Star Bulk Carriers - Business - Capital Allocation Strategy & Dry Bulk Sector Update - May 31, 2023

Introduction

The podcast introduces the guest, Mr. Hamish Norton, President of Star Bulk Carriers and provides a brief overview of the topics that will be discussed.

Introduction to Guest and Discussion Topics

• Nicolas from Capital Link introduces Mr. Hamish Norton, President of Star Bulk Carriers.

• The discussion will focus on Starbucks development strategy and the driver sector outlook.

Q1 2023 Results

This section discusses Star Bulk Carrier's Q1 2023 results and how they compare to Q1 2022.

Comparison of Q1 2023 to Q1 2022

• Adjusted net income for Q1 2023 was $37 million or $0.36 per basic share.

• Fleet growth contributed to lower results in Q1 2023 compared to Q1 2022.

• Port congestion relief resulted in an effective growth of the fleet close to eight percent.

• Anticipated slowdown due to new regulations had not yet kicked in during Q1.

Fleet Development

This section discusses Star Bulk Carrier's fleet development strategy, including selling older ships and acquiring newer, more fuel-efficient ones through long-term charters.

Fleet Renewal Activity

• Attractive market prices for older ships make it possible for Star Bulk Carriers to sell them off.

• Long-term charters are negotiated for brand new latest technology super eco ships built by Japanese shipbuilding companies in the Philippines.

• Chartering allows for taking advantage of fuel efficiency of latest generation new buildings without committing capital to ships that are not able to burn zero carbon fuels.

English The Benefits of Zero Carbon Fuel and Fleet Diversification

In this section, the speaker discusses the benefits of using zero carbon fuel and fleet diversification in the dry bulk shipping industry.

Benefits of Zero Carbon Fuel

• Conventional fuel ships are expensive to operate, but green methanol is even more costly at almost $4,000 per ton of fuel oil equivalent.

• Customers may have to pay high rates if fuel becomes too expensive. However, carbon tax could make traditional fuel equally expensive.

• Chartering in ships that burn zero carbon fuel can benefit Star Bulk by providing very low fuel consumption and access to the latest technology without committing capital to a ship that only burns traditional fuels.

Fleet Diversification

• Star Bulk has a large fleet of 125 vessels, which is the largest publicly listed dry bulk company in the US.

• The company is always looking for opportunities to use its shares for mergers and acquisitions to reduce overhead costs per ship per day and improve market knowledge.

• Diversification across vessel sizes in the dry bulk market has been helpful for Star Bulk. Sometimes supermaxes earn more than capes or panamaxes depending on market conditions.

Scrubber Investments

• Star Bulk invested about $250 million in scrubbers, which allow them to use high sulfur heavy fuel oil when ships without scrubbers have to use very low sulfur fuel oil that costs considerably more.

• Scrubbers have been earning excellent profits since they were fully paid for in Q1 2023. They produce savings that are a direct addition to profitability from operating under spot or time charters.

• Higher fuel prices can benefit Star Bulk unless they have a seriously negative impact on economic activity.

Fuel Prices and Fleet Efficiency

In this section, the speaker discusses how fuel prices affect the fleet's ability to carry cargo and how it impacts charter rates. The speaker also explains why zero-carbon fuels are beneficial for their business.

Fuel Prices and Charter Rates

• Higher fuel prices lead to a decrease in the fleet's carrying capacity.

• If demand remains constant, charter rates will double if fuel prices double.

• The company benefits from higher fuel prices.

Zero-Carbon Fuels

• Zero-carbon fuels are beneficial for their business.

• They are preparing for the next phase of exploring green fuels while improving efficiency in conventional fuels.

Starbucks' Environmental Compliance and Fleet Efficiency

In this section, the speaker talks about Starbucks' investments in environmental compliance and efficiency. They discuss steps taken to improve fuel consumption, reduce environmental impact, and enhance commercial attractiveness.

Energy-Saving Devices

• Energy-saving devices have been installed on many ships.

• These devices help save between 5% to 8% of fuel consumption.

Propeller Efficiency Improvement

• Mavis ducts and propeller boss cap fins have been installed on ships to make propellers more efficient.

• These improvements result in an 8% reduction in fuel consumption.

Green Technologies

• The company has participated as a partner in a feasibility study of a green corridor from Australia to East Asia.

• Carbon capture technology is being trialed on board ships.

• Gate rudders can save up to 30% of fuel consumption by making propellers more efficient.

Anti-Fouling Systems

• Fouling is one of the most significant factors affecting fuel efficiency.

• The company is looking into anti-fouling systems such as fancy paints, ultrasonic anti-fouling, and Hull cleaning robots.

Fleet Deployment Strategy

In this section, the speaker discusses the company's deployment strategy in terms of time versus sport. They also talk about how their employment strategy has changed over the last year.

Spot Market vs. Q1

• The company does better keeping its fleet in the spot market for long-term benefits.

• The exception is during Q1, which tends to be weak.

• Taking advantage of a strong Q3 and chartering ships out to cover Q1 is more beneficial.

Employment Strategy

• The company's balance sheet is strong.

• Their employment strategy has not changed much over the last year.

• They were unable to cover Q1 of 2023 but intend to keep doing so when possible.

Liquidity and Debt

In this section, the speaker discusses the company's current liquidity and leverage levels. They also talk about their plans for debt reduction and dividend payouts.

Current Leverage and Liquidity Levels

• The company is paying down almost $200 million worth of debt every year.

• Net debt to total asset value is below 25% at this point.

• The company plans to keep going until they get net leverage down to zero.

• Being relatively unleveraged, being in a position to pay large dividends, and being very liquid is the right thing to do.

Capital Allocation Priorities

• The company intends to pay down debt as fast as it amortizes.

• Operating cash flow will prioritize dividends.

• If there's a big enough spread between selling vessels and buying back shares, they might sell vessels and buy back shares.

Dividend Policy

• The company has opted for a more generous payout as opposed to keeping more money in-house because they think new builds are very expensive.

• They want to wait a little bit before investing in new builds so that they can see what's available even if it involves building traditionally fueled new buildings.

Outlook of the Dry Bulk Sector

In this section, the speaker talks about the outlook of the dry bulk sector. They discuss how demand for dry bulk shipping movements has historically grown with world GDP while supply varies.

Demand vs Supply

• Demand for dry bulk shipping movements has historically grown more or less hand in hand with the size of the world economy.

• The supply of dry bulk ships varies a lot, and at the moment, they have just about the smallest order book in the history of dry bulk shipping.

• Fleet growth seems to be lower even than the relatively modest growth in world GDP.

• With new environmental regulations coming out and considerable commercial pressure on ships that are high consumers of fuel, they think we'll see a very...

The Impact of Carbon Emissions on Charter Rates

In this section, the speaker discusses how the pressure to reduce carbon emissions will lead to high charter rates.

High Charter Rates

• The pressure to reduce carbon emissions will lead to high charter rates.

• Minimal fluid supply will cause high charter rates.

• New technology ships fueled by ammonia and methanol will only be ordered if the charter rates are very high.

Port Congestion and Environmental Regulations

In this section, the speaker talks about how environmental regulations can impact port congestion.

Port Congestion

• Port congestion lets air out of a deflating balloon more quickly than it would deflate otherwise.

• Slow steaming may come in a bigger way due to environmental regulations.

• Poor congestion can come back very quickly when air is coming back in.