Why Diana Shipping will be sensitive to rates near the end of 2014

Market Realist

Diana Shipping's unique features and key May 14 discussions (Part 2 of 6)

(Continued from Part 1)

Chartering strategy

Diana Shipping contracts its vessels via short-term charters and long-term charters, with staged maturity dates. The short-term charters are usually chartered out between 11 and 14 months, which allows the company to take advantage of industry cycles. The long-term charters are chartered for 17 to 62 months and provides a stable and steady revenue stream, which helps to shield the company during industry downturns.

As fluctuations in the Baltic Dry Index show, shipping rates can be very volatile. Because time charters provide stability, the returns are more consistent and less subject to swings. Using a combination of staged maturities and short- to long-term contracts makes Diana Shipping Inc. a safer investment compared to DryShips Inc. (DRYS).

Charter expiration

Over the next six months, nine of Diana’s contracts are expected to expire. On average, these contracts (and those maturing in 2015) are priced below the current 12-month charter rates, based on data compiled by RS Platou.  Most of them are set to expire during the fourth quarter of 2014 and first month of 2015. Since those periods are typically seasonally strong for the dry bulk market, Diana Shipping might be able to recharter its vessels out at attractive rates. Even though industry players understand seasonality, psychology could still play an important role. It’s also not easy to differentiate how much of the ups and downs in the industry are seasonal.

Impact on shares

Still, that fact could be priced in already. If it isn’t, then Diana Shipping could perform better over the next few quarters. For Diana Shipping, where rates stand at the end of 2014 or the beginning of 2015 will be critical. Market expectation (or actual) rates around charter expiration dates are Diana’s key drivers—but bear in mind that this expectation is also influenced by day-to-day changes in the spot market and developments beforehand. For companies with longer-term charters, investors can use Navios Maritime Partners (NMM) and, to a lesser extent, Safe Bulkers Inc. (SB). For a diversified investment in the shipping industry, the Guggenheim Shipping ETF (SEA) is an option.

Continue to Part 3

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