DRYS), Diana Shipping Inc. (DSX) and Safe Bulkers Inc. (SB), are spot (voyage) and time charter (period). Companies that engage in the spot market will charge a one-time fee that customers pay to have a certain amount of goods shipped from one destination to another. On the other hand, companies in the time charter market will contract ships and operational services out for a specific period, usually one to two years, at a negotiated daily rate.The two main markets for shipping companies, such as DryShips Inc. (
Contracts are double-edged swords
In a supply driven market with excess capacity, companies in time charter markets tend to outperform those in spot markets because of lagging shipping rates; firms that have longer term contracts are able to shield themselves from declining industry fundamentals and falling shipping rates until contracts expire. Thus, it is important for investors to understand each dry bulk shipping companies’ time charter contracts’ maturity dates. When contracts expire, shipping companies will have to renegotiate prices at a lower rate, lowering revenues, earnings and free cash flows. Although a company’s value should reflect its long-run earnings potential, near-term earnings tend to have large influences on share prices for a cyclical industry, like shipping.
Company with the most valuable contracts
Using data extracted from dry bulk shipping companies’ latest annual reports, the value of each firm’s contracts was compared to the current time charter equivalent rates for the spot and time charter markets. The model also takes into account contract maturity dates to reflect how future revenues will be affected. As of April 15th, Safe Bulkers Inc. (SB) held the most valuable set of time charter contracts: their premiums make up roughly 30% of the company’s total shipping revenue. This is positive for the company, as long as the contracts are forever.
Maturing contracts’ adverse effects on shipping companies
Unfortunately, time charter contracts are not forever. Safe Bulkers Inc. (SB) and DryShips Inc. (DRYS) will recontract their ships out at lower rates as early as July 2013. If time charter rates in the market stay the same as they are now until July 2014, SB, DRYS, and Diana Shipping Inc. (DSX)’s revenues will be ~19%, 10% and 5% lower, respectively. Given the uncertainty surrounding the timing of shipping rates’ recovery (see “Stabilizing baltic rates support upsides, short term risk remains“), SB will be most negatively affected by the valuable contracts, whereas DSX will be least affected.
Information regarding contracts is also available for other dry bulk shipping firms, such as Knightsbridge Tankers Ltd. (VLCCF) and Navios Maritime Partners LP (NMM), in their financial reports. Investors often utilize these reports to make better informed investment decisions. Alternatively, a way to stay shielded from company specific drivers is to consider the Guggenheim Shipping ETF (SEA), which invests in shipping companies worldwide and performs similar to the Dow Jones Global Shipping Index.
© 2013 Market Realist, Inc.