Seaspan Corporation (ATCO) has gone through some rough seas over the past year, which caused its stock to sink more than 50%. Weighing on the company has been increasing uncertainty in the global shipping market due to slowing trade and the sinking of a leading shipper into bankruptcy, which had an impact on the company's results last quarter. Those issues are causing investors to worry that its dividend might not survive the storm. Given that backdrop, here are three things to watch this week that should give investors a better idea of how the company is navigating the current storm.
Keep an eye on cash flow
Last quarter, Seaspan reported a noticeable decline in its cash flow metrics. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), for example, decreased from $183.5 million in the third quarter of 2015 to $148.4 million in last year's third quarter, while cash available for distribution to common shareholders fell from $117.5 million to $90.4 million over that same time frame. These declines came despite the fact that revenue increased from $212.7 million to $224.9 million as a result of five new-build vessels added to its fleet last year and an 8.9% decrease in ship operating expense per ownership day.
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The primary driver of the cash flow decline was the bankruptcy of South Korean shipping giant Hanjin, which had leased four vessels from Seaspan. The company stopped recognizing revenue from these ships during the quarter and sold one to a ship recycler because it wasn't likely going to find another customer for this vessel. Overall, Seaspan recorded $18.9 million of expenses relating to the bankruptcy.
What investors should keep an eye on this quarter is if cash flow continued to decline due to additional costs associated with that bankruptcy. If it did, that could intensify worries that the dividend might get cut or eliminated until the shipping sector is back on solid ground.
Take a look at liquidity
One reason why investors are concerned about Seaspan Corporation's dividend is that it has eight more newbuilds scheduled for delivery this year, which had $470 million of remaining capex. The company had secured $240 million in financing for five of these vessels. However, two of them still don't have long-term charters in place, which not only makes them tougher to finance but it means Seaspan will not start collecting revenue on them when they enter its fleet.
The company has worked hard to get out ahead of its financing issues by raising over $1.5 billion from the capital markets through the first nine months of last year. Because of that, it had about $500 million of liquidity that it believes will enable it to not only finance its new-build capex but capture opportunities that might arise from the industry's challenges. Given the importance of liquidity to Seaspan right now, investors should look to see if that number rose during the quarter or if it used some to capture opportunities in the market.
Image source: Getty Images.
Watch for any changes in the outlook
While the container market has been challenging over the past year, there does appear to be some green shoots that suggest better days might lie ahead. Container leasing company Textainer Group Holdings Limited (TGH), for example, noted in its fourth-quarter earnings release that "as we look to the rest of 2017, we see a number of positive trends that should help us turn the corner from a difficult 2016." In fact, Textainer Group Holdings' CEO Phillip Brewer went so far as to say that "the important point is that our industry has passed the bottom of this cycle and is showing strong signs of recovery."
Those trends bode well for containership lessors, which was something rival Costamare (NYSE: CMRE) noted on its fourth-quarter conference call. CEO Gregory Zikos said that the rates for containers themselves have increased in the second half of last year and that "if the trend continues...if there is more demand, in theory, you can argue that the liner companies would need more ships." That said, Zikos also stated:
However, when this would happen, I'm afraid, I wouldn't like to provide any forecast now. Let me say, however, that witnessing a positive trend in box rates it is definitely good news for all parties involved. Now what's going to be the time gap between an upticking box rate and charter rates, I'm afraid that I don't want to provide any forecast right now, but it generally is a positive trend.
Given those outlooks, investors should look to see what Seaspan has to say about what it sees on the market. In particular, if it believes it can find customers for its uncontracted newbuilds as well as for leases that will expire in 2017. If the company is optimistic, it could ease fears that the dividend could be going down.
Investor takeaway
The entire container shipping industry has been going through an intense storm due to tepid demand and overcapacity, which put tremendous pressure on shipping companies. Because of this, there are worries that Seaspan might need to cut its dividend so that it has the liquidity to stay afloat. However, the sector appears to have turned the corner in the fourth quarter, which is a trend that hopefully will show up in the company's fourth-quarter results later this week.
