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Industrials

Transportation

Eagle Bulk Shipping Inc.

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Fleet renewal program remains active with acquisition of two Ultras.
Yesterday, the acquisition of two 2015-built scrubber-fitted Ultras was announced at a cost of $44 million. The Ultras, which are SDARI-64 design, were built at Jiangsu Hantong Ship Heavy Industry Co. They&nbsp;will be renamed Antwerp Eagle and Valencia Eagle and both should be added to the fleet by the end of 3Q2021.
<div>Figure 1: Fleet Age Profile (Pro forma for pending transactions)</div>
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/EGLEfleetprofile.jpg" style="width: 501px;height: 331px" />&nbsp;
Source: Company reports and Noble Capital Markets estimates.
Sale of older Supra also helps fleet profile.&nbsp; 
 The sale of the Tern, a 2003-built Supra, for $9.7 million was also announced. This move is positive, and it leaves only two other 2003-built Supras left to sell. The sale should close in July prior to the upcoming survey and required BWTS installation. Two other Supras (Jaeger/Cardinal), which are older than 15 years, are generating positive cash flow and likely to remain in the fleet until they can be sold at the right price.
Pro forma fleet expands to 53 and is balanced with fleet consists of 26 Ultras and 27 Supras.&nbsp; 
The fleet renewal program, which began in April 2016, continues and activity has been high over the past several quarters. Combined with the acquisitions of four other Ultramaxes and three 2011-built Supramaxes that should close in 1H2021, the pro forma fleet will total 53 vessels (26 Ultras/27 Supras) with an average age below nine years. The fleet renewal program has expanded the fleet by nine to the highest level ever. 20 older Supramaxes with an average age of ~14 years left the fleet and were replaced with 26 Ultramaxes with an average age of less than five years and three Supramaxes with an average age of about ten years.
The impact on fuel consumption is also positive, with 47 of the pro forma fleet of 53 outfitted with scrubbers. All six of the Ultras acquired this year are outfitted with scrubbers so the fleet remains well positioned to benefit from fuel spreads that are likely to widen as refined product demand normalizes and higher oil prices flow through the refining chain. As the average size of the fleet has expanded into the 59k DWT range from the 55k DWT range five years ago, fuel consumption per sailing day has steadily declined from ~0.61 ton/DWT to ~0.54 ton/DWT.
ATM Equity issuance and asset sales fund acquisitions and temper&nbsp;financial leverage.
The latest acquisitions will be funded with existing cash, including $22.5 million raised using the ATM program. In May, the ATM program was active and 475,894 shares were issued at average price of $47.39/share. There is no rush to lock in any debt financing.&nbsp;A combination of asset sales and equity issuance should dampen the impact of the Ultramax/Supramax acquisitions for $130 million, including the previous announced acquisitions for $86 million.&nbsp;As the acquisitions of the Antwerp and Valencia approach, the financing plans should become clearer. The Tern asset sale of $9.7 million will also partially fund the acquisitions and temper financial leverage.
1Q2021 liquidity was healthy at $119.7 million, including cash of $80.7 million and credit availability of $39.0 million. Availability under the Holdco revolver is expected to increase to $35 million from $24 million post the delivery of the Rotterdam Eagle in June. Total debt consisted of Norwegian bonds of $180.0 million, Ultraco debt of $158.6 million, and Ultraco revolver debt of $55.0 million and convert debt of $114.1 million. In April, the Ultraco debt facility was expanded by $16.5 million to finance the Supra acquisitions and $5.5 million was drawn when the Sankaty Eagle was delivered. Additional draws of $11.0 million are expected when the Newport Eagle and Montauk Eagle are delivered later this month.
Looking at the rest of 2021, stronger operating results should more than offset acquisitions and lower financial leverage. Operating cash flow of $164.1 million is expected to easily cover capex of $23.9 million so free operating cash flow should be $140.3 million, or $11.35/share. With the latest acquisitions, net free cash flow will shift to negative $9.0 million, or -$0.73/share, with working capital expected to be negative $14.3 million and acquisitions net of sales in the $135.5 million range. Debt will increase by $17.3 million and equity issuance will total $34.9 million so cash will still increase by $38.4 million to $127.2 million. Including unamortized financing costs of $16.4 million, total debt should approximate $492.8 million. Given our revised estimates and the new transactions, net debt is now forecast to drop into the $365.6 million range, the net debt/EBITDA ratio should drop to 1.6x from 4.4x in 2020.
Based on our 2022 EBITDA estimate, operating results should further lower financial leverage. Operating cash flow of $221.4 million should more than cover capex of $19.0 million and free operating cash flow should approximate $202.4 million, or $15.75/share. While difficult to predict, we estimate negative working capital of $15.5 million so net free cash flow should approximate $187.5 million, or $14.59/share. Net free cash flow and existing cash should more than cover debt amortization of $39.1 million and debt maturities of $180.0 million so cash is projected to drop $37.3 million to $102.5 million. If the Norwegian bonds are not refinanced and the balance of $168.0 million paid off at maturity in 4Q2022, total debt would approximate $327.3 million and net debt is expected to drop into the $232.7 million range, or a LTM EBITDA/debt ratio of 0.9x.
While cash should build up to a level sufficient to retire the $168.0 million balance of the Eagle Bulk Shipco 8.25% bonds (Norwegian Bonds) at maturity in November 2022, we expect a refinancing later this year. Not only is the interest rate highest, other debt has less restrictive covenants. Given that the acquisitions will be partially financed with revolver debt, a global financing might make sense.
Strong stock price performance also has the potential to lower financial leverage further since the convertible debt is in the money. Even though the conversion price is $39.29/share, there is little likelihood to convert until the August 2024 maturity date is closer since there is little incentive to convert prior to maturity.
 
Maintain Outperform rating and price target of $65/share.
EGLE&#8217;s track record of TCE rate outperformance is strong and execution on the fleet renewal program is solid. Following the closing of the pending transactions, the fleet will expand to the highest level ever and is well positioned to benefit from continued strong dry bulk market fundamentals. Operating leverage has expanded, the fleet profile has improved and scrubbers should add value if/when fuel spreads recover. While the YTD gain of 149% has fully erased last year&#8217;s loss of 41% and partially discounts the strong dry bulk market fundamentals, we believe that the outlook remains bright and the risk/reward profile remains attractive.
Figure 2: Stock Price Performance (July 2016-Present)
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/EGLEpriceperform.jpg" style="width: 435px;height: 279px" />
Source: Yahoo Finance.
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Eagle Bulk Shipping Inc. (EGLE)

Fleet Renewal Program Remains Active

Fundamental Analysis:

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Eagle reports results slightly below expectations, goes all in on shipping improvement (EGLE)

Earnings Preview (EGLE)

First-Quarter Results In Line With Recently Revised Estimates (EGLE)

Earnings Preview – The Upward Trend Begins (EGLE)

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