Will All Shipping Companies Suffer Equally?
Forbes reported Thursday that the Baltic Dry Index, which measures dry bulk shipping rates around the world, fell 3.9% to 733 points, the lowest reading since 1987 and down 94% since May’s high. If shipping companies are banking on China, one look at record contraction in its manufacturing sector will cure that.
Ship Finance International (SFL) and Frontline Ltd. (FRO) recently reported sharply different results. Ship Finance maintained its dividend, for example, while Frontline cut. (From Frontline Ltd.’s Q308 conference call:)
The reduction in the dividend was taken after a thorough evaluation of different items but of course the newbuilding commitments, the weak fundamentals that we foresee in 2009, and also the squeeze in the credit market was important in that consideration.
From Ship Finance International Ltd. Q308 conference call:
The vessel operating expenses are down from the previous quarter and also compared to the same period of last year, and we see the fruits of our deliberate avoidance of operating expense risk, as we have seen those expenses escalate very substantially over the last few years.
All vessels to Frontline are operated at $6,500 per day fixed by Frontline and that includes dry docking. When Frontline reported their numbers today, they reported an average operating expense year-to-date of $11,000 per day, which is significantly over the $6,500 per day that we pay.
From Frontline:
Rates dramatically changed in the third quarter in 2008. There was a complete sentiment turn basically from fear of oil supply to fear of demand.
The high rates for VLCCs were $164,000 per day to lows down to $29,500. At the end of July the market for VLCCs fell more then 100 WS point within one week and our strategy of fixing short higher paying [AGE] voyages proved to be wrong.
The profit share agreement with Frontline has been very favorable for the company… The profit share has generated approximately $90 million in average annual incremental cash flow which is more than $400 million over the 4.5 year period the company has been in existence and this has enabled the company to fuel significant growth. And based on the market outlook we expect that the profit share to be significant also for the fourth quarter this year.
Frontline has announced that four vessels will be dry docked into the third quarter and this will of course influence the profit share contribution from those vessels.
The book value of our assets are significantly below market values for the third quarter and as an illustration: For the Frontline fleet they had around $3.7 billion charter fee value for the third quarter. We have approximately $1.7 billion book value in our balance sheet and the loans we have against those vessels amounts to approximately $1.2 billion.
Frontline is banking on China and oil price gains (from FRO):
A positive thing in the market is the stimulus package which is being introduced. We hope that of course they will mean increased demand for oil and consumption.
Strategic stock building in China has not happened yet. There has been various discussion that maybe one way of spending money in China is to buy oil at the present low price and then do some stock building. This will of course be a positive for the tanker market.
Finally, oil prices [are] in contango meaning that the forward price is higher then the present price. The contango right now is around $7 to $8 per barrel six months ahead which has made it attractive for various oil companies and oil traders to fix VLCCs and put the ships in storage.
Frontline appears more exposed to credit market uncertainty:
The company expects maximum $300 million in additional funds will be needed to complete the full financing of the company’s newbuilding commitments. If credit markets don’t improve before 2012, this might have to be funded from the operational earnings from existing and new vessels.
The main wildcard in the tanker order book for Suezmaxes is that basically half of the order book is ships going to be built at Greenfield Shipyards, e.i. shipyards that have not built any Suezmax tankers before and delays will happen and is already happening.
The yard where we ourselves have eight ships on order, have seen delays and we have already adjusted our deliveries with one quarter and we expect further delays there. The light blue in 2008 is five ships from Rongsheng should have been delivered this year and they’ll be delayed onto next year. So we see further delays there.
Finally the Gulf of Aden we have put in there, that’s a lot of media attention these days of piracy and most likely some owners already have decided they will go around the Cape and we ourselves will put into a policy that we will try and follow the escort ships, or marine ships that are in the region so there will be some delays.
But SA’s Tim Plaehn writes that Ship Finance International’s (SFL) results are closely intertwined with Frontline Ltd.’s (FRO) because Frontline leases most of its tankers from Ship Finance and the companies share profits from leased ships. He notes:
Frontline is the big gorilla in the tanker market and their long term fleet growth plans will eventually reward shareholders with piles of dividends. However, FRO has a daily break-even of $24,800 for their Suezmax tankers. Nordic American Tanker (NAT) with their small, all Suezmax fleet has a break even of less than $10,000.
Even though results are different, could one's difficulties bring down the other?
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This article has 17 comments:
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CT Programmer
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116 Comments
Dec 01 08:16 AM-
vatexas645
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9 Comments
Dec 01 08:28 AM-
cos1000
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1198 Comments
Dec 01 09:25 AMGood point. FRO only has 8 vessels out of their 76 that are capable of transporting ore, O/B/O types, 10.5% of their fleet. SFL has 8 of their vessels being O/B/O types and only 1 dedicated Dry Bulk vessel, of their 58 vessel fleet or the potential for 15.5% of their business effected by dry bulk rates. Using the happenings of the BDI, BPI, or BCI to explain the quarterly results of these companies is only as effective as the percentage of their business participating in this type of transport IMHO. Reporting on the effect of the oil transport industry for both of these companies would seem to be more meaningful, with dry bulk sprinkled in as a punctuation mark of the economic downturn for this sector in general..
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James Wilson
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133 Comments
Dec 01 10:30 AM-
User 310144
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2 Comments
Dec 01 11:18 AM-
skipper
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13 Comments
Dec 01 12:07 PM-
old trader
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70 Comments
Dec 01 11:31 PM-
tonmiletrader
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1 Comment
My Website
Dec 02 11:26 AMtonmiletrader.com
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poor&unemployed
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31 Comments
Dec 02 12:35 PMSenior management will personally own all the vessels within next 5 years. - management 100 - Share holders - Zero.
It's same old game from 90's.
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cashflowtrader
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3 Comments
Dec 02 12:54 PMfinance.yahoo.com/q/cf...
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Chris B
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501 Comments
Dec 02 04:02 PMThe difference is that quite a few of the more leveraged shipping companies could go under as a result of prolonged low day rates, so buying shipping companies now is far more risky than buying oil producers or servicers now. This is especially true when one pirate attack could bankrupt a carrier. The smart companies are dry docking their ships for maintenance and buying oil futures.
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nmelendez@prw.net
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120 Comments
My Website
Dec 02 05:28 PM-
Anthony Alfidi
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108 Comments
My Website
Dec 02 10:10 PM-
poor&unemployed
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31 Comments
Dec 03 10:44 PMwww.forbes.com/2008/12...
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Roy M.
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352 Comments
Dec 08 01:11 AMIn good or bad times. In bad times, it's good time
for investors to buy. Patiency is the word.
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s_m_p
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4 Comments
Dec 15 06:37 PM-
Gregorian
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4 Comments
Dec 19 02:15 PMHis name is John Fredriksen, and is regarded a big celebrity in Norway (a bit like W. Buffett in US). I won't give you the whole story here, but through his Hemen Holding company, he's having de facto control over these companies. It seems like SFL has been given the role of a "bank", while Fro is more like a high-risk player in the tank market.
Many of you seem concerned about the high leverage in these companies. But this has always been Mr. Fredriksens game. He's draining the companies of dividends, BUT at the same time he keeps a (huge) pile of cash ready in case there's a market downturn (and there is one now...right?). Just look at the capital injection in Frontline earlier this year. He's been doing this many times before. He would not let any of his companies go bankrupt, and he has the means to avoid it, too.
So I'd like to make clear that the inherent risk in investing in these shares is much lower than it seems. That includes Fredriksens other companies, such as Seadrill (SDRL) and Golden Ocean (GOGL), but I don't know if these are listed in the US.
"It's always darkest right before sunrise" (bad quotation, hopefully meaning clear..?), nowhere in the investing world is this more true than here. People who'd invest alongside Fredriksen could make 1000% profit, given optimal timing. I know, cause I missed out on it a couple of times already...