Watching Genco (GNK)

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I wish I had access to the old Motley Fool boards. Then I would have access to one or two threads on Genco Shipping (GNK). In the absence of that data, I will just have to gather some relevant points and see if that kludges well.

Genco Shipping (GNK) is a dry bulk shipping company that attempts to differentiate itself from peers in two ways

  1. Operates what they term a barbell strategy i.e. own a fleet with vessels that carry major bulk (iron, steel, grain) and minor bulk (steel, fertilizer, cement, other agricultural products,etc). In GNK’s case, they own 17 Cape vessels (for major bulk) and 27 Supramax or Ultramax vessels (for minor bulk)
  2. Low leverage - Per early Nov 2022, the company indicated it had a net LTV of 11%. There might be some small nuances there, so let me rephrase the point slightly different. Shipping is a capital intensive sector and GNK’s fleet has an avg debt load of $4.1M per vessel. That’s quite low

In late 2021, Genco consolidated all its debt to one $450M financing facility comprised of a loan facility ($150M) and a revolving debt facility ($300M). GNK currently has about $180M in debt, but can continue to draw on the revolver as needed. Genco is in Year 1 of the facility and probably in Year 4 or Year 5, there might be some restrictions on how much of the revolver the company can utilize. But their cash position, and access to the revolver gives GNK a lot of liquidity.

Dividends? Genco - We have a formula!! https://emoji.discourse-cdn.com/twitter/grinning.png?v=12

But being serious for a moment, starting in 2022, the company rolled out a formula for determining the quarterly payout.
A - Operating cash flow
B - Debt repayment ($8.75M)
C - Maintenance capex
D - Reserve ($10.75M)
E - Shares outstanding
dividend = [A - (B+C+D)]/E

Digest on that. The next part I will discuss Q3 2022 results (shares already trading Q3 ex-div, so no urgency on a decision)

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Q3 2022 results

  • Revenue of ~ $136M
  • Net income of $40.8M
  • Q3 div of 78c/sh (Q2 div of 50c/sh)
  • Target: Net debt of zero (GNK mgmt have suggested this goal previously)
  • All 17 Cape vessels have scrubbers installed (strategic decision: install scrubbers on fuel consuming vessel category)
  • 10 vessels on time-charter (including three on index charters). Each of the 7 fixed charters is at a very profitable level for the vessel size.

So going back to that formula for the dividend. One item puzzles me
A - Operating cash flow
B - Debt repayment ($8.75M)
C - Maintenance capex
D - Reserve ($10.75M)
E - Shares outstanding
A, B, C & E are real. Ok, so I get GNK are using the item (D) in a formula. But if GNK has set it aside in Q1, couldn’t that Reserve (D) be reused in subsequent quarters? If not, is there an accumulation of reserves and I should expect to see it in the form of higher cash balances?

Quick back-of-envelope type fleet calculation: $950M - $1050M.

Risks:

  1. Economic depression
  2. Iron ore trade remains subdued
  3. While IMO 2023 overall should be a positive, the cost of getting a vessel to compliance is fuzzy/uncertain

While the fleet is not really old, over half the vessels are over 10 years old (including three 17-year old Supramaxes). Some dry bulk companies e.g. NMM, DSX, GOGL have trimmed some of their older vessels from their respective fleets. GNK - no changes (besides the two 2022 additions).

Already have a GNK position. And, it seems like GNK took a heavier Q3 hit on ex-div date. Odd, given the div hike and the de-risk angle of having some time-charter coverage. Hence, the thread title.

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