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Earnings Call Analysis
Q3-2023 Analysis
Golden Ocean Group Ltd
In the third quarter of 2023, the company's financial stand was highlighted by an adjusted EBITDA of $78.9 million, a slight drop from $80.4 million in Q2. Net profit was reported at $28.7 million with an earnings per share (EPS) of $0.14, which fell from $34.9 million net profit and an EPS of $0.17 in Q2. The fleet achieved average Time Charter Equivalent (TCE) rates of $17,100 per day, with Capesize and Panamax vessels earning $18,200 and $15,400 per day, respectively. Looking ahead to Q4, TCE is expected to rise to $23,045 per day for Capesize and $17,250 for Panamax. Ship trading maneuvers included profitable sales of a Supramax vessel, which is expected to recognize a gain of around $6 million, and a Panamax vessel, which brought in $1 million in gain and $7 million in net cash. Furthermore, a dividend payment of $0.10 per share was declared for Q3.
The company successfully reduced General & Administrative (G&A) expenses to $4.4 million from $5.2 million in Q2, bringing down daily G&A to $470 from $560 per day – a commendable cost control measure. Operating expenses reached $64.5 million, up from Q2's $62.4 million, attributed to increased ship days and changes of technical managers at around $3 million, offset by lower expenditures in other areas.
A rise in net interest expenses was recorded at $28 million, up from $23 million due to hikes in reference rates and higher average debt. However, this increase was partly mitigated by gains from interest rate swaps and bunker derivatives, totaling $11.9 million, which include both realized cash gains and mark-to-market advantages due to rising long-term interest rates.
The company managed to balance shareholder returns with effective capital investment. A $19.9 million dividend payment for Q2's results and an additional share repurchase payment demonstrated this commitment. Q3's investment cash flow stood at $88.5 million, dominated by delivery and installation costs for newer vessels, resulting in a net decrease in cash of $7.8 million. Still, the company maintained $99.7 million in cash and equivalents, with the option to tap into $50 million in undrawn credit facilities, if needed.
As of the end of Q3, the company had a solid capital structure with an average fleet-wide loan-to-value (LTV) ratio under the company's debt facilities at 45.6%. With book equity of $1.9 billion, the ratio of equity to total assets was a healthy 53%, indicating a conservative approach to leveraging and a well-capitalized balance sheet to support future operations and investments.
Good day, and thank you for standing by. Welcome to the Q3 2023 Golden Ocean Group Limited Earnings Conference Call and Webcast. [Operator Instructions] Please note that today's conference is being recorded. I would now like to turn the conference over to your speaker, Lars-Christian Svensen, Interim CEO. Please go ahead, sir.
Hi there, and a very good afternoon from Oslo. My name is Lars-Christian Svensen, and I'm the interim CEO of Golden Ocean. Today, CFO, Peder Simonsen and I will guide you through our Q3 numbers and update you on recent activities in Golden Ocean and our forward outlook.
Here are our highlights for Q3. Our adjusted EBITDA in the third quarter of 2023 ended up at $78.9 million compared to $80.4 million in the second quarter. We delivered a net profit of $28.7 million and earnings per share of $0.14. This compared with net profit of $34.9 million and earnings per share of $0.17 for the second quarter. Our TCE rates for Capesize and Panamax vessels were $18,200 per day and $15,400 per day, respectively, combined a total fleet wide net TCE of $17,100. For Q4, we have secured a net TCE of $23,045 per day for 79% of the Capesize days and $17,250 per day for 83% of the Panamax days.
For Q1, we have secured a net TCE of $21,700 per day for 12% of the Capesize days and $15,600 per day for 23% of the Panamax days. During Q3, we have also entered into back-to-back agreements to buy and sell a Supramax vessel, which we held as a purchase option. The company expects to recognize a gain from the sale of approximately $6 million upon delivery of the vessel and the expected delivery date is before year-end. We also completed the sale and delivery of one of our Panamax vessels to new owners, recognizing a gain from the sale of about $1 million and net cash proceeds of about $7 million. True to the dividend policy, we declared a dividend of $0.10 per share for the third quarter of 2023.
With that, I will pass the word over to Peder.
Thank you, Lars-Christian. If we move to the -- our profit and loss. We delivered strong commercial performance with Cape TCE rates coming in at $18,200, slightly down from previous quarter, and Panamax is coming in at $15,400, in line with previous quarter.
Our total fleet-wide time charter equivalent was $17,100, which was materially unchanged from Q2. We had 2 ships dry-docked in Q3 versus 6 ships in Q2, resulting in approximately 115 days off-hire versus 215 days off-hire in Q2. We have 2 ships expected to dry dock in Q4, which are expected to complete -- be complete by the second half of the quarter. We added just below 550 vessel days compared to Q2 through new ship deliveries, net of vessel sales in Q3. Our net revenues came in at $156.6 million compared to $154 million in Q2.
Looking at our operating expenses. We recorded $64.5 million versus $62.4 million in the previous quarter. This was impacted by additional ship days compared to the previous quarter. In addition, we recorded a -- approximately $3 million expense relating to the change of technical managers on certain of our ships. This was offset by few dry dockings in this quarter compared to previous quarter, and also offset by lower OpEx reclassified from charter hire with fewer ships being chartered in on average during the quarter. The reclassified charter hire was $4.9 million in Q3 versus $6.2 million in Q2.
Our general and administrative expenses came in at $4.4 million, down from $5.2 million in Q2, which is fairly unchanged when adjusting for nonrecurring items in Q2. Our daily G&A ended at $470 per day, net of cost recharge to affiliated companies, down from $560 per day in Q2. Our charter hire expense were $8.3 million, down from $10.2 million, due to fewer vessel days in the trading portfolio, and an adjusted EBITDA of $78.9 million versus $80.4 million in Q2.
Looking at the net financial expenses. We recorded $28 million in net interest expense versus $23 million in Q2, a change due to higher reference rates and higher average debt in the quarter. The increase in interest rates also needs to be seen in relation to the realized portion of the interest rate swap portfolio, which impacted our derivatives and other financial income in the quarter.
We recorded a gain of $11.9 million compared to a gain of $14.3 million, of which $10.6 million relates to interest rate swaps and $1.8 million relate to bunker derivatives and FFA gains. And of the $10.6 million, $4.9 million is realized cash gains and $5.8 million is mark-to-market gains following an increase in long-term interest rates.
Results from investments in associates. We recorded a loss of $300,000 compared to a gain of $4.9 million in Q2, which relates to our investments in SwissMarine, TFG and UFC, a net profit of $28.7 million and $0.14 per share and a dividend declared of $0.10 for the quarter.
Moving to the next slide. Our cash flow from operations came in at $47.4 million, which includes $600,000 dividend from associated companies. Our cash flow provided from financing came in at $33.5 million. We recorded $32.4 million drawdown relating to delivery of 1 Newcastlemax vessel. We drew $40 million relating to deliveries of 2 Kamsarmax newbuildings, and we drew $25 million under our revolving credit facility. This was offset by $7.6 million prepayment relating to the sale of 1 Panamax vessel and $35.8 million in scheduled debt and lease repayments.
We recorded a dividend payment of $19.9 million relating to our Q2 results and a $900,000 payment for share repurchases. Our cash flow used in investments was $88.5 million, which mainly relates to $45.3 million relating to the delivery of the last Newcastlemax vessel, $58.1 million in installments and costs relating to our Kamsarmax newbuildings. And this was offset by $14.8 million in net proceeds from the sale of a Panamax vessel. Total net decrease in cash of $7.8 million during Q3.
Moving to the balance sheet. We had a cash and cash equivalents of $99.7 million, including $2.2 million of restricted cash at the end of Q3. In addition, we had $50 million in undrawn available credit facilities at quarter end. Our debt and lease liabilities totaled $1.5 billion, end of Q3, up by approximately $72 million since Q2. Our average fleet-wide loan-to-value under the company's debt facilities per quarter end was 45.6%. With a book equity of $1.9 billion, we had a ratio of equity to total assets of approximately 53% at the end of Q3.
With that, I give the word back to Lars-Christian.
Thank you, Peder. In Golden Ocean, we'd like to focus on the larger vessels where they have the most volatility and also potential upside historically. A young and modern fleet, which currently holds an average of 7 years allows us to constantly beat the market over time. And with our current vessel count on 95, we offer a large commercial platform.
Our market cap of $1.5 billion in dual listings in New York and Oslo provide solid liquidity for our shareholders. All of the above should make Golden Ocean an attractive go-to company for all investors wanting dry bulk exposure.
As I mentioned in our previous slide, we're proud of a young and modern fleet. However, it's just as important to maintain a low cash breakeven to float in practically any market, illustrated here with our 60 Capesize vessels, our Cape and Newcastlemax cash breakeven over our entire fleet holds at $14,800 per day. Due to our fleet composition and clinical execution, we have outperformed the market with about $5,000 per day so far this year. If you deduct that premium from the $14,800, Golden Ocean's adjusted cash breakeven is below $10,000 per day.
From the bottom left historical graph, you can clearly see the Golden Ocean modern fleet combined with an industry low cash breakeven, much due to excellent financing will make money in almost any market. We will continue to invest in our vessels to increase our fleet premium towards the market and thus decrease our adjusted cash breakeven further.
Not only should we be considered a market-leading company with high liquidity, but a company that has a massive upside potential with downside protection well covered. Albeit volatile, Q3 finished on a strong note for both Panamax and Capesize. China is continuing to import iron ore, bauxite, coal and agri products surpassing last year's levels. Even so, the Chinese iron ore and steel stockpiles are decreasing, much due to a huge steel export program.
We have seen increased tonne miles in both segments and with the seasonality coming to life, the Panamax and Cape sectors look to finish 2023 on a strong note.
The iron ore trade has come into full bloom so far in 2023, with steady Chinese demand and continuous imports from both Brazil and Australia. Brazil will, for the first time since the Brumadinho incident delivered around high yearly targets. The commodity price itself is pushing $130 per tonne, which has led to frustration in the Chinese government and steel mills as their stockpiles continue to diminish.
India has had a declining iron ore export throughout the third quarter. And in addition, they have concluded a large iron ore contract from Brazil to India for 5 million tonnes, which can indicate a new trend and trading pattern for dry cargo. For the tonne mile scenario, we would very much welcome more iron ore imports to India from Brazil.
So where has all the increased landed iron ore tonnes been absorbed? Well, China is the world's largest steel producer accounting for 56% of global steel output. Contrary to negative macro news, China's Steel production is up 2% year-on-year with a solid 4.5% increase in Q3.
Although property investments are down about 9%, we see that the Chinese iron ore production is down and rotation to technology-intensive manufacturing and energy transition with infrastructure investment is up 9% year-on-year, and private manufacturing investments were up 6%. In addition, Chinese car exports are up 62% as deluxe [indiscernible] exports 30% year-on-year, which equates to about 80 million tonnes of iron ore.
As we have discussed early this year, the bauxite trade from Guinea has developed into a steady long-haul Capesize trade predominantly into China. This bauxite trade has dominated a total global Cape tonne mile with a staggering 12.5%. In addition, it's inversely seasonal to the iron ore trade from Brazil, which makes it tempting to assume that the coming Q1 will be more volatile and interesting than we've seen in many years.
We see an upside to this trade into 2024, and we will position large parts of our fleet accordingly. The supply side is still looking vastly compelling in the dry space. The total dry order book is around 8% of the total fleet and even more [indiscernible] as the Capesize segment where we have 5% of the total fleet ordered for newbuildings. Historically, this remains at an all-time low and combined with unusual low congestion, it still suggests that the downside is priced already.
To round off this presentation. We would like to show you the significant earnings potential in Golden Ocean as we finish off the volatile dry cargo year for 2023. Keeping in mind the premium we achieved on our fleet, the graph on the right shows the substantial cash flow potential and yield at various freight levels.
As an example, to achieve a 25% yield, you must need an average Baltic Index Rate of $20,000 per day, if you apply the 2023 year-to-date performed Golden Ocean premium of $5,000, while the current spot market suggests a free cash flow yield of approximately 30%.
With that, thank you very much for listening, and I will pass the word back over to the operator.
[Operator Instructions] We are now going to proceed with our first question. And the questions come from the line of Sherif Elmaghrabi from BTIG.
I just want to first focus on the Supramax that you sold. It sounds like the purchase option and then subsequent sale was a pretty unique opportunity. But are there any other upcoming options on the 8 Capes that you've time chartered in, which could present a similar opportunity? Or could you even hang on to that tonnage given where asset prices are today?
Yes. Thank you for that. I think, first of all, when it comes to the Supramax vessel, we -- that is something that we consider noncore business. So for us to be able to do a good market transaction, we thought that was a good idea. When it comes to Cape sizes, which we absolutely consider core business, we are definitely interested in the clearing options, if it makes sense on the market at the time.
Okay. And then turning to scrubbers. The scrubber premiums really widened over the last few months. And so just -- with that in mind, could we see scrubbers installed on other vessels in the fleet as they come in for dry dock or special survey?
Yes, definitely. If there's a young enough asset that we see potential, and we will upgrade as many of them as possible in the next dry dock cycle.
[Operator Instructions] We are now going to proceed with our next question. And the questions come from the line of Omar Nokta from Jefferies.
I just wanted to ask, obviously, you highlighted the -- overall, the strong sort of quality of the Golden Ocean fleet. Wanted to ask, obviously, 3Q was supposed to be generally or had been a pretty soft quarter when we look at just spot market averages, and looking at what companies in this sector have reported. But you guys generally kind of came in sort of flattish or maybe even cash flow generation was a bit better.
So I just wanted to ask kind of what drove that improvement, that sequential sort of modest improvement? Was that sort of well-timed time charters or some spot performance that was a bit beyond expectations? Any color you can give on that?
Yes. No, I think you're entering into the quarter. We were quite covered on the Panamax front. We realized quite quickly that we needed to have some more exposure there to capture the market. So we turned every stone to be able to add on some more spot exposure on the Panamaxes, which yielded well. Same thing with the Capesizes. As we discussed in the previous quarter as well, we had fairly high confidence in the second half this year, simply because of the many drivers that we see on the coal and the bauxites and also Brazil performing the way it should do. So for us, going into this quarter, it was quite clear that we wanted quite a bit of spot exposure. And luckily we got this one up.
Okay. Got it. That makes sense. And then maybe just as a follow-up, you highlighted the looking to further invest in the fleet to capitalize or, at least, create excess earnings potential. You've got the -- your order book program basically is close to wrapping up here with those 4 Kamsarmaxes due in 2024. Recently, we've seen several of your competitors order ships on a dual fuel basis that deliver out in '26, '27, I think even we saw '28.
How are you guys thinking about the newbuilding order because it is now in terms of -- obviously, you mentioned the fleet sizes at 8%? This is a relatively small. But in terms of Golden Ocean and looking forward, how do you think about where you stand with newbuildings? Are you comfortable with these 4, taking delivery of them and then moving on? Or can we expect you to dive deeper into new buildings?
I think for our focus at the moment, we're very happy with the newbuilding program that we had on and looking to complete next year. We're definitely there to grow in terms of vessels on the [indiscernible]. We define modern tonnage 2, 3, 4 years old. That fit well into our strategy and fleet. We think that as a better investment at the moment than to go to the yards and place a newbuilding order. In respect to which fuel to attack, we haven't made up our mind there yet and maybe not as clear as the other competitors. So we prefer to invest in our fleet, what we already have that already makes money, and grow the fleet that way.
[Operator Instructions] We have no further questions at this time. I will like to hand back to you for closing remarks.
Thanks a lot for dialing in, and we'll see you next quarter.
Thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you.