Risks and opportunities in Ocean Yield

Ocean Yield is a ship owning company, who leases out ships to counter parties believed to be solid. Most of the contracts are “hell or high water” with floating interest rates. The company with ticker “ocy” on the Oslo Stock Exchange pays a quarterly dividend of $0,15 As of this writing the current share price is 34,90 NOK

Here I will try to address some of the risks and opportunities in the current market situation.

Risk 1: Counterparty risk. What is the probability and consequences if a company defaults on it contractual obligation?

When the company buys an asset, they get a sellers credit. This will amortize to zero over the charter period, and it carries no interest. In layman’s terms: Ocean yield do not pay full price for the asset. Let’s pretend Ocean Yield buys a ship for $40 million, and gets a sellers credit of $5 millions. Then leases it back on a 12 year contract. If for some reason the counter party get into financial troubles, they have the option to do a public offering, or private placement. If that does not succeed, and the counter party defaults, Ocean Yield will reclaim their asset, and either sell it, or lease it to another company. This is possible due to Ocean Yields focus on buying “off the shelf” assets. Ocean Yield could sell it for $5 million less than its actual value, and still not have lost anything. That is, if the asset has had a normal ,or lower decline in value. I would say that the risk is more than acceptable with today’s pricing.

Risk 2: $ declines relative to NOK

If the dollar for some reason declines, the dividend in nok will become lower. This is not something we normally can do much about. I think we just have to accept there is a risk, and have a margin of safety when we buy.

Risk 3 Debt and interest rates

Increasing interest rates will noramally be charged the counter party. This is not a problem, until the counter party defaults. However, Ocean Yield might have to refinance sometime in the future, and higher interest rates, means higher cost.

Risk 4 Purchase options

Some of the contracts include purchase options, and if exercised would reduce the company’s revenue. Again – This is a calculated risk. Ocean Yield will just have to find another asset to buy.

Risk 5 Reduced demand for leasing ships

I find this unlikely, but it worth mentioning. What the last years have taught me, is that it been more difficult for companies to get funding through regular bank funding. But it’s not a problem for Ocean Yield.

Opportunity 1: Business as usual

If nothing unusual happens, with today’s price you’ll get a yearly dividend of 15,90 percent or 5,50 nok a year. With this kind of compounding interest, it takes less than five years to double the original investment.

Opportunity 2: A contract for the FPSO

This unit has been troubling Ocean Yield for some time. But it is debt free, and its value has been written down. Should Ocean Yield succeed to get it employed again, it will generate a large amount of cash flow.

Opportunity 3: A long time charter for Connector

After the bankruptcy of EMAS Offshore, this vessel has just had short term contracts.

A few other things to consider. The dividend has just been reduced to $0,15 and the board says this is sustainable. Also, the main owner is Aker ASA, a solid company with mutual interest as Ocean Yield. The management of the company also owns shares, and their interests are aligned with the shareholders. It seems that this is the time to be greedy when others are fearful.

As always: Remember , this is not to be considered as investment advice. It is just my current thoughts about this company.

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