Star Bulk Carriers Update: Staying The Course While Focusing On Longer Term Sector Fundamentals

Capital Link President Nicolas Bornozis hosted an interview with Mr. Hamish Norton, President of Star Bulk Carriers SBLK on August 8, 2023. The interview, which is part of Capital Link’s “Trending News Podcast Series,” touched upon Star Bulk’s recently announced Q2 2023 results, but delved more deeply into the company’s strategy, recent developments, and dry bulk sector outlook.

Interview Highlights

• SBLK produced strong results in Q2 2023 despite a “disappointing” dry bulk market.
• Declared a quarterly dividend of $0.40 per share.
• Sold 7 older vessels in 2023 -5 of them in Q2 – taking advantage of – attractive asset prices.
• Investing heavily in green technology, fuel efficient upgrades to maintain fleet competitiveness.
• Low orderbook and aging global fleet underpin strong dry bulk market fundamentals.
• Far-flung grain producers set to fill gap in supply left by Ukraine, increased ton miles expected.

Metrics

Q1 2023

1 H 2023

Voyage Revenues

$238.7m

$462.7m

Proforma Cash (8/2/23)

$487.1m

Adjusted Net Income

$48.5m

$85.6m

Debt + Leases (8/2/23)

$1,183m

Adjusted EBITDA

$96.2

$180.1

Equity

$1.993.7m

EPS diluted

$0.43

$0.88

Fleet Scrap Value

>800m

Dividend

$0.40

$0.76

Share Price 8/10/23

$18.85

Daily TCE/Vessel

$15,835

$15,020

Daily OPEX/Vessel

$4,915

$4,887

Daily G&A/Vessel

$1,051

$1,010

* Source: Company Filings

Port Congestion – Ship Supply Main Factors Behind 1H 2023 Dry Bulk Market Weakness

Mr. Norton mentioned that many attributed the weakening of the dry bulk sector in the first half of this year to economic stagnation in China. However, while China’s post-covid economic rebound did not come to fruition, the country continued to import as much dry bulk commodities, particularly iron ore, grain, and coal, as expected. Therefore, the dip in the market cannot be attributed to the Chinese economy’s performance alone. 

An increase in ship supply likely contributed much more to the market’s softening and the decrease in charter rates—not only were a very limited number of ships scrapped, but also ports became decongested. Typically, congested ports translate to higher rates in the dry bulk sector. If ports are blocked up, ships are not as available to transport cargo as quickly as they would if ports were decongested, leading to limited supply and thus higher freight rates. During Q2 2023, there was very little port congestion, leading to an increase in supply of about 5% and bringing down rates. 

Soft Market Did Not Eliminate Shareholder Returns

Despite the softening market, SBLK remained profitable, keeping its operating costs low and maintaining high fleet utilization. Adjusted net income was $48.5 million or $0.47 per basic share with adjusted EBIDTA of $96 million.

As of August 2nd, 2023 proforma cash was $457 million, and total debt stood at $1.18 billion. The scrap value of its fleet exceeds $800 million based on a scrap price of $400 per light dead weight ton.

For Q2, Star Bulk declared a dividend per share of $0.40 payable on or about September 7, 2023. Q1 dividend was $0.36, bringing the total dividend for the first half of 2023 to $0.76 per share. Also, continued with share buy-backs, buying 307,349 shares at a cost of $6.1 million. Through continued dividends and buybacks, the company has returned over $1 billion to shareholders since 2021. 

Capital Allocation To Continue On Same Path

Taking advantage of elevated S&P values, SBLK sold five older Supramax vessels, built in 2012. Placing this in context, Mr. Norton highlighted that these sales resulted in an IRR of 42% and realized a cash multiple of 4.6x on the equity invested.

During 2023, SBLK sold seven vessels in total and together with insurance proceeds for one vessel, received $153.1 million, net of debt repayments. After utilizing $13.1 million for share buy backs, SBLK has a cash cushion of $140 million, which as Mr. Norton stated, will be used for purposes other than dividends, as dividends are paid only from cash from operations.

Regarding capital allocation, Mr. Norton stated that investors can expect SBLK to continue along the same path. Dividends will continue to be paid with cash from operations. Debt  reduction will continue with debt amortization of $177 million scheduled for the next 12 months.  Share buy backs and opportunistic vessel sales may also continue, especially if there is a meaningful arbitrage selling ships and buying back shares. But he also hinted that there may be “some very interesting investment opportunities where cash received from vessel sales can be used.”   

Upgrades And Data Monitoring Key To Fleet Competitiveness

“Our view is that fuel efficiency is going to become more and more important over time,” stated Mr. Norton, “as environmental regulations and the preferences of charterers for energy-saving vessels may lead to significant stratification between fuel efficient and standard vessels.”

In this context, SBLK has been “disposing of older, less fuel-efficient ships in as efficient a way as possible”. The company is always open to consider purchasing second-hand fuel efficient vessels or even newbuilds, if advantageous opportunities arise.   

But the main focus rests on upgrading the existing fleet. The  company has taken an aggressive approach to making it as green and fuel-efficient as possible so that it can remain competitive until the “winning” green fuel is decided upon. SBLK has invested heavily in upgrades such as scrubbers and ballast water treatment systems, as well as in other technologies, such as eco-friendly paint and anti-fouling devices.

“The single most important thing you can do to keep your fleet as fuel efficient as possible is to keep the hull as clean as possible,” Mr. Norton said. A fouled hull, he noted, can cause the ship to consume significantly more fuel than it normally would. Specialty paints and hull-cleaning robots could be effectively implemented to maintain clean hulls.

SBLK aims to utilize anti-fouling technology on all its vessels, as well as energy-saving devices and precision vessel performance monitoring equipment, which sends data to SBLK’s office in real-time, allowing it to monitor the performance of its ships. This data can be used to “optimize its routes and speeds” taking factors such as “weather, wind, waves, and currents” into account, Mr. Norton stated.

More generally, Star Bulk has historically understood the importance of investing in environmentally friendly technology, most notably in scrubbers. SBLK has invested around $250 million in scrubbers, and completely paid off this investment in just over two years. Since then, the technology has brought in “excellent profits” for Star Bulk, its President said, in a previous interview with Capital Link. 

Carbon Capture Can Materially Reduce CO2 Emissions

The race to discover the most efficient green fuel to replace fossil fuels will take time. In the meantime, all industries, including particularly shipping, will have to strive to reduce their emissions in order to comply with regulations until the new fuel becomes widely used.

While foregoing fossil fuels completely is the ultimate goal, much of the globe will continue to run on carbon-based fuels for the foreseeable future, even after the use of green fuels is more widespread. Capturing, and thus reducing, carbon emissions is an emerging strategy in the realm of decarbonization.

SBLK has successfully tested carbon capture on its vessels, and the technology was proven to reduce up to 30% of CO2 emissions. In the case that a carbon tax is implemented, or carbon emissions come with a financial burden, carbon capture can help both the company’s bottom line and the environment, SBLK President Norton stated. 

The technology captures CO2 emissions, liquifies them, and stores the liquid in tanks on board. It is both effective and practical, even for ships traveling on long journeys. However, it comes at a hefty price—along with the $5 to $10 million dollars required to install the technology on the ships, as well as significant operating costs. This steep price renders the technology financially attractive in case a substantial tax on carbon is put in place.

Dry Bulk Sector Outlook

“Net fleet growth is unlikely to exceed 2% in the next two years, while demand in ton-miles is expected to grow by 2.4% in 2024” highlighted Mr. Norton, stating that despite the current weakening of the dry bulk market, there are several factors that can lead to a rebound.

The supply side for the next two years “is basically locked in” as he mentioned. "There is just no way that you can order a ship for delivery before 2026”. The total order book is close to a historical low of ~7.4% of the fleet and vessels above 15 years of age are at ~19.4% of the fleet.   

Additionally, many dry bulk vessels are not fuel-efficient, and may not be useable in the future due to environmental regulations. If this large number of inefficient vessels, which make up around one-third of the global dry bulk fleet, are not commercially viable, supply in the dry bulk sector will become extremely tight, and charter rates should increase.

It is for this reason that numerous shipowners who were previously not involved in dry bulk have begun to take an interest in the market, with some purchasing dry bulk assets and others acquiring stakes in listed dry bulk companies.

On the demand side, a number of geopolitical and macroeconomic factors are impacting the dry bulk sector. Mr. Norton reiterated that, even though China’s economy did not rebound as expected, the country continued to import a significant amount of dry bulk commodities. The war in Ukraine and the subsequent collapse of the Black Sea Grain deal between Ukraine, Turkey, the UN, and Russia have limited the global grain supply. Yet, Mr. Norton stated that other grain producers, particularly Brazil, will be able to fill the gap in the grain supply, thereby increasing ton-miles.

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