Earlier this month, the Baltic Dry index hit 2,230, a 52-week high and good news for the shipping industry, which has been grappling with low rates for some time now. What’s more, rising demand for oil and refined products within Asia has driven tanker rates to a three-and-a-half year high. Furthermore, the rate for Jones Act tankers also hit an all-time high last week, as surging domestic US oil production squeezes the market for US flagged vessels — Under the Jones Act only US flagged vessels are allowed to transport cargo between US domestic ports.
All of this is great news for the global shipping market, implying that the industry’s outlook is starting to improve. Additionally, along with rising day rates and increasing demand, the number of new tankers and drybulk ships entering the global fleet is starting to decline, ending several years of market oversupply.
With green shoots rising in the shipping sector, could it be time for contrarian value investors to take a look? One of the financial world’s most famous contrarian value investors, George Soros seems to think so.
George Soros getting in on the shipping game
Soros’ Soros Fund Management revealed that it had built up positions within six shipping companies during the third quarter. The multi-billion dollar hedge fund took positions in DryShips Inc. (NASDAQ:DRYS), Diana Shipping Inc. (NYSE:DSX), Navios Maritime Partners Navios Maritime Holdings Inc. (NYSE:NM), Safe Bulkers, Inc. (NYSE:SB), Baltic Trading Ltd (NYSE:BALT), and Ardmore Shipping Corp (NYSE:ASC).
Of course, for value investors there are many opportunities within the shipping sector. With the industry still suffering a hangover from 2008, many shipping stocks currently trade below their book value per share.
However, some shipping companies are stronger than others and Diana is one of them. Specifically, Diana has a low debt-to-equity ratio of only 37%, debt-to-assets of only 26% and cash of $315 million, which covers current liabilities six times and nearly covers the company’s whole $466 million debt pile. Diana Shipping Inc. (NYSE:DSX)’s book value per share stands at approximately $15.30 so the company looks attractive based on its strong financial position and discount to book.
Nevertheless, Diana Shipping Inc. (NYSE:DSX)’s current rate of cash burn is worrying. In particular, the company has spent $130 million during the past four quarters funding operations and this has come out of cash in the bank. Still, with day rates improving, Diana should see some improvement during the next few quarters and the company has a solid financial cushion behind it.
The other shipping company that looks attractive for value investors is Knightsbridge Tankers Limited (NASDAQ:VLCCF). Knightsbridge is effectively a shell company, having entered into management agreements with Frontline Management Ltd, a subsidiary of Frontline Ltd. Under this agreement, Frontline is responsible for managing all of Knightsbridge’s operations. Knightsbridge’s fleet is composed of four Capesize vessels with a further four on order. My thesis for Knightsbridge Tankers Limited (NASDAQ:VLCCF)’s suitability as a play on shipping hinges on the fact that Capesize vessel shipping rates have exploded to a near three-year high during the past year. This should, over the next few quarters depending upon charter agreements, filter through to the company’s bottom line over the next few quarters. Knightsbridge Tankers Limited (NASDAQ:VLCCF)’s book-value-per share is around $10.50.