HaHa said:
Thanks Brewer. When /if you have the time, could you give a short discourse on the different ways that these companies can earn revenues? I read the recent Offering Prospectus for Navios, but I still feel kind of in the dark about the drivers of revenue in this business.
Ha
Its really simple: they own the ships and rent them out.
Dry bulkers are about the simplest animals out there. They own the ships, usually financed with a mix of debt & equity. They rent the ships out to charterers. Charterers can rent the ships one of three ways:
1) Spot - charterer hires the ship for an agreed on daily rate, the boat owner pays for everything (fuel, port charges, etc.)
2) Time charter - charterer hires the ship for a daily rate for a period of time (days to years) and pays for fuel and port charges, the ship owner pays for maintenance and the crew
3) Bareboat - Charterer pays for everything (rare)
The cost strcture for the ship owner is basically:
- daily vessel expense (crew, spares, lubricants, filters, etc.)
- chartering commissions (typically 5% of revenue)
- corporate overhead
- interest expense (if any)
- depreciation
- drydocking (every 5 years the ships have to be pulled out of the water, inspected, and repaired as necessary)
Most of these companies are based in offshore locations and do not pay income taxes.
The only thing that is a variable cost in all of this is the commission expense. So for every extra dollar of chartering revenue you get for a boat, about 95 cents drops to the bottom line. Combine this with significant financial leverage (as in the case of DRYS) and things can get really exciting. Some ship owners choose to trade away some upside for less volatility by locking their ships in on time charters (moths to years at a time) so they know what future revenue will be.
Charter rates have been zooming up and there appears to be a shortage of ships. The shipyards are turning ships out, but they get quickly absorbed. Lots of buyers are looking for ships on the secondhand market, so prices have been jumping. Lately, charterers have been agggressively trying to lock ships in for 1+ years at a time, which suggests that they are worried they won't be able to get ships in the future very easily.
But, rates can and do go down from time to time. Operating and financial leverage cut both ways. Having said that, I think this sector is one of the cheapest in the market right now. I think it is a matter of time before the market notices, or these things start getting bought out at a premium.