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Appetizer
Being somewhat disloyal to the team, we shirked our set-up responsibilities for Marine Money Week and snuck off to participate in Morgan Stanley’s 3rd Annual Shipping Conference, with its superb cast, for part of the morning. Wiley Griffiths set the stage by asking questions, which he hoped by the end of the day, would be answered. Where are we in the cycle? Where will investors find returns? He noted that banks were making loans selectively and the return of bonds and IPOs. But volatility remains a concern. He termed this a period of uncertainty, however there is a sense of optimism as fundamentals remain positive. Then there is the old standby saw intimating hope: no news is good news.
Ole Slorer then took the stage to introduce the master of PowerPoint, who also happens to be President and CEO of OSG, Morten Arntzen. Mr. Arntzen as always was right on point and this time provided an encore to Barbara Streisand’s The Way We Were, previewed at our Hamburg conference, with Bob Dylan singing The Times They Are a Changin’. While both were entertaining, they made very serious points. The lyrics of the former were a reminder that the banking world had changed and there is no turning back. The latter was a reference to the Deepwater Horizon intimating again that our world was going to change as a result and much quicker than anyone expects. Whereas in the past he conceded to requests to remove the technical management slide from the deck that would no longer be the case. Investors and lenders need to focus on the technical capabilities of the companies they invest in for to do otherwise is suicidal.
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The Doctor Is In!
For us, the news of a companies’ placing new orders for ships was largely background noise. Covering the financial markets is a full-time job, in and of itself, although we do like to take a peek at broker reports when we have a chance. But in the main we get our market news largely distilled from the analysts, all of whom are keen students of the market. And so the news of new orders barely impinged upon our thoughts as we were more focused on the existing orderbook, and the forever unknowns, slippage and cancellations.
That was the case until we had a look at a short précis on the dry bulk market authored by Gregory Lewis of Credit Suisse in which he discussed the current dry bulk orderbook and made the following observations:
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Complications Unwound. How DRYS Got There.
Last week, DryShips announced that it had agreed to acquire, from George Economou and other third party interests, the remaining 25% minority interest in Primelead Shareholders, Inc., the holding company and operating platform for DryShips ultra deepwater drilling rig assets including two owned and operational ultra deepwater semisubmersibles and 4 newbuilding drillship contracts as well as the commercial operating company, Ocean Rig ASA.
The transaction was structured to minimize the cash outlay and leverage with the price being dilution. Consideration for the transaction included $50 million in cash and the issuance of $280 million in face value of mandatorily convertible preferred stock, based upon a price per share of $5.36, the weighted average seven day trailing price. At the offering price, this equates to 52.2 million shares. The shares are manditorily convertible in four equal installments at $6.83 per share (a 27.5% premium) upon delivery of each of the four newbuilding drillships.
Morgan Stanley II
Despite a pressing deadline, we couldn’t pass up the opportunity to get out of the office and attend Morgan Stanley’s 2nd Commodities and Shipping Conference. In these difficult times how could one possibly forego the opportunity to hear what Ole Slorer and his team have to say with the added benefit of gleaning some insights on the capital and lending markets. All interspersed with company presentations and lessons from Morgan Stanley’s commodities and freight trading experts. It is a rare opportunity for us to receive an invitation to these investor only meetings and we are most appreciative. Putting on an investor hat for a moment, we can confirm that if one is interested in the space there is no better way to get an education and gather information about this sector than attending these conferences. And, we did not even benefit from having a one-on-one meeting.
Wiley Griffiths, the Head of Global Shipping, and his team started us off with a view of what was happening in the market. Continuing historic trends, the markets as always remain interesting.
Out of Favor
Last week, The Wall Street Journal provided another indicator of the shipping slump when they announced the Best on the Street analysts for 2008. Unlike last year, our shipping analysts were conspicuously absent, although the number three slot was taken by Jim Corridore of Standard & Poors, who had rated Horizon Lines a sell during the period in October when the shares fell 77%.
WKSI No More
Perhaps one of the least painful but aggravating aspects of the share price collapse of the shipping stocks is the loss of one’s “well-known seasoned issuer” or WKSI qualification. When the company’s market cap falls below $700 million, the company no longer is a universal filer but must register as you go. For perspective, as of Tuesday, only Teekay, Teekay LNG, Nordic American Tankers, Diana Shipping and Alexander & Baldwin were qualified. OSG just missed at $641 million.
Hellenic Norwegian Confab
For the fifteenth year, the Hellenic-American and Norwegian-American Chambers of Commerce presented their Annual Joint Shipping Conference posing the question of “How Will Shipping Survive the Perfect Storm?” Whether the question was answered or not, attendees were able to garner lots of insights into what happened and what may happen in the future. Once again, the following will highlight what we found of particular interest.
Arlie Sterling of Marsoft provided insights into “what happened” and “what might happen.” The industry did well based upon an explosion in trade and demand and yard capacity limits. The chart below lays out the extraordinary growth.
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DnB NOR Chief Bullish Expansion Set – Lending Grows
It is always a pleasure to hear from someone with a fresh and confident outlook, and such was the happy occasion when the Norwegian American Chamber of Commerce presented Rune Bjerke the Group Chief Executive of DnB NOR at an early evening, late summer event in New York. Mr. Bjerke joined the Bank leaving the successful Hafslund ASA where he was CEO. And as he noted the switch to banking left some of his friends perplexed it was the sort of challenge that appealed even though his start date approximately coincided with the start of the Sub Prime crisis.
Morgan Stanley Confident in Commodity Shipping Sector
Morgan Stanley Downgrades Energy Shipping, Remains Optimistic About Future
Morgan Stanley analysts Mark MacLean and Ole Slorer have been keeping a close watch on the US-listed tanker market lately. They caught a lot of people’s attention when they lowered their energy shipping Industry View from Attractive to In-line and lowered their recommendation on General Maritime from Overweight-V to Equal Weight. While Tradewinds notes that the analysts are concerned about factors like the decline in valuation for single-hull tankers, we understand that Mr. Slorer and Mr. MacLean believe that tanker stocks have only taken a run up in line with improving fundamentals in their market. The two recommend in their report that investors “lock in” the profits they can get off the latest run, as strong fourth quarter results are released, and look for a “better entry point in April-May.” Additionally, General Maritime, whose stock price was at $49.60 when the report was published, had reached within range of the $53.00 price target the Morgan Stanley analysts set when the company first announced its new dividend policy, so a re-rating to Equal Wight seems fairly natural.
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