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SBLK - Star Bulk Carriers


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This is a shipping company that owns dry bulk carriers. If you know something about the shipping industry, there is quite some variance in shipping rates. Now Morgan stanley has released a report that shipping will go in an upcycle again due to decreasing amount of ships coming on the market and an increasing demand for shipping of coal and steel in the next few years. I dont really know how to read this, but what are general thoughts on this?

 

From what I got from the shipping man and a shipping text book, smart ship owners buy low and sell high. The owners of this company  have done so in the past few decades. He sold the majority of his 32 ships in 2006-2007. Current fleet is 24 ships. Or at least it will be early 2014. Av age is less then 10 years now I think.

 

Now why this is also interesting is because Oak tree is involved in this one. Market cap is only 180 million$, and I think their ships which are pretty fairly valued right now at an almost bottom in the market (ship value and shipping rates go togehter) are trading to a discount ofcurrent fair value. You can look it up, maybe I made a mistake here :) .

 

The more interesting thing is if shipping rates really recover over the next few years. They had 130 million in net income in 2008 with 12 ships. So with a market cap of 180 million, shipping rates dont really need to recover to pre financial crisis levels to make this a multibagger. And you can trust management to start selling their ships for a nice profit if the rates start getting ridicilous again.

 

Graph of him buying and selling:

http://static.cdn-seekingalpha.com/uploads/2013/8/5/9961161-13757122248025255-Deep-Value-One_origin.png

 

Thoughts?

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I dont know what the orderbook is, but from what iv heard its going down in general. In the last 100 years no shipping down cycle lasted more then like 9 years I think. We are 5 years in now.  and with Oak tree and some other fund injecting 75 million I think, and owning 40% I trust the shareholders wont get fked? So we dont need a long upcycle for this to pay off. Ship prices will shoot up with the rates, and as soon as that happens management will start selling the ships to the new influx of dumb money, locking in the gains.  So technically this is more a net net company that will earn some cash in the mean time.

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http://www.aya.com.gr/pdf/stopford2013.pdf

 

Your right about the crazy ship build mania in china. Seeing the second ship building cycle is crazy. The fallout of that might take a while, and its going to need some serious demand to pump rates up to those pre crisis days. I guess wait this one out a bit then.

 

still they generate v nice cash flow. Not enough to warrant buying a new ship, but they are cash flow positive. In 2012 charter rates were at a almost all time low. They had 14 ships in operation. they had 30 million$ in EBITDA which is basicly their free cash flow if they dont buy ships. They say they plan on having 32 vessels by 2015 I think. If we assume rates are at least somewhat higher then in 2012 going forward (they havent been that low in a long time) then they should generate about 60-80 million$ in cash each year untill there is a upturn in shipping rates again. this seem to be a bear case? If im not mistaken the market cap is now 190 million$? Seems like this could be a buy now , and your freerolling an upturn in the rates. What am i missing here? Am I not counting the amount of shares right?

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I saw the reco from MS on the industry including SBLK, but since I already had enough, 10% of NAV, in dry bulk carriers, SB and BALT, I did not look at it in depth. 

 

It looks like the one MS liked the best was SB, so curious why you chose SB?

 

The whole industry should improve at the same time responding to the macro trend, with strength of balance sheet and exposure to rate changes being the important drivers to distinguish which ones you want to own.

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  • 9 months later...

Anyone looking at this? It seems they  merged with another shipping company. And within 2 years all ships will be delivered, and their ships will be partially low cost.

 

Fully delivered their fleet will be 11.8 million DWT. Your paying about 800m$ for that. I have no idea what capital structure will be though.

 

Existing fleet is about 6.6m DWT. But some of those ships are old and not making money in current enviroment.

 

Existing fleet is 67 ships. And new buildings, Which are mostly larger ships then exiting fleet are another 36 ships.

 

EBITDA for GLBS is about 12-13 million for 7 ships that are older then the fully delivered fleet of SBLK. So on that basis, ebitda would be about 180m$.

 

Going by DWT I get more like 314m $ in EBITDA though. They also operate some ships from other companies, which is another 5-15m$ in ebitda?

 

Thing is, SBLK will have some eco ships which have lower costs then the rest of the fleet. ALso operating leverage is more when rates would turn up.

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To add, with the operating leverage, if rates double from 2013 levels, then they could do 1.6 billion$ in EBITDA. so on that basis it would be trading at about 0.5x ebitda :) .

 

Seems interesting because potential earning power is hidden and not very obvious. You have Oak tree on board, and Petros Pappas seems like a smart guy. He is managing it from the inside.

 

Also note how DRYS has 4.1 m DWT and cash from operations was about 250-300m$ in a bad year. Not much new deliveries. Their ships are older (after 2 years), and SBLK has a better operator/capital allocator. They have more leverage then fully delivered SBLK. And their market cap is about 700m$. By that logic SBLK's market cap with probably less debt should be at least double of what it is now. 

 

http://starbulk.irwebpage.com/files/SBLK_Q2_2014.pdf

 

So at page 23, at day rates below last year, they would do 350m$ in ebitda in 2016. Debt of between 500-1b$. So that would mean about 25-50m$ in interest. So 300m$ in FCF. If rates would go to 2010 levels, that would be over 800m$ in FCF or their entire market cap.

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Interesting idea.  There are three points/questions that occur to me when I look over this thread:

1. Oaktree had a smallish position in SBLK prior to the Excel Maritime acquisition (5.5 million shares, out of ~60 million outstanding).  They had a fairly large debt position in Excel Maritime, which SBLK bought out.  Oaktree now owns 57% of SBLK.  Given that they are essentially the controlling shareholder, what is their end game?  Do they buy the rest of the company and become the owner-operator? Probably not...  Do they start to liquidate their position?  Possibly, and this would be a huge overhang over the stock price...  Not saying this company is a bad idea, but I am hesitant to jump in bed with a large controlling shareholder like Oaktree given that their actions will likely have a greater impact on the price action of this stock, rather than the fundamentals. 

2.  Would SBLK have purchased Excel Maritime if Oaktree had not been on both sides of the transaction? 

3.  The economic/employment situation in China concerns me.  The bulk of the population is concentrated in coastal cities.  Shipyards have traditionally been a large employer in these coastal cities, and many of the shipyards are state-owned enterprises (or at least implicitly supported by the state).  My understanding is that the state is essentially subsidizing some of these shipyards to produce ships in the absence of orders simply to maintain a reasonable level of employment.  This has a deflationary effect on the Baltic Dry Index given all of the extra ships floating around (no pun intended!).   

 

         

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A lot of these ships are low quality, and it is hard to get financing for them. Also looking at orderbook, it is at 2009 levels, and I think scrapping rates are at all time highs? Also they have higher maintenance costs.

 

I worked out the capital structure too. Net debt will be around 1.3-1.5 billion$ 2 years from now.

 

going into 2016 they will have about 38k fleet spot days. 39 of their 103 ships are 200k DWT adn the rest about 80k DWT. I think the newcastlemax 200k dwt get between 10-40k$ with bigger variance and the smaller ships will get about 10-20k$. And this is in a somewhat depressed enviroment. For example rates were closer to 120k$ in 2007-08 for a newcastlemax.

 

So taking 15k$ rates on average for their fleet on 38k fleet spot days, that is 570m$. Which seems on the low side if you look at the past decade. 60% of their fleet will also be eco vessels that use up to 25% less fuel.

 

Now they say they will be lowest cost operator in the industry. So if you want to know cash flow in a depressed enviroment, you can look at safebulkers. With about 1/4 of  SBLK's ships they do 65% EBITDA margins in 2012 and 2013, both bad years. And their ships are mostly 70-90k DWT.

 

So then I get about 300-350 million of ebitda on the low end in a depressed market where a lot of other operators are running break even or barely break even EBITDA wise.

 

on 1.5 billion in debt that is about 30-60m$ in interest. Interest for SB is 2% and 2.6% currently for SBLK.

 

Rates go to 2010 levels and I get 5-600m$ in EBITDA. Which would ofcourse mostly go to shareholders.

 

Im not worried about Oaktree, I doubt they will just hit a bunch of market orders. They are also limited in their ability to sell off by contract. They can only sell of small amounts. If anything, Oak tree is a positive. Also Oak tree holds only 33% of voting power.

 

So if you think shipping rates will stay depressed for 10 years, that is 3 billion$ in ebitda. That would still give you equity value of well over 1 billion$. If you think rates shoot up for a few years in that period, you can easily get 4-5 billion$ in ebitda and equity value of several billion$. Given their low level of leverage compared to a lot of other shippers, there is not much risk.

 

What makes this interesting is that China will start importing a lot more iron ore from the outside, because a lot of their ore is low grade and high cost. So imports will increase even when iron demand stays flat. And for india and China coal imports will also increase. Higher quality coal needs to be imported from further away.

 

 

I think their advantage is their size. Some costs are fixed. And skilled managers. For some reason some managers don't pull of running ships cheaply. And also being in the minority of the market with those eco ships.

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These are supramax/panamax rates. On average about 12k$. for 65 ships that would be 280m$ in revenue.

https://www.bimco.org/Reports/Market_Analysis/2014/~/media/7BBD797CB7FC44448FF147C82D0B810A.ashx

 

https://www.bimco.org/Reports/Market_Analysis/2014/~/media/7607B5CE35F04ECD99FEE1A441EE4E76.ashx

 

Capesize  probably 20k$ on average. Newcastlemax is bigger, and they are ecoships, so they probably get a bit more.

 

Panamax about 12k$. So that is 15k$ a day in a bad market where most don't make money. If they would have the same margins as Safebulkers, that would be 556m$ in revenue or about 360m$ in ebitda. So more then enough margin of safety.

 

Get the rates to an average of 30k$ for a year and it is about 700m$ in ebitda. Or probably about 650m$ to debt and equity holders.

 

ANd if the rates go lower, a lot of older ships have to be taken on land, so that puts a floor in the TC rates.

 

If you look 20 years back, they were similar on average. But they should be higher now as fuel costs have risen a lot due to oil not being at 20$ anymore.

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Spent some time on SBLK today. It looks like a good opportunity, but if my numbers are correct, it doesn't make it to my top 8 ideas. I see a range of 28% to 50% IRR. There is a lot of fluctuation based on TCE Rates and holding period, or course.

 

The interest rate of their Excel Vessel Bridge Facility is Libor plus 5% for 2015 and plus 6% 2016. I assume the approx 1b more they need for the 36 new build "eco-types" will be around the same rate. So that means interest is around 100mm a year and repayments of debt around 50mm per year.  I do no believe there is a risk of them coming in short. I believe TCE rates would have to be under 6000$ a day given their fleet for them to be less than breakeven. And they haven't had TCE Rates less than 14'000$ the last 5 years.

 

They seem to be a low cost provider and their 36 eco-types that are already arriving and will be full delivered by 2016 will make them even more efficient.

 

On an EV basis and pro-forma 2016 numbers, they are not cheap; around 9x low end approximations. I think the value would come from them being appraised on a FCF basis, (or EV basis once they start repaying their massive amounts of debt they will incur for the huge fleet expansion).

 

If I didn't have 8 better ideas, I would strongly consider buying them. I expect there to be selling pressure given they have not delivered the full 29.9mm shares to Excel yet for the 34 ships; they will do this over the next few months as ships arrive. As of the last release, they had delivered 9mm of the 29.9mm shares. I expect Excel will be selling some of those shares on the open market.

 

Seems like good management. Pappas has 35 years experience and 260 vessel acquisitions and dispositions. Like now, he has in the past expanded at market bottoms buying cheap ships, and sold nearing market tops. As well, Oaktree has 57% ownership (33% voting rights).

 

Downside looks like 28% IRR based on pro-forma 2016 low end FCF and taking 2.5 years to get there at 10x FCF multiple. Upside is around 50% IRR on a mid range of TCE rates. Definitely attractive.  However, I think I've found 8 other ideas with similar or better returns and less debt.

 

Here are some figures and calcs. Reasonable chance they are wildly off and should be scrutinized intensely.

http://postimg.org/image/6vw5dctc1/

 

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I've followed a few names in dry bulk for years, but haven't been following this one. I did notice they appear to trade at a premium to book value. Is book value understated due to picking up assets in the cheap in bankruptcy? Hard for me to imagine deserving such a high premium otherwise.

 

I do think that we will eventually see sustainable recovery.in shipping rates, but I dont think it will be until 2016 at the earliest. Order book looks much better but it still outstrips current demand growth and scrapping levels are 30% below their highs. Also, vessels that are of age to scrap only compromise 10% of current fleet so not much bang for your buck even if a large number of these were scrapped. I believe many companies are slow-steaming too which would dilute some effects of growing demand. I'd be a little less agressive with your expected averages for rates and expect that they may be this low for a year or two with a slowing global economy, slowing coal and iron ore demand, and incremental supply growth slightly exceeding demand growth. You have the fleet earning 15k on average a day, but the last I checked Capes were 12k a day and panamax was close 7k a day. You also didnt remove vessel operating expesnes and you're assuming they charter every ship for every day. I think these are unrealistic expectations in this environment if you're trying to be conservative.You're talking a real sustained recovery in rates to get to your expected EBITDA and I just dont know if we're there yet.

 

My strategy has been to buy SB when it trades at a 40-50% discount to book and begin to sell it at a 20% premium to book. Earnings don't matter in this environment, just get a hefty discount to book while waiting for earnings to recover and sell into the rally. I like SB because they have the liquidity to acquire ships and pay down debt even if rates stay where they're currently at. There wouldn't be much left for equity holders but I don't expect these rates to persist forever either.

 

 

 

 

 

 

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they charter ships for close to 100% of the year. For SB vessel operating expenses are about 6500$ a day. But SBLK will likely be the lowest cost operator. So 5500-6000$ is probably more accurate.

 

And 9-10k$ average rates for Newcastlemax and panamax is really low. Your talking about throughs of all time lows here. Judging by the last 2 decades, if you just take the bad years, average is probably closer to 20k$ for 200k dwt and 10k$ for 80k dwt with current oil prices.

 

So then if you take the average of bad years you get 14k$-6k$ = 8k$ in cash flow per ship per day. 103 ships, and 98% utilization rates (theya re the lowest cost provider) you get 8k$x 355 x 103 = 292m$ in ebitda. Interest will be between 70-100m$ depending on which year you take. So that is more then 200m$ that goes to paying off ships and to shareholders. So if 50m$ can be paid out, that is a 5% yield in bad years.

 

http://i0.wp.com/drg.blob.core.windows.net/hellenicshippingnewsbody/images/stories/General_photos2/wDB-2014smoNo2-1_Year_TC_Rates.png?w=960

http://content.edgar-online.com/edgar_conv_img/2011/07/18/0000950123-11-066233_Y91605Y9160506.GIF

 

im you gotta take averages. If you cite 7k$ a day, you gotta consider the times they get 30k$ a day too.

 

Also these things have huge optionality. Because SBLK is always cash flow positive, even when a lot of other operators are breaking even, they are like long term options that don't expire. So some volatility on the upside should be priced in.

 

If one year average rates are 50k$ a day, that is 44k$ a day in profit. Or about 1.6bn$ in ebitda. That could be possible in one good year  :D , Seems like that should be reflected in the current price?

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they charter ships for close to 100% of the year. For SB vessel operating expenses are about 6500$ a day. But SBLK will likely be the lowest cost operator. So 5500-6000$ is probably more accurate
.

 

Just out of curiosity, why do you believe they will be lower than SB? They acquired a bunch of old ships from Excel Maritime. SB is low cost due to a highly efficient fleet of new ships averaging 5 years old. That doesnt sound like what you have here.

 

And 9-10k$ average rates for Newcastlemax and panamax is really low. Your talking about throughs of all time lows here. Judging by the last 2 decades, if you just take the bad years, average is probably closer to 20k$ for 200k dwt and 10k$ for 80k dwt with current oil prices.

im you gotta take averages. If you cite 7k$ a day, you gotta consider the times they get 30k$ a day too.

Averages make sense over a time frame similar to the average - 30K was in a time very different from the one we're in.  Structurally, global growth is slower and many of the goods these carriers haul are in structural demand decline as well. I'm not saying they're going away - I'm saying barring something totally unforeseen, we're not going to see 30k a day anytime soon. Using averages works well over long term time frames in environments similar to that experienced during the average. I dont think either one is really applicable here.

 

Also these things have huge optionality. Because SBLK is always cash flow positive, even when a lot of other operators are breaking even, they are like long term options that don't expire. So some volatility on the upside should be priced in

.

Agreed on the optionality but I only like it when I'm not paying for it. SB trades at 40% discount to its equity value and I'd audio cash flow positive through the hardest market. Why should I pay a premium for SBLK hoping for higher earnings when I get that optionality in SB and a discount?

 

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Just out of curiosity, why do you believe they will be lower than SB? They acquired a bunch of old ships from Excel Maritime. SB is low cost due to a highly efficient fleet of new ships averaging 5 years old. That doesnt sound like what you have here.

 

average age of ships will be about 7.8 years I think in early 2016. About 10 of their ships will be 14 years of older. If you exlude those, average will be 5.3 years on 93 ships. Looking at ESEA and FREE they will probably not make money with those inc urrent enviroment. 20-28% of the fleet out there is 10+ years old I think.

http://www.lloydslistintelligence.com/llint/dry-bulk/index.htm

 

And SG&A costs will be mostly fixed up untill some point. Same with public company costs. And value whise, 60% of SBLK's fleet will be eco carriers.

Averages make sense over a time frame similar to the average - 30K was in a time very different from the one we're in.  Structurally, global growth is slower and many of the goods these carriers haul are in structural demand decline as well. I'm not saying they're going away - I'm saying barring something totally unforeseen, we're not going to see 30k a day anytime soon. Using averages works well over long term time frames in environments similar to that experienced during the average. I dont think either one is really applicable here.

 

http://i0.wp.com/drg.blob.core.windows.net/hellenicshippingnewsbody/images/stories/General_photos2/wDB-2014smoNo2-1_Year_TC_Rates.png?w=960

 

looking at capesize rates, average was north of 20k$ a day in the past years. If you take the 90's graph, average was 15k$. But fuel prices were lower back then. That is what im saying, you take average assuming spikes on the upside will be rare, and you get 15k$ average rates. But a year like 2010 or 2007 or 2004 is not priced in.

 

Agreed on the optionality but I only like it when I'm not paying for it. SB trades at 40% discount to its equity value and I'd audio cash flow positive through the hardest market. Why should I pay a premium for SBLK hoping for higher earnings when I get that optionality in SB and a discount?

http://www.starbulk.com/UserFiles/sblk082014.pdf

equity is 912m$ valued this year at all time lows. I think they took an average of 3 brokers. But they still have ti give out 23 million shares at a value of 23 11.7$ per share. So that is an additional 266m$ in ships they will receive by the end of the year. So equity is at 1178 and market cap at current price is then 980m$. But the newbuilds were bought at bottom prices so there you get an additional 200m$ or so probably. so 29% discount to book value.

 

So im not sure which one is cheaper here.

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http://starbulk.irwebpage.com/files/sblk_roadshow_1014.pdf

 

Some new info. Looks operating expenses per ship is about 5200 and sg&a less then 1k so 6200 total

 

I found ou that bunker costs are not reflected in costs but in revenue. So more fuel efficient ships get more revenue. So assuming 16-17k a day is not unreasonable in a average bear case. Getting less then 300-350m ebitda seems unlikely.

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  • 4 weeks later...

Looks like Howard Marks just made this, by far, his largest equity position.

 

I don't  think this is through open market purchases - the 50M new shares are a result of the all-share purchase that was done in July for Star Bulk to acquire Ocean Bulk that was owned by Oaktree.

 

Basically, you knew it was going to be a 10% position for his fund when the deal closed in July even though the disclosure is only now occurring. Definitely bullish sign, just not new info.

 

I think things are beginning to look up for dry bulk. Next few years should be interesting.

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Looks like Howard Marks just made this, by far, his largest equity position.

 

I don't  think this is through open market purchases - the 50M new shares are a result of the all-share purchase that was done in July for Star Bulk to acquire Ocean Bulk that was owned by Oaktree.

 

Basically, you knew it was going to be a 10% position for his fund when the deal closed in July even though the disclosure is only now occurring. Definitely bullish sign, just not new info.

 

I think things are beginning to look up for dry bulk. Next few years should be interesting.

 

Thanks. I hadn't been following this one, but started reading when I saw it was such a big position for him.

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  • 3 weeks later...

Things are getting pretty exciting in dry bulk land. Increasing sea borne shipments of iron ore into China, the potential for India to be the next China, a lean orderbook, and rock bottom prices suggests an industry on the verge of turning. These co'Co's trade for fractions of book value and extremely modest multiples of future cash flows IF rates normalize. Have been buying a lot of SB and SBLK recently - planning to add more sub 4 and sub 7 respectively. 

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i would buy globus and  star bulk. Both cheaper and better then SB.

 

I'm not quite sure. SBLK will have lower cash costs based on estimates when ALL ships have been delivered over the next two years. SB has the lowest cash costs currently.

 

SB has book value of around 1.2B. You estimated that SBLK did as well, but the comom for SB trades at 566M (including preferpreferred shares capped at 8% dividends) while the common for SBLK trades at 728M. It's  true SBLK will have greater earnings power in the event of a turn in the industry, but that is a big IF. I'm concerned with downside protection reletive to assets in the event that oversupply/overinvestment in the industry continues to hang over our heads. Even with  the orderbook lean again, a prolonged slow down in China will hang over rates and could result in a lack of demand exacerbating the supply situation again.

 

I own both SB and SBLK, but to say that SBLK is cheaper requires an assumption about the future of rates that I don't need to say SB is.

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The decline in these companies is relentless! I did pick up some today at sub-7 but still before the EOD collapse. I wish these companies would use a little cash on hand to slowly repurchase shares when they trade at these levels instead of empire building and issuing debt/equity to buy more ships.

 

The main reason I picked up SBLK is because I'm hoping Oaktree can pressure them, as necessary to make smart capital allocation decisions that would leverage an industry turn around and the impact on its shares. It's odd to me that even after 5 years of oversupply that companies were still issuing debt/equity to order more new builds then they were scrapping... goes to show that the incentives are wrong for the industry to behave as a whole.

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