I have commented earlier stating that shipping stocks could present a great buying opportunity as the industry continue to reel from the glut of new ships and decline in charter rates over the last 2 years. I have resisted the urge of buying so far, believing that there is some more pain in the industry before it finally bottoms out.
This is a very cyclical industry and the cycles are pretty reliable and driven by significant capital investments in the form of new ship building at the top of the cycle and as the supply over takes the demand and the charter rates fall, there is a race to the bottom as the shipping companies scramble to scrap their excess shipping assets and competition for business intensifies. Most analysts believe that 2012 will be the year when the glut in the ships will start to ease off, so until than the industry is likely to go through some painful restructuring and bankruptcies. The survivors could be bought for cheap and a patient investor can wait for the cycle to turn up. The interesting thing about shipping cycles is that it rewards or punishes investors to the extreme. So at the bottom, some of these stocks could be down as much as 90% and at the peak, it is not uncommon to see profits as high as 1000%.
Frontline Crashes and Burns
Frontline (FRO) has long been considered one of the best managed shipping company in the business. Let by John Frederiksen, the company has managed to create tremendous shareholder wealth in good years, including succulent dividends and capital gains. The company is now floundering and has announced that there is too much uncertainty in its business and it needs a capital restructuring – more capital infusion – to survive. It is very likely that it may be able to renegotiate some of its debt facilities as long as it does not end up violating any of the existing covenants. It is also very likely that John Frederiksen, who owns 40% of the stock through his investment vehicle, Hemen Holdings, will step in and infuse some capital to steady the ship.
This comes right at the heels of another shipper General Maritime filing for Chapter 11 bankruptcy protection a few days ago.
It is to be noted that both GMR and FRO haul oil and if oil demand picks up as projected, they might see some benefits going forward. It is still a big if.
There is Some Light at the End of the Tunnel
As reported earlier, the Baltic Dry Index is slowly averaging up indicating that there is an uptick in the demand that if sustained should strengthen the charter rates in the spot market. This tracks the dry bulk shipping sector (commodities, grains, ores). But the dry bulk sector also suffers from shipping glut so and uses similar vessels so it is a good barometer of how the supply issues are affecting the entire shipping industry.
I believe that in the next 6 months or so, the shake out will be largely complete and a great opportunity to invest in this sector will present itself.