Safe Bulkers' Net Income Is Going Down In Flames: Avoid

| About: Safe Bulkers (SB)
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Summary

SB has many higher-rate contracts expiring.

SB should go from barely profitable to losses.

SB management had little more than gloomy words for the industry in the conference call.

Last quarter Safe Bulkers (NYSE:SB) reported an adjusted net income of $1.0 million despite low shipping rates. The reason it was able to squeeze out a profit is simple: Most of its ships earn revenue from fixed rate contracts making the daily spot prices as part of the Baltic Dry Index, or BDI, largely irrelevant. However, this strategy has a double-edged sword attached to it, and it looks like it's about to get ugly.

Vessel Name

DWT

Year Built

Country of construction

Charter Rate(1)USD/day

Charter Duration (2)

Panamax

Maria

76,000

2003

Japan

9,100

Jul 2014 - Jan 2015

Koulitsa

76,900

2003

Japan

13,250

Jun 2014- Jun 2015

Paraskevi

74,300

2003

Japan

8,500

Jul 2014 - Dec 2014

Vassos

76,000

2004

Japan

BPI(4) + 6%

Apr 2014 - Nov 2014

Katerina

76,000

2004

Japan

12,450

Jul 2014 - Nov 2014

Maritsa

76,000

2005

Japan

27,649 (3)

Mar 2013 - Jan 2015

Efrossini

75,000

2012

Japan

10,400

Jul 2014 - May 2015

Zoe

75,000

2013

Japan

9,100

Aug 2014 - Jan 2015

Kypros Land

77,100

2014

Japan

15,000

Aug 2014 - Nov 2014

Kypros Sea

77,100

2014

Japan

15,350

Sep 2014 - Nov 2014

Kypros Unity

78,000

2014

Japan

11,000

Sep 2014 - Nov 2014

Kamsarmax

Pedhoulas Merchant

82,300

2006

Japan

BPI(4) + 9.5%

Jul 2013 - Jul 2015

Pedhoulas Trader

82,300

2006

Japan

BPI(4) + 6.5%

Aug 2013 - Aug 2015

Pedhoulas Leader

82,300

2007

Japan

10,600

Jul 2014 - Apr 2015

Pedhoulas Commander

83,700

2008

Japan

10,500

Jul 2014 - Apr 2015

Pedhoulas Builder

81,600

2012

China

8,750

Sep 2014 - Nov 2014

Pedhoulas Fighter

81,600

2012

China

9,200

Aug 2014 - Nov 2014

11,250

Nov 2014 - Dec 2014

Pedhoulas Farmer

81,600

2012

China

11,000

Sep 2014 - Aug 2015

Post-Panamax

Stalo

87,000

2006

Japan

13,500

Aug 2014 - Nov 2014

Marina

87,000

2006

Japan

13,000

Jul 2014 - Nov 2014

Xenia

87,000

2006

Japan

8,500

Jul 2014 - Jan 2015

Sophia

87,000

2007

Japan

10,000

Oct 2014 - Dec 2014

Eleni

87,000

2008

Japan

12,500

Oct 2014 - Nov 2014

Martine

87,000

2009

Japan

9,250

Aug 2014 - Feb 2015

Andreas K

92,000

2009

South Korea

7,500

Oct 2014 - Nov 2014

14,000

Nov 2014 - Dec 2014

Panayiota K

92,000

2010

South Korea

13,300

Jul 2014 - Nov 2014

Venus Heritage

95,800

2010

Japan

10,000

Sep 2014 - Nov 2014

Venus History

95,800

2011

Japan

9,833

Sep 2014 - Jun 2015

Venus Horizon

95,800

2012

Japan

13,000

Oct 2013 - Mar 2015

Capesize

Kanaris

178,100

2010

China

25,928

Sep 2011 - Jun 2031

Pelopidas

176,000

2011

China

38,000

Feb 2012 - Dec 2021

Lake Despina

181,400

2014

Japan

24,376 (5)

Jan 2014 - Jan 2024

Total

2,941,700

If you take a look at the contract lineup in the last earnings release, there are 14 out of 32 ships with contracts that either expired last month or are expiring this month. Then there is another dozen or so contracts expiring early next year. Almost all of these are for rates that are higher than the current equivalent daily rate. All other things being equal, these expired contracts will either renew at lower rates or operate based on daily spot rates and the lowered revenue will eat directly into the bottom line. What's worse is there doesn't seem to be much hope for rates to go anywhere but down from here in the short run.

The good news is the three Capesize ships are at rates multitudes higher than the current daily spot rates for Capesize ships and the contracts won't expire for a while. The bad news is it's only three ships out of 32 in the fleet and not enough to keep a $1.0 million adjusted net income from sinking to a loss.

The conference call that followed earnings didn't hold much promise either. President Loukas Barmparis mentioned the global orderbook for new ships remains a problem, citing a growth of 3.8% in the first nine months of the year and already a 9% increase on slate for fleet growth in 2015. He stated that forecasted surges of rates during the second half of the year failed to materialize and cited a number of continued risks going forward. He mentioned things such as a slowdown in China's economy, too much global fleet oversupply, China potentially changing the import rules or taxes, and cheap fuel prices leading to an elimination of slow steaming by ships thus increasing the supply of available trips.

Since SB management isn't very confident about the future, why should we be? I plan to avoid SB along with other dry shipping stocks until and unless a serious fundamental change occurs. On a side note, I applaud SB management for being straight up. If and when the dry shipping market turns positive again, it gives SB management credibility in any positive remarks they may have to say going forward as they seem to call it like they see it.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.