Rogue Wave Swamps Dry Bulk Shippers

Rogue waves come out of nowhere, and have been known to swallow massive ships in the blink of an eye. For mariners and investors alike, it pays to keep a vigilant watch even when conditions appear favorable.

In the wake of a perfect storm, that vigilance must intensify further; and the recent bear-market rally among the dry bulk shippers provides the ultimate cautionary tale. Understandably eager to climb aboard the first available life raft within a sea of uncertainty, buying interest returned to the shipping sector in December when a sudden reversal in the Baltic Dry Index (BDI) set the blogosphere ablaze with bullish sentiment.

Now that a series of dramatic developments have bashed the group like a rogue wave, and fourth-quarter results are beginning to emerge, let's step back and take a comprehensive look at the sector.

Credit running dry
Placing an exclamation mark after the company's epic deterioration from last year's glory, DryShips (Nasdaq: DRYS  ) doused investors last month by slashing its dividend and later revealing that the company had breached debt covenants. I believe that contravention of debt covenants presents a wholly unacceptable level of risk for Fools in this environment, so I held no punches in cautioning Fools to leave this one alone. Hopefully, Fools heeded my caution, since a momentary recovery after two lenders renegotiated debt terms lasted only a matter of days.

How rogue waves are formed
South Korean shipper Samsun Logix has run aground, filing for court receivership and splashing some competitors in the process. With close ties to struggling steelmaker POSCO (NYSE: PKX  ) , Samsun Logix provides a timely reminder that a global downturn of this magnitude will not reverse as easily as the sudden spike in the BDI might have suggested. Consequences will continue to reveal themselves, and Fools are encouraged to proceed cautiously with their precious investment capital.

This development has far-reaching implications for the industry. The failure was precipitated by the cancellation of charter contracts by shippers that themselves became insolvent. Like an airborne virus, the malaise travels through Samsun Logix to the publicly traded shippers. As an integrated ship owner and operator, Samsun Logix inked charter contracts with vessel owners like DryShips and Navios Maritime (NYSE: NM  ) to maintain a more elastic fleet. DryShips was in the process of selling a vessel to Samsun Logix, while Genco Shipping & Trading (NYSE: GNK  ) had only one vessel chartered to Samsun Logix.

Mounting bankruptcies within the sector give charter clients additional bargaining power when it comes to renegotiating long-term charter contracts … many of which were priced at rates substantially higher than present charter rates.

First to report a rogue wave
The ability to rely upon contracts as binding instruments is central to the normal functioning of global commerce, so the news that two charter clients of Excel Maritime Carriers (NYSE: EXM  ) suddenly decided to pay only half the contracted rate caught the industry off guard. Excel Maritime promptly halted its dividend, citing a $107 million hit, and warned that the company "cannot assure that charterers will continue to pay hire at agreed rates, reduced rates, or at all." 

That chilling statement, I believe, speaks to a systemic threat affecting all dry bulk shippers. Because legal means of enforcing contracts are costly and time consuming, cash-strapped commodity players around the world may feel emboldened by this development to force shippers back to the negotiating table for major reductions in charter rates.

With substantial debt-related concerns, a looming writedown, and the resignation of the CEO announced Monday, Excel Maritime leaps to second place behind DryShips on this Fool's list of scariest shipping stocks. Frankly, however, the news places the entire sector within a cloud of risk and uncertainty.

Is anyone still making money?
Both Navios Maritime and Diana Shipping (NYSE: DSX  ) carried earnings into port late last week. Navios lost $5.6 million on an array of charges and a 30% reduction in revenue from the prior year. While I am decidedly less bullish on the company than I was in November, Navios still appears better-positioned than several competitors.

Diana Shipping recorded income of $54.2 million with a 43% increase in revenues, and solidified its position -- in my view -- as the best competitor in the sector. With high-profile clients like BHP Billiton (NYSE: BHP  ) , a 25% increase in average charter rates, and one of the cleanest balance sheet in the sector, Diana appears best-equipped to absorb the impact of any further rogue waves. Although poised to pounce upon opportunities as they arise, Diana remains uninterested in its publicly held competitors. If Diana has no interest in the other dry bulk shippers, then perhaps Fools would do well to leave them alone as well. I expect Diana Shipping to survive, and that's about all I can say with any conviction at the moment.

Further Foolishness:

The "dry bulk shipping" tag within Motley Fool CAPS lists 16 companies. Join our online community today and share your views on the offerings in this sector, or any other. CAPS is free and fun!

Fool contributor Christopher Barker captains yachts and writes about stocks. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of BHP Billiton and Diana Shipping. POSCO is a Motley Fool Income Investor pick. The Motley Fool's disclosure policy is designed to roll 360 degrees if impacted by a rogue wave.


Read/Post Comments (7) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 23, 2009, at 5:00 PM, Ecomike wrote:

    I still think most of the real risk is priced into these stocks, like EXM right now, short of complete, total, permanent collapse of everything. EXM is selling for 10% of book value, and like to continue reporting profits inspite of all the bad news.

    I am long on EXM, and PRGN right now. Looking to buy more if they go lower.

  • Report this Comment On February 23, 2009, at 5:35 PM, XMFSinchiruna wrote:

    Ecomike, just as many companies across multiple sectors are refusing to issue earnings guidance citing insufficient visibility, I would argue that insufficient visibility makes calculating (and therefore valuing) risk a very uncertain endeavor. The risks are effectively unknowable in the dry bulk sector just now because information on contract cancellations - for example - is just now emerging. How, then, can we posit that risks are priced in?

    I suppose it's a question of risk tolerance whether or not to invest in a sector where the risks are not clearly defined. I, for one, am seeking to minimize risk in this environment. That being said, as I disclosed above, I am long Diana Shipping and intend to ride it out. Had I never opened that position, I doubt that I would be doing so at this particular juncture.

    Thanks for your comment, and good luck!

  • Report this Comment On February 23, 2009, at 7:04 PM, SunbeamDimension wrote:

    This is just another article filled with a bunch of "mays" so why did the author even bother to write the article in the first place? Sounds to me like he's a shorty. Shorties are not legitimate investors .... perhaps legal, but not at all moral or legitimate. Articles like this one just spreads more negativity (as do the shorters by their actions) and reinforces the inclination for companies to try to re-negotiate lower shipping rates. Destroy the shipping industry, and you will continue to erode the economy of the world. You people who write these articles are actually a nuisance to legitimate investors. Wall Street con artists.

    In particular, you fail to note that Navios Maritime has good insurance on charter default. The fact that you left this very important detail out of your article is an indication to me that you are either a short manipulator or are not very well informed and should go get a real job.

    About the time that us ruralites shut the food supply off to you urbanites, you will soon realize that all of your urbanite and suburbanite glamour, glitter, and nonsense do not amount to a hill of beans when you can no longer put food in your bellies.

  • Report this Comment On February 23, 2009, at 7:45 PM, XMFSinchiruna wrote:

    Sunbeam,

    I suppose I should be flattered that you feel this article possesses sufficient clout to affect shipping rates and bring down an entire industry. My former employers in the shipping industry would certainly have words with me in that case.

    Please note in the disclosure above that I am long Diana Shipping. I am purely a buy-and-hold investor with no short positions, period.

    As for Navios, that insurance is precisely the reason why I consider the company better-positioned than many of its competitors, as stated above.

    Fool on!

  • Report this Comment On February 23, 2009, at 9:07 PM, SunbeamDimension wrote:

    Basically, this is just a period of adjustment to more even keel shipping rates, and steady as you go is more desireable to those of us who invest in companies like Navios for dividend yield. While many of the other shippers were doing excess dividend payouts, Navios was holding steady at an approximately 10% payout ratio, and it is one of the few dry bulk shippers which has continued with a dividend payout with a yield that is common sense.

    Valle has just announced significant new iron ore contracts, and ore stockpiles at companies such as Acelor Mittal have been drawn down significantly. The ships will be sailing well shortly. The world cannot function without them.

    The biggest wave came from a bunch of Rogue bankers who are nothing but con artists. I am glad to see the likes of Thain being brought in front of the courts. But then, he is the current front fall guy for the boys who really pulled off this derivative con. Take a look at the information about Riggs Bank.

  • Report this Comment On February 23, 2009, at 9:19 PM, steven107 wrote:

    It's easy to find positive comments about any company or industry, and an making them doesn't ever get you in trouble with your audience. As a Long, i'm happy to hear the downside, its so rare to find anything approaching a negative critique. ...And it is often neccessary to hear it, even and especially if you are Long. Also, despite never having had the guts to Short anthing, I don't look at Shorts as being evil. Unless they are 'Naked Shorts'.

  • Report this Comment On February 23, 2009, at 9:21 PM, steven107 wrote:

    I'm not Long in this industry, but I meant that I'm Long in everything that I get into, having no guts to take Short positions in anything; though it sure would have helped the portfolio to short the whole economy if i'd had the forsight to know what was coming.

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