“We’re not saying this as any form of warning or trying to panic people,” said Robert Bugbee, president of Scorpio Bulkers (NYSE: SALT), on the company’s quarterly call with analysts.
Still, investors could be forgiven their concern — especially after Bugbee described the plan going forward as “prepare for the worst and hope for the best.”
There was a clear “batten down the hatches” vibe on the call, which highlighted three headwinds hitting dry bulk simultaneously: deeper-than-usual seasonal weakness, drastically higher fuel costs due to the IMO 2020 rule, and surging fears over the Wuhan coronavirus.
Defending against coronavirus risk
There has yet to be any actual impact on the dry bulk market from the virus, but Bugbee’s message was that the mere threat of a worst-case scenario effectively compels management to take a more defensive approach.
“We’re going to take a very conservative view on our potential cash flows, and we will manage the balance sheet accordingly,” he said. Scorpio disclosed solid day rates for bulkers booked at the beginning of the first quarter of 2020, but Bugbee explained, “We would budget for a weaker environment for the balance of the quarter and would suggest investors do the same. Play it safe until further notice.
“China itself is different than it was in the last big one, SARS [in 2002-03],” Bugbee continued. “It’s clear that what’s going on right now is not a positive thing for imports of dry cargo commodities into China. So, until further notice, the company is going to manage and budget in a more conservative way.
“We have cash on the balance sheet and we’ve spent a long time ensuring that the balance sheet is strong. We didn’t expect to deal with a virus but we did build the balance sheet to deal with any sort of financial meltdown or currency crisis. There is definitely spare liquidity without resorting to ship sales or stock sales.”
The virus threat will spur different capital-allocation decisions. Asked whether it would make sense to buy back discounted shares in the current environment, Scorpio Bulkers CEO Emanuele Lauro replied, “Today, for sure [we would not]. Let’s see what the coronavirus brings next week. It may be a great investment because the stock is down, but you don’t start a buyback in such an uncertain market. You don’t want to be a hero. You want to be prudent.”
Costs spiking due to IMO 2020
Adding insult to injury, the coronavirus threat is transpiring at the same time the dry bulk industry is dealing with much higher fuel bills.
“The impact of IMO 2020 is starting to become apparent,” Lauro said. “Specifically, the fleet experienced a near 100% increase in fuel costs during the switch from high-sulfur fuel oil to compliant fuels, and freight has been unable to reprice to the new fuel setup, raising questions as to what market balance we are presently experiencing.” (Translation: Ship operators do not have enough leverage to pass higher fuel costs on to cargo shippers because there are still too many vessels in relation to cargo volume.)
Since Jan. 1, the IMO 2020 rule has required ships not equipped with exhaust-gas scrubbers to burn 0.5% sulfur fuel known as very low sulfur fuel oil (VLSFO) or 0.1% sulfur marine gasoil (MGO), not less expensive 3.5% sulfur heavy fuel oil (HFO).
While many analysts, executives and investors have focused on the VLSFO-HFO spread and the cost advantage of scrubber-equipped ships, the more important indicator is the year-on-year change in fuel costs cited by Lauro because most ships do not yet have scrubbers installed.
Most companies with plans to put scrubbers on all of their ships, including Scorpio Bulkers, have only installed a limited number so far due to installation delays at Chinese yards. Out of 40 planned installations, Scorpio has completed eight.
These delays could potentially escalate due to the coronavirus if the outbreak restricts work at Chinese yards.
On one hand, scrubber-installation delays have been viewed as a positive for rates, as they remove capacity from the market over a longer period. On the other hand, for the companies doing the installations, delays are a negative, as ships must consume more expensive VLSFO for longer than planned.
Lauro confirmed that coronavirus has now become part of the scrubber-installation conversation. “Over the weekend we started planning which measures we will take,” he said. “The workloads and the workforce at the yards are proceeding as normal right now, but will this be the case if the outbreak gets worse? Who knows?”
Quarterly results
On Jan. 27, Scorpio Bulkers reported net income for the fourth quarter of 2019 of $15.1 million versus a net loss of $7.3 million in the same period last year. Excluding noncash items, the adjusted loss was $0.08 per share, in line with analyst consensus.
Scorpio operates bulkers in the Ultramax (60,000-65,000 deadweight tons) and Kamsarmax (82,000-83,000 deadweight tons) classes. Its Ultramaxes earned $11,244 per day in 4Q19, down 8% year-on-year. Its Kamsarmaxes earned $11,934 per day, down 9% year-on-year.
Scorpio Bulkers has 49% of its available days in the first quarter of 2020 for its Ultramaxes booked at $10,505 per day and 57% of its available days for its Kamsarmaxes booked at $12,242. However, as Bugbee stressed, the remainder of the available days may be booked at lower rates. More FreightWaves/American Shipper articles by Greg Miller
