I’ll keep this one relatively brief, mainly because it's about tankers. If you don’t know anything about the tanker industry, better stay away. There are very few industries I’ve studied over the years where so much shareholder value has been destroyed on such a regular basis. Pretty much all public tanker companies have a long history of awful returns, massive shareholder dilution, bad management, weird holding constructions with plenty of ‘advisory fees’ leaking out of the company (generally to management). Castor Maritime is no different. Just look at the chart below... massive destruction of shareholder value. You have been warned.
So why am I looking at this thing?
One reason I keep an eye out on tanker companies is because of the industry dynamics. For reasons I won’t delve into, generally, tankers have one or two good years over the cycle where they make a lot of money while losing truckloads of money during the rest of the cycle. The main reason profits tend to be explosive is a market environment (temporarily) causing high tanker rates, combined with a tanker company’s massive fixed cost base. Simply put, if a tanker has daily all-in costs of $17k (think opex, depreciation, financing, maintenance), it needs daily charter rates of $17k just to make a zero return. Most of the time, charter rates hover at or below this level, so the tankers lose money. Every now and then circumstances push rates higher (the tighter the demand / supply balance for tankers, the higher the spikes), and tankers make a lot of money. If daily rates spike to $40k and stay there, a tanker makes $40k - $17k = $23k cash flow per day. Things can move rapidly in tanker world.
Now, to keep it short, Covid, Russia and Europe’s energy crisis (a.o.) have created a very nice rate environment for oil tankers (both crude and product). Rates have been relatively high for a while now and 2022 has been a great year for oil tankers. Just look at the YTD returns of product tanker companies Torm and Scorpio Tankers.
This brings me to Castor. Castor is mainly a dry bulk shipping company (think coal, grain, metals, etc. for dry bulk commodities). As you might expect, dry bulk shipping is not having a good year. This is the Baltic Dry Index, tracking time charter rates for dry bulk:
Not a good 2022 so far indeed. And looking at the YTD price action of Castor, it should be no surprise what we see:
This brings me finally to why I’m looking at Castor. I said the company is mainly a dry bulk shipper; however, it also owns 8 product tankers (oil). You would not be able to see it from the share price, but these tankers are contributing to Castor having a great year.
Castor reported 9M22 results today. The company is printing money at the moment, mainly helped by its fleet of product tankers, and has now a net cash position. As previously mentioned, you wouldn’t say Castor is having a great year by looking at the price chart.
Interestingly, and the main point of this write-up, last week Castor announced the spin-off of its tanker fleet:
‘Castor  has decided  to effect a spin-off of its tanker fleet comprising one Aframax, five Aframax/LR2 and two Handysize tankers (the “Spin-Off”). In the Spin-Off, Castor shareholders will receive two common shares of Toro Corp. (“Toro”), a newly formed subsidiary that will act as the holding company for the eight tanker vessels, for every five Castor common shares held at the close of business on December 6, 2022.’
The purpose of the spin-off is basically to monetise the good momentum of its product tankers, for which the market seems the be giving Castor little value. Looking at the charts above of Torm and Scorpio, this might be a smart move.
Castor’s enterprise value is c. $130m (c. zero net debt), including ‘Toro’. Toro will get some debt from Castor and $60m preferred shares will be issued to Castor (amongst others); the spin-off is very beneficial to management, as can be expected from tanker companies. There are a few ways to look at the possible value of Toro. Keeping it simple:
The tankers are pretty old, with age averaging ~17 years. Tankers get scrapped at around age 25. Using current scrap value (see recent chart below from Clarksons) as a base for the value of the 8 tankers, we get 8 x $10m = $80m for the metal. Taking the current age of 17 years, we get roughly $175m for second hand prices of the vessels. Keeping in mind that used vessel values as well as the value of scrapping generally go up as the market tightens (like 2022), both are quite large values;
So a big part is just the metal. Add to that the free cash flow that these tankers currently generate. Daily rates for LR2s are now >$50k. Let’s say avg. $40k per day - $15k pd avg. all-in costs = $25k per day * 90 days * 8 tankers = $18m FCF per quarter. Your guess is as good as mine on how long these rates will hold, but over a couple of quarters these things can earn $40m or more should rates remain at current levels.
Summing the value of the vessels, the potential FCF generation (keeping in mind 4Q is a very good quarter for tankers so far), the current booming tanker market and investors looking at charts of Torm and Scorpio as peers, and we could have the recipe for some interesting dynamics in a few weeks as Toro spins-off (both for Castor as well as Toro).
I’m keeping an eye on this one, but remember that tankers are never to invest, only to trade. Again, you have been warned!
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