Money and Investing Thoughts

BBC NEWS | Americas | Cuba claims massive oil reserves.

I have not found the news linked above anywhere else. This could be a benefit to the U.S. in the event of future normalized relations between the two countries. The states would be a natural market for increased petroleum production in Cuban waters. The report claims that the reserves in the coastal water are significantly higher than previously believed:

If correct, Cuba’s oil reserves would be almost the same as those of the US – 21bn barrels, according to the Oil & Gas Journal – and nearly twice the size of Mexico’s – 11.7bn barrels.

Cuba currently produces 60,000 barrels of oil per day and imports 93,000 barrels per day from Venezuela at preferential rates.

Star Bulk Announces Updated Employment Status of Star Beta – International Business Times -.

When I wrote about Star Bulk Shipping (SBLK: 1.16 0.00 0.00%) last month I said  that this was definitely a high risk stock as indicated by its 20% yield. The positive for the company was the fixed contracts for its dozen bulk carriers that promised stable revenue for the next couple of years. With the news release linked above the company announced one of their contractors has gone bankrupt and put in doubt the receipt of $110,000 per day of revenue. Losing $10 million in quarterly revenue is a big hit for a company this size. In the current shipping environment it would be impossible to release the ship at any where near the lost contract rate.

With this news I am “selling” the SBLK position from this site’s Opportunities Portfolio. The portfolios on this site are  a hypothetical way to track the stock positions I believe will provide superior long term returns.

Although the current stock market is very frustrating for those of us who look at a stocks fundamentals when making investment decisions, I find the recent actions of Aircastle Ltd (AYR: 13.93 0.00 0.00%) to probably be the most frustrating of the stocks I follow on this site.

I became interested in Aircastle last spring when then significantly reduced their dividend to retain cash in the tight financial market. Yet in June the market knocked half the value out of the stock on the fears that the company’s aircraft leasing customers would have problems with the record oil prices. As these fears proved unfounded, the stock worked its way back up to around $14 providing about a 7% yield.

The new and improved bear market is now taking down all sectors and AYR stock is again under $7. The stock yield is not back up to 12.5%. And this time the falling oil prices should benefit Aircastle’s customer base. AYR leases their aircraft primarily to international airlines with very little exposure to the U.S. airline market. I do not believe that international air travel will experience any significant fall off and the aircraft leases will continue to be paid on time.

I would like to point out the strong financial position of Aircastle. The company currently has free cash flow of  $1.10 per quarter (and growing), providing excellent coverage on the 25¢ dividend. That is free cash flow of over $4.40 per year on a $7.00 stock, unbelievable. Management seems to be doing a excellent job releasing the few aircraft coming off lease and they have been making profitable sales of their older aircraft. The aircraft fleet is undervalued on the books at $4 billion against $2.6 billion of debt. Market capitalization is currently only $560 million.

This is just another indicator how stupid the market has been recently in the indiscriminate dumping of stocks. I have written and given examples several times and will continue to be patient and collect dividends.

Note: AYR is a component of this site’s hypothetical Income Portfolio.

Shipping Lines Sail Uncertain Seas – WSJ.com.

The article linked above from WSJ.com (subscription required) started me to think about the ongoing prospects for the shipping related companies I follow. The gist of the article is that container shipping rates have fallen up to 75% reaching unprofitable levels. The Baltic Dry Index has fallen by 2/3 over the last several months hitting the bulk shippers. The Claymore/Delta Global Shipping ETF (SEA: 17.636 0.00 0.00%) has fallen by 50% in the two months since it was launched. The three shipping stocks I follow here have also fallen so I wanted to revisit each and look at the prospects going forward.

First up, oil tanker company Nordic American Tanker (NAT: 14.41 0.00 0.00%). NAT leases all of its Suezmax tankers on the spot market. The company has kept its expenses very low and pays out virtually all of its free cash flow as quarterly dividends. Dividends fluctuate with the spot tanker rate and vary wildly from quarter to quarter ranging from 40¢ to $1.88 during the last 4 years. Over it’s 10 year history the dividend has provided a greater than 10% yield. NAT share price has fallen from over $40 in late July to the current $27. The company has given guidance that 3rd quarter dividend will be in the same range as the 2nd quarter’s $1.60. Earned Suezmax tanker rates for NAT averaged $64,900 for the 2nd quarter and I calculate rates for Q3 will come in near there. Early October spot rates are still in the $60k per day range, so tanker rates have not fallen like the cargo shipping.  Since the future dividends of Nordic American are unpredictable, I consider this stock an accumulate proposition when share prices fall.

Ship Finance International (SFL: 12.07 0.00 0.00%) has exposure to both the dry bulk and container shipping sectors. Of the current 73 ships in the company’s fleet, 11 are dry bulk and 13 are container vessels. These ships account for 14% of the asset value of Ship Finance. Over 80% of SFL’s revenues are derived from their oil tankers and offshore vessels. Ship Finance leases their vessels to shipping companies on long term, bare boat leases. They get the first dollars their ships earn and should continue to get their lease payments unless one of their customers goes completely under. For the 2nd quarter SFL had $1.57 in free cash flow to easily cover their 58¢ dividend. About $1.20 of the cash flow is from their long term leases and the balance is from the profit sharing agreement with Frontline (FRO: 4.99 0.00 0.00%). A recently announce deal to buy and lease back a pair of deep sea drilling rigs with SeaDrill will add an additional 90¢ per quarter starting Q2, 2009. I believe the current 16% dividend is secure and will grow over the next several quarters. The only problems I foresee is possible difficulty obtaining financing for future deals. The graphic below shows the different banks that Ship Finance does business with and we are all guessing as to when access to additional funds for companies like SFL will be possible. Please note, they are in no need of any additional financing at this time. I think SFL is a great value at the current share price.

Star Bulk Carriers (SBLK: 1.16 0.00 0.00%) is a much more speculative pick in this sector. Star Bulk is a year-old start up with a fleet of  12 bulk carriers. The company plans to keep all of their vessels on longer term contract and are currently booked 90% through 2009 and 60% through 2010. The current 35¢ quarterly dividend appears to be well covered by earnings. Of course, any kind of hiccup in their contracts would kill this company’s cash flow. If earnings have been maintained when the 3rd quarter results are announced, the current stock price is going to look like a great value. This is a high risk opportunity that may end up with a 24% yield plus stock price appreciation if the company’s contracts are solid.

SFL and NAT are components of this site’s Income Portfolio. NAT and SBLK are included in the Opportunities Portfolio. These portfolios are for the hypothetical tracking of stocks I am interested in.

Note: I have long positions in NAT and SFL.

Ship Finance International Ltd. (SFL: 12.07 0.00 0.00%) has entered into a purchase then lease back of two deep water drill rigs with Seadrill Ltd. The total purchase price of the rigs is $1.7 billion with SFL contributing $300 million and obtaining financing for the $1.4 billion balance. Of the $1.4 billion note, Ship Finance will only be liable for $100 million. The leases to Seadrill will be 15 year bareboat charters.

As a result of this deal, Ship Finance will be increasing the quarterly dividend to 60¢, pushing the yield on the current stock price to over 11%. SFL has paid a steady, growing dividend throughout its 5 year existance.

It is impressive that Ship Finance can put together a deal of this magnitude in the current financial environment. This is a record breaking deal for the maritime industry and SFL has now invested $3.4 billion in offshore equipment. The dividend increase will be the 3rd in 2008, increasing the annual payout by approximately 10% over 2007. The recent market down turn has made strong dividend payers like SFL tremendous values. Ship Finance’s historical yield has been between 7.5% and 8.5%, indicating the stock should be at least $28 once the market becomes rational again. SFL is a component of this site’s Income Portfolio and I will be increasing the position in the portfolio.

Note: I have a long position in SFL.

Press release: Ship Finance International Ltd..