First Quarter 2014 Results
The Company reports net income of $10.7 million and earnings per share of $0.35 for the first quarter compared with net income of $3.5 million and earnings per share of $0.12 for the preceding quarter. Net income in the first quarter includes $9.7 million, which was received as partial settlement for a claim for damages and unpaid charter hire. The average daily time charter equivalent ("TCE") earned by the Capesize vessels in the first quarter was $25,200 compared with $28,600 in the preceding quarter. In May 2014, the Company estimates an average cash cost breakeven rate for the remainder of 2014 on a TCE basis for its Capesize vessels of $13,000 per vessel per day.
Cash and cash equivalents increased by $9.2 million in the first quarter. The Company generated cash from operating activities of $14.7 million, paid $0.2 million in respect of its newbuildings and paid $5.3 million to shareholders.
The Company's sailing fleet consists of five Capesize bulk carriers. The Battersea and KSL China are employed in the spot market. Golden Zhejiang and Golden Future are employed on index related time charter contracts. The Belgravia is on a time charter contract with estimated expiry in the third quarter this year.
The Company's newbuilding program will consist of 34 Capesize bulk carriers with estimated delivery in 2014-2016, of which 25 will be purchased from Frontline 2012 (see below).
On March 10, 2014 Knightsbridge announced it had agreed to acquire five fuel efficient 180,000 DWT Capesize bulk carrier newbuildings from Frontline 2012 and one Capesize bulk carrier built in 2013 from Hemen for a total consideration of $360 million whereof $186 million in shares of Knightsbridge at $10 per share, $150 million in absorption of remaining newbuilding instalments and $24 million in cash. On April 23, 2014 Knightsbridge issued 15.5 million shares to Frontline 2012 and 3.1 million shares to Hemen. Knightsbridge also took delivery of the Capesize bulk carrier from Hemen. The five newbuilding vessels are expected to be delivered between May and September 2014.
On April 24, 2014 Knightsbridge announced it had agreed to combine Frontline 2012's remaining fleet of 25 fuel efficient vessels with Knightsbridge. Under the agreement in principle, the exchange ratio for the acquisition and share issuance will be based on NAV using March 31, 2014 broker values. The Knightsbridge/Frontline 2012 exchange ratio will be 44%/56%. Accordingly, Knightsbridge has agreed to issue 62.0 million shares to Frontline 2012 and absorb $894 million in net remaining estimated Capex. The closing will be executed in two stages, with 31.0 million shares expected to be issued around September 15, 2014 and 31.0 million shares around March 15, 2015. The transaction is subject to definitive documentation, normal closing conditions and regulatory approvals. The transaction is also subject to consent from Knightsbridge's shareholders to increase the Company's authorized share capital to enable the issuance of the new shares to Frontline 2012.
30,521,550 ordinary shares were outstanding as of March 31, 2014, and the weighted average number of shares outstanding for the quarter was 30,496,806. The Company currently has 49.1 million shares outstanding and following the expected issuance of shares in September 2014 and March 2015, the Company will have 111.1 million shares outstanding and a market capitalization of $1.3 billion based on current share price.
The Board has decided to declare a cash distribution of $0.20 per share. The record date is May 22, 2014, the ex dividend date is May 20, 2014 and the cash distribution will be paid on or around June 5, 2014.
The Company has secured financing of $30 million per vessel for the 11 first newbuildings bought from Frontline 2012 based on a 20 year loan profile. The second hand vessel bought from Hemen will be financed by an existing facility and will enjoy an installment holiday until May 2015.
The Dry Bulk Market
The second biggest economy in the world continued to make the headlines during first quarter of 2014. China has become the favorite of concerns among many observers analyzing the country. The importance for the dry bulk industry is well known and China contributed 83 per cent of global dry bulk growth or 200 million tons in pure volume during 2013. Chinese GDP grew by 7.4 per cent during the first quarter which was in line with expectations. In addition to the positive development in the U.S., several of the European economies showed signs of recovery and on the back of that EU increased its steel production by 6.7 percent compared to same quarter in 2013. The global steel industry and energy coal for utilities are accounting for about 70 percent of seaborne dry bulk transportations and both coal and iron ore volumes increased during first quarter.
China imported 240 million mt of iron ore during the first quarter which is 20 per cent more than the same quarter last year. Coal imports to China came in at 71 million mt or 9.5 per cent more than the first quarter of 2013. Japan imported 49.5 million mt of coal, which again represented an increase of about 9 per cent. Preliminary data is indicating an overall volume growth in seaborne dry bulk trade of 6 percent for the first three months of 2014 against a net fleet growth of about 5 per cent.
About 16 million dwt were delivered and 3.5 million dwt were scrapped during first quarter. Delivery ratio, versus what should have been delivered according to the official order book, is slightly higher this year compared to the previous five years. The main reason is that the current order book has a higher percentage of good quality yards. About 25 million dwt were ordered during the first quarter, almost twice as much as the same quarter last year, but still 10 million dwt less than the fourth quarter of 2013. The order book represents 19 per cent of the total dry bulk fleet.
Capesize vessels earned on average $16,300 per day during the first quarter, and experienced strong volatility ranging from $7,900 per day to $35,000 per day. The market performed better than most forecasters predicted, given that iron ore stockpiles in the major Chinese ports were high by the end of last year. However de-stocking did not take place and stocks remained unchanged during the quarter. We have witnessed some draw down of inventories in recent weeks and the Capesize spot market has reacted accordingly.
Through most of the first quarter expectations for an upturn in earnings were high. This was reflected in the Forward Freight Curve which was in contango, in particular for the second half of 2014. Due to the fact that spot earnings surprised on the upside in combination with a positive sentiment, asset values continued to trend higher in the three first months of the year. The value of a five year old Capesize was up 10 per cent for the quarter and according to broker estimates was worth $48 million.
In April 2014, both spot and forward markets have been under pressure, but most analysts remain confident that the fundamentals should cater for a market upswing within the next few months.
The Frontline 2012 transaction is a transformative step for Knightsbridge and is expected to make the Company the leading US listed Capesize owner. The Board is excited about its portfolio of 34 fuel efficient newbuildings and looks forward to taking delivery of the first two vessels later this month. Based on sea trials of the first newbuilding vessel from SWS, with the optimized hull form and "G type" main engine, the fuel consumption seems to be significantly lower compared to similar sized vessels in service. This should translate into higher time charter equivalent earnings.
With a unique fleet of 39 Capesize vessels and a targeted cash breakeven rate below $15,000 per day, Knightsbridge is in a strong position to benefit from an expected recovery in the dry bulk market.
The Board will seek to grow the Company's dividend per share as the dry bulk market recovers and newbuildings commence operation.