By Tudor Invest Holdings
Summary
- The increase in the BDI will translate into higher earnings.
- Free cash flow has been established and is set to continue to increase.
- Management needs to walk the walk and talk the talk.
As stated in my article on Navios Maritime Partners from Aug. 14, in which I revisited my bullish view on the stock, management had communicated with shareholders and analysts that it was expecting free cash flow of $36 million for the second half of 2017.
Dry cargo market update
We know that the market has improved. Since writing my last article, the BDI (Baltic Dry Index) stood at 1,155 and has continued to propel higher. It now stands at 1,476 points, after a big daily drop of nearly 2%.
With a BDI at 1,476, we’re still well below the 20-year average, which is 2,288.
How does this translate into the earnings of each dry cargo ship NMM runs in the spot market?
On Aug. 4, 2017, Capesize spot average earnings stood at $17,366. The improvement is $4,340 per day per ship.
On Aug. 4, Panamax spot average earnings stood at $10,854. The improvement is $3,280 per day per ship.
On Aug. 4, Supramax spot average earnings stood at $10,063. The improvement is $3.375 per day per ship.
What does this mean for NMM?
Here is commentary from the Baltic Exchange Briefing for Capesize, dated Sept. 15, 2017: “Brazil/China activity was largely slow this week but rates appeared to have found a flow with $16.90 and then $17.10 paid for early October cargoes. One charterer took a 179,000-tonner from Singapore at $20,500 daily plus a $260,000 bonus for a Brazil round that some sources suggested equated to the upper $17.00s basis Tubarao/Qingdao.”
The difficult part of ship chartering is that the market is very volatile. We know that just one voyage from China, going empty to Brazil and returning with iron ore to China, takes roughly 70 to 75 days. You do need some luck to be ready for the next cargo in a period when the market is good. The market can change a lot in 70 days. There are troughs and peaks. If you’re lucky, you might be available at peaks and busy during troughs. On the other hand, you could be not so lucky.
Since we are not privy to the detailed information from NMM on exactly what it fixes its ships on, and at what rates, we can only estimate how much it is able to earn based on what we know the spot market is offering. In the past, NMM management has stated that it is able to perform better than the average market. This is quite possible.
As can be seen in the slide above, NMM claims that it is able to earn 21% above the spot market level. Nevertheless, to be kind to NMM, let’s just assume that it’s only able to deliver average performance. Here is how it should play out:
The above is the dry cargo portion of the fleet. We’ve added the container ships to this below:
Adjusted EBITDA for the first half of 2017 was $58.1 million. My estimate for EBITDA is $18 million higher for the second half of the year. If we add the $18 million to the $36 million FCF the company communicated prior to the market going up, it would be an FCF of $54 million.
As the Danish physicist Niels Bohr once said: “Predictions are very difficult, particularly about the future.” The last few weeks have seen a drop in many dry cargo commodities. This does impact the Chinese willingness, or lack thereof, to build stockpiles. The effect of such stocking and destocking is very big on dry bulk shipping. We could see a major reversal in the BDI in the coming weeks.
NMM Is a Master Limited Partnership
Master limited partnerships are supposed to distribute the free cash flow. If you check the cash distribution policy from NMM’s prospectus from 2014, you’ll find that it says the following: “Our cash distribution policy reflects a basic judgment that our unitholders will be better served by distributing our cash available (after deducting expenses, including estimated maintenance and replacement capital expenditures and reserves) rather than retaining it. Because we believe we will generally finance any expansion capital expenditures from external financing sources, we believe that our investors are best served by our distributing all of our available cash.”
There is no doubt in my mind that NMM had good reasons to postpone distribution over the last two years, as the shipping market was at low levels and the debt was too high. However, this has all changed now. It’s clear that over the last quarter, NMM did not follow its stated policy, as it used some of the free cash flow to make new investments. This is contrary to what it said it would do.
As we near the close of Q3, many investors will ask themselves if NMM will restore the distribution this year. That is the big question. Exactly how much the free cash flow will be is anybody’s guess. But it’s safe to assume that it’s considerably higher than what it was in the first half of the year. Therefore, NMM now has the ability to restore the distribution. Let’s see if the company also has the willingness. That would mark the end of two years of no dividends for unitholders.
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Image Source: Bloomberg, NMM Q2 2017 presentation, Clarkson Research,
Source: Seeking Alpha
