Editors’ Note: This is the transcript version of the video (recorded on June 16th, 2022) we published on Tuesday. Please note that due to time and audio constraints, transcription may not be perfect. We encourage you to listen to the video embedded below, if you need any clarification.
J Mintzmyer: Hi everyone. My name is J Mintzmyer. I am the Head of Research on Value Investor’s Edge, which is a research platform hosted on Seeking Alpha which is focused on the maritime shipping industry.
Today I have the honor of interviewing Ulrik Anderson, who’s the CEO of Golden Ocean, which trades on the U.S. stock exchange, with the symbol NASDAQ:GOGL. We’re here today to learn a little bit more about Golden Ocean as well as Ulrik’s leadership at the company and how he plans to position them to outperform their competitors and profit from this cycle uplift in the dry bulk industry. Ulrik, welcome. Thanks for joining us today.
UK: Thank you for having me.
JM: Yeah. Absolutely. So we’re going to keep this really broad level, because I’m sure we’re going to have some people watching this interview who aren’t really into the shipping sector, like you and I are. So we’ll start off kind of basic, for those of — who haven’t really heard of Golden Ocean, or maybe aren’t as familiar with the dry bulk industry, can you talk a little bit about what you do and how your business operates, and kind of what differentiates your specific niche?
UA: Yeah, absolutely. So Golden Ocean is considered the leading stock-listed company in large sized dry bulk shipping. We are focused as the only company that is listed at least on the two largest vessels classes, Capesize and Panamaxes. I think we may come back to why that is important later.
So what we do is pretty simple, we transport the three types of commodities, iron ore, grains and coal. And we do that around the world for our customers, and it is usually on a single trip basis, or we rent out you can say. We call it charter out our vessels for a period, could be six months, one year, five years.
Most of our trade is from Brazil or Australia to China, with iron ore. But we are a global — we have global operation and we are essentially loading and discharging all over the world. We have around, well 100 vessels, and we are the largest owner of Capesize business in the world, and our market cap is around $2.5 billion. And we have a dual listing here in Oslo as well.
JM: Certainly, it’s certainly interesting, a very interesting market. When a lot of folks think of shipping, they especially with the recent supply chain crisis we’ve had, they’re thinking about those big container ship boxes, they’re thinking about the ports in the United States or in Europe or wherever they might live. Can you talk a little bit about — a little bit more about your business and how it’s different than that? What are some of the nuances that maybe you have to deal with, that are a little bit different?
UA: Yeah I think you’re right. Normally shipping for people outside the industry, they think of the container traffic, the big liner companies. We know Biden is talking about them at the moment. But I’ll say that they’re very different. The major difference between the two segments, dry cargo and liner traffic is that the liner business is what you can compare to a bus service. It’s a fixed schedule where you go from A to B, yeah on fixed times, whereas a dry bulk is what we call a tramp business. We tramp around the world for cargos, more like a taxi service. So we don’t have a fixed schedule. That is the — you can say the overall difference.
Personally I think people from the other industry, the liner industry may disagree, but I think that it’s a bit more of a dynamic environment that we have in the tramp business, because we have to be very commercial and we have to be extremely, can you say alert and ready to move our positions, our what can you say, our vessels to different regions of the world depending on a lot of, both macro inputs but also, can you say even regional changes. So very dynamic industry.
JM: Yeah. Certainly it makes sense. I mean you’re involved with iron ore, you mentioned, you mentioned coal and some of the grains. Do you actually trade those commodities yourself or are you just providing a transportation service for the mining companies and other folks who do that sort of stuff?
UA: We are, what we call a traditional ship owner. It means that we don’t own any cargo. We are means to an end, you can say. We are connecting our customers with their end customer and we do a bit of what can you say trading, but that is trading of freight. It’s probably less than 5%, but we do from time to time take in the vessels from other owners that we then use in our own program.
We also do — adjust some of our risk in the freight forward market, which is the swaps market, a paper market, but as I say 95% of what we do is fixing our vessels and employing our vessels in hopefully on the right contract at the right place. And we like to do it like that. We like to keep it simple. We have a very investor-friendly philosophy. So we want to be transparent, but we also like to be easy to understand, so we don’t want to mix up a lot of trading activities into the ship owning activities because it becomes very difficult to gauge the risk for the investors. It becomes very complicated business.
So we are a traditional ship owner buying and selling vessels, and hopefully at the right time, and otherwise employing our vessels the best way possible.
JM: Yeah. It certainly makes sense. And of course shipping, what you do with transportation is also a commodity market, right? It has its own supply and its own demand curves across the different sectors, across different sizes. We’re recording this right now in June of — mid-June of 2022, so just from this perspective and hopefully this interview will be evergreen for years to come and the insights here will be very accurate. But…
UA: Now you’re scaring me.
JM: I’m holding you down here. But… From the current viewpoint of June of 2022, can you talk a little bit about the supply and demand elements of the market, the balances and medium term, maybe the next couple years how do you see those evolving?
UA: I think that the medium term is looking really positive. I mean it’s a combination of several factors. I think the first and most prominent factor to point to is that we have a situation where the order book, so the new vessels coming into the market is at a 30-year low and there are simply no orders haven’t been made, many orders for many years now. And it means that the supply is really coming to a not full stop, then certainly a very, very hard stop. And that is of course the one side of the equation.
At the same time, you see on the demand side we see a reasonable demand growth. It’s — there’s a lot of different commodities, so we have to speak on an aggregated basis here. But usually you can look at GDP growth and say there’s a correlation between that and the demand for dry bulk commodities. And what we are seeing is of course a slowdown in the economies around the world, but we are still looking at reasonable demand prospects in China, hopefully around 5%, maybe more. And when you pitch that up against the supply situation that is looking pretty good.
When we then throw in a few other factors, it is — there it begins to be interesting, because we have seen — as we have seen the container business also a lot of disruption in the — can you say in the supply chain. It has been a lot of congestion which we will continue to see, but especially from next year we will see new emission regulations entering into force and those emission regulation essentially means that most of the dry bulk fleet will have to speed down, slow down so it cannot sail as fast as possible.
Obviously that reduces the efficiency of the fleet. At the same time we also expect but let’s see, there will be a nice kick, at least some stimulus into China towards the end of the year to kind of kick start the country after the lockdowns and can you say, the little bit slow period that China has been seeing.
And then finally, the last kind of factor that is playing a role here is the very high demand for coal, which at the same time is extremely inefficiently allocated. So where you had the — can you say — well you have two things that are causing this. The first thing is we have had a ban on — from Australian coal on Chinese — into China, which has caused Australia to have to find new customers. But then recently obviously we have a conflict in Ukraine which means that Russian coal is now being banned.
So where Russian coal used to go to Europe, it is now going to India, and other places, even China. At the same time we see Europe sourcing coal from the U.S., from Colombia and even from Australia which is on the other side of the world. And this is good news for, what can you say a Capesize owner like us because the longer distances you tend to use larger vessels. So we see kind of, can you say, essentially some inefficiencies, we see a very, very low supply, and then we see a reasonable demand growth and that is enough to make us confident about the future.
Of course one, can you say, warning is that there’s nothing that’s a straight line in shipping. It is always volatile, both on the, can you say, the quoted market for ships, the Baltic Index, but also the equities, and yeah, that would be — there would certainly be ups and down over the coming years.
JM: Yeah, certainly Ulrik, and that’s a fantastic summary of everything. I really appreciate you going into the details. I’m glad you mentioned China a little bit. I’m glad you mentioned Ukraine a little bit, because that was on my mind. Those were two of the follow-ups I really wanted to ask. So we’ll just briefly hit each one of those.
So first of all, let’s start with China, right. They’ve been in the zero COVID lockdowns far longer than I would have expected, and I think longer than most people would have expected. China is a very seasonal market right. They’re always — it’s always a weaker season there around February and March with the Lunar New Year. That has been extended right because of these zero COVID lockdowns. As we go through the rest of 2022, and into 2023 do you think China is going to continue to be a headwind and a challenge for the dry bulk market, or do you think they’re going to open back up and do infrastructure stimulus and become more of a tailwind? So I guess, are you more optimistic or more kind of concerned and pessimistic about China right now?
UA: Both, because I am a bit of both. I think it’s obvious, or maybe it’s not obvious but it is so that the dry bulk space is extremely dependent on China. In fact around 50 of all dry bulk commodities go into China. So we cannot really underestimate China’s importance. And of course China has not been faring as well, as it did 12 months ago. And this current COVID policy — zero COVID policy, as you point out, has been a bit of a surprise also to me for sure in that it has persisted for so long.
It is a bit of a two-edged sword because when you have the COVID lockdowns, it creates congestion which of course slows the efficiency of — or lowers the efficiency of the fleet which is good for the market. But of course at the same time you also have a lower industrial activity, which is bad for the market and overall you’d like to see the COVID restrictions go away. And then of course when we look around the world generally speaking it is uncertain out there.
And so that is for the pessimistic view although, can you say, the concern. However when we look at the growth targets and look at the problems that China have, which are different than what we see in Europe and the U.S., then we are hopeful at least that China will stimulate the economy in the fall, or certainly at some at some point in the near future. It is the traditional way for China to kick start their economy, and that is, yeah, it has been through the construction sector that has been the traditional way. And that is obviously good news or Golden Ocean, because we have the large vessels that transport the iron ore.
And the incremental iron ore will most likely come from Brazil, which is extremely long haul and would be good for the market. So I think we are watching China very closely. We are concerned like, I think everyone is at the moment. It’s extremely uncertain out there, but we are at the same time optimistic that China will reach a reasonable growth this year and next year, and hopefully through the stimulation of the economy with the — yeah, stimulating the, particular the construction sector. So cautious optimist.
JM: Cautiously optimistic. I think that’s prudent to have that as — I think your company is — obviously to have some sort of vision and optimism but not to get carried away, right? So I think that makes sense.
Let’s talk about Ukraine a little bit because I’ve heard that the crisis in Ukraine, the invasion of Ukraine could disrupt a lot of the world’s grain trade. And I know obviously that’s going to have an impact to your business. On the other hand I’ve heard that there’s a lot of rerouting of coal markets where there’s longer and longer trade lanes. So I just wanted to kind of suss out the balance of that. Is that balance going to add to the demand for dry bulk, is it going to hurt the demand for dry bulk, is it kind of a wash in the end? How do you assess that so far?
UA: There are two main things to consider here, and that’s coal and grains. I mean before I get into that, obviously it’s a super regrettable situation and we hope that gets solved as fast as possible. But if we look at it from a business perspective, and the impact for Golden Ocean, having the large vessel classes, it is arguably a positive. And the reason is that the coal as I mentioned briefly previously is being allocated extremely inefficiently.
So the Russian coal can now not be sold in Europe, and that means that it has to find a home further away, and will find a home because it is not the entire world that is banning Russia. So at the same time we see a lot of the demand for coal in general, so of course this is a positive contributor. And as I also mentioned briefly going longer distance, require larger vessels. So this is definitely a positive for the ton mile, for the large size vessels, and thereby for Golden Ocean.
For grains the situation is a bit more negative, also a bit more complicated. For us it is not a huge impact because we have the larger sizes. It’s mainly the smaller sizes that transport grains. And what we are seeing is that a lot of the grains are being obviously blocked in, is not leaving Ukraine. In the short run that can be replaced from elsewhere, but over time the way we look at it, we are seeing a demand destruction. So unless there is a final solution on how to get this out, we think it is going to be overall negative for the market. But again it will hit the smaller sizes and not so much us.
So overall for us the conflict is, as sad as it really sounds, but is actually a positive for us, from a from a business perspective.
JM: Yeah. I appreciate that summary, Ulrik and of course, yes definitely, we’re just talking about the economics of the situation. Obviously a very serious unfortunate situation in Ukraine right now.
So we’ve hit the key themes, right. We talked about China, we’ve talked about the impact of the Ukraine invasion. I have to bring this one. We got to talk about inflation, right, we’re talking about the CPI, the Federal Reserve tightening, investors are looking for things which might be an inflation hedge. Can you talk a little bit about the impacts of inflation and rising costs to your market? What does that mean for you? Is it a benefit, is it a risk, how does that shake out?
UA: Many things in this world, there are pros and cons, and this is the same as well. We can start with the positive. The positive is of course we have a huge and large asset base. So when prices on steel go up, can you say, our value, or can you say, our base value increases. So that is the good news. And I think, as you kind of allude, to many investors have seen the dry bulk spaceship owners in general as a sort of an inflation hedge. And I suppose you can say that has also been the case so far at least.
And of course the negative is, which is negative for everyone, is that if you have high inflation costs and you have eventually a recession, maybe even stagflation, then you will see the economy obviously go down. Demand will drop and that will also reflect over on dry bulk commodities at the end of the day.
So I think it’s — again it’s a two-edged sword and as much as we would probably get through a high inflation environment better than most equities, I think we would also eventually like to see a normalized world, again if there is something called that. But certainly a lower inflation environment than a higher inflation environment. But in the short term it is probably an advantage for us.
JM: One thing on that note, Ulrik, one thing I’ve noticed is that the price of newbuilds, if you wanted to order new vessels has significantly risen over the last year or so. And the price for demolition of old tonnage right, the scrap tonnage of 20 year old, 25 year old ships is also significantly higher. It’s the highest it’s been since 2007, 2008. So is that rise, we’re seeing it on both sides of the curve, the newbuild side. We’re also seeing it on the demolition side. Is that mostly related, do you think to inflation or is that a product of the strong markets? What’s going on there? Do you think that rise in asset values is sustainable, I guess is what I’m getting at?
UA: I think inflation can explain some of it, but that’s not the main reason. The reason the asset, or can you say the new building prices have gone up is the demand, and it has not been the demand from dry cargo. We have to remember that the yards can build — most yards can build or this, let’s just say that, but simply put a yard can build whatever vessel it likes.
So that means that we are competing for cargo — a slot, sorry with other segments like LNG containers, LPG vessels and so on and so forth. And there’s been a tremendous demand from primarily the container side, from the liner companies, and from LNG. So that has driven up the prices certainly the last 12 months. And now within the last quarter maybe you can start throwing inflation on top as well.
So I think that the new building prices have not peaked yet. I think they have more legs and where they will end let’s see but I don’t see that cooling off anytime soon. So to recapitulate, I think yes, inflation plays a role but at the end of the day it’s supply and demand that has dictated this. And yeah, maybe one more point, since 2008 the capacity, the new building capacity has been very reduced. So there’s been no real structural investments and this has been underinvested in for many years. And now we are seeing — we can almost call it a perfect storm with high demand from what can you say the big segments combined with limited capacity. And then prices go up, and now we throw inflation on top. So yeah I think we will continue north.
JM: Yeah. So it certainly makes sense and it seems like now is not necessarily the time to be ordering new vessels from the yards, and probably part of the reason why we see such a small order book, it’s just too expensive right. It’s hard to justify the economics. Is there any interest in any sort of second-hand tonnage to grow your fleet that way or are you sort of satisfied and happy with the large fleet and scale that you already have?
UA: Last year we purchased one vessel in ’18 in February, and then we followed up with contracting seven more in the middle of last year. And then obviously since then prices — I mean they were already on the rise. They hadn’t really started. It was a good time and now they have continued, and now they have continued on. So obviously, yeah that was — it was a 33% increase of our fleet. So we have expanded our fleet capacity quite substantially last year. So that means that our average site, can you say for new building has gone down. I never rule out anything because we have almost 100 vessels and we need to continuously, can you say, have a flow of orders and selling old vessels but generally speaking we don’t have a lot of appetite.
We certainly don’t have an appetite for 18 new vessels as we had last year. So are there — so that’s the new building market, so are there opportunities on water? There are always opportunities. But it is also becoming extremely expensive. The markets are good, forward market is good the outlooks are good and of course that is getting, that is getting priced in. So in Golden Ocean we always have appetite for consolidation or growth, but obviously it has to be accretive transaction.
So it has to be investments that we believe also makes sense in the longer run. And I think another thing that is making expansion difficult at this stage, outside prices also that we have a very focused strategy A, around the large vessels but also B, around modern tonnage because we believe decarbonization will play a big role and we believe that having modern and flexible low — high efficient tonnage is the way forward. And that leaves only very few candidates. So can you say maneuver room is relatively limited.
So as I say we’re always looking for accretive transactions. But then they are not a lot to choose from at the moment, and yeah, maybe we’ll talk about capital allocation shortly. And then I’ve kind of given a little bit away where our focus is, because with no, can you say obvious investment opportunities then we are focused on paying out dividends.
JM: Yeah, it makes sense. I was about to note that it doesn’t sound like there’s a lot of upcoming CapEx for Golden Ocean. Before we talk about shareholder returns which is the most exciting part, I’m sure, and what everybody wants to hear about, I do have to ask about the balance sheet, balance sheet leverage. Are you happy with the current debt-to-asset ratios, the current leverage. Is that sustainable or do you think there’s going to be a push towards delevering the balance sheet as we move forward.
UA: Well I think we are at a very comfortable place. We have a lot of cash on the balance, as you talked there, and then we have the — I think we have 42% loan to value, if I’m not remembering wrong, which I think is a very comfortable position to be in. We are paying down debt continuously, but we are not looking to make any extraordinary payments. We feel that we have such a young fleet that is so low levered that we are where we want to be. So we are happy with that.
JM: Yeah, it makes sense. It sounds like there’s not really a need to set aside cash for deleveraging aside from the regular repayment schedule. It sounds like you’re not super interested in CapEx at this time. So that leaves only one thing, right. It leaves dividends. So let’s talk about that. You’ve had some large dividends the last couple quarters, but there doesn’t seem to be a clear formula or a policy. Can you expand upon that a little bit because if I’m an investor today, and I’m interested in buying Golden Ocean, how do I know how many dividends I’m going to get?
UA: Yeah, no, it’s true. We don’t have a written down formula where you can put some numbers in and then calculate and then get a number out, if you are able to predict our net profit that is. But I think the proof is in the pudding. We have paid out more than $600 million over the past five quarters. And we have been very clearly communicating hopefully that the dividend is a priority for us. We want to pay out significant portion of our net profit.
We don’t have a fixed down policy, because we want to have some sort of maneuver room should that accretive transaction come up, or should the market fundamentals change. But we have been aggressively paying out. And as I said with a very — a big cash portion on the balance sheet, very low debt, no material CapEx, no debt maturities, there is really one outlet left and that is going to be the dividends, because we think ultimately that the money sits best in the shareholders’ pockets and if they want to buy back into the share, do that. If they want to go somewhere else, do that. But we are not here to sit on a large pile of cash.
JM: Yeah, I think that makes sense. It’s just — there’s no formal policy, but it sounds like just because you don’t want to tie your hands in case things change, but it sounds like as long as the markets are decent and things are as they are, a very high percentage of free cash flow is going to be paid directly as dividends each quarter. Is that right?
UA: We made $527 million in net profit last year and we paid out $500 million. And can you say obviously dividend’s at the end of the day a Board decision. It’s not my decision, although I am very positive. But I think there’s a good reason to be confident that, that strategy will continue this year. Certainly it did continue in Q1.
JM: Certainly, one of the nuances of Golden Ocean is that it’s dual-listed right. You have on U.S. GOGL, but also on the Oslo stock exchange. Can you talk a little bit about what that means and does that impact liquidity or trading volumes or anything like that?
UA: I suppose it will impact our liquidity in some sense because some will buy here obviously and some will buy in the U.S. But what we are seeing is a quite dramatic change between Oslo and the U.S. So where are we 12 months ago maybe more, but around 12 months ago saw 80% of the trading volume in Oslo and 20 in the U.S. that has turned upside down. So now we see 80% in the U.S. So we have a very — we have a very high trading liquidity, that can also accommodate, can you say the large funds.
We are going to be accepted into the Russell 3000 Index now by the end of the month, and that signals that we can say we have the size to now attract the larger — the large funds as well. And that’s good for our pricing obviously. For the private retail investor there should be no problems at all certainly. So there are pros and cons for being listed both places when it comes to trading, liquidity, okay we will probably give a little bit away, but on the other hand we can also raise capital now both in the U.S. and in the Nordic region whichever we find to be priced the most competitive. So it also gives us some flexibility.
JM: Yeah, I’m sure folks who live in Europe and in Oslo appreciate having a local stock, right, local stock exchange. And of course retail investors in the United States absolutely depend on that U.S. listing. So it’s good that you have both of those, as long as, right, as long as the trading liquidity is not hampered. And it sounds like that hasn’t been a problem.
UA: No, I mean we have American now through our bill in the U.S. and we have we have plenty of liquidity in this year, and that has also been a goal of ours to lift the liquidity up to a point where it became interesting for institutional funds, and there we are at the moment. So that’s always an important factor of course.
JM: Yeah, it makes sense of course. Ulrik, it’s been a great talk, and it’s been great getting to know more about Golden Ocean, and I hope it’s helpful for everyone who’s learning about the industry and learning about the company. I do want to give you the final word. Look there’s a lot of dry bulk companies. There’s actually like nine of them or ten of them on the U.S. stock exchange. That’s a lot of different companies for one small sector.
So I want to give you the last word, your sales pitch as it were, why — first of all, why invest in Golden Ocean at all, right why even be interested in the dry bulk industry? And secondly why pick Golden Ocean versus all those other dry bulk stocks? I mean there’s a lot of them right?
UA: Yes, that’s the million dollar question, I suppose but then I’d say, the three main arguments for why you’d want to invest in Golden Ocean over the competition is that we have we have exposure solely to the two large segments. And the two large segments are, over time and have over time outperformed the smaller segments. So if you want the clean exposure to the large segment where the earnings are the highest, then you want to go to Golden Ocean.
The second reason is that we have the lowest cash breakeven of all our listed peers. So our cash breakeven is only $12,000 per day across the fleet. This is probably on par with some of our competitors, that have you know even Supras and Handy’s. So we have more or less the same what can you say, downside but we have the exposure to the big peaks that we see in the larger segments. And obviously we will always extract more value in any market because we have a very low cash breakeven.
And then finally of course we are extremely aggressive on dividends. I know this is something that may not necessarily differentiate us widely. But if I look at some of the formulas from our competition, and look at what we have actually paid out then we have been a bit more generous. So I think these would be the three main factors I would point to if asked why to invest in Golden Ocean.
JM: All right, Ulrik. Well, it sounds pretty convincing. So we’ll see how folks — we’ll see how the stock does right? I mean there’s so many macro elements that are driving us around and there’s so many other small components. But I think you’ve done a really good job making the case right, for the micro side of things and for your company. So Ulrik, again thanks for joining us today and for taking the time with the Seeking Alpha audience.
UA: Oh, it was my pleasure and thank you for this time. And hope to see you again.
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