Game Changers?

In their 4th quarter earnings release, Golden Ocean Group Limited announced that its application for a secondary listing in Singapore had been approved by the Singapore Exchange (“SGX”). The company already has an operational presence in Asia and saw the opportunity offered by the July 2009 Memorandum of Understanding between SGX and the Oslo Bors (“OSE”), which facilitated a simplified and accelerated dual listing process between the exchanges. This will be the first secondary listing by a Norwegian firm under the new accords.

From our perspective, this is an interesting transaction. Not only is this an example of a western company seeking equity capital in the East, it also raises the question of whether the market would follow the trendsetter, John Fredriksen, who was the first to bring his company to the U.S markets. The successful listing of Golden Ocean will blaze the trail for more to follow and strengthen Singapore’s position as a maritime and financial hub. Continue Reading

Game Changer?

In their 4th quarter earnings release, Golden Ocean Group Limited announced that it had begun the process of pursuing a secondary listing in Singapore with the goal of accessing the growing Asian investor market. The company already has an operational presence in Asia and saw the opportunity offered by the July 2009 Memorandum of Understanding between the Singapore Exchange (“SGX”) and the Oslo Bors, which facilitated a simplified and accelerated dual listing process between the exchanges.

Our Singapore correspondent, Rodricks Wong, highlighted the significance of this transaction from the Asian perspective:
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Wikborg Rein Sees More Listings in Singapore

Last week, Wikborg Rein provided an outlook for listings in Singapore in 2010. The Norwegian law firm pointed out that a large part of market capitalisation has been eroded by the privatisation of several listed companies but it expects to see a greater number of listing candidates, both in primary and secondary in Singapore this year. In view of the Memorandum of Understanding (MoU) signed between Singapore Exchange (“SGX”) and Oslo Børs on 8 July 2009 to promote dual listings on the two markets and an improving global economic outlook, Wikborg Rein believes that secondary listings of Oslo-listed companies will re­ceive increased attention.

For those IPO aspirants, Wikborg Rein has the following advice.

-          Companies contemplating primary lis­tings on the SGX should commence the process sooner rather than later due to the proposed changes to the listing rules in Sin­gapore which will, inter alia, tighten the admission requirements and raise the minimum issue price. In this regard, timing is the key for any company which wishes to list on the SGX – the candidate should either decide to do so quickly before the changes take place, or wait until the new regime is in place. Continue Reading

2008 Dahlman Rose Energy Supply Chain Conference

Last week’s conference showcased Dahlman Rose’s prowess in their chosen franchise -the energy supply chain. In a two day New York and Boston road show, they presented 29 companies covering the full range of the supply chain including offshore, exploration and production, drilling, offshore construction and shipping to a myriad group of investors. And as much as we appreciated the formal presentations, we really enjoyed the opportunity to sit and talk with the principals who presented their companies, a rare opportunity for us, in the casual atmosphere of the breakout room. The participants could not have been more generous in sharing their time to teach us about their companies and their industry.

The morning began with a keynote address by Mr. Simon Rose. We strongly suggest you beg, borrow or steal a copy of the presentation that distills the energy crisis in a mere 10 slides. The quick answer is that is all about motorization.

Rather than try to cover the conference, which is impossibility, given the breadth and depth, we have chosen instead to highlight discussions we had with Northern Offshore and Omega Navigation.

“Who Are Those Guys?”
Marion Woolie, the President and CEO, of Northern Offshore Ltd. began his short and picture filled presentation with the above referenced quote from the movie, “Butch Cassidy and the Sundance Kid.” For him, it reflected the company’s lack of recognition, which was one of the key issues that he encountered when he joined the company last year. But even in this short period of time, he has put his stamp on the company and the market now knows who they are.

Throwing off the shackles of the corporate world, Mr. Woolie has found his dream job, building a company from scratch. And although he is having fun doing it, it is quite a challenge. After emerging from a re-structuring with three older rigs, with an average age of 30 years, the company entered into an agreement last June with Maersk to purchase and leaseback three North Sea Jack-ups bringing the fleet to six and the average age down to 28. The company was then listed on the Oslo Bors in September 2007. And by the time the fourth quarter arrived, Mr. Woolie’s greatest challenge was to pull together a management team. He reached out to his network and brought together solid managers with whom he worked with for 15 to 20 years and who together have a combined 200 years of experience. And, they, too, are apparently having fun.

Flipping through rig pictures, Mr. Woolie described the employment picture of the fleet. The Energy Driller, a first generation semi-submersible is on a three-year charter to ONGC at $230,000 and operates in a water depth of 600-1,000 feet. The Energy Searcher, a drill ship, is working short-term in Southeast Asia for Total. The Energy Producer is working in the North Sea earning a tariff rather than a day rate. It is paid according to the volumes produced and the price of oil. These are the cash cows. Then there are the Maersk rigs, which are all operating in international waters. The rigs are earning $170,000 per day with two of them off contract in 2008 and the last in September 2009. The good news is that the Maersk Exerter, coming off the contract in May, has found follow-on work for 6 months at $250,000 per day. Given Northern’s past history, this deal was structured to minimize risk for the charterer by requiring a secured performance bond and a cash collateral account and an accelerated debt repayment schedule for the benefit of the bank. Specifically, the new rig debt has to be paid down to 0 in 2010 requiring principal payments of $100 million per year.

The best illustration of where the company was and how it has been transformed was shown in a calculation of uncontracted rig months, which Mr. Woolie describes as a health gauge. As of the fourth quarter 2007, 62% of the total available months were available. With market focus and execution, the new management team brought that figure down to 12.5% in the first quarter 2008. The total current backlog is $616 million, which compares to a market cap of $600 to $700 million indicating that the stock is cheap in management’s view.

The next task this management team faces is how to grow the company. Mr. Woolie doesn’t pull any punches. Organic growth through the placement of new rig orders is unlikely. Rig prices are too high and deliveries, now scheduled for 2011, are too slow. He is targeting existing rigs whether used or newbuildings under construction. It is the latter group that is of particular interest. He does not expect that all of the 150 rigs on order for delivery in 2008 and 2009 will be delivered on time, on budget and with a term contract and therein lies the opportunity. Finally when asked if he is going into deepwater or the jack-up market, his simple response is that it doesn’t matter as long as it adds value.

With respect to oil prices, his views remain traditional. He joked that oil prices are changing so quickly oil companies cannot keep up. He acknowledges a fundamental change but argues prices will remain cyclical. The trading range is certainly higher with lots of volatility. To Mr. Woolie, it is not the price but the direction. All of which is clouded for the moment by lots of emotion.

So, if anyone comes up to you and asks you “who are those guys,” the correct response is Northern Offshore’s posse. Watch your back!

Deferred Equity and Other Interesting Insights
We were also intrigued by a number of points in Omega Navigation Enterprises, Inc.’s (“Omega”) presentation including, in particular, the structuring of its yard financing.

Timing and creativity are crucial aspects of financing in general and we found both of these evident in Omega’s newbuilding financing. Omega had signed shipbuilding contracts, in 2007 with Hyundai Mipo, to construct five 37,000 DWT product/chemical IMO II/III tankers for $44.2 million each for a total cost of $221 million. The vessels are scheduled for delivery between March 2010 and February 2011.

Currently the shipyard is quoting the identical vessel for $47.5 million with delivery in 2011. However, market sources indicate the current value of the vessels is closer to $50 million particularly the earlier deliveries.

Financing for both the progress payments and post delivery is in place.  Our focus, however, is on the former, which minimizes the use of Omega’s cash flow while allowing the payment of dividends. To accomplish this, the progress payments are highly levered in the beginning with increasing amounts of equity required, as subsequent installments are due as follows:

The benefits of this structure are best illustrated in the chart that shows the sources of the progress payments through 2009.

Ultimately, as the process is reversed and more equity is injected and the capitalized interest is paid, the overall financing at delivery is 75%. The post-delivery financing benefited from being negotiated just before the credit crisis and is extremely competitive at a rumored LIBOR + 80 bps. All of this was made possible by the timely placement of the orders as well as the quality of the vessels and the shipyard and the company’s employment strategy.

Among other interesting insights provided at the presentation was Omega’s employment strategy. When it comes to time charters, they believe that 3 years is ideal as anything beyond that is steeply discounted. When feasible, upside protection is obtained through profit sharing agreements. Currently, 6 of their 8 vessels have such arrangements. Their fleet is currently time chartered to Norden, Torm and with Glencore. In the case of Norden and Torm, the vessels are operated in pools. Although all three are first-class, they find that Glencore is more creative and flexible as a consequence of their trading mentality.

On the other hand, Omega faces challenges. The company is frustrated by the fact that asset values and charter rates are disjointed making it difficult to do an accretive acquisition. And investors are concerned about the lack of liquidity of the company’s shares. Float is small with only 12 million shares trading making it difficult for an investor to take a position.

And, finally, financing of growth may be somewhat more difficult as it is already moderately leveraged with a net debt to capital of 63% and its shares carry a low valuation. Some relief will come from its re-structured debt facility, which is expected to close in Q1 2008. Both junior and senior facilities will be non-amortizing until the final repayment date in April 2011.

Despite these issues, the company is extremely well positioned to take advantage of evolving worldwide trading patterns resulting from roughly 5 million barrels per day of new refining capacity in the Middle East and India starting up by the end of the decade. These trades will involve longer hauls and therefore increased demand. To service this trade, Omega will have one of the youngest fleets with an average age of less than 2 years, which will be almost equally divided between the MR and LR1 sizes upon delivery of the newbuildings.

This pure play product company may just have gotten it right. With an established market position, fixed employment and carefully structured debt, the company’s dividend is protected in the interim while waiting for the market to catch-up.

In the interest of full disclosure and perhaps as an indication of the quality of the conference, we must confess that we were sufficiently intrigued by a number of presentations to buy shares in two companies, but not in the shipping sector, of course. We are certain that our investment was not quite what Mr. Rose hoped for but we expect that others, with more meaningful dollars to deploy, either took new positions or increased their holdings.