VLCCF - First Quarter 2013 Results

The Company reports a net loss from continuing operations (i.e. the Capesize vessels) of $0.4 million and a loss per share from continuing operations of $0.02 for the first quarter compared with net income from continuing operations of $1.3 million and earnings per share from continuing operations of $0.05 for the preceding quarter. The decrease in net income is primarily attributable to a decrease in vessel earnings. The average daily time charter equivalent ("TCE") earned by the Company's Capesize vessels in the first quarter was $17,900 compared with $22,700 in the preceding quarter. In May 2013, the Company has an average cash breakeven rate for its Capesize vessels of $8,900 per vessel per day.
Following the sale of three VLCCs and the balance sheet classification of the fourth as 'held for sale', the results of the VLCCs have been recorded as discontinued operations in accordance with U.S. generally accepted accounting principles. The Company reports a net loss from discontinued operations of $6.5 million and a loss per share from discontinued operations of $0.26 for the first quarter compared with a net loss from discontinued operations of $1.6 million and a loss per share from discontinued operations of $0.06 for the preceding quarter. The increase in the loss from discontinued operations is primarily attributable to the impairment loss of $5.3 million that was recorded in the first quarter in respect of the Mayfair.
Cash and cash equivalents decreased by $15.9 million in the quarter. The Company generated cash from operating activities of $3.4 million, received $4.4 million as a deposit on the sale of the Mayfair, paid $15.4 million in installments on the two newbuilding contracts, used $4.0 million to repay loan facilities and paid $4.3 million in distributions to shareholders.
THE DRY BULK MARKET
The overall global economic climate remained weak through the first quarter of 2013 with certain regional differences. The European economy remains subdued while more positive signs are observed from the United States. More US jobs were created and official unemployment figures were approaching seven percent by the end of the quarter. On the other hand and more worrying for the dry bulk market are some of the leading indicators received from China. Declining Chinese Purchase Market Index and curbs on real estate have lead to lower steel futures. However, steel production remains at a high level and at the same time there has been a strong draw down of iron ore inventories.
The dry bulk market showed few signs of recovery during the quarter, while the smaller vessel sizes performed better than the Capesize segment in absolute terms for most of the quarter. A Capesize earned on average $6,015 per day according to the Baltic Dry Index, which did not cover operating expenses for many owners.
There are some obvious explanations why the Capesize segment has underperformed:
- Iron ore exports out of Brazil have been low. There is a strong correlation between the Brazilian iron ore export and the Capesize spot market due to the long sailing distances.
- Fortescue delayed their ramp up of production in Australia from March until May 2013.
- Colombian coal exports were almost 70 million metric ton lower on an annualized basis, partly due to strikes during first quarter of 2013.
Our dependence of development of the Chinese economy has been highlighted for several years. During 2012, iron ore and coal imports combined increased by more than 12 percent, while preliminary data are showing an increase of about six percent for the first three months of 2013. Historically the first quarter is the slowest quarter of the year, which is mainly due to adverse weather in the Southern Hemisphere.
Development in international coal and iron ore prices will have a great impact on the dry bulk market going forward. Presently there is a positive arbitrage both for steel producers and utilities compared to domestic Chinese iron ore and coal. With new iron capacity from Australia, Brazil and West Africa coming on stream the next three years and poorer quality of Chinese domestic iron ore, it is expected that imports of iron ore to China will increase.
According to shipping analysts, the total dry bulk order book at the end of the first quarter is below 100 million dwt or approximately 14 percent of the existing fleet. At the same time, the fleet older than 20 years is estimated to be approximately 88 million dwt and it is fair to say that the supply side is becoming more balanced. The order book is front heavy and it is expected that supply growth will be well below five percent in 2014 and 2015. There are still available newbuilding slots for 2015 delivery, but quality yards have limited capacity available. An interesting observation is that many yards are reluctant to repeat prices achieved during the first quarter and analysts are estimating that newbuilding prices have bottomed out.
In spite of the weak markets, there has been more interest in second hand vessels. Many sales candidates have had several inspectors onboard. Some of the sales concluded have been done at levels equal to or at higher than last done. This is in particular true for vessels less than ten years old built at Japanese or Korean yards.
THE FLEET
In March 2013, the Company agreed the sale of its final VLCC (the Mayfair) and the vessel was delivered to the buyer on April 9, 2013. The Company recorded an impairment loss of $5.3 million in results from discontinued operations in the first quarter being the expected loss resulting from the sale of this vessel.
In March 2013, the Company concluded newbuilding contracts for two 182,000 dwt Capesize bulk carriers with Japan Marine United Corporation ("JMU") in Japan. The design provided by JMU represents the next generation Capesize bulk carriers with the latest technology available in order to secure fuel efficiency. The vessels are expected to be delivered during 2015. The Company has paid $15.4 million in installments and has purchase commitments of $87.0 million with expected payments of $5.1 million and $81.9 million in 2014 and 2015, respectively.
The Company's sailing fleet consists of four Capsize vessels. The Battersea is employed in the spot market. The Golden Zhejiang and Golden Future are employed on short term time charters with estimated expiries in the fourth quarter of 2013 and the first quarter of 2014, respectively. The Belgravia is on a long term time charter with estimated expiry in the third quarter of 2014.
CORPORATE
In January 2013, the Company issued 35,061 common shares and paid $181,610 to members of the Board of Directors, to the General Manager and the Dry Bulk Manager in settlement of the first and second tranches of the RSUs granted in December 2012 and December 2011, respectively, that vested on December 29, 2012.
24,472,061 ordinary shares were outstanding as of March 31, 2013, and the weighted average number of shares outstanding for the quarter was 24,462,711.
The Board has decided to declare a cash distribution of $0.175 per share. The record date is May 22, 2013, the ex cash distribution date is May 20, 2013 and the cash distribution will be paid on or around June 5, 2013.
OUTLOOK
The Board believes the recent Capesize newbuilding contracts concluded with JMU represents an attractive investment for the Company in terms of risk/reward. Although we are in a period with over supply in the dry bulk market, the Board expects the situation to improve at the time of delivery of the newbuildings.
Knightsbridge remains well positioned in the market place with its modern bulk fleet and financial flexibility. The Company will continue to search for additional acquisitions in market segments where the risk/reward ratio is attractive.
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Source: Knightsbridge Tankers Limited