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It's been a bad month for dry-shipping stocks, particularly for ex-high-flying names such as DryShips (NASDAQ: DRYS ) , Genco Shipping & Trading (NYSE: GNK ) , and Eagle Bulk Shipping (NASDAQ: EGLE ) . All three have been trading almost as if their entire fleets have been torpedoed and sunk.
DryShips, Genco Shipping & Trading, and Eagle Bulk Shipping all hit new 52-week highs in September, only to see their stock prices take a dive since. DryShips has fallen 27%, Genco Shipping & Trading has fallen 44%, and Eagle Bulk Shipping has fallen 31% as of the Oct. 23 close.
So what's going on?
For starters, the Baltic Dry Index, which measures the overall shipping activity of four different size vessels, fell for the fifth straight day. But that's just the beginning. The rates for the Capesize ships, which are by far the largest and most profitable -- at least, they were -- have been cut nearly in half since their late-September peak. As of Oct. 23, they are at levels not seen since Sept. 6, with plenty of downward momentum behind the fall.
In September, Capesize ships averaged around 34 bookings a week. Last week, that number got clipped down by two-thirds, to 12 a week. Through Oct. 23, that number was fell further, landing at 6-7 for the week according to GHS Securities analyst Omar Nokta.
The effect of long-term Capesize rate drops has on each shipper will vary. DryShips has most of its Capesize in fixed-rate contracts, but those contracts don't last forever, and will eventually have to be renewed. Many of them expire in 2013 and 2014. The market will naturally have at least some long-term outlook in this regard.
As of July 31, 12 out of 42 vessels in DryShips' fleet -- or 29% -- were Capesize ships. Most of the rest of its fleet is Panamax ships. Based on the current rates of Panamax ships, around 40%-50% of DryShips' revenue comes from Capsesize rates. This means the change in rates for that single size of ship will swing the entire fleet's overall revenue.
As an example, if Capesize were to climb or fall from here by 10%, it would affect overall dry-shipping revenues by 4%-5%. All things being equal, changes in rates have an equal effect on the bottom line as the top line.
For Genco Shipping & Trading, nine out of 53 vessels in its fleet were Capesize vessels as of July 31. This comes out to 17% of its fleet. Based on current rates for its vessels, around 29% of its revenue comes from Capesize ships.
While this is far less than the 40%-50% for DryShips, Genco Shipping & Trading has very high financing costs making it difficult to earn a profit on a per-ship basis. Last quarter, it reported an average of $3,667 per vessel in interest expense alone. Genco Shipping & Trading needs every dollar it can get on both the top and bottom lines.
The lone wolf
Eagle Bulk Shipping is very different from both DryShips and Genco Shipping & Trading. Not only does it own no Capesize ships, but the ships it does own are all Supramax. This class of vessel's rates have been a bright spot, currently at a high for the year.
It seems Eagle Bulk Shipping has been unfairly punished in response to a negative change of rates for its peers, even though those changes have no effect on Eagle. In fact, the company's fundamental picture is higher now than when it hit its 52-week high back in September, despite the 31% fall in stock price. Eagle's stock may have fallen now, but unlike shares of its fellow dry shippers, investors shouldn't expect it to remain that way.
Shape up or ship out