In the last couple of weeks, Diana Shipping (NYSE:DSX) has announced fixed-rate contracts for two of its vessels. While having fixed-rate contracts locked in assures Diana Shipping operating profits, the company couldn't have picked a worse time to lock in the rates
Diana Shipping, the ant
Recall the fable of the grasshopper and the ant. For years, Diana Shipping has been operating more like the ant – diligently accumulating cash while cautiously keeping debt down. With the dry shipping environment showing signs of recovery, maybe it's time for Diana Shipping to pay attention to Baltic Trading Limited (NYSE:BALT) and start operating more like the grasshopper.
Of its two new fixed-rate contracts, one is for at least 22 months with one of its Capesize ships, and the other is for at least 9 months with one of its Panamax ships. The Capesize contract is for $18,350 per day, and the Panamax contract is for $11,000 per day.
At the time of this writing, the daily spot rates for Capesize ships are at $27,041. The daily spot rates for Panamax ships are at $13,903. These rates are already higher than Diana Shipping's new contracted rates by 47% and 26% respectively.
Diana Shipping almost nailed the exact V-shaped bottom. Since every dollar of higher rates goes straight to the bottom line as profit, Diana Shipping has already sacrificed a lot of profit, presumably for the security it received locking in rates.
Even a contract doesn't guarantee ironclad security. On Nov. 27, one of its charterers terminated a contract in light of cheaper rates. Determining whether Diana Shipping will ultimately be able to recover for breach of contract involves risks and unknowns even less certain than the rate environment itself.
It's odd that Diana Shipping jumped into two new contracts at rock bottom prices, considering how optimistic the company is about increased rates in 2014. The company believes dry shipping is in the "lower parts of the cycle."
Baltic Trading Limited, the grasshopper
Meanwhile, right after Diana Shipping, Baltic Trading Limited announced it has taken delivery of a Capesize vessel and entered a contract. But instead of entering a fixed-rate contract like Diana Shipping did, Baltic Trading Limited, tied the roughly year-long charter directly to the daily floating spot rates.
Thus, right out of the gate -- or dock, in this case -- Baltic Trading Limited will be charging 47% more for its Capesize vessel than Diana Shipping will be charging for its similar-sized vessel. What's more, Baltic Trading Limited is in position to capture any further appreciation in rates, which both it and Diana Shipping see coming in 2014.
Baltic Trading Limited expects "further improvement in the prevailing rate environment." The company is calling for increased iron ore demand from China and limited supply growth in ships to fuel the rate surge. It is so confident in better rates that it's also paying a quarterly dividend of $0.02 per share, while Diana Shipping is opting to forgo any dividend until later in the shipping cycle. Then again, with Diana Shipping locking in rates at potentially rock-bottom prices, it's hard to blame the company for conserving its cash reserves.
Foolish final thoughts
Based on this behavior, Baltic Trading Limited is the higher-risk company, but it also offers the higher potential reward. Follow the rate environment. As long as rates continue to escalate, as expected by both Baltic Trading Limited and Diana Shipping, then investing with the grasshopper should prove to be the better strategy.
Nickey Friedman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.