Investment overview
The dry bulk industry is among those that have been significantly impacted by the global slowdown and China’s economic slowdown. There are signs of sustained recovery in the industry, however.
Scorpio Bulkers Inc. (SALT, Financial) operates a shipping company in the dry bulk industry. The company operates its vessels in the Scorpio Ultramax Pool and Scorpio Kamsarmax Pool, which are both spot market-oriented pools that aim to increase vessel utilization.
Year to date, Scorpio Bulkers has moved 48% higher and this rally is likely to sustain in the coming quarters. Therefore, the stock is interesting for fresh exposure even after strong upside in the recent past.
Steady increase in time charter rates
I mentioned there are signs of sustained recovery in the industry. The chart below, which is from Scorpio's third-quarter presentation, puts things into perspective.
The time charter equivalent (TCE) rates for Ultramax and Kamsarmax have witnessed steady improvement and the projections for the fourth quarter are healthy.
Scorpio Bulkers reported operating expenses of $4,951 per day for the third quarter and general and administrative expenses of $912 for the same period. With day rates likely to be above $10,000 in the fourth quarter, the company is well positioned for healthy EBITDA and cash flows.
The positive impact of higher day rates has already been evident in the last two quarters, with operating cash flow growing to $2.5 million in the second quarter and to $6.1 million in the third quarter. Considering the expected day rates, operating cash flow is likely to be higher in the fourth quarter, which will take the stock higher.
It is also important to mention that in the third quarter, the company initiated a quarterly dividend of two cents per share. This is likely to sustain and potentially increase in fiscal 2018. Therefore, improving cash flows and potentially higher dividends serve as the key upside catalyst for the stock in the coming quarters.
Healthy growth pipeline
On Sept. 25, Scorpio Bulkers announced the acquisition of six Ultramax dry bulk vessels for $142.5 million. This acquisition provides growth visibility for the coming quarters and the company is well financed.
As of Oct. 20, Scorpio Bulkers had $48.8 million in cash along with $85.5 million in available credit facility. With $128.5 million as the remaining purchase obligation, the company is fully financed for the current acquisition.
In addition, Scorpio also has undrawn revolving debt of $79 million and liquidity of $6 million under Japanese lease financing. This gives the company a liquidity buffer of $90 million, even after considering payments for the six dry bulk vessels.
With ample liquidity, improving EBITDA and additional vessels providing growth opportunities, Scorpio Bulkers is well positioned for the next three to four quarters.
No credit stress
As of the third quarter, Scorpio Bulkers had $530 million in debt, which is not likely to be a concern for the company.
To put things in perspective, the company’s cash interest cost for the third quarter was $1,637 per day.
Further, the company’s operating cost, G&A expenses and cash interest expense was $7,500. In the fourth quarter, the time charter equivalent rate will likely be above $10,000 per day and debt servicing will be smooth. Even if the TCE rate is sustained at these levels, I do not see any credit stress for the company.
While the company’s debt will increase on the acquisition of new vessels, EBITDA will also see upside and debt servicing is likely to remain smooth. Importantly, as the fleet is operating in the spot market and as economic conditions remain stable, fleet utilization will improve in the coming quarters.
Conclusion
Scorpio Bulkers has moved higher year to date, and improving fundamentals support further upside. With day rates likely to remain healthy, I see improved results in the coming quarters. Sustained dividends will also support stock upside.
In addition, the company’s recent acquisition of Ultramax dry bulk vessels will add to the top line and EBITDA. Considering these factors, Scorpio Bulkers is interesting for exposure at current levels with a medium to long-term investment horizon.
Disclosure: No positions in the stock.
