Dry Bulk Shippers: Good to Go

Bears have hammered the dry bulk sector for last 6+ months, mainly for being:

- At its all time cyclical peak
- Soon to suffer from overcapacity on new ship builds
- Global economy entering into recession
- Bulk freight index decline showing lack of pricing power
- Overlevered

and other varied reasons. But it seems like they might have overdone it (even if in near term).

I believe it might be, yet another time, when it's time to look at this sector wearing your "bullish" glasses. Especially since

- Long-term global trade trends are still positive and this sector grows with the growth of global trade, no matter which way it's moving.

- Demand/ supply dynamics for new capacity look pretty in sync at least for another 2-3 years and even after that most of the data can be learned either way. BTW next year there are 111 more bulk ships coming online against order book of 1000+

- Bulk freight index (index of freight prices for different vessels) after coming down by more than 30-40% seem to be stabilized now. Some consider first quarter to be soft since commodity price negotiations are being held and some countries try to play games with commodity suppliers by holding up boats at the ports without letting them unload. But now that overhang should be going away

- Coal: As suggested by most coal producers, China is in net importer status of Coal, it should bode well for shippers as China imports coal from Australia. Indeed India is starting to look for thermal coal from overseas too (as validated by Tata groups deal with Indonesia's BUMI resources).

- Grains: It's not just that wheat and rice is going up in prices but the amount of travel, these agri commodities are doing is also going up. Seasonally too we should see grain from southern hemisphere to start rising going into second quarter.

- Dividend announcements coming: most Shippers pay a big part of earnings as dividend and since prices are still strong, we should expect earnings to be strong and in turn the dividends to be strong. Most of these dividends should be announced in next few days. BE READY

Above all Valuation: Most estimates are calling for revenue decline since analysts are baking in major decline in Baltic freights, you be the judge of how stocks are react if the freights don't decline or indeed if they go up. Based on these declining Baltic freights, stocks on average are trading 4-9X EV/ EBITDA and offering dividend yields of 7-13%.

My favorite names are DRYS, DSX, ESEA and SBLK. More on these names soon. Good luck!

click to enlarge

Comments

[papita]

as a holder since last year of dsx and drys, I am still negative on these holdings. however, since I have owned them, their daily price action and volume has never looked this good. although they are up 33+%, I do believe they have a long way to go higher. fundamentals and valuation are working in our favor.

[twoshooters]

Yea, DryShip's future is so bright that it's investing substantial capital into an unrelated business, inwhich it has virtually no competitive advantage. Clearly, management must be really talented since it is an expert a multitude of industries. Hey, how about the new DryShip cell phone? Or their new line of Oceanwear clothes for teens. Come on, its part of the commodities bubble that is going to sink this barge of a company. biz.yahoo.com/ap/08042...

[DanielKowkabany]

i own exm which has been down, but starting to move up and I'm starting to show a small profit. I like the industry and will play it out.

[alphameister]

Love the outlook for ultra-deep-water drillers, so I like DRYS even more now that management has targeted that sector for expansion. It's a good move and the market seems to agree.

[investingpennies]

We retain a bullish outlook on DryShips Inc. (DRYS). Since our recommendation on March 17, 2008, DRYS has accounted a 50.15% return as of April 25, 2008. You can see our recommendation for this company here:

investingpennies.com/i...

[The CorretCall]

We really like FREE in this space.

The more aggressive types can think about FREEW

thecorrectcall.com/?p=...

[cupcake]

Why are you looking at shareholder unfriendly companies when you can look at Golden Ocean and Seadrill. Both controlled by John Fredrikson--He knows more about dry shipping and deep drilling then all the above in total. Plus very dividend friendly(Seadrill coming).

[paultaut]

When the US starts importing all oil products in bulk because most of our refineries can not handle heavy/sour grades...which is the total available excess capacity, the shares will start their real bubble.

Bulk Dry prices are still 20% below their previous highs...they will go higher....

[gaucho]

What the did not say was that the DRYS has invested its cash into buying a drilling platform company and new deep water drilling ships. Leasing oil platforms and drilling ships is a natural step for a company that leases dry bulk ships. DRYS eventually pay for most of the acquisition with the cash from operations.

The lease price for the drilling platforms is about 650K a day and rising. The price of oil should remain high and the deep water drilling ships and platforms are in very tight supply. I expect that the return on investment is around 17% and growing if they kept the company.


DRYS CEO stated at the last conference call that he wants to spin the ocean drilling off in1-1 1/2 years. It has been estimated the markets cap from such a spinoff would be around 5 billion. The CEO of DRYS said he will keep a portion of the company its spins off.

I think that he will spin off 50-60% and get all his investment back and still hold nearly 1/2 of a very profitable company. This kind of diversification continues to show the business savvy of DRYS CEO.

[Night trader]

Look at USS.,paying 18% dividend,at a very low entry price,

[workout]

EXM Downgraded,drys being shorted,Dsx contracts moderately priced,don't expect a large gain like last year.

[GOLD]

Don't pay for low returns in shipping. Oil we keep on being moved while US economy is no place close to a recover if you are using housing as your prime marker (which you should be). It's the consumers foundation.

TNK is where you should be (Wed May 14th EPS announcement)

TNK's parent company is TK which is the largest spot market vessel management company in the world.



TNK presentation

Q1 EPS = $0.76
YRLY EPS = $3.04

The company just bought two new Suezmax tankers on credit and you can see that the profits will go up based upon this purchase and the currently highly spot rates. Download the guidance chart from TNK directly.

link to divided payout schedule (guidance chart) based upon spot rates
www.teekaytankers.com/...
download 48kb 3 page file and look at dividend spreadsheet.

Here is the data you need to do the calculations - this data was acquired from a professional source confirmed to be accurate with TNK.

04/04/08
VLCC $95,263
SUEZMAX $60,471
AfraMAX $41,447

I watch and record the weekly spot averages for all tanker types.
The above list is the Average tanker daily spot rate as of the end of Q1. Q2 is higher already.


Here is the latest average including every week from Jan 1 to today.
05/02/08
VLCC $96,718
SUEZMAN $72,152
AFRAMAX $46,545

For those of you too lazy to download this critical guidance here is the brief summary.

Current Q1 spot rates

20,000 = dividend $1.64
25,000 = dividend $1.99
30,000 = dividend $2.34
35,000 = dividend $2.69
40,000 = dividend $3.04 ***** here we are

Download the full chart to see how the two new suezmax tankers effect income (its dramatic).

[iansane]

The baltic dry index hit ANOTHER high today-11459! Drys ended the day at $110.I got into this less than a few months ago at $61-i still laugh at all the whining about drys being over bought at $75!!