This past year has been a disappointment for investors in Seaspan Corporation (ATCO). The largest independent containership owner and manager started the year by slashing its dividend so it would have the cash to capitalize on opportunities that might emerge amid the current weakness in the industry. Meanwhile, its financial results declined in every quarter when compared to 2016. These and other issues weighed on the stock, pushing it down more than 35% for the year.
That said, there were three signs that this sinking ship is turning things around -- and investors can expect the containership leasing giant to have a much better year in 2018.
From a headwind to a tailwind
While Seaspan's financial results sank versus the prior year in each quarter, the company seems to have hit bottom in the first quarter. That's because revenue in the second quarter was higher than in the first, while third-quarter sales rose versus the second. One of the factors that drove this improvement is the significant improvement in shipping rates for its short-term Panamax-sized fleet, which is made up smaller vessels that can fit in the Panama Canal. Rates for these ships had been below breakeven levels in 2016 but have come up sharply in 2017. That improvement has started showing up in Seaspan's results over the past couple of quarters.
However, the company has much more upside to this market in 2018. The company noted last quarter that it has 24 ships on short-term charters expiring in 2018 that are priced $2,000 to $2,500 per day below the current seasonally low market rates, and $3,500 to $4,000 per day below 2018 estimates. Because of that, the company should be able to collect higher dayrates from these vessels in 2018, which should provide a lift to its financial results.
Dual fuels for the long-term fleet
The company also has five contracts on larger vessels set to expire by the end of next year. Most of these charters are so far below current market rates that Seaspan has 50% to 100% upside if it were to recharter these vessels at current prices.
On top of that upside, the company continues adding more large ships to its fleet. In the third quarter, it took delivery of three newbuilds, all under long-term charters. In addition, the company has four more newbuilds expected to enter service over the next year, which it has also secured to long-term contracts. These new additions should provide steady revenue and earnings growth in 2018.
The flexibility to pounce
One of Seaspan's goals during the recent cyclical downturn in the shipping market has been to shore up its financial situation. In addition to cutting the dividend, the company has completed several transactions to reduce debt and secure long-term financing. As a result, it has repaid $850 million in bank debt since 2015, including $200 million in the past four months alone. In light of those efforts, Board Chair David Sokol stated last quarter that the company remains "well positioned to capitalize on growth opportunities that may arise during this period of improving industry fundamentals."
With the shipping market improving and its financial situation on a firmer footing, one of Seaspan's priorities for 2018 is to seek out acquisition opportunities, which could include creative partnerships with shipping companies. One thing Sokol noted on the company's third-quarter call is that several of its customers have "kind of given [the company] a bit of hunting license to fill some gaps they have and if [it] can find the right vessel to put into place with the right charter arrangement," Seaspan will acquire those ships.
Meanwhile, members of management hinted on the call that they've been talking to competitors because they expect there to be some consolidation or joint ventures on the charter-owner side given the amount of consolidation among shipping companies in the past year. While a potential merger with a large rival like Costamare (NYSE: CMRE) seems unlikely, it's possible that Seaspan could seek to acquire smaller competitors. That's something Costamare CFO Gregory Zikos addressed on his company's most recent quarterly conference call, pointing out that it is tougher for smaller containership owners to operate in this cyclical industry since it costs money to maintain ships to the specifications needed to meet the requirements of large shippers. Thus, it makes sense to have access to capital, which a company can best accomplish with larger-scale operations. These comments from the industry's leaders suggest that there could be some M&A activity in the sector in 2018.
Expect a better year
Seaspan seems to have bottomed out this year, as evidenced by the slow improvement in its financial results. That should continue in 2018 since the company has several below-market leases set to expire that it should be able to re-up at higher rates. Add to that an expanding fleet from recent newbuild additions, with the potential upside from acquisitions, and investors should expect Seaspan's financial results to head higher next year -- which will hopefully take the stock up with it.