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John Wobbensmith, CEO of Genco Shipping (NYSE:GNK), joined J Mintzmyer’s Value Investor’s Edge Live on June 14, 2022, to discuss the dry bulk markets and forward prospects and capital allocation. Genco Shipping is a major US-listed dry bulk company with 44 vessels on the water. We discussed overall dry bulk fundamentals, ranging from China’s impact on markets to the impact of the Ukraine invasion on midsize trade routes in grain and coal. We also reviewed the economics of GNK’s scrubber program and the updated shareholder returns program. Genco will pay out nearly 100% of free cash flow going forward and aims to be net debt free by next year.
This interview and discussion is relevant for anyone with dry bulk investments or interest in the overall sector, including Diana Shipping (DSX), Eagle Bulk (EGLE), EuroDry (EDRY), Grindrod Shipping (GRIN), Golden Ocean (GOGL), Navios Maritime Partners (NMM), Pangaea Logistics (PANL), Safe Bulkers (SB), Seanergy Maritime (SHIP), and Star Bulk Carriers (SBLK).
Topics Covered
- (0:00) Intro/Disclosures
- (1:45) Dry bulk market overview
- (6:00) Additional color on China dynamics and Ukraine impacts?
- (10:45) Updated views on market vs. early-2022 expectations?
- (14:30) Will elevated opex levels remain going forward, or just a one-off?
- (17:45) Update on scrubber spreads and company strategy?
- (21:30) Any interest in secondhand vessel acquisitions?
- (23:30) Desire to further reduce debt or still targeting net debt zero?
- (25:30) Any interest in repurchases?
- (27:30) Discussion on the merits of zero net debt strategy.
- (35:45) Review of newbuild markets, any interest here?
- (39:00) Why invest in GNK vs. other dry bulk peers?
Full Interview Transcript
J Mintzmyer: Good afternoon, welcome to Value Investor’s Edge Live. We’re recording on the afternoon of June 14, 2022, about 1 o’clock in the afternoon, Eastern Time. We are hosting Genco Shipping, the CEO, John Wobensmith. We also have CFO, Apostolos Zafolias on the line as well. Good afternoon, gentlemen. Thanks for joining us today.
John Wobensmith: Good afternoon. Thanks for having us.
JM: Yeah, absolutely. Before we begin, just a reminder. Nothing on the call today is going to constitute official company guidance or investment recommendations of any form. I do not currently have position in Genco stock. However, this is being recorded on the afternoon of June 14. So if you listen to a recording at a later date, please be advised those positions may have changed.
John, again, welcome. Let’s jump right into it, talking about the overall balance of the drybulk market. We’ve seen a lot of volatility year-to-date in the Capesize, but we’ve seen a lot more stability in some of the medium sized ships that you’re involved in. What’s the primary factor to watch here? And what does this say about the market balance?
JW: Yeah, no look, it’s obviously a great question to lead off here. I mean, clearly, capes are double the beta of the minor bulk. So naturally, they’re going to be more volatile. You’ve got fewer players that participate in this market. And China actually, they represent 70% of global iron ore imports, while Brazil and Australia make up 80% of that iron ore trade, those exports going into China. Whereas Supras, various trade patterns, including grain and coal have been rerouted due to the war in Ukraine.
We’ve had very firm demands for minor bulk commodities, including pet coke, steel, etc., fertilizers. There’s definitely been some positive impact from the tightness in the container ship market. And then we’ve had increased fleet inefficiencies in those midsized vessels and a lot of port congestion.
I think some of the key dynamics right now in the current market is the impact of the war in Ukraine, those rerouting of the grain and coal cargo flows that we’ve seen. Because of the high bunker prices, we’ve seen the fleet overall slowdown. So that’s been helpful from a freight rate standpoint. Higher commodity prices are also helpful to the drybulk trade. We definitely — unfortunately, we predict there will be potential grain shortages as the year progresses.
So I think there’s a lot of stockpiling, at least trying to stockpile that’s going on the grain side right now. And we’ve definitely seen a strong trade on the coal front into the Atlantic, as we’re coming to terms with the European ban on Russian coal. But on the negative side, we haven’t seen iron ore flow out of Ukraine for very obvious reasons.
A couple other things that have affected the market, we have a very high scrubber spread right now. And as you know, we have scrubbers on all 17 of our Capesize vessels. And spread is anywhere between $400 $500 a ton in Singapore after being below $100 for quite a while. As I said that coal trade has been strong, increased longer ton miles. The Brazilian iron ore trade is slowly starting to improve from early in the year but it has not ramped up yet. And that’s been a little slower than what we would have anticipated.
We believe it’s a combination of production delays in Brazil as well as China’s zero COVID policies that we’ve seen over the past few months. There has been some easing of port congestion which has been widely reported, though again, we think that’s temporary. We think that’s short term, in terms of impacting the actual supply and demand balance of the fleet.
And on a positive note, we’ve seen China’s steel meal utilization improving off of the February low, which is clearly supporting not only iron ore imports, but China’s steel exports. So a lot to digest there. But in general, we continue to be positive on the drybulk market. And certainly, we’d be happy to go into that in a little deeper manner.
JM: Yeah, thanks, John. That’s a great rundown, lots of detail, and you kind of beat me to some of my follow-ups here. So let’s see if I can make sure I still thread this needle right. The two themes that I’ve noticed here today, and stuff I did want to dive a little bit more on are, first of all, China, there’s zero COVID policy, and specifically how that’s impacting the market. So I guess that’s kind of part one. And you touched on it briefly.
And then the other part I want to ask about is the net impact of this crisis in Ukraine from the Russian invasion, because it seems like we could have a negative, this summer, this fall from a lack of grain exports. But at the same time, we’re seeing a lot of coal rerouting. So I guess, first of all, can you talk a little bit about the China’s zero COVID policy and the impact there? And secondly, what’s the overall net impact from what’s happened in Ukraine?
JW: Look on, China, there’s always a risk with China, right, given the lack of predictability that anyone has on government policy. We would not have expected their zero COVID policy to last this long, particularly because of the economic targets they set in March, and ahead of the 20th Party Congress, which is taking place towards the end of this year. Having said that, the government definitely announced quite a few stimulus measures over the past two months, which is partially in response to the economic impact of the zero COVID policies. And I think you have to keep in mind, China is the largest drybulk importer, the BDI and Chinese GDP growth have a high correlation. It’s actually 0.7%. And just to put that in perspective, I know we’re all focused on a recession in the U.S., but the reality is the U.S. core — US GDP and the BDI correlation is zero.
So while we have a lot of grain going out of the U.S., it is effectively recession proof in terms of drybulk trade. We do expect further accommodation in China, the easing of economic policies. I think it’s going to coincide very well, with the seasonal ramp up in iron ore cargoes that we tend to see in the second half. The second half iron ore cargoes typically are 20% higher than the first half. And that dynamic we think will be very supportive of Cape rates going forward.
And just looking at the FFA curve, while we’re around $19,000, $20,000 a day on the BDI, the FFA curve is predicting $33,000 a day for the second half of the year. And a little more than $26,000 on in the Supramax sector. So we’re still talking very good rates that generate very good cash flows, particularly when our cash flow breakeven rate is in the low $8,000 a day. That’s on China.
As we get into the Ukraine, there’s a few things that are that are going on. With the ban on coal, going into Europe from Russia, we’re seeing Europe have to source for much longer distances. So we’ve had a net positive in terms of ton miles, more coal has been coming from the United States, Colombia, Australia, South Africa going into the into the European Union. And if we backdrop that with the grain trades and we talk a little bit about Q3, I think that’s where the uncertainty lies from a volume perspective, with Black Sea being peak season typically in July and August, I think it’s fair to say that’s unlikely to materialize.
However, we are seeing more ton miles come about that, from the war in Ukraine. We’re coming into peak U.S. grain season that will start August, September, October timeframe. We’ve seen a lot more inventory draws coming out of the U.S. and Brazil right now again expanding ton miles. And then I think, you got to keep in perspective, the third quarter does tend to be a softer grain exporting period anyway. So the real strength will come in the early part of the fourth quarter.
But just summing up what is unfortunately happening in the Ukraine, it is forcing longer ton miles on the coal and energy trades, and longer ton miles on the grain trades. Our view is that ton mile growth on the grain trades will make up for the lack of volumes that are not going to be able to come out of the Black Sea this season.
JM: Thanks, John. No, that’s a very helpful rundown of both of those, definitely adding a lot of color. And that’s been kind of a theme. We’ve hosted a few different drybulk companies over the last couple of weeks. And it’s been the two themes are really China’s zero COVID, and how long that’s going to last. And then of course, the net impact of Ukraine. It sounds like folks are saying similar things. So that’s good. At least, you’ll all be in the boat together.
So look last time we talked was in January, and you were pretty optimistic on the drybulk market and pointing to the new dividend policy, and that’s panned out nicely. You’ve had two very decent payouts here the last couple quarters. Do you see yourself as similarly bullish, less bullish, more bullish? I know it’s kind of hard maybe to compare and contrast exactly. But how do you feel now versus the start of the year, have things panned out like you thought they would? Or if not, where have things been different?
JW: Well, as you know, we’ve been bullish on the drybulk markets really, since the end of second quarter 2020. What has materialized since then has definitely directionally been in line with our views. But candidly, late performance has outperformed our expectations overall. So we’re clearly we’re happy about that. And I think the last six months have continued to support our bullish view.
I think it’s fair to say that, and I’ll go back to what I said before on Brazil, it is slower in terms of iron ore exports, going into China than what we would have predicted. So we’re a little off there. But in general, I think rates have been above and beyond our expectations. The reality is, we’ve seen a strong market for almost two years. And I think historically, that’s been a challenge, at least over the last 10 to 15 years. And the sustainability of that rally cycle is obviously huge for investor confidence, as well as confidence for ourselves, because as I said before, we had a very challenging decade in the business.
I think that — again, it’s all having to be put into context against the backdrop of the supply side. It is set up magnificently, in the fact that we are at historically low order book. As I mentioned, before, vessel speeds have slowed down because of the very high bunker price, the port congestion, fleet inefficiencies. And then we have the upcoming environmental regulations in 2023, which will also keep the fleet most likely in a slower band in terms of speed. And what that means is it creates greater inefficiencies in the fleet and higher and firmer freight rates.
Again — and I’ll go back to the zero COVID policy. That’s gone on a little longer than we expected, in terms of the impact on rates, but we do believe the additional government stimulus will have a very positive impact as we get into the second half of the year. And just keep in mind we’re at the beginning part of that. We just haven’t seen the real effect of that yet. And that definitely lags from announcements.
So if you look at the stimulus in the second half of the year, as well as a normal seasonal, drybulk volume ramp up, I think things are positioned pretty well.
JM: Yeah, I mean, considering, how weak China has been year-to-date, and everything else. So I think that’s a valid case to make that — we’re still doing this good, despite all that which has happened. So yeah, thanks for the rundown there, John. And it’s clear that you are very bullish, your team is bullish.
So at this point, we’ll pivot a little bit from the broad drybulk market. And we’ll talk a little bit specifics about Genco and capital allocation and what your shareholder returns program’s going to look like. Yeah, I do want to start off and ask about your OpEx levels, because that’s key to calculating your cash breakevens and how much cash is available for distribution. We saw a pretty significant increase over the past year, especially in Q1 of this year. I’m just curious how much of that is permanent inflation. We’re all talking about inflation. How much of that is labor inflation costs, parts inflation, and how much of that is more so like one-off COVID stuff or one-off Ukraine type disruptions?
JW: Yeah, look controlling costs, it’s been an industry wide challenge. The rising costs inflation, it’s not just being seen in shipping, but obviously every sector globally at this stage unfortunately. In terms of Genco, crew costs, they’re the majority of our vessel OpEx spend. So the budgeting for the first half of this year has been particularly challenging as a result of continuously shifting COVID restrictions, inflationary pressures, rising gas prices, etc.
We’ve experienced these COVID-related challenges, particularly repatriating Chinese crew. And we do expect a portion of that to be temporary as we’ve cycled out of Chinese crew. And most of our ships are now made up of Indian crews and Filipino crews. So there should be a normalization in the second half, in terms of OpEx costs. And I would say, our budget went up for 2020 over 2021. But in general, we haven’t changed our guidance over budget for 2022. And what I mean by that is, again, I think we’ve seen most of the push in the first half with some normalization in the second half of the year.
Big picture, though, our time charter equivalent growth has far exceeded any increase on the cost side. So if you think about our TCE, having risen in thousands of dollars, versus the OpEx, rising in hundreds of dollars, it’s obvious as to why we’re very focused on growth on the revenue side, and doing everything we can to keep costs under control on the OpEx side.
JM: Yeah, I mean, I think what investors really want to hear is that those costs levels are kind of normalizing, and maybe even coming down a little bit in the back half of the year. And we’re not going to just keep seeing quarter after quarter increases, right. It sounds like the Q1 was pretty much, I mean, some of its inflation right. But it sounds like the magnitude of that was kind of a one-off. Is that fair?
JW: Look, yeah, so I think it’s — again just to be a little more detailed, I think it’s fair to say that in the second half of the year, all of our — most of our extraordinary crew changes will have been concluded, which is repatriating our Chinese crew.
JM: Okay, thanks, John. And then on — I guess, on the positive side of things, you alluded to it earlier, is the scrubber spreads, right? I mean, the scrubber spreads have gone ballistic. We had Singapore quotes of over $500 per ton. Of course Genco has scrubbers on all of the Capesizes. Is there any way to lock those spreads in for those vessels? Or are you just kind of riding the spot market there? And I guess secondly, with the scrubber spreads this large, and with their futures curve developing — now, I realized the futures curve is backwardated. But with the market in the future, are you considering adding some scrubbers for those midsize vessels at all?
JW: So in terms of locking in spreads, there’s no doubt you could do it. But having said that, we have felt that staying in the spot market, at least for the time being produces better returns. So just to put some numbers in, if you look at the spot rate at $451 a ton versus the backwardation showing second half of 2022, at only 185 and then sub-160 thereafter, again we think it’s more important to capture the front end of the curve rather than locking in at something that may be less than 200 at this point.
And most of the time in these fuel curves, you have this backwardation. So grabbing as much as we can on the economics right now we feel is the best way forward. And keep in mind, we fully paid off our scrubber investment. So every dollar spread that we’re taking in is pure return at this at this point. So I think it allows us to be more aggressive on our fuel spread approach, then maybe we would be if we were still paying back that investment.
I think in terms of new scrubbers, yeah, look, obviously the current Singapore spread being so wide is a great thing for us. It’s hard for me to expect that this will last for years on end to justify large scale investments. And there’s a few things that I think you have to take into account. The most important one is you have to take a ship out of service in today’s pretty firm market, which carries a pretty significant opportunity costs. And dry dockings in China are taking longer than they have in the past, so that can actually start to add up quite a bit and adds to your payback time on that.
So I think that’s an obstacle. We do still believe in a portfolio approach. We like the fact that we only put scrubbers on our Capes. That’s where you get the biggest bang for your buck, because those ships are consuming the most amount of fuel. They are at sea, the longest period of time. And again we installed those on every one of our Capes. And that scrubber investment has paid off.
So even if the spread went down to $100 per ton again, we’re still making thousands of dollars a day, over and above what we would if we were burning low sulfur fuel oil, and did not have the scrubbers on board. So that’s a longer answer. But the short answer is, not at this point. We’re very happy with the investment we’ve made. It’s earning a very nice return. And for the time being, that’s where we’re going to concentrate on.
JM: Yeah, thanks, John. Yeah, it makes sense. I mean, it’s hard to lock in a curve that’s so massively backwardated, especially if you’re sort of somewhat bullish. Well, I mean, even if you — I guess even if you don’t really have a firm view on the spread, you just see something that crashes so hard in that forward curve, and it just, logically might make sense to ride that. As far as installing the scrubbers just on the Capes, at the time, I think absolutely, right. That was the right decision and mathematically made sense.
I mean, obviously, with the benefit of hindsight, John, I’m pretty sure you would have wanted to install scrubbers on the entire fleet. But I do admire the fact that you’re not chasing it afterwards, right. I mean, I think right now, what you’re doing makes total sense. So yeah, I mean, as you said, you’ve already paid off the program in two years. So that’s pretty good.
What about vessel acquisitions or any sort of fleet renewal? There’s any second hand type acquisition makes sense at this point?
JW: Look, you know our value strategy well, and as well as our capital structure, so that in itself gives us a lot of flexibility to continue to grow, along with de-leveraging and high dividends and keeping that on a parallel path, similar to what we did in 2021, and to-date this year. In terms of individual acquisitions, we do still view rates on the minor bulk ships as ahead of values, so that they continue to put up strong cash on cash returns, buying ships today, secondhand ships today. So that’s something that we can continue to focus on in terms of modern fuel efficient tonnage.
We did a lot of fleet renewal last year. And I think we’ll probably do — continue to do some of that this year on an opportunistic basis. And then on — in terms of what that can spin off is obviously an accretion on the dividend side. And that’s the most important thing for us is making sure that whatever acquisition we do, that we continue to show a greater ability to pay larger dividends from an accretion standpoint.
JM: Yeah, I think that makes sense. And the only other thing we’ve — because we talked about the scrubbers and how they’re helping the cash flow, we talked about the OpEx, and how that’s trending in. The only other question that would really fit into that calculus of the dividends, I mean, besides the obvious, which is the market rates, but besides that one is, how much additional debt repayment do you plan to do at this point? I mean, I know you kind of mentioned this aspirational goal of having maybe zero net debt, or maybe even negative net debt.
At this point, your leverage is pretty low, though, right? I mean, you’re basically in the teens and in percentages, maybe even closer to 10%. Are we done paying back debt for the next year or two? Or do you think there might be something else, John?
JW: So we’re down to about a net debt of 12%, on a value standpoint of the fleet. As I think you know, we are continuing to target voluntary debt repayments of $35 million for 2022, which works out to about $8.75 million per quarter. So there’s still a little more debt that we’re going to voluntarily repay or prepay. And I emphasize that because we’ve paid down so much debt that we have zero amortization due for the next several years at this point.
And I think we’ve paid off maybe 55%, 56% of our debt in the last 18 months, which is obviously huge, and it’s incredible to see that the scrap value of our fleet is more than two times the debt of our — debt outstanding today. And as I said above, we do have a goal of net debt zero, which we think will occur by the end of 2023 at this point.
JM: Yeah, thanks for the clarity on that. John. I mean, I get the long term goal, I suppose I am a little curious, at 12% leverage, which is exactly what we have on our analytics as well. You’re doing the $8.5 million kind of extra, right, per quarter, the stock? I mean, I guess it depends on the market conditions, right. But I mean, the markets been pretty choppy, the stock market, at least the last couple of weeks. And you’re trading now at pretty decent discount to net asset value. And who knows, I mean, with your earnings going up, that discount might widen even further.
So is there any appetite to just, I don’t know, pause the deleveraging, and maybe just some repurchases, or is that net debt zero really a hard target?
JW: The net debt zero is something that is important for us to get to. Obviously, you could toggle between dividends and share buybacks. I still maintain that if you’re going to do share buybacks, it has to be in a pretty large manner to move the needle on net asset value. And since we really just had our first full payout dividend in Q1, we do want to stick to this dividend formula, and allow that dividend to be seasoned over the next three quarters or so. And we think that will drive valuation more so than stock buybacks at this point.
But I’m not going to take it off the table. It’s why we have established our reserve that we put into place each quarter. That reserve can be used for a wide variety of things, including share buybacks. And if that’s something that makes sense, then we’ll then we’ll definitely do it. But again, we do think the valuation for us should improve. It should get much more, so do cash flow, yield and dividend yield. And we just think it takes a few quarters.
We’ve gone back and looked historically, at what Genco went through in the ’05 to ’07 time period when it went public. And it took it took three to four quarters before that dividend yield pushed down into the single digits. And I think that will — well it should occur this time around. Even with all the noise that is — noise is probably a wide term, okay, with all the — with everything that is going on in the equity markets today hopefully we can overcome that.
JM: Yeah, thanks, John. And I appreciate your time and your patience. And I’m going to push a little bit harder on this question just because I want to assess the logic a little bit. My concern, or at least I guess where I have some — I guess I’m a skeptic. So look, I see the point, I see the argument you make, especially towards a retail investor that look, this company has no debt, there’s no big risk. We’re going to pay out big dividends with this cash flow when the market’s good.
But how do you justify that on like a weighted average cost of capital basis, right? I mean, because you have a decent fleet, you can get, 40%. And we’re not talking huge leverage, right. But you can get 35%, 40%, 45% leverage at extremely favorable terms, right. And that enables you with that low cost leverage to earn a higher return on your equity over the cycle. I mean, what’s the thought process on that, John? Is it that you can actually earn a higher return on equity with no debt, or what’s kind of the logic?
JW: Yeah, the whole idea is to trade at a significant premium to NAV. And I think the only way you can do that on a long term basis is to not have a lot of financial leverage. So we think that we’ve created the best balance in terms of a risk reward model with the low cash flow breakeven, which not only protects you in downside scenarios, but it allows you to pay higher dividends going forward. So without having to repay debt and that interest going into breakeven rate. So that’s a big part of it.
And J, I would remind you, all the things in the academic discussions look great on paper, in terms of weighted average cost of capital, but the reality is when this industry experiences a downturn dividends get shut off. We don’t ever want to turn this dividend off. That is one of the very key things to this dividend policy is not ever having be able to turn it off because of the low cash flow breakeven and the low financial leverage. And let’s also be frank, a lot of these companies in down markets went and did rescue equity and that is very expensive.
So if you look at long term cost of capital, we think this is absolutely the best model to never again have to go back to the market on a rescue basis and always continue to pay a dividend, so that investors that have bought our stock basis that dividend don’t have to make the decision. Well, I’m not getting a dividend anymore, so I need to get out.
JM: Well, it certainly looks like we went from in the market, in the drybulk market and I’m a younger guy, but I’ve been following the industry now, make myself not old, but I’ve been falling the industry for 14, 15 years. And it seems like we’ve went from one end to the absolute extreme, which was massive leverage, unsustainable fixed, and it wasn’t even variable dividends. They were like fixed dividends. And that ended in tears and disaster, right. And now we’re at the opposite end of the spectrum, which is low to no [ph].
And you’re not — I mean, you’re doing a great job. I’m not trying to take anything away from you. But there’s lots of companies that are starting to try to do a similar thing, which is very low debt, very high payout variable, right, which I applaud the variable part because at least that’s tied to something that’s sustainable on a variable formula, right, because fixed is not, right. I mean fixed is just based on — unless you see [multiple speakers].
JW: We agree.
JM: Okay, so I applaud all that John. I guess, trading above NAV would be great. I mean, I would love to see it. You’d be like the NAT of drybulk. But it doesn’t rely upon — I’m trying to phrase this correct way and without being offensive, but doesn’t it rely upon like a retail, very uninformed, very ignorant retail investor who is valuing a drybulk company based on the dividend yield? Like I don’t want to back you into a corner, but like how do you get yourself valued with that metric?
JW: Well, so why — I guess the question is, why should a shipping stock trade purely on net asset value? And I think why shouldn’t these companies, like a lot of other companies, trade on cash flow yield, or an enterprise value to EBITDA, which we — if you go back, and you look in the past a lot of these companies, midcycle traded in the five to six times. And right now we’re maybe around 3.5. And that seems very undervalued at this point.
So I’m not quite sure why NAV in some cases is the benchmark. To me, it’s more about cash flow yield, just like any other company. So I don’t think — I think we’re more focused on investors that appreciate dividends and want dividends in their portfolio. And I think that’s a pretty important thing, particularly now with what’s happening in the stock market, and two, inflationary pressures, which we all know, shipping in general, is the right place to be in an inflationary market.
JM: Well, I do want to get to an agreement, John. So one thing I will agree with you, and I think, we can agree on, so I got to get a yes. No, but one thing I think we both agree on is that getting, if you can, get your stock to trade at a strong premium to NAV, then you’re in a circumstance and you’re in the catbird seat, where you can literally create professional value, right. You can grow the company by acquiring assets on the market. You can issue stock accretively, you can do ships for shares accretively, and you can actually grow the company perpetually. So I mean, if you get there, it’s a beautiful thing.
JW: J, so I’m with you on that. And I would tell you that we are a very patient management team. Last year, when our peers turned on the dividend tap and in a very high way three quarters before we did, we stuck to our plan. We paid down the debt to the target that we wanted to get to last year. And that took a lot of patience and discipline. And now we are set up with this very low cash flow breakeven, low financial leverage, to pay out manageable and sustainable dividends.
So a little bit of patience J, little bit little bit of patience. I think the valuation will come.
JM: Yeah, we’ll wish for the best. It would be healthy for the sector to have a company traded at strong valuations. I think it is tough for the drybulk sector when every company is simply comps to each other, and it gets really circular really fast. And there’s a lot of, I don’t know, if I agree that they’re arbitrary, but there’s definitely a lot of ceilings to the current valuation environment. So if one or two companies can break out to the upside, that’s healthy. I’m certainly not opposed to that.
My only final caveat, John, and I’m sure you agree with me at the end of the day, but if you’re trading at a big discount to NAV, the opposite is true, right? You can accrete value and you can create perpetual value by repurchasing shares. So I mean, it’s — I guess your goal is that you just never have to have that question, right because you never trade there. Is that maybe fair?
JW: I think that’s fair. And again, we want to give this dividend strategy which has taken us more than a year to get to. We want to have that play out, get seasoned and then we will assess where we are.
JM: Yeah, I mean, that’s all you can do is do your best and then assess. So anyways, John, thanks for putting up with my probing on that policy. Definitely a skeptic. I’m optimistic.
JW: No, it’s a good question. It’s an interesting conversation. And like I said, the management team has a lot of patience to get where it thinks it can — where it thinks it can go.
JM: Yeah, certainly, John. So last sort of industry question, and then I’ll give you the closing word on Genco. But let’s — I got to ask about the new builds. I mean, I’ve been asking basically everyone on here. It’s a very interesting dynamic, right, steel prices are up. Timelines are pushed out. What’s the new build environment look like for the drybulk market? Like what’s the sort of, I guess, price versus normal? What’s the sort of timeline? And do the economics of a new build make any sort of sense?
JW: Yeah, so as I mentioned earlier, in our conversation, the order book is at a historical low. So it’s just a fantastic backdrop for drybulk shipping, at least for the next few years, with that visibility to really looking at delivery schedules now, maybe at the end of 2024, but much more likely in 2025. And I always thank my container ship owners, my friends, in terms of having soaked up that yard capacity. So that’s been really good.
I think, in general, we — well, not even in general, very direct, we’re not going to be ordering any conventional fuel ships, in terms of new builds. We would much rather buy secondhand vessels and get immediately strong cash flows off of those. And our view is that the equity markets want cash flows today versus many years out, particularly given the rising interest rate environment and lower value, those lower cash flows may have several years down the road.
So we want to put the money to use right away, get those cash on cash returns and derisk the purchase. But just from a fundamental standpoint, we don’t think prices are actually incentivizing right now for ordering. If you look at the Cape new build price is basically in parity with resale prices. And even for that math to start to make sense, you’ve got to have resale prices significantly higher than the new builds, in order to incentivize people to order. And we’re just not seeing that today. So that’s actually a very positive thing.
In terms of other issues, you have the environmental regulations and reducing emissions, and the alternative fuel that come along with that. So there’s just a lot of questions around useful life of ordering conventional fuel ships today versus ships of the future which will most likely be burning ammonia or hydrogen, or other, even renewables down the road. So that that’s sort of a — again, it’s a detailed view. But that’s why we’re pretty positive in terms of that feeling being in place for drybulk ordering at this point, at least for the next few years.
JM: Yeah, we’ll hope the order book stays low. I agree with you that current numbers are excellent. And I also agree with you that the economics of ordering new builds at this point doesn’t really make sense. So hopefully we’ll continue to see that standoff and we’ll see that order book get even smaller yet. I would love to see an order book of pretty much near zero. I don’t know if that’s possible. But the lower the better. So fingers crossed.
JW: Please. Now see J, we definitely agree on something.
JM: And we thought — I knew we’d find something, John. No, it’s been good. We really, really appreciate you, John. So I’ll give you the last word. Look, there’s lots of drybulk companies. I think you’ve hinted at some stuff that Genco is doing different, but why should investors pick Genco, GNK today, what differentiates you from your peers? And why is this the place to be?
JW: I’ll go back to the value strategy that we put in place and the dividend. Everyone can pay a dividend in a $20,000 to $30,000 market. But we think we offer the best risk reward balance because of our low financial leverage, the low cash flow breakeven rate, creating the highest dividend potential and a sustainable dividend across all cycles. And I’ll go back to — the key is not having to turn it off.
And we think we’ve set that model up. And you can also argue that in a softer market, which we don’t see coming anytime soon. But in a softer market dividends can actually be even more valuable, because investors get paid to wait for the next upturn. But we think that’s actually — we don’t see that coming anytime soon.
So the combination of that low financial leverage, the high operating leverage that we have embedded in our actual fleet, that’s what creates that risk reward balance. And the financial model that we’ve set up.
The only thing I would tell you is this model that Genco has put into place, it hasn’t been accomplished at this scale in drybulk shipping, in the public markets at all. 12% net loan to value, strong liquidity position, $270 million, as of March 31, which by the way, is about 30% of our market cap interestingly enough. We do have scale with 44 ships, the operating leverage of the larger ships, the Capesize sector, and as we talked earlier about the more steady minor bulk ships. So it allows us to play offense in every single market, which again, is very important, because that’s how value is created.
And so on top of all this, and to sum it up, we’re a very highly transparent company. We’re one of only two U.S. filers in our peer group, very high corporate governance standards. In fact, we were rated number one ESG in terms of public shipping companies out of 54 companies. So our view is that, while it’s taken some time, the better part of a year, we now have ourselves set up to execute very well under the value strategy. And we saw that first of all pay out dividends in the first quarter, and we’re looking forward to the rest of the year.
JM: Certainly, John. Well, wishing you the best of luck, and we’re definitely both watching the drybulk markets together and hoping things stabilize, hoping that China gets their reopening act together and next time we talk hopefully we’re celebrating even better times.
JW: That’s great, J. It’s always good talking to you. You take care of yourself and thanks for the talk.
JM: Fantastic. Have a good afternoon John.
This concludes another iteration of Value Investor’s Edge Live. We just hosted Genco Shipping CEO, John Wobensmith. Genco trades on the U.S. stock exchange, stock symbol GNK.
Nothing on the call today constitutes official company guidance for investment recommendations of any form. I currently have no position in Genco. However, this is being recorded on the afternoon of June 14, 2022. So if you’re listening to recording at a later date, these positions may have changed. (Note: I currently have a long position in GNK as of June 24, 2022).
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