GOGL - Golden Ocean: Steaming Ahead With More Profits To Come

2023-12-13 08:30:23 ET

Summary

• Dry bulk shipping rates have been volatile, with a recent doubling of rates for Capesize vessels driven by Chinese demand.
• Golden Ocean Group Limited has seen a 16% total return since June, outperforming the S&P500.
• We estimate that GOGL's EPS will improve to $0.35 in Q4 of 2023.
• 2024 FY earnings are expected to be slightly higher than this year.

Investment Thesis

Dry bulk shipping has seen large volatility in rates recently.

A doubling of rates for the larger Capesize vessels came and went like the morning dew. Much of this is likely a result of the fervent fixing of vessels by the Chinese to restock commodities for deliveries before their New Year which falls on 10 to 12 February 2024

In our previous article on Golden Ocean Group Limited (GOGL) of 8th June this year, we had a bullish view of the market and GOGL’s profitability. The total return since then has been 16% compared to 7.8% for the S&P500.

Half a year has gone, and it is time to revisit the thesis

What to Expect in Q4?

Transparency has improved in the shipping sector over the years. That is a good thing. Owners are now not only reporting past results, but also giving some guidance as to what the next quarter will be.

During the announcement of the Q3 results, GOGL advised that they had fixed 79% of the 60 Capesize/Newcastlemax vessels and 83% of the Panamax/Kamsarmax vessels at rates average rates of $23,045 for the Capesize vessels and $17,275 for the smaller Panamax vessels. Based on shipbrokers' estimate of the TCE earnings per week in Q4, excluding weeks 50 and 51 where we have made our estimate, we get spot rates at $28,429 for Capesize and $15,813 for Panamax vessels.

It is important to understand that their Newcastlemax vessels and Kamsar vessels' TCE are considerably higher than the estimates brokers give for Capesize and Panamax vessels every week.

This is also highlighted by GOGL in their Q3 results presentation, where they explained that the difference in GOGL’s TCE and the weighted average is as high as 5,184 per day.

In our estimate, we used a premium of $5,000 per day. From this, we get an improvement in the average TCE in Q4 for the entire fleet of $40.23 million.

This translates to the EPS going from $0.14 in Q3 to an estimate of $0.34 per share in Q4.

Financial leverage is coming down

John Fredriksen-controlled companies have never been shy of leveraging in the past. However, “Big Wolf” as he used to be called in Oslo, has changed over time. Surely, the experiences around Frontline’s earlier financial difficulties, and more recently the problems at Seadrill, have hopefully left him more cautious about piling on debt to grow the business empire.

Let us look at how GOGL’s debt position has developed over the years.

GOGL does have a modern fleet with an average age of just 7 years. With that in mind, their debt level is not high.

Market development

The spot market is volatile. We can easily detect this by looking at our earlier estimate of Q4 earnings. For Capesize vessels, the estimated earnings went from $28,071 in week 47 to $51,727 in week 48.

That is nearly a doubling in just one week.

Something that can rise this much in such a short time can also drop equally much.

In a sense, we need to block out some of the noise from the weekly rates. Such jumps in rates are also useless if the shipowner has no available vessel to take advantage of these spikes. This depends on luck and not skills.

On a more long-term basis, we are encouraged by the recent news coming out of China on improved exports in November, after seven consecutive months of decline. The improvement Q-o-Q was just 0.5%, but we believe it will continue to grow, although at a slow pace.

Relating to bulk commodities such as iron ore and bauxite, it is positive for the market that China is taking more bauxite from West Africa, and with iron ore volume from Brazil increasing it adds to the tone-miles. Rio Tinto (RIO) is also moving forward with investments in infrastructure for the large iron ore mine in West Africa. Much of this ore will go to China and increase tonne-miles as compared to shipping it from Western Australia.

We are cautiously optimistic for 2024 with expectations of slightly higher earnings for all dry bulk owners, including GOGL.

Risks to Thesis and Conclusion

We often remind our readers that the tricky part of the supply and demand equation is not the supply side. If anybody wanted to add a large number of bulk carriers to their fleet, they would have to wait at least two years before those ships hit the water.

It is the supply that is trickier to predict.

How much coal and agriproducts will be required to keep the lights on and the food on the table? What will the weather be like? Droughts or floods do have an impact. Are there more geo-political events that will take place next year that could change trading patterns?

These are risks, but can also be huge opportunities.

We remain bullish on dry bulk commodities and the shipping of these.

Our Buy stance on GOGL remains firmly intact.

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