Seeking Alpha: Genco Shipping Offers A High-Risk Charter Rate Call Option

Dry bulk shipping company Genco (GNK) is holding on by its fingertips. With charter rates crushed by capacity additions over the last three years, Genco is deep in the red and facing a day of reckoning with its lenders. Recent spikes in certain dry bulk rates are encouraging, but not enough to get the company back on its feet without the cooperation of those lenders. Although I do believe Genco will manage to restructure or renegotiate its debt, that's a risky call at this point and the company's net asset value is in the red. Still, for those investors looking to bet on further recovery in charter rates, Genco could offer meaningful bang for the buck.

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Genco Shipping Offers A High-Risk Charter Rate Call Option

Investopedia: 2011 In Review - Shipping Hit The Iceberg

What more is there to say about the state of the shipping industry for 2011 beyond words like "yuck," "blech", and "please make it stop"? Rates for all manner of ships plunged throughout the year, sometimes sinking below the daily operating costs of even the efficient operators. Clearly, an industry in which companies can't even charge enough to pay their operating costs is one that's in difficult shape, so the stock market carnage seen in this sector during the year is not exactly surprising.


Shipping was not actually the worst-performing sector this year (thanks solar, coal and banks), but a worse-than 20% drop for the sector is certainly bad enough. (For related reading, see Warning Signs Of A Company In Trouble.)

Yes Virginia, There Were Some Winners
Against a terrible backdrop, there actually were some notable winners this year - proof positive yet again that a lotus can still bloom in even the funkiest pit.


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Investopedia: Frontline Lives On, But At What Cost?

There was no question that the company had to do something, but Frontline (NYSE:FRO) has taken a pretty interesting path in its restructuring. Although the chances of Frontline going out of business due to liquidity pressures are now much lower, it is an open question as to how upside remains left with the publicly-traded remainder and who really benefits the most from this somewhat convoluted transaction. (For related reading, check out Understanding Financial Liquidity.)

 

From One to Two  

Frontline was founded in the mid-1980s by John Fredriksen in response to a terrible market for oil tankers. Yet another terrible tanker market, a market wherein rates have frequently been at or below cash operating costs, will now fundamentally change this company going forward.

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Investopedia: Shipping A Big Mess

This isn't the first time, nor likely the last, that I've written about the tough conditions in the shipping industry. A combination of high capacity, high fuel prices and inconsistent emerging market demand, has led to low rates and high operating costs and numerous struggling companies. With the recent bankruptcy of General Maritime (OTCBB: GMRRQ) and the warnings from Frontline (NYSE: FRO) management about its own potential liquidity difficulties, it seems pretty clear that the reckoning has come for many of these companies. (To know more about bankruptcy, read: An Overview Of Corporate Bankruptcy.)

General Maritime Goes Down

General Maritime was not the first, nor will it likely be the last, shipping company to declare bankruptcy, during this downturn. There's not a lot that really needs to be said about this situation; the company had a great deal of debt, which is true for many shipping companies, and a dismal operating environment, which, again, is true for pretty much all shipping companies.

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Investopedia: DryShips Still Leaking

If this is what an economic recovery looks like, investors in the shipping sector should shudder to think what even worse times might look like. While DryShips (Nasdaq:DRYS) has fared better than several of its rivals in drybulk shipping, the stock has been punished as shipping rates continue to decline below the operating costs of even the best operators. Though this is not a sustainable set of circumstances, and Capesize rates have spiked up recently, it could be some time before the shipping industry looks truly healthy again.

Disappointing Results For Q2  
DryShips did not report an especially strong fiscal second quarter. Revenue was basically flat, as positive (albeit disappointing) growth of 16% in the offshore drilling segment was offset by a 19% decline in net voyage revenue in the drybulk business. Revenue in the drilling business was hurt by several rig mobilizations (companies typically do not get paid while they move rigs to a new jobsite); though that is a valid issue, it is one that the company could (and should) have communicated to investors earlier.

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http://stocks.investopedia.com/stock-analysis/2011/DryShips-Still-Leaking-DRYS-RIG-DSX-SB-NAT-GLNG-CMRE0902.aspx

Investopedia: Here Comes The Tricky Part For Rail Traffic

Railroads are a classic example of a derivative industry - that is, they produce nothing on their own and the demand for their services is a product of (a derivative) the demand for other goods. That is something that is worth keeping in mind as the railroads continue to meet anniversary dates in this economic recovery and face increasingly difficult comparisons. 

February - Another Quarter of Mixed Data 

January's rail traffic data, which we highlighted in our Raid Traffic Data Still Largely Good News article, was mostly positive but had a few worrying signs - namely the slowdown in intermodal traffic in the U.S. and weaker rail performance in Canada. Like January, February's data was not as clean as economic optimists might have hoped.

U.S. rail traffic increased more than 4% from last year (and almost 3% from 2009) and intermodal traffic increased more than 10%. Unfortunately, the sequential performance was not nearly so strong - rail traffic slid 3% from January's level, while intermodal activity was up only a fraction of a percent. As intermodal is a profitable growth area for railroad operators like Union Pacific (NYSE:UNP) and Berkshire Hathaway's (NYSE:BRK.A) Burlington Northern, that is not an insignificant figure.

While bad weather seems to have had a significant impact, investors should at least consider this a yellow flag until the next month or two of data confirm that February's performance was just a weather-related anomaly.

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Investopedia: Has Dry Bulk Shipping Reached Low Tide?

It is easy to make a bunch of "perfect storm" references to the dry bulk shipping industry these days. Serious floods in Australia, Indonesia and South Africa have created major problems for suppliers, as have commodity export bans in countries like Russia and India. On the flip side, China's desire to control inflation has investors worried about the state of iron ore demand. If that all was not enough, shipping companies continue to order new vessels and refrain from scrapping older ones, and a major chartering partner (Korea Line) recently declared bankruptcy. 

All of this has wreaked havoc on shipping prices. During the week of Chinese New Year, spot rates for the monstrously large Capesize vessel class troughed at around $5,000 a day - a level that is below the daily operating costs of even the most efficient operators and dramatically lower than the average of approximately $33,000 seen in 2010. And it is not just the Capesize vessels seeing tough times - Capesize is down the most, but every category is down from fourth quarter levels (with Handysize faring the best). (For more, see Is Dry Bulk Shipping All Dried Up?)

What Is An Investor To Do?
Investors should probably invest with an eye towards safety. It is all well and good to own riskier operators when rates are climbing (in fact, lower-quality companies tend to seriously outperform then), but this troubled environment could last for a few years and the halcyon days of $100,000+ spot rates for Capesize vessels is a long time ago (2007, to be exact). If daily spot rates are low, it makes sense to gravitate towards companies with more of their vessels under contract and/or those who can profit even in low-rate environments. By the same token, debt can become a lethal deadweight during market troughs, so investors should keep an eye on the balance sheet.

Genco (NYSE:GNK) is fairly efficient as an operator, with relatively low operating costs. It does have more than 60% exposure to spot rates, but less than 10% of that in the Capesize category. This could be an interesting play for aggressive investors wanting a company with strong earnings leverage to an eventual recovery.
 

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