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A Fresh Look at Shipping Company Stocks

by: Tim Plaehn October 10, 2008 | about stocks: FRO / NAT / SBLK / SEA / SFL    
Tim Plaehn

Tim Plaehn

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Shipping Lines Sail Uncertain Seas - WSJ.com.

The article linked above from WSJ.com (subscription required) started me thinking about the ongoing prospects for the shipping related companies I follow. The gist of the article is that container shipping rates have fallen up to 75% reaching unprofitable levels. The Baltic Dry Index has fallen by 2/3 over the last several months, hitting the bulk shippers. The Claymore/Delta Global Shipping ETF (SEA) has fallen by 50% in the two months since it was launched. The three shipping stocks I follow here have also fallen so I wanted to revisit each and look at the prospects going forward.

First up, oil tanker company Nordic American Tanker (NAT). NAT leases all of its Suezmax tankers on the spot market. The company has kept its expenses very low and pays out virtually all of its free cash flow as quarterly dividends. Dividends fluctuate with the spot tanker rate and vary wildly from quarter to quarter ranging from 40¢ to $1.88 during the last 4 years. Over its 10 year history the dividend has provided a greater than 10% yield. NAT share price has fallen from over $40 in late July to the current $27. The company has given guidance that 3rd quarter dividend will be in the same range as the 2nd quarter’s $1.60. Earned Suezmax tanker rates for NAT averaged $64,900 for the 2nd quarter and I calculate rates for Q3 will come in near there. Early October spot rates are still in the $60k per day range, so tanker rates have not fallen like the cargo shipping.  Since the future dividends of Nordic American are unpredictable, I consider this stock an accumulate proposition when share prices fall.

Ship Finance International (SFL) has exposure to both the dry bulk and container shipping sectors. Of the current 73 ships in the company’s fleet, 11 are dry bulk and 13 are container vessels. These ships account for 14% of the asset value of Ship Finance. Over 80% of SFL’s revenues are derived from their oil tankers and offshore vessels. Ship Finance leases their vessels to shipping companies on long term, bare boat leases. They get the first dollars their ships earn and should continue to get their lease payments unless one of their customers goes completely under.

For the 2nd quarter, SFL had $1.57 in free cash flow to easily cover their 58¢ dividend. About $1.20 of the cash flow is from their long term leases and the balance is from the profit sharing agreement with Frontline (FRO). A recently announced deal to buy and lease back a pair of deep sea drilling rigs with SeaDrill will add an additional 90¢ per quarter starting Q2, 2009. I believe the current 16% dividend is secure and will grow over the next several quarters. The only problem I foresee is possible difficulty obtaining financing for future deals. The graphic below shows the different banks that Ship Finance does business with and we are all guessing as to when access to additional funds for companies like SFL will be possible. Please note, they are in no need of any additional financing at this time. I think SFL is a great value at the current share price.

Star Bulk Carriers (SBLK) is a much more speculative pick in this sector. Star Bulk is a year-old start up with a fleet of 12 bulk carriers. The company plans to keep all of their vessels on longer term contract and are currently booked 90% through 2009 and 60% through 2010. The current 35¢ quarterly dividend appears to be well covered by earnings. Of course, any kind of hiccup in their contracts would kill this company’s cash flow. If earnings have been maintained when the 3rd quarter results are announced, the current stock price is going to look like a great value. This is a high risk opportunity that may end up with a 24% yield plus stock price appreciation if the company’s contracts are solid.

SFL and NAT are components of my site’s Income Portfolio. NAT and SBLK are included in the Opportunities Portfolio. These portfolios are for the hypothetical tracking of stocks I am interested in.

Disclosure: I have long positions in NAT and SFL

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This article has 12 comments:

  •  
    Oct 10 10:21 AM
    Thanks for the analysis, Tim.
    I have SFL, FRO and DSX. Just bought some OCNF and am very tempted by SBLK. What do you think of OCNF? Did you ever look at MSB? I passed that one up at 6$. One of my major goofs.
    Thanks again.
    Reply
  •  
    Oct 10 11:12 AM
    FRO & NAT have been great.no one has figured out a way to pave over the ocean.
    Reply
  •  
    Oct 10 01:47 PM
    I, too, am a FRO and SFL shareholder. Reinvesting dividends has been key, especially since these stocks have such a high yield.
    Reply
  •  
    Oct 10 02:57 PM
    New to the shippers.......I was simply looking for high yield and
    stumbled on this group.Long NAT and was near pushing button for
    FRO when the excrement hit the HVAC.
    In normal Market the group has outstanding yields, in this mess
    yields must be the highest you may ever get.

    Good fortune to all and "don't shoot until you see the white of
    their eyes !"

    Tom
    Reply
  •  
    Oct 10 05:20 PM
    I just sold NAT. I like the company and that fact that it has no debt. However, it is entirely dependent upon the spot market and has no long term contracts, and according to everything I read in Lloyds List and the Capital Link Shipping site, tanker rates will be volatile at best and likely to decline sharply. I also just sold Eagle Bulk because of what I view as shareholder-unfriendly behavior. However, I own Star Bulk for the reasons cited in the above article. I also own Sea Span, a container company yielding 16 1/2 %, All of its ships on the water are subject to 10 or 11 year charters with A1 Class charterers and have an average unexpired term of 7 years. Their newbuilds are all subject to 10 year charters effective upon delivery to the charterer (the same ones), and it is shareholder froendly.
    Reply
  •  
    Oct 11 06:59 AM
    I have FRO, and am staying with it for now, but would also like to know about OCNF. I picked some up a while back, and it's dropped a bit, so I basically want to know if it's worth waiting or if I should cut my losses and get out now. Instinct tells me to stick it out. Any opinions?
    Reply
  •  
    Oct 12 02:01 PM
    Just picked up some more FRO at 30, to average down. Had sold it a while back. When it dropped into the low 40s I thought it was a good buy. Who knew? I wanted a stock with yield that I could sit with for a while and this one fits the bill.

    I just bought some OCNF the other day. Owned the stock a long time ago based on a Cramer recommendation and sold out in the mid twenties. Surprised to see it trading at 7 --- but the entire dry bulk shipping group has plummeted along with the index. With high yields come high risk, but I'm betting that China will have to import coal and grain sooner than later and the index will stabilize. While the world economy slows, China may very well put people to work building infrastructure and restructuring their current farming system.

    One has to wonder if there will not be consolidation in the industry at these prices. Personally, I think you will see a lot of M&A activity in the basic material space, as well as the shippers and infrastructure companies.

    I used to be scared of buying stocks will crazy dividend yields. I bought Fording Coal (FDG) at 19 when it was yielding over 20%. Sold it at 21, thinking the yield was too good to be true. Regretted that one. Still do.

    This market sell off has created some very interesting opportunities if you have the money and patience to play, not to mention a cast iron stomach. Back to the buy and hold strategy. I think we used to call it investing.
    Reply
  •  
    Oct 13 01:21 PM
    Does anyone know or have read the specifics about the FRO "stock split" ie. particularly the "cut off" date of share ownership in order to take advantage of the 5 for 1 split announced @ the Sept. 22, 2008 Shareholders meeting.
    Reply
  •  
    Oct 17 05:53 PM
    I'm holding puts on PRGN at $12.50. with probably a 15% yld. at that price. What are your thoughts. Always had good luck with a buy and hold strategy and definately don't mind it as long as the co. doesn't fold on me.
    Reply
  •  
    Oct 27 10:40 AM
    Anybody got info / insight on DHT? They are trading around $4 a share and paying almost 30% at these levels. That is amazing. Why would'nt you park a few grand here than a bank CD?
    Reply
  •  
    Oct 28 05:24 PM
    If we truly are going into a major recession where the commodities boom and emerging markets boom are turning into a bust and there is much less demand for shipping, putting your money into an FDIC insured deposit yielding 4-5% might be the best thing for the short term..
    Reply
  •  
    Nov 06 06:02 PM
    One thing I've noticed is that with gas prices down so much people are beginning to drive a lot more!
    Two months or so ago when gas was around $4.00 per gallon I was out on a thurs night and it was like a ghost town out there!
    So, it looks like gasoline usage that was down 11% last May is headed up again which is good for spot shipping rates.
    Also, a cold winter which has already started up North.
    I'm torn, in this bear market I'd *love* to see both FRO and NAT which I own go down to $10 per share and really pile on some shares at that price!
    But, unfortunately (for me) that probably won't happen, people need gas and oil reccession or no.
    With the high yields of these stocks why go anywhere else?
    Oh, the CEO of NAT will be interviewed on CNBC friday morning, Nov 7th between 0930-1000.
    Reply
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