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A method for estimating a shipping company's quarterly revenue

|Includes:FreeSeas, Inc. (FREEF)

1.  Motivation

This note presents a method for predicting the quarterly revenues of Freeseas Inc. (FREE, FREED) prior to earnings release.   This method is shown to be unbiased (i.e. no systematic overestimation or underestimation of revenues), and accurate to with +/- 5% of FREE’s actually quarterly revenues.  It is the hope that readers will be able to apply this method to other shipping companies, and ultimately estimate other aspects of a shipping company’s balance sheet (e.g. quarterly free cash flow, earnings per share, etc.).

2.  Method

The following steps are based on actual numbers from FREE’s 4th quarter of 2009.

Step 1.  Create a new spreadsheet and add all ships and their charter rates in units of dollars per day.  FREE’s current charter rates are found on their webpage and their subsequent updated charter rates are provided via press releases.   The first set of rates were the charter rates as of 9/1/2009.

 

09/01/09

Destiny

10000

Envoy

7900

Goddess

12500

Hero

14500

Impala

8750

Jupiter

25216

Knight

8300

Lady

51150

Maverick

9500

Neptune

15000

Click to enlarge

 

Step 2.  Every time FREE updates its charter rates, update the spreadsheet accordingly.  Be sure to note the date of the press release at the top of the column.  For example, during Q4 2009, FREE updated its charter rates two other times during the quarter – 11/19/2009 and 12/15/2009.

 

09/01/09

11/19/09

12/15/09

Destiny

10000

9075

14000

Envoy

7900

7200

7200

Goddess

12500

12500

12500

Hero

14500

11500

11500

Impala

8750

11500

13500

Jupiter

25216

25216

25216

Knight

8300

7000

15000

Lady

51150

51150

51150

Maverick

9500

10000

14000

Neptune

15000

20000

16000

Click to enlarge

 

  Step 3.  Calculate the number of days between charter changes, and make sure the total number of days sum to the total number of days in the quarter.  For example, in Q4 2009:

# days 9/1 – 11/18

# days 11/19 – 12/15

# days 12/16 – 12/31

total

49

27

16

92

Click to enlarge

 

Step 4.  Multiply the number of days by the appropriate charter rate and sum over all ships.  For example, in Q4 2009:

Ship name

cum. Revs

 

cum. Revs

 

cum. Revs

Destiny

49

490000

27

245025

16

224000

Envoy

49

387100

27

194400

16

115200

Goddess

49

612500

27

337500

16

200000

Hero

49

710500

27

310500

16

184000

Impala

49

428750

27

310500

16

216000

Jupiter

49

1235584

27

680832

16

403456

Knight

49

406700

27

189000

16

240000

Lady

49

2506350

27

1381050

16

818400

Maverick

49

465500

27

270000

16

224000

Neptune

49

735000

27

540000

16

256000

SUM

 

7977984

 

4458807

 

2881056

Click to enlarge

 

         

cummulative revenues

Step 5.  Sum all of the cumulative revenue values:

sum 1

sum 2

sum 3

total

total (million)

7977984

4458807

2881056

15317847

15.32

         
Click to enlarge
       

16

224000

Click to enlarge

Step 6.  In order to calculate the total revenues, we need to multiply the total from step 5 by the utilization rate.  The utilization rate is essentially the percentage of time that FREE’s ships were actually earning revenues (i.e. transporting goods).  I assumed an utilization rate of 0.94, which was pulled from the previous quarter’s earnings report.  The estimated quarterly revenues then become:  0.94 x 15.32 = 14.25 million.

This is a simple method for estimating FREE’s quarterly revenues.

Verification

I applied this method to Q409, Q110, and Q210.  The table below highlights my performance. 

 

forecast

actual

% off

Q4 2009

14.2456

14.5

-1.8

Q1 2010

15.1076

15.66

-3.5

Q2 2010

16.9608

16.5

2.8

Click to enlarge

Conclusion

This method can be used to estimate a shipping company’s revenues prior to an earnings release.  The drybulk company, Freeseas, was used as an example since it operates in the spot market and updates its charter rates often.  It should be noted that sometimes charter terms include a ballast bonus.  These are one-time fees earned that must also be added to the quarterly revenue estimate.  Future comments will provide methods for analyzing other aspects of Freeseas balance sheet.

 



Disclosure: long FREE
Stocks: FREEF