SBLK - Star Bulk Carriers (NASDAQ)

[Ferg]

Star Bulk Carriers $SBLK is a dry bulk shipping company, headquartered in Greece and listed on the NASDAQ.  Dry bulk is things like grain, iron ore and minerals etc.  Not containers.  They have a fleet of 128 ships with gross tonnage of 14m+ tonnes, average age of 10 years, and they ship ~60m tonnes per year.

Much more information can be found here: https://www.starbulk.com/

There was an interesting interview with the President, Hamish Norton, here:
https://www.youtube.com/watch?v=w-8_rc2r6pY

Historical financial summary can be found here: https://finance.yahoo.com/quote/SBLK/financials?p=SBLK

They are on an absolute tear with their earnings.  Current SP is US$24.26, P/E ratio is circa 3 and pre-tax dividend yield is 22% (yes you read that right, twenty two percent).  They have a policy where any "excess" cash is distributed as a quarterly dividend.  "Excess" cash is last reported cash holding less forecast cash required for the quarter.

I guess the market has priced this with the expectation current earnings are not sustainable.  Time will tell.  When Hamish Norton talks about ESG in the interview he is talking about using less fuel and installing scrubbers, i.e. savings costs and the planet.

All figures US$: Market cap $2.5b, last FY (Dec 2021) revenues $1.4b, NPAT $815m (51%), Assets US$3.7b, Liabilities $1.6b, equity $2.1b.  Last quarterly report for March 2022 had revenues $361m (+16% QoQ, +80% YoY) and NPAT $170m (+ heaps).  Hamish talks about contract rates being locked in for future periods.  103m shares with 9% owned by insiders, 56% by institutions and 3% short.

Disclosure: long and accumulating.  I hope to get this to a point where it is a free holding and then it goes into the bottom drawer.

DYOR, this is not financial or investment advice.

[Sideshow Bob]

Thanks for the heads up. Interesting - up today 7%, but still circa 20% down from their recent highs.

The shipping industry has become an area for super-profits. Unfortunately some of the companies aren't so easy to invest in from NZ.

On the container side, was recently looking at Ocean Network Express, who are the world's 6th biggest container line. Roughly in 2020 they turned over $15 billion USD, costs of $12.5 billion, so made circa $2.5 billion USD.

In 2021, their expenses rose by $2.5 billion (to $15 billion USD), but their revenue doubled. They made $15 billion USD profit.   Likely continued into 2022.

Fuel costs are offset by increased BAF's, but otherwise can't see the situation changing dramatically anytime soon.

[Ferg]

Thanks SB.  Ocean Network Express makes SBLK look like a minnow - incredible earnings.  And that is #6 in the industry!  I too cannot see a short term trigger for the reversal of recent shipping earnings.

I couldn't find ONE on Yahoo.  It appears they are a privately owned JV: https://en.wikipedia.org/wiki/Ocean_Network_Express
which partly explains the difficulty of investing in that particular business! 

Not as bad as that, but the FIF tax rules get in the way of making significant investments without being unduly penalised.  Very frustrating.

[BlackPeter]

Thanks SB.  Ocean Network Express makes SBLK look like a minnow - incredible earnings.  And that is #6 in the industry!  I too cannot see a short term trigger for the reversal of recent shipping earnings.

I couldn't find ONE on Yahoo.  It appears they are a privately owned JV: https://en.wikipedia.org/wiki/Ocean_Network_Express
which partly explains the difficulty of investing in that particular business! 

Not as bad as that, but the FIF tax rules get in the way of making significant investments without being unduly penalised.  Very frustrating.

True - the FIF rules are clearly highly unfair and in effect taxing the capital you have invested instead of the income you get out of your investment.

However - they even might help you to save taxes ... pay your 5% of your original investment and don't worry how much money you really made out of this investment (and hopefully its more).

Sure - if you have a loss, paying taxes on top of a loss is tough. But hey, somebody must pay for all the useless politicians and bureaucrats in Wellington.

Anyway - any party proposing to disestablish FIF will get my vote, but until this happens I would not worry too much about it - just makes some accountants happy and rich .... and yes, might keep some more capital in NZ (which might be a good thing).

[nztx]

Thanks SB.  Ocean Network Express makes SBLK look like a minnow - incredible earnings.  And that is #6 in the industry!  I too cannot see a short term trigger for the reversal of recent shipping earnings.

I couldn't find ONE on Yahoo.  It appears they are a privately owned JV: https://en.wikipedia.org/wiki/Ocean_Network_Express
which partly explains the difficulty of investing in that particular business! 

Not as bad as that, but the FIF tax rules get in the way of making significant investments without being unduly penalised.  Very frustrating.

True - the FIF rules are clearly highly unfair and in effect taxing the capital you have invested instead of the income you get out of your investment.

However - they even might help you to save taxes ... pay your 5% of your original investment and don't worry how much money you really made out of this investment (and hopefully its more).

Sure - if you have a loss, paying taxes on top of a loss is tough. But hey, somebody must pay for all the useless politicians and bureaucrats in Wellington.

Anyway - any party proposing to disestablish FIF will get my vote, but until this happens I would not worry too much about it - just makes some accountants happy and rich .... and yes, might keep some more capital in NZ (which might be a good thing).

Interesting comments on FIF tax which I agree with - slightly off topic:

Another which affects NZ Imputed dividends - note that when Tax rates reduced for
corporates to 28% - Tax on dividends remain unchanged for all @ 33%

The extra 5% withholding tax has been a pain in the backside for Accountants & Investors ever since..

(unless the dividends are paid from the becoming extinct QC's which are a straight 28%)

[nztx]

Thanks Ferg - have a few of these onboard

The Oil Infrastructure LP listings in US are also of interest to me- no Tax/W/tax is deducted at source & yields can be quite good, but
need to watch the exchange movements US/Kiwi as with any US stocks ..

[Ferg]

Thanks Ferg - have a few of these onboard

The Oil Infrastructure LP listings in US are also of interest to me- no Tax/W/tax is deducted at source & yields can be quite good, but
need to watch the exchange movements US/Kiwi as with any US stocks ..

Oh dear - have we given this the kiss of death with the reverse Midas touch?  Dry bulk shipping rates have fallen slightly lately but given a large % of forward rates were already locked in by SBLK, this should have little impact on this and the next quarter's earnings.  I'm working on some KPIs etc and indicators to watch - I will post them when I'm done.

As for the USD - a nice time to be selling but not buying...I suspect there is an inverse correlation between the USD/NZD cross rate and the USD stock prices.  This is anecdotal and needs to be tested.  I am sensing favourable cross rates for buying coincide with low US stock prices and vice versa - I need to test and confirm it but I suppose it makes sense from a demand and supply perspective.

[nztx]

Thanks Ferg - have a few of these onboard

The Oil Infrastructure LP listings in US are also of interest to me- no Tax/W/tax is deducted at source & yields can be quite good, but
need to watch the exchange movements US/Kiwi as with any US stocks ..

Oh dear - have we given this the kiss of death with the reverse Midas touch?  Dry bulk shipping rates have fallen slightly lately but given a large % of forward rates were already locked in by SBLK, this should have little impact on this and the next quarter's earnings.  I'm working on some KPIs etc and indicators to watch - I will post them when I'm done.

As for the USD - a nice time to be selling but not buying...I suspect there is an inverse correlation between the USD/NZD cross rate and the USD stock prices.  This is anecdotal and needs to be tested.  I am sensing favourable cross rates for buying coincide with low US stock prices and vice versa - I need to test and confirm it but I suppose it makes sense from a demand and supply perspective.

Further opportunity to steal someone elses forfeited opportunity maybe

Those cross rates can easily wipe even respectable gains, as I too have seen

[Ferg]

Further opportunity to steal someone elses forfeited opportunity maybe

Those cross rates can easily wipe even respectable gains, as I too have seen

Too right!  However, my average entry USD rate is 70.1c so the current cross rate of ~62c provides a ~10% buffer on SP movements.  Although I will accumulate more at very attractive prices (e.g. <$23).

Note: links have been provided for industry specific acronyms and terms.

I'm picking a record Q2 for SBLK with EPS around US$1.95 (+62% YoY) and a dividend around US$1.35.  This is based on 97% fleet utilisation and a TCE of just under $29,400.  This compares favourably to the Baltic Dry Index (BDI) by +16% (last quarter was +34%).

The Baltic Dry Index looks at spot pricing across a number of differing trade routes and ship sizes. The index value is based on 3 other indices, being the sum of 40% of the Baltic Capesize Index (100k+ DWT) plus 30% of the Baltic Panamax* Index plus 30% of the Supramax index (<60k DWT); the sum is then multiplied by 0.1.  By DWT SBLK fleet is 55% capesize, 30% Panamax and 15% Supramax (BDI is 40%, 30%, 30%).  Historically larger ships have higher TCE values.

*Panamax weights can vary from 60-100k DWT (but the "New Panamax" is larger than Panamax and is part of this category).  These are the largest ships allowed through the Panama canal.

The BDI is a commonly used indicator in the industry, and the correlation with SBLK TCE is +0.91 for the past 13 quarters.  I am yet to be convinced it is a finely tuned indicator for SBLK given:

• observed historical variations between SBLK reported TCE and the BDI values
• the mix of fleet for SBLK differs to the BDI
• the differing shipping routes, and
• forward rates are often locked in with SBLK clients, whilst the BDI is a spot rate.

However, the BDI will provide an indication of direction of pricing, rather than an absolute value for SBLK.  Each sub-index uses prices for various routes, each being given a weighting, e.g. Western Australia to China is circa 15% of the capesize index.  The BDI for Q2 was 16% higher than Q1.

SBLK have installed scrubbers on almost all of their fleet, which confers a pricing advantage for fuel (I believe the President mentioned annual savings of circa US$140m) - but I am yet to figure out if these cost savings accrue to the client as part of the TCE price, or if they accrue to SBLK in opex savings.  Or it could be that SBLK can achieve higher TCE than the BDI due to fuel savings not being passed on..?  I still need to figure out this bit of the puzzle.

[Ferg]

Earnings for Q2 will be posted August 4th.

Further to my earlier comments, it appears the fuel cost savings will go directly to the bottom line.  In addition, given ~95% of the SBLK fleet is fitted with scrubbers the benefit to SBLK increases as the gap between the price of Very Low and High Sulphur Fuel widens.  SBLK uses the cheaper fuel with the higher sulphur content.  Following is a commentary from DB that explains how it works:

Deutsche Bank on SBLK: MAINTAIN BUY

Star Bulk: Huge Scrubber Benefit; Assessing Near-Term Cash Impact
2022-07-18 10:51:12.920 GMT

We remain very positive on shares of SBLK – the world's largest shipper of dry bulk commodities – based on our view that the company can sustain dividend payments of $4 per share (after debt repayment) on a midcycle basis. We are also becoming increasingly optimistic about near/mid-term earnings and cash flow, reflective of scrubber economics that we believe market participants are not fully appreciating (note: 95% of SBLK's 128 vessels have scrubbers installed).

For example, the fuel spread between Very Low Sulfur Fuel Oil (VLSFO) and High Sulfur Fuel Oil (HSFO) in Singapore as of today is ~$500 per metric ton, and the fully delivered cost of VLSFO is even higher right now due to a shortage of bunkering barges in Singapore related to a fuel contamination incident (which is now impacting Rotterdam, as well). As such, the fuel spread is as high as ~$600/Mt on a fully delivered basis. To note, SBLK sources ~75% of its bunkers from Singapore.

Based on the current spot rate for a 2010-built Capesize vessels of ~$12,800/day, we believe SBLK's scrubbers could add as much as 40% to 115% in additional earnings depending on when the vessel was re-fueled. While average Capesize rates have declined in recent weeks, the fuel spread, especially in Singapore, has been on the rise, which we don't believe is well appreciated by market participants.

The bottom line is that SBLK has ~95% of 128 vessels equipped with scrubbers and this is providing the Company with meaningful earnings uplift to headline rates as the fuel spread has continued to widen. The scrubber investment has already been paid back, so any premiums the Company is earning on its scrubbers drops entirely to the bottom line. While there is nuance around the Company's re-fueling cycle, directionally the widening fuel spread should have an increasingly large, positive impact for earnings (which should show up when SBLK announced 3Q booking with 2Q results). Maintain Buy.

Here are the prices for VLSFO and HSFO ex Singapore.  And an article that discusses this topic.

[Ferg]

Results for Q2 were reported this morning.  I said earlier earnings per share would be $1.95 per the quote below.  Earnings were.....drum roll please.....$1.96 per share. Not bad if I do say so myself.  Analysts were picking $1.88.

SBLK announcements here: https://www.starbulk.com/gr/en/financial-summary/

Q2 release pdf is here: https://www.starbulk.com/media/uploads_file/2022/08/05/p1g9lbtk5o95kq881ii916kc6ar4.pdf

Interesting and easy reading presentation here which explains the scrubber benefits, state of the industry etc: https://www.starbulk.com/media/uploads_file/2022/08/05/p1g9ld87gk9s1mhp1fld15j7akf4.pdf

TLDR: a good result and all is on track.  Nice dividend yield of ~26% assuming dividends are maintained.

Note: all figures are in USD unless otherwise stated.

Financial summary:

• Q2 Revenues at $417m were +34% on last year (Year To Date for Q1 & Q2 = +52% vs LY, and Q2 this year versus Q1 this year is +16% )
• Q2 Time Charter Equivalent (TCE) per day of $30.4k was +33% on last year, +49% YTD and +11% on Q1
• NPAT $200m +59% on last year, +132% YTD and +17% vs Q1
• NPAT 48% of revenues
• Ship operating costs are ~$5k per ship per day (+10% vs LY), and G&A costs are ~$1k per ship per day which is similar to last year and last quarter
• Dividend for Q2 of $1.65 per share, ex date is 24 August 2022 (same as Q1)
• Last 4 dividends total $6.55, current SP is $24.76 giving an historic pre tax yield of ~26%
• Historic PE ratio using last 4 quarters into today's SP is <3
• One-off opex costs due to Covid estimated at $5.6m for Q2
• Non cash stock compensation within G&A for Q2 of $10m was not on my radar (last year $2m)

Other interesting points / metrics:

• 61% of Q3 available shipping days are already locked in with an average TCE of $29k per day
• SBLK TCE premiums over the Baltic Dry Index for Q2 were +16% for Capesize, -3% for Panamax and +23% for Supramax (previous quarter was +48%, +9% and +19% respectively)
• SBLK capacity is 55% Capesize, 30% Panamax and 15% Supramax
• Sulphur scrubbers are installed on 94% of ships, original capex cost US$250m; that has been fully repaid this quarter with fuel savings over the last 2.5 years
• Today's price advantage for high sulphur fuel over low sulphur fuel is US$260 per tonne; whilst not as high as it has been, this gives SBLK a competitive financial edge over dry bulk carriers using low sulphur fuel
• Ship utilisation was slightly lower than forecast at 95.2%, average for the previous 4 quarters was 96.9% - there is some speculation a couple of ships were stuck in Ukraine but that has not been confirmed
• $310m of debt refinancing with longer terms and lower rates will see interest cost savings of $4m p.a.
• Term debt repaid in Q2 $113m, Q1 was $51m
• Debt to equity 73%, 79% last qtr, 81% last year end
• Of the share repurchase plan, US$30m has been spent up to today, with another US$20m to go

I haven't finished my forecast for Q3 but will share it once I am done. We may see some SP weakness once the buyback programme is complete; that is assuming the current SP is being supported by the buyback programme.  Average buyback price to date is $25.37.

I'm picking a record Q2 for SBLK with EPS around US$1.95 (+62% YoY) and a dividend around US$1.35.  This is based on 97% fleet utilisation and a TCE of just under $29,400.  This compares favourably to the Baltic Dry Index (BDI) by +16% (last quarter was +34%).

[snip]

SBLK have installed scrubbers on almost all of their fleet, which confers a pricing advantage for fuel (I believe the President mentioned annual savings of circa US$140m)

[nztx]

Last Quarter's results don't look too bad - Ferg

May have to start accumulating a few more

[Ferg]

The Baltic Dry Index (BDI) has seen soft pricing lately.  The BDI measures a basket of dry bulk shipping routes and ship sizes which is a rough pricing indicator for SBLK.  The BDI currently sits at ~US$1,400 which is down 38% on the daily average for the first 6 months of US$2,279.  Multiply the BDI by 10 to get weighted average daily shipping rate of ~US$14k per day.  SBLK stated they had locked 61% of the available days for Q2 at an average TCE of $29k per day.  This includes savings from scrubbers which allows SBLK to use high sulphur fuel.  Current price advantage for high sulphur fuel is ($811 - $514=) US$297 per tonne.  This translates to annual savings for SBLK of ~$200m p.a. (source = page 6).  Current running costs for SBLK including G&A is about $6k per ship per day so there is still plenty of pricing headroom.....for now.  The question will be what impact this has on Q3.

Edit: and in other news the 62k DWT "Star Laura" was released from Ukraine recently, as was the 82k DWT Star Helena.

[Ferg]

Let's try and demystify what is going on with the weak SBLK share price of late.  The market is pricing in a potential recession and is also looking at the very weak dry bulk pricing indices.
https://nz.finance.yahoo.com/quote/SBLK/chart?p=SBLK

Intro
The Baltic Dry Index (BDI) has been weak lately and is one of two relatively important indicators for SBLK.  To recap, the BDI is 10% of the weighted average of the Baltic capesize, panamax and supramax indices.  Each index measures daily spot and period prices for a basket of dry bulk trade routes.  The BDI is comprised of 79% "Time Charter Equivalent" (TCE) spot rates and 21% voyage spot rates.

Background
Whilst the BDI gives an indication of price movements, the values achieved by SBLK differ on a quarterly basis.  This is because a percentage of days available are contracted to clients in advance.  In addition, the composition of the SBLK fleet is 55% capesize, 30% panamax and 15% supramax by tonnage whereas the BDI is 40%/30%/30%.  Note: that the SBLK fleet composition is 32%/39%/29% when looking at the number of ships.

The equivalent measure within the SBLK financials is TCE revenues which measures revenues less voyage and charter expenses.  TCE values are expressed as USD per ship per day.

SBLK performance vs the index
Following is a graph of quarterly SBLK TCE vs the Baltic Dry Index.  I have multiplied the SBLK quarterly TCE by 0.1 to put it on the same scale as the BDI.  The BDI line on the graph is the average of the daily closing rates for each quarter.  The grey line shows SBLK TCE as a % of the BDI and uses the scale on the right hand side.  Anything over 100% is a rough indicator SBLK earned at a greater rate than the BDI and vice versa.

You cannot view this attachment.

Correlation
The correlation between the 2 data sets is +0.9 which suggests they move in the same direction a very large % of the time.   No surprise there.  SBLK have achieved TCE revenues greater than the BDI for the last 3 quarters where the grey line exceeds 100%.  Note we will use this grey line on a later chart.  Leading or lagging 1 data set versus the other does not produce a higher correlation so we cannot reliably use one (e.g. the BDI) as a predictor for the other (e.g. SBLK TCE).

3Q22 projection
To date 3Q22 (third quarter of fiscal '22) has a daily average BDI of 1,681 which equates to very roughly $17k TCE/day.  SBLK mentioned in their recent 2Q22 presentation they had already pre-booked 61% of available days for 3Q22 at an average rate of US$29k which I'm assuming is TCE given it was directly under other TCE KPIs.

If 10% of 3Q22 days are unsold (2Q22 was 2%, the average for the past 14 quarters was 6%, and the last 4 quarters averaged 4% so 10% is very conservative) and the remaining 29% are sold at 90% of the average rate per the BDI, that implies TCE revenues of ~$22k/day for 3Q22.  Versus the average BDI for 3Q22 to date of 1,681 that gives SBLK a premium of +31%, which is almost as high as 1Q22's record of +34% (this is shown as 134% per the graph above).  I expect SBLK will achieve TCE's of much more than $22k per day.  Note they achieved just over $30k/day in 2Q22.

Note the highest profit to date occurred in 4Q21 where capesize rates were at record highs and NOT in 1Q22 where SBLK had the highest premium vs the BDI.  We are unlikely to see a repeat of that windfall profit in 3Q22 given the capesize rates are currently lower than supramax and panamax, despite having a larger carrying capacity.

Capesize Issue
To put this into context, capesize makes up 55% of the SBLK fleet as measured by tonnage but 32% of the total number of SBLK ships.  TCE and BDI are measured by ship and are not adjusted for tonnage AFAIK.  The following chart of capesize rates for the past 10 years shows the quarterly average has fallen below the 90 day moving average and also below the 10 year linear average of 1,991.

You cannot view this attachment.

From left to right the 2 lowest points on the graph above are for 1Q16 and 1Q20.  I'm not sure about 2015/2016 but 1Q20 was the worldwide economic meltdown due to Covid restrictions.

And the last 90 days is even more woeful.

You cannot view this attachment.

I believe the market is looking at this index and assuming all is not well for SBLK.  That is not so for Q3 per my analysis above.  However, Q4 remains to be seen and I will touch on the second important indictor in my next post.

Profitability
FYI breakeven for SBLK averaged across the last 4 quarters is ~US$12k per ship per day - which is significantly less than the TCE of $22k/day calculated above.  Before we try to extrapolate a profit, we need to consider the spread of the cost of high vs low sulphur fuels.  The SBLK fleet employs scrubbers on >90% of its fleet which allows SBLK to use the cheaper high sulphur fuels.  My analysis suggests these spreads are widening - I will discuss this in my next post.

[Ferg]

I never got around to the next post.  Long story short I am picking a dividend somewhere around $1.25/share for Q3.  But much like making sausages, I will spare you the workings.

Meanwhile, the spread between very low sulphur fuel (VSLFO) costs and high sulphur fuel (IFO380) continues to widen.  The current spread for IFO380 being cheaper than VLSFO is over US$300/tonne ex Singapore:
https://www.shipandbunker.com/prices/apac/sea/sg-sin-singapore

The annual benefit to SBLK at this spread is ~US$210m p.a. or $4,800/day per ship fitted with scrubbers.  Reminder: this gets added to the daily charter equivalent rates as additional earnings for SBLK over and above the spot & charter rates.

120 of the 128 ships in the fleet have sulphur scrubbers installed, with another 4 due to be finished before the end of 2022.

And the Baltic Dry Capesize shipping rates have rebounded from lows in early September:
https://www.investing.com/indices/baltic-capesize-historical-data

The base variables are headed in the right direction.  As are macro indicators such as forward order books for the industry at 25+ year lows, new slow steaming regulations for shipping commencing 1 January 2023, and 18% of the industry fleet being 15+ years old and not eco-compliant.

I believe there is one ship still stuck in Ukraine.  It is the Star Pavlina at 82k tonnes, but it is relatively new having been commissioned in 2021....one hopes it is still intact.
https://www.vesselfinder.com/vessels/details/9917490

Current NZD/USD cross rates prohibit us somewhat from taking advantage of recent price weakness.
https://nz.finance.yahoo.com/quote/SBLK?p=SBLK

Recent company update here, which was the source for some of the above information:
https://www.starbulk.com/media/uploads_file/2022/09/15/p1gd06uduuga6vutu2p3p9s234.pdf