Wednesday, March 23, 2011

NewLead turns to Scorpio for pool employment

NewLead recently announced the the 37,000-dwt Hiotissa (built 2004) and Hiona (built 2003) will join Scorpio’s Handymax Tanker Pool during the second quarter. This justifies my observations at the time of the Aries reverse merger with then Grand Union. I felt that Grand Union - a traditional vessel provider model - lacked the commercial base of Scorpio . I also had concerns about recapitalization, which are still an issue. On the restructuring, I commend the efforts of the NewLead management.

Aries (NASDAQ: RAMS) was a listing that never should have happened. The group had many weaknesses and was not a deal for institutional investors. I expressed my personal concerns at the time to Stephanie Kasselakis, who was assisting John Sinders at Jefferies and is now at Poten Capital.  It was only the skill and determination of John Sinders at Jefferies that got this problematic IPO placed. Sinders worked hard for his two main shareholders clients - Mons Bolin and Gabriel Petrides - to achieve an extraordinarily deal.

Unfortunately, these efforts went in vain and it was a downhill course thereafter for the company and its investors with a series of operational problems and operating losses that put the company on the verge of bankruptcy. It is to the credit of Jeff Parry, who came from Poten in the eleventh hour as CEO that the reverse merger with GrandUnion got done and the company did not go under.

GrandUnion did not put a lot of money initially in the new venture, which is understandable on their part. They capitalized their entry by transferring tonnage of their own to the troubled company and got some financing from the Industrial Bank of Greece. They realized their goal of a publicly-listed company, but they also took upon themselves a gigantic restructuring job with a company where almost nothing worked. They have done a commendable job so far, selling off unproductive assets, cleaning up the vessel technical management and dropping into the company new assets from the Grand Union. They moved the Aries vessel management to Nick Fistes' company NewLead and renamed Aries as NewLead, sensible management decisions in an effort to rebrand and change a tarnished corporate image.

The Scorpio Group, who was reported to be a contender for Aries, was not for this kind of job and the existing Aries tanker tonnage would have been very problematical for them. Scorpio made a very wise decision to pass on any involvement with Aries and do a clean IPO on their own to build up their asset base with good quality tonnage at moderate prices. They already had a significant tanker commercial base with three pools and a fine management team, so the listing had inherent value.

The Scorpio Group is in stronger position than NewLead (NASDAQ: NEWL) - the renamed company -and can hardly be called a rival. Scorpio Tankers, the listed downstream company, has a fleet of ten modern, high specification product tankers. The Scorpio Group controls commercially 57 vessels of which their Handymax Tanker Pool is now 33 units including the two from NewLead.

On the other hand, it is sensible move for NewLead to join the Scorpio Handymax Tanker Pool. They do not have comparable internal capabilities that were a substantial investment of the Scorpio management to develop over time and add value to their group. NewLead already has put three of their Suezmax tankers on period time-charter. They also have a larger drybulk fleet - a number of them built in the early 1990's, which is undoubtedly facing some challenges in current market conditions. NewLead's major challenge is to complete the restructuring, turn profitable, establish a dividend policy, increase capital and scale up.

The tanker markets are struggling and the Japan earthquake has increased the turmoil. Scorpio Tankers CEO Robert Bugbee was one of the first major tanker companies to warn investors last fall of the coming challenges in the tanker sector. Both companies face turbulent market conditions this year.

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