RF Position Update: EXM

Houston - we have a big problem and that was the messed up share offering after the bell today. The offerings, as far as I know, has not been priced yet; however, will be rather dilutive to common shareholders like myself. This is why homework is VITAL in every holding and in order to make serious money, homework is a must. So let me address both the quarter and the share offering:

Quarter: The quarter EPS seemed very strong; however, it is very difficult to compare it to last year's numbers due to some many variables. Sequential revenue drove better margins due to the firm's exposure to short-term contract exposure. I adjusted for noncash amortization revenue, from the firm's acquistion of Quintana Maritime (rival) and EXM's top line slid 25% YoY (year over year). Operating expenses were up 2%, which is not too bad, considering most of their cost struture seems relatively fixed. Adjusted margins fell from 42% to 20%. The contract structure is a key to the margin. That could another complete discussion but I do not have to get into deep detail because only CPAs and shipping experts would want to hear my views on that. In short, EXM carries high areas of undercertainity, due to the spot-market focus of their business model, as well as the fleet line. The BDI (Baltic Dry Index) is a good measure to view as it is the global shipping index of sorts.

Offering: The biggest problem with EXM is the debt load. This is just not a random stock you can just buy and think "oh it was at $9 last week and now it's $7, let me buy it and make $2". It is not possible with this firm. A company like MSFT, yes maybe if the stock dips to $22 and you buy it for a trade to $24 for 2 bucks, it works but not EXM because too many of the variables are tied to daily flucuations that need to be understood and researched. Anyways, one challenge facing the firm is that it faced $18-22 milion in quarterly deb principal payments over the next 8 quarters and the firm does not have tons of cash on hand. I don't have the numbers in front of me but I am guestimating $200m of cash on the balance sheet. Most of their assets are the actual ships, which depreciation, so when you value the firm, you must take that into account. So with that debt load, can becomes an issue, especially if we have a double-dip recession and China/other emerging markets reduce commoditity imports. The second problems is that EXM has 3 ships on order for 2010 that will require $100 MILLION in capital expenditure money. From my calculations, EXM had huge profits but only average $35M per quarter in cash flow (operating) therefore, they was not way they can meet contractual commitments without issuing stock or selling vessels. Anotherwards, they have too much debt and they can issue stock to screw over shareholders -OR- sell vessels that could cost them revenues and profits. I am being rather blunt about the first but the ownership of the company becomes dilutive and the stock price drops unless institutional money gets happy about liquidity risks being taken away and decide to buy the stock. I don't think this will be the case, as they can buy solid tankers like Nordic Tanker or Frontline (FRO) and get a oil tanker shipper that yields 3-5% dividends.

Needless to say I am disappointed for leaving a lot of money on the table but I have a good profit cushion. I just don't know how long these shippers can keep up doing well. I believe the BDI will be very volatile in the coming quarters. I am still long the name and will post my decisions live time as always....we are in this game together.