Star Bulk Carriers: Ready For IMO 2020 Disruption

Summary

• Star Bulk Carriers is one of the largest and best-managed dry bulk shipping companies in the world.
• The company has taken a very aggressive stance, planning on having 104 ships fitted with scrubbers before the start of 2020.
• The company has acquired $1.1 billion worth of vessels in the LTM at decent prices.

Company overview

Star Bulk Carriers (NASDAQ:SBLK) is a US-listed dry bulk shipping company with 120 vessels with an average age of 7.8 years. In the last twelve months, the company has spent $1.1 billion buying ships at depressed valuations, which can deliver tremendous value if rates run when IMO 2020 takes effect.

Investment thesis

SBLK's aggressive take on scrubbers (104 ships fitted with scrubbers at the end of 2019), combined with the fleet ampliation the company has achieved during this last year, can provide tremendous value if the spread between HSFO and VLSFO or other compliant fuels like marine gasoil is high, providing the company with a premium to average market rates.

IMO 2020

IMO 2020 is an International Maritime Organization (IMO) regulation that will limit the amount of sulfur in fuel used by shippers to about 0.5% from 3.5% (by weight) when it takes effect January 1, 2020. The 3.5% limit was established in 2012, reducing it from 4.5%.

Source: International Energy Agency (IEA) Oil 2019 report

As we can see above, the IEA expects HSFO usage to fall by about 60% while the usage of MGO (marine gasoil) and VLSFO (very light sulfur fuel oil) will skyrocket. This image illustrates what the IEA expects for the whole world (we can see they expect about 750,000 mb/d of unscrubbed HSFO usage suggesting some maritime companies will decide to not comply with the new regulation).

Source: the Effects of Changes to Marine Fuel Sulfur Limits in 2020 on Energy Markets (U.S Energy Information Administration).

The EIA expects about total compliance with the new regulation (at U.S. ports, it does not make worldwide forecasts). The most interesting considerations from this illustration are the gradual acceptation of liquefied natural gas (LNG) as power for the shipping industry and the adoption of scrubbers

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, but may initiate a long position in SBLK, EURN over the next 72 hours. 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.

This article is for educational and informational purposes and should not be considered investment advice. Some of the information that this article contains comes from Value Investor’s Edge, a Marketplace research plataform focused on shipping.