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The Inevitable – Taxes and Restructuring
President Obama’s Proposed International Tax Changes – Will They Truly Achieve Economic Stimulation
Tamara Moravia-Israel of Ernst & Young was forthright in views of the President’s proposed changes in international tax law. It is not good for shipping. And there is a question as to whether it will in fact create jobs, stimulate the economy and increase competitiveness as is suggested. First, the “check the box” regime is proposed to be reformed in that foreign eligible entities with a single owner could be disregarded for federal US tax purposes only if: (1) they are organized in the same country in which the owner is organized or created, or (2) a US person wholly owns them (except for tax avoidance cases). The implications of this are potential conversion of first-tier (for tax avoidance) and second-tier (or lower) foreign disregarded entities (FDEs) to corporations that may have US tax implications. Ms. Moravia-Israel suggests that the current check the box regime allows US multinationals to be on somewhat of a level playing field with its foreign competitors. An additional proposed change by the Obama Administration is the deferral of deductions. That is, there will no longer be allowed a deduction for foreign expenses on the US return unless the foreign source income associated with said foreign expense is recognized for US tax purposes. However the biggest threat comes from the Levin Bill, which Congress is potentially currently considering. In effect, the bill puts forth that a foreign corporation is treated as managed and controlled in the US if substantially all of the executive officers and senior management of the corporation who exercise day-to-day responsibility for making decisions involving strategic, financial, and operational policies of the corporation are located primarily within the US. If the foreign corporation is considered to be managed and controlled in the US, it is treated as a domestic corporation for US tax purposes. This goes against the traditional determination of nexus, which has historically been the location of board meetings.
Even the Analysts Wonder
We arrived at work last Friday morning to the rather surprising news that DryShips, clearly seeing the opportunity, had once again gone out into the equity market. The company announced its second ATM Equity Offering through Merrill Lynch for up to $475 million of the company’s common shares. Back in January, DryShips had entered into an earlier agreement to sell up to $500 million, which it completed last month selling a total of approximately 95.7 million shares, generating net proceeds of ~$487.5 million after commissions. An ATM equity offering allows the company to issue common shares at any time and at the company’s discretion.
Written by: carisk | Categories: Freshly Minted, The Week in Review | May 14th, 2009 | Add a Comment
Rashomon – As We See It
It began with the movie “Rashomon” and evolved into a concept. “The Rashomon effect is the effect of the subjectivity of perception on recollection, by which observers of an event are able to produce substantially different but equally plausible accounts of it.” Or as the movie asks, who is telling the truth and what is the truth?
Our version of the script calls for a look at Seaspan’s first quarter earnings announcement to elicit the main takeaways. We then turned to our favorite shipping analysts, including Natasha Boyden of Cantor Fitzgerald, Gregory Lewis of Credit Suisse, Omar Nokta of Dahlman Rose, Douglas Mavrinac of Jefferies, Urs Dür of Lazard and Justin Yagerman of Wachovia, for their views and calls. This becomes a very interesting exercise because, as the analyts tell us, there is no company that is easier to model given their strategy to lock-in costs and fix revenues for the long-term.
Written by: carisk | Categories: Freshly Minted, The Week in Review | April 30th, 2009 | Add a Comment
Betting on Tankers
Last week it was dry bulk. This week, all the fuss seems to be revolving around the tanker market. A Wall Street Journal “Money & Investing” section cover story on the popularity of shorting tanker stocks drew some attention. As did a bearish report from R.S. Platou, a much-talked-about, products-focused IPO from Aries Maritime, positive reports form Jefferies and Banc of America and tanker stock coverage initiations from First Albany. So what, exactly, are the arguments going around, and of what should tanker market players and their financiers be aware? It’s still impossible to predict the future, but we can tell you what some of the competing arguments are.
R.S. Platou analyst Erik Andersen drew a lot of attention with his bearish report on shipping, particularly tankers. According to Mr. Andersen, the seasonality justification for low spot rates – which brokers say have dropped into the upper teens for VLCCs on some routes – is badly overblown. He notes that from 1997-2004, the average second quarter rate was about 37.5% lower than the average fourth quarter rate, completely out of order with the drop in rates from $147,000 in the fourth quarter of 2004 to $41,000 so far in the second quarter of 2005. However, this is still above the 8-year average second quarter rate of $35,000 – albeit with higher bunker prices – suggesting that perhaps the $147,000 was more of an anomaly than the $41,000 is a sign of a crash. Still, tanker fleet annualized growth figures of 6-7% compared to a comparable rate of 1% annually over the decade from 1993-2003 are somewhat ominous. Citigroup Smith Barney analyst Charles de Trenck noted how the current weak rates are making the tanker market the first among the shipping sectors to experience the pricing pressures derived from growing capacity. But on the bright side, Mr. Andersen did write that he does not believe tanker markets will weaken so much as to create a weak year for owners.
Analysts Magnus Fyhr and Douglas Mavrinac at Jefferies & Company have a much different take on the current market situation. They said in a report issued to reiterate their buy rating on Ship Finance International that they expect tanker demand to be firm on increasing OPEC production. Importantly, the analysts believe that incremental fleet growth of 21 MMdwt scheduled through the end of the year is likely to be absorbed by increased tanker demand.
Evincing similarly positive sentiments, analysts Daniel Barcelo, Philippe Lanier and Pierre Sargeant of Banc of America Securities issued a report on oil tankers optimistically titled “Hold On for the Summer Heat.” They note that a 5% tanker stock pullback over the past two weeks has been related more to Arabian Gulf VLCC market conditions than to the tanker industry as a whole, much of which has remained fairly strong. Additionally, they point out that the 450 vessel global VLCC fleet has grown by only two vessels so far in 2005, implying that softened rates could not be explained by supply buildup, but rather are a product of a reduction in Arabian Gulf export volume and a temporary buildup of available tonnage in the gulf. Analyst Craig Irwin of First Albany appears to agree, having this week initiated coverage on General Maritime, OMI and Arlington Tankers with a Buy rating. And a group of Asian investors that market sources say recently put their money into a very expensive $140 million VLCC newbuilding have put their money where their mouth is when it comes to predicting a strong VLCC market for years to come.
Much of Wall Street, however, seems to have sided with R.S. Platou on the more bearish side of the debate, as a widely disseminated article titled “Shorts Expect Tankers to Take On More Water” strongly suggests. Teekay, OMI, Knightsbridge and General Maritime are all being subjected to this phenomenon, with Frontline leading the pack. Investors are brazenly betting that tanker stocks will keep falling. Whether or not this will happen is hard to tell, though the practice certainly is not encouraging for those hoping to see their tanker investments appreciate.
Fortis Initiates Arlington, Jefferies Lukewarm on Nordic American
Fortis Bank analyst Dan Barrett, for one, is still interested in tanker equities. He issued a report this week initiating Arlington Tankers with a Buy rating and a $25 price target. He believes that the tanker market will ease from current levels but remain strong throughout 2005, not returning to mid-cycle levels until 2006. As for Arlington in particular, the report is confident in the company’s modern fleet and long-term contracts, while Mr. Barrett is positive on the company’s estimated 2005 yield of 10.8%.
Jefferies analysts Magnus Fyhr and Douglas Mavrinac this week raised their price target on Nordic American Tanker Shipping to $46, but are maintaining a rating of Hold. The analysts believe tanker demand is firming on increasing OPEC production, but are also lowering 2005 EPS estimates for NATS due to 1Q05 results that were below expectations on non-cash G&A expenses.
Fyhr & Mavrinac Initiate Diana, Bullish on Arlington
Jefferies analysts Magnus Fyhr and Douglas Mavrinac continued to expand their comprehensive shipping sector coverage with the initiation of coverage on Diana Shipping with a Buy rating and a $21 price target. The analysts note that Diana operates a modern dry bulk fleet while dry bulk fundamentals remain attractive. The company has a strong balance sheet that is readily available to support future growth, and it has announced a policy to pay out all free cash as dividends, a policy which is supported by Diana’s timecharter strategy.
The analysts also reiterated this week their Buy rating for Arlington Tankers, with a target price of $25.00, though the report also reduces EPS estimates based on lowered charter rate expectations. One thing that both these Buy ratings have in common is a notable dividend yield. Calculating the value of near-term returns, dividend yields mean a lot to analysts, but how much do they mean to equity investors?
General Maritime’s recent inauguration of a considerable dividend policy gives us a rare venue to test the hypothesis that higher dividends translate into higher share prices. The accompanying graph comparing General Maritime’s share price evolution, starting in the beginning of January and going through the period when the company announced its new dividend policy, to that of Frontline.
Written by: carisk | Categories: Freshly Minted, Market Commentary | April 28th, 2005 | Add a Comment
Mergers & Acquisitions to Dominate 2005 Dealflow
Mergers & Acquisitions to Dominate
2005 Dealflow
It’s really no surprise, at least to us, that merger and acquisition activity has been very brisk so far in 2005. With companies flush with cash, credit abundant, the outlook for the markets positive into the foreseeable future and public markets assigning premium valuations to shipping companies, growth is the name of the game – and many of the public companies have gotten so large that single ship acquisitions are no longer meaningful.
As the valuation table that accompanies this article shows, public shipping companies have been willing and able to pay premium prices for en bloc purchases, even when their own shares are priced at such a discount to the prices that they are paying that the transactions are effectively dilutive by some metrics. Due to the nature of shipping, most of these deals have involved hard assets only, and not employees, real estate, intellectual property, etc, and as a result, investment bankers have been supplanted by shipbrokers as advisors – and in many cases the shipowners have simply done the deals direct with no advisors at all.
Dominating the action in the last week has been the recently de-merged Euronav whose CEO Paddy Rogers has had one a heck of a busy start to the month of March. In the last 10 days, the company has announced acquistions of 16 ships totaling about $1.5 billion. For those who aren’t familiar with the company, Euronav is key driver behind the Tankers International pool and currently has whole or partial interest in a fleet of 28 VLCCs and ULCCs – 25 of which trade in the TI pool and represent more than half the total fleet of that marketing alliance.
The first deal that the company announced, on March 3rd, was consistent with the Euronav’s existing business. The transaction involved the acquisition of four VLCCs from Metrostar; the Crude Guardian (1993 – 290,927 dwt), the Crude Creation (1998 – 298,304 dwt), the Crude Topaz (2002 – 319,470 dwt) and a newbuilding (± 318,000 dwt) to be delivered in May 2005 for a total purchase price of $477.5 million – or $120 million each. At the time of the announcement, Euronav said that the new vessels would be entered into the TI pool. “Given the market outlook, the Executive Committee is confident that the addition of the 4 vessels will be accretive to both growth and earnings of the company.” A big move, a full price. Fine.
And then just five days later Euronav filed a public statement saying that it had successfully concluded negotiations to acquire a controlling position in Tanklog, the suezmax/aframax operation owned and managed by Livanos-controlled Ceres Hellenic, for $1.07 billion. Now this was an interesting one. In addition to the sheer size of the deal, this transaction was a shocker because it marked the VLCC-focused company’s move into two new sectors. Tanklog’s fleet consists of 14 Suezmax tankers, of which five will deliver from Samsung in 2006 and 2007. The fleet also has two modern double hull aframax tankers.
Euronav will use a combination of stock, cash and assumption of debt to fund the purchase with some of the considering likely coming from the recent $1.2 billion unsecured loan that the company is presently marketing through Nordea at LIBOR + 80 basis points. Euronav will pay $410 million in cash at the closing and will issue to Ceres 10.5 million primary shares lifting the total shares outstanding to 52.5 million and giving the Livanos a 20% stake in the entire enterprise, compared to the 45% controlled by members of the Saverys family. Euronav will also assume $300 million in debt on the suezmax tankers under construction. Euronav could certainly be a player in the US capital markets, but to date the company has shown little interest in being exposed to vagaries of regulatory requirements such as Sarbanes Oxley.
According to our calculations, Euronav paid a full price for the spot trading VLCCs and got good value for the suezmaxes. That said, although the valuation of the Ceres suezmax fleet appears low compared to the VLCC acquisition and other M&A deals, it is important to bear in mind that most the ships are on long term charter to Valero and Sun, many for as long as 10 years, and are therefore not commanding the $70,000 per day rates that spot suezmaxes are presently getting. All in all, the Ceres transaction was a clean and drama free deal, more likely done over the dinner table than the boardroom table, in which two partners in the Coeclerici dry bulk pool found that their objectives were perfectly aligned.
It’s really no surprise, at least to us, that merger and acquisition activity has been very brisk so far in 2005. With companies flush with cash, credit abundant, the outlook for the markets positive into the foreseeable future and public markets assigning premium valuations to shipping companies, growth is the name of the game – and many of the public companies have gotten so large that single ship acquisitions are no longer meaningful.
As the valuation table that accompanies this article shows, public shipping companies have been willing and able to pay premium prices for en bloc purchases, even when their own shares are priced at such a discount to the prices that they are paying that the transactions are effectively dilutive by some metrics. Due to the nature of shipping, most of these deals have involved hard assets only, and not employees, real estate, intellectual property, etc, and as a result, investment bankers have been supplanted by shipbrokers as advisors – and in many cases the shipowners have simply done the deals direct with no advisors at all.
Dominating the action in the last week has been the recently de-merged Euronav whose CEO Paddy Rogers has had one a heck of a busy start to the month of March. In the last 10 days, the company has announced acquistions of 16 ships totaling about $1.5 billion. For those who aren’t familiar with the company, Euronav is key driver behind the Tankers International pool and currently has whole or partial interest in a fleet of 28 VLCCs and ULCCs – 25 of which trade in the TI pool and represent more than half the total fleet of that marketing alliance.
The first deal that the company announced, on March 3rd, was consistent with the Euronav’s existing business. The transaction involved the acquisition of four VLCCs from Metrostar; the Crude Guardian (1993 – 290,927 dwt), the Crude Creation (1998 – 298,304 dwt), the Crude Topaz (2002 – 319,470 dwt) and a newbuilding (± 318,000 dwt) to be delivered in May 2005 for a total purchase price of $477.5 million – or $120 million each. At the time of the announcement, Euronav said that the new vessels would be entered into the TI pool. “Given the market outlook, the Executive Committee is confident that the addition of the 4 vessels will be accretive to both growth and earnings of the company.” A big move, a full price. Fine.
And then just five days later Euronav filed a public statement saying that it had successfully concluded negotiations to acquire a controlling position in Tanklog, the suezmax/aframax operation owned and managed by Livanos-controlled Ceres Hellenic, for $1.07 billion. Now this was an interesting one. In addition to the sheer size of the deal, this transaction was a shocker because it marked the VLCC-focused company’s move into two new sectors. Tanklog’s fleet consists of 14 Suezmax tankers, of which five will deliver from Samsung in 2006 and 2007. The fleet also has two modern double hull aframax tankers.
Euronav will use a combination of stock, cash and assumption of debt to fund the purchase with some of the considering likely coming from the recent $1.2 billion unsecured loan that the company is presently marketing through Nordea at LIBOR + 80 basis points. Euronav will pay $410 million in cash at the closing and will issue to Ceres 10.5 million primary shares lifting the total shares outstanding to 52.5 million and giving the Livanos a 20% stake in the entire enterprise, compared to the 45% controlled by members of the Saverys family. Euronav will also assume $300 million in debt on the suezmax tankers under construction. Euronav could certainly be a player in the US capital markets, but to date the company has shown little interest in being exposed to vagaries of regulatory requirements such as Sarbanes Oxley.
According to our calculations, Euronav paid a full price for the spot trading VLCCs and got good value for the suezmaxes. That said, although the valuation of the Ceres suezmax fleet appears low compared to the VLCC acquisition and other M&A deals, it is important to bear in mind that most the ships are on long term charter to Valero and Sun, many for as long as 10 years, and are therefore not commanding the $70,000 per day rates that spot suezmaxes are presently getting. All in all, the Ceres transaction was a clean and drama free deal, more likely done over the dinner table than the boardroom table, in which two partners in the Coeclerici dry bulk pool found that their objectives were perfectly aligned.
TORM Picks Up Six Tankers from LGR Navigazione
As we go to press, we understand that Danish tanker and bulk shipping company TORM has agreed to purchase a modern fleet of five product tankers and one panamax tanker from LGR Navigazione. The vessels range from just over 17,000 mdwt up to 72,000 mdwt and have an average age in the range of five years; only the panamax tanker was built before 2000. Purchase price is said to be around $290 million, and the ships had previously been a part of the TORM pool.
The purchase falls right in line with TORM’s stated policy of continued fleet renewal. It also comes after TORM’s January purchase of 5.5 product tankers from Malaysia Bulk Carriers Group and Wah Kwong Shipping Holdings Limited for $250 million.
Concurrent with the purchase, Jefferies analysts Magnus Fyhr and Douglas Mavrinac issued a report downgrading TORM from a Buy to a Hold. This should probably not be taken too bearishly, however, as they are maintaining their former price target of $55.00. TORM has crossed this threshold in the past week, but at $51.18 is trading a few dollars below it at presstime. The analysts cite valuation as the reason for the downgrade, noting that TORM trades at a significant premium to its tanker comparables at 8.2 times 2005E EPS and over 130% of NAV. It doesn’t help that Jefferies has reduced 2005 EPS estimates for the company from $7.49 to $6.30. However, the analysts maintain that both the product tanker and dry bulk markets have attractive outlooks.
Written by: carisk | Categories: Freshly Minted, Mergers & Acquisitions | March 10th, 2005 | Add a Comment
DryShips Gets a BUY
Although they were not even an underwriter on the deal, Jefferies has become the first to publish research on DryShips. It seems like we have featured an article on DryShips every week since 2005 began. Both massive and controversial, this deal seems to have some of the key ingredients to maintaining the market spotlight, and everyone has an opinion. Last week we got a brief synopsis of Kathryn Welling’s strongly negative opinion of the deal, a viewpoint that emphasized George Economou’s dubious history in the U.S. capital markets and the lack of historical research done by investors.
This week, Jefferies analysts Magnus Fyhr and Douglas Mavrinac have published a much brighter view. The pair rates DryShips a Buy, with a target price of no less than $30 per share. Their report begins with a focus on the apparently magical factors that whisked DryShips’ IPO performance above all expectations: growth in China and energy demand. The outlook on these fronts has yet to change. Mr. Fyhr and Mr. Mavrinac also look for increased global industrial activity and believe that strong growth in India and the U.S. will buttress the more widely discussed growth in China. Further into the future, they note that increasing competition for shipyard capacity should serve to limit fleet growth beyond 2008. And yard owners seeking to maximize margins will often turn away from the lower-value added dry bulk vessels if they are forced to choose.
But dry bulk market prospects have been reported to be strong for some time, and the niche has long been under-represented in the U.S. capital markets. While there are always those who caution against the shipping industry’s cyclicality, much of the criticism surrounding the DryShips deal, like that of Ms. Welling, revolved around specifics of the company, its principal, and the particular deal. That is why the more interesting part of the Jefferies report is its support for DryShips specifically, as a particularly well-situated player in the dry bulk industry.
Asset Prices, Consolidation and Valuations
Mr. Fyhr and Mr. Mavrinac believe that DryShips is “poised to become a consolidator in the dry bulk market.” The company’s acquisition of 19 vessels in the short period since its IPO and its current stance as the world’s second largest panamax dry bulk operator lend credibility to this statement. And while many have commented that vessel prices are too high for DryShips’ pace of acquisition, in the event of a serious market downturn the company will be greatly helped by the fact that its purchases have been funded in such large proportion by equity, rather than debt that needs to be serviced.
The Jefferies report also cites DryShips as being an “attractive dividend yield with potential for extraordinary dividends.” The company is reasonably valued at 2.9x price to book, though it is expensive at a price to net asset value ratio of 170%, especially considering the premium at which asset values currently stand. However, at price to cashflow ratios for 2005E and 2006E of 3.3x and 3.1x, respectively, DryShips trades at a substantial discount to tanker comparables.
Written by: carisk | Categories: Freshly Minted, Market Commentary | March 10th, 2005 | Add a Comment
TORM Picks Up Six Tankers from LGR Navigazione
As we go to press, we understand that Danish tanker and bulk shipping company TORM has agreed to purchase a modern fleet of five product tankers and one panamax tanker from LGR Navigazione. The vessels range from just over 17,000 mdwt up to 72,000 mdwt and have an average age in the range of five years; only the panamax tanker was built before 2000. Purchase price is said to be around $290 million, and the ships had previously been a part of the TORM pool.
The purchase falls right in line with TORM’s stated policy of continued fleet renewal. It also comes after TORM’s January purchase of 5.5 product tankers from Malaysia Bulk Carriers Group and Wah Kwong Shipping Holdings Limited for $250 million.
Concurrent with the purchase, Jefferies analysts Magnus Fyhr and Douglas Mavrinac issued a report downgrading TORM from a Buy to a Hold. This should probably not be taken too bearishly, however, as they are maintaining their former price target of $55.00. TORM has crossed this threshold in the past week, but at $51.18 is trading a few dollars below it at presstime. The analysts cite valuation as the reason for the downgrade, noting that TORM trades at a significant premium to its tanker comparables at 8.2 times 2005E EPS and over 130% of NAV. It doesn’t help that Jefferies has reduced 2005 EPS estimates for the company from $7.49 to $6.30. However, the analysts maintain that both the product tanker and dry bulk markets have attractive outlooks.
Written by: carisk | Categories: Freshly Minted, Mergers & Acquisitions | March 10th, 2005 | Add a Comment
2004 Earnings Begin to Roll In – Some Break Records, Others See Mixed Results
2004 Earnings Begin to Roll In – Some Break Records,
Others See Mixed Results
Public tanker companies OMI Corporation and Teekay Shipping both started the year off with a bang by announcing last year’s results, showing growth that was virtually off the charts. Tanker yield play Knightsbridge also brought exceedingly strong numbers, enough to prompt Jefferies analysts Magnus Fyhr and Douglas Mavrinac to commend the company for exceeding expectations, though not enough to lift the company any further than its HOLD rating. CP Ships enjoyed modest growth of both net income and revenue, even as the company recovers from its results restatement in 2003 and deals with the class action lawsuits that followed in its wake. Meanwhile, US-flag petroleum transporter Maritrans saw a rise in revenue paired with a drop in net income, though.
Public tanker companies OMI Corporation and Teekay Shipping both started the year off with a bang by announcing last year’s results, showing growth that was virtually off the charts. Tanker yield play Knightsbridge also brought exceedingly strong numbers, enough to prompt Jefferies analysts Magnus Fyhr and Douglas Mavrinac to commend the company for exceeding expectations, though not enough to lift the company any further than its HOLD rating. CP Ships enjoyed modest growth of both net income and revenue, even as the company recovers from its results restatement in 2003 and deals with the class action lawsuits that followed in its wake. Meanwhile, US-flag petroleum transporter Maritrans saw a rise in revenue paired with a drop in net income, though.
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