Should You Buy It? General Maritime

• ByDavid Peltier, Portfolio Manager
• On 9:00 am EDT, Thursday August 27, 2009

General Maritime is a fallen angel that is attempting to climb out of the cellar. The company operates a fleet of about 30 oil tankers and the stock caught a lift on Wednesday when it was upgraded at the brokerage Friedman, Billings, Ramsey from market-perform to outperform.

At $8.28, General Maritime shares gained about 6% Wednesday, but have underperformed the overall market since the March lows and remain down 23% year-to-date.

Tanker stocks are often coveted for their dividends and General Maritime doesn't disappoint with a 6% yield. That said, the company cut its dividend earlier this summer to 12.5 cents a share because of declining demand and prices in the tanker market.

With that in mind, I'm here to answer readers' questions: Should you buy it? Does General Maritime offer value at current levels or will the stock remain mired in the single digits for the time being?

General Maritime's struggles were evidence in its second-quarter results announced last month. The company earned just 14 cents a share, down from 50 cents a year ago, even though revenue was up 2% year-over-year. The difference was primarily because of utilization rates and an 80% decline in average day rates.

According to Robert MacKenzie, the analyst behind the FBR upgrade, one benefit for the recent dividend reduction is that it frees up capital for management to potentially buy more tankers at depressed levels.

In the meantime, General Maritime has a relatively strong balance sheet given the capital-intensive nature of the business. The company ended the second quarter with just $48.6 million of cash and $940.5 million of long-term debt (63% of total capitalization).

Even so, there company generates steady operating cash flow and has no major capital commitments and has no maturities coming due until 2011.

At the end of the day, I believe readers should avoid shares of General Maritime for the time being. Shipping rates have not rebounded along with the spot price of oil this year and could remain under pressure as long-term contracts expire and will be repriced at lower levels.

So even though the company has the capital to potentially acquire more assets at depressed levels, there will likely be a few more quarters of pain and General Maritime's 6% dividend yield is not enough to entice an investment.

Buzz up!