-bolts" and "call 'em like you see 'em" approach you take toward analysis.

Jan 23 05:03 PM

[henarl:]

Thanks for your article Tim, and I like the idea of your blog on just shipping stocks. All info is helpful in sorting out this sector. I'm long FRO, OSG, and EXM and recently was exercised out of NAT (at a profit) by a covered call. I write covered calls on all of these positions since these stocks are good covered call candidates due to their volitilty. Between call premiums and dividends, you should be able to realize yields of at least 30% APR.

Jan 23 06:04 PM

[dsrtwriter:]

Tim, your depth of knowledge in this area is appreciated. I hope you do a shipping blog.

Jan 23 06:07 PM

[d_teller:]

NAT, NGPC, and SFL appear to have anticipated the credit squeeze, and seem to have a somewhat better capital & dividend security. On the other hand, OCNF, PRGN, EGLE,DSX, GNK, GMR, TNP, and even Navios, seem to have been hammered as they suspended or reduced payouts. The bulk shippers (EGLE, DSX, GNK, for examples) have been hit by the reduction in credit for building new vessels, while the tanker group has been hit by the reduction in oil shipping rates (contango is exerting a depressing effect). The best buys are those that have been hardest hit, IMHO.

I hold GMR, DSX, EGLE, GNK, OCNF, NGPC, PRGN, and not more than 2% of a total portfolio in any one.

Jan 23 11:33 PM

[bsharvy:]

GNK hasn't "suspended or reduced payouts."

Jan 24 04:56 AM

[xom-only:]

please do the blog

Jan 24 07:16 AM

[elliot_mllr:]

Such a blog would be very helpful. It would be a pleasant change from Lloyd's List, which specializes in non-analytic gloom and doom.


On Jan 23 09:42 AM Tim Plaehn wrote:

> Thanks for the comments. I have been thinking seriously about starting
> a blog/website just about shipping stocks. Research into these companies
> is sometimes hard to dig out and I believe many analysts do not understand
> what they are reporting on. Let me know if a site like that would
> be of interest.

Jan 24 01:10 PM

[Derrick Lilly:]

FRO did not suspend its dividend. It did trim it, but that was expected by most shareholders. They also plan to drydock a number of ships to reduce costs while the market is soft, which is a smart move. FRO is a very well run company.


On Jan 23 10:58 AM oilsands wrote:

> Tim, I really hope you will do a shipping blog. While the overall
> market impacts everything, as Rolex18k indicated, shipping will be
> one of the strong sectors, relatively speaking. I believe you are
> correct, many analysts lack the depth of understanding needed to
> cover this complex sector. So money is likely to be spread across
> the board in the sector.
> DRYS suspended its dividend, following similar actions by DSX, SBLK
> and FRO. Expect more of the same for the next year of two.

>
> Hope to see your comments on the current state of PRGN, TNK, EXM,
> SBLK, VLCCF.
> Rolex18K, the real impact of the BDI is on the fund managers, whose
> perceptions of the market are easily swayed.

Jan 26 04:53 PM

[Tim Plaehn:]

I am working on the blog. Please sign up for the RSS or email feed at shippingstocksblog.com. I want to get a couple of hundred subscribers before I launch.

Jan 26 05:42 PM

[Derrick Lilly:]

I am also surprised that there is no mention of Seaspan (SSW), which is another excellently run company. The shares took a beating and have since doubled back up. Dividend is secure, and all current and future ships are booked for long-term charters.

Jan 27 12:53 PM

[User 354397:]

I am trying to learn as much about options and equity trading right now. I like the tanker sector and have my eyes on TK,TOO,FRO based on the current storage situation. Do you think these stocks will pop higher after first quarter earnings are reported. I would think they would be a little higher with the increase in storage leasing and higher lease rates due to the contango market.

Also, please explain covered calls and how to take advantage of this trading strategy. Thanks for your help and input!

I can be e-mailed at [e-mail]...


On Jan 23 06:04 PM henarl wrote:

> Thanks for your article Tim, and I like the idea of your blog on
> just shipping stocks. All info is helpful in sorting out this sector.
> I'm long FRO, OSG, and EXM and recently was exercised out of NAT
> (at a profit) by a covered call. I write covered calls on all of
> these positions since these stocks are good covered call candidates
> due to their volitilty. Between call premiums and dividends, you
> should be able to realize yields of at least 30% APR.

Feb 10 11:43 AM

[Mad Hedge F...:]

With 50 million barrels of crude in storage at sea, tanker companies have the buffer they need to weather the first globally synchronized recession. As long has crude for delivery in a year trades at a $10-$15 premium to the spot price, known as contango, this fleet will grow. Slow steaming, or cutting cruise speeds from 15 to 13.5 knots to reduce fuel consumption, is having the effect of taking another 35 million tons of tanker capacity off the market. With a 10% yield, Nordic American Tanker Shipping (NAT) is now the highest dividend paying stock listed on the NYSE, and gives you a pretty safe way to play this anomaly. The stock has no debt, $500 million in unused credit lines, and a bargain PE multiple of 9 X.

Feb 20 12:43 PM

[change is t...:]

sharing your insights. All markets are tough to analyze right now, and details such as tanker size and spot versus charter are helpful to clear the air. I don't know about anyone else, but I get all shipping companies are not the same even if the BDI and BCI is used to determine shipping rates. And getting it means one shipping company's problems causing another company's stock to sell off represents a buying opportunity. Again, thanks.

Feb 22 02:35 PM

[Slunder:]

Although NAT pays out a nice yield the stock tends to go in the same direction as Suezmax rates. Currently the spot rates are at $20k/day, with a forward curve indicating sub $25k/day for the rest of the year. (coming from $65k/day 1 year average). Good company, but say goodbye to current div yield

Mar 31 07:44 AM