ESEA - Euroseas Ltd. (ESEA) - Positive Impact of Another Oakland Rate Reset
Another positive reset on the Oakland intermediate. Yesterday morning, the fleet employment table was updated on the web site to show that the TCE rate on the Oakland had moved up to $64.7k/day over the weekend versus the last reset of $38.0k/day in April. The reset is the last one under a charter that is based on 90 percent of the Contex index for 4,250 TEU vessels, which had moved up into the more than $70.0k/day range. Once the current charter ends in late October, the Oakland is likely to move onto a longer term charter.Tight supply and higher container rates are positives for upcoming charters. According to Contex indices, rates have moved up by more than 40% over the past several weeks. Our current estimates assume that the feeders (Spetses/Diamantis/Corfu/Evridiki) will soon secure longer term work at charter rates in the $20.0k—$25.0k/day range.Increasing 2021 EBITDA estimate to $46.9 million based on TCE rates of $18.0k/day, up from $44.1 million based on TCE rates of $17.4k/day. Forward cover was already high so the Oakland reset has a slight impact, but it moves the average rate up by $1.0k/day. Currently, ~91% of 2021 available days of 5,000 are booked at average rates of $16.2k/day, up from $15.2k/day. Visibility into next year is the highest in more than a decade, and there is no change to 2022 EBITDA estimate of $69.7 million based on TCE rates of $22.3k/day.Capital structure improving due to strong cash flow. Debt of $0.9 million was prepaid in May and all of the convertible preferred stock was converted following the redemption notice. With improved visibility and strong cash flow, net debt should drop to $31.8 million in 4Q2021 and might be close to zero in 4Q2022 even after two new builds. With an improving capital structure, a regular dividend and/or special dividend might be paid by yearend 2021. Please see our July 16th research note for additional details on the preferred stock conversion.Maintain Outperform rating and price target of $30.00/share. Our container market outlook stays favorable and numerous longer term charters at higher rates create forward cash flow visibility. Even though the stock was up 325% in 1H2021, the stock has dropped ~20% in July. We believe that the current valuation remains attractive and the risk/reward profile warrants a positive rating. Moreover, improving operating results and declining financial leverage should allow shareholder friendly moves, like paying a regular and/or special dividend. Read More >>