Who's up for a 200% forward cash flow yield? How about hitchhiking on the growth of India and the Orient, while riding the wave of increasing environmental regulations, and profiting from the US spats with China and Iran? You've come to the right place, but there's a catch. Actually, there are seven.
Navios Maritime Acquisition Corporation (ticker NNA) trades in the $7's, but they own a fleet worth $86 a share based on secondhand transactions. Unfortunately, they owe $86 per share to creditors. Before you blacklist "White Chip Stocks", a few bits and bobs add another ~$8.
I bought in after the latest round of dilution sent the stock below $8. Since then, the stock has fallen to $7.38, and I'm buying every downtick. Judging by my trusty sentiment indicator, Seeking Alpha message boards, tankers are about to tank, Angeliki Frangou is about to run off with the money, and time is running out. Here is a representative comment chain post-dilution:
Grannyscookiejar123 - Stupid People!!!
Stephen - I'm NEVER putting money into anything Navios again.
Rodrigo - Crooks peddling diamonds.
Hot$tocks - Why oh why did I not place a sell at $11. Back to Tesla and safety.
Jacob296 - There goes retirement.
Joanofarc - My mantra from now on - Never Navios!
As revealed in my first post, I'm a big fat tanker bull. Shrinking supply, exploding demand, and untoward operating leverage make for a true roller coaster. Everything Navios has lit money on fire for a decade, but tanker rates are finally breaking out, and new supply is restricted through at least 2021. Pipeline completions will more than double US crude export capacity over the next 18 months, and US exports have to travel twice as far as Saudi crude to get to China, India, Malaysia, and the rest of the gang. Meanwhile, boats are being taken offline for scrubber retrofits.
If you've been following shipping at all, you know that IMO 2020 will crush demand for high sulfur bunker fuels, while multiplying demand for compliant fuels overnight. High sulfur bunker fuels come from dregs at the bottom of the barrel, with little in the way of alternative uses. When demand shuts off, there's nowhere to put it, short of floating storage, which would take even more boats offline. In fact, if all of the excess HSFO went to floating storage, it would fill up the entire global Aframax fleet in three years. Will this happen? Of course not. But the math is tantalizing. Let's say we have 200 million surplus barrels of heavy fuel oil, which would be a few months' worth of the daily surplus. An Aframax can carry 750k barrels of oil. It's easy to see how floating storage could take out a significant portion of the ~700 strong Aframax fleet.
While that's nice, sanctions and scrubber installations are pulling ships off the water today. America recently sanctioned some of COSCO Shipping's boats, after catching COSCO sneaking oil from Iran. Clarksons, a reputable source, says that 26 VLCCs were affected. VesselsValue, another credible source, says that 4 VLCCs were affected. But the real story is that many Western charterers shunned COSCO entirely. COSCO controls over 5% of the VLCC fleet, and panicking charterers pushed headline rates to $300,000 per day as traders panicked to lock in replacement charters, prompting the U.S. Treasury Department to issue a waiver, allowing traders until December 20 to wind down the transactions. Shortly afterwards, rates floated down to $70,000 per day, a measly 20x last year's lows.
As we learned in the latest round of Iransanity, shipping is such a terrible industry that almost any change is for the better. Disruptions in oil supply translate directly into arbitrage opportunities for trading houses, boosting tanker demand. The work of a boat is to resolve supply/demand imbalances between one place and another. Chaos spells disequilibrium, higher demand for shipping, and mushrooming profits. If you don't believe me, take a 10 year chart of oil price volatility and compare it to tanker rates. I rarely leave my statistician's cubbyhole, but it's hard not to notice when Iran is launching missiles left and right (allegedly...) and China and the US are playing "trade war".
NNA owns crude and product tankers, split between VLCCs, LR1s, and MRs. One share of Navios controls almost $100 worth of tankers and assorted receivables - all as spot rates are surging, demand for oil transportation continues to grow, and scheduled deliveries of new tankers as a percentage of the existing fleet remain at the lowest level since Microsoft was a hot stock. With IMO 2020 pandemonium scheduled to break out sometime between now and mid-December, I'm buckling up to enjoy the ride.
Needless to say, Navios has issues. That's why it's down 95% since the IPO. NNA owes more than most competitors even have. NNA's insolvent parent owns a third of the common, and a Greek lady is calling the shots. NNA pays management fees to a company controlled by the CEO. NNA has to come up with $700,000,000 in cash to cover the 2021 debt wall, no mean feat for a company with a market cap barely over $100 million. They don't have scrubbers, forcing Navios to burn high sulfur fuels, which could add significantly to daily operating costs. NNA has diluted investors badly to stay afloat. This is Greece - there are probably loads of dodgy deals we don't know about. And unlike the Greek government, Navios pays a distimctly positive interest rate on its debt (did I mention they have debt?).
If you're still here, it's time for number crunching (also known as "counting your chickens before they hatch"). NNA has 41 tankers. Only God knows how much bunker madness will add to fuel costs, but let's call TCE breakeven ~20k. Let's suppose NNA achieved a $35,000 blended daily rate. Multiply by 365 days in a year x 41 tankers and you get $225 million. Divide by 15.6 million shares outstanding and you get $14 - not to mention free exposure to any increase in vessel values. If NNA earns twice its market cap in a year, I don't think it will be trading at NAV.
Sure, I'm ignoring utilization and plenty of other stuff, but what if VLCC rates stay at $70,000, where they are now? We won't have to wait long to find out.
Angeliki has more brains than she gets credit for. Though she has consistently run Navios into the ground, assured investors the dividend was safe months before slashing it, deftly drained millions into her own pocketbook, and perfectly mistimed every market shift since 2010, she always seems to have an ace up her sleeve. She owns millions of dollars of stock. For now, she's on our side of the table.
If I'm wrong about charter rates, Navios is toast. With rates in the stratosphere and IMO 2020 looming, I think Navios can make it. If not...
Caveat Emptor: This is a Greek shipping company leveraged ten to one.
