Major Impairment Hits Star Bulk Carriers Corp. Results

Star Bulk Carriers Corp., a global shipping company focusing on the transportation of dry bulk cargoes, announced its unaudited financial and operating results for the second quarter and the first half of 2019.

Petros Pappas, Chief Executive Officer of Star Bulk, commented:

“Star Bulk announced today its second quarter 2019 financial results, reporting TCE Revenues of $92.7 million, Adjusted EBITDA of $31.2 million and a Net Loss of $40.2 million and Adjusted Net Loss of $20.5 million during a period of significant dry bulk market weakness. Our average TCE for the quarter, was at $10,549 per vessel 4% above index despite substantial at times charter discounts we had to accept in order to reposition our fleet closer to the shipyards where we perform our scrubber installations, while daily Opex and Net Cash G&A expenses per vessel remained at top of class levels at $3,939/day and $1,009/day respectively. As of today, we have fixed 59% of Q3 2019 days at average TCE rates of $14,420.

During Q2, we installed 26 scrubber towers completing 10 dry docks as well an additional 8 dry docks in progress. All these dry dock costs were expensed during the quarter exceeding $19 million. The days spent for dry docks/scrubber installations were 930 amounting to the equivalent of $9.8 million in foregone income. In total, up to June 30th 2019, we have installed 34 scrubbers half of which in Capes and Newcastlemaxes taking advantage of their market weakness at that time.

We maintain a steadfast focus on our end goal and, as already communicated to our shareholders, 2019 marks a year of planting the seeds for a strong performance in 2020. Our plan is, without disturbing the dry dock cycle, to accelerate all our 2020 dry docks to 2019, so that we complete works concurrently with the scrubber installations and have no stoppages in 2020 enabling us to maximize our scrubber return. We expect to have 81 scrubber towers installed by the end of September, 104 by the end of December 2019, leaving for Q1 2020 10 scrubber installations on the Supramaxes we have recently acquired.

As far as the market is concerned, and despite the trade war shortcomings, we are very optimistic up to the end of 2019 and especially on the bigger sizes as a consequence of much improved Brazilian iron ore exports along with reduced Chinese stocks and higher bauxite imports in China as well as, major supply inefficiencies due to extensive scrubber installations, shipyard overbookings and consequent substantial off-hires. During 2020, without a trade war resolution, we may on the macro picture see a world economy slowdown whereas, on the micro-world of shipping, we expect further slow steaming due to expensive bunkers, increased scrapping of inefficient/older tonnage and, overall, an improved demand picture from that of 2019 as a whole, despite the potential limitations.”

Recent Developments

Fleet Update

On May 28, 2019 and July 15, 2019, we took delivery of the Newcastlemax vessels Debbie H (ex-HN 1389) and Star Ayesha (ex-HN1390), with a carrying capacity of 206,861 and 206,852 deadweight tons, respectively, both built at Shanghai Waigaoqiao Shipbuilding Co., Ltd. (“SWS”). The acquisition of both vessels is financed under bareboat leases with CSSC (Hong Kong) Shipping Company Limited (“CSSC Leasing”).
Pursuant to the previously announced agreement, we have agreed to acquire eleven operating dry bulk vessels (the “Delphin Vessels”) from Delphin Shipping LLC. As of the date hereof, we have acquired eight of these eleven vessels, with the first being delivered to us mid-July. The remaining three vessels are expected to be delivered during August 2019. To finance the acquisition of the Delphin Vessels, we have entered into a new seven-year capital lease with China Merchants Bank Leasing. We have recognized $67.2 million in lease obligations in connection with the acquisition of the eight vessels we have acquired as of today.
On June 21, 2019 and July 8, 2019, we agreed to sell the Star Anna, a 2015 built Ultramax vessel and the Star Gamma a 2002 built Supramax vessel. We expect to deliver both vessels to their new owners by the end of September and August, respectively.
Financing Activities

On May 22, 2019, we entered into an agreement to sell the Star Libra and simultaneously entered into a bareboat charter contract with Ocean Trust Co. Ltd. for seven years, with a purchase obligation at the expiration of the bareboat term. We received $34.0 million as consideration for the sale and leaseback agreement, which we used to pay the aggregate outstanding amount under the previous lease agreement of the Star Libra in July 2019.
On July 10, 2019, we entered into an agreement to sell the Star Challenger and simultaneously entered into a bareboat charter party contract with Kyowa Sansho Co. Ltd. for 11 years, with a purchase obligation at the expiration of the bareboat term. The amount of $15.0 million provided under the sale and lease back agreement was used to pay the outstanding amount of approximately $10.9 million under the HSH Nordbank AG $35.0 million Facility.
On July 31, 2019, we entered into a loan agreement with a wholly owned subsidiary of NTT Finance Corporation, the “NTT Facility,” for an amount of $17.5 million, which was used to refinance approximately $11.2 million under the NIBC $32.0 million Facility which was secured by the Star Aquarius. The NTT Facility is secured by a first priority mortgage on the aforementioned vessel and will mature in August 2026.
In July 2019, we entered into a committed term sheet with China Export-Import Bank for a loan of up to $106.5 million (the “CEXIM $106.5 million Facility”). The facility will be available in three tranches of $35.5 million each, and will be used to refinance the outstanding amounts under the lease agreements of the Katie K, the Debbie H and the Star Ayesha. The three tranches are expected to be drawn by October 2019 and will mature 10 years after each drawdown. The CEXIM $106.5 million Facility will be secured by first priority mortgages on the three aforementioned vessels.
In July 2019 and August 2019, we drew down an amount of $2.8 million under the ING $100.6 million Facility and $9.1 million under the DNB $310.0 million Facility, which were used to finance our scrubber installation program. Following these drawdowns, the undrawn portion of scrubber related financing under all of our debt and lease agreements stands at $115.3 million.
Share Count Update

As of the date of this press release we have 94,545,032 common shares outstanding after giving effect to the repurchase of shares under our previously announced share repurchase program, the issuance of new shares in connection with the acquisition of the Delphin Vessels (as described above) and the issuance of shares under our equity incentive plans.
Employment update

As of today, we have fixed employment for approximately 59% of the days in Q3 2019 at average TCE rates of $14,420 per day.

More specifically:

Capesize / Newcastlemax Vessels: approximately 48% of Q3 2019 days at $19,780 per day.

Post Panamax / Kamsarmax / Panamax Vessels: approximately 62% of Q3 2019 days at $12,465 per day.

Ultramax / Supramax Vessels: approximately 67% of Q3 2019 days at $10,960 per day.

Amounts shown throughout the press release and variations in period–on–period comparisons are derived from the actual numbers in our books and records.

Second Quarter 2019 and 2018 Results

Voyage revenues for the second quarter of 2019 increased to $157.8 million from $132.6 million in the second quarter of 2018. Adjusted time charter equivalent revenues (“Adjusted TCE Revenues”) (please see the table at the end of this release for the calculation of the Adjusted TCE Revenues) were $92.1 million for the second quarter of 2019, compared to $91.5 million for the second quarter of 2018. Adjusted TCE Revenues were positively impacted by an increase in the average number of vessels in our fleet to 107.2 in the second quarter of 2019, up from 73.5 in the second quarter of 2018. The TCE rate for the second quarter of 2019 was $10,549 compared to $13,800 for the second quarter of 2018 reflecting the weaker dry bulk market environment in 2019 compared to the same period in 2018.

For the second quarter of 2019, operating loss was $18.4 million, which includes depreciation of $30.0 million. Operating income of $27.3 million for the second quarter of 2018 included depreciation of $22.1 million. Depreciation increased during the second quarter of 2019 due to a higher average number of vessels in our fleet as described above. Operating income declined in the second quarter of 2019 as compared to the second quarter of 2018, because of higher depreciation expense, lower TCE rates as well as the significantly higher dry docking expense following our management’s decision to bring forward to 2019 all the 2020 dry docking services in order to install scrubbers and take advantage of the low freight market environment.

For the second quarter of 2019 we had a net loss of $40.2 million, or $0.44 loss per share, basic and diluted, based on 91,841,090 weighted average basic and diluted shares. Net income for the second quarter of 2018 was $10.7 million, or $0.17 earnings per share, basic and diluted, based on 64,233,289 weighted average basic shares and 64,633,668 weighted average diluted shares, respectively.

Net loss for the second quarter of 2019, included the following significant non-cash items, other than depreciation expense mentioned above:

Unrealized loss on forward freight agreements and bunker swaps of $4.1 million or $0.04 per share, basic and diluted;
Stock-based compensation expense of $2.6 million, or $0.03 per share, basic and diluted, recognized in connection with common shares granted to our directors and employees;
Impairment loss of $3.4 million, or $0.04 per share, basic and diluted, recognized in connection with the agreements signed to sell the Star Anna and Star Gamma;
Loss on bad debt of $1.3 million or $0.01 per basic and diluted share associated with the write‐off of disputed charterer balances; and
Net amortization of the fair value of below and above market acquired time charters of $0.5 million, or $0.01 per share, basic and diluted, associated with time charters attached to vessels acquired. The respective net amortization was recorded as an increase to voyage revenues.
In addition, as mentioned above, we installed scrubbers on certain of our vessels in the three months ended June 30, 2019. Some of these vessels were scheduled to undergo their dry docking surveys due in 2020. In order to avoid any further off hire days for these vessels in 2020, we decided to complete the dry docking survey for the vessels concurrently with the installation of scrubbers in the second quarter of 2019. During the second quarter of 2019, we incurred dry docking expenses of $19.0 million, $8.4 million of which related to accelerated dry dockings due in 2020. During the second quarter of 2019, 10 of our vessels completed their periodic dry docking surveys (4 of which had commenced in the first quarter of 2019), resulting in expenses of $7.0 million while the remaining $12.0 million were incurred in connection with in progress and forthcoming dry dockings. Dry docking expenses for the second quarter of 2018 were $2.1 million corresponding to two of our vessels that underwent their periodic dry docking surveys.

Net income for the second quarter of 2018, included the following significant non-cash items, other than depreciation expense:

Stock-based compensation expense of $3.9 million, or $0.06 per share, basic and diluted, recognized in connection with common shares granted to our directors and employees; and
Unrealized gain on forward freight agreements and bunker swaps of $1.3 million, or $0.02 per share, basic and diluted.
Adjusted net loss for the second quarter of 2019, which excludes certain non-cash items and the accelerated dry docking expenses that were due in 2020 discussed above, was $20.5 million, or $0.22 loss per share, basic and diluted, compared to adjusted net income of $13.4 million, or $0.21 earnings per share, basic and diluted, for the second quarter of 2018. A reconciliation of Net income/(loss) to Adjusted Net income/(loss) and Adjusted earnings/(loss) per share basic and diluted is set forth in the financial tables contained in this release.

Adjusted EBITDA for the second quarter of 2019, which excludes certain non-cash items and the accelerated dry docking expenses that were due in 2020 discussed above, was $31.2 million, compared to $52.0 million for the second quarter of 2018. A reconciliation of EBITDA and Adjusted EBITDA to net cash provided by/(used in) operating activities is set forth in the financial tables contained in this release.

For the second quarters of 2019 and 2018, vessel operating expenses were $39.1 million and $27.4 million, respectively. This increase was primarily due to the increase in the average number of vessels to 107.2 from 73.5. Vessel operating expenses for the second quarter of 2019 included pre-delivery and pre-joining expenses of $0.6 million compared to $0.7 million in the second quarter of 2018. Excluding these expenses, our average daily operating expenses per vessel for the second quarter of 2019 and 2018, were $3,939 and $3,996, respectively.

General and administrative expenses for each of the second quarters of 2019 and 2018 were $9.8 million and $10.4 million, respectively. Management fees for the second quarters of 2019 and 2018 were $4.1 million and $2.0 million, respectively. The increase is attributable to the new management agreements entered into in connection with the acquired fleets during the third quarter of 2018. Our average daily net cash general and administrative expenses per vessel (including management fees) for the second quarter of 2019 were reduced to $1,009 from $1,072 during the second quarter of 2018 (please see the table at the end of this release for the calculation of the Average daily Net Cash G&A expenses per vessel).

Charter-in hire expense for the second quarters of 2019 and 2018 was $21.8 million and $24.3 million, respectively. The decrease is due to lower charter-in rates counterbalanced by the increase in charter-in days of 1,468 in the second quarter of 2019 compared to 1,157 in the second quarter of 2018. In both quarters, the charter-in days are attributable to the activities of our subsidiary Star Logistics.

For the second quarter of 2019 we incurred a loss on forward freight agreements and bunker swaps of $1.0 million, consisting of realized gain of $3.1 million and unrealized loss of $4.1 million. For the second quarter of 2018 we incurred a gain on forward freight agreements and bunker swaps of $2.8 million, consisting of realized gain of $1.5 million and unrealized gain of $1.3 million.

Interest and finance costs net of interest and other income/ (loss) for the second quarters of 2019 and 2018 were $21.0 million and $16.6 million, respectively. The increase is primarily attributable to the increase in the weighted average balance of our outstanding indebtedness of $1,474.6 million during the second quarter of 2019 compared to $1,063.4 million for the same period in 2018.

First half 2019 and 2018 Results

Voyage revenues for the first half of 2019 increased to $324.3 million from $253.7 million in the first half of 2018. Adjusted TCE Revenues were $195.7 million for the first half of 2019, compared to $173.2 million for the first half of 2018. Adjusted TCE Revenues were positively impacted by an increase in the average number of vessels in our fleet to 107.2 in the first half of 2019, up from 72.8 in the first half of 2018. The TCE rate for the first half of 2019 was $10,880 compared to $13,208 for the first half of 2018 reflecting the weaker dry bulk market environment in 2019 compared to the same period in 2018.

For the first half of 2019, operating loss was $1.2 million, which includes depreciation of $59.8 million. Operating income of $50.5 million for the first half of 2018 included depreciation of $43.2 million. Depreciation increased during the first half of 2019 due to the higher average number of vessels in our fleet as described above. Operating income declined in the first half of 2019 as compared to the first half of 2018, because of higher depreciation expense, lower TCE rates as well as the significantly higher dry docking expense as discussed above.

For the first half of 2019 we had a net loss of $45.5 million, or $0.49 loss per share, basic and diluted, based on 92,457,415 weighted average basic and diluted shares. Net income for the first half of 2018 was $20.6 million, or $0.32 earnings per share, basic and diluted, based on 64,170,654 weighted average basic shares and 64,468,860 weighted average diluted shares, respectively.

Net loss for the first half of 2019, included the following significant non-cash items, other than depreciation expense mentioned above:

Unrealized loss on forward freight agreements and bunker swaps of $1.0 million or $0.01 per share, basic and diluted;
Stock-based compensation expense of $2.9 million, or $0.03 per share, basic and diluted, recognized in connection with common shares granted to our directors and employees;
Impairment loss of $3.4 million, or $0.04 per share, basic and diluted, recognized in connection with the agreement to sell the vessels Star Anna and Star Gamma;
Loss on bad debt of $1.3 million or $0.01 per basic and diluted share associated with the write‐off of disputed charterer balances; and
Net amortization of the fair value of below and above market acquired time charters of $1.2 million, or $0.01 per share, basic and diluted, associated with time charters attached to vessels acquired. The respective net amortization was recorded as an increase to voyage revenues.
In addition, during the first half of 2019, we incurred dry docking expenses of $28.7 million, $10.5 of which relating to accelerated dry dockings due in 2020. During the first half of 2019, 12 of our vessels completed their periodic dry docking surveys, resulting in expenses of $12.3 million and remaining $16.4 million were incurred in connection with in progress and forthcoming dry dockings. Dry docking expenses for the first half of 2018 were $3.3 million corresponding to two of our vessels that underwent their periodic dry docking surveys.

Net income for the first half of 2018, included the following significant non-cash items, other than depreciation expense:

Stock-based compensation expense of $5.0 million, or $0.08 per share, basic and diluted, recognized in connection with common shares granted to our directors and employees; and
Unrealized gain on forward freight agreements and bunker swaps of $0.3 million, or $0.01 per share, basic and diluted.
Adjusted net loss for the first half of 2019, which excludes for certain non-cash items and the accelerated dry docking expenses that were due in 2020 discussed above, was $26.9 million, or $0.29 loss per share, basic and diluted, compared to adjusted net income of $25.2 million, or $0.39 earnings per share, basic and diluted, for the first half of 2018. A reconciliation of Net income/(loss) to Adjusted Net income/(loss) and Adjusted earnings/(loss) per share basic and diluted is set forth in the financial tables contained in this release.

Adjusted EBITDA for the first half of 2019, which excludes certain non-cash items and the accelerated dry docking expenses that were due in 2020 discussed above, was $77.2 million, compared to $98.5 million for the first half of 2018. A reconciliation of EBITDA and Adjusted EBITDA to net cash provided by/(used in) operating activities is set forth in the financial tables contained in this release.

For the first half of 2019 and of 2018, vessel operating expenses were $78.1 million and $53.7 million, respectively. This increase was primarily due to the increase in the average number of vessels to 107.2 from 72.8. Vessel operating expenses for the first half of 2019 included pre-delivery and pre-joining expenses of $0.9 million compared to $1.1 million in the first half of 2018. Excluding these expenses, our average daily operating expenses per vessel for the first half of 2019 and 2018, were $3,977 and $3,993, respectively.

General and administrative expenses for each of the first half of 2019 and 2018 were $17.1 million and $17.7 million, respectively. Management fees for the first half of 2019 and 2018 were $8.2 million and $3.9 million, respectively. The increase is attributable to the new management agreements entered into in connection with the fleets we acquired in the third quarter of 2018. Our average daily net cash general and administrative expenses per vessel (including management fees) for the first half of 2019 were reduced to $990 from $1,086 during the first half of 2018 (please see the table at the end of this release for the calculation of the Average daily Net Cash G&A expenses per vessel).

Charter-in hire expense for the first half of 2019 and of 2018 was $44.4 million and $40.8 million, respectively. The increase is due to charter-in days of 3,208 in the first half of 2019 compared to 2,085 in the first half of 2018. In both periods, the charter in days are attributable to the activities of our subsidiary Star Logistics.

For the first half of 2019 we incurred a gain on forward freight agreements and bunker swaps of $7.4 million, consisting of realized gain of $8.4 million and unrealized loss of $1.0 million. For the first half of 2018 we incurred a gain on forward freight agreements and bunker swaps of $2.0 million, consisting of unrealized gain of $0.3 million and realized gain of $1.7 million.

Interest and finance costs net of interest and other income/ (loss) for the first half of 2019 and 2018 were $42.7 million and $29.9 million, respectively. The increase is primarily attributable to the increase in the weighted average balance of our outstanding indebtedness of $1,468.4 million during the first half of 2019 compared to $1,054.3 million for the same period in 2018.

Liquidity and Capital Resources
Cash Flows
Net cash provided by operating activities for the first half of 2019 was $7.6 million, whereas net cash provided by operating activities for the first half of 2018 was $61.1 million.

The reduction was due to the weaker dry bulk market in the first half of 2019 compared to the same period in 2018, which resulted in a significantly lower TCE rate of $10,880 compared to $13,208 for the first half of 2018. Despite the increase in the average number of vessels in our fleet, the decrease in TCE rates as well as the increased dry docking activity during the first half of 2019, resulted in a decrease of Adjusted EBITDA to $77.2 million for the first half of 2019 from $98.5 million for the corresponding period in 2018. This decrease in Adjusted EBITDA was combined with (i) a net working capital outflow of $19.1 million during the first half of 2019 compared to a net working capital outflow of $6.9 million for the first half of 2018 and (ii) higher net interest expense for the first half 2019 compared to the corresponding period in 2018.

Net cash used in investing activities for the first half of 2019 and 2018 was $132.1 million and $115.6 million, respectively.

For the first half of 2019, net cash used in investing activities mainly consisted of (i) $93.2 million paid in connection with our newbuilding and newly acquired vessels and other capitalized expenses and (ii) $64.6 million paid for the acquisition and installation of scrubber equipment and ballast water management systems for certain of our vessels, offset partially by proceeds from the sale of three vessels concluded during the period of $20.0 million and insurance proceeds of $5.7 million.

For the first half of 2018, net cash used in investing activities mainly consisted of $115.9 million paid for advances and other capitalized expenses for our newbuilding and newly delivered vessels delivered during the period.

Net cash provided by financing activities for the first half of 2019 and 2018 was $7.0 million and $21.5 million, respectively.

For the first half of 2019, net cash provided by financing activities mainly consisted of:

$392.4 million of proceeds from financing including financing from leases;
offset by:

$366.1 million lease and debt obligations paid in aggregate in connection with: (i) the regular amortization of outstanding vessel financings and capital lease installments, and (ii) early repayment due to the refinancing of certain of our finance agreements and the sale of three of our vessels;
$11.6 million used mainly to repurchase our common shares in open market transactions;
$6.2 million of financing fees paid in connection with the new financing agreements; and
$1.5 million of prepayment fees paid in connection with early repaid debt.
For the first half of 2018, net cash provided by financing activities mainly consisted of:

$130.0 million of proceeds from financing transactions including financing from leases
offset partially by:

$108.7 million paid in aggregate in connection with: (i) $43.1 million at regular amortization of outstanding vessel financings and capital lease installments and (iii) $65.6 million of excess cash for the quarters ended December 31, 2017 and March 31, 2018, paid to our lenders pursuant to the cash sweep mechanism in our Supplemental Agreements, during the first half 2018.
Full Report

Source: Star Bulk Carriers Corp.