Safe Bulkers – Focusing Of Fleet Investments While Positioning For Dry Bulk Sector Rebound

Capital Link President Nicolas Bornozis hosted an interview with Dr. Loukas Barmparis, President of Safe Bulkers SB on August 1, 2023. The interview, which is part of Capital Link’s “Trending News Podcast Series,” touched upon the company’s recently announced Q2 2023 results, but largely centered on Safe Bulkers’ fleet development, strategy to remain competitive in the face of increased environmental regulations, and outlook on the dry bulk sector.

Interview Highlights

• Despite soft market conditions due to high interest rates, the strong supply fundamentals (orderbook) indicate a ground for improvement in the future dry bulk sector.
• Safe Bulkers maintains strong liquidity and comfortable leverage despite weaker market conditions in Q2 2023.
• The company is investing in environmental upgrades to its existing fleet in order to remain competitive, technology could reduce ship’s energy consumption by 5% to 12%.
• Safe Bulkers is awaiting the delivery of an additional eight IMO GHG Phase 3 – NOx Tier III newbuild vessels by 2025, on top of the four already delivered.
• A large portion ~50% of the company’s ships are scrubber fitted; average age of the fleet is 10.6 years.
• Declared its seventh consecutive quarterly dividend of $0.05 per share of common stock.

Q2 2023 Results

Owing in part to high interest rates, concerns regarding economic growth, and geopolitical issues, the dry bulk market has been soft, accounting for Safe Bulkers’ lower net income and EBITDA in Q2 2023 compared to last year.

Its daily TCE per vessel averaged $17,271 during the quarter, which generated for the company a daily free cash flow of over $6,000. Additionally, Safe Bulkers has a number of strong long-term charter contracts in play. Its Capesize vessels are currently chartered at a daily rate of $22,000 for a period of two more years, while the daily charter rate for ships of that size is currently at about $15,000.  

At the end of Q2, the company maintains strong liquidity of around $300 million while leverage stood at $453 million or about 35% against a fleet scrap value of $385 million. 

Focus On Fleet Development- Maintaining An Environmentally Competitive Fleet

Safe Bulkers is focused on upholding a competitive fleet, particularly in terms of green technology. Investing in environmentally friendly upgrades and Phase 3 newbuilds is especially important in today’s regulatory landscape, in which ships are classified and categorized depending on their fuel efficiency and environmental impact, Dr. Barmparis stressed. Green ships which rank high on these metrics will be greatly preferred by charterers, compared to vessels classified in the lower, “less-green” categories.

Based on IMO regulations, by 2030 vessels are expected to achieve a 40% reduction in CO2 emissions compared to the base year of 2008. Against this backdrop, as the company shared in its Q2 2023 presentation, only a small percentage of global dry bulk fleet is compliant with IMO Phases for emission reductions meaning that companies with environmentally upgraded fleets and Phase 3 newbuilds will be better placed in terms of commercial competitiveness.

In 2019 and 2020, Safe Bulkers undertook a large newbuilding program of 12 vessels, designed to meet the IMO regulations related to the reduction of GHG and NOx emissions (the ''IMO GHG Phase 3 - NOx Tier III''). As of today, the company has received four of these newbuild vessels, with three more scheduled deliveries in 2023, three in 2024 and two in the first half of 2025.  The aggregate capital expenditure of the newbuild program is approximately $409.6 million, of which $209.3 million are remaining as of July 21, 2023.

80% of the company’s fleet is Japanese built. Dr. Barmparis explained that Japanese built vessels maintain better asset value and are more fuel efficient.

Currently, only 30% of the global dry bulk fleet is expected to comply with Energy Efficiency Existing Ship Index (EEXI) environmental regulations, without requiring any upgrades. Safe Bulkers, however, has taken clear steps to keep its own fleet competitive and compliant with regulations.

Apart from the newbuilding program, Safe Bulkers has invested in its existing fleet by upgrading its vessels with green and energy-saving technology during dry docks. By the end of this year, 20 vessels of its 44-ship fleet will be fitted with these upgrades that can reduce the vessel’s energy consumption by up to 12%, Dr. Barmparis stated, depending on the ship.

Notably, 22 of its vessels are already fitted with scrubbers, which are important both for the environment and for the company’s profitability. Scrubbers allow ships to run on cheaper, sulfur-rich fuels, while non-scrubber-fitted ships have to run on much more expensive, sulfur-free fuels. This adds to the company’s profitability.

 As Dr. Barmparis mentioned, considering the fact that a great number of the global dry bulk fleet is lagging in terms of environmental upgrades, Safe Bulkers’ fleet is highly competitive in a market in which charterers turn more and more toward green, fuel-efficient ships.

Liquidity & Capital Allocation

As mentioned, apart from the four ships that have already been delivered, Safe Bulkers is expecting eight more newbuilds by Q2 2005. The company has quite low leverage and intends to maintain it. Safe Bulkers’ President stated that it can comfortably fund the remaining capex for these newbuilds through its existing significant liquidity, which equals about $300 million.

Dr. Barmparis noted, that Safe Bulkers takes a reasonable, stable, and moderate approach toward dividends. For seven consecutive quarters, Safe Bulkers has distributed to its shareholders a quarterly dividend of $0.05 per share, which translates into an annualized yield of about a 6% based on current share prices. This strategy allows the company both to reward its shareholders and to invest in fleet development.

Share Buyback Program

In addition to its dividend distribution, Safe Bulkers has also pursued a share buyback program, which it recently suspended. Dr. Barmparis stressed that the program can be revived at any time when market conditions improve.

Since 2022, the company executed two share buyback programs of 5 million shares each, both of which were completed in full. Due to current market conditions, the company prefers to use its cash flow to invest in its fleet upgrades and newbuilding program, or for other corporate purposes which the company’s President believes better serves its shareholders under the circumstances.

Dry Bulk Sector Outlook

Although the market is currently soft, Safe Bulkers’ President believes that several factors may contribute to improved market conditions not too far along in the future. The market’s supply side is particularly favorable. Not only is the orderbook for the global dry bulk fleet low at 6.5%, but shipyards are booked to capacity, meaning that if any companies wish to order newbuildings, they would have to wait considerably for construction to begin.

Furthermore, the current dry bulk fleet is aging—20% of Panamaxes on the water are over 20 years old—and only a small portion of vessels are compliant with environmental regulations, both of which favor scrapping in the dry bulk fleet, further tightening supply side fundamentals in the market. While supply fundamentals are clearly very favorable for the dry bulk sector, the great question revolves around demand, as an uptick of demand can translate into a tighter market with higher freight rates.

Currently, increased interest rates are inhibiting GDP growth and the dry bulk sector relies on economic growth.  As Dr. Barmparis stated, inflation and high interest will eventually subside, and it seems we may be close to a pause in interest rate hikes. While growth in China has temporarily slowed, India is growing faster than expected, at an estimated annual rate of 6.1% for 2023. Furthermore, geopolitical challenges add to market volatility. He believes that a small uptick in demand in the future coupled with the already-tight supply fundamentals, could potentially lead to an improved market. China, which recently increased coal imports heavily, remains the driving force behind the global dry bulk market improvement.

It is worth pointing out that following public news, a number of shipowners have been rushing into the dry bulk sector, either buying assets or acquiring shares in listed dry bulk companies.

Capital Link is the investor relations advisor to Safe Bulkers. This content is for informational purposes only and is not intended to be investing advice.