Eagle Bulk Shipping Inc.
Q4 2020 Earnings Call Transcript

Published: 5 Mar 2021

[Operator:]

Greetings, and welcome to the Eagle Bulk Shipping Fourth Quarter 2020 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. . As a reminder, this conference call is being recorded. I would now like to hand the call over to Gary Vogel, Chief Executive Officer; and Frank De Costanzo, Chief Financial Officer of Eagle Bulk Shipping. Mr. Vogel, you may begin.

[Gary Vogel:]

Thank you, and good morning. I'd like to welcome everyone to Eagle Bulk's fourth quarter 2020 earnings call. To supplement our remarks today, I would encourage participants to access a slide presentation that is available on our website at eagleships.com.

[Frank De Costanzo:]

Thank you, Gary. Please turn to Slide 10 for a summary of our fourth quarter and full year 2020 financial results. The improvement in the chartering market drove top-line growth in Q4, with revenue net of both voyage and charter hire expenses, totaling $50.1 million, an increase of 15% from the prior quarter. In Q4, our TCE came in at $11,190, which is $961 above the adjusted net BSI. For the year, revenue, net of both voyage and charter hire expenses, was $164.3 million, remaining relatively flat as compared to 2019. For the full year 2020, our TCE came in at $9,710, which is $1,964 above the adjusted net BSI and $675 a day lower than prior year. We reported a net income of $115,000 for the fourth quarter versus a net loss of $11.2 million in the third quarter. Basic and diluted earnings per share for the fourth quarter were $0.01 versus a loss per share of $1.09 for the third quarter of 2020. Adjusted EBITDA improved in Q4, coming in at $22 million as compared to $11.5 million in the prior quarter and $9.8 million in the fourth quarter of 2019. Adjusted EBITDA for the full year 2020 came in at $54.1 million as compared to $48.7 million in 2019. Let's now turn to Slide 11 for an overview of our balance sheet and liquidity. Throughout the course of the pandemic, we maintained a strong liquidity position. Total cash, inclusive of $18.9 million of restricted cash, was $88.8 million at December 31, 2020, representing an increase of $3.6 million as compared to the end of the third quarter. The increase in cash was primarily a result of proceeds from the sale of 3 vessels, proceeds raised from the equity issuance in December 2020 and cash provided by operating activities, offset in part by the principal payments on the Norwegian Bond and the Ultraco Debt, along with the repayment of the Ultraco Debt Facility revolver, CapEx spending and deposits paid on the Oslo Eagle and Helsinki Eagle acquisitions. Total liquidity increased to $143.8 million at the end of Q4. Liquidity is comprised of total cash of $88.8 million and $55 million of the undrawn availability on the Ultraco revolving credit facility. Total gross debt, excluding debt issuance costs at the end of Q4, were $475.6 million, a decrease of $46.8 million from the prior quarter. The decrease is due to the $35 million we repaid on the Ultraco revolving credit facility, a principal repayment of $7.8 million on the Ultraco Debt Facility and a principal payment of $4 million on Norwegian Bond.

[Gary Vogel:]

Thank you, Frank. Please turn to Slide 16. Here, we depict the BSI for the last 5 calendar years plus 2021 year-to-date, which is represented by the dark blue line. I believe a picture's worth a thousand words and the velocity of the recent increase, as well as the levels, are quite demonstrative. Year-to-date, the BSI is averaging approximately $13,800 with current spot above $20,000. And I think it's particularly noteworthy that the markets exhibited such strength during Q1, a period which typically represents a seasonal low due to, among other things, elevated newbuilding deliveries that tend to occur in January and the Lunar New Year holiday in February. In recent weeks, we've been able to book strong fixtures across most regions to transport a diverse mix of cargoes, including fertilizer from the Baltic, sugar and grains from Brazil, pet coke from the U.S. Gulf and manganese ore from West Africa, among others, all at levels not seen for many years. Please turn to Slide 17. Looking at rates from a more historical perspective, the BSI is now trading at a 10-year high. Although 2020 demand and rates were severely impacted by COVID-19, we believe we may be back on track in terms of a long-term cyclical recovery, which began to take shape back in 2016. Given improving supply side fundamentals and an expected further recovery in global GDP and drybulk demand, notwithstanding inherent volatility, we believe rates can continue to remain strong for the foreseeable future. We typically don't discuss asset prices, but I think it's worthwhile to note that, if rates remain strong or increase even further, we could see a material upswing to values. To put this into context, a 5-year old Ultramax today is worth around $17 million, while in 2010, a 5-year old Supramax was valued at over $27 million. Please turn to Slide 18. Fuel prices, as well as spreads between high sulfur fuel oil and very low sulfur fuel oil, came under significant pressure last year due to the demand shock caused by COVID-19 as well as the OPEC Russian oil price war. Notwithstanding extreme volatility, market fuel spreads averaged roughly $100 per ton for calendar 2020. And for Eagle, given the hedges we put in place in early 2020, we were able to realize an average fuel spread of approximately $150 for the year, helping us to generate over $26 million in savings from operating scrubbers, basis the first 12 months of operation. It's also worth noting that we closed out all of our 2021 fuel spread hedges totaling 72,000 tons during last year at a weighted average price of around $105. This level is now well below 2021's current quoted spread of approximately $120. We did so with a view that with the world coming back online and oil demand normalizing, there will be continued upward pressure to underlying fuel prices and spreads, both of which will be supportive towards our earnings capability on a go-forward basis.

[Operator:]

. Our first question comes from Omar Nokta with Clarksons Platou Securities.

[Omar Nokta:]

Good commentary, I think, on the market and some of the macro factors underlying things. And clearly, rates are quite strong. I wanted to ask you, how do you feel about where your fleet is today, and it's a question that you get constantly, but you've added 7 ships at what we -- when we look back in hindsight are very well timed. And you also monetized some of your older ships in keeping with your fleet renewal plans. What's your appetite today when you think about the outlook for the purchases? Do you feel the return still makes sense? And also, when it comes to selling older ships, do you still have an interest in doing that?

[Gary Vogel:]

Yes. Thanks, Omar. I mean, I think the answer is we still have appetite. I think we -- while we have a general goal of fleet renewal and growth, each acquisition has to be measured and evaluated given market dynamics, ability to raise capital or cash on the balance sheet and also same with divesting of assets. So we now have 3 vessels left that are over 15 years old. I mean, they clearly are on the sales -- potential sales list for us, always they have been. But fair value for those ships, in our opinion, is higher than where the market is today given the increase. I mean, I can tell you that just this morning we traded on the Baltic Supramax Index, the BSI at $16,250. That's up $6,000 for those 3 quarters from just January. And so, that's a meaningful cash flow on any given ship relative to the index. And so that has to be taken into account for the asset value in terms of selling. So while our goal ultimately will be -- or we will sell those ships, it has to be at the right time, given the economics. And if we can garner the cash flow by operating them for longer and then sell them, and that's what we'll do. And same in terms of acquisitions.

[Omar Nokta:]

And with kind of maybe sort of that theme, I guess, with Supramax/Ultramax rates being over 20,000 today, especially this early as you mentioned in your opening remarks, things were pretty solid. Have you been approached into entering into time charters of, say, a year, has it gone there yet? Do you see yourselves wanting to put vessels on contract? Or with your freight trading, do you see yourself being more of the guys chartering in?

[Gary Vogel:]

So first of all, if I may, just slight correction, we just got the index in during the call. So we're now just over 21,000.

[Omar Nokta:]

You're right.

[Gary Vogel:]

No worries, no worries, Tongue and cheek. But the answer is we have been approached, and we always value that relative to the curve. All things being equal, we prefer to keep control of our assets and trade them for the reasons you mentioned, right? The goal to outperform, and we're able to hedge cash flows using derivatives. Having said that, given the dynamics in the market, there are operators who have positions they need to cover. And given the velocity of the change in the market, are there to pay up significantly for a vessel on period, whether it's 3 to 5 or 7 to 9 months and even longer. And if we can get significant premium to what we call par value on the curve, we will relet ships. But you've heard me talk about it before when you relet a vessel, you give away an option at the end, even if it's just a 2, 3 month option in terms of redelivery window. And so given that we can trade the ship ourselves, we need to be paid for that when we do our internal calculations in order to relet a vessel. So the answer is yes, but we have multiple ways to lock in cash flows as we go forward, and reletting ships is not the number one for us.

[Omar Nokta:]

Got it. That's pretty clear. And maybe just, sorry, one final one, and maybe for Frank. You talked a bit about the financing of the acquisitions you guys have done. I wanted to ask how do you think the appetite is for the Supramaxes you acquired, the 2011s. They're not equal design, but they are sister ships to what you have. Do you see them being financed with traditional bank debt or other means? Or do you prefer to keep them as a sort of unencumbered cash purchases?

[Frank De Costanzo:]

Omar, thanks for the question. Yes, the appetite for those ships in the bank market is good. And we are considering putting on modest leverage similar to what we've done in the past on the Ultraco facility. So good appetite, and we're looking at doing something.

[Operator:]

Our next question comes from Randy Giveans with Jefferies.

[Randy Giveans:]

So yes, obviously, I appreciate the quarter-to-date rate guidance, which, as you mentioned, well above benchmarks, likely at a 9-year high, I think you said in your press release. So can you break this out by Ultramax and Supramax? And then, also, is there something maybe unique about this quarter in your operations that's somehow increasing the first quarter numbers that might result in lower second quarter numbers? Or is just purely a reflection of the state of the market and kind of your normal trading operations?

[Gary Vogel:]

Thanks for that. So let me take it. First of all, we don't break out Ultramax from Supramax. And the reason is, is that we trade our fleet as one homogeneous and arbitrage between vessels and cargoes. And we think it kind of gives the wrong picture if there's volatility between the two. So in the back of our earnings deck, we provide in the appendix a guide to relative earnings values of different size ships and so you can break it out yourself in terms of what our overall fleet is. With our recent acquisitions, we've actually now gotten to a point where it's just over 50% of our ships pro forma for the deliveries will be Ultramaxes. So that's a huge milestone for us, given that 4 years ago, we were 100% Supramax player. In terms of this quarter, the answer is there's always going to be volatility. Our market is such that backhaul trades, our ships don't typically balance from, let's say, the Far East to Brazil and back. And because of that, there's considerable evolve between a backhaul trade of, let's say, $4,000, $5,000 a day and today outbound was going to be $35,000, even $40,000. And so because of that, you can get volatility depending on how many ships are backhaul and front haul. Having said that, I can tell you that our quarter is not -- this -- the numbers in the guidance is not based on a predominant amount of front haul business. So I would say this is more about the business methodology. But having a majority of our fleet in the Atlantic for this upturn in the market has definitely been helpful, and we've been able to capture it, but it hasn't been done by sending all these ships out. At the moment, our balance remains similar to where we entered the quarter.

[Randy Giveans:]

Got it. Okay. Yes, just making sure there wasn't like a huge surge now and then you have no more availability for the next month or so. But it sounds like not the case. And then, you ended fourth quarter with, like you said, $89 million in cash. Another, whatever it was, $50 million in your undrawn -- $55 million in your undrawn availability. You should obviously be cash flow positive here in the coming quarters, pretty manageable debt amort, shares trading, close to NAV. So all that being said, what are your plans for this free cash, assuming rates stay relatively firm here in the coming quarters. Is it just keeping the cash on the balance sheet? Repaying debt, and then you paid down on your revolver in the past. Some kind of repurchases? Secondhand acquisitions? How are you going to balance these plethora of options?

[Gary Vogel:]

Well, I appreciate the question, and I appreciate that we're in a situation where you have the ability to ask the question, right, given rates. But having said that, we just acquired 7 ships, as you pointed out, and it's early days into the quarter. So I think we'd like to get deliveries on these ships. As Frank mentioned, we're looking at potentially putting debt on some or all of the acquisitions and then see how things play out and what the intention will be given opportunities in the market, paying down debt, things like that. So it's still early days, but it's definitely on our radar. And we intend to turn to it, given hopefully that this market continues to show strength as the forward curve indicates it does.

[Operator:]

And your next question comes from Greg Lewis with BTIG.

[Gregory Lewis:]

Gary, I wanted to touch a little bit on some of your comments you made around the strengths in the curve and maintaining flexibility. At least, for us, from our point of view, the market has been much stronger than we expected. There's -- and that's helped the next few quarters of the curve. While I understand why you want to maintain exposure to your vessels and not just turn over the keys to other operators, how do you think about the strengths in the curve in, say, the back half of the year, $13,000, $14,000, I get it's not as high as today, but it's still nothing to slow chow. Should we think about the potential for the company to take advantage of that and maybe just lock in a little bit of coverage around the derivatives market, realizing, not really sure how you can talk about that, but any kind of color around that, I think, would be helpful?

[Gary Vogel:]

Yes, absolutely. I mean, first of all, the answer is yes. You can expect us to take advantage of opportunities and the fact that the strip, as we call it, is trading over $16,000, and I mentioned we traded that this morning. So locking in certain cash flow, as we've said, until further notice. Consider us a spot player, and our goal is to outperform the spot index. But as we said last year for defensive reasons, we communicated that we put on a significant number of hedges, downside protection, given the uncertainty around COVID. And similarly, if we get to a point where we want to communicate that we've done something substantial in terms of locking in cash flows. So even though at this point, we're not going to say that, rest assured, we are managing the fleet in such a way that we think we can take advantage of strength and then volatility as well. So we're quite aware of what $16,000 means over the back 3 quarters of this year from a company standpoint and cash flow, and we're going to act accordingly.

[Gregory Lewis:]

Okay. Great. Great. And then just another one around scrubbers, and it's kind of the same question asked a different way. I mean we're bullish on the outlook for scrubbers in the press release last night, you kind of -- I think in Frank's comments, you touched on it. I mean, we're well up off the bottom in spreads between high sulfur and low sulfur fuel. I guess, a couple of questions. And you mentioned that the fleet is -- I guess, I'll ask it this way, are there different markets where scrubber utilization would just be better, i.e., is there something around whether it's the Atlantic or the Pacific, where vessels in certain markets just have a better chance to run utilization, whether it's because of the distances or because of -- as we think about some ports aren't letting scrubbers be used, is there any way to think about -- is there ideal better location than others for scrubber vessels?

[Gary Vogel:]

Yes. Absolutely. So first thing I would do is, for the most part, you can discount what ports allow scrubbers to be used because our vessels have low consumption when import. The vast majority of consumption is at sea. And so, the way to look at it is really the percentage of sea days as compared to a total voyage or pulling back how many days of the year can you spend at sea. So ships with scrubbers gaining that benefit are better off spending time at sea, which typically is actually cross trading Atlantic to Pacific and Pacific to Atlantic, right? Because all things being equal, load and discharge, number of days to load and discharge a ship, the more days you put in the middle at sea, the better it is for scrubbers. So we find our ships with scrubbers tend to be doing those long-haul trades. Of course, there are other dynamics involved, but that's the main driver of trying to maximize the days at sea. It's really no different than when you have a ship, which is heavy on consumption and not very economical, you do the opposite. You find business where they ship spends more time in port and it's not as noticeable as the consumption at sea.

[Operator:]

. Our next question comes from Liam Burke with B. Riley.

[Liam Burke:]

Gary, you talked about a strong seasonally slow first -- strong -- traditionally seasonally slow first quarter. And then, do you anticipate the traditional patterns of the subsequent quarters to continue with the macro, even though you've had an unusually strong first quarter?

[Gary Vogel:]

Yes. I think, I would separate it out in the sense that there's a number of reasons. The first quarter has started off strong. We had the fourth quarter, China, record 100 million tons of soybeans. But the real -- the standout here, especially compared to the last few years with the trade war and tariffs is that the U.S. doubled its exports from 18 million to 36 million tons, and the majority of that moves on the U.S. harvest, which is fourth quarter and carrying into the first quarter. We're still loading beans to China now. And then you've had a cold winter and more coal moving and -- into China, so that's been helpful. And also, the Lunar New Year, there was much less travel. So China really kind of pushed through it as opposed to the normal slowdown. Having said that, we don't really see a change to typically the strength coming into the second quarter, is really on the Brazilian soybean movements. And although the harvest has started a bit late, it's ramped up pretty significantly. And expectation is we're already loading and that, that's going to be strong as well as China is -- continues to rebuild the pig population. So we don't see anything on the horizon that would indicate that things are out of whack for Q2 because of a strong Q1.

[Liam Burke:]

Great. And Frank, I know you have time on the senior secured 2022s. But are you looking now possibly reducing your interest rate, understanding it's not due for a bid here?

[Frank De Costanzo:]

Yes, sure. We are looking. And as the market improves, our options improve also. So we're looking across a broad spectrum of options, bank debt, a New Norwegian Bond and other instruments to see and find the ideal mix, and we do expect that it will improve our picture going forward once we do refi.

[Operator:]

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Gary Vogel for any further remarks.

[Gary Vogel:]

Thank you, operator. We have nothing further. So I'd just like to thank everyone for joining us today and wish everyone a good day.

[Operator:]

Thank you. Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.