Tuesday, April 1, 2014

Is Peter G’s sudden foray into chemical tankers a clear signal to short the sector?

 Peter Georgiopoulos in his effort to make a comeback in the shipping space has decided to enter the chemical tanker sector with a speculative order for five firm 25,000-dwt vessels, plus five options at the state-owned Avic Dingheng yard. Well-placed sources say the ships are costing more than US$ 40 million each, with Avic slated to deliver the firm units in 2016 and 2017. Rumor is that Georgiopoulos had teamed up with unidentified private-equity investors to enter the chemical tanker segment. Given the recent history of his tanker company General Maritime in and out of Chapter 11, with massive losses to share and bond holders and his dry bulk company Genco teetering on the edge of Chapter 11 reorganization for some time now, should investors jump in to support this sort of asset play, especially in an entirely new sector where he has no prior operating or commercial experience? 

This latest movement of Peter G could well serve to vindicate the viewpoint of Niels Stolt Nielsen that “the amount of [private equity and institutional] money now entering into shipping is extremely worrisome……”  The Stolt CEO goes on to say: “The orders for new ships are being driven not by increased demand for logistical services, but by the overflow of capital available in the market.”   Finally, he expresses his concern about the acceptance of fee structures where the managers of these new “shipping companies” get fees up front when ordering ships, or for managing the ships they order, without having any equity stake in what is being ordered. 

Peter G’s new venture opens all Stolt Nielson’s concerns. If we take as a benchmark the Georgiopoulos dry cargo venture; Baltic Trading has had fairly steady losses from inception until very recently, but provides valuable source of collateral revenue, shoring up his main dry cargo operation Genco, with a hefty management fee structure to husband Baltic. It is speculative, asset arbitrage driven venture. Not surprisingly, Baltic stock trades very much like a freight market derivative instrument.

The challenge for any investment in the chemical tanker sector is that historical returns on asset have been exceptionally low (less than 10%). The number of players is limited, making for an illiquid sale and purchase market. In the case of the Eitzen Chemical distressed debt, senior lenders preferred to become shareholders and even waive loan spread, staving off any distressed asset sales under these limitations. Finally, this is has been a high cost, low margin business based on contracts of affreightment for base cargoes and the spot market to fill up the remaining empty space. The cargo contract commitments on the vessels further limit flexibility for asset plays in this sector because they create restrictions on timing for sales.. 

The mature groups in the chemical tanker sector have all transformed their business models from vessel  to logistics services provider and diversified into parallel sectors like chemical storage and gas shipping to improve their financial returns and risk profile. They have also kept their finance costs as low as possible and maintain strong balance sheets. None of the major players like Stolt see a quick market turnaround. They are companies with long term commitments to their customer base. 

None of this fits with Peter Georgiopoulos and his business approach. Peter G is above all an asset player. He keeps to the traditional Greek business model of vessel provider. His focus is mainly on acquiring shipping assets in large block deals. Further it is unlikely that he is putting a large amount of his own increasingly limited capital into this new venture and more likely that he is acting as an asset manager in this venture.  Here, however, in contrast to Baltic Trading, he does not have an operating company like Genco to back this new venture, which is fundamentally a start-up play. 

Another interesting twist is that the Avic Dingheng yard is also a newcomer to chemical tanker construction. The large, established players like Stolt and Jo Tankers have contracted larger size units (Dwt 38.000 and 30.000) at Hudong and Minde respectively. They appear to be aiming for lower unit costs, using larger deadweight units for emerging US chemical exports over the smaller competitor vessels. Both these yards have a proven track record in building chemical vessels. 

The Navig8 venture with Oaktree Capital has placed their orders (Dwt 25.000) at Kitanihon Shipbuilding and Fukuoka Shipbuilding, which are well established, first class Japanese yards with a long history of building stainless chemical tankers. By contrast, Avic has only built small coastal chemical tankers.

It will be very interesting to see how this new venture fares, but it likely be challenging for the investors unless there evolved an exceedingly bullish market given the stronger position of competitor peer companies.

1 comment:

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