Star Bulk Carriers: Good Chance To Ride Out The Storm

| About: Star Bulk (SBLK)

Just over four months ago, I wrote a coverage article on Star Bulk Carriers (NASDAQ:SBLK). SBLK was trading at 97 cents and has since lost 16.1% of its value (20.2% not including dividends). Now that the Q1-12 report and accompanying presentation (pdf) is out, a comparison will be done to see if the 19.6% drop is quantitatively justified, or simply due to declining investor sentiment. The below 6-month chart (source: Google Finance) displays the last article publish point and relevant dividends (Google incorrectly displays 1.5 cents as 2 cents).

Debt Service

As mentioned in the previous article, SBLK has little to no risk of bankruptcy. The upcoming debt repayments are shown below and were taken directly from the Q1 Webcast. SBLK has $17M remaining in 2012, $32M in '13, $33 in '14, and $28M in '15. SBLK has $48M in net cash and was OCF positive by $6.6M last quarter minus dividends of $1.2M.

Charter Coverage

The primary risk in SBLK is that expiring charters will be renewed for lower rates, thus reducing cash flows, and ultimately ending dividend payouts. Starbulk has 6-7 supramax vessels coming off charter throughout 2012, and one Capesize vessel in the spot market. The supramax vessels are currently chartered at an average of $12,200 per day. The supramax rate is currently hovering between $12-$13k or near even year/year, so 2012 cash flows are unlikely to deteriorate unless the supramax index worsens in the fall. Capesize rates are down to approximately $8k per day, which is a 43% drop y/y, which will negatively affect SBLK if rates continue poorly into 2013. Current charters are 2x and 3x higher of this respective rate.

Dividend Security

Star Bulk has the cash available to continue paying a 6 cent annual dividend throughout 2012; however, if rates do not improve soon, there is a strong likelihood that it will cut this dividend in order to maintain positive cash flow.

Long-Term Prospects

Star Bulk has a fleet of 14 vessels (6 capesize and 8 supramax), with an average age of 10 years. If the market improves to $25k average TCE rates, SBLK has the potential to produce operating cash flows of roughly $104M with depreciation charges of approximately $10M, debt service of $30M, leaving 79 cents of cash flow per share.

Star Bulk's current position gives it time to wait for a recovery and the stock is currently trading at bargain-basement levels. If you have ample patience, I recommend SBLK for a small portion of your portfolio.

If you are looking for a company with similar valuations and are willing to pay a slightly higher premium for a boatload of cash, check out Diana Shipping (NYSE:DSX) - related analysis here.

Disclosure: I am long SBLK, DSX.