Dry Bulk Strikes an Iceberg

Today's ships come stacked with electronic navigation equipment that tracks both your own vessel's position and the location of potential obstacles in your path. Just the same, the prudent mariner still makes constant use of paper charts and binoculars to double-check what the computers display.

As Thursday's computer-driven, 1,000-point decline in the Dow Jones Industrial Average demonstrates, that same prudence of human oversight is utterly lacking in the structure of today's hyper-paced equity markets.

Meanwhile, neither computers nor humans have managed to prevent the dry bulk shipping stocks from striking an iceberg as they voyage through the mounting air of caution that has descended over equities in recent days.

Most of the major names are down more around 10% this week alone, which may coincide with a growing concern that China's incredible rate of growth may not continue to track a straight line. Beyond the pain of massive share dilution that speculators in DryShips (Nasdaq: DRYS  ) have endured, the stock opened today trading within $0.52 of its 52-week low. Earnings reports have begun to drift in, so let's take this timely opportunity to take the pulse of a crucial bellwether sector.

Around the fleet in 80 seconds
Genco Shipping & Trading (NYSE: GNK  ) reported net earnings down 20% from the prior year at $1.06 per share. Although the company made substantial progress in its quest to move away from the volatile spot market for charter contracts -- increasing time charter coverage from 58% of the fleet to 67% during recent months -- average daily hire rates overall contracted 8.9% versus the prior-year mark.

Looking proactively to the eventual bottom of this painful business cycle for dry bulk shipping, Genco completed its spin-off IPO of Baltic Trading (NYSE: BALT  ) for proceeds of $210 million. Looking to time a bottom with opportunistic purchases of at least six vessels that the new company will operate on the spot market, Baltic Trading will become the more aggressive counterpoint to Genco's increasingly conservative posture. One analyst predicts that Baltic Trading will tack on $0.32 per share to Genco's 2011 earnings, and is targeting a 50% share increase to $30 over the coming year. I find that expectation a bit heavy on the optimism.

The queen of conservatism remains, meanwhile, the fare Diana Shipping (NYSE: DSX  ) . Diana continues to coast along with heavy reliance upon long-term charter contracts for her young fleet of vessels that features eight massive Capesize carriers to complement 14 of the more versatile Panamax vessels. Not one of these ships was constructed before the turn of the century, which speaks to the remaining longevity of the fleet's collective long-term earnings potential.

After biding her time through the initial absorption new vessel deliveries that Diana has long foreseen creating a debilitating oversupply condition for the sector at large, the shipper finally dipped its toes into opportunistic vessel purchases beginning last December. All told, this timely growth initiative targets $500 to $700 million in asset purchases on top of a separate $50 million investment in containerships.

Last month, Diana announced a very encouraging development that I believe will further cement the company's position at the top of the dry bulk food chain. Diana has contracted the construction of two new vessels that even outsize the gigantic Capesize carriers. Forming a new category that is clearly named for the maximum tonnage capacity at the busy Australian coal export facilities at Newcastle, these "Newcastlemax" vessels sport an incredible 206,000 deadweight tonnage. 

Since BHP Billiton (NYSE: BHP  ) and its joint venture partners are preparing to double capacity at their Newcastle facility from 30 million to 60 million tons per year, Diana is positioning itself beautifully to score strategic market share in one of the world's clearest hotspots for long-term, reliable demand for seaborne coal. Strutting her savvy stuff, Diana also paid just $8 million more for both of these massive vessels combined than a rival operator paid last month for a single Capesize vessel.

Eagle Bulk Shipping (Nasdaq: EGLE  ) dropped anchor this week with an estimate-beating 81% earnings decline ... to just $0.07 from $0.37 per share a year earlier. With at least 14 new vessels yet to be delivered before the end of 2011, and options in place for eight more, it remains far too early in this environment of acute oversupply to declare Eagle's aggressive counter-cyclical growth spurt a success. Thus far, however, I will concede that the fleet expansion has progressed smoothly. Eagle has navigated a 32% fleet expansion within a difficult climate, while maintaining fleet utilization at 99% during the first quarter.

At the bottom of the fleet, moored alongside DryShips on my list of unsuitable investments within the dry bulk sector, is Excel Maritime Carriers (NYSE: EXM  ) . Although the company managed to increase adjusted income nominally from prior-year levels, the fact that adjusted earnings per share declined 39% from $0.18 to $0.11 underscores the unacceptable degree of shareholder dilution that underlies even its persistently stagnant share price. 

The shipper continues to pump headline earnings with amortized charter contracts from an acquisition that occurred more than two years ago, and nearly 83% of available charter days for 2011 remain unfixed.

Setting a course for home
There will be light at the end of this persistent malaise impacting the dry bulk shipping stocks, and Diana Shipping has given investors a clue regarding timing with the tepid initiation of its opportunistic asset purchases. I encourage Fools eager to participate in the sector to exercise the same patience that Diana has shown. When Diana Shipping steps up its buying activity to approach that $500 million mark, we may just be nearer to an eventual bottom that we are today.

Furthermore, all macroeconomic eyes must remain transfixed upon China and related pan-Asian economies to telegraph whether major interruptions in recent growth trends may be in store that could exacerbate the oversupply of bulk cargo vessels and place the more leveraged operators like DryShips and Excel at potential risk once again. As Thursday's troubling blip on the Big Board reminded us, this remains a time to turn off the auto-pilot and take the wheel with attentive care.

Whatever your opinions on the prospects for the dry bulk sector, continued uninterrupted growth in China, or even the significance of Thursday's stock market free-for-all, your fellow readers look forward to gleaning your perspective. I have selected Diana Shipping to outperform the S&P 500 within my Motley Fool CAPS portfolio. Which will you choose?

Fool contributor Christopher Barker has sailed through the Bermuda Triangle, but never encountered a sight as scary as DryShips. He can be found blogging actively and acting Foolishly in the CAPS community under the user name TMFSinchiruna. He tweets. He owns shares of Diana Shipping and Peabody Energy. The Motley Fool's disclosure policy can hold its breath underwater while a cargo ship passes overhead.


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  • Report this Comment On May 10, 2010, at 6:43 PM, Puckplayr4 wrote:

    I'd like to know your thoughts on Paragon shipping, one of the few to maintain a Dividend.

    Thanks!

  • Report this Comment On May 10, 2010, at 8:25 PM, krude wrote:

    Paragon will get hit by a rouge wave and there dividend will sink to Davey Jones locker just like all the rest have gone.The board of directors love to have a div. to attract buyers which I think is very shrewd, but among there Cfo's accounting moves they might prove to be a heavy anchor to keep up with. What say you?

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