GOGL - Golden Ocean: Impaired Financial Results And Decreasing Rates

Summary

• Golden Ocean’s 4Q 2022 and full-year 2022 financial results were weaker than 3Q 2022 and full-year 2021 financial results.
• Despite the positive effects of the reopening of China, the dry bulk shipping market outlook is not attractive.
• GOGL’s 1Q 2023 TCE per day is expected to be significantly lower than in 4Q 2022.
• GOGL stock’s ROA and ROE ratios are far lower than in previous quarters.

Mentioning Golden Ocean's ( GOGL ) modern fleet and active chartering strategy, Golden Ocean's CEO said that the company delivered another strong result in 4Q 2022. However, the company reported impaired fourth-quarter results compared to the previous quarters. GOGL's EPS decreased from $0.52 in 3Q 2022 to $0.34 in 4Q 2022 and its dividend per share decreased from $0.35 in 3Q 2022 to $0.20 in 4Q 2022. Despite the positive effects that can be expected from the reopening of China, the negative effects of the global recession and tight monetary policies on the dry bulk shipping market are continuing. I expect GOGL's 1Q 2023 quarterly results to be even weaker than its fourth quarter results. The stock is a sell.

Quarterly results

In its 4Q 2022 financial results, Golden Ocean's net revenues (operating revenues minus voyage expense) of $180 million, compared with 3Q 2022 net revenues of 196 million. The company's net income decreased from $105 million in 3Q 2022 to $68 million in 4Q 2022. Golden Ocean reported fourth-quarter adjusted EBITDA of $112 million, compared to $118 million in 3Q 2022. The company's fourth-quarter financial result shows a significant impairment compared to the previous quarter. It is worth noting that GOGL's full-year 2022 financial results are also weaker than its full-year 2021 results. One major reason behind the company's weakening results in 2022 was the decreased freight rates. GOGL's TCE per day dropped from 27582 in full-year 2021 to 24262 in full-year 2022. The company's TCE per day decreased from 23017 in 3Q 2022 to 20421 in 4Q 2022. For the first quarter of 2023, GOGL estimates a TCE per day of $13150 for 63% of Capesize days and a TCE per day of $14900 for 73% of Panamax days. For the second quarter of 2023, GOGL estimates a TCE per day of $21100 for 19% of Capesize days and $17900 for 14% of Panamax days.

The market outlook

"Inflation remains quite elevated, and so more needs to be done," Fed Governor Christopher Waller said . On 2 February 2022, the Federal Reserve increased its key rate by 0.25 percentage point to 4.50% (it was the eighth rate hike since the Fed started increasing the federal funds rate a year ago to combat inflation). The interest rates in the United States are now at their highest levels within the last 15 years. For inflation to meet the Federal Reserve's 2% goal, it is probable that the Fed increase its funds rate to 5.25% - 5.50% in 2023. Goldman Sachs and Bank of America expect the Fed to raise interest rates three more times in 2023.

Due to the central banks' measures to combat inflation in Major economies and the continuing war in Ukraine, which weighs on economic activities, the contributions of the United States and European countries to global economic growth are not significant in 2023. On the other hand, the reopening of China can support global economic growth. According to IMF, China is expected to have a 5.2% real GDP growth in 2023, compared with 3.0% in 2022. Figure 1 shows that in 2023, driven by China's forecasted growth, Asia contributes significantly to global economic growth.

Figure 1 - Asia's contribution to the global economic growth

The Baltic Dry Index skyrocketed in the first nine months of 2021. It slashed after its significant jumps, and now, the Index is equal to its levels in May 2020. Year-to-date, the Index is down 49%. However, it is worth noting that in the past few days, the Baltic Dry Index surged as demand across all vessel segments increased.

As the winter season ends, more positive effects on dry bulk shipping activities and dry bulk commodities demand can be expected from the reopening of China in the next few months. However, I expect the positive effect of China's reopening on the dry bulk market to be offset by the negative effects of the thigh monetary policies in other major economies. Moreover, it is important to know that according to MSI , the dry bulk shipping capacity is expected to increase by 20 million dwt in 2023, implying that GOGL's fleet utilization in 2023 will be lower than in 2022. MSI expects 2023 average freight rates to be 25% to 30% lower than 2022 average freight rates.

Figure 2 - The Baltic Dry Index

GOGL performance outlook

I looked at Golden Ocean's profitability and liquidity ratios in this thorough article to assess how well the company can turn a profit and use its assets to make money for its investors. I have examined the profitability ratios for margin and return ratios to provide useful insights into the financial health of the company. I calculated the ratios in comparison to earlier quarters to be more helpful.

In general, margin ratios evaluate the ability of the company to turn revenues into profits in a number of ways. Overall, due to the shortcomings of the dry bulk market in 2022, this shipping company had weaker gross profit, EBITDA, and net profit margins compared with the end of 2021. In minutiae, the total revenue of Golden Ocean declined by 33% from $375.4 million in 4Q 2021 to $249.6 million in 4Q 2022. A decline in revenue combined with the lower level of profits and EBITDA led to lower margin ratios at the end of 2022.

GOGL's gross profit margin was 0.44 in the fourth quarter of 2022, which is far lower than its amount of 0.63 at the end of 4Q 2021. Also, the company's EBITDA margin was 0.42 in 4Q 2022, which is about 32% lower year over year compared with its amount of 0.62 at the same time in 2021. Moreover, Golden Ocean's net profit margin, which is a final picture of how profitable the company is after all expenses, dropped considerably to 0.27 in 4Q 2022 versus its previous amount of 0.37 at the end of the third quarter of 2022 and 50% year over year versus 0.54 in 4Q 2021. As a result, the weakening market conditions in the preceding year affected Golden Ocean's revenue and declined its margin ratios (see Figure 3).

Figure 3 - GOGL's margin ratios

I looked into GOGL's return on equity and return on assets ratios to show how well the company can tailor returns to its shareholders. The ROA ratio illustrates the amount of profit a company may produce for each dollar of its assets. The ROA ratio of 2.09% for Golden Ocean in 4Q 2022 decreased by 106 bps from the third quarter of 2022 and 381 bps year-over-year compared with its level of 5.90% in 4Q 2021. Additionally, its return on equity of 3.56 % in the fourth quarter of 2022 is far lower than 5.44% and 10.57% in 3Q 2022 and 4Q 2021, respectively. ROE ratio shows the company's net income concerning shareholders' equity and is important since it calculates the rate of return on the capital invested in the business. Golden Ocean's net income of around $104 million in the third quarter of 2022 dropped considerably to about $68 million in the fourth quarter of 2022 and thus affected its return ratios. It means that the return ratios of Golden Ocean could indicate that the return circumstances of the corporation weakened due to the deficiency of the dry bulk market and I anticipate similar results for the first quarter of 2023 (see Figure 4).

Figure 4 - GOGL's return ratios

Summary

Golden Ocean's net income and revenue in 4Q 2022 dropped considerably year over year, and thus affected its margin and return ratios negatively. The company's net profit margin, which is a final picture of how profitable the company is after all expenses, declined in the fourth quarter of 2022. Also, according to the current dry bulk shipping market outlook, I don't expect GOGL's 1Q 2023 financial results to improve. GOGL is a sell.

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