Judging by the disturbingly cautious outlook of Diana Shipping (NYSE:DSX) President Anastassis Margaronis; DryShips' (NASDAQ:DRYS) patience-snapping move to raise capital through yet another equity offering; a 10% cancellation of worldwide orders for new bulk vessels; and a still-languishing Baltic Dry Index, the dry bulk shipping sector finds itself operating in an ever-shrinking pond. Which makes now a particularly odd time for any shipper to launch a massive expansion of its fleet.

The impressive earnings Eagle Bulk Shipping (NASDAQ:EGLE) released late last week would seem to suggest clear sailing ahead -- but only if we ignored the broader context. On the strength of a 30% fleet expansion as the company's bold new building program gets under way, revenue surged 53%, and earnings rose 20%. From an operational standpoint, Eagle continues to perform well under adverse market conditions, although a number of vessel charters will expire during 2009, thus becoming subject to the prevailing weak hire rates.

While Eagle keeps the growth throttle pressed forward, this Fool is altering course. Back in March, I added Eagle Bulk Shipping to my short list of lower-risk operators with which to ride out this epic storm. But as the outlook grows clearer, Eagle's risk profile appears to be rising. With advances of $382 million already paid for the new building program, which thankfully was pared back from 35 to 27 vessels, Eagle has a deadweight ton riding on this growth spurt. Given the somber warning from Diana's management about excess capacity, and my reconstituted expectation of major bankruptcies and credit contraction looming over the sector, I am no longer comfortable with Eagle's enthusiastic fleet expansion.

True, all but three of the 22 undelivered vessels have already been hired, which somewhat offsets my concerns. But until I see hard evidence of a real rebound for commodity demand, I cannot steer Fools toward any company engaging in such a counter-cyclical growth spurt. With more than $800 million borrowed against the company's $1.35 billion credit facility, Eagle remains unattractively leveraged against a book value of less than $500 million and a market capitalization less than $350 million. Meanwhile, Navios Maritime Holdings (NYSE:NM) and Genco Shipping (NYSE:GNK) both have some of the enormous Capesize vessels on order, but each maintains a far more favorable liquidity position.

Dry bulk shipping remains a battle for survival first and foremost. I remain convinced that Diana Shipping and Navios Maritime Holdings are among the most seaworthy operators, and would consider Genco Shipping at my number three spot. I now add Eagle Bulk Shipping to my Foolish caution list, along with DryShips and Excel Maritime Carriers (NYSE:EXM).

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.