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More SALT please - dry bulk shipping becomes all the rage

More SALT please - dry bulk shipping becomes all the rage
Dry bulk shipping is all the rage. Consider that Scorpio Bulkers (SALT), a bellwether of the sector, has seen its share price strengthen with the seemingly improved dry bulk market.

Most importantly, the company will begin paying a quarterly dividend to shareholders, albeit a tiny one at $0.02 per share. On its recent conference call, Scorpio Bulkers chairman Emanuele Lauro explained: “We believe that current market rates are sustainable and will continue to improve through 2018. As a result, we are excited to initiate a quarterly dividend, which is a reflection of our confidence in our company’s financial strength and cash flow generation and the markets in which we operate.”

SALT, after it completes the acquisition of six ultramax vessels from Golden Ocean, will own 52 vessels (roughly 3.6m dwt aggregate)- made up of 18 kamsarmax vessels and 34 ultramax vessels. One ultramax is also chartered in.

The quarter’s result showed a small loss- but the gap continues to narrow. Importantly, “cash flow from operations” registered a positive number, meaning that drybulk’s rising tide has lifted inflows to levels above daily breakevens, which consider operating expenses and a financing cost component.

For the first nine months of 2017, daily hires on kamsarmaxes and ultramaxes were $9,218 per day and $8,519/day respectively, compared to $5,024 per day and $5,434 per day in the same period in 2016. On the earnings call, Scorpio cfo, Hugh Baker, explained that : “If rates increase by $1000 per day, then our annual cash flows improve - for 52 ships times 365 days per year, times $1,000 a day, gives us an additional $18.98 million per year.”

For perspective, the company said dividend payouts, at $0.02 per share, consume approximately $1.5m per quarter, or about $6m over a year’s time. In a discussion of the dividend, SALT’s president, Robert Bugbee, made clear that dividend payments will not be formulaic, saying, rather: “We've signalled that we think we can afford a dividend, we think that the market is going up and the…exact type of dividend will depend a little bit on the next three, four, five months the next quarter or two”. Bugbee also suggested that the company would welcome opinions from analysts and shareholders about the dividend.

On assets and charter markets, Bugbee indicated that SALT is seeing more activity across the wide range of commodities carried in kamsarmaxes and ultramaxes; he suggested that the company is not inclined to delve into the capesize segment, which has clearly been leading the market. On chartering policy he noted that “we don’t need to fix out tonnage defensively” and suggested that SALT has “no real desire to fix ships out for longer terms”.

He offered a view that “vessel values have lagged charter rates” which provides an opportunity right now. “More buyers will emerge in the coming months,” he opined, causing prices of vessels to move upward.

In spite of all the optimism among shipping people, equity investors are still skittish. In an effort to “test the waters”, SALT announced that it would be raising fresh equity through the sale of 10m shares, only to withdraw its offering 12 hours later “due to the unsatisfactory price offered to the company.”

In the absence of a distress situation, share issuers will aim for a price point above the net asset value (NAV) per share. For SALT this curious share sale was always unlikely. It might have worked if the shares had popped up following the investor call since analysts estimate SALT’s NAV to be somewhere around $10 per share. At its recent pricing around $8.50 per share, which is below NAV, the lines were not meant to cross . Still in place, however, is an authorization to buy back up to $50m of shares, which SALT might exercise were share prices to dip precipitously.

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