Money and Investing Thoughts

Genco Shipping and Trading Limited – Press Release.

Genco Shipping (GNK: 8.33 0.00 0.00%) has suspended their dividend and stock repurchase program in exchange for an easing of the collateral requirements on their credit facility. At first glance this seems like a prudent move because it avoids lender problems due to the breaking of loan covenants and the credit facility has enough credit available to pay for the 3 new-build Capesize vessels that will be coming on in the next 2 quarters.

The $1.00 per share quarterly dividend amounts to about $31.5 million which almost the last quarter’s total expenses. Total 3rd quarter revenues were $107 million for comparison.

The press release stated that the dividend and share repurchase cannot resume until the collateral requirements for the credit facility are again being met. It may be a while before they resume the dividend. Genco has several ships coming off contract in the second half of 2009 and the 3 new Capesize to find homes for.

The market is taking the news in stride and the shares have only fallen about 3%. I will be standing on the sidelines watching GNC for the next few quarters as they work to put their out-of-work bulk carriers to work.

Note: GNK is a component of this site’s hypothetical Opportunities Portfolio, but not for long.

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Inergy, L.P. | Investor Relations | Press Release.

Inergy LP (NRGY: 18.04 0.00 0.00%) a propane distributor and natural gas midstream operator has announce their 4th quarter dividend of 64.5¢. This is a penny more than the 3rd quarter payout and 6.6% higher than the distribution of a year earlier. As I noted in the headline this is the 29th consecutive dividend increase for Inergy.

Inergy has grown their business through acquisition of local propane distributors and some creative growth in their midstream business. For example, in 2008 they acquired a salt production company that will allow them to use the salt caverns to store billions of cubic feet of natural gas.

The cold winter should bode well for propane sales. The current lower prices for propane will make the customers less afraid of their energy bill as they heat their homes to fight the cold. The majority of Inergy’s propane business is to retail customers. This allows them to maintain their margins no matter what the level of energy prices.

The new dividend rate give NRGY a yield of over 11%. It is hard to believe that during the market lows in November this stock had a yield of over 20%. Kudos to any investors who picked up some share at that time.

Notes: NRGY is a component of this site’s Income Portfolio. If you are interested in income stocks, do not miss my post on shipping stocks.

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The Associated Press: Cowskulls and dust: Drought grips Argentina.

Harvest season will start in a month or so for the major South American agricultural areas in Brazil, Argentina and Uruguay. Unfortunately, for many of the farmers there will not be much to harvest. There has been no rain in much of the region for all of the spring and summer. The AP article linked above gives some graphic examples of how Argentinian farmers are being affected.

Brazil and Argentina are the number 2 and 3 producers of soybeans. Brazil is the world’s number 1 exporter of beef and Argentina is in the top 5. The drought is especially hard on the corn crop which is used mainly to feed the beef, although a lot of the beef raised in the region is grass fed. The grass has not been watered either.

During the spring planting season the financial meltdown was at its peak and many South American farmers were not able to get loans to purchase fertilizer for their crops, putting a dent in the possible harvest for the year. Now the drought is further reducing the amount of grain that will be harvested and killing of a significant portion of the region’s cattle herd.

What does this mean for investors? First, I think you will start to see significant price increases in agricultural commodities: corn, soybeans and beef especially. Normally increasing prices for commodities would be good for the fertilizer prices, but this drought may have a strong negative impact on fertilizer sales in South America. Farmers there will not have the money or motivation to buy fertilizer for the next seasons crop until they know the drought has broken. The problems in South America should be a benefit for U.S. based producers of meat and soybeans. The foreign markets that need these products will be forced to buy from U.S. suppliers.

I have not seen a lot of U.S. based news on the severity of the drought in South America but it is going to have a tremendous impact on exports from the region.

On this site I have been tracking the real estate markets of Sacramento and Las Vegas plus commentary about the overall California housing market. I write about these markets because I am familiar with them and they were the most explosive during the housing bubble and hardest hit when the bubble popped.

Sacramento finished 2008 with another monthly sales increase in December. Sales were 90% higher than in December 2007 and 6% greater than the November numbers. Sacramento started showing year-over-year increases in home sales in May and finished the year with 8 straight months of higher year-over-year sales. During the year available inventory fell by 32% and now is at a 3.5 to 4 month supply.

Median and per square foot prices continued to decline through the year. I found an interesting item among the pricing facts. The average price for bank owned property (REO) fell by 34%. For non-REO properties both the median price and per square foot averages were down by a more moderate 20%.

REO sales drove the market in 2008, increasing by 200% and making up about 2/3 of all sales. The hot sector in the market is REO properties selling for under $200k. Continued REO sales in this bracket will continue to have a negative effect on average prices.

New home sales have fallen in a hole that they will not come out of for a while. With buyers looking for deals in the foreclosure market, only about 170 new home sold in November (the last month for which I have data). The existing home market is now exceeding 3,000 sales per month. Currently new homes are selling at a pace 60% lower than in 2007.

The affordability of homes has brought out buyers for the last 2/3 of 2008, but the median prices continued to fall. With mortgage rates near 5% is is now cheaper to buy than rent for those that can get a mortgage and cash buyers of rental homes are getting a better than 10% income stream from their investments. The supply side of the equation is warped by bank owned properties that are dumped with little regard to the selling price. Almost nonexistant new home building will eventually tighten the supply side, but the overall California economic health needs a boost before that happens.

Today was a very mixed news day for shipping companies both tanker and dry bulk. I thought it would be interesting to put up a synopsis of the various events.

• The biggest piece of news affecting stock values is the announcement that DryShips, Inc. (DRYS: 2.805 0.00 0.00%) is suspending their dividend, cancelling orders for a bunch of Capesize bulk carriers and will report a loss.
• In contrast to the news from DryShips, the Baltic Dry Index and Baltic Capesize Index posted nice gains, up 5% and 7.7% respectively. Although these indexes are still way below the levels of last spring, The BDI is up 42% from its recent low and the BCI has tacked on 130% since bottoming.
• There is a weird divergence in the dry bulk rates. A Capesize vessel can carry twice the cargo of a Panamax dry bulk ship, yet the spot rates for the Capesizers is over 4 times the $4,000 per day the Panamaxes are getting. Panamax rates have been very soft compared to other drybulk sizes. Even smaller ship classes are earning more than the Panamaxes.

• On the tanker front the VLCC size ships have being doing well as a good chunk of the supply is being used for floating storage to take advantage of the oil price contango. VLCC’s are used mainly to haul oil from the Middle East to Asia. As the contango fades and OPEC production cuts kick in the near term outlook for VLCC rates is soft. Frontline, Ltd. (FRO: 5.20 0.00 0.00%) is the most visible company in the VLCC spot market.
• Suezmax rates, on the other hand are doing a little better. Over the last few days the WS rate for VLCC’s had dropped from 67 to 57.5. Durning the same period the WS rate for Suezmaxes has gone from 80 to 82.5 on strong demand. Nordic American Tankers, (NAT: 14.59 0.00 0.00%) is all Suezmax vessels.

The point of this discussion is to make you aware that the revenues of shipping companies can be going in different directions based on the size and type of ships they own. Also, remember these rate only apply to vessels being chartered today on the spot market. Spot charters generally last 30 to 60 days so what a ship is currently earning may be quite different than today’s rates. Companies who place their vessels on long term charters are a completely different animal. The BDI and BCI rates are only important, revenue wise,  if these companies have a ship comming of charter or buying a new vessel.

At this point the stock market treats all shipping companies pretty much the same. If DryShips, for example,  has bad news they are all hammered. I believe in the long run there will be a great differentation between the earnings of the various companies depending on their ships, types of contracts, borrowings and expense management.

In the shipping sector I currently own positions in (SFL: 12.27 0.00 0.00%) and (NAT: 14.59 0.00 0.00%).