Baltic Trading Limited: Proceed With Caution

| About: Baltic Trading (BALT)
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Summary

Baltic Trading Limited has been subject to speculation of a buy out from Genco, but has some operational weaknesses.

The company currently has enough cash for operations, but low revenue and negative earnings will likely continue to drain cash.

If there is no buy out, and rates don't improve, the company may have to issue more equity around the end of 2Q14.

Several recent articles have Baltic Trading Limited (NYSE:BALT) as a potential buy out target. Since the initial call, Lloyds List has come out confirming that Genco has hired advisors to explore the possibility of the acquisition. However, barring a buy out, investors would be wise to move on to another company. Operationally, the company has low expenses to match its low revenue and the balance sheet looks weak compared to peers.

BALT reached a 12-month high just shy of $8 on March 6th, and then proceeded to fall, along with the rest of the industry, down to the current price of $2.52. If Genco is looking for a buy out candidate, it may be approaching an even sweeter deal now than it did in October when the price was trading in the $3.50-$4 range.

Compared to the rest of the industry, it is in line with the fall of the rest of the companies.

Revenue

The company began expanding its fleet during the 2nd quarter of 2013 from 9 ships with a capacity of 672,000 DWTs to the current fleet of 14 ships and just shy of 1.2M DWTs. The increase in the fleet size corresponded to a rise in revenue but has since been declining.

Revenue peaked in the 4th Quarter before beginning the decline. The decline in revenue, in spite of the increase in capacity, is due to the falling shipping rates and contracts the company has established.

(Source: Company Presentation)

And while the company has been able to post positive EBITDA for 7 of the last 8 quarters, once Interest, Taxes, Depreciation and Amortization is taken out, the company has posted a net loss for 7 of the last 8 quarters.

This has been fairly consistent across the industry, as many companies have been operating on net losses and burning cash in anticipation of the looming recovery. The only problem is the recovery still hasn't materialized.

The company was running low on cash in 4Q12 and 1Q13 before beginning a series of equity offering and gaining credit facilities to help finance the expansion of the fleet. The company reached a high of just over $60M in cash on hand at the end of 3Q13 before the decline began again.

Over the past two quarters the company saw a decline of $12M in cash on hand from 1Q14 to 2Q14 and then another $4M from 2Q14 to 3Q14.

$20M is enough cash to sustain the company for a while, but there comes a point when the company has to prepare for another issuance before the coffers are empty.

The fall in Bunker Fuel prices will help to reduce the operating expenses of the company, but if the draw down continues at a rate of $3-5M per quarter, the company will need to begin the process for another offering around the end of 2Q15.

Industry comparison

I recently completed a series looking at industry Revenue, Expenses, and Balance Sheets. Compared to its peers, the company is doing fairly well in some areas, but lagging in others.

The company uses smaller ships, so revenue per Ship was lower as was revenue per DWT. When looking at earnings on a per Ship and per DWT basis, it was nearly at the bottom.

The company did well when expenses were compared across the fleets on a per Ship and per DWT basis.

When looking at the balance sheet, the company has a low level of Cash on Hand compared to its peers with $1.6M per Ship and $20 per DWT.

When looking at the Long Term Debt levels, it looks healthy compared to its peers with the lowest per Ship at under $12M.

Conclusion

BALT lags behind its peers in many areas but has shown some efficiencies in running its fleet with low operating expenses. The red flags that remain come from the low levels of revenue combined with negative earnings and the negative trend in the Cash on Hand levels. The only way this company should be recommended is on the back of a possible buyout which may or may not happen. For investors, there are better companies in the sector to invest in, or save your money for when the Dry Bulk Shipping market becomes profitable again. For speculators, the company may see a buyout, but proceed at your own risk.

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.