Funding Thesis
Dry bulk transport has seen giant volatility in charges just lately.
A doubling of charges for the bigger Capesize vessels got here and went just like the morning dew. A lot of that is probably a results of the fervent fixing of vessels by the Chinese language to restock commodities for deliveries earlier than their New 12 months which falls on 10 to 12 February 2024
In our previous article on Golden Ocean Group Restricted (NASDAQ:GOGL) of eighth June this yr, we had a bullish view of the market and GOGL’s profitability. The overall return since then has been 16% in comparison with 7.8% for the S&P500.
Half a yr has gone, and it’s time to revisit the thesis
What to Count on in This autumn?
Transparency has improved within the transport sector over time. That may be a good factor. House owners at the moment are not solely reporting previous outcomes, but additionally giving some steering as to what the subsequent quarter might be.
Throughout the announcement of the Q3 results, GOGL suggested that they’d fastened 79% of the 60 Capesize/Newcastlemax vessels and 83% of the Panamax/Kamsarmax vessels at charges common charges of $23,045 for the Capesize vessels and $17,275 for the smaller Panamax vessels. Primarily based on shipbrokers’ estimate of the TCE earnings per week in This autumn, excluding weeks 50 and 51 the place we have now made our estimate, we get spot charges at $28,429 for Capesize and $15,813 for Panamax vessels.
You will need to perceive that their Newcastlemax vessels and Kamsar vessels’ TCE are significantly greater than the estimates brokers give for Capesize and Panamax vessels each week.
That is additionally highlighted by GOGL of their Q3 outcomes presentation, the place they defined that the distinction in GOGL’s TCE and the weighted common is as excessive as 5,184 per day.
In our estimate, we used a premium of $5,000 per day. From this, we get an enchancment within the common TCE in This autumn for your entire fleet of $40.23 million.
This interprets to the EPS going from $0.14 in Q3 to an estimate of $0.34 per share in This autumn.
Monetary leverage is coming down
John Fredriksen-controlled corporations have by no means been shy of leveraging prior to now. Nonetheless, “Big Wolf” as he was referred to as in Oslo, has modified over time. Absolutely, the experiences round Frontline’s earlier monetary difficulties, and extra just lately the issues at Seadrill, have hopefully left him extra cautious about piling on debt to develop the enterprise empire.
Allow us to have a look at how GOGL’s debt place has developed over time.
GOGL does have a contemporary fleet with a median age of simply 7 years. With that in thoughts, their debt stage will not be excessive.
Market growth
The spot market is unstable. We will simply detect this by our earlier estimate of This autumn earnings. For Capesize vessels, the estimated earnings went from $28,071 in week 47 to $51,727 in week 48.
That’s practically a doubling in only one week.
One thing that may rise this a lot in such a short while can even drop equally a lot.
In a way, we have to block out among the noise from the weekly charges. Such jumps in charges are additionally ineffective if the shipowner has no accessible vessel to benefit from these spikes. This depends upon luck and never expertise.
On a extra long-term foundation, we’re inspired by the current information popping out of China on improved exports in November, after seven consecutive months of decline. The development Q-o-Q was simply 0.5%, however we imagine it’s going to proceed to develop, though at a sluggish tempo.
Regarding bulk commodities equivalent to iron ore and bauxite, it’s constructive for the market that China is taking extra bauxite from West Africa, and with iron ore quantity from Brazil growing it provides to the tone-miles. Rio Tinto (RIO) can be moving forward with investments in infrastructure for the massive iron ore mine in West Africa. A lot of this ore will go to China and enhance tonne-miles as in comparison with transport it from Western Australia.
We’re cautiously optimistic for 2024 with expectations of barely greater earnings for all dry bulk house owners, together with GOGL.
Dangers to Thesis and Conclusion
We regularly remind our readers that the tough a part of the availability and demand equation will not be the availability aspect. If anyone wished so as to add numerous bulk carriers to their fleet, they must wait not less than two years earlier than these ships hit the water.
It’s the provide that’s trickier to foretell.
How a lot coal and agriproducts might be required to maintain the lights on and the meals on the desk? What’s going to the climate be like? Droughts or floods do have an effect. Are there extra geo-political occasions that may happen subsequent yr that might change buying and selling patterns?
These are dangers, however may also be enormous alternatives.
We stay bullish on dry bulk commodities and the transport of those.
Our Purchase stance on GOGL stays firmly intact.