They say good things come in threes. Usually, when you see three different major competitors in one industry all giving the same detailed opinion, you can take that view to the bank. Safe Bulkers (NYSE: SB) joined the ranks of DryShips, (DRYS) and Navios Maritime Partners (NYSE: NMM) with a bullish outlook that suggests smooth sailing ahead for the industry as a whole.
Calm seas in Q3
Safe Bulkers reported its third-quarter results after hours on Nov. 4. Revenue dropped 10% to $41.9 million. Adjusted earnings before interest, taxes, depreciation, and amortization or EBITDA dropped 25% to $23.4 million. Adjusted net income dropped 43% to $13.1 million or $0.16 per share.
The reason for the across-the-board drop, despite an improved year-over-year rate environment? Several fixed-rate contracts from years ago, signed at peak shipping rates, ran their course and expired. New contracts got lower rates. The drop in sales, EBITDA, and profits for Safe Bulkers shows how important an improving rate environment can be, even for shippers with long-term fixed-rate contracts.
Safe Bulkers feels very confident about the shipping industry's future. Its board of directors raised its dividend 20%, from $0.05 to $0.06 per share. While a $0.01 raise does not sound like a lot, in reality it actually represents $3 million on an annualized basis, on top of the $15 million annual dividend it was already paying. It seems to signal the company's confidence in the future -- far more convincingly than any comment that management could issue.
That said, words don't hurt, either. Safe Bulkers' president, Dr. Loukas Barmparis, explained that the reason for the dividend increase was the "improving climate in the charter marke,t" which he described as in "an early stage of the forthcoming shipping cycle." This implies that he and Safe Bulkers believe shipping rates have bottomed out, with years of improvement ahead.
DryShips and Navios Maritime Partners
DryShips CEO George Economou concurs, having stated that his company is "cautiously optimistic, expecting a sustainable recovery in 2014 and beyond." DryShips CFO Ziad Nakhleh also predicted a rise in spot rates in 2014, with a "sustainable recovery" throughout the year and into 2015. Nakhleh expects rates to be positively influenced due to the old age of many ships in the industry. Ships, like automobiles, have to be scrapped after they get too old, and a smaller supply equals higher rates.
Navios Maritime Partners sees similar trends. CEO Angeliki Frangou believes the dry shipping industry has "brightened significantly." She, too, was optimistic about how scrapping could reduce vessel supply and raise shipping rates. On the demand side, Navios Maritime Partners Executive Vice-President George Achniotis sees "significant additional export capacity" for iron ore. Excess exporting would increase demand and rates for shippers.
Safe Bulkers conference call
Safe Bulkers' Barmparis went out on a limb after being pushed a bit in the questions and answers session of his company's conference call. He expects the market to "really move higher" second half of 2014 and onward. He said he no intentions of entering longer-term contracts until this environment "improve[s] dramatically." Refusal to lock in rates now is a strong bet of confidence that rates are going up.
CEO Polys Hajioannou further explained that iron ore is undergoing a buyer's market. This keeps iron ore cheap, which in turn, as Hajioannou puts it, "keep[s] the commodity flowing on the high seas." High supply and cheap iron ore leads to greater shipping demand and higher rates.
Foolish Final thoughts
One company's optimism can be disregarded. Two companies' optimism starts to become interesting. When three companies all agree and say the same thing about the future, it's time to pay attention.
Watch the spot rates and outlooks from other shipping companies as well. Make sure the optimism of Safe Bulkers, DryShips, and Navios remains intact. Also, keep an eye on the news for iron ore demand and supply. If all these things continue to point in the right direction, the bull market for dry shippers may be just getting started.
