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Why Low Vessel Operating Expenses Are a Positive

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Daily vessel operating expense

Daily vessel operating expense is an important metric to gauge the operational efficiency of marine shipping companies. It affects companies’ costs and earnings. When operating efficiency is high, companies will generally have higher margins and returns on investments, and vice versa.

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Operating leverage

Vessel operating expenses typically include crew costs, provisions, deck and engine stores, lubricating oil, insurance, maintenance, and repairs. These are relatively fixed costs compared to vessel expenses. This leads to a high level of operating leverage in the dry bulk space.

High operating leverage magnifies gains and losses. Leverage usually benefits a company when its revenues are rising, and vice versa.

DryShips has highest operating expenses

For 1Q15, Navios Maritime Partners (NMM) reported daily vessel operating expenses of $5,107. This is very low compared to 1Q15 expenses per day of $6,356 for DryShips (DRYS) and $6,073 for Diana Shipping (DSX). Expenses for Safe Bulkers (SB) are quite low at $4,872 per day for the same quarter. The above graph shows dry bulk shippers’ daily operating expenses for 1Q14 and 1Q15.

Navios Partners forms 2.9% of the Guggenheim Shipping ETF (SEA). The SPDR S&P 500 Trust ETF (SPY) represents the broader transportation industry.

Safe Bulkers’ low vessel operating expenses match up well with its young fleet, as we’ve already seen. This gives it a margin advantage over its peers. DryShips, on the other hand, is battling with very high operating expenses leading to pressure on its margins.

In the current scenario of a weak dry bulk market, companies with lower operating expenses are preferred, since pressure on revenues makes operating leverages work negatively.

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