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Fairfax Goes Shipping


JEast
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Very interesting move. I have been watching tankers for a year. If I had billions this is how I would invest. The company can now go out and buy tankers at a deep discount. The lower costs should allow them to operate them at a profit while others have losses.

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Fairfax says that it will go wherever there is value, and the events of the last few weeks have borne that out -- private equity investments in India, the BOI transaction, and now a PE investment in the shipping industry!  Each of them seems like a shrewd move.  Very excited to see how these investments play out.

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  • 2 weeks later...

http://www.bloomberg.com/news/2011-08-11/oil-tanker-rentals-fall-to-dangerously-low-level-owner-sohmen-pao-says.html

 

Owners are contending with the biggest glut of new tankers in 29 years as the fleet expands twice as fast as demand. At the same time, the price of ship fuel that represents their biggest expense has jumped 39 percent in Singapore, driving earnings from the vessels to the lowest level since 2002.

 

The six-company Bloomberg Tanker Index (TANKER) has slumped 44 percent this year to 208.38, exceeding the 8.5 percent slide by the S&P 500 Index of stocks.

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Bifurcation reigns!  Tankers without long-term contracts are actually, in some cases, taking on trips below actual cash costs on some Asian routes.  On the other hand, container shipping is holding up better than one would expect.  Even more so for companies that have long-term contracts.

 

 

Cheers

JEast

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  • 1 month later...

The Baltic Dry Index is a strange composition of an index.  More importantly to this discussion though is it has little to do with tankers that carry oil.  Just look at FRO with new 52-week lows for nearly for a year now.  Some call this a failing knife, but I like FFH's entry.

 

 

Cheers

JEast

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To look at Dry bulk shippers consider Genco, GNK; Dryships, and others.  Their stocks have started to turn, I suspect in part related to the drop in fuel price. 

 

The investment FFH, Ross et al have made is to help finance the biggest, and newest tankers.  As time goes on Environmental Regs. and fuel costs have been obsoleting some of the older fleet.  Overseas Shipholding (OSG) has a mountain of info on this industry and the politics around it on their website.  It looks from the press release in August that they will be building a couple of LNG tankers as well.  These may go to use moving gas from Vancouver to Asia in the not too distant future.

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For tankers it's the Baltic Dirty Tanker Index that you want to look at:

 

http://www.bloomberg.com/apps/quote?ticker=BIDY:IND

 

I bought some FRO a few weeks ago but sold due to the unknown duration of the downturn; and especially the potential small U.S glut of oil.  The Middle East- U.S Gulf route is the longest route; if it has low utilization the tanker downturn has just begun.  The glut of tankers is absolutely huge and if you look back, there are multiple year periods (70s and early 80s) with very long periods of low rates.

 

 

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...I bought some FRO a few weeks.....

 

Prof, I have been following the collapse of the tanker industry for a while, and FRO in particular. Am doing DD.  Did you have a chance to calculate the current value of its owned tanker fleet (market or scrap value) versus the market cap and debt on the books.  It seems that the company has a negative net worth. It seems to me that Fredericksen has to right size the balance sheet in order to ride out the downturn:  cancel newbuilds and sell some ships to reduce debt.

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...I bought some FRO a few weeks.....

 

Prof, I have been following the collapse of the tanker industry for a while, and FRO in particular. Am doing DD.  Did you have a chance to calculate the current value of its owned tanker fleet (market or scrap value) versus the market cap and debt on the books.  It seems that the company has a negative net worth. It seems to me that Fredericksen has to right size the balance sheet in order to ride out the downturn:  cancel newbuilds and sell some ships to reduce debt.

 

No, but that should be fairly easy to calculate.

 

# ships * current market value of an 11 year old tanker.  My guess is that the current market value is ~$35M and they have about 76 vessels paid for so ~$2.6B of current market value (of course,  a liquidation would take a few years in this market so I'm not really looking at FRO like this; more of a future (very future) earnings type of investment).

 

This is a very rough guess; I'm not an expert in these things at all.

 

Scrap value should be: Total DWT * LWT factor * steel price/ton gives us something like: 17.6 *28.5% * ~$520/ton = $2.6B.  This is an incredibly rough estimate which ignores their dry bulk fleet and post-20F ship dealings among other things. (http://www.tankeroperator.com/news/todisplaynews.asp?NewsID=2943)

 

I was trying to envision how this plays out for them; they don't have much current capability to purchase new ships.  I was thinking that maybe Fredriksen will loan FRO a few hundred million to purchase a few or perhaps he will purchase some through Knightsbridge (which raised significant capital a few months ago). 

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