GNK - Pangaea Logistics Solutions: New Multi-Year Highs Despite Challenging Market Conditions

2023-06-21 23:24:51 ET

Summary

• Pangaea Logistics Solutions is a somewhat unique dry bulk shipping company with a diversified strategy and stronghold in the ice class niche.
• Last month, Pangaea reported seasonally weaker first quarter results, but still managed to generate a respectable $11.6 million in cash flow from operations.
• Pangaea remains committed to paying a fixed quarterly cash dividend of $0.10 per common share, which remains well-covered by operating cash flows.
• Despite challenging market conditions, shares have outperformed industry peers by a wide margin in recent months and even marked a new multi-year high on Wednesday on decent trading volume.
• Considering recent outperformance and with shares approaching estimated net asset value, I would advise investors to take some gains off the table and potentially consider cheaper peers like Eagle Bulk Shipping, Genco Shipping & Trading and EuroDry Ltd.

Note:

I have covered Pangaea Logistics Solutions, Ltd. ( PANL ) previously, so investors should view this as an update to my earlier articles on the company.

Pangaea Logistics Solutions, Ltd. or "Pangaea" is a Bermuda-based dry bulk shipping company with somewhat unique characteristics:

Unlike most industry players, Pangaea doesn't exclusively focus on 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. 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, Pangaea 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 Pangaea 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 a substantial part 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 as well as taking delivery of four 50%-owned newbuild Post-Panamax ice class carriers:

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

After backing out $78.6 million in debt attributable to Pangea's joint venture partners, net asset value ("NAV") per share calculates to approximately $7.73 per share:

Moreover, judging by the company's outperformance in time charter equivalent ("TCE") rates relative to the industry benchmark, additional value should be attributed to the company's COAs:

That said, the somewhat defensive nature of the company's long-term COAs usually results in Pangaea outperforming the market by a wide margin in times of weakness while the company tends to slightly underperform spot market-focused competitors during rallies in charter rates.

Last month, Pangaea reported seasonally weaker first quarter results but the company still managed to generate a respectable $11.6 million in cash flow from operations.

At the end of Q1, Pangea's cash and cash equivalents amounted to $129.2 million while long-term debt was $289.9 million.

Overall, the balance sheet remains in decent shape with net debt of $165.0 million representing approximately 35% of estimated fleet value.

Please note that reported cash and cash equivalents at the end of Q2 are likely to be down by an estimated $20 million to $25 million due to the recent acquisition of the Supramax vessel Bulk Prudence and a number of port terminal operations on the U.S. East Coast.

The first quarter daily TCE rate of $14,372 outperformed benchmark average Baltic Panamax and Supramax indices by almost 50%.

At the time of the earnings release, Pangea projected a Q2 daily TCE rate of $15,678 which represented an approximately 16% premium to quarter-to-date market averages.

Given the renewed weakness in dry bulk charter rates witnessed in recent weeks, the final Q2 TCE number is likely to be lower and based on current forward freight agreement ("FFA") rates, weakness might very well continue for the remainder of the year.

But even in the current market environment, I expect the company to remain solidly profitable and generate meaningful cash flow from operations, as already evidenced in Q1.

As outlined by management during the questions-and-answers session of the conference call , dry bulk charter rates remain closely tied to Chinese commodity demand, particularly iron ore:

(...) I think China activity is sort of an indicator for us for the market. We're not really directly involved in a lot of trade in and out of China. But like we always say, all ships rise and fall with the tide in China.

Our iron ore trade is mostly in the summer months, in the next few months, it's concentrated from Baffin Island, where we've got a 10-year contract to move iron ore from Baffin Island in the Arctic to Europe. So they -- those ships are fully spoken for during that period from August through October. And so any real iron ore activity going to China will mostly affect our other ships on the water.

It will soak up more capacity in the Panamax trades that we generally see, and that flows down eventually into the Supramax trades. So more activity on steel in China will be good for everybody out there.

Pangaea remains committed to paying a fixed quarterly cash dividend of $0.10 per common share which remains well-covered by operating cash flows:

Despite challenging market conditions, shares have outperformed industry peers by a wide margin in recent months and even marked a new multi-year high on Wednesday on decent trading volume.

Bottom Line

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

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

In addition, Pangea's fixed quarterly cash dividend of $0.10 per share remains well-covered.

While the company's near-term performance will be impacted by the weak charter rate environment, Pangaea should still generate substantial amounts of cash flow from operations, thus increasing NAV further going forward.

But considering recent outperformance and with the stock price approaching estimated net asset value, I would advise investors to take some gains off the table and potentially consider cheaper peers like Eagle Bulk Shipping ( EGLE ), Genco Shipping & Trading ( GNK ) and EuroDry Ltd. ( EDRY ).

But unlike Pangaea, these companies don't pay fixed quarterly dividends. While both Eagle Bulk Shipping and Genco Shipping & Trading have adopted a variable dividend policy, small Greece-based dry bulk shipper EuroDry Ltd. has never paid a dividend but recently bought back approximately 7% of its outstanding shares.

Considering the recent momentum in the shares, a downgrade to " Hold " appears to be a tough call but at least in my opinion, there are better values in the dry bulk shipping space right now.

For further details see: