Golden Ocean Group Limited reports a profit of $6.1 million and earnings per share of $0.01 for the fourth quarter of 2011. This compares with the profit and earnings per share of $23.9 million and $0.05 respectively for the fourth quarter of 2010. Total operating revenues for the fourth quarter were $66.1 million, total operating expenses were $40.4 million and other gains/losses net were a loss of $15.3 million. Net financial items were negative with $4.2 million.
The Company reports a profit of $14.3 million and earnings per share of $0.03 for the full year 2011. Total operating revenues were $317.1 million, total operating expenses were $263.0 million and other gain/losses net were negative with $7.5 million. Net financial items for the year ended December 31, 2011 were negative with $32.4 million.
The profit for the period of $6.1 million is a decrease of $5.0 million compared to last quarter. The operating revenues decreased by $6.0 million, and the operating expenses decreased by $8.7 million. Total other gains/ (losses) net decreased by $16.9 million. This leads to a net operating result of $10.4 million, which is $14.1 million lower than previous quarter. The difference in net operating result is mainly explained by impairment of $14.1 million relating to the reduction in market value of the Knightsbridge Tankers Limited (“KTL”) shares. The Company has booked a gain from the settlement agreement for Ocean Minerva.
Relative to the third quarter results the short term portfolio contributes negative with $3 million. The Company has booked dividends received from KTL of $1.2 million in net other financial items, the same as in the third quarter of 2011.
As a result of the impairment of the KTL shares, cumulative losses of $7.1 million previously recognized directly in Other Comprehensive Income has been reclassified from equity and recognised in the Consolidated Comprehensive Income Statement in the quarter. On 15 February 2012, the market value of the KTL share is $14.96 per share. The increase in fair value of $3.1 million in the period from 1 January to 15 February 2012, and any subsequent increases in fair value, including those that have the effect of reversing earlier impairment losses, will all be recognised in equity through Other Comprehensive Income in the period they incur. Any future impairment will be recorded in the Consolidated Comprehensive Income Statement under "other losses net".
The operating profit is generated from owned vessels, the long term time charter in contracts and the bareboat vessels (in sum the long term portfolio), and a short term portfolio, which consist of the vessels, cargoes and derivatives that is entered into with a short duration. The table below shows the split for some key numbers between the long term and the short term portfolio for the fourth quarter of 2011. Administrative expenses are not allocated.
Cash and cash equivalents increased by $3.3 million during the quarter. The Company generated cash from operating activities of $36.0 million during the quarter. The Company paid $28.9 million in installments and other predelivery costs in the quarter. Restricted cash increased by $10.2 million, this is mainly related to security put up under one loan facility to comply with minimum value covenants. Financing activities used $2.4 million net during the quarter. This includes drawdown of long term debt related to the newbuildings of $26.8 million, interest paid of $6.7 million and repayment of long term debt of $20.2 million.
Fleet Status
In November 2011 Golden Ocean took delivery of Golden Suek from Pipavav. The vessel has commenced a five year time charter at $16,985 /day net.
The Company has entered into two agreements to restructure some of the Company's charter contracts.
The first agreement was entered into with the Charterer of Channel Navigator, whereby Channel Alliance is fixed out to the Charterer for the same remaining period as Channel Navigator and half the profit from the charter on Channel Navigator is allocated to the charter for Channel Alliance. The new daily hire rate for both vessels starts at $32,700/day and will be reduced through 2012 to $32,000/day, and from January 1, 2013 the rate will stay at $32,000/day until the end of the charter period. The Charterer has an option to pay in cash to reduce the charter hire rate further.
The charterer of Ocean Minerva terminated the charter and redelivered the vessel to the Company prior to the minimum period of the charter (December 2012). Golden Ocean has been able to enter into a settlement agreement with the charterer, whereby the outstanding hire will be settled and the charterer will compensate the Company for early redelivery. The settlement amount shall be paid in full before the end of February 2012. Ocean Minerva was in January 2012 fixed for a one year time charter contract at $11,550 / day net. Golden Empress was in February 2012 delivered on a 10 year charter at $22,800 / day net. This charter was initially intended for Golden Enterprise, but was swapped in an agreement with the charterer.
Newbuilding Program
The Company took delivery of the first vessel from Pipavav shipyard in November 2011. The second vessel is expected to be delivered in the first quarter of 2012.
As of now, Golden Ocean’s newbuilding program consists of one Capesize vessel, four Kamsarmax vessels and seven ice class Panamax vessels. In addition the Company has the option to build two further ice class Panamax vessels.
The remaining capital expenditure for the newbuilding program is $224.7 million. This is split into expected payments of $84.7 million in first quarter of 2012, $88.0 million for rest of 2012 and $52.0 million in 2013.
Potential capital expenditure for the two optional ice class Panamaxes at Pipavav shipyard is not included in these numbers.
Golden Ocean has secured financing for the newbuildings, except for two ice class Panamax vessels (no option vessels included). The unfinanced vessels have expected delivery in first half 2013.
Corporate
The Company reports broker values on all loan facilities to the banks each quarter. In October 2011, the Company paid in $11.9 million and put $8 million on deposit in order to have the correct loan value ratio as per the loan agreements. As per December 31, 2011, there were some facilities where the minimum value of the vessels was below the required levels defined in the loan agreements. The Company has therefore made extraordinary down payments of $18.0 million on some of the loan facilities in the first quarter of 2012. The $8.0 million that was placed as security under one facility in October 2011 was released from the deposit account in January 2012.
The Company anticipates further drop in asset values going forward. The Board of Directors has therefore decided not to pay dividends for the fourth quarter 2011.
The Company has obtained a pre- and post delivery financing for two Kamsarmax and two ice class Panamax vessels from Jinhaiwan. Golden Ocean has then only two unfinanced newbuildings left, the two last ice class Panamax vessels from Jinhaiwan.
The Company has come to an agreement with Korea Line Corporation (“KLC”) on the amount outstanding as a claim towards KLC. The claim is split into a secured claim and an unsecured claim. The secured claim, which is low, will be paid out during 2012 while the unsecured claim will be part of the creditor pool. The current rehabilitation plan projects 37% cash return over 10 years, with most of the repayments in the later years, and a portion of shares in KLC.
As of December 31, 2011 the total number of shares outstanding in Golden Ocean was 456,990,107 of $0.10 par value each. During 2011 the Company purchased a total of 3,490,107 of the Company’s own common stocks on Oslo Stock Exchange, at an average price of NOK 3.99. The buy-back program ended on December 31, 2011. The Company cancelled the treasury shares that the Company held on January 4, 2012. Following the cancellation of the shares, the outstanding issued shares in Golden Ocean Group Limited is 453,500,000.
The Dry bulk market
For quite some time dry bulk analysts have focused on the order book and potential oversupply of dry bulk vessels. In 2011 more than 1100 vessels entered the market out of which 250 were Capesizes and 290 Panamaxes. In other words, more or less one vessel from each segment hit the water every working day last year.
At the beginning of 2011 the official order book projected that as much as 140 mdwt was scheduled to be delivered during 2011. This represented as much as 25 per cent of the existing fleet back in January 2011.
But the same trend as in 2009 and 2010 occurred also last year. A combination of delays, cancellations and restructuring of contracts resulted in a delivery ratio of 67 per cent compared to the official order book.
Forecasters are questioning the quality of the input to the official order book, which mainly derives from lack of information when cancellation are done and not reported. In addition the ambitious plans of many so called green field yards have not been realistic.
Scrapping, which is mainly a function of the spot market, was at a historic high in 2011. Almost 25 mdwt was scrapped and the average age of the vessels being scrapped was the lowest since 2003. Consequently the net fleet growth was 77 mdwt or close to 14 per cent of the existing fleet.
With such supply growth we should have expected a dramatic drop in utilization and earnings. That did not happen, at least not to the same extent as most analysts predicted. For the smaller sizes earnings were relatively flat throughout the year, while Capesize earnings were split with considerably higher returns in the second half compared to the first half of 2011. There were three factors that made first half particularly difficult. Adverse weather in Australia, with flooding and bad weather conditions in general in the southern hemisphere, the earthquake and devastating tsunami in Japan plus a traditional high influx of newbuildings which takes place at the beginning of every calendar year.
Overall it is believed that the average utilization of the dry bulk fleet during 2011 was around 85 per cent:
The increase in tonnes mile demand was close to 10 per cent, while volume growth on its own was less than 6 per cent. Other elements stabilising the balance were:
- Slow steaming
- Congestion
- Chinese coastal trade.
Since the start of the dry bulk super cycle in 2003 it has been an all about the China story. The country has accounted for about 95 per cent of incremental growth and the dependence of Chinese growth will remain the same coming years. In 2011 dry bulk imports to China increased by 21.5 per cent and in four months last year monthly imports of all dry bulk commodities exceeded 100 million mt.
Looking into the future most forecasters agree that 2012 will be a challenging year for owners of dry bulk tonnage. It is expected that net supply growth could almost reach same levels as in 2011, while demand growth is expected to be slightly lower resulting in lower spot earnings and further downward pressure on asset values. Further out on the curve analysts are giving good reasons for a potential positive fundamental trend shift. In 2013 the order book is considerably smaller and in spite of a bleak outlook for the European economies in particular, demand growth is expected to remain robust.
There are a couple of reasons worth mentioning in this context:
- A combination of poorer quality of the Chinese iron ore production and substantial new capacity of international iron ore entering the market will most likely give a positive arbitrage for Chinese Steel Producers.
- It is expected that Indian ore exports will continue to diminish, which in turn will result in longer sailing distances for iron ore in general
- Imported coal to China is only accounting for 6 per cent of the total Chinese coal consumption and
similarly to iron ore it is expected that positive arbitrage will stimulate imports
- India will continue its strong growth in coal imports and could potentially be forced to import iron ore as well if analysts are right when they forecast Indian steel production in the years to come
Strategy
The Board of Golden Ocean has consistently expressed its concern for the rapidly growing order book which inevitably had to lead to lower utilization of the dry bulk fleet and declining spot earnings and asset values.
As a consequence a conservative chartering strategy has been adopted over a period of time. Presently GOGL only has half a Capesize and one Kamsarmax vessel exposed to the spot market though index linked charter contracts. In 2013 70 per cent of the Capesize capacity and 60 per cent of the Panamax capacity is covered.
The Company observes that the newbuilding program at both yards could face further delays. The situation will be monitored closely and may lead to further restructuring of some of the newbuildings.
Given the state of the spot market it is vitally important to focus on counterparty risk and continue to have a proactive strategy to protect the Company’s values going forward.
Outlook
The Board of Directors expects the first quarter 2012 operating profit to be somewhat lower compared to the fourth quarter 2011. This is due to several reasons: new charter on Ocean Minerva, docking on Channel Navigator leading to off-hire and lower spot market for the open vessels.
The total size of the order book has peaked and is presently being reduced based on massive deliveries.
Based on recent drop in asset values and a continued downward pressure for the dry bulk sector in general, it is expected that attractive investment opportunities will arise. The Company should therefore hopefully bein the forefront to capitalize on the present low cycle and meet a potential positive trend shift with a bigger fleet.
The Company will seek for opportunities with limited equity investments and large exposure can be obtained.
Due to high oil prices and new regulations imposed on the entire shipping industry, GOGL will focus on fuel efficient and eco friendly assets when analyzing acquisition candidates. Consequently, existing fleets of vessels is not the prime target for acquisitions.
The Company reports a profit of $14.3 million and earnings per share of $0.03 for the full year 2011. Total operating revenues were $317.1 million, total operating expenses were $263.0 million and other gain/losses net were negative with $7.5 million. Net financial items for the year ended December 31, 2011 were negative with $32.4 million.
The profit for the period of $6.1 million is a decrease of $5.0 million compared to last quarter. The operating revenues decreased by $6.0 million, and the operating expenses decreased by $8.7 million. Total other gains/ (losses) net decreased by $16.9 million. This leads to a net operating result of $10.4 million, which is $14.1 million lower than previous quarter. The difference in net operating result is mainly explained by impairment of $14.1 million relating to the reduction in market value of the Knightsbridge Tankers Limited (“KTL”) shares. The Company has booked a gain from the settlement agreement for Ocean Minerva.
Relative to the third quarter results the short term portfolio contributes negative with $3 million. The Company has booked dividends received from KTL of $1.2 million in net other financial items, the same as in the third quarter of 2011.
As a result of the impairment of the KTL shares, cumulative losses of $7.1 million previously recognized directly in Other Comprehensive Income has been reclassified from equity and recognised in the Consolidated Comprehensive Income Statement in the quarter. On 15 February 2012, the market value of the KTL share is $14.96 per share. The increase in fair value of $3.1 million in the period from 1 January to 15 February 2012, and any subsequent increases in fair value, including those that have the effect of reversing earlier impairment losses, will all be recognised in equity through Other Comprehensive Income in the period they incur. Any future impairment will be recorded in the Consolidated Comprehensive Income Statement under "other losses net".
The operating profit is generated from owned vessels, the long term time charter in contracts and the bareboat vessels (in sum the long term portfolio), and a short term portfolio, which consist of the vessels, cargoes and derivatives that is entered into with a short duration. The table below shows the split for some key numbers between the long term and the short term portfolio for the fourth quarter of 2011. Administrative expenses are not allocated.
Cash and cash equivalents increased by $3.3 million during the quarter. The Company generated cash from operating activities of $36.0 million during the quarter. The Company paid $28.9 million in installments and other predelivery costs in the quarter. Restricted cash increased by $10.2 million, this is mainly related to security put up under one loan facility to comply with minimum value covenants. Financing activities used $2.4 million net during the quarter. This includes drawdown of long term debt related to the newbuildings of $26.8 million, interest paid of $6.7 million and repayment of long term debt of $20.2 million.
Fleet Status
In November 2011 Golden Ocean took delivery of Golden Suek from Pipavav. The vessel has commenced a five year time charter at $16,985 /day net.
The Company has entered into two agreements to restructure some of the Company's charter contracts.
The first agreement was entered into with the Charterer of Channel Navigator, whereby Channel Alliance is fixed out to the Charterer for the same remaining period as Channel Navigator and half the profit from the charter on Channel Navigator is allocated to the charter for Channel Alliance. The new daily hire rate for both vessels starts at $32,700/day and will be reduced through 2012 to $32,000/day, and from January 1, 2013 the rate will stay at $32,000/day until the end of the charter period. The Charterer has an option to pay in cash to reduce the charter hire rate further.
The charterer of Ocean Minerva terminated the charter and redelivered the vessel to the Company prior to the minimum period of the charter (December 2012). Golden Ocean has been able to enter into a settlement agreement with the charterer, whereby the outstanding hire will be settled and the charterer will compensate the Company for early redelivery. The settlement amount shall be paid in full before the end of February 2012. Ocean Minerva was in January 2012 fixed for a one year time charter contract at $11,550 / day net. Golden Empress was in February 2012 delivered on a 10 year charter at $22,800 / day net. This charter was initially intended for Golden Enterprise, but was swapped in an agreement with the charterer.
Newbuilding Program
The Company took delivery of the first vessel from Pipavav shipyard in November 2011. The second vessel is expected to be delivered in the first quarter of 2012.
As of now, Golden Ocean’s newbuilding program consists of one Capesize vessel, four Kamsarmax vessels and seven ice class Panamax vessels. In addition the Company has the option to build two further ice class Panamax vessels.
The remaining capital expenditure for the newbuilding program is $224.7 million. This is split into expected payments of $84.7 million in first quarter of 2012, $88.0 million for rest of 2012 and $52.0 million in 2013.
Potential capital expenditure for the two optional ice class Panamaxes at Pipavav shipyard is not included in these numbers.
Golden Ocean has secured financing for the newbuildings, except for two ice class Panamax vessels (no option vessels included). The unfinanced vessels have expected delivery in first half 2013.
Corporate
The Company reports broker values on all loan facilities to the banks each quarter. In October 2011, the Company paid in $11.9 million and put $8 million on deposit in order to have the correct loan value ratio as per the loan agreements. As per December 31, 2011, there were some facilities where the minimum value of the vessels was below the required levels defined in the loan agreements. The Company has therefore made extraordinary down payments of $18.0 million on some of the loan facilities in the first quarter of 2012. The $8.0 million that was placed as security under one facility in October 2011 was released from the deposit account in January 2012.
The Company anticipates further drop in asset values going forward. The Board of Directors has therefore decided not to pay dividends for the fourth quarter 2011.
The Company has obtained a pre- and post delivery financing for two Kamsarmax and two ice class Panamax vessels from Jinhaiwan. Golden Ocean has then only two unfinanced newbuildings left, the two last ice class Panamax vessels from Jinhaiwan.
The Company has come to an agreement with Korea Line Corporation (“KLC”) on the amount outstanding as a claim towards KLC. The claim is split into a secured claim and an unsecured claim. The secured claim, which is low, will be paid out during 2012 while the unsecured claim will be part of the creditor pool. The current rehabilitation plan projects 37% cash return over 10 years, with most of the repayments in the later years, and a portion of shares in KLC.
As of December 31, 2011 the total number of shares outstanding in Golden Ocean was 456,990,107 of $0.10 par value each. During 2011 the Company purchased a total of 3,490,107 of the Company’s own common stocks on Oslo Stock Exchange, at an average price of NOK 3.99. The buy-back program ended on December 31, 2011. The Company cancelled the treasury shares that the Company held on January 4, 2012. Following the cancellation of the shares, the outstanding issued shares in Golden Ocean Group Limited is 453,500,000.
The Dry bulk market
For quite some time dry bulk analysts have focused on the order book and potential oversupply of dry bulk vessels. In 2011 more than 1100 vessels entered the market out of which 250 were Capesizes and 290 Panamaxes. In other words, more or less one vessel from each segment hit the water every working day last year.
At the beginning of 2011 the official order book projected that as much as 140 mdwt was scheduled to be delivered during 2011. This represented as much as 25 per cent of the existing fleet back in January 2011.
But the same trend as in 2009 and 2010 occurred also last year. A combination of delays, cancellations and restructuring of contracts resulted in a delivery ratio of 67 per cent compared to the official order book.
Forecasters are questioning the quality of the input to the official order book, which mainly derives from lack of information when cancellation are done and not reported. In addition the ambitious plans of many so called green field yards have not been realistic.
Scrapping, which is mainly a function of the spot market, was at a historic high in 2011. Almost 25 mdwt was scrapped and the average age of the vessels being scrapped was the lowest since 2003. Consequently the net fleet growth was 77 mdwt or close to 14 per cent of the existing fleet.
With such supply growth we should have expected a dramatic drop in utilization and earnings. That did not happen, at least not to the same extent as most analysts predicted. For the smaller sizes earnings were relatively flat throughout the year, while Capesize earnings were split with considerably higher returns in the second half compared to the first half of 2011. There were three factors that made first half particularly difficult. Adverse weather in Australia, with flooding and bad weather conditions in general in the southern hemisphere, the earthquake and devastating tsunami in Japan plus a traditional high influx of newbuildings which takes place at the beginning of every calendar year.
Overall it is believed that the average utilization of the dry bulk fleet during 2011 was around 85 per cent:
The increase in tonnes mile demand was close to 10 per cent, while volume growth on its own was less than 6 per cent. Other elements stabilising the balance were:
- Slow steaming
- Congestion
- Chinese coastal trade.
Since the start of the dry bulk super cycle in 2003 it has been an all about the China story. The country has accounted for about 95 per cent of incremental growth and the dependence of Chinese growth will remain the same coming years. In 2011 dry bulk imports to China increased by 21.5 per cent and in four months last year monthly imports of all dry bulk commodities exceeded 100 million mt.
Looking into the future most forecasters agree that 2012 will be a challenging year for owners of dry bulk tonnage. It is expected that net supply growth could almost reach same levels as in 2011, while demand growth is expected to be slightly lower resulting in lower spot earnings and further downward pressure on asset values. Further out on the curve analysts are giving good reasons for a potential positive fundamental trend shift. In 2013 the order book is considerably smaller and in spite of a bleak outlook for the European economies in particular, demand growth is expected to remain robust.
There are a couple of reasons worth mentioning in this context:
- A combination of poorer quality of the Chinese iron ore production and substantial new capacity of international iron ore entering the market will most likely give a positive arbitrage for Chinese Steel Producers.
- It is expected that Indian ore exports will continue to diminish, which in turn will result in longer sailing distances for iron ore in general
- Imported coal to China is only accounting for 6 per cent of the total Chinese coal consumption and
similarly to iron ore it is expected that positive arbitrage will stimulate imports
- India will continue its strong growth in coal imports and could potentially be forced to import iron ore as well if analysts are right when they forecast Indian steel production in the years to come
Strategy
The Board of Golden Ocean has consistently expressed its concern for the rapidly growing order book which inevitably had to lead to lower utilization of the dry bulk fleet and declining spot earnings and asset values.
As a consequence a conservative chartering strategy has been adopted over a period of time. Presently GOGL only has half a Capesize and one Kamsarmax vessel exposed to the spot market though index linked charter contracts. In 2013 70 per cent of the Capesize capacity and 60 per cent of the Panamax capacity is covered.
The Company observes that the newbuilding program at both yards could face further delays. The situation will be monitored closely and may lead to further restructuring of some of the newbuildings.
Given the state of the spot market it is vitally important to focus on counterparty risk and continue to have a proactive strategy to protect the Company’s values going forward.
Outlook
The Board of Directors expects the first quarter 2012 operating profit to be somewhat lower compared to the fourth quarter 2011. This is due to several reasons: new charter on Ocean Minerva, docking on Channel Navigator leading to off-hire and lower spot market for the open vessels.
The total size of the order book has peaked and is presently being reduced based on massive deliveries.
Based on recent drop in asset values and a continued downward pressure for the dry bulk sector in general, it is expected that attractive investment opportunities will arise. The Company should therefore hopefully bein the forefront to capitalize on the present low cycle and meet a potential positive trend shift with a bigger fleet.
The Company will seek for opportunities with limited equity investments and large exposure can be obtained.
Due to high oil prices and new regulations imposed on the entire shipping industry, GOGL will focus on fuel efficient and eco friendly assets when analyzing acquisition candidates. Consequently, existing fleets of vessels is not the prime target for acquisitions.