(Author's Note: Investors should be mindful of the risks of transacting in securities with limited liquidity, such as OYIEF. The Ocean Yield listing in Oslo, OSL:OCY, offers stronger liquidity).
The Coronavirus-induced market free-fall, now coupled with the oil scare, has and will affect a number of different companies. Being that I focus on primarily, classically "safe" dividend yields, I see myself as quicker than most when it comes to keeping company thesis up to date.
To put it as concisely as possible - Ocean Yield (OTCQX:OYIEF) may need to cut the dividend further if certain contracts in the company's current lineup become distressed as a result of this.
As an investor, you need to take this into consideration prior to investing, to make certain that Ocean Yield lines up with your long-term investment goals.
Ocean Yield - Coronavirus brings uncertainty
No company is immune from external factors, and higher-risk shipping companies are certainly amongst those bearing the brunt of the goings-on in the current market. Let's quickly go through what the danger is here, to get everyone up to speed.
Ocean Yield has bareboat charters to a variety of different operators and companies. The diversification in the contract portfolio is appealing, but this certainly doesn't equate to a risk-free investment. No investment, particularly a 10%+ yielding one, is ever risk-free. In fact, Ocean Yield is probably the riskiest investment in my portfolio. I outline in previous articles exactly why that is, but to quickly sum this up, it's due to a strong majority stakeholder coupled with an excellent fleet as well as a good contract backlog.
(Source: Ocean Yield FY19 report)
I've pretty clearly communicated that I considered it wise to wait with any purchase until the company officially communicates their dividend cut - as any such communication is more than likely to result in more drops insofar as the common share goes.
Due to the nature of the company's business, Ocean Yield is not directly exposed to seasonal or short-term market volatility. It's part of what appeals to me about this company. Any momentary dip in the market is soaked up by the fact that customers lease in very long terms, and with bareboat charters. This provides continuous cash flow regardless of the market climate.
The flip side is that if something major happens, chances are that customers will be unable to pay the contracts. While I believe it is too early to say whether the Coronavirus or the oil scare will actually do this, I think it is wise to at least consider the possibility.
Today, on Wednesday, the first major analyst following the company has highlighted this risk. Their focus is on Hoegh Autoliners and MSC, which would constitute about 23% of the company's current contracts. I consider the likelihood that these operators start experiencing problems to be very remote - especially MSC - due to the company character.
The Mediterranean shipping company is the world's second-largest shipping line in terms of container vessel capacity and is a Swiss-Italian company, operating over 500 vessels and over 21 million TEU capacity. The company doesn't publish financials per se, so it's hard for us to know what sort of coverage the company has. However, we also need to consider the fact that MSC may ask Ocean Yield for leniency. The company has a history of charter payment standstills with the FAR Senator and FAR statesman. It's not out of this world that the same could happen with MSC if this crisis gets bad enough.
Höegh Autoliners is the world's largest PCTC (Pure Car and Truck Carriers) and one of the largest RoRo operators in the world. Much like Ocean Yield, it's majority owned by a Norwegian company - in this case, Leif Höegh, with the remaining~38% being owned by A.P Möller-Maersk (OTCPK:AMKAF). Here we know a bit more, such as the fact that the company doubled its deficit back in 2018. The likelihood, as such, that the Coronavirus or oil war has improved things seems very remote indeed.
What's the risk?
Regardless if one or both of these companies are afflicted - or even more - the risk to Ocean Yield's fundamentals in the short to medium term results and coverage is clear. If the company is forced to offer payment standstills for further customers, even the current cut, $0.15/share quarterly, becomes unsustainable on an NTM basis as long as this keeps up.
It's worse than this since we have no realistic predictions of when the effects of this economic disturbance may taper off, this makes forecasting any sort of realistic scenario of where we might be dubious at best. Pareto Securities, one of the companies covering Ocean Yield, made an attempt this morning wherein they declared that Ocean Yield's current WACC is far too high for the global environment and considers a further dividend cut to $0.1/share and quarter to be necessary to allow the company sufficient legroom to navigate this environment.
The risk to Ocean Yield's fundamental business is very similar, regardless of the situation - it's nonpayment, contract default or a failure to find new customers for the company's charter contracts. 2020 finds us in a combination of the three.
- The FPSO Dhirubhai-1 is still not chartered, and the current market climate is unlikely to make re-chartering the vessel easier.
- The current contract uncertainty regarding the Connector and other short-term vessels.
- The added uncertainty of the Coronavirus and the oil price war.
This is not a good situation for Ocean Yield to be in, and even the fundamental safeties in the form of an excellent majority shareholder and a long-term appealing business model with excellent backlogs may begin to shift in the wind under these circumstances.
What are the positives?
Well, first of all - all of this is currently speculation. Ocean Yield is, as I am writing this article, down in 5-6% market action due to a combination of analyst criticism released a few hours ago, and the Oslo stock market as a whole being down as a result of the Coronavirus and the oil scare.
We know the market is irrational. This may be another irrationality that we in 2-3 years look back upon and say "I wish I'd have bought more."
Secondly, the company just managed to lock up another contract for the Connector in China, which will begin during summer 2020. So while activity is down, it's clearly far from "dead", as such.
We also need to consider the fact that little in terms of company fundamentals have changed, and that even if the company's customers - some of the largest shipping companies in the world - start asking for payment concessions on charter contracts, this is a temporary measure until things pick back up again.
Which also brings us to company valuation, which at this point looks something like this in terms of tangibles:
(Source: Tikr.com)
This means that at this point, Ocean Yield is for the first time in its recorded history trading below the value of its tangible assets. Tangible assets in this context of course mean the vessels they currently own. This metric currently stands close to 0.6X.
While I do see risks here aplenty, at least in the short term, I also think the ridiculousness of this valuation speaks for itself in the longer term.
Insiders have also been saying their piece on this valuation - in that they've been buying stock. Over the past 2 months, the head of Business Development/M&A, SVP investments, CFO, SVP Investor Relations and members of the board, have all been loading up shares at prices of 36-42 NOK/share. Some of these buys are within the incentive program within Ocean Yield, others are outside of this.
So - positives? There are plenty.
Wrapping it up
However, in the end, I'm an investor who values safety above risk. My own position as financially independent, and with a comparatively small (just above 1.3%) portfolio exposure to Ocean Yield, insulates me somewhat from the volatile emotion experienced by those who may have a larger exposure to the company at this time. I view Ocean Yield from the perspective of decades, not years.
To me, the Coronavirus and the oil scare are barely a blip on that radar. As a result of this, I've been loading up and averaging down since the dividend cut announcement. The fact is, I will continue to do so.
However, please understand that this is done within the realms of my investment circumstances - it's a risk that I consider to be worth taking in my own context. I'll publish an article on how you can think about investments like these in a day or so, and I encourage you to read it.
Unless you share the view that you want to own Ocean Yield for decades, and you're fine with the very real possibility that the stock price fall has just begun, or perhaps even a further dividend cut, then I consider owning Ocean Yield at this time something you may perhaps avoid.
Choosing investments in a market where you can throw a rock and hit quality well above Ocean Yield (quality in this context meaning current dividend safety, balance sheet stability, low beta) is not a hard exercise. I've written multiple articles on this, and I want to clarify that the majority of my investments are done in companies such as Bristol-Myers Squibb (BMY), General Dynamics (GD), 3M (MMM), Caterpillar (CAT) and so forth. For every dollar invested into a company like Ocean Yield or Tanger Factory Outlet (SKT), I invest another ten in companies such as those.
However, due to my own due diligence and the research of investors I trust, I consider both companies, Tanger Factory Outlet and Ocean Yield, to be undervalued, high-dividend paying gems that in the long term will deliver significant alpha.
This means that the lower a company such as Ocean Yield goes, the more cash I will get for my investment, and the more I will invest. As long as the fundamental thesis doesn't break - and I don't see 70+ vessels becoming worthless - these shifts really don't bother me - they make me buy more.
However, I'm at the same time the first to tell people to focus on a portfolio of 90% of quality, A-grade dividend stocks at undervaluation. Positions like Ocean Yield serve to offer exciting high yields, but these high yields do come at a cost of risk.
Because of this, I encourage all investors to think carefully about if, and how much to invest in higher-risk companies. Ocean Yield is certainly among them at this time.
Stay safe out there - and consider your allocation well!
Stance
Ocean Yield remains a "BUY" and escapes becoming a "STRONG BUY" due to the risk associated with the Coronavirus and oil in relation to its bottom-feeding valuation.
