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90% upside for shares of Eagle



March 25, 2015 – Comments (6) | RELATED TICKERS: EGLE , SBLK

Star Bulk Shipping, a big holding of Oaktree Captial (Howard Marks), has been a very active company over the past year. 

In 2014, Star Bulk purchased Excel Maritime just after Excel emerged from bankruptcy.  Oaktree was a big equity holder of Excel at the time of the acquisition, in addition to holding shares of Star Bulk.  Star Bulk ultimately purchased 34 vessels for $635MM, or a purchase price of about $19MM per ship.  Marks ultimately swapped out a bunch of his Excel position for a Star Bulk position.

Also in 2014, Star Bulk merged with Oceanbulk.  Star Bulk effectively purchased 41 ships from Ocean Bulk for $653MM, or a purchase price of about $16MM per ship.  Many of those ships were still under contract, and weren’t going to be delivered to Star Bulk for another 6-18 months.

So what does this have to do with Eagle?

Eagle, like Excel, emerged from bankruptcy not long ago.  Eagle reduced their debt load by 80% from $1.2B to about $0.2B.  With the reduced debt load, the company’s latest Enterprise Value is somewhere around $575MM.  That prices Eagle’s fleet of 45 ships at only $12.8M per ship. valued Eagle’s fleet at $881M about 6 months ago.  The Market Cap would have to appreciate over 90% from todays close to hit that valuation.  And $881MM seems to be pretty reasonable: the cost of building a brand new Supramax is still well above $20MM per ship.

Now, I could be missing something here, but I doubt Marks is missing anything.  He loaded up on 14.3MM shares of Eagle last quarter while shares were trading between $14-16.  He owns roughly 40% of the company.

As of the close today, shares are trading for $8.70.

I can’t confirm the purchase price for Marks; I’m not sure if he got some sweetheart deal on those shares as Eagle came out of bankruptcy.  But another big asset management shop – Goldentree Asset – has been buying EGLE shares over the past 3-6 months, too.

This seems like a Mohnish Pabrai “Heads I win, tails I don’t lose much” scenario.  With their debt burden removed, Eagle isn’t at risk of failing anymore.  So basically, you’re getting good assets (nearly every ship was built in 2000 or later) for pennies on the dollar, and you’re investing alongside the best distressed asset investor in the industry.  The potential catalyst is an acquisition of Eagle.

So, either I’m missing something, or this is an opportunity to buys shares of a company that are blatantly undervalued, in an industry that has seen a LOT of M&A activity recently. 

Here’s a James Tisch speech that I recently found.  He talks in pretty good detail about investing in heavy assets (vessels and rigs) during the bottom of cycles.  Good supplemental reading if you’re interested in this opportunity – Loew’s has been adding to their stake in Diamond Offshore lately.

6 Comments – Post Your Own

#1) On March 26, 2015 at 10:00 AM, Teacherman1 (< 20) wrote:

Thanks for the "heads up" ElCid

I am going to take an indepth look later today.

This might be a good opportunity to get back into shipping.

I put DCIX back on my watch list because it looks like they may be coming back to life, but that dividend would have to go back up to generate any significant interest.

I don't expect it to go back to where it once was, but it can certainly go to well above the current $0.01 per share they lowered it to when they issuded more stock.

JMO and worth exactly what I am charging for it.  

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#2) On March 26, 2015 at 10:30 AM, ElCid16 (94.64) wrote:

No problem Teacherman - would really appreicate your take on this situation.

I guess the ultimate thesis is that $12MM per ship is too cheap relative to other ships in the market right now.  Whether your talking about the price per ship in other fleets ($16-20MM) or the price per ship for a new build ($25MM).

I've studied the quality of Eagle's ships very little.  I know the average ship age is about 7-8 years old.  I think that's pretty normal for a fleet.

When Tisch (Loew's) did his bargin hunting back in the 1980s, he was buying tankers at scrap value, which was 90% of the cost of a new ship.  Eagle's ship are only trading at  about a 50% discount to a new ship cost, but Tisch may have been buying 10-15 year old ships, not 7 year old ships.

JM[Thoughts].  :) 

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#3) On March 26, 2015 at 11:42 AM, Teacherman1 (< 20) wrote:

I took a quick look, but their information is not quite up to date.

I am more impressed with the restructuring they did, (which did effectively wipe out the previous sharehalders) when their creditors took stock (99%+-)  in place of the debt.

I expect that their new balance sheet will look strong, and they got a new president who seems to have a lot of good experience in the business.

I may wait to see what their cash flow looks like for Q4 and Q1 before I actually buy.

There is also the concern that the new equity holders (the former debt holders) may bail out if and when they get whole, but there are some good current holders.

Not sure what is happening with current bulk rates, but I think the new president probably has a lot of China connections.

Need to look in detail to see what their operating costs are per day, going forward, and how that compares to day rates.

Overall, the balance sheet should be strong, but the income statement is an unkonown right now.

Will keep an eye on it and post if and when I decide to buy it.

JMO and worth exactly what I am charging for it.  

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#4) On April 09, 2015 at 8:20 PM, ElCid16 (94.64) wrote:

Goldentree purchased another 500,000 shares at $8.70 on Monday.

Goldentree and Oakmark, combined, own over 50% of the company. 

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#5) On May 21, 2015 at 6:29 PM, ElCid16 (94.64) wrote:

EGLE traded above a $400MM market cap today.

Upside is now a paltry 60%...

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#6) On October 09, 2015 at 11:22 AM, ElCid16 (94.64) wrote:

Market Cap: $225MM

Net Debt: $200MM

EV: $425MM

# of ships: 45

EV/ship:  $9.4MM

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