Friday, July 28, 2017

Brookfield buys into TeeKay Offshore

TeeKay Offshore Partners (TOO) has been an industry leader in the shuttle tanker and floating storage business. It most direct competitor is Knutsen Offshore, more recently listed but an established operator with Japan’s NYK as partners. Although the offshore business is under stress, shuttle tanker are on long term employment, there are entry barriers to the business and the assets are in limited supply. TOO has recently struck up a new business partnership with Brookfield Business Partners - a new dominate shareholder - that rewrites their balance sheet. This ring fences TOO liabilities for parent TeeKay Corp and makes TOO a formidable player in the marine offshore infrastructure market.

Latest 1st Quarter financial results for TOO showed profits of US$ 15 mio and distributable cash flow double that amount. Both the shuttle tankers and the FPSO floating storage business were profitable. There were no Auditors remarks. These were better result than a year ago 1st quarter 2016, when they had some small losses, most likely from asset impairment charges. Their bank leverage is on the high side (70%) but not yet to the point of breaching LTV covenants.

What destabilized TOO was the generally poor business climate and concerns about possible future difficulties. The catalyst for this was last June when their Lenders sold some US$ 75 mio of the company's secured debt in the secondary market at a discount, reportedly at levels between US$ 0.75 and 0.85 on the dollar.

This precipitated a panic in the share price and spiked over to the parent company TeeKay Corp. It was all about future issues, not  present liquidity issues that risked possible insolvency. There was the matter of future asset values for very specialized assets in a narrow resale market. Oil rig assets in recent distressed sales have lost as much as 60-70% of their value. There was the matter of future contract renewals. In fact, TOO was recently obliged to renew at reduced rate one of its FPSO contracts. Queiroz Galvao Exploracao e Producao. Finally, there was the impact on TeeKay Corp struggling itself in the currently beleaguered tanker market.

The situation was an opportunistic investment for Brookfield Business Partners with a capital injection of US$ 610 million. Brookfield is taking a 60% stake in the company. TeeKay Corp retains a 14% share in the business, injecting a smaller capital amount of US$ 30 mio. Brookfield is also taking a 49% stake in the general partner and providing them an intercompany loan of US$ 200 mio, allowing them to restructure their debt and extend maturities.

They are planning to separate the shuttle tanker business from the offshore floating storage and placing an order for four additional shuttle tankers.

Brookfield is reputedly a low risk investor, seeking 15% long term returns, which is a realistic target in the shipping industry. Given the general situation in Offshore and uncertainties with low oil prices, etc,, it may take a few years until recovery but there is a fair likelihood that the curtailment of new offshore projects the last few years will lead to shortages as older fields like the North Sea are depleted and new projects in the future.

Thursday, June 22, 2017

Odfjell acquiring Georgiopoulos chemical vessels to be delivered and taking the commercial management of the delivered vessels in a common pool.

When Peter Georgiopoulos jumped on the band wagon back in 2014 and moved into the chemical tanker sector with a speculative order in China and establishing Chemical Transportation Group, it was clear that the MR/ handysize stainless sector was clearly going to be over invested and rates would disappoint from the excess capacity.  I have mentioned this in a prior post: Is Peter G’s sudden foray into chemical tankers a clear signal to short the sector?

Peter was a chemical tanker outsider with no knowledge of the industry and a career of speculative asset plays. Peter G is essentially an asset trader with mixed reputation on operating profits. He has made some very good asset plays and had also some very bad calls resulting in disastrous hits for his investors that crashed into bankruptcy and reorganization like Genmar and Genco.

Now we see Georgiopoulos monetizing half of his chemical fleet and breaking off from his pool managers, Hansa Tankers, to a new pool with Odfjell, who already has Celsius Tankers backed by Breakwater as clients. This appears a wise move on his part. Doubtful that he is making the profits that he expected but then he walked into a sector of the market where he had no experience.

Chemical tankers have had traditionally poorer returns on asset than any other shipping sector. It is small market that is only 3% of the entire tanker market. Stainless steel chemical tankers are expensive, specialized assets that only a few can operate efficiently because of the parcel nature of the cargo lots and the need for a contract base with end users. The vessels are often built to order for the needs of the major operators. It is generally a very narrow resale market where the best contenders are a handful of peer operators. It is difficult to time the sales because the vessels are committed to contracts and cannot easily be freed up. Because it Is a relatively small market size, it does not take a lot of ordering to flood the market with over capacity.

A great deal of ordering has been motivated by the shipyards. In this particular cases, Ding Heng in China wanted to develop a niche market reputation for handysize stainless-steel chemical tankers. Building a stainless chemical vessel is much more difficult than an LPG carrier. In the case of LPG vessels, the cargo tanks are pre-fabricated by the manufacturer and then mounted into the vessel by the shipyard. LPG vessels only have a very few cargo tanks. In the case of stainless steel vessel, the cargo tanks are many and they have to be built into the vessel. This work is very costly and requires skilled welders that know how to work with stainless steel. It can also result in painful, loss making contracts for novice shipyards with higher construction costs, unexpected delays and performance problem.

The Italians built the last generation of stainless vessels back in the late 1990’s under state yard subsidy schemes. They were replaced in part by a new generation of vessel with Marine Line coating built speculatively in Turkey. None of these vessels built every made much money for their owners from these two periods of ordering binges.

The Japanese have been very successful in building high quality clad stainless vessels with very standardized designs without room for modifications. They are supported by domestic Japanese owners, who then time charter them on a long term basis to the major operators like Stolt, Odfjell and Tokyo Marine. These are very reliable cookie cutter designs of good quality.

The above major chemical tanker operators are a ‘defacto’ industry oligopoly. The entry barriers with the end users for major contracts are substantial. They create base cargoes for which profits come from the completion cargos on the spot market. As in any competitive, relatively low margin business, the major operators are best served with a mixed fleet of chartered and owned vessels, where they can add and subtract tonnage according to market conditions. Speculative owners are very much price takers in this process.

Georgiopoulos tried to soften this by turning to Hansa Tankers in Bergen, Norway for pool employment. Hansa was a break off from the collapse of Bryggen Tankers where one of the partner, Hans Solberg, decided to go on his own. Hans Solberg has built up a very impressive commercial/ pool management business in this sector with an impressive roster of clients, comprised of some major Japanese names, some institutional investors in the sector like Princimar and Greek operators like Interunity and Georgiopoulos who moved into the sector a vessel operators without chemical tanker commercial management skills. Commercial management in the chemical sector is a lucrative business.

Currently, the chemical markets are weak. Last year was not a good year and this year is proving difficult. The Odfjell move makes sense and is no surprise as part of the inevitable chemical tanker industry consolidation process. You have a major chemical tanker operator partially absorbing a novice operator as well as undercutting Hansa commercial management and poaching the existing Georgiopoulos vessels to their own management.

Monday, June 19, 2017

Major Management changes after Aegean Petroleum disappoints with signficant earnings shortfall

Aegean Petroleum (ANW) with its unusual business model compared to its bunker supplier peer competitors has been courting trouble for a long time that is finally beginning to roost on is management.  The company reported much worse than expected earnings for 1st Quarter 2017. Its CEO John Tavlarios resigned.  Neither Tavlarios - as director - nor Peter Georgiopoulos as Aegean Chairman garnered enough shareholder votes to continue on the Aegean Board of Directors.  Aegean announced that they want to move to an asset light business model, effectively throwing in the towel and following their competitors’ business model.  In my mind, it was a miracle that they were able to continue their previous course for so long in this brutal, overly competitive, low margin business.

I have been warning for years on Aegean and its weak and incoherent business strategy.  See my previous posts.  Aegean Marine Petroleum Network: lagging competitors with low return on investment and mounting financial expense eroding earnings margins

The marine bunker business has the worst earnings margins in the fuel business.  The competition is brutal.  The normal course of most marine bunker companies is eventually to sell out to competitor companies.  Aegean stock price performance – always below NAV - has been crying out for years that its shareholders would be better served by this path given that a merger with an established competitor like World Fuel would offer them better value. 

Many of the peer companies are arms of major commodities traders such as the case of Chemoil that was acquired by Glencore.  Others like World Fuels (INT) are highly diversified in the fuel business in other more profitable areas like fuel for land trucking and jet aviation.  They are companies that have low leverage and are able to finance their sales with ample working capital. 

Aegean followed an inherently Greek strategy to build up assets and leveraged up in the process with debt.  Their IPO was to acquire an owned fleet of double hull bunker vessels and somehow gain competitive advantage with this delivery system. Never mind that marine bunker supply is a trading business and these assets are cost to them as part of their delivery system in their sales to customers, making this a ludicrous strategy for competitive advantage.   

Why Aegean attracted so many major value investors is something that I find inscrutable.  I have done consulting work on Aegean over the years for some of them and the experience was disconcerting.  I discovered the most incredible misconceptions about Aegean.  Many actually believed that Aegean with its bunker vessels was another Greek shipping company with tankers instead of a bunker supplier!!!! They were shocked when I tried to bring them to reality of the Aegean business model and explain to them how the bunker fuel business works. 

Several years later under the urging of Aegean’s founder, Mr. Melissanides, who had some land in Fujairah, Aegean embarked upon a strategy of building oil terminals for its bunker oil to be sold to customers.   

Now liquid storage for third parties as a business Is normally more profitable with better returns than selling bunker oil or even transporting oil for third parties, but this was to acquire the physical commodity and then sell it to its customers in competition with its peer competitors.  The logic was along the same lines as its fleet of bunker tankers.  Adding these assets to the balance sheet as well as the bunker fuel inventory required additional financing, for which Aegean increased its leverage and finance costs. 

By comparison, Glencore – a major trading company – upon acquiring Chemoil started to divest of Chemoil storage facilities to lighten up the balance sheet on the logic that rented space would be cheaper and more efficient.  Moreover, peer competitor companies generally avoid physical bunker commodity, preferring to purchase from producers like major oil companies and hedge their sales to customers with derivatives.   They all fostered an asset light business model to support their bunker trading business competitively given the very low margins on sales.  Concurrently, they wanted to keep finance costs to a minimum. 

Aegean actively bought market share as a growth strategy and raised additional capital to do so.  Over time, Aegean got more and more bogged down with a heavy asset based balance sheet and aimless expansion without a coherent strategy for competitive advantage and better earnings margins. 

Personally, I give enormous credit to John Tavlarios that he managed as well as he did to hold on for so long given the extensive challenges that he faced with such an unproductive business strategy against a lean, brutal competition.  But these dramatic events where Aegean now publicly want  themselves to move to a more asset light business model that they have finally seen the light and thrown the towel here. 

Agile low-cost newcomers are cropping up in their major fuel hubs.  The market is saturated with back to back trading entities.  Aegean is going to have to start selling off its assets, deleverage and consider potentially exiting less profitable markets. 

The biggest jack asses in this mess are Aegean’s two largest shareholders  Canada’s Senvest Management and US-based Towle & Co. who bought into Aegean and are the largest shareholders.  They should have realized years ago the incongruities in Aegean with its asset heavy approach.  The case speaks for itself!  Hopefully, they will work themselves out of this to create some value for their investors.  Despite the challenges, I believe that Aegean shareholders could see better days with the management in the right hands.

Wednesday, June 14, 2017

Hunter Maritime Capesize acquisition deal flops

It is very surprising that a shipping acquisition deal promoted by the Saverys SPAC, Hunter Maritime and a major NY investment bank, Morgan Stanley would fall flat on its face with investors.  Saverys is a well-known and regarded figure in shipping circles.  Morgan Stanley is a major Wall Street investment bank that has done a lot of  high profile shipping deals.  What went wrong???

This deal was for the purchase of the 175,000-dwt Charlotte Selmer and Greta Selmer (built 2011), the 175,000-dwt Tom Selmer (built 2011), and the 175,000-dwt Lene Selmer and Hugo Selmer (both built 2010). They were all built by Chinese shipyard New Times Shipbuilding.  It was a pure asset deal, not the purchase of a going concern company.  

The originally announced price tag of US$ 139,4 million was higher than the US$ 123 million market valuation.  Eventually the price was reduced to US$ 133.5 million, still a rather hefty premium.   The deal hinged on completing a tender offer to buy back 8.2 million of its Class A common shares, roughly half of the shares sold to the public last year, at $10 per share.  Too many shares were tendered.  

Several knowledgeable sources explained that Investors hated this proposed deal.  Normally to induce SPAC investors to stay and recycle the investor base to de-SPAC, there has to be an acceptable arbitrage over the nominal US$ 10 share value.  The share buyback, moreover, was at par and gave shareholder nothing from it. The deal was poorly put together: small for a US$ 150 mio raise.  Even worse arbitrage and in a sub-sections that traded at a discount of P/Nav!!!  

Morgan Stanley is not considered by the Street a SPAC bank.  They appear to have fallen flat on their faces, unable to help Saverys/ Hunter recycle the shares nor assist in structuring the deal properly to be workable with shareholders in term of the share arbitrage. Why was Morgan Stanley not on the ball here???

Hunter has a 24-month deadline from its public offering last November to find potential acquisitions or return capital to its shareholders. The company said it is still looking for potential acquisitions.

Tuesday, September 6, 2016

Hanjin collapses into bankruptcy and receivership: Sursum Corda!

I have been predicting this sort  of high profile bankruptcy of a major liner company as inevitable for years now.  There are just too many loss making liner companies and sooner or later state support would reach its limits.  The whole matter of counterparty risk for the vessel provider companies has been misconstrued for years now on the false assumption that the liner companies were just too big to fail. 

Seaspan's Gerry Wang calls the Hanjin bankruptcy a nuclear bomb and mixing his metaphors a 'Lehman moment', but did not Wang see this coming?  For years, he was ordering aggressively and chartering out to loss makers like Hanjin.  His policies contributed to this!

This industry suffers from chronic overcapacity and low margins.  Further their business model based on China and head haul routes is in risk of becoming outdated with the slowing of Chinese growth and trade rebalancing as well as technologically obsolescent with the robotics, 3-D printing, etc.  I have always been in agreement with my friend Christopher Rex of Danish Ship Fund on this industry and its prospects. 

I have argued this time and again with my Wall Street investment bank friends. Hopefully, with this Hanjin case, they will start to wake up and understand better the container industry dynamics.  See some of my  blog articles on this subject over the years.  For example, I was very early to point out the large exposure of Danaos (NYSE: DAC) to financially weak liner companies. 

Danaos was somewhat fortunate with the HMM charters receiving shares in restructured HMM in return for reduced charter rates.  In the case of Hanjin, DAC has estimated exposure of US$ 560 million on Hanjin.  First estimates are creditor returns of 35% for secured claims. But only 5% for unsecured claims and zero on liquidation.  That is quite a mark down!

Over the years, Wall Street has made some bad shipping calls like the earlier reckless, irresponsible dry bulk speculative asset plays.  Investors in shipping stocks have frequently lost their shirts. 

Of course, the great thing about shipping markets as opposed to politics in the US and EU - where the usual reaction is to double up on failed policies, buy time and hide the truth from the public - is that you cannot hide financial losses, financial resources are limited and there are natural market corrections, asset write downs and consolidation.  Raw Schumpeter capitalism always prevails keeping the industry lean and mean over the long run, but not without significant volatility and market swings. 

It is not a good idea to get lost in the noise and ignore supply chain logistics that generates the underlying cargo demand for marine transport.

Monday, August 29, 2016

Hanjin Shipping wins Seaspan concessions: the inevitable for the vessel provider companies!

The current plight of Hanjin is representative for the Liner industry: substantial operating losses, need for recapitalization and over indebted balance sheet.  The container industry panacea of ever larger units to reduce unit costs and defend eroding earnings margins is not working out as hoped.  This has created more overcapacity with cascading.  Now there is talk of the Panamax sizes going for scrap. 

World trade growth is slowing. It is not clear that the old model of large ships for headhaul lines is going to meet the requirements of the future with trade rebalancing in China, robotics and the sharing economy of the future.

The cold truth is that there are already more liner companies than the market can support.  A large number of liner companies are making losses.  Some like NOL have been put on the block for sale and are being consolidated into other companies like CMA-CGM, others like HMM and Hanjin are staving off bankruptcy with financial restructuring.

Vessel provider companies like Seaspan and Danaos have built their fleets by every larger vessels that they let on term time charter to financially weak liner companies that want the larger units to defend themselves from the ordering and competition of the stronger liner companies but unable to carry the vessels themselves on their balance sheets.

I have repeatedly signaled out this risky business policy of the vessel provider companies on my blog.  I have stressed that it was not a sound and sustainable business strategy.  The vessel provider companies would face inevitable challenges in the future as the financial situation of the liner companies deteriorates, leading to bankruptcy and restructuring that would inevitably entail charter renegotiation.  I pointed out the heavy exposure of Danaos to HMM and Hanjin as major charterers.  I stressed the aggressiveness of Seaspan to service financially weak Asian liner companies with ever larger units.  Cosco for example recently announces losses of over US$ 1 billion in their liner business, one of their customers.

I have always felt that Gerry Wang's assertions about having a leasing company business model were overstated and disingenuous to investors.  Seaspan lets its tonnage on time charter with operating risks.  With Hanjin in financial crisis, Wang took the hard line on charter negotiations for investor ears, but Seaspan is in a weak position with its exposure in large containerships.  It cannot easily withdraw and redeploy its vessels because the market for these units is not large.  Inevitably as its liner company customers begin to face financial difficulties, Seaspan has no choice but to accept cuts in charter rates to keep them going with their creditors as long as possible. 

Since the original writing of this piece, Hanjin's restructuring negotiations have not worked out and they are going into receivership.  Seaspan is hoping for a merger between HMM and Hanjin and that perhaps with some sort of state support, they might be able to avoid cuts in charter rates.  We will see over time how Seaspans fares.  This is a test for their exposure to other weak Far East charterers and possible state intervention to keep them afloat.

I restate again these points because I have often met dead ears in NY investment banking circles, still enamored with the containership industry.  Over time, the bankers and financial industry are going to have to face the reality:

  • The containership industry is just as challenged as dry cargo with overcapacity. 
  • The growth days from the global megacycle and China boom are over and gone.
  • Liner companies will inevitably be forced to consolidate for survival. It is not clear that very large containerships will be needed to extent anticipated.
  • Vessel provider companies are going to face a long period of thin margins as their liner company employment base shrinks in the consolidation process.
  • Inevitably there is renegotiation risk on their charters that they will not be able to avoid with their liner company customers. 

Sunday, July 31, 2016

Greek Maritime Cluster: Role of the small family shipping business – challenges and opportunities.

What will be the future landscape of the Greek maritime cluster in the coming years ahead? 
The Greek maritime cluster has been facing a period of rising unemployment and shrinkage in the small medium sector,  It has been hit by the bankruptcy of the local banking system, tight money, rising taxation on ships and most significantly the very poor dry cargo markets the last few years, where there is a very heavy exposure. 
Generally these smaller private companies have a lot of bias against their larger listed company compatriots and their use of capital markets and private equity money, which they see as an unsustainable passing fad and a primary reason for the over investment in shipping assets and poor markets. 
These companies generally have older and smaller vessels, primarily handy size bulk carriers, with the larger better capitalized companies operating also Supramax and Panamax bulk carriers. This sector has been the incubator of the maritime cluster, allowing newcomers to enter.  Given the larger number of this type of company, it is a key market for the local Greek service companies such as chartering and ship brokerage firms, crewing, insurance and suppliers.  

As George Economou astutely observed during Posidonia this year, Greeks have been predominate in shipping because they were willing to accept the lower long term returns on shipping assets that others found unattractive. There are a variety of historical reasons for this:  
  • Greece is a small, relatively resource poor country. This drove many Greeks to the sea and created a maritime tradition. 
  • Greece was prior entry to the Eurozone, a soft currency country with constant moderate inflation, where investment in assets was a hedge to currency depreciation and an opportunity for capital gains.
  • Because of the abundance of local seafarers and the family nature of the business, the Greek ship was cheaper and more efficient than most competitors on operating expenses, but this advantage started to erode and has largely been eliminated with the Greek entry into the Eurozone, where Greece lost many other local industries such as ship repairs, textiles, etc.
Still today despite the hikes in ship taxation and EU pressure to eliminate Law 89 offshore law, the cost of maintaining a shipping office in Greece is relatively low compared to lower tax jurisdictions in the Far East like Singapore and Hong Kong. There is an abundant supply of personnel with the increasing unemployment in the sector.

The Greek business model is owner operator. It is based on owning shipping assets and chartering them out for hire with the crew. About 70% of the Greek maritime cluster is invested in dry cargo vessels because of the lower capital requirements and the ease of entering the sector, which is highly fragmented.

The period of growth and success of Greek shipping from the early 1970’s was due to several key factors:    

  • The ability of Greeks to acquire older vessels and keep them running for longer than expected trading life.  
  • The inflation of shipping asset and scrap values along with market fluctuations created significant capital gain opportunities that allowed the company to borrow against higher values to expand and renew their fleets and reduced the nominal value of the bank debt.
  • Abundant bank debt to finance ship acquisitions and roll over the fleet at low cost. Greek shipping was initially fueled by petrodollars and merchant banks, then the German landesbanks and the expansion of the local Greek banks until the 2008 financial crisis and the Greek national bankruptcy within the Eurozone.

The past few years, the climate has changed for Greek shipping. Money has become tight and more expensive, ship values and scrap prices have declined. Earning margins have tightened. The dry cargo chartering market has become more age conscious with a tiered market structure similar to the tanker sector. Ships over 15 years have become less preferred with lower rates with the overabundance of newer tonnage in the market for hire.

Investments in older tonnage at close to scrap levels are no longer a guarantee of safe returns. The earnings margins are very poor, sometimes negative. Often over time, the vessel values erode such that it is not possible over the limited remaining trading life of the vessel to recuperate the asset impairment loss.

This is a highly emotional and very controversial subject in Greek shipping circles. Most of the local Greek shipping industry would vehemently contest this view, but I can safely say that I have seen frequently this phenomenon reflected in balance sheets for older vessels over the last few years.

The present hope today is for a surge in investment in dry cargo shipping assets, even with negative carrying costs as a means of substantial future profits to reflate the sector. This is very understandable with the current depleted balance sheets of the industry and the suffering service industries, particularly the local chartering and sale and purchase firms. A lot of private Greek money has been invested this year in dry bulk shipping assets. More units keep employment for the shipping offices, and create needed income for the local Greek brokerage firms.

For a family business, the top priority is to reinvest in the future of the business that is their prime source of livelihood. Under these conditions, it is quite a different investment decision than an institutional investor or shipping industry outsider. The key differentiating factor is the returns criteria. An outsider is looking for the best possible return for his risk profile in a variety of alternatives. A family business dependent on the shipping industry is willing to live with much lower returns and higher risks initially, even to the point of no returns or negative carry for the prospects of future capital gains. The reason for this is obvious: The critical factor is the future of the family business. A family shipping business without outside investors does not really need profits, investing their own money in their business as long as it stays solvent and supports a good life style.

Another important point to be considered is that the local Greek banks have a lot of older, unattractive dry bulk assets on their books and they will make every effort to keep these assets operating with local family companies rather than scrapping them and taking losses now on weak balance sheets. They will also be willing on a limited basis to finance older vessels for local companies that have the necessary liquidity to carry them.

So there will always be a place in the market, particularly for older bulk carrier operators. More than likely than not, there will be less scrapping and more efforts to prolong trading life than the larger players invested in new tonnage would like to see. The fragmented nature of the bulk carrier industry will allow space for this, even with the lower operating costs and fuel consumption of the newer vessels because the family operator will accept lower margin business and remain viable.

Unless present economic conditions change, however, I do think that there will be inevitable further consolidation in the Greek shipping SME’s as well as the larger operators and less space for new comers in the industry. The profits on capital gains will be subdued and below expectations for some time to come because ship replacement value will remain low and there will not be sufficient banking liquidity to support the sale and purchase turn overs to generate a significant rise in asset prices. The older tonnage will eventually be scrapped at low prices.

Those companies with resources to invest in younger vessels, build up larger fleets and develop good trading platforms will be the best positioned for the future.