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Must-know: Navios Holdings and Safe Bulkers’ low operating expense

Xun Yao Chen, Industrials Analyst

Daily vessel operating expense

Daily vessel operating expense is an important measure of operating efficiency that affects companies’ costs and earnings. When operating efficiency is high, companies tend to earn higher margins and returns on a dollar of investment. Conversely, if operating efficiency is low, profitability and returns on capital tend to be lower than the industry average. This is one of many factors that describe what’s good and what’s bad about a company.

(Read more: Dry bulk capacity growth slows further, encouraging sign for later half of 2013)

Vessel operating expense varries

Daily vessel operating expenses for five large publicly traded dry bulk shipping firms have averaged ~$5,200 per day per vessel for the past three years. These are expenses that include crew wages and related costs, the cost of insurance, expenses relating to repairs and maintenance, the costs of spares and consumable stores, tonnage taxes, and other miscellaneous expenses incurred in operating fleets. While some companies have done better than the average, some have not. The daily operating vessel metric is preferred over simple accounting margin calculations such as operating margin, EBITDA margin, gross margin, and profit margin because it focuses on how well the companies are managing day-to-day operating costs and excludes the effect of time charter length, time of charter negotiation, and time of vessel purchases that vary widely from company to company.

Notably, the above chart shows that Diana Shipping Inc. (DSX) has not done so well compared to other companies, such as Safe Bulkers Inc. (SB), DryShips Inc. (DRYS), Navios Maritime Holdings Inc. (NM), and Navios Maritime Partners LP (NMM). Over the past three years, daily operating expense per vessel has steadily climbed, while those of other companies moved sideways or slightly higher. The past three years show the possibility of an outlier. DryShips Inc. (DRYS), for example, incurred higher daily vessel operating expense per vessel for its dry bulk shipping segment. This was due to an increase in expenditure due to drydocking—when ships are taken out of service and inspected for damage, repairs, and maintenance.

(Read more: Diana Shipping: the most undervalued dry bulk shipping company)

The Safe Bulkers and Navios brands

You could attribute Safe Bulkers’ low operating costs to its new ships, which often require fewer crews and a significant portion of vessel operating expense, and will incur lower maintenance expenses. Navios Maritime Partners LP (NMM), on the other, has had a relatively flat vessel operating expense in the past, because these companies have an agreement with Navios Holdings to pay a fixed management fee of $4,650 per day for Ultra-Handymax ships, $4,550 per day for Panamax ships, and $5,650 for Capesize vessels in return for technical and management service, which includes operation of vessels.

From January 2014 to December 2017, Navios Partners will reimburse Navios Holdings for all of the actual operating costs and expenses in connection with the management of Navios Partners’ fleets, but that’s unlikely. Navios Holdings’ own vessel operating expense stands at just $3,840 per day per vessel on average, according to the company’s recent annual report. The low expense is driven by its use of a modern, efficient fleet with strong in-house technical management.

Navios Holdings is the most positive; Diana Shipping is the least positive 

These daily differences may not seem like a lot, but when multiplied by the number of days in a year and the number of fleets, they can be substantial. As the lowest-cost operator, based on daily operating vessel expense, Navios Holdings Inc. (NM) is in the best position to generate higher-than-average returns for investors through new ship purchases. Safe Bulkers Inc. (SB) and Navios Maritime Partners LP (NMM) aren’t that far behind, while operating expense may be an area that Diana Shipping Inc. (DSX) can work on.

(Read more: Why the Baltic Dry Index has decoupled from the Chinese market)

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