GOGL - Pangaea Logistics Solutions: Cheap Dry Bulk Shipper With Differentiated Business Approach

Summary

• Pangaea Logistics Solutions ("Pangaea") is a somewhat unique dry bulk shipping company with a diversified strategy and stronghold in the ice class niche.
• First-half results have been decent but the second half is likely to see some impact from the recent drop in dry bulk charter rates.
• So far this year, the company has more than doubled its quarterly dividend, which should be sustainable even in a considerably weaker market environment.
• While dry bulk charter market conditions are likely to remain volatile in the near term, Pangaea's unique business approach offers a more balanced risk/reward than the majority of industry peers at this point.
• Investors looking for exposure to the dry bulk shipping markets should consider scaling into the shares on weakness.

Pangaea Logistics Solutions ( PANL ) or "Pangaea" is a Bermuda-based dry bulk shipping company with somewhat unique characteristics.

Unlike most of its peers, Pangaea doesn't exclusively focus on the usual voyage or time charters but also on so-called "Contracts of Affreightment" ("COAs").

COAs are agreements providing for the transportation between specified points for a specific quantity of cargo over a specific time period but without designating specific vessels or voyage schedules, thereby allowing flexibility in scheduling since no vessel designation is required. COAs can either have a fixed rate or a market-related rate. The company’s COAs typically extend for a period of one to five years, although some extend for longer periods.

In addition, the company focuses on backhaul cargoes to reduce ballast days and increase expected earnings for well-positioned vessels.

Moreover, the company is a leader in the ice class niche. Ice class trading includes service in ice-restricted areas during both the winter (Baltic Sea and Gulf of St. Lawrence) and summer (Arctic Ocean). Trading during the ice seasons has provided superior profit margins, rewarding the company for its investment in specialized vessels and the expertise it has developed working in harsh environments.

Other than most of its peers, the company carries a wide variety of commodities:

Pangaea is employing an asset-light strategy with the majority of the fleet chartered-in on short-term contracts to allow for quick adoption to changes in the market environment.

That said, the company has increased its owned fleet in recent quarters by adding a number of secondhand vessels at favorable prices as well as taking delivery of four 50%-owned newbuild Post-Panamax ice class carriers:

Please note that the company consolidates two joint ventures owning the company's Panamax and Post-Panamax ice class carriers with the company's respective stake incorporated in the table above. Consequently, only the vessel values attributable to Pangea are included in the fleet value estimate above.

In contrast, as Pangaea does not break out debt attributable to the company's joint venture partners, I conservatively included all consolidated debt into my net asset value ("NAV") estimate:

Assuming $10 million of debt per Panamax- and Post-Panamax ice class vessel being attributable to the company's respective joint venture partners, NAV would be closer to $8 per share.

The first half of 2022 has been decent for Pangaea with revenues increasing by more than 40% year-over-year to $387.3 million while Adjusted EBITDA more than doubled to $75.5 million.

The company generated almost $70 million in cash from operations and recently increased its quarterly dividend by 50% to $0.075.

That said, the severe drop in dry bulk charter rates experienced in recent months is going to impact second-half results to some extent but Q3 should still show decent profitability while Q4 is likely to be somewhat weaker.

In any way, the company's quarterly dividend appears safe for the time being.

Bottom Line

There's a lot to like about Pangaea's strategy of serving higher-yielding niches of the dry bulk shipping markets in a flexible manner without being entirely dependent on certain key commodities like iron ore or coal.

While the company's second-half performance is likely to be impacted by the recent drop in dry bulk charter rates, Pangaea should still generate strong cash flow from operations, thus increasing NAV even further going forward.

Particularly in times of market weakness, the company tends to outperform dry bulk shipping peers by a wide margin.

While Pangaea's annual dividend yield of approximately 6.3% doesn't look impressive compared to market leaders Star Bulk Carriers ( SBLK ) or Golden Ocean Group ( GOGL ), investors should note that these companies pay variable dividends while Pangaea's quarterly distribution is unlikely to be reduced anytime soon.

As a result, the company's shares have held up better than most peers during the recent market sell-off but nevertheless lost more than 30% from multi-year highs reached in June.

While dry bulk charter market conditions are likely to remain volatile in the near term, Pangaea's unique business approach offers a more balanced risk/reward than the majority of industry peers at this point.

Investors looking for exposure to the dry bulk shipping markets should consider scaling into the shares on weakness.

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