Genco seeks differentiation in commoditized sector

The challenge faced by publicly listed dry bulk companies, and for that matter, tanker companies, is that investors view them as highly commoditized and virtually interchangeable.

Their stocks are valued in relation to what the ships could be sold for in the second-hand market – the liquidation value of the steel – with essentially no premium awarded for the individual brand or management acumen.

U.S.-listed dry bulk companies including Genco and Eagle Bulk (NASDAQ: EGLE) have sought to differentiate themselves by touting an ‘active’ fleet management approach, acting as both owners and operators, not passive owners chartering out ships to operators.

Genco also seeks to differentiate itself from the pack by marketing its ‘barbell’ fleet approach. In investing, a barbell strategy is one in which the middle ground is avoided, and investments are split between high risk/high return and low risk/low return bets.

Genco touts the barbell term to describe a fleet that has both larger Capesizes (bulkers of 100,000 deadweight tons or DWT or more), as well as ships in smaller categories, including Handysizes (35,000 DWT or less). Capesizes are high risk/high return, because they are heavily exposed to iron ore and coal imports to China, while smaller ship categories such as Handysizes are less volatile, because they can carry a wide variety of commodities shipped to a wide variety of destinations.

In other words, saying you have a barbell fleet strategy is another way of saying you have a diversified fleet – a very common strategy in shipping.

“During the first quarter of 2019, we drew upon our active commercial strategy and our barbell approach to fleet composition as we effectively operated through a volatile and challenging rate environment,” said Genco chief executive officer John Wobensmith in the earnings release filed after market close on May 8.

“This period highlighted the key advantage of our barbell strategy, which provides direct exposure to both major and minor dry bulk commodities. Specifically, while the Capesize market came under pressure, the earnings for the smaller-class vessels exhibited relative strength during the quarter,” said Wobensmith.

Regarding the active fleet management strategy, Genco, like Eagle Bulk, sees the spread between its achieved rates and the relevant index rates as a key performance indicator.

According to Wobensmith, “We have further developed our commercial platform, which outperformed our benchmark by approximately $2,100 per day on a fleet-wide basis during the first quarter.”

The day before Genco filed its quarterly report, Eagle Bulk announced that its own active fleet management strategy allowed it to outpace the index benchmark by its highest margin ever, around $2,400 per day, during the first quarter.

Genco’s fleet achieved an average rate of just $9,230 per day in the first quarter of 2019, down 12 percent from the same period last year.

The reported rate represents the ‘time charter equivalent’ or TCE rate, which translates spot business sold in dollars per ton of cargo into a fleetwide average measured in dollars per day under the same terms as time charters.

Although Genco’s management put a positive spin on the advantages of its strategies, rate performance appears to be deteriorating in the second quarter.

Currently, it has 64 percent of its available days booked for the second quarter at a TCE rate of $7,220 per day, well below first-quarter levels and down 35 percent from the second quarter rates announced at the same time in 2018.

As for its barbell strategy of owning both big and small bulkers, Genco’s second-quarter rates booked to date are down in both categories. Rates for the larger Capesizes are down by 54 percent, and rates for Handysizes are down by 36 percent.