Over the past few years, amid a global slump in demand for dry bulk commodities and a disturbing tonnage oversupply, the marine transportation business has not been on fire. The dry bulk market has a long way to go before it can exit risk territory. But the year-to-date run-up in many shipping stocks, as well as analysts’ expectations for a substantial lift in Chinese iron ore imports, suggest that there might be light at the end of the tunnel after all.
I have to admit there’s some truth to this bullish sentiment, and there are a few industry players who are most definitely worth keeping an eye on for the long term. Yet I think that ship owners have huge mountains to tackle ahead of them.
Let’s see what three recent earnings reports have to tell us about fundamental puzzles within the industry:
DryShips Inc. (NASDAQ:DRYS): The disruptive implications of debt overload
Last week, DryShips Inc. (NASDAQ:DRYS) — perhaps the most controversial player in the space — reported earnings for the first calendar quarter of 2013. For the period, the shipper witnessed its net income hit rock-bottom levels, decimated by the sale of four new buildings. Revenue from charters for its dry bulk fleet nearly halved compared to the same period in 2012, while its overall net losses came in at $116.6 million, or $0.30 a share.
Fundamentally, the shipper is not looking good. To its credit, it has been making every effort to reduce its capital expenditures and remedy its liquidity weakness. However, thus far these efforts have been rather painful. During the quarter, just to get rid of some of its newbuilding dry bulk vessels, it had to suffer losses of somewhat above $75 million. At the same time, it operated its fleet at a below-break-even point. To top it all, the balance sheet was burdened by a whopping $4.4 billion in total debt obligations.
DryShips Inc. (NASDAQ:DRYS) needs a substantial pickup in daily rates, which would enable it not only to cover daily operating and debt expenses, but also to earn a place in the sun again.
Sadly, even George Economou himself – the man in charge – does not expect to see a ray of sunshine this year. His exact words were: “We do not expect any positive sustainable development in charter rates this year.”
Diana Shipping Inc. (NYSE:DSX): In dire straits because of depressed rates
In terms of cash availability, Diana Shipping Inc. (NYSE:DSX) is the one to beat. Its current ratio of more than 7.5 handily crushes the industry’s median, while as of Mar. 2013, its balance sheet showed a $370 million differential between current assets and current liabilities. The Wall Street Journal gives this shipper the thumbs up, with 10 out of 18 analysts suggesting it’s worth buying. Also, the company just had its target price boosted by Deutsche Bank from $11 to $12.