The NYFEX Report: Dry Cargo Operating Costs

In my inaugural survey of operating costs in the Dry Cargo Shipping Industry,  I found that Safe Bulkers (SB), Star Bulk Carriers (SBLK), and Genco Shipping & Trading (GNK) have consistently achieved lower operating costs than Scorpio Bulkers (SALT), Eagle Bulk Shipping (EGLE) and Diana Shipping (DSX).

The results of the survey are important because Dry Cargo Shipping companies with low cost structures have a tangible advantage over peers with higher cost structures, generating $15m to $30m in annual cost savings.

In the following survey, I ranked six publicly traded shipping companies based on their most recent 3-year average Daily Operating Cost (Vessel operating expenses plus general & administrative expenses, divided by the number of ownership days)

These three companies were the leaders:

And these these companies were the laggards: 

The link to the full article published on Seeking Alpha is:

https://seekingalpha.com/article/4369718-survey-of-operating-costs-in-dry-cargo-shipping

Data were sourced from company press releases and/or SEC filings, or they were estimated by NYFEX Research if not readily available. Data are believed to be accurate but with no warranty, express or implied.

This article, including the information contained herein, is the intellectual property of Lambros Papaeconomou and NYFEX Research and it may not be copied, reproduced, republished, or posted in whole or in part, in any form, without prior written consent.

The NYFEX Report: Dry Cargo - G&A Costs

In this article, we provide a comparison of General & Administrative costs for Dry Cargo companies. G&A costs include management fees paid to related companies, and amortization of stock compensation expense.

Daily G&A Costs are calculated based on total number of Ownership Days for each quarter. Data are sourced from company press releases, presentations, and SEC filings. Ownership Days are estimated by NYFEX Research when such data are not readily available. Data and corresponding charts are believed to be accurate but they are presented without any warranty, express or implied.

This article, including the information contained herein, is the intellectual property of Lambros Papaeconomou and NYFEX Research and it may not be copied, reproduced, republished, or posted in whole or in part, in any form, without prior written consent.

Scorpio Tankers Executive Share Ownership

Since its IPO in 2010, Scorpio Tankers (STNG) has awarded its management team with generous stock grands on an annual basis, to align their interests with that of shareholders.

However, STNG top executives have been active sellers of their share awards as they become vested, in effect negating the company's policy.

The number of fully vested or "free" shares owned by each of the two top STNG executives is lower today than it was five years ago.

This article, including the information contained herein, is the intellectual property of Lambros Papaeconomou and NYFEX Research and it may not be copied, reproduced, republished, or posted in whole or in part, in any form, without prior written consent.

The NYFEX Report: Andreas Sohmen-Pao’s knack for deal making

BW Group’s chairman is known for preying on rival companies and for a cunning ability to make the most out of each situation.

The news of Hafnia making an offer to acquire rival Ardmore Shipping (ASC) has reignited shipping’s interest in mergers and acquisitions, by pitting a seasoned corporate raider against a scrappy upstart.

BW Group, Hafnia’s controlling shareholder, and its Chairman Andreas Sohmen-Pao, are no strangers to the high stakes of corporate takeovers. Hafnia is itself the product of a friendly merger between BW Tankers and Hafnia Tankers in January 2019.

Prior to Hafnia in May 2018, Mr Sohmen-Pao orchestrated an unsolicited bid to merge BW affiliate BW LPG with Dorian LPG (LPG).  And in March 2017, BW had merged its fleet of eleven VLCCs with DHT Holdings (DHT).

There is a lot to learn by observing how Mr Sohmen-Pao plays the M&A game. A common thread is the drive for market share consolidation and economies of scale in operating costs. Another feature is the use of common stock as the currency of choice, preferring all-stock transactions based on net asset valuations.  

But above all, Mr. Sohmen-Pao has been extremely disciplined in holding - and folding - his cards when circumstances merit such action.

Dorian LPG failed merger

Take the example of BW LPG's failed takeover of Dorian LPG.  The parent company BW had first taken a $92m stake in Dorian LPG in July 2015, when it acquired 6m Dorian shares from Scorpio Tankers. By the time BW LPG made its failed merger proposal, BW had amassed a 14.2% stake, but it was staring at a $45m paper investment loss. 

Instead of cutting his losses and running away, Mr Sohmen-Pao stayed the course as a passive investor. And when the opportunity presented itself, BW systematically reduced its stake between June 2019 and January 2020.

By the time its Dorian ownership had fallen below 5%, BW was looking at breaking even. That was a spectacular turnaround for an investment once deep out of the money.

DHT investment and subsequent divestment

BW had a seemingly better luck with DHT, easily coming to terms to contribute 11 VLCCs in exchange for about 48m shares, then valued at $256m. But about a year following the blockbuster agreement, BW was again in purgatory staring at an unrealized investment loss of some $70m.

In typical fashion, and after opportunistically buying more shares to lower its cost, BW has since May 2019 diligently reduced its DHT ownership to about 26m shares today. After taking into consideration cash dividends and the fair market value of the remaining shares, BW is looking at a $80m net investment profit.

The Ardmore Quest

It is still too early to tell if the proposed merger between Hafnia and Ardmore will be consummated, or even if a white knight will emerge to further stir the pot. What is known is that Hafnia offered to acquire Ardmore in an “all-stock-deal” based on relative net asset value terms. The goal is to create a behemoth in product tankers with a combined NAV of approximately $1.5bn.

The offer, which called for the exchange of each Ardmore share for 2.4 Hanfia shares, has been summarily declined by Ardmore. Full terms of the deal, however, have not been fully disclosed yet.  It is also not known whether BW had acquired any stake in Ardmore in advance of its unsolicited offer.

Based on who you ask (Hafnia or Ardmore), the proposed deal represents either a heavy premium or a substantial discount to Ardmore's stock price.

Ardmore is the newcomer in this fight, but its CEO Tony Gurnee is a seasoned executive who can hold court on his own. It will be fascinating to watch the turn of events and see if Mr. Sohmen-Pao can live up to his reputation as an expert deal maker.

This article, including the information contained herein, is the intellectual property of Lambros Papaeconomou and NYFEX Research and it may not be copied, reproduced, republished, or posted in whole or in part, in any form, without prior written consent.

Lessons In Shipping: Pay Debt or Return Cash?

Suppose you are the CEO of a shipping company and have an extra dollar to spare. Would you pay down debt or would you return the dollar to shareholders?

I believe that paying down debt is the better choice, especially in a cyclical industry like shipping where weak markets are the norm, and they can happen at any time.

As you can see from the case study, when you return cash to shareholders (either through dividends or stock-buybacks), you effectively increase your leverage by raising the net debt to capitalization ratio.

The higher the leverage, the harder – and more expensive – would be to borrow during a down cycle.

Paying down debt should be your top priority, until you reach a leverage target that allows for prompt & low-cost borrowing.

In our next lesson we will explore the best way to return cash to shareholders, once the leverage target is achieved.

This article, including the information contained herein, is the intellectual property of Lambros Papaeconomou and NYFEX Research and it may not be copied, reproduced, republished, or posted in whole or in part, in any form, without prior written consent.

DHT Convertible Senior Notes Due 2021

DHT Holdings (DHT) issued $125m in convertible senior notes in August 2018. The notes, which pay an annual interest rate of 4.5%, are scheduled to mature on August 15, 2021.

The conversion price is adjusted lower with each cash dividend declared by DHT.  In the charts below, you can view the history of cash dividends and conversion adjustments, as well as the potential dilutive effect on common equity, should note holders exercise their right to convert the notes to common shares.

This article, including the information contained herein, is the intellectual property of Lambros Papaeconomou and NYFEX Research and it may not be copied, reproduced, republished, or posted in whole or in part, in any form, without prior written consent.

The NYFEX Report: Tankers & Toilet Paper

Tanker owners are having a field day but when deciding what to do next they should heed homeowners’ advice and hoard cash like toilet paper.

It’s a close call: Who is binge buying more? Consumers hoarding toilet paper or traders storing oil in tankers?

The rationale for each panic-driven buying binge is of course different.  We hoard toilet paper fearing we will run out. Oil traders buy oil hoping to make a quick buck.

But whether it’s fear or greed that drives each behavior, the two cases also have something in common.  There appears to be scarcity for neither toilet paper nor crude oil, and no underlying reason why demand will increase any time soon. 

In fact, when it comes to oil, forecasts are calling for a precipitous drop in demand now that airlines, cruise ships, and non-commercial vehicles are at a standstill. Arbitrage traders are risking being stuck with cheap oil and no buyers in sight.

Now the real beneficiaries of this sudden surge in oil storage are tanker owners. Very large crude carriers – which have the capacity to store two million barrels – can provide temporary storage, for a “reasonable” fee. 

Tanker stocks – historically among the worst performing – are rallying, and stock pundits are yelling buy, buy, buy, because the best is yet to come.

Or is it? What will happen when demand for floating oil storage dissipates?  When the current “contango” in oil prices – the phenomenon of oil prices today being substantially lower that future oil prices - is over, so will the maniac storage onshore or in VLCCs.

What will happen to oil tankers is similar with what will happen to toilet paper.

I know that if I found an 18-roll of toilet paper at the store tomorrow I would buy it with impunity. And if I found another roll the next day, I would buy that too.

Not that my use of toilet paper has increased. In fact, we have all learned how to become more efficient, doing more with less.

But sooner or later I will realize that toilet paper is no longer scarce.  And at that moment I will stop buying it for a while, using instead my stockpile at home.

Paper manufacturers – who are busy keeping up with the current spike in demand while ringing the cash register – know that the moment of truth will arrive.  After all, we can only use so much toilet paper every day.

Tanker owners are facing the same predicament. They see daily spot rates for oil tankers spike to $150,000 or more, but they know that the more they earn today the less they will earn when refiners begin drawing down their inventories. Just like when consumers begin using their stash of toilet paper.

So here is my advice to tanker owners.  Use your cash windfall wisely.  Forget about quarterly dividends or stock buybacks.  Forget about short-term stock gains and focus on the long game.  

Your prime responsibility is to keep your company alive for the long haul. If the downturn ends up being milder than expected you can always declare a special dividend twelve or eighteen months from now.

Until then please treat your cash like toilet paper: Hoard it!

This article, including the information contained herein, is the intellectual property of Lambros Papaeconomou and NYFEX Research and it may not be copied, reproduced, republished, or posted in whole or in part, in any form, without prior written consent.