StealthGas: Shipping Your Dollars Away

While a company may appear undervalued on an earnings basis, this does not mean the company has cash to distribute to shareholders. A quick way to help determine if a company has the cash flows needed to pay shareholders is to compare its depreciation expenses with its capital expenditures within the context of its operating income.

For StealthGas (GASS), a provider of carriers and tankers for the oil and gas industry, the comparison is as follows:

Unfortunately, this profile is not dissimilar to that of other companies in the shipping industry.

Clearly, it is unlikely that there is any cash left over after these massive capital investments are funded. Rather than using earnings to pay shareholders, the company has needed a source of financing to fund an expansion. That source has been debt financing, as the company has increased its D/E from a more reasonable 65% to its current 90%.

As this company has ramped up its expansion, it has put itself as risk. Despite what the growing earnings record may show, this company is in no position to reward its shareholders.

The high debt levels combined with the fact that the company is in a cyclical industry suggests trouble is ahead, especially if the industry is expanding while the economy is not. While in other industries capital expansion can be cancelled and in some cases capacity can even be cut, this is not the case in shipping.

Due to high manufacturing lead times, GASS is contracted to buy several more ships through 2012! These contractual obligations will require another $135 million in financing!

Since other companies in this industry are in the same position, supplies of ships will continue to increase in the next few years, while goods that need to be transported are slowing. This leads to lower revenues and reduced fleet values...a situation investors should be wary of entering, despite the earnings growth profiles these companies have shown in the last few years.

While stock market values of these companies are depressed (GASS' P/E is less than 5, and its P/B is .33), long-term investors should ensure their company is not too laden with debt and expensive commitments to outlast what could be a rough few years for this industry.

Disclosure: None

Comments

[Miletius:]

Your article include some facts, but IMO your analysis is superficial. To start, GASS is not a plain "provider of carriers and tankers for the oil and gas industry". They are in the gas LP Niche, a very good one, with specific economics. Then your assumtion that nobody can cancell ships previously ordered, is wrong, check all the cancelation of drybulks few moths a go. For the Gas LP maeby there is no cancelations because this niche still strong with "relative stable" outlook. You also suggest that the shippers can not cut capacity, this is wrong, check all the scraping around the industry...
This points and your comments about the financing strategy shows to me that you don't know very well this industry. I am not an expert but I understand it a little bit more. And you are right, there is not a pink and nice outlook in general, but IMO your article is somehow misleading.

Jul 23 08:57 AM

[Saj Karsan:]

Hi Miletius,

You're right that LPG is more stable, but spot rates have still fallen. The point of the article is that there is no cash to return to shareholders due to high borrowing and commitments for new ships (which cannot be cancelled per the company's 20-F filing).

Jul 23 07:38 PM