Which Way Are Shipping Stocks Headed?

 |  Includes: DRYS, FRO, NAT
by: Tim Plaehn

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. (NASDAQ: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. (NYSE: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, (NYSE: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 (NYSE:SFL) and (NAT).