Small, Greece-based drybulk carrier Seanergy Maritime (NASDAQ:SHIP) has been experiencing tough times as of late. As a highly leveraged capesize pureplay with its vessels mostly trading in the spot markets, fallout from the recent Vale S.A. (VALE) dam incident in Brazil will likely be hitting the company hard in the first half of 2019.
Despite the current challenges, management offered some reassuring comments in the company's recently published Q4/2018 report:
In the beginning of 2019 we have experienced a sharp drop in the market that was driven primarily by the supply disruption caused by the Brumadinho dam disaster in Brazil. The main drivers of the market in 2019 are expected to be the Chinese government policies and trade relations, the availability of long-haul iron ore cargoes from Brazil, the disruptions caused by the upcoming implementation of IMO 2020 regulations and fleet growth prospects. It appears that the U.S. and China are moving closer to a temporary agreement on trade, and we expect that the situation in Brazil will normalize within the second quarter.
Indeed, the Baltic Dry Index and particularly capesize rates have recovered from abysmal Q1 levels in recent weeks but remain below the numbers quoted before the Vale dam incident in late January.
Photo: 2012-built Capesize Drybulk Carrier "Partnership", most modern vessel in the company's fleet - Source: Company Website
As a result, the company will likely burn substantial amounts of cash in H1/2019 (after generating $5.7 million in cash from operations in 2018) and has already taken a number of proactive measures to address the issue:
- secured a new $4.5 million credit line with an existing lender
- amended debt covenants with certain lenders
- deferred $3.3 million in 2019 debt installments for up to two years
- entered into a new $7.0 loan facility and extended debt maturities with its controlling shareholder, Jelco Delta Holding ("Jelco"), a company affiliated with Greek shipping magnate Claudia Restis
In addition, the company prepared for an underwritten public offering of common shares and warrants with the respective documents having already been filed with the SEC in early April.
After the registration statement became effective, the company announced the pricing and other offering terms in Thursday's pre-market session:
- sold 4.2 million units consisting of one common share, one Class B warrant to purchase one common share and one Class C warrant to purchase one common share at a price of $3.40 per unit.
- gross proceeds are expected to be approximately $14.3 million
- Class B warrants are immediately exercisable for one common share at an exercise price of $3.74 for a term of three years. The warrants will be publicly traded on the Nasdaq Capital Market under the symbol "SHIPZ".
- Class C warrants are immediately exercisable for one common share at an exercise price of $3.74 for a term of six months.
- granted the underwriter, Maxim Group LLC, a 45-day option to purchase up to an additional 630,000 shares of common stock or pre-funded warrants, 630,000 Class B warrants and/or 630,000 Class C warrants, at the public offering price less discounts and commissions.
Concurrently, the company conducted a private placement with Jelco Delta Holding of $6.2 million of units at the public offering price. As consideration for the units, Jelco has agreed to:
- waive the company's obligation to make interest payments accrued through March 31, 2019 under its debt facilities with Jelco in an aggregate amount of approximately $2.11 million
- the elimination of interest payments under the company's debt facilities with Jelco for the period between April 1, 2019 and December 31, 2019 in an aggregate amount of approximately $3.85 million
- waive the mandatory prepayment requirement with respect to the offering under the company's loan agreement with Jelco dated March 26, 2019
As a result, the number of outstanding shares increased by more than 200% from 2.8 million to 8.8 million. Not surprisingly, investors weren't exactly enthusiastic about the massive dilution and headed for the exits during Thursday's session, causing the share price to crater by 50%.
While the renewed dilution is certainly painful, the highly leveraged company urgently needs the cash infusion to cover operating losses and partially pre-fund $12.5 million of scheduled investments in exhaust gas cleaning systems ("scrubbers") on five of the company's vessels during the second half of the year. That said, Seanergy Maritime will be fully reimbursed by the charterers upon commencement of the respective time charters.
Assuming cash burn from operations for H1/2019 of $5 million and including the new Jelco credit facility, post-offering cash balances calculate to roughly $20 million while the estimated market value of the company's fleet is around $250 million, in combination roughly matching the company's overall debt balance of $270 million (including $38.7 million in convertible notes due to Jelco).
In layman's terms: At this point, the company's net asset value ("NAV") is basically zero which doesn't make Seaenergy Maritime exactly look like a bargain relative to some of its peers:
Source: Companies' SEC-Filings, Author's own work
That said, the company's massive leverage works in both ways and with a much lower number of newbuilds anticipated to hit the market going forward in combination with potential fleet disruptions from the upcoming implementation of new environmental rules in 2020 as well as the installation of scrubbers, especially in the capesize segment, a significant tonnage supply contraction might be close at hand which should lead to considerably higher charter rates starting in the second half of 2019.
Given the recent recovery in capesize rates and the much improved short-term outlook, I decided to take the gamble and buy into Thursday's 50% share price drop.
In light of the highly speculative nature of this trade, I only committed to a small position which I might decide to average down on should the shares exhibit further weakness without an accompanying decrease in capesize rates.
Under normal circumstances, I would set a stop loss just below $1.50 but given the small position size and the anticipated volatility in the shares, I might very well decide to average down instead.
Recent turmoil in the drybulk markets caused by the Vale dam incident in late January has put some meaningful pressure on Seaenergy Maritime, forcing the company, among other things, to renegotiate debt covenants, defer interest and amortization payments and even raise a sizeable amount of new capital, causing massive dilution to existing equityholders.
But even after Thursday's whopping 50% share price drop, the company is not a bargain by any means and shouldn't be touched by more conservative investors with a ten-foot pole.
But with leverage working in both ways and a much improved outlook for the second half of 2019, the shares might be worth a gamble for experienced traders and highly speculative investors.
That said, proven market leaders like Starbulk Carriers (SBLK), Genco Shipping & Trading (GNK), Scorpio Bulkers (SALT) and Golden Ocean Group (GOGL) are all trading at sizeable discounts to net asset value, offering solid price appreciation potential at considerably lower risk relative to Seanergy Maritime.
In any case, don't bet the farm on a highly speculative stock like Seanergy Maritime and adequately manage your risk.
I will update investors on the company going forward, so stay tuned.
Disclosure: I am/we are long SHIP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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