In my last article on Ocean Yield (OTCQX:OYIEF) during late July, I specified just why Ocean Yield is a company I consider a good investment even if a potential dividend cut occurs (which, I want to reiterate, I'm taking into account). Even if one materializes, the company yield at the time of the publication of the article, Ocean Yield: ~10% Yield Even After A Potential Cut, will, as the title suggests, still be above or close to 10%. While I don't typically invest in companies with this type of yield, the company's characteristics along with its Norwegian backing through Aker BP (OTCPK:DETNF) makes it a company I enjoy owning despite the (for me) atypical yield and risk/reward ratio.
To put it cleanly, Ocean Yield is a company that's a far higher risk due to its business than the things I usually invest in, but it's an investment I nonetheless am comfortable with at this time.
Let's take a look at some recent news items which for me has warranted a small thesis update at this time.
Some news items confirm the potential upside for the company
Since I wrote my last article, the stock price for Ocean Yield has actually dropped a bit to multi-year lows, only to (at the time of writing of this article) bounce back up to above the then-relevant stock price.
Today alone, the Norwegian listing has appreciated by 3.4%. Personally, I'm hoping we see prices below 50 NOK/share again. This would present further buying opportunities and I, unfortunately, was a bit late to the party here.
Once again, we have some news items which could be considered relevant for your investment thesis. Let's tick them off one by one.
First, the company has agreed to acquire another dry bulk with an already-confirmed 10-year bareboat charter to Interlink Maritime. Ocean yield has pledged a purchase price of $18 million for the ship. Delivery will be taken in September of 2019, and, as a result of this, Interlink's contracts with the company will number six ships on long-term charters. Interlink owns a fleet of 28 vessels and is in turn owned by the Carlyle Group, a global asset manager with $223 billion worth of assets.
Second, the company successfully finished its placement of hybrid capital worth $125 million at a rate of three-month LIBOR (+6.5%) with quarterly interest payments. The bond was oversubscribed and was managed by DNB Markets, Nordea, Pareto, and SEB as well as Arctic Securities. The oversubscription and success of the placement indicate further confidence in the company--and this was all but expected to this contributor. DNB remains one of the foremost shipping finance banks in the world.
Third, the company's option agreement with Aker Energy AS was extended once again to December 2019, as opposed to the previous due date on September 1, 2019. This is also the reason why this update is a bit tardy in coming. Had the option expired in September, the update likely would have come at that time, as a dividend cut might have materialized at that time. As it stands, however, Aker Energy agreed to extend the option once more, bringing Ocean Yield additional compensation to secure against the loss of income from the FPSO.
My interpretation of this piece of news is that the underlying reasons cannot be determined from the limited data/information we have. The indication is that the company considers a solution to the problem likely--given what was said in the quarterly, where managed confirmed that no option, including divesting the FPSO altogether if circumstances require, is off the table completely.
As it stands, the company will not need to take drastic measures until December of 2019 (or perhaps early 2020, given the due date of December 31).
Extensive Insider Stock Purchases
Following the placement of capital as well as the drop in share price, the company as well as individual members of the board/executives, have been active purchasers of the company's shares both through management incentive programs as well as the company buybacks aimed at employee incentive programs (these are obviously connected).
While the management incentive program is nothing new if looking back to 2018 (though not 2017--no such transactions are to be found during the year), the transactions, due to their size, still bear looking at, as 150,000 shares are involved, adding up to a value of around ~8 NOK. The shares bought on the market by the company to be held in the form of treasury shares also means that the company will, following the purchases, hold a far greater number of treasury shares compared to the 9021 shares held prior to the purchases.
In total, management has bought 70,000 shares, with a lock-up period of three years. Shares were bought at market value less a 20% discount, to reflect the lock-out.
While this isn't to be construed as something unique, as its happened before, the continued purchases and especially the timing, indicate management's and the company's continued confidence in the business.
Local analysts see continued upside as well
My fellow Swedish/Nordic dividend investors and I are hardly the only ones to see upside in this company at this point. I'm not going to run through the fundamental argumentation for the company once again--not in this article. I consider these well-covered in my previous articles and none of the fundamentals have deteriorated to a point, or changed, to where I consider a thorough update on this to be relevant.
The pressure influencing the company's share price can be said to come from two sources.
First, we have company-specific weaknesses related to charter contracts with companies which are currently suffering financial troubles. We also have the FPSO uncertainty related to charter/contracts.
Second, we have global troubles currently influencing the world market, including shipping and freight. The trade troubles between China and the US have done their part in changing sentiment toward a company like Ocean Yield, as has the somewhat-associated drop in oil price, going from about $75/barrel to $58/barrel. This, too, affects company valuation and share price.
However, the fundamental upsides in the thesis on Ocean Yield remain. The following positives could be said to be relevant to consideration regarding an investment in Ocean Yield, things which haven't been mentioned clearly in my previous articles.
- The most negative analyst forecast is targeting a share price of 56 NOK--the stock is currently well below this.
- Ocean Yield actually profits from a weak NOK and, given its current breadth of operations, isn't as tied to the development of oil prices as it once (during inception over a decade ago) was. All of this is good, and continued FX weakness is nothing that need be considered a risk to the company.
- Even with the FPSO removed, two AHTS removed as well as the deep sea vessel removed from the company, the NAV is still above the current share price, which is also related to the first point here (analyst rating/target prices).
A small thesis update
To call Ocean Yield a safe investment on par with conservative consumer staples would, of course, be completely incorrect. Ocean Yield is one of the riskier positions in my portfolio, but one that I'm currently happy to have.
The combination of aforementioned motivated owners as well as cooperations with Aker BP/Aker Energy, a well-diversified charter/contract portfolio stretching well over a decade with new charters and ships being added to the lineup on a yearly basis means that this company isn't as tied to singular vessels such as the FPSO as it once was. It makes it a far more appealing company.
My previous thesis was that even with the FPSO trouble still influencing the company, a 10%-covered yield is still available here.
It still is. I also choose to view the extension of the option for the FPSO as a positive, a sign that the company may yet resolve the troubles here--even if it isn't something I strictly include in my calculations when it comes to the return from the investment.
Combine this with the positive news items, the continued insider purchases, and treasury shares, the oversigned hybrid bond, and the undervaluation we see at this time, and I consider the thesis for purchasing Ocean Yield to be stronger than ever.
While I purchased a small position at the beginning of September, I'm willing to purchase even more (and am planning to do so), if we see another dip in the share price. I do believe that we will see such a dip if the company is unable to solve the FPSO charter and at that time, one will be able to load up on more of the company at an even cheaper price point.
So, while we wait for December to arrive, as well as the 3Q19 report from Ocean Yield, my stance and thesis for the company remains a firm "BUY"--and this contributor remains an Ocean Yield long.
Thank you for reading.
Share prices of 53 NOK/Share (Oslo Listing) are still considered undervalued by this contributor, based on comparison to historical value, earnings, NAV and the potential upside even with the removal of the FPSO from the company lineup. I consider the company undervalued due to company-specific uncertainties and global trade worries. Ocean Yield remains a "BUY" though the recommendation regarding careful position sizing remains due to the inherent risk to any company with this risk profile.
Disclosure: I am/we are long OYIEF. 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.
Additional disclosure: While this article may sound like financial advice, please observe that the author is not a CFA or in any way licensed to give financial advice. It may be structured as such, but it is not financial advice. Investors are required and expected to do their own due diligence and research prior to any investment.
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