By Tiernan Ray
This afternoon I had a chat with John Wobensmith, the chief financial officer of Genco Shipping (GNK), and also president and CFO of Baltic TradingBALT), which came public back in March. He is, in fact, the sole employee of Baltic, which was created last year by Genco as a way for investors to bet on the Baltic Dry Index, widely considered the leading barometer of how the shipping business is doing.
The premise: While most drybulk shipping firms contract their ships for months or years into the future, Baltic charges customers the spot market price based on the weekly average of the Baltic Index. That aligns its revenue directly with what the Index is doing.
Baltic’s fleet is managed by Genco, so Baltic is a kind of a virtual company, formed to acquire ships cheap and to pay out dividends.
You might think now’s a bad time to do such a thing, given that the Baltic dry index is down some 8% from a year earlier, reflecting factors such as a pullback in iron imports by China’s steel industry that have hurt demand for shipping and, hence, prices.
However, as Wobensmith explains, the price to acquire vessels is cheap, and the resultant capital expenditures to own the fleet can be low enough that it leaves plenty of cash to pay dividends.
Baltic declared its first quarterly dividend, 16 cents per share, on August 9th when it reported Q2 revenue of $6.99 million, slightly ahead of Street estimates of $6.6 million, and profit per share of 12 cents, in line with expectations.
Wobensmith says the company is taking advantage of tight financing in the shipping industry, which makes it a buyer’s market. In June the company acquired three new vessels for $99.8 million, bringing its total fleet to nine ships.
Baltic has an S1 filed with the Securities & Exchange Commission to raise $110 million in gross proceeds in a secondary offering.
“We have a ways to go in just buying up vessels,” says Wobensmith. “There’s at least another 12 months of tight credit in the shipping business.”
As for the Baltic prices, they’ve been on an upswing of late, and Wobensmith sees some catalysts to drive prices higher. One is the beginning of the US grain season, and the other is China’s recent return to purchasing iron ore.
As Wobensmith points out, spot prices for so-called Capesize drybulk ships have soared in the last two weeks alone, going from $12,000 to $30,000. Wobensmith points out that the company’s break-even rate is about $15,500 a day so far, so rates like these can lead to substantial money left over for payouts.
True, if the Baltic Index declines, the variable quarterly dividend takes a hit. If it rises, however, there’s upside as well. Part of the fun of betting on the Baltic, if you like that kind of thing.
Source: barrons.com
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