How to Play Defense With Dry Shippers

Predicting where the market rates for dry shippers can be as difficult as predicting the weather. Since experts such as the Baltic and International Maritime Council, or BIMCO, can't even seem to get it right, so how is the individual investor supposed to guess where the daily spot rates will be in 2014 and beyond?  How can they protect themselves from a potential downturn that non one will see coming?  The answer is simple: Look for dry shippers that are well-capitalized enough to weather any storm.

Two months ago, BIMCO forecast what it thought rates would look like in the present. It predicted average rates of Capesize vessels to be $8,000 to $13,000 per day, Panamax to be $6,000 to $9,000 per day, and Supramax to be $8,000 to $11,000 per day. How did it do? Using the midpoints for each, the reality is Capesize rates are 200% higher, Panamax rates are over 100% higher, and Supramax rates are 30% higher. All three blew away the high-end of the forecasted range.

Analyze the balance sheet and cash flows
One way to remain conservative is to begin analysis by using by estimating how much operating cash a dry shipper might need over the next year. For this estimate, we'll use second-quarter 2013 cash flows; during this period, rates were much lower than they are now. Multiply that figure by four, and you've got a quick, educated guess for the full year's cash needs. 

Baltic Trading Limited (NYSE: BALT  ) used $1.8 million in cash for operations in its second quarter, which works out to a $7.2 million annual rate.  Add to that the $1.5 million it needs for interest payments, and it requires a total of $8.7 million in cash for operations.  Since it ended the quarter with $23.7 million in cash, raised $63.5 million, and scored $22 million in credit , it has well more than enough to cover that $8.7 million, even after investing $41 million in new ships.

Diana Shipping (NYSE: DSX  ) last reported $375 million in cash and $16 million in positive operating cash flow for the second quarter. Diana has continued to buy more ships -- but it's only spending $50 million to $60 million per quarter on this effort, representing only a fraction of its cash on hand.

Diana's cash-management strategy specifically prepares for the worst, acknowledging how difficult the rate environment is to predict. In its most recent conference call, Diana's management stated that it's keeping a sturdy balance sheet in reserve, waiting for the day when the market finally turn, and the company can sprint into action. Diana is playing defense to the benefit of its shareholders.

Navios Maritime Holdings (NYSE: NM  ) boasts a low cash flow breakeven of $5,365 per day, far below even the very low rates of $7,000 to $12,000 at this time last year. This means Navois has a wide cushion to still operate profitably, even in the worst rate environments. As of June 30, it had $271 million in cash.

Its CEO, Angeliki Frangou, stated in the latest earnings release: "Navios Holdings' adaptable chartering strategy has been formed in context of its conservative business philosophy...we have been negotiating period charters that provide a floor above our cash flow breakeven and a mechanism for market exposure so that we can enjoy the upside from a rapidly improving market."

This leaves Navios in a position to still make money during bad times, yet enjoy plenty of potential upside in good times -- a win-win for investors in an uncertain environment.

Baltic Trading, Diana Shipping, and Navios Maritime are three examples of dry shipping companies with adequate cash and credit and low cash needs for operations, even if rates take a turn for the worst. These companies have taken a conservative viewpoint of the future, to their shareholders' benefit. They are prepared for the worst, yet will benefit from the best.


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  • Report this Comment On October 16, 2013, at 6:48 AM, Hohum777 wrote:

    Two issues with your BALT analysis

    1. The company has had two share offerings in 2013.

    2. If you "annualize" Q2 numbers, you miss the extra operational expense of two vessel additions

    NM is a holding company. Its revenue sources are much more than just its dry bulk vessels. Dividends and distributions from NNA and NMM, revenue from NSALI, refinancing debt, etc. For 2013, there are also proceeds from credit default insurance.

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