Eagle Bulk Shipping Inc
NASDAQ:EGLE
Earnings Call Analysis
Q3-2023 Analysis
Eagle Bulk Shipping Inc
During a notably challenging Q3 for the dry bulk industry, which saw the weakest third quarter in three years, our company faced a net loss of $5.1 million, reflecting a broader market slump with depressed freight rates. Despite these headwinds, we successfully sold three older vessels, pocketing a substantial profit and demonstrating the agility and strategic foresight that remains central to our operations. As the quarter unfolded, particularly weak trade in July and August hampered our financials beyond what had been previously anticipated, resulting in an adjusted net loss of $2.9 million. However, with an uptick in rates by the close of September, we've begun Q4 on a firmer footing, fixing a majority of our days at improved rates, setting the stage for a modest rebound.
Looking ahead, we're projecting a TCE of $15,655 for Q4 with about 68% of our days already fixed. On the operational front, our expenses have seen a welcome dip, attributed to decreased repair activities and a normalization of crew costs post a significant transition period. We're tightly managing general and administrative expenses as well, which reported a reduction from the prior quarter. Cash and costs have remained in-line with our outlook. With the continued execution of a strategy focused on fleet optimization and divestment of non-core assets, we have increased our liquidity and reduced net debt, positioning ourselves carefully in a period signified by high global inflation and interest rates that hover around 5.2%.
The fluctuations in fuel prices are of particular interest to us, with fuel spread playing a pivotal role. Our sizable fleet of scrubber-fitted vessels positions us favorably in this regard, set to contribute significantly to our earnings through an anticipated increase in fuel spread moving into the fourth quarter. We estimate an annualized incremental earnings boost of around $30 million from scrubbers alone, underscoring the operational efficiency and profitability we can harness even in a tumultuous market.
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Welcome to the Eagle Bulk Shipping Third Quarter 2023 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Gary Vogel, Chief Executive Officer.
I'd like to welcome everyone to Eagle Bulk's Third Quarter 2023 Earnings Call. To supplement our remarks today, I would encourage participants to access the slide presentation that is available on our website at eagleships.com. Please note that part of our discussion today will include forward-looking statements. These statements are not guarantees of future performance and are inherently subject to risks and uncertainties. You should not place undue reliance on these forward-looking statements. Please refer to our filings with the Securities and Exchange Commission for a more detailed discussion of the risks and uncertainties that may have a direct bearing on our operating results, our performance and our financial condition. Our discussion today also includes certain non-GAAP financial measures, including TCE revenues, adjusted net income, EBITDA and adjusted EBITDA. Please refer to the appendix in the presentation in our earnings release filed with the Securities and Exchange Commission for more information concerning non-GAAP financial measures and a reconciliation to the most comparable GAAP financial measures. Please turn to Slide 6. The industry experienced a challenging market during Q3 with the BSI averaging just over 10,000 for the period, the weakest third quarter in three years. Our financial results for the quarter are reflective of the underlying freight environment that impacted our results as we generated a net loss of $5.1 million or $0.55 per share.We continue to execute on our strategy to monetize noncore older vessels. Specifically, we closed on the sale of the Sankaty Eagle, a mid-aged nonscrubber-fitted supramax. This was the third and last vessel in the Eagle Bulk transaction we previously disclosed. The sale of the three ships generated a total of $35 million in profit for us, implying a levered IRR of 70% based on just a 2-year investment period. Please turn to Slide 7. Q3, we achieved a net TCE of $11,482 representing an outperformance versus a benchmark BSI of $1,441 per ship per day or roughly 14%. Freight rates during the months of July and August remained depressed with the BSI averaging just 8,500. This weakness was driven by lower fleet utilization as a result of the continued low levels of vessel congestion globally. The BSI bottomed at 75-45 on August 7th and has since experienced a strong rally with the index reaching close to 15,000 by the end of September. The Atlantic Basin was the main driver of this recovery in rates as we saw robust exports of soybeans and corn out of Brazil following a record crop being harvested this season. As we look to Q4, spot rates have come off from their highs and will remain supported with the BSI averaging approximately $13,700 for the month of October. As of today, we fixed approximately 68% of our owned available days for the fourth quarter at a net TCE of $15,655. With that, I'd like to turn the call over to Costa, who will discuss our financial results for the period.
Please turn to Slide 9. As mentioned earlier on the call, weak market fundamentals during the third quarter and particularly during the month of July and August, impacted our financial results for the period with net top line performance or TCE revenues totaling $54 million. This equates to an achieved TCE of $11,482 or about 5% above the level we indicated for our fixtures to date on our last earnings call. Although freight rates improved significantly during September, this was not really reflected in our results for Q3 due to the inherent lag when fixing business. As indicated earlier, we expect to see a meaningful increase to our TCE in Q4 based on the business we have fixed thus far. Vessel operating expenses improved approximately 7% quarter-on-quarter to total $29 million or $59.94 per day, in line with our outlook. OpEx improved primarily due to the decrease in repairs and discretionary upgrades, normalization crew costs post the completion of our crew management transition project and also benefited from the fact that we did not take delivery of any newly acquired vessels during the quarter. General and administrative expenses decreased 5% quarter-on-quarter to total $10.7 million, in line with our outlook. Cash and costs came in at just under $9 million. Other operating expense items, which had a net positive impact for the quarter included a $4.9 million gain relating to the sale of the Sankaty Eagle, offset partially by a $700,000 cost relating to legal. Net interest expense, inclusive of cash interest expense, cash interest income and noncash deferred financing fees came in at $6.2 million for the quarter, which was modestly better than what we had previously guided at. Our interest expense increased as compared to the prior quarter as a result of the upside and subsequent drawdown on our credit facility in June. Unrealized net P&L on derivatives for Q3 was negative $2 million. This was primarily attributed to our outstanding FFA positions as of September 30. After stripping out the noncash mark-to-market effect from derivatives, we generated an adjusted net loss for the quarter of $2.9 million or $0.31 per share basic and diluted. Please note that the convertible bond was deemed to be anti-dilutive this quarter from an EPS perspective. As such, the shares underlying the security were not included in the diluted share count. Adjusted EBITDA amounted to $15.6 billion. Please turn to Slide 10. We ended the quarter with a total cash position of $116 million, down $2 million as compared to June 30. We generated $3.8 million from operations. We produced $14.5 million from investing activities, which was primarily comprised of the proceeds from the sale of the Sankaty Eagle, and we used $20 million in financing comprised of the following: a $12.5 million payment relating to the quarterly amortization on our term loan, a $5.8 million payment relating to our Q2 dividend distribution and $1.8 million in payments primarily relating to advisory fees for the share repurchase transaction concluded in June. Please turn to Slide 11. Our liquidity position as of September 30 totaled $171 million, inclusive of $55 million in undrawn RCF availability. Total debt outstanding as of quarter end was $504.5 million comprised of the following: $104 million on the convertible bond base amount, $275 million on the term loan and $125 million on the RCF. In the third quarter, we entered into interest rate swaps on $75 million notional relating to the new upsized term loan amount. As of September 30, 75% of our total debt is now fixed and an removement in underlying interest rates. Inclusive of swaps that we have in place, the all-in weighted average interest rate on our total debt position is approximately 5.2% today. For more information on our debt facilities, please reference the debt term summary slides in the appendix. Please turn to Slide 12. As we look ahead into Q4, we are providing you with the following informational outlook. Owned available days is projected to be 4,560 after taking into consideration estimates for both scheduled and unscheduled off-hire. As I indicated earlier, as of today, we have fixed approximately 68% of our owned available days at a TCE of $15,655. Please note this figure is inclusive of our pro rata estimate for realized of big gains and losses for the period on a mark-to-market basis. On the expense side, we are projecting the following on a per owned days basis. Personal operating expenses are expected to remain flat in the range between 5,900 and 6,200. Noncash depreciation and amortization expense is projected to come in between $3,200 and 3,400. G&A cash expenses are forecast to come in between $1,700 and 1,900. As a reminder, this figure is based on our own fleet only and does not take into account our vessel operating days for the chartered in fleet. Noncash stock-based compensation is estimated to come in between $300 million and $400 million. Net interest expense is expected to commit between $1,300 and 1,600. As of September 30, we had 9.3 million basic shares outstanding and 12.8 million diluted shares outstanding after taking into account the shares underlying the convertible bond and unvested equity awards. This concludes my remarks. I will now turn the call back to Gary, who will discuss industry fundamentals.
Please turn to Slide 14. As mentioned earlier, freight rates have posted a meaningful recovery since early August. The Atlantic market is holding up well, thanks to strong grain exports out of both Brazil and now being supported by grain exports from the U.S. gulf as well. It's also benefiting due to a shortage of available tonnage in the region. Our drought in Central America has led to low water levels in Panama and force the canal authorities to put in place restrictions to the number of vessels transiting through the canal, leading to a rise in vessel delays.Under normal conditions, approximately 32 vessels can transit to the canal each way every day. Recently, that number has been reduced to around 25%. Just this week, the canal authority said the number, will be reduced further down to just 18 vessels per day by February. This reduction will continue to add to delays and also increase ton miles for vessels that are forced to use alternate routes. Rates in the Pacific Basin, which have benefited from elevated Chinese coal imports in recent months appear to have reached a seasonal peak in mid-October and have traded off. It's worth mentioning that the Israel Hamas conflict has not materially impacted the drybulk market as the Eastern Mediterranean is not a significant import or export region. However, the elevated risk from a macro perspective is real and could have meaningful consequences for global growth should the conflict widen. Please turn to Slide 15. Our scrubber position remains unchanged with 50 of our ships or 96% of our fleet being fitted with exhaust gas cleaning systems. Fuel prices generally rose during the third quarter with HSFO rising by 18% on increased demand from the Middle East for use in power generation and tighter HSFO supply as EU continued to be impacted by the ban on Russian crude and refined products. VLSFO, which tends to be highly correlated with crude oil rose by 9%. As a result, fuel spread between HSFO and VLSFO averaged roughly $86 per ton for the third quarter. Notwithstanding the contraction in fuel spreads during the quarter, we've seen a meaningful widening in recent weeks due to a relative drop of HSFO prices stemming from increased supply of HSFO as more Russian crude is going into Asian markets and West African crude production increased as well relative to earlier this year. The crude from these regions generally results in more HSFO production than from other regions. The current fuel spread for the fourth quarter now stands at around $150 per ton. Based on the 2024 forward curve of $115 per ton, we estimate our scrubbers would generate approximately $30 million of incremental earnings on an annualized basis.This translates to an incremental sea benefit of approximately $1,650 per day, representing a meaningful contribution in the current freight environment. Please turn to Slide 16. Mimicking the trend in freight rates, asset prices bottomed in August and have since traded up by approximately 10%. Buying interest remains focused on a more modern tonnage and still seems to be dominated by European-based shipowners who tend to have more of an asset trader approach to investing. Asian buyers, which have generally been out of the market for most of the year appear to be showing interest again, and we view this as a positive signal for market sentiment and general direction. For Eagle, we continue to monitor the market and evaluate opportunities that can further optimize our fleet and enhance our competitive position. Since 2016, we've executed a total of 58 sell on purchase transactions turning over 52% of our fleet and generating incremental value for the enterprise and our shareholders. Please turn to Slide 17. Fleet supply growth slowed in Q3. Total of 113 drybulk newbuild vessels were delivered during the period as compared with 132 in the prior quarter. Newbuilding deliveries in Q3 were partially offset by 37 vessels, which were removed from the market and scrapped. Notably for Eagle, 12 midsized geared vessels were scrapped during the quarter. While still low, this represents a very significant increase and compares to just 9 midsized vessels scrapped during all of 2022 out of a fleet of approximately 4,100 vessels. As we have mentioned previously, despite high scrap prices that have averaged around $540 per tonne in 2023 thus far, the low level of demolition is not surprising given the strength in the underlying spot market during 2021 and '22 and the apparent shared sentiment by owners that rates will be strong going forward. In terms of forward supply growth, the overall drybulk order book remains close to historically low levels of around 8.1% of the on-the-water fleet. Despite rising modestly in recent quarters, it's noteworthy that the delivery range of ships that have been ordered now extends more than 4 years even into 2028, lowering the impact of the order book even further as compared with headline numbers. For 2023, dry bulk net fleet growth is projected at 2.9%. The main driver of this low growth rate is a continuation of muted deliveries, which has occurred despite low levels of scrapping across all dry bulk segments. We also note that scrapping in '23 was forecast to be as high as $30 million deadweight last year, but that projection has continuously been revised downward and is now forecast at just 6.7 million deadweight tons. Total of 71 ships were ordered during Q3, down 60% from 169 ships during the prior quarter. Notably, this is the first time in 3 years that contracting was under 100 vessels for a quarter. It's also worth noting that the vast majority of orders being placed today will not be delivered until 2026 or even later. Please turn to Slide 18. The longer-term future supply dynamics continue to look very favorable. Based on delivery of the current order book as well as anticipated scrapping levels, the midsize fleet is expected to surpass the record average age of 11.8 years in mid-'24. A positive from this trend is that there's an ever-increasing number of significantly older ships that will need to be recycled during the coming years. As we noted on the previous slide, the forecast for scrapping over the next year or two has been continually revised downwards, which only increases the average fleet age and adds to the pool of potential future scrapping candidates. It's worth noting that ships over 15 years of age need to dry dock every 30 months, which translates to a meaningful and ever increasing cost for ships as they age. Given limited yard capacity, relative cost advantages of secondhand ships versus newbuildings as well as uncertainty surrounding decarbonization and future fuel propulsion technology, we believe ordering and the resulting order book will remain low for some time. We expect these dynamics combining a near record low order book with a near record fleet age to further improve the supply side in terms of fleet development in the coming years. Please turn to Slide 19. The IMF is currently projecting global GDP growth to reach 3% for 2023, unchanged from their previous forecast in July. For 2024, global GDP is expected to grow by 2.9%, which is a 10 basis point reduction compared to the July estimate. The forecast notes that both headline and core inflation rates are being brought under control in most countries. At the same time, the soft landing scenario where inflation control is achieved without a meaningful downturn in the economy looks increasingly likely. The IMF does note that the GDP outlook faces potential downside risk from both the deepening of real estate crisis in China as well as volatility in commodity prices. In terms of the drybulk market, total trade demand for 2023 is expected to come in at 3.7% on a core basis and improved further to 4.6% once factoring in the ton mile effect. Please turn to Slide 20. Looking into the details of drybulk demand on this slide, we note that 2023 forecast for most commodities has improved since our last earnings call. Iron ore demand growth has been revised upward by 150 basis points to 3.9%, primarily on an upward revision in Chinese demand of 29 million tonnes. Coal demand has also been revised upward by 70 basis points to 6.4% growth for 2023, an increased demand from China for both thermal coal and cooking coal, which has been partially offset by reductions in coal demand from Europe, India and Japan. Demand for minor bulks is generally holding steady with an upward revision of 60 basis points to 1.9% growth on an absolute basis for 2023, which is led by increases in trade demand for steel, scrap, aggregates as well as sugar. In terms of grains, trade demand growth has been revised upwards by 135 basis points to 3.7% in 2023. On the export side, increases in estimated trade volume has been led by Brazil and Russia, but also includes increases from Canada, Ukraine and Australia, partially offset by decreases from the U.S. and Argentina.Looking ahead to 2024, it's now projected for minor bulks to lead drybulk demand with growth of 3.2% on a core basis with increased demand forecast for nearly all minor bulk commodities. Major bulks are projected to grow at just 0.1% on a core basis with the increases in the grain trade being offset by decreases in both iron ore and coal. The strong minor bulk forecast is particularly important for Eagle Bulk, which historically derives approximately 2/3 of its cargo demand from minor bulk cargoes.Please turn to Slide 21 for a recap. Given Eagle's exclusive focus on the midsized segment as well as a commercial platform that has a track record of meaningful outperformance, we continue to be in an optimal position to maximize utilization and capitalize on a rapidly evolving environment. Looking forward, we remain positive about the medium-term prospects for the dry bulk industry, particularly given strong supply side fundamentals. With a fully modern fleet of 52 predominantly scrubber-fitted vessels with approximately $170 million in total liquidity, Eagle is well positioned to continue to take advantage of opportunities for the benefit of all of our stakeholders. With that, I'd like to now turn the call over to the operator and answer any questions you may have.
[Operator Instructions] Our first question comes from the line of Liam Burke with B. Riley Financial.
Gary, you mentioned a number of things both on the supply and demand side to drive up rates or improve the rate environment. They're still trending below historical averages. Is there anything else out there that's holding rates back? Or is it just the market? I mean it would seem that supply is very tight. The demand for commodities is positive. It shouldn't take a whole lot to get rates going, especially with the tight fleet supply?
Yes. First of all, we definitely see that the markets move fairly quickly and both directions is volatility, which I think speaks to your point about fairly tight balance in various markets. The supply side, I think our view is looks extremely compelling given the historically low order book, along with the almost record age. Having said that, we just haven't seen meaningful scrapping now for 6 years. As I mentioned, this quarter, 12 ships is not a big number, but at least it's significantly more than last year when it was 9 all year. We need to see that scrapping and I believe we are starting to see it because you just can't keep steel ships in a saltwater environment going forever. As I mentioned in my prepared remarks, ships over 15 years old, need to dry dock every 2.5 years. We think that's coming, that's scrapping, and that's really what's going to tighten up the supply side. On demand, demand has been, I think, strong on a relative basis from where it was expected. As I mentioned also in my prepared remarks, most commodity demands have been -- were revised upward over the last quarter. Having said that, I think the big headwind we faced this year was really an unwinding of congestion, much more efficiency in ports, particularly in China, not much congestion there. On top of it, there's also a lot of ships taken out that for drydocking, newer ships every 5 years, and I mentioned the older ships every 2.5 years. During COVID, with Chinese Zero COVID policy, dry dock times went up significantly, and they're now back to normal. I think we faced an unwinding of global congestion that really was -- had a profound impact on the market. Having said that, we got to pre-COVID levels in terms of congestion. As I mentioned also in my prepared remarks, we're starting to see some bottlenecks in various areas. Panama Canal is one example. Also, there's a significant amount of congestion on smaller ships waiting to load sugar off Brazil and things like that. Congestion is a double-edged sword. It's when it comes, it takes supply out of the market. We inevitably it unwinds at times. I think that's one of the things we faced in 2023.
Costa, you've got -- you're looking at a fourth quarter with sequentially higher spot rates. You've laid out what your CapEx requirements are for the quarter, but it looks like you're going to see a nice significant step-up in cash flow. You've got your stated dividend policy. What happens after that?
I think our first kind of way to view that is on repayment of the RCF. We have $125 million of RCF drawn, -- although we don't have to pay anything down on that until 2026, mid-of '26, I think we'll likely look to repay that opportunistically. We also, of course, have the convert maturing in August. As we said, in a number of quarters now, we'll likely look to settle that with some sort of combination of cash and shares. We do have a number of months until we need to put a plan in place for that.
Our next question comes from the line of Ben Nolan with Stifel.
Gary, if I could go back to your Panama Canal stuff. I mean, obviously, there's been a lot of noise in the market about it. I know that the -- as the number of transits go down, still, my understanding is that the container ships are given preference. It's all of the other ships that are really bearing the brunt of the decline in transit. I guess my question though is how big of a deal is it for the Supramax and Ultramax segments, in particular. I mean, do you -- as part of your regular business have many ships going through there? Or is it just sort of on the margin?
No, it's a meaningful part of the business, particularly for grain cargoes out of the U.S. Gulf to China and Asia, and that's the typical trade historically. Having said that, we're now routing ships through Suez, which adds about 10 days, and it's slightly more expensive as well in terms of canals use. That's separate from paying auction rates for Panama. It definitely is meaningful. The other thing is that, historically, it was fairly common for ships that were open. I'm talking about supramax/ultramax ships that were open on the West Coast of Central America and South America to ballast through the Panama Canal into a loading area, whether that would be MCSA, Colombia coal or the U.S. Gulf. That's a nonstarter right now. There's a lack of ships that are able to get back into the Gulf in an efficient manner. Which also causes a lack of available tonnage there and is positive for rates coming out of the U.S. Gulf. We've seen that just this past week. Anecdotally, we fixed one of our ships out of the U.S. Gulf at a rate of $32,000 per trip to the Far East, that again was routed by Suez.
Then just optically, the number of charter-in days that you guys have, I think it was 589 or something like that, was meaningfully below where it was last -- almost half of what it was last year, and it was even still meaningfully lower than what it was in the second quarter. Is that just the normal cyclical dynamic? Or maybe any color that you can give on the chartering book.
Yes, it's a good observation. I mean, essentially, the amount of short-term trading in and out, which is a fair amount of what we do is pretty static, but we had a number of charter in vessels. Given the weak market over the last number of months through the summer, those ships were redelivered options aren't declared. It's a normal ebb and flow.Then in a weaker rate environment as we take more ships on charter for whether it's for, call it, 3 to 5 months with options or a year with options, you start to see that grow. What happened previously was as the market -- as we had ships with options and the market was strong, those options get declared and that's, call it, a base, for every ship that you have in on period for a quarter that's roughly 90 days. What you're seeing there is a lack of those period in ships as they were redelivered given the weakness in the market.
As we look into the fourth quarter, obviously, you've announced that the rates are somewhat better than they had been. There should be in theory, a little bit of a bounce back in that charter in as you, in theory have options that are declared. Is that a fair assumption?
Well, I would say it this way. I think directionally, over the medium term, I think you'd see that number grow, but I wouldn't speak to the fourth quarter because as you start to take ships in, it takes time to build that up and then declare options on top of new charters. I wouldn't -- I don't want to give guidance that, that number will increase significantly in Q4, but I think you'll see us trending back to kind of a more average or mean number as we go forward.
Our next question comes from the line of Greg Lewis with BTIG.
Gary, I was curious, just as we watch the rate market, and I think you were touching on it a little bit. Can you talk a little bit more about kind of what drove the higher rate performance over the last couple of months and really the Q4 bookings look a lot better, I think, are looking a lot better than I think a lot of us thought maybe before the quarter started?
Yes. I mean I think the main driver is grain. Historically, the South American grain market was a Q2 event that's built into July. What we're seeing now is really robust grain. I mean, as I mentioned in my remarks, Brazil had a record crop. We're still seeing very significant amounts. Also in the U.S., the beginning of the year, exports in the U.S. grain exports were down 26% in the beginning of the year, and they're making up for that in a meaningful way. Overall, we expect them to be down sequentially year-over-year, but significantly up on the latter part of the year, which is, of course, the fourth quarter, which is typically the strongest. When you combine the grain exports out of Brazil, along with out of the Gulf, that's the main driver out of the Atlantic. Of course, as I mentioned, ton-mile days are going up as ships go via Suez instead of Panama and/or wait at Panama for transit. In the Pacific, what drove rates, I think a significant amount of increase in coal voyages particularly in China, and that's abated a bit. I think those were the main drivers. Again, it was definitely led and continues to be led by the Atlantic.
Then I did have another one. You mentioned that scrubber, the high sulfur fuel kind of fell off. I know you guys are always looking to hedge freight. Is this something where we could maybe hedge some fuel but kind of lock in a decent scrubber spread here as we kind of look out over the fuel curve?
The answer is yes. We definitely can. We had a meaningful scrubber hedge position going into 2020, which ended up being very beneficial given what happened with COVID. Having said that, we haven't done hedged fuel spreads over the last couple of years for a number of reasons. The numbers, except for recently when they spiked up in 2022. The forwards were still significantly below that significantly backwardated. I think our view is we're open to it. We monitor the market. When you combine the transaction cost and the wide bid as that happens in the futures market, we just don't think it's that compelling.
One for Costa. I'm not even sure if we have -- if you have this readily available. Any kind of color around how many dry docks we should be thinking about for next year?
Yes. We do -- if you look back in the appendix page, we do offer kind of a CapEx schedule. Yes, in terms of dry docks for next year, it's about 10 or so.
Then just as we think about that, and do we try to attach those with kind of the strength of the market?
There's sort of a window that we are able to affect the drydock and that's dependent on the special survey date. It fluctuates between probably 3 to 5 months roughly. There is some wiggle room there that we can kind of try to optimize based on the market and based on the position of the ships.
Really, what I'm wondering is, Q1 is seasonally weak should -- if we think about throughout the year, would we expect a few more maybe in Q1 than the rest of the year kind of?
Right now for Q1, we have three scheduled -- for full year calendar '24, we actually have six. A bit last night than I mentioned before.
[Operator Instructions] Our next question comes from the line of Omar Nokta with Jefferies.
Gary, you outlined that ship values have been on the rise kind of since August and generally have been pretty firm even with the downshift we've seen in rates in the recent quarters. Just wanted to ask kind of what do you think is behind the uptick?You mentioned there's been a focus on modern tonnage. How much of this sort of brides and firmness in the secondhand market has to do with people looking or scrambling perhaps to modernize ahead of regulations versus, say, are bullish on the outlook. Is there any way to maybe sort of qualify that to give us a sense of what's driving the strength in the S&P market?
My view is it's really driven by future rate expectation in the sense that you don't need to modernize today, let's say, in particular versus if you think the market is going to be flat for a while. I mean, people are seeing the slide we put up, which speaks to the average age against the order book, I think, is extremely compelling.Notwithstanding the fact that we're approaching record age, the order book and our slide speaks just to the midsize is at 9%. People see that. That, combined with the fact that companies have made significant amounts of money over the last couple of years are positioning themselves, I think, for what we believe is going to happen, and that is that these older ships inevitably will have to scrap and the headwinds that we've seen on some of the demand side will abate and that will be extremely positive. There's simply not the capacity to put new supply into the market in a meaningful way in a short time span. At the moment, you're ordering ships, typically, you're talking about 2026, even 2027. As these older ships start to scrap and you've got any kind of reasonable demand pop, I think people are planning for that. I also think part of the reason, aside from the age profile is and we've spoken about this before, right, the uncertainty around things like carbon pricing, future propulsion regulations, CII and what that's going to mean. ETS is coming into effect in January. When you put all those things together, older ship is going to become less efficient, even noncompetitive and people see that. To me, it's really about an expectation of a more robust rate environment going forward. The numbers and the graphs that illustrate that, I think, as I said before, I think, are quite compelling.
Second question I just have is, clearly, the Eagle Bulk got a pretty good amount of liquidity even after the buyback of the Oaktree position. You've got a pretty solid balance sheet. Just in terms of the convert that comes due next year, I think it's July, I know you've been asked this in the past. Any thoughts on how you envision that maturity playing out, assuming it stays in the money, do you take your capital and sort of do a cash, it would take it out for cash? Or do you prefer to have it convert into equity?Any thoughts there updated thoughts ahead of that?
Yes. I think it's very much dependent on where things are in terms of the -- our share price, the rate environment. It is in August. As Costa mentioned, there's a very good chance. It's a combination of cash and shares. We believe we have a lot of different options in that regard where a new data extension of convert a combination, again, and part of that will be how comfortable we are and what our cash balance looks like and how much we want to use of that. It's shipping, and next August is a long way away. We're definitely focused on it, but we don't have to make any decisions now. Again, where the shares are trading, I think, will also be an important part of our decision process as we go forward.
I'm showing no further questions at this time. I'd like to hand the call back over to Gary Vogel for closing remarks.
Thank you, operator. We have nothing further, but I'd like to thank everyone for joining us today and wish everyone a good weekend.
This concludes today's conference call. Thank you for participating. You may now disconnect.