Seeking Value in the High Seas: Gener8 Maritime – GuruFocus.com – GuruFocus.com

New York-based Gener8 Maritime (NYSE:GNRT), the $483.7 million shipping and ports company, reported 0.8% revenue decline in the first quarter to $123 million year over year and an unimpressive 55.9% drop in profits to $26.86 million a 21.8% margin compared to 49.1% in the same period last year.

Overall operating expenses have increased by 37.3% to $76.7 million mostly because of higher direct vessel operating expenses, depreciation and amortization and a 73 times rise in losses in disposal of two vessels, Gener8 Daphne and the Gener8 Elektra.

"We are pleased that our 'ECO' vessels continue to earn a demonstrable premium. This is a significant competitive advantage for us, particularly as the market enters a somewhat weaker rate environment amplified by growth in the size of the global fleet.

"Subsequent to the end of the quarter, we made a series of important decisions to provide us significant flexibility to manage our business. The resulting stronger financial platform will serve as a buffer through any extended market downturn and also allow us to be opportunistic going forward. Importantly, we were able to improve our financial profile without diluting our shareholders. In the meantime, following the completion of our newbuilding program expected in the third quarter and assuming no further changes to our fleet, the DWT-weighted average age of our fleet will be 4.9 years, and our VLCCs will have an average age of just 2.7 years, giving us the youngest and most modern VLCC fleet among our public company peers. This is significant as we believe the modernity of our fleet will contribute to competitive operating expenses and ultimately to our profitability."Peter Georgiopoulos, chairman and CEO of Gener8 Maritime

Valuations

Gener8 trades at some premium to its peers but traded below book value. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 14.58 times vs. the industry median of 17.6 times, a price-book (P/B) ratio of 0.32 times vs. the industry median of 1.24 times and a price-sales (P/S) ratio of 1.21 times vs. the 1.14 times.

The company has not paid dividends to its shareholders in the past half decade.

Average 2017 revenue and earnings per share indicated forward multiples of 1.39 times and 32.4 times.

Total returns

Gener8 has outperformed the broader Standard & Poor's 500 index so far this year having generated 30.13% total returns vs. 9.6% (Morningstar).

Gener8 Maritime

According to filings, Gener8 Maritime Inc., a leading U.S.-based provider of international seaborne crude oil transportation services, resulting from a transformative merger between General Maritime Corp., a well known tanker owner, and Navig8 Crude Tankers Inc., a company sponsored by the Navig8Group, an independent vessel pool manager.

General Maritime was founded in 1997 by the now Gener8s chairman and CEO, Peter Georgiopoulos, and Gener8 has been an active owner, operator and consolidator in the crude tanker sector.

As of March 10 Gener8 owned a fleet of 40 tankers on the water, consisting of 24 Very Large Crude Carriers (VLCCs), 10 Suez max vessels, four Afra max vessels and two Panamax vessels with an aggregate carrying capacity of 9.4 million deadweight tons, or DWT, and one eco VLCC new building that is being constructed at a highly reputable shipyard and is expected to be delivered during the second half of 2017.

The company believes it is uniquely positioned to benefit from the recent expansion of its own fleet through the acquisition of 21 VLCC vessels in 2014 and 2015.

As of March, Gener8s average fleet size was 39.5 vessels compared to 30.7 vessels for the prior-year period.

In addition, Gener8 maintains strong relationships with high-quality customers including SaudiAramco, BP (NYSE:BP), Shell (NYSE:RDS.A)(NYSE:RDS.B), S Oil, Exxon (NYSE:XOM), Chevron (NYSE:CVX), Repsol (XMCE:REP)(REPYY), Valero (NYSE:VLO), Reliance, Petrobras (NYSE:PZE) and Clearlake, either directly or through pooling arrangements.

According to filings, Gener8s non-U.S. operations accounted for a majority of its revenues and results of operations. Vessels regularly move between countries in international waters over hundreds of trade routes. It is therefore impractical to assign revenues, earnings or assets from the transportation of international seaborne crude oil and petroleum products by geographical area.

Further, the company operates its business in one reportable segment, which is the transportation of international seaborne crude oil and petroleum products.

Company metrics

Net voyage revenues

Gener8 evaluates its performance using net voyage revenues. Net voyage revenues are voyage revenues minus voyage expenses. Voyage expenses primarily consist of port and fuel costs that are unique to a particular voyage.

In the recent quarter, net voyage revenues have minimal change year over year at -0.5% to $121.1 million.

Total operating days

Total operating days for fleet are the total number of days Gener8 vessels are in the companys possession for the relevant period net of off-hire days associated with major repairs, drydocking and special or intermediate surveys. It would be safe to assume that the higher the figures go the better business revenue Gener8 could have.

Total operating days in the recent quarter were 3,510 compared to 2,822 in the same period last year.

Time charter equivalent rates

Time charter equivalent (TCE) rates are calculated by dividing net voyage revenue by total operating days for fleet for the relevant time period. The higher the rate realized could be better for Gener8.

In the recent quarter, Gener8s fleet TCE was $34.49 million compared to $43.12 million in the same period last year.

Fleet utilization (%)

Fleet utilization is the percentage of time that our vessels were available for revenue generating voyages and is determined by dividing total operating days for fleet by total calendar days for fleet for the relevant period.

In the recent quarter, fleet utilization remained steady at 98.6% compared to 98.7% the year prior period.

Sales and profits

In the past two years, Gener8 logged revenue growth average of 1.84% and profit margin average of 23.4% (Morningstar).

Cash, debt and book value

As of March, Gener8 had $143.4 million in cash and cash equivalents and $1.64 billion in debt with debt-equity ratio 1.11 times vs. 0.82 times in the same period last year. Overall debt rose by $473 million while equity increased by $57.3 million.

No goodwill or intangible assets were observed in Gener8s balance sheet. Meanwhile, the company increased its book value by 4.06% year over year to $1.47 billion.

Cash flow

In the recent quarter, Gener8s cash flow from operations dropped by 47.5% decline to $70.8 million. In addition to lower profits, the company had (more) cash outflows in relation to charterers, provision for bad debts, net unrealized gain on derivative financial instrument and deferred drydock costs incurred.

Capital expenditures were $99.6 million leaving Gener8 with (-)$28.8 million in free cash outflow compared to (-)$212.9 million in the same period last year. The company also took in $47.3 million in credit facility borrowings net any payments.

Gener8 also failed to generate any positive free cash flow figures in the recent three fiscal years.

Conclusion

Gener8s overall revenue remained near flat for the quarter secondary to lower company-metric TCE rates realized. Nonetheless, operating days (denominator of TCE rates) increased by 24% year over year thus leading to the reduction of the former.

In review, operating days increased primarily as a result of the deployment of 12 additional VLCC new building vessels since the end of the prior-year period.

In addition, expenses have increased leading to lower profits. Gener8s direct vessel operating expenses and depreciation and amortization expenses rose primarily due to an increase in the Gener8's fleet size compared to the prior-year period.

The companys disposal of its two vessels, about 213,000 DWT in combination, also led to higher charges to profits. These (disposals) were also observed in fiscal year 2016 when Gener8 recorded $24.2 million when it disposed of four of its vessels.

Gener8 did seem to carry a more leveraged balance sheet compared to the year-prior period while still having generated no positive free cash flow.

Nine analysts have an average price target of $7.06 per share 21.1% higher than the share price of $5.83 per share (at the time of writing). Applying a two-year P/S multiple and revenue growth averages followed by a 15% margin indicated a value of $5.7 per share.

Meanwhile, asking for a 20% discount from Gener8s current book value of $1.47 billion would indicate a possible returns north of 100% upside to $12.38 per share.

Ignoring the companys inability to generate free cash flow, Gener8 is a buy with $7 per share target price.

Disclosure: I do not have shares in any of the companies mentioned.

Mark Yu

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