Rising Rates for Shippers Could Mean a Happy 2014

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In a previous article, I argued that the ultra-low pricing for water transportation, represented by the Baltic Dry Index (BDI), through 2012 and 2013 was unsustainable and should rebound. That rebound appears to be well under way with the BDI up over 200% in just the last year.

Though Q4 and beyond will provide more favorable pricing, the timing of this impact on balance sheets will not be uniform throughout the industry. This is due to the nature of contracts. Some companies favor locking in long-term contracts while others prefer daily spot pricing. Those with daily price adjustments will obviously show the benefits of this increased pricing ahead of those with long-term contracts. But are those the companies you should buy for the long term?

DryShips (NASDAQ: DRYS  ) is a majority daily spot rate carrier. While long term contracts are being emphasized for their predictability going forward, currently this company's revenue is heavily tied to daily BDI rates. Therefore, it will be one of the first to experience the benefits of the increased pricing, and analysts are eagerly awaiting their Q4 report for confirmation.

Buried in the middle of its Q3 2013 report there were indications that substantial increases in demand from China for raw materials could provide the catalyst leading to more favorable conditions for shippers. China iron ore imports were up 16.9% YoY, and Chinese coal imports were up a staggering 21.4% YoY.  Consequently, exports from countries like Australia and Brazil were up as well. A key factor going forward, according to management, is global steel demand, which appears to be increasing as the global economy improves and stockpiles are depleted.

Frontline (NYSE: FRO  )  was once a multi-billion dollar company that paid attractive dividends and traded above the $70 range before the 2008 economic collapse. Now this company sits at around $4, pays no dividend, and has about a $300 million market cap. Oh, how times have changed in the liquid tanker industry.

Frontline was unprepared for the financial collapse and their balance sheets suffered as a result. Hidden in the 2012 annual report is a statement that should concern all shareholders about the future of this company:

If the tanker market does not recover before 2015 and no additional equity can be raised or assets sold there is a risk that we will not have sufficient cash to repay the existing $225 million convertible bond loan at maturity in April 2015. Such a situation might force a restructuring of the Company, including modifications of charter lease obligations and debt agreements. In the event that our cash flow from operations does not enable us to satisfy our short term or medium to long term liquidity requirements, we will have to consider alternatives, such as raising equity, which could dilute shareholders, or selling assets, which could negatively impact our financial results, depending on market conditions at the time.

Since that statement the company has only posted dismal results and recent reports indicate poor conditions will continue. If this market recovery doesn't materialize for Frontline over 2014 things could get even worse.

Diana Shipping (NYSE: DSX  ) is still my top pick in this sector for numerous reasons. Having the newest fleet of all shippers (5.4 years) contributes to efficiency and overall profitability. The majority of vessels are chartered on a medium- to long-term basis, providing an element of stability compared to spot pricing. Finally, dry bulk carriers can adapt to changing demand in the market by shipping ore one month and transporting grain or automobiles the next.

Over the last year shares of Diana are up 87%, but there is still more room to run, especially as pricing continues to improve. A low LT debt/equity of 0.32 against an industry average of 1.41 and an attractive price/book of .89 vs an industry average of 1.98 indicate a well-run company with significant bang for your buck.

Final thoughts
The water transportation sector has seen some rough times. While things are looking better recently, this sector is still facing many challenges. Low global trade, high capacity in the liquid tanker market, and wild currency exchange rates are just a few things that will continue to hurt this industry. However, as global conditions improve, so will the balance sheets of well-run companies like Diana Shipping.

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  • Report this Comment On January 06, 2014, at 7:42 AM, imacg5 wrote:

    "Finally, dry bulk carriers can adapt to changing demand in the market by shipping ore one month and transporting grain or automobiles the next."


    You think that automobiles are transported by dry bulk ships?

    It's been stated many times that the BDI has been dramatically skewed by the Cape rates over the last four months, while Panamax spot rates are only moderately above break even.

    And as expected, they are falling fast.

    DRYS exposure to spot rates is through Panamax.

    Every year there are countless articles getting excited about the year end rally in the BDI, and every year the rally crashes.

    In October 2012, Cape rates rose dramatically to $17,000 per day. Only to fall below $5,000 per day, a couple of months later.

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Related Tickers

9/30/2016 3:59 PM
DRYS $0.45 Up +0.01 +1.86%
DryShips CAPS Rating: **
DSX $2.62 Up +0.01 +0.38%
Diana Shipping CAPS Rating: ****
FRO $7.17 Up +0.14 +1.99%
Frontline CAPS Rating: **