The Dry Bulk Industry: A Comparison Of Operating Expenses

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Includes: BALT, DRYS, EGLE, GOGL, NM, NMM, ORIG, SB, SBLK
by: MTF Investing

Summary

The past five years have been lean times for the dry bulk industry with companies closely monitoring operating expenses in order to survive.

The decision to operate ships on either a Voyage Charter, Time Charter, other combination determines who pays which operating costs: either the charterer or the ship owner.

Navios Maritime Partners, Safe Bulkers, and Star Bulk Carriers are all stand outs for their ability to manage expenses that will ultimately drain profits.

The past five years have been a time of famine for the dry bulk shipping industry. When rates crashed, companies had to tighten their belts in order to survive. A few haven't and have had to file for bankruptcy. While some of them may emerge in better shape, the industry has had to trim expenses in order to survive.

The tightening of the belt is a good measure of efficiencies the companies have been able to achieve. While there can be multiple expenses that are registered each quarter the main expenses investors can expect to see are:

  1. Voyage expenses
  2. Vessel Operating expenses
  3. Depreciation
  4. General and Administrative expenses
  5. Dry docking
  6. Management fees

In order to focus on the operating expenses that are directly tied to the actual daily operations of the fleet, this article will focus on Voyage expenses, Vessel Operating Expenses, and General, Administrative, and Technical Management Fees. While depreciation is recorded as an expense, it is typically used to reduce the tax burden of the company and no cash is expended. Dry docking is required in the industry, and each ship will go through it, but the timing will change from quarter to quarter. Management fees will also depend on the structure and parent organizations. While those fees will take away from the bottom line, it's the actual management and operations of the fleet that I want to focus on.

The data used to compile the charts comes from the most recent Quarter, and only looks at that quarter. While some of the expenses will fluctuate from quarter to quarter, all shippers will be subject to bunker fuel rates, weather delays, and repairs needed that will affect expenses. A look at yearly expenses is also helpful, as is multi-year comparisons, but those that are either in bankruptcy or facing bankruptcy haven't managed their expenses efficiently, and results will be about the same.

The fees the companies will log are also tied to how the fleet is managed. The two means most companies use are either Voyage Charter or Time Charter.

Voyage Charter: In a Voyage Charter a company hires a shipper to move its product from one location to another. The charterer pays the shipper on a per-ton basis and the shipper pays the port costs, fuel costs and crew costs. Because most of the dry bulkers are moving iron ore and coal, the voyages are typically one way. So a shipper will move a load from Australia to China, but have to return empty on their dime.

Time Charter: In a time charter the ship is chartered for a specific period of time and the charterer will decide the ports and routes. The charterer will pay for all fuel, port charges, commissions, and a daily hire to the owner of the vessel.

During the market downturn most shippers preferred the safety of a voyage charter over the risk of a time charter. They were guaranteed a set amount. In comparison, over the past three years the time charter rates have been averaging around $10,000 per day, while spikes have brought it up above $20,000 from time to time.

(Source: dryships.com)

Historically, placing ships on the time charter rate has been more profitable, especially when rates have been up in the $40,000 per day range. Industry experts are predicting a pickup in these rates in the next 6-12 months, and many of the drybulk shippers are timing their charters to expire over the next 6-24 months in order to be able to maximize their exposure to the higher rates.

Voyage expenses

Voyage expenses are all expenses unique to a particular voyage, including bunker fuel expenses, port fees, cargo loading and unloading expenses, canal tolls, agency fees and commissions. When a company operates their ships in the voyage charter spot market, the company is responsible for all voyage expenses as opposed to spot market-related time charters in which a company is not responsible for voyage expenses.

Vessel operating expenses

Vessel operating expenses includes crew costs, provisions, deck and engine stores, lubricating oil, insurance, maintenance and repairs and management fees. Under both types of charters the company will be responsible for these costs.

General and Administrative Expenses

General and administrative expenses include onshore vessel administration related expenses such as legal and professional expenses and administrative and other expenses including payroll, office rent and expenses, directors' fees, and directors and officers insurance. General and administrative expenses also include non-cash compensation expenses.

Time Charter Equivalent (TCE) rates

TCE rates are defined as voyage and time charter revenues less voyage expenses during a period divided by the number of available days during the period. The TCE rate is a standard shipping industry performance measure used primarily to compare daily earnings generated by vessels on time charters with daily earnings generated by vessels on voyage charters, because charter hire rates for vessels on voyage charters are generally not expressed in per day amounts, while charter hire rates for vessels on time charters generally are expressed in such amounts.

Comparison

While each company will manage their vessels differently on voyage charter, time charter, and a combination of the different negotiated terms, the rates will help to identify strong performers. Each of the companies mentioned have a mix of fleets and sizes, so it is helpful to compare the costs on a ship rate and a dry weight ton rate.

(Source: data compiled from sec.gov)

Analysis

Baltic Trading Limited (NYSE:BALT) The company has 13 ships with a total of 1,095,000 DWT's managed.

The company operates their ships on the Time Charter with rates either at or a few percentage points higher than the spot rate. As such, the company has low Voyage Expenses since the charterer is responsible for these costs. Operating and GA&T expenses are slightly higher than the industry averages.

DryShips, Inc. (NASDAQ:DRYS) operates one of the largest fleets in the industry, and some of its books are intertwined with Ocean Rig (NASDAQ:ORIG). The company currently has 34% of its fleet on the time charter schedule with 66% on the spot rate. Going forward it plans on continuing to scale off the time charter market and move further into the spot market. Even with a low level of Time Charters, the company is still able to keep Voyage Expenses below industry averages. Operating expenses are a little high, as are GA&T fees.

Eagle Bulk Shipping, Inc. (NASDAQ:EGLE) has also entered bankruptcy, but expects to emerge from it in September 2014 (according to the latest 10Q). Since the fleet is comprised of Handymax vessels, it is able to standardize a lot of the costs. The majority of its fleet operates on the time charter market, however there are some that are working on the voyage charter. Again, because of this, the Voyage Expenses are below average, however Operating Expenses are above average. GA&T expenses are lower on a per ship basis, but since they are operating smaller ships, the fees per DWT are at the industry average.

Knightsbridge Tankers Limited (VLCCF) operates a fleet of 9 Capesize ships on a combination of Time Charters and the Spot Market. Because of this the Voyage Expenses are slightly higher than the industry. Operating expenses are lower than the industry while the Average GA&T per DWT is lower than the industry.

Navios Maritime Holdings Inc. (NYSE:NM) operates their fleet in contracted fixed rate charters. A good portion of the contracts are linked to the index rate, but in spite of this, the company has high operating expenses across the board. On a ship average and DWT average the company Voyage Expenses, Operating Expenses, and GA&T fees are higher than the industry averages.

Navios Maritime Partners L.P. (NYSE:NMM), a sister company to NM, operates 32 ships with 3,264,759 DWTs. The company operates its vessels on long term time charters. However, unlike NM, its averages are significantly below the industry averages.

Safe Bulkers, Inc. (NYSE:SB) has balanced the chartering of the fleet between the time charter and spot market. In spite of this balance, the company has been able to achieve below average operating expenses in all areas.

Star Bulk Carriers Corp. (NASDAQ:SBLK) recently acquired the fleet of Excel Maritime and will be adding more ships and DWTs to its fleet over the next six months. The company operates the majority of its ships on short term charters, but balances the rest between the spot market and longer term time charters. With that being said, the company has across the board lower operating costs on both a ship and DWT average.

Conclusion

When looking solely at Operating Costs, the companies that are the most efficient should perform better than the industry. Navios Maritime Partners , Safe Bulkers , and Star Bulk Carriers are all stand outs for their ability to manage expenses that will ultimately drain profits. I've already written one article about Star Bulk Carriers acquisition, and I believe their ability to keep expenses down will help to compound their profits going forward.

Disclosure: The author is long DRYS, SBLK.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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