As an investor, it is important to realize that not all investments are appropriate for the traditional buy and hold strategy. Many industries are classic boom and bust opportunities that move within the greater economy. A great example is the extremely volatile shipping industry.
Perfect example…years ago I invested in General Maritime Corporation in the midst of a tanker boom. GMR’s share price experienced great volatility as it leveraged itself to acquire vessels from 1999-2004, but the strategy turned out to be wise as market then strengthened leaving GMR with a strong fleet going to work with taker rates at historic levels. Earnings boomed, share price rocketed and the company paid extraordinary dividends, culminating in a massive $11/share special dividend in 2007!
However, seeing a frothy tanker market, growing global economic concerns, and a surplus of new-build tankers coming online, I had some concerns about further opportunity for the industry. GMR in particular showed weakness with declining earnings and cash flow, had started selling ships and management had taken on a huge debt burden at precisely the same time it was paying out such a huge cash distribution! I exited the position immediately after receiving the special dividend and that turned out to be a great call as the stock plummeted immediately, cut the dividend drastically and now sits 80% from it’s high.
So here we are…near the bottom, and while I’m not yet ready to predict another industry boom, there are signs that the shipping industry is stabilizing and the global economy will resume growth, even if at a much slower pace. To start building a position in this industry, I’m considering General Maritime Corporation (GMR) and Nordic American Tanker (NAT) as immediate purchases while also reviewing Diana Shipping Inc. (DSX) and Ship Finance International (SFL).
General Maritime Corporation: (Stock Info)
After its precipitous decline, GMR was perceived as such a risk because of an unsustainable dividend and high debt load while market rates floundered. Furthering such concerns, to finalize a merger with Arlington Tankers, GMR took on additional $300 million debt at 12% – ouch!
But there is method to the madness here. The acquisition of Arlington’s 8 vessels (average age of 5 years) brings efficiency and modernization to GMR’s fleet, the sweet spot being the two VLCC’s (very large crude carriers) which command huge day rates, especially on a spot market showing signs of strength. In addition, in 2009 GMR made a prudent, if unpopular, decision to reduce the quarterly dividend from $0.50 to $.125. The move saves about $80 million per year and easily covers debt repayments for 2010 and 2011. In the meantime, according to the company’s investor presentation, roughly 2/3 of the core costs are covered by fixed contracts for 2010 and it plans to utilize short term 1-2 year contracts to ensure 100% cost coverage until the market strengthening is confirmed.
GMR should benefit going forward with 17 vessels in a strengthening crude market, the new dividend is still a healthy 6-7% at the current share price and the dividend is easily covered by cash flow which offers opportunity for dividend increases if market rates improve in the next 1-2 years. Technically speaking, the stock has established support at the $7 price level and is currently testing the 200 moving average. While a bit of a risk play, I’d recommend a buy under $8/share with a 1-2 year holding period…Considering the low share price, it may be a good idea to buy half your desired position now and double up on any significant move down. If no move occurs, maybe double up once we have better clarity on the dividend policy.
Nordic American Tanker: (Stock Info)
This would be the “safer” bet here. NAT’s downturn is similar to the rest of the industry…its fortunes fell with the global economy, market rates and oversupply of ships and like the rest of the industry, Nordic had to severely cut the historically strong dividend and the company also sold more stock to raise cash, further upsetting investors with resulting dilution.
However, I believe investors have over-reacted, perhaps not understanding the company’s clear strategy. First of all, I’ll say that company management is one of the most clear and straightforward teams I’ve ever seen with routine updates and surprisingly blunt discussion, so when the CEO speaks, I trust him at his word. Now, the corporate strategy has always been clearly spelled out for those who actually do their homework! The company explicitly states that it plans to issue equity to fund the purchase of new vessels, doing so selectively and in a prudent manner which ensures that the fleet growth will outpace the dilution of stock…leading to future dividend strength. The balance sheet reflects adherence to this strategy as NAT carries almost no debt and very low admin costs which justify the equity sales. NAT simply took advantage of the market’s downturn to purchase vessels cheaply and in addition to the 2 vessels purchased for $50 million, management believes they could acquire 4 more vessels without any further share offerings.
In my opinion, the bad news is baked in and spot rates, in NAT’s focus Suezmax segment of the industry, have showed signs of strength. The company has already started raising its quarterly dividend with a 150% increase last quarter from $0.10 to $0.25 and management has hinted that it expects additional increases in 2010. The stock is not nearly as volatile as most in this industry and any swings in stock price should be mild compared to competitors, so at $30/share and a 6-7% yield, I think this would be a great investment with significant upside potential.