GOGL - Golden Ocean Group: Fleet Acquisitions Help To Face Regulatory Risks

2023-03-29 10:32:58 ET

Summary

• Golden Ocean Group is actively selling old vessels and acquiring new ones with scrubbers; this helps the company to face regulatory changes.
• The company has experienced management with a track record of providing positive EBIT over a five-year period.
• Golden Ocean Group's major risk is the high cost of debt capital in a high-interest rate environment for new vessel acquisitions.

Investment Thesis

Golden Ocean Group (GOGL) is taking proactive steps to future-proof its fleet. The company is actively selling older ships and purchasing newer, more energy-efficient, and environmentally friendly vessels. By trading vessels, GOGL is positioning itself to thrive in the ever-evolving regulatory landscape of the maritime shipping market. Fleet renewals and attractive valuation gives a hold recommendation for the stock.

Introduction to Golden Ocean Group Limited

Golden Ocean Group is one of the largest dry bulk shipping companies. According to the company website , GOGL is the world's largest owner of Capesize vessels. The company operates a fleet of 93 vessels with approximately 13.4 million deadweight tonnes capacity. The strategy of the company focuses on four main sections. Firstly, the company plans to remain the largest player in the large-size dry bulk cargo market. Secondly, the company wants to be a cost leader, meaning that they utilize company size in order to achieve economies of scale and opportunistically sell and acquire vessels. Thirdly, the company aims to return a major share of its earnings to investors. However, GOGL does not announce a regular dividend payment scheme and wants to decide on each dividend payment based on the company earnings. The last and maybe the most important part of Golden Ocean Groups' strategy is to focus on decarbonizing its vessel fleet.

Golden Ocean Group Trading Vessels Actively

On February 13th, 2023 , Golden Ocean Group announced the acquisition of six Newcastlemax vessels (208 000 deadweight tonnes per vessel). The transaction's total value is $291 million, which leads to approximately $48.5 million cost per vessel. According to GOGL, the market valuation for similar ships stand at $57.5 million per vessel, meaning that the company made a relatively good deal by purchasing these vessels. Each vessel is equipped with an exhaust gas cleaning system (also known as scrubbers), which aligns with GOGL's strategic ambition to decarbonize its fleet. GOGL finances deal with a $233 million credit facility which is covered by the acquired vessels and two other vessels from its fleet. The rest of the purchase price, $58 million, will be financed with cash. During the last two years, GOGL has sold 11 older vessels and gained approximately $124 million in cash proceeds from asset sales. The newly acquired vessels will be chartered back to their former owner for 36 months. Time charter deal has a daily TCE rate of approximately $21,000 net. In 2022, GOGL's reported TCE rate for the total fleet was $20,421 per day. Taking 2022 rates into account, it can be concluded that the agreed daily TCE rate of $21,000 is relatively good for acquired ships as the economic forecasts are unclear.

IMO Regulation Development and Newbuilt Vessel Market

International Maritime Organization ((IMO)) has set ambitious climate goals for the maritime industry. In 2018 IMO decided on a strategy that targets international shipping to cut its greenhouse emissions by half by 2050. 2023 will be an important year from a regulation perspective as IMO has decided to review its strategy and set more detailed guidelines on the initial strategy set in 2018. From the shipowner's perspective, unclear regulatory requirements has led to low ordering of newbuilt vessels. The effect has been especially visible in the dry bulk vessel market as the order book is at 30-year lows. This is due to huge newbuild ordering of container vessels that have kept shipyards busy and also the strong supply of dry bulk capacity that grew on a global scale before and during the great financial crisis of 2007-2008.

What is certain from a regulatory perspective is that the shipowners like GOGL must address climate issues, and ship emissions must decline. GOGL's active selling of older vessels and acquiring newer vessels is in line with regulatory requirements. Older vessels are usually not equipped with scrubbers that decrease emissions and improve energy efficiency. Newer vessels are equipped with emission-decreasing scrubbers, which also burn less fuel. Even when dry bulk newbuild orders are at 30-year lows, GOGL has been active also in the newbuild orders. The company has 10 newbuilt vessels under construction that will be delivered between 2023 and 2024. In the short term, these vessels will increase the company's DWT capacity, revenue, and absolute earnings potential. From a regulatory perspective, newbuilds also carry risks. If IMO decides on technological requirements that new build vessels are not compliant with, vessels may need to be sent to drydock for upgrades early in their useful life. In the broader picture, ordering newbuild is a good strategical decision as technology is up to date. On the other hand, older vessels can be improved by installing scrubbers that reduce emissions and improve energy efficiency.

Financials

From a revenue perspective, GOGL's business variates according to the available capacity and TCE rates. Through the last five years since 2018, the company revenue has been relatively stable, with extraordinarily high revenue in 2021 and 2022 due to extreme prices in the dry bulk market. From a profitability perspective, the company's EBIT has remained positive through the last five years, which indicates strong operational abilities from the company management.

While analyzing GOGL from a balance sheet perspective, we must focus on leverage. Due to the increased interest rates, the amount of debt on the balance sheet effects significantly interest rate expenses, which directly affect the company's ability to pay dividends and invest in new vessels.

From a relative approach, the overall debt in GOGL's balance sheet has remained stable with a downward trend since 2019. With a loan-to-value level of approximately 35%, leverage is at a relatively conservative level. Currently, according to 20-F SEC filings , GOGL's interest rate is at a relatively low level of 2.01%. With this interest rate, the interest cost on outstanding debt of $1.1 billion would be approximately $22.69 million per year. If the interest rate increases to 4%, the annual interest expense would be approximately $45.16 million, an increase of $22.47 million or a 99% increase. These figures are just examples to highlight the effect of interest rates on the income statement. GOGL's interest expenses in 2022 were $56 million.

Overall from a financial perspective, GOGL is a profitable company with relatively low debt levels.

Valuation

Seeking Alphas Valuation screener gives an A+ rating for GOGLs valuation. Price-to-Earnings ratio is standing at 4.94, which is relatively low, indicating that the market does not expect significant profitability growth for GOGL. Low P/E ratios are typical for companies operating in traditional, asset-intensive industries. The price-to-Book ratio stands at 0.99, meaning the company is more valuable on its balance sheet than in the stock market. This is a typical phenomenon in the shipping industry. Low P/B ratios may encourage hostile takeovers as vessels are theoretically on sale with discounted prices in the public market. In GOGL's case, such a takeover is unlikely as the company has a singular large shareholder (John Fredriksen) with 39.2% ownership, which decreases the supply of stock in the public market, at least with a low P/B price.

Risks

The cost of debt capital is a major risk for the fleet development of GOGL. If GOGL is not able to arrange debt capital agreements with reasonable interest rates, it may affect the company's ability to renew its fleet. If the fleet renewal stops, the operational ability may suffer. This is a real risk as it is extremely unlikely that dry bulk shipowners would get lower than market interest rates.

China has been reopening during Q1 2023, which is positive for dry bulk shipping, especially for GOGL, as they operate with a larger vessel size fleet that is reliant on coal and iron ore transport to China. However, issues within the global financial sector, such as Credit Suisse's merger with UBS and Silicon Valley Bank's bankruptcy, may negatively impact global GDP development, which decreases demand for ocean dry bulk transports. In this sense development of global GDP is a risk for the development of GOGL's business.

Regulatory changes are a risk for GOGL. The company has actively shaped its fleet to be more aligned with lower carbon emission requirements, but unclear regulations will force the company to continue investments in lower-emission ships.

Conclusion

In conclusion, Golden Ocean Group is a stock with reasonable pricing, and its fleet is well-aligned with future regulatory changes. Experienced management has been able to show an excellent operational ability to provide positive EBIT for the last five years, which gives confidence to investors. If the company is able to continue on a similar track as it has been on, GOGL is a stock to hold.

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