Golden Ocean Stock: Best Days Are Over (NASDAQ:GOGL)

Introduction

Thanks to their recent booming operating conditions, Golden Ocean Group (NASDAQ:GOGL) was splashing cash on big dividends that often saw quote pages displaying yields in excess of a massive 20%, although as my previous article warned, this risks leaving a severe hangover when their operating conditions normalize. Since half a year has subsequently elapsed, it now seems timely to provide a follow-up analysis, especially since it appears that their best days are over with a possible recession on the horizon.

Executive Summary & Ratings

Since many readers are likely short on time, the table below provides a very brief executive summary and ratings for the primary criteria that were assessed. This Google Document provides a list of all my equivalent ratings as well as more information regarding my rating system. The following section provides a detailed analysis for those readers who are wishing to dig deeper into their situation.

*Instead of simply assessing dividend coverage through earnings per share cash flow, I prefer to utilize free cash flow since it provides the toughest criteria and also best captures the true impact upon their financial position.

Detailed Analysis

Following an astonishingly strong performance during the first nine months of 2021, their cash flow performance ended the year even stronger with their operating cash flow hitting a massive $219.2m during the fourth quarter alone. Despite this one quarter being around twice its quarterly run-rate during the preceding nine months, this appears to have been their best days. In fact, their operating cash flow of $123.6m during the first quarter of 2022 almost halved consecutively, thereby seeing their attributable quarterly dividends follow in tandem with a circa 44% decrease.

Admittedly, their latest results are still a world of difference versus their beaten-down operating cash flow of only $6.6m during the first quarter of 2021 but this also serves as a cautionary tale of what can happen during less favorable operating conditions. If their financial performance can experience such a rapid improvement, it can also experience an equally as rapid deterioration. Whilst the broader shipping industry is notoriously volatile with one quarter by itself not necessarily meaning the best days are over, this appears to be the case when overlaying the macroeconomic outlook. The last month saw markets and various commodities sell-off as fears of an impending recession during late 2022 or early 2023 grip investors at a time when central banks are sending interest rates surging to reign inflation back under control.

Unlike certain industries, such as tobacco, which see minimal impact from economic conditions, the broader shipping industry sees a strong link, including their dry bulk sub-industry with economic expansions driving demand for iron ore, coal and so forth, which in turn drives demand for their seaborne trade. On one hand, the past twelve months have been wonderful for shipping, although on the other hand, this does not result from a permanent change but rather, fiscal stimulus and supply chain upheaval following the Covid-19 pandemic and more recently, the Russian invasion of Ukraine rerouting trade following Western sanctions.

No one can see the future but suffice to say, the global economy appears far more likely to cool and soften rather than accelerate, even if a recession is avoided. It remains to be seen exactly how much this stands to impact demand for the seaborne trade of dry bulk commodities. Although it would obviously pose a significant headwind and thus almost certainly ensure their booming operating conditions come to end, which in turn would send their cash flow performance plunging. Whilst shareholders have been lining their pockets with big dividends for around a year now, it seems prudent to consider what they can expect to receive going forwards once these booming operating conditions merely normalize, let alone a downturn from a recession.

On their current market capitalization of approximately $2.1b, their average free cash flow during 2019-2020 of $119.5m and thus at the very best, they could only safely provide a moderate dividend yield of circa 5.50% on current, which assumes they utilize the entirety of their free cash flow with nothing sent towards deleveraging. In my eyes, this is remaining as generous as possible because as a reminder, these years saw relatively low capital expenditure of only $34.5m on average, well less than the $445m during 2021. Not to mention, they also still saw operating cash flow of $149.5m on average, which was far from their worst historically speaking, as many years have seen sub-$100m results or even negative results during 2015 and 2016. This means that realistically, a recession could easily push their financial performance even lower and thus hurt their shareholders, thereby further highlighting the downside risk that investors still face.

Whilst a moderate yield would not be too bad for certain companies, sadly this does not include those in notoriously volatile industries, especially those with a heavily indebted financial position. During 2019 and 2020, their share price often traded for only between circa $4 to $6, which is essentially half its current price of circa $10. If their share price were to revert back to circa $5, it would see this hypothetical dividend yield rise to around a very high 10%, which is more aligned with the level of income an investor would normally desire to compensate for the undesirable nature of this industry and what I view as a reasonable expectation for the coming year.

Since conducting the previous analysis, their net debt remained essentially unchanged with its level of $1.278b following the first quarter of 2022 merely a few million dollars above its previous level of $1.275b following the third quarter of 2021, thereby making it redundant to reassess their leverage in detail. Meanwhile, their cash balance more than halved to $107.4m versus its previous level of $242.4m during these same two periods of time but as this nevertheless remains relatively large, it would also be redundant to reassess their liquidity in detail.

The two relevant graphs have still been included below to provide context for any new readers, which shows that despite these booming operating conditions, their leverage remains moderate with a net debt-to-EBITDA of 2.14 and a net debt-to-operating cash flow of 2.46 both within the applicable range of 2.01 to 3.50. This is not problematic until considering when their financial performance normalizes and sends their leverage surging back into the very high territory, such as during 2020 when these two results were 7.71 and 7.72 respectively and thus well above the applicable threshold of 5.01. This risks a severe hangover that further hinders their dividends and thus creates further downside risks to those already discussed. At least their liquidity remains strong with a current ratio of 1.21 and a cash ratio of 0.44 that should help avert any issues remaining a going concern. If interested in further details regarding these two topics, please refer to my previously linked article.

Conclusion

Their attention-grabbing massive 20%+ dividend yield looks alluring but sadly, it appears that their best days are over with the economy expected to cool and possibly even slide into a recession as central banks rush to control inflation. When looking ahead, their dividends will almost certainly continue sinking lower because even a simple reversion back to their normal operating conditions of 2019-2020, would see their yield on current cost sink to circa 5%, if not even lower given they would also find themselves overleveraged. Since this would likely see their share price also roughly halve back to its usual circa $5 level of 2019-2020, I now believe that downgrading to a sell rating is appropriate with it being time to look for a life raft as investors abandon ship, metaphorically.

Notes: Unless specified otherwise, all figures in this article were taken from Golden Ocean Group’s SEC Filings, all calculated figures were performed by the author.