Golden Ocean: It Does Look Like Stars Are Aligning

Summary

• Golden Ocean is well positioned to take advantage of strong rates with their large modern fleet.
• Trade route disruptions and lackluster interest to order new ships should bode well for the company.
• Very high dividend could continue but history tells us that it is not stable.

CaraMaria/iStock via Getty Images

Golden Ocean logo (Golden Ocean investor relation home page)

Investment thesis

Since my last article on Golden Ocean (NASDAQ:GOGL) back in November of last year, the share price has gone up 58%.

Golden Ocean up 58% since Nov 2021 (Seeking Alpha)

My “hold” stance then surely qualifies me for the “Patsy of the month” award.

In a fast-changing world, much has happened since my last article, and I would like to share with my readers whether I think GOGL is still a Hold or potentially a Buy.

Fourth Quarter 2021 Financial Results

Their 4Q net income of $204 million, or $1.02 per share, was the best quarterly result in the history of GOGL.

GOGL ended 2021 with delivering time charter equivalent rates of $39,300 per day for the Capesize ships and $29,600 for the Panamax ships.

During the conference call, they did share that they had so far in Q1 of 2022 secured $26,000 per day for 75% of their Capesize ships and $21,000 per day for 72% of their Panamaxes.

I have often criticized them in the past for not taking enough coverage. They do now have a more balanced mix of spot and covered positions. To illustrate this, we can see that into Q2, they had (as of February 16, 2022) secured $31,000 per day for 22% of its Cape days and $23,000 per day for 14% of its Panamax days. When GOGL reports Q1 on around 18 May, we will most likely see that this has increased further.

With the Federal Reserve now stepping up the speed of the increases in interest rates, we should be wary of companies that have high leverage and debt coming due for refinancing. When we look at GOGL’s financial expenses in Q4 of last year, we see that they had $10.4 million in net financial expenses which were $400,000 down from the previous quarter.

Their committed Capex and debt maturities are manageable. Assuming a 55% leverage on their new buildings once delivered, their remaining Capex is only $65 million, of which $22 million has already been raised through vessel sales.

Their balance sheet has improved.

At the end of 2021, they held cash of $210 million, which included $13 million in restricted cash related to their derivatives portfolio.

Their debt and lease liabilities totaled $1.4 billion. With recorded book equity of $1.9 billion and total assets of $3.5 billion, the ratio of equity to total assets is quite comfortable at 56%.

This is especially good bearing in mind that they have a very modern fleet with an average age of just 6.5 years.

Returning capital to shareholders

The dividend for the fourth quarter of 2021 was $0.90 per share. With 200,435,621 common shares outstanding, they paid out $180 million in the first quarter. As such, their pay-out ratio of 88% is high.

Shareholders received $502 million in 2021 in the form of dividends.

In my previous article, I tried to predict what they would be paying out in dividends for Q3 last year, and I was off the mark as I thought they would maintain their dividend of $0.50 but they paid out $0.80 per share. So much for my reading of tea leaves.

If you think that net income in Q1 this year is going to be as high as it was in the last quarter of last year, you could hope for a similar dividend. However, unless they have done a lot better than the level offered by the general market, it is safe to assume that it might be somewhat lower.

They did come forward and state that they are bullish on the market and have a good cash cushion, so they may want to keep the dividend at the same level as they ended last year or perhaps just shave off five-cents and pay $0.85

At the present price of USD 12.54 per share, the yield is tantalizingly high at 20.7% on a 12-month trailing basis.

However, it is certainly not stable. Here is the dividend history over the last 5 years.

Golden Ocean - 5 year dividend history (Data from GOGL. Graph by author)

Fundamentals dictating the future

How the freight market is going to be for the next 12 to 24 months is ultimately dependent upon supply and demand

With regard to the supply of dry bulk carriers, the order book presently looks favorable for the ship owners. It is at a 30-year low level.

As I have pointed out in earlier articles on GOGL there is little interest in making capital allocation into building news ships in general because we still do not know what propulsion technology the regulators, like IMO, is going to demand in the near future. This is why additional supply will remain limited for the next two years.

Dry Bulk carrier - Fleet growth (GOGL - presentation )

We can see that supply gives us a pretty accurate picture of what is coming down the pipeline for the next two years.

Next year, IMO is also looking at forcing ship owners to comply to a cap on the speed of the vessel. If this will be complied with you get less efficiency as lowering the speed means each vessel can do fewer voyages in a year putting more pressure on supply.

GOGL offered their view on the demand for dry bulk ocean transportation during their conference call to analysts on 16 February 2022

Since 1991, the demand for dry bulk shipping has been growing by an average of almost 4% per annum. Only two years in that period did it retract, during the financial crisis in 2008 and during COVID in 2020”

That is good news.

Another two positive elements are the potential increase in tonnes/miles, and also congestion caused by supply chain disruptions and delays in ports.

Changes in trading patterns happen from time to time. It can be caused by drought, flooding, and the likes, or it can be caused by geopolitical events. We see plenty of both of these at the moment. The obvious and most important is the war in Ukraine.

Not many people know that Russia and Ukraine are, in fact, large exporters of agricultural products.

Wheat exports as of 2020 (Wikipedia)

Countries that have relied on steady supply from these two countries are now having to buy from suppliers which often are much further away. This requires more ships as the sea voyages can be double or even longer.

Apart from this terrible war in Ukraine, some countries are now trying to protect their own population from the high inflation taking place. That means they will first supply some natural resources to their own people, often at subsidized prices, before they allow them to be exported.

An example of this is Indonesia. It is not a small country. The population is 276 million people. In January this year, they did put a ban on the export of coal for about one month. Much of that coal was exported short distances like China and India.

Last week they also put a stop to the export of palm oil. That is not related to GOGL, but it gives you an idea of the unpredictable changes in the supply and the demand of commodities.

How can anyone predict this with any degree of certainty?

Generally one can assume that this uncertainty will increase the rates for ocean transportation.

Conclusion

With a cash breakeven rate for Capesize vessels of $12,800 per day and $8,600 per day for their Panamax vessels, GOGL will still make lots of free cash flow for the rest of 2022. And, as we know, when times are good, most of this will be passed on to the shareholders.

So, am I willing to put my neck out again with another call on GOGL, risking further humiliation?

I have to say that when we put a call on what our stance is in terms of whether it is a good idea to buy, sell or hold shares in a company, I do not think this can be done without first asking what is your objective with potentially taking a position in the company?

Are you trying to “flip” the shares in a couple of weeks or months, or are you trying to build a portfolio of income-generating companies that at least holds their value in good or bad times over the years?

We can discuss at length what is good value, I shall not do that here, If you do want to learn more about what I do think is value, you might want to read my book on value investing.

After my assessment of the past, present and possible outcome of the future, the answer to the question is that I upgrade my view to a Buy.

Indeed, despite a possible slowdown in the world’s economies, I believe the stars are aligned, as their management said earlier, for a multi-year period of generous returns both to the company and its shareholders.

For what it is worth, GOGL has a strong buy here at Seeking Alpha’s quant rating.

GOGL - SA Quant Rating (Seeking Alpha)

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within 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.