Crunch Time for Dry Bulkers

Christopher Barker, The Motley Fool
Updated

Although the world's carriers of dry bulk products have encountered stunningly challenging business conditions for a few years now, the latest wave of weakness invokes a heightened level of concern for the very survival of select operators as charter rates hover near breakeven levels.

For Genco Shipping & Trading (NYS: GNK) and its 2010 spinoff Baltic Trading (NYS: BALT) , however, I do not perceive a threat of outright failure even if larger rival Diana Shipping (NYS: DSX) proves correct with its dire outlook for the sector. While I wouldn't touch some shippers with a 10-foot pole -- and special cases like DryShips (NAS: DRYS) may be suitable only for the bravest (or most foolhardy?) Fools -- I consider both Genco and Baltic relative safe havens within a seriously dangerous corner of the investment world.

Both operators released second-quarter earnings this week, offering a glimpse of their respective resilience to some of the worst operating conditions the industry has ever faced. It's crunch time for every dry bulk hauler -- time to show what they're made of. Genco offloaded profit of $10.1 million, crushing the consensus estimate by $0.09 per share. By adding 16 vessels to its fleet over the past year in a bold countercyclical growth spurt, Genco has managed to defend its bottom line even against a backbreaking 40% collapse in the average charter rate achieved for each vessel.

Without the cushion of longer-term charters to ward off the full force of this rate collapse, Baltic Trading's spot-market-focused business model sent the shipper reeling from a 52% drop in average daily revenue per vessel. Not even Baltic's 209% surge in available operating days -- as the fleet grew from an average of three vessels in the prior-year period to nine vessels this time around -- sufficed to overcome the carnage, as rates dipped below the carrier's break-even threshold. To console shareholders for the $0.4 million loss, however, Baltic Trading sustained its quarterly dividend with a scheduled payout of $0.10 per share.

The core of a supportive investment thesis for both Genco and Baltic can be found in this recent Foolish roundtable discussion. My colleague Sean Williams has taken a shine to Genco's preference for shorter-term charter contracts, with the idea that contracts will be promptly renegotiated as rates eventually improve. Genco also commands a powerful cash position for a shipper that's emerging from such a rapid growth spurt. While Baltic could use some extra cash, I maintain that a deep disconnect between the its market capitalization and the asset value of its lightly leveraged fleet offers the company another sort of resilience: a capacity to grow its way through further weakness by taking on some additional debt and capitalizing on distressed asset sales as the industry strikes an inevitable long-term bottom. I also believe Genco's involvement with Baltic implies another potential lifeline of protection from a worst-case scenario, and I look forward -- patiently -- to the long-term fruits of its generous dividend policy.

At the time thisarticle was published Fool contributorChristopher Barkercan be foundblogging activelyand acting Foolishly within the CAPS community under the usernameTMFSinchiruna. Hetweets, and he owns shares of Baltic Trading, Diana Shipping, and DryShips. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.

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