OceanFreight: Risky, But Deserving of Consideration

 |  Includes: FREEF, OCNF, PRGNF, SB, SBLK
by: Ryan Edward

Recently, I have been looking to add some small positions in stocks that would excel during an economic recovery. Unfortunately, after a quick search of these types of stocks, it's easy to see that their valuations have risen through the roof as of late, with not much changing on the fundamental side.

From shipping to commodities to business services, it's becoming much harder to find value, especially with the recent market rally. Fortunately, I think I've found a company, who although extremely risky, might be able to find a place in the 'speculation' section of many investors portfolios.

OceanFreight (NASDAQ:OCNF) belongs to the volatile shipping industry. Officially,

OceanFreight Inc., together with its subsidiaries, provides shipping transportation services. It specializes in transporting drybulk cargoes, including iron ore, coal, grain, and other materials, as well as crude oil cargoes through the ownership and operation of drybulk carriers and tanker vessels. - Yahoo! Finance

As you can imagine, shipping companies have been killed with the global recession, but as of late, many of them have seen huge rebounds, some as large as 100%. Although OCNF has seen a partial life, their valuations are still too dirt cheap to ignore.

Sitting at about $1.70, OCNF seems to be a risky penny stock, but that was not so as of just a few months ago. As late as last summer, OceanFreight boasted a market cap of almost $2 Billion (knocked down to a measly $151 million). Here are some quick stats to consider:

  • $11.77 book value (.13x)
  • Long term contracts (some of which extend until 2016)
  • 80% of 2009 backlogged (as well as almost 50% in 2010)
  • 13% insider ownership
  • 1.52 EPS (P/E of 1.16)

About the only problem that is plaguing the company, besides the economy, is their gigantic debt load ($300 million vs market cap vs $151 market cap). This is not as bad as it sounds however. Most shipping companies have large debt loads, and OCNF was never planned on being permanent. Their capital expenditures have accounted for most of the debt load, and now that they have slowed, they can use the cash flow to pay off the debt.

They have also shown the ability to raise capital, offering almost $100 million in shares. Although this extremely diluted existing shareholders, it is a positive for anybody recently looking to get into the stock. The share offering now gives them a large amount of cash to not only cover debt obligations, but also to upgrade their fleet at a discount due to the economic environment.

Recently, management has shown extreme savvy, selling a 1996 built Panamax, 73,040 dwt to a third party for a gross price of $21.95 million. Meanwhile, they purchased a larger, much newer 2001 built Panamax, 74,716 dwt from a third party for a gross price of $25 million. Management is showing they are still in the game, and are using their credit facilities to create maximum shareholder value.

If you think that a rebound will come in the next few years, OCNF is possibly the best value play in the shipping sector. Take a look at this chart from their annual report comparing fundamentals and financial strength.

click to enlarge

Click to enlarge

Although risky, OCNF definitely deserves consideration.

Disclosure: Author holds no positions in any security mentioned at this time, but retains the right to purchase in the future.