Star Bulk Carriers Corp. (SBLK): 10 Bagger Or Bust

I believe that over the next 3 years it’s possible that Star Bulk Carriers Corp. (SBLK) could rise 1000%, a 10 bagger if various scenarios unfold in the proper sequence.

Every investor is familiar with the ongoing China crash and the fact that dry bilk rates are hovering at 3k currently, the gloom is thick. In fact a recent article in Hellenic shipping news referred to the industry as operating in an Armageddon position. This is the first time in my long career as a distressed investor that I have heard an industry operating in an argamagedon scenario. If an investor is to buy when blood is in the streets this is an apt time.

As many analysts have referenced in seeking alpha SBLK does not suffer from balance sheet insolvency, it is suffering from a cash flow crises. In the table below I have crafted a back of the envelope table for future ebitda based on 80 ships at various TCE rates.

Star Bulk Carriers EBITDA and Free Cash Flow Generation
TCE Rate 5,000 7,000 8,000 10,200 11,750 15,000
Revenue 138,700,000 194,180,000 221,920,000 282,948,000 325,945,000 416,100,000
Expenses 122,640,000 122,640,000 122,640,000 122,640,000 122,640,000 122,640,000
Gross Margin 16,060,000 71,540,000 99,280,000 160,308,000 203,305,000 293,460,000
Dry Docking 15,000,000 15,000,000 15,000,000 15,000,000 15,000,000 15,000,000
SGA 24,000,000 24,000,000 24,000,000 24,000,000 24,000,000 24,000,000
EBITDA -22,940,000 32,540,000 60,280,000 121,308,000 164,305,000 254,460,000
Interest 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000
Principal Payments 110,000,000 110,000,000 110,000,000 110,000,000 110,000,000 110,000,000
Free cash Flow -182,940,000 -127,460,000 -99,720,000 -38,692,000 4,305,000 94,460,000
         
EBITDA -22,940,000 32,540,000 60,280,000 121,308,000 164,305,000 254,460,000
Restructured Interest 80,000,000 80,000,000 80,000,000 80,000,000 80,000,000 80,000,000
Restructured Principal 40,000,000 40,000,000 40,000,000 40,000,000 40,000,000 40,000,000
Restructured Free cash Flow -142,940,000 -87,460,000 -59,720,000 1,308,000 44,305,000 134,460,000
Assumptions
Fleet Size 80
Utilization 95%
Days 365
Operating Days 27,740
Costs days 29,200
Daily expenses 4,200

 

At current rates of $5000 a day the company would generate negative ebitda of $23 million and after interest and principal payments a negative $182 million. Comparing this to an estimated cash balance in Jan 2016 of $250 million dollars after sales of vessels and equity required for new build acquisitions. Clearly the company could only survive for one year under this scenario considering that the company must also maintain 500k of cash for each vessel operating or $40 million assuming 80 ships in operation. So it’s clear to see why the share price is 40 cents and has a equity cap of $90 million versus a book value of $1.4 billion. However, let’s consider various scenarios that could occur that investors are giving zero chance to happening.

First scenario: it’s highly likely that dry bulk ship scrapping will accelerate quickly and dry bulk owners may soon begin laying up ships. This is my third cycle investing in the shipping business over the past 30 years and I have found that shipping has a unique ability to right size itself in the worst of times. Considering this is the worst of times, I’m estimating that owners will soon lay up ships and begin significant scrapping. There are 9600 dry bulk vessels operating in the world with about 1000 vessels on order that are scheduled to be delivered over next few years. Assume 30% of the newbuilds are never delivered leaving 700 new vessels. There are 900 vessels that are older than 15 years, which are likely to be scrapped over next two years. Then assume 5% of the exiting fleet or 480 are laid up within the next few months. If this were to happen it’s highly likely that rates for various dry bulk vessels could rise to $7000 or $8000 a day. Under that scenario you’re looking at an EBITDA generation of between $30 and $60 million

Second Scenario: Chinas domestic coal and iron ore producing companies are loosing incredible amounts of money; some suggest billions in annual operating losses when interest and principal payments are factored in. If china decides to shut down just a portion of these cash burning coal and iron ore mining companies even slightly the demand for imported coal and iron ore combined could move up by 30 to 50 million tons a year. This would have a nice incremental impact on supply and demand for vessels. I am not suggesting this is a high probability but it is possible.

Third scenario: Oaktree capital which owns 50% of the equity in Star Bulk Carriers, has a cost basis of $600 to $700 million for its SBLK shares that are now worth $50 million. At this point investors are fearful that another round of equity offerings are in store or worse a preferred stock offering that Star Bulk Carriers offers to Oaktree, which would prime Oaktree over existing shareholders.

I view this risk at 25% percent given the company’s recent sale of cape vessels. The sale of new building vessels indicates to me that the company is going to “burn the furniture” or in other words use the equity inherent in the new builds to stay alive over the next 2 years. The most convincing evidence that Star Bulk Carriers will try to prevent significant dilution comes from the CEO Petros Pappas .He is sitting on a Capital loss that I estimate approaches $100 million. He received 8.6 million shares in SBLK at $12 a share when he swapped his ownership in Ocean Bulk Carriers for Star Bulk Carriers shares then worth $100 million. Those shares are currently worth $5 million. I am sure that Petros is working day and night to figure out how to recover a portion of that lost fortune. I’m also confident that oak tree or Star Bulk Carriers would not offer him equity grants large enough in the future to make up that loss.

Scenario Four: I believe that after Star Bulk Carriers takes delivery of its Ultramaxes this year it will enter into an agreement with its existing banks to stretch out amortization payments. If you look at the EBITDA table you will see that I have proposed a restructured interest payment to the banks of $80 million of annual interest and $40 million in principal payments as opposed to the $50 million in interest and $110 million principal payments under the current capitalization structure.

Given that’s Star Bulk Carriers’ balance sheet is strong for a shipping company and solvent under rates of 8k to 10k a day, I believe it’s in the banks interest to work with the company, as it will protect their collateral value during this downturn. Over the past three decades it has not been uncommon for banks to stretch out principal payments to owners that have reasonable balance sheets when day rates are at depressed levels. In this scenario, if rates were to rise to $10,000

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